Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch)

Franbar Holdings Ltd, a 25% shareholder in Medicentres, sought permission to continue a derivative claim against directors Patel and du Plessis for alleged breaches of duty including diversion of business opportunities. The court refused permission, finding Franbar had adequate alternative remedies through its existing unfair prejudice petition and shareholders' action.

Facts

Franbar Holdings Ltd held a 25% shareholding in Medicentres (UK) Ltd, with Casualty Plus Ltd holding the remaining 75% following a share sale in July 2005. A Shareholders’ Agreement governed their relationship, including options for share purchases. Disputes arose following the appointment of Mr Patel as a director in May 2007.

Franbar brought three sets of proceedings: a claim for breach of the Shareholders’ Agreement, a petition under section 994 of the Companies Act 2006 for unfair prejudice, and a derivative claim against directors Mr Patel and Dr du Plessis on behalf of Medicentres. The substantive allegations were identical across all three proceedings.

Allegations

Franbar alleged: diversion of business opportunities from Medicentres to Casualty Plus at four locations; improper suspension of director Mr Lalani; failure to provide adequate financial information; appointment of Mr Patel despite alleged unfitness to act as director; and various other acts of misconduct including loss of a contract with Southern Rail and mishandling of lease renewals.

Issues

The central issue was whether the court should grant permission under section 261 of the Companies Act 2006 to continue the derivative claim, having regard to the factors set out in section 263, particularly:

• Whether a director acting in accordance with section 172 would seek to continue the claim
• Whether Franbar was acting in good faith
• The importance a hypothetical director would attach to continuing the claim
• Whether the acts complained of could be ratified
• Whether Franbar could pursue the cause of action in its own right

Judgment

Mr William Trower QC, sitting as a Deputy Judge, refused permission to continue the derivative claim. The court held that while there was substance in some complaints, the hypothetical director would not attach great importance to continuing the derivative claim at present.

“In my judgment, the hypothetical director acting in accordance with section 172 would take into account a wide range of considerations when assessing the importance of continuing the claim.”

Critically, the court found that section 263(3)(f) was engaged because the same acts and omissions giving rise to the derivative claim also supported Franbar’s unfair prejudice petition and shareholders’ action:

“I can see no reason why Franbar should not be granted such relief on the unfair prejudice petition as may be necessary to ensure that the interest which it seeks to realise is valued on a basis which takes full account of the value of the complaints it wishes to pursue on behalf of Medicentres in the derivative claim.”

Regarding ratification, the court confirmed that section 239(7) preserves the common law rule against ratification of fraud on the minority, stating:

“Section 239(7) explicitly preserves any rule of law as to acts that are incapable of being ratified by the company.”

Implications

This case provides important guidance on the new statutory derivative claim procedure under the Companies Act 2006, particularly:

• The court confirmed that section 239(7) preserves common law restrictions on ratification, meaning wrongdoer control can still prevent effective ratification even where connected person provisions are not satisfied
• Where alternative remedies exist (particularly unfair prejudice petitions), permission to continue derivative claims may be refused under section 263(3)(f)
• The case establishes that the availability of a buy-out remedy through section 994 proceedings weighs significantly against granting permission for parallel derivative claims
• Good faith under section 263(3)(a) is not negatived merely by seeking to extract value through share purchase, though ulterior motives may be relevant

Verdict: Permission to continue the derivative claim was refused. The court granted special leave to inspect the court file in relation to Swindon Brewing Company Limited under rule 7.31(4) of the Insolvency Rules 1986, subject to conditions restricting use of the information to the section 994 petition and shareholders’ action.

Source: Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch)