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This note will focus on derivative claims and the petition for winding up of the company on just and equitable ground, being two of the three main statutory remedies available to a member of a company.

Part 1: Derivative Actions

Derivative actions are claims brought by individual shareholders, acting on behalf of a company, against the company’s directors. They are brought in respect of wrongs committed against the company that, for whatever reason, the company is not willing to pursue in its own right. Where a derivative action is brought, the entire benefit of the proceedings goes to the company and not to the shareholder who brings the claim. This is in contrast to unfair prejudice claims.
It is important to note that at the time the global financial crisis started a derivative action was only available at common law (which largely followed the principles in Foss v Harbottle (1843) 67 ER 189 and limited actions could be brought: i.e. non-compliance with a special procedure where the personal right of the member has been infringed, where there has been fraud on the minority etc.). The statutory provisions which were brought in via the Companies Act on 1 October 2007, were to extend the remedies available. Whilst the statutory procedure deals with single derivative claims, multiple derivative claims still remain governed by the common law.

As a derivative action is an equitable remedy the court in exercising its discretion would consider the conduct of the claimant, his motives in seeking to sue and the availability of other remedies.

Bringing a derivative claim – when is a derivative claim likely to be brought?

s.260 – 263 Companies Act 2006

The introduction of the 2006 Companies Act saw the implementation of the statutory criteria for bringing a derivative claim. These are set out in sections 260-263 of the Act.

Chapter 11

s. 260 Derivative Claims

(1) This Chapter applies to proceedings in England and Wales or Northern Ireland by a member of a company—

(a) in respect of a cause of action vested in the company, and

(b) seeking relief on behalf of the company.

This is referred to in this Chapter as a “derivative claim”.

(2) A derivative claim may only be brought—

(a) under this Chapter, or

(b) in pursuance of an order of the court in proceedings under section 994 (proceedings for protection of members against unfair prejudice).

(3) A derivative claim under this Chapter may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving:

breach of duty
breach of trust

by a director of the company.

The cause of action may be against the director or another person (or both).

(4) It is immaterial whether the cause of action arose before or after the person seeking to bring or continue the derivative claim became a member of the company.
(5) For the purposes of this Chapter—

(a) “director” includes a former director;

(b) a shadow director is treated as a director; and

(c) references to a member of a company include a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law.

Therefore, a derivative claim may be brought against a director (including a former director or a shadow director) or another person or both. In terms of the “other person” this is to be made against a person who assisted a director in a breach of duty or who is a recipient of corporate assets in circumstances where he knows the director is acting in breach of his duties i.e. an auditor.

If unfair prejudice is available as a remedy why would a derivative claim also be pursued?
Frequently there is considerable overlap between wrongs done to the claimant which warrant a personal action and wrongs done to the company, and depending upon the overlap, the court may deem that it is appropriate that a derivative claim is continued by an individual member under section 262.
s.262 Application for permission to continue claim as a derivative claim

(1) This section applies where—

(a) a company has brought a claim, and

(b) the cause of action on which the claim is based could be pursued as a derivative claim under this Chapter.

(2) A member of the company may apply to the court for permission (in Northern Ireland, leave) to continue the claim as a derivative claim on the ground that—

(a) the manner in which the company commenced or continued the claim amounts to an abuse of the process of the court,

(b) the company has failed to prosecute the claim diligently, and

(c) it is appropriate for the member to continue the claim as a derivative claim.

(3) If it appears to the court that the application and the evidence filed by the applicant in support of it do not disclose a prima facie case for giving permission (or leave), the court—

(a) must dismiss the application, and

(b) may make any consequential order it considers appropriate.

(4) If the application is not dismissed under subsection (3), the court—

(a) may give directions as to the evidence to be provided by the company, and

(b) may adjourn the proceedings to enable the evidence to be obtained.

(5) On hearing the application, the court may—

(a) give permission (or leave) to continue the claim as a derivative claim on such terms as it thinks fit,

(b) refuse permission (or leave) and dismiss the application, or

(c) adjourn the proceedings on the application and give such directions as it thinks fit.

A derivative claim may be brought against a director (including a former director or a shadow director) or another person or both. In terms of the “other person” this is to be made against a person who assisted a director in a breach of duty or who is a recipient of corporate assets in circumstances where he knows the director is acting in breach of his duties.
The Relationship between a s.994 claim and a derivative claim
The precise relationship between the statutory derivative claim and s.994 of the CA is still being explored by the courts. In practice, most successful petitioners on an unfairly prejudicial petition rely heavily on breaches of fiduciary duties and, in particular, on the misappropriation of corporate assets by the majority shareholders/directors.

It might be argued that such matters should be remedied through a derivative claim rather than a personal claim since the wrong is done to the company and should not be the subject of a personal claim. Though there is no requirement to consider whether the shareholder is acting unreasonably in pursuing a derivative claim rather than a personal claim, that factor would undoubtedly be taken into account by the court when considering s263(3)(f).

Examples of where a derivative claim may be brought in preference to a s.994 petition

The 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 unaddressed if the derivative claim was not brought”.

Montgold Capital LLP vs Agnieszka Ilska and Others 2019 High Court (Chancery Division)

In this case a shareholder was granted permission under s.261 of the Companies Act 2006 to continue a derivative claim on behalf of the company, where there was a realistic claim that the directors and shareholders and others, had conspired to place the company into administration and pre-pack the company, which was not to the benefit of the other current shareholder, and in the interests of the company’s creditors.

Other scenarios involve circumstances where a shareholder wishes to remain a member of the company rather than selling their shares, which would be a more likely remedy under s994 of the Companies Act. In such a case a where a shareholder wishes to retain their shares, a corporate remedy is likely to be preferable to a personal remedy.

