SERVICE OF PROCEEDINGS WITHOUT PERMISSION: THE COURT HAS POWER TO RECTIFY THE POSITION RETROSPECTIVELY

Can the court rectify the situation when a claimant, who requires permission to continue proceedings, has issued and served without such permission? That was the question considered by His Honour Judge Davis-White QC in Wilton UK Ltd v Shuttleworth & Ors [2017] EWHC 2195 (Ch).

 

THE CASE

The claimant issued proceedings by way of a derivative claim against several defendants.  Proceedings were served within the four month. However permission of the court is required to continue derivative proceedings under s.260 of the Companies Act 2006 and CPR 19.9.

THE ISSUE THE JUDGE HAD TO DETERMINE

The judge summarised the issue he had to decide.

  1. Accordingly, in my judgment, the question that arises is whether as a matter of statutory construction, the defect is treated as one that creates an irregularity but does not invalidate at all the steps taken to effect service and, if the steps are invalid, whether or not retrospective permission can be obtained under CA 2006.

THE RIVAL CONTENTIONS

  • The claimant argued that the service of proceedings was valid, unless set aside by the court. Further that service was invalid but was capable of being validated retrospectively by the court.
  • The defendants argued that this was a matter under the Companies Act and not just the Civil Procedure Rules. Statute required the obtaining of permission.

THE JUDGE’S DECISION

The judge considered the history of derivative actions in some detail. He concluded that the statutory regime meant that he had power to retrospectively validate the action.

“…that the failure to obtain permission does invalidate steps thereafter taken but that the court does have jurisdiction retrospectively to validate the same. The principles applicable in exercising that jurisdiction, both generally and to the facts of this case remain the subject of further submissions.”

The judge also considered the position if he was incorrect in his finding that the Companies Act determined the situation and the application fell to be heard under the Civil Procedure Rules.

“In my judgment, if this permission to continue derivative proceedings is one where the CA 2006 is to be treated as having no application and the matter is to be viewed as governed solely by the CPR, then the failure to seek permission prior to serving the claim form on the Relevant Defendants falls on the Vinos side of the line and retrospective permission (if available) would need to be obtained and CPR r3.10 has no operation. However, I consider that there would be power under the CPR to grant such retrospective permission. Essentially the same reasoning as I have considered above in relation to the need for permission under CA 2006 would apply, but with the added weight that the matter would, on the hypothesis I am considering, solely be a matter of procedure which the court should lean in favour of holding would not amount to an irretrievable nullity if not followed.”

CONCLUSION

In my judgment, service in this case was not valid but the court has jurisdiction to validate it retrospectively. This is so whether the default is to be viewed as a default under the CA 2006 (which is my preferred view of what it is) or a procedural error under CPR Part 19″

BUT THIS IS ONLY THE HALF WAY POINT

The judge determined that the court had a discretion to rectify the position retrospectively.   The matter is now listed for a further hearing as to whether that discretion should be exercised.

THE RELEVANT STATUTE, RULES AND PRACTICE DIRECTION

The judgment sets out the relevant statutory provisions, rules and the Practice Direction.

    1. The statutory provisions are contained in Chapter 1 of Part 11 of the Companies Act 2006. So far as relevant to these proceedings they are as follows:
CHAPTER 1
DERIVATIVE CLAIMS IN ENGLAND AND WALES OR NORTHERN IRELAND
260. Derivative claims

(1) This Chapter applies to proceedings in England and Wales or Northern Ireland by a member of a company—

(a) in respect of a cause of action vested in the company, and

(b) seeking relief on behalf of the company.

This is referred to in this Chapter as a “derivative claim”.

(2) A derivative claim may only be brought—

(a) under this Chapter, or

(b) in pursuance of an order of the court in proceedings under section 994 (proceedings for protection of members against unfair prejudice).

(3) A derivative claim under this Chapter may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. The cause of action may be against the director or another person (or both).
(4) It is immaterial whether the cause of action arose before or after the person seeking to bring or continue the derivative claim became a member of the company.
(5) For the purposes of this Chapter—

(a) “director” includes a former director;

(b) a shadow director is treated as a director; and

(c) references to a member of a company include a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law.

261 Application for permission to continue derivative claim
(1) A member of a company who brings a derivative claim under this Chapter must apply to the court for permission (in Northern Ireland, leave) to continue it.

