Universal Project Management Services Ltd v Fort Gilkicker Ltd & Ors

This is an application for permission to continue a derivative action. It raises for decision two related legal questions which are not the subject of any reported English authority. It does so because the action is what is called a double derivative action. The applicant is not a shareholder in the company in which the cause of action is alleged to be vested. Rather it is a member of a limited liability partnership (“LLP”) which owns all the shares in that company.

Prior to the coming into force of the Companies Act 2006, derivative actions relating to companies were creatures of the common law. It is common ground that the ordinary derivative action (by a member of the allegedly wronged company) was wholly replaced by the statutory derivative claim provided in Chapter 1 of Part 11 of the 2006 Act, which confers locus standi only upon a member of the relevant company. The legal questions for decision on this application are:

(1)

Whether a multiple derivative action was known to English common law before the coming into force of the 2006 Act; and,

(2)

If so, whether the multiple derivative action (of which the double derivative action is a sub-species) has survived the coming into force of the 2006 Act.

If either of those questions is answered in the negative, then it is common ground that this application should be dismissed without further investigation of its merits. If both are answered in the affirmative, then it is common ground that the Particulars of Claim disclose a sufficient prima facie case for the giving of permission, but the defendants other than the company itself submit that the circumstances are such that the court should either refuse permission as a matter of discretion, or at least stay the proceedings for negotiation.

The defendants’ sensible acknowledgment that the Particulars of Claim disclose a prima facie case means that I can describe the facts relatively briefly. The claimant Universal Project Management Services Limited (“UPMS”) and the second defendant Mr Ian Pearce are equal participants in a property development joint venture which, at least since January 2008, has been carried on through Askett Hawk Properties LLP (“the LLP”) in which UPMS and Mr Pearce are the only members, with equal shares.

The joint venture is currently engaged in three separate property developments, in the Isle of Man, in Guernsey and in Hampshire, each of which was to be carried on through the medium of a separate single purpose vehicle (“SPV”). The Hampshire development relates to a former Victorian coastal battery called Fort Gilkicker. The SPV used for the re-development of Fort Gilkicker into a series of residential units was Askett Hawk Developments (Gilkicker) Limited. It was incorporated on 16 December 2010 and changed its name to Fort Gilkicker Limited (“FGL”) in March 2011. FGL is the company in which it is alleged that there is vested the cause of action which UPMS seeks permission to litigate on its behalf. It is the first defendant to the claim.

Subject to any more detailed terms of the written LLP agreement regulating the affairs of the LLP, (which was not in evidence), the joint venture for which the LLP was the vehicle was carried on pursuant to an oral agreement between UPMS (represented by its principal mover and shaker Dr Frischmann) and Mr Pearce, under which each was to have equal shares in the joint venture, to contribute equally to its costs, to be entitled to half of any profits, to have equal representation on the board of any company pursuant to which any part of the joint venture was conducted, and an equal share in any relevant decision making. Dr Frischmann (who is a successful civil engineer) and Mr Pearce (who is a successful chartered building surveyor) became, and remain, the only two directors of FGL.

The initial steps in the acquisition of Fort Gilkicker, and the obtaining of planning permission for its development, were carried out through another joint venture company Askett Hawk Developments Limited (“Askett Hawk”) in which UPMS and Mr Pearce were also equal shareholders and directors. The steps were taken with a view to vesting ownership of Fort Gilkicker, and the benefit of any planning permission, in FGL, while Askett Hawk remained responsible for the marketing of the residential units, once built.

Askett Hawk obtained planning permission for the development of Fort Gilkicker, following a public inquiry, in August 2010. On 7 July 2011 FGL entered into an option to acquire Fort Gilkicker from Hampshire County Council (“the Option”), the main terms of which were as follows:

(a)

the premium for the option was £15,000,

(b)

its term was for one year,

(c)

its exercise was to create a contract for the purchase of Fort Gilkicker for £300,000 less the premium of £15,000, the balance of £285,000 being payable ten days after completion of the first transfer on sale of a freehold or leasehold residential unit within the fort.

