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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Franbar Holdings Ltd. v Patel & Ors [2008] EWHC 1534 (Ch) (02 July 2008) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2008/1534.html Cite as: [2008] BCC 885, [2009] Bus LR D14, [2009] 1 BCLC 1, [2008] EWHC 1534 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		2 July 2008

Mr William Trower QC:

1. I have before me a number of applications in proceedings which have as their substance disputes between Franbar Holdings Ltd ("Franbar") and Casualty Plus Ltd ("Casualty Plus") in relation to the affairs of Medicentres (UK) Ltd ("Medicentres").
2. Three sets of proceedings have been issued. The first is a claim by Franbar against Casualty Plus for breach of a shareholders' agreement dated 28 July 2005 ("Shareholders' Agreement"). The second is a petition under section 994 of the Companies Act 2006 by Franbar against Casualty Plus. Two directors of Medicentres, Mr Ketam Patel and Dr Johan du Plessis have been joined as respondents to the petition, but the principal head of relief is an order against Casualty Plus for it to purchase Franbar's shares in Medicentres. The third is a claim by Franbar against Mr Patel, Dr du Plessis and Medicentres (together "Defendants"), which Franbar seeks permission to continue as a derivate claim because it seeks a remedy on behalf of Medicentres. In each of the three sets of proceedings, the substantive allegations are the same.
3. The application for permission to continue the derivative claim is the first matter with which I must deal. The other outstanding applications relate to permission under section 182 of Finance Act 1989 to disclose and/or rely upon material arising from an Inland Revenue investigation and permission pursuant to rule 7.31 of Insolvency Rules 1986 to inspect and take copies of the court file. The application notice also seeks an order for consolidation of the derivative claim with the section 994 petition, to be heard together with the shareholders' action. All parties are now agreed that, if permission is granted, it is appropriate for all proceedings to be heard together.
4. Franbar also indicated in its skeleton argument that it sought an order that it be indemnified by Medicentres in respect of its costs if I were to give permission to continue with the derivative claim. This application was not in fact made in Franbar's application notice and, during the course of the hearing, Mr David Matthias Q.C., who appeared for Franbar, informed me that Franbar did not wish to pursue it on the basis that it could not show that an interim order was genuinely needed in accordance with the principles considered by Walton J. in Smith v. Croft [1986] 1WLR 580.
5. Before expressing my conclusions on the application for permission to continue the derivative claim I should say a little about the background. Medicentres was established to provide primary healthcare and medical services and between July 2001 and July 2005 it was wholly owned by Franbar. At the end of July 2005 Franbar sold 75 per cent of the shares in Medicentres to Casualty Plus. At the same time Franbar and Casualty Plus entered into the Shareholders' Agreement which, amongst other matters, granted Franbar an option to sell its remaining shares in Medicentres to Casualty Plus and granted Casualty Plus an option to call for those shares, in each case at a price of 9 times Medicentres' adjusted EBITDA, as derived from its most recent audited accounts. The put option is exercisable on various dates between 31 March 2007 and 31 March 2012. The call option is exercisable on various dates between 31 March 2009 and 31 March 2012.
6. It seems that, by the time of the Shareholders' Agreement, Medicentres had branches at Euston, Victoria, Waterloo, Paddington and Cannon Street railway stations and at a number of other locations in central London. It is of some significance to Franbar's case that Medicentres had an established presence at those railway stations and also that it had established relationships with Network Rail and a number of train operating companies for whom it supplied medical services.
7. The Shareholders' Agreement made detailed provision for the regulation of a number of other matters relating to the continuation of Medicentres' business. Casualty Plus was entitled and obliged to appoint and maintain two directors and was entitled to appoint a third director as a permanent chairman. The directors of Medicentres initially appointed by Casualty Plus were Dr du Plessis and Mr Sayed Jaffery (then the chairman of Casualty Plus). I am not sure whether Casualty Plus exercised its contractual right to appoint a majority of the board, but I will assume for present purposes that, in the events that occurred, those directors appointed by it had at least de facto control of Medicentres' affairs from July 2005.
8. Franbar was required by the Shareholders' Agreement to appoint and maintain Mr Karim Lalani in office as a director and was entitled to appoint one other director. In the event, he was so appointed and his executive function was to act as property director, a job which he carried out on a part time basis. From shortly after the Shareholders' Agreement, the other director appointed by Franbar was Mrs. Shelina Lalani; she was replaced by Mr Mark Olbrich in May 2007. The Shareholders' Agreement also made a number of matters reserved shareholder matters so that they could not be altered without the unanimous consent of Franbar and Casualty Plus.
9. In May 2007, Mr Jaffrey, who had been a director of both Casualty Plus and Medicentres and its Chief Executive Officer ceased to carry out any executive responsibilities and subsequently (in August) he resigned as a director. His replacement, appointed by Casualty Plus was Mr Patel. He was appointed on 31 May 2007. It is Franbar's case that the appointment of Mr Patel acted as the principal catalyst for the disputes which have arisen between Franbar and Casualty Plus.
10. I must now explain in outline the shape of the case and summarise the allegations made by Franbar and the answers to those allegations advanced by Casualty Plus. I do so by reference to the case as pleaded in the derivative claim. In substance, however, these allegations are or will be set out in exactly the same terms in the section 994 petition and the shareholders' action, albeit that in the derivative claim they are pleaded as breaches of identified duties owed by Mr Patel and Dr du Plessis to Medicentres. Indeed the main evidence relied on by Franbar in support of this application (a statement by Mr Lalani) was prepared for use in the section 994 petition, in which, as I have already mentioned, the principal relief sought is an order against Casualty Plus for it to purchase Franbar's shares in Medicentres.
11. The first complaint (or series of complaints) relates to the diversion of business opportunities from Medicentres to Casualty Plus. This is said to have happened at four separate units proposed for St Pancras Station, Canary Wharf, Waterloo Road and Aldgate. Franbar contends either that these units were or should have been intended for Medicentres or (in the case of Aldgate) that the proposal would have had the effect of diverting business away from a Medicentres unit at Fenchurch Street.
12. The Defendants' answer to the complaints in relation to St Pancras is that Medicentres could not afford the fitting out costs of the unit without further loans from Casualty Plus the terms of which could not be agreed by the parties, that there was a suggestion that Casualty Plus should take a head lease instead, but that in the event the acquisition did not proceed. This they say means that there was no breach of duty and no loss was sustained by Medicentres. As to the complaint in relation to Canary Wharf, the Defendants say that Medicentres never intended to take the unit, in any event without entering into joint venture arrangements with a third party and that, in the events that occurred, the lessor withdrew. They say that the allegations in relation to Waterloo Road do not disclose a wrong at all.
13. The position in relation to Aldgate is a little more complicated. The complaint is that Casualty Plus has developed a proposal to open a new branch at Aldgate for the purpose of treating persons currently treated at the Medicentres' Fenchurch Street branch. The Defendants deny that there is any poaching of patients involved, as the branches will offer different types of medical services. They say also that what has occurred is a wholly unexceptional rearrangement of group facilities, because two nearby Medicentres units at Cheapside and Eldon Street have had substantial recent investment committed to them.
14. The second category of allegation relates to the role of Mr Lalani. He is said to have been suspended with a view to improving the ability of Mr Patel and Dr du Plessis to divert business from Medicentres and drive down its share price with the actual or constructive knowledge of Casualty Plus. The continuation of Medicentres' business in the absence of Mr Lalani is said to have damaged Medicentres by depriving it of his skill and expertise. The Defendants claim that the suspension of Mr Lalani was justified because of his misconduct. They list a whole series of matters which are said to justify the suspension, most of which, if established, would amount to breaches of duty by Mr Lalani to Medicentres. It is also said that the exclusion of Mr Lalani can only be a wrong to Mr Lalani himself and not to Medicentres.
