Advent Investors Pty Ltd v Goldhirsch
[2001] VSC 59
•8 March 2001
| SUPREME COURT OF VICTORIA | |
| COMMERCIAL AND EQUITY CORPORATIONS LIST | Not Restricted |
No. 6615 of 1999
| ADVENT INVESTORS PTY LTD AND OTHERS | Plaintiffs |
| v | |
| MICHAEL GOLDHIRSCH AND OTHERS | Defendants |
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JUDGE: | Warren J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 28 February 2001 | |
DATE OF JUDGMENT: | 8 March 2001 | |
CASE MAY BE CITED AS: | Advent Investors Pty Ltd and Ors v Goldhirsch and Ors | |
MEDIUM NEUTRAL CITATION: | [2001] VSC 59 | |
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Corporations Law, ss.236, 1472, CLERP amendments – existing proceedings –
Derivative proceedings – rule in Foss v Harbottle – abolition of common law proceedings.
Statutory Interpretation – whether amendment retrospective or prospective.
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APPEARANCES: | Counsel | Solicitors |
For the Plaintiffs | Mr A. Rodbard‑Bean | Abbott Stillman & Wilson |
| For the First to Fourth Defendants | Mr J.I. Fajgenbaum QC with Mr G. Bloch | Wise Gershov & Co |
| For the Fifth to Sixth Defendants | No appearance |
HER HONOUR:
The plaintiffs' appeal against orders by the Master staying part of their claim.
In summary, the plaintiffs were investors in two mining companies, Eromanga Hydrocarbons NL ("Eromanga") and Bisan Limited ("Bisan"). The first to fourth defendants were directors of Eromanga and Bisan and they are referred to hereafter as "the directors". The plaintiffs claim that the directors conducted Eromanga and Bisan such as to breach directors' duties owed at common law and under the Corporations Law and fiduciary duties and, further, that the directors misappropriated the assets of those companies. In part, on behalf of the companies the plaintiffs seek relief including equitable compensation, damages and restoration of assets and moneys.
The proceeding has had a chequered jurisdictional and interlocutory history. The plaintiffs commenced the proceedings on 22 December 1997 in the Supreme Court of South Australia. The proceedings were transferred under cross‑vesting legislation to the Federal court. Subsequently, as a consequence of the judgment of the High Court in Re Wakim[1] the Federal Court ceased to have jurisdiction to determine the matter. The proceeding came to be admitted to the Corporations List of this court on 8 October 1999.
[1](1999) 198 CLR 511.
The defendants filed an interlocutory application to stay the plaintiffs' claim, alternatively strike out the statement of claim. Various directions and orders were made in the proceeding including an order by me referring the defendants' summons to a master. It transpired that for various reasons the interlocutory application by the defendants did not come on for some time. During that period an amendment of some significance for present purposes was made to the Corporations Law. I will address the amendment in detail shortly. In any event, on 28 November 2000 the master ordered that the proceeding be stayed insofar as the plaintiffs claimed relief on behalf of Eromanga and Bisan. The appeal is made against that order.
As the proceeding is one in the Corporations List and raises matters under the Corporations Law it was referred, in part, to the master pursuant to Order 16 of Chapter V of the Rules. Since the orders were made by the master Order 16 of the Rules was amended to require leave to appeal to be obtained. Insofar as it is necessary to do so, I was satisfied that this was a matter in which the plaintiffs' appeal was at least arguable and that it was appropriate to grant leave to appeal. Further, it was conceded on behalf of the directors that this was the case and, hence, leave to appeal was not opposed.
I turn to consider the claim of the plaintiffs against the directors.
The further amended statement of claim
The plaintiffs, Advent Investors Pty Ltd ("Advent"), Noble Investments Pty Ltd ("Noble") and Enterprise Holdings Pty Ltd ("Enterprise") are companies incorporated in South Australia. The directors Michael Goldhirsch, Robert Fixler, Henry Hyman Sharp and Stephen Schnider are company directors of Eromanga, a publicly listed company incorporated in New South Wales. Its principal business activity is that of resource exploration and investment in Australia and resource exploration in the USA. The directors are also directors of Bisan and it is also a publicly listed company incorporated in Victoria with a principal business activity of investment, finance and engineering research.
Advent, Noble and Enterprise hold fully paid and partly paid shares in Eromanga. Advent and Noble also hold fully paid shares in Bisan. Each of the directors also held shares in either or both Eromanga and Bisan. Broadly, the plaintiffs allege that the directors failed to cause Eromanga to carry out its principal business activity of mining and exploration and had caused Eromanga to record successive operating losses. The plaintiffs claim that the directors failed to perform their duties with care, skill and diligence, contrary to s.232(4) of the Corporations Law and the duty of care owed by directors of a company at common law.
