Giannis Ntzegkoutanis v Georgios Kimonis & Ors

As its heading indicates, Part 11 of the 2006 Act is concerned with “derivative claims and proceedings by members”. Chapter 1 of Part 11, comprising sections 260-269, deals with the position in England and Wales or Northern Ireland.

Mr Kimionis’ respondent’s notice is founded on the terms of section 260 of the 2006 Act. That provides:

“(1)

This Chapter applies to proceedings in England and Wales or Northern Ireland by a member of a company—

(a)

in respect of a cause of action vested in the company, and

(b)

seeking relief on behalf of the company.

This is referred to in this Chapter as a ‘derivative claim’.

(2)

A derivative claim may only be brought—

(a)

under this Chapter, or

(b)

in pursuance of an order of the court in proceedings under section 994 (proceedings for protection of members against unfair prejudice).

(3)

A derivative claim under this Chapter may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.

The cause of action may be against the director or another person (or both) ….”

Subsequent provisions in Chapter 1 of Part 11 of the 2006 Act deal with applications for permission to continue derivative claims. In particular, section 261(1) stipulates that a member of a company who brings a derivative claim under Chapter 1 must apply to the Court for permission to continue it and section 263 addresses circumstances in which such an application must be refused and matters to be taken into account when considering whether permission should be granted.

The explanatory notes to the 2006 Act noted that, at common law, the general principle was that it is for a company itself to bring proceedings where a wrong has been done to it, but that, where there had been a “fraud on the minority”, there was scope for a member to bring an action to enforce the company’s rights: see paragraph 485. The explanatory notes went on to say that the sections in Chapter 1 of Part 11 of the 2006 Act did not replace the pre-existing substantive law, but “instead reflect the recommendation of the Law Commission that there should be a ‘new derivative procedure with more modern, flexible and accessible criteria for determining whether a shareholder can pursue an action’”: paragraph 491. Paragraph 492 of the explanatory notes stated:

“The sections in Chapter 1 of this Part introduce a two-stage procedure for permission to continue a derivative claim. At the first stage the applicant will be required to make a prima facie case for permission to continue a derivative claim and the court will be required to consider the issue on the basis of the evidence filed by the applicant only, without requiring evidence from the defendant. The courts must dismiss the application if the applicant cannot establish a prima facie case. At the second stage – but before the substantive action begins – the court may require evidence to be provided by the company. The sections set out a list of the matters which the court must take into account in considering whether to give permission and the circumstances in which the court is bound to refuse permission.”

As Mr Robins explained, the contention advanced in the respondent’s notice proceeds as follows.

Section 260(2) of the 2006 states in terms that a “derivative claim” may only be brought under Chapter 1 of Part 11 or in pursuance of an order made in proceedings under section 994. The expression “derivative claim” is defined by section 260(1) to refer to:

“proceedings in England and Wales … by a member of a company—

(a)

in respect of a cause of action vested in the company, and

(b)

seeking relief on behalf of the company”.

That definition applies as regards the claims made in paragraphs 32.2 and 32.3 of the petition. To that extent, the petition involved proceedings by Mr Ntzegkoutanis as a member of the Company “in respect of a cause of action vested in the company” and “seeking relief on behalf of the company”. That, Mr Robins argued, is evident from the terms of the petition. Paragraph 32.2 asks that Mr Kimionis account and/or pay damages “to … the Company” and/or “compensate the Company” and paragraph 32.3 seeks declarations of constructive trust “in favour of the Company” (emphasis added in each case). Moreover, such relief is said to be warranted because of breaches by Mr Kimionis of duties he owed to the Company as a director. Parliament can be seen to have had in mind, Mr Robins argued, the grant of relief such as would vindicate a company’s cause of action and preclude future proceedings in respect of it. That would be the case, Mr Robins said, as regards the relief claimed in paragraphs 32.2 and 32.3 of the petition.

The upshot, Mr Robins submitted, is that, as matters stand, Mr Ntzegkoutanis is barred from pursuing the relief set out in paragraphs 32.2 and 32.3 of the petition. That follows from the fact that no order sanctioning proceedings for such relief has been made either under Chapter 1 of Part 11 of the 2006 Act or in section 994 proceedings. Mr Robins accepted that, with such sanction, there would be no need for a separate originating process: the relief could be included in a petition complaining of unfair prejudice and would not have to be the subject of a distinct claim form. If, therefore, Mr Ntzegkoutanis had applied for permission to continue the compensation and constructive trust claims in accordance with Chapter 1 of Part 11, it would have been open to the Judge to entertain the application. There being no such application, however, paragraphs 32.2 and 32.3 fell to be struck out.

