UK: Scotland: shareholder indemnification and leave to bring derivative proceedings

In Wishart v Castlecroft Securities Ltd. [2009] CSIH 65 the court granted leave for a shareholder to bring derivative proceedings under Part 11, Chapter 2, of the Companies Act (2006) and subsequently held that the company should indemnify the petitioning shareholder in respect of the costs reasonably incurred in seeking such leave. In Wishart v Castlecroft Securities Ltd. [2010] CSIH 2, published earlier this week but dated 25 November 2009, Lord Reed: [1] explained the juridical basis on which the Scottish courts are able to make such an order regarding indemnification and [2] stressed the desirability of Scottish shareholders being placed in the same position as their counterparts in England and Wales (at paras. [4] and [5]):

The logic of derivative proceedings, as explained in the earlier opinion of the court, is that the proceedings are brought by the member on behalf of the Company. In those circumstances, the member falls within the scope of the principle that "representative persons are entitled to the costs necessarily incurred in the interests of their constituents" (Gibson v Caddall's Trustees (1895) 22R 889 at page 893 per Lord McLaren). Where leave to bring derivative proceedings is granted, that principle applies to the application for leave as well as to the derivative proceedings themselves. It follows that the member ought ordinarily to be indemnified by the company in respect of the expense incurred in relation to the application for leave.

We also note that, as explained in the earlier opinion, one of the objectives of the legislation introducing the requirement that leave be obtained was to achieve consistency in company law throughout the United Kingdom. In England and Wales, provision is made by the Civil Procedure Rules for the court to order the company for whose benefit a derivative claim is brought to indemnify the claimant against liability for costs incurred in the permission application as well as in the derivative action (Rule 19.9E). It is undesirable, against that background, that the legislation should be applied in Scotland in a manner which makes it more difficult in practice for a shareholder to bring derivative proceedings".