DERIVATIVE CLAIM (SHAREHOLDERS BRING THIS CLAIM AGAINST A DIRECTOR)
In certain limited circumstances, a minority shareholder is permitted to bring a ‘derivative claim’ in the
company’s name for a wrong committed against the company. For example: where wrong-doing directors
control
G the board and refuse to take action on behalf of the company. The minority shareholder in this
case can bring a derivative claim on behalf of the company to protect the company.
Thus, a derivative claim is an exception to the rule in Foss v Harbottle (that only a company, rather than a
specific shareholder can bring a claim against a wrong done to a company)
However, if a minority shareholder wishes to make a claim in respect of a wrong committed against him rather
than against the company, he must do so in a personal claim under S33CA, as a derivative claim would be
inappropriate.
DERIVATIVE CLAIM
A claim may be brought by any shareholder under S 260(3)CA for an actual or proposed act or
omission involving negligence, default, breach of duty or breach of trust by a director.
There is no need to demonstrate any actual loss suffered by the company, or indeed any benefit
gained by the directors.
TWO STAGES OF A DERIVATIVE CLAIM
PRELIMINARY STAGE: TO DECIDE WHETHER THE APPLICANT IN ENTITLED TO BRING A DERIVATIVE CLAIM
The preliminary stage involves the applicant obtaining the permission of the court to bring a derivative
claim (CA 2006, s 261(1))(2 STAGES)
(1) The court must first consider the claim and must dismiss it under s 261(2) unless the applicant
shows a prima facie case for giving permission.
(2) Only if this prima facie case is established will the court move on to the second stage and hold a
full hearing to decide whether to grant permission for the derivative claim to continue or not (CA
2006, s 261(4)).
The aim behind this two-step preliminary process is to weed out any frivolous or vexatious claims or
claims without merit.
TO DETERMINE IF PERMISSION SHOULD BE GRANTED TO SHAREHOLDER
S263 CA sets out rules the court must take into consideration at the full permission hearing when determining,
whether or not the shareholder is allowed to bring the claim: this includes:
(a) whether or not the shareholder is acting in good faith in bringing the claim;
(b) the importance a director (who is under a duty to promote the success of the company under s 172 of the
CA 2006) would place on continuing the claim; and
(c) whether authorisation or ratification of the wrong by the company would be likely.
The court should be careful in regard to any evidence put before it as to the views of shareholders who have no
personal interest in the matter (CA 2006, s 263(4))
TO COURT CAN REFUSE PERMISSION TO THE SHAREHOLDER IF
S263(2 CA) if
(a) a person acting in accordance with the director’s duty under s172 CA (duty to promote the success of the
company) would not seek to continue the claim; or
(b) the act or omission forming the basis of the claim has been authorised or ratified by the company. Under s
239 CA, the ratification must be passed by the shareholders without the votes of the director concerned
(assuming he is a shareholder) or a person connected to him (e.g, his wife or civil partner
In Kiani v Cooper [2010] , permission to proceed with a derivative claim under s 261 of the CA 2006 was
granted to a shareholder where the director in question had failed to produce evidence supporting his defence
to allegations of breach of fiduciary duty.
IF SUCESSFUL AT PRELIMINARY STAGE: DERVIATIVE CLAIM CAN PROCEED TO FULL TRIAL OF ISSUES
RAISED
If this claim is successful, it will result in a remedy being awarded to the company and not the
shareholder, as a derivative claim is being brought on behalf of the company.
DIRECTORS POWERS
Article 3MA states that the directors are responsible for the management of the company and can exercise all the
company’s powers. There is a similar provision in art 70 of Table A.
The directors usually exercise these powers by passing resolutions (decisions) at a meeting of the board of
directors of the company, known more usually as a board meeting or (as in the model articles for private
companies) as a directors’ meeting.
art 7 states that the general rule as to decision-making by directors is that it may be done by a majority decision at
a board meeting. Ultimately this is a matter for the articles, and art 7 goes on to say that a decision may also be
taken in accordance with art 8 where the board can exercise their powers unanimously without a meeting being
held, so long as all directors indicate to one another that they share a common view on a matter.
