A Guide to Derivative Claims

A derivative claim is legal action that is brought concerning a company director for a breach of duty, usually by shareholders. It can be brought if the director is believed to be negligent or has breached duty or trust. 

Directors of a company are legally bound by statutory duties under the Companies Act 2006 (the Act). The Act codifies certain common law and equitable duties that directors must adhere to when managing a company. 

The Act sets out the general duties of a director, which are:

• To act within the powers of the company’s constitution and to use those powers only for the purposes for which they were conferred;
• To promote the success of the company for the benefit of its shareholders;
• To exercise independent judgment;
• To exercise reasonable care, skill and diligence;
• To not accept benefits from third parties;
• To avoid conflicts of interest; and
• To declare interest in a proposed transaction or arrangement.

Where certain indiscretions are committed by company directors in relation to the management of a company, and it is argued that the directors are in breach of their duties, the courts have the power to permit shareholders of a company to bring a claim against the offending directors, on behalf of the company.

The desired effect of this claim is to make the directors personally liable for any misconduct whilst compensating the company for any loss suffered. As an aside, a director may also face disqualification proceedings and a ban from being permitted to act as a director, depending on the nature and severity of the breach.

Where the actions of a director have caused the company to suffer loss, a derivative claim should be presented in court, requesting the court’s permission to bring such a claim. The right to bring a derivative claim is restricted to members of the company only.

For these purposes, a member also includes a person to whom shares have been transferred but is not yet formally registered as a member or a person to whom shares have been transmitted by operation of law (for example, a personal representative of a deceased member).

A derivative claim may be brought in certain circumstances, generally in scenarios where there has been a breach of director’s duty, although a claim can also be brought in other limited circumstances, including losses suffered by the company as a result of a director’s:

• Negligence;
• Default; or
• Breach of trust

In order for the court to permit a derivative claim to be brought by a shareholder, the court must generally have regard to two factors, being:

• If the court considers that a person under an obligation to promote the success of the company would not seek to continue the claim; or
• If the court finds that the Act or omission which has led to the derivative claim was ratified or authorised in any way by the company.

The court must refuse any application to bring a derivative claim if either of the factors above are satisfied. If the court is persuaded that neither factor 1 nor 2 applies, the shareholder is likely to be granted permission d to bring the derivative claim on behalf of the company.  

Nevertheless, if an application to bring a derivative claim succeeds, various remedies can benefit a company. These remedies include, but are not limited to:

• Damages to rectify any losses suffered by the company;
• An order for restitution or a requirement that the director accounts to the company for any profit obtained;
• An order to set aside a specific transaction;
• An order for the restoration of company property; or
• An injunction to prevent further or prospective breaches