(2) If it appears to the court that the application and the evidence filed by the applicant in support of it do not disclose a prima facie case for giving permission (or leave), the court—

(a) must dismiss the application, and

(b) may make any consequential order it considers appropriate.

(3) If the application is not dismissed under subsection (2), the court—

(a) may give directions as to the evidence to be provided by the company, and

(b) may adjourn the proceedings to enable the evidence to be obtained.

(4) On hearing the application, the court may—

(a) give permission (or leave) to continue the claim on such terms as it thinks fit,

(b) refuse permission (or leave) and dismiss the claim, or

(c) adjourn the proceedings on the application and give such directions as it thinks fit.

262 Application for permission to continue claim as a derivative claim
[Deals with the situation where a company has commenced a claim which could be brought as a derivative claim]
263 Whether permission to be given
(1) The following provisions have effect where a member of a company applies for permission (in Northern Ireland, leave) under section 261 or 262.
(2) Permission (or leave) must be refused if the court is satisfied—

(a) that a person acting in accordance with section 172 (duty to promote the success of the company) would not seek to continue the claim, or

(b) where the cause of action arises from an act or omission that is yet to occur, that the act or omission has been authorised by the company, or

(c) where the cause of action arises from an act or omission that has already occurred, that the act or omission—

(i) was authorised by the company before it occurred, or

(ii) has been ratified by the company since it occurred.

(3) In considering whether to give permission (or leave) the court must take into account, in particular—

(a) whether the member is acting in good faith in seeking to continue the claim;

(b) the importance that a person acting in accordance with section 172 (duty to promote the success of the company) would attach to continuing it;

(c) where the cause of action results from an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be—

(i) authorised by the company before it occurs, or

(ii) ratified by the company after it occurs;

(d) where the cause of action arises from an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company;

(e) whether the company has decided not to pursue the claim;

(f) whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company.

(4) In considering whether to give permission (or leave) the court shall have particular regard to any evidence before it as to the views of members of the company who have no personal interest, direct or indirect, in the matter.
(5) The Secretary of State may by regulations—

(a) amend subsection (2) so as to alter or add to the circumstances in which permission (or leave) is to be refused;

(b) amend subsection (3) so as to alter or add to the matters that the court is required to take into account in considering whether to give permission (or leave).

(6) Before making any such regulations the Secretary of State shall consult such persons as he considers appropriate.
(7) Regulations under this section are subject to affirmative resolution procedure.
    1. S261 CA 2006 sets out the requirement to seek permission of the court to “continue” a derivative action. It does not in terms say how or when such permission is to be sought. Nor, in terms, does it say what is the effect of not seeking and obtaining permission. The further details with regard to seeking permission is one of procedure governed by, and set out in, the CPR.
    2. CPR Part 19 provides, so far as relevant, as follows:
“Derivative claims – how started 19.9
(1) ) This rule –

(a) applies to a derivative claim (where a company, other body corporate or trade union is alleged to be entitled to claim a remedy, and a claim is made by a member of it for it to be given that remedy), whether under Chapter 1 of Part 11 of the Companies Act 2006 or otherwise; but

(b) does not apply to a claim made pursuant to an order under section 996 of that Act.

(2) ) A derivative claim must be started by a claim form.
(3) The company, body corporate or trade union for the benefit of which a remedy is sought must be made a defendant to the claim.
(4) After the issue of the claim form, the claimant must not take any further step in the proceedings without the permission of the court, other than –

(a) a step permitted or required by rule 19.9A or 19.9C; or

(b) making an urgent application for interim relief.

Derivative claims under Chapter 1 of Part 11 of the Companies Act 2006 – application for permission
19.9A
(1) In this rule –
‘the Act’ means the Companies Act 2006;
‘derivative claim’ means a derivative claim under Chapter 1 of Part 11 of the Act;
‘permission application’ means an application referred to in section 261(1), 262(2) or 264(2) of the Act;
‘the company’ means the company for the benefit of which the derivative claim is brought.
(2) When the claim form for a derivative claim is issued, the claimant must file –

(a) an application notice under Part 23 for permission to continue the claim; and

(b) the written evidence on which the claimant relies in support of the permission application.

