RENOVA RESOURCES PRIVATE EQUITY LIMITED v. GILBERTSON and FOUR OTHERS 14-April-2009
[2009 CILR 268]
RENOVA RESOURCES PRIVATE EQUITY LIMITED v. GILBERTSON and FOUR OTHERS
GRAND COURT (Foster, Ag. J.): April 14th, 2009
Civil Procedure—pleading—fraud—in pleading equitable fraud, not necessary to use words “dishonest” or “dishonesty” if acts self-evidently dishonest—allegation deemed implicit in pleading
Companies—derivative action—leave to continue action—on application for leave, to consider whether plaintiff has prima facie case on merits of claim on behalf of company and that alleged wrongdoing by majority of shareholders able to prevent claim—claim not to be unfounded or speculative, but to be bona fide, in interests of company and sufficiently strong
Companies—derivative action—leave to continue action—on application for leave, not to consider views of hypothetical board of directors unless plaintiff seeks indemnity costs from company—financial consequences of indemnity costs may require court to consider whether hypothetical board would approve expenditure
Companies—derivative action—multiple derivative action—to be permitted in appropriate circumstances when loss to subsidiary causes indirect loss to parent company and its shareholders
Companies—derivative action—reflective loss—to prevent double recovery of losses, parent company or shareholder not allowed to recover reflective loss mirroring that sustained directly by subsidiary—not to prevent shareholder or parent bringing derivative action for relief on behalf of subsidiary
Companies—directors—breach of fiduciary duty—exclusion of liability—irreducible core of obligations owed by fiduciary (duty to act honestly and in good faith) and thus claims for equitable fraud not to be excluded by exemption clause
    The plaintiff company applied for leave to continue a derivative action, pursuant to O.15, r.12A(2) of the Grand Court Rules, in which the first and fifth defendants had given notice of their intention to defend.
    The plaintiff company was owned by a holding company which was a member of a group of companies. The plaintiff owned 50% of the shares

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in the second defendant company with the other 50% being owned by a company of the first defendant, who was also one of its directors. An investment structure was established, pursuant to an agreement between the plaintiff’s holding company and the first defendant, whereby the second defendant company was set up as the general partner of the third defendant company, which in turn was set up as the general partner of the fourth defendant, the master fund. The structure was established to enable ultimately the second defendant company and its shareholders to benefit from the acquisition and management of investments held by and through the master fund. The agreement provided that the first defendant would be in charge of developing and implementing the structure’s investment funds.
    The dispute between the parties arose over the acquisition of rights in a well-known commodity. The acquisition was initially proposed by the first defendant as an investment to be held within the investment structure but, without the consent or knowledge of the plaintiff or the second defendant company, he made alternative arrangements and purchased the rights using funds raised by the fifth defendant, a company owned by the first defendant, and two other investors. This meant that the investment structure was deprived of the opportunity to enjoy the benefits from managing the rights through the master fund as had been allegedly previously agreed.
    The plaintiff brought a derivative action on behalf of the second defendant company alleging that (a) the first defendant, as director of that company, acted in breach of his fiduciary duties by diverting away from the company the valuable investment opportunity to acquire the rights; and (b) the fifth defendant company, also owned by the first defendant, had participated knowingly in this breach and consequently received the shares in the acquiring company as constructive trustee for the master fund and the rest of the investment structure. Since the defendants had given notice of their intention to defend, the plaintiff sought leave from the court to continue the action.
    The plaintiff submitted that it should be granted leave to continue the action because (a) it had established a prima facie case since the first defendant had agreed that the rights would be acquired by a company in the group for the benefit of the investment structure and had instead diverted the opportunity away from the structure for his own personal benefit and in breach of his duties as director; and (b) the first defendant had an irreducible core of obligations which could not be excluded by the articles of association.
    The first defendant submitted in reply that leave should not be granted because (a) the plaintiff would not only need to show a prima facie case but also that a hypothetical independent board of the company would have proceeded with the case; (b) he did not owe any duties in respect of the acquisition of the rights because this investment was always intended to be outside the investment structure; (c) further, he would have the benefit of indemnities in the articles of association which would exonerate him from

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liability in respect of any such agreement and that, anyway, the agreement between the parties was null and void so that no duties were owed; (d) the plaintiff had not explicitly pleaded dishonesty; and (e) there was no basis for giving leave for an action on behalf of the company since it had suffered no direct loss and any loss it did suffer would be reflective, for which the plaintiff would be unable to claim.
    Held, granting the plaintiff leave to continue its action:
    (1) The appropriate test to be adopted in considering an application for leave to continue a derivative action was that the court would have to be satisfied that the plaintiff had a prima facie case both in relation to the merits of the claim on behalf of the company, and that the alleged wrongdoing had been perpetrated by the majority of the shareholders, who were in a position to prevent the company from pursuing the claim against them. The requirement to obtain leave was to protect the defendant against and prevent the wasted expense and time of vexatious litigation. In deciding whether the plaintiff had shown a prima facie claim, the court would have to take a view of its merits, based on its first impressions of all the evidence presented, including that submitted by the defendant. The court would have to be satisfied that it was not unfounded or speculative, that it had been seriously brought on bona fide grounds in the interests of the company and that it was sufficiently strong to justify granting leave to continue the action rather than dismissing it at a preliminary stage. In the instant case, the court was satisfied that the plaintiff had a prima facie case against the defendants. The defendant director, with control of 50% of the shares in the company, was in a position to prevent the company from bringing a claim against him and, prima facie, his diversion of a valuable commercial opportunity away from the company for his own personal benefit was a breach of his fiduciary duties to the company. Leave would therefore be granted to continue the action pursuant to O.15, r.12A(2) of the Grand Court Rules (paras. 11–12; paras. 31–32; para. 35; para. 50; para. 73).
    (2) When the court was considering whether the plaintiff should have leave to continue a derivative action, there was no need for it to concern itself with the views of a hypothetical board of directors. This test would only be necessary when a plaintiff sought indemnity costs from a company, since in such a case there would be financial consequences for the company and the court would need to consider hypothetically whether a reasonable board of directors would have approved the incurring of such costs. The plaintiff had made it clear that it did not intend to seek indemnity costs and, given there was no evidence that a hypothetical board would not have proceeded with the claim, the test was irrelevant (para. 24; paras. 30–32).
    (3) The breach of the irreducible core of obligations owed by a fiduciary—the duty to act honestly and in good faith—and thus claims for equitable fraud could not be excluded by an exemption clause. Further, it

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was not necessary for the plaintiff to have used the words “dishonest” or “dishonesty” in its pleadings since if the acts were self-evidently dishonest, the allegation would be deemed implicit in what was pleaded. Therefore, when considering this and the explicit exclusion of the dishonesty of a director in the indemnities in the company’s articles of association, the first defendant had not shown a compelling argument that he would be exonerated through an indemnity or exclusion clause so that it was sufficient to justify the refusal of leave to the plaintiff to continue this action. Moreover, the fact that the agreement between the parties had subsequently been declared null and void was also irrelevant since the core fiduciary duties he owed in his capacity as director of the second defendant company were imposed as a matter of law and not derived from the written agreement (paras. 56–57; paras. 60–61; para. 72).
    (4) In appropriate circumstances, a multiple derivative action—as in this case in which the plaintiff brought an action for losses incurred by a wholly-owned subsidiary of the company in which he was a shareholder—would be permitted, since any loss to the subsidiary caused indirect loss to its parent company and shareholders. A sub-subsidiary of the company, the master fund, had in this case sustained significant losses as a result of the actions of the first defendant, without the knowledge or consent of any of the companies in the investment structure, and in these circumstances, a multiple derivative action on behalf of the company would not be objectionable (para. 66).
    (5) To prevent double recovery of losses, a shareholder or parent company would not be allowed to recover reflective loss, the indirect loss mirroring that suffered directly by the subsidiary. In the present case, the plaintiff as shareholder of the second defendant company would be permitted to bring a multiple derivative action on behalf of the master fund, but not a derivative action on behalf of the company, to recover compensation for loss reflective of that sustained by the master fund. It was clear that the plaintiff was seeking relief on behalf of the whole investment structure and so it was evident that this was not a derivative action to recover compensation for reflective loss and thus leave to continue the action would be granted (paras. 68–69).
Cases cited:
  (1)    Airey v. Cordell, [2007] Bus. L.R. 391; [2007] BCC 785; [2006] EWHC 2728 (Ch), not followed.
  (2)    Armitage v. Nurse, [1998] Ch. 241; [1997] 3 W.L.R. 1046; [1997] 2 All E.R. 705; [1997] Pens. L.R. 51; (1997), 74 P. & C.R. D13, followed.
  (3)    Beddoe, In re, Downes v. Cottam, [1893] 1 Ch. 547; (1892), 62 L.J. Ch. 233; 37 Sol. Jo. 99, referred to.
  (5)    Edwards v. Halliwell, [1950] 2 All E.R. 1064; [1950] W.N. 537; (1950), 94 Sol. Jo. 803, referred to.