, before the directors can enter into a so-called substantial property transaction under s 190(1) of the CA 2006
between the company and one of its own directors, the company’s shareholders must first pass an ordinary
resolution. The shareholders therefore hold a power of veto, because if the ordinary resolution is not passed, the
contract cannot be entered into.
the shareholders may change the articles by special resolution under s21 CA in order to take certain powers from
the board. Both these decisions require a 75% shareholder majority, which demonstrates the seriousness with
which the directors’ general power of management of the company is taken. There is a further power for
shareholders to remove directors by ordinary resolution (over 50% of votes in favour) under s168(1) of the CA
2006.
DELEGATION OF POWERS
Under Art 5 It allows the directors as a board to decide to delegate any of their powers: (a) to such person or
committee; (b) by such means; (c) to such an extent; (d) in relation to such matters; and (e) on such terms; as they
think fit.
Article 5 even allows the board to grant the director delegated the power to delegate further to another person if
required. Clearly such a power gives the directors tremendous flexibility.
AUTHORITY OF DIRECTORS
Actual authority: is a legal relationship between principal and agent created by a consensual agreement to
which they alone are the parties. It can be expressed or implied. It is where the company (principal) gives the
director (the agent) specific prior consent to their actions e.g buying a property on behalf of the company/
Apparent (ostensible) authority: where the agent (the director) without the principal’s (the company) prior
consent but still binds the principal (the company) in the contract with the third party. That is, the principal (the
company) is estopped from denying the agent’s (the director) authority. It is where the director (agent) acts
without the company’s (principals) prior consent, but still binds the company (principal) in the contract with a third
party.
Directors will bind the company if they act with either actual or apparent authority. If they exceed this authority,
they will not bind the company. They will be personally liable for breach of warranty of authority to any third party
with whom they were dealing. They will also be personally liable on the contract to the third party, as they would
have failed to tie the company into the contractual obligation.
Apparent authority is based on a representation, by words or conduct, to the third party by the company that the
person in question (eg, the director) is acting with the company’s authority. Apparent authority cannot arise by the
agent’s own actions, only by those of the company.
DIRECTORS ANNUAL RESPONSIBILITIES
A company must keep adequate accounting records under S386(1) of the CA 2006, otherwise it commits an
offence.
It is the directors’ responsibility to ensure that full accounts are produced for each financial year (CA 2006, s
394).
These accounts must give a ‘true and fair view of the state of affairs of the company as at the end of the financial
year’ (CA 2006, s 396(2)). The directors must not approve the accounts unless they are satisfied that they give a
true and fair view of the assets, liabilities, financial position, and profit and loss of the company (CA 2006, s
393(1)).
The form and content of company accounts are prescribed by S396–413 CA.
Under S415CA every company must prepare a directors’ report for each financial year to accompany the
accounts. The accounts, directors’ report and, if required, auditors’ report must be circulated to every shareholder
in accordance with S423(1)CA, this is the directors’ responsibility.
S417CA requires the directors’ report to include a business review which contains a balanced and
comprehensive review of the development and performance of the company’s business, the risk and
uncertainties faced, and the position of the business at the end of the financial year. This does not apply to ‘small’
companies.
S441 CA companies must also file the accounts and directors’ report for each financial year at Companies
House. However, so-called ‘micro-entities’, ‘small’ and ‘medium-sized’ companies may file an abbreviated version
of the year-end accounts.
The time limit for filing accounts is nine months from the end of the accounting reference period for a private
company (CA 2006, s 442(2)).
THE CONFIRMATION STATEMENT
Every company must submit a confirmation statement to the Registrar of Companies once in every 12-month
period.
