Court of Appeal refuses to strike out unfair prejudice petition seeking relief in favour of the company

The Court of Appeal has clarified that a shareholder bringing an unfair prejudice petition can seek relief in favour of the company in addition to personal relief: Ntzegkoutanis v Kimionis [2023] EWCA Civ 1480.

However, at least generally, such relief will not be granted unless it corresponds with relief to which the company would have been entitled in an action brought by or on behalf of the company (including a derivative action). Moreover, an unfair prejudice petition may be struck out as an abuse of process if the petitioner claims only relief in favour of the company, or is not genuinely interested in obtaining personal relief but is merely attempting to bypass the restrictions on bringing a derivative action. Otherwise, it will not generally be appropriate to strike out a petition which seeks both forms of relief.

The Court of Appeal’s decision confirms that, in certain circumstances, aggrieved shareholders may be able to achieve remedies in favour of their company without first having to overcome the stringent requirements of the derivative action regime.

However, would-be petitioners will need to consider carefully the framing of their case. In particular, they will likely need to seek personal relief as a primary basis, and avoid giving any impression that pursuing a remedy for the benefit of the company via section 994 is an improper attempt to achieve company redress via the back door. Continue reading

Compensation orders against disqualified directors: High Court confirms they are not limited to cases of fraud

In only the second reported decision on compensation orders against disqualified directors under section 15A of the Company Directors Disqualification Act 1986 (CDDA 1986), the High Court confirmed that compensation orders are not limited to cases of fraud but can be made in cases of negligence or recklessness causing identifiable loss: Secretary of State For Business and Trade v Barnsby (Re Pure Zanzibar Ltd) [2023] EWHC 2284 (Ch).

This unwelcome development for directors is somewhat offset by the court’s suggestion that questions of foreseeability may be relevant in determining whether the director caused the alleged losses, though it is likely to depend on the precise unfit conduct giving rise to the disqualification order. Ultimately, further clarity on the test for causation of losses needs to be provided by future judgments as the judge’s comments were not only obiter dicta but were made without the issue being properly argued before her.

The court also considered the relevance of a disqualified director’s impecuniosity in relation to the making of a compensation order. The decision suggests that, while a director’s resources (or lack thereof) may be a factor to take into account in exercising the court’s discretion, the court will be slow to view financial difficulties as a sufficient factor to justify not making the order. Continue reading

Court of Appeal rejects second major attempt at a climate-related derivative action

In July 2023, the Court of Appeal dismissed an application by members of a pension scheme to bring a derivative action against the directors of the scheme’s trustee company. The court also made it clear that derivative actions are not appropriate when direct challenges are available: McGaughey & Anor v Universities Superannuation Scheme Limited [2023] EWCA Civ 873.

Taken together with ClientEarth v Shell (see our blog post here), the decision confirms that the courts of England and Wales remain wary of challenging reasonably made decisions of company directors. So, while derivative actions may continue to be brought as a disruptive tactic by activist shareholders, there is likewise continued judicial reluctance to second-guess corporate decision-making. The courts are aware that climate risks are just one of the many risks which executives consider when deciding on strategy. In the absence of evidence of egregious disregard for climate risks, the courts seem unwilling to find that directors have the balance wrong.

For more information, see this post on our ESG Notes blog.

For a deeper analysis of emerging shareholder litigation related to climate change, see this article in our series on climate disputes: Global perspectives on climate disputes – A recent history of shareholder claims.

Commercial litigation podcast series – Episode 21: General update

In this 21st episode of our series of commercial litigation update podcasts, we look at developments relating to litigation funding since the Supreme Court’s dramatic decision in Paccar in late July, as well as brief updates on ADR, pre-action conduct and costs. We also discuss developments relating to Russian sanctioned parties, and the disqualification proceedings brought against former non-executive directors of Carillion which came to an abrupt end when the claim was dropped shortly before trial.

