Argus Group Pty Ltd v Litigation Lending Services Ltd - [2014] SASC 181

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
ARGUS GROUP PTY LTD v LITIGATION LENDING SERVICES LTD
[2014] SASC 181
Reasons for Decision of The Honourable Justice Gray
28 November 2014
CORPORATIONS - LEGAL CAPACITY AND RELATIONS WITH OUTSIDERS - EXTERNAL LITIGATION PROCEDURE - APPEARANCE IN COURT BY COMPANY AND REPRESENTATION
CORPORATIONS - MEMBERSHIP, RIGHTS AND REMEDIES - MEMBERS' REMEDIES AND INTERNAL DISPUTES - PROCEEDINGS ON BEHALF OF COMPANY BY MEMBER
Application to represent a company pursuant to section 237 of the Corporations Act 2001 (Cth). The plaintiffs hold a minority interest in the first defendant, Litigation Lending Services Ltd, a litigation funding company. They have also commenced proceedings against the second to fourth defendants, who are directors and shareholders in Litigation Lending, and the fifth defendant, JustKapital Litigation Pty Ltd, a litigation funding company. The dispute arose out of JustKapital’s attempt to take control of Litigation Lending. JustKapital, by its cross-action, brought an action against Litigation Lending claiming, inter alia, breach of contract. Litigation Lending was unrepresented at the time of this application. The plaintiffs’ claim against the second to fourth defendants was that, inter alia, they engaged in oppressive conduct and breaches of their directors’ duties by impermissibly dealing with JustKapital. At the outset of the proceedings the plaintiffs had obtained injunctive relief against the defendants. Litigation Lending was unrepresented.
Whether Litigation Lending would bring or take responsibility for the proceedings. Whether the plaintiffs are acting in good faith. Whether a grant of leave was in the best interest of Litigation Lending. Whether there is a serious question to be tried. Whether it is appropriate to grant leave notwithstanding a failure to comply with the notice requirements.
Held (granting the application):
1. Litigation Lending would not itself bring the proceedings or defend the cross-action. The company is unrepresented. Given the nature of the claim against the second to fourth defendants and the cross-claim of JustKapital, it would be inappropriate for the second to fourth defendants to represent Litigation Lending.
2. The plaintiffs are acting in good faith. The plaintiffs have a legitimate interest in the welfare and good management of Litigation Lending and their action, if successful, would result in the recovery of property and compensation by the company. The plaintiffs have been granted injunctive relief on the basis that they have an arguable claim.
3. A grant of leave is in the best interests of Litigation Lending. A grant of leave will ensure that Litigation Lending is able to benefit from any success the plaintiffs have in the proceedings and defend the cross-claim. The plaintiffs have given undertakings as to damages and no satisfactory alternative contradictor was suggested by the other parties.
4. There is a serious question to be tried. The test for whether there is a serious question to be tried is the same as that for an interlocutory injunction. The plaintiffs have filed considerable affidavit material and submissions in the proceedings and have been granted injunctive relief on the basis that there is a serious question to be tried.
5. It is appropriate to grant leave notwithstanding a failure to comply with the notice requirements. The second to fourth defendants had previously conceded that the plaintiffs should represent the company and the fifth defendant had submitted that the cross-claim should not be separated from the primary proceedings. There was no identifiable prejudice from a grant of leave and leave may be granted nunc pro tunc.
Corporations Act 2001 (Cth) s 236 and s 237, referred to.
Swansson v Pratt [2002] NSWSC 583; Australian Mortgage & Finance Company Pty Ltd as trustee of the Melnikoff Family Trust & Ors v Rome Euro Windows Pty Ltd as trustee of the Rome Euro Windows Unit Trust & Ors [2014] NSWSC 996; Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859, considered.

ARGUS GROUP PTY LTD v LITIGATION LENDING SERVICES LTD
[2014] SASC 181
Civil
GRAY J.

This is an application pursuant to section 237 of the Corporations Act 2001 (Cth) to intervene in proceedings on behalf of a company.
