Members Remedies

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.

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

The no reflective loss

A person may engage in an act or omission that causes loss both to the company and its memebrs

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

Members can sue for a reduction in the value of their shareholding if

They have a cause of action to do so

The company has suffered loss but has no cause of action to recover that loss

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.

Representative actions and GLOs

Representative actions

Where more than one person has the same interest in a claim, then a representative action may be commenced by one or more persons who have same interest as representatives of any other persons who have that interest

A member who has suffered loss can on his own or with other affected members bring a claim along with the affected members

If the case succeeds, any judgement or order made by the court binds all the parties represented in the claim

Can also be enforced on persons not party to the claim with the permission of the court

Group litigation orders

In a presentative order, all affected members will obtain the same remedy

If some members wish to obtain different remedies a GLO will be preferable

Effectively a mechanism to manage multiple cases that arise from common or related issues of fact or law

Affected persons who opt in to the GLO will be placed on a group register and their cases will be heard by the court

Each claimant who opts in brings their claim in an individual capacity but the case will be heard in a single court avoiding multiple proceedings

If the case succeeds, any judgement or order made by the court binds all the parties on the group register, unless the court orders otherwise

Derivative claim

Provides a mechanism under which a member can sue to obtain redress for a wrong done to the company

The principal rationale behind the proper claimant principle is a desire to prevent excessive claims being brought

There were 4 instances where a derivative action could be brought

The act complained of was illegal or ultra vires

The act complained of infringed the personal rights of a member

The act complained of could only be done or sanctioned by the passing of a special resolution

The act complained of constituted a fraud on the minority

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

Claim must be brought by a memember

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)

Where the claimant is a member of a company that is not registered under a Companies Act

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

A claim can be made against a director or another person

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

Derivative claim procedure

The first step is for the derivative claimant to issue a claim form which must be accompanied by an application for permission to confute the claim

The application is necessary because CA2006 provides that a member who brings a derivative claim must apply to the court for permission to continue it

The claimant must provide evidence supporting his claim and why permission should be granted

The process for determining whether permission is granted involves a 2 stage process

Stage 1: Establishing a prima facie case

Involves the court determining if, based on the evidence provided, there is a prima facie case for granting permission to continue the claim

The purpose of this stage is to weed out frivolous or unmeritioros claims, the company is not involved at this stage

At the end of stage 1, there are 3 possible outcomes

The court may adjourn the proceedings and give directions as it thinks fit

IF the court decides a prima facie case has not been established, it must dismiss the claimants application and the court ay make any consequential order that it considers appropriate

If the court decides a prima facie case has been established, the court may give directions to the company as to the evidence that it must product and may adjourn the proceedings to allow such evidence to be obtained

Stage 2: Determining whether to grant permission

Involves a hearing to determine if permission to continue the claim should be granted

There are 3 circumstances in which permission to continue the claim must be refused

The court is satisfied that a person acting in accordance with s.173 would not seek to continue the claim

The court is satisfied that the cause of action arises from an act or omission yet to occur and the act or omission has been authorised by the company

The court is satisfied that the court of action arises from an act or omission that has already occurred and the act or omission was authorised by the company before it occurred or has been ratified by the company

If none of the 3 circumstances apply, the court will have discretion as to whether to grant permission

S.263 provides that the court must take into account 6 factors

Whether the member is acting in good faith

The importance that a person acting in accordance with s.172 would attach to the claim

The cause of action results from an act or omission that is yet to occur, whether the act or omission could be authorised or ratified

Where the cause of action results from an act or omission already occured, whether it could be ratified

Whether the company has decided not to pursue the claim

Whether the act or omission could be pursued in the members own right rather than on behalf of the company

Costs

The court can order that the company pays the costs

The court may order the company to indemnify the claimant against liability for costs incurred