This case illustrates the types of factors that a Court may take into account when considering whether a shareholder applying to bring a derivative action under section 237 of the Corporations Act 2001 (Cth) on behalf of a company (in this case, to recover consultancy fees paid to directors) is acting in good faith. In this case, the Court refused to grant leave to bring an action on the basis that the shareholder’s lack of apparent genuine concern about the quantum of, or likelihood of recovering, the fees or apparent genuine interest in resolving the dispute without litigation suggested that the shareholder was motivated by a takeover or control strategy, rather than a good faith desire to recover the fees for the company.
Coeur de Lion Investments Pty Ltd (Coeur de Lion), a shareholder of the President’s Club Ltd (the Club), applied for leave under s 237 of the Corporations Act 2001 (Cth) (Act) to bring proceedings on behalf of the Club against the directors to recover consultancy fees paid by the Club without member approval under section 208 of the Act.
The Court identified the following two questions to determine whether an applicant under section 237 of the Act is acting in good faith:
- whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success; and
- whether the applicant is seeking to bring the derivative suit for a collateral purpose (which need not necessarily amount to an abuse of process).
The Court held that Coeur de Lion had failed to establish it was acting in good faith for the following reasons:
- Coeur de Lion did not provide evidence that the rates paid were excessive. Further, it had not previously expressed disagreement with the quantum of the fees (despite being aware that they had been paid for a number of years) and auditors had expressed views as to the appropriateness of the payments in some annual reports;
- Coeur de Lion had not attempted to ascertain whether the amount that was likely to be recoverable was sufficient to merit litigation. The amount recoverable may have been reduced because it was arguable that half the claims may have been statute-barred, the directors may have been entitled to relief under section 1318 of the Act and the consultancy fees may have been permitted without shareholder approval under section 211 of the Act;
- The fact that Coeur de Lion had not asked the directors to justify the payments or to demand repayment before resorting to litigation was significant, particularly given previous correspondence which inferred that Coeur de Lion seemed to have no interest in resolving its claims by means other than litigation; and
- Given the fact that Coeur de Lion’s controller was seeking to take over the Club or spill the board of directors, it was clearly open to conclude that the purpose in bringing the proceedings was more likely to be a tactical move as part of a takeover or control strategy rather than to increase the Club’s assets.
The Court also found that absence of good faith made it unnecessary to consider whether granting leave under section 237 of the Act was in the Club’s best interests.
See the case.