[2016] CSIH 62



Lord Justice Clerk

Lord Malcolm

Lord McGhie



delivered ex tempore by LADY DORRIAN, the LORD JUSTICE CLERK

in the cause


Pursuer and Appellant;



Defenders and Respondents:

Act: McIlvride, QC;  Harper Macleod LLP

Alt: G MacColl; MacRoberts LLP


14 July 2016


[1]        This appeal relates to an application raised by two shareholders on behalf of the pursuer company as a derivative action in terms of section 265(1) of the Companies Act 2006 (“the 2006 Act”).  The action was directed against (i) a director of the pursuer company and (ii) a rival company said to be operated by the first defender in competition with the pursuer.  The causes of action were breach of fiduciary duty by the first defender whilst a director of the pursuer and knowing participation by the second defender in the first defender’s breach.  After debate the sheriff concluded that leave should not be given, and because a somewhat unusual procedure had been adopted, also dismissed the action.


The statutory procedure

[2]        The procedure which should be followed in terms of section 266 and OCR 46.1 is clear.  A written application must be lodged, addressed to the sheriff clerk, specifying the cause of action, and summarising the facts upon which the proceedings are to be based.  At that stage the application is not to be served upon any party.  It is then placed before a sheriff for consideration without a hearing.  If the court considers that a prima facie case is not disclosed, it must refuse the application.  If the application is not refused on such a basis, the alternative is not that the application is granted.  Rather the application is effectively deemed to merit further consideration.  At this point the applicant must serve the application on “the company” (s 266(4)(a)) by which is clearly meant the company of which the applicant is a member and in protection of the interests of which the application has been made.  At the same time, the sheriff may order the production of certain evidence, and may adjourn proceedings for that purpose.  Moreover, from now on the company “is entitled to take part in further proceedings upon the application” (s 266(4)(c)).  On hearing the application the court may grant, refuse, or adjourn the application, with orders for further procedure.

[3]        If there were any doubt that this is the procedure to be followed in terms of section 266, it is removed on consideration of section 268 which makes provision for the circumstances in which the court must refuse an application or in respect of the matters which the court must take into account in reaching its decision.  These include matters of fact which would be likely to be in the exclusive knowledge of the company - see eg s 268(2)(d) and (e).  OCR 46.1 also clearly envisages that after service of intimation in terms of section 266(4) (ie where the court has determined that there appears to be a prima facie case) the company may be heard on the application on giving due notice to that effect (OCR 46.1(5)) and the next stage will be a hearing at which both the applicant and the company may be heard (OCR 46.1(6)).  The hearing is to be notified to the applicant and the company (OCR 46.1(7)).

[4]        It is noteworthy that at no stage in this process is there any entitlement for the potential defenders in the proposed derivative action to be heard.  That is what one would expect, since there is no action at this stage, and the only live issue is one between the company and the members who are making the application.  The only provision for notice to the defender is once an application has been granted (OCR 46.1(8)).  However, once an action has been raised, it would be open to the defender to challenge the competency of the action on the basis that leave had not been granted, which is effectively what happened here in due course.

[5]        That the appropriate procedure is as outlined above is also made clear in the case of Wishart v Castlecroft Securities 2010 SC 16, para 9 in the opinion of the court delivered by Lord Reed.  The sheriff was therefore wrong (para 20) to consider that the correct course is that for applications which are not refused the court should grant leave and then fix a hearing.  The purpose of the hearing is to consider whether the application should be granted.  In practice, of course, as noted in Wishart, the parties may agree to telescope this procedure by dealing with the application in its entirety at a single hearing.


The procedure adopted in the present case

[6]        The pursuer applied for leave in terms of OCR 46.1(1).  The court pronounced an interlocutor, on 25 September 2014 in which it ordained the applicant to serve a copy of the application and supporting documents on ICU (EUROPE) Limited, ordaining that company if it wished to be heard within 21 days to lodge written submissions setting out its position.  Accordingly, the proper procedure was followed up to this point.  The intimation to the company was intimation in terms of OCR 46.1 (4) and (5) and section 266(4).