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  (6)    Foss v. Harbottle (1843), 2 Hare 461; 67 E.R. 189, referred to.
  (7)    Johnson v. Gore Wood & Co., [2002] 2 A.C. 1; [2001] 2 W.L.R. 72; [2001] 1 All E.R. 481; [2001] 1 BCLC 313, considered.
  (8)    Mumbray v. Lapper, [2005] BCC 990; [2005] EWHC 1152 (Ch), not followed.
  (9)    Nurcombe v. Nurcombe, [1985] 1 W.L.R. 370; [1985] 1 All E.R. 65; [1984] BCLC 557, considered.
(10)    Prudential Assur. Co. Ltd. v. Newman Indus. Ltd. (No. 2), [1981] Ch. 257; [1980] 3 W.L.R. 543; [1980] 2 All E.R. 841; on appeal, [1982] Ch. 204; [1982] 2 W.L.R. 31; [1982] 1 All E.R. 354, followed.
(12)    Smith v. Croft, [1986] 1 W.L.R. 580; [1986] 2 All E.R. 551; [1986] BCLC 207, referred to.
(13)    Towers v. African Tug Co., [1904] 1 Ch. 558; (1904), 73 L.J. Ch. 395, referred to.
(14)    Viscount of Royal Ct. v. Shelton, 1985–86 JLR 327; [1986] 1 W.L.R. 985; (1986), 2 BCC 99,134, referred to.
(15)    Waddington Ltd. v. Chan Chun Hoo, [2008] HKEC 1498, followed.
(16)    Wallersteiner v. Moir (No. 2), [1975] Q.B. 373; [1975] 2 W.L.R. 389; [1975] 1 All E.R. 849, considered.
Legislation construed:
Grand Court Rules 1995, O.15, r.12A: The relevant terms of this rule are set out at para. 2.
R. Millett, Q.C. and J.S. Eldridge for the plaintiff;
R. Miles, Q.C. and A. Choo Choy, Q.C. for the first and fifth defendants.
1 FOSTER, Ag. J.: This is an application by the plaintiff, pursuant to O.15, r.12A(2) of the Grand Court Rules, for leave to continue a derivative action in which the first and fifth defendants have given notice of intention to defend.
2 The relevant parts of O.15, r.12A of the Grand Court Rules provide as follows:
“(1)    This rule applies to every action begun by writ by one or more shareholders of a company where the cause of action is vested in the company and relief is accordingly sought on its behalf (referred to in this rule as a ‘derivative action’).
(2)    Where a defendant in a derivative action has given notice of intention to defend, the plaintiff must apply to the Court for leave to continue the action.
(3)    The application must be supported by an affidavit verifying the facts on which the claim and the entitlement to sue on behalf of the company are based.”

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The rule then makes various provisions concerning service and other procedural matters and continues:
“(8)    On the hearing of the application under paragraph (2), the Court may—
(a)    grant leave to continue the action, for such period and upon such terms as the Court may think fit;
(b)    subject to paragraph (11) [which makes provision for when only part of the relief claimed is sought on behalf of the company], dismiss the action;
(c)    adjourn the application and give such direction as to joinder of parties, the filing of further evidence, discovery, cross examination of deponents and otherwise as it may consider expedient.”
After making certain further provisions the rule continues:
“(13) The plaintiff may include in an application under paragraph (2) an application for an indemnity out of the assets of the company in respect of costs incurred or to be incurred in the action and the Court may grant such indemnity upon such terms as may in the circumstances be appropriate.”
3 The plaintiff’s application for leave to continue the action is strongly opposed by the first and fifth defendants and several issues arise for determination. First, there is the question of the test which the court should adopt in considering whether to grant leave to the plaintiff in a derivative action to continue the action. Secondly, there is the issue of whether on the material before the court the plaintiff has met that test. Thirdly, there is the question whether a derivative action may be brought by a shareholder in the holding company of the company (or in this case the exempted limited partnership) which is its ultimate subsidiary and in which, at least arguably, the cause of action against the defendant(s) is vested. Such an action is usually described as a multiple derivative action. There is also a question as to whether such a shareholder in a holding company may claim for loss or damage which, having arguably been sustained by a subsidiary company, is reflective loss. These are the principal issues arising in this matter but there are other peripheral issues as well.
The derivative action
4 The concept of a derivative action is well-established in this jurisdiction, as in other Commonwealth jurisdictions. In the leading judgment of the Court of Appeal in Schultz v. Reynolds (11), Zacca, P. referred to the well-known English authorities which he clearly accepted as reflecting

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also the law of the Cayman Islands. He started with the general principle established in Foss v. Harbottle (6) which is (1992–93 CILR at 63)—
“that where a wrong has been done to a company, prima facie the only proper plaintiff is the company itself and that an action by a shareholder claiming relief for the company is not available. The plaintiff may only bring a derivate action if it falls within the exceptions to the rule in Foss v. Harbottle.
That the concept of a derivative action is an exception to that principle is explained in the judgments in Edwards v. Halliwell (5), Wallersteiner v. Moir (No. 2) (16) and Prudential Assur. Co. Ltd. v. Newman Indus. Ltd. (No. 2) (10). The President referred to the judgment of Jenkins, L.J. in Edwards v. Halliwell, where he said ([1950] 2 All E.R. at 1067):
“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 control of the company, the rule is relaxed in favour of the aggrieved minority who are allowed to bring what is known as a minority shareholders’ action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue. Those exceptions are not directly in point in this case, but they show, especially the last one, that the rule is not an inflexible rule and that it will be relaxed where necessary in the interests of justice.”
5 In Wallersteiner v. Moir (No. 2) (16), Lord Denning, M.R. clearly explained why a derivative action should be available when a company is controlled by the alleged wrongdoers ([1975] Q.B. at 390):
“But suppose [the company] is defrauded by insiders who control its affairs—by directors who hold a majority of the shares—who then can sue for damages? Those directors are themselves the wrongdoers. If a board meeting is held, they will not authorise the proceedings to be taken by the company against themselves. If a general meeting is called, they will vote down any suggestion that the company should sue them themselves. Yet the company is the one person who is damnified. It is the one person who should sue. In one way or another some means must be found for the company to sue. Otherwise the law would fail in its purpose. Injustice would be done without redress.”
6 He also said in a passage also cited by the President (ibid., at 391):
“Stripped of mere procedure, the principle is that, where the wrongdoers themselves control the company, an action can be brought on

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behalf of the company by the minority shareholders on the footing that they are its representatives to obtain redress on its behalf.
I am glad to find this principle well stated by Professor Gower in Modern Company Law, 3rd ed. (1969), at 587, in words which I would gratefully adopt:
‘Where such an action is allowed, the member is not really suing on his own behalf nor on behalf of the members generally, but on behalf of the company itself. Although . . .  he will have to frame his action as a representative one on behalf of himself and all the members other than the wrongdoers, this gives a misleading impression of what really occurs. The plaintiff shareholder is not acting as a representative of the other shareholders, but as a representative of the company . . . In the United States . . .  this type of action has been given the distinctive name of a “derivative action,” recognising that its true nature is that the individual member sues on behalf of the company to enforce rights derived from it.’”
The test which the court should apply
7 The requirement that the plaintiff in a derivative action in which the defendant has given notice of intention to defend must apply to the court for leave to continue the action was introduced in the Grand Court Rules of 1995. It had previously been introduced in England in the Rules of the Supreme Court, then in the Civil Procedure Rules and is apparently now in the Companies Act 2006. The reason for its introduction was to provide a safeguard to prevent vexatious or inappropriate claims, which were not in the interests of the company concerned to pursue. Prior to the introduction of the requirement in the Rules for the plaintiff to obtain leave to continue, a defendant’s only recourse was to apply to strike out the action or to have the plaintiff’s entitlement to bring the derivative action determined as a preliminary issue.
8 There is, however, little reported guidance as to the test which the court should apply in determining whether the plaintiff should have leave to continue the action. There is no reported authority in this jurisdiction. (Schultz v. Reynolds (11) was before the rule was introduced and in any event the issue in that case was whether the plaintiff as beneficial owner rather than legal owner of shares in the company could bring a derivative action.)
9 However, in England, prior to the introduction of the equivalent of O.15, r.12A of the Grand Court Rules, at common law the plaintiff was required to satisfy the court that he had a prima facie case in order to justify proceeding with such a claim. In fact, there are two elements to this: first, the plaintiff was required to show prima facie that there was a

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viable cause of action vested in the company and, secondly, that the alleged wrongdoers had control of the company (or could block any resolution of the company or the board) and thereby prevent the company bringing an action against themselves.
10 In Prudential Assur. Co. Ltd. v. Newman Indus. Ltd. (No. 2) (10), the English Court of Appeal said ([1982] Ch. at 221):
“In our view, whatever may be the properly defined boundaries of the exception to the rule [in Foss v. Harbottle], the plaintiff ought at least to be required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed, and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v. Harbottle. On the latter issue it may well be right for the judge trying the preliminary issue to grant a sufficient adjournment to enable a meeting of shareholders to be convened by the board, so that he can reach a conclusion in the light of the conduct of, and proceedings at, that meeting.”
11 With regard to the latter comment, in the present case there would, in my opinion, be no point in adjourning to enable a meeting of shareholders of the company. This is because the first defendant controls 50% of the shares in the company and is one of only two directors of the company, so the outcome of such a meeting would be a foregone conclusion.
12 Since the procedural rule requiring the plaintiff in a derivative action to obtain leave has been introduced, it has apparently continued to be the position of the English courts that a plaintiff in seeking leave to continue should satisfy the court that he has a prima facie case in relation both to the merits of the claim by the company and, secondly, that the alleged wrongdoing has been perpetrated by the majority who are in control or are otherwise in a position to prevent the company from pursuing the claim against them. In my opinion, in the present case, if the company has a prima facie viable claim against the first defendant as one of its directors (which I have yet to consider), the case falls within the exception to the rule in Foss v. Harbottle (6) because, as I have already explained, the first defendant is clearly in a position to prevent the company from bringing such a claim against him. The question, therefore, in the present case is whether the company has a prima facie claim against the first and fifth defendants.
The independent board test
13 However, it was argued on behalf of the first and fifth defendants that there are two limbs to the test which the plaintiff in a derivative action must satisfy in seeking leave to continue. It was submitted that not only must the plaintiff satisfy the court that the company has a prima facie case against the defendant on its merits but he must also satisfy the court that, even if the company does have such a case, a hypothetical independent

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board of the company acting reasonably would have brought and proceeded with the case.
14 This submission was largely based on the comments of the judge (Warren, J.) in Airey v. Cordell (1). That case concerned an application by a minority shareholder in a company to carry on a claim as a derivative action in relation to alleged breaches of duty by the directors in diverting a corporate opportunity of the company in which he was a shareholder to a new company owned by them in which he was neither a shareholder nor a director. The defendant directors accepted that there was a prima facie case against them and that the case was in principle within the exception to the rule in Foss v. Harbottle (6) to enable a derivative claim. However, they argued that the test to be applied by the court in deciding whether to allow a derivative claim to continue was based on what a reasonable, independent board of directors would do and they contended that an independent board would not have sued the directors but would have waited for developments and, if the corporate opportunity concerned was successful, then sued for an account of profits.
15 In his judgment, the judge set out the background to the case in some detail, in particular the various proposals by the defendant directors pursuant to which, they argued, the claimant would be allowed to share in the profits derived from exploiting the corporate opportunity. They contended this was the real complaint of the complainant rather than that the company itself was being deprived of such benefit. As the judge commented, as a matter of legal analysis, the way in which the complainant shareholder conceived that he could share in the benefit of the corporate opportunity was to make sure that it was retained by the company in which he was a shareholder and its subsidiary, an analysis which, as will be seen, is not wholly dissimilar from that in the present case.
16 Having reviewed Wallersteiner v. Moir (No. 2) (16) and Prudential Assur. Co. Ltd. v. Newman Indus. Ltd. (No. 2) (10), the judge said ([2007] BCC 785, at para. 55):
“As I said, it is a minimum of a prima facie case in relation to (i) and (ii) so the case may clearly be within the exception to Foss v. Harbottle, for instance because, if there is a breach of duty, it is clearly one perpetrated by the majority who are in control, but there may nonetheless be a very weak case on the part of the company itself if it brought proceedings, so that if it did not even amount to a prima facie case the derivative proceedings would not be allowed to continue.”
17 As I have already said, it is my view that the present case does fall within the exception to Foss v. Harbottle (6) and I did not understand counsel for the parties to argue otherwise. However, the judge in Airey v. Cordell (1) then went on to refer to the comments of the judge in Smith v.

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Croft (12), which was an application in a derivative action for an indemnity by the company of the plaintiff shareholder’s costs of the action down to discovery. The judge in that case, Walton, J., said ([1986] 1 W.L.R. at 590):
“Of course there is no room for a mini trial, of course the court has no ability at this stage to decide the truth of the plaintiffs’ allegations. What, however, it can and should do is to look at all the facts, first those which are common ground, then those alleged by the plaintiff but denied by the company, and then those alleged by the company but denied by the plaintiff, and make up its mind. The standard suggested by Buckley, L.J. in Wallersteiner v. Moir (No. 2) was that of an independent board of directors exercising the standard of care which prudent businessmen would exercise in their own affairs. Would such an independent board consider that it ought to bring the action?”
18 As the judge in Airey v. Cordell (1) emphasized, that was said in relation to an application for an indemnity against costs and not in relation to an application to strike out the derivative action. Nonetheless, after considering Mumbray v. Lapper (8), he concluded as follows ([2007] BCC 785, at paras. 75–76):
“My conclusion in agreement with Judge Reid is that the appropriate test for bringing proceedings is indeed the view of the hypothetical independent board of directors, but I am also of the view that it is not for the court to assert its own view of what it would do if it were the board, but it merely has to be satisfied that a reasonable board of directors could take the decision that the minority shareholder applying for permission to proceed would like it to take, and I do not think it would be right to shut out the minority shareholder on the basis of the court’s, perhaps inadequate, assessment of what it would do rather than a test which is easier to apply, which is whether any reasonable board could take that decision.
If no reasonable board would bring the proceedings, even though there is a prima facie case, then the court should not sanction the minority shareholder’s action. This may mean that the introduction of a requirement for permission first in the RSC and now in CPR, has narrowed the range of cases which can now be brought compared with the minimum standard that the Prudential case might appear to have laid down and the sort of case which it at least seems possible but Buckley, L.J. seems to think might have been permitted to continue, not with the sanction of the court but simply to continue at the decision of the minority shareholder at his own risk as to costs.”
19 The judge’s decision on the facts of that case was that it could not be said that no reasonable board would not pursue the directors by litigation.

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However, he went on to stay the action to allow the parties to attempt to agree a detailed proposal whereby the claimant shareholder would be given an interest under the directors’ new arrangements which would adequately reflect his interest in the company and its subsidiary.
20 With due respect, it does not seem to me that the conclusion of the judge in Airey v. Cordell (1) that the test for approving the continuance of a derivative claim is the view of the hypothetical independent board of directors is appropriate and in my opinion it does not represent the law in this country. The basis for the judge’s view is that he considers that the test to be applied in considering whether a shareholder may continue a derivative action and the test to be applied in considering whether a shareholder should have an indemnity from the company for his costs of such an action should be the same. His analysis relies on comments by Buckley, L.J. in Wallersteiner v. Moir (No. 2) (16), which was itself a case concerning inter alia an application for an indemnity of the shareholder’s costs by the company, when he said, by analogy with the position in a Beddoe (3) application by a trustee (which is, of course, an application for indemnity for costs out of the trust fund) ([1975] Q.B. at 403):
“In all the instances mentioned the right of the party seeking indemnity to be indemnified must depend on whether he has acted reasonably in bringing or defending the action, as the case may be: see, for example, as regards a trustee, In re Beddoe. It is true that this right of a trustee, as well as that of an agent, has been treated as founded in contract. It would, I think, be difficult to imply a contract of indemnity between a company and one of its members. Nevertheless, where a shareholder has in good faith and on reasonable grounds sued as plaintiff in a minority shareholder’s action, the benefit of which, if successful, will accrue to the company and only indirectly to the plaintiff as a member of the company, and which it would have been reasonable for an independent board of directors to bring in the company’s name, it would, I think, clearly be a proper exercise of judicial discretion to order the company to pay the plaintiff’s costs. This would extend to the plaintiff’s costs down to judgment, if it would have been reasonable for an independent board exercising the standard of care which a prudent business man would exercise in his own affairs to continue the action to judgment. If, however, an independent board exercising that standard of care would have discontinued the action at an earlier stage, it is probable that the plaintiff should only be awarded his costs against the company down to that stage.”
21 Buckley, L.J. then went on to propose a procedure (this was, of course, before the rule in England, from which O.15, r.12A(2) of the Grand Court Rules is derived, came into effect) analogous to the procedure adopted by a trustee pursuant to In re Beddoe (3) by way of an ex

