Written by Jeremy Boyle Last Updated: 5 November, 2025When company directors breach their duties, it can be difficult for shareholders to take direct action. That’s where derivative claims come in – a complex but powerful remedy designed to hold directors to account when the company’s own management will not.
In this guide, we explain how derivative claims work under UK company law, when they may be appropriate, and how shareholders can pursue them effectively.
- What is a derivative claim?
- The purpose of derivative actions
- Who can bring a derivative claim?
- When can a derivative claim be brought?
- Key examples of derivative action claims
- The process for bringing a derivative claim
- Will a derivative claim be approved?
- Derivative claim costs and indemnities
- Derivative claim remedies and outcomes
- Advantages and disadvantages of derivative claims
- Difference between unfair prejudice and derivative claims
- FAQ’s on derivative claims
- Contact our derivative claim solicitors today
What is a derivative claim?
A derivative claim (also called a ‘shareholder derivative action’) is brought by a shareholder against a director. In essence, the shareholder ‘steps into the shoes’ of the company to seek redress for harm suffered by the business as a whole.
What you need to know about derivative claims
- Under UK law, derivative claims are primarily governed by Part 11 of the Companies Act 2006
- Derivative claims can be brought only by a member (shareholder) of a company, including minority shareholders
- The shareholder must obtain permission from the court before the claim can proceed
- Any damages or remedies recovered benefit the company, not the individual shareholder
- In limited circumstances, a claim can be made against third parties who have assisted or benefited from the wrongdoing.
The purpose of derivative actions
Derivative actions exist to ensure that company directors are accountable for wrongdoing, even where the company’s management refuses to act.
For instance, if a director exploits a company opportunity for personal gain, the board may be reluctant to take action against one of its own members. A derivative claim allows a shareholder to take the matter forward, safeguarding the company’s and shareholders’ collective interests.
These claims are particularly important in closely held or family-run companies, where the balance of power often lies with a small group of directors.
Who can bring a derivative claim?
Only a member of the company, such as a shareholder or beneficial owner of shares, can bring a derivative claim. This right is not limited to majority shareholders. In fact, minority shareholders are often the ones most affected by director misconduct.
Before a claim can proceed, the shareholder must obtain permission from the court, which acts as a safeguard against unmeritorious or vexatious claims.
The court will assess, among other things:
- Whether the shareholder is acting in good faith
- Whether the company itself could pursue the alleged wrongdoing
- Whether continuing the claim is in the company’s best interests.
This process ensures that derivative claims remain a remedy of last resort, used only where necessary.
When can a derivative claim be brought?
A derivative claim can be brought when a director’s conduct causes harm to the company through negligence, misconduct, or a breach of their statutory or fiduciary duties.
Examples include:
- Exceeding authority: Entering into contracts or making commitments that go beyond the powers set out in the company’s constitution.
- Personal conflicts: Taking part in transactions where the director has an undisclosed financial or personal interest.
- Misapplication of assets: Using company money, property, or resources for personal use or unrelated ventures.
- Exploiting opportunities: Diverting potential business deals or contracts away from the company for private gain.
- Undue influence: Allowing external pressure, from shareholders or other parties, to dictate decisions rather than exercising independent judgment.
- Lack of transparency: Failing to keep proper records, disclose material interests, or document key board decisions.
- Lack of due care: Making decisions without reasonable skill, care, or diligence expected of someone in that position.
In some cases, a derivative claim may also arise alongside a breach of contract. For example, if a director breaches a shareholder agreement in a way that harms the company, shareholders may be able to pursue both contractual and statutory remedies.
Derivative claims can also be brought against third parties such as advisers, accountants, or auditors who knowingly assisted in the wrongdoing.
Key examples of derivative action claims
To illustrate how derivative claims work in practice, here are several key developments in case law:
Foss v Harbottle (1843
In this foundational case, the court ruled that only the company itself, not individual shareholders, could sue for wrongs done to it. This became known as the rule in Foss v Harbottle.
