Plaintiffs dismissed for derivative action failure; no indemnity granted due to lack of procedural filter and no personal claim pursued.

Neutral Citation Number: [2007] IEHC 452

THE HIGH COURT

COMMERCIAL

2005 No. 3238 P and 105 COM

BETWEEN

JAMES GLYNN AND KEVIN McCABE

PLAINTIFFS

AND

JOHNATHAN OWEN, ALLAN OWEN, STEPHEN LEYLAND,

FATSTRIPPA HOLDNGS COMPANY

AND FATSTRIPPA CORPORATION LIMITED

DEFENDANTS

Judgment on costs of Ms. Justice Finlay Geoghegan delivered the 21st day of December, 2007.

1. On 5th October, 2007 I gave judgment on the entitlement of the plaintiffs to pursue by way of derivative action the claims pleaded

against the first, second or third named defendants for alleged wrongs and breach of duty to the fourth and fifth named defendants. I

concluded that the plaintiffs were not entitled to so proceed. In the course of the hearing counsel for the plaintiffs had indicated that

the plaintiffs were not now proceeding with the personal claims pleaded against any of the defendants. Accordingly, I listed the

matter for 23rd October, 2007 to hear submissions on the orders now to be made and applications for costs.

2. The plaintiffs accept that having regard to the conclusion on the preliminary issue and the fact that they are not now pursuing the

personal claims, it follows that there must be an order dismissing the plaintiffs’ claims against all the defendants.

3. The solicitor for the third named defendant had prepared for the hearing on 23rd October, a list of all appearances in these

proceedings which indicates those matters in respect of which orders for costs have already been made or were reserved. From this,

it appears that in addition to the costs of the proceedings, there remains to be determined the costs associated with the following:

(1) motion for directions

(2) plaintiffs’ motion for interlocutory injunctive relief

(3) plaintiffs’ motion to enforce a settlement

(4) plaintiffs’ contempt motion

4. The first and second named defendants now appear in person. They were jointly legally represented until 20th November, 2006.

5. The applications of the first, second and third named defendants are for their costs against the plaintiffs to include the costs of

the proceedings and the costs of each of the above motions. Counsel for the plaintiffs made submissions in reliance upon certain of

the facts in the proceedings that the Court should not make full orders for costs against his clients, particularly in favour of the first

and second named defendants.

6. Having considered the submissions made by the first and second named defendants, counsel for the third named defendant and

counsel for the plaintiffs, I have concluded that there are no grounds which permit me to depart from the normal rule in O. 99 of the

Rules of the Superior Courts that costs follow the event. The plaintiffs’ claims against all defendants have been dismissed and hence

the following orders should be made:

(1) An order in favour of the first and second named defendants jointly for their costs of the proceedings against the

plaintiffs jointly and severally up to 20th November, 2006.

(2) An order in favour of each of the first and second named defendants against the plaintiffs jointly and severally that

they be paid expenses incurred by them of defending the proceedings as lay litigants on dates subsequent to 20th

November, 2006.

(3) An order in favour of the third named defendant against the plaintiffs jointly and severally for the costs of the

proceedings.

(4) An order that the costs of all hearings on applications for directions be costs in the cause. This is in accordance with

the normal practice in the Commercial List.

(5) An order that the costs of each of the plaintiffs’ motions for interlocutory injunctive relief, enforcement of the

settlement and contempt be costs in the cause on the basis that such motions were brought but not heard and adjourned

to the hearing of the substantive action and not heard.

7. All of the above orders for costs and expenses to be taxed in default of agreement.

8. Counsel appeared on the instructions of the solicitors on record for the fourth and fifth named defendants and applied for their

costs limited to the costs of entering an appearance and the costs of appearing in response to the plaintiffs’ motion to enforce the

settlement. I was informed that the solicitors had been appointed by decision of the first to third named defendants. The fourth and

fifth named defendants had not been separately represented in the hearings in July, 2007 before me. When the action came on for

hearing before me the plaintiffs were not seeking any reliefs against the fourth and fifth named defendants.

9. I am not satisfied that a case has been made out on behalf of the fourth and fifth named defendants for an order for costs in their

favour against the plaintiffs, even limited to the matters referred to above. I will make no order for the costs of the fourth and fifth

named defendant against any other party. They must bear their own costs of the proceedings.

10. Counsel for the plaintiffs also sought an order that the fourth and fifth named defendants (“the Companies”) indemnify the

plaintiffs against the orders for costs made against them in these proceedings. He does so in reliance upon the approach taken by

Lord Denning the Court of Appeal in Wallersteiner v. Moir (No.2) [1975] 2 WL.R. 389.

11. In that case the defendant was a minority shareholder in two companies. The plaintiff was a director of the companies. The

plaintiff claimed damages for libel. The defendant counterclaimed alleging, inter alia, that the plaintiff had been guilty of fraud,

misfeasance and breach of trust and seeking orders that the plaintiff should pay sums totalling £500,000 to the two companies

concerned. The plaintiff did not deliver a reply or a defence to the counterclaim and his claim was struck out and judgment given

against him in default of defence directing certain sums to be paid to the Companies. The plaintiff was given leave to defend on the

remaining issues including the claims for declarations of fraud, misfeasance and breach of trust. The relevant part of the judgment of

Lord Denning related to an application by the defendant for an indemnity from the companies in respect of future costs of the

derivative proceedings in the counterclaim. Lord Denning had considered the principles involved in the bringing of a derivative action

including that the defendant sues in his own name but in reality on behalf of the Companies. He then continued at pp. 396-397:

“Indemnity.

