Leslie v Ball

The court considered an application for a pre-emptive costs indemnity made by minority shareholders who had been given leave to continue a double derivative claim on behalf of two companies. The key legal principles were: (a) where the court has authorised a shareholder to bring a derivative claim on a company’s behalf the shareholder is prima facie to be regarded as acting as the company’s agent and may, in principle, be entitled to indemnity for costs; (b) CPR Part 19.19 and the authorities originating in Wallersteiner v. Moir (No.2) govern pre-emptive indemnities; and (c) the court must exercise care before ordering a pre-emptive indemnity where there is a risk of injustice or where the claim overlaps with proceedings pursued for the claimant’s direct benefit.

Applying those principles, the judge held that (i) Adam Johnson J’s earlier order giving permission to continue the derivative claim must be given effect and the claimants are to be treated as authorised to act for the companies; (ii) notwithstanding that authorisation, a pre-emptive indemnity was not appropriate in this case because the derivative claim substantially overlaps with a contemporaneous unfair prejudice petition pursuing the same factual allegations for the claimants’ personal benefit; and (iii) there was not a sufficient degree of assurance that the claimants would, after trial, be entitled to an indemnity from the companies. The application for a pre-emptive indemnity was dismissed.

Background and parties. The claimants (Mary Leslie and a trustee) brought a double derivative claim on behalf of Arnbrow Ltd and Westridge Estates Ltd against Robert Ball and Melanie Ball, alleging that in 2008 transfers of three Isle of Wight parcels were made by Arnbrow to SPVs owned by Robert and his late brother Norman in breach of fiduciary duty and at no or an undervalue. The claimants also issued a contemporaneous unfair prejudice petition seeking a buy-out which incorporated the derivative allegations.

Procedural posture. Adam Johnson J had previously granted permission (on 27 May 2022) for the derivative claim to continue. The present hearing concerned the claimants’ application for a pre-emptive indemnity (to be paid by Arnbrow or Westridge) in respect of costs already incurred, future costs up to a specified procedural stage, and any adverse costs orders.

Issues framed by the court.

• Whether the court before which the indemnity application was heard could re-open or discount the earlier permission to pursue the derivative claim.
• Whether the usual Wallersteiner principle that a court-authorised derivative litigant is entitled to a pre-emptive indemnity applies where the claimant is also pursuing an unfair prejudice petition based on largely the same facts for the claimant’s personal benefit.
• Whether the factual and legal overlap between the derivative claim and the petition meant that the derivative claim costs were properly treated as costs incurred for the claimants’ own benefit and so not appropriate for indemnification.

Court’s reasoning and findings. The judge held that, as a matter of principle, once permission has been granted and not set aside the claimant must be treated as properly authorised to act as the company’s agent; hence the earlier findings that an independent board could authorise the claim could not be re-opened absent setting the grant aside. However, the Wallersteiner line of authority does not displace the need for caution: the court must consider fairness, the risk of injustice and whether a pre-emptive order is necessary. Where the derivative allegations are substantially incorporated into an unfair prejudice petition that seeks an immediate personal benefit (a buy-out that takes account of sums recoverable for the company), ordering a pre-emptive indemnity risks producing an unfair inequality of arms and advantages the claimant personally. The judge also applied the approach in Smith v. Croft, Bhullar and related authorities requiring care and, in some cases, a high degree of assurance that an indemnity would be appropriate after trial before making a pre-emptive order. On the facts the court found very significant factual overlap between the derivative claim and the petition, and could not be satisfied to a high degree of assurance that after trial the companies would be ordered to indemnify the claimants. The application for a pre-emptive indemnity was therefore dismissed.

Practical note. The decision emphasises (i) the binding effect of an extant grant of permission to continue a derivative action, and (ii) the court’s reluctance to make pre-emptive indemnities where derivative allegations are pursued concurrently for the claimant’s personal benefit in unfair prejudice proceedings, because of the risk of unfairness and imbalance between the parties.

The application for a pre-emptive costs indemnity was dismissed. The court held that Adam Johnson J’s earlier permission to continue the derivative claim must be given effect but, applying the Wallersteiner authorities and the Civil Procedure Rules, a pre-emptive indemnity was inappropriate because the derivative claim substantially overlapped with a contemporaneous unfair prejudice petition pursued for the claimants’ direct benefit and there was not a high degree of assurance that an indemnity would be appropriate after trial.