[7]        We think it would probably be a convenient approach, in most cases, when an interlocutor such as this is pronounced, that the court should also fix a hearing to take place at an appropriate time for final determination of the leave application.  However, not only did that not happen but at the same time that this interlocutor was pronounced, a warrant to cite was issued by the sheriff clerk in terms of OCR 3.3.  Accordingly, the writ and warrant was served also on the defenders in terms of that warrant.  Thereafter the defenders seem to have entered appearance and on 31 October 2014 on joint motion of the parties the action was sisted for settlement negotiations.  The sist was recalled on the pursuer’s motion on 7 January 2015.  On neither occasion did the defenders challenge the competency of proceedings on the basis that leave had not been granted.  On the latter date, the sheriff, overlooking the fact that leave had not been granted, ordained the defenders to lodge defences.  The defences were lodged and contained no challenge to competency.  Such an issue was raised by adjustment on 10 April 2015.  There followed several case conferences, and eventually, a debate took place on 4 August 2015.

[8]        At debate counsel for the defenders challenged the competency of the action on the basis that leave was required but had not been given.  He was entitled to do so, although his submissions did stray into the question of whether leave should be given, which is understandable in the unusual circumstances of the case.  Counsel for the defenders also attacked the pleadings as fundamentally irrelevant and sought dismissal.  It appears that the solicitor for the pursuer did not address the sheriff at all on the question of leave, and on the issue of relevancy did not defend the terms of the writ.  Rather he sought leave to amend.  The sheriff continued the hearing 21 days for a Minute of Amendment to be received. At the resumed hearing, she heard further argument relating to the relevancy of the proposed amended pleadings, and a brief argument from the pursuer’s agent regarding leave.

[9]        The question of leave not having been decided, the sheriff considered that the matter was at large for her consideration.  She said (para 23):

“in order to establish a relevant claim the pursuer needs to aver a case which falls outwith the rule in Foss v Harbottle …”. 


She was referred to the case of Wishart and also to the judgment of Roth J in the case of Bamford v Harvey [2013] BCC 311, which was relied upon by the defenders for a submission that circumstances required to be exceptional before such an action could be brought.  She concluded (para 25) that

“... I read nothing in the judgments of Lord Reed and Justice Roth to suggest that the nature of the act or omission is no longer subject to the high standard of scrutiny required to determine whether it falls outwith the Foss v Harbottle test.”


She went on to say (para 26):

“It is therefore of vital importance to the relevancy of this action and to the application for leave that the pursuer’s averments meet that test”.


[10]      In our view the sheriff fell into error in so saying.  Wishart makes it clear that the purpose of the legislation was to sweep away all the old uncertainties surrounding circumstances where derivative actions could be brought, including those arising from Foss v Harbottle.  We cannot read the sheriff’s decision as doing other than seeking to apply the rule in Foss v Harbottle, or something akin to it.  Furthermore, as counsel for the appellant submitted, it will no doubt be the case that the existence of circumstances which make the raising of such an action appropriate will be rare, and the legislation clearly places restrictions on the circumstances in which such actions may be raised, but there is no basis for adopting any test of exceptionality as the sheriff seems to have thought.  Reference was made to the first of the Law Commission’s guiding principles which did mention “exceptional circumstances” but we note that this was not carried through into the legislation.  At para 38 in Wishart the court stated:

“….. as we have explained, one of the objects of the 2006 Act was to introduce more flexible criteria than the former ‘fraud on the minority’ exception to the rule in Foss v Harbottle.”


[11]      The sheriff took the view that the leave issue and the relevancy and specification points should be addressed together (para 21).  We can understand why she reached that conclusion in the rather unusual circumstances of the case, but it must be understood that the tests which apply to each of these decisions are not identical.  On the relevancy question the Jamieson test is appropriate.  On the leave issue, at the second stage as this was, the question is the rather broader one of whether in light of all the information before the court, leave should be given.  In his submissions Mr McIlvride recognised that in the circumstances of this case nothing turned on this: if the pleadings upon which the application was to proceed were hopelessly irrelevant he acknowledged that his argument would fail.



