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All England Reporter/2006/October/*Singh v Anand and others - [2006] All ER (D) 153 (Oct)

[2006] All ER (D) 153 (Oct)

*Singh v Anand and others

Chancery Division (Birmingham District Registry)

Judge Norris QC sitting as a judge of the High Court

17 March 2006

Injunction - Interim - Legal expenses - Claimant seeking declaration as to his beneficial interest in share
capital of company - Defendants registered shareholders and directors of company - Claimant applying for
injunction restraining defendants from permitting company to fund their legal expenses - Whether injunction
should be granted.

The claimant sought to establish against the defendants, the two registered shareholders in a company and
the two directors, entitlement to a declaration as to his beneficial interest in the share capital of the company
and damages for breach of trust. Accordingly, the question for the court's determination was whether the
claimant had any equitable claim. During the course of the trial the claimant applied without notice for an
injunction restraining the defendants from causing, procuring or permitting the company to fund their legal
expenses.

The application would be granted.

Company money could only properly be expended for the company's purposes and not for the personal
purposes of directors or shareholders.

The prima facie position was that the company's funds could not be expended on pursuing the personal
interests of the defendants. They sought to fund their litigation with company money thereby relieving them
of a burden which the claimant bore in having to fund his costs personally. The balance of injustice lay in
restraining the defendants from using company money for what was prima facie an improper purpose and to
do so even at the suit of someone who had not established a right to intervene in the company's affairs.

The court would therefore grant an injunction restraining the defendants, directly or indirectly, from causing,
procuring or permitting the company to expend any moneys upon legal fees in respect of the instant
proceedings.
Re a company (No 1126 of 1992) [1994] 2 BCLC 146 considered.

Thomas Graham and Nicola Allsop (instructed by BP Collins, Gerrards Cross) for the claimant.

James Corbett and Paul Dean (instructed by PM Suchak & Co, Leicester) for the defendants.

Celia Fox Barrister.

Judgment
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CHANCERY DIVISION (BIRMINGHAM DISTRICT REGISTRY)

17 MARCH 2006

JUDGE NORRIS (SITTING AS A JUDGE OF THE HIGH COURT)

JUDGMENT ON THE CLAIMANT'S APPLICATION FOR AN INJUNCTION APPROVED BY THE COURT

APPROVED JUDGMENT

1. In this action Mr Singh seeks to establish against the two registered shareholders in AIL and the two
directors entitlement to a declaration as to his beneficial interest in the share capital of AIL and damages for
breach of trust and like relief. The case proceeds on the footing that Mr Singh made an agreement or
reached an understanding as to the basis of his participation in AIL, which agreement or understanding has
not been performed. Accordingly, at the heart of the action lies the question of Mr Singh's status in relation to
AIL. There is no doubt that the defendants are the registered shareholders and have the legal rights
attaching to those shares. There is no doubt that the directors are the de jure directors of AIL and able to
exercise its powers. The question is whether, as matters stand, Mr Singh has any equitable claim.

2. The trial is part way through. Extensive evidence has been called, but it is inevitable that the trial will not
finish today. There will have to be an adjournment and a further two days of evidence and one or two days of
submissions.

3. An application is at this point made by Mr Singh without notice for an injunction to restrain the defendants
from causing, procuring or permitting AIL to fund their legal expenses. The issue itself first arose at an early
stage in the proceedings in November 2003 when Mr Singh's solicitors required confirmation that all costs
incurred by the respective defendants were being met personally and not from company funds. On 23rd
December 2003 the defendants' solicitors responded by saying that how the defendants met their legal costs
had nothing to do with Mr Singh and was privileged information; the issue about funding was irrelevant.

4. There the matter rested until Mr Bhupinder Singh Anand, in the course of his evidence, disclosed that his
costs and those of other defendants were being paid at present by AIL. The first question is whether I should
entertain a without notice application or whether I should insist upon the issue of an application notice and
return date before considering the question of any relief.

5. For the defendants Mr Corbett has protested that he was not aware until Mr Graham rose to make the
application of the precise terms of the injunction that was being sought, nor until Mr Graham's reply of the
forms of undertaking that were being offered in support of it. Those points were well made and I have borne
them in mind. But I also bear in mind that this application is being brought in the course of a very heavy trial
which is imposing unusual burdens on those participating in it because of the manner in which the evidence
is having to be taken. In these circumstances it is not surprising that formal court documents have not been
prepared in support of the application.

6. I propose to consider the application on a without notice basis. I have invited Mr Corbett either to keep his
powder entirely dry or simply to address short bullet points, bearing in mind the difficulty he faces in
addressing the form of application and the authorities on which it is based. He has given me short bullet
points. I have borne those in mind. I have decided to proceed to adjudicate on the application for three
reasons.
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7. First, in the immediate future, substantial costs are likely to be incurred. It is right that that expenditure
should be incurred under a regime that has been adjudicated upon by the court rather than left undetermined
pending the hearing of a formal application.

8. Secondly, the nature of Mr Singh's complaint is that the parties are not on an equal footing. He is being
forced to conduct this litigation out of his own pocket, whereas the defendants are conducting it using funding
out of AIL in which Mr Singh says he has a significant interest. CPR Part 1.1(2)(a) specifically says that the
court's approach to procedure must take into account the need to ensure that the parties are on an equal
footing. Once the question has been raised I therefore think it right that I should rule on it rather than
postpone it, to ensure that if there is any inequality, it is dealt with.

