Kleanthous v Paphitis & Ors

The Claimant, Mr Kleanthous, is a shareholder in Ryman Group Limited (“RGL”), the Fifth Defendant. By the application before me, he seeks permission under section 261 of the Companies Act 2006 to continue a derivative claim on behalf of RGL and one of its subsidiaries, Ryman Limited (“RL”), which is the Sixth Defendant.

The claim which Mr Kleanthous wishes to pursue arises out of the acquisition by Xunely Limited (“Xunely”) of La Senza plc (“La Senza”) in 1998. Xunely’s owner, Mr Paphitis (the First Defendant), was (and is) also a director of RGL and the company’s principal shareholder. In the present proceedings, Mr Kleanthous alleges that the acquisition of La Senza involved breaches of fiduciary duty on the part of Mr Paphitis and three other directors of RGL: the Second, Third and Fourth Defendants, respectively Mr Cooke, Mr Towner and Mr Childs. I shall refer to Messrs Paphitis, Cooke, Towner and Childs collectively as “the Director Defendants”.

In 1998, RGL, which was then called “Chancerealm Limited”, had three subsidiaries. One of these, RL, carried on a well-known stationery business. A second subsidiary, Contessa (Ladieswear) Limited (“Contessa”), had a lingerie business. The third subsidiary, NAG Communications Limited, had a mobile telephone business.

RGL’s shareholders were Mr Kleanthous, Mr Paphitis and Mr Childs. Mr Paphitis was much the largest shareholder, with 72.4% of the shares. Mr Kleanthous and Mr Childs respectively held 15.5% and 12.1% of the shares.

RGL’s board included two of its three shareholders: Mr Paphitis and Mr Childs. The other members of the board were Mr Cooke, Mr Towner and a Mr Ring. Mr Kleanthous was not a director. He had entered into a shareholders’ agreement in 1996 under which he had undertaken that he would hold his shares for investment purposes only and would not:

Mr Paphitis is one of the “dragons” on the well-known television programme “Dragons’ Den” and has a high public profile. Mr Childs has a background in marketing and was co-founder with Mr Paphitis of Movie and Media Sports Limited, a business which, Mr Childs says, occupied most of his time in 1998. For his part, Mr Cooke has many years’ experience of senior management, especially in retail; he was a director of RL before Mr Paphitis became involved with it. Mr Towner is a solicitor and was a partner in Richards Butler (later to be incorporated into Reed Smith) until he retired in 1992; he is a non-executive director of RGL and RL (“the Ryman Companies”). In 1998, Mr Cooke and Mr Towner each had share options in RGL.

At the beginning of 1998, Suzy Shier, a retailer in Canada and the United States, owned through Suzy Shier Equities Inc, a wholly-owned subsidiary of Suzy Shier Limited, 60.2% of the issued share capital of La Senza. La Senza carried on a lingerie business and was listed on the London Stock Exchange’s AIM market.

By early 1998, Suzy Shier was looking for buyers for its shareholding in La Senza. According to Mr Paphitis, he was approached about La Senza in February or March of 1998 and subsequently discussed with other directors of RGL the possibility of becoming involved with La Senza. Both Mr Paphitis and the other Director Defendants say that it was decided that it would not be appropriate for RGL to acquire La Senza.

Mr Paphitis says that he was approached about La Senza again at the beginning of June 1998. On this occasion, Mr Paphitis explains, Suzy Shier offered to sell its shares in La Senza for just £1 subject to the provision of an indemnity in respect of certain ongoing liabilities of La Senza, which largely related to equipment leases. According to Mr Paphitis, he and his fellow directors remained of the view that RGL should not undertake the acquisition, but he decided (with the blessing of other directors) that he would like to take on La Senza in a personal capacity. The evidence of the other Director Defendants is to broadly similar effect.

Matters came to a head during the night of 3-4 June 1998, during which there were negotiations which ultimately led to Mr Paphitis agreeing to buy Suzy Shier’s shares in La Senza through Xunely, a newly-acquired shelf company. In the course of these negotiations, Mr Paphitis asked Mr Cooke, Mr Towner and Mr Ring whether they would agree to RGL lending Xunely the funds (some £1.4 million) required to buy the shares in La Senza held by shareholders other than Suzy Shier (Suzy Shier having apparently called for proof of Mr Paphitis’ ability to fund the purchase of these shares) and giving a guarantee in respect of Suzy Shier’s exposure to liabilities of La Senza (Suzy Shier having apparently stated that a third party guarantee was required).

In Mr Cooke’s words, “[a] board meeting was convened between those directors [of RGL] present in the meeting room at Gouldens’ offices”. Mr Towner wrote out minutes of this meeting in manuscript. These recorded that Mr Paphitis, Mr Cooke and Mr Towner were present and that Mr Ring, who was “unavoidably absent but had participated in negotiations”, was in agreement. The minutes stated that it had been resolved that:

A loan of up to £1.8 million should be made to Xunely to finance its acquisition of La Senza at an interest rate of 3% above base rate and with security over Xunely’s assets;

A guarantee should be given in respect of “the possible liability of La Senza to Suzy Shier Limited on terms to be agreed by the Board”;

A management agreement should be entered with Xunely on terms to be agreed.

