Topic Derivative claims

Introduction
Following the introduction of statutory derivative claims under the Companies Act 2006, the questions of
whether multiple derivative actions were permissible at common law and whether the device had remained
available were, for the first time, considered in Re Fort Gilkicker Ltd1, where Briggs J answered the two
questions in the affirmative.
In light of the decision, this essay will examine 5 issues; firstly, the justification of multiple derivative
actions at common law; secondly, the rationale for the reform of common law derivative actions; thirdly,
the interpretation of the 2006 Act; fourthly, the implications of the continuing significance of common law
derivative actions; and lastly, its likely effect on the practical importance of English derivative claims.
This essay will contend that the Fort Gilkicker decision is welcomed yet unfortunate; whilst it plugs the
loophole of potential injustice, it also means that common law derivative actions will subsist side by side
with the statutory derivative claims this runs contrary to the initial purpose of bringing the reform.
Notwithstanding the regrettable untidiness of the current law, a comparison between the old and the new
devices will reveal that the former consists of complicated and restrictive principles whereas the latter
imposes significant procedural hurdles. Therefore, from the perspective of the litigants, the continuing
significance of common law derivative actions does not ameliorate the restrictive application nor does it
enhance the practical importance of derivative claims in the realm of shareholders seeking redress.
Re Fort Gilkicker Ltd
The applicant and the respondent were equal participants in a joint venture, the business of which was
carried on through its wholly-owned subsidiary, where the applicant and the respondent were its directors.
The claim concerned an alleged breach of the respondents fiduciary duties owed to the subsidiary2. The
difficulty was that the cause of action was vested in the subsidiary. Accordingly, the applicant, as a
member of the holding joint venture, sought permission to continue the proceedings as a double derivative
action at common law3.
To decide whether permission should be granted, the legal issues were whether multiple derivative actions
were recognised at common law and whether it has survived the introduction of statutory derivative claims
under the 2006 Act4. In the first instance court, Briggs J justified the device with the principle of locus
standi and answered, in the affirmative, the second question on the basis of statutory interpretation.
Justifying multiple derivative actions
In principle, there can be no objection to multiple derivative actions5. To begin with, the general rule in
Foss v Harbottle6 stated that a company, as a separate legal entity, was the proper claimant against a wrong
done to it. That said, whereas derivative actions do allow a shareholder7 to bring an action on behalf of the
company, the principle of separate legal personality is not offended as the would-be claimant is not
pursuing a personal claim but a claim for the benefit of the company. Hence, as established at common
law8, under the circumstances of fraud and that the wrongdoer could exercise sufficient control to prevent
the claims from being brought in the name of the company, someone else must be allowed to bring a claim

Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] EWHC 348 (Ch)
By misappropriating a business opportunity for his personal benefit
3
Which is using the standard procedure set out in CPR r.19.9 and Practice Direction 19C.
4
Part 11 of the Companies Act 2006
5
Tan, C. (2013). Multiple derivative actions. Law Quarterly Review, 129(Jul), pp.337-339.
6
Foss v Harbottle 67 E.R. 189
7
normally a shareholder or sometimes a shareholder of another company in the corporate group
8
Edwards v Halliwell [1950] 2 All E.R. 1064 and Prudential Assurance Co Ltd v Newman Industries Ltd
(No.2) [1982] Ch. 204
2


for the company to prevent injustice9. As Lord Millett rightly pointed out in Waddington10, the matter is
one of locus standi and minority shareholders are the ones with a sufficient interest. Where there is no such
minority shareholder in the wronged company, members of its parent or ultimate holding company may
bring the action11.
This principle of locus standi also centred in Briggs Js reasoning in Fort Gilkicker. He explained that the
rationale for the device was to bring justice in situations where the company was incapable of protecting
itself12. The judge recognised that the English courts had accepted the extension of locus standi to
members of holding companies13. In his view, the right to bring a derivative action at common law was a
single piece of procedural ingenuity by permitting someone with a sufficient interest to sue in the name of
the company for the benefit of all its stakeholders14. Hence, Briggs J held that multiple derivative actions
were permissible at common law.
Problems with the common law rules and the reform
The common law derivative actions were made very difficult by the English courts prior to the 2006 Act,
primarily due to the internal management rule, and the proper claimant rule in Foss v Harbottle. The only
exception to the proper claimant rule15 was where what has been done amounts to fraud16 and the
wrongdoers control the company17. This exception, however, did not escape criticisms18 regarding the
absence of clarity in the meaning of wrongdoer control19 and that there were cases20 where claims were
permitted in the absence of fraud. Some academics21 asserted that the courts deliberately made the device
cumbersome to protect the company against the irritating shareholders, as evidenced by cases where
claims falling within the scope of the exception were rejected as they were not pursued bona fide for the
company22.
Considering the common law rules as complicated and unwieldy, Law Commission proposed a new
procedure for derivative actions23, favouring a reform that replaced the common law rules with a simpler
and more modern procedure24. Yet, it oddly left the issue of multiple derivative actions to the discretion of
the court on the ground of its rarity25.

