Jafari-Fini v Skillglass Ltd & Anor

J U D G M E N T

1. LORD JUSTICE CHADWICK: This is an appeal from an order made on 26th October 2004 by His Honour Judge Rich QC, sitting as a judge of the High Court in the Chancery Division, in proceedings brought by the appellant, Mr Mohammad Jafari-Fini, against Skillglass Limited.

2. The issue before the judge in October 2004 was whether to give permission to amend the claim form by which the proceedings had been commenced so as to add derivative claims on behalf of Phoenix Acquisitions Limited; and, if so, whether to permit those derivative claims to be carried on by the claimant. He dismissed those applications. He ordered the claimant to pay to Skillglass and to Phoenix Acquisitions Limited - which was separately represented before him - 75 per cent of their costs of the application. He gave permission to appeal. And he gave directions for a further conduct of the action which would proceed in relation to Mr Jafari-Fini's personal claims against Skillglass.

3. The appellant, Mr Jafari-Fini, claims to be beneficially interested in a majority of the issued shares of Phoenix Acquisitions Limited ("PAL"). In 2003 PAL made a public offer to acquire the shares of Chesterton International Plc ("Chesterton"). In order to fund that acquisition, the appellant and PAL entered into a number of agreements with Skillglass Limited and others. The agreements are dated 16th April 2003 and, so far as material, included the following: first, a facility agreement between Skillglass and PAL; second, a debenture granted by PAL to Skillglass; third, a guarantee executed by the appellant in favour of Skillglass; and, fourth, legal charges over shares and property granted by the appellant to Skillglass.

4. Under the terms of the Facility Agreement, Skillglass agreed to make available to PAL a term loan facility to a maximum principal amount of £12.85 million, or thereabouts, for the purpose of purchasing shares in Chesterton and meeting fees and ancillary costs. Draw down under the agreement could take place when the proposed offer for the Chesterton shares had become unconditional. Repayment was to be made in accordance with the following schedule: (1) within 21 days of the first draw down, £1,299,900; (2) within 180 days of the first draw down, £3,700,100 - making in aggregate with the first tranche £5,000,000; (3) within 365 days of the first draw down, such amount as might be required to reduce the amount outstanding under the facility to £4 million; (4) on the second anniversary of the first draw down, the balance then outstanding.

5. Clause 23.2 of the Facility Agreement provided for the rights which Skillglass was to have in the event of default by PAL. Put shortly, in the event of default Skillglass would be entitled to serve written notice cancelling any future right to draw under the facility, declaring the whole amount already drawn to be immediately due and repayable, and declaring any security granted by PAL - and in particular the debenture to which I have already referred - to be immediately enforceable. But those rights were subject to the proviso that they could not be exercised prior to the expiry of 220 days from the date of the offer - a period defined as "the Certain Funds Period" - unless the event of default constituted a "Major Default", which was also a defined term.

6. Under the debenture granted by PAL to Skillglass, PAL covenanted that it would pay on demand all monies owed by it under the Facility Agreement and secured that obligation by fixed and floating charges over all its property and undertaking. The property subject to the fixed charge in the debenture included shares in Chesterton as and when acquired by PAL under the offer. That security was supported by an obligation on PAL to deposit with Skillglass share certificates and share transfers in respect of the Chesterton shares.

7. The appellant's guarantee contained an undertaking by him to pay on demand by Skillglass and to discharge all monies and liabilities due and owing by PAL to Skillglass under the facility letter. That obligation was secured by legal charges in favour of Skillglass over properties owned by the appellant and over all shares from time to time held by the appellant in PAL. Again, that security was supported by an obligation on the appellant to deliver share certificates and executed transfers and to procure that Skillglass was registered as the owner of the shares in PAL.

8. Once those funding arrangements were in place, PAL made a public offer to acquire shares in Chesterton. That offer was made on 1st May 2003 on the basis that it open to acceptance by 22nd May. PAL was entitled - and in the event did - extend time for acceptance to 30th June 2003. But on 27th June 2003, PAL, with the consent of Skillglass, declared the offer to be unconditional, notwithstanding that it then had acceptances in respect of no more than 87 per cent in value of Chesterton shares, rather than the 90 per cent contemplated by the offer itself.

9. Upon the offer being declared unconditional, PAL was entitled to draw down under the facility letter in order to pay for the Chesterton shares which it had acquired. The first draw down was on 11th July 2003. That set the timetable for the first repayment of £1,299,900 to be made on 1st August 2003, and for the second repayment - a tranche of £3,700,100 - to be made on 4th January 2004.