Mr Robins cited in support of his submissions the decision of the Eastern Caribbean Supreme Court in Gray v Leddra [2012] ECSCJ No. 171. In that case, an application was made to strike out parts of a claim because, “unless special circumstances obtain, it is wrong in principle to introduce into an unfair prejudice action, which asserts a personal claim by a shareholder, what is in truth an unauthorised derivative claim seeking to assert a right vested in the company in question”: see paragraph 6. Acceding to the application, Bannister J said in paragraph 9:

“In my judgment, the position here in the BVI is clear. A derivative action requires permission under section 184C [of the Business Companies Act 2004]. In considering whether to grant permission, the Court here is mandated to take into account a number of important considerations. The Court may not give permission unless it is satisfied that the company itself does not intend to make the claim and that it is in the interests of the company that conduct of the proceedings should not be left to the company or to a majority of its board or of its members (emphasis added). These conditions are of so stringent a nature that in my judgment it is an abuse of the process to attempt to mount a derivative claim without the consent of the Court under section 184C. If that permission is granted, then it seems to me that it is a matter of case management whether the derivative claim is prosecuted as part of unfair prejudice proceedings or is tried together with them or separately, but to attempt to bring such a claim without permission is, in my judgment, an abuse.”

Mr Robins pointed out that Bannister J arrived at this conclusion even though the BVI legislation did not contain a provision corresponding to section 260(2) of the 2006 Act.

By the time the statutory regime in respect of derivative claims was introduced in the 2006 Act, it was well-recognised that the Court had “a very wide discretion to do what is considered fair and equitable in all the circumstances of the case” (to quote Oliver LJ in Re Bird Precision Bellows Ltd [1986] Ch 658, at 669) in unfair prejudice proceedings. More specifically, there was authority for the proposition that redress benefiting the company could potentially be granted on an unfair prejudice petition. Thus, in Lowe v Fahey [1996] 1 BCLC 262, Charles Aldous QC, sitting as a Deputy High Court Judge, declining to strike out such a petition, observed at 268 that “where … the unfairly prejudicial conduct involves the diversion of company funds, a petitioner is entitled as a matter of jurisdiction to seek an order under s 461 [i.e. a predecessor of section 996 of the 2006 Act] for payment to the company itself not only against members, former members or directors allegedly involved in the unlawful diversion, but also against third parties who have knowingly received or improperly assisted in the wrongful diversion”. In Clark v Cutland [2003] EWCA Civ 810, [2004] 1 WLR 783, His Honour Judge Norris QC (as he then was) had at first instance given judgment against a director in favour of the company in respect of money taken from it without authority in the sum of £1,150,753 in unfair prejudice proceedings: see paragraphs 2 and 3 of Arden LJ’s judgment. Far from casting doubt on the legitimacy of that, the Court of Appeal went further, holding that the company was entitled to trace payments into the hands of the trustees of a pension fund to which some of the money had been paid. Moreover, Arden LJ expressed the “provisional view” that, “although the relief sought is claimed under section 461, it is sought for the benefit of the company and … it is, therefore, open to Mr Clark [i.e. the petitioner] to seek an order against the company for payment to him of any costs incurred by him on this appeal”: see paragraph 35. In Chime, Lord Scott said in paragraph 42:

“Whether or not a court hearing an ‘unfair prejudice’ petition has jurisdiction in the strict sense to order a respondent against whom a breach of duty to the company has been established to pay compensation, or to make restitution, to the company, there is no doubt at all that in many cases the jurisdiction to do so has been assumed, that many orders of that sort have been made, and that it is highly convenient that they should have been made.”

There is, nonetheless, nothing in the explanatory notes to the 2006 Act to indicate that the introduction of the provisions relating to derivative actions was intended to bear on unfair prejudice petitions. Nor is any such indication to be found in the Law Commission report on “Shareholder Remedies” (Law Com No 246, Cm 3769), which, as the explanatory notes stated, was the inspiration for Part 11 of the 2006 Act. The Law Commission recommended that a “new derivative procedure should replace the common law derivative action entirely”, but it did not say that this would or should affect unfair prejudice proceedings. In fact, the Law Commission explained that it had decided that it would not be appropriate “to require all claims which can be brought by or on behalf of the company” to be brought by way of “derivative action” and, to the contrary, considered that “a claimant should have the right to choose whether to bring a derivative action or proceedings under s 459 [i.e. a predecessor of section 994 of the 2006 Act], or cumulative claims under both”: see footnote 27 to paragraph 6.12. In paragraph 6.11, the Law Commission had said, “Whilst we noted the tendency of applicants to bring section 459 proceedings in respect of matters which could have given rise to a derivative action, we do not consider that the two should be entirely assimilated”.