Introduction
The plaintiffs hold a minority interest in the first defendant, Litigation Lending Services Ltd, a litigation funding company. They have also commenced proceedings against the second to fourth defendants, who are directors and shareholders in Litigation Lending, and the fifth defendant, JustKapital Litigation Pty Ltd, another litigation funding company. The dispute arose out of JustKapital’s attempt to take control of Litigation Lending. JustKapital, by its cross-action, brought an action against Litigation Lending for, inter alia, breach of contract. Litigation Lending was unrepresented at the time of this application.
At the outset of these proceedings, the plaintiffs sought and obtained urgent injunctive relief from a Master of this Court. The proceeding then came before a Judge of the Court on the application of the plaintiffs seeking an interlocutory injunction generally in terms of the injunction granted by the Master. Detailed affidavits in support of the plaintiffs’ claims were before the Court. The application was contested. The plaintiffs filed an outline of argument that, in substance, raised the basis of its claim in oppression, asserted breaches of statutory and fiduciary duty by the second to fourth defendants and generally addressed the relief claimed. The Judge granted injunctive relief but was not requested to provide, and has not provided, written reasons for those orders. It may be accepted that the Judge found a prima facie case and that the balance of convenience favoured the grant of relief. The usual undertakings as to damages were proffered. That injunctive order continued until trial and was the subject of limited variation by consent. With the consent of all parties, I continued the injunctive order as granted until further order, noting the continuing undertakings as to damages.
The plaintiffs’ application was brought the day before the trial was listed to commence in response to a dispute between the parties concerning the plaintiffs’ standing and the availability of relief. The application was opposed by the second to fourth defendants and JustKapital.
The Application
Before turning to consider the issues arising on the application, it is convenient to set out the relevant provisions of the Corporations Act. Section 236 provides as follows:
Bringing, or intervening in, proceedings on behalf of a company
(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.
Section 237 provides as follows:
Applying for and granting leave
(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.
Will Litigation Lending Bring or Take Responsibility for the Proceedings
The plaintiffs’ primary claim is in the nature of an oppression claim and is opposed by the majority of shareholders and directors of Litigation Lending. Further, the plaintiffs’ claim against the majority directors and shareholders that they have unlawfully colluded with JustKapital, the company which, as noted earlier in these reasons, has brought a cross-action against Litigation Lending.
In these circumstances, it is apparent that Litigation Lending will not itself bring the proceedings or defend the cross-action. Further, it would be inappropriate for those majority directors or shareholders to represent the company against JustKapital.
Are the Plaintiffs Acting in Good Faith
In Swansson v Pratt, Palmer J considered the requirement of good faith and said:[1]
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.
However, where the applicant is a former shareholder or officer with nothing obvious to gain directly by the success of the derivative action, the Court will scrutinise with particular care the purpose for which the derivative action is said to be brought.
For example, a creditor may happen to be a former shareholder of the company and may seek, by the derivative action, to place the company in a financial position to repay the debt. There would be no abuse of process in commencing and maintaining the derivative action itself in that the action is commenced and maintained in order to achieve the purpose for which it is designed, namely, to recover property for the company. However, it may well be said that, in making an application for leave under Pt 2F.1A, the applicant is not acting in good faith because he or she is, in reality, seeking to vindicate his or her interest as a creditor and not whatever interest he or she may have as a former shareholder.
To take another example: a derivative action sought to be instituted by a current shareholder for the purpose of restoring value to his or her shares in the company would not be an abuse of process even if the applicant is spurred on by intense personal animosity, even malice, against the defendant: it is not the law that only a plaintiff who feels goodwill towards a defendant is entitled to sue: see e.g. Dowling v Colonial Mutual Life Assurance Society (1915) 20 CLR 509, at 521-522; IOC Australia Pty Ltd v Mobil Oil Australia Ltd (1975) 11 ALR 417, at 426-427. On the other hand, an action sought to be instituted by a former shareholder with a history of grievances against the current majority of shareholders or the current board may be easier to characterise as brought for the purpose of satisfying nothing more than the applicant’s private vendetta. An applicant with such a purpose would not be acting in good faith.
