Derivative Claim Against A Director

A derivative claim is one that is brought by a shareholder of a company in the name of the company against a director.Â

Prior to 01 October 2007 a derivative claim only existed under common law. However, this has now been implemented into the Company’s Act 2006 under sections 260 to 290 which replaces common law. A derivative claim is brought against a director of the company if it is thought or evident that they have acted or omitted one of its duties under the company’s act 2006 by way of negligence, default, breach of duty or breach of trust.Â

It is generally up to the directors of the company to decide whether such action can be taken in the company name. Only under exceptional circumstances can a minority shareholder bring a derivative claim because they have restrictions on what they can or cannot do. There are two situations under which a minority shareholder can bring a derivative claim

1. Where the majority cannot ratify what has been done and

2. Where it would prove to be unjust not to allow a derivative claim i.e. in circumstances where fraud has been committed on the minority or where there is ‘unfair prejudice.’

The procedure of bringing the claim sets out two stages.Â

The first stage comprises of the shareholder putting a prima facie forward to courts to continue. It is based on the evidence filed by the shareholder. If a prima facie case is not made out then the application is dismissed.

Upon dismissal the applicant may request an oral hearing for the decision to be reconsidered but this is at the discretion of the judge.

If the application is not dismissed the claim proceeds to the second stage. At this hearing the court decides whether the case should proceed, taking into account the evidence from the applicant and respondent. There are various factors to consider when deciding this. For example, is the shareholder acting in good faith? Whether the company has decided not to pursue the claim, or whether the act or omission can be authorised or ratified.

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