Franbar Holdings Ltd. v Patel & Ors

Permission to continue a derivative claim may be refused where a hypothetical director acting in accordance with section 172 of the Companies Act 2006 would not attach sufficient importance to pursuing it. The court must consider the statutory factors in section 263, including good faith, the importance of continuation, ratification, whether the company has declined to sue, and whether the member has a personal cause of action. A derivative claim may be refused where substantially the same complaints can be addressed through an unfair-prejudice petition or other personal proceedings. Ratification remains subject to equitable rules. The statutory voting restrictions do not remove the rule that conduct cannot be ratified where ratification would be unfair, improper, illegal, fraudulent or oppressive. Special leave to inspect an insolvency court file may be granted for evidence relevant to other proceedings, subject to safeguards against prejudice and misuse.

Franbar Holdings Ltd was a minority shareholder in Medicentres (UK) Ltd after selling 75 per cent of its shares to Casualty Plus Ltd. It brought proceedings concerning alleged diversion of business opportunities, mismanagement, inadequate financial information, the appointment of a director and other alleged breaches of duty.

Franbar sought permission under section 261 of the Companies Act 2006 to continue a derivative claim on behalf of Medicentres. It also pursued a section 994 petition and a shareholders’ action concerning substantially the same conduct. The court also considered an application for special leave to inspect the court file in the winding up of Swindon Brewing Company Ltd and an application concerning disclosure of tax-related information. The central issues were whether the derivative claim should proceed and whether inspection should be permitted.

1. Derivative claim. The application for permission under section 261 of the Companies Act 2006 was refused. The allegations disclosed an arguable case of actionable breaches of duty, so the court could not refuse permission solely because the evidence and loss were insufficiently particularised. The statutory discretion nevertheless required consideration of section 263(3) and (4).
2. The court accepted that Franbar was acting in good faith. However, a hypothetical director acting under section 172 would consider the prospects of success, recoverability, disruption, costs and reputational consequences. The derivative claim was of limited importance because most of the complaints could be pursued through the existing section 994 petition and shareholders’ action, including by ensuring that the value of Franbar’s shares reflected any relevant loss suffered by Medicentres.
3. Although the alleged conduct was likely to be ratifiable in some respects, section 239 did not provide an exhaustive code. Section 239(7) preserved rules of law concerning acts incapable of ratification. The principles stated in North-West Transportation Company v Beatty (1887) 12 App Cas 589 therefore remained applicable. Conduct might be incapable of effective ratification where the process was unfair, improper, illegal, fraudulent or oppressive. It could not be assumed that every breach affecting the value of a minority shareholding was oppressive, but diversion of company business or opportunities to the majority might be incapable of ratification.
4. The existence of an alternative personal cause of action was a significant factor under section 263(3)(f). The fact that the proposed defendants in the derivative claim differed from the principal defendant in the personal proceedings did not prevent that factor from being engaged.
5. Inspection and tax information. Special leave under rule 7.31(4) of the Insolvency Rules 1986 was granted. Inspection for use in other proceedings could be legitimate where the material was probative of an issue and no countervailing prejudice was shown. Copies and information were restricted to the section 994 petition and shareholders’ action. The court did not need to decide conclusively whether section 182(4) of the Finance Act 1989 applied, because disclosure within the limits of the inspection order had lawful authority under section 182(6)(d).

First-instance decision. The judgment itself records no prior appellate decision.