Coyne v Walsh & Ors

The court considered an application for permission to continue a derivative claim under Part 11 (sections 260 et seq.) of the Companies Act 2006, specifically the statutory permission gateway in section 263. The Claimant alleged misappropriation of company monies by the sole director and majority shareholder, Mr Walsh, and sought leave to pursue the claim on behalf of MFW Developments Limited.

The judge found that the pleaded case disclosed a prima facie cause of action for breach of fiduciary duties by Mr Walsh and that the proposed derivative claim and the company27s existing claim against a third party, Ms Wetton, were inextricably linked. The court rejected the submission that unfair prejudice proceedings under section 994 were the more appropriate vehicle and concluded that a derivative claim was the proper route to obtain remedies for alleged misconduct rather than mismanagement. Permission to continue the derivative claim was granted and an indemnity as to costs was ordered up to the first costs and case management hearing.

Background and parties:

• The Claimant, Mrs Anne Marie Coyne (16% shareholder), sought permission to bring a derivative claim on behalf of MFW Developments Limited against Mr Michael Francis Walsh (sole director and 68% shareholder) for alleged misappropriation of company assets. The company and Mr Walsh had also issued a separate claim against Ms Naomi Wetton, the former Company Secretary and partner of Mr Walsh, which alleged she had received company monies.

Procedural posture:

• The claim form was issued on 19 June 2019 and the application for permission on 20 June 2019. Earlier case management orders had been made by HHJ Stephen Davies on 24 July 2019 (joinder of the company to the permission application and directions) and on 14 August 2019 (adjournment and further directions; grant of a proprietary injunction restraining use or disposal of specified sale proceeds).

Relief sought:

• Permission to continue a derivative claim on behalf of the company against Mr Walsh and, by consent between the claimant and Ms Wetton, joinder of Ms Wetton as a defendant and consolidation with the existing company claim against her. The Claimant also sought an indemnity as to costs from the company.

Issues framed by the court:

Whether the statutory tests in section 263 were satisfied, including: (a) whether the member acted in good faith, (b) whether a person acting to promote the company27s success would attach importance to pursuing the claim (section 263(3)(b)), (c) whether an alternative remedy (notably section 994 unfair prejudice petition) was the appropriate route, and (d) whether an indemnity as to costs should be granted.

Evidence and linked proceedings:

• The court had a substantial body of witness evidence from the Claimant27s solicitors, the Claimant, Mr Walsh and the company27s solicitor. The company had separately issued proceedings against Ms Wetton (claim no. BL-2019-MAN-000073) alleging recovery of two sums, and Ms Wetton27s defence admitted receiving company monies but asserted that she acted at Mr Walsh27s direction.

Reasoning and conclusions:

• The judge accepted that there was a prima facie case of misappropriation by Mr Walsh capable of supporting a derivative claim and that the factual issues between the derivative claim and the company27s claim against Ms Wetton could not practically be separated. Combining the proceedings would be efficient, avoid inconsistent outcomes and ensure the matters were resolved by the same judge.
• The court rejected the defendants27 contention that the matter was essentially one of mismanagement better suited to a section 994 petition, concluding instead that the Claimant sought remedies for alleged misconduct by the director and that a derivative claim was the correct vehicle.
• The court found that the Claimant acted in good faith and that a person promoting the company27s success would attach weight to pursuing the claim. Given the company was already funding litigation against Ms Wetton and there was no imminent distribution of assets, an indemnity as to costs up to the first costs and case management hearing was appropriate.

Outcome:

• Permission to continue the derivative claim against Mr Walsh and to join Ms Wetton was granted; the existing Wetton proceedings were to be stayed by arrangement; an indemnity as to costs from the company was ordered up to the first costs and case management hearing.

This was a first instance decision granting permission to continue the derivative claim. The court held that the pleaded case disclosed a prima facie cause of action against the director for misappropriation, that the derivative claim and the company27s claim against the third party were inextricably linked and should be litigated together, and that the matter was one of alleged misconduct (remedied by derivative proceedings) rather than mere mismanagement subject to an unfair prejudice petition. The claimant was found to act in good faith and the court granted an indemnity as to costs up to the first costs and case management hearing.

Not appellate. Procedural history within the High Court: claim form issued 19 June 2019 and permission application issued 20 June 2019. HHJ Stephen Davies made orders on 24 July 2019 (joinder of the company and directions) and on 14 August 2019 (further directions and proprietary injunction restraining use or disposal of certain sale proceeds). The company separately issued claim BL-2019-MAN-000073 against Ms Naomi Wetton on 8 August 2019; the derivative application and that claim were directed to be dealt with together.