SDI Retail Services Ltd v King & Ors

Permission to continue a derivative claim should be granted where the statutory conditions are met and the claim is necessary to protect the company’s business or assets. The mandatory bar is objective: the question is whether no hypothetical director acting under the duty to promote the company’s success would continue the claim. The court must form a provisional view of the claim’s merits, but should not conduct a mini-trial. The statutory discretionary factors require an overall commercial evaluation, including the claim’s strength, value, costs, funding, and effect on the company. A shareholders’ agreement preventing the company from suing without consent does not necessarily prevent a shareholder from bringing derivative proceedings on the company’s behalf, particularly where the company is not a party to the agreement and the alternative would leave it without an effective remedy.

SDI Retail Services Ltd, a 49% shareholder in Rangers Retail Ltd, applied for permission to continue a derivative claim on behalf of the company. The proposed claim concerned the purported termination by Rangers Football Club Ltd of an intellectual property licence that constituted the company’s sole business. SDI alleged that two directors, David King and Paul Murray, had breached their fiduciary duties by participating in the termination strategy, preventing the company from challenging it, and interfering with sub-licensees.

The defendants argued that the statutory conditions were not satisfied, that the directors’ conflicts and lack of information prevented continuation, and that a shareholders’ agreement barred litigation without unanimous consent. They also contended that SDI had alternative remedies in its own right. The central issue was whether permission should be granted under the derivative-claim provisions of the Companies Act 2006.

1. Permission granted. The pleaded claims arose from alleged acts and omissions involving breaches of duty by directors. A shadow director is treated as a director for this purpose. The claim against Rangers Football Club Ltd was sufficiently connected with the alleged breaches by King and Murray and did not arise independently of them.
2. The mandatory bar was not established. The question under section 263(2)(a) was whether no hypothetical director acting in accordance with section 172 would seek to continue the claim. That was an objective test. The court was far from satisfied that the answer was yes. The purported termination might be invalid, and allowing it to stand would destroy the company’s entire business. SDI’s offer to fund the litigation and indemnify the company against adverse costs was also relevant.
3. The court was required to assess the merits provisionally, without conducting a mini-trial. On the material before it, the claims were sufficiently powerful and well substantiated to justify continuation. The claim’s value was the difference between the company having a business and having no business at all.
4. The discretionary factors required an overall, non-mechanistic evaluation. SDI was acting in good faith. The company had not decided not to pursue the claim. The proposed claim was one that only the company could properly bring. The shareholders’ agreement did not prevent derivative proceedings: SDI, rather than the company, was the claimant; the company was not a party to the agreement; and reading the provision as an absolute bar would undermine the commercial structure and dispute-resolution arrangements.
5. SDI’s possible alternative claims did not provide an adequate substitute. The rules of privity, separate corporate personality and reflective loss prevented SDI from vindicating the company’s rights in its own name. A petition under section 994 would not be the appropriate vehicle, although the court might ultimately direct derivative proceedings under section 996(2)(c).

First-instance decision. Permission was granted to SDI Retail Services Ltd to continue the derivative claim.