Hughes v Burley & Ors

Permission for a derivative claim requires more than a prima facie case, but the court must avoid conducting a mini-trial. It should form a provisional view of the claim’s strength and consider whether a hypothetical director acting under Companies Act 2006, section 172, would pursue it.

A contractual breach is capable of being a breach of duty for the purposes of section 260(3). A derivative claim is not confined to duties arising from the defendant’s role as director. Fiduciary duties between commercial co-venturers remain exceptional and fact-sensitive, while a more limited duty of good faith may be arguable.

Third-party funding and an effective costs indemnity may materially support permission. The absence of evidence that the proposed funder can meet the litigation costs may nevertheless justify refusal.

The claimant sought permission under section 263 of the Companies Act 2006 to continue a derivative claim on behalf of Nida Properties Ltd against its co-director, a related company and an appointed receiver.

The proposed claim concerned alleged breaches of contractual, fiduciary, statutory and good-faith duties, together with the sale and development arrangements concerning three properties. The defendants argued that the causes of action were outside the statutory derivative-claim regime, had poor prospects, and would not be pursued by a hypothetical director acting under section 172.

The court had previously found a prima facie case sufficient to proceed to the permission hearing. The central issues were whether the causes of action were legally arguable and whether permission should be granted having regard to section 263.

1. Permission refused. The claimant’s proposed derivative claim was not unarguable, but the evidence did not justify allowing it to proceed.
2. Section 260(3) of the Companies Act 2006 includes a breach of contractual duty. A derivative claim is not limited to acts or omissions arising from a director’s capacity as director. Such a limitation would conflict with the purpose of the derivative remedy, namely enabling the company to pursue claims where those controlling it cannot or will not do so. The issues under the Contracts (Rights of Third Parties) Act 1999 were matters for later determination and were not fatal at the permission stage.
3. The relationship between shareholders and commercial co-venturers does not ordinarily give rise to fiduciary duties. Such duties may arise exceptionally where one party is dependent on another to exercise rights or powers for their benefit and can reasonably expect that party to put their interests first. On the pleaded facts, fiduciary duties were doubtful, but a more limited obligation of good faith was arguable.
4. At the second stage of the statutory procedure, the court must not conduct a mini-trial. It must form a provisional view of the claim’s strength and consider the factors relevant to a hypothetical director acting under section 172, including the merits, likely value, cost, funding, recoverability, disruption, reputational consequences and effect on the company.
5. The claim against the receiver was also arguable. A receiver has a broad professional discretion, but must act in good faith and take reasonable care to obtain a proper price if selling. The sparse explanation for the sales was relevant to whether the claim should proceed, although the court was not deciding the facts or the ultimate burden of proof.
6. The litigation was speculative, factually and legally difficult, and likely to be expensive. The claimant supplied no evidence that he could fund it to conclusion and gave no effective undertaking to indemnify the company against adverse costs. Those deficiencies meant that a hypothetical director could not confidently regard the litigation as being in the company’s interests. Permission was therefore refused.
7. The court indicated that an administration order in respect of the company was now appropriate, subject to consequential orders after further submissions.

This was a first-instance permission decision in the High Court. The court had previously adjourned an administration application after the claimant indicated an intention to bring a derivative claim, and had decided that the claimant had passed the initial prima facie threshold.