Franbar Holdings Ltd v Patel

The court refused permission under section 261(1) Companies Act 2006 for Franbar to continue a derivative claim on behalf of Medicentres. The judge applied the statutory tests in sections 263 and 172, considering (inter alia) good faith, the importance a director acting under section 172 would attach to continuation, and the prospects of ratification by the company (including the effect of section 239 on ratification). Although some pleaded acts might be incapable of effective ratification and some complaints had substance, the court concluded that Franbar could obtain the relief it sought by means of the section 994 petition and the shareholders' action and that a hypothetical director might not attach substantial importance to pursuing the derivative claim at this stage.

Separately, the court granted special leave under rule 7.31 Insolvency Rules 1986 to inspect and copy documents from the Swindon winding-up file for the purposes of the section 994 petition and the shareholders' action, subject to use limitations. The court also held that disclosure derived from material produced under that court order would be made with lawful authority for the purposes of section 182 Finance Act 1989.

Background and parties: Medicentres (UK) Ltd (Medicentres) was formerly wholly owned by Franbar Holdings Ltd (Franbar). In July 2005 Casualty Plus acquired 75% of the shares and a Shareholders' Agreement was entered into with options for purchase of the remaining shares. Disputes arose after Casualty Plus appointees (notably Mr Patel and Dr du Plessis) took control. Franbar issued three sets of proceedings: (i) a shareholders' action for breach of the Shareholders' Agreement, (ii) a petition under section 994 Companies Act 2006 seeking a buy-out, and (iii) an application for permission to continue a derivative claim against the directors and Medicentres under section 261 Companies Act 2006. The same core factual allegations underlay all three sets of proceedings.

Nature of the application: Franbar sought permission to continue the derivative claim (relief on behalf of Medicentres for alleged negligence, default and breaches of duty by directors) and ancillary relief: inspection of the Swindon insolvency court file under rule 7.31 Insolvency Rules 1986 and permission under section 182 Finance Act 1989 to disclose material derived from an Inland Revenue investigation.

Issues for decision: (i) Whether permission to continue the derivative claim should be granted under sections 261 and 263 Companies Act 2006, applying the hypothetical director test in section 172 and the statutory factors in section 263(3) and (4); (ii) whether the acts complained of could be, or were likely to be, ratified by Medicentres (including the effect of section 239 and the connected-person rules in sections 252 and 254); (iii) whether Franbar acted in good faith and the importance the hypothetical director would attach to continuation; (iv) whether Franbar had an adequate alternative remedy by way of the section 994 petition and the shareholders' action; (v) whether special leave to inspect the Swindon file should be granted under rule 7.31; and (vi) whether disclosure derived from the court-ordered inspection would be unlawful under section 182 Finance Act 1989.

Court’s reasoning and conclusions: The judge held there was material that could support actionable breaches of duty and that some breaches might be incapable of ratification. However, on balance: (a) the statutory factors in section 263 weighed against granting permission because Franbar could pursue equivalent relief through the section 994 petition and the shareholders' action and the hypothetical director might not attach substantial importance to continuing the derivative claim at this stage; (b) the possibility that Casualty Plus (as majority shareholder) could procure ratification diminished the need for a derivative route, subject to the caveat that some breaches might not be ratifiable; and (c) deficiencies in particularisation and the risk of unnecessary complexity weighed against continuation. Accordingly permission to continue the derivative claim was refused. The court granted Franbar special leave under rule 7.31 to inspect and copy the Swindon court file for use in the section 994 petition and shareholders' action, subject to a restriction on further use; and held that further disclosure in accordance with the court order would be made with lawful authority for the purposes of section 182 Finance Act 1989.

The court refused permission to continue the derivative claim under section 261 Companies Act 2006. The refusal rested on a balancing exercise under section 263: although some allegations had substance and some breaches might be incapable of ratification, Franbar could obtain appropriate relief via the section 994 petition and shareholders' action and a hypothetical director might not attach substantial importance to pursuing the derivative claim now. The court granted special leave under rule 7.31 Insolvency Rules 1986 to inspect and copy the Swindon court file subject to restricted use and held that disclosure made in accordance with the court order would have lawful authority under section 182 Finance Act 1989.