Singh Brothers Contractors (North West) Ltd, Re

The claimant issued a derivative claim under section 261 of the Companies Act 2006 alleging that a director (his brother) had procured unlawful/excessive dividends and excessive remuneration by ineffective dividend waivers and other breaches of duty. The application before the court was for permission to continue the derivative claim and for an indemnity out of the company’s assets for costs.

The court refused permission. The principal legal grounds were that the challenged payments and recorded emoluments were set out and approved in the company accounts, and the three directors were also the three shareholders, so the conduct had been authorised by the company before it occurred or effectively ratified thereafter (section 263(2)(c) Companies Act 2006). The judge also held that, alternatively, the claimant was motivated by a family dispute (the will dispute) rather than by a genuine company interest (section 263(3)(a)), and that personal remedies (for example an unfair prejudice petition under section 994 or a just and equitable winding up or personal claims by the estate) were more appropriate. The court therefore refused permission and would not have granted an indemnity out of company assets.

This is a first-instance contested application for permission to continue a derivative claim brought by Mr Sukhpaul Singh on behalf of Singh Brothers Contractors (North West) Limited under section 261 of the Companies Act 2006. The second defendant is the company; the first defendant is the claimant’s elder brother and co-director and co-shareholder.

Background and relief sought:

• The claimant alleged his brother procured unlawful or excessive dividends over the years ending 31 August 2002 to 31 August 2009 by relying on ineffective dividend waivers and also procured excessive remuneration in the late 1990s, together causing loss to the company (quantified in the particulars of claim). The claimant sought damages, an account and further relief on behalf of the company and sought permission under section 261 to continue the derivative claim and an indemnity out of company assets for legal costs.
• The factual genesis included a family will dispute after the death of the parties’ mother in January 2010; the claimant acknowledged the will dispute prompted the investigations that led to the derivative claim.

Issues framed by the court:

• Whether permission should be granted under sections 260–263 of the Companies Act 2006 to continue a derivative claim.
• Whether mandatory bars under section 263(2) applied (in particular whether no director acting in accordance with section 172 would seek to continue the claim, and whether the cause of action arose from acts authorised by the company before they occurred or ratified since).
• Whether discretionary factors under section 263(3) (good faith, importance to the company, availability of alternative remedies, costs and limitation) meant permission should be refused.
• Whether the dividend waivers were effective, whether undue influence or misrepresentation vitiated consents, and whether limitation rules (Limitation Act 1980 s.21) were engaged.

Court’s reasoning and disposition:

• The judge conducted extensive pre-reading of the evidence and skeleton arguments and considered authorities including Hughes v Weiss and Kiani v Cooper on the permission stage.
• The pivotal factual finding was that company accounts (for the relevant years that were available) recorded and were approved by the three directors who were also the three shareholders, demonstrating that the payments and remuneration had been authorised/approved and thereby engaging the mandatory bar in section 263(2)(c). The accounts showed the dividend payments and the recorded emoluments; the directors had approved those accounts.
• In relation to remuneration, the passage of time and limitation risk strengthened the case for refusing permission. The court concluded that a director acting in accordance with section 172 would not seek to continue the claim.
• Alternatively, the judge found that the real motive for the claimant’s application was personal animosity arising from the will dispute, so the claimant was not acting in good faith for the company (section 263(3)(a)).
• The judge further identified alternative personal remedies (an unfair prejudice petition under section 994 or a just and equitable winding up, or personal claims by the late mother’s estate) as more appropriate avenues for redress than a derivative action.
• On that basis the court refused permission to continue the derivative claim and declined to grant an indemnity out of the company’s assets.

Procedural note: the application for permission was heard at first instance in the Chancery Division (Manchester District Registry) and determined on the papers and oral submissions; no appellate history is stated in the judgment.

This is a first-instance decision. Permission to continue the derivative claim under section 261 Companies Act 2006 was refused. The court held that the principal reason was that the payments complained of had been recorded in, and approved by, the company accounts such that they were authorised by the company before they occurred or effectively ratified thereafter (mandatory bar under section 263(2)(c)); alternatively the claimant lacked good faith (section 263(3)(a)) being motivated by a family dispute, and alternative personal remedies (for example section 994 unfair prejudice or winding up) were available and preferable. The court therefore refused the application and would not order an indemnity out of company assets.