Derivative Claims: Bridge v Daley [2015] EWHC 2121

Cases are slowly filtering through on the new derivative claim procedure as I work on my British Academy project on the subject. Bridge v Daley [2015] EWHC 2121. Bridge is the 18th derivative claim to be heard under the Companies Act 2006, part 11, and the 17th of note for my empirical study, since FanmailUK.com Ltd v Cooper [2008] EWHC 2198 was adjourned. (NB: table updated 11th Dec 2015 to incorporate 18th case Hook v Sumner [2015] Unreported)

The relevant factors from Bridge are detailed below, including practical circumstances and outcome. The particular points of note from this case relate to: 1) information asymmetries between weaker and stronger parties; 2) statutory procedure; 3) wrongdoer control; and 4) it involved a plc.

I will not say too much about these but briefly outline the points:

1) Information asymmetries
This was brought by a minority shareholder, Bridge, who owned 1.83% in an AIM company. He appeared as litigant in person but failed to substantiate any of his claims against the four directors since he had no proof of any of his claims nor could he direct any of his claims against any particular director. The judge (at [76]) was highly critical of this noting Bridge's submission that the directors were "all in it together" as insufficient for establishing a cause of action against all four. He also noted that Bridge was 'a highly opinionated individual who is incapable of any objective analysis of evidence placed before him' (at [85]).

Bridge surely should have taken legal advice but his lack of any evidence is a telling problem with derivative claims. His claims were severe, despite not substantiated, and the judge noted that he might have a remedy for unfair prejudice. He did also have the support of a further 4 minority shareholders as the claim progressed. Therefore, the information asymmetries that exist between shareholders and directors/controllers can be a difficult obstacle to seeking redress through the courts since it is difficult to turn suspicions in to substantive arguments.

2) Statutory Procedure
This links to a second point where one might be critical of the court for not following the statutory procedure. At [98] the judgment notes that Bridge should have seen his claim was "doomed" to failure. Why did it get this far then where time and expense of the company was taken up? The judge noted that it was unlikely that there was even a prima facie case but seemed very confused as to what was required for a prima facie case based on his citation of the incorrect statement from Stimpson on establishing one. In Stimpson v Southern Landlords Association [2009] EWHC 2072, as cited by Bridge, it was said by Judge Pelling that in considering whether there was a prima facie case that the court was bound to consider those factors in section 263(3) and (4) and all other relevant circumstances. This is wrong. A prima facie case is set out in s.261 that it must be: 1) a cause of action vested in the company; 2) in relation to a breach of duty, trust, negligence or default; and 3) brought by a shareholder. The discretion is for part two.

The judgment is littered with contradictions by the judge. Despite citing Stimpson he had earlier cited Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (at [13]-[15]), which is the correct authority for the statutory procedure, where it was noted that at the second stage, something more is needed than a prima facie case to satisfy the court that permission should be given.

Therefore, in one part of the judgment the judge claims a prima facie case is about the whole circumstances of the case, whereas earlier he recognises that the procedure is two distinct parts.

This contradiction is followed by failing to hear the ex parte application separately, describing it as pragmatic to do so (at [9]). It is difficult to see how it is pragmatic to dispense with the need for establishing a prima facie case and involving the company when the judge later uses terminology such as the claim was 'doomed' and the claimant had failed to clearly demonstrate a prima facie case since Bridge could not direct his claims at any director in particular or submit them in the form of breaches covered by the Act.

By not hearing an ex parte application the company was involved unnecessarily, which is what is meant to be avoided by having an ex parte application. Both Stimpson and Bridge failed to hear a prima facie case but both were dismissed for mandatory bars. Both stated that not hearing the first stage was pragmatic but do not cite any authority for judges being permitted to avoid a statutory procedure on the basis of pragmatism.

3) Wrongdoer control
This case revisits the issue of wrongdoer control and confirms that wrongdoer control is not a bar to claim but can form part of the discretion when determining whether to grant permission. In this case, the judge found no reason why the company should not pursue this claim if it wished to do so, since independent shareholders did not support the claim nor did the company.

