Tonstate Group Ltd & Ors v Wojakovski

A pre-emptive costs indemnity in a derivative action is discretionary. The court should be satisfied that the indemnity would probably be appropriate after trial, having regard to the interests of all shareholders and the claimant’s ability to fund the litigation. Pay-as-you-go funding requires particular caution and normally evidence that it is genuinely needed.

A common-law double derivative action is unavailable where the relevant parent company can itself pursue a statutory derivative claim. An injunction restricting a company’s use of its assets requires a serious issue, inadequacy of damages and a favourable balance of convenience. A concrete, strong and tangible risk is required, and a clear financial limit may provide adequate protection instead.

The judgment determined applications arising in three related proceedings involving companies in the Tonstate Group, Mr and Mrs Matyas and Mr Wojakovski. The applications concerned permission to continue or commence derivative proceedings, the availability of indemnities from company assets, and injunctions restricting the use of those assets to fund litigation.

The court considered whether claims by companies in a deadlocked corporate structure should proceed as double derivative actions or as statutory derivative claims by the relevant parent company. It also considered whether the companies’ assets could fund the claims and whether Mr Wojakovski had established a sufficient basis for interim injunctive relief.

1. Derivative permission. Permission was granted to Mr Matyas to continue the claims brought by the yellow companies as double derivative actions. Permission was granted to Tonstate Group Ltd (TGL) to commence derivative actions on behalf of the red companies.
2. Indemnity for the yellow companies. The power to grant an indemnity derives from Wallersteiner v Moir (No 2) [1975] QB 373. Later authorities establish that a pre-emptive indemnity requires considerable care. The court should have a high degree of assurance that the indemnity would be proper after trial. Pay-as-you-go funding requires evidence that it is genuinely needed. Here, the companies were substantially in wind-down and the claims also affected the shareholders’ economic interests. If the claims failed, it would be unfair for Mr Wojakovski’s interest to bear their costs. The indemnity application was therefore refused.
3. Statutory rather than double derivative proceedings. The common-law derivative action exists to overcome the rule in Foss v Harbottle where the company is controlled by the wrongdoers. It is unavailable where the company can itself bring the claim. Since TGL was a member able to pursue a statutory derivative claim, there was no basis for a double derivative common-law claim. The alleged conflict was a bootstraps argument: where there was no choice of procedure, there was no relevant conflict.
4. Injunctions. The principles in American Cyanamid applied. Although there were serious issues to be tried, damages or an equivalent adjustment after trial would adequately protect Mr Wojakovski. TGL had substantial liquid assets, and any expenditure could ultimately be apportioned against the Matyas interest. The wider and narrower injunctions were therefore refused. However, safeguards were imposed, including undertakings and an initial £3 million limit on TGL’s funding of the main action, subject to further consideration and possible variation.