Bringing proceedings on behalf of a Company

In a recent Supreme Court proceeding, the Court considered when a person may bring proceedings on behalf of a company by way of a derivative action.

The facts

1. Mr Bath and Mr Dhillon were directors of a company.
2. The company purchased land. Mr Bath said the purpose of the land was for the company and its business, and also to be developed into a childcare and medical centre.
3. The company paid the deposit, but due to financing issues the land was purchased in the names of the two directors and their wives.
4. Mr and Mrs Bath lived in the property and did not pay rent.

The proceedings

Mr Dhillon filed VCAT proceedings seeking the sale of the property and payment of rent.

Mr Bath filed Supreme Court proceedings alleging:

1. that Mr Dhillon had breached his directors’ duties;
2. that Mr Dhillon diverted customers to another company and created false book entries in the company’s books;
3. that the land was held on a constructive trust, or alternatively a resulting trust, for the company; and
4. that Mr Dhillon’s conduct in the affairs of the company was contrary to the interests of members, and was oppressive or unfairly discriminatory against Mr Bath.

The law

In certain circumstances, the Court will grant leave for a person such as a shareholder or director to bring proceedings on behalf of a company.

This may occur where:

1. the application is made in good faith for final relief;
2. it is probable that the company will not itself bring the proceeding, and notice of the application has been given to the company; and
3. it is in the best interests of the company that leave be granted, and there is a serious question to be tried.

Often, where there is an allegation that one director or shareholder has caused loss to the company, the Court will permit the other director or shareholder to bring proceedings on behalf of the company by way of derivative action.

The Court

In this case, the Court was satisfied that leave should be granted for Mr Bath to bring proceedings on behalf of the company.

However, the Court required Mr Bath to fund the proceedings himself and to indemnify the company for any adverse costs orders made against it.

Lessons

The decision is a useful reminder that the Court will require a number of threshold matters to be established before granting a director or shareholder the ability to bring proceedings on behalf of a company.

Derivative actions can be an important remedy where those in control of a company will not act, but leave is not automatic and the applicant may still bear significant cost consequences.

Catherine Ballantyne, Principal at Hunt & Hunt, is experienced in this area and can be contacted at [email protected] or on +61 3 8602 9200.