The plaintiffs claim relief against the directors and Eromanga and Bisan on a number of grounds under the Corporations Law. A series of allegations are made against the directors, in their capacity as directors of both Eromanga and Bisan. The plaintiffs claim that a number of decisions were made by the directors which involved conferring a financial benefit upon the first defendant, Michael Goldhirsch, contrary to s.243H of the Corporations Law, of which the second to fourth defendants were knowingly concerned, in contravention of s.243ZE(3) of the Corporations Law.
It is alleged that in March 1992, the directors entered into a lease in respect of premises in Melbourne in order to confer a financial benefit upon Goldhirsch, in his capacity as lessor of those premises. It is claimed that the terms were more favourable to Goldhirsch than Eromanga would otherwise have negotiated and that by voting and passing the resolution in favour of the lease, it is alleged that each of the directors were in breach of their duties.
During the financial year of 1993/94, the directors, in their capacity as directors of Bisan, entered into an agreement with Eromanga whereby Eromanga was to provide management services and for which Bisan would pay an annual fee. It is alleged that by virtue of this agreement, Bisan conferred a financial benefit upon Goldhirsch.
During the 1994/95 and 1995/96 financial years, it is further claimed that the directors resolved that the firm Goldhirsch & Fixler, the partners of which are Goldhirsch & Fixler be retained to provide legal services to Eromanga. The fourth defendant, Schnider, was an associate employed by the firm Goldhirsch & Fixler. It was further alleged that the fees charged for the legal services provided by the firm were excessive, and that, again, the directors acted so as to confer a financial benefit upon Goldhirsch.
The plaintiffs further allege that the affairs of Eromanga are or have been conducted in a manner that is oppressive, unfairly prejudicial and unfairly discriminatory against the applicants as members of Eromanga and other minority shareholders in Eromanga as well as in a manner that is contrary to the interests of the members of Eromanga as a whole. They claim relief under s.246AA of the Corporations Law.
The plaintiffs claim that the directors of Eromanga caused a prospectus to be issued in relation to the proposed issue of shares in Eromanga that was deficient in that it contained material misstatements that were likely to mislead shareholders in Eromanga. It is alleged that the directors acted in breach of ss.995 and 996of the Corporations Law. Nevertheless, the proposed issue of shares by Eromanga proceeded in accordance with the terms of the prospectus.
If is further alleged by the plaintiffs that the directors purported to ratify their prior unlawful conduct by convening an extraordinary general meeting. It is claimed that the Notice of the meeting was defective and invalid and that the resolutions purportedly passed at the meeting were of no force and effect. As such, it is claimed that there was no approval given by the members of Eromanga for the financial benefits allegedly given by Eromanga to the related parties. Nor was there any approval given by the members of Bisan.
The plaintiffs claim that the directors are liable to pay equitable and/or general damages to Eromanga for the loss and damage suffered by Eromanga and Bisan as a result of the alleged breaches of the directors. Inter alia, the applicants also seek declarations that the directors contravened the Corporations Law.
The amendments to the Corporations Law.
The directors applied to stay or strike out all or parts of the statement of claim initially on 3 December 1998 when the proceedings were before the Federal Court. Amendments were made to the statement of claim during the ensuing period culminating in the further amended statement of claim filed in this court on 3 November 1999. Subsequently, on 13 March 2000 amendments to the Corporations Law came into force. The amendments were made to the Law by the Corporate Law Economic Review Program Act 1999 generally referred to as "CLERP".
Prior to the amendments, as the Law stood, aggrieved shareholders could not bring a derivative action on behalf of a company unless it fell within one of the exceptions to the rule in Foss v Harbottle[2]. The rule, it is to be recalled, was that the company itself was the proper plaintiff in respect of any wrong done to it. The exceptions to the rule, it is to be further recalled, were articulated in Russell v Wakefield Waterworks Co[3] and conveniently restated in Edwards v Halliwell[4].
[2](1843) 2 Hare 461; 67 ER 189.
[3](1875) 20 LR Eq. 474, 482.
[4][1950] 2 All ER 1064, 1066-9.
The gravamen of the exceptions was that the general meeting of a company cannot condone a wrong to that company by ordinary resolution. Hence, where actions were beyond power or unconstitutional, or where an individual right of a member was infringed and condonation of the infringement by a general meeting would constitute a fraud on the company[5] such circumstances constitute the exception.
[5]Ford's Principles of Corporations Law (9th ed.), Ford H.A.J., Austin, R.P., Ramsay, I.M., pp.516-517.
Section 236 of the Corporations Law as inserted by CLERP abolished the common law right to bring proceedings on behalf of a company. Part 2F.1A of the Law, including s.236, provides:
"Part 2F.1A – PROCEEDINGS ON BEHALF OF A COMPANY BY
MEMBERS AND OTHERSSECT 236 Bringing, or intervening in, proceedings on behalf of a
company236(1) A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if:
(a) the person is:
(i)a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or
(ii) an officer or former officer of the company; and
(b) the person is acting with leave granted under section 237.
(2) Proceedings brought on behalf of a company must be brought in the company's name.
(3) The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.