Mascarenhas, T. (2013). Multiple derivative actions under English law. International Company and
Commercial Law Review, 24(9), pp.336-339. And also as per Lord Denning in Wallersteiner v Moir
(No.2), Injustice would be done without redress.
10
Waddington Ltd v Chan [2008] HKEC 1498
11
Op Cite Note 11, at 70
12
Op Cite Note 1, at 19, citing Russell v Wakefield Waterworks Co (1875) L.R. 20 Eq. 474 and
Wallersteiner v Moir (No.2) [1975] Q.B. 373
13
Ibid, Halle v Trax BW Ltd [2000] B.C.C. 1020, Truman Investment Group v Societe General SA [2003]
EWHC 1316 (Ch), Airey v Cordell [2006] EWHC 2728 (Ch)
14
Op Cite Note 1, at 24
15
It was contended to be the only true exception in Prudential Assurance Co Ltd v Newman Industries
Ltd (No.2) [1982] Ch. 204
16
Brown v British Abrasive Wheel Co Ltd [1919] 1 Ch. 290
17
Smith v Croft (No.2) [1988] Ch. 114
18
The Law Commission, Shareholder Remedies (1997), Law Com. No.246, para. 6.4
19
There has been debates over whether de facto control is sufficient or that de jure control must be
established.
20
Daniels v Daniels [1978] Ch. 406
21
Payne, J. (2005). Sections 459461 Companies Act 1985 In Flux: The Future of Shareholder Protection.
Cam. Law. J., 64(03), p.647.
22
Barrett v Duckett [1995] B.C.C. 362 and Op Cite Note 23
23
The Law Commission, Shareholder Remedies (1997), Law Com. No.246, para. 6.4
24
Ibid, para. 6.111
25
Ibid, para. 6.109 and 6.110


The 2006 Act
Taking into consideration the Law Commissions recommendations and in response to the problems of
common law derivative actions, the 2006 Act introduces the statutory derivative claims26. One issue is that,
as defined by the Act, the proceeding may only be brought by a member of a company27. By virtue of
s.260(5), the Act does not confer standing to a shareholder in the parent company of the wronged
company. s.260(2) further provides that a derivative claim may only be brought under the Act. In this
regard, the introduction of statutory derivative claims has rendered the status of multiple derivative actions
a topic of academic debate, as to whether it has been consigned to dustbin28. Notably, Lord Millett,
writing extra-judicially, considered multiple derivative actions as having no scope under the Act29.
In Fort Gilkicker30, Briggs Js decision was clearly contrary to this view. The judge regarded the question
of the effect of the 2006 Act as a question of statutory construction. On the one hand, despite noting the
Law Commissions purpose of introducing the statutory device, he could not make sense of the
Parliamentary intention of placing the statutory ordinary derivative claims alongside a continued obscure
common law regime for multiple derivative claims. On the other hand, he could not find any persuasive
reason why Parliament would abolish a convenient procedural device to do justice, particularly when
multi-layered corporate structures are commonplace. Hence, concluding that had parliament wished to
preclude multiple derivative action, it should have done so in a clear manner31. The Act only abolished the
law regarding single derivative actions and did not deal with multiple derivative actions so it remains
available at common law.
Implications of Fort Gilkicker
Briggs J made clear that he handed down his holding with some relief32 as the alternative would be to
accept that English courts could not address the manifest scope for real injustice33. His decision in Fort
Gilkicker is welcomed as it adds to the armoury of minority shareholders in international disputes34 and
ensures that the English law remains in harmony with other major common law jurisdictions35. Lord
Millett was quite right to be concerned with the consequence of injustice brought by the absence of
multiple derivative actions36. Thankfully, the decision exemplifies that the loophole is now closed to
potential fraudsters37.
Be that as it may, Briggs J himself also considered that his interpretation of the Act was unpalatable as
unfortunately, the decision of Fort Gilkicker means that the Foss v Harbottle jurisprudence does not

