#7390 - Member's Remedies Summary - Corporations Law

Member’s Remedies

• Types of remedies:

  • Statutory remedies:

    • Statutory derivative action Part 2F.1A

    • Oppressive conduct part 2F.1A

    • Injunction 1324

    • Winding up 461

  • Personal actions

  • Common law remedies are no longer important due to 236(3) which abolished the right of a person at general law to bring, or intervene in, proceedings on behalf of a company. The common law remedies are still relevant when members seek to enforce personal rights.

• In addition to remedies already discussed including:

  • Breach of statutory contract 140

  • The right to inspect book 247A

  • Remedies for unlawful variation of class rights 2F.2

  • Overcoming procedural irregularities that cause injustice 1322

• Derivative Actions and Oppressive Conduct compared:

  • Oppression emphasis the impact of conduct on the applicant / member (objective test) whereas derivative actions based on a breach of directors’ duties emphasis the directors’ knowledge and conduct

  • Oppression action considers cumulative effect of oppressor’s conduct whereas derivative action is concerned with specific wrongs

  • Standing under oppression remedy is not difficult to establish whereas need leave of court to bring derivative action

  • Court has wide discretion re appropriate relief in oppression actions whereas usual relief in successful derivative actions is monetary remedy for company

  • Costs orders not being made re derivative actions

Statutory Derivative Action Part 2F.1A (ss236-242)

1. Exhaustive code - s 236(3) precludes the bringing of derivative actions under general law

2. NB: This is NOT a personal legal action for the shareholder. Shareholders can take action on behalf of the company for a wrong done to the company.

3. General approach

   • Member requires leave to bring a statutory derivative action, and leave will only be granted if the court is satisfied it is in the best interests of the company and involves a serious issue to be tried

   • The benefits of the derivative action accrue to the company, not to the member who brings it – yet the member may be responsible for the costs of the litigation

   • Members right is derived from the company’s right

4. Who has standing?

   • S 237(1) – “A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.”

   • S 236(1)(a) - the person is:

     • a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or

     • an officer or former officer of the company

       • Note a member or officer could apply for leave in relation to conduct that occurred before they became a member or officer

   • S 236(2) – “Proceedings brought on behalf of a company must be brought in the company's name.”

5. When will leave be granted? s 237(2)

   • (2) The Court must grant the application if it is satisfied that:

     • (a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and

       • e.g., if the wrongdoers are on, or have a dominant influence on, the board.

     • (b) the applicant is acting in good faith; and

       • Involves at least two factors Swansson v R A Pratt Properties Pty Ltd

         • Honest believe that a good cause of action exists and has reasonable prospects of success; and

         • Applicant is not bringing it for a collateral purpose that would amount to an abuse of process.

       • Absence evidence of mala fide, assume bona fide

       • In considering these factors, examine the objective facts and circumstances, as well as the subjective assertions of the applicant Ragless v IPA Holdings Pty Ltd

       • Could be a lack of good faith if the action is designed to advance the applicant's personal interests rather than the interests of the company as a whole Chapman v E-Sports Club Worldwide Ltd; Chahwan v Euphoric

     • (c) it is in the best interests of the company that the applicant be granted leave; and

       • See rebuttable presumption

       • Swansson v R A Pratt Properties Pty Ltd (2002)): take into account all relevant circumstances, including:

         • the character and business (if any) of the company

         • the availability of alternative means to achieve the redress sought

         • the defendant’s ability to meet the judgment

       • Relatively high standard Swansson. The court must be satisfied that the proposed derivative action is on balance of probabilities in the best interests of the company.

       • Should enhance the value of the company - potential compensation to the company should outweigh the costs of the proceedings

       • Fact applicant may also have a personal interest that will be advanced is not of itself determinative that it is not in the best interests of the company Metyor Inc v Queensland Electronic Switching Pty Ltd

       • What if the company is in liquidation? Chahwan v Euphoric Pty Ltd

     • (d) if the applicant is applying for leave to bring proceedings - there is a serious question to be tried; and

       • Designed to prevent claims that are frivolous or vexatious [Explanatory Memorandum, para 6.46] – therefore standard is relatively low

       • Show an arguable case – court will not, at this stage, probe into the depth of the issues Chahwan v Euphoric Pty Ltd

       • Applicant is only required to show that proceedings should be commenced, not a high threshold Swansson

     • (e) either:

       • (i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or

       • (ii) it is appropriate to grant leave even though subparagraph(i) is not satisfied.

         • Perhaps if the company is in liquidation

6. Rebuttable presumption – s 237(3)

   • “A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that:

     • (a) the proceedings are:

       • (i) by the company against a third party [defined in s 237(4) related party]; or

       • (ii) by a third party against the company; and

     • (b) the company has decided:

       • (i) not to bring the proceedings; or

       • (ii) not to defend the proceedings; or

       • (iii) to discontinue, settle or compromise the proceedings; and

     • (c) all of the directors who participated in that decision:

       • (i) acted in good faith for a proper purpose; and

       • (ii) did not have a material personal interest in the decision; and

       • (iii)informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and

       • (iv)rationally believed that the decision was in the best interests of the company.

   • The director's belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold.”

7. Effect of ratification of the conduct the subject of the application for leave – s 239

   • does not prevent a person from applying for leave under section237, or bringing proceedings with such leave; and

   • does not mean that an application for leave under section237 must be refused, or proceedings brought with such leave must be determined in favour of the defendant.

   • the Court may take the ratification into account in deciding whether to grant leave under s 237, and what order or judgment to make in proceedings brought with such leave. In doing this, the court must have regard to:

     • how well-informed about the conduct the members were when deciding whether to ratify or approve the conduct; and

     • whether the members who ratified or approved the conduct were acting for proper purposes.

8. Who pays – 242

   • “The Court may at any time make any orders it considers appropriate about the costs of the following persons in relation to proceedings brought or intervened in with leave under section237 or an application for leave under that section:

     • (a) the person who applied for or was granted leave;

     • (b) the company;

     • (c) any other party to the proceedings or application.

   • An order under this section may require indemnification for costs.”

9. Remedies for SDA:

   • Injunction and Winding Up

Oppressive Conduct

1. Introduction:

   • One of the most important remedies / protections a member has against the risk of the company (or those who control the company) engaging in unfair practices against them.

   • What are potential examples of such unfair conduct?

     • withholding dividends

     • distributing profits to the majority (e.g. as salary, bonuses)

     • exclusion from management participation

     • diversion of corporate assets to interests associated with the majority

     • disproportionate (inequitable) share allotments

     • withholding information concerning company’s affairs

     • making other changes affecting the value of minority interests

2. Who has standing? 234:

   • “An application for an order under section233 in relation to a company may be made by:

     • (a) a member of the company, even if the application relates to an act or omission that is against:

       • (i) the member in a capacity other than as a member; or

       • (ii) another member in their capacity as a member; or

       • Note: unclear whether an applicant must be registered as a member for the purposes of 234(a)

     • (b) a person who has been removed from the register of members because of a selective reduction; or

     • (c) a person who has ceased to be a member of the company if the application relates to the circumstances in which they ceased to be a member; or

     • (d) a person to whom a share in the company has been transmitted by will or by operation of law; or

     • (e) a person whom ASIC thinks appropriate having regard to investigations it is conducting or has conducted into:

       • (i) the company's affairs;...