Key Takeaways
- A derivative claim allows shareholders to sue directors on behalf of the company when directors have committed wrongs such as negligence, breach of duty or breach of trust.
- Shareholders must obtain court permission before a derivative claim can proceed.
- Derivative claims usually arise when directors act unlawfully or cause loss to the company by failing in their legal duties.
- Time is critical. Delays can damage the claim or limit what the court can achieve.
- Inaction can allow directors to continue harmful conduct, risking further losses to the company.
- Derivative claims differ from unfair prejudice petitions and direct claims, so getting tailored legal advice is vital.
- Any recovery from a successful derivative claim benefits the company, not the individual shareholder who brought the claim.
- Our solicitors guide clients through the complex process of derivative claims and advise on alternatives and risks.
- Early legal advice can help protect your interests, and those of the company, if you suspect director misconduct.
What Is a Derivative Claim and When Can Shareholders Sue Directors on Behalf of the Company?
Shareholders in England and Wales can bring a derivative claim when company directors have breached their duties and the company itself, usually under the control of those directors, will not act. A derivative claim is a legal action by a shareholder seeking relief on behalf of the company for wrongs such as negligence, default, breach of duty or breach of trust by a director.
The Companies Act 2006, section 260, defines a derivative claim as proceedings started by a company member in respect of a cause of action vested in the company, with the aim of securing a remedy for the company’s benefit.
Our solicitors advise shareholders and companies on complex disputes. If you suspect director misconduct, our team can assess whether a derivative claim is the right step.
Who Can Bring a Derivative Claim and When Does It Apply?
Any current shareholder (member) of a company in England and Wales can bring a derivative claim, provided the case fits the statutory requirements set out in section 260 of the Companies Act 2006. The wrong must affect the company itself, rather than causing personal loss to the shareholder, and must relate to acts or omissions by a director involving negligence, default, breach of duty or breach of trust.
Most often, derivative claims are used where directors control the company and prevent it from pursuing legal action against themselves.
If directors are refusing to act on alleged misconduct, our solicitors can review your position and outline your options.
What Legal Wrongs Can Lead to a Derivative Claim?
Derivative claims apply where a director’s conduct involves:
- Negligence
- Default
- Breach of duty
- Breach of trust
Section 260 of the Companies Act 2006 covers these acts and omissions, whether already committed or proposed. The Explanatory Notes confirm that the focus is on wrongs involving directors, even if third parties are also involved, so long as the harm to the company flows from director misconduct.
How to Bring a Derivative Claim: Step-by-Step Permission Process
Bringing a derivative claim in England and Wales is a structured process focused on court permission from the outset.
- Assess the Harm and Gather Evidence
- Is the loss to the company as a whole?
- Gather documents such as emails and board minutes that show wrongdoing.
- Consider Pre-Action Options
- Approach the board or individual directors seeking an explanation or action.
- Explore alternatives, including negotiation or other remedies.
- Issue the Claim and Apply for Permission
- Begin proceedings in the company’s name.
- Make a formal application to the court for permission to proceed.
- Stage One: Initial Court Review
- The court reviews the papers to check for a prima facie case.
- Claims lacking merit may be dismissed at this stage.
- Stage Two: Full Permission Hearing
- If there is an arguable case, the court holds a hearing where both sides are heard.
- The court considers the seriousness, company response, and strength of evidence.
- Possible Outcomes
- Permission granted: proceedings continue in the company’s name.
- Permission refused: claim is dismissed, and the shareholder may face a costs order.
If you are dealing with board misconduct, early support from our specialist solicitors can reduce risk and strengthen your case.
What Does the Court Consider Before Allowing a Derivative Claim?
Courts consider several factors before giving permission for a derivative claim:
- The seriousness and credibility of the alleged wrongdoing.
- Quality and sufficiency of evidence.
- Whether a majority of independent shareholders would support the claim.
- Proper purpose: is the claim for company benefit, or for tactical advantage?
- If the company’s decision not to sue is reasonable and fair.
The overriding concern is the best interests of the company, not any one shareholder or group.
What Laws and Deadlines Apply to Derivative Claims?
The Companies Act 2006, section 260, is the backbone for derivative claims in England and Wales. It sets out that a member can start proceedings for acts or omissions by a director, where relief is sought for the company’s benefit and the cause of action is vested in the company. The Explanatory Notes clarify that only members can bring these claims and only for wrongs described in the statute.