The decision meant that minority shareholders could not usually bring proceedings for harm done to the company unless the majority of shareholders agreed to act, which was unlikely when the wrongdoers controlled the board. Over time, the courts developed limited exceptions to reduce the injustice caused by the rule.
The Companies Act 2006 effectively modernised and codified those earlier exceptions, introducing a statutory framework for derivative claims.
Mission Capital plc v Sinclair (2008)
This was one of the first tests of the new statutory regime under the Companies Act 2006. In this case, the court refused permission for the shareholder to continue the derivative claim, holding that it was not in the company’s best interests and that there were alternative remedies available.
Franbar Holdings Ltd v Patel (2008)
This case reinforced the principles set out in Mission Capital. The claimant sought to bring a derivative action against company directors for alleged breaches of duty. The court again refused permission, noting that an unfair prejudice petition provided a more appropriate remedy.
Together, these early decisions signalled that derivative claims would be available only when no adequate alternative existed and where pursuing the claim clearly served the company’s best interests.
Montgold Capital LLP v Ilska (2018)
In this more recent case, Montgold Capital, a shareholder, alleged that the directors had engineered a pre-pack administration and conspired to transfer the business to themselves at an undervalue, depriving the company of fair value.
The court granted permission for the derivative claim to proceed. The dispute was later settled out of court, with a payment made to the company as part of the settlement – effectively rectifying the alleged wrongdoing.
These cases demonstrate that, while the statutory framework has broadened shareholder rights compared to the old Foss v Harbottle rule, the courts continue to exercise strict control.
The process for bringing a derivative claim
- Filing the claim: The shareholder begins by issuing a claim form in the High Court, supported by detailed evidence explaining the alleged wrongdoing, the harm caused to the company, and why the claim is in the company’s best interests.
- Initial permission stage: The court conducts a preliminary review of the case. If the claim appears to be without merit, it may be dismissed without a hearing.
- Permission hearing: If the claim survives the first stage, the court holds a full hearing where both parties can make submissions. The court will assess whether the shareholder is acting in good faith, whether there is sufficient initial evidence to support the claim, and whether pursuing the claim would genuinely benefit the company.
- Substantive proceedings: If permission is granted, the case proceeds like other civil litigation, with disclosure of documents, witness evidence, and potentially a trial. Any judgment or award at the end of the case belongs to the company, not the claimant personally.
Will a derivative claim be approved?
Permission will only be granted if the claim is fair, worthwhile, and properly motivated. The court will refuse permission for a derivative claim if:
- A reasonable director acting for the company’s benefit would not think the claim is worth pursuing. For example, if the costs outweigh the potential benefit or the claim could harm the company’s reputation
- The alleged wrongdoing has already been, or is likely to be, approved or ratified by the company.
The court will also take into account:
- Whether the shareholder is acting honestly and in good faith
- How important the claim is to the company
- Whether the shareholder could bring a personal claim instead
- The views of other shareholders who are not involved in the dispute.
Because these cases are procedurally complex and potentially expensive, obtaining expert legal advice at an early stage is crucial. Specialist shareholder dispute solicitors can assess whether a derivative claim is viable, help prepare the supporting evidence, and guide you through the permission process.
If you are facing a derivative claim, experienced solicitors can help you respond effectively, assessing the merits of the claim, preparing your defence, and seeking to resolve the dispute in your best interests.
Derivative claim costs and indemnities
Because a derivative claim is brought for the company’s benefit, the court may order the company to indemnify the claimant’s legal costs. This can sometimes be done pre-emptively, even before the case concludes, on a staged or “pay-as-you-go” basis.
Such orders are discretionary and usually granted only where:
- The claimant is acting in good faith
- The claim is likely to benefit the company
- The claimant could not otherwise afford to pursue the claim.
If a shareholder also pursues an unfair prejudice petition based on the same facts, the court is less likely to grant a pre-emptive indemnity.
Derivative claim remedies and outcomes
If a derivative claim succeeds, the court has broad discretion to make orders designed to restore the company’s position and prevent further harm.
