Facts
- The case concerned whether a parent company shareholder could bring a derivative claim on behalf of a subsidiary against its directors.
- The Companies Act 2006 (sections 260-264) provides statutory rules for derivative claims, replacing common law procedures.
- The claim in question involved alleged wrongdoing by directors of a subsidiary, with the parent company seeking to address harm suffered by the subsidiary.
Issues
- Whether a parent company shareholder may bring a derivative claim on behalf of a subsidiary against that subsidiary’s directors.
- Whether such claims must comply with statutory requirements under the Companies Act 2006.
- Whether claims should target direct losses suffered by the subsidiary, excluding reflective or indirect losses suffered by the parent.
Decision
- The High Court held that a parent company shareholder may bring a derivative claim for a subsidiary if the statutory requirements in the Companies Act 2006 are satisfied.
- The court found that claims must be brought on behalf of, and for the benefit of, the subsidiary as the directly harmed entity.
- Broad or generic allegations are insufficient; specific evidence of director wrongdoing and a clear case that pursuing the claim serves the subsidiary’s interests are required.
- The rule against reflective loss continues to apply, preventing the parent company from claiming for losses arising solely from a fall in value of its shares in the subsidiary.
Legal Principles
- Derivative claims are permitted where those in control of the company prevent it from acting in its own interest (Companies Act 2006 ss 260-264).
- Section 260(1) enables claims against directors (including former or de facto directors) for negligence, default, or breach of duty.
- Claims must be supported by clear, specific evidence and demonstrate a realistic prospect of success.
- The "no reflective loss" principle prevents shareholders from recovering for loss that only reflects the company’s own loss; recoveries should go directly to the company harmed.
Conclusion
The decision in Universal Project Management Services Ltd v Fort Gilkicker Ltd affirmed that derivative claims on behalf of subsidiaries must comply with Companies Act 2006 requirements, must be founded on specific wrongdoing and direct loss to the subsidiary, and do not permit recovery for reflective losses suffered by the parent. This ruling clarifies the procedural and evidential standards for such claims within corporate groups.
