Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch)

Shareholders sought permission to continue a derivative claim against directors alleging breach of duty in accepting rescission of share sale agreements and failing to assert beneficial ownership of mining licences. The court refused permission for most claims but adjourned consideration of the trust claim, directing the board to reconsider its position.

Facts

Westrip Holdings Ltd was formed to raise funding for the development of mineral exploration licences in Greenland held by Rimbal Pty Ltd, a company owned by Mr Barnes. Westrip entered into share sale agreements (SSAs) with Mr Barnes and Ms Walker to acquire shares in Rimbal in exchange for redeemable preference shares. Due to technical defects in Westrip’s internal procedures, compliant preference shares were never validly issued. In October 2008, Mr Barnes and Ms Walker gave notice exercising their right to rescind the SSAs. The board of Westrip, having taken legal advice, accepted the rescission and re-transferred the Rimbal shares.

The claimants, minority shareholders in Westrip, applied under section 261 of the Companies Act 2006 for permission to continue a derivative claim on behalf of Westrip, alleging that the directors had breached their duties by colluding in the rescission and failing to consider possible defences, including estoppel. They also sought to assert that Rimbal held certain exploration licences on trust for Westrip.

Issues

1. Whether permission should be granted for the derivative claim regarding the rescission

The court considered whether the board was in breach of duty in accepting the rescission of the SSAs.

2. Whether an estoppel defence existed

The claimants alleged that Mr Barnes and Ms Walker were estopped from asserting that compliant preference shares had not been issued.

3. Whether Westrip had beneficial ownership of certain licences

The claimants alleged that Rimbal held exploration licence 2005/17 (later split into the Northern and Southern Licences) on trust for Westrip.

Judgment

Lewison J refused permission to continue the derivative claim in so far as it related to the conspiracy allegations, the decision not to contest the rescission, and the restitutionary claim. The judge found that the board had followed legal advice from eminent counsel and could not be criticised for doing so:

“In my judgment therefore (in agreement with Warren J and Mr Trower QC) section 263 (2) (a) will apply only where the court is satisfied that no director acting in accordance with section 172 would seek to continue the claim.”

Regarding the estoppel argument, the court found it did not withstand analysis. The Second Variation Agreement, which extended the settlement date, was inconsistent with any assumption that compliant preference shares had already been issued. Furthermore, the payment of £300,000 characterised as partial redemption was held to be unlawful under section 173 of the Companies Act 1985:

“There is, in my judgment, a heavy burden placed upon a party who seeks to support an estoppel by relying on a transaction that Parliament has said is not merely invalid but ‘unlawful’.”

However, regarding the trust claim, Lewison J considered it to be potentially strong and adjourned the application to allow the board to reconsider Westrip’s defence to proceedings brought by Rimbal in Australia:

“My personal view (for what it is worth, and I appreciate that it is the board’s view that counts) is that the trust claim is a strong one based both on the underlying facts, and also (to my mind more importantly) on the acknowledgements by Rimbal of the existence of the trust in the Side Deed and the subsequent deeds of novation.”

Implications

This case provides important guidance on the application of the statutory derivative claim procedure under Part 11 of the Companies Act 2006. It establishes that at the second stage of the procedure, something more than a prima facie case is required, and the court must form a view on the strength of the claim. The judgment clarifies that section 263(2)(a) only mandates refusal of permission where no director acting in accordance with section 172 would seek to continue the claim.

The case also confirms that where directors take and follow legal advice from competent professionals, they cannot readily be criticised for breach of duty, even if the decision proves disadvantageous. The judgment addresses the role of collateral purposes in derivative claims, holding that a claimant will not be disqualified if the dominant purpose is to benefit the company, even if there are other benefits to the claimant.

Verdict: Permission to continue the derivative claim was refused in so far as it related to the conspiracy allegations, the decision not to contest the rescission of the SSAs, and the restitutionary claim. The application regarding the trust claim was adjourned to allow the board to reconsider Westrip’s defence to the Australian proceedings. The freezing order was continued only in respect of the Northern and Southern Licences, conditional upon the claimants providing an unlimited personal cross-undertaking in damages.

Source: Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch)