Company successfully dismisses former director’s action to raise derivate proceedings against it 

Kenneth Sinclair, the pursuer and respondent in the derivate proceedings action, was alleged to be in breach of his duties as a director of CJC Media (Scotland) Ltd, the appellant. Mr Sinclair was a co-director of the company alongside Gary Clark, the first defender. 

The appeal was heard in the Sheriff Appeal Court (Civil Division) by Sheriff Principal Lewis, Sheriff Principal Turnbull, and Appeal Sheriff Holligan. 

No power to grant leave 

Mr Sinclair and Mr Clark were the only directors of CJC Media Scotland until 2013 when Mr Sinclair resigned as a director, retaining membership of the company. He proceeded to set up a company called Tactical Media Ltd, to which a pharmacy contract was diverted away from the appellant. This resulted in a substantial loss of business for the appellant. 

The appellant argued that in doing do Mr Sinclair was in direct competition with its business. In previous Court of Session proceedings it was held that he was in breach of his duties as director of the appellant company by establishing the new company and acting in this manner. 

Mr Sinclair was ordered to pay monies to the appellant company as a result of the breach. He sought to bring derivative proceedings under the 2006 Act to obtain remedies principally from Mr Clark. At the original hearing for the application in 2018, the sheriff granted leave to raise derivative proceedings against the company, with the appellant to indemnify Mr Sinclair for all expenses. 

On appeal, the appellant submitted that the sheriff’s interlocutor was not competent because he had no power to grant leave at the stage he purportedly did. The statutory procedure set out in section 266 of the 2006 Act was not followed as the application had not been served on the company when leave was granted by the sheriff, denying the company an opportunity to be heard on the application. 

In response, it was submitted for Mr Sinclair that the proceedings were a commercial action and thus governed by Chapter 40 of the Ordinary Cause Rules. OCR 40 permitted the sheriff to make such order as he thought fit for the progress of the case insofar as not inconsistent with the other provisions of Chapter 40. 

Procedure departed from 

The opinion of the court was delivered by Sheriff Principal Turnbull. On the nature of the action, he said: “The fact that the action was a commercial one, governed by the provisions of Chapter 40 of the Ordinary Cause Rules, is immaterial. It will be noted that whilst the procedure envisaged by what we have referred to as the first and second stages of the process was followed, the procedure required by section 266 of the 2006 Act and OCR 46.1 was then departed from.” 

He continued: “Most notably, the company was deprived of its statutory right to take part in the proceedings by way of the lodging of written submissions and being heard at a hearing prior to the application being granted. The interlocutor of 23 January 2018 is an incompetent one.” 

Retrospective leave 

Having concluded that the interlocutor was incompetent, further submissions were invited on whether the court could grant retrospective leave for derivative proceedings. The appellant argued that, as the company was no longer trading, a director seeking to promote the success of the company would not raise or continue the present proceedings. 

Further, the appellant company was, in reality, a quasi-partnership, with Mr Sinclair and Mr Clark owning equal shares. A disinterested director, having regard to the nature of the business, would conclude that it was fair as between Mr Sinclair and Mr Clark that the appellant ceased trading and for both Mr Sinclair and Mr Clark to be free to compete with their new businesses. 

On the question whether retrospective leave should be granted, Sheriff Principal Turnbull said: “Had the correct procedure been adopted at the outset, there would have been a very real issue as to whether Mr Sinclair was entitled to the grant of leave to raise derivative proceedings. We are not persuaded that when one considers all the features of this matter that this is a suitable case for a grant of leave.” 

He continued: “In setting up and operating Tactical Media Limited, Mr Sinclair was in breach of his duties to the appellant. It had adverse consequences for the appellant. The grant of leave to one of the members, coupled with an order for indemnity for expenses, is to privilege one of the two members at the expense of the other; it creates an unfairness and an imbalance.” 

For these reasons the appeal was allowed, and the action dismissed.