(d)

Between exercise and completion, the Council’s entitlement to the deferred balance of the purchase price was to be secured by a legal charge granted by FGL over Fort Gilkicker.

The premium for the grant of the option was paid by Askett Hawk on behalf of FGL, and funded equally by UPMS and Mr Pearce.

The day to day conduct of the development of Fort Gilkicker lay with Mr Pearce, but subject to the requirement for unanimity as between him and Dr Frischmann on any major decision, pursuant to the oral terms of the joint venture.

In May and June 2012 there arose a serious disagreement between Dr Frischmann and Mr Pearce in relation to the development of Fort Gilkicker, arising from Dr Frischmann’s loss of confidence in a Mr Franklin, the architect for the project. Dr Frischmann’s preference was to continue the development with a different architect, whereas Mr Pearce’s preference was to continue with Mr Franklin, if necessary by Mr Pearce taking over UPMS’s share in that development (but not in the rest of the joint venture), and repaying its investment in the Fort Gilkicker project in full.

That difference had not been resolved when Dr Frischmann left for his annual holiday in Majorca, from 2 to 30 July. Meanwhile the Option was due to expire five days later, and had not by then been exercised.

UPMS’s case is that, while Dr Frischmann was away and behind his back, Mr Pearce allowed the Option to expire, incorporated a new company, Fort Gilkicker Properties Limited (“FGP”) and, pretending that it was another joint venture entity, secured its purchase of Fort Gilkicker from the County Council on precisely the terms which had previously been available to FGL pursuant to the Option. It is common ground that FGP is a company owned and controlled entirely by Mr Pearce, and that it has indeed acquired Fort Gilkicker on those terms. It is the third defendant to the claim.

The development of Fort Gilkicker had been estimated to be capable of generating a profit of several million pounds for the joint venture. UPMS therefore claims that in taking the steps just described, while remaining director of FGL, Mr Pearce misappropriated a valuable business opportunity of FGL for his personal benefit, in breach of his fiduciary duty to FGL. That is, of course, a claim solely vested in FGL which may be assumed to be unlikely to pursue it against Mr Pearce for as long as the jointly owned LLP remains FGL’s sole shareholder, and Dr Frischmann and Mr Pearce remain its sole directors.

Mr Pearce and FGP have yet to be called upon to serve a defence to that claim. Nonetheless, in a witness statement served by way of opposition to the application for permission to continue the claim, Mr Pearce has set out an attempted justification of his conduct. I can summarise it by saying that he claims that the purchase of the Fort by FGP was a step taken to ensure that the potential investment of both time and money in the project was preserved, notwithstanding the expiry of the Option, against a backdrop of UPMS through Dr Frischmann ceasing to co-operate in the project, and expressing a desire to extricate UPMS’ investment from the project by its sale to a third party.

It appears to be common ground that, to their credit, Dr Frischmann and Mr Pearce have managed to insulate their disagreement about the Fort Gilkicker development in such a way that they continue co-operatively to pursue the other two development projects of the joint venture in Guernsey and the Isle of Man. This is not, therefore, a case in which either of them wishes to have the joint venture terminated or wound up. Mr Pearce said, both in his witness statement and through Miss Marion Smith of counsel, that he hopes and expects shortly to be able to resolve his differences with Dr Frischmann in relation to the Fort Gilkicker project, without the necessity of further court proceedings of any kind.

The ordinary derivative action (by which a member of a company is exceptionally permitted to litigate a cause of action vested in the company where the company is unable to do so) was by 2006 a long-established creature of the common law, both in England and other common law jurisdictions. It constituted a pragmatic but principled exception to the rule in Foss v Harbottle (1843) 2 Hare 461, that the only person with locus standi to pursue a claim on behalf of a company is the company itself. It reflects the principle that, although the would-be claimant may have suffered loss as the result of wrong done to the company, its loss would be merely reflective of the company’s loss and insufficient to give it a cause of action in its own right.

