A Guide to Shareholder Derivative Claims: Part 11 of the Companies Act 2006

In most circumstances, when a company suffers loss due to a director’s conduct, it is the company itself that decides whether to pursue legal proceedings. However, there are situations where shareholders may be permitted to bring a claim on the company’s behalf.

Whilst relatively uncommon, and with a high bar for consent by the courts, they remain an important mechanism to hold directors to account and protect company interests.

In this guide, we provide an overview of derivative claims under Part 11 of the Companies Act 2006, focusing on the legal framework, procedural requirements, and practical considerations.

Tables of Contents

• Legal framework
• When can a derivative claim be brought?
• Common examples of derivative claims
• Derivative claims v unfair prejudice petitions
• The court process
• When must the court refuse permission?
• Key factors considered by the court
• Available remedies
• Costs and funding
• Key practical considerations
• Alternatives to derivative claims
• Seeking legal support
• FAQs

Legal framework

A derivative claim is a claim brought by a shareholder on behalf of the company, even though the cause of action belongs to the company itself. In effect, the shareholder “steps into the shoes” of the company. The usual position is the company, acting through its board of directors, decides whether to bring a claim. Derivative claims are a limited exception to that principle.

Derivative claims brought by members in respect of companies registered under the Companies Act 2006 in England and Wales are governed by Part 11 of the Act (specifically sections 260 – 264). While a parallel regime exists at common law (for example for non-members or certain corporate structures such as LLPs), this guide focuses solely on statutory derivative claims.

When can a derivative claim be brought?

Claims brought by members under the Companies Act 2006 are commonly referred to as “statutory derivative claims”.

A statutory derivative claim may only be brought in respect of an action arising from an actual or proposed act or omission by a director of the company (including former directors and shadow directors) involving the following:

• Negligence
• Default in office
• Breach of duty (including sections 171 – 177 of the Act)
• Breach of trust

It is not necessary for the claimant to have been a member at the time of the relevant wrongdoing. However, the court may take into account what the member knew (or ought to have known) when acquiring their shares. 

Common examples of derivative claims

In practice, derivative claims commonly arise where:

• Directors have misappropriated company assets
• There has been a diversion of business opportunities
• Directors have awarded themselves excessive remuneration
• Transactions involving conflicts of interest, or lack proper authorisation

The key issue is not whether a shareholder feels aggrieved, but whether the company itself has suffered loss as a result of the director’s alleged conduct.

Derivative claim or unfair prejudice petition?

Derivative claims and unfair prejudice petitions frequently arise from similar underlying facts, particularly in owner-managed businesses.

The crucial difference is who has suffered the harm and who benefits from the remedy.

Issue	Derivative Claim	Unfair Prejudice Petition
Who suffered the loss?	The company	The member
Who benefits from the remedy?	The company	The member
Typical objective	Recover assets or compensation for the company	Personal relief, often a buyout
Legal basis	Part 11 Companies Act 2006	Section 994 Companies Act 2006

That being said, selecting the appropriate remedy significantly impacts the outcome, and so early legal advice is essential in ensuring you are pursuing the right goals.

The court permission process

A key feature of derivative claims is the two-stage court permission process.

Stage 1: Initial review

At stage 1, the court will consider the claim based on the claimant’s filed evidence only. If the application and supporting evidence do not disclose a prima facie case, the claim will be dismissed at this stage. 

If a prima facie claim is made out, the claim will proceed to a substantive permission hearing. At that point, the company, directors and any other parties (where appropriate) may be joined to the proceedings and directions given for their evidence in response (if any).

Stage 2: Substantive permission hearing

At the substantive hearing, the court considers evidence from all parties and determines whether the claim should be permitted to continue, applying the statutory criteria in section 263 of the Act.

When the court must refuse permission

The court must refuse permission if:

• The claim is not in the company’s interests (i.e. a reasonable director (acting under their duty to promote the success of the company under section 172 of the Act) would not seek to continue the claim). Section 172 sets out a number of matters to which a director must have regard when making that assessment, including the likely consequences of any decision in the long term, and the need to foster business relationships with suppliers, customers and others.
• The relevant act or omission has been authorised in advance or subsequently ratified by members (where capable of ratification).

Key factors for the court when considering whether to grant permission

In addition to the mandatory bars for refusing permission, the court retains a broad discretion and must consider, in particular:

• Whether the member is acting in good faith in seeking to continue the claim.
• The importance a director acting under section 172 would attach to the claim.
• Whether the act could (or likely would) be authorised or ratified.
• Whether the company has, in fact, decided not to pursue the claim. There may be a host of reasons (commercial and non-commercial) why further action is considered unattractive.
• The availability of alternate remedies to the member (for instance, unfair prejudice).
• The views of other members with no personal, direct or indirect, interest in the matter.

The court will look beyond the allegations and consider whether the litigation is truly being brought for the benefit of the company rather than to advance a personal shareholder agenda.

Available remedies

A range of remedies exists at the disposal of the courts should a derivative claim succeed. These may include:

• Compensation payable to the company
• Recovery of misappropriated assets
• Injunctions preventing further wrongdoing
• Orders setting aside transactions
• Other relief aimed at restoring the company’s position

Unlike other shareholder remedies, an award in a derivative claim is for the company’s benefit,  rather than the member who brought the proceedings, though there may be some collateral benefit to the member by ensuring the company enforces the rights available to it..

Costs and funding

As with most litigation, the general rule is the loser pays the winner’s costs, subject to the court’s discretion.

The court may also grant a costs indemnity in favour of the claimant which may cover some or all of the costs of the application or the claim. These are commonly known as Wallersteiner orders. Such orders are discretionary and not automatic. The court will consider carefully whether it is appropriate to expose the company to the cost of litigation at an early stage.

A Wallersteiner order may be made if:

• It is a claim which it would have been reasonable and prudent for the board of directors to have pursued;
• The claim is entirely for the company’s benefit, and not the individual member’s; and
• The claimant does not have any financial interest in the outcome, other than in their general capacity as a member.

Key practical considerations

Before pursuing a derivative claim, members should carefully consider the following:

• Is the company the real loser, or is this a personal dispute?
• Would an unfair prejudice petition achieve your objective more effectively?
• Is there a strong evidential case at an early stage?
• Are the costs proportionate to the likely recovery?
• Will the court see the claim as genuinely in the company’s interests?

Alternatives to a derivative claim

Derivative claims often overlap with unfair prejudice petitions (under section 994 of the Act) and just and equitable winding up, save that:

• A derivative claim may be more appropriate where the objective is to recover something for the company itself.
• If the member’s real aim is to achieve some personal relief or benefit, an unfair prejudice petition may be more appropriate.

Our guides on unfair prejudice claims and our guide on just and equitable winding up petitions offer an in-depth look at these remedies.

Conclusion

Derivative claims are a powerful but tightly controlled remedy for addressing wrongdoing by directors. However, they involve significant procedural hurdles, cost risks and strategic considerations.

Early specialist advice is essential to assess whether a derivative claim is the most effective route, or whether alternative remedies may achieve a better commercial outcome.

Seeking legal support

The key issue is often not whether something has gone wrong, but whether a derivative claim is the right remedy. In many cases, a member may achieve a better outcome through an unfair prejudice petition, negotiated exit, mediation, or another form of shareholder dispute resolution.

Our commercial litigation team regularly advises businesses, directors and shareholders on complex corporate disputes, including derivative claims, unfair prejudice petitions, shareholder fallouts and wider company governance issues. We can help assess the merits of a potential claim, evaluate alternative remedies and develop a strategy focused on achieving the best commercial outcome.

Get in touch today via our form to speak with an expert.

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