It seems that it was also that evening that Mr Cooke and Mr Towner became directors of Xunely, as did Mr Ring. Mr Cooke and Mr Towner were later to acquire share options in Xunely, but not, it seems, until late 2001. Thereafter, Mr Cooke and Mr Towner respectively had share options of 7.62% and 3.55% in RGL and 7.5% and 2.55% in Xunely. Mr Childs has never held shares or share options in Xunely nor been a director of the company.

On 4 June 1998, an agreement was entered into under which, among other things, Xunely agreed (a) to buy Suzy Shier Equities Inc’s shares in La Senza for £1 and (b) to indemnify Suzy Shier companies in respect of guarantees they had given in relation to La Senza. Further, RGL covenanted that it would procure that Xunely performed its obligations under the agreement and, in particular, would pay Suzy Shier any sums which Xunely failed to pay.

Mr Childs says that he recalls being told by Mr Paphitis during the morning of 4 June 1998 that he had bought La Senza. Mr Paphitis says that he told Mr Childs that day that Mr Cooke, Mr Towner and Mr Ring had accepted appointments as directors of Xunely.

In the following days, there were press reports about Xunely’s acquisition of La Senza. The Independent, for example, reported on 5 June 1998 that:

On 15 June 1998, there was a board meeting of RGL. This was attended by Mr Paphitis, Mr Cooke, Mr Childs and Mr Ring. The minutes contained the following account of events:

Also on 15 June 1998, Mr Ring wrote on behalf of RGL to confirm that it would “procure or provide such financial support as is necessary and reasonable to ensure that La Senza plc is able to continue trading and meet its commitments as they fall due”. On 16 June, RGL formally offered to lend Xunely up to £1.8 million to enable it to make an offer for all the issued shares in La Senza not already owned by Xunely.

Minutes of a further board meeting of RGL, on 23 June 1998, recorded agreement to provide United Mizrahi Bank Limited with a guarantee, limited to £2 million, which the Bank required in support of a trade finance facility provided to La Senza.

There was reference to arrangements between Xunely and RGL in a circular distributed in the second half of June 1998 to shareholders of La Senza (who, however, did not include Mr Kleanthous). In particular, a letter included in the circular had a passage in these terms:

Mr Kleanthous evidently saw some of the press coverage relating to the sale of La Senza. In a letter to Mr Towner dated 11 August 1998, he said:

Mr Kleanthous wrote back to Mr Paphitis on 27 August 1998. His letter included these paragraphs:

The Ryman Companies’ accounts for the year ended 27 March 1999, which were filed at Companies House in April 2000, contained references to the companies’ support for Xunely and La Senza. The note to RGL’s accounts dealing with related party transactions explained that the figure given for “other debtors” of RGL included “£1,398,076 owed by La Senza Limited, this balance having arisen as a result of cash transfers having been made to La Senza Limited” and “£146,338 owed by Xunely Limited … as a result of the payment of professional fees on behalf of Xunely Limited”. It was further explained that the figure given for “other debtors” of the group included £1,443,340 owed by Xunely “as a result of the payment of professional fees on behalf of Xunely Limited and as a result of cash transfers to Xunely Limited”. There was reference, too, to the group having “made a management charge of £625,000 to La Senza Limited to cover warehouse, transport and other associated costs borne by the group on behalf of La Senza Limited”. Another note stated that RGL “guarantees the trade finance facility of La Senza”.

In late 2001, Contessa was de-merged. Contessa was, as I understand it, transferred to a new holding company whose shareholdings corresponded to RGL’s. Mr Cooke explains in his witness statement that it was thought sensible for RGL to focus exclusively on stationery. At this stage, Mr Kleanthous through his then solicitor acknowledged that there had been no breach of duty by RGL’s directors “as far as he [was] aware”.

In similar vein, in 2002 Mr Kleanthous countersigned a letter to confirm that, so far as he was aware, he had no claim against his fellow shareholders or directors “suggesting any breach of fiduciary obligations or anything improper in the operations of any of [the companies in the RGL and La Senza groups]”.

Xunely declared dividends in favour of Mr Paphitis of some £2.7 million in 2004 and £4 million in 2006.

In 2006, Xunely sold 90% of its shares in La Senza to a private equity group called Lion Capital for more than £100 million.

Later in 2006, Contessa was also sold to Lion Capital. According to Mr Kleanthous, the price to be paid was over £8 million but was to be reduced to about £5.5 million after deduction of a debt owed to RGL. Following its sale, 47 of Contessa’s shops seem to have become La Senza shops while the remaining 18 were apparently closed.

In a letter dated 26 February 2010, Mr Kleanthous’ solicitors informed Mr Paphitis and the directors of the Ryman Companies that Mr Kleanthous was proposing to bring a claim by way of derivative action against Mr Paphitis, RGL and RL. At this stage, it was not suggested that the proposed claim would extend to Mr Cooke, Mr Towner or Mr Childs. It was, however, said that Mr Cooke, Mr Towner and Mr Childs were “not independent” and that “it should have been apparent to them that the conduct of Mr Paphitis was wrongful”. Subsequently, after correspondence with solicitors instructed on behalf of, respectively, Mr Paphitis and the other directors of RGL and RL, Mr Kleanthous widened the ambit of the proposed derivative claim to encompass allegations against Mr Cooke, Mr Towner and Mr Childs.

