Tag: Derivative action

By Kumaran Sivathillainathan, Senior Associate Solicitor – Commercial Litigation, Vyman Solicitors

When a director fails in their duties, the cost to the company can be significant. Whether it’s misusing company funds, acting in bad faith, or pursuing personal gain over the company’s best interests—these are not just ethical breaches; they are often legal ones too.

For shareholders – particularly those without control – knowing your rights is essential. If the board is unwilling or unable to act, UK company law provides a powerful, though underused, remedy: the derivative action.

In this article, we explain:

• What directors’ duties are under UK law
• What happens when those duties are breached
• How shareholders can take legal action on behalf of the company
• When a derivative action is appropriate—and when it’s not

Understanding Director Duties in the UK

Under the Companies Act 2006, all directors owe a series of legal duties to the company, including:

• Acting within powers (s.171)
• Promoting the success of the company (s.172)
• Exercising independent judgment (s.173)
• Avoiding conflicts of interest (s.175)
• Not accepting third-party benefits (s.176)
• Declaring interests in proposed transactions (s.177)

These duties are owed to the company, not to individual shareholders—meaning that in many cases, only the company can bring a legal claim when those duties are breached.

When a Director Breaches Their Duties

Common examples of breaches by a director include:

• Diverting company opportunities to a competing business
• Excessive or unauthorised remuneration
• Misappropriation of funds
• Failing to disclose a conflict of interest
• Entering into deals that benefit the director, not the company

These actions can cause long-term reputational and financial harm to the business.

So what happens when those in control of the company refuse to act or are the ones involved in the wrongdoing?

What is a Derivative Action?

A derivative action is a claim brought by a shareholder on behalf of the company against a director or third party for breach of duty, negligence, or default.

This type of action is “derivative” because the legal claim belongs to the company, not the shareholder personally. If the claim succeeds, any damages or recovery go to the company.

A court must grant permission before the claim proceeds, and they will assess:

• Whether there is a prima facie case
• Whether a hypothetical independent board would pursue the claim
• Whether the shareholder is acting in good faith

Statutory basis: Part 11 of the Companies Act 2006.

When to Consider a Derivative Claim

Derivative actions are most suitable when:

• The board refuses to take action against wrongdoing
• The wrongdoer(s) control the board or majority shares
• The company has suffered a measurable financial loss
• Other remedies (e.g. unfair prejudice petitions) may not be suitable or effective

Derivative claims are often brought alongside or in place of an unfair prejudice petition, especially in family businesses, SMEs, or quasi-partnerships where relationships have broken down.

Case Study: Pursuing Directors Post-Insolvency

We acted for a liquidator following the collapse of a luxury travel business. The company had ceased trading and owed substantial refunds to clients, yet the directors continued paying themselves salaries, dividends and personal loans.

We advised the liquidator on pursuing claims for transactions at undervalue and preferential payments, and issued proceedings against the directors for breach of duty. Our intervention enabled direct recovery from those responsible for the company’s mismanagement.

This case highlights how litigation can protect creditors and enforce director accountability, even after business failure.

Early Action = Stronger Position

In our experience, shareholders often delay seeking advice until after serious damage is done. But the sooner issues are raised, the more options are available.

At Vyman Solicitors, we:

• Review board decisions for potential breaches
• Advise on evidence and shareholder rights
• Help clients decide between negotiation, unfair prejudice claims, or derivative action
• Act swiftly to protect assets and prevent further harm

FAQs: Derivative Actions in the UK

Can any shareholder bring a derivative action? In most cases, yes – but you must have legal standing and obtain court permission.

Is it expensive?

Derivative claims can be complex, but in serious breaches, the cost may be outweighed by recovery for the company or pressure for early settlement.

What if the company refuses to sue a director?

If those in control of the company are compromised, a derivative action gives minority shareholders a route to justice.

Is a derivative claim public?

Yes, proceedings are part of the court record, but strategic legal advice can often lead to private resolution or settlement before trial.

Speak to Our Commercial Litigation Experts

If you’re concerned about director conduct, misuse of company assets, or you’ve been sidelined as a shareholder, don’t let silence cost your business.

Contact Commercial Experts!

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About Vyman Solicitors

Located in North West London, Vyman Solicitors provides a comprehensive range of legal services, including Corporate & Commercial Property Law, Litigation, Residential and Conveyancing Law, Family Law, Private Client and Immigration. Known for its commitment to personalised client support and legal excellence, Vyman is a trusted partner for businesses and individuals alike.

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Disclaimer: This article is for informational purposes only and does not constitute legal advice.