• NHI

Sample 4

HOW TO SUE FOR AND ON BEHALF OF A COMPANY

Application

Where two directors of a private company (limited by shares), each with a shareholding of 50% want to sue the other in their respective capacities for and against the company.

Issues

1. Provision of the law on rights of directors and shareholders to sue on behalf of the company.
2. Procedure for suit against the directors.

Rule of Law

The Companies Act,2015 “the Act” provides that, for suits on behalf of the Company, the only way to approach court is through derivative action. This is provided for under Section 238 of the Act. Its described to be:

1. in respect of a cause of action vested in the company; and
2. seeking relief on behalf of the company.
3. A derivative claim may be brought only under this Part; or
4. in accordance with an order of the Court in proceedings for protection of members against unfair prejudice brought under this Act.

Analysis

Therefore, it is only a shareholder dissatisfied with an errant director that would issue a claim in the name of the company and request the court’s permission to take it forward.1 A successful shareholder will be allowed to pursue the claim, but the court has a wide discretion to adjourn the case to gather evidence from the company itself.2 An unsuccessful shareholder risks paying the other parties’ costs and an order restraining further action.

Crucially, permission to pursue a claim will only be granted if the court decides there is a prima facie case to answer.3 The following are the key criteria:

1. whether it in the best interests of the company to pursue the matter through the courts; or
2. whether the shareholder has their own agenda/ulterior motives;
3. whether a director acted in accordance with the duty to promote the success of the company (Directors' Duties) continue the claim.

A business association in the form of Companies have advantages over other forms of business associations. The highlight of such benefits is the limited liability of members. The

1 Section 238 of the Act.

2 Foss v Harbottle (1843) 67 ER 189

3 Section 240 of the Act.

debts and other obligations can only be against the company itself and never against the directors or shareholders. Within the law a company and its members are two different persons.

As a general rule, the Director has no personal liability on behalf of the company. However, under certain circumstances, a Director may be held liable on behalf of the company. Directors can be held liable both jointly and collectively, for any and every act, commission or omission which is prejudicial to the interests of the company and that which violates any of the duties to be discharged by them.

The Act, has made a formal statement of the obligations of directors. These are: -

1. Directors must act within powers granted to them by the constitutive documents (S.142). Any acts outside are ultra vires and directors may become personally liable for them.
2. They must act in such a way as to promote the success of the company (s.143)
3. They must exercise independent judgment in the execution of their duties (s.144);
4. They must apply reasonable care, skill and diligence to their tasks (s.145);
5. They are under a duty to avoid conflicts of interest (S.146); and
6. They are obligated not to accept benefits from third parties (S.147); and
7. They must declare an interest in a proposed transaction or arrangement (S.151) in writing (S.152&153).

Other factors to be considered include: whether the shareholder is acting in good faith in bringing the claim (or just being vexatious); the views of other shareholders who have no personal interest in the claim; and whether the shareholder has other remedies available, such as a claim under a shareholders’ agreement.

On the other hand, the exception to the rule is In Fanning v Murtagh4 Judge Irvine identified that, as a matter of law, there are four recognized exceptions to the Foss v Harbottle rule, which she summarized as comprising the following categories of wrongdoing:

1. an act which is illegal or ultra vires (sic) to the company;
2. an irregularity in the passing of a resolution which requires a qualified majority;
3. an act purporting to abridge or abolish the individual rights of a member;
4. an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of the company.

Conclusion

It is our opinion that only shareholder can sue a director on behalf of the company. There are no provisions for any other way for approaching the court in such an instance. Not even by way of resolution. Nonetheless it is not likely that the court would entertain such a suit

4 Fanning v Murtagh (2009) 1 IR 551, Judge Irvine.

unless on the face of the claim discloses a probable cause against the director as discussed above. Where possible it is best that the parties settle in civil manner.