10. A further consequence of the offer being declared unconditional was that the appellant, Resurge Limited - the parent company of Skillglass - and Phoenix Holdings Partners LLC - a Delaware limited liability company owned by investment bankers Babcock & Brown ("PHP"). - became obliged to take up shares in PAL. Thereafter the appellant was beneficial owner of some 61 per cent of PAL, subject to the legal charge in favour of Skillglass, PHP was the owner of some 14 per cent and Resurge was the owner of the remaining 25 per cent of the shares in PAL.

11. The effect was that the appellant controlled PAL. But clause 21 of the investment agreement, which imposed the obligations to take shares in PAL upon the offer to acquire Chesterton's shares becoming unconditional, provided that, upon default under the Facility Agreement, Skillglass should have the right to assume control of PAL in the place of the appellant.

12. I have mentioned that under the debenture, and under the charge' given by the appellant, Skillglass was entitled to require shares in Chesterton acquired by PAL and shares in PAL for which the appellant had subscribed to be transferred to it upon the happening of an event of default under the Facility Agreement. Following the PAL offer for Chesterton shares becoming unconditional, it was agreed that the shares charged as security should be registered in the name of Skillglass forthwith; to be held by Skillglass as nominee pending default under the facility letter. Those arrangements are recorded, first, in a nominee declaration dated 27th June 2003 - under which Skillglass undertook to the appellant that it would hold the appellant's shares in PAL as nominee or bare trustee to deal with the shares only as the appellant might direct until such time as the money secured by the appellant's guarantee became payable - and, secondly, in a nominee declaration dated 10th July 2003 in which Skillglass gave similar undertakings in relation to PAL's shares in Chesterton. From June and July 2003 Skillglass was the registered holder of 61 per cent shares of PAL and PAL's 87 per cent shares in Chesterton.

13. PAL duly paid the first tranche of £1,299,900 on 1st August 2003. It did so from monies subscribed under the investment agreement. On 24th October 2003 it made a further advance repayment of £600,000 by way of pre-payment of the second tranche, thereby reducing to £3,100,100 the amount due on 4th January 2004.

14. It seems to have been the appellant's intention from the outset that the second, third and fourth tranches by which the monies advanced by Skillglass to PAL under the Facility Agreement were to be repaid would be funded from monies generated within Chesterton's business. No doubt it was intended that Chesterton would make distributions to its shareholder, PAL, under section 153(3) of the Companies Act 1985 out of distributable profit, relying on what are sometimes described as the "whitewash provisions" in Chapter 6 of Part V of that Act.

15. Following the acquisition of control of Chesterton, the appellant was appointed to the board and given the post of Executive Chairman. He arranged for the sale off of Chesterton assets. But it became clear that Chesterton had suffered losses and incurred liabilities which raised doubts as to its solvency; and, in particular, which made it impossible to release funds to PAL under the whitewash provisions in Part V of the Companies Act 1985. Declarations of solvency from auditors and directors - which are essential to any distribution under those provisions - would not be forthcoming. That put the source of funds required to meet the second repayment tranche of £3,100,100 due on 4th January 2004, in doubt.

16. On 27th October 2003 Skillglass served on PAL a notice asserting that there had been a breach of clause 20.1 of the Facility Agreement and that that breach constituted an event of default under clause 23.1.2 of the Facility Agreement. The notice declared that the moneys advanced under the Facility Agreement had thereby become due and payable and that the securities had become enforceable.

17. The validity of that notice is in dispute. It is challengedby the appellant on two principal grounds. First, it is said that the breach of clause 20.1 of the Facility Agreement - which required PAL to ensure on a month by month basis over the term of the facility that its consolidated profits before tax and operating cash flow did not vary adversely by more than 15 per cent from projections set out in a business plan appended to the facility letter - did not constitute a "Major Default" within the meaning of the Facility Agreement with the consequence that no default notice could be given in respect of the breach alleged until the end of the Certain Funds Period. That, as I have said, was a period of 220 days from the date of the offer and so, prima facie, would not expire until 6th December 2003. Second, it is said that PAL and Skillglass had agreed in a side letter, signed at the time of the Facility Agreement, that the business plan appended to the Facility Agreement would be replaced by a revised plan once the offer had become unconditional and PAL had obtained access to Chesterton's records, and that until then Skillglass would not be entitled to rely upon a breach of clause 20.1 of the Facility Agreement. It is said that no such revised plan was agreed.

