Derivative Action: A Shareholder's Remedy To Protect The Interests Of The Company

• Published date: 22 January 2024
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Financial Services, Commodities/Derivatives/Stock Exchanges, Corporate and Company Law, Directors and Officers, Shareholders
• Law Firm: Appleby
• Author: Mr Yahia Nazroo and Fatema Mohidinkhan

Generally, when there is a wrongdoing committed against a company, it is the company itself which acts. The decision to initiate proceedings rests with the directors and not the shareholders. The latter are normally precluded from initiating proceedings on behalf of the company and the courts are rarely inclined to intervene into the management of a company.

However, there are instances where certain specified types of wrong are committed by the directors against the interests of the company and in breach of their fiduciary duties, which can allow shareholders to have recourse to the Court on behalf of the company. Such an action is known as a derivative action and has as its principal objective to protect the interests of the company.

This article analyses the recent judgment of the Court of Civil Appeal (CCA) in Bay Capital Investments Ltd v Mohinani Harry Hassomal 2023 SCJ 516 where the Court restated the conditions that must be met for a derivative action to be successful and briefly looks at the potential remedies available and the issue of costs for derivative actions.

THE CASE

The Appellant Company, Bay Capital Investments Ltd (BCI Ltd) appealed against the decision of the Supreme Court granting to the Respondent (Mr Mohinani) leave to bring a derivative action against the directors of the BCI Ltd.

Mr Mohinani is an investor and bought shares in a total amount of GBP 1.5 million in BCI Ltd. A restructuring proposal was made by the Board of Directors of BCI Ltd towards its investors in relation to the funding of a particular project known as the 'Park Chinois Project'.

Subsequent to the implementation of the restructuring proposal, Mr Mohinani made an application to the Commercial Division of the Supreme Court for leave to enter a derivative action, pursuant to Section 170(1)(a) of the Companies Act [the Act] in the name and on behalf of BCI Ltd, alleging, inter-alia, that the restructuring of investments was tainted with fraud and was set up for the benefits and interests of Bay Capital Partners Ltd (Investment Manager) and its Founding and Managing Partner, one Mr Mehta and not for those of BCI Ltd. Mr Mohinani alleged that the 'scheme' devised benefitted from the complicity of the board of directors of BCI Ltd who, according to him, have condoned the acts and doings of the Investment Manager and Mr Mehta in breach of their fiduciary duties and fraudulently.

WHO CAN BRING A DERIVATIVE ACTION

Section 170(1) of the Act provides for who can bring a...