Case Background & Strategy

Where a company is wronged by its own directors but the wrongdoers control the board, sections 347 to 350 of the Companies Act 2016 allow a ‘complainant’ — including a member or former member — to apply for leave of the court to bring proceedings in the name and on behalf of the company. Leave requires thirty days’ written notice to the directors, and the court must be satisfied the complainant is acting in good faith and that the action appears prima facie to be in the best interest of the company.

When a derivative action is the right tool

The derivative action addresses wrongs done to the company — misappropriation of assets, diversion of corporate opportunities, breaches of duty causing corporate loss — where the board will not sue because the defendants are the board. It is distinct from oppression under section 346, which vindicates the member’s personal interests; many disputes justify both, and choosing (or combining) the routes is a core strategic decision.

The leave stage

The statutory derivative action displaces the old common-law exceptions to Foss v Harbottle. At the leave stage the court does not try the merits; it asks whether there is a reasonable, arguable case, whether the applicant acts in good faith rather than for a collateral purpose, and whether pursuing it serves the company. The thirty-day notice to directors is mandatory, and defective notice is a frequent — and avoidable — ground of failure.

Costs and control

The court may order the company to pay the complainant’s costs of the proceedings, authorise interim control arrangements, and approve any settlement or discontinuance — a safeguard against collusive resolutions. Any recovery belongs to the company, not the complainant personally.

Frequently asked questions

Can a small shareholder obtain leave?

Yes. There is no shareholding threshold; standing turns on the statutory definition of complainant and the leave criteria.

Can a derivative action continue if the company is wound up?

Once a liquidator is appointed, the right to sue in the company’s name generally passes to the liquidator, and different considerations apply.

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