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parte application at which the merits of the case may be discussed with the court and the court, if it considers it appropriate, may give directions as to whether the company or other minority shareholder or the defendants or anyone else should be made respondents to the application.
22 However, in the context of derivative proceedings all of this clearly related to an application by the plaintiff shareholder for an indemnity for his costs of the action from the company. It did not concern directly the appropriate test which the court should adopt in considering whether the plaintiff should have leave to commence or continue the action. In fact what Buckley, L.J. said about that in the passage to which I have referred was (ibid.) “where a shareholder has in good faith and on reasonable grounds sued as plaintiff in a minority shareholder’s action” which suggests he considered that the appropriate circumstances were when the minority shareholder sued in good faith and on reasonable grounds.
23 It seems to me that “reasonable grounds” is very similar to a prima facie case. The test for bringing or continuing derivative action was first specifically considered and explained in Prudential Assur. Co. Ltd. v. Newman Indus. Ltd. (No. 2) (10) some six years later when, in the passage from the English Court of Appeal judgment to which I have already referred, the court gave their view that the plaintiff in a derivative action ought at least be required before proceeding to establish a prima facie case that the company is entitled to the relief claimed and that the action falls within the exception to the rule in Foss v. Harbottle (6).
24 In the present case, there was and is no application by the plaintiff for an indemnity for its costs of the action by the company and I was informed that it is not intended to make one. Accordingly, the issue in Wallersteiner v. Moir (No. 2) (16), on which the judge in Airey v. Cordell (1) relied, does not arise. The conclusion of the judge in Airey v. Cordell is apparently derived from the case of Mumbray v. Lapper (8) in which the judge in that case, having considered the relevance of the shareholder claimant’s conduct and of the availability of an alternative remedy, stated ([2005] BCC 990, at para. 5): “The central question in any case such as this is ‘Would an independent board sanction pursuit of the proceedings?’”
25 I was referred by counsel for the plaintiff to the judgments of the Court of Final Appeal of Hong Kong in Waddington Ltd. v. Chan Chun Hoo (15). In his judgment, Ribeiro, P.J. said ([2008] HKEC 1498, at para. 13):
“The derivative action is a procedural device invented by the courts to afford protection to the minority. Procedurally, there is no requirement at common law for a person seeking to sue derivatively first to obtain leave of the court. But it does not follow from this that there is no threshold requirement to be met by the plaintiff. Substantively, such an action is only permitted where it can prima facie be shown

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that there exists a viable cause of action or equitable claim vested in the company which, if made good, would establish a fraud on the minority; as well as control of the company by the alleged wrongdoers such as to enable them to stifle any proposed action against themselves.”
26 Having explained the procedural practice at common law he went on to say (ibid., at para. 14): “It is in such a context that the court has to consider whether the self-appointed derivative plaintiff should be permitted to proceed with the action by way of exception to the proper plaintiff rule.”
27 He then referred to Prudential Assur. Co. Ltd. v. Newman Indus. Ltd. (No. 2) (10) and the conclusion of that court which he summarized as (ibid., at para. 16) “the answer was for a prima facie case test to be adopted, coupled with the possibility of seeking the views of the company in general meeting where appropriate.” Having referred also to Smith v. Croft (12), he said (ibid., at para. 17) “this has continued to be the approach of the English courts,” and referred in a footnote to, amongst other cases, Airey v. Cordell (1).
28 After explaining that the prima facie test has also been adopted in Hong Kong, Ribeiro, P.J. continued (ibid., at para. 20):
“The common law rule is therefore that a plaintiff whose standing to bring a derivative action is challenged must establish a prima facie case that the company is entitled to the relief claimed and that the action falls within an applicable exception to the rule in Foss v. Harbottle (usually the fraud on the minority exception). Where, as often occurs, the plaintiff seeks an order to be indemnified as to costs by the company which may benefit from the derivative action, the court’s approach is to consider whether and to what extent an honest, independent and prudent board might decide to authorise prosecution of the action, given the available evidence.”
And he referred as support for his comments again to Airey v. Cordell as well as Wallersteiner v. Moir (No. 2) (16) and Smith v. Croft.
29 In the same case, Lord Millett, N.P.J. said (ibid., at paras. 53–54):
“The solution which the Court of Appeal found in Prudential was to require the plaintiff, whether at the trial of a preliminary issue or on an application to strike out the proceedings, to establish a prima facie case both that the company was entitled to the relief claimed and that the plaintiff was entitled to bring the claim on its behalf by way of a derivative action. In an appropriate case the court could adjourn the proceedings in order to ascertain whether the independent shareholders considered that it was in the interests of the company to pursue the claim.

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This approach was followed in Smith v. Croft (No. 2) and was subsequently adopted by the Rules Committee when the Rules of the Supreme Court were amended by adding O.15, r.12A (later CPR r.19.9 and now s.260 of the Companies Act 2006). This imposed a requirement for the plaintiff in a derivative action to obtain the leave of the court to continue the action, thereby providing the filter which had been discarded more than a century earlier. The plaintiff has consistently been required on the application for leave to establish a prima facie case both that the company would be likely to succeed if it brought the action itself and that the case falls within an exception to the rule in Foss v. Harbottle.
30 I respectfully agree with the statements of Ribeiro, P.J. and Lord Millett, N.P.J. It does not in my view follow, as suggested in Airey v. Cordell (1), that the test to be adopted in considering whether a shareholder should have leave to proceed with a derivative action and the test to be adopted in considering whether a shareholder plaintiff in a derivative action should have an indemnity for his costs from the company should necessarily be the same. The circumstances and the considerations seem to me to be different. In an application for leave to continue a derivative action there are not inevitably financial consequences for the company.
31 The only issue is, or should be, whether there is a prima facie case, first, that the claim falls within the exception to the rule in Foss v. Harbottle (6) and, secondly, on the merits against the defendant. The purpose of this “filter,” as Lord Millett, N.P.J. described it, is to satisfy the court that there are reasonable grounds for the plaintiff’s claim and that it is not vexatious or frivolous or has no real prospect of success. In an application for an indemnity for costs by the company there are obviously potential financial consequences for the company. One can see that in such circumstances consideration of whether a hypothetical independent board of directors would be likely to approve the incurring of such costs would be appropriate in determining that issue. But where the only issue is whether the plaintiff should have leave to continue the action there is no risk to the company and, in my view, no need to be concerned with the views of a hypothetical board.
32 In my opinion, the appropriate test for this court to adopt in considering an application for leave to continue a derivative action is the prima facie case test, that is, where a defendant in a derivative action has given notice of intention to defend, the plaintiff must satisfy the court that the company has a prima facie case against the defendant (and that the action falls within an applicable exception to the rule in Foss v. Harbottle (6)). Even if I am wrong about this, there was anyway no evidence before me to indicate that a hypothetical honest, independent and prudent board of directors could or would not have proceeded with the claim of the company, if such a board was satisfied that there was a prima facie case. I

