Derivative claims: ratification | Practical Law

Derivative claims: ratification | Practical Law

In Franbar Holdings Ltd v Patel and ors, the High Court refused an application under section 261 of the Companies Act 2006 for permission to continue a derivative claim. In so doing, the court held that, under section 239 of the 2006 Act, it was still good law that a company could not ratify breaches of duty by its directors where the affirmation or adoption was brought about by unfair or improper means, or was illegal or fraudulent or oppressive towards those shareholders who opposed it, in addition to ultra vires acts. The connected person provisions in section 239, under which any decision to ratify conduct by a director must be taken by members without reliance on votes by the director or any of his connected persons, imposed additional requirements for effective ratification which drew on existing equitable rules but imposed more stringent demands. It followed that, where the question of ratification arose in the context of an application to continue a derivative claim, the court must still ask itself whether the ratification had the effect that the claimant was being improperly prevented from bringing the claim on behalf of the company. That might still be the case where the new connected person provisions were not satisfied, but there was actual wrongdoer control under which assets had been diverted to persons associated with the wrongdoer, although not connected in the sense of section 239(4).

Derivative claims: ratification

Practical Law UK Legal Update Case Report 8-382-8847 (Approx. 9 pages)

Derivative claims: ratification

by PLC Corporate
Law stated as at 02 Jul 2008England, Wales
In Franbar Holdings Ltd v Patel and ors, the High Court refused an application under section 261 of the Companies Act 2006 for permission to continue a derivative claim. In so doing, the court held that, under section 239 of the 2006 Act, it was still good law that a company could not ratify breaches of duty by its directors where the affirmation or adoption was brought about by unfair or improper means, or was illegal or fraudulent or oppressive towards those shareholders who opposed it, in addition to ultra vires acts. The connected person provisions in section 239, under which any decision to ratify conduct by a director must be taken by members without reliance on votes by the director or any of his connected persons, imposed additional requirements for effective ratification which drew on existing equitable rules but imposed more stringent demands. It followed that, where the question of ratification arose in the context of an application to continue a derivative claim, the court must still ask itself whether the ratification had the effect that the claimant was being improperly prevented from bringing the claim on behalf of the company. That might still be the case where the new connected person provisions were not satisfied, but there was actual wrongdoer control under which assets had been diverted to persons associated with the wrongdoer, although not connected in the sense of section 239(4).