Derivative Claims Under Section 260 of the Companies Act 2006

What Is a Derivative Claim?

A derivative claim is a legal action brought by a shareholder on behalf of the company rather than for the shareholder’s own personal benefit. It is used where the company itself has suffered harm, usually because of misconduct by one or more of its directors, but those in control of the company are unwilling or unable to take action to recover that loss.

The logic of the derivative claim is straightforward. If a director has stolen from the company, breached their fiduciary duties or otherwise caused harm to the business, the normal course would be for the company to sue the director to recover the loss. But where the wrongdoing director controls the company, or where those who control the company have no interest in pursuing the claim, the company itself will not take action. The derivative claim gives a shareholder the ability to step into the company’s shoes and bring the claim on the company’s behalf. Any recovery goes to the company, not to the individual shareholder.

This page is part of the Shareholder Disputes Knowledge Guide. If you need legal advice on a shareholder dispute see my direct access barrister page.

The Statutory Basis: Section 260 of the Companies Act 2006

Section 260 of the Companies Act 2006 provides the modern statutory basis for derivative claims in England and Wales. Under this provision, a derivative claim can only be brought in respect of wrongdoing involving negligence, default, breach of duty, or breach of trust by a director of the company. This includes current directors, former directors and shadow directors. The claim may be brought against the director concerned, against another party involved in the wrongdoing, or against both.

The statutory regime replaced the older common law rules that had governed derivative actions before 2006. It introduced a more structured and controlled permission stage designed to filter out weak, tactical or unnecessary claims, and it gave the court clearer guidelines about the factors to consider when deciding whether to allow a derivative claim to proceed.

The Permission Requirement

A shareholder cannot simply issue a derivative claim and proceed to trial. They must first obtain the court’s permission to continue the claim. This permission requirement is a key feature of the statutory regime and is designed to prevent the derivative claim from being used as a tactical weapon in shareholder disputes where the real issue is between the shareholders rather than a genuine claim on behalf of the company.

The permission process operates in two stages. At the first stage, the court considers on paper whether the shareholder has shown a prima facie case: whether there is enough on the face of the evidence to justify the claim continuing. If this initial threshold is not met, the claim will be dismissed at an early stage without a full hearing. Where the court considers there is a prima facie case, the matter proceeds to a full permission hearing.

At the full permission hearing, the court considers a wider range of factors. These include whether a director acting properly to promote the success of the company would bring the claim, whether the claim is genuinely in the interests of the company as opposed to in the personal interest of the shareholder bringing it, whether the shareholder is acting in good faith, and whether there are better alternative remedies available. The shareholder must also notify the company promptly after issuing the claim so that the company can engage with the process and, where appropriate, oppose permission.

Factors the Court Considers at the Permission Stage

The Companies Act 2006 requires the court to refuse permission in two circumstances. First, where a person acting in accordance with the duty to promote the success of the company under Section 172 would not continue the claim. Second, where the act or omission that gives rise to the claim has been authorised or ratified by the company.

Beyond these mandatory refusals, the court takes into account a range of factors including: whether the shareholder is acting in good faith; whether the claim concerns an act or omission that is likely or unlikely to be authorised or ratified by the company; the importance that a notional director would attach to continuing the claim; whether there is an alternative remedy available to the shareholder; and the views of independent shareholders who have no personal interest in the outcome.

In practice, derivative claims are difficult to bring and hard to win. Courts are cautious about allowing shareholders to litigate on the company’s behalf, particularly where the dispute is really about control, strategy or personal grievances between the shareholders rather than a genuine claim to recover loss caused to the company by director wrongdoing. Claims are more likely to succeed where there is credible evidence of serious wrongdoing and clear and quantifiable harm to the company.

Derivative Claims in Practice: When They Work and When They Fail

Derivative claims succeed most readily where there is clear evidence of misappropriation of company funds, diversion of business opportunities that properly belonged to the company, or serious breaches of directors’ duties that have caused measurable loss to the company. Where the wrongdoing is serious, the harm to the company is clear, and the claimant shareholder is acting genuinely to recover that loss rather than to pursue their own agenda, the court is more likely to grant permission.

