Court of Appeal judgment on damages law handed down in Barrowfen Properties Limited v Patel
On 23 January 2025, judgment was handed down by the Court of Appeal on issues of damages law in Barrowfen Properties Limited v Patel and others [2025] EWCA Civ 39.
At trial, the Court made various findings of dishonest breaches of directors’ duties against the First Defendant and of negligence against the Second Defendant firm of solicitors.
The trial judge awarded damages based on the lost rental income suffered because of the delay in the development of Barrowfen’s commercial property in Tooting. The principal award of £4 million was reduced down to £1.7 million because Barrowfen was required to give credit for the increased capital value of the revised development scheme implemented compared to the original development scheme that would have been implemented at an earlier date.
Both Barrowfen and the Second Defendant appealed to the Court of Appeal on issues of damages law about the application of the credit, but the decision of the trial judge was upheld (other than on a point about the amount of interest as damages):
- Barrowfen appealed on the basis that it intended to hold the property as an income-producing asset and that once the increased finance costs of the more expensive revised development scheme were taken into account there was no credit to be given. The Court of Appeal analysed the leading cases on mitigation, causation and betterment and dismissed Barrowfen’s appeal on the basis that the decision to retain the Tooting property (and incur future financing costs) rather than sell it was an independent decision that broke the chain of causation.
- The Second Defendant cross-appealed, contending that the credit should be deducted (in full) after the application of the loss of a chance percentages, rather than before the application of the loss of a chance percentages. The Court of Appeal explained the decision in Hartle v Laceys and dismissed this main cross-appeal.
Tim Matthewson was instructed with Adam Kramer KC of 3VB by Withers to act for Barrowfen.
High Court hands down judgment in dispute concerning contractual rights to intellectual property
On 27 January 2025 the High Court dismissed the claim made in Hill v Touchlight Genetics Ltd & Ors [2025] EWHC 107 (Pat), a case concerning contractual rights to intellectual property.
Emily McKechnie (instructed by Bristows and acting with Adrian Speck KC and Henry Ward of 8 New Square) represented the successful defendants, the Touchlight group. The claim had been brought by Touchlight’s former chief scientific officer, Dr Hill, who argued that her innovative ideas had been developed prior to her employment with Touchlight and had not been contractually assigned to the company following the commencement of her employment.
The High Court held that the ideas were conceived by Dr Hill during her employment and were thereby contractually owned by Touchlight, and that in any event the disputed rights were assigned to Touchlight on the true construction of Dr Hill’s employment contract. The court also found that Dr Hill shared a common assumption with Touchlight (or made representations) to the effect that Touchlight was the owner of the disputed rights, that Touchlight was entitled to assume that Dr Hill supported its applications for patent protection based upon those rights, and that Touchlight relied upon Dr Hill to its detriment.
MOD and Annington Homes reach settlement following a major piece of long-running litigation
A major piece of long-running litigation came to an end on 17 December 2024, with the announcement that Annington Homes will sell approximately 36,000 properties housing armed forces personnel and their families back to the Ministry of Defence for £6bn.
This comes 30 years after a privatisation deal, involving a sale of the married quarters estate to Annington and leaseback to the MOD. The deal has been widely criticised, with the National Audit Office estimating in 2018 that the taxpayer was £2.2bn – £4.2bn worse off over the first 21 years of the arrangements than if it had retained the estate. In 2019 the Public Accounts Committee called it “disastrous”.
Under the terms of the leases held by MOD, rent reviews were due on dates between 2021 and 2024. In 2019, Annington and MOD agreed to streamline the rent review process and submit it to arbitration. Joanne Wicks KC and Daniel Petrides were part of the Counsel team, instructed by Gowling WLG (UK) LLP, acting on the arbitration for MOD. This was concluded by a settlement in January 2022.