It is significant, too, that Part 30 of the 2006 Act made no mention of Part 11 or any requirement to obtain permission to seek any relief in unfair prejudice proceedings. Had Parliament envisaged that Part 11 of the Bill which became the 2006 Act could impinge on Part 30 of that same Bill, it might have been expected to include in Part 30 at least a cross-reference to Part 11, but it did not do so. Further, the explanatory notes to the 2006 Act say simply, “Sections 994-998 restate sections 459, 460 and 461 of the 1985 Act, which provide a remedy where a company’s affairs are being conducted in a manner which is unfairly prejudicial to the interests of its members”, making no reference to Part 11. The reality, I think, is that it cannot have been anticipated that the statutory regulation of derivative claims introduced by Part 11 would affect unfair prejudice proceedings under Part 30.

Mr Mather argued that the wording of Part 11 of the 2006 Act is to the same effect, so that section 260(2) does not bite on Mr Ntzegkoutanis’ petition. He submitted that the present proceedings:

I am not myself persuaded by the first of these points. While the meaning to be attributed to the expression “in respect of” will be affected by the context in which they occur (see Mirchandani v Somaia [2020] EWCA Civ 1260, [2021] 1 Cr App R 7, at paragraph 75), it has been said to have “the widest possible meaning of any expression intended to convey some connection or relation between the two subject matters to which the words refer”: see Albon (t/a NA Carriage Co) v Naza Motor Trading Sdn Bhd [2007] EWHC 9 (Ch), [2007] 1 WLR 2489, per Lightman J at paragraph 27, quoting Mann CJ in Trustees Executors and Agency Co Ltd v Reilly [1941] VLR 110, at 111. I also think it is clear that paragraphs 32.2 and 32.3 of the petition ask for orders to be made on the strength of “causes of action” that, on Mr Ntzegkoutanis’ case, are “vested” in the Company. The petition asks for money to be paid to the Company, and declarations of constructive trust “in favour of the Company”, on the basis that the Company is entitled to that relief as a result of alleged breaches of duty by Mr Kimionis. That being so, it seems to me that, read naturally, the words “seeking relief” “in respect of a cause of action vested in the company” (as they appear in section 260(1)) cover paragraphs 32.2 and 32.3 of the petition.

I also agree with Mr Robins that it can be no answer to his contentions that the petition seeks other relief which, on any view, would not be “in respect of a cause of action vested in the company” within the meaning of section 260(1) of the 2006 Act. Section 260 must be capable of applying where proceedings “[seek] relief on behalf of the company” “in respect of a cause of action vested in the company” but also ask for something else. Section 260 does not state that it is limited to proceedings which are exclusively, or even primarily, for relief such as is described in section 260(1)(a) and (b), and it would make no sense for the statutory code that has been introduced for derivative claims to be so confined.

However, I find Mr Mather’s contention that Mr Ntzegkoutanis is not seeking relief “on behalf of the company” within the meaning of section 260(1)(b) of the 2006 Act compelling. True it is that Mr Ntzegkoutanis is seeking relief which, if granted, will benefit the Company, but he is asking for it in his own right rather than on behalf of the Company. He is exercising his personal entitlement, as a member of the Company, to apply to the Court on unfair prejudice grounds pursuant to section 994 of the 2006 Act. One of the remedies that can be granted where such a petition is held to be well-founded is an order “authoris[ing] civil proceedings to be brought in the name and on behalf of the company”: see section 996(2)(c). Proceedings issued in pursuance of such an order would be a “derivative claim” within the meaning of section 260(1), but the present proceedings are not of that kind. Mr Ntzegkoutanis has no authority to bring proceedings on the Company’s behalf, and he does not do so.

