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Dispute Resolution analysis: Permission to bring a multiple derivative claim at common law was refused on the basis that the claimants, suing in their capacity as trustees of the Erutuf Trust, did not have sufficient interest to pursue the claim on a derivative basis on behalf of the companies and, therefore, lacked standing.
This decision confirms that whilst the standing requirements for bringing a derivative claim are somewhat elastic, that elasticity has limits. Derivative claims may be brought by either the legal or the beneficial owners of shares in a company. Those holding lesser equitable interests will not have sufficient interest to obtain permission to bring a derivative claim at common law. Where the claimant is itself a trustee, it faces a conceptual difficulty if it seeks to argue standing by means of a beneficial interest in the company’s shares. In those circumstances, permission should be sought by the trust beneficiaries and not the trustees.
This dispute concerned the Szerelmey group of companies, which operate a stone restoration and repair business. The ultimate principal stakeholders in the group are Earl Krause and Gordon Verhoef, albeit through a complex range of corporate and trust entities. Mr Krause alleged that he was excluded from the business by Mr Verhoef in around 2015 and that Mr Verhoef had, thereafter, dishonestly procured the group companies to enter into transactions, undertake financial obligations or transfer assets for no legitimate business purpose in a way that was economically detrimental to the companies and/or was economically beneficial to one or more recipient companies. The recipient companies were operated in each case by Mr Verhoef himself. Because neither claimant was a direct shareholder in the companies, they lacked standing to bring a derivative claim under sections 260 et seq of the Companies Act 2006. They sought permission to bring a common law derivative claim through an intermediary company, Tellisford Limited. Permission to proceed was granted at the ex parte first stage hearing by Charles Hollander QC, sitting as a Deputy High Court Judge. Permission was resisted by the Defendants at the return date, however.
The parties agreed on the legal principles applicable to the test for permission at common law. Those were (i) that the claimants had sufficient interest (i.e. standing) to pursue claims on a derivative basis on behalf of the relevant companies, (ii) a prima facie case (i.e. good prospect of success in respect of each claim, (iii) that the claim falls within an established exception to the rule in Foss v Harbottle and (iv) that it is appropriate in all the circumstances to permit pursuit of such derivative claims. The judge concluded that he would have given permission but for his conclusion that the claimants lacked standing. The claimants conceded that they were not the registered holder of any shares in Tellisford. They argued, however, that they were the rightful owners of 95 A shares and 5 B shares in that company, and had brought proceedings for the rectification of Tellisford’s register to reflect that. Because the claimants were themselves trustees, the judge could not accept the contention that they held the shares beneficially. He concluded that they likely held some lesser equitable interest in the shares in the form of an equitable right to seek rectification of Tellisford’s share register. That was not sufficient, however, to confer standing to bring a derivative claim. Mr Krause, as the beneficiary of the Erutuf Trust might have had standing, however, he was not named as a party to the proceedings. Permission was, therefore, refused.
This article was first published by Lexis PSL on 14 May 2020.
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