On 21 May 2025, a reserved judgment was handed down by HHJ Rawlings, sitting as a High Court Judge, in the contested application for permission to continue a derivative claim brought in proprietary estoppel by a minority shareholder (Lloyd v Lloyd). The case raised important questions on the Court’s balancing exercise when the derivative claim could also have been brought in an unfair prejudice petition, and on the relevance or otherwise of the underlying merits of the proposed claim. Ali Tabari acted for the successful applicant, who also obtained a substantial costs order in his favour.
The claimant (“C”) was a 50:50 shareholder in a family farming business with his brother (“D”). The land which the company farmed was primarily owned by their father; as a result of the split of their father’s estate upon his death, D obtained the legal and beneficial interest in the land upon which several large barns had been built over several years – C’s case was that those barns belonged beneficially to the company, as a result of company funds being used to build them, and a series of conversations and understandings over the years in which the barns/land had been unequivocally referred to as being the company’s. D refused to recognise the company’s rights to the barns or the land on which they are situated, which led to C seeking permission to bring a derivative claim on behalf of the company in proprietary estoppel. D opposed the application on a number of grounds, as discussed below.
The judge allowed permission to continue the claim until the end of the disclosure phase, exercising his flexible jurisdiction under s.262(5)(a) Companies Act 2006 (“CA”). He found that there were no mandatory grounds to dismiss the application under s.263(2) CA:
- A reasonable director could consider it in the company’s best interests to continue the claim, and D’s failure to recognise the company’s rights was not an act or omission which was either authorised or subsequently ratified.
He also found there to be no discretionary grounds on which he would dismiss the application under s.263(3) CA:
- Despite previous correspondence between the parties referring to C bringing an unfair prejudice petition, this dispute would be best dealt with in a derivative claim, and that correspondence did not suggest an absence of good faith in bringing this derivative claim instead. The Judge’s finding on this point was fortified by C not claiming any indemnity from the company for his costs, so he was not getting a ‘free hit’ at litigation;
- Whilst the judge had reservations about the strength of the proprietary estoppel claim, the pleadings and disclosure phase would likely cast a different light on the parties’ positions, and the Court would not engage in a ‘mini trial’ at this stage. In any event, the merits of the claim were only one factor amongst several, and it was at least equally important that the company potentially had a valuable claim on its hands which, at present, could not be pursued because of the deadlock at shareholder level.
In his judgment, the Judge addressed the parties’ submissions on the large body of caselaw which gives clarity on how a Court can assess a lack of good faith, how it ought to weigh the different discretionary factors in the balance, and what approach the Court should take in determining whether a director can properly consider it in the company’s best interests to continue litigating. Directions were given to a CCMC, and the litigation continues.
Ali was instructed by Sean Adams and Georgia Morris of Gowling WLG.
