Jafari-Fini v Skillglass Ltd & Anor

Permission for a derivative claim is exceptional. The claimant must establish that the proposed action is brought bona fide for the company’s benefit and that no other adequate remedy exists. The court must assess the realistic benefit to the company, including the costs and risks of litigation. Where personal proceedings raise the same decisive issues, and success would restore the claimant’s control of the company, the company may be bound by the result instead of bringing a derivative claim at that stage. The court may add the company as a defendant for that limited purpose and preserve liberty to seek derivative permission after the preliminary issues have been determined.

The appellant claimed beneficial ownership of a majority shareholding in Phoenix Acquisitions Limited (PAL), but the shares were registered in the name of Skillglass Limited under security arrangements. He brought personal claims concerning Skillglass’s enforcement of funding and security documents and later sought to amend the claim, add PAL as a defendant, and continue claims on PAL’s behalf under CPR 19.9.

The High Court held that beneficial ownership did not by itself prevent the appellant from seeking derivative permission. It nevertheless refused permission, principally because the proposed proceedings offered no realistic benefit to PAL and the appellant’s personal action provided an adequate route to resolving the common issues. The appeal concerned that refusal, together with issues about repudiatory breach, the prospect of repayment, the appellant’s personal claims, and the position of PAL’s other shareholders.

Chadwick LJ gave the leading judgment. Pill and Latham LJJ agreed. The appeal was dismissed, subject to directions concerning PAL’s participation in the claimant’s personal action.

1. The court applied the principles stated in Barrett v Duckett [1995] 1 BCLC 243. A claimant seeking derivative permission must satisfy the court at the preliminary stage that the claim is brought bona fide for the company’s benefit, concerns a wrong to the company, and is needed because no other adequate remedy is available.
2. The relevant benefit must be realistic. PAL had no realistic prospect of funding the January 2004 repayment tranche. Distributions from Chesterton were unavailable because of solvency concerns and the required declarations. The suggested reverse-premium transaction involving Lily Hill House was commercially improbable and appeared likely to contravene the prohibition in Chapter 6 of Part V of the Companies Act 1985. The proposed derivative action therefore exposed PAL to litigation costs without a sufficient potential benefit.
3. The appellant’s personal claims and the proposed claims for PAL depended on the same underlying questions: whether the notices of default were valid and, if not, whether the facility agreement and security arrangements remained enforceable. The court did not decide whether a premature demand was repudiatory, a question which the High Court had also left open in light of Concord v The Law Debenture Corporation plc [2004] EWCA Civ 1001.
4. If the appellant succeeded in his personal action, he would regain control of PAL and could then cause PAL to pursue any worthwhile claim. If he failed, PAL would have no viable basis for such a claim. It was therefore sufficient, and procedurally preferable, for PAL to be bound by the determination of the common issues rather than to commence derivative proceedings immediately.
5. It was open to the court, when considering derivative permission, to take account of the support or opposition of other shareholders, particularly an independent shareholder such as PHP. That point was not necessary to the decision because permission had already been refused on the substantive grounds.
6. PAL was to be added as a defendant solely so that it would be bound by any declarations concerning the notices and agreements. The common issues were remitted to the Chancery Division as preliminary issues. PAL could participate at its own risk as to costs, but was not required to do so. Liberty was given to apply for derivative permission after determination of those issues. The appellant was ordered to pay the respondents’ appeal costs, and leave to appeal to the House of Lords was refused.

• Court of Appeal (Civil Division): On 16 March 2005, the appeal was dismissed. PAL was to be added as a defendant only to ensure that it was bound by relevant declarations, and the action was remitted to the Chancery Division for preliminary issues.
• High Court, Chancery Division: On 26 October 2004, His Honour Judge Rich QC refused permission to amend the claim and to continue derivative claims on behalf of PAL. He ordered the appellant to pay 75 per cent of Skillglass’s and PAL’s costs of the application and gave directions for the appellant’s personal claims.