Stimpson v Southern Private Landlords Association

The court considered an application for permission to continue derivative proceedings under the Companies Act 2006 (in particular sections 261 and 263) and an associated interim injunction. The judge applied the Chapter 1, Part II statutory framework and treated the contested hearing as the substantive permission stage under section 263. The central legal test was whether a hypothetical director acting in accordance with section 172 would seek to continue the claim and whether the impugned acts had been authorised or ratified under section 263(2).

The judge found that most causes of action advanced were not realistically arguable: claims that the transfer effected an unlawful disposal at undervalue or that sections 175/176 created realistic conflicts were unlikely to succeed. The only realistically arguable point related to the validity/quoracy of board meetings in June 2008 (the appointments of Mr Harrison and a subsequent director) and whether an inquorate board authorised the transfer. Even so, the claim was held to have modest value (cash c. £200,000 plus intangible assets), significant litigation costs (circa £350,000 per side), funding risk and speculative prospects against the transferee (relying on constructive trust/unconscionability and article 47). The members' questionnaire produced limited support for litigation and the first claimant's conduct (absenting himself to render meetings inquorate) and motive weighed against good faith. Applying section 263, permission to continue the derivative claim was refused.

The applicants sought permission to continue a derivative claim by the first defendant's company members under section 261 Companies Act 2006 and an interim injunction to continue relief previously granted. The principal respondents were the executive committee members who negotiated and signed an agreement transferring the company's business and assets to a larger landlords' association (the sixth defendant, NLA). The claimants alleged breaches of fiduciary duties (sections 171, 172, 175, 176 and related provisions) and sought equitable compensation or an account of profits, and alternatively that the transferee held assets on constructive trust because of its knowledge of breaches.

• Nature of the application: permission to continue derivative proceedings under section 261/263 and an interim injunction.
• Procedural posture: applications issued 4 September 2008; Briggs J had previously granted interim relief on 18 September 2008; Evans-Lombe J directed a members' questionnaire on 18 March 2009; the contested permission hearing was determined by Pelling QC on 21 May 2009.
• Issues for decision: (i) whether a hypothetical director acting in accordance with section 172 would continue the claim, (ii) whether the relevant acts had been authorised or could be ratified, (iii) the merits and likely value of the causes of action (including quoracy of board meetings in June 2008), (iv) whether the transferee had the requisite knowledge to attract a constructive trust, and (v) collateral factors including costs, funding risk, employee consequences and member support.

The judge analysed the statutory two-stage procedure but treated the hearing as the substantive permission stage under section 263. He applied the guidance in Franbar Holdings v Patel concerning the considerations a hypothetical director would take into account (prospects of success, recoverability, disruption, costs). The court concluded that, apart from an arguable quoracy point, the other causes of action had little realistic prospect of success or were of limited value. The claim against the transferee (constructive trust/unconscionability) was speculative and vulnerable to article 47. The likely recoverable value was modest (cash c. £200,000 less liabilities and some tangible assets), litigation costs were high and partly unrecoverable, funding was uncertain, and the members' responses provided only limited support. The claimant's conduct (deliberate non-attendance to frustrate quoracy) undermined good faith. Taking all relevant statutory and non-statutory factors into account, the judge refused permission to continue the derivative claim and would in any event have refused permission even if the hypothetical director test were answered positively.

Permission to continue the derivative proceedings was refused. The judge concluded that a hypothetical director acting in accordance with section 172 would not seek to continue the claim because, although there was an arguable quoracy point, the overall prospects, modest recoverable value (cash circa £200,000 and mainly intangible assets), substantial litigation costs, funding and insolvency risk, limited member support and concerns about the claimants' good faith meant continuation was not in the company's interests. The judge also held that the claim against the transferee was speculative and that ratification/authorisation and article 47 issues further militated against permission; even if the hypothetical director test had favoured permission, the judge would nonetheless have refused it.

Applications issued 4 September 2008. Briggs J granted interim relief on 18 September 2008. Evans-Lombe J, on 18 March 2009, directed that a questionnaire be sent to members of the first defendant. The contested permission hearing was determined by Pelling QC in the High Court, Chancery Division, on 21 May 2009.