Immediately after the settlement of the rent review arbitrations, MOD sought to explore its ability to acquire the freehold of houses on the estate under the Leasehold Reform Act 1967 by serving a series of test case notices. Annington challenged MOD’s ability to enfranchise as a matter of private law and sought judicial review of its decision to serve the notices. Joanne and Daniel, instructed by Forsters LLP, again acted as part of the Counsel team for MOD. On 15 May 2023, Holgate J handed down judgment in favour of MOD, holding that it was entitled to seek to enfranchise the houses on the estate and dismissing the judicial review. A hearing of Annington’s appeal, listed for July 2024, was adjourned to allow the parties to explore settlement discussions.
Supreme Court hands down judgment in LA Micro Group Inc v LA Micro Group (UK) Ltd and others [2024]
The Supreme Court today handed down judgment in LA Micro Group Inc v LA Micro Group (UK) Ltd and others [2024] UKSC 42. Clare Stanley KC acted for the first appellant, instructed by Tom Bolam and Cecilia Ricks of Fladgate LLP, leading William Buck and Jen Coyne of Monckton Chambers, and assisted by Prof Andreas Televantos.
It concerns s. 53(1)(c) and s. 53(2) of the Law of Property Act 1925. It finally settles the academic debate as to whether s. 53(1)(c) applies to personalty (and holds that it does); it traces the historical development and legal effect of the ‘vendor purchaser constructive trust’; and holds that such a trust can operate to effect the surrender/release of a beneficiary’s interest in personalty in favour of the trustee.
Invest Bank P.S.C. v El-Husseini & Ors: Important Commercial Court case providing guidance on pleading and proving cases under s.423 Insolvency Act 1986
On 21 November 2024 the Commercial Court handed down judgment in Invest Bank P.S.C. v El-Husseini & Ors [2024] EWHC 2976 (Comm), a claim brought under s.423 Insolvency Act 1986, following a 4 week trial in July 2024.
The Court determined that the Claimant (“the Bank”) had failed to prove its inferential case in respect of the various transactions that had taken place by which the First Defendant (“Ahmad”) had transferred valuable assets and interests to the other Defendants, who were his family members, companies under their control and the trustees of a discretionary trust of which they were beneficiaries (“Virtue Trustees”).
Mr Justice Calver analysed in particular (1) the relevant legal principles concerning what needs to be pleaded and proved in order to satisfy the statutory requirements of section 423 (2) when the Court may draw an inference that a Defendant had the purpose of putting his assets beyond the reach of a creditor (3) the circumstances in which the Court may draw adverse inferences against a Defendant and his co-Defendants by reason of a failure to engage with the proceedings, to attend trial or to disclose documents and (4) the relevance of contemporaneous documents in assessing where the truth lies in such a dispute.
Mr Justice Calver held that an allegation that a Defendant acted for the s.423 purpose of putting assets beyond reach of creditors amounts to an allegation of serious wrongdoing or discreditable conduct and any inferential case that this was the Defendant’s subjective purpose requires a clear pleading of the primary facts said to give rise to the inference and a case proved by cogent evidence.
Although, as the Judge observed, Ahmad had “haunted the trial like Banquo’s ghost” the Court had not heard from Ahmad himself because he had failed to participate in the proceedings following an unsuccessful jurisdiction challenge. The Judge nevertheless determined that the Bank was not entitled to an adverse inference against Ahmad and his co-Defendants “as of right” and that on a close factual analysis of all the relevant considerations no such inference could be drawn.
Further, although Ahmad had used the phrase “asset protection purposes” in discussions with his financial advisers on various occasions in connection with management of his wealth, the Judge accepted evidence that this phrase did not have one single, well understood meaning. The Court held that Ahmad did not have the alleged purpose of avoiding claims by the Bank when making any of the transfers, and that Virtue Trustees had no reason to think that the transfer of assets by Ahmad into trust was effected for anything other than legitimate tax and estate planning reasons.
Tim Penny KC acted with Marc Delehanty (Serle Court) and Frederick Wilmot-Smith (Brick Court) for the Bank, instructed by PCB Byrne LLP.