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propose to consider the plaintiff’s application on the basis of the prima facie case test.
Standard of a prima facie case
33 There does not appear to have been any precise analysis in the English case law of the standard of a prima facie case in this context. In Prudential Assur. Co. Ltd. v. Newman Indus. Ltd. (No. 2) (10), in the passage which I have already quoted, it was made clear that the right to progress a minority action is not to be equated with the absence of grounds for a strike-out in ordinary litigation. It has also been made clear that a prima facie case is more than a good arguable case. It is also clear that the hearing of such an application for leave “must not be allowed to turn into a mini-trial, but the Court must nevertheless have sufficient evidence before it is able to make a careful assessment of the merits”—see 1 Supreme Court Practice 1999, para. 15/12A/4, at 259.
34 Counsel for the plaintiff accepted that the plaintiff must do more than merely show that the case cannot be struck out but he also submitted that the plaintiff does not have to prove its case on the evidence as if this were a trial, which in my view must be right. However, he also argued that the appropriate question is whether, if the defendants were to choose not to defend, the claim would be more likely than not to succeed on the pleaded case and the material before the court. That seems to me to amount to submitting in effect that the court should proceed as if the pleaded case were true and ignore the evidence submitted by the defendants, which does not accord with my understanding of the authorities.
35 The purpose of requiring the plaintiff to obtain leave to continue the derivative action, as I understand it, is to prevent the expense and time of (and to protect the defendants against) vexatious or unfounded litigation which has little or no prospect of success or which is clearly brought by an aggrieved shareholder for his own reasons rather than in the interests of the company. The phrase “prima facie” has various shades of meaning but literally means “at first sight.” Given that there is not to be a mini-trial of the plaintiff’s case, it seems to me that I must form a view of the plaintiff’s case based on my first impressions, having regard to my assessment of all the evidence before me, including that submitted by the defendants. For the plaintiff to obtain leave to continue with the action, I consider that I must be satisfied in the exercise of my discretion that its case is not spurious or unfounded, that it is a serious as opposed to a speculative case, that it is a case brought bona fide on reasonable grounds, on behalf of and in the interests of the company and that it is sufficiently strong to justify granting leave for the action to continue rather than dismissing it at this preliminary stage.

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The parties
36 The plaintiff, Renova Resources Private Equity Ltd., is a company incorporated in the Bahamas. It is wholly owned by Renova Holding Ltd., (“Renova Holding”) which is a Bahamian holding company and a member of the Renova Group of companies (“the Renova Group”). The Renova Group is ultimately controlled by Mr. Viktor Vekselberg. The plaintiff is the holder of 50% of the shares in the second defendant company, Pallinghurst (Cayman) General Partner LP (GP) Ltd. (“the company”). It is on behalf of the company that the plaintiff purports to bring this derivative action. The company is incorporated in the Cayman Islands. The holder of the other 50% of the shares in the company is Fairbairn Trust Ltd., which is effectively controlled by the first defendant, Mr. Brian Gilbertson. There are two directors of the company, Mr. Gilbertson and Mr. Vladimir Kuznetsov who is the investment director of another member company of the Renova Group.
37 The company is the general partner of a Cayman exempted limited partnership called Pallinghurst (Cayman) General Partner LP (“GPLP”), the third defendant. GPLP is in turn the general partner of the fourth defendant, another Cayman exempted limited partnership called Pallinghurst Resources Management LP (“the master fund”). The fifth defendant (“Autumn”) is a British Virgin Islands company also wholly owned by Fairbairn Trust Ltd. and therefore a Gilbertson entity.
38 This structure was established pursuant to an agreement between Renova Holding and Mr. Gilbertson contained in a letter dated November 24th, 2005 (“the letter agreement”). Mr. Gilbertson was employed by a Renova Group entity in Russia and the preamble to the letter agreement states that it sets out conditions relating to the granting by Renova Holding of certain “incentive units,” being notional shares in another Renova Group company, to Mr. Gilbertson. Pursuant to the letter agreement, Renova Holding was to set up, and duly did set up, the structure at its cost and Renova Holding and Mr. Gilbertson were to work together to add value to the master fund. The purpose of the master fund was to explore, acquire and develop opportunities in the metal and mining industry. As can be seen, the structure involved the setting up of the master fund, GPLP and the company, with the company as the general partner of GPLP and, through it, ultimately the master fund. This structure was known throughout as the Pallinghurst structure.
[The learned judge outlined the duties of Mr. Gilbertson towards the master fund and the company as detailed in the letter agreement and continued:]
The plaintiff’s case
39 The complaint which the plaintiff seeks to bring on behalf of the company by way of the derivative action is that Mr. Gilbertson, who was

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at all material times a director of the company, acted in breach of his fiduciary duties to the company by diverting away from the company a valuable opportunity to acquire from Unilever Plc. the benefit of exploiting the rights to the Fabergé brand (“the rights”). This opportunity to acquire and exploit the rights became known as “Project Egg.”
40 The plaintiff also alleges that Autumn (which is a family entity of Mr. Gilbertson’s) participated in this diversion of assets by, unknown to the company, providing part of the funding for the purchase of the rights and acquiring substantial shares in the company which acquired the rights, Project Egg Ltd. (“PEL”), in consideration for such funding. The plaintiff contends that Autumn made this investment and received shares in PEL, knowing that the dilution of the master fund’s 100% ownership of PEL and the issue of new shares in PEL, inter alia to Autumn, was a breach of fiduciary duty by Mr. Gilbertson and that consequently Autumn received its shares in PEL as a constructive trustee for the master fund and the Pallinghurst structure.
41 The plaintiff pleads that, as a director of the company, Mr. Gilbertson owed fiduciary duties to the company, including the duties to act in good faith, in the best interests of the company, not to place himself in a position where his duties to the company and his own interests might conflict and to refrain from self-dealing. The plaintiff also contends that Mr. Gilbertson’s actions amounted to making a secret profit and that he had a duty to account for such profit. The plaintiff pleads that Mr. Gilbertson is in breach of all of these duties and that, as explained above, Autumn is also liable to account as a constructive trustee.
[The court summarized the reliefs sought by the plaintiff and then noted the affidavits and documentation it had received in support of and in opposition to the application. The learned judge continued:]
The history of the dispute
[The learned judge outlined the background to the acquisition of the rights, and in particular the dispute as to whether it was ever intended that they should be acquired within the investment structure and consequently whether Mr. Gilbertson owed any fiduciary obligations in respect of the transaction. He continued:]
Conduct of the plaintiff
42 Mr. Gilbertson also contends that the conduct of the Renova Group renders it inequitable to grant leave to the plaintiff, a member of that group, to continue these proceedings. As explained above, Mr. Gilbertson argues that the position taken by the plaintiff in these proceedings (that Mr. Gilbertson diverted the rights away from the Pallinghurst structure) is inconsistent with the position taken by Renova Holding in 2007, and

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particularly in its letter of May 25th, 2007. He says that this volte face demonstrates that the plaintiff has not brought this action bona fide for the benefit of the company or the Pallinghurst structure.
43 It is said also on behalf of Mr. Gilbertson that the conduct of Mr. Vekselberg as the ultimate principal of the Renova Group and thus of the plaintiff, in seeking to procure the transfer of the ownership of the rights outside the Pallinghurst structure, itself resulted in breaches of duty to the company by Mr. Kuznetsov, Mr. Gilbertson’s fellow director. It was contended that it was Mr. Kuznetsov who acted in breach of his fiduciary duties to the company by pursuing Mr. Vekselberg’s personal agenda rather than the best interests of the company and the Pallinghurst structure. It was submitted that the Renova Group have been the authors of their own misfortune by insisting that the rights should be owned outside the Pallinghurst structure and that a court of equity should not assist a party who has brought about the very matters complained about.
44 In Nurcombe v. Nurcombe (9), Browne-Wilkinson, L.J. said, by reference to Towers v. African Tug Co. (13) ([1985] 1 W.L.R. at 378):
“In my judgment, that case established that behaviour by the minority shareholder, which, in the eyes of equity, would render it unjust to allow a claim brought by the company at his instance to succeed, provides a defence to a minority shareholder’s action. In practice, this means that equitable defences which would have been open to defendants in an action brought by the minority shareholder personally (if the cause of action had been vested in him) would also provide a defence to those defendants in a minority shareholder’s action brought by him.”
The defendant argues this conduct by the plaintiff shareholder or those behind it renders it inequitable to allow a claim brought by it on behalf of the company to proceed.
45 The plaintiff argues that the contentions on behalf of Mr. Gilbertson are a misinterpretation of the facts and that it was always intended by the plaintiff and the Renova Group that the economic benefit and management of the rights should remain within the Pallinghurst structure and that it was the actions of Mr. Gilbertson which diverted that economic benefit and control away from the Pallinghurst structure, and thus the company, in breach of his duties to the company. What is more, the plaintiff says, the Gilbertsons clearly initially agreed with this proposal and entered into negotiations about the precise terms of a draft agreement giving effect to it. There was no suggestion by them at the time that it was not in the best interests of the Pallinghurst structure or of the company, or that Mr. Gilbertson was somehow released from his duties as a director of the company as a result. Indeed, there was nothing to indicate, until Mr.

