Derivative Claims: Where are we part II

Summer is over and I have not blogged in a while due to several holidays! I thought I would start back light with some information on UK derivative claims. Below is a table of all 14 cases brought in England and details of the significant relevant issues that were addressed by the court in applying its discretion as to whether a claim should be allowed to proceed. (see end for full citations of claims)

NB: whilst I am familiar with these cases the table below may not detail all factors considered but only those that were of significance. 

Case Name	Dismissed For/Allowed	Significant Circumstances Considered
Bamford	Dismissed at court’s discretion	Wrongdoer control
Cinematic Finance	Dismissed at court’s discretion	Majority bringing derivative claim; wrongdoer control; side-stepping insolvency rules
FanmailUK	Case adjourned	Case adjourned
Franbar	Dismissed at court’s discretion	Strength of legal claims; ratification; alternative remedy
Hughes	Permission granted	Strength of legal claims; ratification; alternative remedy
Iesini	Mandatory Bar	Weak legal claims
Kleanthous	Dismissed at court’s discretion	Independent review of whether litigation was beneficial; strength of legal claims; alternative remedy; and benefit would be small
Kiani	Permission granted	Failure of defendant to produce any evidence to the contrary; alternative remedy
Mission Capital	Dismissed at court’s discretion	Alternative remedy; little weight to a claim for wrongful dismissal of a director
Parry	Permission granted	Strength of legal claims; ratification; good faith; alternative remedy
Phillips	Permission granted	Alternative remedy; matter of urgency case was brought to recover sums taken from the company without good reason
Seven Holdings	Mandatory Bar	Claims did not relate to a breach of duty, care, negligence or default
Stainer	Permission granted	Strong grounds that there had been a breach of duty; strength of legal claims; disinterested shareholders deceived in to approving the loan
Stimpson	Mandatory Bar	The impact an action would have on the interests of the employees; claim of little value compared to cost of claim; legal claims were not realistically arguable

To raise a couple of points. Iesini is probably viewed as the most authoritative source for general interpretation of the new procedure as it has been cited in detail by most of the proceeding cases. 

A second point is that of the significance of the legal merits of a claim. Previously under the common law claim, a claim of fraud on the minority would be dismissed where legal merits did not meet a certain threshold. (see, for example, Law Commission Shareholder Remedies (Consultation Paper No 142 1996) paras 6.6, 14.1-4, 16.21; Law Commission Shareholder Remedies (Report Law Com No 246) (Cm 3769, 1997) para 6.4; Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch. 204; MacDougall v Gardiner (1875) 1 Ch. D. 13; Edwards v Halliwell [1950] 2 All E.R. 1064; Estmanco (Kilner House) Ltd v Greater London Council [1982] 1 W.L.R. 2).

Reform wished to do away with having claims assessed on their legal merits and allow claims based on all relevant circumstances (see Consultation Paper at para 16.22 and Report at para 6.73). However the Commission noted that it would be inappropriate to allow a completely hopeless claim to proceed (See, Commission Report Para 6.71). Thus whilst they wished to do away with having claims assessed on the legal merits it seems they still form part of the assessment.

The cases heard so far have taken differing views as to how significant the legal merits are to a claim. Franbar and Stimpson have dismissed claims on the basis, inter alia, that there was no obvious breach of duty and that claims were not realistically arguable. Iesini has said "something more" was needed when the court applies its discretion than when deciding whether there is a prima facie case. Cases such as Stainer, Hughes and Kleanthous have dissented from Iesini to the extent a claim has to show sufficient legal merit although it is considered by this author that these three cases did not carefully consider the wording of Iesini but the cases do raise interesting points on the assessment of legal merits to a claim. 

As a result, whilst the reform wished to remove claims being assessed on the merits it seems that this still forms a significant part of the court's discretion as to whether they will allow a claim to proceed. 

Bamford v Harvey [2012] EWHC 2858 (Ch); [2013] Bus. L.R. 589; Cinematic Finance Ltd v Ryder [2010] EWHC 3387 (Ch); Fanmailuk.com Ltd v Cooper [2008] EWHC 2198 (Ch); [2008] B.C.C. 877; Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch); [2008] B.C.C. 885; Hughes v Weiss [2012] EWHC 2363 (Ch); Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch); [2010] B.C.C. 420; Kleanthous v Paphitis [2011] EWHC 2287 (Ch); (2011) 108(36) L.S.G. 19; Kiani v Cooper [2010] EWHC 577 (Ch); [2010] B.C.C. 463; Mission Capital Plc v Sinclair [2008] EWHC 1339 (Ch); [2008] B.C.C. 866; Parry v Bartlett [2011] EWHC 3146 (Ch); Phillips v Fryer [2012] EWHC 1611 (Ch); [2013] B.C.C. 176; Re Seven Holdings Ltd  [2011] EWHC 1893 (Ch); Stainer v Lee [2010] EWHC 1539 (Ch); [2011] B.C.C. 134; Stimpson v Southern Landlords Association [2009] EWHC 2072 (Ch); [2010] B.C.C. 387