The conditions for the bringing of an ordinary derivative action are most easily to be found in the Court of Appeal’s decision in Prudential Assurance Co. Ltd v Newman Industries & ors (No. 2) [1982] Ch 204, at pages 211 A-B and 221H-222B in the Judgment of the Court. The would-be claimant must show a prima facie case (i) that the company is entitled to the relief claimed and (ii) that the claim falls within the proper boundaries of the relevant exception to the rule in Foss v Harbottle. That exception arises where:

“what has been done amounts to fraud and the wrongdoers are themselves in control of the company. In this case the rule is relaxed in favour of the aggrieved minority, who are allowed to bring a minority shareholders’ action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue.”

It is common ground that “wrongdoer control” will also arise where the aggrieved members and the wrongdoers are in 50/50 control, such that either may prevent the company from suing, and that “fraud” includes a variety of forms of equitable wrong, including breach of fiduciary duty, although not mere negligence.

The rationale for the derivative action, namely to enable justice to be done where the wrongdoer is in control of the entity in which the cause of action is vested, is to be found stated in numerous authorities on the derivative action. In Russell v Wakefield Waterworks Company (1875) LR 20 Eq 474, at 480, Sir George Jessel MR said, of all the exceptions to the rule in Foss v Harbottle that:

“The exceptions depend very much on the necessity of the case; that is, the necessity for the Court doing justice.”

In Wallersteiner v Moir (No 2) [1975] 1 QB 373 Lord Denning said, describing the derivative action generally, at 390:

“In one way or another some means must be found for the company to sue. Otherwise the law would fail in its purpose. Injustice would be done without redress.”

In cases such as Prudential v Newman (and also Smith v Croft (No 2)[1988] Ch 114), it is natural to find the court describing the would-be claimant or claimants as a shareholder or a minority of the shareholders of the wronged company. That is what they were in fact, and they were the natural choice for the conferral of an extended locus standi to pursue the company’s claim. Thus the derivative action may be described as typically involving the conferral of locus standi on a member or minority of members of the wronged company, and a claim by such persons may properly be described as an “ordinary” derivative action.

There were however a number of reported cases in which the court recognised the conferral of locus standi to pursue the company’s cause of action not upon one of its members, but upon one or more members of its holding company, where the holding company was itself subject to the same wrongdoer control as the company. In chronological order those cases are Wallersteiner v Moir (No 2) itself, Halle v Trax BW Ltd [2000] BCC 1,020, Truman Investment Group v Societe General SA [2003] EWHC 1316 (Ch) and Airey v Cordell [2006] EWHC 2728 Ch.

The nearest on its facts to the present case is Halle v Trax BW Ltd, in which the claimant and the alleged wrongdoer were, respectively, 50/50 shareholders in Trax, which wholly owned the wronged company BW Manufacturing Ltd. Permission for Mr Halle to bring a derivative action on behalf of BWM was granted without opposition. On an unsuccessful appeal to Sir Richard Scott VC against the Master’s refusal of a costs indemnity, no doubt was cast upon the proper constitution of the claim as a derivative action.

In none of the four cases enumerated above was there any protest, still less decision, as to the proper constitution of a derivative action by affording locus standi to a member of the wronged company’s parent company. The absence of concern that the claimant was not an immediate member of the wronged company is perhaps most vividly illustrated by the facts of Wallersteiner v Moir (No 2). There, the claimant Mr Moir successfully pursued derivative actions on behalf of both HB Ltd, of which he was a minority shareholder, and B & Co. Ltd. which was HB Ltd’s wholly owned subsidiary. That this was the relationship between Mr Moir and the two companies is not apparent from the headnote or the judgments in Wallersteiner v Moir (No 2) but counsel were agreed that it sufficiently appeared from the report of earlier litigation concerning the same parties.

