The right of members to bring an action in the name of the company - an interesting New South Wales ‘excursion’.
When the Corporations Law, as it then was, was amended to introduce the statutory business judgment rule, Treasurer Peter Costello indicated that this particular "concession" to directors was to be counterbalanced by the introduction of new shareholder protection provisions in the legislation. These would allow actions to be brought in the name of these companies against directors and others by members without having to fight the famous old rule in Foss v Harbottle which, in effect, provided that only the company could bring the action against directors. If the directors controlled the company this was often a matter of some difficulty, especially if they wanted to sue the directors or persons associated with them. The statutory representative action (or derivative action) has not been the subject of much litigation and reported cases as yet - the recent decision of Einstein J in the New South Wales Supreme Court shows that the new statutory provisions do have a degree of flexibility which will make them quite useful in the future.
In BL & GY International Co Ltd v Hypec Electronics Pty Ltd ((2001) 19 ACLC 1622) the circumstances involved not just the rights of individuals but also the rights of individuals in the context of a company that was in liquidation and the ability to bring an action against persons who it was alleged owed money to the company. The facts of the case are taken from the headnote in the CCH Company Law Cases. M was a director of Hypec Electronics Pty Ltd. Hypec was placed into liquidation on 7 May 2001 following a default judgment having been entered against it on 4 December 1997. The judgment related to common law proceedings commenced by BL & GV International Co Ltd for the balance of a loan account between BL and Hypec or, alternatively, on account of "monies had and received" by Hypec for the use of BL. At the time of the common law proceedings, M was also involved in Family Law proceedings with his ex-wife, who was the only other director of Hypec. M's ex-wife was also a director of BL and held 44 percent of its shares.
M commenced two forms of action seeking the same relief. The first was by summons joining the liquidator as first defendant and BL as second defendant. The application was made pursuant to section 237 of the Corporations Act 2001 or, in the alternative, pursuant to the Court's inherent jurisdiction. The application requested an order that M be given leave to intervene in the common law proceedings or, alternatively, be appointed receiver of Hypec's right to defend the proceedings and Hypec's cause of action against BL and associated parties. The second form of action was by notice of motion in the winding up proceedings, which generally sought the same form of relief. M submitted that there was evidence to explain the failure of Hypec to file a defence and its delay in applying to have judgment set aside. He further submitted that, upon the evidence to be tendered in the Common Law Division, the proposed application in the name of Hypec had strong prospects of success. Other factors relied on by M were:
• the suggested improbability of the liquidator bringing the application in the New South Wales Supreme Court;
• the economy of M liquidating in the name and interests of Hypec;
• the suggested detriment to Hypec if the application was refused; and
• that the only other contributory of Hypec was not prejudiced.
BL's submissions centred on the appropriateness of appointing M as a receiver pursuant to section 418 of the Corporations Act and M's actions as a director of the company. The liquidator submitted that any action on behalf of Hypec should be instigated by the liquidator on behalf of the company and that, practically, M was not an appropriate party to the litigation. Einstein J rejected the liquidator's claim. In his view there was a power in the court to permit M to bring proceedings in the company's name even though the company was in liquidation. Sections 236 and 237 of the Corporations Act had not been intended to remove that right. Where it was appropriate for a relevant shareholder to bring an action in the name of the company if the Parliament had intended to remove that right when the company was in liquidation it would have said so much more specifically. In his view there was nothing in the legislation to suggest that the relevant sections applied to a company in liquidation.
After a quite detailed discussion of relevant cases and the legal merits of allowing a shareholder in effect to bring proceedings when the company was in liquidation and reviewing the background to the statutory representative action, the judge considered the applicant was acting in good faith. He was satisfied that he was acting in good faith, that there was evidence that suggested a finding by a court that the applicant could succeed in the action on behalf of the company and the application for the shareholder to bring the proceedings was granted. Certain undertakings were ordered to be provided to the court in permitting the particular action to proceed. It is unnecessary to go into the merits of the litigation (nor did the court in any real sense) in reaching its conclusion on this particular matter. What is important, and what is most interesting in the context of the development of company law, is the fact that the shareholder's right to intervene in such circumstances was clearly recognised. It would appear that the statutory representative action will have a significant role to play in enhancing shareholders' rights if the conclusions reached by Einstein J in this case are not overturned in any later challenge.
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.
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