Note 1: For the right to inspect company books, see subsections 247A(3) to (6).Note 2: For the requirements to disclose proceedings and leave applications in the annual directors' report, see subsections 300(14) and (15).
Note 3: This section does not prevent a person bringing, or intervening in, proceedings on their own behalf in respect of a personal right.SECT 237 Applying for and granting leave
237(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.
Note:'Related party' is defined in section 228.
SECT 238 Substitution of another person for the person granted leave
238(1) Any of the following persons may apply to the Court for an order that they be substituted for a person to whom leave has been granted under section 237.
(a)a member, former member, or a person entitled to be registered as a member, of the company or of a related body corporate.
(b)an officer, or former officer, of the company.
(2)The Court may make the order if it is satisfied that:
(a)the applicant is acting in good faith; and
(b)it is appropriate to make the order in all the circumstances.
(3)An order substituting one person for another has the effect that:
(a)the grant of leave is taken to have been made in favour of the substituted person; and
(b)if the other person has already brought the proceedings or intervened – the substituted person is taken to have brought those proceedings or to have made that intervention.
SECT 239 Effect of ratification by members
239(1)If the members of a company ratify or approve conduct, the ratification or approval:
(a)does not prevent a person from bringing or intervening in proceedings with leave under section 237 or from applying for leave under that section; and
(b)does not have the effect that proceedings brought or intervened in with leave under section 237 must be determined in favour of the defendant, or that an application for leave under that section must be refused.
(2)If members of a company ratify or approve conduct, the Court may take the ratification or approval into account in deciding what order or judgment (including as to damages) to make in proceedings brought or intervened in with leave under section 237 or in relation to an application for leave under that section. In doing this, it must have regard to:
(a)how well-informed about the conduct the members were when deciding whether to ratify or approve the conduct; and
(b)whether the members who ratified or approved the conduct were acting for proper purposes.
SECT 240Leave to discontinue, compromise or settle proceedings brought, or intervened in, with leave
240Proceedings brought or intervened in with leave must not be discontinued, compromised or settled without the leave of the Court.
SECT 241General powers of the Court
241(1)The Court may make any orders, and give any directions, that it considers appropriate in relation to proceedings brought or intervened in with leave, or an application for leave, including:
(a)interim orders; and
(b)directions about the conduct of the proceedings, including requiring mediation; and
(c)an order directing the company, or an officer of the company, to do, or not to do, any act; and
(d)an order appointing an independent person to investigate, and report to the Court on:
(i)the financial affairs of the company; or
(ii)the facts or circumstances which gave rise tot he cause of action the subject of the proceedings; or
(iii)the costs incurred in the proceedings by the parties to the proceedings and the person granted leave.
(2)A person appointed by the Court under paragraph (1)(d) is entitled, on giving reasonable notice to the company, to inspect any books of the company for any purpose connected with their appointment.
(3)If the Court appoints a person under paragraph (1)(d):
(a)the Court must also make an order stating who is liable for the remuneration and expenses of the person appointed; and
(b)the Court may vary the order at any time; and
(c)the persons who may be made liable under the order, or the order as varied, are:
(i)all or any of the parties to the proceedings or application; and
(ii)the company; and
(d)if the order, or the order as varied, makes 2 or more persons liable, the order may also determine the nature and extent of the liability of each of those persons.
(4)Subsection (3) does not affect the powers of the Court as to costs.
SECT 242Power of the Court to make costs orders
242The Court may at any time make any orders it considers appropriate about the costs of the following persons in relation to proceedings brought or intervened in with leave under section 237 or an application for leave under that section:
(a)the person who applied for or was granted leave
(b)the company
(c)any other party to the proceedings or application.
An order under this section may require indemnification for costs."
As a consequence of these changes there is now a statutory derivative action contained in Part 2F.1A of the Law. The plaintiffs have not applied for leave to make additional amendments to the statement of claim so as to rely upon s.236 of the Law. Indeed, they could not do so without first obtaining leave under s.237 of the Law.
The directors focussed their attack on the existing claim on the basis that it is a cause of action abolished by virtue of s.236(3) of the Law since 13 March 2000. The plaintiffs resist the attack on the basis that the CLERP amendment that inserted s.236 in the Law, in particular sub-s.(3), was prospective in its application and not retrospective and, therefore, does not apply to their cause of action.
Procedural statutes and statutes that create or abolish substantive rights
The distinction between procedural statutes and those which create, modify or abolish substantive rights and liabilities is not always easy to apply. The relevant principle is clear but the difficulty lies in the application. Turning to the principle, in Maxwell v Murphy (1957) 96 CLR 267, Dixon CJ said:
"The general rule of the common law is that a statute changing the law ought not, unless the intention appears with reasonable certainty, to be understood as applying to facts or events that have already occurred in such a way as to confer or impose or otherwise affect rights or liabilities which the law had defined by reference to the past events. But, given rights and liabilities fixed by reference to past facts, matters or events, the law appointing or regulating the manner in which they are to be enforced or their enjoyment is to be secured by judicial remedy is not within the application of such presumption. Changes made in practice and procedure are applied to proceedings to enforce rights and liabilities, or for that matter to vindicate an immunity or privilege, notwithstanding that before the change in the law was made, the accrual or establishment of the rights, liabilities, immunity or privilege was complete and rested on events or transactions that were otherwise past and closed. The basis of the distinction was stated by Mellish LJ in Republic of Costa Rica v Erlanger (1876) 3 Ch D 62 at 69. 'No suitor has any vested interest in the course of procedure, nor any right to complaint, if during the litigation the procedure is changed, provided, of course, that no injustice is done'."
