Statutory Derivative Actions: An Overview & Practical Insights

15 September 2025 in Business Law | 10 min read | skip to FAQs

This article explains statutory derivative actions, as well as the scope and operation of key relevant sections under the Act and relevant case law. Statutory derivative actions are contained in Part 2F.1A of the Corporations Act 2001 (Cth) (the “Act“) and provide an essential mechanism to address corporate mismanagement and ensure accountability. Central to this framework are sections 236 and 237 of the Act, which outline the circumstances and requirements under which current or former members, officers or directors of a company may bring proceedings on behalf of the company.

Understanding Statutory Derivative Actions

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

The statutory derivative action serves as a critical mechanism for addressing managerial misconduct or negligence, such as breach of directors’ duties under sections 180-184 of the Act, and when the company’s board fails or refuses to act. At the heart of derivative actions, there is a delicate balance between empowering members and officers of the company to act as corporate watchdogs and preserving the board’s power to make corporate decisions, as enshrined in the business judgement rules, set out in section 180(2) of the Act. 

The rules recognise that decisions of a company, including decisions to initiate any legal proceedings, should rest in the hands of the board of directors, if such decision is made in the best interests of the company and for a proper purpose.

Therefore, for any eligible applicant to bring a derivative action against wrongdoers on behalf of a company, the requirements under Part 2F.1A of the Act are to be met to ensure that there is no undue judicial interference with the directors’ management of the company.

Key Provisions in Part 2F.1A of the Corporations Act

Section 236: Right to Bring or Intervene in Proceedings

Section 236(1) permits a member or officer to:

1. Bring proceedings on behalf of a company; or
2. Intervene in existing proceedings involving the company.

This right is contingent on the eligible applicant acting with the leave of the court granted under section 237 of the Act and bringing the proceedings on behalf of the company and in the company’s name (see section 236(2) of the Act).

Leave of the Court: Key Requirements Under Section 237

Section 236(1)(a) of the Act permits statutory derivative actions to be initiated by a certain group of applicants, such as members (shareholders), former members, an officer or former office of the company, but critically, 236(1)(b) requires that the person initiating the proceedings on behalf of the company must first obtain the leave of the Court under section 237 of the Act.

Before commencing a statutory derivative action, the applicant is required by section 237(2) to satisfy to the Court of the following elements:

1. it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; (Section 237(2)(a))
2. the applicant is acting in good faith; (Section 237(2)(b))
3. it is in the best interests of the company that the applicant be granted leave; (Section 237(2)(c))
4. if the applicant is applying for leave to bring proceedings – there is a serious question to be tried; (Section 237(2)(d))
5. either the applicant served written notice to the company 14 days prior to making the application of the intention to apply for leave and of the reasons for applying, or the applicant established that it is appropriate for the Court to grant leave without a written notice. (Section 237(2)(e))

Onus of proof

For the applicant to obtain leave under the Act, the applicant bears the onus of establishing the five matters specified in section 237(2) above to the Court’s satisfaction on the balance of probabilities. (see Swansson v R Pratt Properties Pty Ltd [2002] 42 ACSR 313; [2002] NSWSC 583, at [26] per Palmer J; Huang v Wang [2016] 114 ACSR 586; [2016] NSWCA 164 at [57].)

1. Probable Inaction by the Company (Section 237(2)(a))

The first element of section 237(2)(a) requires that the Court be satisfied it is probable that the company will not, itself, bring the proceedings, absent the grant of leave. This often arises in situations where the directors of the company, who may be involved in the alleged wrongdoing, are unwilling to pursue legal action against the company. In such cases, the company’s management may have a vested interest in not initiating proceedings, thus leaving shareholders or other eligible stakeholders to seek leave for a derivative action.

For example, In the matter of Winifred Avenue Pty Ltd [2023] NSWSC 1226, the Court recognised that the company was unlikely to bring the action due to the defendant, Mr Fox, being the company’s director and shareholder, which underscored the need for external intervention. The Court recognises that in such cases the company’s decision-making process may be biased or compromised, making it improbable that the company will initiate proceedings without the Court’s leave being granted.

2. Proceedings Brought in Good Faith (Section 237(2)(b))

Section 237(2)(b) requires that the applicant act in good faith when seeking leave to bring the derivative action. The Court will assess whether the applicant is pursuing the action for legitimate reasons and whether the applicant genuinely believes that there is a valid cause of action with a reasonable prospect of success.

In determining whether the above requirement is satisfied, Palmer J in the leading case of Swansson v R Pratt Properties Pty Ltd [2002] 42 ACSR 313; [2002] NSWSC 583 (“Swansson”) provides that the Court will consider at least the following two interrelated factors:

[36] … The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success… The second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process.

It is worth noting that in Swansson, Palmer J explained that good faith is generally easy to demonstrate when the applicant is a current shareholder of a company who has more than a token shareholding, or a current director of the company concerned about the company’s welfare. Palmer J specifically states that:

[38] Where the application is made by a current shareholder of a company who has more than a token shareholding and the derivative action seeks recovery of property so that the value of the applicant’s shares would be increased, good faith will be relatively easy for the applicant to demonstrate to the Court’s satisfaction. So also where the applicant is a current director or officer: it will generally be easy to show that such an applicant has a legitimate interest in the welfare and good management of the company itself, warranting action to recover property or to ensure that the majority of the shareholders or of the board do not act unlawfully to the detriment of the company as a whole...

