Hughes v Burley & Ors

The claimant sought permission under section 263 of the Companies Act 2006 to continue a derivative action on behalf of the fourth defendant (the company) against the first to third defendants. The court considered threshold and substantive issues under Part 11 (Chapter 1) of the 2006 Act, whether the causes of action fell within section 260(3), and whether the company could enforce terms of a purported joint venture by reliance on the Contracts (Rights of Third Parties) Act 1999. The judge held that the pleaded causes of action were not unarguable but were speculative, involved hard factual disputes and novel or fact‑sensitive legal questions about fiduciary duties and duties of good faith between commercial co‑venturers. Permission was refused because the claimant had not shown ability or given undertakings to fund the litigation or to indemnify the company, and a hypothetical director acting under section 172 would be unlikely to authorise the litigation given the risks to the company.

Background and parties: The claimant, an architectural consultant, and the first defendant, a funder, were equal shareholders and directors of the fourth defendant (a property development company). The company acquired three properties for development funded by loans from the first defendant. Relations broke down in 2020; the first defendant appointed a fixed charge receiver (the third defendant) and two properties were sold to a company controlled by the first defendant (the second defendant). The claimant brought both personal and derivative claims and sought permission under section 263 of the Companies Act 2006 to continue a derivative action on behalf of the company.

Nature of the application (relief sought): Permission pursuant to section 263 of the Companies Act 2006 to continue derivative claims on behalf of the company against the first to third defendants; ancillary applications (inspection of accounting records and earlier administration application) were stayed pending determination of the permission issue.

Issues framed by the court:

• Whether the pleaded causes of action fall within section 260(3) (i.e. arise from negligence, default, breach of duty or breach of trust by a director).
• Whether the company could rely on the Contracts (Rights of Third Parties) Act 1999 to enforce terms of the alleged joint venture.
• Whether fiduciary duties or a duty of good faith arose between the claimant and the first defendant as co‑venturers; the scope of directors’ duties under section 172 and statutory duties under sections 174–177.
• Whether the conduct of the receiver (third defendant) in selling properties to an associate of the chargee gave rise to an arguable claim.
• Whether a person acting in accordance with section 172 would seek to continue the claim (the mandatory refusal limb of section 263(2)), and whether the claimant was acting in good faith.

Court’s reasoning and decision: The court analysed threshold and second‑stage permission principles under sections 261 and 263, and the comparative authorities on joint ventures, fiduciary duties and receiver duties. The judge accepted that (i) breaches of contractual obligations can amount to a breach of duty for the purposes of section 260(3); (ii) it was arguable that some duties (notably a duty of good faith) might be implicated by the parties’ joint‑venture arrangements and that the company might be able to enforce contractual benefits under the 1999 Act; and (iii) the claim against the receiver was not plainly hopeless given the limited explanation provided for the sales. Nevertheless, the claim was speculative and hinged on contested facts and novel or fact‑sensitive legal questions, and the claimant provided no evidence of an ability to underwrite the costs or an undertaking to indemnify the company. The absence of a disinterested member, the company’s insolvency position and the realistic prospect that litigation would be lengthy and expensive led the judge to conclude that a hypothetical director acting under section 172 could reasonably decide not to pursue the litigation. Accordingly, permission to continue the derivative claim was refused. The judge invited parties to discuss an administration order in consequence of the decision.

Permission to continue the derivative claim pursuant to Section 263 of the Companies Act 2006 is refused. The court found the pleaded causes of action not unarguable but speculative and factually contentious; the claimant had not shown ability or given undertakings to fund the litigation or indemnify the company, and a hypothetical director acting under section 172 would be unlikely to continue the claim given the risks to the company. The judge indicated that an administration order should be considered consequentially.