Adams v Meridian Mining Ltd - [2009] WASC 176

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: ADAMS -v- MERIDIAN MINING LTD [2009] WASC 176

CORAM: MASTER SANDERSON

HEARD: 23 JUNE 2008 & 18 MARCH 2009

DELIVERED : 23 JUNE 2009

FILE NO/S: COR 29 of 2008

BETWEEN: HENRY JAMES ADAMS
JULIAN FLETCHER GRILL
Plaintiffs
AND
MERIDIAN MINING LTD (ACN 110 884 789)
Defendant

Catchwords:

Corporations Act 2001 (Cth) - Application to bring action in name of company against directors - Turns on own facts

Legislation:

Corporations Act 2001 (Cth), s 237

Result:

Leave to bring action granted

Category: B

Representation:

Counsel:

Plaintiffs: Mr S Penglis
Defendant: Mr P A Tottle

Solicitors:

Plaintiffs: Freehills
Defendant: Tottle Partners

Case(s) referred to in judgment(s):

Chapman v E‑Sports Club Worldwide Ltd (2000) 35 ACSR 462
Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31
Malacca Nominees Pty Ltd v Morrone (2006) 59 ACSR 539
Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313

MASTER SANDERSON: This is the plaintiffs' application for leave to bring what is generally described as a derivative action. The originating process itself seeks an order in the following terms:
The plaintiffs seek leave to bring proceedings on behalf of the Defendant against the following current and former directors of that company for breach of their directors' duties to the company:
(a)Ron Morellini of 37A Dunkley Avenue Applecross WA 6153;
(b)Clanan Marr of Unit 1/59 Eric Street Como WA 6152; and
(c)Carol McLoughlin of 728 Beach Road Hamersley WA 6022.
(Directors)
…
Although Meridian Mining Ltd (Meridian) is expressed to be the defendant in these proceedings, each of the three persons named in the originating process appeared at the hearing and made submissions. The named defendant took no part in the proceedings. For ease of reference, I will refer to the three persons named in the originating process as the 'directors' throughout these reasons.
There was an array of affidavits filed in support of, and in opposition to, this application. In support of the application, the plaintiffs relied upon three affidavits of the first‑named plaintiff sworn on 18 March 2008, 8 April 2008 and 5 May 2008. They also relied on an affidavit of the second‑named plaintiff sworn 18 March 2008. In addition there were four affidavits of Richard Gordon Lilly relied upon. These were sworn 18 March 2008, 8 April 2008, 20 June 2008 and 19 December 2008.
The directors relied on two affidavits. One was sworn by Owen Robert Davis on 28 April 2008. The other was sworn by Mark Allen MacLennan on 22 April 2008.
At the commencement of the proceedings, a number of objections were raised on behalf of the directors to the affidavits relied upon by the plaintiffs. I dealt with those objections in the course of the hearing. I do not propose to revisit that issue in these reasons. It is sufficient if I say that none of the paragraphs which were struck out or which were left in, despite objection, played any part in the outcome of the application.
There are a number of unusual features of this application to which I should make reference at the outset. On 13 June 2008, the plaintiffs sought leave to issue a subpoena against Mr Morellini. The documents the plaintiffs sought to have produced, were documents referred to in an affidavit of Mr Morellini sworn 20 November 2007 and filed in other proceedings in this court. The matter came on for hearing on 17 June 2008 and I made an order. The effect of this order was that although at first blush it may seem there was a large amount of affidavit evidence, much of the plaintiffs' case was made out by reference to documents produced consequent upon the subpoena and tendered without objection. The effect of this will become plain later in these reasons.
Prior to the hearing of the application, the directors gave notice they wished to cross‑examine the first‑named plaintiff on his affidavits. The plaintiffs took no objection to that course of action and cross‑examination did take place. I will refer to this cross‑examination during these reasons.
The matter itself has had a somewhat tortured history. The originating process was filed on 19 March 2008. It was first returned in chambers on 1 April 2008 at which time programming orders were made. The hearing was estimated to take half a day. It was listed for 23 June 2008 but the time allocated proved to be insufficient and it was adjourned part‑heard. It was relisted on 18 June 2008. Prior to that date, the parties indicated they were discussing settlement and sought to have the matter adjourned until 18 August 2008. That was done. When the matter came back on 18 August 2008, the parties indicated they were still negotiating and they sought to have the matter adjourned sine die. I made that order. Although a settlement was apparently negotiated, it was not carried into effect. The parties then sought to have the matter relisted. While the delay in disposing of the matter might be regrettable, there was no point in forcing the parties to conclude the hearing while negotiations were in progress.
