Fraser & Ors v Oystertec Plc & Ors

On a summary judgment application, a defence must have a real, properly evidenced prospect of success. A bare assertion of law is insufficient; the defendant must identify the factual basis of the defence. The court may determine a difficult legal issue summarily where doing so is likely substantially to reduce the burden of a trial.

An agreement allowing a company to divest itself unilaterally of a substantial asset at the heart of its business on insolvency is contrary to public policy where the asset is held out to creditors as the company’s property. A transaction may nevertheless become unchallengeable through laches or acquiescence. Equitable relief remains discretionary and may be replaced by compensation.

Minority shareholders and creditors of Easyrad Limited brought a derivative claim concerning a patent for the Oyster Converter. They alleged that an assignment by Easyrad to Paul Davidson was ineffective because it relied on an insolvency agreement and lacked the authority required by the shareholders’ agreement. The patent was later transferred to Oystertec plc and used in its flotation.

The court considered summary judgment, the validity and scope of the insolvency agreement, laches and acquiescence, alleged settlement, equitable compensation, and fiduciary duties. The central issues were whether the patent had been effectively divested, whether proprietary relief was barred or limited by the claimants’ conduct, and whether compensation or fiduciary remedies remained available.

1. Summary judgment. CPR Part 24 permits judgment where the opposing party has no real prospect of success and there is no other compelling reason for trial. A fanciful prospect is insufficient. A respondent relying on a legal defence must give enough facts to show that it has a reasonable basis. The court may decide a difficult question of law summarily where the decision is likely substantially to reduce the length or complexity of a trial.
2. Patent and insolvency agreement. The Patent was a substantial asset at the heart of Easyrad’s venture and was held out to the outside world as its property. An agreement permitting unilateral divestiture of that asset merely because of insolvency, without independent valuation or an opportunity for alternative investment, fell outside the recognised distinction between a determinable interest and forfeiture of property. It was therefore void as contrary to public policy. The agreement’s reference to Insolvency Act 1986 did not require a prior court determination of insolvency for summary judgment purposes.
3. The Patent was not transferred to Easyrad for the consideration of £1 required by clause 1 of the agreement. The divestiture clause therefore did not apply to it in any event.
4. Laches and acquiescence. A void transaction may nevertheless become unchallengeable where a person entitled to complain stands by and permits the transferee or a third party to alter its position. The claimants’ conduct barred an unqualified proprietary declaration after the flotation, but did not necessarily bar financial compensation. The amount and form of equitable compensation had to be assessed having regard to unconscionability and the interests of innocent investors.
5. The alleged 2001 settlement was not established. The contemporaneous correspondence, repeatedly marked subject to contract and inconsistent with a concluded agreement, made the defendants’ version fanciful.
6. The claim against Mr Binney for damages for breach of fiduciary duty failed on summary judgment because he could genuinely have believed that the insolvency agreement bound him. The claim against Mr Davidson succeeded: no reasonable director could regard stripping the company of its principal asset for an arbitrary price as being in the company’s best interests.
7. The claimants succeeded in establishing that the Easyrad Assignment did not effectively divest Easyrad of the Patent. The proprietary declaration was refused subject to the possibility of adequate compensation. The claim for equitable financial compensation against Oystertec succeeded, as did the fiduciary-duty damages claim against Mr Davidson. The claim against Mr Binney failed.

First-instance decision. The judgment was delivered in two parts, on 8 September and 7 November 2003, and treated as one integral judgment. Permission to appeal was contemplated and time to appeal was extended until the hearing.