That conclusion seems to me to accord with the language of section 260 of the 2006 Act, but it is reinforced by the matters mentioned in paragraphs 32-34 above. As Lord Nicholls noted in R v Secretary of State for the Environment, Transport and the Regions, ex p Spath Holme Ltd [2001] 2 AC 349, at 397, statutory interpretation is “an exercise which requires the court to identify the meaning borne by the words in question in the particular context” (emphasis added). Provisions elsewhere in the statute may provide relevant context, as may explanatory notes and Law Commission reports: see R (O) v Secretary of State for the Home Department [2022] UKSC 3, [2023] AC 255, at paragraphs 29 and 30.

It follows that, in my view, section 260 of the 2006 Act does not extend to paragraphs 32.2 and 32.3 of the petition and they do not therefore fall to be struck out on that basis. The argument advanced in the respondent’s notice thus fails.

Chime, from which the Judge derived “the Chime approach”, involved an unfair prejudice petition presented under section 168A of the Companies Ordinance (Cap.32). The question before the Hong Kong Court of Final Appeal was whether the petitioners should be allowed to amend the petition to introduce claims that a respondent had procured the company to make improper loans and, as a result, that there should be an order for repayment or compensation to be paid to the company. As was noted at paragraph 8 by Bokhary PJ, with whom Chan and Ribeiro PJJ and Mortimer NPJ agreed, the case raised the issue “whether there is jurisdiction to make, on an unfair prejudice petition presented by a shareholder, an order for the payment of damages or compensation, or for the grant of restitution, to the company itself”.

After an extensive review of the authorities, Bokhary PJ concluded in paragraph 27:

“I would not say that there is no such jurisdiction in the theoretical sense of the type of case that the court is capable of entertaining. And even in the practical sense of the circumstances in which it is proper for the court to entertain the case or to make a particular order, I stop short of saying that there is absolutely no such jurisdiction. I would not rule out the possibility of circumstances in which it can be seen that such an order could properly be made. But such circumstances, even if they can arise, would in any case of complexity be rare and exceptional.”

Bokhary PJ said in paragraph 28 that no such circumstances had arisen in the case before the Court, adding:

“Quite apart from anything else undesirable, pursuing relief in respect of the CAL loans by way of an unfair prejudice petition rather than by way of a derivative action would entail the risk of the respondents or one or more of them facing a claim for such relief in a derivative action after the petitioners had failed to obtain the same in the petition.”

For his part, Lord Scott NPJ, with whom Chan and Ribeiro LJJ and Mortimer NPJ also agreed, endorsed at paragraph 47 doubts which Millett J had expressed in Re Charnley Davies Ltd (No 2) [1990] BCLC 760 (“Charnley Davies”) as to the “propriety of seeking [an order for payment or restitution to the company] on an unfair prejudice petition if the essence of the complaint was not of mismanagement of the company but of misconduct by the director”. Likewise, Lord Scott observed in paragraph 63 that “the use of a s.168A petition in order to circumvent the rule in Foss v Harbottle (1843) 2 Hare 461 in a case where the nature of the complaint is misconduct rather than mismanagement is, in my opinion, an abuse of process”.

Later in his judgment, Lord Scott said:

“61.

Although … the court has jurisdiction, in the strict sense, to make the orders sought (other than the order against CAL which is not a party to the petition) it would not, in my opinion, be proper for the court on this petition to entertain what would, in effect, be Chime’s action against the directors for their breach of duty in causing the loan to be made. If there is misconduct it can be established in a derivative action. If the court, on hearing the petition, thinks that a derivative action prosecuting this alleged misconduct should be brought, it can make an order to that effect under s.168(2)(b). It could also, if persuaded it were a convenient course to adopt, order that the petition and the derivative action be tried together.

62.

As a general rule, in my opinion, the court should not in a s.168A [i.e. unfair prejudice] petition make an order for payment to be made by a respondent director to the company unless the order corresponds with the order to which the company would have been entitled had the allegations in question been successfully prosecuted in an action by the company (or in a derivative action in the name of the company). If the order does not so correspond then, either the company will have received less than it is entitled to, in which case it will be entitled to relitigate the issue in an action against the director for the balance, or the company will have received more than it was entitled to, in which case a clear injustice to the director will have been perpetrated. Nor, in my opinion, should the court allow a prayer in the petition for payment by the respondent director of compensation or of restitution to the company to stand unless it is clear at the pleading stage that a determination of the amount, if any, of the director’s liability at law to the company can conveniently be dealt with in the hearing of the petition. In any other case, in my opinion, if the allegations against the director are proper to be relied on as evidence of unfairly prejudicial conduct, the appropriate relief to be sought would be an order under s.168A(2)(b) for a derivative action to be brought for the recovery of the sum legally due. It would be proper for the company to express its views as to whether it would be in its interests for such an action to be brought.”

