Derivative Actions Defined
A derivative action occurs where a member of a company, usually a minority shareholder, pursues a cause of action on behalf of the company. S184(c) of the BVI Business Companies Act 2004 (BCA) provides that a member of a company can apply for leave to (i) bring proceedings in the name of and on behalf of the company; and (ii) intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing proceedings on behalf of the company.
It is only under this section that members of the company are permitted to bring an action on behalf of the company. In all other circumstances the position is that the company is the proper claimant to sue in relation to its own causes of action.
A derivative action is brought where a wrongdoer, most commonly a director of the company, has caused the company loss through their wrongdoing. The cause of action is the company's and so is the relief. The relief is confined to the action to recoup those monies lost from the company through this wrongdoing and no relief is due to the shareholder bringing the claim.
The BVI courts will also apply the principle of reflective loss. Even if a shareholder can establish an independent cause of action, a shareholder cannot recover for loss he or she has suffered if that loss is reflective of the company's loss.
PROCEDURE
Procedural Hurdles to bringing a Derivative action in the BVI Court
Under s184(c) BCA, a shareholder must obtain permission from the Court before he can bring or continue proceedings on behalf of the company. The first stage of proceedings is ex parte in that only the claimant shareholder will be present. If permission is granted at this stage, an inter partes hearing (will be held where all parties are present including the defendant, often a director of the company, and the company). The Court will decide whether permission should be granted for the action to continue, but will not go into the merits in great detail in this hearing since this is of course a matter for trial.
Role of the Company in the Proceedings
In circumstances where the shareholder feels compelled to bring a derivative action, the claim will be brought against the wrongdoing director as the 'real' defendant and the company will be joined to the claim as the 'nominal' defendant.
Prior to the trial of the action it is unlikely that the company will be separately represented. However, the company may be represented if a truly independent board of directors conducts an investigation into the proposed cause of action and contends that it is not proper that an action should be brought. In making such an investigation, the importance of the board's independence may have considerable sway with the Court.
THE POSITION AS TO COSTS
Rules as to the Award of Costs
It is possible for the claimant shareholder to protect his position as to costs from the outset. The claimant can apply for a Wallersteiner Order, so named after the case Wallersteiner v Moir (No2) [1975] QB 373 which, if granted, will provide that (i) the company fund the proceedings in their entirety, and (ii) that the company provides the claimant shareholder with an indemnity as against any adverse costs order.
The traditional winner/loser principle in costs can be applied only so far as it concerns the real defendant, the defendant director. If the action succeeds the defendant director, as the 'loser', would pay the costs, however, if the action fails then the defendant director's costs must be reimbursed. The effect of a Wallersteiner Order is that the company pays the costs whether the action is successful or not. This is the protection that the claimant needs because claimant shareholders bring these actions not for their personal benefit but for the benefit of the company, and with the benefit of a Wallersteiner Order the claimant will be under no liability whether the action succeeds or not.
Tactical advantage of Claimant obtaining a Wallersteiner Order
The tactical advantage to the claimant in obtaining a Wallersteiner Order is significant. The claimant is in control of proceedings but has no responsibility or liability as to costs. Of course the claimant, qua shareholder, will have an interest in not causing the company unnecessary expense.
The Court is mindful of the tactical advantage that such orders give the claimant and will review the matter on a regular basis.
Possible conditions attached to Wallersteiner Orders
In granting a Wallersteiner Order, the Court will often expressly direct that the matter come back to Court for review after the exchange of witness statements. The Court may require further review after disclosure has taken place and possibly again at the pre-trial review hearing before the actual trial commences. The Court will be receptive to any arguments from the defendant director that either the permission to litigate or the Wallersteiner protection is being abused. The Court will have particular regard to the merits of the case in the course of the proceedings.
The Court has a wide discretion to withdraw Wallersteiner Orders so the claimant must ensure that they behave reasonably throughout the conduct of the litigation in order to avoid the loss of their costs protection.
Potential rights of Indemnity
Where provisions exist in a company's articles of association providing a right of indemnity for directors, it worth considering, as a claimant whether such an indemnity may be void under s132(5) BCA. The effect of this section is that that the indemnification principles under the BCA do not apply to a person unless he acted honestly and in good faith and in what he believed to be the best interests of the company. This prevents a position where the company's articles provide an indemnity for directors who have caused the company wrongful loss.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