15. The third category of complaint relates to a failure by Mr Patel and Dr du Plessis to provide adequate financial information, including in particular the audited and management accounts to which Franbar and Mr Lalani say they are entitled. As with the other complaints, it is said that this failure amounted to a breach of good faith and a want of reasonable care and skill on the part of Mr Patel and Dr du Plessis. In the petition this complaint is said to disadvantage Franbar in that it prevents it from contributing meaningfully to the improvement of Medicentres and from properly assessing the value of its option or the option granted to Casualty Plus. The absence of such information is also said to make it impossible for Franbar to establish the fair value of its shares or the harm which the other breaches have done to Medicentres.
16. The Defendants' response to this category of complaint is twofold. In essence they contend that Mr Lalani was sent the same financial information that every director had and that the preparation and finalisation of the year-end accounts has been held up by the poor state of the records and disputes over loans made to Medicentres by Casualty Plus and their proper accounting treatment. More generally it is said that there is no reason why Mr Patel and Dr du Plessis, the only directors sued in the derivative claim, are culpable for the deficiencies, and even if they are, there is no explanation as to how any loss can have been caused to Medicentres.
17. The fourth category of complaint relates to the appointment of Mr Patel as a director of Medicentres in the first place. It is said that Mr Patel was unfit to be a director because of his history of involvement with insolvent companies, his failure to comply with statutory and other accounting requirements (including in particular Swindon Brewing Company Limited ("Swindon")), his misuse and misdirection of corporate assets and unlawful involvement in the running of businesses while bankrupt. It is said that these are matters of which Casualty Plus had actual or constructive knowledge (through Dr du Plessis and Mr Sunil Sheth, a director of Casualty Plus and its Company Secretary) and that the appointment of Mr Patel in these circumstances, and his maintenance in office, amounted to a breach of duty both by Mr Patel himself and by Dr du Plessis.
18. The answer to this complaint is said to be that Mr Patel was not in fact responsible for the long list of defaults alleged by Franbar; Mr Patel blames another director of the companies concerned. The Defendants also say that the board of Casualty Plus is aware of the allegations and is content for Mr Patel to continue to act. On this issue as well they assert that it is impossible to see how Medicentres can have suffered any loss.
19. The fifth category of complaints relates to a series of other miscellaneous acts by Mr Patel and Dr du Plessis. The first of these is that Mr Patel is said to have caused Medicentres to lose a valuable contract with Southern Rail by reason of his aggressive and offensive behaviour. The second relates to the renewal of leases of the Medicentres units at Euston, Waterloo and Victoria. Mr Patel and Dr du Plessis are said to have carelessly, incompetently or deliberately failed to take sufficient steps to progress negotiations, failed to discharge outstanding rent and thereby lost the good will that Medicentres had built up with Network Rail. Although these leases were eventually renewed, it is said that the renewals were on more onerous terms for Medicentres than would otherwise have been the case. The third is that Mr Patel and Dr du Plessis are said to have failed to ensure that a debt due to Quest Diagnostics Limited was paid leading to the presentation of a winding up petition against it. Other examples of unpaid debts are pleaded. Finally it is alleged that the suspension or removal of Mr Jonathan Rich as a sales director and his replacement by a Mr McAvoy amounted to a breach of duty from which Medicentres has suffered and will continue to suffer loss and damage.
20. The Defendants contend that the first two of these complaints are deficient on the facts for various reasons, including inherent unlikelihood and lack of particularity. It is then said that the unpaid debts have now been paid and that nothing is pleaded to show why Mr Patel and Dr du Plessis are to blame and not Mr Lalani or Mr Olbrich. As to the complaints about Mr Rich the simple answer is said to be that his removal was justified because he was "a passenger" and that he is a Lalani associate, on the Franbar side in relation to the disputes that have arisen.
21. It is not appropriate for me on this application to reach any final conclusions on the merits of the dispute, nor am I in a position to do so. What I can say, however, is that, if they are substantiated at trial, all of the breaches relied on are as capable of being characterised as breaches of the Shareholders' Agreement and conduct amounting to unfair prejudice as they are of being characterised as breaches of duty causing loss to Medicentres. Indeed a number of the complaints do not fit naturally with losses sustained by Franbar itself, as opposed to matters which simply demonstrate (if proved) that Medicentres' affairs have been conducted in an unfairly prejudicial manner. Mr Timothy Sisley, instructed by all of the Defandants, submitted that the quality of the evidence in support of Franbar's case is very poor and in some respects the case is contrived. I do not accept that characterisation, but I do agree that the problem for Franbar at the moment is that it is not always possible to see from either the pleadings or the evidence a clear causal link between what would, if established, be plainly unacceptable conduct and any recoverable loss for which Mr Patel and Dr du Plessis might be liable to compensate Medicentres.
22. Mr Matthias does not deny that, in a number of respects, the loss that Medicentres has suffered is unparticularised. He submits, however, that the evidence of breach is strong and that losses must have been caused. He submits that Franbar cannot be criticised for lack of particularisation because its access to the material from which losses could be established has itself been caused by the breaches of duty of which further complaint is made. In this regard he points in particular to the failure to produce accounts and other financial information to Franbar. In my judgment this is an understandable position for Franbar to maintain. That does not mean, however, that, in the light of the shareholders' action and the section 994 petition, the derivative proceedings commenced by Franbar ought to be continued.
23. As I have already indicated, the principal relief sought in the section 994 petition is an order that Casualty Plus do buy Franbar's shares in Medicentres at a fair price to be determined. It is of some relevance that the Defendants accept that it is desirable that Franbar be bought out and plead that, on 14 April 2008, solicitors instructed by Casualty Plus and the Defendants made an open offer on behalf of all of their clients to purchase Franbar's shares at an independent expert valuation on the assumption that everything alleged in the petition was either remedied or true. It is said that Franbar's refusal to accept this offer means that the petition is now an abuse of process. In their evidence on these applications they indicate that, if this offer is not accepted, the Defendants intend to apply for a summary order in the petition that a valuation be made and that Franbar be required to transfer its shares for the value so established. It follows that all parties accept that the proper ambit of this dispute is about the terms on which Franbar can exit from its involvement in Medicentres; it is not a case in which there is any question that a remedy is required to protect the interests of a minority shareholder who wishes to remain involved in Medicentres' affairs
24. I now turn to the application for permission to continue the derivative claim under section 261(1) of the Companies Act 2006. In the normal course this application would have come before the court without Medicentres being made a respondent (CPR 19.9A(3)) and, on that application, the court would have been required to consider whether the application and the evidence filed in support of it disclosed a prima facie case. If they had not, the court would have been required to dismiss the application, but if they had, the court would have ordered that Medicentres and any other appropriate party be made a respondent to the application and would have given directions for service on them of the application notice and claim form. In the present case this procedure has been telescoped. Franbar has not so far sought to establish a prima facie case for permission to continue its derivative claim, but Mr Sisley accepts that it would be appropriate for me to deal with the entirety of the application for permission to continue at a single hearing. That is what I propose to do.
25. The proceedings are brought by Franbar as a member of Medicentres in respect of causes of action vested in Medicentres and seeking relief on behalf of Medicentres. The claim arises from acts and omissions alleged by Franbar to have involved negligence, default, breach of duty or breach of trust by Mr Patel and Dr du Plessis as directors of Medicentres. Accordingly, the claim is a derivative claim within the meaning of section 260(1) of the Companies Act 2006 and satisfies the test set out in section 260(3). By section 261(4), the court is empowered, on hearing the application, to give permission to continue the claim on such terms as it thinks fit. It may also refuse permission and dismiss the claim, or adjourn the proceedings on the application with directions.
26. As with any derivative claim, the effect of permission being granted is to override the rights of Medicentre's directors to determine whether or not litigation should be commenced to enforce its rights. The court must now approach such an application by reference to the requirements of section 263 of the Companies Act 2006, the material parts of which are in the following terms:

