Hitesh Gandesha v Narendra Gandesha & Ors: Re Milestar Limited

This was an application under section 261 of the Companies Act 2006 for permission to continue derivative claims brought by a minority director and shareholder on behalf of Milestar Limited. The court applied the two-stage statutory permission procedure and the matters listed in section 263, in particular whether a director acting in accordance with section 172 would continue the claims and whether the claimant was acting in good faith. The proposed claims comprised: (i) a bank-mandate claim seeking declaration and implementation of a directors' resolution removing a signatory; (ii) a claim for the Company’s cash allegedly retained by a director; (iii) a claim in respect of directors' loan account debts arising from a partnership; and (iv) a claim for trust income in respect of rental receipts for property held on trust for the Company.

On the evidence available at the permission hearing the judge concluded that none of the claims fell within the mandatory bar in section 263(2)(a) and that a hypothetical director acting under section 172 would attach sufficient importance to continuing each claim. The judge rejected the allegation that the claimant was acting in bad faith and found it not determinative that the matters could alternatively be pursued under section 994. Having regard to the authorities on costs indemnities in derivative actions, the judge granted permission and a pre-emptive indemnity limited in time (up to and including exchange of witness statements), reserving liberty for further applications if circumstances materially changed.

The claimant, a director holding 25 of 100 shares, applied under s.261 Companies Act 2006 for permission to continue four derivative claims on behalf of Milestar Limited against other directors/shareholders: (1) to enforce a director-resolution removing a co-director as a bank signatory; (2) to recover cash alleged to have been retained by that director; (3) to recover sums due under a directors' loan account said to arise from a grocery partnership; and (4) for an account of trust rental income from property held by two directors but found to be beneficially held for the Company.

Procedural posture: Adam Johnson J had earlier concluded at the paper stage that a prima facie case existed and directed joinder and service; the present decision was the substantive permission hearing under the two-stage s.261 procedure.

Issues framed:

• Whether any director acting in accordance with s.172 would refuse to continue the claims (s.263(2)(a));
• Whether the claimant was acting in good faith (s.263(3)(a));
• The weight a hypothetical director would give to continuing the claims (s.263(3)(b));
• Whether the causes of action were matters the claimant could pursue personally rather than derivatively (s.263(3)(f));
• Whether the Company should be ordered to indemnify the claimant for costs and, if so, on what terms (CPR r.19.19 and the authorities).

Court’s reasoning and conclusions: The judge analysed each claim against the section 263 criteria. On the bank mandate claim the resolution had been passed at a directors' meeting and the factual disputes (for example whether the meeting had been postponed) did not demonstrate that no director acting under s.172 would pursue it; the claim had practical importance to the Company. The cash claim, although some source documents were not in evidence, rested on accountant/bookkeeper figures and an opening balance taken from the 2015 accounts; a director acting under s.172 would likely pursue an account. The directors' loan account claim involved a material discrepancy in partner/company accounts which a director would sensibly litigate rather than accept without explanation. The trust income claim likewise raised evidential uncertainties but a director would expect defendants to obtain and produce records (for example from the local authority) before abandoning a claim. The allegation of bad faith was rejected: expressions of anger by the claimant were not inconsistent with an otherwise bona fide pursuit of company causes of action and the matters were not res judicata. Although the matters could potentially be raised in unfair prejudice proceedings, the court concluded the derivative route was a natural and proportionate remedy in this case.

Costs indemnity: The judge concluded that some form of indemnity was inevitable and appropriate given the circumstances and authorities (including Wallersteiner and Wishart) but that a pre-emptive, unlimited indemnity would be inappropriate. Following guidance that pre-emptive indemnities should normally be limited and subject to review if circumstances change, the judge ordered a pre-emptive indemnity limited to costs up to and including the exchange of witness statements, with liberty for either party to apply on a material change of circumstances.

The court granted the claimant permission under s.261 Companies Act 2006 to continue the derivative claims and ordered that the Company indemnify the claimant in respect of costs, but limited that pre-emptive indemnity to the period up to and including the exchange of witness statements. The decision rested on the s.263 analysis (good faith, the position of a director acting under s.172 and other statutory factors) and on authority governing indemnities in derivative actions; liberty was reserved to vary or extend the permission or indemnity if circumstances materially change.