Lawrence Ewan McGaughey & Anor v Universities Superannuation Scheme Limited & Ors

The Court of Appeal dismissed the appellants' challenge to the refusal of permission to continue common law derivative proceedings on behalf of the trustee company (Universities Superannuation Scheme Limited, "USSL") against current and former directors for alleged breaches of directors' duties. The court applied established principles governing derivative actions, including the rule in Foss v Harbottle and the Prudential two‑limbed test, and emphasised that a derivative claimant must show (i) that the subject company has suffered loss or harm which the action seeks to remedy and (ii) that the claimant's own loss is reflective of that company loss.

The court also confirmed that, for the fourth exception to Foss v Harbottle to apply, a claimant must establish a prima facie case of deliberate or dishonest breach of duty or that the wrongdoers improperly benefitted themselves at the company's expense (the benefit need not be purely financial). Applying those tests to the four pleaded heads of claim (the Valuation Claim, the Discrimination Claim, the Costs Claim and the Fossil Fuels Claim), the court concluded there was no sufficient evidential basis of loss to USSL reflective of the appellants' loss, no prima facie equitable fraud or improper benefit, and in several respects adequate alternative remedies were available (including direct or beneficiary derivative claims against trustees). Accordingly permission was correctly refused and the appeal was dismissed.

Parties and procedural posture. The appellants, two active members of the Universities Superannuation Scheme ("the Scheme"), sought permission to continue proceedings on behalf of USSL (the corporate trustee, limited by guarantee) against USSL's current and former directors for breach of directors' duties. The application was made as a common law derivative claim analogous to the statutory procedure in Part 11 Companies Act 2006. The application was refused by Leech J ([2022] EWHC 1233 (Ch)) and the appellants appealed to the Court of Appeal.

Claims pleaded. The Amended Particulars of Claim pleaded four heads: (1) the Valuation Claim (challenge to the 2020 actuarial valuation and the Deed of Amendment and alleged improper assumptions leading to increased contributions and reduced accrual); (2) the Discrimination Claim (that the benefit changes indirectly discriminate contrary to section 19 and section 61 Equality Act 2010); (3) the Costs Claim (alleging impermissible increases in operating costs and remuneration); and (4) the Fossil Fuels Claim (alleged failure to plan for divestment and to address climate‑related investment risks, contrary to duties under sections 171 and 172 CA06 and regulation 4 of the 2005 Regulations).

Issues framed by the court. The principal issues before the Court of Appeal were (i) the legal requirements for a common law multiple/double derivative claim and the standing/interest threshold (in particular whether the company must have suffered loss reflective of the claimant's loss), (ii) whether the pleaded facts established a prima facie case within the exceptions to Foss v Harbottle (notably the fourth exception concerning fraud on the minority and improper benefit), (iii) what standard to apply when deciding if a prima facie case exists at a permission stage where evidence for both sides is before the court, and (iv) discretionary considerations including availability of alternative remedies.

Court's reasoning and conclusions. The court held that a derivative action is fundamentally an action brought to vindicate loss or harm suffered by the company and, accordingly, a claimant must show the company has suffered loss/harm and that the claimant's own loss is reflective of it so as to demonstrate a legitimate and corresponding interest in the company claim. The court endorsed authorities (including Abouraya and Harris v Microfusion) which require, when reliance is placed on the fourth exception, a prima facie case of deliberate/dishonest breach or that wrongdoers improperly benefitted themselves at the company's expense (the benefit need not be exclusively financial). Where evidence from both sides is before the court, the judge must assess the totality of the evidence and may only find a prima facie case if there are factual issues on which it would be wrong to accept the company's evidence without cross‑examination.

Applying these principles, the Court of Appeal concluded:

• Valuation Claim: USSL had not suffered a loss as a company reflective of the appellants' loss; the pleaded relief was in substance directed against USSL as trustee rather than a remedy for loss to USSL; there was no prima facie case of equitable fraud or improper benefit.
• Discrimination Claim: parasitic on the Valuation Claim, hypothetical and better addressed by direct claims by affected members against USSL; no reflective loss and no prima facie case.
• Costs Claim: although capable in principle of being a multiple derivative claim, there was no prima facie evidence that directors had secured improper personal benefit or that breaches had occurred.
• Fossil Fuels Claim: no prima facie case that USSL suffered loss, no causal link to the appellants' asserted loss, and the pleaded investment approach was within trustee/regulatory duties (including regulation 4 of the 2005 Regulations).

Remedy and wider comment. The court observed that beneficiary derivative or administration claims or direct trustee actions would have been the appropriate procedural vehicles for some of the grievances and emphasised that the derivative mechanism is an exceptional remedy where a company is unable to vindicate its own rights. The appeal was dismissed.

Appeal dismissed. The Court of Appeal held that a common law derivative claimant must show the subject company has suffered loss or harm which the action seeks to remedy and that the claimant's own loss is reflective of that company loss; where reliance is placed on the fourth exception to Foss v Harbottle a prima facie case of deliberate or dishonest breach or of wrongdoers improperly benefiting themselves at the company’s expense must be shown. Applying these principles the appellants failed to establish standing, reflective loss or a prima facie case of equitable fraud or improper benefit in relation to the Valuation, Discrimination and Fossil Fuels claims, and there was no prima facie evidence of improper benefit in relation to the Costs claim; alternative remedies were available in several respects; accordingly permission was correctly refused and the appeal dismissed.

This is an appeal from the Companies Court (ChD) decision of Leech J; the detailed High Court judgment is reported at [2022] EWHC 1233 (Ch). The original permission application had been dismissed on paper by Leech J by order dated 13 December 2021; that order was set aside and the renewed oral application was heard, with Leech J again refusing permission (order dated 10 August 2022; judgment [2022] EWHC 1233 (Ch)). The present appeal to the Court of Appeal was decided in this judgment, [2023] EWCA Civ 873.