In the same case, Fullagar J said, at 286:
"A consideration of the cases generally cited in this connection has led me to think that the distinction is properly best stated by saying that it is between statutes which create or modify or abolish substantive rights or liabilities on the one hand and statutes which deal with pursuit of remedies on the other. In the former class of case there is a presumption against retrospective operation in the sense explained above. In the latter class of case there is no such presumption: on the contrary, the presumption is that the enactment applies in all proceedings commenced after it became law, and it may be right to construe it as applying even in proceedings commenced before it became law."
At 285, Fullagar J said that the word "retrospective" in such context is not synonymous with "ex post facto, but is used to describe the operation of any statute which affects the legal character, or the legal consequences, of events which happen before it became law."
In Robertson v City of Nunawading[6] the Full Court of this Court considered circumstances where a property developer submitted a sub-division proposal to a municipal council for approval. Subsequently, the local government statutory provisions were amended whereby the council became empowered to require payment of security from the developer. In the absence of payment the council had a discretion to refuse to seal the plan of sub-division. The council required a security under the amendment, the developer did not comply with the request and the council refused to seal the plan of sub-division. The Full Court was concerned with whether the amendment had prospective or retrospective application. In the joint judgment (at 823-824) the court considered the presumption in the following terms:
"The language of the new provision, and of the amending statute is, therefore, neutral in significance as to whether the new provision was intended to apply in relation to plans submitted to the council before the change or not.
As is so often the case in similar circumstances resort has then to be had to any presumption which operates to indicate what was intended and to any interpretative statutory provisions.
The common law principle which is applicable may for present purposes be taken from two statements, recently cited by Gibbs J, in Mathieson v Burton (1971), 124 CLR 1, at p.22; [1971] ALR 533, one from the judgment of Wright J, in Re Athlumney; Ex parte Wilson [1898] 2 QB 547, at pp.551-2; [1895-9] All ER Rep 329, the other from the judgment of Dixon J, in Maxwell v Murphy (1957), 96 CLR 261, at p.267; [1957] ALR 231. The first is as follows:-
'Perhaps no rule of construction is more firmly established than this – that a retrospective operation is not to be given to a statute so as to impair an existing right or obligation, otherwise than as regards matter of procedure, unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only.'"
[6][1973] VR 819.
The Full Court cited the extract from the judgment of Dixon J I have already cited and continued:
"The other statement, that of Dixon J, is as follows:-
'The general rule of the common law is that the statute changing the law ought not, unless the intention appears with reasonable certainty, to be understood as applying to facts or events that have already occurred in such a way as to confer or impose or otherwise affect rights or liabilities which the law had defined by reference to past events.'
It is to be observed that this principle is not concerned with the case where the enactment under consideration merely takes account of antecedent facts and circumstances as a basis for what it prescribes for the future, and it does no more than that: Maxwell on Interpretation of Statutes, 12th ed., pp.216-7. The principle is concerned with the case where the enactment would apply to these antecedent facts and circumstances in such a way 'as to impair an existing right or obligation' or 'as to confer or impose or otherwise affect rights or liabilities which the law had defined by reference to the past events.'
As Fullagar J, said in Ku-Ring-Gai Municipal Council v Attorney-General (NSW) (1957), 99 CLR 251, at p.269; [1957] ALR 953 – 'What the rule really means is that prima facie a statute must not be construed so as to change the legal character or the legal consequences, of past events and transactions'."
Further (at 824-825) the Full Court said:
"It may be that an immunity conferred by law can properly be described as a 'right', if it is of a particular character. Thus Windeyer J, in Mathieson v Burton (1971), 124 CLR 1, at pp.12-3; [1971] ALR 533, said: 'It was said that s.83A(1) created immunities not rights. But I fail to see why an immunity or an exemption from legal consequences should not be called a right or privilege once it has taken effect and is not merely inchoate. Before 1968 the respondent had 'the like right to continue in possession of the premises as her father had had'. But, says the appellant, what was called a right was not really a right'. But the learned Judge was speaking of something which was conferred by the unamended statute and was described in it as 'the like right to continue in possession'. And when Kitto J, in his dissenting judgment in Australian Iron and Steel v Hoogland (1962), 108 CLR 471, at p.480; [1962] ALR 842 (referred to by Windeyer J, in Mathieson v Burton), spoke of the amending Act as not being able to apply 'without depriving a person … of an accrued immunity or defence' he was speaking of the effect of a statute in barring a legal remedy after a particular period. He was not speaking of a mere gap in the field covered by the legislation which left the person concerned free of statutory control in that area. There cannot, in any relevant sense, or perhaps in any sense, be a 'right' to exemption or immunity from legislative action. The taking of legislative action in a field where previously there was none cannot be treated as an impairment of a right for the purpose of the principle."
