Court leave needed to challenge directors

Remedies of minority shareholders - another hurdle overcome.

With the introduction in 2000 of the statutory representative action to replace the rule in Foss v Harbottle, it has been interesting to see how quickly judges of our courts have reacted to the new challenges facing them in dealing with this area of the law. Earlier in this issue we refer to the decision of Mandie J in Chapman v E-Sports Club Worldwide Ltd & Anor ((2000) 35 ACSR 462) on the utility of the new statutory derivative action (even though in that case the application failed). Now, in Advent Investors Pty Ltd & Ors v Goldhirsch & Ors ((2001) 19 ACLC 580) Warren J has made it clear that as a result of the amendments made by the CLERP Act to the law, the rule in Foss v Harbottle no longer applies. General law remedies for shareholders are no longer available if they wish to sue directors for breaches of the law. Now, the only way in which directors can be sued in this context is pursuant to the provisions of the Corporations Law contained in Part 2F.1A "Proceedings on behalf of a company by members and others" which replaced the rule in Foss v Harbottle.

After reviewing a number of cases dealing with the question of when legislation of the kind under discussion here became effective, in the context of proceedings brought against the company, Warren J concluded that it was not possible for the plaintiff to bring proceedings on the basis that the new law was not in place. It was argued by the plaintiff that the new law was cast in prospective terms – it did not apply to past conduct of the directors only to "new" conduct of directors. Warren J rejected that interpretation. In her view the new statutory provision was a procedural provision. It took effect immediately. In the view of Warren J the statutory derivative action (or representative action) displaced the common law derivative action (ie the exceptions to Foss v Harbottle). The new part of the legislation is clearly a procedural one. It does not purport to alter the substantive rights and liabilities of a company. But it does apply so that any action brought against directors in the context of a derivative or representative action has to go through the procedures laid down in the legislation.

The plaintiffs argued that it was perverse to argue that the new legislation was intended to lead to a replacement of any common law or general law action brought by shareholders. In the view of Warren J the purpose of the legislation was to introduce a new regime, to establish a new statutory derivative cause of action, and to require plaintiffs such as those in this case to follow the procedures laid down in the legislation. In all of the circumstances the plaintiffs failed. So, if shareholders are to challenge the actions of directors they must now proceed via the new statutory derivative action route – leave of the court has to be obtained before the action is commenced although that leave will not be refused if reasonable grounds are able to be established. Whether the plaintiffs will now re-institute the litigation in this case is an interesting question that we may see answered in due course.

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The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.