It is not I think particularly surprising that the court has, where necessary, been prepared to permit derivative claims to be brought on behalf of companies in wrongdoer control by persons other than their immediate shareholders without regarding those cases as special, and in particular without thinking it necessary to distinguish between “ordinary” and “multiple” derivative actions. Once it is recognised that the derivative action is merely a procedural device designed to prevent a wrong going without a remedy (see Nurcombe v Nurcombe [1985] 1 WLR 370 at 376A) then it is unsurprising to find the court extending locus standi to members of the wronged company’s holding company, where the holding company is itself in the same wrongdoer control. The would-be claimant is not exercising some right inherent in its membership, but availing itself of the court’s readiness to permit someone with a sufficient interest to sue as the company’s representative claimant, for the benefit of all its stakeholders.

The question whether the common law permitted that extended form of derivative claim (whether called double or multiple being merely a matter of classification) was fully reviewed as a matter of the law of Hong Kong by the Hong Kong Court of Final Appeal in Waddington Ltd v Chan Chun Hoo Thomas & ors [2008] HKCU 1381. Paragraphs 61 to 80 of Lord Millett’s judgment contains a comprehensive review of the issue which, taking into account the four English examples to which I have referred, answers the question decisively in the affirmative for reasons which appear to me as applicable to English as to Hong Kong common law, at least as it stood prior to the coming into force of the 2006 Act. The Waddington case was followed in relation to the common law of the Cayman Islands in Renova v Gilbertson [2009] CILR 268.

In my judgment the common law procedural device called the derivative action was, at least until 2006, clearly sufficiently flexible to accommodate as the legal champion or representative of a company in wrongdoer control a would-be claimant who was either (and usually) a member of that company or (exceptionally) a member of its parent company where that parent company was in the same wrongdoer control. I would not describe that flexibility in terms of separate forms of derivative action, whether headed “ordinary”, “multiple” or “double”. Rather it was a single piece of procedural ingenuity designed to serve the interests of justice in appropriate cases calling for the identification of an exception to the rule in Foss v Harbottle.

Section 260 of the 2006 Act (headed “Derivative Claims”) comes at the beginning of chapter 1 (headed Derivative Claims in England and Wales or Northern Ireland) of Part 11, headed “Derivative Claims and Proceedings by Members”. It provides, so far as is relevant:

“(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).

(4)

….

(5)

….

(c)

References to a member of a company include a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law.”

Chapter 1 of Part 11 continues by setting out the procedural requirements for the bringing or continuing of “a derivative claim under this Chapter”, and sets out in detail the considerations which the Court is required to take into account when deciding whether to permit such a claim to be continued. All in all, Chapter 1 of Part 11 provides a comprehensive code which prescribes the conditions for bringing a derivative claim (as defined), the method by which it must be brought, and the considerations relevant to permitting or refusing its continuation.

The question what effect the 2006 Act has wrought upon the common law procedural device of the derivative action in relation to companies is ultimately a question of construction of the Act. Statute will be construed as taking away common law rights only if it does so expressly or by necessary implication: see Islington Borough Council v Uckac [2006] 1 WLR 1303 per Dyson LJ at paragraph 28, relying on Coke’s Institutes. The same case shows that where Parliament prescribes an exhaustive code for the arising and exercise of a particular right formerly conferred by the common law, the common law right will generally be regarded as ousted by implication.

The same cautious approach to the displacement of the common law is applicable to common law rules as much as to common law rights: see R (Rottman) v Commissioner of Police for the Metropolis [2002] 2 AC 692, per Lord Hutton at paragraph 75:

“It is a well-established principle that a rule of the common law is not extinguished by a statute unless the statute makes this clear by express provision or by clear implication.”

Miss Smith submitted that the comprehensiveness of the code in Chapter 1 of Part 11 of the 2006 Act for the bringing and continuation of derivative claims (as defined) was sufficient to oust the common law in relation to an ordinary derivative action, brought by a member of the wronged company, and Mr James Bailey for UPMS did not seriously dispute that. The main bone of contention between counsel arose from the restrictive definition of a “derivative claim” in section 260(1). Even when “member of a company” is given the extended meaning conferred by section 260(5)(c), the phrase plainly excludes claims in respect of a cause of action vested in the company by persons other than members, such as members of the company’s holding company. In short, using the threefold categorisation of derivative claims referred to above, it includes ordinary derivative claims, but excludes multiple, including double, derivative claims.