[12]      The sheriff having clearly misdirected herself on the approach to be taken to the question of leave, we consider that the matter is at large for our consideration in light of the circumstances as they now stand before this court.  Accordingly, we do not need to dwell on the submissions focusing on paragraph 34 of the sheriff’s note.  We start by examining the pleadings, by which we mean the revised pleadings proposed by the pursuer, since it is clear that these are the pleadings upon which leave is being sought.  Given the procedural history of this case it would be entirely artificial to look at matters only on the basis of the original writ, or to be distracted by technical issues relating to amendment or the like.  As the court said in Wishart (para 39):

“As we have explained, the merits of the proposed derivative proceedings bear on the issue raised by sec 268(2)(b), in particular.  It is not, however, appropriate that the merits should be investigated in detail.  It is clear from the Law Commission report that one of the objectives underlying their recommendations was to avoid a detailed investigation into the merits of the case taking place at the leave stage, since such a ‘mini-trial’ would be time-consuming and expensive……. In our opinion, the approach which should be aimed at is that described by Lord Denning MR, anticipating the leave procedure which was subsequently introduced, in Wallersteiner v Moir (No 2) (p 392): ‘[T]his preliminary application should be simple and inexpensive.  It should not be allowed to escalate into a minor trial.’


[13]      We consider that the revised pleadings not only reveal a prima facie case but contain averments relevant and sufficient for the purposes of a claim based on the breach of fiduciary duties on the part of the first defender, and knowing participation in that on the part of the second defender.  The averments which are made on a “believed and averred” basis are adequately supported by preceding factual averments.

[14]      On the broader question whether leave should be given we require to look at the statutory considerations, such as whether a responsible hypothetical director would think it appropriate in the interest of the company to raise the action, but also at the whole circumstances of the case, and of course the question of alternative remedies.  As was made clear in Wishart the availability of an alternative remedy is only one consideration.  It is quite true that it might be open to the applicants to seek to pursue a remedy utilising sections 994 and 996 of the 2006 Act, but it is not unreasonable for it to be suggested that this provides them with a less attractive option.  These provisions provide only a discretionary remedy, and in all the circumstances we think it likely that the court would make an order under section 996(2)(c) thereby in effect authorising a derivative action on the part of the company.  Weighing all these factors in the balance with the procedural confusion which has led to the issue of leave being considered at such a late stage, we are clearly of the view that leave should be given.

[15]      In Wishart (para 39) Lord Reed noted that:

“There was some discussion before us of the question whether the court would have jurisdiction to entertain derivative proceedings which had been raised without leave and to grant leave retrospectively (as has been held to be possible in an Australian decision: South Johnstone Mill Ltd v Dennis and Scales).  It is however unnecessary for us to consider that question for the purposes of the present case.”


[16]      This issue was not directly raised or discussed in the case before us, and no reference was made to any authority on the point.  It will also be apparent that the circumstances of this case were particularly unusual, in that the application had indeed been made, and the proper process of notification had followed. No submissions were made on behalf of the company.  What should have followed was simply a hearing at which the purser alone was heard on the matter.  The complications arising from the fact that the procedure went completely awry make this an extreme case, in which all parties were agreed that it would be open to this court to consider the issue of leave.

[17]      We will therefore allow the appeal, recall the interlocutor of the sheriff dated 30 September 2015, and grant leave for the action to proceed on the basis of the revised pleadings.  On one view of the matter, the pleadings should not require amendment to reflect their current position, but since the procedure so far has allowed both defences and adjustment to be lodged, we will for the avoidance of doubt allow the pleadings to be amended so that they read in their revised form, recognising that the respondent may wish to make the appropriate application to the sheriff to respond to the pleadings as they now stand.  We shall therefore remit to the sheriff to proceed as accords.