Summary

Permission to continue with a derivative action under the Companies Act 2006 s.261 was refused where a notional director was unlikely to attach much importance to the claim and the alleged damage was speculative.

Facts

The applicant former executive directors (S) sought permission to continue a derivative claim against the respondent company (M) and a mandatory injunction to force M to re-employ them and restore them to the board of directors. M had terminated S's employment and required them to resign from the board on the basis that they had failed to meet financial forecasts and submit important financial information to the board. The board was made up of S and three non-executive directors. M obtained an injunction excluding S from company premises and requiring them to deliver documents. S counterclaimed and brought a derivative claim against M, the non-executive directors and their replacement director (P), claiming that M would suffer damage from their wrongful dismissal, and that P would act improperly. The issues to be determined were whether (1) permission should be granted under the CPR r.19.9A for S to continue with the derivative action; (2) there should be specific performance of S's employment contracts and directorships.

Held

(1) When considering whether to grant permission for a party to continue with a derivative action it was necessary to apply the two-stage process set out in the Companies Act 2006 s.261 and s.262. Section 263(2)(a) was mandatory in character. If it was established that a notional director would not seek to continue the claim, the court had to refuse leave. S's derivative action might succeed where the counterclaim failed and the company would be able to claim damages against the directors for damage suffered by the company as a result of S's wrongful dismissal. Damages of that kind would not be available to S as shareholders. S had therefore passed the first stage of the test and it was necessary to consider the discretionary factors in s.263(3). S had brought the action in good faith. However, while a notional director might continue the claim, he would not attach much importance to it, especially as the damage that the company would suffer from S's wrongful dismissal was speculative. It was more likely that the company would replace S than take action against those responsible for the damage caused by their wrongful dismissal. In addition, S could recover what they sought by means of an unfair prejudice petition under s.994. S's application for permission to continue with the derivative claim was refused. (2) It was not necessary or appropriate to finally determine the issue of S's termination on the instant applications. However, it was necessary to consider whether S had a real prospect at trial of successfully persuading the court that their case fell within the exception to the general rule that a contract for personal services would not be specifically enforced. It was plain that it could not seriously be argued that a high degree of confidence existed between the parties. Evidence of a sufficient degree of mutual trust was simply not present, Hill v CA Parsons & Co (1972) Ch 305 CA (Civ Div) and Powell v Brent LBC (1988) ICR 176 CA (Civ Div) considered, and Zockoll Group Ltd v Mercury Communications Ltd (No1) (1998) FSR 354 CA (Civ Div) cited. It was therefore unlikely that S would succeed in their claim for injunctive relief regarding the termination of their employment. The balance of justice was plainly in favour of refusing injunctive relief. To restore S to their executive positions under the control of a board of directors with whom they were locked in litigation was a recipe for strife at the workplace. While the concern which S felt about the future of the company was genuine, it was by no means certain that M would not manage satisfactorily without them. (3) Courts were reluctant to grant specific performance in relation to orders requiring a company to allow a director to continue to act in that capacity, Callard v Pringle (2007) EWCA Civ 1075, (2008) 2 BCLC 505 considered. M had offered to provide an undertaking not to sell the business or its assets and not to wind up the company without giving notice to S, and it was appropriate to take that into account when considering the balance of justice. To restore S to form a minority group on the board would not give them power to prevent impropriety, although it would give them advance notice of it. Therefore, although S's case was arguable, the balance of justice was against the grant of an injunction to restore S to their directorships.

Applications refused