Leave under section 237: derivative actions in receiverships - the new black?

Whilst directors’ powers are suspended once a company is placed into receivership,¹ directors (among others) retain the right to bring or intervene in proceedings on behalf of the company in receivership, subject to the Court’s leave: section 237 of the Corporations Act 2001 (Cth) (Act).

Section 237 is not available to aggrieved parties at large.  Standing is conferred on members, former members, a person entitled to be registered as a member of the company, an officer or former office of the company: section 236(1)(a) of the Act.

An applicant seeking leave will be required to prove, on the balance of probabilities, that all of the elements of section 237 have been established, that is that:

  • it is probable that the company will not institute proceedings: section 237(a). If there is no clear-cut refusal by the receiver to take specific proceedings after a detailed request to do so by or on behalf of the applicant, the applicant must show that in all of the relevant circumstances, actual refusal or the probability of refusal is to be inferred:  Swansson v R A Pratt Properties Pty Ltd & Anor [2002] NSWSC 583 per Palmer J at [29];

  • the applicant is acting in good faith: section 237(b). ‘Acting in good faith’ is determined by the context of the particular case.  The court will have regard to whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success or whether the applicant is seeking to bring the derivative action for a collateral purpose that would amount to an abuse of process:  Swansson v R A Pratt per Palmer J at [36];

  • it is in the best interests of the company that leave be granted: section 237(c).  Here the Court will consider the company’s business, including whether it is a going concern, the ability of the proposed defendant to meet any judgment and the proposed effect the litigation will have on the company.  If an alternative remedy exists, for example, via a receiver ad litem, such that the asserted company ‘interests’ can be pursued by alternate means then the court will be unlikely to grant leave to the applicant: Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd [2001] QSC 324 cited in Vinciguerra v MG Corrosion per Gilmour J at [121];

  • there is a serious question to be tried: section 237(d). The applicant must be able to identify the legal or equitable rights to be determined at trial in respect of which the final relief is sought:  Ragless v IPA Holdings Pty Ltd (in liq); Oates v Consolidated Capital Services Ltd (2008) 66 ACSR 277 per Debelle, Sulan and Vanstone JJ at [40]; and

  • the applicant served prior notice pursuant to section 237 of their intention to seek leave or there are reasons why leave should nonetheless be granted: section 237(e).  Again, a question of fact to be established on evidence.

If any of the prescribed conditions are unsatisfied, the court must refuse the application: Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763. Fundamentally, the actions of the applicant must not prejudice the proper administration of the receivership.  It is a question of fact whether the purported exercise of power by the applicant will be detrimental to the functions of the receiver.  If it is, the applicant must defer to the receiver: Tudor Grange Holdings Ltd v Citibank NA [1992] Ch 53 cited in Deangrove Pty Ltd (receivers and managers appointed) & Anor v Commonwealth Bank of Australia [2001] FCA 173 per Sackville J at 86.

Lavan Legal comment

Recent case law suggests an increasing trend for aggrieved parties, predominantly directors, seeking the Court’s leave under section 237.  This may be a reflection of the increasingly more complex nature of receiverships or of a more litigious society.  Directors and aggrieved parties are increasingly more attuned to their legal remedies and may see strategic benefit in using section 237 or the threat of proceedings relating to it, in their dealings with receivers.

For further information please contact partner Alison Robertson on (08) 9288 6872 / alison.robertson@lavanlegal.com.au or senior associate Claire Petersen on (08) 9288 6746 / claire.petersen@lavanlegal.com.au.

¹Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd [1969] 2 NSWR 782.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.