In Ungar v City of Malvern[7] the Full Court applied Robertson v City of Nunawading in circumstances where a land owner applied unsuccessfully for a town planning permit for a particular use of land. The owner appealed to the Town Planning Appeals Tribunal. By the time the appeal came on to be heard the relevant planning scheme was amended so as to preclude the particular use proposed by the owner. The Full Court held that the owner had not acquired a right or privilege to have his application determined in accordance with the law as it existed at the time the appeal was instituted. The Full Court held (at 265-266):
"In the present case the institution of the appeal by the appellant gave him no more than a hope or expectation that his appeal would succeed and that he would be granted a permit. But, as the Appeals Tribunal had a discretion as to whether or not it would grant a permit, the question was open and unresolved. No right or privilege had been acquired by the appellant nor had any right or privilege accrued to him. The investigation by the Appeals Tribunal was not in respect of some right of the appellant but was to decide whether some right should or should not be given. Hence, as the appellant had no right or privilege when the law was changed to make it illegal to grant a permit for a commercial vehicle park for 33 Peverill Street, the Appeals Tribunal was bound to refuse to give such a permit to the appellant.
This conclusion accords also with the decision of the Full Court in Roberston v City of Nunawading, [1973] VR 819. In that case a subdivider of land applied to a municipal council for it to seal a plan of subdivision submitted by him. After the application to the council was lodged with the council, but before it had been dealt with by the council, the law was amended by provisions which empowered a council to require a subdivider to pay certain security to the council before a plan of subdivision was sealed. The Full Court, applying the decision of the Privy Council in Director of Public Works v Ho Po Sang, supra, held that the lodging of the plan with the council gave the subdivider no right to a continuance of the proceedings unaffected by the amendment to the statute and that the council was entitled to require the payment of the security by the subdivider."
[7][1979] VR 259.
The principle was considered by the High Court in Yrttiaho v Public Curator (Queensland)[8]. The Queensland Rules of Court precluded any fresh step in a proceeding where none had been taken in the preceding six years without leave of the court. The rule was amended to reduce the six year limitation period to one of three years. A plaintiff did not take any step in a proceeding for a little over three years and, assuming the amendment applied, sought leave to proceed. The judge refused. The plaintiff appealed and, inter alia, submitted that the amendment did not apply. The appeal was dismissed. The plaintiff appealed to the High Court where the court held that the amendment was procedural in nature. Gibbs J (at 241), with whom Windeyer and Walsh JJ agreed, described the application of the principle thus:
"However, although the amendment to O.90, r.9 might have affected vested rights if it had applied to cases where the three-year period had elapsed before the amendment took effect, in the present case, in my opinion, the operation of the amendment to O.90, r.9 was purely procedural. The amendment did not impair the appellant's right or bar his cause of action. After the amendment took effect the appellant remained entitled to continue with his action and enforce his right. It is true that it then became necessary for him to take a fresh proceeding in the action before 24th June 1966, unless he could obtain the leave of the Court or a judge, whereas previously the rule had allowed him until 24th June 1969 for this purpose. This only means that the rule governing the manner in which the action has to be conducted had been amended. The change was one in procedure; the amendment to the rule affected the manner in which the appellant might proceed in his action for the purpose of enforcing his right but the right remained enforceable. It is also true that the appellant cannot now proceed in the action, and is barred by statute from bringing another action to enforce the right, but that is due, not simply to the fact that the rule was amended, but to the inaction of the appellant or his legal advisers after the amendment was gazetted."
[8](1971) 125 CLR 228.
In order to better apprehend whether the amendment to the Law was procedural or substantive it is instructive to analyse the nature of the derivative action. The derivative or, as it was previously called, the representative action was a procedural device of courts of equity. In Scarel Pty Ltd v City Loan and Credit Corporation Pty Ltd (1988) 17 FCR 344, Gummow J considered the rule in Foss v Harbottle and its exceptions and (at 348-349) cited Browne‑Wilkinson LJ, as he then was, in Nurcombe v Nurcombe [1985] 1 WLR 370 at 376 where His Lordship said:
"Since the wrong complained of is a wrong to the company, not to the shareholder, in the ordinary way the only competent plaintiff in an action to redress the wrong would be the company itself. But, where such a technicality would lead to manifest injustice, the courts of equity permitted a person interested to bring an action to enforce the company's claim. The case is analogous to that in which equity permits a beneficiary under a trust to sue as plaintiff to enforce a legal right vested in trustees (which right the trustees themselves will not enforce), the trustees being joined as defendants. Since the bringing of such an action requires the exercise of the equitable jurisdiction of the court on the grounds that the interests of justice require it, the court will not allow such an action to be used in an inequitable manner so as to produce an injustice."