(3) The claimant must not make the company a respondent to the permission application.
(4) Subject to paragraph (7), the claimant must notify the company of the claim and permission application by sending to the company as soon as reasonably practicable after the claim form is issued –

(a) a notice in the form set out in Practice Direction 19C, and to which is attached a copy of the provisions of the Act required by that form;

(b) copies of the claim form and the particulars of claim;

(c) the application notice; and

(d) a copy of the evidence filed by the claimant in support of the permission application.

(5) The claimant may send the notice and documents required by paragraph (4) to the company by any method permitted by Part 6 as if the notice and documents were being served on the company.
(6) The claimant must file a witness statement confirming that the claimant has notified the company in accordance with paragraph (4).
(7) Where notifying the company of the permission application would be likely to frustrate some party of the remedy sought, the court may, on application by the claimant, order that the company need not be notified for such period after the issue of the claim form as the court directs.
(8) An application under paragraph (7) may be made without notice.
(9) Where the court dismisses the claimant’s permission application without a hearing, the court will notify the claimant and (unless the court orders otherwise) the company of that decision.
(10) The claimant may ask for an oral hearing to reconsider the decision to dismiss the permission application, but the claimant –

(a) must make the request to the court in writing within seven days of being notified of the decision; and

(b) must notify the company in writing, as soon as reasonably practicable, of that request unless the court orders otherwise.

(11) Where the court dismisses the permission application at a hearing pursuant to paragraph (10), it will notify the claimant and the company of its decision.
(12) Where the court does not dismiss the application under section 261(2) of the Act, the court will –

(a) order that the company and any other appropriate party must be made respondents to the permission application; and

(b) give directions for the service on the company and any other appropriate party of the application notice and the claim form.

Derivative claims – costs

19.9E

The court may order the company, body corporate or trade union for the benefit of which a derivative claim is brought to indemnify the claimant against liability for costs incurred in the permission application or in the derivative claim or both.

Derivative claims – discontinuance and settlement

19.9F

Where the court has given permission to continue a derivative claim, the court may order that the claim may not be discontinued, settled or compromised without the permission of the court.

    1. The provisions of CPR 19 are supplemented by the Practice Direction, Practice Direction 19C-Derivative Claims. So far as relevant it provides as follows:
Application of this practice direction
This practice direction –

(a) ) applies to –

(i) derivative claims, whether under Chapter 1 of Part 11 of the Companies Act 2006 or otherwise; and

(ii) applications for permission to continue or take over such claims; but

(b) does not apply to claims in pursuance of an order under section 996 of that Act.

Claim form
2
(1) ) A claim form must be headed ‘Derivative claim’.
(2) If the claimant seeks an order that the defendant company or other body concerned indemnify the claimant against liability for costs incurred in the permission application or the claim, this should be stated in the permission application or claim form or both, as the case requires.
Application for order delaying notice
3 If the applicant seeks an order under rule 19.9A(7) delaying notice to the defendant company or other body concerned, the applicant must also –

(a) ) state in the application notice the reasons for the application; and

(b) ) file with it any written evidence in support of the application. Form to be sent to defendant company or other body

4 The form required by rule 19.9A(4)(a) to be sent to the defendant company or other body is set out at the end of this practice direction. There are separate versions of the form for claims involving a company, and claims involving a body corporate of another kind or a trade union.
Early intervention by the company
5 The decision whether the claimant’s evidence discloses a prima facie case will normally be made without submissions from or (in the case of an oral hearing to reconsider such a decision reached pursuant to rule 19.9A(9)) attendance by the company. If without invitation from the court the company volunteers a submission or attendance, the company will not normally be allowed any costs of that submission or attendance.
(Sections 261, 262 and 264 of the Companies Act 2006 contain provisions about disclosing a prima facie case in applications to continue a derivative claim.)
Hearing of applications etc.
6
(1) Where a permission application to which this practice direction applies is made in the High Court it will be assigned to the Chancery Division and decided by a High Court judge.
(2) Where such an application is made in a county court it will be decided by a circuit judge.
Discontinuance of derivative claim
As a condition of granting permission to continue or take over a derivative claim, the court may order that the claim is not to be discontinued, settled or compromised without the court’s permission. Such a condition may be appropriate where any future proposal to discontinue or settle might not come to the attention of members who might have an interest in taking over the claim.