The proceedings which are now before me were issued on 29 November 2010. On the same day, Mr Kleanthous applied for permission under section 261 of the Companies Act 2006 to continue his derivative claim. On 21 December 2010, Floyd J gave directions in relation to the application to continue the derivative claim. The directions provided, among other things, for the various Defendants to be made Respondents to Mr Kleanthous’ application and for the Defendants to file and serve evidence in answer to it.

The board of RGL now comprises Mr Paphitis, Mr Cooke, Mr Towner, Mr Childs, Mr Kypros Kyprianou (“Mr Kyprianou”) and Mr Simon Lakin (“Mr Lakin”). Mr Kyprianou joined the RGL group in 2004. Mr Lakin became a director of RGL in 2008, having previously been an employee since 2001.

On 17 February 2011, the boards of RGL and RL each resolved to set up a committee, to consist of Mr Kyprianou and Mr Lakin, to seek professional advice and make decisions in relation to the present proceedings. On 3 March, the committees resolved that RGL and RL should not bring or continue the claim brought derivatively by Mr Kleanthous. The minutes of each meeting included this:

the negative effect on the Company’s businesses of the Company bringing or continuing a claim against the Defendant Directors greatly outweighs any benefit to the Company by pursuing the claim; and

bringing or continuing the claim against the Defendant Directors would not promote the success of the Company”.

Mr Kleanthous’ case is summarised as follows in the Particulars of Claim:

As directors of RGL and Ryman [i.e. RL], the Director Defendants owed fiduciary obligations to RGL and Ryman, which amongst other things required them not to use company assets for their own benefit or for that of associated companies and not to divert business opportunities from RGL or Ryman.

From about June 1998 onwards, the Director Defendants committed serious and fraudulent breaches of these fiduciary duties:

the Director Defendants diverted a substantial business opportunity (namely the purchase of the company and lingerie business, La Senza) away from RGL and Ryman in order to develop this opportunity for the benefit of Pahitis and his company Xunely (in which Cooke and Towner were also interested);

the Director Defendants used the assets of RGL and/or Ryman for their own benefit and/or that of Paphitis’ company, Xunely, by procuring RGL and/or Ryman: (1) to make loans to Xunely in order to purchase La Senza; (2) to fund La Senza’s activities after the acquisition, and (3) to provide a trade finance facility for La Senza;

the Director Defendants failed to disclose their own breaches of duty to the independent shareholder of RGL and/or Ryman, namely AK.

Paphitis (acting on his own behalf and for Cooke, Towner and Childs) deliberately concealed the wrongful conduct and breaches of duty from AK [i.e. Mr Kleanthous], being the independent shareholder of RGL and Ryman.

By reason of the said matters, the Director Defendants have made very substantial profits (in excess of £120 million) and have caused enormous loss to RGL and Ryman.

RGL and Ryman remain under the control of the Director Defendants who have refused to permit these companies to commence proceedings in respect of the wrongdoing committed by them.

By reason of the matters aforesaid, it is appropriate for this claim to be brought as a derivative action. RGL and Ryman are entitled to remedies against the Director Defendants including declarations of trust and/or an account of profits or equitable compensation.”

Mr Kleanthous now asks, first, for permission to continue the claim on behalf of RGL and RL and, secondly, to be indemnified by RGL and RL in respect of costs. The Defendants all oppose the grant of any such relief.

The circumstances in which a derivative claim can be brought are nowadays dealt with in Part 11 of the Companies Act 2006. As regards England and Wales, the relevant provisions are sections 260-264.

Section 261(1) of the 2006 Act stipulates that a member of a company who brings a derivative claim must apply to the Court for permission to continue it. If it appears to the Court that the application and the evidence filed in support of it do not disclose a prima facie case for giving permission, the Court must dismiss the application (section 261(2)). If, on the other hand, the application is not dismissed at this stage, the Court may “give directions as to the evidence to be provided by the company” and adjourn the application to enable the evidence to be obtained (section 261(3)). On hearing the application, the Court may (under section 261(4)):

refuse permission … and dismiss the claim, or

adjourn the proceedings on the application and give such directions as it thinks fit”.

Section 263 is concerned with when permission to continue a derivative claim should be given. Sub-sections (2), (3) and (4) are in the following terms:

Section 172 of the 2006 Act, to which there is reference in section 263, requires a director to act “in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”. In doing so, he is to have regard (amongst other matters) to:

Section 263(2)(a) of the 2006 Act will not apply merely because some, or even most, directors would not seek to continue the claim. In Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2010] BCC 420, Lewison J explained the position as follows (in paragraph 86):

Mr Kitchener submitted that the Court should grant permission for a derivative claim to be continued only if satisfied that the Claimant has a strong case. In this connection, he relied on a passage from Iesini v Westrip Holdings Ltd. In paragraph 79 of his judgment in that case, Lewison J suggested that, for the Court to give permission for a derivative claim to be continued under section 261(4), “something more than a prima facie case” is required.

