The classic dilemma in a shareholder dispute involving director misconduct: the wrongdoer controls the company and will never authorise it to sue them. Section 236 of the Corporations Act provides the solution—a shareholder can seek the court’s leave to bring the claim on the company’s behalf.
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The Problem: Majority Rule and Company Autonomy
A foundational principle of company law is that a claim belonging to the company must be brought by the company—not by its shareholders. This is the rule in Foss v Harbottle (1843) 2 Hare 461. Where the wrongdoer controls the company and can prevent it from suing, minority shareholders are left without a direct remedy.
The statutory derivative action under Part 2F.1A of the Corporations Act (ss236-242) provides the solution.
Who Can Apply?
Under s236(1), a person can apply to the court for leave to bring a derivative action if they are:
- A member of the company
- A former member, if it is just and equitable to grant leave
- An officer of the company (or former officer)
The Test for Leave: S237
The court may grant leave if it is satisfied that:
- It is probable that the company will not itself bring the proceedings
- The applicant is acting in good faith
- It is in the best interests of the company that the applicant be granted leave
- There is a serious question to be tried
- The applicant gave 14 days’ notice to the company before applying (s237(2)(e))
Section 237(3) creates a rebuttable presumption that granting leave is not in the best interests of the company where a majority of independent and disinterested members oppose the action. This presumption can be rebutted by showing the action is substantively meritorious and the majority’s opposition is not genuinely in the company’s interests.
How the Derivative Action Proceeds
If leave is granted, the applicant sues in the company’s name—typically naming themselves as the plaintiff suing on behalf of [Company Name]. The proceeding is conducted by the applicant’s lawyers, but the company is the true plaintiff, and any recovery flows to the company, not the individual shareholder.
The court can make any order it thinks is just in relation to costs, funding, and conduct of the proceedings. It can require the company to indemnify the applicant for their costs in appropriate cases.
Derivative Action vs Oppression Remedy
The derivative action and the oppression remedy (s232) are complementary but distinct:
| Derivative action | Enforces a claim that belongs to the company—for example, breach of director duties where the loss is the company’s. Recovery flows to the company. |
| Oppression remedy | Enforces personal rights of shareholders where the company’s conduct is oppressive, unfairly prejudicial, or unfairly discriminatory. Recovery can include orders personal to the shareholder—for example, a buyout order. |
In practice, both are often pleaded together where there is significant director misconduct that also adversely affects the minority shareholder’s position.
Frequently Asked Questions
Q: Can the company settle a derivative action without the applicant’s consent?
A: No—the court controls derivative action proceedings. The company cannot settle, discontinue, or compromise the action without the court’s approval. This protects the applicant from the wrongdoer using the company to kill the claim.
Q: Who pays the costs of a derivative action?
A: The court can order the company to indemnify the applicant for their legal costs of the application and the derivative action itself. This is a significant protection — it means a minority shareholder can bring a legitimate claim without bearing the entire cost risk.
Q: What counts as ‘good faith’ for S237 purposes?
A: Good faith means the applicant genuinely believes the action is in the company’s interests, is not bringing the action for a collateral purpose (personal advantage unrelated to the company’s claim), and has taken a proper, reasonable view of the merits. It does not require perfect motive.
Q: Can a derivative action be used against a third party (not just the director)?
A: Yes—a derivative action can pursue any claim the company has, whether against a director, an officer, or a third party (for example, a company that entered a transaction with the company knowing the director was in breach of duty).
Q: Does the 14-day notice requirement delay urgent matters?
A: The court can waive the notice requirement where giving notice would cause significant prejudice—for example, where urgent interim relief is also needed. The applicant should flag this on the leave application.
Q: Can a derivative action be combined with an oppression application?
A: Yes. It is common to bring both in the same proceeding. The applicant can seek leave to bring a derivative action (for the company’s claims) and also pursue an oppression remedy (for personal shareholder claims) in the same originating process.
