BVI derivative claims and the permission stage: Court of Appeal issues key guidance

In the recent decision of Zvi Dekel v Clerkenwell Lifestyle Limited (BVIHCMAP2025/0017 and BVIHCMAP2025/0018) ("Dekel"), the Eastern Caribbean Court of Appeal (the "COA") considered the requirements for obtaining leave to bring derivative proceedings under section 184C of the BVI Business Companies Act 2004 ("BCA"). The decision provides important guidance on the evidential threshold applicable to derivative claims, the effect of directors' indemnities, the treatment of alleged shadow directors, the identification of corporate loss within a group structure, and the circumstances in which fresh evidence may be adduced on appeal. 

A derivative claim is an exception to the general principle that a company itself is the proper claimant in respect of wrongs done to it. Where those controlling the company are unwilling or unable to cause it to pursue a claim, a shareholder may apply for permission to bring proceedings in the company's name and on its behalf. Any recovery obtained belongs to the company rather than the shareholder personally. The leave requirement under section 184C therefore serves an important gatekeeping function, ensuring that only claims with sufficient merit are pursued in the company's name. 

Importantly, as recognised in the first instance judgment in Dekel, the leave requirement is not merely a procedural requirement but a substantive pre-condition to the commencement of a derivative claim. A shareholder cannot circumvent the section 184C regime by pursuing a derivative claim abroad without first obtaining the requisite leave from the BVI court.

The Commercial Court's decision 

The case arose from a failed property development project in London. Clerkenwell Lifestyle Limited ("CLL BVI"), a BVI company, acted as the holding and fundraising vehicle for the project. It wholly owned an English subsidiary, Clerkenwell Lifestyle (UK) Limited ("CLL UK"), which held the underlying property. 

Zvi Dekel, a shareholder of CLL BVI, invested approximately £4 million in the project and alleged that the project's failure resulted from misconduct by those involved in its management and financing. Mr Dekel applied under section 184C of the BCA for leave to bring derivative proceedings on behalf of CLL BVI. The proposed claims included allegations of breach of fiduciary duty, negligence, dishonesty and bad faith. One of the proposed defendants was also alleged to have acted as a shadow director, being a person in accordance with whose directions or instructions the company's directors were said to have acted, notwithstanding that he had never been formally appointed as a director. 

The BVI Commercial Court refused leave, principally on the basis that the proposed claims lacked a realistic prospect of success. It subsequently refused an application to revisit that decision after Mr Dekel offered to indemnify CLL BVI against adverse costs exposure. Mr Dekel appealed both refusals.

The Court of Appeal's decision 

Refusal of leave to bring derivative claims

The COA dismissed the appeals and upheld both decisions. The court reaffirmed that, although a section 184C application is not a trial of the underlying claim, the court is entitled to scrutinise the evidential foundation of the proposed derivative proceedings when determining whether they are likely to succeed. The court will not permit derivative claims merely because serious allegations have been made. The applicant must place before the court sufficient material to demonstrate that the claim has a realistic prospect of success.  

In relation to Mr Dekel's allegations of dishonesty and bad faith, the Court of Appeal accepted that direct evidence will often be unavailable at an interlocutory stage and that such allegations may be established by inference. However, it held that the matters relied upon by Mr Dekel, including alleged conflicts of interest, unsuccessful commercial outcomes, related-party transactions and financing arrangements benefiting connected parties, were insufficient, without more, to support an inference of dishonesty or bad faith. The court therefore upheld the Commercial Court's conclusion that the evidence did not establish the primary facts necessary to justify the serious allegations advanced against the proposed defendants. 

Mr Dekel's negligence claims met a similar fate. The court emphasised that the failure of a commercial project, without more, does not establish negligence. Rather, an applicant must identify the relevant duty of care, the conduct said to have fallen below the applicable standard, and the causal link between that conduct and the loss allegedly suffered by the company. The court considered that Mr Dekel's proposed claims amounted largely to criticisms of commercial decisions which, with the benefit of hindsight, had proven unsuccessful. However, poor commercial outcomes and errors of business judgment do not, without more, give rise to actionable negligence. The court therefore concluded that the evidence did not establish a sufficient basis for the negligence claims sought to be advanced on the company's behalf.  

Directors' indemnities 

The COA's decision also contains important guidance on the scope of directors' indemnities under the BCA. CLL BVI's articles contained an indemnity protecting directors against liabilities incurred in legal proceedings, provided they had acted honestly, in good faith and in what they believed to be the company's best interests. Mr Dekel argued that such indemnities should be confined to claims brought by third parties and should not extend to derivative proceedings brought in the company's name. The COA rejected that argument. It held that neither section 132 of the BCA (which sets out provisions regarding indemnification) nor the wording of the indemnity in the company's articles itself drew any distinction between claims brought by third parties and claims brought by the company. A properly drafted indemnity may therefore operate as a complete defence to claims that fall within its scope, including derivative proceedings. Whilst the indemnity could not protect directors who acted dishonestly or in bad faith, the court considered that, once Mr Dekel's allegations were discounted for lack of evidential support, the indemnity presented a substantial obstacle to the remaining negligence claims.