18. If, contrary to the appellant's contentions, the notice of 27th October 2003 was valid and effective, then Skillglass was entitled thereafter to exercise the rights associated with the PAL shares and the Chesterton shares registered in its name free from the restrictions imposed by the nominee declarations to which I have referred.

19. On or about 7th December 2003 the appellant left England to visit his father in Iran and was away for some four or five weeks.

20. On 11th December 2003 Skillglass served a further notice on PAL. That notice referred to the October notice and demanded immediate repayment of the monies advanced under the facility letter. By that date, 11th December 2003, the Certain Funds Period had expired; but the validity of the December notice is challenged on the ground that the breach relied on in that notice, being the breach of clause 20.1 specified in the October notice, had itself occurred within the Certain Funds Period.

21. On 23rd December 2003 the appellant's appointment as Executive Chairman of Chesterton was terminated by resolution of the board of directors of that company. Subsequently, on 16th January 2004, the Chesterton board resolved to remove the appellant as a director of the company.

22. On the assumption that the notices of October or December 2003 were not valid, the second tranche of monies due under the Facility Agreement had - prima facie at least - to be repaid by 4th January 2004. PAL did not make that payment. On 20th May 2004, following the commencement of this action, Skillglass served notice of default in relation to the failure to pay on 4th January 2004.

23. The third tranche, to reduce the amount outstanding under the Facility Agreement to £4 million, was due on the first anniversary of the first draw down, which fell in July 2004. That payment was not made. On 17th September 2004 Skillglass served a further notice of default.

24. The position therefore is this. Some £10.4 million or thereabouts was drawn down under the Facility Agreement. £1,899,100 of that has been repaid - £1,299,100 on 1st August 2003 and £600,000 on 24th October 2003. The balance, which on those figures would be some £8.5 million or thereabouts, together with accrued interest, remains outstanding. Of that sum, £3,100,100 was due for payment under the Facility Agreement on 4th January 2004 and a further £1.5 million or thereabouts was due for payment in July 2004.

25. PAL is a company whose only asset is its holding of 87 per cent of the shares in Chesterton. Chesterton went into administrative receivership on 7th March 2005. Evidence has been put before us - and there is nothing to suggest to the contrary - that there will be no funds available in the administrative receivership to meet the claims of unsecured creditors. On any objective assessment the shares in Chesterton must be regarded as worthless, or almost worthless.

26. The present proceedings were commenced by Mr Jafari-Fini by the issue of a claim form in the Queen's Bench Division on 14th May 2004. The sole defendant to the claim, as issued, is Skillglass. Relief was sought under the following heads. First, declarations that Skillglass is in breach of the Facility Agreement with PAL by serving the notice of 27th October 2003 and that - by acting upon such notice in relation to the other funding arrangements of 16th April 2003 - Skillglass is in breach of the guarantee and charge granted by the appellant, with the consequence that the appellant is discharged from his liability under the guarantee and charge. Second, delivery up and cancellation of the guarantee and charge. Third, an order for payment over of the proceeds of sale of two properties subject to the charge. Fourth, damages for breach of the guarantee and charge. Fifth, and in the alternative, a declaration that no valid demand has been made and that the guarantee and charge have not become enforceable. Sixth, accounts and enquiries as to the monies, if any, due from the appellant under the guarantee and charge. Seventh, an injunction restraining Skillglass from disposing of the proceeds of sale of properties pending such accounts and enquiries.

27. It is to be noted that no relief is claimed in the action as issued, in respect of damage arising from any alleged breach of the facility agreement or the debenture. The relief claimed in the action as commenced is relief personal to Mr Jafari-Fini. It does not include damages in respect of loss which he may have suffered as a result of diminution in the value of the PAL shares; loss conveniently described in the cases as "reflective loss".

28. Relief in relation to PAL was sought in particulars of claim dated 10th June 2004. By that stage it appears that the action had been transferred to the Chancery Division. I can summarise that relief, so far as additional to the relief claimed in the proceedings as issued, as follows. First, declarations that Skillglass is in breach of the facility agreement and debenture and that PAL is discharged from liability under those documents. Second, delivery up of the facility agreement and the debenture and a re-transfer to PAL of PAL's shares in Chesterton. Third, damages or equitable compensation for breach of the Facility Agreement and the debenture.

29. The relief sought in the particulars of claim included a claim by Mr Jafari-Fini personally for damages for equitable compensation for breach of his guarantee, the charges over his properties and shares and his nominee declaration. But it does not include any personal claim in respect of any loss caused to PAL. So there is no reflective loss claim in those particulars of claim.