Lord Millett NPJ made remarks to similar effect in Waddington Ltd v Thomas [2008] HKCFA 63, [2009] 2 BCLC 82 (“Waddington”), another decision of the Hong Kong Court of Final Appeal. He said in paragraph 77:

“Unfair prejudice proceedings are concerned to bring mismanagement to an end; derivative actions are concerned to provide a remedy for misconduct: see Re Charnley Davies Ltd (No.2) [1990] BCLC 760; Re Chime Corp Ltd (2004) 7 HKCFAR 546. While the court may have jurisdiction in the strict sense on a petition under s.168A to order payment of compensation to the company, the derivative action is the proper vehicle for obtaining such relief where the plaintiff’s complaint is of misconduct rather than mismanagement: see Re Chime Corp Ltd at p.571.”

Comparable views have been expressed in other cases from common law jurisdictions. In Re Shun Tak Holdings Ltd [2009] 5 HKLRD 743, Kwan J, sitting in the Hong Kong Court of First Instance, struck out an unfair prejudice petition as an abuse of process in circumstances in which the petitioners had “offered no or no valid reason why the safeguard of a filter should be bypassed” and it was “difficult to see what positive benefit they could gain by pursuing the complaints in a s 168A petition other than avoiding the filtering process [i.e. that provided by the need to obtain leave to bring a derivative action]”: see paragraph 68. In Prestigic (Wisley) Nominees Ltd Co v JTC Management Ltd [2012] JRC097 (“Prestigic”), the Jersey Royal Court struck out unfair prejudice proceedings as an abuse of process, having concluded that the complaint was “one of misconduct simpliciter” (paragraph 51) and that it had to “distinguish between relief for mismanagement of the affairs of the Company and relief for misconduct and that it is only actions in relation to the former that fall properly within the ambit of the unfair prejudice provisions” (paragraph 43). In Ho Yew Kong v Sakae Holdings Ltd [2018] SGCA 33, the Singapore Court of Appeal, affirming a view it had previously expressed in Ng Kek Wee v Sim City Technology Ltd [2014] SGCA 47, said at paragraph 93 that unfair prejudice petitions “should not be used to vindicate wrongs which are in substance wrongs committed against a company and which are thus corporate rather than personal in nature”.

Lord Scott himself cited Chime in Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] UKPC 26, [2007] Bus LR 1521 (“Baltic Partners”). Giving the judgment of the Privy Council, he said:

“27.

The first question to be addressed, therefore, is whether an order for payment of damages to the company whose affairs have allegedly been conducted in an unfairly prejudicial manner can be sought and made in an unfair prejudice application. Another way of putting the question is whether a cause of action allegedly vested in the company can be prosecuted to judgment in an unfair prejudice application. It would, of course, always be essential for the parties allegedly liable on the cause of action to be respondents to the proceedings. But that is not a problem in the present case.

28.

There is nothing in the wide language of article 143(1) [which corresponded to section 996 of the 2006 Act] to suggest a limitation that would exclude the seeking or making of such an order: the court ‘may make such order as it thinks fit for giving relief in respect of the matters complained of’. The point was raised and considered by the Hong Kong Court of Final Appeal (the CFA) in In re Chime Corpn Ltd (2004) 7 HKCFAR 546. An unfair prejudice application had been made in respect of Chime and one of the issues was whether the court had power on such an application to make an order for the payment of damages or compensation to the company. The CFA held that the court did have power to make such an order: see the judgment given by Lord Scott of Foscote, at paras 39–49, concurred in by the other members of the court, and the cases there cited. No reason has been advanced to their Lordships on this appeal why the decision in the Chime case should not be followed. Accordingly, no objection to Gamlestaden’s prayer in its article 141 application for an order that the directors pay damages to Baltic for breach of duty can be taken at this strike-out stage.”

The Judge considered that, in this passage, Lord Scott was referring to the Court’s “theoretical” jurisdiction rather than its “practical” jurisdiction: see paragraph 52 of the Judgment. I agree. There is no indication that he was intending to retreat from views he had expressed in Chime as to when it is “proper” for the Court to entertain unfair prejudice proceedings seeking relief in favour of the company. Baltic Partners thus provides further confirmation that the Court has power to order a respondent to pay compensation to the company, but I do not think it is of any real help on the question of when it is appropriate for such relief to be claimed by way of unfair prejudice petition.

