Derivative action

The Corporations Act 2001 (Cth) contains a mechanism under ss 236 and 237 whereby Shareholders can commence what is known as a “statutory derivative action” on behalf of the company.

A derivative action differs from an action seeking an oppression remedy in that actions relating to oppression remedies are brought by a member against another member or Director, whereas, derivative actions are brought by a member on behalf of the company as a whole.

The basis for a derivative action is that where a wrong is committed against the company (e.g. because the Directors have breached their duties by misappropriating funds or being grossly negligent), the plaintiff is the company itself. However, The Directors are unlikely to cause the company to bring an action against themselves for breach of their duties. Therefore, the Court allows Shareholders to bring an action against the Directors on behalf of the company.

The individual seeking to bring the derivative action must have the leave of the Court. Therefore, it is important to seek legal advice as the Court must not grant leave unless satisfied that certain criteria are met.