Common derivative claim remedies include:
- Restitution: Requiring the director to return money, property, or assets wrongly taken from the company.
- Compensation: Ordering payment of damages to cover financial loss caused by the director’s breach or misconduct.
- Rescission: Setting aside or reversing a contract or transaction entered into improperly or in breach of duty.
- Injunctions: Preventing a director or third party from continuing or repeating the wrongful conduct.
- Declaratory relief: Issuing a formal declaration confirming that the director has acted in breach of duty.
All remedies benefit the company, not the individual shareholder. However, the court may direct the company to reimburse the claimant’s legal costs.
Advantages and disadvantages of derivative claims
A derivative action can be a valuable remedy for shareholders, but it is rarely the first option. It works best where the wrongdoing is serious, the company’s losses are clear, and no other legal route would give an adequate remedy.
Advantages of derivative claims:
- Accountability: Provides a means to hold directors accountable when the company’s management fails to act.
- Protection of company interests: Helps safeguard the company’s assets, reputation, and long-term financial health.
- Restoration of value: Can result in the recovery of misused funds, reversal of improper transactions, or compensation for losses.
- Deterrence: Sends a clear signal that directors’ duties are enforceable and that misconduct will not be overlooked.
Disadvantages of derivative claims:
- Complex and expensive: The process involves multiple court stages and often requires expert evidence, making it costly and time-consuming.
- Strict permission requirement: The court’s approval is needed before a claim can proceed, and many claims are filtered out at this stage.
- Company-focused remedies: Any damages or recovery go to the company, not directly to the shareholder who brings the claim.
- Relationship strain: Legal action against directors can create tension among shareholders, directors, and management, especially in smaller or family-run companies.
The best chance of success comes with expert legal representation from solicitors experienced in shareholder and director disputes.
Difference between unfair prejudice and derivative claims
Derivative claims and unfair prejudice petitions often arise in similar circumstances but serve different purposes and protect different interests.
- Derivative claim: Deals with wrongs done to the company itself. A shareholder brings the claim on the company’s behalf, and any remedy or damages are awarded to the company.
- Unfair prejudice claim: Concerns wrongs done to shareholders personally, such as exclusion from management, diversion of profits, or misuse of power. Remedies typically benefit the individual shareholder – most often through a share buyout or other compensatory order. However, in limited circumstances, it may be possible for a shareholder to ask for remedies that benefit the company as part of an unfair prejudice petition.
Which is right for me?
Deciding between a derivative claim and an unfair prejudice petition depends on who has suffered the loss and what outcome you want to achieve. In some situations, both claims may be relevant, for example, where a director’s misconduct harms both the company and individual shareholders. In these cases, the court will look at which route is the most appropriate and proportionate.
In practice, unfair prejudice claims are more common because they offer a more direct route to personal redress. However, derivative claims remain an essential tool for addressing serious misconduct by directors, ensuring accountability when the company’s own management fails to act.
FAQ’s on derivative claims
A derivative action is a legal claim brought by a shareholder on behalf of the company against directors (or others) who have harmed the company through negligence, breach of duty, or breach of trust.
Any shareholder, regardless of their shareholding size, can apply to bring a derivative action under the Companies Act 2006, subject to court permission.
A statutory derivative claim is one brought under Part 11 of the Companies Act 2006, replacing the old common law exceptions to Foss v Harbottle.
Unfair prejudice protects the rights of shareholders personally, while derivative claims preserve the company’s interests as a whole.
Contact our derivative claim solicitors today
At Summit Law, we advise shareholders and directors in all forms of company litigation, including derivative claims, director disputes, shareholder disputes, and unfair prejudice petitions.
Our experienced director dispute solicitors can:
- Assess the merits of your case: And advise on the most effective strategy for your situation.
- Explore alternative remedies: Such as unfair prejudice petitions or negotiated settlements.
- Manage the permission process: Preparing evidence and representing you at court hearings.
- Provide ongoing representation: Guiding you from initial advice through to resolution or settlement.
For tailored support on derivative claims, contact us today on 020 7467 3980 or complete the website enquiry form.
