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Members Remedies, iles v Rhind [2002] EWCA Civ 1428
Giles and Rhind were…
Members Remedies
Derivative claim
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The principal rationale behind the proper claimant principle is a desire to prevent excessive claims being brought
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A derivative claim is a claim brought by a member of a company in respect of a cease of action vested in the company which seeks relief on behalf of the company
Seveal consequences
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A person who was a member and had a cause of action cannot commence a derivative claim once he ceases to be a member
If a person is a current member, it does not matter whether the cause of action arose before or after they became a member
The claimant need not be a minority member but the courts will usually only grant permission for a majority shareholder to bring a claim in exceptional circumstances
As the cause of action must be vested in the company, a claim cannot be brought for a cause of action that is personally vested in the member
Any benefits of the derivative claim go to the company and not the member bringing the claim, the company will be made a party to a derivative claim so that is is able to enforce the courts judgement
Two instances where the provisions relating to the statutory derivative claim do not apply and the common law derivative action will be relevant
Where a multiple derivative action is involved, this occurs where a member is seeking relief not on behalf of the company in which he is a member, but on behalf of another company (normally a subsidiary)
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Causes of action
A derivative claim can only derive from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director
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A claim can only be made against a person who is not a director where the damage suffered by the company arose from an act involving a breach of duty on the part of the director
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The no reflective loss
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Normally both can sue the wrongdoer, but the members will be prevented from suing where the no reflective loss principle applies
This principle states that where the members losses are reflective of the loss sustained by the company, then it is the company that should recover the loss and the company's claim will trumpt that of the shareholders
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If a member sustains loss due to the company or another member breaching the constitution then, as the constitution forms a contract, the member may be able to sue for breach of contrac
A person may cause loss to both the company and its members, the gnarl rule is that both the company and its members have a personal right to sue the wrongdoer
iles v Rhind [2002] EWCA Civ 1428
Giles and Rhind were directors and shareholders of Surrey Hill Foods Ltd (SHF). Rhind resigned and the terms of his resignation provided that he would not set up a new company that competed with SHF. Rhind did set up a rival company and diverted clients from SHF to this new company.SHF commenced proceedings against Rhind, but Rhind’s actions had driven SHF to insolvency and so it did not have sufficient funds to continue the claim. Therefore, Giles commenced a personal claim against Rhind for the reduction in value of the shares he held in SHF.The court noted that, in Johnson, it was held that a member could sue for a reduction in the value of his shareholding if the company did not have a cause of action. Here, Waller LJ stated that
‘the same should be true of a situation in which the wrongdoer has disabled the company from pursuing that cause of action’. Giles’ personal action against Rhind was therefore allowed to continue.
Foss v Harbottle (1843) Foss and Turton were shareholders of a company. They alleged that the company’s directors
and certain other shareholders defrauded the company by entering into a series of fraudulent transactions. They therefore commenced proceedings against the wrongdoers ‘on behalf of themselves and all the other members of the corporation, except those who committed the injuries complained of’. The court held that the conduct engaged in by the defendants had not just caused loss to Foss and Turton – it was ‘an injury to the whole corporation’. Wigram V-C stated that ‘[i]t was not, nor could it successfully be, argued that it was a matter of course for any individual members of a corporation thus to assume to themselves the right of suing in the name of the corporation’. There was nothing preventing the company from commencing proceedings to obtain redress and, as it was the proper claimant, Foss and Turton’s claim failed.