Derivative Claims Essay

3840 words - 16 pages

Proper Plaintiff Rule 2
Nirad Amilal Mehta v Genelec Limited and Ors 3
Onyx Pvt Ltd v Yash Raj Films , Onyx Mobile Pvt. Ltd 4
Yogesh Radhakrishnan v Media Networks and Distribution (India) Ltd 6
BSN (UK) Ltd v Janardan Mohandas Rajan Pillai 9

The concept ‘derivative action’ is not something new to common law. It was developed as an exception to the rule laid down in Foss v Harbottle, an 1846 case. It is an equitable remedy that is resorted to by a ...view middle of the document...

According to the Model Business Corporation Act, 2008, a ‘derivative proceeding’ means “a civil suit in the right of a domestic corporation or, to the extent provided in section 7.47, in the right of a foreign corporation.” ‘Derivative Suit’ has been defined as a “suit filed by a shareholder on behalf of the corporation where the cause of action belongs to the corporation as an entity and arises out of an injury done to the corporation as an entity."
In simpler terms, ‘Derivative Action’ can be defined as an action brought by the shareholders of the company on its behalf when the interests of the latter are being adversely affected by the action/inaction of the management.
Proper Plaintiff Rule
The concept of derivative action developed as an exception to the ‘proper plaintiff rule’ developed in Foss v Harbottle. The proper plaintiff rule enunciated in the case specified that it the company only, and no one else, which has got the right to bring an action against the wrongdoers. This was propounded in pursuance of the separate legal entity of the company vis-à-vis the directors and the shareholders of the company. In the various cases that followed, various exceptions to the rule were recognised. One of them being, a derivative action, being brought by a shareholder of the company on behalf of the company, which has been disabled from bringing such a suit due to the wrongdoers being in control of the company. This was allowed on the ground that in case, the proper plaintiff rule and the separate corporate identity of the company is applied strictly, then the wrongdoers will never be brought before the court as the wrongdoers are in control of the company and due to which sheer injustice will be committed in case the shareholders of the company are not allowed to bring an action against the alleged wrongdoers. Two essentials have to be proved for bringing a derivative action- firstly it has to be proved that the alleged act amounts to fraud and that the wrongdoers are in control of the company.
A ‘reflective loss’ principle was also enunciated, which allow a minority shareholder to bring a derivative action on behalf of the company which has been wronged. According to this principle, the shareholder has a locus in filing such a suit as due to the wrong that has been committed against the company, the value of the assets of the company will diminish. The diminution in the value of the dividends, shares of the company is reflective of the loss suffered by the company.
To gauge the scope of ‘single derivative action’ in India, the reasoning of the courts in various cases needs to be analysed taking into consideration the particular facts of the case. Only a few cases have been decided on the question of ‘derivative claim’ while many have been dismissed on technical grounds.
Nirad Amilal Mehta v Genelec Limited and Ors
In this case, the petition has been filed by the plaintiff, who is a shareholder of Genelec Co,...

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