Fort Gilkicker Ltd, Re [2013] EWHC 348 (Ch)

UPMS, a member of an LLP which wholly owned Fort Gilkicker Ltd, sought permission to bring a double derivative action against a director who allegedly misappropriated a business opportunity. The court held that multiple derivative actions survived the Companies Act 2006 and granted permission to continue the claim.

Facts

Universal Project Management Services Limited (UPMS) and Mr Ian Pearce were equal members of Askett Hawk Properties LLP, which wholly owned Fort Gilkicker Limited (FGL). FGL had obtained an option to acquire Fort Gilkicker for property development. A dispute arose between Dr Frischmann (representing UPMS) and Mr Pearce regarding the project architect. While Dr Frischmann was on holiday, Mr Pearce allowed the option to expire, incorporated a new company (Fort Gilkicker Properties Limited) under his sole control, and purchased Fort Gilkicker on the same terms previously available to FGL.

The Derivative Claim

UPMS alleged that Mr Pearce, while remaining a director of FGL, misappropriated a valuable business opportunity belonging to FGL for his personal benefit, in breach of his fiduciary duty. Since FGL was unlikely to pursue the claim against Mr Pearce while the jointly-owned LLP remained FGL’s sole shareholder, UPMS sought permission to bring a double derivative action on FGL’s behalf.

Issues

Two principal legal questions arose:

1. Whether a multiple derivative action was known to English common law before the Companies Act 2006; and
2. Whether the multiple derivative action survived the coming into force of the 2006 Act.

Judgment

Existence of Multiple Derivative Actions at Common Law

Briggs J reviewed authorities including Wallersteiner v Moir (No 2), Halle v Trax BW Ltd, and the Hong Kong Court of Final Appeal decision in Waddington Ltd v Chan Chun Hoo Thomas. He concluded that the common law derivative action was sufficiently flexible to permit claims by members of a holding company where both the holding company and subsidiary were in wrongdoer control:

“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.”

Survival After the 2006 Act

Briggs J noted that section 260 of the Companies Act 2006 defined “derivative claim” as applying only to proceedings by a member of the company. He applied the principle that statute will only be construed as taking away common law rights if it does so expressly or by necessary implication:

“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.”

The judge expressed relief at this conclusion:

“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.”

Whether the Holding Company Being an LLP Made a Difference

The court rejected the argument that the common law derivative action could not extend to members of an LLP bringing proceedings on behalf of a company owned by that LLP, holding that the precise nature of the corporate body owning the wronged company’s shares was legally irrelevant provided it was itself in wrongdoer control.

Implications

This decision is significant for clarifying that multiple derivative actions remain available under English common law despite the statutory scheme in the Companies Act 2006. The statutory regime applies only to ordinary derivative claims by members of the wronged company, leaving common law remedies intact for claims by members of holding companies. This ensures that wrongdoers cannot escape liability simply by structuring their wrongdoing to affect a subsidiary rather than its parent company.

Verdict: Permission granted for UPMS to continue the double derivative action on behalf of Fort Gilkicker Limited, with a stay for negotiation as part of case management directions.

Source: Fort Gilkicker Ltd, Re [2013] EWHC 348 (Ch)