Mr Bailey submitted that section 260(1) identifies the only claims to which Chapter 1 applies, whereas sub-sections (2) and (3) identify the essential statutory restrictions within which such a claim may be issued, leaving section 263 to set out the circumstances in which the court may permit such claims to be continued. By contrast he submitted that common law claims by other persons seeking relief on behalf of a company in respect of a cause of action vested in the company were entirely unaffected by the Chapter, and survived in full force and effect.

For her part, Miss Smith submitted that this was an excessively literalist approach. The plain purpose of Chapter 1 was, she said, to replace the whole of the common law in relation to derivative claims in respect of companies with a new statutory code which was comprehensive both as to the persons capable of bringing such a claim, the conditions which had to be met and the considerations to be applied by the court when giving permission.

In my view, neither interpretation produces a result which is so obviously more satisfactory than the other for it to be safe on that ground alone to conclude that Parliament must have intended it. As will appear, a main purpose of the codification of derivative claims in Chapter 1 was to remove what were regarded (at least by the Law Commission in its report on shareholder remedies) as complicated, unwieldy and obscure provisions of the applicable common law and to replace them with a clear and transparent code. A conclusion that what Parliament in fact achieved in 2006 was to place a statutory code for derivative claims by members of the wronged company alongside a continued obscure, complicated and unwieldy common law regime for derivative claims by others does not commend itself as an exercise in commonsense. Conversely, a conclusion that by narrowly defining locus standi for all company derivative claims to members of the wronged company Parliament abolished a convenient procedural device for doing justice in cases of wrongdoer control, in a modern context where multi-layered corporate structures with holding companies and subsidiaries are ever more common, hardly commends itself as an exercise in justice. There is, on the face of it, no persuasive reason why Parliament should have wished to provide a statutory scheme for doing justice where a company is in wrongdoer control, but none where its holding company is in the same wrongdoer control.

Neither counsel nor I can think of any third construction which would avoid all those unpalatable consequences. It might have been tempting to construe “member of a company” in section 260(1) as including member of its holding company, but the express and inadequately narrow widening of the ordinary meaning of member in sub-section (5)(c) makes that impossible.

It is legitimate at this stage to have regard to the Law Commission Report pursuant to which Chapter 1 was enacted, namely its report on shareholder remedies. A fair reading of Part 6, entitled “A New Derivative Action”, and especially paragraphs 6.50-6.55, suggest that, generally speaking, the Commission favoured the complete replacement of the common law derivative action with a statutory scheme. Nonetheless, in a short postscript headed Multiple Derivative Actions, at paragraph 6.109-110, the Commission did directly address the present issue, albeit without any detailed analysis, and of course well in advance of the Waddington case. The Commission concluded:

“Although a small majority of respondents who address this issue did consider that provision should be made for multiple derivative actions, we are not persuaded that it would be helpful or practicable to include such a provision. We consider that this situation is likely to be extremely rare and that any rule attempting to deal with it would be complicated and unlikely to be able to cover every conceivable situation. We consider that the question of multiple derivative actions is best left to the courts to resolve, if necessary using the power under section 461(2)(c) of the Companies Act 1985 to bring a derivative action. Accordingly, we do not consider that there should be any express provision dealing with multiple derivative actions.”

It seems reasonably clear that Parliament broadly intended to follow the Law Commission’s recommendation, not least because of the express inclusion of the alternative route for a derivative claim in section 260(2)(b), since an order in proceedings under section 994 would be the statutory successor to the order under section 461(2)(c) of the Companies Act 1985 to which the Law Commission expressly referred.