Tiffany Scott KC acted with Emma Hargreaves (Serle Court) for Virtue Trustees, instructed by Edwin Coe LLP.
The Privy Council confirms that shareholders have a personal claim against a company for improper exercises of power
This article is co-authored by Thomas Lowe KC (Wilberforce), Tara Taylor (Wilberforce), Corey Byrne (Ogier), Gemma Bellfield (Ogier), Oliver Payne (Ogier), and Maria On (Ogier).
Introduction
On 14 November 2024, the Judicial Committee of the Privy Council handed down its decision in Tianrui (International) Holding Company Ltd v China Shanshui Cement Group Ltd [2023] UKPC 36 (Tianrui),[1] and confirmed that a shareholder has a personal claim against a company when the directors of the company exercise their powers for an improper purpose. More specifically, the Board confirmed that such a claim may be brought by a minority shareholder in circumstances where the directors have allotted shares for the improper purpose of diluting that shareholder’s voting power, thereby facilitating a takeover of the company.
This is a landmark decision confirming the rights of shareholders, including minority shareholders, to prevent improper exercises of power and oppression by a company. It confirms a shareholder’s ability to bring a personal claim against the company for declarations or injunctions to prevent conduct in breach of a company’s articles of association, without the need for a derivative action under the rule in Foss v Harbottle. In doing so, the Board finally resolves what Professor Gower once described as “one of the most difficult problems in company law” (Gower: Principles of Modern Company Law (2nd ed, 1954) at 529).
Background to Shareholder Dispute
The background to the appeal involves a prolonged battle for control of the respondent, China Shanshui Cement Group Ltd (China Shanshui), which is a Cayman Islands exempted company whose shares are listed on the Hong Kong Stock Exchange. China Shanshui is engaged in the production, distribution and supply of cement and related construction products in the PRC.
The takeover battle in question was waged between three principal shareholders of China Shanshui, namely the appellant, Tianrui (International) Holding Company Ltd (Tianrui) on one side and Asia Cement Corporation (ACC) and China National Building Materials Co Ltd (CNBM) on the other. China Shanshui, Tianrui, ACC and CNBM are all competitors in the cement production industry in the PRC.
In August and October 2018, without any prior notice, China Shanshui issued convertible bonds to six subscribers in two tranches. At a subsequent general meeting of China Shanshui, a majority of shareholders (including ACC and CNBM) passed a resolution permitting the directors to allot and issue new shares in China Shanshui to the holders of the convertible bonds.
Tianrui alleges that the bondholders are connected to ACC and CNBM by an undisclosed agreement or concert party to take over voting control of China Shanshui, and that the allotment was for the purpose of enabling ACC and CNBM to control China Shanshui by achieving a dilution of Tianrui’s shareholding from 28.16% to 21.75%. This brought Tianrui’s shareholding below 25%, thereby preventing them from exercising ‘negative control’ to block special resolutions of China Shanshui, including merger resolutions. As such, Tianrui argues that the issue of the convertible bonds and the allotment and issue of the new shares were an improper exercise of China Shanshui’s power to allot and issue securities.
Tianrui issued writ proceedings against China Shanshui seeking a declaration that the exercise by its directors of the powers to (i) issue the convertible bonds, (ii) convert the bonds into shares, and (iii) issue the new shares; were each not a valid exercise of the relevant power. China Shanshui sought to strike out Tianrui’s claim as an abuse of process on the basis that Tianrui did not have standing to sue China Shanshui for claims which are based on a breach of fiduciary duty by the directors. It argued that the claim ought to have been brought derivatively under the rule in Foss v Harbottle.
At first instance, Segal J concluded that Tianrui had standing to bring a personal claim against China Shanshui in respect of the improper dilution. However, the Cayman Islands Court of Appeal allowed an appeal on the basis of the earlier Cayman decision of Kawaley J in Gao v China Biologic Products Holdings, Inc [2018 (2) CILR 591] which Segal J had declined to follow and found that the proper plaintiff for the claim pleaded by Tianrui was the company and, therefore, the appropriate course was for Tianrui to bring a breach of duty claim on behalf of the company against the directors as a derivative action.
