| [2010] UKSC 22 | 21 |
whole matter in a single suit, they can join the third partyas a
co-defendant".56. That joinder of the trustees in abeneficiaries' derivative
action is required is supported by the analogy ofshareholders' derivative
actions, where the wrongdoers are themselves incontrol of the company, and the
aggrieved minority may bring a minority shareholders'action. In Nurcombe v
Nurcombe [1985] 1 WLR 370 (CA) Browne-Wilkinson LJ said (at 378) that
aminority shareholder's action, where the courts of equity permitted a
personinterested to bring an action to enforce the company's claim, was
analogous tothat in which equity permitted a beneficiary under a trust to sue
as plaintiffto enforce a legal right vested in trustees, which right the
trustees will notthemselves enforce, the trustees being joined as defendants.
57. A derivative action is brought in representative form,and the company is
joined as a defendant in order for it to be bound by anyjudgment and to receive
the fruits (if any) of the judgment, and because theaction has not been
authorised by its board or general meeting: Spokes v Grosvenor and West End
RailwayTerminus Hotel Co Ltd [1897] 2 QB124 , which is the leading authority
on the joinder of the company inderivative actions. A L Smith LJ said (at
126):"That in the circumstances of this case the company arenecessary parties
to the suit I do not doubt, for without the company beingmade a party to the
action it could not proceed".58. Chitty LJ said (at 128-129):"To such an action
as this the company are necessarydefendants. The reason is obvious: the wrong
alleged is done to the company,and the company must be party to the suit in
order to be bound by the result ofthe action and to receive the money recovered
in the action. If the companywere not bound they could bring a fresh action for
the same cause if the actionfailed, and there were subsequently a change in the
board of directors and inthe voting power. Obviously in such action as this is,
no specific relief isasked against the company; and obviously, too, what is
recovered cannot be paidto the plaintiff representing the minority, but must go
into the coffers of thecompany. It was argued for the appellants that the
company were made a partyfor the purpose of discovery only, and authorities
were cited to shew that whenno relief is asked against a party he cannot or
ought not to be compelled tomake discovery. But this argument and these
authorities have no bearing on thepresent
| [2010] UKSC 22 | 22 |
case, where, as already shewn, the action cannot proceed inthe absence of the
defendant company, and the defendant company are interestedin and will be bound
by the results".59. Since Part 11 of the Companies Act2006 came into force in
2007 shareholders' derivative claims have been put on astatutory basis. CPR
19.9 is headed "Derivative Claims – howstarted". It does not apply to
derivative claims of the type in issue onthis appeal, but it illustrates the
general principle that in derivative actionsthe entity on whose behalf the
claim is brought is a necessary party to thederivative claim. CPR 19.9 applies
in terms only to derivative claims bymembers of companies, other bodies
corporate, and trade unions, and provides inCPR 19.9(3) that: "The company,
body corporate or trade union for thebenefit of which a remedy is sought must
be made a defendant to theclaim."
60. The expression "derivative action" in thecontext of shareholders' actions
has been used in the United States since thenineteenth century and was first
used in that context in England by LordDenning MR in Wallersteiner v Moir(No
2) [1975] QB 373 , 390 etseq. In the United States it is equally established
that the corporation is anecessary party in any shareholder derivative action,
although (as in aderivative claims by beneficiary) it is sometimes analysed as
two claims, oneagainst the company for failure to take action and the other
being the claim bythe company against the wrongdoer: Nurcombev Nurcombe
[1985] 1 WLR 370 ,378; Konamaneni v Rolls RoyceIndustrial Power (India) Ltd
[2002]1 WLR 1269 , at [50]. In 1873, in Davenportv Dows , 85 U.S 626 (1873)
Justice Davis, delivering the opinion of theSupreme Court, said, at p
627:"These rights the individual shareholder is allowed toassert in behalf of
himself and associates, because the directors of thecorporation decline to take
the proper steps to assert them. Manifestly theproceedings for this purpose
should be so conducted that any decree which shallbe made on the merits shall
conclude the corporation. This can only be done bymaking the corporation a
party defendant. The relief asked is on behalf of thecorporation, not the
individual shareholder, and if it be granted, thecomplainant derives only an
incidental benefit from it. It would be wrong, incase the shareholder were
unsuccessful, to allow the corporation to renew thelitigation in another suit
involving precisely the same subject matter. Toavoid such a result, a court of
equity will not take cognizance of a billbrought to settle a question in which
the corporation is the essential party ininterest unless it is made a party to
the litigation".
| [2010] UKSC 22 | 23 |
61. Almost a hundred years later, in Ross v Bernhard , 396 US 531 (1970) at
538, the Supreme Court said: "Thecorporation is a necessary party to the
action; without it the case cannotproceed. Although named a defendant, it is
the real party in interest, thestockholder being at best the nominal plaintiff.
The proceeds of the actionbelong to the corporation and it is bound by the
result of the suit".Another reason for joinder has been said to be that "the
decree mustprotect the directors against any further suit by the corporation,
and thiswill not be true unless it be a party to the suit:" Philipbar v Derby
, 85 F 2d 27 (2d Cir 1936) at 30.
