From time to time, officeholders apply to court to seek approval of a proposed course of action which they have decided to take in connection with their function.
But where the court sanctions those decisions, are the officeholders protected from subsequent claims relating to the same?
The Court of Appeal, in the case of Denaxe Limited v Cooper & Rubin  EWCA Civ 752 recently considered this question in the context of Receivers who had obtained the approval of the court for a sale of assets over which they had been appointed. In this blog we consider what comfort, if any, officeholders in the broader sense can take from this decision.
Denaxe, formerly known as Blackpool Football Club (Properties) Limited, owned various assets, in particular; the majority shareholding in the holding company of Blackpool Football Club (“the Club”), the Club’s football stadium and its training ground (“the Footballing Assets”).
A dispute broke out between (i) Denaxe (as majority shareholder of the Club) and Denaxe’s owner/ controller Mr Owen Oyston (“Mr Oyston”) and (ii) the minority shareholder of the Club (“VB”). VB issued an unfair prejudice petition and succeeded in obtaining an order that its shares in the Club to be bought out by Denaxe and Mr Oyston (“the Buy-Out Order”).
Denaxe failed to pay all of the sums due to VB under the Buy-Out Order and, amongst other things, VB successfully applied to court to appoint Receivers, by way of equitable execution, over Mr Oyston’s shares in Denaxe and the Footballing Assets (“the Receivership Order”).
Once appointed, the Receivers explored the sale of the Club and the other Footballing Assets, but they were concerned that Mr Oyston might acquire VB’s shares in the Club (pursuant to the Buy-Out Order) and concluded that should this happen, it would affect the sale price of the Footballing Assets.
As such, VB applied to court to vary the Buy-Out Order, in conjunction with an application by the Receivers, to obtain sanction to a sale of the Footballing Assets together with VB’s shares in the Club, as a composite lot, to a specific person, for a specific price (“the Sanction Application”).
Both Mr Oyston and Denaxe were given an opportunity to attend the hearing of the Sanction Application. Mr Oyston attended and contended that the Receivers did not need a direction from the court to sell Denaxe’s shares in the Club and the other Footballing Assets because their power to do so was plainly covered by the Receivership Order. He also sought to reserve his position in respect of valuation. Denaxe was not separately represented.
At the hearing, Mr Justice Smith approved the specific sale and concluded that it was right for the Receivers to seek approval of the sale because it was momentous. And, in reaching his decision, the Judge commented that Mr Oyston had not raised any issue with the proposed sale but instead, had sought to reserve his rights, which was, in his judgment, inappropriate.
The sale of the Footballing Assets and VB’s shares in the Club was completed. Following which the court discharged the Receivership Order, the effect of which was to restore control of Denaxe to Mr Oyston.
Denaxe then issued a claim against the Receivers asserting they had breached their duties of care and had sold the Footballing Assets at an undervalue. The Receivers responded by issuing an application to strike out Denaxe’s Claim.
At first instance, Mr Justice Fancourt found in favour of the Receivers and struck out Denaxe’s Claim, finding that; by reason of the court’s approval of the specific sale, the Receivers were immune from Denaxe’s Claim, or, in the alternative, the claim brought by Denaxe was a Henderson v Henderson abuse of process because Denaxe and Mr Oyston were aware of the Receivers’ application for sanction of the sale but they did not utilise the opportunity to object.
Denaxe appealed Mr Justice Fancourt’s decision and, whilst the Court of Appeal did not agree with the way in which Mr Justice Fancourt framed his analysis of immunity (which depended on the proposition that if the court approves a specific transaction that confers a wide immunity in respect of all subsequent claims), it dismissed the appeal on the basis that regardless of whether or not the decision of Mr Justice Smith in the Sanction Application gave rise to an issue estoppel, it was, without a doubt, an abuse of process for Denaxe to bring its Claim, for the reasons given.
Key Takeaways for Officeholders
The decision provides the following clarification about the extent of protection that officeholders can expect when seeking approval from the court on a specific course of action:
- There is no doctrine of “immunity” in English law. Although court approval is likely to provide some protection to officeholders (see below for the extent of this) it will not prevent future claims against them even if they have acted in accordance with the order sanctioned by the court. To claim “immunity”, a trustee or other officeholder would have to rely on the doctrines of res judicata and abuse of process.
- The “immunity” that officeholders get, essentially arises as a result of issue estoppel. In other words, if a judge sanctions a particular step that will operate as a bar to a party to the application (or one of their privies) seeking to relitigate that issue in subsequent proceedings. To rely on issue estoppel, it is an essential requirement that the claimant in the second set of proceedings should also have been a party (or a privy of a party) to the earlier decision.
- Accordingly, if officeholders notify beneficiaries or creditors of their intention to seek approval for a momentous decision (and those parties then have the opportunity to participate (and object)) then the officeholders will undoubtedly have a better prospect of persuading a court (or heading of) a subsequent claim that seeks to challenge the officeholder’s actions. This is because the beneficiaries or creditors had opportunity to make objections at the approval application and if they did not, then they should not be given a further opportunity to do so.
- If following an approval application, an officeholder’s actions are challenge, to determine whether the officeholder is “immune” from that challenge they must first identify the issues that were decided at the approval application, then consider whether the complainant was a party (or notified) of that application and then ask whether any of the issues complained of are the same. The extent of “immunity” will depend largely upon who were the parties to the approval decision and the nature of any subsequent claim.
- Whilst the court hearing an approval application is not required to decide in advance precisely what “immunity” will flow from a decision to approve the transaction, it will assist an officeholder if they identify as clearly as possible the issues which the court is being asked to decide and by identify specifically the type of claims that would or would not be barred as a consequence of the court’s sanction. This would hopefully avoid much of the difficulty faced by the court in Denaxe.
It is clear from Denaxe that officeholders should not treat the court as a sanctuary or bomb shelter. There is no blanket or automatic rule about the scope of any “immunity” for officeholders and there is no ‘one size fits all’ answer.
The scope of any “immunity” will depend on what precisely the court has determined during the course of the approval application and applying the legal principles of res judicata and abuse of process.
When approaching an approval application, it would be prudent for officeholders:
- To ensure that all interested parties are given the opportunity to attend and be heard, whether that is via notice of the application, or, where notice is not possible or practical, via advertisement.
- To be clear with the issues they are asking the court to determine, including why they are seeking approval of the court, the nature of any legal or evidential inquiry and invite the court to consider the parameters, effects and consequences of the decision including the type of claims that would or would not be barred; and
- As part of the application, invite all interested parties to raise any objections they have and seek a direction of the court that evidence in opposition to the application should be filed and served by a specified deadline.