Immediately after citing this passage, Gummow J continued, at 349:
"Representative actions were the product of equity procedures and the rule in Foss v Harbottle and its exceptions have generally been considered part of the powers and procedures of modern courts of equity of which this [Federal] Court (in respect of matters otherwise within its jurisdiction) is one."
Furthermore, in Nurcombe v Nurcombe, Lawton LJ observed, at 376:
"It is pertinent to remember, however, that a minority shareholder's action in form is nothing more than a procedural device for enabling the court to do justice to a company controlled by miscreant directors or shareholders."
In my view Part 2F.1A provides for rules of practice and procedure by prescribing a mode of proceeding under which the rights of a company are to be enforced as distinguished from the substantive law which gives or defines those rights.
The position of the plaintiffs in the present proceeding was tantamount to arguing that they were entitled to continue the present proceeding as if the Law (so far as it applied to them), in particular s.236(3), had not been enacted. It was contended for the plaintiffs that s.236(3) was cast in prospective terms by virtue of the use of the words in the sub-section "to bring or intervene in". It was said that the expression "to bring" and "intervene in" constituted a specific legislative intention to exclude existing proceedings already on foot from the abolition contained in s.236(3). I do not accept these submissions. The specific silence of the statute vis‑à‑vis existing actions cannot be combined with a reference to new and future proceedings so as to create a prospective legislative intent. To do so would run against the presumption expounded in the authorities. Time and again it has been said that there must be a clear legislative intention of a prospective limitation. That does not occur here.
The authorities I have referred to were concerned with various legislative enactments and the issue of retrospectivity. The retrospectivity of Part 2F.1A of the Corporations Law has been considered on two occasions thus far.
In Karam & Ors v ANZ Banking Group Limited & Anor (2000) 34 ACSR 545, Santow J held that the new statutory provision was a procedural provision. In that case the plaintiffs were shareholders who sued a bank. They applied to join the company itself in which they were shareholders as a plaintiff. An issue arose as to the limitations of statutes. The judgment raised the issue of the statutory derivative cause of action contained in s.236 of the Law and the need for the plaintiffs to seek leave under s.237. The plaintiff argued that s.236 was substantive rather than procedural in character and that, therefore, the limitation bar did not apply. The bank submitted the converse argument. Santow J granted leave and in the course of his judgment considered the nature of s.236 of the Corporations Law. Santow J considered the statutory derivative action created by s.236 to be remedial and held (at 553) that " … To deny its remedial effect to those whose rights had accrued prior to the introduction of the legislation would be to frustrate its remedial purpose; … "
His Honour referred, in passing, to the difficulty in distinguishing between substantive and procedural legislation and held (at 554):
"The plaintiffs strenuously argue that while the derivative action may be viewed as procedural, its removal, like the denial of a right of action under a limitation statute, is substantive. In that regard they may have found some support in John Pfeiffer. But such a view ignores the fact that what is really happening is the substitution of what the various law reform bodies thought was is by no means self-evident that its removal can be viewed in isolation from what is substituted and considered to be substantive with the interpretative consequence that it is not retroactive in relation to accrued rights.
It follows that while the matter cannot be said to be free from doubt, I consider the better view to be that the statutory derivative action has displaced any potential recourse to the fifth (or other) exception in the rule in Foss v Harbottle for the plaintiffs, notwithstanding that the right to invoke it may have accrued.
Karam was followed by Mandie J in Chapman v E‑Sports Club Worldwide Limited (2000) 35 ACSR 462. In that case, the plaintiff commenced a derivative action and in the expectation that the new Part 2F.1A of the Law had deprived him of his right to bring that action, he made an application to the Court either to amend the existing proceedings so as to bring them within the new Part or, alternatively, for leave to bring fresh proceedings under that Part. Mandie J held (at 463) " ... that the better view is that the statutory derivative action which has now been created by the Corporations Law, has displaced any potential recourse to any of the exceptions in the rule in Foss v Harbottle … ". Further, His Honour dismissed the application because, in his opinion, the criteria for granting leave under s.237 were not satisfied.
The plaintiffs in the present proceeding attempted to distinguish Chapman v E‑Sports on the basis that the proceeding was commenced after 13 March 2000, that is, the date when Part 2F.1A of the Law came into operation. In fact, the writ in Chapman was filed on 9 June 2000, some three months after the commencement of the new provisions. In my view it makes no difference. I respectfully agree with the views of Santow J in Karam and Mandie J in Chapman. The essential point is that as stated by Mandie J, the statutory derivative action has displaced the common law derivative action. Part 2F.1A is clearly a procedural provision. It does not purport to alter the substantive rights and liabilities of a company that could previously have been enforced by a plaintiff, who was given standing to bring a derivative action on behalf of the company under an exception to the rule in Foss v Harbottle. In this context, Part 2F.1A provides for a new procedure by which proceedings might be brought on behalf of the company.
