Derivative Claims Until 2017

As reported on Westlaw, there have now been 20 derivative claims heard. To keep information updated on this as I write my paper the most recent decision was heard in November 2016, Zavahir v Shankleman [2016] EWHC 2772 (Ch). The claim was refused for a mandatory bar, namely no director would continue the claim when acting in accordance with the Companies Act 2006, s 172, to act in the company's best interests.

This takes the figures to the following:
Permission: 40% (8/20)
Refused: 60% (12/20)
Mandatory Bars: 35% (7/20)

It has been said that the success of the reform would depend on whether the claim was accessible to meritorious claims, so looking at the above numbers may not be particularly edifying. Descriptive data may be more useful if one focuses on those claims that had some merit to them, i.e. that did not succumb to a mandatory bar.

Therefore, the figures would be as follows:
Permission: 61.5% (8/13)
Refused: 38.5% (5/13)

By bringing the claim on to clearer grounds the intention of reform was to create access to meritorious claims, but also deter frivolous ones. By looking at the data on derivative claims, my current working paper is looking to assess whether that has happened.

The investigation is premised on the general concept that while a law may intend to do one thing, the outcome may be different. Take the example of 'criminal conversations', a particular offence in legal history for what is now referred to as adultery. The claim is brought by the husband against the adulterer. While the offence was intended to deter men from having adulterous relationships with married women, the law created incentives for married couples to dupe unsuspecting men of wealth in to sexual relations with the woman to extract compensation settlements from them, either in or out of court. There was such evidence of this in cases such as Cibber v Sloper and Worsley v Bisset. However, in both cases the jury, while finding in favour of the claimants, only awarded £10 and one shilling respectively, to reflect the limited injury suffered.

Moving back in to context, the same can be said of derivative claims. Will putting the claim on clearer footing make it more accessible or will it result in frivolous litigation? Speaking generally, the literature acknowledges that a legal system and its institutions generally need to be aligned if a particular outcome is to be achieved. Otherwise there is a risk in introducing a new mechanism or law that is not aligned may irritate the legal system, producing unexpected outcomes.

Therefore, given that it is generally accepted that the UK legal system and its institutions are generally set up against derivative enforcement, it seems unlikely that the new procedure will enable access for meritorious claims. However, making it clearer when claims can be brought to shareholders might be seen to encourage frivolous litigation where an attractive settlement or other benefit might be derived from pursuing the litigation, even if success is unlikely. Given that 30% of claims so far can be described as frivolous, since they failed to overcome the relatively low hurdle that no director would continue the claim if acting in accordance with s 172, suggests that some shareholders might be doing just that.

Case Name	Dismissed For/Allowed	Significant Circumstances Considered
Bamford	Dismissed at court’s discretion	Wrongdoer control
Bridge	Mandatory Bar	No reasonable director would pursue the claim; alternative remedy; company decision; independent views; wrongdoer control
Cinematic Finance	Dismissed at court’s discretion	Majority bringing derivative claim; wrongdoer control; side-stepping insolvency rules
Cullen Investments	Permission granted	Hypothetical director would question if full and frank disclosure was given for authorisation; and case was simple on this premise; significant sum could be recovered based on lack of evidence to contrary; no basis for lacking good faith; hypothetical director would attach considerable importance; claim being funded by C so no financial risk to company and possible benefit; claimant’s action may give rise to action in own right but this was not a decisive consideration since the defence necessitated it and as a precaution since the company was entitled to some or all of the relief
FanmailUK	Case adjourned	Case adjourned
Franbar	Dismissed at court’s discretion	Strength of legal claims; ratification; alternative remedy
Hook	Permission Granted	Good faith; strength of legal claims; ratification; Alternative remedy
Hughes	Permission granted	Strength of legal claims; ratification; alternative remedy
Iesini	Mandatory Bar	Weak legal claims
Kleanthous	Dismissed at court’s discretion	Independent review of whether litigation was beneficial; strength of legal claims; alternative remedy; and benefit would be small
Kiani	Permission granted	Failure of defendant to produce any evidence to the contrary; alternative remedy
McAskill	Permission granted	Good faith; Alternative remedy; director would attach weight to the claim under s.172
Mission Capital	Dismissed at court’s discretion	Alternative remedy; little weight to a claim for wrongful dismissal of a director
Parry	Permission granted	Strength of legal claims; ratification; good faith; alternative remedy
Phillips	Permission granted	Alternative remedy; matter of urgency case was brought to recover sums taken from the company without good reason
Seven Holdings	Mandatory Bar	Claims did not relate to a breach of duty, care, negligence or default
Singh	Mandatory Bar	No director would continue the claim if acting in accordance with s.172; fides of the claimant in question; s.994 more appropriate
Stainer	Permission granted	Strong grounds that there had been a breach of duty; strength of legal claims; disinterested shareholders deceived in to approving the loan
Stimpson	Mandatory Bar	The impact an action would have on the interests of the employees; claim of little value compared to cost of claim; legal claims were not realistically arguable
Zavahir	Mandatory Bar	No director acting in accordance with section 172 would continue the claim. If incorrect little weight would be attached due to the costs involved were less than potential recovery, and there was an alternative remedy

Case	Type of company	Costs indemnity sought	Financial State of the company	Shareholding % (respondent/claimant)	Amount Claimed for*	Concerned a conflict of interest?	Length of proceedings
Bamford	Ltd	Yes	Solvent	50/50	£3,500,000	No	1 day
Bridge	Plc	Yes	Solvent	Minority (1.83%)/Director	N/A	Yes	2 days
Cinematic Finance	Ltd	N/A	Doubtful solvency	0/100	N/A	Yes	N/A
Cullen Investments	N/A	No	N/A	N/A	“Scant evidence”	Yes	N/A
Fanmailuk	Ltd	N/A	Solvent	Majority/minority	£70,000,000	Yes	N/A
Franbar	Ltd	N/A	Solvent	75/25	N/A	Yes	2 days
Hook	Ltd	Yes	Solvent	Minority/Majority		Yes	2 days
Hughes	Ltd	Likely	To be dissolved	50/50	£100,000+	Yes	1 day
Iesini	Ltd	N/A	Doubtful solvency	Majority/minority	N/A	Yes	4 days
Kleanthous	Ltd	N/A	Solvent	84.5/15.5	£120,000,000	Yes	4 days
Kiani	Ltd	Yes	Solvent	50/50	£296,000	Yes	1 day
McAskill	Ltd	Yes	Solvent	50/50	£197,640	Yes	1 day
Mission Capital	Plc	N/A	Solvent	N/A	N/A	Yes	N/A
Parry	Ltd	N/A	No assets	50/50	£248,577.24	Yes	1 day
Phillips	Ltd	N/A	Solvent	50/50	N/A	Yes	2 days
Seven Holdings	Ltd	N/A	Effectively no assets	50/50	£1,693,212.32	No	1 day
Singh	Ltd	Yes	Solvent/not trading	50/50	£873,000	Yes	1 day
Stainer	Ltd	Yes	Solvent	87/0.08	£7,000,000	Yes	1 day
Stimpson	Ltd by guarantee	N/A	No assets	Majority/minority	£5,300,000	Yes	4 days
Zavahir	Ltd	Yes	Solvent £20,000 only	Equal	£136,000	No	N/A