The Board’s Conclusions as to the availability of a direct shareholder claim
As the Board recognised, courts have long allowed shareholders to make personal claims against the company in which they are invested for a wrong done to them qua shareholder and to enforce those rights via a personal action (for example claims to enforce personal rights to vote on resolutions put to the company in general meeting). This includes cases where directors have exercised their powers improperly, such as Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71.
The limit to those cases was always thought to be whether or not the contravention of a shareholder’s rights was capable of ratification by the company in general meeting. If it was, then in accordance with the rule in Foss v Harbottle (as applied in McDougal v Gardiner (1875) 1 Ch D 13, a case about general meetings conducted in breach of the articles of association), there would be no cause of action. That principle was always controversial not least because similar direct claims were allowed in other cases such as Pender v Lushington (1877) 6 Ch D 70. In a seminal article in 1957, Professor Wedderburn suggested, on the basis of the House of Lords decision in Quin & Axtens Limited v Salmon [1909] AC 442, that a shareholder should always have a direct claim for breach of the articles, as if were a breach of contract. Such a breach was incapable of ratification by a simple majority of members because it would be tantamount to amendment of the articles. The question before the Board was more nuanced because it concerned the improper exercise of a power conferred by the articles, the exercise of which may, by its nature, be capable of shareholder approval.
The Board reviewed a long line of English and Australian decisions of high authority on share issues, including Fraser v Whalley (1864) 2 H & M 10; Punt v Symons & Co Ltd [1903] 2 Ch 506; Hogg v Cramphorn Ltd [1967] Ch 254; Bamford v Bamford [1970] Ch 212; Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 and Residues Treatment & Trading Co Ltd v Southern Resources Ltd (1988) 6 ACLC 1160, in which the Courts recognised that shareholders may bring a personal claim in relation to improper share dilution. However, the Board noted that none of these cases explained the jurisprudential basis for a shareholder’s standing to bring a personal claim. For instance, in the well-known Privy Council decision of Howard Smith Ltd v Ampol Petroleum , the relevant question for the Board was whether the impugned share allotment was valid and there is no suggestion in the judgment that the standing of the minority shareholder plaintiff to bring the claim had been questioned. Outside of the Cayman Islands, a plaintiff’s standing was challenged in only one case in Residues Treatment & Trading Co Ltd v Southern Resources Ltd (1988) 6 ACLC 1160, although the South Australian Supreme Court dismissed the challenge.
Given the lack of principled consideration in most of the cases, the Board ultimately approached the matter from ‘first principles’ and found as follows:
1. The availability of a direct action depended on the statutory contract constituted by the memorandum and articles of association. As an intrinsic feature of the contract between shareholders and the company, it is implicit that when directors are exercising their fiduciary powers on behalf of a company, they will be exercised for proper purposes. The conferment upon directors of the power to allot and issue shares is an important part of that statutory contract. As a consequence, the power is subject to the constraint that it will be exercised for a proper purpose which is (at [72])
“as much a part of that corporate contract as if it had been spelt out word for word in the articles. It is a term of the corporate contract that, if the exercise of the power to allot and issue new shares by the directors as agents for the company is to be valid and binding as between the individual shareholder and the company, it should comply with all conditions necessary to make it a proper exercise. These include compliance with the directors’ fiduciary duty owed to the company. This is a constraint implied by law as inherent in the relationship between the shareholder and the company.” (emphasis added)
2. An allotment of shares which eliminates a shareholder’s right of control or their right of ‘negative control’ can have the effect of altering the balance of voting power between shareholders within the company and the relative economic stakes they have in the company. As such, where such an allotment is deliberately aimed at altering the balance of power, this constitutes the improper use of the power to issue and allot shares. Accordingly, the shareholder has a personal right to challenge the allotment based on a breach of an implied term of the corporate constitution.
