In Bhullar v Bhullar & Ors [2015] EWHC 1943 (Ch) the High Court considered a number of interesting issues in relation to a double derivative claim brought by a shareholder against a director. A double derivative claim is the term used to describe a derivative claim brought by a shareholder of a parent company for actions accruing to the parent company’s subsidiaries i.e. the claimant is not a direct shareholder of the companies to whom the causes of action accrue, instead he is a shareholder of the parent company of those companies.

Following implementation of sections 260-264 of the Companies Act 2006, derivative claims are now founded in statute, not common law (the statutory procedure). However the statutory procedure only covers the situation where the person bringing a claim is a shareholder in the company with the cause of action; not where the claim is a double derivative claim. The court in Bhullar v Bhullar was clear, noting case law since implementation of the statutory procedure, that the common law continues to provide for the possibility of a double, or multiple, derivative claim, unaffected by the introduction of the statutory procedure.

The court needed to consider therefore whether the common law test for bringing a derivative claim had been made out i.e. did the subsidiaries have a prima facie case to the relief claimed and did the claim fall within the exception to the rule in Foss v Harbottle (1843) 2 Hare 461. The rule in Foss v Harbottle provides that normally the right to sue a director for a breach of duty owed to the company is a right which is vested in the company and cannot be pursued by a shareholder. The exception arises where what has been done amounts to fraud and the wrongdoers are themselves in control of the company. Whilst noting that there is not complete clarity of the meaning of a “prima facie” case, the court concluded that, in relation to one of the claims, both the tests had been met.

A particularly interesting point in this case was whether the court was prepared to grant the shareholder bringing the claim an indemnity for his costs out of the assets of the companies to which the causes of action accrued. Considering an extensive number of precedents, the court distinguished the decision in the case of Wallersteiner v Moir (No.2) [1975] QB 373, which suggested that an indemnity for costs may be appropriate in a derivative claim; the principle being that due to the nature of a derivative claim an individual claimant would otherwise be liable for costs but would receive no or little benefit from a successful claim. In Wallersteiner v Moir the shareholder had already expended a great deal of time and money on the litigation but had no resources left to bring it to a successful conclusion and the case involved proven serious wrongdoing. Here the claim was at an early stage, and considering later authorities which indicated that the court should exercise considerable care when deciding whether to order a pre-emptive indemnity, the court concluded that it should not give such an order for costs. The court noted that the claim was brought as a stepping stone towards negotiating a formal split of the group’s business, or unfair prejudice proceedings, and it was therefore more appropriate to deal with costs on the basis of unfair prejudice proceedings i.e. the shareholder and director should be treated equally and each be on risk as to costs. It was noted that if the claimant had an indemnity for costs it would give him more leverage in negotiating a successful outcome.

Impact – the case is an interesting example of the continuing ability to bring double derivative claims under the common law. It is also a useful indication of where it might be appropriate to seek an indemnity for costs when pursuing a derivative claim and the considerations a court may bear in mind when deciding whether to award such an indemnity