Nonetheless, paragraph 6.110 of its Report contains its own uncertainties and ambiguities. It is not clear whether (in advance of Waddington) the Law Commission thought that the existing common law was sufficient to permit a multiple derivative action. At paragraph 6.109 they described having “raised the issue of whether a shareholder in a parent company should be able to bring a derivative action on behalf of a subsidiary or associated company within the group (which we referred to, for simplicity, as a “multiple derivative action)”. Thus the Law Commission may have been thinking only in terms of a statutory reform conferring locus standi upon a wider class than was recognised by the common law.

Further, paragraph 6.110 speaks of leaving the question of multiple derivative actions to the courts to resolve, without making it clear that the Law Commission considered a solution by way of relief in an unfair prejudice claim as the only alternative to the invocation of the new statutory derivative claim.

Academic commentary on the effect of the 2006 Act upon multiple derivative actions has been evenly divided. One view is that they must be treated as having been abolished, albeit lamentably, by comparison with other common law jurisdictions which have either preserved them or made them statutorily available. In the vanguard of that view is to be found Lord Millett himself, speaking extra-judicially in his article “Multiple Derivative Actions”, in the Gore-Browne bulletin for July 2010. He said:

“Had the facts alleged in Waddington come before an English Court the case must have been dismissed in limine, and for the first time more than 150 years an alleged injustice would be without redress. The moral for would-be fraudsters is simple; choose an English company and be careful to defraud its subsidiary and not the company itself.”

To the same effect, but with perhaps less passion, are the contributions of Professor Prentice and Dr Reisberg in Multiple Derivative Actions LQR 2009 at 209, by Pearlie Koh in “Derivative Actions Once Removed” JBL 2010 at 101 and by Sh Goo in “Multiple Derivative Action and Common Law Derivative Action Re-visited: a tale of two jurisdictions” in the Journal of Corporate Law Studies (April 2010) Vol 10 Part 1 at 255. Charlesworth’s Company Law (18^th Ed.) at p.518 expresses the same conclusion.

The alternative view, that the 2006 Act simply did not deal with multiple derivative actions, finds favour in Daniel Lightman’s “Two Aspects of the Statutory Derivative Claim” [2011] LMCLQ 142, and in Hollington on Shareholders’ Rights (6^th Ed.) at para 6-28. The editors of Palmer’s Company Law (writing after the Waddington case) appear at paragraph 8.3705 on balance to take the same view, although they point to the unsatisfactory consequence of having two differently regulated types of derivative claim, one common law and the other statutory, lying side by side.

Finally, the editors of Joffe on Minority Shareholders appear to have moved from an adverse to a supportive view about the survival of the multiple derivative action: compare the relevant parts of the 2^nd, 3^rd and 4^th editions.

Counsel were kind enough to supply, at my request after the hearing, copies of relevant extracts from the Company Law Review Steering Group’s materials, which preceded the 2006 Act. They did not seem to me to take the matter significantly further.

I have come on balance to the conclusion that the 2006 Act did not do away with the multiple derivative action. My reasons follow. First, there was before 2006 a common law procedural device called the derivative action by which the court could permit a person or persons with the closest sufficient interest to litigate on behalf of a company by seeking for the company relief in respect of a cause of action vested in it. Those persons would usually be a minority of the company’s members, but might, if the company was wholly owned by another company, be a minority of the holding company’s members. These were not separate derivative actions, but simply examples of the efficient application of the procedural device, designed to avoid injustice, to different factual circumstances.

In 2006 Parliament identified the main version of that device, namely where locus standi is accorded to the wronged company’s members, labelled it a “derivative claim” and enacted a comprehensive statutory code in relation to it. As a matter of language, section 260 applied Chapter 1 of Part 11 only to that part of the old common law device thus labelled, leaving other instances of its application unaffected.

Applying the well established relevant principle of construction, Parliament did not expressly abolish the whole of the common law derivative action in relation to companies, even though by implication from the comprehensiveness of the statutory code it did do so in relation to derivative claims by members (as defined) of the wronged company. Beyond that, the assertion that the remainder of the common law device was abolished fails because abolition was neither express nor a clear or necessary implication.

