Glynn & McCabe v Owen and Others

• Jurisdiction: Ireland
• Judge: Ms. Justice Finlay Geoghegan
• Judgment Date: 21 December 2007
• Neutral Citation: [2007] IEHC 328,[2007] IEHC 452
• Court: High Court
• Docket Number: No. 3238 P and 105 COM/2005
• Date: 21 December 2007

Glynn & McCabe v Owen & Ors

BETWEEN/

JAMES GLYNN AND KEVIN McCABE

PLAINTIFFS

AND

JOHNATHAN OWEN, ALLAN OWEN, STEPHEN LEYLAND, FATSTRIPPA HOLDNGS COMPANY AND FATSTRIPPA CORPORATION LIMITED

DEFENDANTS

[2007] IEHC 328

No. 3238 P and 105 COM/2005

THE HIGH COURT

COMMERCIAL

COMPANY LAW

Derivative action

Rule in Foss v Harbottle - Whether fraud on minority - Personal defendants majority shareholders and directors of company - Whether plaintiffs could institute proceedings on behalf of company - Whether wrongdoers in control of company - Definition of control of company - Whether exceptions to rule to be expanded - Crindle Investments v Wymes [1998] 4 IR 567 followed; Foss v Harbottle (1843) 2 Hare 461, O'Neill v Ryan [1993] ILRM 557, Burland v Earle [1902] AC 83, Edwards v Halliwell [1950] 2 All ER 1064, Gray v Lewis (1873) LR 8 Ch App 1035, Daniels v Daniels [1978] Ch 406 and Prudential Assurance v Newman Industries [1982] Ch 204 considered - Claim dismissed (2006/3238P - Finlay Geoghegan J - 5/10/2007) [2007] IEHC 328Glynn v Owen

The Commercial Court ruled that it would determine as a preliminary issue an issue as to whether the plaintiffs were entitled to pursue by way of derivative action claims pleaded against the first, second and third defendants for alleged wrongs to the fourth and fifth defendants, by way of exception to the rule in Foss v Harbottle.

Held Finlay Geoghegan J. that the Plaintiffs had failed to establish that they should be permitted to pursue by way of derivative action the claims pleaded for alleged wrongs and breach of duty to the fourth and fifth defendants.

Reporter: RW

FOSS v HARBOTTLE 1843 2 HARE 461

O'NEILL v RYAN 1993 ILRM 557

PRUDENTIAL ASSURANCE CO LTD v NEWMAN INDUSTRIES LTD (NO 2) 1982 CH 204

EDWARDS v HALLIWELL 1950 2 AER 1064

BURLAND v EARLE 1902 AC 83

CRINDLE INVESTMENTS & ORS v WYMES & ORS 1998 4 IR 567

DANIELS v DANIELS 1978 CH 406

JOFFE MINORITY SHAREHOLDERS: LAW, PRACTICE & PROCEDURE 2ED 2007 PARA 1.43

PAVLIDES v JENSEN 1956 CH 565

RUSSELL v WAKEFIELD WATERWORKS COMPANY 1875 LR 20 EQ 474

KEANE COMPANY LAW 4ED 2006 PARA 26.20

Judgment of

Ms. Justice Finlay Geoghegan

1 delivered the 5th day of October, 2007.

2 The plaintiffs and the first, second and third named defendants are each a twenty per cent shareholder in and director of the fourth and fifth named defendants.

3 These proceedings commenced in September, 2005. They were admitted to the commercial list by order of 14^th November, 2005. On 31^st July, 2006, the Court was asked to receive and file a document entitled "proceedings settled on the following terms" but not to make it a rule of court. The intended settlement was not achieved and the matter was ultimately listed for hearing on 6^th March, 2007, before Clarke J. The opening commenced but, at the request of the parties, time was given and I understand at the end of a few days the proceedings appeared capable of settlement and were again adjourned back into the commercial list. However, settlement was not achieved and the matter was re-listed for hearing before me on 27^th June, 2007. The proceedings in the form they commenced before me indicated that the plaintiffs were maintaining both personal claims for alleged wrongs done by the first to third named defendants and derivative claims on behalf of the fourth and fifth named defendants by way of exception to the rule in Foss v. Harbottle (1843) 2 Hare 461. Counsel for the third named defendant at an early stage made an application that I determine, as preliminary matters, whether the plaintiffs are entitled to maintain these proceedings as derivative claims on behalf of the fourth and fifth defendants having regard to the rule in Foss v. Harbottle and as to the plaintiffs' right to maintain a personal claim alongside the intended derivative claim.