Shadow directors 

The judgment also provides important guidance on the distinction between de facto and shadow directors under the BCA. The Court of Appeal noted that the BCA's definition of "director" extends to a person who occupies or acts in the position of a director, regardless of formal appointment, thereby capturing de facto directors. However, unlike the Insolvency Act 2003, the BCA does not expressly extend directors' duties to persons in accordance with whose directions or instructions the appointed directors are accustomed to act. The court therefore concluded that shadow directors do not fall within the statutory duties imposed by sections 120 to 122 of the BCA. 

The court further emphasised that commercial influence, leverage or involvement in a company's affairs will not, without more, be sufficient to establish shadow-director status, and thus triggering a shadow director's duties at common law. What is required is evidence that the board, or a functional majority of it, habitually acted in accordance with that person's directions or instructions. On the facts, the evidence relied upon by Mr Dekel demonstrated no more than influence and involvement in the affairs of the relevant companies, which fell well short of establishing the degree of control necessary to characterise the individual as a shadow director. Consequently, the proposed claims founded on alleged breaches of directors' duties were held to have no realistic prospect of success. 

Corporate loss and the proper claimant 

The COA nevertheless disagreed with one aspect of the Commercial Court's reasoning, namely its conclusion that any relevant loss could only have been suffered by CLL UK as the owner of the underlying development asset. The COA recognised that a holding company may suffer loss independently of its subsidiary and that, depending on the facts, such loss may arise where the holding company's own assets are misapplied, its liabilities are increased, or value is diverted through transactions affecting the holding company itself. In that regard, the court accepted that there was at least an arguable basis for contending that CLL BVI had suffered loss distinct from any loss sustained by CLL UK. Ultimately, however, that conclusion did not assist Mr Dekel. Although the court differed from the Commercial Court on this aspect of the analysis, it held that the other deficiencies in the proposed claims, including the absence of a sufficient evidential foundation for the allegations of wrongdoing, were independently fatal to the application for leave.

Fresh evidence and draft judgments 

The COA's judgment also contains important guidance on applications to adduce fresh evidence on appeal. During the original hearing, the Commercial Court raised the possibility that an indemnity from Mr Dekel against CLL BVI's potential adverse costs exposure might favour the grant of leave. Counsel did not have instructions on that issue. Following circulation of the draft judgment, Mr Dekel informed the court that he was willing to provide an indemnity and later sought to rely on supporting financial evidence. He subsequently applied to adduce that material as fresh evidence before the Court of Appeal. The COA refused the application. 

Reaffirming the principles in Ladd v Marshall [1954] 1 WLR 1489, it held that, although those principles may be applied with greater flexibility in interlocutory appeals, they remain cumulative. An applicant must still establish that the evidence could not, with reasonable diligence, have been obtained for use below, that it would probably have an important influence on the result and that it is apparently credible. 

Importantly, the court rejected the argument that the requirement of reasonable diligence was satisfied simply because the issue was first raised by the judge. Once the significance of the issue became apparent, it was incumbent on the applicant to seek an adjournment or permission to adduce further evidence if additional material was required. The fact that the issue originated with the judge did not relieve the applicant of the obligation to put his full case before the court at first instance. 

The court also emphasised that the circulation of a draft judgment is not an opportunity to improve a party's case, introduce new evidence or advance materially different arguments. Parties cannot use the draft judgment process to cure deficiencies identified by the court before judgment is handed down. Such attempts are inconsistent with the principles of finality and procedural fairness that underpin the appellate process. 

Key takeaways 

The Court of Appeal's decision reinforces the rigorous approach the BVI courts take to derivative claims. Applicants must do more than identify an arguable grievance or an unsuccessful commercial outcome. They must establish a proper evidential foundation for the proposed claims, demonstrate a realistic basis for alleging wrongdoing, and identify a loss suffered by the company itself. The judgment serves as a reminder that derivative proceedings are brought to vindicate corporate rights and not merely to address a diminution in shareholder value. 

The decision also contains important guidance on corporate governance issues. The court emphasised the need to distinguish carefully between de facto and shadow directors and confirmed that influence over corporate affairs will not, without more, attract the duties and liabilities imposed upon directors under the BCA. The judgment further highlights the significance of directors' indemnities, which may in appropriate circumstances provide a complete answer to proposed claims, subject to the statutory limitations imposed by the requirement of honesty and good faith. 

Finally, the court reaffirmed the importance of procedural discipline. Questions concerning corporate loss, funding arrangements and indemnities should be addressed at the leave stage. Likewise, parties should not assume that evidential deficiencies can be cured on appeal. The court's permission of fresh evidence on appeal remains exceptional, and neither judicial questioning during a hearing nor the circulation of a draft judgment will ordinarily provide an opportunity to supplement the evidential record or reshape a party's case after the event. The judgment is therefore likely to become an important authority not only on derivative claims, but also on the limits of appellate intervention in BVI commercial litigation.

Whether you are a shareholder considering a derivative claim, a company responding to a section 184C application or a director concerned about potential liability, it is important to assess the evidential merits, constitutional protections and funding arrangements at an early stage. Please do not hesitate to contact us at Carey Olsen for strategic and practical advice tailored to your circumstances.