Thursday, 18 November 2010

UK: England and Wales: derivative claims under the Companies Act 2006

As noted in an earlier post, the High Court delivered its judgment last month in Cinematic Finance Ltd v Ryder and Others (Ch.D., 21 October 2010), in proceedings for permission to continue a derivative action/claim under Part 11 of the Companies Act (2006). The judgment has not yet been published on BAILII but a digest of the decision has been posted on the Company Law Forum: see here. Here is an extract from the digest:

In general, it was only the company, acting by its proper organ, that could bring proceedings for a wrong done to the company. A minority shareholder had no power to do so. A derivative claim represented an exception to the general rule whereby a minority shareholder was permitted to claim a remedy in respect of a wrong done to the company. The essential question was whether there had been a fraud on the minority, which generally involved an abuse of power by the directors and a stifling of the claim by reason of the control exercised by wrongdoers over the company.

In the instant case, the new statutory code in the Act, preserved the existing law as to the need to show 'wrongdoers control'. The new statutory rules did not formulate a substantive rule to replace the rule in Foss v Harbottle but provided a new procedure with more modern, flexible and accessible criteria for determining whether a shareholder could pursue an action. The Act would need radical language to displace such a well established rule. Section 261(4) of the Act made it clear that the court had a discretion whether to allow a derivative action to continue. Although s 263(2) of the Act did not mention that permission was to be refused where the applicant had control of the company, it would only be in exceptional circumstances that such an application would be allowed to continue. The instant circumstances were not exceptional. The evidence indicated that one of the principal reasons for the use of a derivative action procedure was to save the cost of pursuing the remedy through the insolvency procedure. That was not a sufficient reason to allow a derivative action to proceed".

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