26

Part 11 of the Companies Act 2006

s.260(1) of CA2006
28
Davies, P. and Worthington, S. (2008). Gower and Davies' principles of modern company law. London:
Sweet & Maxwell.
29
Lord Millett, Multiple Derivative Actions, Gore-Browne Bulletin, July 2010
30
Op Cite Note 1, at 29
31
given that it is a well-established principle that a rule of the common law is not extinguished by a
statute unless the statute makes this clear by express provision or by clear implication. in R (Rottman) v
Comr of Police of the Metropolis [2002] 2 AC 692 and cited by Briggs J at 30 of Op Cite 1.
32
Ibid, at 49
33
Mascarenhas, T. (2013). Multiple derivative actions under English law. International Company and
Commercial Law Review, 24(9), pp.336-339; and Bailey, J. and Mugerwa, J. (2013). Multiple derivative
actions in company law: can you or can't you?. Company Lawyer, 34(10), pp.302-304.
34
Directors should be no more free to exploit subsidiaries for their own gain than to exploit holding
companies. from Baker, G. (2013). Derivative actions: members only?. Practical Law. [online] Available
at: http://uk.practicallaw.com/6-525-3715?source=relatedcontent.
35
Such as Singapore, Hong Kong, Australia, Canada, New Zealand and Delaware where multiple
derivative claims are available either in statutes or common law.
36
Op Cite Note 30
37
Bailey, J. and Mugerwa, J. (2013). Multiple derivative actions in company law: can you or can't you?.
Company Lawyer, 34(10), pp.302-304.
27


belong to the realm of history as it was intended to be38. Rather, they subsist side by side with the statutory
derivative claim and accordingly the messiness of the common law rules continues in such form39. This
runs contrary to the purpose of introducing statutory derivative claim in the first place.
Impact on the practical importance of derivative claims?
Although it is incontestable that the continuing significance of common law derivative actions has
preserved a weapon for shareholder litigations40 in the UK, this does not achieve much in enhancing the
overall importance of derivative claims in practice or changing the landscape of English shareholder
litigations due to the restrictive application of both the old and the new devices; under the Act, despite the
widened principles, the courts are reluctant to grant permission for the actions41.
Comparing Part 11 with the common law rules, there is little change of emphasis in formulation; whereas
the rule in Foss v Harbottle purported to prohibit claims unless the fraud on the minority exception was
satisfied42, the statutory provisions in s.261 264, in a similar manner, proceeds from the rather negative
standpoint that the court must dismiss the application or claim in a number of specified circumstances43.
The underlying rationale is that for fear of opening a Pandoras box to shareholder litigations44, the
extension of principle under the Act45 should be balanced by numerous safeguards46 to prevent
unmeritorious claims; therefore, consent from the court is required by demonstrating a prima facie case ex
parte47 and only if the application is not dismissed will the court proceed the case to the full permission
hearing. This costly and time-consuming two-stage process is a disincentive for shareholders to employ
derivative claims to seek redress. Thus, the new procedural requirements48, as was the common law
principles, represent significant hurdles to be overcome. The early case law decided under Part 11 of the
Act also shows that the courts are adopting a cautious approach when exercising their discretion49.
Concluding thoughts
The Fort Gilkicker decision reveals a parallel operation of the common law multiple derivative actions and
the statutory derivative claims. Albeit the case has brought clarity in the interest of justice, this also renders
the current state of law incoherent. A reform to incorporate multiple derivative actions into the statute is
necessary for tidying up this realm of law. Notwithstanding, upon comparison of the old and the new
devices, it is clear that with regard to the equally restrictive applicability of both devices, the preservation
of common law multiple derivative actions does not achieve beyond adding an extra tool to the armoury of
shareholder litigation, where the major weapon is still the unfair prejudice petition under s.994 of the 2006
Act50.

