High Court closes door on using derivative actions to remove directors
The High Court has dealt with a novel point of law in the recent judgment of Deputy High Court Judge Nicola Rushton KC in Sherman v Schwartz & iBridge Finance Limited [2025] EWHC 2083 (Ch) in which I acted for the successful respondent. The case gives rise to a point of company law on which (perhaps unsurprisingly) there has been no prior authority.
The case related to an attempt by one director and 50% shareholder to bring a derivative action (an action on behalf of the company) seeking the removal of his co-director (and owner of the remaining 50%) because of alleged breach of statutory duty. The company is deadlocked with model articles and no shareholders' agreement and the application was a crude attempt to break that deadlock for tactical reasons rather than go down the common route of a compulsory winding up.
The judgment arose from the usual application for permission by the shareholder to continue the action on behalf of the company. What was unusual, however, was that there was a hearing of the first stage of the permission process, which is ordinarily done on paper. The application was duly opposed by my client.
The legal test for the first stage is that the proposed claim has a prima facie chance of success - which takes the applicant's claim at its reasonable highest (ClientEarth v Shell Plc & ors [2023] EWHC 1897 (Ch)). That test favours the applicant and is designed to sift out vexatious claims.
Being as circumspect as I can be as I still act in the wider dispute, the judgment of the court was that there is no cause of action known in law by which a company (who would be the notional claimant in the derivative action) can remove its own director. The court does not have an equitable supervisory jurisdiction over companies as it does, for example, with trustees. A company is a creature of statute governed by its articles and the CA. The rare circumstances where a court will order, as a remedy to a cause of action, the removal of a director are limited to s.994 CA 2006 petitions brought by aggrieved shareholders – because s.996 CA 2006 clothes the court with the necessary jurisdiction to make such an order. Those circumstances are somewhat peculiar and exceedingly rare.
Therefore, the use of s.260 CA 2006 derivative actions as a tool for the removal of directors is now a legal dead end. Permission to appeal was denied by the judge and no application for permission has been made to the Court of Appeal.
As an aside, because my client was directed to respond to the application, the court awarded his costs. This is analogous to the position with Permission to Appeal applications.
Speak to an expert
David Bowman is a Legal Director in the Litigation National Team at Weightmans. He works out of the firm’s London office. David specialises in company disputes, including claims arising from directors’ duties, shareholder agreements, unfair prejudice petitions and derivative actions.
Read More