30. The relief sought in the particulars of claim - insofar as it is relief sought on behalf of PAL - goes outside the relief sought in the action commenced by the issue of the claim form on 14th May 2004. This was recognised, as appears from the application notice issued on 2nd July 2004. By that application the claimant, Mr Jafari-Fini, sought an order that PAL be added as a defendant to the action and that consequential amendments be made to the claim form. The amendments sought consist of an addendum to the claim form which is in these terms, so far as material:

"The Claimant's claim is for breach of contract and/or trust by the First Defendant [that is Skillglass] in respect of loan and security arrangements entered into with the Claimant and/or the Second Defendant [that is PAL] in 2003 in conjunction with the acquisition by the Second Defendant of a majority shareholding in Chesterton International Plc."

The addendum then goes on to describe the various funding and security documents to which I have already referred. It continues with this sentence:

"The claim is brought by the Claimant on his own behalf and also on behalf of the Second Defendant as a derivative action under the 'fraud on the minority' exception of the rule in Foss v Harbottle .

The relief sought by the Claimant is as follows ..."

And there then follows a statement of the relief sought which is in substantially, if not precisely, the same terms as that in the particulars of claim to which I have already referred.

31. The statement of relief sought now include: first, relief sought on behalf of both the claimant and PAL; second, relief sought on behalf of PAL alone; third, relief sought on behalf of the claimant alone; and, fourth, further or consequential relief sought on behalf of both the claimant and PAL - being interest accounts and enquiries and costs.

32. On 12th July 2004 a further application notice was issued on behalf of the claimant. That sought an order, pursuant to CPR 19.9, that the claimant have permission to continue on behalf of PAL the claims made in the name of PAL against Skillglass in the particulars of claim as a derivative action. The basis on which that relief was sought was stated to be that, if permission were not granted, PAL would not be able to advance the claims made on its behalf.

33. CPR 19.9 is headed "Derivative Claims" and, so far as material, is in these terms:

"(1) This rule applies where a company, other incorporated body or trade union is alleged to be entitled to claim a remedy and a claim is made by one or more members of the company, body or trade union for it to be given that remedy (a 'derivative claim').

(2) The company, body or trade union for whose benefit a remedy is sought must be a defendant to the claim."

The rule then provides for the procedural steps to be taken including, under subrule (3), an application to the court for permission to continue the claim. Subrule (7) provides that the court may order the company, body or trade union to indemnify the claimant against any liability in respect of costs incurred in the claim.

34. The general principles governing the pursuit of derivative claims were set out in this court by Peter Gibson LJ in Barrett v Duckett [1995] 1 BCLC 243 at 249 h to 250 c.

"The general principles governing actions in respect of wrongs done to a company or irregularities in the conduct of its affairs are not in dispute:

1. The proper plaintiff is prima facie the company.

2. Where the wrong or irregularity might be made binding on the company by a simple majority of its members, no individual shareholder is allowed to maintain an action in respect of that matter.

3. There are however recognised exceptions, one of which is where the wrongdoer has control which is or would be exercised to prevent a proper action being brought against the wrongdoer: in such a case the shareholder may bring a derivative action (his rights being derived from the company) on behalf of the company.

4. When the challenge is made to the right claimed by a shareholder to bring a derivative action on behalf of the company, it is the duty of the court to decide as a preliminary issue the question whether or not the plaintiff should be allowed to sue in that capacity.

5. In taking that decision it is not enough for the court to say that there is no plain and obvious case for striking out; it is for the shareholder to establish to the satisfaction of the court that he should be allowed to sue on behalf of the company.

6. The shareholder will be allowed to sue on behalf of the company if he is bringing the action bona fide for the benefit of the company for wrongs to the company for which no other remedy is available. Conversely if the action is brought for an ulterior purpose or if another adequate remedy is available, the court will not allow the derivative action to proceed."

35. The application of 2nd and 12th July 2004 first came before His Honour Judge Rich QC on 11th October 2004. The judge was asked to determine as a preliminary question whether the claimant, Mr Jafari-Fini, had standing to seek an order under CPR 19.9 in circumstances that he was not a member of PAL.

36. It must be kept in mind that the shares in PAL of which the claimant claims to be the beneficial owner are registered in the name of Skillglass, subject to the nominee declaration. This is not the more familiar case in which the alleged wrongdoers control the company by virtue of shares which they hold in their own right. The complaint in this case is that the alleged wrongdoer, Skillglass, controls PAL by reason of the rights derived from shares beneficially owned by the claimant. The underlying issue in these proceedings is whether Skillglass, by virtue of the security interest over the PAL shares which are registered in its name, is entitled to exercise rights derived from those shares in a way which contravenes the wishes of the claimant as the ultimate beneficial owner.

