Harris v Microfusion 2003-2 LLP

The Court of Appeal considered whether a member of a limited liability partnership could bring a common-law derivative action for wrongs said to have been committed against the LLP by its Designated Members. The court applied the "fraud on the minority" exception to the rule in Foss v Harbottle and followed the analysis in Abouraya v Sigmund that the exception requires (i) a loss to the company and (ii) that the alleged wrongdoers must have personally gained from the breaches of duty unless there is deliberate and dishonest conduct. The court concluded that the judge at first instance applied that legal test correctly in relation to the LMI fee claim but had erred in principle in granting permission for the other two claims because, on the admitted pleadings, there was no pleaded personal gain or deliberate and dishonest breach that would prevent lawful ratification by the members.

This case arose from a film-financing LLP in which two companies, collectively called Future Films, were appointed as the LLP's Designated Members. A member, Mr Brian Harris, sought permission to bring derivative claims on behalf of the LLP against Future Films for alleged breaches of fiduciary and statutory duties in relation to three matters: (1) the payment of an excessive fee to LM Investments Limited (the "LMI fee"), (2) the payment of a marketing fee to Alcon Entertainment LLC (the "Alcon fee"), and (3) the rebate of sums otherwise due to the LLP to a production company (the "rebate of minimum guaranteed amount"). Mr Harris alleged loss to the LLP of more than £5 million and sought permission in the High Court under the common-law derivative procedure. The High Court (HH Judge Pelling QC) granted permission in respect of the Alcon fee and rebate claims but refused permission in respect of the LMI fee claim; both sides appealed to the Court of Appeal.

The Court of Appeal summarised the legal framework: Chapter 1 of Part 11 of the Companies Act 2006 does not apply to LLPs and the common-law derivative remedy survives. The key issue was the ambit of the "fraud on the minority" exception to Foss v Harbottle. The court adopted the approach in Abouraya v Sigmund that for the exception to apply, the wrong must cause loss to the company and the alleged wrongdoers must have personally benefited from the breach unless there is deliberate and dishonest conduct. The court reviewed authority including Daniels v Daniels, Estmanco (Kilner House) Ltd v GLC and Fort Gilkicker, and rejected a submission that the exception should be extended so as to cover any misuse of power or breach of fiduciary duty absent personal gain or deliberate dishonesty.

The court held that the LMI fee pleading did not sufficiently allege personal benefit or deliberate dishonesty and therefore permission for that claim was rightly refused. Because the pleaded allegations for the Alcon fee and rebate claims did not, on the formulation advanced on appeal, properly plead deliberate and dishonest breaches or personal benefit by Future Films, the judge should not have granted permission for those two claims; accordingly, the Court of Appeal allowed Future Films' appeal and dismissed Mr Harris's appeal. The court did not decide the related limitation or exoneration clause issues because they were unnecessary to determine in light of the ruling on the derivative-exception issue.

Appeals allowed in part: Mr Harris's appeal against refusal of permission in respect of the LMI fee claim was dismissed and Future Films' appeal against the grant of permission in respect of the Alcon fee and rebate claims was allowed. The Court held that the "fraud on the minority" exception to Foss v Harbottle requires a loss to the company and either deliberate and dishonest conduct or a personal benefit to the wrongdoers that renders ratification impossible; the pleadings did not meet that test.

Appeal from HH Judge Pelling QC sitting as a Deputy High Court Judge (Chancery Division), [2015] EWHC 1116 (Ch). Permission to appeal was subsequently granted by Lewison LJ by orders dated 21 May 2015. Final determination by the Court of Appeal, [2016] EWCA Civ 1212.