Statutory Derivative Action: Effectiveness and Reform

The assignment analyzes the statutory derivative action, a legal mechanism allowing shareholders to sue on behalf of a company against directors for wrongdoing. It explores both the benefits and drawbacks of this provision, discussing its ability to protect shareholder interests while acknowledging potential loopholes and challenges. The document also proposes reforms to enhance the effectiveness of the statutory derivative action and achieve a more balanced approach that safeguards the rights of both shareholders and directors.

Running head: COMMERCIAL & CORPORATION ACT
Statutory Derivative Action
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Table of Contents
Introduction................................................................................................................................2
Discussion:.................................................................................................................................2
Statutory derivative action......................................................................................................2
How it works as a remedy for the shareholders.....................................................................3
Reasons for reformation.........................................................................................................4
Process of reformation............................................................................................................5
Conclusion..................................................................................................................................6
Reference....................................................................................................................................7

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Introduction:
In Australia, the company matters are governed by the Corporation Act 2001 (Cth).
This Act has provided certain provision for securing the interest of the shareholders by
prescribing the duties of the directors. It has been stated that if the directors of the company
will fail to perform their duties, the shareholders can bring certain action against them.
Statutory derivative action is such action. It is a common rule that if a director could not able
to perform his duties prescribed by law, the Board of Directors can take action against him.
Under the derivative action, a shareholder can bring action against the alleged director under
certain circumstances (Stylianou 2017). However, there are certain loopholes present in this
system and certain reforms are required to amend the provisions of the action. In this report, a
brief discussion on it has been made.
Discussion:
Statutory derivative action
The nature of statutory derivative action is corporate-based. This action can be
taken against a director of the company by a shareholder. According to Section 236 of the
Corporation Act 2001, the shareholders have the right to bring an action against the director
of a company if the director has not performed their duties (Chen 2017). The duties of the
directors have been discussed under certain sections of the Corporation Act 2001. According
to section 180, a director should have to take proper care in case of dealing with the
shareholders. He must act in good faith as stated under section 181 of the Corporation Act. If
a director will misuse his or her position, he will be liable under section 182 (1) of the Act. In
case a director continue to trade while the company has become insolvent, he will be liable
under section 588G of the Act. However, the common rule is that in such circumstances, the
Board of Directors will take all the necessary actions against the alleged director. Dilemma

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arose when the member of the Board has made any violation to the rules. Possibility of
partiality may crop up in such cases and the interest of the shareholders can be at risk. To
curb this, Corporation Act has added certain provisions so that any shareholder can bring an
action against any directors against whom any act of infringement had alleged. However,
there are certain conditions that have been prescribed in case of Foss v Harbottle (1843) 67
ER 189.
If the applicant is acting in good faith and submit petition before the court for leave
to bring in the proceeding, his application can be granted on the satisfaction of the court and
the required proceeding has been inserted under section 237 of the Corporation Act 2001.
It has been mentioned under section 239 of the Act, a member of the company can
be brought under a proceeding though he has ratified the conduct and it is not true that the
decision of the court could be go in favour of them.
If the court is satisfied enough to impose a cost upon the respective party, it can do
so under section 242 of the Corporation Act 2001.
The court can order for the inspection of the company books or the registered of
the company with an intention to probe into the matter in dispute. All these sections are
known as the derivative action as per the provision of Corporation Act 2001.
How it works as a remedy for the shareholders?
Certain rules have been prescribed by the court for the proper application of
statutory derivative action. It was stated by the court in Foss v Harbottle (1843) 67 ER 189
that a shareholder will get this option only if his personal rights have been infringed. In
addition, the shareholder may bring an action if a fraud or injustice has been taken place
(Wong and Yeo 2015). Otherwise, the shareholder could not take any action against the

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director. Certain changes to this rule has been made in Edwards v Halliwel [1950] 2 All ER
1064, where it has been decided that if the action of the director will be go against the policy
of the company, or any non-compliance has been made by the director, shareholders will get
an opportunity to bring an action against the directors (Keay 2016). However, it has been
stated in Barrett v Duckett [1995] 1 BCLC 243 that if there is a chance to get additional
remedies for the shareholders, he cannot make any claim under this provision.
Before the provision, a shareholder had no right to claim anything against the
director of the company. They had to depend on the Board of Directors as the common law
considers the company as a legal person. Therefore, if any mishap takes place, only the
company get the option to take action against the alleged director. Problem arose if the
alleged director was a member of the Board of Director. In such circumstances, much
possibility of partiality cropped up and the interest of the shareholders became insecure.
There is a demand made for protecting the interest of the shareholders and section
236 to section 242 were added under the Corporation Act 2001. Rights have been given to the
shareholders under section 236 of the Corporation Act to bring any action on behalf of the
company. The shareholder may make an application for leave before the court under section
237 of the Corporation Act. This provision of statutory derivative action has given right to the
shareholders to express their views before the court. It has been held by the court that if the
personal right of the shareholder could at any time be violated by the director, the shareholder
can take an action against the director (Tang 2016). Therefore, if any director restricts the
right to cast vote or prevents the shareholders to transfer their shares to the third party, the
shareholder shall have the option to go against the director and make a claim under the
provision of statutory derivative action.
Reasons for reformation