Section 237 of the Corporations Act 2001 (Cth) is in the following terms:
(1)A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.
(2)The Court must grant the application if it is satisfied that:
(a)it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and
(b)the applicant is acting in good faith; and
(c)it is in the best interests of the company that the applicant be granted leave; and
(d)if the applicant is applying for leave to bring proceedings--there is a serious question to be tried; and
(e)either:
(i)at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(ii)it is appropriate to grant leave even though subparagraph (i) is not satisfied.
(3)A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that:
(a)the proceedings are:
(i)by the company against a third party; or
(ii)by a third party against the company; and
(b)the company has decided:
(i)not to bring the proceedings; or
(ii)not to defend the proceedings; or
(iii)to discontinue, settle or compromise the proceedings; and
(c) all of the directors who participated in that decision:
(i)acted in good faith for a proper purpose; and
(ii)did not have a material personal interest in the decision; and
(iii)informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and
(iv)rationally believed that the decision was in the best interests of the company.
The director's belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold.
(4)For the purposes of subsection (3):
(a)a person is a third party if:
(i)the company is a public company and the person is not a related party of the company; or
(ii)the company is not a public company and the person would not be a related party of the company if the company were a public company; and
(b)proceedings by or against the company include any appeal from a decision made in proceedings by or against the company.
As EM Heenan J noted in Malacca Nominees Pty Ltd v Morrone (2006) 59 ACSR 539, there is now a substantial body of jurisprudence which has developed in discussing and analysing this section. Perhaps the most comprehensive discussion of the principles is found in the judgment of Barrett J in Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31. In any event there was no dispute between the parties as to the applicable principles in this case and I need not analyse any of the relevant authorities in detail.
As the case was argued, there was no dispute that the criteria found in subparagraph 2(a) and (e) of s 237(2) was satisfied. That left three remaining questions. First, is the applicant acting in good faith. Second, is it in the best interests of the company that the applicant be granted leave. Third, as the applicant is applying for leave to bring proceedings, is there a serious question to be tried. The directors contended that on all three of these grounds the plaintiffs' application should fail. It was also accepted by both sides that, if the plaintiffs failed in any one of these three criteria, then the application should be dismissed.
It is convenient to deal first with the question of whether there is a serious issue to be tried. It was common ground between the parties that an applicant has to overcome the relatively low threshold to be surmounted on an application for an interlocutory injunction: see Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313. (It is perhaps worthy of note that in this case there was some discussion of the role of cross‑examination in determining whether the criteria have been satisfied: see (318). Palmer J concluded that the parties' rights of cross‑examination should not be restricted in relation to matters relevant to the criteria which are in contest.)
On behalf of the plaintiffs, it was submitted that Meridian had four causes of action which it could bring against the directors. These causes of action were set out in a letter sent by the plaintiffs' solicitor to Mr Martin Bennett of Lavan Legal on 12 July 2007. This letter was produced pursuant to the subpoena and is exhibit 1. The letter was written on the basis that Mr Bennett was acting as solicitor for Mr Morellini. Relevantly, it reads as follows:
We are instructed that Meridian is the registered holder of, inter alia, Mining Leases 70/815, 70/816 and 15/621 (Tenements).
It appears that your client is the sole shareholder of National Uranium Ltd, Prime Holdings Pty Ltd and Superfund Pty Ltd (Morellini Companies).
On our instructions, it appears that your client may have breached his fiduciary and statutory duties to Meridian in at least the following ways:
(a)'vending in' to Meridian the Tenements on the basis that he held them unencumbered, when it appears that he did not do so (in respect of which we refer to claims made by George Lee and Gregory Howlett in their Supreme Court proceedings against inter alia, your client (Action));
(b)diverting to himself (or his related entities) opportunities that ought to have been opportunities of Meridian, namely a claimed 2% 'royalty' with respect to the Tenements arising from a transaction involving Kalgoorlie‑Boulder Mining Pty Ltd and the Morellini Development Trust (Royalty Entitlement), and applications for further exploration licences through National Uranium Ltd on the basis of knowledge and opportunities obtained as a director of Meridian;
(c)causing shares in Meridian to issue to your client or persons or entities related to your client for no (or no proper) consideration, including the ordinary shares issued for 1 cent each as follows:
(1)810,000 to your client;
(2)2,200,000 to Prime Holdings Pty Ltd;
(3)3,800,000 to Superfund Pty Ltd; and
(4)3,000,000 to the Morellini Development Trust; and
(1 Cent Shares);
(d)borrowing money from Meridian to fund his (or his related entities', including the Morellini Companies') acquisition of shares in Meridian.
The letter went on to seek copies of certain documents. It also raised the possibility of action being taken by Meridian against Mr Morellini.
In his submissions, counsel for the plaintiffs dealt first with the question of whether there was a serious question to be tried in relation to allegation (b) made in the letter of 12 July 2007. I will follow that lead. Counsel tendered a document appearing as exhibit 2 which is described as Gross Revenue Return ‑ Royalty Deed. That deed was entered into between Meridian and Kalgoorlie‑Boulder Mining Pty Ltd (Kalgoorlie‑Boulder). The recitals state Meridian has agreed to pay the royalty to Kalgoorlie‑Boulder and the purpose of the deed is to record that agreement. Clause 2.1 is in the following terms:
Meridian must pay to KBM a royalty of 2 percent of the gross sales price of all minerals mined from any tenement.
The document is signed by Mr Morellini and Mr Marr. As counsel pointed out, this is not a contract where consideration passes between both parties. It is a deed. Meridian agrees to pay the royalty to Kalgoorlie‑Boulder but receives nothing in return. There is no obvious reason why Meridian should have entered into this agreement.
Counsel next referred to a document described as Declaration of Trust by Kalgoorlie‑Boulder (the trustee) and Mr Morellini as the trustee of the Morellini Development Trust. That document appears as exhibit 3. The Declaration of Trust was executed two days before the Royalty Deed. Both the Royalty Deed and the Declaration of Trust were stamped at the same time on the same day ‑ 24 April 2006. Mr Morellini signed the Declaration of Trust and it was witnessed by Mr Marr. The effect of the Declaration of Trust is to declare the benefit of Kalgoorlie‑Boulder's interest in the 2% royalty to be held in trust for Mr Morellini's trust. Otherwise the Declaration of Trust is unremarkable. But there appears to be no doubt that Meridian granted a royalty to Kalgoorlie‑Boulder which was immediately effectively passed onto Mr Morellini.
None of the directors have offered any explanation for this transaction.
At the time this transaction was entered into, all three of the directors were directors of Meridian. Mr Morellini was appointed a director on 8 September 2004 and has remained a director ever since. Mr Marr was appointed a director on 8 September 2004 and ceased to be a director on 22 March 2007. (Mr Marr was subsequently reappointed a director but this is not presently relevant.) Ms McLoughlin was a director from 8 September 2004 to 22 March 2007. Presumably then, it was a decision of these directors to have Meridian enter into the Royalty Deed. No affidavit evidence has been lodged to the contrary. That being so, it is at least arguable that in authorising Meridian to enter into that deed the directors breached their fiduciary duties.
I should emphasise that I make no findings on this question. What I have to determine is whether or not there is a serious question to be tried. I am satisfied that there is. At a later date the directors may be able to put forward arguments which establish what they did was perfectly justified in the circumstances. But on the evidence available I am satisfied that the low threshold necessary to bring these proceedings has been achieved.
