How to Bring a Derivative Claim Against a Director

When a company's directors act in ways that harm the company - for example by breaching their duties, acting negligently, or misusing company assets - the company itself is the proper party to bring a claim for compensation. However, where the directors in control refuse to take action, shareholders can bring a derivative claim on the company's behalf. This article explains what a derivative claim is, when it can be brought, how to prepare and file one under the Companies Act 2006, the procedural hurdles involved, and the remedies that may result.

What Is a Derivative Claim?

A derivative claim is a type of lawsuit brought by a member (usually a shareholder) on behalf of the company where wrongdoing has caused loss to the company. The claim focuses on a legal right that belongs to the company - not to individual shareholders - and the member seeks relief for the company rather than for themselves personally.

Derivative claims are grounded in Part 11 (sections 260–264) of the Companies Act 2006. They are available only in specific circumstances, and the courts maintain a careful balance between protecting the company's interests and avoiding unnecessary interference with internal management.

When Can a Derivative Claim Be Brought?

Grounds for a Derivative Claim

Under section 260 of the Companies Act 2006, a member may bring a derivative claim only where a director (or former or “shadow” director) is alleged to have caused loss to the company through:

• Negligence: failure to exercise reasonable care, skill and diligence;
• Default: failure to perform legal obligations;
• Breach of duty: violation of statutory or fiduciary duties owed to the company; or
• Breach of trust: improper management of company property or funds.

A derivative claim can be brought even if the wrong occurred before the claimant became a member because the right being enforced belongs to the company, not the individual shareholder.

Who Can Bring a Derivative Claim?

Only a member of the company may bring a derivative action under the 2006 Act. This includes people who have acquired shares through operation of law, such as a trustee in bankruptcy or a personal representative of a deceased shareholder.

The claim may be brought against a current, former or “shadow” director. A shadow director is someone whose directions or instructions the board customarily follows, even if they are not formally appointed.

Step‑by‑Step Process to Bring a Derivative Claim

1. Identify the Cause of Action

Before starting a derivative claim, determine whether the alleged conduct falls within the statutory grounds (negligence, default, breach of duty or trust) and that the cause of action belongs to the company rather than being a personal grievance of the shareholder.

Typical examples include failure by directors to consider conflicts of interest, misuse of company funds, or failure to enforce contracts that the company could have pursued.

2. Issue the Claim Form

A derivative claim begins with issuing a Claim Form in the appropriate court. The claimant should list themselves as the claimant, the company as a defendant, and the director(s) alleged to have caused the loss as additional defendants. The claim form must be clearly headed “Derivative Claim”, and the civil procedure rules in Practice Direction 19C supplement the Companies Act requirements.

At this stage, no substantive actions can be taken (for example, witness evidence or case management) until permission (leave) is sought from the court.

3. Apply for Permission to Continue

A critical step in a derivative claim under the Companies Act 2006 is applying for the court's permission to pursue the claim. Without this permission, the claim cannot proceed to full trial.

The permission process involves two stages:

• Prima Facie Stage: The claimant must show there is a prima facie case - meaning sufficient evidence that, at first glance, a cause of action exists if further investigation were permitted.
• Full Hearing: If prima facie eligibility is established, the matter advances to a full hearing where the court considers several discretionary factors. These can include the claimant's good faith, whether the claim could be ratified by the company, and whether someone acting to promote the company's success would pursue the claim.

The court is required to refuse permission if specific statutory conditions apply (for example, where independent shareholders are unlikely to support the claim or where the alleged act has already been ratified). Even when these mandatory bars do not apply, the court still has discretion to refuse permission if it concludes that continuing would not be in the company's best interests.

4. Proceed to Trial or Settlement

If the court grants permission, the derivative claim proceeds like other civil litigation, with disclosure, witness evidence, expert reports and legal argument. The claimant's role at this stage is to demonstrate that the director's conduct caused loss to the company and that an appropriate remedy should be awarded.

In some cases, parties may reach a settlement agreement, subject to court approval, resolving the dispute without a full hearing.

Remedies from a Successful Derivative Claim

If the derivative claim succeeds, remedies are directed to the company, not to the shareholder bringing the claim. Potential remedies include:

• Damages payable by the director to compensate the company for loss;
• Restitution or recovery of assets or benefits wrongfully acquired;
• Injunctions to prevent ongoing or future breaches;
• Orders setting aside improper transactions; and
• Directors' accounting for profits made in breach of duty.

In some cases, a director may also face disqualification proceedings if their conduct shows unfitness to manage a company, but this is pursued under separate legislation and not within the derivative claim itself.

Practical Considerations and Risks

Burden of Proof and Evidence

Although the prima facie requirement at the permission stage is not a high evidential threshold, claimants must still assemble credible evidence of the alleged wrongdoing. Insufficient proof at this early stage will lead to an application being dismissed.

Good Faith and Corporate Interest

The court will weigh whether the claimant is acting in good faith and whether the claim serves the company's best interests rather than a personal agenda. If independent shareholders would not support the claim, the court may refuse permission.

Ratification

If the company has already ratified the alleged breach through a proper shareholder decision, this can bar a derivative claim. Ratification effectively confirms that the company accepts the conduct, eliminating the basis for derivative action.

Complexity and Costs

Derivative claims are inherently complex and require detailed legal argument, procedural compliance and often extensive documentation. Costs can be significant, and weighing potential recovery against expense is a practical step before initiating proceedings.

Key Takeaways

A derivative claim is a statutory procedure that allows a shareholder to hold directors to account on behalf of the company for wrongdoing that has caused loss to the company. To bring such a claim in England and Wales, a member must:

• Show the claim relates to negligence, default, breach of duty or breach of trust by a director;
• Issue a claim form headed “Derivative Claim”;
• Apply to the court for permission to continue the claim; and
• Proceed to trial or settlement once permission is granted.

The remedies, once granted, benefit the company by compensating it for loss, correcting improper actions, or preventing further harm. Derivative claims are a powerful tool for minority protection but involve strict procedures and judicial discretion at key stages.