However, Part 11 of the 2006 Act does not in terms provide that a claim must reach a specific threshold if it is to be allowed to continue. Further, in Stainer v Lee [2010] EWHC 1539 (Ch), [2011] BCC 134, Roth J expressed the view (in paragraph 29) that section 263(3) and (4) “do not prescribe a particular standard of proof that has to be satisfied but rather require consideration of a range of factors to reach an overall view”. Roth J went on:

Roth J’s observations are consistent with the Law Commission’s intentions. In paragraph 6.72 of its report on shareholder remedies (number 246), on which the relevant provisions of the 2006 Act are to a considerable extent based, the Law Commission recommended that “there should be no threshold test on the merits”. Roth J’s views are in keeping, too, with comments made in a Scottish case, Wishart v Castlecroft Securities Ltd [2009] CSIH 65. Lord Reed, giving the opinion of the Inner House, there said (in paragraph 40):

In the circumstances, it seems to me that the Court can potentially grant permission for a derivative claim to be continued without being satisfied that there is a strong case. The merits of the claim will be relevant to whether permission should be given, but there is no set threshold.

When opening the matter, Mr Richard Keen QC, who appears with Mr Andrew Hunter for Mr Kleanthous, queried what role the Director Defendants should be playing in the application. He pointed out that in Wishart v Castlecroft Securities Ltd the Inner House considered that directors against whom it was proposed that derivative proceedings be brought should not be allowed to take part in the application to continue the claim (see paragraph 26 of the opinion of the Court). The Court’s reasons for arriving at that conclusion included, first, that the directors had “no interest in the proceedings as individuals (other than in the most general sense), by reason of being intended defenders in the derivative proceedings” (paragraph 19); secondly, that, while the 2006 Act provides for evidence from the company, there “is no indication in sec 266 that the proposed defenders are intended to participate in the proceedings on the application” (paragraph 20); thirdly, that there “is nothing in the matters to be considered which suggests that it should ordinarily be necessary to hear the proposed defenders” (paragraph 20); and fourthly, that it “is not in the interest of the company … that the potential defenders in those proceedings should be given advance notice of weaknesses in the company’s case and of documents and witnesses which would be helpful to their defence” (paragraph 23). Section 266 of the 2006 Act, which is concerned with derivative proceedings in Scotland, largely corresponds to section 261 of the Act.

Mr Keen did not go so far as to suggest that I should refuse to hear counsel for the Director Defendants. In any case, I consider that the Director Defendants were entitled to advance submissions to me. That must, I think, follow from the order made by Floyd J on 21 December 2010, which provided for the Director Defendants to be made Respondents to the application for permission to continue the derivative claim and to put in evidence in answer to the application. It seems to me, moreover, that it was appropriate for the Director Defendants to be permitted to participate in the permission application. In the first place, section 261 of the 2006 is not identical to section 266. In particular, while section 266 states that “the company is entitled to take part in the further proceedings on the application”, section 261 says nothing about who is entitled to take part in the permission application. More importantly perhaps, where (as in the present case) the Claimant is seeking an indemnity as to costs, a Defendant who is a shareholder will have an interest other than merely as a person against whom it is intended that proceedings are brought. On the facts of the present case, an indemnity would be likely to mean that the Director Defendants stood, in practice, to bear the bulk of Mr Kleanthous’ costs even if his claim were wholly unsuccessful. Further, while (as Mr Keen pointed out) proposed Defendants can be expected to be partisan, so can the Claimant. A Claimant will be in a very different position to that of, say, trustees seeking a Beddoe order, on whom it is incumbent to “make full disclosure of the strengths and weaknesses of their case” (see Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220, at 1224). That leads to another point. A Court hearing a Beddoe application will commonly need to have access to privileged material. In contrast, there will normally be no question of a Court dealing with an application to continue derivative proceedings being offered access to privileged material, and there was no suggestion in the present case that I needed to see such material; participation in the permission application will not, therefore, have given the Director Defendants access to material which they could not otherwise have seen. It is also relevant to note that the modern tendency is to allow those with whom trustees are in litigation to participate as fully as possible in Beddoe applications. Thus, in STG Valmet Trustees Ltd v Brennan (1999) 4 ITELR 337, the Court of Appeal for Gibraltar said (at 351):

The merits of the proposed claim are of obvious relevance to the matters I have to decide. They have a bearing, in particular, on the factors specified in section 263(2)(a) and section 263(3)(b) of the 2006 Act. As Lewison J said in Iesini v Westrip Holdings Ltd (in paragraph 79), any view as to the strength of a claim “can only be provisional where the action has yet to be tried; but the court must … do the best it can on the material before it”.

Argument about the merits of the claim ranged widely. I do not think I need rehearse all the points that were aired before me, but I shall sketch out some of the main issues.

