Key Takeaways
- You can bring a derivative claim against a director who breached their fiduciary duties, but only on the company’s behalf and only with the court’s permission.
- The route fits misconduct that caused loss to the company, such as undisclosed conflicts, secret profits, diverted opportunities or misuse of company property.
- The court must refuse permission if the conduct was authorised or ratified, or if a director promoting the company’s success would not continue the claim.
- If your own shareholder interests suffered, an unfair-prejudice petition may give you a personal remedy that a derivative claim cannot.
- Preserve financial records, correspondence and board documents promptly. You fund the claim, but any recovery goes to the company.
- Our solicitors can assess the evidence, identify the right route and explain the permission process and the litigation risks.
- Go Legal is rated Excellent with over 300 five-star reviews and 5/5 on Trustpilot and Google, placing our solicitors among the best-reviewed litigation lawyers in England and Wales.
Can I Bring a Derivative Claim Against a Director Who Breached Their Fiduciary Duties to the Company?
Yes. Under Part 11 of the Companies Act 2006, a shareholder may bring a derivative claim on the company’s behalf against a director or former director whose act or omission involves negligence, default, breach of duty or breach of trust. You must obtain the court’s permission to continue the claim, the court applies a statutory two-stage test, and any compensation or other remedy goes to the company rather than to you personally.
A derivative claim for breach of fiduciary duty typically addresses conduct such as:
- An undisclosed conflict of interest.
- A secret profit or commission.
- Misuse of company money, property or confidential information.
- Diverting a business opportunity away from the company.
The deciding question is who suffered the loss. If the money, property or opportunity belonged to the company, the claim belongs to the company. Your shares may have fallen in value as a result, but that indirect loss does not turn a company claim into a personal one.
A derivative claim is also different from a claim for breach of your own rights as a shareholder. Exclusion from management, dilution or unfair treatment usually points towards an unfair-prejudice petition or another personal remedy. Nor is it the same as a claim the company brings itself. The derivative route exists because the board, often controlled or influenced by the wrongdoer, will not sue.
Under section 260 of the Companies Act 2006, “director” includes a former director, and a shadow director is treated as a director. The claim may be brought against the director, another person, or both.
Our solicitors advise shareholders on director and shareholder disputes and can help you identify the correct route from the outset.
What Is a Shareholder Derivative Claim and How Does It Work?
A derivative claim is court proceedings brought by a member of a company for a cause of action that belongs to the company, seeking relief on the company’s behalf.
Normally the board decides whether the company sues. That fails as a safeguard where the director accused of wrongdoing controls the board or the majority vote. A derivative claim prevents the wrongdoer from blocking accountability by allowing a shareholder to ask the court for permission to pursue the claim instead.
You start the process, but you do not own the claim. If it succeeds, the company receives the remedy, which may include:
- Compensation for the company’s loss.
- Restoration of company property.
- An account of profits the director made.
- An injunction to stop further harmful conduct.
- A declaration of the parties’ legal rights.
The company is usually joined to the proceedings because the cause of action and the remedy are its own. Depending on the circumstances, the director may seek indemnity or contribution from the company.
How Does the Two-Stage Permission Test for a Derivative Claim Work?
Under section 261 of the Companies Act 2006, a shareholder must apply to the court for permission to continue a derivative claim. The court decides in two stages: a prima facie case filter, then an assessment of statutory factors.
Stage 1: the prima facie case
The court reviews the application and supporting evidence on paper. A prima facie case means evidence which, if accepted, would establish the alleged breach and the resulting loss to the company.
The court must dismiss the application if the evidence does not disclose a prima facie case, and it may do so without a hearing. If the application survives, the court may direct the company to provide evidence and adjourn so that evidence can be obtained.
Stage 2: the statutory permission factors
At the full hearing, section 263 requires the court to take into account, in particular:
- Whether the shareholder is acting in good faith.