37. The judge decided on 11th October 2004 that the claimant should not be excluded from seeking a direction or permission under CPR 19.9 by reason only of the fact that he was not the registered holder of the shares. The judge said this, at paragraphs 42 and 43 of his judgment of 11th October 2004:

The purpose of the exception to the rule in Foss v Harbottle is to allow the grievance, (at least certainly one affecting a person with an interest in the company) to reach the court which would not otherwise reach it because, and this is the essential element, of the wrongdoer's control. In exceptional circumstances, where the alleged wrongdoer exercising control is also allegedly wrongly conducting himself against the beneficial owner of the shares, to deny the beneficial owner the standing to bring a derivative action must frustrate at least the efficient and expeditious bringing of the company's grievance to court.

Without prejudice therefore to the question whether in this particular case the claimant should be permitted to bring such action, I hold that he should not be excluded from doing so solely because his interest is beneficial only, and he is not the registered owner."

38. The judge identified correctly the point in this case: namely, that this is not a case where a beneficial holder of a minority shareholding registered in the name of another complains of control exercised by a third party over the company. The complaint in this case is that the complainant is beneficial owner of a majority of the shares in the company which are registered in the name of the wrongdoer. The wrongdoer is said to be a trustee for the claimant. If the claimant were registered as the owner of the shares of which he claims to be beneficial owner, the need to invoke the exception to the rule in Foss v Harbottle in a case such as the present would not arise. The claimant would be able to control the company, in those circumstances, by virtue of being registered as owner of the majority of the shares. There would be no need for a derivative action. The company controlled by the claimant - would bring the claim in its own name.

39. Following the judge's ruling on 11th October 2004, the application then proceeded before him on the basis that the claimant had the necessary standing to seek the permission under CPR 19.9 which he required if he was to bring a derivative action. The judge gave judgment on that application on 15th October 2004. He set out the relief which would be sought in the action on behalf of PAL if permission were granted. At paragraph 9 of his judgment he reminded himself of the guidance given by this court in Barrett v Duckett , to which I have already referred. At paragraph 10 of his judgment he said this:

"The foundation of both the claimant's personal action and the proposed derivative action is the alleged invalidity of the notice of default and the demand. I am reluctant, in considering the arguments which have been addressed to me in regard to this, to arrive at conclusions which might prejudice either way the claimant's personal action which is also so founded unless it is essential for determination of whether derivative proceedings should be permitted."

40. With that introduction, the judge addressed, at paragraphs 11 to 16 of his judgment, the question whether the Certain Funds Period had ended before 6th December 2003. He concluded, at paragraph 17, that there was a good arguable case that the period had not ended before 6th December 2003. On that basis it was unnecessary for him to consider whether the failure to meet the forecast projections was an event of default under clause 20.1, notwithstanding that revised forecasts had not been agreed.

41. As the judge observed, his view that there was a good arguable case that the Certain Funds Period had not ended before 6th December 2003 gave weight to the claimant's personal claim but it was necessary, in order to advance the claim which Mr Jafari-Fini sought to bring on behalf of PAL, that the making of the premature demand and the acting upon that demand as alleged amounted to a repudiatory breach of the facility letter and the other documents on which Skillglass relied. It was necessary to assert that the repudiatory breach was to prevent Skillglass from relying on its rights under the various security documents and, in particular, on its rights under the nominee declarations.

42. The judge found the proposition that the giving of a premature demand led to a repudiatory breach difficult to reconcile with a recent decision of this court in Concord v The Law Debenture Corporation plc [2004] EWCA Civ 1001. But he held that he did not need to reach a firm conclusion on that point; and that it was undesirable that he should do so having regard to Mr Jafari-Fini's personal claims. The judge pointed out, at paragraphs 23 and 24 of his judgment, that if the claimant were to succeed on his personal claims, he would either be able to exercise control over PAL through his PAL shares and, subject to the contractual obligations to which he would later refer, assert PAL's rights at that stage; or the claimant would be entitled to damages assessed on the basis of what PAL would have been able to do but for the wrongful enforcement of the security against PAL. He went on:

"It is in those circumstances that I must ask myself whether the bringing of this action now on behalf of PAL is in the interests of PAL, because there is no other adequate remedy for Skillglass's alleged wrongdoing."

