Hughes v Weiss

This is an application under section 261 of the Companies Act 2006 for permission to continue derivative claims on behalf of Iuvus Limited. The claimant alleged three heads of breach by the respondent director: (1) wrongful transfer and misappropriation of £100,000, (2) carrying on competing business in breach of fiduciary duty, and (3) diversion of payment of invoices. The judge applied the statutory test in sections 261 and 263 (including the duty in section 172 and transitional provisions for acts before 1 October 2007) and concluded that the applicant had shown a prima facie case and that permission should be granted.

Key legal findings: the transfers were not shown to have been authorised or ratified by the company; the claimant was acting in good faith; a hypothetical director acting under section 172 could attach importance to pursuing the claims; alternative remedies (unfair prejudice petition or liquidation) were not a compelling reason to refuse permission; the personal claim by the claimant was not part of the derivative application and was stayed to the case management conference.

Background and parties:

• The claimant, Ms Suzy Hughes, and the first defendant, Mr Nigel Weiss, were equal directors and equal shareholders of Iuvus Limited, a small company formed to provide commercial legal consultancy services. The joint venture had effectively ended by June 2007 and Iuvus was later dissolved and restored to allow these proceedings.

Nature of the application:

• Ms Hughes applied under section 261 for permission to continue derivative claims on behalf of Iuvus. She advanced three principal causes of action vested in the company: (a) wrongful removal and failure to account for £100,000 taken from the company bank account, (b) breach of fiduciary duty by competing with Iuvus (through a company called New Avenue Projects Ltd), and (c) diversion of invoice payments into Mr Weiss’s bank account.

Procedural posture:

• The application for permission was considered by HH Judge Keyser Q.C. following earlier directions given by HH Judge Behrens. Evidence included witness statements from both parties and prior pre-claim disclosure orders.

Issues framed:

Whether the claimant disclosed a prima facie case; whether the acts were authorised or had been ratified by the company; whether a director acting in accordance with section 172 would seek to continue the claim; whether the claimant acted in good faith; whether alternative remedies (section 994 petition or liquidation) made the derivative route inappropriate; and the effect of transitional provisions for acts before 1 October 2007.

Court’s reasoning and conclusions:

• The judge formed a preliminary view that the claimant had good prospects of establishing breaches of duty by Mr Weiss, finding the defendant’s explanations — including his account of the £100,000 transfer, alleged quantum meruit, payments to family members and justification by bank mandate — unconvincing on the material before the court.
• The judge held there was no evidence of prior authorisation by the company or of ratification, and therefore no mandatory bar under section 263(2)(c). He also concluded it could not be said that no director acting under section 172 would pursue the claim, so section 263(2)(a) did not mandate refusal.
• Considering the discretionary factors in section 263(3), the claimant was found to be acting in good faith and a person acting under section 172 would attach importance to pursuing the allegations, particularly given the company’s likely imminent dissolution and the need to protect fair distribution between members.
• Alternative remedies were considered (unfair prejudice petition, members’ voluntary liquidation). The court concluded those routes were not clearly preferable and that a derivative claim was an appropriate procedure to seek restitution and compensation for the company.

Disposition:

• Permission to continue the derivative claims was granted. The separate personal claim by the claimant for recovery of sums she had paid on the company’s behalf was stayed until the case management conference.

The court granted permission to continue the derivative claims under section 261 of the Companies Act 2006. The judge gave that permission because, on the material before him, the claimant had a prima facie case that the director had misappropriated company funds, diverted invoices and possibly carried on competing business in breach of fiduciary duty; there was no evidence of authorisation or ratification by the company; the claimant was acting in good faith and a director acting under section 172 could properly attach importance to pursuing the claims; and alternative remedies did not make the derivative route inappropriate. The claimant’s personal claim was stayed to the case management conference.