3. Best Interests of the Company (Section 237(2)(c))

The third requirement under section 237(2)(c) stipulates that the Court must be satisfied that it is in the best interests of the company to grant leave. This condition ensures that the derivative actions are necessary and beneficial for the company as a whole. Courts will examine several factors to determine whether the action serves the company’s interests, such as the nature of the company to ascertain the effects of proceeding on the company and its operation, any other alternative means to obtain the same redress, the likelihood that the company will benefit from the outcome of the litigation and the ability of the defendant to meet at least a substantial part of any judgment awarded in favour of the company.

Specifically, in order to prove that the leave is in the company’s best interests, Palmer J in Swansson provides that an applicant generally should give evidence of the following:

[57] First, there should be evidence as to the character of the company: different considerations may well apply depending on whether the company is a small, private company whose few shareholders are the members of a family or whether it is a large public listed company…

[58] Second, there should be evidence of the business, if any, of the company so that the effects of the proposed litigation on its proper conduct may be appreciated.

[59] Third, there should be evidence enabling the Court to form a conclusion whether the substance of the redress which the applicant seeks to achieve is available by a means which does not require the company to be brought into litigation against its will…

[60] Fourth, there should be evidence as to the ability of the defendant to meet at least a substantial part of any judgment in favour of the company in the proposed derivative action so that the Court may ascertain whether the action would be of any practical benefit to the company.

Based on Palmer J, whether the substance of the redress which the applicant seeks to achieve is available by a means which does not require the Company to be brought into litigation is a critical factor for the Court to consider. For instance, in the matter of Swansson, the Court declined the grant for leave on the basis that Ms Swansson would be entitled to pursue a Family Court order under s87(8)(a) of the Family Law Act 1975 (Cth) and the Family Court would be far better placed to do substantial justice than would the Court in a derivative action.

Another important factor to consider is whether the defendant has sufficient assets, at least at present, to meet such an indemnity. In the event that the defendant does not have capacity to meet a judgement against him or her, bringing the proceedings would deprive the proceedings of practical utility.

4. Serious Question to Be Tried (Section 237(2)(d))

Under section 237(2)(d), the applicant must demonstrate that there is a serious question to be tried – that is whether the applicant is able to identify the legal or equitable rights to be determined at trial in respect of which the final relief is sought, and that the applicant must be able to show a sufficient likelihood of success to justify the grant of the leave or merely that there is a real question to be tried that is not frivolous or vexatious. (Swansson v R Pratt Properties Pty Ltd [2002] 42 ACSR 313; [2002] NSWSC 583 at [25]).

The threshold for this requirement is relatively low, as would apply in the case of an interlocutory injunction. As noted in Swansson, Palmer J stated that the Court need only determine whether the issue is serious enough to justify judicial consideration. While the applicant must present sufficient evidence to show that there is a plausible case to be heard, the Court is not required to resolve any questions of fact in dispute in granting the leave.

5. Notice to the Company (Section 237(2)(e))

Section 237(2)(e) requires that the applicant provide written notice to the company, via the company’s directors, of their intention to apply for leave and the reasons for doing so. This notice provides the company with an opportunity to respond to the application before the Court makes its decision. However, the Court may grant leave without this notice if it deems it inappropriate in the circumstances.

Consideration of Costs

An important factor in the Court’s determination to grant leave is the issue of costs. In Winifred Avenue Pty Ltd [2023] NSWSC 1226, for example, the applicant provided a personal undertaking to the Court that he would be responsible for costs of the proceedings, including costs of conducting the proceedings, any cost order against the company and security for costs that may be ordered against the company.

The Court considered the applicant’s willingness to bear the cost of the proceeding in favour of granting leave for the applicant to initiate proceeding on behalf of the company, considering that it is less burdensome for the company to initiate proceeding when the aggrieved party is willing to indemnify the company against any adverse cost order that the company may incur in the proceeding.

Section 239: Ratification of Misconduct

Section 239 establishes that ratification of the alleged misconduct by directors does not automatically bar the initiation of statutory derivative proceedings, nor prevent leave to be brought under section 237 of the Act. This provision effectively ensures that the board or any wrongdoers cannot shield themselves from accountability through internal resolutions.

Section 240: Court Permission to Settle

Section 240 provides that the court’s approval is required to settle or discontinue statutory derivative actions that are brought with leave under section 237 of the Act. This provision safeguards derivative actions and ensures that the company’s interests remain paramount and are not compromised by any settlement.

Sections 241 and 242: Power of the Court

Section 241 gives the court general power to make orders in relation to statutory derivative actions. Specifically, section 241(1) empowers the court to make orders appointing an independent investigator to examine matters in relation to the proceedings, including financial matters, circumstances that gave rise to the cause of action concerning the proceedings and the costs incurred in the proceedings.

Further to the above, section 242 importantly grants the court a broad power to make any order as to costs in relation to statutory derivative actions brought with leave under section 237.

Key Takeaways

Statutory derivative actions play an essential role in the Australian corporate landscape, providing a mechanism for members or officers of a company to bring claims against wrongdoers, such as directors and officers for breach of their duties, in protection of the company’s best interests as a whole. By codifying the process mainly under sections 236 and 237 of the Corporations Act 2001 (Cth), the legislature has created a structured framework to empower members and officers of a company to act as corporate watchdogs against managerial misconduct while safeguarding undue judicial interference of business decisions.

How can BSM Sydney Lawyers assist you?

Brander Smith McKnight’s business lawyers have decades of experience in commercial and corporate law and are able to provide strategic advice on pursuing or defending statutory derivative actions. BSM law firm Sydney provides high level and precise corporate legal advice without the price tag of a large city firm. We provide a highly responsive and personalised legal service to our clients. BSM’s Sydney lawyers will ensure that your legal and commercial interests are protected. For tailored advice or further insights into statutory derivative actions, contact our senior business lawyers for a free 20-minute consultation.

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