Claims fail most commonly where the evidence of wrongdoing is weak or speculative, where the shareholder’s real objective is to obtain leverage in a personal dispute rather than to recover loss for the company, where there are better alternative remedies available such as an unfair prejudice petition, or where the conduct complained of has been or is likely to be ratified by the independent shareholders of the company.

The rule against reflective loss is an additional constraint on derivative claims. This rule prevents a shareholder from recovering personally for losses that properly belong to the company. Where the shareholder’s loss is merely a reflection of the company’s loss, the claim must be brought as a derivative claim on behalf of the company rather than as a personal claim.

The Relationship Between Derivative Claims and Unfair Prejudice Petitions

Derivative claims and unfair prejudice petitions are distinct remedies that serve different purposes but can arise from the same underlying facts. An unfair prejudice petition under Section 994 of the Companies Act 2006 provides a personal remedy to the shareholder. A derivative claim provides a remedy to the company. Where director misconduct has both prejudiced the minority shareholder personally and caused loss to the company, both routes may in principle be available.

In practice, the court will generally consider whether a buyout or other personal remedy available under Section 994 is sufficient to address the shareholder’s position before allowing a derivative claim to proceed. Where personal relief would adequately address the situation, the derivative claim is less likely to be necessary or appropriate. Derivative claims tend to be reserved for cases where the real objective is to restore value to the company rather than to extract a shareholder from it.

For detailed guidance on unfair prejudice petitions see the chapter on how to bring an unfair prejudice petition.

Published Resources

My book Shareholder Disputes: A Practical Guide for Business Owners, Directors and Family Businesses covers derivative claims in detail including relevant case law such as Humphrey v Bennett, Hook v Summer, McGaughey v Universities Superannuation Scheme, ClientEarth v Shell and Stainer v Lee, and the application of derivative claim principles to the Whitcombe Family Business dispute.

See all books.

Frequently Asked Questions

Who receives any money recovered in a derivative claim?

Any recovery in a derivative claim goes to the company, not to the individual shareholder who brought the claim. This is a fundamental feature of the derivative claim: the shareholder is suing on behalf of the company to recover the company’s loss, not to recover their own personal loss.

Can a director defend a derivative claim by showing the company ratified their conduct?

Ratification by the company is a relevant factor and in some cases a complete defence. However, ratification by a majority that includes the wrongdoing director or their associates may not be effective, and the court will consider the circumstances of any purported ratification carefully. The Act requires the court to refuse permission where the act has been authorised or ratified, but this must be genuine ratification by independent shareholders.

What is the rule against reflective loss?

The rule against reflective loss prevents a shareholder from claiming personally for losses that are in truth the company’s losses reflected in a reduction in the value of the shareholder’s shares. Where the shareholder’s loss is merely a reflection of the company’s loss, only the company can sue for it, and the claim must be brought as a derivative claim. Personal claims for losses that properly belong to the company will be struck out.

Is a derivative claim appropriate in most shareholder disputes?

No. Derivative claims are a specialist and tightly controlled remedy reserved for cases where director wrongdoing has caused genuine loss to the company and where the company itself is unwilling or unable to pursue the claim. In most shareholder disputes, an unfair prejudice petition is the more appropriate and practical route. Shareholders considering a derivative claim should take specialist legal advice before proceeding.

Get in Touch

If you are considering a derivative claim or want to understand whether this route is appropriate for your situation, I would be glad to advise.

Call 020 4538 0246, use the contact form below, or book a call directly.

Important disclaimer: This page is provided for general information and educational purposes only and does not constitute legal advice. The content may not be legally accurate for your specific situation. You must not rely on anything on this page in respect of your legal rights. The law in this area relates to companies registered in England and Wales only. Always seek independent legal advice from a qualified specialist before taking or refraining from taking any action. The author accepts no responsibility for any decisions made or outcomes arising from use of this material. If you would like specific advice on your situation, contact me here.

How Do I Bring a Derivative Claim Under Section 260 of the Companies Act 2006?