Philip Gamett v Paul Hughes & Anor

At the second stage of an application for permission to continue a derivative claim, the court must examine the claim beyond a prima facie threshold, while avoiding a mini-trial. Under the Companies Act 2006, s.263(2)(a), permission must be refused where no director acting in accordance with s.172 would pursue the claim. The court may assess the apparent merits, legal character of the claim, alternative personal remedies, likely benefit, costs, proportionality and other statutory factors. An alternative remedy is not an absolute bar, but may carry substantial weight. A claimant’s purpose need not be exclusively corporate, although benefit to the company must be dominant. Permission was refused because the claim was weak, more naturally personal, and disproportionate to its likely value.

Philip Gamett sought permission under the Companies Act 2006, s.261 to continue a derivative action against Paul Hughes concerning Continental Clothing Company Limited and the operation and closure of a German company, CCC Germany. The pleaded case alleged an oral agreement requiring CCC Germany to be a subsidiary, to account for profits and to transact with the Company on specified terms. It alleged that Mr Hughes had breached contractual, fiduciary and statutory duties.

Stage 1 permission had been granted on the papers by Mr Justice Adam Johnson. At the inter partes second-stage hearing, the court considered whether the mandatory bars in s.263 applied and, if not, whether permission should be refused in the exercise of the statutory discretion, including because the claims could be pursued personally.

1. Disposition. Permission to continue the derivative action was refused. The mandatory bar in Companies Act 2006, s.263(2)(a), was satisfied because no director acting in accordance with s.172 would choose to continue the claim. This was sufficient to dispose of the application.
2. Stage-two approach. The court applied the guidance in Iesini v Westrip Holdings [2011] 1 BCLC 498: stage 2 is not a mini-trial, but requires more than a prima facie case. A preliminary merits assessment is permissible. The strength of the proposed claim is important but not determinative, and the court must look sufficiently beneath the surface of each claim to apply the statutory factors, as explained in Re Nexbell Ltd [2021] BCC 904 and Boston Trust Co Ltd v Szerelmey Ltd [2020] EWHC 1136.
3. Application of the hypothetical-director test. Documentary evidence from more than 20 years substantially undermined the alleged 2002 oral agreement concerning ownership and profits. The pleaded claim also faced a legal difficulty: an agreement between the two individuals, to which the Company was not a party, did not naturally become a derivative claim for breach of directors’ duties. The claims were largely unquantified, speculative or of limited value. The claim to CCC Germany’s shares had little tangible value after its closure, and substantial payments had already been made to Mr Gamett. The cost and complexity of investigating the parties’ businesses over a lengthy period were disproportionate.
4. Alternative remedies and discretion. The availability of a personal claim was not an absolute bar, but was particularly powerful under s.263(3)(f). A personal claim could address the alleged agreement while avoiding costs exposure for the Company. The court was not satisfied that Mr Gamett was acting in bad faith, but good faith carried little weight because the dominant corporate purpose was uncertain. The factors concerning future acts, ratification and an independent company decision carried little or no weight in a 50/50 company with no disinterested members.
5. Other issues. The court considered authorisation and ratification separately, but did not need to decide them. If the s.263(2)(a) bar had not applied, it would not have been satisfied on the material that the authorisation or ratification bar was established. The court also agreed with the disclosure guidance in Re Seven Holdings Ltd [2011] EWHC 1893 (Ch), but left the consequences of material non-disclosure at stage 1 open. The immediate-discharge approach in Derma Med Ltd v Ally [2024] EWCA Civ 175 concerned a materially different without-notice context. Partial or disclosure-limited permission was inappropriate.

High Court (Business and Property Courts): Stage 1 permission was granted on the papers by Mr Justice Adam Johnson in November 2025. At the second-stage hearing on 29 and 30 April 2026, the Deputy Judge refused permission to continue the derivative action.