Hitesh Gandesha v Narendra Gandesha & Ors: Re Milestar Limited

Permission to continue a derivative claim involves a two-stage process. At the second stage, the court must make an overall, provisional assessment of the statutory factors and should avoid conducting a mini-trial. The mandatory bar in section 263(2)(a) applies only where no director acting in accordance with section 172 would seek to continue the claim. The strength of the claim is important but is not determinative; commercial considerations, prospects of recovery, costs and the claim’s importance to the company also matter. An alternative personal remedy, including unfair-prejudice proceedings, is a factor rather than an automatic bar. A prospective costs indemnity may be ordered where necessary, but it should ordinarily be staged and remain reviewable if circumstances materially change.

Hitesh Gandesha, a shareholder and director of Milestar Limited, applied under section 261 of the Companies Act 2006 for permission to continue four derivative claims on the company’s behalf against his brother Narendra Gandesha and the executors of another brother.

The claims concerned the company’s bank mandate, alleged retention of cash, directors’ loan accounts and rental income from property held on trust for the company. The application had passed the paper stage before Adam Johnson J. The defendants opposed permission on the grounds of the statutory section 172 test, lack of good faith and the availability of personal unfair-prejudice proceedings under section 994. The claimant also sought a prospective costs indemnity.

1. Permission. Permission was granted under section 261(4)(a) of the Companies Act 2006 to continue all four derivative claims. The claims were sufficiently arguable and each was one which a director acting in accordance with section 172 would regard as worth pursuing. The bank mandate claim had practical importance, while the remaining claims had potential financial value and required further information rather than a mini-trial.
2. Mandatory bar and section 263(3)(b). Section 263(2)(a) required refusal only if the court was satisfied that no director acting in accordance with section 172 would continue the claim. The statutory factors were not exhaustive and prescribed no particular standard of proof. The court had to form an overall, provisional view, weighing the merits with matters such as value, costs, funding, disruption and prospects of recovery.
3. Good faith and alternative remedies. The claimant’s family grievances and earlier litigation did not establish bad faith where the claims remained undetermined and were brought for causes of action vested in the company. The availability of section 994 proceedings was relevant under section 263(3)(f), but did not require refusal. In the circumstances, derivative proceedings were the more natural and proportionate route.
4. Indemnity. Under CPR r.19.19(1), an indemnity was appropriate in principle. A pre-emptive indemnity required a high degree of assurance that an indemnity would be proper after trial and had to be necessary to avoid deterring the shareholder from bringing a meritorious company claim. The indemnity was therefore limited to costs incurred up to exchange of witness evidence. The permission and indemnity proceedings were adjourned with liberty to apply for extension, variation or revocation following a material change of circumstances.