Royal Westminster Investments SA & Ors v Varma

The applicants sought interim relief under section 25 of the Civil Jurisdiction and Judgments Act 1982 to restrain the respondent, Mr Varma, from causing Nilon Limited (a BVI company of which he is sole director and registered shareholder) to expend company funds on proceedings in the British Virgin Islands, to require disclosure of sums expended and to order repayment of any wrongful expenditure.

The court applied the two-stage section 25 approach: first, whether the facts would justify the relief if the substantive proceedings were in England; and second, whether it would be inexpedient to grant relief because the court had no jurisdiction apart from section 25. Key legal principles applied were the company-law principle that a company's funds should not be expended on disputes between shareholders, the limits on a shareholder's ability to sue or obtain interim relief for wrongs done to the company (Foss v Harbottle and Johnson v Gore Wood principles), and the established tests for granting interim injunctions (American Cyanamid and related authorities).

The court dismissed the application. It held that the applicants lacked standing to obtain the relief in respect of alleged breaches of duty owed to Nilon because any substantive claim for such breaches would belong to Nilon (and, if pursued by a shareholder, would have to be by way of a derivative claim). Even on the merits, the judge was not satisfied that it was clearly shown that Mr Varma had acted or would act in breach of duty, that damages would not be an adequate remedy, or that the balance of convenience favoured the injunctions sought. Further, granting the orders would risk obstructing the management of the BVI proceedings by the BVI courts and section 25(7)(b) barred certain forms of relief directed to obtaining evidence. Consequently the interim orders for restraint, disclosure and repayment were refused.

Background and parties. The applicants are claimants in BVI proceedings concerning a proposed Nigerian rice venture and assert they were entitled to shares in Nilon Limited. Nilon is a BVI company of which the respondent, Mr Varma, is sole director and (for now) sole registered shareholder. The applicants alleged both a joint venture agreement and a collateral agreement with Nilon; they say no shares were issued and seek rectification, specific performance and damages in the BVI. Bannister J originally refused service out but later granted permission after the pleadings were amended. The BVI Court of Appeal allowed the applicants' appeals and held there was a real issue for trial as to rectification and that Mr Varma was a necessary and proper party. The applicants then applied in England under section 25 CJJA for interim relief restraining expenditure by Nilon, for disclosure of sums spent and for repayment.

Nature of the application. The relief sought comprised: (i) a prohibitory injunction preventing Mr Varma (with limited exceptions) from procuring or permitting Nilon to incur legal or other costs in the BVI proceedings; (ii) an order requiring disclosure by Mr Varma of the quantum of sums expended by Nilon; and (iii) a mandatory order requiring Mr Varma to repay any sums wrongfully expended.

Issues framed by the court.

• Whether, applying the law that a company’s money should not be expended on disputes between shareholders, the facts would justify the interim relief if the substantive proceedings were in England;
• whether the applicants had standing to seek such relief in respect of alleged breaches of duties owed to Nilon;
• whether damages would be an adequate remedy and where the balance of convenience lay;
• whether the fact the main proceedings were in the BVI made it inexpedient to grant relief under section 25 (including risk of interference with the BVI court's management and the restriction in section 25(7)(b) on measures to obtain evidence).

Court’s reasoning and conclusions. The court concluded that the application was not in aid of any substantive claim that the applicants could properly bring in their own right. Any cause of action for breach of duty to Nilon belonged to Nilon and could only be pursued by the company or by a derivative claim; the applicants were not even registered shareholders and so had no standing to obtain the relief sought. The judge accepted that it was seriously arguable Mr Varma had involved Nilon in the BVI proceedings, but he was not satisfied there was clear evidence of improper conduct such as to justify mandatory relief. The evidence suggested Mr Varma had substantial means so damages would likely be adequate. The court also found that making the orders would risk hampering the management of the BVI proceedings by the primary court, and that an order for disclosure sought as ancillary to repayment would be improper where no repayment order was appropriate. Section 25(7)(b) was also relevant to the disclosure relief. For these reasons the application was dismissed.

Wider context. The judgment restates established constraints on shareholders seeking to protect company assets via interlocutory relief: shareholders cannot generally obtain interim orders to enforce rights that belong to the company, and English courts should be cautious about exercising section 25 powers where intervention would interfere with the primary court’s management of foreign proceedings.

The application for interim relief under section 25 CJJA is dismissed. The court held the applicants lacked standing to obtain interim relief in respect of alleged breaches of duties owed to Nilon (those claims belong to the company and, if pursued by a shareholder, only by derivative action). The judge also found insufficient cogent evidence of clear breach or imminent misuse of company funds, that damages would likely be adequate, and that granting the orders risked obstructing the BVI court’s management of the substantive proceedings; accordingly prohibitory, disclosure and repayment orders were refused.