Einde inhoudsopgave
Exit rights of minority shareholders in a private limited company (IVOR nr. 72) 2010/3.3.12.2
3.3.12.2 No reflective loss principle and derivative claims
mr. dr. P.P. de Vries, datum 03-05-2010
- Datum
03-05-2010
- Auteur
mr. dr. P.P. de Vries
- JCDI
JCDI:ADS405215:1
- Vakgebied(en)
Ondernemingsrecht (V)
Voetnoten
Voetnoten
Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1982] Ch 204 as confirmed by the House of Lords in Johnson v Gore Wood & Co [1998] 1 All ER 481. However, in Giles v Rhind [2002] EWCA Civ 1428; [2002] 4 All ER 977, a Court of Appeal case, a shareholder was allowed to sue personally for reflective loss. It should be noted that in the latter case, the company went into administrative receivership and was not able to start proceedings, because it lacked the money to provide security for costs. For the reason that the company had no cause of action to recover the loss, the shareholder was allowed to bring a claim.
Gower/Davies (2008), p. 624-625. About derivative claims see Gower/Davies (2008), Ch. 17.
Gower/Davies (2008), p. 625.
Foss v Harbottle (1843) 2 Hare 461.
This action was already introduced by s. 461 CA 1985.
Law Commission (1996), at 10.8, fn. 25; Joffe/Drake/Richardson/Lightman (2008), p. 279-280 (Joffe/Drake/Richardson/Lightman submit that there are no reported cases).
In English company law, it is established that in principle a shareholder cannot personally sue for loss that is reflecting loss of the company, for instance the loss that results from a wrong done to the company.1 The right of the company to sue for its own losses principally bars personal claims of shareholders. The tule applies irrespective of whether the company actually initiates action and irrespective of whether a derivative claim on behalf of the company can be started or not.2 This rule is known as the Prudential principle. Davies puts the principle into the perspective of the protection of creditors:
"It might be said that it addresses the following issue: if the shareholder is allowed to recover first, he or she effectively moves assets out of the company, to the potential detriment of the creditors of the company, who can sue the company but not the shareholders. This seems a good reason for giving the company's claim priority, but, where the company has distributable assets, the creditors cannot be said to be prejudiced by this indirect form of distribution of the shareholders."3
Principally, the company is the proper claimant for a 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. Shareholders are entitled to start a derivative action on behalf of the company based on and under conditions of Part 11 CA 2006. Recently, this statutory derivative action replaced the ancient rules on derivative actions under common law known as the rule in Foss v Harbottle.4
In addition to the statutory derivative action contained in Part 11 CA 2006, another statutory derivative action can be found. This second derivative action is of a less recent date.5 S. 996 (2) (c) CA 2006 clarifies that the court may authorize a petitioner under the unfür prejudice remedy to start a derivative claim on behalf of the company. It should be noted that the unfür prejudice remedy is rarely used for this aim. The reason for this remedy not being used is that application of S. 996 (2) (c) CA 2006 takes a time-consuming and expensive roundabout route when compared the route of a derivative action under Part 11 CA 2006. The petitioner must first start proceedings under the unfür prejudice remedy before being able to proceed with a derivative action. Only in a very small number of cases the order was sought, and there are even less reported cases in which the order under s. 996 (2) (c) CA 2006 has been made.6