Having reached that conclusion, I am satisfied that the criteria in s 237(2)(d) has been satisfied. Counsel for the plaintiffs went through evidence which he said discloses there was a serious question to be tried in relation to each of the other three matters referred to in exhibit 1. I do not need to examine that evidence. An order made under s 237(1) is an order for leave to bring 'proceedings'. It is not leave to bring a particular cause of action. By s 241 a general power is given to the court to supervise the conduct of the proceedings. It may be the case that once a statement of claim is lodged, one or other of the pleaded causes of action is so weak and its pursuit will be so costly the court will order it not be pursued. But in my view it would be inappropriate at this stage of the proceedings to attempt to delineate what form the proceedings might take. Once the criteria is satisfied, that is enough.
Then to the question of whether the grant of leave would be in the best interests of the company. Prima facie, it would appear that it would be to the company's benefit if it were to take action in relation to the Royalty Deed. The allegation made by the plaintiffs is that the royalty imposed upon mining tenements held by the company was granted in breach of the directors' fiduciary duties. If that were so, it is possible that the transaction would be unwound, in one way or another, so as to relieve the company of the obligation to pay the royalty. That would mean that if any mining eventuated, the company would achieve a greater return than would otherwise be the case. That must be to the company's benefit.
Against that, it was submitted on behalf of the directors, there was no evidence as to what the proposed action might cost or who was going to pay for it. Further, there was no evidence as to who would manage the litigation. Reference was made to the decision of Mandie J in Chapman v E‑Sports Club Worldwide Ltd (2000) 35 ACSR 462. While that is correct, it is a matter which in my view would not preclude leave being granted. The powers given to the court in s 241 and s 242 of the Corporations Act seem to me to allow both for direction as to how the proceedings are to be conducted and the making of costs orders which will protect the company.
It was further submitted there was no evidence as to how litigation by the company against its directors will affect the company's interests. It can be accepted without evidence that, when a company is suing its own directors, the conduct of the day to day affairs of the company must necessarily be disrupted. Even the most stoic of directors would have to be distracted in his administration of the company's affairs by the idea that he might be consumed by the very company he is managing. But that is a necessary consequence of the grant of leave ‑ it must have been within the contemplation of the legislature when this provision was introduced. If there were evidence of specific circumstances affecting a particular corporation, which could be said to outweigh any benefits that might flow from action being taken by the company against its directors, then doubtless leave could be refused. But in this case there is no such evidence.
Another factor which, it was submitted on behalf of the directors, weighed against a grant of leave, was the fact that no other members of the company supported the application. Counsel did not refer to any authority to support the proposition that a canvassing of the members of the company was a consideration in the grant of leave. In my view, it is not a relevant consideration. It is not referred to in the criteria found in s 273(2) and it does not naturally fit within any of those criteria. Moreover, it may well be the case that the directors against whom the application is brought, control a majority of shares. In that case, the shareholders are unlikely to endorse the derivative action. Perhaps such a consideration might be relevant in certain circumstances but I am not satisfied that it is relevant here.
The directors claimed that as the plaintiffs had not satisfied the court that they (the directors) could meet any judgment, the court could not be satisfied that it was in the best interests of the company to proceed. For their part, the directors put no evidence to establish that if a monetary judgment was awarded against them, they could not meet it. In any event, that is beside the point. As I have indicated above, at least one of the potential causes of action by the company against the directors is to unwind the Royalty Deed the company has entered into. The impecuniosity of the directors is neither here nor there in that cause of action. I am not satisfied any such consideration would preclude leave being granted.
There were two other matters raised by the directors. First, they said that the plaintiffs have other avenues of redress. Second, it was said that to allow the plaintiffs to commence this action in the name of the company, would result in the plaintiffs having a conflict of interest with the company. Both of these arguments really feed into consideration of whether or not the plaintiffs are acting in good faith and for a proper purpose. I will consider them in that context.

