Company Law Reform Bill [HL] (121-127)

House of Commons

Session 2005 - 06
Internet Publications
Other Bills before Parliament

Company Law Reform Bill [HL] (121-127)

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 11 — Derivative claims and proceedings by members
Chapter 1 — Derivative claims in England and Wales or Northern Ireland
121

259
Transactions under foreign law

For the purposes of this Part it is immaterial whether the law that (apart from
this Act) governs an arrangement or transaction is the law of the United
Kingdom, or a part of it, or not.
Part 11
5
Derivative claims and proceedings by members
Chapter 1
Derivative claims in England and Wales or Northern Ireland
260
Derivative claims
(1)
This Chapter applies to proceedings in England and Wales or Northern Ireland
10
by a member of a company—
(a)
in respect of a cause of action vested in the company, and
(b)
seeking relief on behalf of the company.

This is referred to in this Chapter as a “derivative claim”.
(2)
A derivative claim may only be brought—
15
(a)
under this Chapter, or
(b)
in pursuance of an order of the court in proceedings under section 459
of the Companies Act 1985 (c. 6) (proceedings for protection of
members against unfair prejudice).
(3)
A derivative claim under this Chapter may be brought only in respect of a
20
cause of action arising from an actual or proposed act or omission involving
negligence, default, breach of duty or breach of trust by a director of the
company.

The cause of action may be against the director or another person (or both).
(4)
It is immaterial whether the cause of action arose before or after the person
25
seeking to bring or continue the derivative claim became a member of the
company.
(5)
For the purposes of this Chapter—
(a)
“director” includes a former director;
(b)
a shadow director is treated as a director; and
30
(c)
references to a member of a company include a person who is not a
member but to whom shares in the company have been transferred or
transmitted by operation of law.
261
Application for permission to continue derivative claim
(1)
A member of a company who brings a derivative claim under this Chapter
35
must apply to the court for permission (in Northern Ireland, leave) to continue
it.
(2)
If it appears to the court that the application and the evidence filed by the
applicant in support of it do not disclose a prima facie case for giving
permission (or leave), the court—
40
(a)
must dismiss the application, and

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 11 — Derivative claims and proceedings by members
Chapter 1 — Derivative claims in England and Wales or Northern Ireland
122

(b)
may make any consequential order it considers appropriate.
(3)
If the application is not dismissed under subsection (2), the court—
(a)
may give directions as to the evidence to be provided by the company,
and
(b)
may adjourn the proceedings to enable the evidence to be obtained.
5
(4)
On hearing the application, the court may—
(a)
give permission (or leave) to continue the claim on such terms as it
thinks fit,
(b)
refuse permission (or leave) and dismiss the claim, or
(c)
adjourn the proceedings on the application and give such directions as
10
it thinks fit.
262
Application for permission to continue claim as a derivative claim
(1)
This section applies where—
(a)
a company has brought a claim, and
(b)
the cause of action on which the claim is based could be pursued as a
15
derivative claim under this Chapter.
(2)
A member of the company may apply to the court for permission (in Northern
Ireland, leave) to continue the claim as a derivative claim on the ground that—
(a)
the manner in which the company commenced or continued the claim
amounts to an abuse of the process of the court,
20
(b)
the company has failed to prosecute the claim diligently, and
(c)
it is appropriate for the member to continue the claim as a derivative
claim.
(3)
If it appears to the court that the application and the evidence filed by the
applicant in support of it do not disclose a prima facie case for giving
25
permission (or leave), the court—
(a)
must dismiss the application, and
(b)
may make any consequential order it considers appropriate.
(4)
If the application is not dismissed under subsection (3), the court—
(a)
may give directions as to the evidence to be provided by the company,
30
and
(b)
may adjourn the proceedings to enable the evidence to be obtained.
(5)
On hearing the application, the court may—
(a)
give permission (or leave) to continue the claim as a derivative claim on
such terms as it thinks fit,
35
(b)
refuse permission (or leave) and dismiss the application, or
(c)
adjourn the proceedings on the application and give such directions as
it thinks fit.
263
Whether permission to be given
(1)
The following provisions have effect where a member of a company applies for
40
permission (in Northern Ireland, leave) under section 261 or 262.
(2)
Permission (or leave) must be refused if the court is satisfied—

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 11 — Derivative claims and proceedings by members
Chapter 1 — Derivative claims in England and Wales or Northern Ireland
123

(a)
that a person acting in accordance with section 173 (duty to promote the
success of the company) would not seek to continue the claim, or
(b)
where the cause of action arises from an act or omission that is yet to
occur, that the act or omission has been authorised by the company, or
(c)
where the cause of action arises from an act or omission that has
5
already occurred, that the act or omission—
(i)
was authorised by the company before it occurred, or
(ii)
has been ratified by the company since it occurred.
(3)
In considering whether to give permission (or leave) the court must take into
account, in particular—
10
(a)
whether the member is acting in good faith in seeking to continue the
claim;
(b)
the importance that a person acting in accordance with section 173
(duty to promote the success of the company) would attach to
continuing it;
15
(c)
where the cause of action results from an act or omission that is yet to
occur, whether the act or omission could be, and in the circumstances
would be likely to be—
(i)
authorised by the company before it occurs, or
(ii)
ratified by the company after it occurs;
20
(d)
where the cause of action arises from an act or omission that has
already occurred, whether the act or omission could be, and in the
circumstances would be likely to be, ratified by the company;
(e)
whether the company has decided not to pursue the claim;
(f)
whether the act or omission in respect of which the claim is brought
25
gives rise to a cause of action that the member could pursue in his own
right rather than on behalf of the company.
(4)
In considering whether to give permission (or leave) the court shall have
particular regard to any evidence before it as to the views of members of the
company who have no personal interest, direct or indirect, in the matter.
30
(5)
The Secretary of State may by regulations—
(a)
amend subsection (2) so as to alter or add to the circumstances in which
permission (or leave) is to be refused;
(b)
amend subsection (3) so as to alter or add to the matters that the court
is required to take into account in considering whether to give
35
permission (or leave).
(6)
Before making any such regulations the Secretary of State shall consult such
persons as he considers appropriate.
(7)
Regulations under this section are subject to affirmative resolution procedure.
264
Application for permission to continue derivative claim brought by another
40
member
(1)
This section applies where a member of a company (“the claimant”)—
(a)
has brought a derivative claim,
(b)
has continued as a derivative claim a claim brought by the company, or
(c)
has continued a derivative claim under this section.
45

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 11 — Derivative claims and proceedings by members
Chapter 2 — Derivative proceedings in Scotland
124

(2)
Another member of the company (“the applicant”) may apply to the court for
permission (in Northern Ireland, leave) to continue the claim on the ground
that—
(a)
the manner in which the proceedings have been commenced or
continued by the claimant amounts to an abuse of the process of the
5
court,
(b)
the claimant has failed to prosecute the claim diligently, and
(c)
it is appropriate for the applicant to continue the claim as a derivative
claim.
(3)
If it appears to the court that the application and the evidence filed by the
10
applicant in support of it do not disclose a prima facie case for giving
permission (or leave), the court—
(a)
must dismiss the application, and
(b)
may make any consequential order it considers appropriate.
(4)
If the application is not dismissed under subsection (3), the court—
15
(a)
may give directions as to the evidence to be provided by the company,
and
(b)
may adjourn the proceedings to enable the evidence to be obtained.
(5)
On hearing the application, the court may—
(a)
give permission (or leave) to continue the claim on such terms as it
20
thinks fit,
(b)
refuse permission (or leave) and dismiss the application, or
(c)
adjourn the proceedings on the application and give such directions as
it thinks fit.
Chapter 2
25
Derivative proceedings in Scotland
265
Derivative proceedings
(1)
In Scotland, a member of a company may raise proceedings in respect of an act
or omission specified in subsection (3) in order to protect the interests of the
company and obtain a remedy on its behalf.
30
(2)
A member of a company may raise such proceedings only under subsection
(1).
(3)
The act or omission referred to in subsection (1) is any actual or proposed act
or omission involving negligence, default, breach of duty or breach of trust by
a director of the company.
35
(4)
Proceedings may be raised under subsection (1) against (either or both)—
(a)
the director referred to in subsection (3), or
(b)
another person.
(5)
It is immaterial whether the act or omission in respect of which the proceedings
are to be raised or, in the case of continuing proceedings under section 267 or
40
269, are raised, arose before or after the person seeking to raise or continue
them became a member of the company.
(6)
This section does not affect—

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 11 — Derivative claims and proceedings by members
Chapter 2 — Derivative proceedings in Scotland
125

(a)
any right of a member of a company to raise proceedings in respect of
an act or omission specified in subsection (3) in order to protect his own
interests and obtain a remedy on his own behalf, or
(b)
the court’s power to make an order under section 461(2)(c) of the
Companies Act 1985 (c. 6) or anything done under such an order.
5
(7)
In this Chapter—
(a)
proceedings raised under subsection (1) are referred to as “derivative
proceedings”,
(b)
the act or omission in respect of which they are raised is referred to as
the “cause of action”,
10
(c)
“director” includes a former director,
(d)
references to a director include a shadow director, and
(e)
references to a member of a company include a person who is not a
member but to whom shares in the company have been transferred or
transmitted by operation of law.
15
266
Requirement for leave and notice
(1)
Derivative proceedings may be raised by a member of a company only with the
leave of the court.
(2)
An application for leave must—
(a)
specify the cause of action, and
20
(b)
summarise the facts on which the derivative proceedings are to be
based.
(3)
If it appears to the court that the application and the evidence produced by the
applicant in support of it do not disclose a prima facie case for granting it, the
court—
25
(a)
must refuse the application, and
(b)
may make any consequential order it considers appropriate.
(4)
If the application is not refused under subsection (3)—
(a)
the applicant must serve the application on the company,
(b)
the court—
30
(i)
may make an order requiring evidence to be produced by the
company, and
(ii)
may adjourn the proceedings on the application to enable the
evidence to be obtained, and
(c)
the company is entitled to take part in the further proceedings on the
35
application.
(5)
On hearing the application, the court may—
(a)
grant the application on such terms as it thinks fit,
(b)
refuse the application, or
(c)
adjourn the proceedings on the application and make such order as to
40
further procedure as it thinks fit.
267
Application to continue proceedings as derivative proceedings
(1)
This section applies where—
(a)
a company has raised proceedings, and