The application of s.1472 of the Corporations Law
It was further submitted for the plaintiffs that their position was supported by the terms of s.1472 of the Corporations Law. It provides:
"1472 Under Part 2F.1A (ss.236-242) of the new Law, a person may apply for leave to intervene, and intervene, in proceedings started before commencement."
It was submitted for the plaintiffs that the terms of s.1472 of the Law demonstrate that the legislature specifically considered existing proceedings and, hence, inserted the right to apply for leave to intervene and intervene in proceedings commenced prior to the operation of Part 2F.1A. On the contrary, I consider that the silence of the legislature in not dealing with any prospectivity of s.236(3) in the context of specifically dealing with existing proceedings in s.1472 bears out the view that the legislature intended s.236(3) to apply to proceedings already on foot. The point was made for the plaintiffs that prior to the operation of s.236 of the Law the plaintiff was able only to institute a derivative proceeding under the exceptions to the rule in Foss v Harbottle. It was argued that s.1472 of the Law could only have effect if derivative proceedings that were started before the commencement of the Part were contemplated by the legislature as remaining on foot.
In my view the argument misconceives the purpose of s.1472. Section 1472 is intended to apply to existing proceedings where a party wishes to intervene in those proceedings on behalf of a company pursuant to s.236 of the Law. In my view s.1472 does not refer to derivative common law proceedings commenced before 13 March 2000. Rather, s.1472 is concerned with the second limb of s.236, that is, the right to intervene in an action where a company is a party already. This is the case not because a derivative action has been brought but because the company has commenced proceedings itself or because a third party has sued the company. Section 1472 deals with a new right, that is, the right to intervene in proceedings which are alive already and to which the company is a party, either because it has sued another party or because the third party has sued the company. The section has nothing to do with derivative actions as they were understood under the common law. Furthermore, the matters described in paragraph 6.17, 6.23, 6.24 and 6.30 of the memorandum make it clear that the intention of the legislature was to enact procedural legislation.
It is useful to consider the explanatory memorandum to the Corporate Law Economic Reform Program Bill. Paragraphs 6.11-6.30 of the explanatory memorandum provided:
"Proposed Part 2F.1A – Porceedings on behalf of a company and others
6.11 In recent years, a number of reports have recommended the introduction of a statutory derivative action to enable an individual shareholder to bring an action on behalf of a company for a wrong done against the company, where the company is unwilling or unable to do so.
6.12 The first of these reports was the 1990 report by the CSLRC entitled 'Enforcement of the Duties of Directors and Officers of a Company by means of a Statutory Derivative Action'. The CSLRC recommended that the Companies Act 1981 be amended to enable the Court to grant a person leave to take derivative proceedings. The report included a draft provision, which formed the basis for consideration in subsequent reports (House of Representatives Standing Committee on Legal and Constitutional Affairs, Corporate Practices and the Rights of Shareholders, 1991; Companies and Securities Law Review Committee (CSLRC), Enforcement of the Duties of Directors and Officers of a Company by means of a Statutory Derivative Action, Report No. 12, 1990; Legal Committee of Companies and Securities Advisory Committee (CASAC), Statutory Derivative Action, 1993).
6.13 The Corporate Law Exonomic Reform Program Proposal Paper No. 3, Directors' Duties and Corporate Governance, released on 20 October 1997, proposed a statutory derivative action as a measure to reduce the cost to the members and directors of a company of establishing and enforcing their relationship with one another.
Current position
6.14 Shareholder derivative proceedings may currently be pursued at common law under the so-called exceptions to the rule expounded in Foss v Harbottle that the company is the proper plaintiff for wrongs done to it. However, a number of practical and legal difficulties regarding the operation of the exception have meant that very few derivative actions have proceeded.
6.15 The main difficulties associated with the common law action centre around:
· The effect of ratification of the impugned conduct by the general meeting of shareholders (if effective, the purported ratification by a majority of shareholders could deny the company as a whole, and hence minority shareholders, any right of action against the directors);
· The lack of access to company funds by shareholders to finance the proceedings (where a shareholder seeks to enforce a right on behalf of a company, they are likely to be disinclined to risk having costs awarded against them in a case which will ultimately benefit the company as a whole, not just individual shareholders); and
· The strict criteria which need to be established before a Court may grant leave.
6.16 Appropriate checks and balances will be provided in the legislation to prevent abuse of the proceedings and to ensure that company managements are not undermined by vexatious litigation and that company funds are not expended unnecessarily.
6.17 In summary, the proposed statutory derivative action will allow an eligible applicant, which will include shareholders and directors, to commence proceedings on behalf of a company where the company is unwilling or unable to do so. Proceedings could be commenced in respect of wrongs done to the company and the company would benefit from successful actions.
Persons who may bring, or intervene in, proceedings on behalf of a company.
6.18 To better reflect the nature of the proceedings involved, the term 'proceedings on behalf of a company' will be used rather than the term 'statutory derivative action' in the legislation.
