The recent Victorian Court of Appeal decision of Peter Urban v Junior Academy Elc Pty Ltd (ACN 136 704 697) (As Trustee for The Glen Eira Road (249) Unit Trust (ABN 54 859 835 183)) & Ors  VSC 161 explored the concept of a derivative action under the Corporations Act 2001 (the Act), an often underutilised tool available to shareholders and directors of corporations.
What is a derivative action?
Often there are causes of action that are available to corporations, such as claims against its current or former directors, however for whatever reason the corporation is unwilling or incapable of commencing proceedings. A classic example is where directors of a corporation, who ultimately control the corporation, do not bring proceedings on behalf of the corporation against themselves, for obvious reasons. Understandably, that would be tantamount to a boxer giving himself or herself an uppercut! Fortunately for aggrieved shareholders and other directors, section 236 of the Act is there to help.
Pursuant to section 236 of the Act, a person may bring proceedings on behalf of a corporation if the person is a member or an officer of the corporation, and if leave is granted under section 237 of the Act, pursuant to which the Court must grant leave if it satisfied of a number of matters.
In this case, Mr Urban, who was a director of Junior Academy ELC Pty Ltd (Junior Academy), was seeking leave to appeal an order dismissing his application to bring a derivative action on behalf of Junior Academy against his fellow directors (Mr and Mrs Lahmy) for breaching their director duties. The conduct Mr Urban complained of was that Mr and Mrs Lahmy had diverted the opportunity for Junior Academy to purchase and develop certain land to themselves.
Importantly, the facts of this case were that Mr Urban also formed a partnership on the side with a large childcare operator to purchase land and to develop a childcare centre, however did not tell Mr and Mrs Lahmy.
Section 237 of the Act
Under section 237 of the Act, the Court must grant the application if it is satisfied that, among other things:
- it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them;
- 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 judge at first instance was satisfied of all of the matters in section 237 of the Act bar one, being the requirement in s 237(2)(c) that it is in the best interests of the company that the applicant be granted leave.
The main reason the primary judge was not satisfied that it was in the best interests of Junior Academy was that, by Mr Urban’s own conduct in forming partnership without telling his fellow directors, he had himself potentially breached his duties as a director and the company and the other directors therefore had a potential cross-claim against him. Mr Urban had not come to the court with clean hands. The Court of Appeal agreed and found that the primary judge’s decision to refuse leave was justified.
This case is a reminder of the power of the derivative action and the circumstances in which leave can be refused when it is not in the best interests of the company.