"263 Whether permission to be given

(1) The following provisions have effect where a member of a company applies for permission … under section 261 …

(2) Permission … 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 … 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;

…

(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."

27. Thus, the court is required to dismiss any application under section 261 of the Companies Act 2006 if it is satisfied of at least one of the circumstances described in section 263(2). For present purposes the only one of those circumstances which is capable of being relevant is the one described in section 263(2)(a), namely that a director acting in accordance with section 172 of the Companies Act 2006 would not seek to continue the claim. The reason that the other circumstances described in section 263(2) are not relevant in the present case is that they require the court to be satisfied that the act or omission from which the cause of action arises has already been authorised or ratified. It is not alleged by Medicentres that there has already been such authorisation or ratification. All that is said is that such acts or omissions are ratifiable, a point to which I will revert later in this judgment.
28. The duty under section 172 is to act in the way that the director considers, in good faith, would be most likely to promote the success of the relevant company for the benefit of its members as a whole, having regard amongst other matters to a number of listed criteria. Mr Sisley has sought to persuade me that I can be satisfied that directors acting in accordance with section 172 would not seek to continue the claim because Franbar has not established a sufficiently cogent case on the merits to lead a reasonable director to conclude that the continuation of the claim would be in the best interests of Medicentres. In particular, he submits that the evidence in Mr Lalani's witness statement is of such low quality that the hypothetical director would not seek to continue the claim on that ground alone. By way of example and amplification of that general submission, he says that there is insufficient material for the hypothetical director to conclude that Mr Lalani was suspended for the reasons alleged, he says that the hypothetical director would want to know more about the ability of Medicentres to service the business said to have been diverted to Casualty Plus and he says that the hypothetical director would wish to see more particularisation of the losses claimed.
29. Franbar contends to the contrary. It says that the allegations made are so serious and have caused such serious losses that the hypothetical director contemplated by section 263(2) would undoubtedly seek to continue the claim. For reasons I shall come to, I am not satisfied that this is correct, but my conclusion does not mean that I must refuse permission. The court is only required to refuse permission if it is satisfied that the hypothetical director would not seek to continue the claim.
30. In my judgment, this is one of those cases in which there is room for more than one view. Directors are often in the position of having to make what is no more than a partially informed decision on whether or not the institution of legal proceedings is appropriate, without having a very clear idea of how the proceedings will turn out. Some directors might wish to spend more time investigating and strengthening the company's case before issuing process, while others would wish to press on with proceedings straight away; in a case such as this one, both approaches would be entirely appropriate. It is my view that there is sufficient material for the hypothetical director to conclude that the conduct of Medicentres' business by those in control of it had given rise to actionable breaches of duty. As it seems likely that Mr Patel and Dr du Plessis were behind much of that conduct, I cannot be satisfied that a hypothetical director acting in accordance with section 172 would conclude that the case advanced was insufficiently cogent to justify continuation of the claim. Even though he may take a healthily sceptical approach to Medicentres' ability to prove the allegations at trial, it does not follow that the claim should not be continued on that ground alone.
31. The next question for the court is to exercise its discretion having regard to the statutory considerations set out in sections 263(3) and 263(4) of the Companies Act 2006. On the facts of the present case, the factors identified in section 263(3)(c) and section 263(4) do not arise. There are, therefore, five factors which I am required to take into account in particular. It seems to me that this obliges me to have particular regard to them although I am not thereby precluded from taking into account other factors which properly bear on the question of whether permission ought to be granted.
32. In relation to the question of whether the member seeking permission to continue the derivative claim is acting in good faith, Mr Matthias submits that the prosperity and sound management of the Company are matters of obvious concern to Franbar. He says that the derivative claim is sought to be continued in order to secure appropriate damages to compensate for the financial harm that is being done to Medicentres. Mr Sisley submits that Franbar is not acting in good faith. He points to the fact that it has failed to accept an offer made by Casualty Plus to buy out its shares at what his clients contend to be a fair value, that Franbar has started an array of proceedings when only the petition was necessary, that none of the other directors has been joined, that grave allegations are made and not backed up and that there is nothing to be gained in damages. He says that this all adds up to an indication of an improper motive and he draws my attention to the case of Barrett v. Duckett [1995] 1 BCLC 243, which is authority for the proposition that a derivative claim should not be allowed to proceed where the claimant has an ulterior motive which makes him or her an inappropriate person to bring the proceedings.
33. I accept of course that, where a derivative claim is commenced with an ulterior motive, that may mean that they are not brought in good faith such as to count against the grant of permission to continue under section 261. In my judgment, however, Mr Sisley's clients have not established that this is what is happening in the present case. I am not satisfied that Franbar has any motive in wishing to continue the derivative claim, apart from a desire to ensure that the value it extracts from its shareholding in Medicentres is full and fair. While there may be cases in which an attempt to extract value through a buy-out of the shares is a less legitimate use of a derivative claim than an attempt to preserve that value for the benefit of the company as a whole, I take the view that in the present case that is more relevant to the availability of an alternative remedy (section 263(3)(f)) than it is to the question of Franbar's good faith.
34. Furthermore, even though the offer made by Casualty Plus has not been accepted, it is not clear that it was in such a form that its refusal could be said to evidence a lack of good faith. Likewise, although I accept that there are deficiencies in the way in which the derivative claim has been pleaded, it is not right to say that there are so many grave allegations that have not been backed up that I can infer that Franbar is not acting in good faith. Equally, I am not satisfied that this is a case in which there is nothing to be gained in damages. Doubtless this is hard-fought litigation, and I shall return later to the significance of the fact that other proceedings have been started, but I cannot say at this stage that it is not being pursued in good faith.
35. The second factor I am required to take into account is the importance that a person acting in accordance with section 172 would attach to continuing the derivative claim. I have already concluded that I cannot be satisfied that such a person would not seek to continue it, but section 263(3)(b) requires me to form a judgment as to how important the hypothetical director would regard the continuation of the proceedings as being. This is not a particularly easy exercise, but if he would not attach very much importance to the continuation of the claim, that is likely to count against the grant of permission. If, in fulfilling his duty to promote the success of the company, he would attach substantial importance to the continuation of the claim, that factor is likely to count in favour of granting permission.
36. In my judgment, the hypothetical director acting in accordance with section 172 would take into account a wide range of considerations when assessing the importance of continuing the claim. These would include such matters as the prospects of success of the claim, the ability of the company to make a recovery on any award of damages, the disruption which would be caused to the development of the company's business by having to concentrate on the proceedings, the costs of the proceedings and any damage to the company's reputation and business if the proceedings were to fail. A director will often be in the position of having to make what is no more than a partially informed decision on continuation without any very clear idea of how the proceedings might turn out.
37. Franbar asserts that great importance would be attached to continuing the claim because there is no other means of securing compensation for the breaches of duty that it pleads. In my judgment, the difficulty with this submission is that the complaints are not yet in a form in which the hypothetical director might be expected to conclude that there were obvious breaches of duty which ought to be pursued and that the recovery to be expected in consequence of those breaches would be substantial. I also think that it is likely that the hypothetical director would be more inclined to regard pursuit of the derivative claim as less important in the light of the fact that several of the complaints are more naturally to be formulated as breaches of the Shareholders' Agreement and acts of unfair prejudice which are already the subject matter of proceedings commenced by the minority shareholder. I accept Mr Sisley's submission that, in the present case, where all parties seek and have offered (as the case may be) a buy-out of the minority by the majority and the principal issue is one of valuation, that means that the hypothetical director would be less likely to attribute importance to the continuation of the derivative claim.
38. As all of the acts and omissions relied on by Franbar have already occurred, the third relevant factor is whether those acts and omissions could be ratified, or in the circumstances would be likely to be ratified by Medicentres. Although Casualty Plus has a significant number of outside shareholders, that fact of itself does not cause me to consider that it would not vote in favour of ratification of any of the breaches of duty to Medicentres pleaded against Mr Patel and Dr du Plessis. Mr Sisley (who is also instructed by Casualty Plus in the section 994 petition and the shareholders' action) told me that this was Casualty Plus' intention. I am satisfied that Casualty Plus will, if necessary, take steps to procure a resolution ratifying the conduct complained of against Mr Patel and Dr du Plessis.
39. Any such ratification must of course be effective; merely purporting to do so cannot amount to ratification sufficient to render permission to continue inappropriate, or at least less appropriate than would otherwise be the case. Provision for the ratification by a company of conduct by a director amounting to negligence, default, breach of duty or breach of trust is made by section 239 of the Companies Act 2006, although it applies only to conduct by a director on or after 1 October 2007 (Schedule 3 paragraph 17 of The Companies Act 2006 (Commencement No 3 Consequential Amendments, Transitional Provisions and Savings) Order 2007 SI 2007/2194). Conduct prior to that date is subject to the law relating to ratification applicable immediately before that date. In the present case, some of the conduct of which complaint is made occurred prior to 1 October 2007 and some occurred thereafter.
40. The ratification must be effected by a resolution of the company's members. The material part of section 239 is in the following terms:

"239 Ratification of acts of directors

(1) This section applies to the ratification by a company of conduct by a director amounting to negligence, default, breach of duty or breach of trust in relation to the company.

(2) The decision of the company to ratify such conduct must be made by resolution of the members of the company.

(3) Where the resolution is proposed as a written resolution neither the director (if a member of the company) nor any member connected with him is an eligible member.

(4) Where the resolution is proposed at a meeting, it is passed only if the necessary majority is obtained disregarding votes in favour of the resolution by the director (if a member of the company) and any member connected with him. This does not prevent the director or any such member from attending, being counted towards the quorum and taking part in the proceedings at any meeting at which the decision is considered.

…

(7) This section does not affect any other enactment or rule of law imposing additional requirements for valid ratification or any rule of law as to acts that are incapable of being ratified by the company."

41. The effect of these provisions is that the vote (in his capacity as a member) of the director whose conduct is in issue and the vote of any member connected with him must be left out of account when determining whether an effective resolution ratifying that conduct has been passed. Whether a member is a connected person for these purposes is set out in sections 252 and 254 of the Companies Act 2006, the material parts of which are as follows:

"252 Persons connected with a director

(1) This section defines what is meant by references in this Part to a person being "connected" with a director of a company …

(2) The following persons (and only those persons) are connected with a director of a company—

…

(b) a body corporate with which the director is connected (as defined in section 254);

…

254 Director "connected with" a body corporate

(1) This section defines what is meant by references in this Part to a director being "connected with" a body corporate.

(2) A director is connected with a body corporate if, but only if, he and the persons connected with him together—

(a) are interested in shares comprised in the equity share capital of that body corporate of a nominal value equal to at least 20% of that share capital, or

(b) are entitled to exercise or control the exercise of more than 20% of the voting power at any general meeting of that body."

