Derivative Actions: Company Claims and Leave

Whose Claim Does a Derivative Action Pursue?

A derivative action pursues the company’s cause of action, even when a member applies for permission to bring it. Identify the company’s alleged loss before considering the applicant’s personal position.

Suppose a fictional company, Harbour Components Pty Ltd, pays $48,000 to an entity controlled by a director. The payment description says “consulting”. A shareholder believes no services were supplied and asks the board to recover the money.

The possible wrong concerns the company’s payment and the director’s alleged conduct. The proposed defendants might include the director and recipient, depending on the causes of action supported. The company must account for any services received and any repayment before stating its loss.

Ordinarily, the company’s authorised decision-makers decide whether it sues. Identify those decision-makers from the constitution, appointments and applicable law. If the controllers refuse to act, the shareholder needs a lawful route to pursue the company claim.

A member seeking personal protection can raise a different issue under an oppression remedy. Compare who owns the right and who receives the relief before selecting either claim. Wider shareholder disputes can involve separate exit or contractual questions.

Check the Applicant and the Need for Leave

Establish that the applicant falls within section 236 before preparing a statutory leave application. Its categories cover members, former members and persons entitled to registration in the company or a related body corporate. They also cover officers and former officers of the company.

Under Part 2F.1A of the Corporations Act, leave can authorise commencement or intervention. Intervention can concern responsibility for existing proceedings or a particular step. Proceedings brought on the company’s behalf use its name.

Record exactly what authority the applicant needs. Starting a new recovery claim differs from taking over a defence or seeking control of a settlement step. Retain the existing pleadings and orders where proceedings already exist.

Obtain company searches and the board’s decision or correspondence showing inaction. Check who currently controls the company’s litigation and whether valid company authority already permits action. A shareholder’s instructions alone cannot substitute for that authority.

External administration changes the inquiry. Identify the administrator or liquidator and the powers they hold before assuming the statutory member route applies. In liquidation, examine the distinct authority and leave basis required. Li v Wu [2019] ACTCA 14 illustrates a derivative proceeding relying on inherent jurisdiction for a company in liquidation.

Build the Leave Evidence

Map the evidence to every applicable requirement in section 237(2). Permission depends on the leave requirements, while the underlying claim still requires proof in the company proceedings.

Leave Requirements and Evidence

Requirement	Material to address it
Probable company inaction or failure to take proper responsibility	Board correspondence, resolutions, requests for action and any existing litigation conduct
Applicant’s good faith	The applicant’s purpose, relationship to the proposed defendants and evidence explaining the application
Company’s best interests	Expected recovery, litigation budget, funding, commercial consequences and prospects of collection
Serious question to be tried, for commencement	Proposed causes of action, supporting records and the response to contrary explanations
Notice or alternative treatment	Written notice, reasons, proof of delivery, elapsed period and grounds for seeking leave despite non-compliance

For the fictional $48,000 payment, obtain the contract, invoice and approval records. Seek evidence of work delivered and inspect the accounting entry. A payment to a director-controlled entity needs explanation, but that relationship alone does not prove an actionable diversion.

Reconcile any credits before forecasting recovery. If the recipient returns $8,000, the cash shortfall becomes $40,000. That figure remains subject to the services and entitlement questions. Assess whether a judgment could be collected and record uncertainty about solvency or available assets.

Prepare a realistic litigation budget alongside the possible recovery. Include adverse costs exposure and explain who provides funds. Address the company’s own response to the proposed claim, including a commercial reason it gives for declining proceedings.

Section 237(3) creates a rebuttable company-interest presumption in specified circumstances involving a decision about third-party proceedings. If it applies, address each statutory condition and the evidence needed to rebut it. A board refusal cannot simply be ignored.

The ordinary notice route requires written notice to the company at least 14 days before the application, stating the intention and reasons. Keep the notice separate from later service of court documents. If that route is not satisfied, support the request for the alternative treatment permitted by section 237(2)(e)(ii).

For records needed before assessing the claim, the section 247A Corporations Act guide addresses the separate inspection route.