Company directors, like other fiduciaries, are subject to “no conflict” and “no profit” rules. The effect of these was summarised in these terms by Deane J in the High Court of Australia in Chan v Zacharia (1984) 154 CLR 178:

In the present case, there is a strong case for saying that the “no conflict” and “no profit” rules were both potentially engaged. The decision of the Court of Appeal in Bhullar v Bhullar [2003] EWCA Civ 424, [2003] 2 BCLC 241 suggests that the “no conflict” rule is capable of applying if “the reasonable man, looking at the relevant facts and circumstances of the particular case, would think that there was a real sensible possibility of conflict”, and the reasonable man might surely have taken that view in relation to Xunely’s acquisition of La Senza. Mr Paphitis arguably had conflicts of both interest and duty as Xunely’s owner and one of its directors. Mr Cooke and Towner can also be said to have had conflicts of duty once they had become directors of Xunely as well as of the Ryman Companies. The way in which the Ryman Companies facilitated Xunely’s acquisition of La Senza points to the “no profit” rule applying as well.

One of the answers advanced by the Defendants is that the transaction was approved by RGL’s board (in particular, at the board meeting on 15 June 1998). The Defendants rely in this context on RGL’s articles of association, article 22 of which, at the relevant times in 1998, provided as follows:

may be a party to, or otherwise interested in, any transaction or arrangement with the company or in which the company is otherwise interested;

may be a director or other officer of, or employed by, or a party to any transaction or arrangement with, or otherwise interested in, any body corporate promoted by the company or in which the company is otherwise interested; and

shall not, by reason of his office, be accountable to the company for any benefit which he derives from any such office or employment or from any such transaction or arrangement or from any interest in any such body corporate and no such transaction or arrangement shall be liable to be avoided on the ground of any such interest or benefit”.

There may be some scope for argument as to whether the Director Defendants sufficiently disclosed their conflicts of interest/duty to RGL’s board. The minutes of the 15 June 1998 board meeting referred in terms to Mr Paphitis’ ownership of Xunely, but nothing was said about the fact that Mr Cooke and Mr Towner had become directors of Xunely. Mr Paphitis has said in a witness statement that he told Mr Childs on 4 June 1998 that Mr Cooke, Mr Towner and Mr Ring had accepted appointments as directors of Xunely, but, even if that is right, it could be argued that one of the “provisions of the Act” had not been complied with and, hence, that the requirements of regulation 85 of Table A could not be satisfied as regards Mr Cooke and Mr Towner. The provision in question would be section 317 of the Companies Act 1985, which stipulated that a director of a company with an interest in a contract or proposed contract with the company had “to declare the nature of his interest at a meeting of the directors of the company”. In the present case, Mr Cooke and Mr Towner do not appear to have declared their directorships of Xunely at a meeting of RGL’s board. On the other hand, Mr Richard Snowden QC, who appears with Mr Ben Shaw for Mr Cooke, Mr Towner and Mr Childs, submitted that regulation 85’s reference to the “the provisions of the Act” could not extend to section 317 of the 1985 Act since that would render the next words (viz. “and provided that he has disclosed to the directors the nature and extent of any material interest of his”) otiose.

Mr Keen also challenged the RGL board’s approval of Xunely’s acquisition of La Senza on the basis that all members of the board, including Mr Childs, were conflicted. Mr Keen argued that Mr Childs was to be considered to have had a conflicting interest because he was a close business associate of Mr Paphitis. However, Mr Childs was never at any stage a director of Xunely, and he never had either shares or share options in that company. On the face of it, his interests lay with RGL, of which he was both a director and a substantial shareholder. I doubt whether the mere fact that Mr Paphitis could be described as a close business associate could mean that Mr Childs had a relevant conflict of interest.

Be that as it may, Mr Keen submitted that the Director Defendants acted in conscious disregard of their duty to further the interests of the Ryman Companies and so fraudulently. Such conduct, Mr Keen argued, cannot be authorised or ratified by a board resolution. The minutes of the board meeting of 15 June 1998 represented, Mr Keen suggested, “little more than window dressing, for a clear and deliberate breach of the directors’ fiduciary duties to RGL”. The arrangements relating to the acquisition of La Senza involved, Mr Keen said, RGL taking all the risks for none of the reward. No one, Mr Keen maintained, could have believed the arrangements to be in RGL’s interests.

As was pointed out in submissions, one of the matters put forward in the Particulars of Claim in support of the allegations of fraud and dishonesty is the proposition that “it was obvious and the Director Defendants were or should have been aware that each of them was acting in serious breach of his fiduciary duties” (my emphasis). The complaint that the Director Defendants “should have been aware” suggests negligence rather than fraud. However, Mr Keen said in submissions that the words “or should have been” were a mistake. The passage ought to have alleged knowledge/wilful blindness.