42. In the present case, although Mr Patel and Dr du Plessis were appointed as Casualty Plus directors pursuant to the provisions of the Shareholders' Agreement, there is no evidence that Casualty Plus is a person connected to either of them in the sense for which provision is made by section 254. Indeed I did not understand Mr Matthias to contend to the contrary. In his submissions on behalf of Franbar he concentrated his attack on an allegation that the conduct alleged was not ratifiable in any event. He contended that all of the allegations in the derivative claim are incapable of ratification. He contended that the reason for this was that their effect was to oppress the minority because they drove down the value of Franbar's minority interest, in any event when seen against the background of the options contained in the Shareholders' Agreement.
43. I shall revert shortly to Mr Matthias' submissions on whether or not a particular aspect of the conduct of Mr Patel and Dr du Plessis is capable of ratification. Before doing so, I should deal with a submission made by Mr Sisley that the introduction by section 239 of an obligation to disregard connected votes means that what he describes as the "untainted majority" can ratify any act which is not ultra vires the company. He contended that the connected person provisions in section 239 have replaced the principle that breach of duty by a director is incapable of ratification where it constitutes a fraud on the minority in circumstances in which the wrongdoers are in control of the company. This submission can only relate to conduct which occurred after 1 October 2007.
44. In my judgment, that is not the correct approach. Section 239(7) explicitly preserves any rule of law as to acts that are incapable of being ratified by the company. This will include acts which are ultra vires the company in the strict sense, but it seems to me that it will also include acts which, pursuant to any rule of law, are incapable of being ratified for some other reason. If Mr Sisley were right, the effect of section 239 would be to restrict the types of circumstance in which ratification is not possible because of wrongdoer control to those in which the connected person requirements of section 239(3) and (4) are satisfied. He did not suggest any policy reason why that might have been the Parliamentary intention and the passages from Gore-Browne on Companies ((45^th edn) at paragraph 18[5A]) and Palmer's Company Law ((25^th edn) at paragraph 8.3412 to 8.3424) to which my attention has been drawn suggest that it was not. In summary, I agree with the editors of Palmer that the connected person provisions in section 239(3) and (4) impose additional requirements for effective ratification which draw on existing equitable rules but which impose more stringent demands (Palmer's Company Law (25^th edn) at paragraph 8.3412).
45. It follows that I consider that the words of Sir Richard Baggalay, delivering the advice of the Privy Council in North-West Transportation Company v. Beatty (1887) 12 App Cas 589, 594, describing the circumstances in which a company cannot ratify breaches of duty by its directors, remain good law:

"… provided such affirmance or adoption is not brought about by unfair or improper means, and is not illegal or fraudulent or oppressive towards those shareholders who oppose it."

It follows that, where the question of ratification arises in the context of an application to continue a derivative claim, the question which the court must still ask itself is whether the ratification has the effect that the claimant is being improperly prevented from bringing the claim on behalf of the company (c.f. Knox J in Smith v. Croft (No 2) [1988] Ch 144, 185B). That may still be the case where the new connected person provisions are not satisfied, but there is still actual wrongdoer control pursuant to which there has been a diversion of assets to persons associated with the wrongdoer, albeit not connected in the sense for which provision is made by section 239(4).