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The statutory derivative action has given an opportunity to the shareholders to
make a direct claim against the directors before the court. However, there are certain
loopholes present under the provisions. The provision of statutory derivative action has also
been a part of the Company Act 2006 and it has been observed that the relevant provisions on
the same are quite self contradictory in nature. According to section 260 of the Company Act,
any member can bring an action against the company director (Salim 2016). On the other
hand, according to section 260 (5), the member should have to be that person whose shares
are transmitted by any operation of law. Again, section 260 (3) prescribes that the member
can only bring an action against the director if any cause of action arose to that aspect.
Therefore, the provision of statutory derivative action is complex in nature.
Further, the shareholder can bring an action against the directors only, but he
cannot apply the provision against any third party. Therefore, if the interest of the shareholder
will be affected by the act of the third party, suppose by the auditor, he shall have no option
to make any claim against the auditor before the court and in such situation, he has to depend
on the decision of the Board of Director.
Again, it is the discretionary power of the court to accept the prayer of the
shareholder. The judges are not mandatorily started a proceedings against the directors after
receiving an application from the shareholders. Therefore, the court may accept the prayer or
refuse the claim (Baxt, Wockner and Janson 2017). In case of refusal, the shareholder may
have to face detrimental trauma in the company.
Process of reformation
Many legal scholars have raised their voice against the loopholes of the provision
and it has been stated by them that this provision could not make a positive effort to secure
the interest of the minor shareholders and confirm them justice. Payne supports the provision

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and states that the provision will help the shareholders from getting abused in the hand of the
directors and will protect them from unnecessary litigations.
However, Hirt has made an objection by stating that the court is given certain
ratification period to make an inquiry to the allegation. There are many possibilities that the
investigation report will get influenced by the company directors and the true report will not
be submitted before the court. Therefore, the scope of derivative action can be restricted.
According to J.P. Sykes, the burdensome procedure of the company will diminish
the effect of statutory derivative. Hannigan stated that the process of statutory derivative will
increase the number of suits and the shareholders may get a scope to bring action against the
company directors.
However, there is a scope to make reformation under the present conditions and
should remove the loopholes present in the provisions. An amendment is required to correct
the contradictory provisions and make the provision suitable for the shareholders so that their
interest can be get protected (Douglas and Bath 2017).
Conclusion
The provision of statutory derivative action has given certain opportunities to the
shareholders so that their rights can be protected against the wrongful acts of the directors.
However, there are certain weak points present in the provision. Kyrou was of the view that
this action will facilitate the application process of the shareholders and they could easily get
the remedies by placing proper action against the alleged directors. However, there should be
certain procedures so that the shareholders may not misuse their position or power. If the
existing provisions should not get reformed, the ultimate object of the action will not be
fulfilled. Therefore, it can be stated both the sides of the directors and the shareholders are

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required to be reformed in a systematic way so that there can be a good balance made for the
sake of justice.

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Reference
Baxt, R., Wockner, T. and Janson, S., 2017. ANNUAL REVIEW OF CORPORATIONS LAW.
Chen, V., 2017. The Statutory Derivative Action in Malaysia: Comparison with an Australian
Judicial Approach.
Douglas, M. and Bath, V., 2017. A New Approach to Service Outside the Jurisdiction and
Outside Australia under the Uniform Civil Procedure Rules.
Keay, A., 2016. Assessing and rethinking the statutory scheme for derivative actions under
the Companies Act 2006. Journal of Corporate Law Studies, 16(1), pp.39-68.
Salim, M.R., 2016. Whither the Common Law Derivative Action? A Malaysian Case Study.
Stylianou, A., 2017. Evolution of the derivative action as an enforcement of rights
mechanism under the Companies Act 71 of 2008.
Tang, S.S., 2016. Corporate avengers need not be angels: rethinking good faith in the
derivative action. Journal of Corporate Law Studies, 16(2), pp.471-491.
Wong, R.J. and Yeo, W.A.J., 2015. Rationalizing the Notice Requirement for Statutory
Derivative Actions: Comparing Singapore and Canadian Perspectives. SAcLJ, 27, p.528.