Prepare the Application and Proposed Controls

For a Federal Court application, prepare the corporations process and evidence for the specific leave sought. Confirm jurisdiction over the proposed company proceedings as well as the leave application.

The Federal Court’s corporations sub-area guidance identifies the corporations forms and supporting rules. The Commercial and Corporations Practice Note explains the available methods for presenting the case.

Use the following preparation sequence for a new leave application:

1. Prepare Corporations Form 2 identifying the statutory provisions and relief. Rule 2.2 provides for Form 3 where the application is made in existing proceedings.
2. Prepare the supporting affidavit under rule 2.4 unless the court directs otherwise. For an originating process, annex the company search conducted no earlier than seven days before filing.
3. Identify the company and other necessary parties. Exhibit the notice and response, capacity evidence and material supporting the leave criteria.
4. Provide a proposed pleading or sufficiently precise claim description. Identify defendants, causes of action, payments challenged and relief so the requested authority has defined limits.
5. Prepare draft orders addressing leave and conduct. State who instructs the lawyers, pays costs and reports material developments to the company or court.
6. Arrange filing and service, then retain proof. Diarise the return hearing and every direction governing further evidence.

Under rule 2.7, originating process and supporting affidavits require service as soon as practicable and at least five days before the hearing. The interlocutory period is at least three days. Service covers the defendants or respondents and the company if it is not already a party, subject to applicable directions.

Read the Federal Court (Corporations) Rules with any case-specific orders when calculating service and filing obligations. Consider other applicable notification requirements for the relief actually sought.

State the proposed funding arrangement expressly. Address any indemnity, security or reporting safeguard sought, together with conflicts affecting conduct. Sections 241 and 242 permit directions and costs orders. A funding promise does not itself establish an entitlement to repayment by the company.

Use Financial Evidence Without Expanding the Claim

Connect each challenged company payment to the allegation it supports. Keep the bank evidence, accounting treatment and authority inquiry visible in the same issue schedule.

The fictional records below illustrate how a schedule can preserve competing explanations. The filenames and citations are invented.

Fictional Company Payment Schedule

Item and statement citation	Bank movement	Accounting treatment	Authority and competing explanation	Amount requiring assessment
H1, Harbour-operating.pdf, page 4	$48,000 debit to director-controlled recipient	Consulting expense	Director approved payment; invoice exists; work delivery disputed	$48,000 before credits and any services allowed
H2, Harbour-operating.pdf, page 7	$8,000 credit from recipient	Expense reversal	Remittance describes partial refund; allocation requires confirmation	$40,000 cash shortfall after refund

Attach the invoice and approvals to H1, then connect H2 to the same alleged transaction. Exclude transfers between the company’s own accounts from any loss total unless a separate allegation explains their relevance.

FinTrace organises supplied bank statements into categorised Excel and cited findings for the instructed lawyer or accountant. Each finding identifies its source PDF filename and page, so the supporting payment evidence is readily available.

The lawyer connects those records to the alleged breach and available relief. The accountant assesses the accounting issues and any separate expert work. The director duties guide addresses the underlying duty inquiry. Additional suspicious payments require their own factual and legal assessment before they enter the permitted claim.

Verify Leave and Manage the Proceedings

Read the sealed leave order before commencing the company claim or taking responsibility for existing proceedings. Check the permitted causes of action, parties, conduct and costs conditions against the document you intend to file.

Record who holds authority to instruct and any reporting, funding or security obligations. If the proposed claim exceeds the order, obtain the necessary further authority before acting. Leave does not establish liability or promise a successful recovery.

Section 240 requires court leave to discontinue, compromise or settle proceedings brought or intervened in with leave. A private agreement between the applicant and defendant cannot replace that approval. A change of the person conducting the proceedings requires consideration of section 238 and the existing orders.

Retain the sealed order, filed company claim and service record with the authority documents. Account for any recovery in the company’s records and reconcile the costs paid under the orders. Close the file against the authority actually granted and the disposition the court permits.