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310 Chapter 11Companies (2): Management, control and winding up

The rule in Foss vHarbottleis a logical extension of Salomon vSalomon and Co Ltd.

That case decided that a company is a separate legal person. It follows that if a company is

wronged it alone has the power to sue.

The rule has the advantage of preventing multiple actions. If every shareholder in every

company was able to sue for any perceived wrong to the company then there would be an

enormous number of potential court cases. However, the rule could obviously be very

unfair to minority shareholders, and now both the courts and statute offer protection to the

minority.

shareholders Statutory protection of minority

Statutory derivative claims

Section 260(1) of the 2006 Act has introduced a new derivative claim. Such a claim is

brought by a member of the company on behalf of the company in respect of a right to sue

which the company has. So any remedy which is ordered will be a remedy in favour of the

company.

Section 261(1) provides that a member of a company who brings a derivative claim must

apply to the court for permission to continue it. At this stage the defendant takes no part

in the proceedings. The court must dismiss the application if it appears to the court that

the application, and the evidence filed by the claimant in support of it, do not disclose a

prime faciecase for giving permission. On hearing the application, s. 261(4) gives the court

three options:

n to give permission for the claim to be continued on such terms as it thinks fit;

n to refuse permission and dismiss the claim; or

n to adjourn the proceedings and give such directions as it thinks fit.

So if the court does not dismiss the claim it has considerable power to impose require-

ments on either side.

Section 260(2) and (3) provide that a derivative claim may be brought only in respect of

two matters. First, in respect of negligence, default, breach of duty or breach of trust by a

director of the company. Second, in pursuance of a court order in proceedings under s. 994

for protection for relief from ‘unfair prejudice’. (Unfair prejudice is considered below on

pp. 311–13.) The first category is the more important and would allow a claim to be brought

whenever a director breached any of the general statutory duties set out ss. 171–177. A

person who becomes a member of a company will be able to bring a claim in respect of acts

which the directors have already committed.

Section 262(3) allows a member of a company to apply to the court for permission to

continue a claim brought by the company as a derivative claim. This section is necessary

Foss vHarbottle (1843)

Two members of a company sued five directors who had sold land to the company for

more than it was worth.

HeldThe shareholders had no right to sue. If the directors had wronged the company then

only the company could sue in respect of that wrong. ( The company was most unlikely to

do this because it was controlled by the very directors who had cheated it!)