This episode is hosted by Maura McIntosh, a professional support consultant in our litigation team, who is joined by Ajay Malhotra, a disputes partner, and Richard Mendoza, a senior associate in our disputes team.

Our podcast is available on iTunesSpotify and SoundCloud and can be accessed on all devices. A new episode is released every couple of months. You can subscribe and be notified of all future episodes.

Below you can find links to our blog posts on the developments and cases covered in this podcast.

Maura McIntosh
Maura McIntosh
Professional support consultant
+44 20 7466 2608
Ajay Malhotra
Ajay Malhotra
Partner
+44 20 7466 7605
Richard Mendoza
Richard Mendoza
Senior associate
+44 20 7466 2024

Carillion director disqualification proceedings – Insolvency Service drops proceedings against non-executive directors in so-called “test case”

On the eve of trial, the Insolvency Service (IS), acting on behalf of the Secretary of State for Business and Trade, has discontinued disqualification proceedings brought in January 2021 against five former non-executive directors (NEDs) of Carillion plc. The trial, which had been listed for around 13 weeks (and originally as long as 6 months) had been due to start on Monday 16 October 2023.

The IS had been seeking to disqualify the NEDs from being involved in the management of any company on grounds that they did not know the alleged true financial position of Carillion (in particular alleged fraudulent misstatements of group accounts) at all times, including from the date on which they were appointed – ie a strict liability for the directors.

The IS’s case contrasted with established principles as to the standard of conduct expected of directors, including under the Companies Act 2006. If the IS’s claim had succeeded, it would have had serious and immediate consequences for corporate governance practices in the UK, no doubt impacting the willingness of individuals to act as non-executive directors of UK companies, particularly large and complex corporate groups. Continue reading

High Court gives guidance on the so-called creditor duty where a company faces solvency-threatening claim

In a recent case, the High Court has had one of its first opportunities to consider BTI v Sequana [2022] UKSC 25 (see our previous update here), in which the Supreme Court gave important guidance on the existence and scope of the duty of company directors to have regard to the interests of creditors (the so-called “creditor duty”, which arises in an insolvency scenario).

In Stephen John Hunt v Jagtar Singh [2023] EWHC 1784 (Ch), the court applied the Sequana guidance in the context of a liquidator’s claim against a director of a company which was said to be insolvent at the relevant time on the basis of a substantial (disputed) tax liability. The court acknowledged that one of the unresolved questions following Sequana is whether it is necessary to establish some form of knowledge (actual or constructive) of insolvency on the part of the directors for the so-called creditor duty to arise even where the company was, at the relevant time, actually insolvent or whether the fact of insolvency is sufficient to trigger the duty.

Proceeding on the assumption that some knowledge component is required, the judge held that where a company is faced with a claim to a current liability of such a size that its solvency is dependent on successfully challenging that claim, then the creditor duty arises:

“if the directors know or ought to know that there is at least a real prospect of the challenge failing”.

Accordingly, while uncertainty remains around the precise scope of the creditor duty, the judgment raises important considerations for directors in assessing their company’s solvency position, particularly those faced with so-called “bet-the-company” litigation or other potentially substantial liabilities. Continue reading

Commercial litigation podcast series – Episode 20: General update

In this 20th episode of our series of commercial litigation update podcasts, we look at the High Court’s decision dismissing ClientEarth’s attempt to bring a derivative action against Shell’s directors, the Supreme Court’s rather dramatic recent decision on litigation funding agreements, a brief update on a development relating to representative actions, some interesting recent contract law cases, and a Supreme Court judgment which clarifies the extent of a bank’s duties in paying out from customer accounts.

This episode is hosted by Maura McIntosh, a professional support consultant in our litigation team, who is joined by Sarah McNally, an insurance disputes partner, and Ceri Morgan, a professional support consultant in our banking litigation team.

 

Our podcast is available on iTunesSpotify and SoundCloud and can be accessed on all devices. A new episode is released every couple of months. You can subscribe and be notified of all future episodes.