Chime has also been cited in a number of cases in this jurisdiction, notably Apex Global Management Ltd v Fi Call Ltd [2013] EWHC 1652 (Ch), [2014] BCC 286 (“Fi Call”), Re Hut Group Ltd [2020] EWHC 5 (Ch), [2020] BCC 443 and, on appeal, [2021] EWCA Civ 904, [2021] BCC 970 (“Hut Group”) and Taylor Goodchild Ltd v Taylor [2021] EWCA Civ 1135, [2022] BCC 1155 (“Taylor Goodchild”). In Fi Call, Vos J took the “essence of the decision” in Chime to be that, “where the central claim was an action by the company to be compensated for a director’s breach, a minority shareholder should not use s.994 as a way of circumventing the rule in Foss v Harbottle (1843) 2 Hare 461” (paragraph 119), going on to say in paragraph 125:

“In my judgment, these authorities all speak with one voice. They show that ss.994–996 provide a wide and flexible remedy where the affairs of a company have been conducted in a manner that is unfairly prejudicial to the interests of some or all of its members. A s.994 petition is appropriate where, for whatever reasons, the trust and confidence of the parties to a quasi-partnership has broken down. Relief can be granted to remedy wrongs done to the company, and in such a situation the alleged wrongdoers must be made parties to the petition. Non-members of a company who are alleged to have been responsible for such conduct can be joined as respondents, and, in an appropriate case, such non-members can be made primarily or secondarily liable to buy the petitioners’ shares. Artificial limitations should not be introduced to reduce the effective nature of the remedy introduced by ss.994–996.”

In Hut Group, His Honour Judge Eyre QC (as he then was) at first instance said this in paragraph 55 about paragraph 62 of Lord Scott’s judgment in Chime (quoted in paragraph 44 above):

“In my judgement Lord Scott in that passage is not to be seen as laying down preconditions which must necessarily be fulfilled before the court can ever permit a claim seeking such relief to be brought. Rather he was giving guidance, albeit potent guidance, as to the circumstances in which it was likely to be or not to be appropriate for the court to permit such a claim to be made. That interpretation follows from Lord Scott’s acceptance that the court had power to grant such relief and his indication that the question was the propriety of the inclusion of the claim in the particular case. Moreover, it is of note that Lord Scott expressly stated that he was setting out his assessment of what was appropriate ‘as a general rule’ rather than setting out preconditions for the exercise of the jurisdiction. The distinction is a narrow one because at the lowest the passage provides powerful guidance as to when it will be appropriate for the court to permit such a claim. It follows that it will rarely be appropriate for the court to permit a claim of this kind in circumstances where the two elements identified by Lord Scott are not present. However, I do not understand Lord Scott to have been saying that such a course could never be appropriate.”

Earlier in his judgment, in paragraph 46, Judge Eyre QC had said:

“The purpose of s.994 is to provide redress in cases where the affairs of a company have been conducted in a way which is unfairly prejudicial to the interests of a shareholder as shareholder. It is concerned to address mismanagement of the affairs of the company rather than to provide redress for misconduct which has harmed the company. However, the mismanagement of the affairs of a company can take the form of a breach of duty by those in control of a company and the same acts can be both mismanagement which is unfairly prejudicial to a minority shareholder and misconduct in breach of a director’s duties and causing harm to the company. The question of whether a claim is properly to be seen as appropriately brought by way of a s.994 petition or as being in reality a derivative claim is a matter of analysis of the true nature of the particular claim. In that analysis particular regard is to be had to the relief sought and even more to the nature of the complaint. The court has to consider whether the complaint is in reality in respect of the harm caused to the relevant company by the misconduct (in which case there should be a derivative claim) or in respect of the impact on a petitioner’s position and rights as a minority shareholder (in which case s.994 proceedings are appropriate).”