43. The Judge then addressed the question whether, irrespective of the validity or invalidity of the October and December notices - and irrespective of whatever steps Skillglass may or may not have taken following the services of those notices - there was any prospect that PAL could have avoided default on 4th January 2004. That is to say, whether there was any realistic prospect that PAL could have found the £3.1 million odd needed to pay the second tranche due under the Facility Agreement. He held, at paragraph 25 of his judgment, that there was no prospect of PAL having been in a position to pay the January 2004 tranche, irrespective of any alleged wrongdoing by Skillglass. As I have said, funds could not be made available to PAL by way of distribution from Chesterton. The judge rejected as inconceivable the suggestion advanced on behalf of the claimant that the problem could have been overcome by PAL taking, with the benefit of a reverse premium paid by Chesterton, an assignment from Chesterton of its leasehold interest in property known as Lily Hill House. So, as the judge thought, any claim which PAL might have arising from the premature service of the notices and the steps taken in reliance on those notices was limited to damage suffered by PAL in a period ending in January 2004 when the security could have been enforced anyway in reliance on the failure to pay the second instalment due under the Facility Agreement. At paragraph 31 of his judgment, the judge said this:

"The only realistic benefit to PAL of the action proposed is the possibility of recovering control of Chestertons, because it seems to me that is practicable only if the loans in excess of £11 million could be repaid. On this analysis I do not think that the continuing of the proposed derivative action is of such potential benefit to PAL as to justify imposing upon that company any risk as to costs. Nor do I regard the remedy of waiting until the outcome of the claimant's personal action as inadequate, in the circumstances which I have sought to describe."

44. On proper analysis of his judgment, it is that paragraph which contains the basis of his decision that permission to bring a derivative claim should not be granted in this case. But he then went on to deal with a further question at paragraphs 32 to 36: namely, whether he should in any event grant permission to bring a derivative claim without taking account of the interests and wishes of the other two shareholders in PAL - that is to say, Resurge Limited and PHP. He took the view that Resurge's voice should carry little weight in the circumstances that it was itself the parent of Skillglass, the alleged wrongdoer but he held that PHP, at least, should be notified before a decision to permit the derivative action could be allowed to proceed. That had not been done.

45. The judge gave permission to appeal on the four grounds, A to D, set out in a draft provided to him on 26th October 2004 and now found in the appellant's notice. They are conveniently summarised at paragraph 68 of the skeleton argument prepared by counsel who appeared for Mr Jafari-Fini below and who must have been instructed at some stage in relation to this appeal although he did not appear at the hearing. I will read paragraph 68 of this skeleton argument:

"The Appellant relies on, in essence, four grounds of appeal. In summary, they are as follows:

(A) the Judge wrongly rejected the Appellant's case that the Respondent repudiated the Facility Agreement and security arrangements;

(B) the Judge wrongly rejected the Appellant's case that the second tranche could and would have been paid but for the Respondent's actions;

(C) the Judge wrongly failed to take sufficient account of a number of special circumstances arising out of the fact that the Appellant is pursuing personal claims against the Respondent which mirror those of PAL;

(D) the Judge wrongly regarded the failure to notify PHP of the proceedings as a matter of significance."

Those grounds are elaborated at length in the skeleton argument. Mr Jafari-Fini, who has appeared in person on this appeal, has developed them before us.

46. Before I examine those grounds I should mention that - having addressed us for most of the first day of the hearing of this appeal - Mr Jafari-Fini applied on the morning of the second day, for an adjournment. The need for an adjournment was put on the basis that he, as appellant, needed time to respond to the fact that Chesterton was now in administrative receivership. But that was a fact which he had known for the past ten days or more; although it was not formally brought to the attention of the court until a witness statement of Mr Robeson was put before us by Skillglass yesterday morning. The fact that the Royal Bank of Scotland had appointed administrative receivers of Chesterton had received wide publicity in the press in the course of the last week. We refused that application to adjourn. If it had any merit, it could have been made in the course of last week. It was not made until the court had already spent a day on the hearing of the appeal. To adjourn on the second day of the appeal would have led to a waste of court time and to unnecessary expense to the parties. And, for my part, I am unable to see what Mr Jafari-Fini could hope to gain from an adjournment. The fact is that Chesterton is now in administrative receivership. The judge dismissed the application before him on the ground that there was no potential benefit to PAL in pursuing an action. The position in that respect cannot have been improved by the fact that the bank has now appointed receivers of Chesterton. We refused the application to adjourn.

