High Court can grant retrospective permission to continue a derivative claim

The High Court has held that it has the power retrospectively to validate service of a claim form and particulars of claim in proceedings brought as a derivative claim under the Companies Act 2006, where the claimant was in breach of the statutory requirement to obtain the court's permission to continue the claim and where a new claim would have been time-barred: Wilton UK Limited v John Shuttleworth and others [2017] EWHC 2195 (Ch).

It is fair to say that Wilton is an unusual case – claimants in derivative claims will usually follow the prescribed procedure and no issue as to validity will therefore arise. In this case the judge deferred for further argument the question of whether he should exercise his power in the claimant's favour. So, while the decision confirms that the court may retrospectively validate service in these circumstances, the situations in which such an order will be made remain unclear.

Andrew Cooke, a senior associate, and James Leadill, an associate, in our disputes division consider the decision further below.

Background

Relevant procedure

Section 261 of the Act requires a claimant to seek the court's permission to continue a derivative claim. The Act does not say how or when such permission should be obtained.

The Civil Procedure Rules provide further detail regarding the relevant procedure. CPR 19.9(4) provides that, after issuing the claim form, the claimant must not take any further step in the proceedings without the permission of the court, other than complying with the requirement to send the relevant documents (including claim form and particulars of claim) to the company as soon as reasonably practicable or making an urgent application for interim relief.

Factual background

The claimant held 50% of the share capital in BMO, a 50:50 joint venture company whose purpose was to acquire and develop the Mount Oswald Golf Club in Durham.

On 9 November 2016, shortly before expiry of the relevant limitation period, the claimant commenced proceedings against two directors and an alleged shadow director of BMO alleging that they had, in breach of their fiduciary duties, diverted the golf club project from BMO to a third party, BGL. BGL and BMO were also named as defendants to the claim.

On the same day, the claimant issued an application notice seeking: (1) permission to continue the claim as a derivative claim under section 261 of the Act; and (2) an extension of time to send the particulars of claim to BMO, to enable the claimant to gather further information and evidence. The claimant also requested that the application not be listed for hearing until the detailed particulars of claim and evidence had been filed.

On 8 March 2017, just before expiry of the four month period of validity of the claim form, the claimant served the claim on the defendants, without having progressed its application for permission to continue the derivative claim. On 3 April 2017, the defendants (except BMO) issued an application seeking an order: (1) that the court had no jurisdiction to try the claim because permission to continue the claim had not been obtained; and (2) setting aside service of the claim form and particulars of claim.

On 22 June 2017 (ie over three months after expiry of the time for service of the claim form and particulars of claim), the claimant issued a further application seeking: (1) permission to continue the derivative claim; and (2) an order that the claim form and particulars of claim were deemed served on 8 March 2017.

The parties' arguments

The claimant relied on CPR 3.10, which provides: "Where there has been an error of procedure such as a failure to comply with a rule or practice direction –

(a) the error does not invalidate any step taken in the proceedings unless the court so orders; and

(b) the court may make an order to remedy the error."

The claimant argued that, pursuant to CPR 3.10(a), service of the claim form and particulars was valid unless and until set aside or, alternatively, that service was invalid but was capable of being validated retrospectively by the court either under the Act or under the CPR.

The defendants contended that, while the procedure for seeking permission was set out in the Civil Procedure Rules, the Act governed the consequences of continuing a derivative claim without the court's permission. Specifically, the defendants argued that section 261 required the claimant to obtain permission before continuing the claim and that all steps taken without seeking the necessary permission were of no effect. Service of the claim was therefore invalid. They also argued that section 261 did not permit the claimant to obtain such permission retrospectively. The period of validity of the claim form had therefore expired.

If the defendants were right, that would have the effect of denying the claimant the ability to bring the claim at all, as the limitation period had also expired and so any new claim would be time-barred.

Decision

HHJ Davis-White QC (sitting as a High Court judge) noted that the requirement to obtain the court's permission to continue a derivative claim was set out in section 261 of the Act, not just in CPR 19.9(4). As the failure to obtain permission was a breach of statute, the court could not remedy it under CPR 3.10; that rule was limited to dealing with procedural errors under the CPR.

The key question was therefore whether, as a matter of statutory construction, failure to obtain permission to continue the derivative claim prior to service of the claim was to be treated as invalidating service. If service was invalid, there was a further issue as to whether the court could grant retrospective permission for the claim to be continued as a derivative claim under the Act.

After analysing the history of the derivative claim procedure, which was only put on a statutory footing under the Companies Act 2006 (as supplemented by procedural rules under CPR 19) but which had previously been governed by a combination of case law and court rules, the judge held that the claimant's failure to obtain permission invalidated the steps taken, including service of the claim form.

However, the judge held that he had jurisdiction under the Act retrospectively to give permission to continue the derivative claim.

The judge based his decision on four main grounds:

1. While the procedural control exerted by the court over derivative claims had varied over time, the key was that the court was involved or could be involved at an early stage.
2. The precise moment at which the court is involved was a matter for the CPR.
3. The key thought processes underlying the change from the pre-Act case law was to make the court the body responsible for determining whether leave should be given. An ability retrospectively to validate steps taken when leave had not been obtained was consistent with such court control.
4. The court's ability retrospectively to validate steps taken when leave had not been obtained would not override the protections for the company and the other defendants provided for by the procedural rules governing derivative claims (eg the right to file evidence and be heard on the application for permission).

The judge said that, if he was wrong that the requirement to obtain the court's permission to continue a derivative claim was a breach of the Act, and in fact the matter was solely governed by the CPR, then CPR 3.10 still would not apply, but the court would nevertheless have discretion under the CPR more generally to grant retrospective permission.

The judge adjourned the applications for further argument as to whether he should exercise the jurisdiction which he found he had.