The directors are responsible for doing this within 14 days after the company’s ‘confirmation date’ (the date to
which the confirmation statement is made up) (CA 2006, s 853A(1) and (3)
In certain limited circumstances, a minority shareholder is permitted to bring a ‘derivative claim’ in the
company’s name for a wrong committed against the company. For example: where wrong-doing directors
control
G the board and refuse to take action on behalf of the company. The minority shareholder in this
case can bring a derivative claim on behalf of the company to protect the company.
Thus, a derivative claim is an exception to the rule in Foss v Harbottle (that only a company, rather than a
specific shareholder can bring a claim against a wrong done to a company)
However, if a minority shareholder wishes to make a claim in respect of a wrong committed against him rather
than against the company, he must do so in a personal claim under S33CA, as a derivative claim would be
inappropriate.
DERIVATIVE CLAIM
A claim may be brought by any shareholder under S 260(3)CA for an actual or proposed act or
omission involving negligence, default, breach of duty or breach of trust by a director.
There is no need to demonstrate any actual loss suffered by the company, or indeed any benefit
gained by the directors.
TWO STAGES OF A DERIVATIVE CLAIM
PRELIMINARY STAGE: TO DECIDE WHETHER THE APPLICANT IN ENTITLED TO BRING A DERIVATIVE CLAIM
The preliminary stage involves the applicant obtaining the permission of the court to bring a derivative
claim (CA 2006, s 261(1))(2 STAGES)
(1) The court must first consider the claim and must dismiss it under s 261(2) unless the applicant
shows a prima facie case for giving permission.
(2) Only if this prima facie case is established will the court move on to the second stage and hold a
full hearing to decide whether to grant permission for the derivative claim to continue or not (CA
2006, s 261(4)).
The aim behind this two-step preliminary process is to weed out any frivolous or vexatious claims or
claims without merit.
TO DETERMINE IF PERMISSION SHOULD BE GRANTED TO SHAREHOLDER
S263 CA sets out rules the court must take into consideration at the full permission hearing when determining,
whether or not the shareholder is allowed to bring the claim: this includes:
(a) whether or not the shareholder is acting in good faith in bringing the claim;
(b) the importance a director (who is under a duty to promote the success of the company under s 172 of the
CA 2006) would place on continuing the claim; and
(c) whether authorisation or ratification of the wrong by the company would be likely.
The court should be careful in regard to any evidence put before it as to the views of shareholders who have no
personal interest in the matter (CA 2006, s 263(4))
TO COURT CAN REFUSE PERMISSION TO THE SHAREHOLDER IF
S263(2 CA) if
(a) a person acting in accordance with the director’s duty under s172 CA (duty to promote the success of the
company) would not seek to continue the claim; or
(b) the act or omission forming the basis of the claim has been authorised or ratified by the company. Under s
239 CA, the ratification must be passed by the shareholders without the votes of the director concerned
(assuming he is a shareholder) or a person connected to him (e.g, his wife or civil partner
In Kiani v Cooper [2010] , permission to proceed with a derivative claim under s 261 of the CA 2006 was
granted to a shareholder where the director in question had failed to produce evidence supporting his defence
to allegations of breach of fiduciary duty.
IF SUCESSFUL AT PRELIMINARY STAGE: DERVIATIVE CLAIM CAN PROCEED TO FULL TRIAL OF ISSUES
RAISED
If this claim is successful, it will result in a remedy being awarded to the company and not the
shareholder, as a derivative claim is being brought on behalf of the company.
DIRECTORS POWERS
Article 3MA states that the directors are responsible for the management of the company and can exercise all the
company’s powers. There is a similar provision in art 70 of Table A.
The directors usually exercise these powers by passing resolutions (decisions) at a meeting of the board of
directors of the company, known more usually as a board meeting or (as in the model articles for private
companies) as a directors’ meeting.
art 7 states that the general rule as to decision-making by directors is that it may be done by a majority decision at
a board meeting. Ultimately this is a matter for the articles, and art 7 goes on to say that a decision may also be
taken in accordance with art 8 where the board can exercise their powers unanimously without a meeting being
held, so long as all directors indicate to one another that they share a common view on a matter.