Section 260 could so easily have been phrased to achieve precisely that result. Sub-section (1) could have excluded the phrase “by a member of a company” and re-introduced it in sub-section (2) as a specific additional requirement in sub-sub-section (a) so that it read “under this Chapter by a member of the company”. Alternatively, the whole of the common law derivative action in relation to companies could expressly have been abolished, as it was, for example, by section 236(3) of the Australian Corporations Act 2001 which provides that:

“The right of a person at general law to bring, or to intervene in, proceedings on behalf of the company is abolished.”

Neither Lord Millett nor any of the other academic writers who have concluded that the 2006 Act abolished multiple derivative actions have addressed the simple point of construction advanced by Mr Lightman, Mr Hollington QC and by Mr Bailey in the present case, and it may be assumed that the editors of Palmer must have applied the same or a similar analysis.

I reach this conclusion with some relief. Not only does it address the manifest scope for real injustice which the abolition of any derivative action by members of a holding company would have entailed, and as graphically described by Lord Millett in his article, but it ensures that English company law runs in this respect in harmony with the laws of Hong Kong, Singapore, Canada, Australia and New Zealand, all of which have, albeit by different methods, ensured that injustice of the type described by Lord Millett can properly be addressed.

A main plank in Miss Smith’s oral submissions against the grant of permission was that, whatever may have been the ambit of the common law derivative action, it did not extend so far as to permit members of an LLP to bring proceedings on behalf of a company wholly owned by that LLP. She bolstered that submission by reference to the fact that, although the unfair prejudice remedy has been afforded to members of LLPs, they have been given no statutory means of bringing a derivative claim where the LLP is in wrongdoer control.

I do not find these objections persuasive. First, once it is recognised that the extension of locus standi beyond the immediate members of the wronged company is based upon the need to find a suitably interested claimant to pursue the company’s claim when it is disabled from doing so, the precise nature of the corporate body which owns the wronged company’s shares is of no legal relevance, provided that it is itself in wrongdoer control and has some members at least who are interested in seeing the wrong done to the company put right. As I have said earlier, the locus standi given to the member of the intermediate entity is not an aspect of that person’s rights as a member, but simply the consequence of the law’s search for a suitably interested representative, or champion, of the wronged company.

Secondly, I consider it irrelevant that the LLP’s members have no recourse to a statutory derivative claim. That lacuna (if such it be) relates to the remedies for wrongs done to the LLP, rather than to the company which it owns. Provided that, as I have concluded, the common law multiple derivative action has been preserved as a means of dealing with wrongs done to the company, the existence of a lacuna at the intermediate level is no significant objection to its use, either as a matter of entitlement or discretion, at the permission stage.

I have recorded the concession by Miss Smith that the Particulars of Claim and the evidence in support of them disclose a sufficient prima facie case of a wrong done to FGL to satisfy that part of the common law test. Nonetheless CPR 19, and in particular paragraph 1(a)(i) of the Practice Direction 19CPD make it clear that the permission regime applies to “derivative claims, whether under Chapter 1 of Part 11 of the Companies Act 2006 or otherwise”, and it is common ground that the Court has a discretion whether or not to permit any common law claim to continue which is not limited to a cold analysis of whether the common law requirements set out, for example, in Prudential v Newman (No 2) are met.

Whether or not Miss Smith’s concession as to a prima facie case went this far, I am also satisfied that the circumstances of the present claim are such as would satisfy the relevant exception to the rule in Foss v Harbottle. The claim is for breach of fiduciary duty. It is acknowledged that this is a species of “fraud” within the meaning of the common law rule: see Estmanco (Kilner House) Ltd v Greater London Council [1982] 1 All ER 437 at 445. Furthermore, it is clear that Mr Pearce’s status as an equal owner of the LLP and as one of the only two directors of FGL mean that, in the relevant sense, there is wrongdoer control. It is a form of negative control by which Mr Pearce can, by refusing to agree, ensure that FGL does not bring proceedings against him.

