Bamford v. Harvey

The court refused permission to continue the proceedings as a derivative claim under Part 11 of the Companies Act 2006. The judge applied the statutory framework in ss. 260–264, in particular s. 263(2)–(4), and held that where a shareholder can procure the company itself to bring the action (here by operation of clause 11 of the parties' Shareholders Agreement) the derivative route was unnecessary and permission should be refused. The court followed the flexible approach in Wishart but emphasised the continuing relevance of the Law Commission's guiding principle that normally the company should be the proper plaintiff.

Accordingly, permission for a derivative claim was refused and the claim was ordered to be reconstituted as an ordinary claim in the name of the company.

This was a first instance permission hearing under Part 11 of the Companies Act 2006 for a derivative claim brought by Mr Joseph C E Bamford against Mr J H Harvey, who are joint 50% shareholders and sole directors of Avro Heritage Ltd. The derivative claim arose from a £3.5 million loan advanced by the company to Mr Harvey in circumstances where the company faced an immediate VAT payment obligation to BAE Systems. The claimant sought permission under s. 261 to continue a derivative claim requiring Mr Harvey to repay the loan to the company.

The statutory test and procedure were carefully set out: ss. 260–264 establish a two-stage permission procedure, with the court required to refuse permission in the specified circumstances in s. 263(2) and to take particular factors into account under s. 263(3)–(4). Vos J had previously found a prima facie case at the first, ex parte stage.

The central issue at the second-stage hearing was whether the derivative route was inappropriate because the company could itself bring proceedings against Mr Harvey by virtue of clause 11 of the Shareholders Agreement, which expressly gave the claimant authority to litigate claims against the other shareholder and excluded the other shareholder from participating in consideration of such matters. The defendant contended the Company could and should be the plaintiff and that permission for derivative proceedings should be refused as a matter of principle; the claimant had not relied on clause 11 before commencing the derivative claim.

The court analysed prior authorities including Cinematic Finance, Stimpson and the Inner House decision in Wishart. The judge accepted that 'wrongdoer control' is not an absolute bar but concluded that where there is a clear contractual mechanism enabling the company itself to pursue the claim and no real obstacle shown to the company prosecuting the claim, the derivative procedure was unnecessary. The claimant's failure to rely on clause 11 was an oversight and there was no evidence that the company could not fund ordinary proceedings or obtain conditional fee arrangements. The court therefore refused permission to continue as a derivative claim and ordered the proceedings to be reconstituted as an ordinary Part 7 claim in the name of the company, with further directions to be fixed.

The court refused permission for the claim to continue as a derivative action under Part 11 of the Companies Act 2006 and ordered the proceedings to be reconstituted as an ordinary claim in the name of Avro Heritage Ltd. Rationale: clause 11 of the Shareholders Agreement gave the claimant authority to litigate on the company's behalf so the derivative mechanism was unnecessary; there was no evidence the company could not itself fund or authorise the litigation; the court followed a flexible approach to 'wrongdoer control' but applied the Law Commission's guiding principle that normally the company should be the proper plaintiff.