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Can a Company Director Take Legal Action Against Another Director?

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As a company director, you have a legal obligation to act in the best interests of the company and to use your powers in good faith. Suppose another director is breaching their directors’ duties under the Corporations Act. In this instance, you may apply for an injunction from the Court to protect the company by preventing or enforcing certain actions on the other director. Alternatively, it may be more appropriate for the company itself to commence legal proceedings and sue the other director through derivative action. In this article, we will discuss: 

  1. injunctive actions by a director; and 
  2. derivative action by a company commenced by a shareholder.
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1. Injunctive Action Against A Director

If you suspect or have genuine reason to believe that a director has or is about to breach their duties, you may take pre-emptive action by seeking an injunction. An injunction is a court order that prevents or forces someone to take certain actions. Typically, you would apply for an injunction when the actual or potential misconduct is likely to cause loss for the Company and other shareholders like yourself.

Types of Injunctions

You might apply to the Court for the following types of relief:

Type of ReliefExplanation
Prohibitory InjunctionAn order to prevent improper actions from taking place. This could be to: 
+ prevent the guilty director from transferring Company funds;
+ transacting to sell assets; 
+ issuing shares; or 
+ incurring additional debts/liabilities.
Prescriptive InjunctionAn order to require certain actions to happen. This might be to force the guilty director to:
+ return assets or funds; 
+ repay debts; 
+ disclose documents; or 
+ grant access to financial records.

An application for an injunction can be made urgently and without the other director’s knowledge if warning them about the application might trigger the issues you seek to avoid. You must then bring this injunction, known as an interim preservation order, to the attention of the other director. These injunctions are usually temporary until a further Court hearing.

Applying for an Injunction

For a Court to grant an injunction, you will need to prove that:

  1. there is a serious legal question that the Court needs to determine at a trial; and
  2. you have a decent legal case based on the evidence at hand.

Other factors a Court might consider are:

  • whether the injunction is justified considering its impact on all parties involved;
  • the nature of the issues or property in dispute;
  • whether the innocent director or the Company will suffer permanent harm if nothing is done or whether financial compensation would be sufficient;
  • if the guilty director would be able to compensate the innocent director or the Company;
  • whether any delays in the injunction application will unfairly prejudice the guilty director in any way;
  • if the injunctive relief would materially alter the current circumstances or simply maintain the status quo; and
  • if the innocent director can compensate the guilty director for any financial loss they incur as a result of the injunction if the injunction is ultimately unsuccessful in Court.

You should note that an injunction cannot determine final legal issues. An injunction allows parties in a legal dispute to determine such issues at a later stage.

2. Derivative Action By the Company Against a Director

In addition to seeking injunctive relief, you may be able to apply to the Court to have the company commence legal proceedings against the other director. This is known as derivative action and is similar to the rights that shareholders have in circumstances when the other director is unlikely to sue themselves.

Regardless of whether you are currently or previously a director, you can seek derivative action when the company suffers loss as a result of the other director’s actions. The types of actions that are likely to lead to company loss are:

  • improper management of the company’s affairs and governance of business risk;
  • misappropriation of the company’s assets or funds;
  • sharing confidential information with another competing company; and
  • the sale or purchase of assets that are not in the company’s best interest.

How Can Companies Apply for Derivative Action?

You will need the Court’s permission to bring derivative action on behalf of the company. To do this, they must show the Court that:

  1. the company is unlikely to commence proceedings itself because of the other director’s involvement;
  2. you are acting in good faith;
  3. it is in the Company’s best interest to commence the proceedings; and
  4. there is a serious legal question to be determined that requires a proper trial to determine any relief owed to the Company.

You must also write to the company to notify your intentions to apply for derivative action. This must be done at least 14 days ahead of the application unless there are extenuating circumstances justifying a more urgent application.

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What is the Cost of Derivative Actions?

The Courts have discretion regarding who should bear the costs of derivative action. For instance, a Court might decide that:

  • the company should cover your costs of bringing the derivative action due;
  • you must fund and cover the company’s costs of the proceedings; or
  • you will be liable for covering the costs of the other director if the derivative action is ultimately unsuccessful.

Ultimately, the Court’s decision regarding costs will differ based on:

  • the material circumstances of the case; and 
  • whether it is in the best interest of the Company. 

To do this, the Court might consider the inherent risk or potential losses for the Company if the derivative action is unsuccessful. On that note, you should seek legal advice before commencing legal action against another director. 

Key Takeaways

As a company director, you may take legal action against other directors who are guilty of breaching their directors’ duties under the Corporations Act. In order to prevent or rectify losses to the company, you may: 

  • apply for an injunction to ensure the serious legal issue regarding the other director’s  breach can be resolved at trial at a later date; or
  • if the company has already suffered losses because of the other director’s actions, you may pursue derivative action. 

If you have any questions about taking legal action against another director who has breached their director duties, our experienced disputes lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

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