If a wrong appears to have been done to a company and those in control refuse to take proceedings to redress it, the Court should permit a derivative action to be instituted only by those within the categories allowed by s.236(1) who would suffer a real and substantive injury if the action were not permitted. The injury must be necessarily dependent upon or connected with the applicant’s status as a current or former shareholder or director and the remedy afforded by the derivative action must be reasonably capable of redressing the injury.
[1] Swansson v Pratt [2002] NSWSC 583, [38]-[42].
The plaintiffs are current shareholders of Litigation Lending and together hold much more than a token shareholding. Through these proceedings, they seek relief including compensation to the company under section 1317H of the Corporations Act. This may be expected to increase the value of the plaintiffs’ shares if the proceedings are successful. Two of the shareholders and directors of the plaintiff companies are also two of the directors of Litigation Lending. One is the Chairman of the Board. In this way, it may be understood that the plaintiffs and, in particular, the two directors representing those plaintiffs on the board of Litigation Lending, have a legitimate interest in the welfare and good management of Litigation Lending and in the recovery of property on behalf of Litigation Lending. They also have a legitimate interest in ensuring that the majority of shareholders or the majority of the board do not act unlawfully to the detriment of the company.
As noted earlier in these reasons, a Judge of this Court granted injunctive relief, which entails a finding that the plaintiffs had at least an arguable case. JustKapital submitted that the affidavit evidence in support of the application did not establish that the plaintiffs were acting in good faith. However, this submission overlooks the voluminous affidavit material filed in the proceedings to this point. In any event, the plaintiffs are not required to provide sworn evidence that they believe that a good cause of action exists.[2]
[2] Australian Mortgage & Finance Company Pty Ltd as trustee of the Melnikoff Family Trust & Ors v Rome Euro Windows Pty Ltd as trustee of the Rome Euro Windows Unit Trust & Ors [2014] NSWSC 996, [6]; Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859, [33].
Is a Grant of Leave in the Best Interests of the Company
As noted earlier in these reasons, Litigation Lending is not represented in these proceedings and it would be inappropriate for it to be represented by the second to fourth defendants. If the plaintiffs’ application is unsuccessful, Litigation Lending will be unrepresented at the trail. The issue of the plaintiffs representing Litigation Lending was raised at a directions hearing before me on 14 November 2014. The following exchange took place between: Mr Roberts SC, senior counsel for the plaintiffs; Mr Evans, then junior counsel for the second to fourth defendants; and Mr Brereton SC, senior counsel for JustKapital:
MR ROBERTS:    ... Your Honour will recall from the last occasion we were before you, Ms Whittaker [junior counsel for JustKapital] announced to the court an intention to file a cross-claim. We have promulgated a proposal with our learned friends that the trial on that counterclaim be deferred until after the trial with this objective only in mind, it is a cross-action against the first defendant, where that is concerned that is either requiring the first defendant to be under the control of the three defendants for whom my learned friend, Mr Evans, acts, and they are those that we contend are a related party and future directors of the fifth defendant, JustKapital, or alternatively it ought be pursuant to leave under the control of my clients in order that there be a true contradictor to advance the position as against JustKapital.
...
HIS HONOUR:    Now, Mr Evans, what is your clients’ position in regard to that matter?
MR EVANS:      With respect, we agree with my learned friend on that matter.
HIS HONOUR:    Thank you. Now, Mr Brereton, it's over to you, what is the fifth defendant's position in regard to these matters?
MR BRERETON: Our position is that all matters should proceed at the trial commencing on Wednesday, that we should not be put to the expense of a subsequent hearing or proceedings. The cross-action has been regularly served on the first defendant. Perhaps more significantly, there is an overlap in issues which means that it is not a straightforward thing simply to say that the cross-action can be deferred. [Mr Brereton then discussed the extent of the overlap.]
[Emphasis added.]
In my view, it is in the best interests of Litigation Lending to be represented by the plaintiffs at trial. This will ensure that it is in a position to defend the cross-action from JustKapital. Further, it will put Litigation Lending in a position to benefit from any success the plaintiffs may enjoy at trial in the event they are successful in bringing their primary claim – a grant of leave avoids technical arguments concerning an entitlement to relief in the event that the plaintiffs are ultimately successful. It is to be noted that no satisfactory alternative contradictor was proffered on the hearing of this application.