Hook v Sumner [2015] EWHC 3820

As a result of three of the four shareholders transferring the name and trademarks of the bank on uncommercial terms to a company controlled by them and exploiting the rights profitably, the fourth shareholder wanted to bring a derivative action. The reason for this rather than an unfair prejudice claim, was that the fourth shareholder did not wish to sell his shares given the future value in the exploitation of the name and back catalogue of the band he made a claim under s261. The court agreed that avoiding the risk of a purchase order by pursuing a derivative claim was not an unreasonable preference on his part. Permission was granted to continue the derivative claim.

If the main allegation concerns the misapplication of company funds for which restitution to the company is sought, a derivative action is entirely appropriate and the theoretical option of pursuing an unfairly prejudicial petition under s994 Companies Act 2006 is not a reason to refuse relief. This was highlighted in the case of Hughes v Weiss [2012] EWHC 2363. Even when the claimant has already issued a s 994 petition, the court may consider it appropriate to grant permission for a derivative claim for reasons to do with the speed with which it may be possible to move to a summary judgment under the claim whereas proceedings under the petition may be long delayed as in the case of Parry v Bartlett [2012] BCC 700.

Bhullar v Bhullar [2017] EWHC 407 (Ch)
In this case the court accepted that a dispute in a family business over interest-free loan payments to a company controlled by one of the shareholders was better pursued as a derivative claim, this was on the basis that the claim was narrow and self-contained in contracts with s.994 proceedings which would involve significantly wider issues and would be slow and expensive.

Winding up on the “just and equitable” ground under s122(1)(g) Insolvency Act 1986
Whilst it is usually considered a remedy of “last resort” there may be circumstances where the Court resolve that it is just and equitable to wind a company up, for instance where shareholders cannot agree on the management of the company or where there is shareholder deadlock.
Who can bring a petition?
• Shareholders and other persons liable to contribute to the assets of a company in the event of it being wound up, under section 124 of the Insolvency Act 1986
• The directors of the company pursuant to a board resolution passed by a majority or, in the absence of a resolution, by all of the directors acting unanimously.
• The company
• Creditors of the company (contingent and prospective)

Where shareholders bring an action, the criteria applied is:
(i) a sole shareholder of the Company (ii) an original shareholder of the Company or a registered shareholder of the Company for at least six of the eighteen months before the petition is presented and (iii) they must have interest in winding the company up.

s. 122 Circumstances in which company may be wound up by the court.
(1) A company may be wound up by the court if—
(a) the company has by special resolution resolved that the company be wound up by the court,
(b) being a public company which was registered as such on its original incorporation, the company has not been issued with [a trading certificate under section 761 of the Companies Act 2006 (requirement as to minimum share capital)] and more than a year has expired since it was so registered,
(c) it is an old public company, within the meaning of the [Schedule 3 to the Companies Act 2006 (Consequential Amendments, Transitional Provisions and Savings) Order 2009],
(d) the company does not commence its business within a year from its incorporation or suspends its business for a whole year;
(e) except in the case of a private company limited by shares or by guarantee,] the number of members is reduced below 2,
(f) the company is unable to pay its debts,
(fa) at the time at which a moratorium for the company under section 1A comes to an end, no voluntary arrangement approved under Part I has effect in relation to the company.
(g) the court is of the opinion that it is just and equitable that the company should be wound up.

Common grounds include:

– Loss of substratum – (Re Perfectair Holdings Ltd [1990] BCLC 423)
– Deadlock – (Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426)
– Mismanagement – (Loch v John Blackwood Ltd [1924] AC 783)
– Exclusion from management – (Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 380).

Bringing such a claim is potentially in addition to a potential derivative claim. Typically the members present a petition on the basis that the affairs of the company are being conducted in a manner that is unfairly prejudicial to the petitioner’s interests as a member of the company.
In terms of when the courts allow a claim to be brought under s122(1)(g), this remedy is not typically available when the court holds that another remedy (such as unfair prejudice) is available to the petitioner . This is a requirement under s125(2)(b) of the Insolvency Act 1986.

s.125 Powers of court on hearing of petition.
(1) On hearing a winding-up petition the court may dismiss it, or adjourn the hearing conditionally or unconditionally, or make an interim order, or any other order that it thinks fit; but the court shall not refuse to make a winding-up order on the ground only that the company’s assets have been mortgaged to an amount equal to or in excess of those assets, or that the company has no assets.
(2) If the petition is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the court, if it is of opinion—
(a) that the petitioners are entitled to relief either by winding up the company or by some other means, and
(b) that in the absence of any other remedy it would be just and equitable that the company should be wound up,
shall make a winding-up order; but this does not apply if the court is also of the opinion both that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.
Can historic shareholders bring a claim?
Whilst the ability to present a petition extends beyond shareholders in the company, the nature of the just and equitable grounds justifying winding up is such that it is usually minority shareholders who have grounds for such a case, are the parties which typically bring such case. Historic shareholders wouldn’t meet the criteria mentioned above.

In the absence of other shareholder remedies being available, shareholders and others with an interest in winding the company up, can apply to the court for “just and fair” winding up, but this only usually applies where no other remedies (such as unfair prejudice) are available. The over -arching point is that there needs to be a “tangible benefit” derived from the winding up. In the current market there are likely to be more insolvencies than usual, but if a company is insolvent shareholders will generally receive nothing after the company’s debts and the expenses of the winding up have been paid, so when a case is presented the onus will be on the shareholder to demonstrate that there will be a surplus, to avoid a claim on just and equitable grounds being struck out.

Valerie Whalley
April 2020