46. Mr Matthias submitted that the acts complained of are incapable of ratification because their effect was to oppress the minority by driving down the value of Franbar's minority interest, in any event when seen against the background of the options contained in the Shareholders' Agreement. This might be correct in relation to a number of the breaches alleged against Mr Patel and Dr du Plessis, but it cannot sensibly be said that every breach of duty pleaded in the derivative claim is incapable of ratification merely because it caused sufficient loss to Medicentres to have an effect on the value of Franbar's shares. In my judgment, that would be to give a meaning to the concept of minority oppression which is not justified by the authorities.
47. I do, however, accept that some of the complaints made by Franbar may well be incapable of ratification. It seems to me that, if Franbar were to establish its claim that some part of the business of Medicentres, or some business opportunity which properly belonged to it, had been diverted to Casualty Plus at the suit of Mr Patel or Dr du Plessis, that may well amount to a breach of duty incapable of ratification on the votes of Casualty Plus, more particularly if it was done with the intention of driving down Medicentres' earnings and reducing the amount payable to Franbar on exercise of the option. Despite Mr Sisley's comprehensive submissions on the improbability of any such breach being established, I am unable to say at this stage that he is right. In my judgment it is possible that Franbar will establish at trial that, in all the circumstances of the case, some of the breaches alleged will prove to be incapable of ratification. In this, as in many cases, it is only possible to say at this stage that, while it is likely that an attempt will be made to ratify all of the breaches, it is no more than a possibility that ratification of all of the breaches will prove to be effective.
48. The fourth relevant matter of which I am required to take particular account is whether Medicentres has decided not to pursue the claim. Mr Matthias submitted that Medicentres has made no such decision and Mr Sisley did not contend that it had. I am able to infer, however, that if it were to engage in a formal consideration of whether or not to pursue the claim, Medicentres would decide not to do so. In a case such as the present, this seems to me to add little to the issue of ratification which I have already considered.
49. The final relevant statutory factor is whether the act or omission in respect of which the claim is brought gives rise to a cause of action that Franbar could pursue in his own right rather than on behalf of Medicentres. This is a factor which has central significance in the present case, because Mr Matthias accepted that the factual allegations which Franbar wishes to make in the derivative claim are allegations which give rise to causes of action that Franbar can pursue in its own right, and that it is already doing so through the medium of the section 994 petition and the shareholders' action. Indeed, in his oral submissions, he accepted that there is no aspect of the derivative claim for which Franbar cannot be compensated by relief granted in the section 994 petition or the shareholders' action, other than what he described as the identity of the proposed defendant. By this, he was referring to the fact that Casualty Plus is the principal defendant in the shareholders' action, and the person against whom relief is sought in the section 994 petition, while the principal defendants in the derivative claim would be Mr Patel and Dr du Plessis. In fact, even the identity of the defendants is not a clear-cut distinction, because, although the buy-out order in the section 994 petition is sought against Casualty Plus, both Mr Patel and Dr du Plessis are joined as respondents as well.
50. Mr Matthias submitted that this does not answer the consideration in section 263(3)(f), because the acts or omissions in respect of which the derivative claim are brought do not give rise to a claim by Franbar against Mr Patel and Dr du Plessis that Franbar can bring on its own behalf rather than on behalf of Medicentres. The reason for this is that there is no relevant legal relationship between Franbar, Mr Patel and Dr du Plessis other than the relationship which they have through Medicentres. I do not think that that section 263(3)(f) is so limited. What is required is for the act or omission of which complaint is made to give rise to a cause of action available to the member in its own right. Doubtless such a cause of action will sometimes be a claim seeking relief against the same director defendants, but I do not read the subsection as being limited to such claims. In my view, the only limitation is that the cause of action should arise out of the same act or omission; where that act or omission gives rise to both a claim for unfair prejudice against a member and a claim for breach of duty against a director, section 263(3)(f) is engaged. The adequacy of the remedy available to the member in his own right is, however, a matter which will go into the balance when assessing the weight of this consideration on the facts of the case. Even if this is wrong as a matter of strict construction of the subsection, I consider that it is relevant in the present case for the court to see whether the acts or omissions in respect of which the derivative claim is brought give rise to a cause of action that the member can bring against another person. That is a consideration of some significance where that other person is the majority shareholder with close connections to the directors concerned, and where the buy-out offer which has already been made is made on behalf of all of the Defendants.
51. I can well understand why Mr Matthias accepted the extent of the overlap between the section 994 petition and the derivative claim and I think that he was right to do so. In my view most, if not all, of the allegations of breach of duty to Medicentres (and certainly all those which are even arguably incapable of ratification) are likely to be relevant to Franbar's complaint of unfair prejudice. Furthermore, the losses which Medicentres might have sustained as a result of the breaches of duty pleaded in the derivative claim are relevant to the fair value of Franbar's shares and to the question of what factual assumptions should be made on the valuation to ensure that Franbar is put into the position that it would have been in but for the unfair prejudice which it will (on this hypothesis) have established. I can see no reason why Franbar should not be granted such relief on the unfair prejudice petition as may be necessary to ensure that the interest which it seeks to realise is valued on a basis which takes full account of the value of the complaints it wishes to pursue on behalf of Medicentres in the derivative claim.
52. In the end, it was clear that Franbar's real concern was that Casualty Plus might not be in a position to pay a fair value for Franbar's shares in Medicentres (having regard to the value of Medicentres' claims against Mr Patel and Dr du Plessis), while a judgment against Mr Patel and Dr du Plessis is one which is more likely to be satisfied, or in any event gives Franbar an extra string to its bow. There is some foundation for this concern because it seems possible that Casualty Plus will have to raise additional capital to fund its purchase of Franbar's shares and may have difficulty in doing so, although I give this consideration less weight in the light of the fact that the open offer to purchase is one to which each of the Defendants is a party.