Mr Snowden was prepared to accept that regulation 85 of Table A will not have served to release the Director Defendants from their duties to act in their companies’ interests (compare Movitex Ltd v Bulfield [1988] BCLC 104). However, he stressed, among other things, that it is a director’s obligation to do what he believes to be in his company’s interests (see e.g. Regentcrest plc v Cohen [2001] 2 BCLC 80, at paragraph 120). Both he and Mr Kitchener argued that, on the facts, the prospects of Mr Kleanthous establishing that the Director Defendants had acted otherwise than in what they believed to be the interests of the Ryman Companies were poor to non-existent. Among the more compelling of the matters which the Director Defendants advanced in this context were these:

Absence of motive. Mr Cooke and Mr Towner do not appear to have acquired significant financial interests in La Senza until several years later, and Mr Childs never had any obvious reason to act otherwise than in the interests of the Ryman Companies;

The board minutes. These seem to confirm that the Director Defendants had the interests of the Ryman Companies in mind in June 1998, and showing them to be “little more than window dressing” would not be an easy task;

The Director Defendants have put forward a number of reasons for not wanting RGL to acquire La Senza but being prepared to support Xunely’s acquisition of it. They echo to a considerable extent points made in the minutes of the 15 June 1998 board meeting (see paragraph 16 above).

It was also submitted on behalf of the Director Defendants that any claim was statute-barred. Mr Keen argued otherwise on the basis that section 21(1)(a) of the Limitation Act 1980 and/or section 32 of that Act applied.

Section 21(1) of the 1980 Act provides as follows:

This section was considered by the Court of Appeal in Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400. In that case, Millett LJ distinguished two different situations in which the expressions “constructive trust” and “constructive trustee” have been used by equity lawyers (at 408-409):

Millett LJ went on to indicate (without deciding) that section 21 of the Limitation Act 1980 does not extend to constructive trusts within the second class. He said, for example, the following (at 409-410):

In Gwembe Valley Development Co Ltd v Koshy (No 3) [2003] EWCA Civ 1048, [2004] 1 BCLC 131, the Court of Appeal concluded that the trust at issue in that case was “a class 2 trust, within Millett LJ’s classification” (paragraph 119), with the result that the claim could not be brought within section 21(1)(b) of the Limitation Act 1980 but (in the words of the judgment) “stands or falls on s 21(1)(a)” (paragraph 120). On the face of it, the Court of Appeal was therefore proceeding on the basis that section 21(1)(a) could apply in the case of a class 2 constructive trust. However, in Halton International Inc v Guernroy Ltd [2006] EWCA Civ 801 Carnwath LJ observed:

In J D Wetherspoon plc v Van de Berg & Co [2007] EWHC 1044 (Ch), [2007] PNLR 28, Lewison J commented (at paragraph 36) that the Gwembe case was binding on him. Having regard, however, to Millett LJ’s reasoning in Paragon and Carnwath LJ’s comments in Halton, it seems to me that a higher Court would be very likely to hold that section 21(1)(a) of the Limitation Act 1980, like section 21(1)(b), does not apply to class 2 constructive trusts. That suggests that, for the derivative claim ultimately to succeed on the strength of section 21(1)(a), Mr Kleanthous would need to establish that there was a class 1 constructive trust.

Arguing that this is a class 1 case, Mr Keen said that the reality is that Mr Paphitis took the assets of RGL and improperly used them to purchase La Senza in the name of his own shell company. On the other hand, Mr Kitchener and Mr Snowden each argued that any claim would be within Millett LJ’s class 2. Mr Snowden, for example, submitted that neither the shares in Xunely nor any remuneration received by any of the Director Defendants could represent pre-existing property of RGL to which fiduciary obligations attached. As regards the allegation that funds of the Ryman Companies were improperly lent to Xunely, Mr Snowden pointed out that the loans were repaid within a couple of years and said that the Xunely shares in respect of which an account is claimed could not be said to be either an accretion to, of graft upon, the loans.

Assuming, however, that (contrary to Mr Kitchener’s and Mr Snowden’s submissions) this is a class 1 case, Mr Kleanthous would still have to prove in respect of each of the Director Defendants that there had been fraud (because section 21(1)(a) of the 1980 Act is applicable only to claims in respect of “any fraud or fraudulent breach of trust”). Having regard to matters such as those mentioned in paragraph 54 above, establishing fraud would not be easy.

Turning to section 32 of the Limitation Act 1980, this is in the following terms:

Mr Kleanthous alleges that the letter Mr Paphitis sent him on 17 August 1998 (see paragraph 20 above) involved deliberate concealment. The Particulars of Claim say the following about this:

By the close of argument, Mr Keen was no longer pursuing the suggestion that the correspondence showed there to have been deliberate concealment on the part of Mr Cooke, Mr Towner or Mr Childs; he limited the allegation of concealment to Mr Paphitis. It seems to me, however, that Mr Kleanthous’ prospects of showing that the letter involved deliberate concealment even on the part of Mr Paphitis are quite poor.

