Cinematic Finance Ltd v Ryder & ors

The claimant sought permission to continue a derivative claim under Chapter 1 of Part 11 of the Companies Act 2006. The court held that the statutory procedure for derivative claims does not displace the fundamental rule that causes of action vested in a company should normally be pursued by the company and not by its shareholders. The judge accepted that the Act confers a discretion under section 261 but concluded that a shareholder who controls the company will, save in very exceptional circumstances, not be permitted to bring a derivative claim because the controlling shareholder can procure the company to pursue the action.

The judge relied on the Law Commission's guiding principles underlying the statutory scheme, the rule in Foss v Harbottle and Prudential Assurance v Newman Industries (No. 2) as reflecting the proper starting point. On the facts, the claimant already controlled the majority or all of the shares, had the power to appoint directors and had not shown exceptional circumstances. Further, the companies were said to be insolvent and, if placed into liquidation or administration, the insolvency office‑holder would be the appropriate person to decide whether to pursue the claims (citing the Insolvency Act 1986 remedies). For these reasons the court dismissed the application for permission to continue the derivative claim.

The claimant applied for the court's permission under Chapter 1 of Part 11 of the Companies Act 2006 to continue a derivative claim allegedly on behalf of 17 closely held investment companies. The substantive defendants were two former directors of each company and Zeus Partners LLP. The companies had been established as close companies to invest in films connected to Seven Arts and had also contracted to provide services to Seven Arts.

Nature of the application: permission to continue a derivative claim under section 261 of the Companies Act 2006.

Procedural posture: this was the second stage of the statutory two-stage procedure. At the first stage Lewison J (on 21 June 2010) determined on the papers that the claim disclosed a prima facie case and ordered service and further directions; the present hearing was the substantive application under section 261(3).

Facts: since June 2009 the claimant had acquired either all or the overwhelming majority of the shares in the companies by reason of recourse arrangements under loans to the original investors; the former directors resigned when the claimant obtained control. The claimant had not appointed replacement directors but could have done so. The claimant alleged that payments had been made by the companies to Zeus which should have been paid to SAFE and Seven Arts, causing breaches of duty and VAT liabilities.

Issues framed by the court: (i) whether the fact that the claimant controlled the companies precluded permission for a derivative claim; (ii) whether exceptional circumstances justified a derivative claim by a controlling shareholder; and (iii) whether insolvency of the companies made a derivative claim inappropriate because the insolvency regime should be followed.

Reasoning: the judge accepted that the Companies Act 2006 governs derivative claims but held that it did not intend to overturn the foundational principle that the company is the proper plaintiff. The Law Commission's report and the Act's text support that approach. Only in very exceptional cases could a controlling shareholder be permitted to continue a derivative claim; the judge considered that no such exceptional circumstances were proved. Evidence showed the claimant was aware it held the shares and could have procured appointment of directors and delivery of statutory books; it had not properly sought to obtain the companies' books or to appoint directors. The claimant relied on cost and risk of insolvency procedures as reasons for bringing a derivative claim, but the judge found that where a company is or may be insolvent the proper course is for the liquidator or administrator to decide on pursuing causes of action and that a derivative claim by a controlling shareholder would improperly circumvent the insolvency regime.

Conclusion: the application for permission to continue the derivative claim was dismissed for lack of exceptional circumstances and because the claim was an improper attempt to bypass the insolvency regime.

This is a first instance disposal. The application for permission to continue the derivative claim is dismissed. The court held that the Companies Act 2006 does not displace the fundamental principle that causes of action vested in a company should normally be pursued by the company; a shareholder who controls the company will not, except in very exceptional circumstances, be allowed to continue a derivative claim because the shareholder can procure the company to act. On the facts no exceptional circumstances were shown, and the insolvency of the companies made a derivative route inappropriate because the insolvency office‑holder should decide whether to pursue the claims.

Lewison J previously considered the paper application under section 261(2) and on 21 June 2010 determined that the action should not be dismissed for disclosing no prima facie case and ordered service and further directions; the present hearing was the substantive permission stage under section 261(3).