Seeking leave to bring a “derivative suit” is a mechanism that shareholders of a company can use when they consider the company they own shares in is improperly failing to bring a claim. In the decision of Tydeman v Asgard Group Pty Ltd [2023] FCA 486, some shareholders and directors of a company brought an application in curious circumstances.
In the end the Court refused to grant the plaintiffs leave to bring their “derivative suit” noting that the reason the company was not bringing the claim itself was actually the plaintiffs’ fault. A brief summary of the intriguing facts of this case is as follows:
The Plaintiffs (a parent and their child) were the sole directors and only shareholders of the Defendant company. The Defendant was trustee of a self-managed superannuation fund, and the Plaintiffs were the fund’s beneficiaries.
The Plaintiffs, proceeding without legal advice, sought leave to cause the Defendant to sue for what the Plaintiffs alleged was trust property: shares.
The Plaintiffs said FormerTCo, a former trustee of the SMSF, owned shares in OtherCo; that FormerTCo became deregistered; and the shares (which the Plaintiffs said were property of the SMSF) were unlawfully bought back by OtherCo.
The evidence regarding the alleged buy-back was unclear and included heavy redactions.
In 2016 FormerTCo resigned as trustee of the SMSF and was later deregistered. Following this, the Plaintiffs appointed themselves trustees. In 2022 they retired as trustees and appointed the Defendant.
The Court was left to consider the criteria for bringing a derivative suit set out at s237 of the Corporations Act 2001 (Cth).
Regarding s237(2)(a): the Court found the Defendant would not bring the suit, because the Plaintiffs refused to cause it to do so.
Regarding s237(2)(b): the Court found Plaintiffs’ application was not brought in good faith. It was the Plaintiffs’ conduct that prevented the Defendant from bringing the application.
Regarding s237(2)(c): the Court considered it was not in the Defendant’s best interests that leave be granted as the Plaintiffs’ proposed indemnity was insufficient, and the prospects of the derivative suit succeeding were poor.
Regarding s237(2)(d): the Court found there was “little more than bare assertion” to suggest the buyback was unlawful or improper, but the evidence did disclose a serious question to be tried.
The facts were the subject of twelve (an unusually high quantity) other related pieces of litigation over the years from 2013.
The Plaintiffs’ heavily redacted evidence and failure to disclose apparently relevant matters traversed in the other litigation left the Court in a state of “considerable disquiet” about whether the entire position had been disclosed by the Plaintiffs.
Noting a number of criteria for leave had not been satisfied, leave to bring the derivative action was refused. The Plaintiffs’ application failed.
This case illustrates that in order to meet the criteria required to bring a derivative suit, each of the requirements set out in the Corporations Act 2001 (Cth) must be complied with. Failure to do so will put at risk any chance of success and the likelihood of a costs order being made against the applicant.
If you have any questions, or require any assistance with a dispute or litigation for a corporate entity, please contact Stipe Vuleta of Chamberlains Law Firm on 02 9264 9111