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Good company claim failed cost-benefit test

A "derivative claim" under Part III of the Companies Act 2006 is a company claim but which is brought by one (or more) of its shareholders, who are legally distinct from it.

The law has long looked suspiciously on party A bringing company B’s claim, so unsurprisingly, derivative claims are closely controlled by the courts under Part III.

In Zavahir & others v. Shankleman & others recently, a company’s shareholders (one of whom was also a director) complained that one of the company’s other directors had caused the company to grant the latter, his wife and other associates, long extensions to existing leases, worth an estimated £136,000, for just £1; and this in spite of the fact that the company had almost no money or remaining business.

The judge agreed that the case against that director seemed a good one, but even so refused to give the claimants permission to continue it.

It was the company’s claim, not the claimants’, and the claimants wanted the company to pay the cost of bringing it; but the company just couldn’t afford to do so.  The judge said the claimants could, if they wished, petition for relief against being unfairly prejudiced – that would require no threshold permission – but that was another matter.

What does this mean for me?

In a post-austerity economic world, issues of costs increasingly govern judicial thinking.

The best of claims may practically be worthless if bringing it can’t be financed cost efficiently, and corporate disputes can generate alarmingly high costs, especially in wrong or inexperienced hands.

In Zavahir, the judge arguably did little more than a good lawyer would do: he told the claimants that what they proposed couldn’t be justified financially.  The difference is that a lawyer can only advise: a judge can insist!

How can Ward Hadaway help?

For further information on the issues raised by this article, including derivative claims, shareholder disputes and options for funding legal costs, please contact Peter Hornsey.

Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.

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