3. Although the personal claim involves a breach of fiduciary duty by the directors which is, in theory a breach of its duty to the company, the wrong done to the company is not the substance of the complaint. The basis of the complaint is an alleged infringement of the plaintiff’s rights as a shareholder under the articles and these two causes of action are not mutually exclusive and may co-exist together.
4. The right of the shareholder to sue the company is not dependent upon their status as a minority or majority shareholder. Although Tianrui was a minority shareholder, a majority shareholder may sue the company on the same basis, for instance, when shares are allotted by the company to a favoured outsider depriving that shareholder of majority control.
5. The fact that the offending exercise of power could theoretically be approved in advance or ratified by members in general meeting was not a sufficient rationale to deprive a shareholder of their cause of action. In particular, the Board noted that ratification by the general meeting is constrained by minority oppression principles and a breach by directors having an improper purpose of assisting an existing majority can hardly be ratified by the majority itself without falling foul of these principles.
Based on the above considerations, the Board allowed the appeal and confirmed that the direct cause of action pleaded by Tianrui had a proper basis in law and there was a strong case on the assumed facts for the availability of such a claim.
Clarification of Shareholder Rights
Tianrui is a watershed decision confirming the rights of shareholders in common law jurisdictions. The Board has clarified decades of judicial uncertainty regarding the circumstances in which shareholders can bring personal claims against a company for an improper exercise of power.
Unlike most common law jurisdictions, the Cayman Islands has no statutory remedy for unfair prejudice or oppression and shareholder disputes involving such conduct are usually resolved via just and equitable winding up petitions or derivative actions, each of which present their own difficulties. Accordingly, the decision in Tianrui is particularly significant for shareholders of Cayman Islands companies, providing them with a important remedy in cases where the directors of a company are exercising their powers improperly.
More broadly, even in jurisdictions where the statutory unfair prejudice or oppression remedy exists, the personal claim identified by the Board in Tianrui is likely to apply more widely to improper exercises of power, including to the exercise of any other powers by directors which infringe a shareholder’s rights. This provides disenfranchised shareholders with another important tool in their arsenal against majority oppression and unfair prejudice.
[1] Ogier (Cayman) LLP together with Tom Lowe KC and Tara Taylor of Wilberforce Chambers (who co-authored this article), acted on behalf of Tianrui, the successful appellant.
Receiver restored – an interim remedy in shareholder disputes
Nikki Singla KC acted successfully for the respondent Cloud Innovation in the case of AFRINIC v Cloud Innovation in the Court of Civil Appeal in Mauritius [2024] SCJ 473. AFRINIC is trying to oust Cloud Innovation as a member and to forfeit its valuable internet resources. AFRINIC (through a former director) sought to remove the Official Receiver that had been appointed by the Commercial Court to manage and supervise the company AFRINIC pending the determination of Cloud’s Innovation’s shareholder oppression claim. Cloud Innovation successfully opposed the removal application arguing that AFRINIC had no lawfully appointed director in place, an election to appoint directors required to be held and in all the circumstances it was just for the Official Receiver to continue in his role.
Blower v GH Canfields – claimant fails to establish case on negligence or causation
On 4 November 2024, the High Court dismissed the claim made in Blower v GH Canfields LLP [2024] EWHC 2763 (Ch), a professional negligence claim also involving trusts and insolvency issues.
Jonathan Seitler KC and Lemuel Lucan-Wilson (instructed by Womble Bond Dickinson) acted for the successful defendant, which was alleged to have been negligent in their conduct of a mediation of claims brought by a trustee in bankruptcy against family members of the bankrupt. The defendant had acted for the family members, and was said to have “over-settled” the claims on the basis that those claims would have been unsuccessful and/or the claimant could have set-off against them.
