Welcome clarity for shareholders on the law of double derivative claims

Published: 17/8/2015

The recent case of Bhullar v Bhullar is important and of relevance in confirming the availability of double derivative claims to shareholders enabling them to challenge wrongdoing by those in control of subsidiary companies, and setting out the requirements they must satisfy in order to pursue those claims.

Two predominant regimes

There are two predominant regimes through which shareholders in companies can seek to vindicate their rights and seek relief for wrongs which cause them to suffer loss:

  1. Where the company’s affairs are conducted in a manner that is unfairly prejudicial to a shareholder’s interests as a member of the company, the shareholder may petition the court for relief under section 994 Companies Act 2006 (“CA”). 
  2. Where the cause of action vests with the company itself against its directors or third parties, arising from acts or omissions constituting negligence, default, breach of duty and/or breach of trust by a director, then a shareholder may seek to bring a “derivative claim” against the wrongdoer in the name of the company under section 260 CA.

These regimes are available to registered shareholders in companies.  However, what relief (if any) can a registered shareholder of a parent company seek where the cause of action is vested in its subsidiary company (for example where the subsidiary’s directors have acted in breach of duty and the subsidiary has suffered loss as a consequence)?

In those circumstances, the shareholder of the parent company is two steps removed from the cause of action (vested in the wronged subsidiary company).  Does this mean that the wrongdoers in control of the subsidiary are beyond the reach of the aggrieved parent company shareholder?

The availability of the “double derivative” claim

The answer, thankfully, is no, and the law has received recent support and clarification in the case of Bhullar v Bhullar [2015] EWHC 1943 (Ch).  Bhullar is further confirmation that a “double derivative” claim is available in circumstances where the cause of action belongs to a subsidiary company, and provides useful guidance as to the considerations a court will take into account in determining whether it will grant permission for such an action to be pursued.

The facts of Bhullar

The case involved a group of companies which formed a family business.  One of the family members (“C”) was a minority shareholder in the parent company (“BL”), but was not a director of either of BL’s subsidiary companies (“BBL” and “BDL”).  C alleged that his brother, (“B”), who was a director of BBL and BDL, had acted in breach of duty in:

  • making a number of payments from BBL to a third company (“T”) of which B was the sole shareholder and director; and
  • transferring a property held by BDL to himself in breach of fiduciary duty and at an undervalue.

C alleged that BBL had suffered losses as a result of the payments to T and that BDL had suffered a loss as a result of the transfer of the property at an undervalue to B, having also been deprived of an opportunity to develop the property, whereas B had himself made a profit from undertaking that development.  C sought relief on behalf of BBL and BDL by way of a double derivative claim against the alleged wrongdoer, B.

Criteria to continue a double derivative claim

The court’s approach in Bhullar to the question of whether to permit C to pursue his double derivative claim on behalf of the subsidiaries BBL and BDL, is informative of the approach a court will take in these circumstances and the common law hurdles which a shareholder will need to clear as to whether:

  1. the court had jurisdiction in relation to a double derivative claim in light of the statutory regime introduced for (normal) derivative claims in the CA;
  2. C had established a prima facie case that BBL and BDL were entitled to the relief claimed against B, and that B could not successfully rely on a limitation defence in relation to the payments made by BBL to T; and
  3. C had to establish that the case fell within the exception to the rule in Foss v Harbottle. In this respect, the court had to determine whether:
    • there was fraud;
    • B had benefitted from the alleged wrongdoing;
    • there was “wrongdoer control” of BBL and BDL; and
    • a reasonable board of directors of the relevant company could consider it appropriate to bring the claims.
The Court found that:
  • its jurisdiction in relation to common law double (or multiple) derivative claims had survived the introduction of sections 260-264 CA; and
  • there was a prima facie case of dishonest breach of fiduciary duty by B in his capacity as a director of BBL in respect of the payments made to T, since B, as the sole shareholder in T, was the beneficiary of the payments.  As such, section 21(1) of the Limitation Act 1980 – which provides that there is no relevant period of limitation in the event of a fraudulent breach of trust (which the court found to include a breach of fiduciary duty) - was engaged.  In respect of the property transfer, B accepted there was a prima facie case of breach of duty in failing to comply with section 190 CA.
The facts will prescribe the choice of action

As regards the interaction between the two regimes of relief (derivative action and unfair prejudice), this is a complex area and it is important for shareholders and potential claimants (and their advisers) carefully to consider the facts of any particular case.  There are instances where not only will one regime be more attractive than the other, but also instances (such as those which concern what is known as “reflective loss”) where the facts and circumstances of the case will prescribe the choice of action which a potential claimant may bring.

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