Kleanthous v Paphitis & Ors

Permission to continue a derivative claim under Part 11 of the Companies Act 2006 does not depend on satisfying a fixed merits threshold. The court must make a provisional assessment of the claim and evaluate the statutory factors as a whole.

Permission must be refused where no director acting in accordance with the duty to promote the company’s success would continue the claim. The court should give substantial weight to a properly informed decision by independent company representatives not to litigate, the commercial consequences of proceedings and the availability of an effective alternative remedy, including an unfair-prejudice petition.

The claimant, a shareholder in Ryman Group Limited, sought permission under section 261 of the Companies Act 2006 to continue a derivative claim on behalf of that company and its subsidiary, Ryman Limited. He alleged that four directors had diverted the opportunity to acquire La Senza and had used group assets to support its acquisition by a company associated with the principal shareholder.

The companies’ committees decided that continuing the claim would not promote their success. The central issues were the provisional merits of the proposed fiduciary-duty claims, the statutory permission criteria, the significance of the companies’ decision not to litigate and the availability of relief under section 994.

1. Merits threshold. Part 11 of the Companies Act 2006 contains no fixed threshold requiring a strong case. The court must assess the merits provisionally and evaluate the statutory factors overall. A claim that is merely arguable may sometimes warrant continuation, while a strong claim may still be refused for sound commercial reasons (paras [38]-[42]).
2. Hypothetical director. Section 263(2)(a) requires refusal where no director acting in accordance with section 172 would seek to continue the claim. That condition was met in relation to Mr Childs because the claim against him was particularly weak and there was no apparent profit for which he could account. Permission therefore had to be refused against him (para [70]).
3. Evaluation of the remaining claims. The allegations against the other directors were arguable, including possible engagement of the no-conflict and no-profit rules. However, the prospects of success were materially below even, and questions arose concerning authorisation, disclosure of interests, fraud and limitation (paras [45]-[67]).
4. Commercial factors. In applying section 263(3), the court considered the potential recovery, litigation costs, disruption, reputational harm, loss of experienced directors and damage to business relationships. It attached considerable weight to the reasoned decision of independent company committees, whose members were better placed to assess the companies’ commercial interests (paras [71]-[75]).
5. Alternative remedy and outcome. The availability of an unfair-prejudice petition under section 994 was a powerful reason to refuse permission, particularly because the claimant’s evidence indicated an interest in a buy-out. The application was dismissed and permission to continue the derivative claim was refused. Consequential matters, including any application for permission to appeal, were adjourned (paras [76]-[87]).