53. Franbar also submits that continuation and consolidation will be a cost effective and proportionate way of resolving all claims between the parties. It is said that this is a more efficient way of dealing with the dispute than leaving over the possibility that a derivative claim might have to be pursued in due course, once unfair prejudice has been established. I cannot rule out the possibility that a derivative claim may need to be pursued at a later stage, but I am bound to say that it seems to me most unlikely that this will be necessary. In this particular case, the availability (and indeed use) of both the section 994 petition and the shareholders' action weigh in the balance against the grant of permission to continue the derivative action. Any possible future difficulty in enforcing a buy-out order against Casualty Plus is not, anyway at this stage of the proceedings, a sufficiently powerful basis for taking another view. I also take into account the fact that continuing with a further set of proceedings at this stage might well give rise to unnecessary further complexity in the future, even if those proceedings were to be consolidated with the section 994 petition and even though Franbar has now abandoned (in any event for the present) its application for an indemnity from Medicentres in respect of its costs.
54. In conclusion, I take the view that there is substance in the complaints which have been made by Franbar and that some of those complaints would, if established, give rise to breaches of duty which are incapable of ratification on the votes of Casualty Plus. I also take the view that there is work still to be done in formulating a clear claim for breaches which have caused actionable loss to Medicentres, and that it would be open to the hypothetical director to decline to proceed with the derivative claim at this stage. While he may attach importance to its continuation at some stage in the future, I am not satisfied that he would attach great importance to its continuation now. I also give considerable weight to the fact that Franbar should be able to achieve all that it can properly want through the section 994 petition and the shareholders' action. Having regard to all of these considerations, and carrying out the balancing exercise as best I can on the information currently available, it is my judgment that justice is best achieved by refusing permission to continue.
55. I now turn to the application under rule 7.31(4) of Insolvency Rules 1986 for special leave to inspect the court file in relation to Swindon. This application is made in the section 994 petition and not, as would usually be the case, in the winding up of Swindon. Mr Sisley, acting for Mr Patel does not, however, take any point on the procedure which has been adopted, and so I propose to deal with the application as if it had been so made.
56. Franbar's solicitor has already had sight of the relevant documents as a result of an inspection which he made while seeking evidence on which Mr Lalani and Mr Olbrich (both directors of Medicentres appointed by Franbar) could rely by way of defence or mitigation in their impending prosecution for failure to file Medicentres' 2005 accounts. Franbar contends that the relief sought will ensure that the court has the best evidence at trial of documents relating to a relevant issue, i.e. Mr Patel's obvious unfitness to act. Mr Sisley resists the application, on the basis that, what he calls, the primary facts are not contested. He accepts that Franbar has a legitimate interest in inspection in the sense that the file seems to have something to do with Franbar's allegations; by that I took him to mean that, if the relevant facts had been in issue (which he said they are not ), inspection would have been appropriate.
57. I think that Mr Sisley was right to accept that Franbar might have a legitimate interest to inspect, even though the purpose of the inspection was not directly related to the insolvency of Swindon. Rule 7.31(4) contemplates that inspection may be appropriate at the suit of those outside the classes of person with a strict interest in the insolvency as listed in rules 7.31(1) and 7.31(2). In my judgment the acquisition of evidence relating to the affairs of an insolvent debtor for use in other proceedings is capable of being a legitimate use of rule 7.31(4) so long as that evidence is probative of (or at least relates to) a fact or matter at issue in those proceedings, and so long as the person to whom material on the court file relates is not able to point to any countervailing prejudice. In my view inspection in those circumstances is consistent with the purpose for which the right is give, i.e. to enable persons who have a legitimate interest in a particular insolvency proceeding to discover what has taken place (see Ex parte Creditnet Ltd [1996] 1 WLR 1291, 1299, even disregarding the less strict approach adopted in the obiter dicta of Ward LJ and Potter LJ, on appeal (Ex parte Austintel [1997] 1 WLR 616)).
58. Mr Sisley submitted, however, that this test is not satisfied because the documents concerned only go to Mr Patel's credit, and he pointed out that, in those circumstances, disclosure under CPR 31.9(2) would not be ordered. If I had been satisfied that the documents did indeed only go to Mr Patel's credit, (and if Mr Howard had not already had sight of them), I might have taken a different view. I accept Franbar's submissions, however, that this is not the present state of the evidence. Mr Patel has put in issue the allegations made by Franbar in relation to his personal culpability for defaults in his conduct of the affairs of Swindon amongst others. The extent of his culpability, the extent to which it was known by others and the extent to which he was obviously unfit to be appointed and maintained as a director of Medicentres remain issues in both the section 994 petition and the shareholders' action.
59. Accordingly, I proposed to grant special leave to inspect under rule 7.31 of Insolvency Rules 1986 (with the consequence that Franbar is also entitled to copies on payment of the appropriate fee under rule 12.15 of Insolvency Rules 1986). I do so subject to a condition that, in the absence of further order, the copies and the information contained in them be used only for the purposes of the section 994 petition and the shareholders' action. This order should be treated as made in the winding up of Swindon, with the consequence that any person asserting that they are prejudiced by it, including any liquidator still in office, will be at liberty to apply to rescind or vary it under Rule 7.47 of the Insolvency Rules 1986 (although I should add that by making the position clear, I do not mean to encourage any such application to be made).
60. I now turn to the consequences of this conclusion on the application under s.182(4) of Finance Act 1989, the material parts of which are as follows:

"182 Disclosure of information

…

(2) In this section "tax functions" means functions relating to tax or duty—

(a) of the Commissioners, the Board and their officers,

…

(4) A person who discloses any information which—

(a) he holds or has held in the exercise of functions—

(i) of the Comptroller and Auditor General and any member of the staff of the National Audit Office, or

(ii) of the Parliamentary Commissioner for Administration and his officers,

…

(b) is, or is derived from, information which was held by any person in the exercise of tax functions …, and

(c) is information about any matter relevant, for the purposes of tax functions, (i) to tax or duty in the case of any identifiable person, …

is guilty of an offence.

(5) Subsections (1) and (4) above do not apply to any disclosure of information—

(a) with lawful authority,

(b) with the consent of any person in whose case the information is about a matter relevant to tax or duty, … or

(c) which has been lawfully made available to the public before the disclosure is made.

(6) For the purposes of this section a disclosure of any information is made with lawful authority if, and only if, it is made—

(a) by a Crown servant in accordance with his official duty,

(b) by any other person for the purposes of the function in the exercise of which he holds the information and without contravening any restriction duly imposed by the person responsible,

(c) to, or in accordance with an authorisation duly given by, the person responsible,

(d) in pursuance of any enactment or of any order of a court, or

(e) in connection with the institution of or otherwise for the purposes of any proceedings relating to any matter within the general responsibility of the Commissioners or, as the case requires, the Board,

and in this subsection "the person responsible" means the Commissioners, the Board, the Comptroller, the Parliamentary Commissioner, … as the case requires.

61. I am very doubtful that any disclosure of information by Franbar, where that information has been derived from the court file, falls within section 182(4) at all. I agree with Mr Matthias' submission that for the disclosure to give rise to an offence, the requirements of each of subsections 182(4)(a) to (c) must be satisfied, a view which is consistent with the passages cited to me from Halsbury's Laws of England (4^th edition Reissue) Vol 23(2) at paragraph 1834 and Coppel on Information Rights (2007) at paragraph 26-018. This would not happen in the present case. Although the information might be derived from information which was held by a person in the exercise of tax functions (section 182(4)(b)) and might be about a matter relevant to tax or duty in the case of an identifiable person (section 182(4)(c)), the provisions of section 182(4)(a) will not be satisfied because the information will not be held by Franbar in the exercise of any of the functions referred to in that subsection.
62. It does not seem to me, however, that I need to reach a concluded view on that issue, nor is it appropriate for me to do so. The reason for this is that the grant of relief under rule 7.31 on the terms I have indicated means that the court has granted leave for the inspection, copying and limited use of identified documentation and the information contained in it. So long as any further disclosure by Franbar is in accordance with the limitations of that permission, it is effected with lawful authority because it is in pursuance of an order of the court within the meaning of section 182(6)(d).