Thirdly, I was referred to the decision of His Honour Judge Howarth in Corbett v Corbett. The context of that
decision was a section 459 petition and the issue was whether costs could be incurred and then brought into
account in the ultimate valuation of the shares in the company about which the dispute raged. Judge
Howarth said that that was an unfair duty to put on the shoulders of valuers. He commented:

1 "It is far better to keep the horse in the stable than to allow it to bolt and then hope to lure it
back in the stable somewhat later in the day."

9. I consider that to be an apt metaphor in the present case as well. The issue must be grasped and the
sooner it is grasped, the better. I therefore propose to address the substance of the application but make
clear at the outset that I am considering it only in the context of an interim order.

10. The basic principle cannot be in doubt. It is that companies' money can only properly be expended for
companies' purposes. It cannot be expended for the personal purposes of directors or of shareholders. That
basic principle may of course be adjusted by amendments to articles or specific resolutions. It is conveniently
summarised by Mr Justice Lindsay in Re: A Company, no. 1126 of 1992 [1993] BCC 325. Again, the context
of this judgment was a section 459 petition. The issue was as to the use that could be made of the
company's property in the conduct of the section 459 petition. Mr Justice Lindsay held that first there might
be cases where the company's active participation or the payment of costs was ultra vires in the strict sense,
that is to say outside the express terms of the company's Memorandum and Articles. Secondly, he said, that
in the absence of such a strict ultra vires breach, there was no rule that necessarily and in all cases such
active participation and such expenditure by the company was improper. Thirdly, that the test of whether
such participation and expenditure was proper, is whether it was necessary or expedient in the interests of
the company as a whole. Fourthly, that when considering that question the court's starting point was a
rebuttable distaste for such participation and initial scepticism as to its necessity or expediency and that a
burden lay on those seeking to support the expenditure to satisfy the court of its necessity and expedience.
Fifthly, he said that if a company sought approval by the court in advance, then it was likely in the absence of
the most compelling circumstances, proved by cogent evidence, that the court would refuse such approval. It
is those principles and significantly the second and third which have guided me on this application.

11. Although that rule is expressed in the context of section 459 petitions, it may also be found expressed in
relation to derivative actions. The problem in the instant case is of course that the present proceedings are
not between members of a company. The substance of the action is not the business of the company but the
ownership of its shares. Mr Singh is not a registered owner. He seeks to establish a beneficial interest. Mr
Corbett in one of his bullet points submitted that trusts and beneficial interests were of no concern of the
company's court and he cited Re: A Company, no. 7828 of 1985 [1986] 2BCC 951. That case concerned
whether a person who claimed to be a beneficial owner of a share could bring himself within the scope of
section 459(2) as a person who was not a member but to whom shares in the company had been transmitted
by operation of law. Unsurprisingly, Mr Justice Harman held that a beneficiary under a constructive trust
could not claim to be such a person. But that does not assist me in the present case.
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12. The issue in the present case is closer to the sort of case where the sole owner of a house sells it and his
former live-in partner claims a beneficial interest in the proceeds of sale. The question is then often raised, to
what extent the parties may resort to the fund to pay the respective costs of deciding the fund's ownership. In
that context the expression has sometimes been used that the court has to strike the balance of justice or,
more accurately, the balance of injustice.

13. I believe that the discussion I had in mind was that in Sundt Wrigley v Wrigley [1993] CAT 23 June 1993.
The prima facie position is that the company's funds cannot be expended on pursuing the personal interests
of the registered proprietors, the registered shareholders and the directors. They seek to fund their litigation
with company money thereby relieving themselves of a burden which the claimant bears in having to fund his
costs personally. If it is established that the defendants are right, they can of course cause the company to
ratify the expenditure already incurred on their behalf. If Mr Singh establishes that the defendants are wrong,
he has correctly prevented a misfeasance. It seems to me that the balance of injustice lies in restraining the
defendants from using company money for what is prima facie an improper purpose and to do so even at the
suit of someone who has not established a right to intervene in the company's affairs, because if the claimant
is right, he is currently suffering an improper burden in having to bear his own costs in litigation against
persons extracting costs from the company and the defendants themselves are not significantly harmed by
being forced to pay their own costs in the interim in the same manner as the claimant. They can ratify the
position. If they are right they will be covered by a cross-undertaking in damages to the extent that the
bearing interim funding costs personally until they can ratify the burden being borne by the company causes
their loss.

14. I will therefore grant an injunction restraining the defendants, directly or indirectly, from causing, procuring
or permitting AIL to expend any moneys upon legal fees in respect of the present proceedings. The precise
terms of the undertaking will be those dictated to me by Mr Graham which I have noted but refrain from
reading out in full. That order will last over until close of business on 22nd March. There must be an
undertaking by the claimant to issue an application notice returnable that day and evidence in support of the
application that must be served by noon on Monday.

15. Such injunction issues on the footing that Mr Singh offers the standard cross-undertaking in damages.
Allied to this request for an injunction request was an application for an order that the defendants do disclose
on an ongoing basis management accounts. I decline to grant that order on an interim basis. That must be
addressed, if it is to be addressed, in the substantive application.

(The hearing continues)