Hughes v Weiss Re Iuvus Ltd

Permission for a derivative claim under the Companies Act 2006 requires a provisional evaluation of the statutory criteria, but the Act prescribes no universal merits threshold beyond establishing a prima facie company cause of action. For pre-1 October 2007 conduct, the court must apply the current statutory criteria and then ensure that the claim would also have been permitted under the former law. The availability of an alternative remedy is a discretionary factor, not an absolute bar. A derivative claim is appropriate where the claimant seeks restitution or compensation for wrongs done to the company; an unfair prejudice petition is directed to different relief. In a deadlocked company, the interests of members may justify proceedings even where the company will be dissolved. Permission was granted on the evidence, subject to the provisional nature of the merits assessment.

Suzy Hughes applied under section 261 of the Companies Act 2006 and rule 19.9A of the Civil Procedure Rules 1998 for permission to continue derivative claims on behalf of Iuvus Limited against its other director, Nigel Weiss.

The claims alleged misappropriation of company money, competition with Iuvus in breach of fiduciary duty, and diversion of a company debt into Mr Weiss’s personal bank account. The alleged acts occurred before 1 October 2007. The issues included the statutory and transitional merits tests, authorisation or ratification, good faith, the interests of a hypothetical director, alternative remedies, and the appropriateness of an unfair prejudice petition or voluntary liquidation.

1. Permission granted. The court permitted continuation of all three derivative claims. The evidence disclosed a prima facie company cause of action, and the claimant had good prospects at the permission stage, although the provisional merits views would not bind the trial judge.
2. Under paragraph 20(3) of Schedule 3 to the relevant transitional Order, the court had to apply a two-stage approach. It first had to decide whether permission would be given under section 263. It then had to refuse permission to the extent that the claim would not have proceeded under the law in force before 1 October 2007.
3. Section 263 imposed no particular merits threshold such as a reasonably arguable or likely-to-succeed case. The court had to reach an overall, provisional and non-mechanistic view of the statutory factors. The applicant nevertheless had to establish a prima facie case that the company had a good cause of action arising from the director’s breach of duty.
4. The mandatory bars in section 263(2) were not established. A sole-signatory bank mandate and a general discussion about obtaining better interest did not authorise transferring company funds to a director’s personal account. Nor was the court satisfied that the relevant acts had been authorised or ratified. It could not be said that no director acting under section 172 would continue the claims.
5. The existence of an alternative remedy was a factor under section 263(3)(f), not an absolute bar under the former law. A derivative claim was the appropriate procedure because the claimant sought financial remedies for alleged misfeasance against the company. A section 994 petition, aimed at relief from unfair prejudice, would address a different complaint and different relief. Voluntary liquidation was also impractical because the company had limited assets and a liquidator was unlikely to fund the litigation.
6. Because Iuvus was dormant and deadlocked, the relevant section 172 consideration was fairness between members. The company’s imminent dissolution did not prevent proceedings from promoting the company’s success in the only meaningful sense available: fair distribution of its assets. The company was not required to indemnify the claimant’s costs on the usual derivative-claim basis on these facts; the two members were to conduct the proceedings at their own risk.
7. The claimant’s separate personal claim against Iuvus was stayed until the case management conference, where its future should be considered.