Harley Street Capital Ltd. v Tchigirinsky & Ors

Permission to continue a derivative claim should be refused where the pleaded case is unsupported by credible evidence and continuation would amount to an abuse of the court’s process. The court may consider the claimant’s bona fides, the circumstances in which the claim was brought, the claimant’s interest in the company, compliance with procedural undertakings and the adequacy of the evidence. A shareholder’s general entitlement to inspect company documents does not extend to material covered by litigation privilege where the advice was obtained in the context of hostile litigation involving the company. Interim relief and permission to serve proceedings out of the jurisdiction should be discharged where the substantive claim is unsustainable.

Harley Street Capital Ltd brought a proposed derivative claim on behalf of Sibir, alleging that the defendants had participated in the dilution of Sibir’s interest in Sibneft-Yugra and in improper payments involving Magma. Blackburne J had granted permission to continue the derivative claim, a freezing injunction and permission to serve proceedings out of the jurisdiction. The claimant applied to continue the derivative claim. The defendants sought continuation or discharge of the freezing injunction, an order setting aside permission for service out and relief concerning the claimant’s failure to establish its case. The central issues were whether the claim was supported by credible evidence, whether it was brought bona fide, whether the MacFarlanes investigation report was privileged, and whether the proceedings should continue.

1. Disposition. The application to continue the derivative claim was refused. The freezing injunction was discharged. Permission previously granted for service out of the jurisdiction was set aside, and the proceedings were struck out as an abuse of the process of the court. The defendants were invited to apply for an inquiry as to damages under the claimant’s undertaking.
2. The evidence did not credibly link the defendants to the alleged dilution of Sibir’s interest in Sibneft-Yugra or to the alleged Magma wrongdoing. The claimant’s case depended substantially on inference, selective documents and assumptions which were not supported by evidence. The inadequacy of Sibir’s investigations and the delay in discovering the dilution were equivocal and did not, without more, establish participation in a cover-up.
3. In deciding whether the derivative claim should continue, the court was entitled to take into account the claimant’s minimal shareholding, the unexplained funding and identity of those behind the claim, the claimant’s procedural defaults, the absence of evidence from a proper officer and the claimant’s lack of bona fides. The claim as pleaded was hopeless and there was no proper basis for continuing it.
4. The MacFarlanes report was privileged. It had been obtained in the context of hostile litigation and potential claims against the company and its officers. A shareholder’s general entitlement to inspect privileged company documents did not apply in that context. The principles discussed in Re Hydrosan Ltd and Arrow Trading and Investment Est 1920 v Edwardian Group Ltd supported that distinction. The same reasoning applied to CAS (Nominees) Ltd v Nottingham Forest plc.
5. The court also observed that the circumstances demonstrated the need for careful consideration before proceeding ex parte. Had the defendants’ answers been sought before the application, they would have supplied substantial answers to the allegations.

Not stated in the judgment. This was a first-instance decision of the High Court (Chancery Division).