Singh Brothers Contractors (North West) Ltd, Re

Permission to continue a derivative claim may be refused without applying a fixed merits threshold. The court should form the best provisional view it can from the evidence, without conducting a mini-trial.

Permission is barred where the impugned conduct was authorised before it occurred or ratified afterwards. Approval of company accounts by directors who are also shareholders may establish such authorisation or ratification. The court may also refuse permission where continuation lacks importance to a director acting under section 172, is pursued in bad faith, or is less appropriate than a personal remedy such as an unfair prejudice petition.

The claimant sought permission under section 261 of the Companies Act 2006 to continue a derivative claim on behalf of Singh Brothers Contractors (North West) Ltd against his brother, a fellow director and shareholder.

The proposed claim concerned allegedly excessive dividends and remuneration. The claimant alleged that dividend waivers were ineffective because of undue influence and misrepresentation, and sought an indemnity from the company for his costs. The defendant relied on authorisation, ratification, bad faith, the importance of the claim to a reasonable director, and alternative personal remedies.

The central issues were whether the statutory mandatory bars applied and, if not, whether permission should nevertheless be refused under section 263(3).

1. Permission refused. The claimant was not permitted to continue the derivative claim. The court also declined to grant an indemnity from the company’s assets.
2. Under sections 260 to 263 of the Companies Act 2006, there is no fixed merits threshold for permission. The court must form the best provisional view it can on the material available. That exercise is not a mini-trial.
3. The mandatory bar in section 263(2)(c) applied. The alleged excessive dividends were recorded in the company accounts. The three directors were also the three shareholders, and their approval of the accounts amounted to approval of the dividend payments. The same reasoning applied to the remuneration recorded in the accounts.
4. The court further held that no director acting in accordance with section 172 would seek to continue the challenge. Alternatively, the importance requirement in section 263(3)(b) justified refusal. The substantial delay concerning the remuneration strengthened that conclusion, particularly in light of possible limitation issues.
5. Alternatively, the claimant was acting in bad faith within section 263(3)(a). The real motivation was the family dispute concerning the deceased mother’s later will, rather than vindication of the company’s rights.
6. In any event, the more appropriate remedies were personal proceedings by the claimant, or proceedings by the mother’s estate, including an unfair prejudice petition under section 994 or a just and equitable winding-up petition. The complaints of undue influence and misrepresentation were naturally personal in character.
7. The judge added that, had permission been granted, it would initially have been limited to disclosure and inspection. An advance indemnity for costs would in any event have been refused because the dispute was essentially personal between two shareholders and directors.