Iesini & Ors v Westrip Holdings Ltd & Ors

A statutory derivative claim under Part 11 of the Companies Act 2006 must arise from a director’s negligence, default, breach of duty or breach of trust. It cannot be used to pursue an independent claim against a third party merely because directors improperly declined to pursue it.

At the second permission stage, the court must assess more than a prima facie case, without conducting a mini-trial. Permission must be refused under section 263(2)(a) only where no director acting in accordance with section 172 would continue the claim. Otherwise, the importance attached to the claim falls for discretionary assessment.

Good faith permits a derivative claimant to obtain collateral benefits where the dominant purpose remains the company’s benefit. An alternative remedy is relevant but is not an absolute statutory bar.

Shareholders of Westrip Holdings Ltd sought permission under section 261 of the Companies Act 2006 to continue claims on the company’s behalf. They alleged that directors and associated parties had participated in asset stripping involving valuable Greenland mineral licences, the rescission of share sale agreements and proposed settlement of Australian proceedings.

The proposed claims concerned conspiracy, the board’s acceptance of the rescission, restitution for expenditure on a mining licence, and an assertion that another exploration licence was held on trust for Westrip. The court had to determine whether those causes of action qualified as statutory derivative claims, whether any mandatory or discretionary bar applied, and whether the board should reconsider the trust claim.

Norris J had permitted the application to proceed beyond the paper stage. Proudman J had granted a freezing order over specified assets pending determination of the permission application.

1. Permission was refused for the conspiracy, rescission and restitutionary claims. The application concerning the trust claim was adjourned so that Westrip’s board could reconsider its position. The injunction over the Northern and Southern Licences was continued subject to an unlimited personal cross-undertaking in damages from the claimants.

2. A claim under Part 11, Chapter 1 of the Companies Act 2006 must arise from a director’s negligence, default, breach of duty or breach of trust. The statutory claim may be brought against a director, a third party or both, but it cannot encompass an independent cause of action against a third party merely because directors improperly declined to pursue it. Such relief may instead be available through proceedings under section 994 and an order under section 996.

3. The first stage under section 261 requires a prima facie case both that the company has a good cause of action and that it arises from qualifying director misconduct. At the second stage the court requires something more, although it should not conduct a mini-trial. It must form the best provisional view it can about the claim’s strength because that bears upon sections 263(2)(a) and 263(3)(b).

4. The mandatory bar in section 263(2)(a) applies only where no director acting in accordance with section 172 would continue the claim. Relevant commercial considerations include the claim’s size and strength, litigation costs, funding, recoverability, adverse-costs exposure, disruption and possible harm to the company’s relationships or activities. Where reasonable directors could differ, the issue falls within section 263(3)(b).

5. The rescission claim was exceptionally weak. The company had failed to issue compliant preference shares by the contractual deadline, time was of the essence, and the board had followed specialist English and Australian legal advice. The suggested estoppel was also weak. Public policy prevented an estoppel between the company and selected members from overriding the statutory prohibition on an unlawful redemption from capital. No section 172-compliant director would have continued the claim.

6. The restitution and underlying trust claims did not arise from director misconduct and therefore were not derivative claims within Chapter 1. The trust claim was nevertheless strong and remained capable of protecting Westrip’s beneficial ownership. Since the board agreed to reconsider the proposed settlement, the court directed reconsideration under section 261(4)(c).

7. The claimants acted in good faith because their dominant purpose was to benefit Westrip, notwithstanding possible collateral benefits. An alternative remedy under section 994 was relevant but not an absolute bar. Its availability, together with Westrip’s potential costs liability, would have weighed against permission for the trust claim.

• High Court, Norris J: On 10 July 2009, the paper application disclosed a prima facie case and was directed to proceed to the second statutory stage.
• High Court, Proudman J: On 27 July 2009, a freezing order was granted over Westrip’s GGG shares, its interest in the Northern Licence and the Tanbreez licence.
• High Court, Lewison J: Permission was refused for the conspiracy, rescission and restitutionary claims. The trust issue was adjourned for board reconsideration, and the injunction was continued only over the Northern and Southern Licences, subject to an unlimited cross-undertaking.