Derivative claims and ratification: Time to ditch some baggage

Abstract

The reform of the common law ‘derivative action’, by the statutory ‘derivative claim’ in Pt 11 of the Companies Act 2006, was long overdue. Many of the common law's most intractable problems, however, lay not with the derivative action itself, but rather with the law governing the ratification of breaches of duty. The source of many of these problems lay in the distinction the law sought to draw between fraudulent and non-fraudulent breaches, and the different consequences attached to each category of wrongdoing. The Companies Act 2006 was a timely opportunity at least to resolve the confusion within the law, and ideally to adopt what has been termed a ‘voting based’ approach to ratification. Sadly, the Act did neither, preferring instead to retain the common law largely untouched. Moreover, as a careful analysis of the Act itself shows, the modest changes it did introduce necessarily preserve the common law's distinction between fraud and non-fraud, and the uncertainty to which this gives rise. The paper concludes with an examination of Franbar Holdings v Patel, which illustrates clearly the shortcomings in the law's limited reforms.