Other factors make it even harder for Mr Kleanthous to rely on section 32 of the 1980 Act. Arguably, the companies whose claims are at issue (viz. RGL and RL) can be said to have known all the relevant facts (through Mr Childs, if not otherwise). Mr Kleanthous himself was evidently aware of the fact that a company associated with Mr Paphitis had purchased La Senza, and it can be plausibly argued that Mr Kleanthous could with reasonable diligence have discovered any other facts relevant to the causes of action. It is relevant in this context that “the statutory words ‘any fact relevant to a plaintiff’s right of action’ are to be given a narrow rather than a wide interpretation” (The Kriti Palm [2006] EWCA Civ 1601, [2007] 2 CLC 223, at paragraph 322). As was explained in The Kriti Palm (in paragraph 322), in Johnson v Chief Constable of Surrey (unreported, 19 October 1992), the Court of Appeal accepted a “submission that ‘the relevant fact must be a fact without which the cause of action is incomplete’, contrasting a fact relevant to an action and to a right of action”. It is relevant too that the question is not whether matters should have been discovered sooner but whether they could have been with reasonable diligence (see the Paragon case, at 418). In Paragon, the Court of Appeal said (at 418) that “the test was how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency”. Mr Kitchener submitted that, in the present case, the published accounts would have been sufficient to put Mr Kleanthous on the scent, especially as he had the assistance of an accountant.

My overall conclusion is that there are arguable claims against the Director Defendants, but the chances of the claims succeeding are significantly less than evens. The claim against Mr Childs strikes me as particularly weak.

With regard to the quantum of the claims, a very large sum could potentially be recovered from Mr Paphitis if an account of profits were ordered. It is much less clear that the Ryman Companies would stand to recover very large amounts from Mr Cooke and Mr Towner. On the face of it, Mr Childs has not received any profits for which he could be liable to account.

I shall consider in turn below such of the matters listed in section 263 of the Companies Act 2006 as seem to me to be of particular significance in the present case.

As mentioned above (paragraph 38), section 263(2)(a) is applicable only where no director acting in accordance with section 172 of the 2006 Act would seek to continue the claim. I am not satisfied that that is the case as regards Mr Paphitis or even Mr Cooke or Mr Towner. In contrast, I have been persuaded by Mr Snowden and Mr Michael Todd QC, who appears with Miss Mary Stokes for the Ryman Companies, that section 263(2)(a) is in point as regards Mr Childs. He is in a somewhat different position to Mr Cooke and Mr Towner since he never had any interest or role in Xunely. As I have already said, the claim against him seems particularly weak, and he does not appear to have received any profits for which he could be liable to account. In the circumstances, I consider that “a person acting in accordance with section 172 … would not seek to continue the claim” so far as Mr Childs is concerned. It follows that I am required by section 262(2) to refuse permission to continue the claim as against Mr Childs.

In Wishart v Castlecroft Securities Ltd, Lord Reed said (at paragraph 37):

I have commented above on the size and strength of the claim, and I am not aware of any reason to think that a judgment would go unsatisfied. As regards costs, these could doubtless be very substantial, but the Ryman Companies would probably be in a position to bear them. So far as disruption to business, reputation and relationships is concerned, Mr Kyprianou has advanced a number of reasons for considering that the claim would be very damaging to the Ryman Companies. Mr Kyprianou summarised the views of himself and Mr Lakin in these terms in a witness statement:

the Companies are likely to lose four of their most experienced directors. This in turn is likely to damage the trading performance of the RGL Group, staff morale and the reputation of the Companies;

replacing the Defendant Directors with candidates of similar skills and experience would be extremely difficult and, in the case of Theo Paphitis, impossible;

damaging the reputation of Theo Paphitis would mean damaging the reputation of Ryman, as Theo Paphitis’ name is very closely linked to the Ryman brand. The RGL Group would no longer benefit from the considerable free publicity gained by its association with Theo Paphitis and the numerous business advantages that result from this association;

the impact on employees, customers, suppliers and other shareholders would be disastrous and would be likely to cause a significant deterioration in the RGL Group’s performance and consequently its value; and

the litigation would provide a significant distraction to any remaining senior management.”

Mr Keen understandably sought to minimise the significance of Mr Kyprianou’s evidence, but to my mind there is much force in what Mr Kyprianou says.

As explained above (paragraph 31), RGL and RL each set up a committee comprising Mr Kyprianou and Mr Lakin to seek professional advice and make decisions in relation to these proceedings. The committees decided against bringing or continuing the claim.

Mr Keen argued that Mr Kyprianou and Mr Lakin are “anything but independent”. While, however, Mr Kyprianou has been a director of a number of companies associated with Mr Paphitis, he and Mr Lakin received legal advice on their duties (including that they should not allow the effect of any decision on themselves or other directors to influence them) and had no involvement with Xunely’s original acquisition of La Senza. Mr Keen drew my attention to the comment in Boyle, “Minority shareholders’ remedies”, at page 80, that it is “important that allegations of seriously abusive behaviour should not be defeated by assertions of genuine belief by board members or shareholders who think that litigation must always be the worst option; either financially or in terms of corporate reputation”. On the facts of the present case, however, I do not think I would be justified in ignoring the conclusions arrived at by the chief executive officer (Mr Kyprianou) and finance director (Mr Lakin) of the relevant companies. To the contrary, I accept Mr Todd’s submission that I should attach considerable weight to those conclusions. Mr Kyprianou and Mr Lakin are better placed than I am to assess where the companies’ commercial interests lie.

