How Do You Obtain Permission To Bring A Derivative Action?

Introduction

One of the basic rules of company law is that if a wrong has been committed against a company, the proper claimant ought to be the company itself. However, if the directors are the perceived wrongdoers, it is unlikely that those directors will authorise such legal action to obtain a remedy for that wrong-doing. Accordingly, in certain circumstances and subject to permission from the courts, shareholders may step into the company's shoes to pursue that claim on the company's behalf - a 'derivative' action where the shareholders' right to claim derives from that cause of action instilled in the company.

This form of claim was originally derived from common law principles, but is now set out in legislation in sections 260 and 261 of the Companies Act 2006 (the Act) as an exception to the general rule that a shareholder cannot bring a claim. This legislative opportunity, however, is still subject to the court's oversight by way of the derivative claimant's requirement to seek permission from the court to continue the claim. The judgment delivered in Saatchi v Gajjar and Another [2019] 3472 EWHC Ch offers a very useful overview and update as to the factors that the court will take into consideration when deciding whether to grant permission for a shareholder to pursue such an action.

Case Summary

A company was formed by the derivative claimant shareholder (S) and defendant (G) as 50/50 shareholders, with G also acting as the sole director in the company. S began proceedings against G in relation to an alleged misappropriation of Company assets (via director loans, vehicle purchases and various other payments). S was seeking the court's permission to continue with a derivative claim brought in respect of causes of action vested in the Company pursuant to the Act.

Relevant provisions of the Act

To better understand the outcome of this court action, it is useful to briefly set out the key provisions of the Act. The starting point is that section 260 of the Act provides that a derivative claim may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, or breach of trust by a director of the company.

There are then two stages of the proceedings. The shareholder must first establish a prima facie case for being given permission to proceed (section 261 of the Act). If that stage is passed, the matter proceeds to a second stage and a full hearing. At this point, the...