Derivative claims give shareholders the power to combat a dishonest or negligent director to protect the company’s interests. They can resolve disputes and save companies from unnecessary, unlawful losses.
What is a Derivative Claim?
A derivative claim is a claim brought by a shareholder on behalf of the Company in respect of a breach of duty by a Director. The law on this is set out in Part 11, Chapter 1 Companies Act 2006 Section 260(1).
In law, only the person with a claim can enforce it. So, if Mr Example owes you a debt, you are the only person who can bring an action in the Courts against Mr Example to recover it.
But if Mr Example owes a debt to Comp Ltd, the law allows another person to enforce the claim. Mr Example could be ‘best friends’ with Comp Ltd’s directors, and they may not want to bring a claim against him. In this case, a shareholder can bring forth a derivative claim.
You can bring forth a derivative claim for:
- Breach of duties
- Losses due to negligence
- Losses due to default
- Losses due to breach of trust
Directors’ Duties
Chapter 2 of The Companies Act 2006 established directors’ duties towards their companies. They must:
- Act within their powers and the company’s constitution and use them in the original intention
- Promote the company’s success
- Exercise independent judgement
- Exercise reasonable care and skill
- Avoid and declare actual and potential conflicts of interest in existing and proposed transactions
- Not receive benefits from third parties granted due to their position
Failure to fulfil these duties can result in a derivative action.
How to Make a Derivative Claim
You need permission from a judge to continue making a derivative claim. They will determine whether the claim is in the company’s interests or whether the claimant has other motives.
The shareholder will then have to file enough evidence to establish a case and convince the court that the derivative claim is appropriate, brought in good faith and the type of claim the company would have brought if effectively directed. Collecting this evidence can be challenging.
Results of a Successful Claim
If the court finds your claim to be successful, it can order:
- An injunction barring the director from committing further unlawful acts
- The liable director to pay damages to the company
- The director being removed and dismissed as an employee
- The company to pay the minority shareholders’ legal costs after they retrieve damages from the director
- Transactions that benefited the director through a conflict of interest to be set aside
In claims where the company continues to operate and liable directors are ordered to pay damages, they go to the company, not the shareholder making the claim.
How to Fight a Derivative Claim
If a director suspects that a derivative claim against them is likely, they can apply to a Court for an application of relief. The court will then assess whether the director acted honestly and reasonably in the case’s circumstances and can relieve the director of liability.
If over 50% of shareholders vote in favour of the director’s alleged misconduct, no one can make a derivative claim. It ratifies their actions.
Instruct Our Solicitors
If you want to make or fight a derivative claim or are currently involved in a director dispute or shareholder dispute, we can help. Simply contact our team to set up a free consultation.
FAQ
Who can make a derivative claim?
A member of the company can make a derivative claim. Typically, they are used by minority shareholders.
What can a derivative claim lead to?
A successful derivative claim can lead to the director’s dismissal, an injunction preventing further unlawful actions, transactions with a conflict of interest being set aside and an order to pay damages to the company.
When can I bring forth a derivative claim?
You can bring a derivative claim if you suspect a director has breached their duties or trust or been negligent. The court must evaluate the director’s actions before you can continue the claim.
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