Gott v Hauge & Ors

This was an interim application arising from a petition under section 994 of the Companies Act 2006. The petitioner sought various interim injunctions, principally to prevent the respondents and related companies from using company funds to defend the petition and related proceedings and to enforce undertakings recorded in a letter dated 21 June 2019.

The judge applied the established principle that a company’s money should not be spent to finance disputes between its shareholders. He considered the Court of Appeal decision in Jones v Jones [2002] EWCA Civ 961 and related authorities. On the pleadings and evidence before him the counterclaim pleaded by the respondent companies largely duplicated the defence and was linked to the shareholders’ dispute. The judge held that, as pleaded, the interests of the Fifth to Eighth Respondents were not sufficiently distinct to justify allowing company monies to be spent on legal costs of the proceedings and refused the respondents’ contention that they should be permitted to use company funds.

The judge reserved wider case directions, declined to finally determine other issues on the evidence then before him, and invited the parties to submit a draft order reflecting his decision and directions for the return date.

This judgment concerns an interim application listed in the Insolvency and Companies Court Urgent Applications’ List, arising out of a petition under section 994 of the Companies Act 2006. The petitioner, Mr Gott, sought injunctions to restrain breaches of undertakings given in a 21 June 2019 letter and to prevent a group of related companies (the Fifth to Eighth Respondents) from using company funds to meet legal or professional costs in relation to the petition and related counterclaims.

Nature of the application:

• Interim injunctions to enforce undertakings and to prohibit the Fifth to Eighth Respondents (and the First to Fourth Respondents from causing them) from expending company funds on legal costs in these proceedings; and related interlocutory relief.

Issues framed by the court:

• Whether the Fifth to Eighth Respondents may lawfully use their own companies’ money to pay legal costs incurred in relation to the injunction application and the wider proceedings.
• Procedural directions and expedition of the return hearing in the light of related proposed applications and practical constraints imposed by the Covid-19 pandemic.

Background and procedural posture:

• The petition and the respondents’ defence and counterclaim were lengthy and substantially overlapping. The respondents’ counterclaim repeated material from the defence and claimed loss by multiple respondent entities without particularising which entity pursued which cause of action.
• An undertaking in the parties’ solicitors’ letter of 21 June 2019 provided that the First and Second Respondents would not use funds belonging to the group companies to defend petitions of the same or substantially the same form; the Fifth to Eighth Respondents were not parties to that agreement but were joined to the injunction application.
• Counsel relied on the established rule that company funds should not be used in shareholders’ disputes, and on Jones v Jones [2002] EWCA Civ 961 which recognised exceptions where a corporate action was bona fide and in the company’s interests.

Court’s reasoning and decision:

• The judge reiterated the general principle that a company’s money should not be expended on disputes between shareholders. He examined whether the counterclaims were genuinely separate corporate claims or merely part of the shareholders’ dispute. On the pleadings, the counterclaim largely repeated the defence, lacked particularisation as to which respondent advanced which cause of action, and had been pleaded only in response to the petition after many years.
• Because the counterclaims and defences were inextricably linked, and there was no evidence showing separate, identifiable interests of the Fifth to Eighth Respondents or that their costs could be separately quantified or that any potential loss could not be compensated by damages, the judge concluded that an exception to the general rule was not justified on the material before him.
• The judge therefore refused to permit the Fifth to Eighth Respondents to use company monies to meet legal costs in relation to the injunction application, and he directed that further directions and the timetable for the return hearing be determined, also noting the impact of the Covid-19 pandemic on listing and resources.

The judge invited the parties to submit a draft order consistent with the judgment and reserved matters of costs to the effective hearing.

Application allowed in part. The court refused to permit the Fifth to Eighth Respondents to use company monies to meet legal or professional costs in relation to the injunction application and related counterclaims because, on the pleadings and evidence before the court, those claims were inextricably linked to the shareholders’ dispute and lacked sufficient particularisation to justify an exception to the general rule that a company’s funds should not be spent on disputes between its shareholders. Directions for the return hearing and consequential orders were reserved and the judge invited a draft order reflecting this judgment.