| COMPANY — Shareholder — Minority shareholder's action — Derivative claims by members — Ratification of acts of directors — Persons connected with a director — Whether acts of directors capable of being ratified — Companies Act 2006, s 239
Franbar Holdings Ltd v Patel and others [2008] EWHC 1534 (Ch); [2008] WLR (D) 220
Ch D: William Trower QC sitting as a deputy High Court judge: 2 July 2008
Where the question of ratification arose in the context of an application to continue a derivative claim, under s 261 of the Companies Act 2006, the court should ask itself whether the ratification had the effect that the claimant was being improperly prevented from bringing the claim on behalf of the company. That also applied where the connected person provisions in s 239 were not satisfied but there was still actual wrongdoer control by which there had been a diversion of assets to persons associated with the wrongdoer, albeit not connected in the sense provided by s 239(4).
William Trower QC, sitting as a deputy judge of the Chancery Division, so held when refusing an application, pursuant to s 261(1) of the Companies Act 2006, by the claimant, Franbar Holdings Ltd, for permission to continue as a derivative claim proceedings brought against the first and second defendants, Ketan Patel and Johan Du Plessis, directors of the third defendant, Medicentres (UK) Ltd, for breaches of identified duties owed by the first and second defendants to the third defendant.
The claimant sold 75 per cent of its shares in the third defendant, which it had wholly owned, to Casualty Plus and subsequently brought the claim as a member of the third defendant. When considering the exercise of discretion, under s 263 of the Act, for permission to continue the derivative claim, an issue arose as to whether the conduct of the first and second defendants, as relied upon by the claimant, could be ratified, under s 239 of the Act, being a relevant factor for the purposes of s 263, by the third defendant. The ratification had to be effected by a resolution of the company's members but s 239(3) provided that the vote, in his capacity as a member, of the director whose conduct was in issue and the vote of any member connected with him would be left out of account when determining whether an effective resolution ratifying that conduct had been passed. The claimant argued that the conduct alleged was not ratifiable since the effect of the allegations in the claim was to oppress the minority. The defendants submitted that the introduction by s 239 of an obligation to disregard connected votes meant that the "untainted majority" could ratify any act that was not ultra vires the company, and the connected person provisions in s 239 had replaced the principle that breach of duty by a director was incapable of ratification where it constituted a fraud on the minority in circumstances in which the wrongdoers were in control of the company, as regards conduct that occurred after 1 October 2007.
WILLIAM TROWER QC said that s 239(7) explicitly preserved any rule of law as to acts that were incapable of being ratified by the company, which included acts that were ultra vires the company in the strict sense and also included acts that, pursuant to any rule of law, were incapable of being ratified for some other reason. The connected person provisions in s 239(3) and (4) imposed additional requirements for effective ratification that drew on existing equitable rules but that imposed more stringent demands. The circumstances in which a company could not ratify breaches of duty by its directors as described in North-West Transportation Co v Beatty (1887) 12 App Cas 589 remained good law. Accordingly, where the question of ratification arose in the context of an application to continue a derivative claim, the court must still ask itself whether the ratification had the effect that the claimant was being improperly prevented from bringing the claim on behalf of the company. That could still be the case where the new connected person provisions in s 239 were not satisfied but there was still actual wrongdoer control pursuant to which there had been a diversion of assets to persons associated with the wrongdoer, albeit not connected in the sense for which provision was made by s 239(4). Since the claimant should be able to achieve all that it could properly want through its petition under s 994 of the Act and the existence of a shareholders' action, justice was best achieved by refusing permission to continue the derivative claim.
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