The Defendants all argue that Mr Kleanthous could pursue his complaints more appropriately by a petition pursuant to section 994 of the 2006 Act (unfair prejudice).

Mr Kyprianou said this on the subject in his witness statement:

In Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch), [2009] 1 BCLC 1, Mr William Trower QC, sitting as a Deputy High Court Judge, gave considerable weight to the fact that the Claimant should be able to achieve all that it could properly want through a section 994 petition and shareholders’ action which were already on foot (see paragraphs 53 and 54). In Iesini v Westrip Holdings Ltd, Lewison J said (in paragraph 126) that the availability of an alternative remedy under section 994 was one of the factors which would have led him to the conclusion that, had he not adjourned the matter, it would not have been appropriate to allow a derivative claim to proceed.

In contrast, the availability of an alternative remedy under section 994 did not appear to the Inner House to be a compelling consideration on the facts of Wishart v Castlecroft Securities Ltd, where Lord Reed commented (in paragraph 46) that such proceedings would “constitute, at best, an indirect means of achieving what could be achieved directly by derivative proceedings”. Similarly, in Stainer v Lee Roth J considered a derivative action “entirely appropriate” and “the theoretical availability to the applicant of proceedings by way of an unfair prejudice petition … not a reason to refuse permission”; the applicant was “not seeking to be bought out” (paragraph 52).

In the present case, likewise, it was submitted on Mr Kleanthous’ behalf that he was not seeking a buy-out of his shares. However, the evidence indicates that Mr Kleanthous is interested in being bought out. Mr Kleanthous himself referred in a witness statement to having said to Mr Paphitis in 2008 that he “hoped [Mr Paphitis] would agree to buy [his] RGL shares at a fair price so that [they] could both move on with [their] separate lives”. In a more recent witness statement, Mr Kleanthous said that he had “made no secret about the fact that [he] would be willing to sell [his] shares in RGL at a fair price”. Further, there has been reference to a petition being presented under section 994. In a letter dated 2 June 2010, Mr Kleanthous’ solicitors said that they had been “instructed to prepare, in addition to the derivative proceedings, an application under Section 994 of the Companies Act 2006”. One is left with the suspicion that Mr Kleanthous has chosen to pursue derivative proceedings alone in the hope that that he will be able to obtain a costs indemnity (with the result that the other shareholders in RGL would be likely to bear the bulk of the costs even if the claims against them failed).

In all the circumstances, I agree with Mr Todd that the availability of an alternative remedy in the form of an unfair prejudice petition is a powerful reason to refuse permission for the derivative claim to proceed in this case.

Section 263(4) of the 2006 Act directs the Court to have “particular regard to any evidence before it as to the views of members of the company who have no personal interest, direct or indirect, in the matter”. Mr Snowden referred in this connection to evidence given by Mr Childs. Mr Childs expressed the following, among other, views in a witness statement:

Since Mr Childs is one of the proposed Defendants, I doubt whether he is strictly to be regarded as a member with “no personal interest, direct or indirect, in the matter”. His views still seem to me to be of relevance, especially since (a) he has a shareholding in RGL which is not very much smaller than Mr Kelanthous’ and (b) he does not appear to have benefited in any way from Xunely’s acquisition of La Senza.

In the end, I did not understand Mr Keen to press me to grant permission for the claim to be continued as against anyone but Mr Paphitis. Mr Keen submitted in his reply that I could most properly grant permission against Mr Paphitis alone on the basis that (a) concealment may not have been pleaded against the other Director Defendants and (b) the quantification of any claim is more problematic against Director Defendants other than Mr Paphitis.

I have concluded, however, that I should not grant permission for the claim to be continued at all. I have already expressed the view that section 263(2)(a) applies in relation to Mr Childs (with the consequence that permission has to be refused as against him). With regard to the other Director Defendants, I do not consider the claim Mr Kleanthous wishes to pursue to be of such strength and size (even in the case of Mr Paphitis) as could make it appropriate for me to grant permission when (a) that course is strongly opposed, on a reasoned basis, by the Ryman Companies’ independent committees as well as by Mr Childs, (b) it is open to Mr Kleanthous to seek redress by means of an application under section 994 of the 2006 Act and (c) much of any money recovered from the Director Defendants could be expected to be returned to them by way of distribution. In fact, factors (a), (b) and (c) would have caused me to hesitate to grant permission even if I had been persuaded that the proposed claim was a strong one.

Amongst the matters on which I heard argument were (a) whether there is jurisdiction to authorise a “double derivative” action (i.e. one in which a member of a company brings a claim on behalf of a subsidiary of the company), (b) whether the proposed claim would have been allowed to proceed at common law (as required on the facts of this case by paragraph 20(3) of schedule 3 to the Companies Act 2006 (Commencement No. 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007) and (c) whether it would have been appropriate to grant Mr Kleanthous a costs indemnity. Given the conclusions I have already arrived at, I do not think I need explore these questions.

In all the circumstances, I shall refuse permission to continue the claim and dismiss Mr Kleanthous’ application. I shall further adjourn all consequential matters (including any application for permission to appeal) to a date next term.