Tuesday 29 June 2010

UK: England and Wales: derivative claims under the Companies Act (2006)

The High Court gave judgment today in Stainer v Lee & Ors [2010] EWHC 1539 (Ch). Although only a first instance decision, it is nevertheless important because of the guidance it provides on the operation of the new statutory regime governing derivative claims under Chapter 1, Part 11, of the Companies Act (2006). There have been only a handful of reported cases so far and Stainer is of interest because permission to continue a derivative action was granted, subject to various conditions including one relating to costs. Two points of immediate interest are:

[1] Section 263 sets out the matters which the judge must consider in deciding whether to grant permission. In this regard, the trial judge observed (at para. [29]):

I consider that section 263(3) and (4) do not prescribe a particular standard of proof that has to be satisfied but rather require consideration of a range of factors to reach an overall view. In particular, under section 263(3)(b), as regards the hypothetical director acting in accordance with the section 172 duty, if the case seems very strong, it may be appropriate to continue it even if the likely level of recovery is not so large, since such a claim stands a good chance of provoking an early settlement or may indeed qualify for summary judgment. On the other hand, it may be in the interests of the Company to continue even a less strong case if the amount of potential recovery is very large".

[2] With regard to the claimant's costs, the trial judge observed (at para. [56]):

The Applicant seeks an indemnity for his costs, relying on Wallersteiner v Moir (No 2) [1975] 1 QB 373. I think that is clear authority that a shareholder who receives the sanction of the court to proceed with a derivative action should normally be indemnified as to his reasonable costs by the company for the benefit of which the action would accrue. But where the amount of likely recovery is presently uncertain, there is concern that his costs could become disproportionate. Accordingly, I place a ceiling on the costs for which I grant an indemnity for the future ...".

1 comment:

David Gibbs said...

The case seems to be pretty sound in that a large amount is clearly recoverable if what they are saying is true and there appears to be a good legal claim for breach of duty, which is the true basis for a judge to decide whether to continue except in a clear case, as stated in Iesini, where commercial considerations can be considered.

The only problem for me lies in the rationale of the judge in saying the appropriate remedy is a derivative claim rather than an unfairly prejudicial one.

The purpose of s263(f) is to add weight to not continuing if there is availability of another remedy.

What the judge appears to be saying is that if the claimants want a certain remedy then they can pursue the appropriate action to secure it, which is legally incorrect. Derivative claims are a weapon of last resort and the fact that another remedy is available should be a reason against continuing the claim whether or not it will provide the remedy the claimants want; but that consideration must be weighed against other factors under s263(3) and in my opinion this one factor alone would not outweigh the considerations under s263(3)(b) in this case and the fact 35 other members have shown support.