The decision In the matter of CGH Engineering Pty Ltd [2014] NSWSC 1132 handed down by Justice Brereton early in 2014 required the Court to answer an interesting and novel question - is the statutory derivative action available during a voluntary administration?

The statutory derivative action

Generally speaking, where a wrong is alleged to have been done to a company, the proper claimant is the company itself. This is known as the rule in Foss v Harbottle. For various reasons, however, a company’s management may not always opt to commence proceedings. This could leave a company’s shareholders or creditors high and dry if they were resolutely in favour of litigation. Fortunately, there are common law and statutory exceptions to the rule in Foss v Harbottle which allow a Court to resolve the position of impasse. Section 237 of the Corporations Act 2001 (Cth)(Act) allows a Court to grant leave to person to bring proceedings on behalf of a company in circumstances where:

  • it is probable that the company will not itself being the proceedings
  • the person for leave is acting in good faith
  • it is in the best interests of the company that the person be granted leave to bring the proceedings
  • there is a serious question to be tried.

Relevant question to be determined

The question in this case was whether section 237 of the Act is available in the context of a company voluntary administration   (VA).   As   Justice   Brereton observed, “so far as I am aware, this is not the subject of any decided case, and counsel did not refer to any authority that directly addressed the point.” So then - what can an aggrieved shareholder or creditor do if an administrator stubbornly refuses to commence proceedings? The question would be highly relevant if, for instance, a statutory limitation period was due to expire during the course of a VA and the expiration of that period would disentitle the company from bringing a potentially valuable claim.

The question of whether the statutory derivative action applies to a company in liquidation, on the other hand, is well established. Despite a number of earlier decisions to the contrary, the New South Wales Court of Appeal made it clear in Chahwan v Euphoric Pty Limited [2008] NSWSC 52 that section 237 of the Act does not apply to a company in liquidation. In summary, there are unique features of a company’s liquidation and a liquidator’s powers generally which are inconsistent with the operation of section 237 of the Act.

The Chahwan case featured prominently in Justice Brereton’s judgment. It is unsurprising then that his Honour concluded at [13] that the same considerations that were made by the Court in Chahwan as to why section 237 of the Act should not apply to a company in liquidation are also applicable to a company in VA. In other words, his Honour found that section 237 of the Act does not apply during a VA.

Surely there is a way?

Notably, however, this does not mean that all is lost for aggrieved shareholders and creditors. His honour confirmed that there is a long standing line of authority which gives the Court inherent jurisdiction to authorise the bringing of proceedings by a creditor or shareholder in the name of a company in liquidation and that legislative sources can also be found elsewhere in the Act, for instance in the “catch all” sections 511 and 1321 of the Act.

Similarly, in the context of a VA, his Honour concluded that section 447E of the Act would be the appropriate source of jurisdiction to enable the Court to allow a creditor or shareholder to bring proceedings on behalf of a company in VA. That section allows the Court to make any such order it deems fit if an administrator is managing a company’s business in a way that is prejudicial to some or all of the company’s shareholders or creditors.

it is worth noting that no mention is made in Justice brereton’s judgment to section 447a(1) of the act. section 447a(1) empowers a court to make any orders it thinks appropriate about how part 5.3a of the act (the part of act relating to voluntary administrations) is to operate in relation to a particular company. it would be unsurprising to see orders made in future decisions that part 5.3a of the act applies to a company such that it does not prescribe the bringing of a derivative proceeding under section 237 of the act.

Take away points

Although the CGH Engineering case has by no means made huge waves in insolvency circles, what is clear is that the decision has filled a small legal lacuna. The case has confirmed that the statutory derivative action under section 237 of the Act does not apply to a VA. However, as with many things, there is more than one way to skin a cat, and here the Court confirmed that section 447E of the Act can come to the aid of an aggrieved creditor or shareholder who wishes to commence proceedings on behalf of a company where a company’s administrator refuses to do so.