On appeal, David Richards LJ, with whom Sir Geoffrey Vos MR and Coulson LJ agreed, quoted paragraph 56 of Judge Eyre QC’s judgment (in which Judge Eyre QC had applied the principles he had set out in paragraph 55) and continued in paragraph 45:

“I agree with this analysis of the petition. As regards the proper relationship between petitions under s.994 and derivative actions, consideration of the authorities suggests that it is highly sensitive to the precise circumstances of the case and the relief claimed: see the judgments of Lord Scott in the Court of Final Appeal of Hong Kong in Re Chime Corp Ltd (2004) 7 H.K.C.F.A.R. 546 and in the Privy Council in Gamlestaden Fastigeheter AB v Baltic Partners Ltd [2007] UKPC 26; [2007] B.C.C. 272. Whatever that relationship may be, it does not arise in the present case, which does not involve any claim for relief for the benefit of the company, either in substance or even, very largely, in form. The central point in this case is that, while the petition alleges breach by directors of their duties to the company, it does not allege that the company, as opposed to [the petitioner], has suffered any loss.”

The question in Taylor Goodchild was in a sense the converse of that in the present case: not, as here, whether it is open to a petitioner in unfair prejudice proceedings to seek relief in favour of the company but whether it was incumbent on a petitioner to do so, with the result that the company could not later pursue the claim. In the course of my judgment, I noted that “[i]t is open to the Court … to grant a variety of … remedies, including an order for a respondent to pay compensation to the company or to account to it for profits in respect of a wrong done to the company” (paragraph 30), but that there was “more scope for argument … as to when it is appropriate for the Court to grant relief in favour of the company in unfair prejudice proceedings” (paragraph 31). On the facts, I took the view that, while the Court might have had jurisdiction to grant relief under section 996 of the 2006 Act along the lines that the company now sought, it did not follow that the claim should have been asserted in the unfair prejudice proceedings or that the company’s claim was abusive. Sir Nigel Davis, agreeing, encapsulated the issue in this way in paragraph 50:

“In jurisdictional terms I can accept that Mr Goodchild could have sought to introduce into the unfair prejudice proceedings the derivative claims in respect of the WIP and Account of Profits. The real question, as I see it, is whether he should have done, such that his failure to do so renders an abuse of process the subsequent proceedings brought by the Company raising these claims.”

The mismanagement/misconduct distinction which can be seen in the passages I have quoted from Chime, Waddington, Prestigic and Judge Eyre QC’s judgment in Hut Group can be traced back to Charnley Davies. That case involved a petition under section 27 of the Insolvency Act 1986 alleging that the administrator of a company had managed its affairs in an unfairly prejudicial manner. Millett J said this at 624-625:

“An allegation that the acts complained of are unlawful or infringe the petitioner’s legal rights is not a necessary averment in a sec. 27 petition. In my judgment it is not a sufficient averment either. The petitioner must allege and prove that they are evidence or instances of the management of the company’s affairs by the administrator in a manner which is unfairly prejudicial to the petitioner’s interests. Unlawful conduct may be relied upon for this purpose, and its unlawfulness may have a significant probative value, but it is not the essential factor on which the petitioner’s cause of action depends.

Mr Oliver asked: ‘If misconduct in the management of the company’s affairs does not without more constitute unfairly prejudicial management, what extra ingredient is required?’ In my judgment the distinction between misconduct and unfairly prejudicial management does not lie in the particular acts or omissions of which complaint is made, but in the nature of the complaint and the remedy necessary to meet it. It is a matter of perspective. The metaphor is not a supermarket trolley but a hologram. If the whole gist of the complaint lies in the unlawfulness of the acts or omissions complained of, so that it may be adequately redressed by the remedy provided by law for the wrong, the complaint is one of misconduct simpliciter. There is no need to assume the burden of alleging and proving that the acts or omissions complained of evidence or constitute unfairly prejudicial management of the company’s affairs. It is otherwise if the unlawfulness of the acts or omissions complained of is not the whole gist of the complaint, so that it would not be adequately redressed by the remedy provided by law for the wrong. In such a case it is necessary to assume that burden, but it is no longer necessary to establish that the acts or omissions in question were unlawful, and a much wider remedy may be sought.

A good illustration of the distinction is provided by Re a Company No. 5287/85 (1985) 1 BCC 99,586. In that case the petitioners, who were minority shareholders, alleged that the respondent, who was the majority shareholder, had disposed of the company’s assets in breach of his fiduciary duty to the company and in a manner which was unfairly prejudicial to the interests of the petitioner. Hoffmann J refused to strike out the petition, holding that the fact that the petitioners could have brought a derivative action did not prevent them seeking relief under sec. 459.

