Universal Project Management Services Ltd v Fort Gilkicker Ltd & Ors

A statutory derivative claim under Chapter 1 of Part 11 of the Companies Act 2006 is an exclusive code only for claims brought by a member of the company in which the cause of action is vested. It does not abolish the surviving common-law procedure that permits a sufficiently interested member of a parent entity to represent a subsidiary in wrongdoer control.

Parliament will displace that common-law procedure only by express words or clear and necessary implication. The procedure can extend to a member of an LLP which wholly owns the wronged company. Permission requires a prima facie company claim and wrongdoer control, but the court retains a discretion and may stay a permitted claim to facilitate negotiation.

The applicant and the second defendant were equal members of an LLP which wholly owned Fort Gilkicker Ltd. They were also its only directors. The applicant alleged that the second defendant, while a director, allowed the company’s option to acquire Fort Gilkicker to lapse and procured its acquisition by a company wholly owned by him.

The applicant sought permission to pursue, on Fort Gilkicker Ltd’s behalf, a claim for breach of fiduciary duty and recovery of the diverted business opportunity. It was not itself a shareholder in Fort Gilkicker Ltd. The central issues were whether a double or multiple derivative action existed at common law, whether it survived Chapter 1 of Part 11 of the Companies Act 2006, and whether permission should be granted.

1. Permission was granted for the multiple derivative claim to continue. The proceedings were to be stayed for a short period to allow negotiation, with directions to be determined if necessary.

2. Before 2006, the common-law derivative action was a flexible procedural device intended to prevent a wrong done to a company from going without redress where wrongdoers controlled it. It could therefore permit a member of a parent company to act as representative claimant for its wholly owned subsidiary if the parent was subject to the same wrongdoer control. That was not a distinct cause of action called a double or multiple derivative action, but an application of the same procedure. The court accepted the reasoning in Waddington Ltd v Chan Chun Hoo Thomas & ors [2008] HKCU 1381.

3. Chapter 1 of Part 11 of the Companies Act 2006 comprehensively replaced the common-law derivative action only for claims within section 260: proceedings by a member of the wronged company. Section 260 could not include a member of a holding company, particularly given the limited extension of “member” in section 260(5)(c). The Act neither expressly nor by clear and necessary implication abolished the residual common-law procedure for multiple derivative claims.

4. The same reasoning applied where the intermediate owner was an LLP. The claimant’s standing arose from its sufficient interest in securing redress for the subsidiary, rather than from any inherent membership right in the LLP.

5. The claim disclosed a prima facie breach of fiduciary duty. Such a breach was within the equitable wrongs treated as fraud for the Foss v Harbottle exception, and the director’s equal control amounted to negative wrongdoer control. The suggested contractual and unfair-prejudice alternatives were not sufficiently effective substitutes. A stay after permission, rather than refusal, was more likely to support a just negotiated resolution.

not stated in the judgment.