- The importance a person acting in accordance with the duty to promote the company’s success would attach to continuing the claim.
- Whether the conduct could be authorised or ratified, and whether it probably would be.
- Whether the company has decided not to pursue the claim.
- Whether the shareholder could pursue the cause of action in their own right.
- Evidence of the views of members with no direct or indirect personal interest in the matter.
The court must refuse permission if a person acting in accordance with the duty to promote the company’s success would not seek to continue the claim. It must also refuse where a proposed act has been authorised, or where an act that has already occurred was authorised beforehand or has since been ratified.
The test is demanding. Apparent misconduct is not enough. The court scrutinises whether the claim genuinely serves the company’s interests, rather than a personal dispute or a collateral purpose.
What the courts say
Qualifying as a derivative claim and obtaining permission are separate hurdles. In ClientEarth v Shell Plc & Ors (Re Prima Facie Case) [2023] EWHC 1137 (Ch), ClientEarth sought permission to bring a derivative claim against Shell’s directors. It was accepted that the cause of action was vested in Shell and that relief was sought on Shell’s behalf. The High Court stated:
“These proceedings therefore qualify as a derivative claim within the meaning of s.260(1) of the Companies Act 2006.”
The court nevertheless held that it was bound to refuse permission under section 263(2)(a), the ground that applies where a person promoting the company’s success would not seek to continue the claim. Framing the claim correctly is only the starting point.
In Durnont Enterprises Ltd v Fazita Investment Ltd & Ors [2024] EWCA Civ 299, the Court of Appeal distinguished the section 263 regime, which applies to a member of a UK-incorporated company, from CPR 19.17, which concerned a member of a company incorporated outside the UK. If the company is incorporated abroad, a different framework may apply.
What Evidence Do I Need to Prove a Director Breached Their Fiduciary Duties?
You need documents and witness evidence linking the director’s specific conduct to a breach of duty and a loss to the company. Vague or speculative allegations will be dismissed at the prima facie stage.
Useful evidence includes:
- Company accounts, bank statements and payment records.
- Invoices, contracts and purchase orders.
- Board minutes and shareholder resolutions.
- Emails, messages and internal correspondence.
- Witness statements from employees, suppliers or other directors.
- Expert reports from forensic accountants or valuers.
- Documents showing the director’s personal benefit or the company’s loss.
Typical breaches and the evidence that proves them:
- Undisclosed conflict: the director awarded a contract to their own company without disclosure. Look for the contract, board minutes and any declarations of interest.
- Misuse of company information: the director used a confidential customer list to set up a competing business. Look for customer migration and data access records.
- Secret profit: the director took a commission from a supplier without the company’s knowledge. Look for payment trails and supplier correspondence.
- Diverted opportunity: the director took a deal the company was pursuing. Look for emails and pitch documents showing the company’s interest.
Plead each allegation precisely: what happened, when, how it breached the director’s duty and what the company lost. If the prima facie case is made out, the court may order disclosure or witness evidence at the second permission stage.
Gather evidence lawfully. Do not alter documents, remove company records or access information you are not entitled to see. Improper evidence gathering creates separate legal exposure and damages the good-faith factor.
Who Can Bring a Derivative Claim and What Happens if the Company Is Insolvent?
Any member of the company, including a minority shareholder, may apply to bring a derivative claim. You must hold shares when you apply. Section 260 makes it immaterial whether the cause of action arose before or after you became a member, although the court may consider that history when assessing good faith.
A former shareholder generally cannot bring a derivative claim, because the right is tied to membership.
Insolvency changes the picture. Where the company is insolvent, an insolvency practitioner may investigate and pursue claims for breach of fiduciary duty or misfeasance under the Insolvency Act 1986. In a winding up, section 212 of the Insolvency Act 1986 allows the court, on application by the official receiver, liquidator, creditor or contributory, to examine misapplied or retained company money or property, misfeasance or breach of fiduciary duty. The court may order the director to repay, restore or account for the money or property, or contribute compensation to the company’s assets.