, before the directors can enter into a so-called substantial property transaction under s 190(1) of the CA 2006
between the company and one of its own directors, the company’s shareholders must first pass an ordinary
resolution. The shareholders therefore hold a power of veto, because if the ordinary resolution is not passed, the
contract cannot be entered into.
the shareholders may change the articles by special resolution under s21 CA in order to take certain powers from
the board. Both these decisions require a 75% shareholder majority, which demonstrates the seriousness with
which the directors’ general power of management of the company is taken. There is a further power for
shareholders to remove directors by ordinary resolution (over 50% of votes in favour) under s168(1) of the CA
2006.
DELEGATION OF POWERS
Under Art 5 It allows the directors as a board to decide to delegate any of their powers: (a) to such person or
committee; (b) by such means; (c) to such an extent; (d) in relation to such matters; and (e) on such terms; as they
think fit.
Article 5 even allows the board to grant the director delegated the power to delegate further to another person if
required. Clearly such a power gives the directors tremendous flexibility.
AUTHORITY OF DIRECTORS
Actual authority: is a legal relationship between principal and agent created by a consensual agreement to
which they alone are the parties. It can be expressed or implied. It is where the company (principal) gives the
director (the agent) specific prior consent to their actions e.g buying a property on behalf of the company/
Apparent (ostensible) authority: where the agent (the director) without the principal’s (the company) prior
consent but still binds the principal (the company) in the contract with the third party. That is, the principal (the
company) is estopped from denying the agent’s (the director) authority. It is where the director (agent) acts
without the company’s (principals) prior consent, but still binds the company (principal) in the contract with a third
party.
Directors will bind the company if they act with either actual or apparent authority. If they exceed this authority,
they will not bind the company. They will be personally liable for breach of warranty of authority to any third party
with whom they were dealing. They will also be personally liable on the contract to the third party, as they would
have failed to tie the company into the contractual obligation.
Apparent authority is based on a representation, by words or conduct, to the third party by the company that the
person in question (eg, the director) is acting with the company’s authority. Apparent authority cannot arise by the
agent’s own actions, only by those of the company.
DIRECTORS ANNUAL RESPONSIBILITIES
A company must keep adequate accounting records under S386(1) of the CA 2006, otherwise it commits an
offence.
It is the directors’ responsibility to ensure that full accounts are produced for each financial year (CA 2006, s
394).
These accounts must give a ‘true and fair view of the state of affairs of the company as at the end of the financial
year’ (CA 2006, s 396(2)). The directors must not approve the accounts unless they are satisfied that they give a
true and fair view of the assets, liabilities, financial position, and profit and loss of the company (CA 2006, s
393(1)).
The form and content of company accounts are prescribed by S396–413 CA.
Under S415CA every company must prepare a directors’ report for each financial year to accompany the
accounts. The accounts, directors’ report and, if required, auditors’ report must be circulated to every shareholder
in accordance with S423(1)CA, this is the directors’ responsibility.
S417CA requires the directors’ report to include a business review which contains a balanced and
comprehensive review of the development and performance of the company’s business, the risk and
uncertainties faced, and the position of the business at the end of the financial year. This does not apply to ‘small’
companies.
S441 CA companies must also file the accounts and directors’ report for each financial year at Companies
House. However, so-called ‘micro-entities’, ‘small’ and ‘medium-sized’ companies may file an abbreviated version
of the year-end accounts.
The time limit for filing accounts is nine months from the end of the accounting reference period for a private
company (CA 2006, s 442(2)).
THE CONFIRMATION STATEMENT
Every company must submit a confirmation statement to the Registrar of Companies once in every 12-month
period.
The directors are responsible for doing this within 14 days after the company’s ‘confirmation date’ (the date to
which the confirmation statement is made up) (CA 2006, s 853A(1) and (3)