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Gilbertson’s email of January 2nd, 2007, that everything was not proceeding on this basis and that the Pallinghurst structure, with the company at its head, would not shortly be the owner of the economic benefit and the manager of the rights.
46 The plaintiff contends that Mr. Gilbertson’s real intention from a much earlier stage was to acquire the rights himself and, as he said himself in an email, to “warehouse” them with a view to then negotiating about the possible return of the rights to the Pallinghurst structure from a position of strength. As far as the letter of May 25th, 2007 is concerned, the plaintiff argued that it is simply not relevant in determining the true position which must be derived from the contemporary communications documentation and actions of the parties and not ex post facto at a time when the Renova Group were negotiating months later to resolve a situation caused by Mr. Gilbertson’s breaches of duty. The plaintiff contends that the letter does not provide an equitable defence to Mr. Gilbertson of the kind envisaged in Nurcombe (9) and that what matters is the conduct of the parties at the relevant time. The plaintiff says the case it pleads represents its position as it was at the material time.
47 In my view, the letter of May 25th, 2007, and indeed, the comments of Renova Holding in March 2007, while no doubt material for cross-examination if the case were to proceed, do not constitute conduct of a kind which, at least at this stage and for this purpose, sufficiently impacts on the bona fides and equity of the plaintiff’s case such as to satisfy me that in the light of it the plaintiff should not have leave to continue the action.
Mr. Gilbertson’s duties
48 Counsel for Mr. Gilbertson argued that the letter agreement was fundamental to the relationship between Mr. Gilbertson and the Renova Group and that this determined the scope of Mr. Gilbertson’s fiduciary duties. Mr. Gilbertson argues that from an early stage it was envisaged that the rights would be an investment of the Pallinghurst structure pursuant to the letter agreement, but that it was the Renova Group who changed this by their insistence that the rights should be owned by another Renova company, Lamesa. At that point, it is argued, Mr. Gilbertson would have been perfectly entitled to say “No” to that proposal and he had no duty to negotiate an alternative. It was not his duty, it is said, to serve Mr. Vekselberg’s interests. In fact, Mr. Gilbertson did attempt to reach an accommodation with Mr. Vekselberg in his personal capacity but it was submitted that at that point he was acting as an investor for commercial reasons and not in his capacity as a director of the company. Mr. Gilbertson contends that latterly the draft agreement proposed by the Renova Group for the new arrangement sought to place restrictions on any future sale by PEL of the economic benefit of the rights, which would have made it difficult if not impossible for the master fund to realize the

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investment. In the circumstances, there could be no breach of Mr. Gilbertson’s duties to the company and there was none.
49 The plaintiff, on the other hand, argues that Mr. Gilbertson had clear duties to the company as a director to act in the best interests of the company, to act bona fide and honestly and not to place himself in a position where his own interests conflicted with those of the company or to make a profit at the expense of the company. The plaintiff contends that from December 20th, 2006 it was clear that the Pallinghurst structure would retain the economic benefit and control of the rights and that Mr. Gilbertson agreed in principle with that. It remained his duty, in the best interests of the company, to ensure that was achieved and not to divert that commercial opportunity to himself. By diverting the economic benefit of the rights away from the company and its subsidiary entities in the Pallinghurst structure, Mr. Gilbertson, it is argued, clearly breached his duties to the company for his own personal benefit. It is argued that the terms on which the Renova Group would procure the funding of the purchase of the rights were perfectly reasonable and in the best interests of the company, even if not acceptable to Mr. Gilbertson personally.
50 Although, there are clearly arguable defences to the claim which the plaintiff makes on behalf of the company and its subsidiary entities against Mr. Gilbertson for breach of his duties as a director of the company, I am satisfied that the plaintiff has a prima facie case against Mr. Gilbertson for breach of his duties as a director. The commercial opportunity of acquiring the economic benefit and control of the rights, while it may not have involved retaining actual title to the rights as originally contemplated, nonetheless remained a valuable commercial opportunity which it would have been in the interests of the company to acquire. Prima facie the diversion of that opportunity away from the company and its subsidiary entities in the Pallinghurst structure by a director of the company for his own personal benefit would be a breach of that director’s duties to the company. My overall assessment of the totality of the affidavit evidence put before me at the hearing in my view supported that prima facie analysis.
Indemnities and exclusions in articles of association
51 Apart from his arguments as summarized above, Mr. Gilbertson also claims that as a director of the company he has the benefit of indemnities and exclusions contained in the articles of association of the company which exonerate him from liability in respect of any breach of fiduciary duty on his part and preclude any claim against him in respect of such alleged liability. The relevant articles are 131 and 132 which read as follows:
“131. Every director (including for the purposes of this article any alternate director appointed pursuant to the provisions of these

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articles), secretary, assistant secretary, or other officer for the time being and from time to time of the company (but not including the company’s auditors) and the personal representatives of the same shall be indemnified and secured harmless out of the assets and funds of the company against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained by him in or about the conduct of the company’s business or affairs or in the execution or discharge of his duties, powers, authorities or discretions, including without prejudice to the generality of the foregoing, any costs, expenses, losses or liabilities incurred by him in defending (whether successfully or otherwise) any civil proceedings concerning the company or its affairs in any court whether in the Cayman Islands or elsewhere.
132. No such director, alternate director, secretary, assistant secretary or other officer of the company (but not including the company’s auditors) shall be liable (a) for the acts, receipts, neglects, defaults or omissions of any other such director or officer or agent of the company or (b) for any loss on account of defect of title to any property of the company or (c) on account of the insufficiency of any security in or upon which any money of the company shall be invested or (d) for any loss incurred through any bank, broker or other similar person or (e) for any loss occasioned by any negligence, default, breach of duty, breach of trust, error of judgment or oversight on his part or (f) for any loss, damage or misfortune whatsoever which may happen in or arise from the execution or discharge of the duties, powers, authorities, or discretions of his office or in relation thereto, unless the same shall happen through his own dishonesty.”
52 Mr. Gilbertson contends that these articles exonerate him as a director and that on the plaintiff’s case it cannot be said that he was not acting in or about the business of the company at the relevant time. Reference was made to the decision of the Privy Council in Viscount of Royal Ct. v. Shelton (14) when the articles of a company incorporated in Jersey, which were in very similar terms, were considered. The Judicial Committee held that the relevant article was to be construed as exonerating a director from personal liability, even where his actions had resulted in an act ultra vires of the company. The article concerned concluded with the same words as art. 132 of the company in the present case: “unless the same shall happen through his own dishonesty.” Although those words do not appear to qualify art. 131, it was accepted on behalf of Mr. Gilbertson that the two articles should be read together and that the reference to dishonesty impliedly qualified art. 131 as well. However, it was submitted that the plaintiff has not pleaded dishonesty in the present case. While acknowledging that the position with respect to the plaintiff’s claim against Autumn is clearly different, it was argued nonetheless that since

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the claim against Autumn is dependent upon the claim against Mr. Gilbertson, if there is no cause of action against Mr. Gilbertson there can be no cause of action against Autumn.
53 The interpretation and consequences of similar articles were considered in this court by Smellie, C.J. in In re Bristol Fund Ltd. (4). In his judgment, the Chief Justice stated (2008 CILR 317, at paras. 70–71):
“70 . . . At this stage, the only guidance I think I can possibly give is that the liquidators should not need to provide for amounts of damages to which EYCI may become liable based on its ‘wilful default or wilful neglect, fraud or dishonesty,’ as such liabilities are excluded, either expressly (as in the case of the indemnity within BHM’s articles) or implicitly, because of the nature of what has been termed in another context the ‘irreducible core’ of a fiduciary’s obligations; that is the duty to always act in honesty and good faith (see Armitage v. Nurse). These irreducible core obligations would remain, despite the terms of any indemnity, whether given under the audit engagement letters or under Bristol’s articles.
71 This is a longstanding principle in English company law: see In re City Equitable Fire Ins. Co. ([1925] 1 Ch. at 441) following In re Brazilian Rubber Plantations & Estates Ltd. ([1911] 1 Ch. at 440) (per Romer, J., upheld on appeal to the Court of Appeal). It is a principle which has long since been codified in English company legislation and, by virtue of that codification, it is not possible to give so wide an indemnity as to exclude liability for fraud, dishonesty or wilful default on the part of officers who owe fiduciary obligations to companies . . . Liability found against EYCI, based on allegations of simple negligence, may, however, be covered by the indemnities, as would any further legal costs incurred by EYCI in successfully defending against any kind of claim covered by the indemnities.”
54 It was argued on behalf of Mr. Gilbertson that the Chief Justice’s reference to Armitage v. Nurse (2), in support of his reference to the “irreducible core” of a fiduciary’s obligations which cannot be excluded by provisions in a company’s articles, was wrong because Armitage v. Nurse held that all acts or omissions of the director could be indemnified or exonerated by appropriate wording in the articles, save for dishonest acts or omissions, although that would seem somewhat inconsistent with such core duties being “irreducible.” In fact in Armitage v. Nurse, Millett, L.J. said ([1998] Ch. at 252):
“The nature of equitable fraud may be collected from the speech of Viscount Haldane, L.C. in Nocton v. Lord Ashburton ([1914] A.C. at 953) and Snell’s Equity, 29th ed., at 550–551 (1990). It covers breach of fiduciary duty, undue influence, abuse of confidence, unconscionable bargains and frauds on powers. With the sole exception of the

