Whilst manoeuvring through separation or divorce, it is not uncommon for issues relating to a company run by co-directors to also become involved in a family law dispute regarding the operation of the company and/or the monies received from it.

Many directors, shareholders, and other company officers—whether involved in a family law dispute or not—are often unaware that when a dispute arises between directors and/or shareholders of the same company, they have legal standing to take action on behalf of the company by commencing a derivative action.

A derivative action may be required in family law proceedings when a spouse or third party (as a shareholder/director) needs to protect corporate assets from being depleted by the other spouse, and the company itself will not take action against that wrongdoing.

A derivative action is generally an action brought by the company against a director for a breach of duty. Where a company cannot or does not bring that action, the Court allows members to bring the action on behalf of the company.

This type of action is common when a company or business forms part of matrimonial assets but is controlled by one party who refuses to act in the best interests of the company.

A derivative action enables a person—typically a shareholder or officer—to bring legal proceedings in the name of the company. This is unique, as it allows litigation on behalf of the corporation even though the right to initiate proceedings ordinarily rests with the board of directors. Any benefit from the litigation accrues to the corporation, not the individual bringing the action.

The right to bring a derivative action is available to a director of a company, who may pursue such action by establishing the necessary factors to act on behalf of the company.

Alternatively, where shareholders have been oppressed by the conduct of directors, they also have the right to bring an action on behalf of the company.

Both avenues are common in family law situations where one of the parties is also a director or shareholder of the former family company.

What are Some of the Scenarios Where a Derivative Action May Be Suitable?

Some scenarios that may indicate the need to bring a derivative action include:

• Using the position as director to gain an advantage, whether for personal benefit or for the advantage of someone else.
• Failing to avoid/manage conflicts of interest where personal goals conflict with the best interests of the company.
• Preventing and/or excluding a minority shareholder from involvement in the company or its dealings.
• Using information obtained in the course of a director’s role for personal benefit to the detriment of the Company.
• Manipulating the company board by appointing additional directors or issuing shares to others or the majority.
• Directors diverting corporate opportunities in pursuit of personal profits.
• Excluding a minority shareholder from involvement with the company or its dealings.
• Denying a shareholder the right to remain informed about company affairs.

What Are The Key Factors Considered by Court?

When seeking a derivative action, courts primarily consider whether the lawsuit is in the company’s best interests, whether the applicant is acting in good faith, and whether there is a serious question to be tried.

The party seeking the derivative action must also demonstrate that the company itself is unlikely to bring the proceedings. Additional factors the Court may consider include:

• Whether the action is in the best interests of the company and benefits the company rather than just the individual.
• Whether the applying party is acting in good faith, honestly and for the purpose of protecting the company.
• Whether there is a serious question to be tried with a legitimate and arguable case.
• Evidence showing the likelihood of company action, particularly that the company is unlikely to initiate proceedings itself.
• Whether there are other alternative remedies available.
• Whether the costs of litigation are a prudent use of company resources.
  
  

These actions are typically governed by statutory provisions (e.g., s 237 of the Corporations Act 2001 in Australia), which aim to prevent frivolous or purely personal claims.

How can we help?

if you are having a dispute with a business partner or shareholder and require assistance, contact Dane Thornburgh at dane@danethornburgh.com.au to see if we can assist.

Dane Thornburgh is a Senior Associate at Quinn Law Group, contributing over 23 years of substantial legal expertise as a Solicitor and previously as a Barrister.

His distinguished career spans family law and commercial litigation, complemented by a strong background in several related practice areas.

This blending of advocacy and legal knowledge provides clients with significantly lower legal costs, effectively combining a seasoned advocate and an experienced Solicitor in the one practitioner.

Dane commenced his legal career in 2003 as a Solicitor with the Brisbane-based firm Bennett & Philp.

In 2005, he was called to the Bar as a Barrister-at-Law, establishing himself as a respected advocate.

Dane previously held Barristers’ Chambers at the renowned Culwulla Chambers, a prestigious family law set on Castlereagh Street, Sydney.

Dane continues his Family Law practice as a solicitor to this day, including appearing in complex financial and parenting disputes before the Family Court and representing high-profile celebrities, sporting identities, and members of the public.