Below you can find links to our blog posts on the developments and cases covered in this podcast.

Maura McIntosh
Maura McIntosh
Professional support consultant
+44 20 7466 2608
Sarah McNally
Sarah McNally
Partner
+44 20 7466 2872
Ceri Morgan
Ceri Morgan
Professional support consultant
+44 20 7466 2948

High Court confirms refusal of permission for ClientEarth derivative action against Shell directors

The High Court yesterday handed down a judgment confirming its earlier decision to refuse climate-change activist ClientEarth’s application for permission to continue a derivative action on behalf of Shell plc seeking to challenge its directors’ response to the risks posed to Shell’s business by climate change: ClientEarth v Shell plc [2023] EWHC 1897 (Ch).

Mr Justice Trower dismissed the application on the basis that, in both its written and oral submissions, ClientEarth has failed to establish a prima facie case for granting permission, as required by s.261(2) of the Companies Act 2006 (CA 2006). Like the court’s initial decision (outlined in our previous blog post), the present judgment shows that it will be difficult for environmental and other campaign groups to use the derivative action procedure to challenge directors’ strategic and long-term decision making. The court will not generally interfere in company management decisions, particularly where they require directors to balance competing considerations. Nor is the court likely to grant permission where it considers that the action has been brought for an ulterior purpose – which may be a ready inference where the applicant is a campaign group with a small shareholding.

The earlier decision refusing permission was made on the papers. ClientEarth then exercised its right under CPR 19.15 to ask the court to reconsider the decision at an oral hearing. The present judgment was given following the oral hearing. It consolidates the original judgment and therefore repeats it to a significant extent. In this post we do not repeat all of the messages from the original judgment but instead focus on the additional points of substance or emphasis in the most recent decision.

ClientEarth has announced that it will seek permission to appeal the decision.

Continue reading

High Court refuses permission for climate-change activist shareholder to bring derivative action on behalf of Shell plc against its directors

In a significant decision for boards seeking to grapple with how to respond to the impact of climate change on their company’s business, the High Court has refused permission for ClientEarth, a minority shareholder in Shell plc, to continue a derivative action on behalf of the company against its directors (the Directors) under s.261(1) of the Companies Act 2006 (CA 2006): ClientEarth v Shell plc & Ors [2023] EWHC 1137 (Ch).

The underlying claim brought by ClientEarth alleged that the Directors had breached their statutory duties owed to Shell as a result of acts and omissions relating to: (i) Shell’s Energy Transition Strategy (ETS) published and updated between April 2021-2022; and (ii) the Directors’ response to an order made by the Hague District Court (Dutch Order) on 26 May 2021 in Milieudefensie v Royal Dutch Shell plc CLI:NL:RBDHA:2021:5339.

As a shareholder seeking to bring a derivative claim in the name of the company, ClientEarth was required to apply for permission to proceed with the action. However, the court ruled that ClientEarth failed to meet the initial threshold of establishing a prima facie case for granting permission, and so dismissed the application in accordance with s.261(2)(a) CA 2006.

The judgment provides comfort to boards that the court will be slow to allow shareholders with small or de minimis shareholdings to use the derivative claim procedure under CA 2006 as a way to challenge strategic or long-term decisions made in good faith in relation to addressing the risks posed by climate change. The top takeaways from the decision are as follows:

