Coyne v Walsh & Ors

Permission for a derivative claim is appropriate where the substance of the complaint is misconduct causing financial loss to the company, rather than mismanagement warranting relief between shareholders. A related company claim against another defendant should ordinarily be litigated with the derivative claim where the factual issues are inextricably linked and the director has a conflict of interest. Good faith is not negatived merely because the claimant seeks a costs indemnity, provided the claim is pursued to promote the company’s interests. An indemnity is discretionary and depends on all the circumstances; it is not an automatic consequence of permission.

Mrs Anne Marie Coyne, a minority shareholder, applied under the Companies Act 2006 for permission to continue a derivative claim on behalf of MFW Developments Limited against its sole director and majority shareholder, Michael Walsh, alleging misappropriation of company assets. She also sought permission to pursue a related claim against Naomi Wetton, who was alleged to have received company monies at Walsh’s direction. The company had separately sued Wetton, but Walsh’s personal position conflicted with his position as director.

The application concerned the statutory permission criteria, the relationship between a derivative claim and relief for unfair prejudice under section 994, and whether the company should indemnify the claimant’s costs.

1. Permission granted. The court permitted Mrs Coyne to continue a derivative claim on behalf of the company against Mr Walsh and Ms Wetton. The existing proceedings against Ms Wetton were stayed, and the claims were to be litigated together.
2. The statutory framework was found in sections 260 onwards of the Companies Act 2006. The mandatory bars in section 263(2) were not engaged. The relevant discretionary considerations were good faith, the importance attached by a person acting under section 172 to continuing the claim, and whether the claimant had a personal cause of action under section 263(3), together with the views of disinterested members under section 263(4).
3. The court rejected the submission that the proper remedy was an unfair prejudice petition under section 994. The claimant sought financial recovery for alleged misfeasance by the director on behalf of the company. That was misconduct towards the company, rather than merely mismanagement of the company’s affairs. A derivative claim was therefore the appropriate vehicle.
4. The derivative claim and the Wetton claim had inseparable factual foundations. A common hearing would be efficient, avoid inconsistent outcomes and allow the differences between Walsh’s personal case and the company’s case to be adjudicated. Walsh’s conflict of interest made it more appropriate for the impartial shareholder to conduct the litigation against Wetton.
5. The claimant was acting in good faith. The fact that she hoped to obtain an indemnity from company assets did not undermine good faith where the claim was directed towards promoting the company’s best interests. The court considered that a person acting in accordance with the duty to promote the company’s success would attach considerable weight to pursuing the claim.
6. An indemnity as to costs was granted up to the first costs and case management hearing. Iesini v Westrip Holdings Ltd was qualified by the more nuanced approach recognised in Hook v Sumner: an indemnity is discretionary and is not universal. The concern identified in Bhullar v Bhullar about giving one side an unfair advantage did not arise on these facts.
7. The court observed that, if the company could not agree to proceed by members’ voluntary liquidation after the derivative claim, a contributory’s winding-up petition might be more appropriate than an unfair prejudice petition because the company had ceased trading.