Directors duties, enforcement and s 216A

What happens when directors of the company who have breached their duties are also the ones in control of the company, e.g. through their majority shareholding?

Section 216A of the Companies Act provides a "simple" method to enforce the duties owed to the company. A minority shareholder of a private company can serve a 14 day notice on the board requiring them to take legal action in respect of a wrong done to the company. If the board fails to take the action, the shareholder can then apply to court for permission to start the lawsuit. The section requires the court to be very lenient in granting permission since the main requirement is that the lawsuit should prima facie (or at first sight) be in the interests of the company. The court should not examine the lawsuit in great detail to check whether it has a good chance of succeeding.

If the court grants permission, then the 2nd stage begins - the director(s) is sued for breaches of duty, which have to be proved on a balance of probabilities.

This second stage is called a statutory derivative action since the lawsuit is in the name of the company, and any damages awarded are derived from the harm to the company, and not harm to the shareholder.