Abouraya v Sigmund & Ors

A common-law double derivative claim remains available outside Companies Act 2006 Part 11, including where the holding company is foreign. The claimant must nevertheless have a legitimate shareholder interest in relief for the subsidiary.

Under the exception to the rule in Foss v Harbottle, the claimant must show a prima facie entitlement to relief and a claim within the exception. This normally requires loss to the shareholder, albeit reflective loss, and wrongdoing which cannot be ratified because the wrongdoers benefit personally.

Permission is discretionary. It should be refused where a shareholder without a real shareholder interest seeks to use derivative proceedings to improve his position as a creditor, or where the proceedings would impose an unjustified case-management burden.

The claimant and the first defendant each held one share in Triangle HK, a Hong Kong holding company. Triangle HK wholly owned Triangle UK and its Swiss subsidiary. The claimant sought permission to continue a double derivative claim on behalf of Triangle UK against the first defendant, its sole director, and to serve the claim form on Triangle HK in Hong Kong.

The alleged breaches concerned payments and a trading opportunity said to have been diverted from Triangle UK to the Swiss subsidiary. The claimant accepted that, save for limited alleged benefits, the defendant had not personally received the diverted funds or opportunity. He was also pursuing a separate Queen’s Bench action as an alleged creditor of Triangle UK and sought a combined trial.

The central questions were whether the claim fell within the common-law derivative-action exception and whether permission should be granted in the exercise of the court’s discretion.

The application for permission to continue the derivative action was refused.

1. The statutory derivative-claim regime in Companies Act 2006 Part 11 did not apply. The claimant was not a member of Triangle UK, in which the causes of action were vested, and Triangle HK was not a statutory “company” for this purpose. The court nevertheless had common-law jurisdiction over a double derivative claim. It endorsed Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] EWHC 348 (Ch), which confirmed that Part 11 had not abolished that jurisdiction.

2. The common-law test required a prima facie case that Triangle UK was entitled to relief and that the claim fell within the exception to the rule in Foss v Harbottle. A prima facie case was stronger than a seriously arguable case. The claimant met that threshold, on the present evidence, in relation to Triangle UK’s possible claims concerning the UMCOR contract and the payments.

3. He did not, however, show that the claim fell within the exception. The authorities required a claimant in a double derivative action to have a legitimate interest arising from loss to the parent company and, reflectively, to the shareholder. Any loss to Triangle UK was matched by a gain to Triangle Switzerland, also wholly owned by Triangle HK. The claimant therefore suffered no loss as a Triangle HK shareholder.

4. Nor was there a prima facie case that the defendant personally benefited from the alleged breaches. In the absence of actual fraud or an ultra vires act, the relevant wrong must ordinarily be incapable of ratification because the wrongdoers benefit from it. The alleged benefits to the defendant were either unsupported or concerned remuneration from Triangle Switzerland, for which any excessive-remuneration claim would belong to that company.

5. Independently, permission would have been refused in the court’s discretion. The real purpose was to improve the claimant’s prospective position as a creditor of Triangle UK, rather than to protect a shareholder interest. That was not a proper use of the derivative procedure. The proposed combined trial would also add substantial disclosure, evidence, cross-examination and court time despite little substantive overlap with the creditor action. If the creditor action failed, the derivative proceedings would be wasteful; if it succeeded, ordinary creditor remedies remained available.

not stated in the judgment.