38

Katelouzou, D 2014, 'Multiple Derivative Actions: Is the Rule in Foss v Harbottle Still Alive?'. in GoreBrowne on Companies Special Release. Jordan Publishing, pp. 59-64.
39
Op Cite Note 5
40
Which primarily includes derivative claims and unfair prejudice petition
41
Lord Hodgson even contended at the final committee stage of the House of Lords that the existence of
s.459 was another reason why the codification of derivative claims was unnecessary. Lord Hodgson of
Astley Abbots, Hansard, HL Vol.679, col. GC3 (February 27, 2006)
42
Lowry, J. and Dignam, A. (2014). Company law. Oxford: Oxford University Press.
43
ss. 261(2), 262(3), 263(2)-(3) and 264(3) of the Companies Act 2006
44
Minister Alun Michael provided clarification that the bill will make the law in this area clearer and more
accessible but it will not result in a major change in the law.
45
The grounds for bringing a derivative claim are much wider now.
46
Regarding the additional procedural requirement contained in s.263(4).
47
Sykes, J. (2010). The continuing paradox: a critique of minority shareholder and derivative claims under
the Companies Act 2006. Civil Justice Quarterly, 29(2), pp.205-234.
48
Ibid, despite the liberalising of the derivative claim and expansion of directors duties, there are likely to
be sufficient brakes via the two-stage leave process.
49
Op Cite Note 42, For example, see Mission Capital plc v Sinclair and Franbar Holdings v Patel.
50
Allowing shareholders to seek personal redress.


All Cases Cited
Airey v Cordell [2006] EWHC 2728 (Ch)
Barrett v Duckett [1995] B.C.C. 362
Brown v British Abrasive Wheel Co Ltd [1919] 1 Ch. 290
Daniels v Daniels [1978] Ch. 406
Edwards v Halliwell [1950] 2 All E.R. 1064
Foss v Harbottle 67 E.R. 189
Franbar Holdings v Patel [2008] EWHC 1534 (Ch)
Halle v Trax BW Ltd [2000] B.C.C. 1020
Mission Capital plc v Sinclair [2008] EWHC 1339 (Ch)
Pavlides v Jensen [1956] Ch. 565
Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1982] Ch. 204
R (Rottman) v Comr of Police of the Metropolis [2002] 2 AC 692
Russell v Wakefield Waterworks Co (1875) L.R. 20 Eq. 474
Smith v Croft (No.2) [1988] Ch. 114
Truman Investment Group v Societe General SA [2003] EWHC 1316 (Ch)
Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] EWHC 348 (Ch)
Waddington Ltd v Chan [2008] HKEC 1498
Wallersteiner v Moir (No.2) [1975] Q.B. 373
Significant Legislation Cited
The Companies Act 2006
Bibliography
Bailey, J. and Mugerwa, J. (2013). Multiple derivative actions in company law: can you or can't you?.
Company Lawyer, 34(10), pp.302-304.
Davies, P. and Worthington, S. (2008). Gower and Davies' principles of modern company law. London:
Sweet & Maxwell.
Derivative actions: members only?. Practical Law. [online] Available at: http://uk.practicallaw.com/6-5253715?source=relatedcontent.
Herbert Smith Freehills - Litigation notes. (2015). Double derivative actions: challenging wrongs done to
subsidiary companies. [online] Available at: http://hsfnotes.com/litigation/2015/07/27/double-derivativeactions-challenging-wrongs-done-to-subsidiary-companies/ [Accessed 21 Apr. 2016].


Goo, S. (2010). Multiple derivative action and common law derivative action revisited: a tale of two
jurisdictions. Journal of Corporate Law Studies, 10(1), pp.255-264.
Katelouzou, D 2014, 'Multiple Derivative Actions: Is the Rule in Foss v Harbottle Still Alive?'. in GoreBrowne on Companies Special Release. Jordan Publishing, pp. 59-64.
Kershaw, D. (n.d.). The Rule in Foss v Harbottle is Dead; Long Live the Rule in Foss v Harbottle. SSRN
Electronic Journal.
Lord Hodgson of Astley Abbots, Hansard, HL Vol.679, col. GC3 (February 27, 2006)
Lord Millett, Multiple Derivative Actions, Gore-Browne Bulletin, July 2010
Lowry, J. and Dignam, A. (2014). Company law. Oxford: Oxford University Press.
Mascarenhas, T. (2013). Multiple derivative actions under English law. International Company and
Commercial Law Review, 24(9), pp.336-339.
Payne, J. (2005). Sections 459461 Companies Act 1985 In Flux: The Future of Shareholder Protection.
Cam. Law. J., 64(03), p.647.
Sykes, J. (2010). The continuing paradox: a critique of minority shareholder and derivative claims under
the Companies Act 2006. Civil Justice Quarterly, 29(2), pp.205-234.
Tan, C. (2013). Multiple derivative actions. Law Quarterly Review, 129(Jul), pp.337-339.
The Law Commission, Shareholder Remedies (1997), Law Com. No.246