legal updates
Thursday, 01 Jun 2006
increased opportunities for shareholders to raise actions against directors
Where a wrong is committed against a company, it is the company which has a right of action against the perpetrators. However, when the wrongdoers are the directors themselves (who control the company) often no claim will be made.This is clearly detrimental to the shareholders. To remedy this unsatisfactory situation, the law allows shareholders to raise an action against the directors of the company on behalf of the company.
At present, the circumstances in which such actions can be raised are fairly limited, but the new Companies Act extends this. Shareholders will have increased opportunities to raise such actions, which will have an even wider scope as directors will be subject to increased duties under that legislation.
With effect from 1st October this year shareholders will be able to raise an action against the directors on behalf of the company where:
1. the court has granted permission for them to do so; and
2. there has been any actual or proposed act or omission by a director involving:
- negligence;
- default;
- breach of duty; or
- breach of trust.
The need for the court to grant permission to make the claim is new to the law in this area and is designed to safeguard against shareholders making spurious claims, as the range of grounds for raising actions is also being widened. The courts will have to make a commercial judgement on the merits of each individual case.
Put together with the imminent increase of directors’ duties, this wider scope for shareholder actions is likely to cause a sharp increase in court actions against directors. Accordingly, directors should ensure (a) that they comply with the increased duties placed on them, and (b) that their liability insurance policies cover the defence of claims by shareholders on behalf of the company.