No detailed limitation period for derivative claims is included in the supplied sources. General legal time limits such as six years for contract or tort claims may apply, but clients should seek specific advice about the timing for their own situation.
This legal regime applies to companies incorporated in England and Wales. There are different statutory regimes elsewhere in the UK.
You may also find our guide on derivative claims UK: how shareholders sue directors under Companies Act useful.
What Happens If a Derivative Claim Succeeds?
If a derivative claim is successful, possible remedies include:
- Compensation paid to the company
- Recovery of misapplied assets
- Injunctions to restrain ongoing or future wrongdoing
- Other specific relief to put the company back in its previous position
The key point is that the recovery benefits the company, not the shareholder who brought the claim. Costs are usually paid by the company where the shareholder’s action benefits all shareholders, but failed, unmeritorious claims can expose the claimant to costs.
What Are the Risks and Strategic Considerations for Shareholders and Directors?
Both sides should consider commercial and litigation risks.
For shareholders:
- Liability for costs if the claim fails.
- Potential strain on company management relationships.
- Need for solid evidence and careful procedural preparation.
For directors and companies:
- Adverse publicity.
- Disruption to day-to-day business operations.
- Potential for significant remedial orders if wrongdoing is found.
Strategically, careful assessment of the evidence and the company’s best interests should always come before litigation. Settlement or mediation may offer a quicker and less costly option.
How Are Derivative Claims Different from Unfair Prejudice Petitions or Direct Personal Claims?
A derivative claim seeks redress for harm done to the company. In contrast, other remedies may suit different circumstances:
- Unfair prejudice petitions: Address conduct that is unfairly prejudicial to a shareholder’s interests, such as exclusion from management or unfair dilution.
- Direct personal claims: Allow shareholders to recover for individual losses not shared by the company, such as a blocked dividend.
Choosing the right remedy depends on whether the harm is to the company as a whole or to you personally as a shareholder.
Our Winning Approach to Derivative Claims and Shareholder Actions
Our solicitors support clients from their first enquiry through to resolution of their claim. We provide:
- Clear, jargon-free guidance at every stage, from case assessment to court.
- Strategic advice on negotiation, alternative dispute resolution and the true cost of litigation.
- Comprehensive review of all available options to maximise your chances of success and avoid unnecessary costs.
- Decisive preparation of strong evidence and persuasive written arguments for permission applications.
- Focus on early settlement and practical solutions so your business can get back to normal as soon as possible.
If you are considering or facing a derivative claim, our specialist team can provide strategic, tailored advice on your best next steps.
Frequently Asked Questions
Can an individual shareholder bring a derivative claim on their own?
Yes. Any current shareholder of a company in England and Wales can bring a derivative claim, provided the statutory criteria are met.
Do I always need court permission to sue a director on behalf of the company?
Yes. Court permission is required before a derivative claim can go forward, to prevent misuse of the procedure.
What evidence do I need to support a derivative claim?
You should have credible evidence of the alleged breach, such as internal documents, board minutes or financial records showing harm to the company.
Is there a time limit for starting a derivative claim against directors?
No specific limitation period is verified in the supplied sources, but standard six-year periods for contract or tort claims may apply. Seek legal advice promptly as strict timeframes often apply in company law.
Can I withdraw my claim if the company resolves the issue?
Yes. Withdrawal is possible if the wrong is fixed before trial, but the stage and facts will influence the process and any cost consequences.
Does the size of my shareholding affect my right to bring a claim?
No. There is no minimum shareholding required to bring a derivative claim under section 260.
What if the majority of shareholders do not support my claim?
If independent majority shareholders oppose your claim, the court will take this seriously at the permission stage and may refuse permission.
Are director’s duties to the company the only basis for a derivative claim?
Yes. A derivative claim is only available for loss or wrongdoing involving breach of duties owed to the company by a director.
Can I recover my legal costs if my derivative claim is successful?
If your claim is for the company’s benefit and succeeds, the company may be ordered to pay your costs. If you lose, you may be responsible for costs.
How are derivative claims different from direct claims for personal loss?
Derivative claims deal with harm to the company. Direct claims cover personal losses, such as unpaid dividends, and do not require court permission.
Get Expert Help With Derivative Claims and Shareholder Actions
Bringing a derivative claim is a powerful tool to protect your company from director misconduct, but strict procedures and careful timing are vital. Whether you are considering a derivative claim or need advice as a director, our solicitors will guide you through every step, from preparing the application to resolving the dispute.
