Homes of England Ltd v Sellman (Holdings) Ltd

The court decided that the statutory test in section 263 of the Companies Act 2006 does not apply to limited liability partnerships by virtue of CPR 19.9C. CPR 19.9C adopts only the procedural provisions of sections 261, 262 and 264 and does not import the substantive permission test in section 263. Consequently the common law test for derivative claims (the pre-2006 Act exceptions to the rule in Foss v Harbottle) applies to LLPs. Applying that common law test and the authorities on the fourth exception (fraud or benefit and no other remedy), the pleading did not sufficiently allege dishonest breach or the type of personal benefit required to displace the rule in Foss v Harbottle. The court therefore allowed the appellant to raise the point for the first time on appeal and allowed the appeal.

Background and parties: Homes for England Limited (HoE) and Nick Sellman (Holdings) Limited (Holdings) were equal members of Bromham Road Development LLP (BRD), owner of property at 51 Bromham Road. HoE alleged Holdings delayed executing refinancing documentation, causing increased redemption costs on an earlier loan and consequential losses. HoE initiated proceedings seeking the increased sum and consequential losses and later sought to amend to add a derivative claim on behalf of BRD.

Nature of the application: An application for permission to continue a derivative claim on behalf of BRD under the procedure in CPR 19.9C, which applies the company-derivative procedure to non-company bodies corporate.

Issues framed:

• Whether the test to be applied when considering permission for a member of an LLP to continue a derivative claim is the statutory test in s.263 Companies Act 2006 or the pre-2006 common law test (exceptions to Foss v Harbottle).
• Whether, if the common law test applied, the claimant’s pleading met that test (in particular whether there was pleaded dishonest breach or a personal benefit to the wrongdoer such that the wrong could not be ratified).
• Whether the appellant could be permitted to raise that point for the first time on appeal.

Reasoning: The court analysed CPR 19.9C and concluded it applies only the procedural provisions of ss.261, 262 and 264 and not s.263; the omission of s.263 (and s.260) was deliberate and significant. The statutory provision s.263 effects a substantive change to the permission test for companies and is not apt to be imported by a procedural CPR rule. Forms and commentary supported the conclusion that the statutory permission factors were not intended to apply to non-company bodies corporate. The court then applied the established common law approach to derivative claims: the Foss v Harbottle exceptions and authority such as Abouraya v Sigmund and Daniels v Daniels on the requirement that wrongdoers have obtained a benefit that cannot be ratified. The pleaded particulars did not sufficiently allege dishonest breach or the requisite personal benefit. On the procedural point of taking a new point on appeal, the court treated the issue as a pure point of law, identified relevant authorities (Singh v Dass, Notting Hill v Sheikh) and concluded that allowing the point would not require further evidence nor cause irremediable prejudice to the respondent.

Disposition and consequential order: The court granted permission to appeal, permitted the appellant to raise for the first time on appeal the point that the common law test applies to LLPs, and allowed the appeal. HoE was ordered to pay Holdings’ costs of the appeal; other costs orders were left as detailed in the judgment.

The appeal is allowed. The court held that CPR 19.9C applies only the procedural provisions of ss.261, 262 and 264 of the Companies Act 2006 to bodies corporate that are not companies and does not import the substantive permission test in s.263. Therefore the common law test (the pre-2006 exceptions to the rule in Foss v Harbottle) applies to derivative claims brought on behalf of an LLP. Applying that common law test, the claimant’s amended pleading did not adequately allege dishonest breach or the necessary personal benefit to the wrongdoers such that the exception applied; permission to continue the derivative claim should not have been granted. The appellant was permitted to raise this point on appeal and succeeds; costs of the appeal were awarded to the appellant.

On appeal from the County Court at Central London (His Honour Judge Saunders).