Now that the principle is recognised, it has important consequences which have hitherto not been perceived. The first is

that the minority shareholder, being an agent acting on behalf of the company, is entitled to be indemnified by the

company against all costs and expenses reasonably incurred by him in the course of the agency. This indemnity does not

arise out of a contract express or implied, but it arises on the plainest principles of equity. It is analogous to the

indemnity to which a trustee is entitled from his cestui que trust who is sui juris: see Hardoon v. Belilios [1901] A.C. 118

and In re Richardson, Ex parte Governors of St. Thomas’s Hospital [1911] 2 K.B. 705. Seeing that, if the action succeeds,

the whole benefit will go to the company, it is only just that the minority shareholder should be indemnified against the

costs he incurs on its behalf. If the action succeeds, the wrongdoing director will be ordered to pay the costs: but if they

are not recovered from him, they should be paid by the company. And all the additional costs (over and above party and

party costs) should be taxed on a common fund basis and paid by the company: see Simpson and Miller v. British

Industries Trust Ltd. (1923) 39 T.L.R. 286. The solicitor will have a charge on the money recovered through his

instrumentality: see section 73 of the Solicitors Act, 1974.

But what if the action fails? Assuming that the minority shareholder had reasonable grounds for bringing the action – that

it was a reasonable and prudent course to take in the interests of the company – he should not himself be liable to pay

the costs of the other side, but the company itself should be liable, because he was acting for it and not for himself. In

addition he should himself be indemnified by the company in respect of his own costs even if the action fails. It is a well

known maxim of the law that he who would take the benefit of a venture if it succeeds ought also to bear the burden if it

fails. Qui sentit commodum sentire debet et onus. This indemnity should extend to his own costs taxed on a common

fund basis.

In order to be entitled to this indemnity, the minority shareholder soon after issuing his writ should apply for the sanction

of the court in somewhat the same way as a trustee does: see In re Beddoe, Downes v. Cottam [1893] 1 Ch. 547, 557-

558. In a derivative action, I would suggest this procedure: the minority shareholder should apply ex parte to the master

for directions, supported by an opinion of counsel as to whether there is a reasonable case or not. The master may then,

if he thinks fit, straightaway approve the continuance of the proceedings until close of pleadings, or until after discovery

or until trial (rather as a legal aid committee does). The master need not, however, decide it ex parte. He can, if he

thinks fit, require notice to be given to one or two of the other minority shareholders – as representatives of the rest – so

as to see if there is any reasonable objection. (In this very case another minority shareholder took this very point in

letters to us). But this preliminary application should be simple and inexpensive. It should not be allowed to escalate into a

minor trial. The master should simply ask himself: is there a reasonable case for the minority shareholder to bring at the

expense (eventually) of the company? If there is, let it go ahead.”

12. I would respectfully agree with the principles as stated by Lord Denning, including the possibility of a minority shareholder in

certain circumstances obtaining an indemnity against a company for the costs of bringing a derivative action which fails. However, as

pointed out by Lord Denning, such an order would only be made where the minority shareholder had reasonable grounds for bringing

the action “that it was a reasonable and prudent course to take in the interests of the company” and probably only where a filter

procedure such as envisaged in the final paragraph referred to above had taken place at an earlier stage in the proceedings.

13. It is interesting to note that subsequent to this decision and that of the Court of Appeal in Prudential Assurance Company v.

Newman Industries Limited (No. 2) [1982] Ch. 204, the English Civil Practice Rules now provide for a procedure whereby a claimant in

a derivative action must bring an early application for permission to continue the claim. Such Rules also expressly provide that the

court may order the company to indemnify the claimant against any liability in respect of costs incurred in the claim. Our Rules of the

Superior Courts do not contain any similar procedural provisions. The history of these proceedings set out in some detail in my

judgment of 5th October, 2007, indicate the merit of considering the introduction of specific procedural rules relating to derivative

claims.

14. On the facts of these proceedings it does not appear to me that the plaintiffs are entitled to an indemnity. The plaintiffs did not

seek any order entitling them to proceed by way of derivative claim. In the absence of rules in this jurisdiction they might not be

criticised for so failing. However, on the contrary, when the first and second defendants applied by motion for the hearing of a

preliminary issue as to their entitlement to do so they opposed that application and in such opposition relied upon the fact that they

were pursuing a personal claim against the defendants as well as the derivative claim. Ultimately they did not pursue the personal

claim.

15. At the hearing before me, notwithstanding that they had determined not to pursue the personal claim, they again opposed the

determination of their entitlement to pursue the derivative claim as a preliminary issue. Notwithstanding that opposition I ruled on 2nd

July, 2007, that their entitlement to pursue the derivative claim should be determined as a preliminary issue. In my judgment of 5th

October, 2007, I held that they were not entitled to pursue derivative claims for alleged wrongs done to the Companies. In such

factual circumstances it appears to me that the plaintiffs are not entitled to an order for an indemnity from the Companies in respect

of the orders for costs made against them.