New Derivative Action May Lead To Increased Claims Against Directors

Article by Guy Pendell and Lindsey Davies

A new statutory framework for derivative actions comes into force today under the Companies Act 2006. These provisions widen the scope of such actions and have the potential to increase claims against directors.

The Action

A derivative action is a claim against a director brought by a shareholder on behalf of the company. Such claims are brought when a wrong has been committed against the company which the company itself does not pursue.

Before today, shareholders could only bring derivative actions in very limited circumstances. Generally, an action could be brought only where the conduct complained of amounted to a "fraud on the minority", which the company itself was not pursuing because the wrongdoers controlled the company.

The new derivative action allows shareholders to bring claims for:

any actual or proposed

act or omission

involving negligence, breach of duty or breach of trust

by a director, including breach of those duties codified for the first time in the Act. Importantly, the director does not have to have benefited personally from the conduct of which the shareholder complains.

Derivative actions may also be brought against third parties provided the claim arises from a director's default.

As with the former regime, a shareholder will need the permission of the court to continue any derivative claim. The Act, together with amendments to Part 19 of the Civil Procedure Rules that also come into force today, set out in detail how the court will deal with the permission stage.

In summary, after issuing a claim form, the shareholder must issue an application for permission to continue the claim supported by written evidence and notify the company of the claim and the application. The court will then decide whether the shareholder has a prima facie case on the evidence filed by the shareholder. If the court rules against the shareholder at this stage, the shareholder may request that the court's decision be reconsidered at an oral hearing. If the court decides that the shareholder does have a prima facie case, it may then order the company to file evidence, which will be considered at a full permission hearing. The court will determine whether to grant permission by reference to a number of factors set out in the Act. If permission is granted, the shareholder will then be able to bring the proceedings against the director or third party on behalf of the company.


The extension of...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT