Discuss about the International Corporate Governance System.
The Corporations Act, 2001 (Cth) puts an obligation on the directors and the other officers of the company to work in a manner which is in the best interest of the company, for a proper interest and in good faith. The same rules apply for the derivative actions taken by an applicant. This act shows that the best interest of the company is supreme for the individuals. However, the same can be difficult to determine in such cases where there is an overlapping of the interests of the members, with the control they have in the company.
Blakeney v Blakeney is one of such cases where serious questions were raised regarding this overlapping of interests and when the actions of directors were evaluated by the court, it was held that the directors had not acted in the best interest of the company or with good faith with particular reference to derivative action. The following part covers a discussion on this case, along with the other cases, which highlights that quite often the best interest of the company is overlooked by the members, when it comes to their personal interest.
An officer or a member of the company is enabled through a derivative action to initiate proceedings on behalf of the company. This can be noticed recurrently when the members put an allegation regarding the breach of directors’ duties. The applicants of a derivative action usually believe that it they would not have to fund the litigations. Even though there have been different criteria, one of the recent decision of the Western Australian Court of Appeal has been focused on a major obstacle which a derivative applicant has to exhibit. This demonstration relates to showcasing that the derivative action is in the company’s best interest. This point has to be noted by both the directors and members while they consider making such an application, or when they are threatened by one[6].
The case of Blakeney v Blakeney acts as a reminder to the fact that the likeliness of the best interest of the company in a proposed legislation is not sufficient. It is crucial to establish that the actions undertaken were actually in the company’s best interest, in a clear and proven manner. The judgment in this case, given by the Court of Appeal showed that the proposed litigation which was born out of the derivation application, would hardly ever be in the company’s best interest in case the company is a corporate trustee, the result of which is that are no beneficiary entitlements to the amount which is sought as recovery, and this would place the applicant director in a position which conflicts his duties[7].
In this case, it was held by the Court of Appeal that the initiation of litigation as being a derivative active was not at all in the company’s best interest. And for giving this decision, the Court of Appeal considered a number of different factors. These were the nature of the business of the company; the ability to meet the judgment of the defendant; the possible consequences and costs in case of the proposed litigation being unsuccessful; the possibility of the company recovering the offered indemnity; the potential of bringing out a conflict of duties due to the prose litigation; with regards to the applicant; the requirement for the company’s resources to be devoted to the litigation which has been proposed; the very nature of the indemnity which has been offered to the company by the applicant; the chances of the proposed litigation being a success; the other available avenues, in place of the litigation proposed; and the scale and character of the company[8].
In this case, the applicant director had a minimum of three other options, in form of making an application for appointing a new trustee; for initiating the proceedings on trust’s behalf; and lastly, being an object of the trust, in addition to making the assumption of the existence of special circumstances. The applicant director could have initiated proceedings in his own name against the director and could have sought a declaration. The crux of the matter in this case was that the derivative application is very quickly taken as a part of strategy for litigation; however, there is a need to consider all the options especially in the stringent approach which is taken by the court while assessing the criteria of applicability.
The right to bring the derivative action, in Australia, was earlier covered under the general law, which has been replaced through the statutory right to bring such derivative actions. Part 2F.1A of the Corporations Act 2001[10], containing sections 236 to 242, covers the procedure to bring statutory derivative action[11]. The applicants, who are eligible as per section 236(1) (a) have t make an application to the court for brining or intervening the proceedings on company’s behalf. The reason for the application being derivative is due to the reliance of the applicant on the cause of action, which belongs to the company, instead of a personal cause of action. If satisfied, as per the criteria covered in section 237(2) (a) to (e), i.e., the leave criteria, the court can grant the leave application[13]. The order is made by the court, after considering the appropriate costs of the application, along with the derivative actions, under section 242 of this act[14].
The case of Foss v Harbottle[15] provides a useful background for understanding the provisions set out under Part 2F.1A of the Corporations Act 2001. The rule set out under this case was applied only in cases when the cause of action belonged to the company. In such cases, only the proper plaintiff could initiate the action and this proper plaintiff was the company. Wigram V-C in this case provided the exceptions to this rule, which have been included in the provisions set out in the act[16].
Section 237(2) (c) puts an obligation over the court to be satisfied regarding the best interest of the company for granting the leave to the applicant[17]. And for this grant of leave, the requirement is for more than mere satisfaction, or as has been quoted earlier, the likeliness of the same. There has to be conclusive decisiveness on part of the court regarding the company’s best interest before the leave can be granted[18].
The term company’s best interest imports the common concept of the interest of the company in its entirety. This term is associated with the independent and separate welfare of the company. In the case of Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd[19], identified some matter which had to be considered for granting the leave due to the same being in the best interests of the company. All such bases have already been summarized earlier. The quoted section does not merely acknowledge what is in the best interests of the company, but also regarding whether the same demands the grant of leave. In Blakeney v Blakeney, it was clarified that the bad interest cannot be established for the reasons of personal claims against the defendant. Though, the same becomes a common phenomenon in the disputes which lead to derivative actions. There have been cases where the grant of leave was made after attaining a conditional undertaking from the applicant which indemnified the company for the costs incurred by the company. Some of these cases include Roach v Winnote Pty Ltd[20] by Barrett J and in Cooper v Myrtace Consulting Pty Ltd by Davies J[21].
