Costs In Derivative Actions

Derivative Actions Defined

A derivative action occurs where a member of a company, usually a minority shareholder, pursues a cause of action on behalf of the company. S184(c) of the BVI Business Companies Act 2004 (BCA) provides that a member of a company can apply for leave to (i) bring proceedings in the name of and on behalf of the company; and (ii) intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing proceedings on behalf of the company.

It is only under this section that members of the company are permitted to bring an action on behalf of the company. In all other circumstances the position is that the company is the proper claimant to sue in relation to its own causes of action.

A derivative action is brought where a wrongdoer, most commonly a director of the company, has caused the company loss through their wrongdoing. The cause of action is the company's and so is the relief. The relief is confined to the action to recoup those monies lost from the company through this wrongdoing and no relief is due to the shareholder bringing the claim.

The BVI courts will also apply the principle of reflective loss. Even if a shareholder can establish an independent cause of action, a shareholder cannot recover for loss he or she has suffered if that loss is reflective of the company's loss.

PROCEDURE

Procedural Hurdles to bringing a Derivative action in the BVI Court

Under s184(c) BCA, a shareholder must obtain permission from the Court before he can bring or continue proceedings on behalf of the company. The first stage of proceedings is ex parte in that only the claimant shareholder will be present. If permission is granted at this stage, an inter partes hearing (will be held where all parties are present including the defendant, often a director of the company, and the company). The Court will decide whether permission should be granted for the action to continue, but will not go into the merits in great detail in this hearing since this is of course a matter for trial.

Role of the Company in the Proceedings

In circumstances where the shareholder feels compelled to bring a derivative action, the claim will be brought against the wrongdoing director as the 'real' defendant and the company will be joined to the claim as the 'nominal' defendant.

Prior to the trial of the action it is unlikely that the company will be separately represented. However, the company may be represented if...