47. I return, therefore, to the grounds of appeal. Grounds A and C can be addressed shortly. The judge did not reject the appellant's case that Skillglass had repudiated the Facility Agreement and the security arrangements. Although he expressed doubt whether the case on repudiation could be advanced successfully in the light of this court's decision in Concord v The Law Debenture Corporation , he said in terms that he did not decide the point: see paragraphs 20 and 25 of his judgment. As to ground C, he did not ignore the special factors arising out of the fact that the appellant was pursuing claims against Skillglass which mirrored those which it was sought to advance on behalf of PAL. He was very well aware of the common factors underlying the personal and the derivative claims: see paragraph 10 of his judgment. His conclusion was that if the appellant succeeded on those claims, he would regain control over PAL and would then be in a position to ensure that PAL pursued its own claims if it was sensible to do so: see paragraphs 23 and 31, particularly the last sentence of paragraph 31 of his judgment.

48. Ground D can also be addressed shortly. It is clear from the structure of his judgment that the judge had already decided against giving permission under CPR 19.9 before he came to consider the position of the other shareholders in PAL. It is said in the skeleton argument that, properly understood, the investment agreement to which PHP was party did not require its consent to proceedings brought by PAL. Whether or not that is so, it seems to me fanciful to suggest that it was not open to the judge to consider, when deciding whether or not to grant permission to one shareholder to bring a derivative claim in the name of the company, what support or otherwise that shareholder enjoyed from other shareholders, in particular from independent shareholders. And, as the judge found, there was no evidence that PHP had been given an opportunity to express a view.

49. That leaves ground B. As advanced in the grounds of appeal,it is said that the judge was wrong to hold that there was no prospect that payment of the second tranche would have been made in January 2004 had there been no premature notices and no action taken upon those notices.

50. It is important to have in mind that it was not that point that led the judge to the decision and conclusion which is recorded in paragraph 31. But the judge dealt with that point between paragraphs 25 and 29 of his judgment. Put shortly, he took the view that there was no prospect that the landlord, whose consent would have to be obtained for the assignment by Chesterton of its leasehold interest in Lily Hill House, would agree to an assignment by Chesterton to PAL in the circumstances that the covenant that the landlord would be asked to take from PAL would be a covenant from a company whose only asset was an 87 per cent share in Chesterton and which had substantial liabilities which it could not meet except by receiving a reverse premium from Chesterton. So, whatever the value of Chesterton's covenant might be, the value of PAL's covenant would be significantly less valuable; and, as the judge held, it was inconceivable that a landlord would consent to an assignment to the company which needed a reverse premium in order to meet its current debts without insisting on guarantees which there was no reason to think were available.

51. There are other difficulties as well. These include the likelihood, as it seems to me, is that any such transaction involving a reverse premium would fall foul of the prohibition in Part V Chapter 6 of the Companies Act - as indeed counsel advising PAL seems to have thought at the time. To take money out of Chesterton by means of a reverse premium on the assignment of a lease in order to enable PAL to pay for its purchase of the shares in Chesterton seems to me, I must say, open to very serious objections.

52. But whether or not the judge was right about that, the real basis for his decision - as appears from paragraph 31 of his judgment - is that he could see no benefit to PAL in the pursuit of claims in an action against Skillglass. In reaching that view he had well in mind that, whether or not the notices were valid and whether or not the facility agreement had been repudiated, PAL had received substantial sums by way of advance from Skillglass which it would have to repay for one reason or another. No source of repayment, other than the Chesterton shares, could be identified. So whether or not Skillglass was a secure creditor, the Chesterton shares were the only source of repayment of the monies which it owed to Skillglass. Unless there was some reason to think that those shares were worth substantially more in the hands of PAL under the control of Mr Jafari-Fini than they were in the hands of Skillglass, there was no benefit to PAL in exposing itself to the costs of what, at that stage, was thought to be substantial and expensive action. It was more sensible to wait and see if Mr Jafari-Fini were successful in his challenge to the validity of the notices and the continued enforceability of the Facility Agreement and security arrangements. If that challenge failed, then there was no basis upon which PAL would be able to mount a claim. If that challenge succeeded, Mr Jafari-Fini would then be in control of PAL on the basis that the shares were held by Skillglass as his nominee.