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last, which is a technical doctrine in which the word ‘fraud’ merely connotes excess of vires, it involves some dealing by the fiduciary with his principal and the risk that the fiduciary may have exploited his position to his own advantage. In Earl of Aylesford v. Morris ((1873), L.R. 8 Ch. App. at 490–491), Lord Selborne, L.C. said: ‘Fraud does not here mean deceit or circumvention; it means an unconscientious use of the power arising out of these circumstances and conditions . . .’ A trustee exemption clause such as cl. 15 of the settlement does not purport to exclude the liability of the fiduciary in such cases. Suppose, for example, that one of the respondents had purchased Paula’s land at a proper price from his fellow trustees. The sale would be liable to be set aside. Clause 15 would not prevent this. This is not because the purchasing trustee would have been guilty of equitable fraud, but because by claiming to recover the trust property (or even equitable compensation), Paula would not be suing in respect of any ‘loss or damage’ to the trust. Her right to recover the land would not depend on proof of loss or damage. Her claim would succeed even if the sale was at an overvalue; the purchasing trustee could never obtain more than a defeasible title from such a transaction. But cl. 15 would be effective to exempt his fellow trustees from liability for making good any loss which the sale had occasioned to the trust estate so long as they had acted in good faith and what they honestly believed was Paula’s interests. [Emphasis supplied.]
Accordingly, much of the argument before us which disputes the ability of a trustee exemption clause to exclude liability for equitable fraud or unconscionable behaviour is misplaced. But it is unnecessary to explore this further, for no such conduct is pleaded. What is pleaded is, at the very lowest, culpable and probably gross negligence. So, the question reduces itself to this: can a trustee exemption clause validly exclude liability for gross negligence?”
55 Millett, L.J. then said (ibid., at 253):
“I accept the submission made on behalf of Paula that there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts. But I do not accept the further submission that these core obligations include the duties of skill and care, prudence and diligence. The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts, but in my opinion it is sufficient. As Mr. Hill pertinently pointed out in his able argument, a trustee who relied on the presence of a trustee exception clause to justify what he proposed to do would thereby lose its

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protection: he would be acting recklessly in the proper sense of the term.”
56 It seems to me that Armitage v. Nurse (2) does not stand for the proposition that the irreducible core of obligations owed by a fiduciary, that is the duty to act honestly and in good faith, can be excluded by an exemption clause. Breach of fiduciary duty, unconscionable conduct, generally described as equitable fraud in the sense explained by Millett, L.J., resulting in a claim for equitable compensation may not be excluded.
57 It was argued on behalf of the plaintiff that the Chief Justice’s analysis is correct about the irreducible core of obligations, referred to by Millett, L.J. in Armitage v. Nurse, which are fundamental, in that case to a trust, of performing the trusts honestly and in good faith for the benefit of the beneficiaries as the minimum necessary to give substance to the trust. By analogy a director has similar irreducible core fiduciary obligations to his company. The Chief Justice clearly considered that such irreducible core fiduciary obligations could not, because of their nature, be excluded and in my respectful view that is correct. The plaintiff’s claim against Mr. Gilbertson is not for damages for negligence; it is for an accounting and for equitable compensation for breaches of fiduciary duty.
58 In Armitage v. Nurse (2), Millett, L.J. also said (ibid., at 251):
“It is the duty of a trustee to manage the trust property and deal with it in the interests of the beneficiaries. If he acts in a way which he does not honestly believe is in their interests then he is acting dishonestly. It does not matter whether he stands or thinks he stands to gain personally from his actions. A trustee who acts with the intention of benefiting persons who are not the objects of the trust is not the less dishonest because he does not intend to benefit himself.”
59 He also said (ibid., at 256):
“It is not necessary to use the word ‘fraud’ or ‘dishonesty’ if the facts which make the conduct complained of fraudulent are pleaded; but, if the facts pleaded are consistent with innocence, then it is not open to the court to find fraud. As Buckley, L.J. said in Belmont Finance Corporation Ltd. v. Williams Furniture Ltd. ([1979] Ch. at 268):
‘An allegation of dishonesty must be pleaded clearly and with particularity. That is laid down by the rules and it is a well-recognised rule of practice. This does not import that the word “fraud” or the word “dishonesty” must be necessarily used . . .  The facts alleged may sufficiently demonstrate that dishonesty is allegedly involved, but where the facts are complicated this may not be so clear, and in such a case it is incumbent upon the pleader to make it clear when dishonesty is alleged.’”

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60 Having regard to the nature of their claim in the present case, it does not seem to me necessary for the plaintiff’s pleading to specifically use the words “dishonest” or “dishonestly” in the context of what is alleged against Mr. Gilbertson as a director of the company. In my view, it is quite clear that the acts of Mr. Gilbertson which are alleged are, if established, self-evidently dishonest and that it is not necessary for the plaintiff to specifically use the words “dishonest” or “dishonesty” in the circumstances. It is implicit in what is pleaded. Since a director’s own dishonesty is expressly excluded from the provisions of art. 132 of the company’s articles of association and by implication from art. 131, if the plaintiff’s case against Mr. Gilbertson is established, it does not seem to me that Mr. Gilbertson would be indemnified or exonerated pursuant to those articles. I should also mention that it was also argued on behalf of the plaintiff that even if the relevant articles did apply to Mr. Gilbertson in the circumstances they would only operate to prevent recovery of losses in the form of compensation from Mr. Gilbertson and would not bar the plaintiff on behalf of the company from suing him as a director.
61 Accordingly, it was contended, the relief sought against Autumn by way of declarations that it holds its shares in PEL as a constructive trustee for the company would not be affected. It was also contended that a claim against Mr. Gilbertson for an account of profits would not be precluded by the terms of the relevant articles. I have already expressed my view on that and on the ability to exclude claims for equitable fraud. As I have said, the plaintiff’s claim is not based on allegations of negligence by Mr. Gilbertson but claims of unconscionable conduct as a fiduciary. In all the circumstances, I do not consider the arguments raised on behalf of Mr. Gilbertson with respect to the construction and effect of the relevant articles of the company’s articles of association are sufficiently compelling as to justify the refusal of leave to the plaintiff to continue this action.
The multiple derivative action
62 It was also argued on behalf of Mr. Gilbertson that the relevant exception to the rule in Foss v. Harbottle (6) only arises in the context of loss or damage suffered by the company of which the plaintiff is a shareholder and on whose behalf the plaintiff seeks to bring the derivative action. In the present case, the alleged loss was suffered not by the company but by the master fund, whose shareholding in PEL was diluted as a result of Mr. Gilbertson’s actions from 100% to a nominal amount. Furthermore, it was submitted, the economic benefits arising as a result of the investment of the master fund in PEL and thus the rights were not intended to flow to the company as ultimate general partner. Accordingly, it was contended that there is no basis for giving leave to continue the derivative action on behalf of the company since the company suffered no loss.