A company in financial difficulty is not necessarily in a formal insolvency procedure, so confirm its status before choosing a route. Our insolvency team advises where a company is in, or approaching, a formal procedure.
Should I Bring a Derivative Claim or an Unfair-Prejudice Petition?
The right route depends on whether the main harm fell on the company, on you personally as a shareholder, or on both. A derivative claim targets a wrong done to the company. An unfair-prejudice petition under section 994 of the Companies Act 2006 concerns company affairs conducted in a way that is unfairly prejudicial to the interests of members.
| Issue | Derivative claim | Unfair-prejudice petition |
|---|---|---|
| Whose loss is central? | The company’s | The petitioning member’s interests |
| Who receives the remedy? | The company | Usually the shareholder, though relief can be in the company’s name |
| Permission stage? | Yes, court permission required under Part 11 | No, but you must prove unfair prejudice |
| Typical objective | Recover company money or property | Share buyout, compensation or other personal relief |
| Costs risk | High | High |
A petition may be better where your personal interests are affected, for example through exclusion from management, dividend stripping or dilution, or where you want the other side to buy your shares rather than pay damages to the company.
A derivative claim is the correct route where the wrong is purely to the company, such as a director taking company money, and you have no personal claim. The court can refuse permission where you could pursue the matter in your own right, so choosing the wrong route can cost you the claim. Early advice is critical.
You may also find our guide on unfair-prejudice petitions useful if your own shareholder interests have been affected.
What Are the Costs and Funding Risks of a Derivative Claim?
The central financial risk is that you fund the litigation while any recovery goes to the company.
You are personally liable for your own costs and, if you lose, the defendant director’s costs, unless the court makes a protective costs order. The court may order the company to indemnify you for costs at the permission stage or later, but that is discretionary and not guaranteed.
Litigation funding and after-the-event insurance are options. Funders and insurers will assess:
- The strength of the prima facie case.
- The likelihood of permission being granted.
- The likely value of the company’s claim.
- Whether the director can meet a judgment.
- The likely cost of the proceedings.
If the claim succeeds, your personal recovery is limited to any costs indemnity and the indirect benefit of the company’s recovery, which is most significant if you hold a large stake.
The director may also seek indemnity or contribution from the company, depending on the articles of association and whether the breach was ratified. This can complicate settlement.
What Limitation, Ratification and Settlement Rules Apply?
Timing, company approval and settlement can each decide whether a derivative claim proceeds.
Limitation. Claims for breach of fiduciary duty are generally subject to a six-year limitation period from the date of the breach. No limitation period applies to a claim for fraud or where the director is still in possession of company property. Under section 32 of the Limitation Act 1980, where the claim is based on fraud or a relevant fact was deliberately concealed, time does not start until the fraud or concealment was discovered or could with reasonable diligence have been discovered.
Ratification. If the company, by ordinary resolution of disinterested shareholders, validly ratifies the director’s conduct, the court must refuse permission. Ratification is a complete defence unless the conduct is beyond the company’s power to ratify, such as fraud on the minority.
Settlement. You cannot settle a derivative claim without the court’s approval, because the claim belongs to the company and any settlement must serve its interests. If the company has already released or compromised the director’s liability, for example in a settlement agreement or deed of release, the court is likely to refuse permission unless the release was procured by fraud or is otherwise invalid.
Frequently Asked Questions
Get Expert Help With a Derivative Claim Today
Delay can allow evidence to disappear, push parts of the claim out of time and give the company the opportunity to ratify the conduct or release the director. Each of these can end a derivative claim before it starts.
Our solicitors can establish whether the loss belongs to you or the company, review the documents you hold, advise on costs and funding, and identify whether a derivative claim, an unfair-prejudice petition or an insolvency route best protects your position. To discuss your situation, book a free consultation or call us on 0207 459 4037.