His Honour Judge Paul Matthews KC found that the defendant firm had at all times provided the correct advice regarding the strength of the claims which the claimant had been facing, noting that the set-off now claimed could not have operated on the facts in any event, nor could the trust interests have operated as the claimant submitted at trial. The Court also found that the claimant had failed to set-off her case on causation in the pleadings – simply stating what she would not have done, but then not setting out what she would have done or what would have happened (the claimant expressly rejecting the application of the loss of a chance doctrine).
Court rejects application for Norwich Pharmacal order in the Magomedov litigation
The Commercial Court has rejected an application by the Claimants in the Magomedov litigation – a $14 billion claim concerning alleged unlawful means conspiracies and bribery – for a Norwich Pharmacal order against three financial services companies, following the hearing of jurisdiction challenges and of the Claimants’ substantive application for Norwich Pharmacal relief, at a two-day hearing before Jacobs J.
In the case of the First Respondent, the Court held that an order for alternative service by email in Liechtenstein should be set aside as being positively contrary to Liechtenstein law. Although the Court did uphold a separate order for alternative service in the UK, the substantive application failed because of the likelihood that the provision of information would be contrary to Liechtenstein law, with the Court concluding that the First Respondent “as a third party which is not alleged to have been a wrongdoer, should not be subject to speculative and unprecedented litigation” in Liechtenstein.
As against the Second and Third Respondents, the Court concluded that they had not been mixed up in the wrongdoing and so the Norwich Pharmacal applications against them failed for this reason.
Bobby Friedman and Rachael Earle acted for the successful First Respondent, instructed by Sue Thackeray, Laurence Clarke and Phoebe Alexander of Kingsley Napley.
Court of Appeal hands down Judgment in Important Costs Case
On 22 October 2024 the Court of Appeal handed down judgment in an important case concerning the jurisdiction to award costs in proceedings in the First Tier Tribunal (Property Chamber) (‘F-tT’) and the Upper Tribunal.
Under Rule 13 of the relevant Tribunal Rules, costs can, essentially, only be awarded against another party where that party has ‘acted unreasonably in bringing, defending or conducting proceedings’. There is an equivalent rule for the Upper Tribunal, which is identically worded.
The case of Lea and Others v GP Ilfracombe Management Co Ltd now becomes the definitive ruling as to what ‘unreasonably’ means in this context.
The Court of Appeal allowed the appeal from the Upper Tribunal (‘UT’). The UT had itself dismissed an appeal against the ruling of the F-tT – which had refused to order costs to the successful appellant tenants, following the total failure of the respondent landlord’s service charge application. That substantive application related to service charge demands which the respondent had served on the appellants, totalling around £2.4M. In dismissing the proceedings entirely, the F-tT had found that the demands had been served without any genuine belief that the sums were correct. Yet the F-tT had refused to award costs in the tenants’ favour, despite this finding. The UT upheld their decision, agreeing that the ‘unreasonableness’ threshold had not been crossed.
The Court of Appeal, in allowing the appeal, made clear that ‘unreasonably’ in Rule 13 was not to be equated only with ‘vexatious’ or ‘harassing’ behaviour. Such an interpretation was much too restrictive. UT and F-tT decisions, suggesting that this was the threshold test, were wrong. Unreasonable behaviour includes vexatious, abusive and harassing behaviour but is not limited only to such behaviour.
The Court of Appeal further clarified that the UT had not intended, in the Willow Court case (which, until now, has been the leading case on Rule 13 costs) to state a threshold test which confined the rule only to abusive/harassing behaviour. Affirming Willow Court, the Court of Appeal stated that: ‘a good practical rule is for the tribunal to ask: would a reasonable person acting reasonably have acted in this way? Is there a reasonable explanation for the conduct in issue?’. The Court also made clear that further guidance on the threshold test, or its application, would not be helpful.
Martin Hutchings KC acted for the successful appellants – instructed by Michael Green and Harriet Muffett of Trowers & Hamlins LLP.