Nevertheless, Miss Smith submitted that this was not the type of case where the necessity of a derivative claim was sufficiently demonstrated since, she said, there were obvious alternative remedies. The first was a claim under the joint venture agreement against Mr Pearce directly. The second was an unfair prejudice claim in relation to the LLP.

I am not persuaded that either of these supposed remedies is of sufficient substance to displace a multiple derivative action, on the facts as they currently appear. The joint venture agreement was a purely oral affair, to the rather generalised pleaded terms of which Mr Pearce has yet to advance a fact based defence. Nonetheless, its status as a purely oral agreement makes it a poor vehicle for the pursuit of a claim arising from the alleged misappropriation of a business opportunity from FGL. In particular it is hard to see how any such claim could of itself sound in damages, since the financial loss to UPMS would be reflective of FGL’s loss. It is just as difficult to envisage the mounting of any form of proprietary claim based upon the JVA, by comparison with a simple claim made on behalf of FGL that Mr Pearce and FGP hold on trust, and must account in relation to the benefit of, the business opportunity secured by their purchase of Fort Gilkicker from the County Council.

As for the supposed unfair prejudice claim in relation to the LLP, I bear in mind Lord Millett’s distinction in the Waddington case (which was itself based upon an earlier judgment of his in Re Charnley Davies (No 2) [1990] BCC 605), between on the one hand mismanagement, and on the other hand a claim for compensation based upon misconduct. Although there are dicta, as Lord Millett recognised, to the effect that the unfair prejudice jurisdiction may be used for claims against a company’s directors for an account, it by no means follows that the theoretical availability of a claim by that route renders the multiple derivative action inappropriate. In cases where neither side seeks a buy-out, so that the only remedy for unfairly prejudicial conduct would be for the court to authorise a derivative claim, the consequential multiplicity of proceedings is itself a good reason for giving permission for a derivative claim in the first place: see Stainer v Lee [2011] BCC 134, per Roth J at para 52. That analysis is fully applicable to this case, even though Roth J was concerned only with an ordinary derivative claim by a shareholder.

There might in the present case, as it seems to me, also be significant difficulties in showing that Mr Pearce’s conduct in incorporating FGP and using it, after the expiry of the Option, for the purchase of Fort Gilkicker, necessarily had anything to do with the conduct of the management either of the LLP or of FGL. If the facts alleged in the Particulars of Claim are true, it may simply have amounted to a self-interested breach of a continuing fiduciary duty, having little to do with management at all, even though a management dispute was the casus belli.

Finally, Miss Smith submitted that, on the available evidence, and in particular in the light of Dr Frischmann’s continuing businesslike co-operation on the two other projects within the joint venture, the Court should conclude that no form of legal proceedings were at present necessary in relation to the Fort Gilkicker project, and leave the parties, as sensible and experienced businessmen, to resolve their differences by negotiation.

I agree entirely that businessmen should wherever possible be encouraged to settle their differences without recourse to court proceedings. Nonetheless it is well recognised that the ability of parties to a dispute to reach a just solution by negotiation, mediation or other forms of ADR depends to a large extent upon the ready and timely availability of a judicial resolution, including, where appropriate, interim remedies. In the present case the claimant’s need for interim relief has been met by temporary undertakings, but they have been as yet unable to resolve the underlying dispute about the Fort Gilkicker project.

In my judgment a refusal of permission to continue the multiple derivative action would be less likely to focus the parties upon the negotiation of a just solution to their dispute than would permission to continue, coupled with an order for a relatively short stay for mediation. The evidence (in particular of Mr Pearce) suggests that he expects shortly, or even by the time of the handing down of this judgment, to be in a position to pursue meaningful negotiations with Dr Frischmann. In my judgment the best means of maximising the prospect that those negotiations will bear fruit is for the Court to give permission for the continuation of this multiple derivative action, and then to stay proceedings for negotiation, as part of an order for case management if necessary to trial.

I will therefore grant permission for the claim to continue, and hear submissions as to appropriate directions, if they cannot be agreed.