  1. The court is extremely reluctant to interfere in company management decisions. The decision suggests that it will be difficult for environmental or other campaign groups to challenge directors’ strategy and decision making via a derivative action, since the court will generally take the approach that it is for the directors themselves, and not the court, to determine how best to promote the success of the company. This underlying principle is woven into numerous aspects of the reasoning in this decision, including the stringent test for permission to bring a derivative action, which the court will only grant in “limited and restricted” circumstances. The court noted that the management of a business of the size and complexity of Shell will require the Directors to take into account a range of competing considerations, the proper balancing of which is a directors’ management decision, which the court is ill-equipped to interfere with. In the court’s clear view, the proper forum for ClientEarth to voice its concerns as to the Directors’ conduct, is by vote of the members in general meeting. However, it is important to remember that a technical breach of statutory duty by a director could satisfy the prima facie case threshold on other facts (for example, where a directive shareholder-requisitioned resolution has been passed, a breach of any part of that resolution could amount to a technical breach of directors’ duties).
  2. The court rejected attempts to formulate new and absolute duties in respect of climate change. The court was critical of the way in which ClientEarth put its case, by seeking to impose new and absolute duties on the Directors. These alleged new duties cut across the Directors’ general statutory duties under s.172 CA 2006, which require directors to have regard to many competing considerations in determining how best to promote the success of the company for the benefit of its members as a whole. The law does not superimpose on the general statutory duties more specific obligations as to what is and is not reasonable in every circumstance, and the question is whether the decision falls outside the range of decisions reasonably available to the Directors at the time (as per Sharp v Blank & Ors [2019] EWHC 3096 (Ch)).
  3. Relevance of a shareholder’s motivation, good faith and the views of other shareholders. Although the court was considering whether a prima facie case for granting permission had been made out, it nevertheless reflected on the test to be applied at a substantive hearing of an application for permission to bring a derivative action. One of the discretionary factors that the court must take into account under s.263(3)(a) CA 2006, is whether the shareholder is acting in good faith in seeking to continue the claims. In considering this factor, the decision suggests that the court will look at the motivation behind the action and will be unlikely to grant permission if it takes the view there is an ulterior motive and/or the derivative mechanism is being used for a collateral purpose, such as to publicise and advance the shareholder’s own policy agenda, rather than to secure the directors’ compliance with their duties for the benefit of members as a whole. The test for the substantive application for permission also requires the court to consider the views of other members of the company with no personal interest in the matter (s.263(4) CA 2006, a provision which was incorporated into the legislation during the parliamentary drafting process, as a result of efforts led by Herbert Smith Freehills and other concerned parties). Interestingly, the court quoted support for the ETS in votes cast by members at Shell’s AGMs in 2021 (88.4%) and 2022 (80%) as evidence of the strength of the members’ support of the Directors’ strategic approach to climate change risk.
  4. The court is unlikely to grant mandatory injunctive relief in such cases (even if the claim is successful). It is trite law that the court will not grant mandatory injunctive relief if constant supervision is required to enforce the relevant order. In the court’s judgment, the mandatory orders sought by ClientEarth in this case were too imprecise and would require constant court supervision and adjudication on whether the business was being run in accordance with their terms. This is likely to be a sticking point for any campaign group seeking to compel a company to adopt a different strategy.

It is important to note that the present judgment may not bring an immediate end to these proceedings. The application was considered on the papers, and ClientEarth is entitled to ask for an oral hearing to reconsider the decision, provided that it makes a request in writing within seven days of the judgment.

We discuss the decision in more detail below. Continue reading

Supreme Court decision gives further clarity on claims by distressed companies against directors

Although not directly concerned with directors’ liabilities, the recent Supreme Court judgment in Stanford International Bank Ltd v HSBC Bank PLC [2022] UKSC 34 (previously considered here) provides further clarity on the circumstances in which a distressed or insolvent company may seek to make claims against its directors.

The key aspects affecting directors’ liabilities are that:

  1. at least where unlawful preference rules are not engaged, loss to the company is a necessary element of the company’s claims against its directors for misappropriation of the company’s assets; and
  2. building on the principles considered in the landmark BTI v Sequana decision (considered here), a company’s losses for these purposes are not one and the same as those suffered by its creditors.

This means that, where other remedies are not available to recover sums paid out to third parties in breach of duty, insolvency practitioners and creditors alike should not assume that recourse will lie against defaulting directors to increase the amounts distributable upon liquidation.

For more information see this opinion piece from our Restructuring, Turnaround and Insolvency team.