Kleanthous v Paphitis & Ors

The claimant sought permission under section 261 of the Companies Act 2006 to pursue a derivative claim on behalf of Ryman Group Limited and its subsidiary Ryman Limited arising from the 1998 acquisition of La Senza by Xunely Limited. The court analysed the Part 11 regime (sections 260–264) and the statutory factors in section 263, including whether a director acting under section 172 would continue the claim, the company’s own decision not to pursue the claim, the merits of the proposed claim, and the availability of alternative remedies such as an unfair prejudice petition under section 994. The judge found there to be arguable breaches of fiduciary duties (no conflict / no profit rules) but concluded the claimant’s prospects of success were significantly less than evens and that the claim against Mr Childs was particularly weak; statutory limitation issues under the Limitation Act 1980 (sections 21 and 32) were examined and found to present difficulties. The court placed substantial weight on the independent committees of the companies which had resolved not to pursue the claim and on the availability of an alternative section 994 remedy, and accordingly refused permission to continue the derivative claim.

The claimant, a minority shareholder in Ryman Group Limited (RGL), applied for permission under section 261 of the Companies Act 2006 to continue a derivative claim on behalf of RGL and its subsidiary Ryman Limited (RL) alleging that four director-defendants diverted the opportunity to acquire La Senza to a company controlled by the first defendant, and caused RGL/RL to provide loans, guarantees and management services in circumstances said to breach fiduciary duties.

Background and parties:

• The claimant held 15.5% of RGL; the first defendant, Mr Paphitis, held 72.4% and was a director of RGL and owner of Xunely which acquired La Senza in 1998.
• The proposed defendants included Mr Paphitis and three fellow directors of RGL (Mr Cooke, Mr Towner and Mr Childs). RGL and RL are the corporate parties on whose behalf the derivative claim was to be pursued.

Nature of the application: Permission to continue a derivative action under Part 11 (sections 260–264) of the Companies Act 2006 and an indemnity for the claimant’s costs. The application followed pre-action correspondence and the companies’ own decision, taken by an independent two-director committee, not to pursue the claims.

Issues framed by the court:

• Whether the claimant established a prima facie (provisional) case sufficient to justify continuing the derivative claim, having regard to the statutory factors in section 263.
• Whether a director acting under section 172 would continue the claim (section 263(2)(a)), the importance a director would attach to continuing it (section 263(3)(b)), and whether the company had decided not to pursue the claim (section 263(3)(e)).
• Limitation and concealment issues under the Limitation Act 1980 (sections 21 and 32) and whether any alleged breaches constituted a class 1 constructive trust for the purposes of section 21(1)(a).
• Whether an alternative remedy (section 994 unfair prejudice petition) made derivative relief inappropriate.

Court’s reasoning and conclusions:

• The court reviewed authorities on the statutory leave regime and concluded there is no fixed merits threshold; the court must weigh the factors in section 263 on the material before it.
• The alleged breaches engaged the no conflict and no profit rules and were arguable, but the claimant’s prospects of success were materially below even odds. The claim against Mr Childs was especially weak and, in the court’s view, a director acting pursuant to section 172 would not pursue the claim against him, invoking section 263(2)(a) and requiring refusal as to Mr Childs.
• Limitation arguments (sections 21 and 32 of the Limitation Act 1980) presented further difficulties for the claimant, including the need to show a class 1 constructive trust and deliberate concealment for section 21/32 to assist.
• The court attached significant weight to the independent committee decisions of RGL and RL not to pursue the claims, and to the availability of an unfair prejudice remedy under section 994 which could achieve the claimant’s likely objectives without exposing the companies to the disruption that litigation would cause.
• Balancing the statutory factors, the court refused permission to continue the derivative claim and dismissed the claimant’s application.

The court noted other issues (double derivative jurisdiction, common law continuation requirement under the commencement order, and costs indemnity) but indicated they need not be decided in light of the refusal of permission.

The application for permission to continue the derivative claim is refused and the application is dismissed. The judge concluded that, although there were arguable breaches of fiduciary duty, the claimant’s prospects of success were materially weak (particularly as to Mr Childs), the companies’ independent committees had reasonably decided not to pursue the claim, an alternative remedy under section 994 was available, and the balance of the statutory factors in section 263 did not favour granting permission.