Companies Act 2006 – Section 260

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Derivative claims

494. This section sets out the key aspects of a derivative claim.

• Subsection (1) defines what is meant by a derivative claim. There are three elements
to this: the action is brought by a member of the company; the cause of action is
vested in the company; and relief is sought on the company’s behalf. (A “member” is
defined in section 112. Subsection (5) provides that references to a member in this
Chapter include a person who is not a member but to whom shares in the company
have been transferred or transmitted by operation of law, for example where a trustee
in bankruptcy or personal representative of a deceased member’s estate acquires an
interest in a share as a result of the bankruptcy or death of a member).

• Subsection (2) provides that the claim may only be brought either under this Chapter
or in pursuance of an order of the court in proceedings under section 994 (proceedings
for protection of members against unfair prejudice).

• Subsection (3) provides that a derivative claim “may be brought only in respect of a
cause of action arising from an actual or proposed act or omission involving
negligence, default, breach of duty or breach of trust by a director of the company”.
As such, a derivative claim may be brought in respect of an alleged breach of any of
the general duties of directors in Chapter 2 of Part 10, including the duty to exercise
reasonable care, skill and diligence (section 174).

• Subsection (3) also provides that the cause of action may be against the director or
against a third party, or both. Derivative claims against third parties would be
permitted only in very narrow circumstances, where the damage suffered by the
company arose from an act involving a breach of duty etc on the part of the director
(e.g. for knowing receipt of money or property transferred in breach of trust or for
knowing assistance in a breach of trust).

• Subsection (4) provides that a derivative claim may be brought by a member in
respect of wrongs committed prior to his becoming a member. This reflects the fact
that the rights being enforced are those of the company rather than those of the
member and is the position at common law.

• Under subsection (5), the reference to a director in this Chapter includes a former
director; and a shadow director is treated as a director.

Section 261: Application for permission to continue derivative claim

495. This clause provides that, once proceedings have been brought, the member is
required to apply to the court for permission to continue the claim. This reflects the current
procedure in England and Wales under the Civil Procedure Rules. The applicant is required
to establish a prima facie case for the grant of permission, and the court will consider the
issue on the basis of his evidence alone without requiring evidence to be filed by the
defendant. The court must dismiss the application at this stage if what is filed does not show a
prima facie case, and it may make any consequential order that it considers appropriate (for
example, a costs order or a civil restraint order against the applicant). If the application is not
dismissed, the court may direct the company to provide evidence and, on hearing the
application, may grant permission, refuse permission and dismiss the claim, or adjourn the
proceedings and give such directions as it thinks fit. This will enable the courts to dismiss
unmeritorious claims at an early stage without involving the defendants or the company.

Section 262: Application for permission to continue claim as a derivative claim

496. This section addresses the possibility that, where a company has brought a claim and
the cause of action on which the claim is based could be pursued by a member as a derivative
action:

• the manner in which the company commenced or continued the claim may amount to
an abuse of process (e.g. the company brought the claim with a view to preventing a
member bringing a derivative claim);

• the company may fail to prosecute the claim diligently; and

• it may be appropriate for a member to continue the claim as a derivative claim;

497. The section provides that, in these circumstances, a member may apply to the court to
continue the claim as a derivative action.

Section 263: Whether permission to be given

498. This section sets out the criteria which must be taken into account by the court in
considering whether to give permission to continue a derivative claim.

499. Subsection (2) provides that the court must refuse leave to continue a derivative claim
if it is satisfied that:

a) a person acting in accordance with the general duty of directors to promote the
success of the company (section 172) would not seek to continue the claim; or

b) the act or omission giving rise to the cause of action has been authorised or ratified by
the company. Section 180(4) preserves any rule of law enabling the company to give
authority for anything that would otherwise be a breach of duty. Section 239 preserves
the current law on ratification of acts of directors, but with one significant change.
Any decision by a company to ratify conduct by a director amounting to negligence,
default, breach of duty or breach of trust in relation to the company must be taken by
the members, and without reliance on the votes in favour by the director or any
connected person.)

500. Subsection (3) sets out the criteria which the court must, in particular, take into
account in considering whether or not to grant permission for the derivative claim to be
continued.

501. Subsection (4) provides that, in considering whether to give permission, the court
must have particular regard to any evidence before it as to the views of independent members
of the company i.e. members who have no personal interest, direct or indirect in the matter.

502. Subsection (5) confers on the Secretary of State a power to make regulations with
regard to the criteria to which the court must have regard in determining whether to grant
leave to continue a derivative claim and where leave of the court must be refused. Subsection
(6) provides that, before making any such regulations, the Secretary of State must consult
with such persons as he considers appropriate. The power reflects a recommendation by the
Law Commission in its 1997 report on shareholder remedies in respect of analogous
shareholder actions in Scotland. Under subsection (7), the regulations will be subject to the
affirmative resolution procedure.

Section 264: Application for permission to continue derivative claim brought by another member

503. This section addresses the possibility that, where the court has already decided that
there is an appropriate case for a derivative claim and a member has commenced or continued
a claim:

• the manner in which the member commenced or continued the claim may amount to
an abuse of the court (e.g. the member brought the claim with a view to preventing
another member from bringing the claim);

• the member may fail to prosecute the claim diligently;

• it may be appropriate for another member to continue the claim (e.g. because the
member who brought the claim has become very ill).

504. The section provides that, in these circumstances, another member may apply to the
court to continue the claim as a derivative action.

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