62. Consequently it has been the consistent practice (notedin Annual Practice
1887-8, p 223; Harmerv Armstrong [1934] Ch 65 ,93, per Romer LJ) for almost
300 years that, where a beneficiary brings anaction in his own name to recover
trust property, the trustees should be joinedas defendants. Daniell's Chancery
Practice, 7th ed 1901, p176 states: "….such an actioncannot, however, be
maintained without the personal representative being aparty". To put it
differently, it would be "procedurally improper tocontinue without the addition
… which is proposed": McGee, LimitationPeriods, 5th ed2006, para 23.025. The
purpose of joinder has been said to ensure that they arebound by any judgment
and to avoid the risk of multiplicity of actions: Lewin,Trusts, 18th ed2008,
para 43-05. But joinder also has a substantive basis, since thebeneficiary has
no personal right to sue, and is suing on behalf of the estate,or more
accurately, the trustee.
63. The conclusion that in a beneficiary's derivative actionthe trustee must be
a party is not undermined by those cases in which it hasbeen held, or assumed,
that an action by an equitable assignee of property (suchas a debt, or
intellectual property) can proceed, or is properly constituted,without the
joinder of the assignor at the outset of proceedings.
64. The starting point is that if an equitable assignee suesa third party, the
assignor must be joined as a defendant: E M Bowden's Patents Syndicate Ltd
vHerbert Smith & Co. [1904] 2Ch 86 , 91 (Warrington J); WilliamBrandt's Sons
& Co. v. Dunlop Rubber Co. Ltd. [1905] AC 454 , 462 (LordMacnaghten);
Performing RightSociety, Ltd. v. London Theatre of Varieties Ltd [1924] AC 1 ,
13-14 (Viscount CaveLC), 19-20 (Viscount Finlay), 29 (Lord Sumner); Vandepitte
v. Preferred Accident Insurance Corporation of New York [1933] AC 70 , 79
(Lord Wright); Harmer v Armstrong [1934] Ch. 65 , 82 (Lord Hanworth MR).
65. But it is not an invariable rule: Performing Right Society Ltd v
LondonTheatre of Varieties Ltd [1924]AC 1 , 14 ("there may be special cases
where it will not beenforced" per Viscount Cave LC). In that decision it was
held that anequitable assignee may obtain interlocutory relief but was not
entitled toobtain a final injunction without joining the legal owners. Viscount
Cave LCsaid (at 14):
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"That an equitable owner may commence proceedingsalone, and may obtain interim
protection in the form of an interlocutoryinjunction, is not in doubt; but it
was always the rule of the Court ofChancery, and is, I think, the rule of the
Supreme Court, that, in general,when a plaintiff has only an equitable right in
the thing demanded, the personhaving the legal right to demand it must in due
course be made a party to theaction … Further, under Order XVI., r. 11, no
action can now be defeated byreason of the misjoinder or non-joinder of any
party; but this does not meanthat judgment can be obtained in the absence of a
necessary party to theaction, and the rule is satisfied by allowing parties to
be added at any stageof a case. Subject to these observations, I think that the
general rule isstill operative."66. William Brandt's Sons & Co. v Dunlop Rubber
Co. Ltd. [1905] AC 454 was a case in which an assignee was allowedto proceed
to judgment without joining the assignor. That was because the wholefocus of
the litigation was on the question whether instructions given by thebank's
customer to purchasers of rubber to pay its bank direct amounted to anequitable
assignment of debts, so that the bank could sue for their recovery.The bank
sued the purchasers directly without joining its customer, theassignor. The
fact that the assignor was not a party seems to have beenoverlooked until the
House of Lords held that there had been an equitableassignment. Lord Macnaghten
said (at 462): "Strictly speaking, [thesellers], or their trustee in
bankruptcy, should have been brought before theCourt. But no action is now
dismissed for want of parties, and the trustee inbankruptcy had really no
interest in the matter. At your Lordships' bar theDunlops disclaimed any wish
to have him present, and in both Courts below theyclaimed to retain for their
own use any balance that might remain aftersatisfying Brandts." Lord James said
(at 464): "The defect in theparties to the suit can be remedied."
67. In more modern times it has been held that, although thepractice was to
join the assignor, the requirement is a procedural one, theabsence of which can
be cured. The assignor must be joined before a finaljudgment can be obtained by
the assignee, but the action is validly constitutedwithout joinder, so that if
the assignee sues without joining the assignor, theaction is in time for the
purposes of limitation: Central Insurance Co Ltd v SeacalfShipping Corpn (The
Aiolos) [1983]2 Lloyd's Rep 25 , 34, per Oliver LJ; Weddell v JA Pearce &
Major [1988] Ch 26 , 40, per Scott J; and cf Robinson v Unicos Property Corpn
Ltd [1962] 1 WLR 520 , 525-526, perHolroyd Pearce and Harman LJJ; ThreeRivers
District Council v Governor and Company of the Bank of England [1996] QB 292 ,
309, 313, per PeterGibson LJ. For criticism see Tolhurst, Equitable Assignment
of Legal Rights: AResolution to a Conundrum (2002) 118 LQR 98 , at 111-116.
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