Again, I respectfully agree. The very same facts may well found either a derivative action or a sec. 459 petition. But that should not disguise the fact that the nature of the complaint and the appropriate relief is different in the two cases. Had the petitioners’ true complaint been of the unlawfulness of the respondent's conduct, so that it would be met by an order for restitution, then a derivative action would have been appropriate and a sec. 459 petition would not. But that was not the true nature of the petitioners’ complaint. They did not rely on the unlawfulness of the respondent’s conduct to found their cause of action; and they would not have been content with an order that the respondent make restitution to the company. They relied on the respondent’s unlawful conduct as evidence of the manner in which he had conducted the company’s affairs for his own benefit and in disregard of their interests as minority shareholders; and they wanted to be bought out. They wanted relief from mismanagement, not a remedy for misconduct.”

In Re a Company (No. 005287 of 1985) [1986] 1 WLR 281, to which Millett J referred in Charnley Davies, the petitioners alleged that “H” had conducted the company’s affairs in an unfairly prejudicial manner, including by acting in breach of duty and without authority, but H was said to have transferred his shares and so ceased to be a shareholder. Hoffmann J nonetheless declined to strike H out as a respondent to the petition. He said this at 284:

“It is accepted that on the facts alleged in the petition, the truth of which, of course, remains to be tried, the petitioners would be able to mount a derivative shareholders’ action of the kind exemplified by Wallersteiner v. Moir [1974] 1 W.L.R. 991 against H. in order to require him to account for such of the company’s assets as he may have disposed of without authority. But it is said that such an action should be commenced separately by writ and that it would not be proper to seek the equivalent relief within a petition under section 459.

Looking at the matter from a practical point of view that does not seem to me to be very convenient. It would mean separate proceedings having to be commenced by writ and separate pleadings delivered in respect of matters which would very substantially overlap, if not duplicate, the issues canvassed in the petition and affidavits under section 459. It would then be necessary for both sets of proceedings to be heard together. I would be reluctant to come to the conclusion that this form of duplication was necessary unless it was clear that the jurisdiction under sections 459 and 461 did not permit the whole matter to be dealt with upon the petition. It seems to me that although it is true that section 462(2) shows that the normal order under section 461 will be an order against the company or another member, there is no reason why the words of section 461(1) should not be given their full effect and allow the court to give relief in respect of a complaint that the company’s affairs have been conducted in a manner unfairly prejudicial to the interests of members, even when this would involve giving relief against a respondent who is no longer a member. For that reason, I am not willing to strike out H. as a party to the petition.”

My own view is that the relevant legal principles can be summarised as follows as a matter of the law of England and Wales:

It follows that, in my view, the Judge approached the application for paragraphs 32.2 and 32.3 of the petition to be struck out on a mistaken basis.

The skeleton argument prepared on Mr Ntzegkoutanis’ behalf by Mr Mather explains that the “primary relief sought is a composite remedy whereby [Mr Ntzegkoutanis] seeks the reconstitution of the assets misappropriated and/or damages to the Company for the loss caused by the misappropriations, together with an order that [Mr Kimionis] sell his shares in the Company to [Mr Ntzegkoutanis], so permitting him to resume the business associated with the product which he had developed and, in any event, enabling him to vindicate his economic interest in the business and assets of the Joint Venture”. If that is Mr Ntzegkoutanis’ aim, it makes obvious sense for the petition to claim the relief in favour of the Company sought in paragraphs 32.2 and 32.3 of the petition in addition to an order requiring Mr Kimionis to sell his shares to Mr Ntzegkoutanis. In fact, supposing that Mr Kimionis were ordered to sell his shares, it would be very difficult to determine how much Mr Ntzegkoutanis should pay for them without knowing whether the compensation and constructive trust claims were well-founded and, if they were, their value. It is Mr Kimionis’ position, of course, that both claims are without foundation. On that basis, his shares in the Company are presumably worth very little. He would not want to be ordered to sell his shares to Mr Ntzegkoutanis at a price calculated on that footing only to find that he then had to face proceedings by the Company asserting the compensation and constructive trust claims.

There is, at any rate, no reason to believe that Mr Ntzegkoutanis is not genuinely interested in obtaining an order allowing him to buy Mr Kimionis’ shares and is, instead, trying to bypass the filter for which Part 11 of the 2006 Act provides. Nor did Mr Robins suggest that there is. That being so, I do not consider that paragraphs 32.2 and 32.3 are abusive or should be struck out.

I would allow the appeal and dismiss the application for paragraphs 32.2 and 32.3 of the petition to be struck out.