Harris v Microfusion 2003-2 LLP & Ors

For a limited liability partnership, the statutory derivative remedy in Chapter 1 of Part 11 of the Companies Act 2006 does not apply, but the common-law derivative remedy survives.

The fourth, fraud-on-the-minority exception to the rule in Foss v Harbottle remains restricted. Unless actual fraud or an ultra vires act is alleged, the wrongdoing must cause loss to the entity and confer a personal benefit on the alleged wrongdoers. A bare breach of fiduciary duty, abuse of power, perceived conflict or appeal to justice is insufficient.

Brian John Harris, a member of Microfusion 2003-2 LLP, sought permission to pursue derivative claims on the LLP’s behalf against its designated members, Future Films (Management Services) Limited and Future Films (Partnership Services) Limited. The claims concerned alleged breaches of duty relating to an LMI fee, an Alcon fee and rebates of minimum guaranteed amounts.

The High Court, in [2015] EWHC 1116 (Ch), granted permission for the Alcon fee and rebate claims but refused permission for the LMI fee claim. Harris appealed against the refusal, while Future Films appealed against the grants. The central issue was the scope of the common-law fraud-on-the-minority exception to the rule in Foss v Harbottle.

Disposition. Lord Justice McCombe gave the leading judgment. Lord Justice Christopher Clarke and Lord Justice Jackson agreed. Mr Harris’s appeal was dismissed and Future Films’ appeal was allowed. Permission to continue all three proposed derivative claims was therefore refused.

1. Legal framework. Chapter 1 of Part 11 of the Companies Act 2006 does not apply to limited liability partnerships. The common-law derivative remedy nevertheless survived the statutory scheme, as recognised in Universal Project Management Services Ltd v Fort Gilkicker Ltd & ors [2013] Ch 551.
2. Scope of the exception. The fourth exception to Foss v Harbottle is restricted. Following the analysis in Abouraya v Sigmund [2014] EWHC 277 (Ch) and Daniels v Daniels [1978] 1 WLR 406, the alleged wrongdoing must cause loss to the LLP or company. Unless actual fraud, meaning a deliberate and dishonest breach of duty, or an ultra vires act is alleged, the alleged wrongdoers must also have personally benefited.
3. Ratification and authority. Personal benefit is material because the wrongdoing is then incapable of lawful ratification by a majority vote controlled by the wrongdoers. A general appeal to justice is not an independent test. Estmanco (Kilner House) Ltd v GLC [1982] 1 WLR 2 involved majority members using their voting power for their own political advantage and therefore did not support a wider exception based on breach of duty or abuse of power alone. The passages in Fort Gilkicker concerned the rationale for derivative proceedings, not the boundaries of the exception.
4. Application. Counsel for Harris did not seek to maintain that the Alcon fee and rebate claims alleged deliberate and dishonest breaches, as the first-instance judge had found. Nor could personal benefit to Future Films be alleged in those claims. The judge should therefore have refused permission for them. The alleged connection between Future Films, the relevant group and LMI was also insufficient to plead personal benefit to Future Films themselves, so the LMI claim likewise fell outside the exception.
5. Unresolved issues. The court did not decide whether the claims were time-barred under sections 21 or 32(1)(b) of the Limitation Act 1980, or whether the partnership deed’s exculpation and indemnity provision applied.

• Court of Appeal (Civil Division): Dismissed Mr Harris’s appeal and allowed Future Films’ appeal, reversing the grants of permission so that all three proposed derivative claims could not proceed.
• High Court of Justice, Chancery Division: In [2015] EWHC 1116 (Ch), HH Judge Pelling QC granted permission for the Alcon fee and rebate claims but refused permission for the LMI fee claim.