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 11 — Derivative claims and proceedings by members
Chapter 2 — Derivative proceedings in Scotland
126

(b)
the proceedings are in respect of an act or omission which could be the
basis for derivative proceedings.
(2)
A member of the company may apply to the court to be substituted for the
company in the proceedings, and for the proceedings to continue in
consequence as derivative proceedings, on the ground that—
5
(a)
the manner in which the company commenced or continued the
proceedings amounts to an abuse of the process of the court,
(b)
the company has failed to prosecute the proceedings diligently, and
(c)
it is appropriate for the member to be substituted for the company in
the proceedings.
10
(3)
If it appears to the court that the application and the evidence produced by the
applicant in support of it do not disclose a prima facie case for granting it, the
court—
(a)
must refuse the application, and
(b)
may make any consequential order it considers appropriate.
15
(4)
If the application is not refused under subsection (3)—
(a)
the applicant must serve the application on the company,
(b)
the court—
(i)
may make an order requiring evidence to be produced by the
company, and
20
(ii)
may adjourn the proceedings on the application to enable the
evidence to be obtained, and
(c)
the company is entitled to take part in the further proceedings on the
application.
(5)
On hearing the application, the court may—
25
(a)
grant the application on such terms as it thinks fit,
(b)
refuse the application, or
(c)
adjourn the proceedings on the application and make such order as to
further procedure as it thinks fit.
268
Granting of leave
30
(1)
The court must refuse leave to raise derivative proceedings or an application
under section 267 if satisfied—
(a)
that a person acting in accordance with section 173 (duty to promote the
success of the company) would not seek to raise or continue the
proceedings (as the case may be), or
35
(b)
where the cause of action is an act or omission that is yet to occur, that
the act or omission has been authorised by the company, or
(c)
where the cause of action is an act or omission that has already
occurred, that the act or omission—
(i)
was authorised by the company before it occurred, or
40
(ii)
has been ratified by the company since it occurred.
(2)
In considering whether to grant leave to raise derivative proceedings or an
application under section 267, the court must take into account, in particular—
(a)
whether the member is acting in good faith in seeking to raise or
continue the proceedings (as the case may be),
45

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 11 — Derivative claims and proceedings by members
Chapter 2 — Derivative proceedings in Scotland
127

(b)
the importance that a person acting in accordance with section 173
(duty to promote the success of the company) would attach to raising
or continuing them (as the case may be),
(c)
where the cause of action is an act or omission that is yet to occur,
whether the act or omission could be, and in the circumstances would
5
be likely to be—
(i)
authorised by the company before it occurs, or
(ii)
ratified by the company after it occurs,
(d)
where the cause of action is an act or omission that has already
occurred, whether the act or omission could be, and in the
10
circumstances would be likely to be, ratified by the company,
(e)
whether the company has decided not to raise proceedings in respect of
the same cause of action or to persist in the proceedings (as the case
may be),
(f)
whether the cause of action is one which the member could pursue in
15
his own right rather than on behalf of the company.
(3)
In considering whether to grant leave to raise derivative proceedings or an
application under section 267, the court shall have particular regard to any
evidence before it as to the views of members of the company who have no
personal interest, direct or indirect, in the matter.
20
(4)
The Secretary of State may by regulations—
(a)
amend subsection (1) so as to alter or add to the circumstances in which
leave or an application is to be refused,
(b)
amend subsection (2) so as to alter or add to the matters that the court
is required to take into account in considering whether to grant leave or
25
an application.
(5)
Before making any such regulations the Secretary of State shall consult such
persons as he considers appropriate.
(6)
Regulations under this section are subject to affirmative resolution procedure.
269
Application by member to be substituted for member pursuing derivative
30
proceedings
(1)
This section applies where a member of a company (“the claimant”)—
(a)
has raised derivative proceedings,
(b)
has continued as derivative proceedings raised by the company, or
(c)
has continued derivative proceedings under this section.
35
(2)
Another member of the company (“the applicant”) may apply to the court to be
substituted for the claimant in the action on the ground that—
(a)
the manner in which the proceedings have been commenced or
continued by the claimant amounts to an abuse of the process of the
court,
40
(b)
the claimant has failed to prosecute the proceedings diligently, and
(c)
it is appropriate for the applicant to be substituted for the claimant in
the proceedings.
(3)
If it appears to the court that the application and the evidence produced by the
applicant in support of it do not disclose a prima facie case for granting it, the
45
court—