Monday, March 18, 2013

Double Derivative Actions Revisited

In an earlier post, we had discussed the concept of multiple derivative actions, and the decision of the Hong Kong Court of Final Appeal in Waddington, which held that double derivative actions (shareholder of a holding company bringing a derivative action complaining of wrongs done to the subsidiary company) were maintainable. In the comments, it was pointed out that the Bombay High Court had held in Janardan Pillai that neither English law nor Indian law recognised the concept of multiple derivative actions. A recent decision of the Chancery Division of the England and Wales High Court now clarifies that as a general rule, common law does not bar multiple derivative actions (and thus, the reasoning in Janardan Pillai may require reconsideration in light of this development). The Court also clarified that the statutory changes introduced by the 2006 UK Companies Act has not deviated from the common law position. The judgment of Briggs J, in Universal Project Management v. Fort Gilkicker, [2013] EWHC 348 (Ch), repays close study.

On the first question of whether the common law recognizes a double derivative action, the Court adopted Lord Millet’s analysis from the judgment in Waddington. The Court then considered what is ultimately a question of construction of the 2006 Act – does the new Act modify the common law position in this regard? The beginning point of the analysis was that a statute will be construed as taking away common law rights only if it does so expressly or by necessary implication (see Islington Borough v. Uckac, [2006] 1 WLR 1303). In Universal, it was contended that Chapter 1 of Part 11 of the 2006 Act exhaustively dealt with common law derivative claims, and s. 260 of the Act in this context defined derivative claims, and the section “plainly excludes claims in respect of a cause of action vested in the company by persons other than members, such as members of the company's holding company..” On the other hand, it was contended that this restrictive definition only applied to claims under Chapter 1 of Part 11 (i.e. to usual derivative claims), and the Act did not at all deal with multiple derivative claims. The Court considered that plainly going by the text, neither argument was so strong as to enable the issue to be decided on that ground alone.  Justice Briggs observed (at [34]), “neither interpretation produces a result which is so obviously more satisfactory than the other for it to be safe on that ground alone to conclude that Parliament must have intended it. As will appear, a main purpose of the codification of derivative claims in Chapter 1 was to remove what were regarded (at least by the Law Commission in its report on shareholder remedies) as complicated, unwieldy and obscure provisions of the applicable common law and to replace them with a clear and transparent code. A conclusion that what Parliament in fact achieved in 2006 was to place a statutory code for derivative claims by members of the wronged company alongside a continued obscure, complicated and unwieldy common law regime for derivative claims by others does not commend itself as an exercise in commonsense. Conversely, a conclusion that by narrowly defining locus standi for all company derivative claims to members of the wronged company Parliament abolished a convenient procedural device for doing justice in cases of wrongdoer control, in a modern context where multi-layered corporate structures with holding companies and subsidiaries are ever more common, hardly commends itself as an exercise in justice. There is, on the face of it, no persuasive reason why Parliament should have wished to provide a statutory scheme for doing justice where a company is in wrongdoer control, but none where its holding company is in the same wrongdoer control.

The Court then referred to the Law Commission Report pursuant to which Chapter 1 was enacted. That report indicated that the Commission recommended replacing the common law regime, but further, the Report also stated that “the question of multiple derivative actions is best left to the courts to resolve, if necessary using the power under section 461(2)(c) of the Companies Act 1985 to bring a derivative action. Accordingly, we do not consider that there should be any express provision dealing with multiple derivative actions.” The Court however considered that on a fuller analysis of the Report as a whole, the position remained ambiguous. The Court then referred to a number of academic commentators (including the Judge who delivered the judgment in Waddington, Lord Millet, writing extra-judicially in Gore-Brown) who took the view that the new Act ‘must be treated as having been abolished (multiple derivative actions), albeit lamentably’. Other commentators had taken a different view: for example, Daniel Lightman, Two Aspects of the Statutory Derivative Claim [2011] LMCLQ 142. Considering these debates, on balance, Justice Briggs came to the view that multiple derivative actions were not excluded. He held (at [45]-[47]), First, there was before 2006 a common law procedural device called the derivative action by which the court could permit a person or persons with the closest sufficient interest to litigate on behalf of a company by seeking for the company relief in respect of a cause of action vested in it. Those persons would usually be a minority of the company's members, but might, if the company was wholly owned by another company, be a minority of the holding company's members. These were not separate derivative actions, but simply examples of the efficient application of the procedural device, designed to avoid injustice, to different factual circumstances… In 2006 Parliament identified the main version of that device, namely where locus standi is accorded to the wronged company's members, labeled it a "derivative claim" and enacted a comprehensive statutory code in relation to it. As a matter of language, section 260 applied Chapter 1 of Part 11 only to that part of the old common law device thus labeled, leaving other instances of its application unaffected… Applying the well established relevant principle of construction, Parliament did not expressly abolish the whole of the common law derivative action in relation to companies, even though by implication from the comprehensiveness of the statutory code it did do so in relation to derivative claims by members (as defined) of the wronged company. Beyond that, the assertion that the remainder of the common law device was abolished fails because abolition was neither express nor a clear or necessary implication…” 

What is particularly noteworthy is the affirmation of the principle that there is no bar in common law to bringing multiple derivative actions. After holding that this principle was not affected by the 2006 Act, Justice Briggs observed, I reach this conclusion with some relief. Not only does it address the manifest scope for real injustice which the abolition of any derivative action by members of a holding company would have entailed, and as graphically described by Lord Millett in his article, but it ensures that English company law runs in this respect in harmony with the laws of Hong Kong, Singapore, Canada, Australia and New Zealand, all of which have, albeit by different methods, ensured that injustice of the type described by Lord Millett can properly be addressed.” This last comment brings into sharp contrast the position of Indian law on the point: which holds that as a matter of common law itself, multiple derivative actions are not permissible. The principle in Janardan Pillai may thus require reconsideration in line with these developments.

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