Australia: Liquidation and the Statutory Derivative Action

In Chahwan v Euphoric Pty Ltd trading as Clay & Michel [2008] NSWCA 52 (8 April 2008) the New South Wales Court of Appeal considered whether the Australian statutory derivative action (Part 2F.1A of the Corporations Act (2001)) should be available where a company is in liquidation. The court unanimously held that it should not be available, thereby taking a different position from several first instance decisions in New South Wales and Victoria (see, e.g., Brightwell v Rfb Holdings [2003] NSWSC 7 and Freshstart Australia Pty Ltd v Lofthouse [2006] VSC 317). Tobias JA (with whom Beazley JA and Bell JA agreed) observed (para. [124]):

"...the context as well as the extrinsic materials identifying the mischief which Pt 2F.1A was intended to remedy, namely, the restrictions relating to the exceptions to the rule in Foss v Harbottle, are indicative of an intention that the statutory derivative action was intended to apply only to a company as a going concern and not one under the control of a liquidator. This is because the rule in Foss v Harbottle and its exceptions did not apply and were irrelevant to a company in liquidation".

A few days later, in Ragless v IPA Holdings Pty Ltd (in liq) [2008] SASC 90 (PDF version), the Supreme Court of South Australia (Full Court) touched upon this question but did not (in its opinion) need to provide an answer because an alternative route was found to permit a creditor to bring a legal action on behalf of a company in liquidation. Debelle J. observed (at para. [44]):

"When a company is in liquidation, the liquidator is, as a general rule, the person in whom is vested the authority to bring legal proceedings on behalf of the company ... However, the court has an inherent power to authorise a creditor or contributor to sue in the name of the company. As McLelland J noted in Aliprandi v Griffith Vintners Pty Ltd (in liq) (1991) 6 ACSR 250 at 252 the procedure is of respectful antiquity and is sanctioned by high authority ... Section 236(3) [which states "The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished"] abolishes only the right to bring derivative proceedings. Nothing in the Explanatory Memorandum to the Bill suggests an intention to remove or qualify the court’s inherent jurisdiction".

[For discussion of Foss v Harbottle, click here (the case can be read here). The UK Companies Act (2006) introduced a statutory derivative action: see Part 11].