Bhullar v Bhullar

This was an application for permission to continue a double derivative claim brought by a minority shareholder (Inder) against a director (Jat) of two subsidiaries (BBL and BDL). The court proceeded on the basis that the common law permits a double derivative claim notwithstanding sections 260 to 264 of the Companies Act 2006. The judge applied the prima facie standard to the pleaded causes of action and held that Inder had established a prima facie case of dishonest breaches of fiduciary duty in relation to substantial payments by BBL/BDL to Torex, so the limitation defence under the Limitation Act 1980, s.21 did not bar those claims.

By contrast, the claim concerning the transfer of Southgate B to Jat failed at the permission stage because there was insufficient evidence to show the sale was at an undervalue or that there was a prima facie case of fraud. The court also refused to make a pre-emptive indemnity order for costs out of company assets, concluding that it would be unfair to give the minority claimant a prospective costs advantage over the defendant and that both parties should remain on risk as to costs (analogous to the costs position in s.994 unfair prejudice proceedings). Permission was therefore granted in part (in relation to the Torex payments) but refused in part (Southgate B), and the claim was stayed for three months to allow mediation.

Background and parties

This is a family company dispute concerning three companies in a group (Bhullar Limited as holding company; Bhullar Bros. Limited (BBL) and Bhullar Developments Limited (BDL) as subsidiaries). The claimant, Inder, is a minority shareholder in the holding company and was formerly a director of the subsidiaries. The principal respondent is Jat, a director of the subsidiaries and sole owner of Torex Developments Ltd. The claim is a double derivative action, seeking relief on behalf of BBL and BDL for alleged breaches of fiduciary duty by Jat.

Nature of application and relief sought

• Inder applied for permission under the rules governing derivative claims (CPR 19.9) to continue the double derivative claim. The causes of action concerned (a) a series of payments by BBL/BDL to Torex and (b) the transfer of a property known as Southgate B to Jat.
• Inder also applied for a pre-emptive indemnity as to costs to be paid out of the assets of the relevant companies so that he would be indemnified for his own costs and any adverse costs orders.

Issues framed

1. Whether the court retains jurisdiction to permit a double derivative claim following enactment of Companies Act 2006 (ss.260–264).
2. Whether Inder established a prima facie case that BBL/BDL were entitled to relief against Jat (including whether limitation under Limitation Act 1980, s.21 applied).
3. Whether the claims fell within exceptions to the rule in Foss v Harbottle (including whether there was fraud on the minority, wrongdoer control, or a benefit to the wrongdoer).
4. Whether a pre-emptive indemnity as to costs should be granted.

Court’s reasoning and disposition

• Jurisdiction: The court followed prior authority and proceeded on the basis that the common law permits a double derivative claim; ss.260–264 do not oust that jurisdiction for the present purposes.
• Prima facie standard: The court applied the established prima facie test (higher than seriously arguable) and assessed the totality of evidence before it, recognising the limitations of a pre-trial fact-finding exercise.
• Payments to Torex: On the available evidence the judge found a clear prima facie case that Sohan (the father) acted dishonestly in causing payments to be made to Torex and, because Torex was wholly owned by Jat, there was a prima facie case that Jat was also dishonest. That finding meant the limitation defence under s.21 Limitation Act 1980 did not operate to bar the claims, so permission to continue those derivative claims was granted.
• Southgate B transfer: Evidence as to market value was inadequate; there was no reliable prima facie proof of undervalue or dishonesty. Accordingly, there was no prima facie fraud on the minority in relation to that transaction and permission was refused as to the Southgate B claim.
• Wrongdoer control and appropriateness of litigation: The court found prima facie wrongdoer control because Jat and Rajinder together could prevent a shareholder resolution to authorise litigation, and an independent board could reasonably conclude it was appropriate to pursue the Torex claims given their size and strength.
• Pre-emptive indemnity: The court refused to make a pre-emptive indemnity for costs. Applying the authorities (including Wallersteiner and later cases), the judge emphasised the need for considerable care and fairness: the costs position should not give Inder an unfair prospective advantage over Jat (who would be adversely affected if Inder were indemnified while Jat and Rajinder held the majority of shares), and the costs position should be analogous to s.994 proceedings where both parties are on risk. The court therefore declined a pre-emptive costs indemnity but left open review applications as the litigation proceeds.

Other orders: Permission was granted only in relation to claims about payments to Torex. The court stayed the proceedings for three months to allow mediation.

Permission to continue the double derivative claim was granted in part and refused in part. The court held that it had jurisdiction to permit a double derivative claim. On the evidence there was a prima facie case of dishonest breaches of fiduciary duty by reason of payments to Torex and the claims in relation to those payments were not statute barred, so permission to continue those claims was granted. There was insufficient evidence to show that the transfer of Southgate B was at an undervalue or that there was a prima facie fraud on the minority, so permission in relation to Southgate B was refused. The court refused to make a pre-emptive indemnity for costs out of company assets, concluding that it would be unfair to give the claimant a prospective costs advantage and that both parties should remain on risk; the proceedings were stayed for three months for mediation.