53. The underlying question, as the judge recognised, was whether, by reason of the events of October 2003, - and, perhaps more particularly, December 2003 - control of PAL and with it control of Chesterton had passed in law from Mr Jafari-Fini to Skillglass as secured lender. That depends, first, on the validity of the notices; and, second on whether, if the notices were invalid, the Facility Agreement and the security arrangements ceased to be enforceable by reason of repudiation. If the agreement and the arrangements continued to be enforceable there was no doubt that, by October 2004 at least, there had been a breach. There had been a failure to pay in January and a further failure to pay in July 2004.

54. Those issues - the validity of the notices and the effect in law on the enforceability of the Facility Agreement and the security arrangements - ought to be tried.But they will be tried in an action by Mr Jafari-Fini against Skillglass, because his liability under his guarantee and his charge depend upon findings on those points. There is no need for PAL to bring a claim in that action. What is required is that PAL is bound by the result. It would plainly be unsatisfactory to have a situation in which the court reached an answer on those points in an action by Mr Jafari-Fini against Skillglass; but had not decided that issue in a way which prevented PAL from raising it again against Skillglass; or which prevents Skillglass from re-running its defence in an action by PAL.

55. In those circumstances, it seems to me that the judge was right to dismiss the application for permission to bring a derivative claim. What is required in these proceedings is not a derivative claim by PAL at this stage; but some machinery which ensures that PAL is formally bound by the result in Mr Jafari-Fini's claim against Skillglass.

56. I shall indicate in a moment the directions which, to my mind, should be given to achieve that objective; but I should first say this. By its respondent's notice, although not by way of cross-appeal, Skillglass sought to challenge the judge's decision on 11th October 2003 that Mr Jafari-Fini had standing to make an application for permission to bring a derivative claim. In the event, that challenge has not been pursued in this court for a number of good reasons: one of which, at least, is that it would be unsatisfactory to decide that sort of point - which may have considerable repercussions - in proceedings, where there is not informed legal argument on both sides and, where the point does not arise in what I may describe as the pure form of a minority shareholding held on trust for a beneficial claimant. In the rather unusual circumstances of this case, the real issue is not whether a minority shareholder should be allowed to bring a claim in the name of a company, but whether a majority shareholder, whose shares are said to be held on trust for him by the wrongdoer, should be allowed to use the company's name to sue the wrongdoer. That is not a situation which is likely to arise often. Anything that this court were to decide in relation to it would be unlikely to be of much assistance in future cases.

57. So that point is not pursued. With it falls PAL's cross appeal on costs. As I have indicated, the judge ordered that Mr Jafari-Fini pay 75 per cent of the costs of Skillglass and PAL below. PAL obtained permission to appeal that order on the basis that, if this court were to hold that the judge had been wrong in relation to the question of standing, the basis upon which he made a discount of 25 per cent of costs would fall away - so that PAL should be entitled to all its costs. The point whether the judge was wrong to reach the conclusion that he did on 11th October 2004 not being argued, the cross-appeal on costs falls with it. The permission that was given on condition of success on the substantive point ceases to be of any effect.

58. For the reasons that I have indicated I would dismiss the appeal. But I would give leave to add PAL as a defendant to the action for the purpose only of ensuring that PAL is bound by any declarations which the court may think fit to make as to the effect of notices or agreements to which it is party.

59. I would direct that the action proceed in accordance with the directions which the judge has already given for the purposes of determining as preliminary issues the issues raised in paragraphs 1(a) to (c), 8 to 12 and 15 of the amended claim form that was put before the judge in the course of the hearing below. Those issues will raise the questions for determination whether the notices were valid; and (if not) what the effect, if any, of their invalidity will have been on the enforceability of the facility agreement and the security arrangements.

60. I would further direct that PAL be at liberty - but be not required - to take such part as it may be advised, at its own risk as to costs, in the trial of those preliminary issues. And I would further direct that, unless PAL does take part in that trial, no order for costs should be made against PAL in relation to the determination of those preliminary issues.

61. I would give liberty to apply to both parties for further directions. In particular I would give liberty to Mr Jafari-Fini apply to bring a derivative claim under CPR 19.9 in the light of the determination of the court on the issues which I have indicated should be tried as preliminary issues. I put the point in that way because it seems to me likely that the determination of the court on those preliminary issues whichever way that goes - will be likely to make it unnecessary for further consideration to be given to derivative claims.

62. LORD JUSTICE LATHAM: I agree.

63. LORD JUSTICE PILL: I also agree

Order : Appeal dismissed. Directions as above. Appellant to pay the respondents' costs of the appeal. Case remitted to the Chancery Division with a time estimate of five days. Question of expedition remitted to the Chancery Division, with the court's encouragement to direct an early hearing. Leave to appeal to the House of Lords refused.