Olivier Desmarais & Anor v Misbourne Investment Corporation & Ors

At the first permission stage for a derivative claim, the court must determine whether the evidence discloses a prima facie case satisfying all relevant requirements. The merits threshold is higher than a seriously arguable case, but the court must not construct speculative answers for a defendant who has not yet responded.

The common-law exception to the rule in Foss v Harbottle is confined. It requires a prima facie wrong to the company involving fraud in the broad equitable sense or misuse of corporate power or assets for the benefit of management or shareholders, together with control by those responsible for, or benefiting from, the wrong and use of that control to prevent corporate action. Administrative paralysis or a third party’s threatened claim is insufficient. A derivative claim may in principle prevent threatened loss, but the application failed because the required wrongdoer control was absent.

The claimants, acting for Misbourne Investment Corporation, a Liberian company, sought first-stage permission to continue derivative proceedings. They alleged that a purported €45 million loan from Green Services International GSI Ltd was a sham and sought a declaration that Misbourne was not liable under it. Libra Holdings Ltd was also named as a defendant.

The company’s directors had resigned, leaving it without a functioning board. The claimants argued that they had standing and that derivative proceedings were necessary to protect Misbourne from a threatened contractual claim. The central issues were whether there was a prima facie claim on the merits, whether the claim fell within the common-law exception to the rule in Foss v Harbottle, and whether the court had jurisdiction.

1. Permission refused. The application was dismissed. No order for costs was made because no defendant had been served. The dismissal was stayed pending the period for seeking permission to appeal and any appeal.
2. Under CPR 19.17, the procedure in section 261 of the Companies Act 2006 applies to derivative claims concerning foreign companies. The first stage is a filter. The court asks whether the evidence discloses a prima facie case for permission in respect of all requirements, not merely a prima facie case on the underlying merits.
3. The claimants had standing. There was also a prima facie case that the alleged loan was a sham, because the evidence, taken in its totality, was sufficiently cogent that an unexplained refusal to answer it would justify accepting the claimants’ case. The court should not invent possible answers, although it should test suspicion against the available evidence.
4. A derivative claim may in principle be brought to prevent threatened loss, not only to recover loss already suffered. That possibility does not remove the requirement that the claim fall within a recognised exception to Foss v Harbottle.
5. The applicable exception requires: (a) a prima facie wrong to the company; (b) fraud in the broad equitable sense or misuse of corporate power or assets for the benefit of management or shareholders; and (c) control of the company’s decision-making process by those responsible for, or benefiting from, the wrong, exercised to prevent the company acting in its own interests.
6. That requirement was not met. GSI was alleged to be the party threatening the wrong but did not control Misbourne. The former directors’ resignations were not shown to have been procured by, connected with, or undertaken for the benefit of GSI. The internal alleged wrongdoing and the threatened contractual wrong were unrelated. A lack of an effective board was an administrative difficulty to be addressed through the company’s constitution and the courts supervising its affairs.
7. The court would also have been likely to permit service out if permission had otherwise been granted. The jurisdiction gateway in PD 6B para 3(8) could apply to a declaration that no contract existed where the purported contract, if valid, would satisfy the jurisdictional conditions.
8. The court declined permission to appeal, but granted a stay. It observed that similar derivative claims should ordinarily proceed in the Chancery Division during the permission stages.