Australia: derivative actions - who bears the costs?

In a report published in 2006 - available here (pdf) - Prof Ian Ramsay and Benjamin Saunders provided an empirical analysis of the statutory derivation action introduced in Australia by Part 2F.1A of the Corporations Act (2001). The authors noted that "[n]either the statutory provisions, nor the approach of the courts, provide any certainty of litigation funding. The analysis of the cases indicates that courts have been cautious in relation to the issue of costs" (p. 38).

Against this background, a Federal Court decision - Wood v Links Golf Tasmania Pty Ltd [2010] FCA 570 - is of particular interest. At issue was whether a company should be required to meet a shareholder's costs in bringing a derivative action under Part 2F.1A of the Corporations Act (2001). The trial judge, Finkelstein J., held that it should and stated that he was unable to see why the approach taken in Sub Rosa Holdings Pty Ltd v Salsa Sudada Production Pty Ltd [2006] NSWSC 916 - in which, at [49], it was stated that it was "common place for a person given permission to pursue a claim on behalf of a company to be required, in the first instance, to bear the burden of costs" - had been adopted. Finkelstein J. observed (paras. [9] - [11]):

The purpose of permitting a person to bring an action in the name of the company is to prevent conduct which involves some element of harm. In most cases the wrongdoer will be in control of the company. That will be the reason the company itself is not bringing the action. The purpose of the exceptions outlined in Foss v Harbottle [1843] ER 478, as well as the purpose of Part 2F.1A, is to increase the likelihood that someone brings a claim which the company ought to have commenced. In those circumstances, I can think of no good reason why the company should not bear the costs. Put another way, the principle adopted by Marks J [under the old law, in Farrow v Registrar of Building Societies [1991] 2 VR 589: if the shareholder's action “is bona fide to protect the [company] and the [company] will receive the benefit of success, there is no good reason why the expenses should be met out of the private resources of [the] shareholders”] should continue to apply under the statute.

This is not to suggest that a costs order will be made in all cases ... If a costs order is made and at any later time it turns out the claim is unmeritorious, the costs order can be recalled".