6.19 Under the draft provisions, a person as defined, may commence or intervene on behalf of a company (proposed subsections 236(1) and (2)).
6.20 The proceedings could be in respect of a cause of action, which a company has against either:
· A director of the company for breach of duties owed to the company; or
· A third party for a breach of contract or in respect of a tortious act committed by that third party (it will however be presumed that where proceedings involve a third party, granting leave is not in the best interests of the company unless the contrary is proved (proposed subsection 237(3)).
6.21 The draft provisions will also allow a person to intervene in proceedings to which a company is a party, on behalf of the company, for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings. This could include continuing, defending, discontinuing, compromising or settling the proceedings on behalf of the company.
6.22 To be able to commence or intervene in proceedings, in the name of, and on behalf of a company, a person will need to first apply for leave from the Court (proposed paragraph 236(1)(b) and proposed section 237).
No right of action except as provided in this part
6.23 The common (general) law derivative rights under the exceptions to the 'proper plaintiff' rule in Foss v Harbottle will be abolished. This is designed to promote certainty regarding the nature of the action and avoid confusion between any diverging principles relating to the statutory action and the common law action (proposed subsection 236(3)).
6.24 However, the common law personal action exception to the rule in Foss v Harbottle will remain, since under this action a member is not bringing or intervening in proceedings on behalf of the company (proposed section 236 note 3).
Who can apply for leave
6.25 Pursuant to proposed paragraph 236(1)(a), an application for leave will be able to be made by:
· members of the company (including those with a present entitlement to be registered);
· former members of a company or related body corporate; and
· directors and officers, present and former, of the company.
6.26 Under the common law, only members can institute derivative proceedings on behalf of a company.
6.27 Under the draft provisions, former members will be included because they may have been compelled to leave the company in view of the dispute potentially giving rise to the litigation on behalf of the company. Members and former members of a related body corporate will also be included as they may be adversely affected by the failure of the company to take action and therefore may have a legitimate interest in applying to commence a derivative action.
6.28 The conferral of standing on officers recognises that they are most likely to be the first to become aware of a right of action which is not being pursued by the company.
6.29 The CSLRC and the Standing Committee recommended the inclusion of former members and former directors.
6.30 The Australian Securities and Investments Commission (ASIC) is not included as an eligible applicant, as the basic policy objective of derivative proceedings is to provide an effective remedy for investors and to overcome the difficulties in Foss v Harbottle – there is no proper role for ASIC to bring such proceedings. In particular, the statutory action is not intended to be regulatory in nature, but to facilitate private parties to enforce existing rights attaching to the company – effectively, the action is designed to be a self help measure. In this regard, a statutory derivative action has the potential to remove some of the regulatory burden from ASIC by making it easier for investors themselves to protect the interests of a company. (There are other means by which ASIC may commence actions on behalf of investors, for example, under section 50 of the ASIC Act)."
In my view, insofar as the explanatory memorandum provides assistance for present purposes it reveals that the intention of the legislature was to introduce an entirely different regime with respect to derivative proceedings. This is made especially clear in paragraphs 6.22, 6.23, 6.24 and 6.30 of the memorandum.
It was further argued on behalf of the plaintiffs that the statutory derivative cause of action created under Part 2F.1A of the new Law was intended to be remedial and that, as a consequence, it is perverse to suggest that such legislation was intended to lead to the stay of common law derivative proceedings on foot prior to the operation of the amending legislation. In my view, the explanatory memorandum to the Bill points to the fact that the purpose of the amending legislation was to introduce a new regime with some variations but, in essence, to establish a statutory derivative cause of action. In any event, it was argued for the plaintiffs that the staying of the present proceeding ran against the remedial intention of the amending legislation in that six year limitation periods have expired in relation to the causes of action relied upon in the further amended statement of claim. Mr A. Rodbard‑Bean was pressed on a number of occasions to point to a statutory provision that created a statute bar to any of the causes of action pleaded in the further amended statement of claim. He was unable to identify any. Indeed, the various provisions under the Corporations Law relied upon by the plaintiffs are not the subject of a statute bar. Accordingly this argument on behalf of the plaintiffs is not made out.
Transitional provisions
Furthermore, the observation is to be made that insofar as the Corporations Law contains transitional provisions the legislature inserted such provisions specifically in s.1469 of the Law. It did not take the opportunity to specifically preserve rights under existing proceedings and exclude such proceedings from the application of s.236(3) of the new Law. Similarly, s.1471 of the Law preserves the law as it previously was prior to the amendments with respect to oppression proceedings. In contrast, the legislature made no such specific provision in relation to common law derivative proceedings.
Conclusion
On the basis of the principles set out in the authorities and upon analysis of the amending legislation I am satisfied that s.236(3) of the Law was intended to apply to events that existed prior to 13 March 2000, that is, to existing common law derivative proceedings. Accordingly, in so far as it relates to Eromanga and Bisan the directors succeed in staying the plaintiffs' claim. It follows that the appeal will be dismissed.
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