Importantly, the plaintiffs have given undertakings to pay Litigation Lending’s costs and disbursements arising out of the litigation. These undertakings extend to meeting an adverse costs award against Litigation Lending.
Is there a Serious Question to be Tried
Counsel for JustKapital argued that, without a grant of leave, much of the plaintiffs’ claimed relief could not be granted. Counsel referred the Court to a number of authorities and, in particular, relied on the decision of Palmer J in Swansson v Pratt.[3] Attention was drawn to the following observations of his Honour concerning the care to be taken in allowing the bringing of derivative proceedings:[4]
It is clearly the intent of Pt 2F.1A that leave to bring a derivative action must not be given lightly. An application under s.237(2) is not interlocutory in character; the relief sought is final and the applicant bears the onus of establishing the requirements of the subsection to the Court’ satisfaction.
In order to ascertain whether there is a serious question to be tried for the purposes of s.237(2)(d), the Court will not normally enter into the merits of the proposed derivative action to any great degree. The applicant has the same relatively low threshold to surmount as in the case of an application for an interlocutory injunction: Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618, at 622. Thus, cross examination on the merits of the proposed derivative action will usually be permitted only with leave of the Court and to a limited extent.
However, because of the possibly serious consequences to the company if the application is allowed and the company is thereby compelled to engage in litigation as a plaintiff against its will, all facts and circumstances relevant to the consideration of the requirements of s.237(2)(a), (b), (d) and (e) must be considered and the applicant bears the onus of satisfying the Court that, on the balance of probabilities, those requirements have been fulfilled. There is no reason in principle for restricting the parties’ rights of cross examination if any matter relevant to those requirements is in contest.
[3] Swansson v Pratt [2002] NSWSC 583.
[4] Swansson v Pratt [2002] NSWSC 583, [26]-[28].

It is relevant to recall that the plaintiffs were awarded injunctive relief and that the matter has proceeded to trial without any serious attempt to have aspects of the plaintiffs’ case or statement of claim struck out. It is to be noted that the standard to be applied in determining whether there is a serious question to be tried is the same standard to be applied by the court in determining whether to grant an interlocutory injunction.[5] In my view, there is a serious question to be tried in these proceedings.
[5] Australian Mortgage & Finance Company Pty Ltd as trustee of the Melnikoff Family Trust & Ors v Rome Euro Windows Pty Ltd as trustee of the Rome Euro Windows Unit Trust & Ors [2014] NSWSC 996, [10].
It is Appropriate to Grant Leave Notwithstanding a Failure to Comply with the Notice Requirements
The plaintiffs accepted that they had not complied with the notice requirements under section 237(2)(e)(i) of the Corporations Act. However, it was submitted that the Court should grant leave under section 237(2)(e)(ii) as the defendants have been aware of the proceedings since October, leave can be granted nunc pro tunc at the conclusion of the trial[6] and, if leave was granted, the plaintiffs’ pleaded case would not change – the application simply addresses technical issues of standing and the availability of relief in response to complaints raised by the defendants.
[6] Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859, [17].
It is to be recalled that counsel previously acting for the second to fourth defendants accepted that it was appropriate for the plaintiffs to represent Litigation Lending. Apparently, with a change of solicitors and counsel, a different view has been taken. No explanation for the change of position has been proffered. It has not been suggested that counsel earlier appearing did not act in accordance with his instructions.
Senior Counsel for the second to fourth defendants said that a grant of leave would shift the prime focus of the case, which had previously been oppression, to derivative actions against directors. It was accepted that the substantive matters to be litigated and the complaints as to the conduct of the second to fourth defendants had been pleaded. A submission was made that the application was just too late and that the second to fourth defendants had been prejudiced but there was no condescension to any particularity from this assertion. In my view, the plaintiffs’ failure to comply with the notice provision should not preclude a grant of leave.
Conclusion
The plaintiffs have satisfied me of all the matters required for a grant of leave under section 237 of the Corporations Act. I grant the plaintiffs’ application to represent Litigation Lending in the plaintiffs’ primary action and JustKapital’s cross-action nunc pro tunc.