Derivative Actions under Companies Act 2006

07/07/2010

The High Court has decided when it would be appropriate for a minority shareholder to continue a claim against directors of a company in accordance with sections 261 and 263 Companies Act 2006.

The Claimant, a minority shareholder in a company ("the Company"), brought an action against the Directors of the Company (the first two Defendants) and another company (third Defendant) which was wholly owned by the second Defendant. The directors had agreed that the third Defendant would receive an interest-free loan from the Company, initially for £4million and later for £8.1million.

The Claimant consulted with 35 other minority shareholders and challenged this loan agreement on the basis that the loans to the third Defendant were not in the best interests of the Company.

Derivative actions such as this are governed by sections 260 - 264 Companies Act 2006. Under section 261, a shareholder must apply for leave (permission) from the Court to continue an action against the Directors of the company of which he is a member and must disclose a prima facie case against them.

The Claimant sought leave to continue the claim having received a response from the Directors to his claim. Section 263 governs when the Court can give leave to continue a derivative claim and includes factors which must be taken into consideration, such as whether the member is acting in good faith in seeking to continue the claim (s.263(3)(a)) and the importance that a person acting in accordance with section 172 [Companies Act 2006] (duty to promote the success of the company) would attach to the action continuing (s.263(3)(b)).

Mr Justice Roth applied the recent case of Iesini v. Westrip Holdings Ltd (2009) EWHC 2526 (Ch), and said that the Claimant has to establish something more than a prima facie case, even if the assessment was only provisional. It was made clear by Mr Justice Roth that there were a range of factors to be considered and that:

The Directors, in failing to charge any interest on the initial loan of £4 million and the subsequent loans totalling £8.1million, looked to have acted in breached of their fiduciary duties to the Company. The evidence they provided had been inadequate and the Judge felt it was appropriate to continue the action until the completion of the disclosure process. At that stage the facts would be clearer and the Claimant could be advised on whether to continue.

This case is a valuable addition to the case law exploring derivative actions, as set out and developed in the Companies Act 2006. It is clear that the wider range of circumstances in which derivative actions may be brought by minority shareholders will benefit and help protect companies and their shareholders.

Contact: henryfarris@city-law.net

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