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63 In Waddington Ltd. v. Chan Chun Hoo (15), in the Court of Final Appeal of Hong Kong in September 2008, the plaintiff shareholder sought to impugn three transactions all of which were carried out by wholly-owned sub-subsidiary companies and the alleged losses were not incurred by the ultimate holding company of which the plaintiff was a minority shareholder and on whose behalf the plaintiff had purported to bring the derivative proceedings. It appears that the appellant/defendant, who was a director of the ultimate holding company as well as of the subsidiary company and the sub-subsidiary companies, made the same submission which was made on behalf of Mr. Gilbertson before me, as outlined above.
64 Having indicated that counsel in that case had not been able to discover any reasoned decision of a higher court in any common law jurisdiction outside the United States determining this question, Lord Millett said that the court would decide it as a matter of principle. He said that such an action, known as a multiple derivative action, has been entertained in England in various cases but in none of them had the plaintiff’s right to bring such an action been challenged. He pointed out that Wallersteiner v. Moir (No. 2) (16) and Airey v. Cordell (1) were themselves such cases in which the plaintiff’s right to maintain the action on behalf of a subsidiary of the company in which he was a shareholder was not contested or considered. No point was taken in those cases that the plaintiff was not a shareholder of the company in which the cause of action was said to be vested. Lord Millett concluded that the question whether the action may be brought by a member of the company’s parent or ultimate holding company is one of locus standi and he went on to say ([2008] HKEC 1498, at paras. 74–75):
“On a question of standing, the court must ask itself whether the plaintiff has a legitimate interest in the relief claimed sufficient to justify him in bringing proceedings to obtain it. The answer in the case of a person wishing to bring a multiple derivative action is plainly ‘yes.’ Any depletion of a subsidiary’s assets causes indirect loss to its parent company and its shareholders. In either case the loss is merely reflective loss mirroring the loss directly sustained by the subsidiary and as such it is not recoverable by the parent company or its shareholders for the reasons stated in Johnson v. Gore Wood ([2002] 2 A.C. 1). But this is a matter of legal policy. It is not because the law does not recognise the loss as a real loss; it is because if creditors are not to be prejudiced the loss must be recouped by the subsidiary and not recovered by its shareholders. It is impossible to understand how a person who has sustained a real albeit reflective loss which is legally recoverable only by a subsidiary can be said to have no legitimate or sufficient interest to bring proceedings on behalf of the subsidiary.
This is not to allow economic interests to prevail over legal rights.

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The reflective loss which a shareholder suffers if the assets of his company are depleted is recognised by the law even if it is not directly recoverable by him. In the same way the reflective loss which a shareholder suffers if the assets of his company’s subsidiary are depleted is recognised loss even if it is not directly recoverable by him. The very same reasons which justify the single derivative action also justify the multiple derivative action. To put the same point another way, if wrongdoers must not be allowed to defraud a parent company with impunity, they must not be allowed to defraud its subsidiary with impunity.”
65 After considering some other arguments of the appellant/defendant, Lord Millett went on (ibid., at para. 79):
“The last objection must also be rejected. Australia, New Zealand, Canada and Singapore have all introduced legislation to require the plaintiff to obtain the leave of the court before instituting or continuing derivative actions, and have taken the opportunity to permit multiple derivative actions where the cause of action is vested in a ‘related’ or ‘affiliated’ company of the company of which the plaintiff is a member. The various statutes have different threshold tests, different approaches to deciding whether the proposed action is in the interests of the company, and different procedures. But it is noticeable that in prescribing such requirements none of these statutes draws any distinction between the single derivative action and the multiple derivative action; and in truth there is no conceivable reason why the procedural and other requirements of the two kinds of action should differ.”
66 In my opinion, Lord Millett’s analysis and conclusion also represents the law in this country and I can see no reason why, in appropriate circumstances, a multiple derivative action should not be permitted. In the present case, the company is the general partner of and therefore controls the exempted limited partnership, GPLP. GPLP is itself the general partner and therefore controls the master fund. The master fund is, in my view, no different from a sub-subsidiary of the company for these purposes. On the plaintiff’s case, the master fund has sustained significant loss as a result of the dilution of its 100% shareholding in PEL, procured by Mr. Gilbertson without the knowledge, still less the consent, of the master fund or GPLP or the company. In the circumstances, a multiple derivative action on behalf of the company in respect of Mr. Gilbertson’s actions is not, in my judgment, objectionable.
Reflective loss
67 This leaves the question of loss. In the present case, as I have just explained, the loss of the economic benefit of marketing, exploiting and

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managing the rights was sustained by the master fund and not directly by the company, although the company ultimately controls the master fund. In Waddington Ltd. v. Chan Chun Hoo (15), the plaintiff, if multiple derivative actions were not maintainable in Hong Kong, wished to bring a single derivative action on behalf of the holding company to recover the losses which it conceded were merely reflective of the losses allegedly suffered by its sub-subsidiaries and therefore prima facie not recoverable by the holding company. Lord Millett referred to his own speech in Johnson v. Gore Wood & Co. (7) where he said ([2002] 2 A.C. at 62):
“If the shareholder is allowed to recover in respect of such loss [reflective loss], then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company’s creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder.”
68 He concluded in Waddington by allowing the proceedings to continue as a multiple derivative action brought by the plaintiff shareholder of the holding company on behalf of the sub-subsidiary companies but not as a derivative action on behalf of the holding company to recover damages for reflective loss. By analogy, in the present case the plaintiff as shareholder of the company would be permitted to bring a multiple derivative action as shareholder of the company on behalf of the master fund but not a derivative action on behalf of the company to recover compensation (or an accounting) for loss reflective of the loss sustained by the master fund. In fact, in its statement of claim, as I have already explained above, the plaintiff expressly pleads that the company, including in its capacity as general partner of GPLP and, in turn, the master fund is entitled to the relief which it seeks against Mr. Gilbertson and Autumn. All of the relief sought, whether for declarations, accounting, equitable compensation, payment and interest is specifically on behalf of the company and/or GPLP and/or the master fund.
69 In my view, this makes it sufficiently clear that this is not a derivative action on behalf of the company to recover compensation for reflective loss. In fact, it was argued on behalf of the plaintiff that the company did suffer some direct loss itself as a result of Mr. Gilbertson’s actions because it was intended that the company should exercise ultimate control over investments of the master fund, in this case through the master fund’s intended 100% ownership of PEL, of PEL’s commercial interests in the rights. That is, however, not clearly specifically pleaded as a direct loss to the company in the present statement of claim.

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The letter agreement
70 Finally, it was also submitted that another reason why leave should not be granted to the plaintiff to continue the action is because the letter agreement is null and void ab initio.
[The court outlined how Renova Holding had implemented a clause to terminate the agreement because of its dissatisfaction with the structure, and continued:]
71 Mr. Gilbertson argued that since the letter of agreement is to be treated as having no legal effect ab initio, it follows that either party was free to pursue for their personal benefit any investment opportunities which they had identified and that Mr. Gilbertson was accordingly entitled to pursue the investment in the rights himself for his own personal benefit.
72 I do not accept this argument. Mr. Gilbertson’s fiduciary duties to act honestly and in good faith in his capacity as a director of the company do not derive from the letter agreement but are a matter of law. While Mr. Gilbertson may have had other more specific duties pursuant to the letter agreement, they were not his sole duties and those duties are not, in my view, affected whether or not the letter agreement is properly considered to be null and void ab initio. The duties of Mr. Gilbertson pleaded by the plaintiff in its statement of claim are not, or are mostly not, dependent upon the letter agreement.
Conclusion
73 In conclusion, having regard to all of the affidavit evidence and the helpful arguments and submissions of leading counsel, I have reached the view that the plaintiff should have leave pursuant to O.15, r.12A(2) of the Grand Court Rules to continue this action. I am satisfied that the plaintiff on behalf of the company has a prima facie case and that this is not an action which should be dismissed at this stage. As I have already indicated, I do not consider that adjourning the application or the action to enable a meeting of the shareholders of the company to consider whether the company should or should not bring the action would serve any purpose. I have also considered whether leave to continue the action up to only a certain point, such as discovery, would be appropriate but in my view, having regard to the nature of the issues in the case, it would not. There is no application by the plaintiff for indemnity of its costs of the action from the company and counsel for the plaintiff expressly states that there is no intention to make such an application. I therefore see little point in granting leave to the plaintiff to continue the action only up to a certain point. If the parties cannot reach a compromise it will have to go to trial.
74 Accordingly, I direct that Mr. Gilbertson and Autumn shall file and serve their defence or defences within 21 days of this date and that the

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plaintiff shall file and serve any reply or replies within a further 21 days. On the close of pleadings the plaintiff shall file and serve a summons for directions seeking further directions, agreed if possible, for the further progress of the proceedings to trial.
75 In the circumstances, I consider it appropriate that the costs of and incidental to the hearing before me should be costs in the cause, such costs to include the cost of one leading counsel for each of the plaintiff on the one hand and Mr. Gilbertson and Autumn on the other hand.
Order accordingly.
Attorneys: Maples & Calder for the plaintiff; Mourants for the first and fifth defendants.