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Derivative Claims – What are They?

Our Commercial Litigation Solicitors Explain Derivative Claims Referencing a Recent Case Study

 It is a basic rule of Company Law that where a wrong is committed on the company, whether by the Directors or majority Shareholders, the proper Claimant is the company itself. As our commercial litigation solicitors explain, Derivative Claims permit a minority Shareholder, as representative of all the other Shareholders, to issue Court proceedings on behalf of the company, to try and redress a wrong committed by the majority Shareholders of the company. Permission of the Court is needed to commence that action.

In this article, we look at a recently settled case: Montgold Capital LLP Vs Agnieszka Ilska and Others (2018) and use it to illustrate the key points of derivative claims.

When Will the Court Give Permission to Commence a Derivative Claim?

We look at the factors the Court will take into account, by reference to the Montgold Capital LLP case. However, keep in mind that a key question for the Court, in deciding whether to permit a minority Shareholder to bring a Derivative Claim is whether a wrong committed against the company would otherwise go un-redressed if the Derivative Claim was not brought.

In this case, a shareholder was granted permission under Section 261 of the Companies Act 2006 (‘the Act’) to continue a Derivative Claim on behalf of a company where there was a realistic claim which carried conviction that the Directors and Shareholders, and others, had conspired to place the company in administration and purchase it from the Administrators in a ‘pre-pack’ transaction.

So, What Factors Does The Court Take into Account in Deciding Whether to Grant Permision to Commence a Derivative Claim?

Judge Simon Barker QC held that a Director, acting in accordance with the duty under Section 172 of the Act to promote the success of the company, would consider a number of factors when deciding whether to pursue a claim. Those factors included:

  1. The size of the derivative claim
  2. The strength of the claim
  3. The cost of the proceedings
  4. The company’s ability to fund the proceedings
  5. The ability of the potential defendants to satisfy a Judgment
  6. The impact on the company if it lost the claim and had to pay not only its own costs but the Defendant’s as well
  7. Any disruption to the company’s activities while the claim was pursued, and
  8. Whether the prosecution of the claim would damage the company in other ways.

On These Facts, the Judge Held that the Derivative Claim was Appropriate

The fact that the claim was found by the Judge to have been pursued in good faith would attach considerable importance to the claim. Judge Barker QC held that it could not be said that a derivative action was inappropriate under Section 263(3)(f)  of The Act on these facts. There were no independent shareholders to consider and creditors would not be significantly disadvantaged by allowing the claim to continue. No distribution was imminent.

Our Commercial Litigation Solicitors are Experienced in Derivative Claims

As commercial litigation solicitors specialising in the law of Director Duties and corporate responsibility, we are well used to dealing with the tactics and strategy of making and pursuing derivative claims. If you are facing or pursuing a derivative claim, for a free, no obligation chat, please contact us or call the team on 0121 200 7040.