I am satisfied on the basis of the evidence available, it is in the best interests of the company that the plaintiffs be granted leave.
That leaves the final question whether or not the plaintiffs are acting in good faith. It was the essential thrust of the directors that they were not. The present plaintiffs have issued proceedings against Mr Morellini. This is action CIV 1026 of 2008 in this court. A copy of the statement of claim in those proceedings appears as annexure MM2 to the affidavit of Mr Mark Alan MacLennan sworn 22 April 2008. Without going through the statement of claim in detail, it is alleged by the plaintiffs that they were encouraged by Mr Morellini to invest in Meridian. It is said that Mr Morellini made certain representations to the plaintiffs. One of those representations was that Meridian held certain mining tenements which were unencumbered. The plaintiffs allege as a consequence of this and other representations, they purchased shares in Meridian. It is alleged that these representations including the representation that the tenements were unencumbered, were false. The plaintiffs claim damages under various statutes and at common law.
A number of points can be made about that action. The action is directed at Mr Morellini personally. Meridian is not a party to those proceedings and a reading of the statement of claim makes it plain that it could have no interest in the conduct of the proceedings other perhaps than to provide relevant documents. It is difficult to see how if leave were granted to bring an action in the name of Meridian, a conflict of interest could arise. The two actions are separate and distinct. Nor does there seem to be anything from the fact that the two actions might be running which could be said to lead to a view that the derivative action is brought for some ulterior purpose. There is simply not a sufficient connection between the two sets of proceedings.
That is not to say that the outcome of the two sets of proceedings will not have an affect one upon the other. As I have indicated, in the proceedings brought by the plaintiffs against Mr Morellini, they seek damages. Presumably, this is the difference between what the shares in Meridian would have been worth had the representations been correct and what they were actually worth. If the derivative action were successful, then certain transactions might be unwound and it is possible damages might be awarded against the directors, those damages being payable to the company. If either or both of these circumstances come to pass, the value of the shares in the company will be higher than they would otherwise be. But all that means is that the damages payable by Mr Morellini to the plaintiffs in the action against him personally, would be reduced. To adopt a colloquialism ‑ this is a zero sum game. It is difficult then to see that the plaintiffs could be accused of playing false or, to adopt the words of the criteria, could be said not to be acting in good faith.
There is one further matter which was the subject of the cross‑examination of the first‑named plaintiff (Mr Adams) and to which I should make reference. It would appear that a company associated with Mr Adams has made application for mining tenements over the same ground as Meridian has applied for. Meridian is first in time and therefore has priority. But if Meridian did not proceed, then Mr Adams' company would more than likely be granted these tenements. As I understand the directors' position, it was suggested that in some way Mr Adams intends to use these derivative proceedings to benefit himself by forcing Meridian to relinquish its applications giving Mr Adams a benefit.
I am not satisfied this is the case at all. It is difficult to see how giving leave to bring derivative proceedings can in any way prejudice Meridian's application for these tenements. I certainly could not conclude on the evidence that Mr Adams was not acting in good faith.
In all the circumstances then I am satisfied that the criteria found in s 237(2) have been satisfied. There should be a grant of leave to bring proceedings. However, it may be appropriate to make orders even at this stage as to how the proceedings are to be conducted, who is to be responsible for costs, and whether or not some form of security for the directors' costs ought be provided. I also have some doubts as to whether all necessary parties will be joined in these proceedings if they are taken only against the directors. For instance, if the Royalty Deed arrangement between Meridian and Kalgoorlie‑Boulder is to be unwound, then it would seem that Kalgoorlie‑Boulder would need to be joined in as a party to the proceedings. On publication of these reasons, I will make orders granting leave but reserving to the parties liberty to apply for directions in relation to the conduct of the proceedings.
The originating process sought an order that the costs of the application be in the cause of the proceedings by the plaintiffs against the directors. I will make that order.