Stainer v Lee & Ors

Permission to continue a derivative claim under Companies Act 2006, section 263, requires an overall evaluative assessment rather than a prescribed standard of proof. The court must consider whether any director acting in accordance with section 172 would continue the claim and must weigh the statutory factors, including the strength and value of the claim, costs, ratification, good faith and the views of disinterested members. A later agreement does not ratify an earlier breach merely because it uses the word ratify; the substance and informed nature of the approval matter. Permission may properly be limited to disclosure where the claim is strong or substantial but the loss and factual basis require investigation.

The applicant, a minority shareholder in Kerrington Limited, sought permission to continue a derivative claim against two directors and Eldington Holdings Limited. The claim concerned substantial loans by the company to Eldington, which was controlled by one of the directors. It alleged that interest had not been obtained and that further unsecured lending was outside the authority approved by the members and contrary to the directors’ duties.

The respondents relied on subsequent interest payments, a new loan agreement approved by members, the applicant’s alleged lack of good faith and the possible availability of an unfair-prejudice petition. The central issue was whether permission should be granted under sections 261 and 263 of the Companies Act 2006, and if so on what terms.

1. Permission granted, subject to control. The derivative claim was allowed to continue only to the conclusion of disclosure, after which a further application for permission was required. The applicant was granted an indemnity for reasonable future costs, capped at £40,000 excluding VAT, with liberty to apply.
2. Section 263(2) contains mandatory bars, but it does not prescribe a corresponding standard which must be met before permission can be granted. Sections 263(3) and (4) require the court to evaluate the specified factors and reach an overall view. The assessment is provisional and non-mechanistic.
3. The mandatory bar in section 263(2)(a) applies only where the court is satisfied that no director acting in accordance with section 172 would seek to continue the claim. If some directors would continue and others would not, the issue falls under the discretionary assessment in section 263(3)(b). The hypothetical director’s evaluation may include the strength and size of the claim, likely recovery, costs, funding, defendants’ ability to satisfy judgment, commercial disruption and other consequences.
4. The failure to obtain interest for almost nine years on lending which increased to about £8.1 million gave very strong grounds for a breach-of-duty claim. Uncertainty about the precise loss did not justify refusal at this stage; disclosure was appropriate. The additional lending of about £3.43 million was outside the authority approved in 2001 and was at least well arguable as a breach, given the unexplained purpose, lack of security and the director’s conflict.
5. The new loan agreement did not ratify the earlier additional lending under section 263(2)(c)(ii). It operated as a new agreement for future borrowing and used interest rates different from those applicable when the lending occurred. The members’ approval was also arguably uninformed because the purpose of the loans and the director’s interest in Eldington were not shown to have been disclosed. The personal guarantee did not materially alter the assessment because the evidence did not establish its value.
6. The applicant was acting in good faith. The possible availability of an unfair-prejudice petition under section 994 was only a discretionary factor and did not make the derivative claim inappropriate, since the relief sought was restitution and financial recovery for the company. The claim against Eldington was material because repayment relief lay against that company.