4) Plc
The final point is that this was a public limited company. It serves as some anecdotal evidence of attempts at frivolous litigation and the wider availability of the derivative claim itself. The fact the claim got as far as it did might cause some minor concern for companies.

Figures and tables updated 11th Dec 2015.

Therefore from the 18 cases the following stats on derivative claims are:
Prima Facie Case: 100% (18/18)
Mandatory Bars: 27.78%% (5/18)
Permission Refused Discretion: 38.46% (5/13)
Permission Allowed Discretion: 61.54% (8/13)
Permission Refused Overall: 55.56% (10/18)
Permission Granted Overall: 44.44% (8/18)

Case Name	Dismissed For/Allowed	Significant Circumstances Considered
Bamford	Dismissed at court’s discretion	Wrongdoer control
Bridge	Mandatory Bar	No reasonable director would pursue the claim; alternative remedy; company decision; independent views; wrongdoer control
Cinematic Finance	Dismissed at court’s discretion	Majority bringing derivative claim; wrongdoer control; side-stepping insolvency rules
Cullen Investments	Permission granted	Hypothetical director would question if full and frank disclosure was given for authorisation; and case was simple on this premise; significant sum could be recovered based on lack of evidence to contrary; no basis for lacking good faith; hypothetical director would attach considerable importance; claim being funded by C so no financial risk to company and possible benefit; claimant’s action may give rise to action in own right but this was not a decisive consideration since the defence necessitated it and as a precaution since the company was entitled to some or all of the relief
FanmailUK	Case adjourned	Case adjourned
Franbar	Dismissed at court’s discretion	Strength of legal claims; ratification; alternative remedy
Hook	Permission Granted	Good faith; 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
McAskill	Permission granted	Good faith; Alternative remedy; director would attach weight to the claim under s.172
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
Singh	Mandatory Bar	No director would continue the claim if acting in accordance with s.172; fides of the claimant in question; s.994 more appropriate
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

Case	Type of company	Costs indemnity sought	Financial State of the company	Shareholding % (respondent/claimant)	Amount Claimed for*	Concerned a conflict of interest?	Length of proceedings
Bamford	Ltd	Yes	Solvent	50/50	£3,500,000	No	1 day
Bridge	Plc	Yes	Solvent	Minority (1.83%)/Director	N/A	Yes	2 days
Cinematic Finance	Ltd	N/A	Doubtful solvency	0/100	N/A	Yes	N/A
Cullen Investments	N/A	No	N/A	N/A	“Scant evidence”	Yes	N/A
Fanmailuk	Ltd	N/A	Solvent	Majority/minority	£70,000,000	Yes	N/A
Franbar	Ltd	N/A	Solvent	75/25	N/A	Yes	2 days
Hook	Ltd	Yes	Solvent	Minority/Majority		Yes	2 days
Hughes	Ltd	Likely	To be dissolved	50/50	£100,000+	Yes	1 day
Iesini	Ltd	N/A	Doubtful solvency	Majority/minority	N/A	Yes	4 days
Kleanthous	Ltd	N/A	Solvent	84.5/15.5	£120,000,000	Yes	4 days
Kiani	Ltd	Yes	Solvent	50/50	£296,000	Yes	1 day
McAskill	Ltd	Yes	Solvent	50/50	£197,640	Yes	1 day
Mission Capital	Plc	N/A	Solvent	N/A	N/A	Yes	N/A
Parry	Ltd	N/A	No assets	50/50	£248,577.24	Yes	1 day
Phillips	Ltd	N/A	Solvent	50/50	N/A	Yes	2 days
Seven Holdings	Ltd	N/A	Effectively no assets	50/50	£1,693,212.32	No	1 day
Singh	Ltd	Yes	Solvent/not trading	50/50	£873,000	Yes	1 day
Stainer	Ltd	Yes	Solvent	87/0.08	£7,000,000	Yes	1 day
Stimpson	Ltd by guarantee	N/A	No assets	Majority/minority	£5,300,000	Yes	4 days