For deciding upon the point of best interest in Blakeney v Blakeney, a reference was made to the case of Cooper v Myrtace Consulting Pty Ltd. In this case, a serious question was raised regarding the proposition that the individual was plainly incapable of satisfying the indemnity[22]. The willingness to indemnify the company by the derivative applicant, who was William in t he case of Blakeney v Blakeney, was deemed as a relevant consideration, along with the extent of the capacity of William. And it this case, there was nothing which could show that William would indemnify Geraldton Builders and Fabricators[23].
In establishing the good faith of the directors in the case of Blakeney v Blakeney, the case of Swansson v RA Pratt Properties Pty Ltd[24] was quoted. In this case, Ms. Swansson and Mr. Highland were two individuals who were also divorced; where the former was the director and shareholder of RA Pratt Properties Pty Ltd. (RAPP), and the latter was the director. It was alleged by the plaintiff that the latter had contravened the directors duties stated in 180, 181 and 182 sections of the Corporations Act, 2001, in addition to the ones stated under the common law[25].
Swansson initiated actions against Highland as per section 237(1) of the act[26]. It was held by the court that Swansson was not acting in the company’s best interest and hence, an application was not granted to her. The plaintiff in this case was John Carlton, and in case he won the case, the company was not required to pay the costs of litigations and would also receive compensation which would cover all the losses. Hence, the decision made by the plaintiff was held to be in the company’s best interest.
As has been stated earlier, the rules have stemmed from the case of Foss v Harbottle, which was undertaken in the year of 1843. And the same carved out a number of exceptions from its operation, though, the same was not easy to establish. Due to this, the introduction of the provisions of statutory derivative action was seen as important, particularly for the enlargement of the rights of the shareholders. These provisions have been interpreted since their introduction, in a fairly conservative manner by the court of law[28].
One of the recent crucial decisions given by the Victorian Court of Appeal in this regard is the case of True Value Solar Holdings Pty Ltd and Anor v Fernandez[29], provided the interpretation of the steps which had to be established by the shareholders for obtaining the leave from court so that the statutory derivative action can be allowed, which is applied before the court[30].
In this case, three difficult grounds were set up which had to be satisfied by the shareholders and these were of acting in good faith, which was the least difficult of the three, the best interests of the company that the issue can continued in shareholders’ name and the possibility that the proceedings would not be brought forward by the company or for the steps in it or to take the proper reasonability for them. While interpreting the last point, it was held by the Court of Appeal that the directors in general, would not be keen on pursuing the action against their own numbers. This raises the question of conflict of the overlapping of interests, being against the best interest of the company[31].
Conclusion
To sum up the entire decision, the derivative action allows the member of the company to initiate actions on behalf of it. However, in order to attain such a derivative action, the member of the company is required to establish certain points, one of which is the best interests of the company. However, the problem arises when this particular point has to be established due to the overlapping of control of the company and the interests of the members.
This was famously held in the case of Blakeney v Blakeney, where the mere likeliness of best interest was not held to be a satisfactory ground for granting a leave for the derivative action. In order to give the judgment in this case, a number of other cases were used. And the similar grounds were also established in the case of True Value Solar Holdings Pty Ltd and Anor v Fernandez. In short, for the grant of derivative action, the best interest of the company has to be properly established and an overlapping of interest, can lead to the same not been granted.
Lessambo F, The International Corporate Governance System: Audit Roles and Board Oversight (Palgrave Macmillan, 2016)
Loos A, Directors’ Liability: A Worldwide Review (Kluwer Law International, 2nd ed, 2010)
Picker CB and Seidman GI, The Dynamism of Civil Procedure – Global Trends and Developments (Springer, 2016)
Blakeney v Blakeney [2016] WASCA 76
Cooper v Myrtace Consulting Pty Ltd [2014] FCA 480
Foss v Harbottle (1843) 67 ER 189
Roach v Winnote Pty Ltd [2006] NSWSC 231; (2006) 57 ACSR 138
Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd [2011] NSWSC 1235; (2011) 85 ACSR 432
Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313
True Value Solar Holdings Pty Ltd and Anor v Fernandez (2013) VSCA 27
Corporations Act, 2001 (Cth)
AR Conolly & Company, ‘Insurance, Banking, Construction & Government’ (16 May 2016) <https://benchmarkinc.com.au/benchmark/composite/benchmark_16-05-2016_insurance_banking_construction_government.pdf>
Australasian Legal Information Institute, ‘Blakeney -V- Blakeney [2016] WASCA 76 (12 May 2016)’ (12 May 2016) <https://www.austlii.edu.au/au/cases/wa/WASCA/2016/76.html#fnB63>
Australian Institute of Company Directors, ‘Enhancing the rights of shareholders’ (01 May 2013) <https://www.companydirectors.com.au/director-resource-centre/publications/company-director-magazine/2013-back-editions/may/directors-counsel-enhancing-the-rights-of-shareholders>
Frawley N, ‘The Cost of Bringing a Statutory Derivative Action in Australia- Is It Time To Reconsider the Terms of Section 242 of the Corporations Act 2001?’ (2007) <https://www.clta.edu.au/professional/papers/conference2007/2007NF_CBSDAA.pdf >
Jin’s Legal Story, ‘Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313’ (2017) <https://www.jinslegalstory.com/corporate-law/swansson-v-ra-pratt-properties-pty-ltd-2002-42-acsr-313/>
Legal Services Commission, ‘General Duties of Directors – Corporations Act 2001 (Cth)’ (03 July 2012) <https://www.lawhandbook.sa.gov.au/ch05s01s03s02.php>
Supreme Court, ‘Australian Mortgage & Finance Company’ (12 December 2014) <https://static1.squarespace.com/static/538e6312e4b03cefc2a8a0c3/t/
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