4 Counsel for the plaintiffs then informed the Court that the plaintiffs were not now proceeding with the personal claims. The only claims being pursued were the derivative claims on behalf of the fourth and fifth named defendants. This was a significant change by the plaintiffs. The existence of the personal claims alongside the derivative claim had been relied upon heavily by the former counsel for the plaintiffs in resisting an application brought in January, 2006 on behalf of the first and second named defendants (who were then legally represented) for an orderinter alia that the plaintiffs' right to pursue a derivative claim would be heard as a preliminary issue.

5 Having heard submissions on the application for the determination as a preliminary matter the plaintiffs' entitlement to maintain the proceedings against the first to third named defendants by way of derivative claim on behalf of the fourth and fifth named defendants, I ruled on 2^nd July that I should determine as a preliminary matter the following issue:

6 Are the plaintiffs entitled to pursue, on behalf of the fourth and fifth named defendants, the claims pleaded in the statement of claim for wrongs allegedly committed to the fourth and fifth named defendants;

(i) against the third defendant

(ii) against the first defendant

7 (iii) against the second defendant.

8 In the same ruling I refused an application from the third named defendant that the plaintiffs be required to establish aprima facie case that the fourth and fifth defendants (collectively referred to as "the Companies") are entitled to the reliefs claimed. I ruled that the issue should be determined in relation to the claims as pleaded. Having regard to the late withdrawal of the personal claims and a certain lack of clarity as to the factual basis of the wrongs alleged against the Companies, I also gave ancillary directions for clarification by the plaintiffs of the basis of the claims pleaded.

9 These were complied with and I heard oral evidence limited to the issues relevant to the reliance by the plaintiff on the exceptions to the rule inFoss v. Harbottle and the parties adduced certain documentary evidence relating to the factual matrix in which the claims are sought to be pursued and to the background to the claims pleaded.

10 At the conclusion of the evidence counsel for the third defendant, the first and second named defendants (who were appearing in person) and counsel for the plaintiffs furnished written submissions and made helpful oral submissions on the preliminary issue.

Foss v. Harbottle

11 The parties are in agreement as to the nature of the rule. InO'Neill v. Ryan [1993] I.L.R.M. 557 Blayney J. at 567 stated:

"The rule is concerned with answering the question of who is the proper plaintiff to bring an action in respect of damage suffered by a company. It states that the proper plaintiff is the company itself. In the case of Prudential Assurance Co. Ltd. v Newman Industries Ltd (No. 2) [1982] Ch 204 the Court of Appeal said in its judgment at p. 219 referring to the case of Gray v Lewis (1873) LR 8 Ch App 1035:"

12 'This case highlights what the rule inFoss v Harbottle is primarily concerned with, namely, is a plaintiff shareholder entitled to prosecute an action on behalf of the company for a wrong done to it, or ought the action to be struck out on the footing that it is for the company and not for a shareholder to sue? That is what Foss v Harbottle itself was about …'"

13 A derivative action such as sought to be pursued by the plaintiffs herein is permitted only as an exception to the rule inFoss v. Harbottle which, as the Court of Appeal in Prudential Assurance at p. 210 points out, forms part of the "elementary principle" that "A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C. C is the proper plaintiff because C is the party injured, and, therefore, the person in whom the cause of action is vested".

14 The classic restatement of the rule inFoss v. Harbottle and the exceptions to it is that of Jenkins L.J. in Edwards v. Halliwell [1950] 2 A.E.R. 1064 at 1066:

"The rule inFoss v. Harbottle (1), as I understand it, comes to no more than this. First, the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, then cadit quœstio. No wrong had been done to the company or association and there is nothing in respect of which anyone can sue. If, on the other hand, a simple majority of members of the company or association is against what has been done, then there is no valid reason why the company or association itself should not sue. In my judgment, it is implicit in the rule that the matter relied on as constituting the cause of action should be a cause of action properly belonging to the general body of corporators or members of the company or association as opposed to a cause of action which some individual member can assert in his own right.

The cases falling within the general ambit of the rule are subject to certain exceptions. It has been noted in the course of argument that in cases where the act complained of is whollyultra vires the company or association the rule has no application because there is no question of the transaction being confirmed by any majority. It has been further pointed out that where what has been done amounts to what is generally called in these cases a fraud on the minority and the wrongdoers are themselves in...