Lessons from a “Hail Mary” claim: Ryan v HSBC UK Bank

The High Court has dismissed a derivative action brought by the founders of MCPLC, an insolvent AIM-listed company, in which they requested permission to bring a claim against HSBC as an alleged shadow director of the company (Ryan v HSBC UK Bank Plc). Permission was refused in strong terms. His Honour Judge Parfitt, sitting as a High Court Judge, found that it was “unsubstantiated”, “inconsistent” and “speculative” and as a “Hail Mary” last ditch claim it did not fulfil the statutory requirements for proceeding.

What are the practical implications?

The decision in Ryan v HSBC provides helpful clarification as to what the courts will and, more importantly, won’t accept from claimants. A derivative claim is unlikely be allowed to proceed on the basis that a notional director of the company would be bound to bring a claim because the company had nothing to lose so ‘it might as well try.

Furthermore, a derivative claim cannot be brought on the basis of speculation. The focus should be on the actual circumstances of the case. Anecdotal ‘nature of the beast’ type evidence is not enough.

Finally, from a bank’s perspective, it is entitled to serve its own interests. It may exercise influence or require action from a company in providing financial support, without finding itself in a fiduciary position as a shadow director.

The claim

The claimants owned 46.2 per cent of MCPLC (the Company), which formed part of a group of residential development companies. HSBC UK Bank Plc (the Bank) provided loans to the Company over many years until the Company faced financial difficulties in 2014. The Company’s AIM listing was suspended in 2015 and the Company was transferred to the Bank’s “Loan Management Unit”. It was eventually put into administration and struck off.

The claimants alleged that the Bank’s actions caused the Company to fail. They claimed that when the Bank took over, the Bank exercised significant control over the Company and wrongly pursued its own interests to run down the business. It was the Bank’s control over the Company that was alleged to have led to it becoming a Shadow Director.

The claimants position arose from genuinely and strongly held beliefs. They had only limited access to documents pending disclosure, but those documents led the claimants to believe that there was significant support for the derivative claims. The claimants submitted that the Company no longer had any purpose save for the potential litigation and had nothing to lose in bringing a derivative claim. As there was no risk, any director would have been bound to bring such a claim.

The Bank’s position was that it had acted as banker throughout, protecting its own interests while helping the business as far as it could. To exercise control and impose conditions on the Company did not automatically result in a shadow directorship being created. The allegation that the company was mismanaged for the Banks’ benefit was submitted to be illogical as the Bank was still suffering losses of close to £30m from its collapse.

Statutory framework

By way of background, derivative actions have recently been the subject of much discussion following the rejection of the ClientEarth case against Shell. Such claims require the court’s permission to proceed as they involve claimants stepping into the shoes of a company. In accordance with the Companies Act 2006 (the Act), claimants must pass a two stage test.

The first stage is for the claimant to establish, based on documentary evidence, that they have a sufficient prima facie case, so as not to be dismissed at the outset (under s261(2) of the Act). In the ClientEarth litigation, the claimants failed at this first hurdle. The claimants in Ryan were successful at this stage.

The second stage is governed by s263 of the Act, under which permission must be refused if the court is satisfied that:

• The director’s actions have been authorised or ratified, or
• That no director acting in accordance with their duty to promote the success of the company would seek to continue the claim.
  
  

Other factors which must also be taken into account by the court include:

• What importance a director acting in accordance with their s172 duty would attach to continuing the claim,
• Whether the company decided not to pursue the claim,
• The claimant’s good faith in bringing the claim, and
• Whether the claimant had an alternative remedy.
  
  

What did the court decide?

The court refused permission for the claim to be continued as the claimants failed to satisfy the second stage requirements. The judge was critical of the claim, describing it as weak and speculative, and concluded that no person seeking to promote the success of the Company would continue the claim.

The judge’s observations on the claimant’s position and submissions provide important insight as to why permission was refused:

• There was a flaw in the reasoning that the Company had nothing to lose in bringing proceedings. The statutory test requires there to be positive reasons for continuing a claim. It is not fulfilled by a “Hail Mary” claim, namely commencing proceedings as a last throw of the dice.
• The notional director would recognise the marginal nature of the anecdotal evidence used to support of the claimant’s position. The evidence on the conduct of banks was said to show how founders were driven out of their businesses in favour of technocrats and good businesses were destroyed. The court however found the position presented was too reductive in nature and failed to take into account the wider picture such as the Bank’s irrecoverable debt. The notional director would bear in mind the outcome where the Bank was effectively the last creditor standing with an irrecoverable £20m which was inconsistent with this purported approach.
• The claimants’ allegation of the Bank acting as shadow director was found to be “lacking essential core facts”, and instead the judge relied on Ultraframe (UK) Ltd v Fielding in which it was stated that “a creditor […] is entitled to protect [its] own interests as a creditor without necessarily becoming a shadow director”.
• The judge was unimpressed with the claimants’ lack of documentary evidence and inconsistent case, even at this stage, and their hope that a useful document would turn up in support of their claim. By way of contrast, HSBC had complete, valid and consistent documentation which accorded with what commercial people might expect.
  
  

Ryan v HSBC UK Bank Plc [2023] EWHC 1066

With thanks to Emily Waterhouse, a current trainee in the Dispute Resolution team, for contributing to this article.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, July 2023