Austwide Offshore Services Pty Ltd v Farrell

[2021] FCA 853

FEDERAL COURT OF AUSTRALIA

Austwide Offshore Services Pty Ltd v Farrell [2021] FCA 853

File number:	WAD 97 of 2020
Judgment of:	COLVIN J
Date of judgment:	27 July 2021
Catchwords:	CORPORATIONS - application by plaintiffs for leave to bring derivative proceedings on behalf of companies, for joinder of additional defendant and to amend originating process - where defendant brought interlocutory application to wind up companies and appoint liquidator - where competing interlocutory applications - application for joinder allowed - application to amend originating process allowed to limited extent - application for leave to bring derivative proceedings relisted at same time as hearing of application for winding up
Division:	General Division
Registry:	Western Australia
National Practice Area:	Commercial and Corporations
Sub-area:	Corporations and Corporate Insolvency
Number of paragraphs:	40
Date of hearing:	27 April and 1 July 2021
Counsel for the Plaintiffs:	Mr AC Willinge
Solicitor for the Plaintiffs:	Mills Oakley Lawyers
Counsel for the First, Second and Third Defendants:	Mr A Cheshire SC
Solicitor for the First, Second and Third Defendants:	Balmain Lawyers
Counsel for the Fourth and Fifth Defendants:	The Fourth and Fifth Defendants did not appear

ORDERS

WAD 97 of 2020

BETWEEN:

AUSTWIDE OFFSHORE SERVICES PTY LTD (ACN 163 303 571)

First Plaintiff

PAUL ANTHONY MUSCA

Second Plaintiff

AND:

JOHN FARRELL

First Defendant

EAST COAST MARINE CONTRACTING PTY LTD (ACN 000 700 461)

Second Defendant

SOUTHERN DREDGING PTY LTD (ACN 624 473 463)

Third Defendant

AUSTRALIAN BARGE HIRE PTY LIMITED (ACN 119 657 386)

Fourth Defendant

ESTUARY MANAGEMENT AUSTRALIA PTY LTD (ACN 094 190 280)

Fifth Defendant

ORDER MADE BY:	COLVIN J
DATE OF ORDER:	27 JULY 2021

THE COURT ORDERS THAT:

1.Karlene Farrell be joined as the sixth defendant.

2.There be leave to the plaintiffs to file an amended originating process in accordance with these reasons with such amended originating process to be filed and served on or before 3 August 2021.

3.The further hearing of the plaintiffs' interlocutory application dated 29 January 2021 as amended on 22 April 2021 (Interlocutory Application) be adjourned to a date to be fixed.

4.The interlocutory application by the first defendant for an order winding up the fifth defendant be listed for hearing together with the further hearing of the Interlocutory Application.

5.The costs to date that are of and incidental to the Interlocutory Application be reserved.

6.The matter be listed for a case management hearing at 9.15 am on 5 August 2021.

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

COLVIN J:

1. Mr Paul Musca and Mr John Farrell have been in business together for some time.  They are the directors of Estuary Management Australia Pty Ltd (EMA).  Four shares have been issued by EMA.  Two are held by Austwide Offshore Services Pty Ltd (Austwide) (an entity controlled by Mr Musca), one share is held by Mr Farrell and one share is held by his wife, Karlene Farrell.  Mr Musca and Mr Farrell are also the directors of Australian Barge Hire Pty Ltd (ABH) a wholly owned subsidiary of EMA.

2. There has been a falling out as between the interests of Austwide and Mr Musca on the one hand and the interests of Mr and Mrs Farrell on the other hand.  They each make allegations of impropriety against the other concerning the conduct of the affairs of EMA and ABH.

3. In April 2020, proceedings were commenced by Austwide and Mr Musca (together, the plaintiffs) against Mr Farrell and two companies associated with Mr Farrell being East Coast Marine Contracting Pty Ltd (East Coast) and Southern Dredging Pty Ltd (Southern).  The proceedings also named ABH and EMA as defendants.  It was alleged that there had been oppression in the conduct of the affairs of EMA and breaches by Mr Farrell of his duties as a director of ABH and EMA principally by the diversion of commercial opportunities to East Coast and Southern that ought to have been taken up for the benefit of ABH and EMA.  East Coast and Southern were alleged to have been involved in the breach of Mr Farrell's duties as a director.  It was also claimed that, in the events that had occurred, a number of pontoons were held by East Coast on constructive trust for EMA.  An account of profits or equitable compensation was sought from Mr Farrell and also from East Coast and Southern being parties who were said to have benefited from their involvement in the breach by Mr Farrell of his duties as a director.  The plaintiffs also sought an order that Mr Farrell transfer his shares in EMA to Austwide or Mr Musca at a value to be determined by the Court.

4. There were evident difficulties with some of the claims raised because they sought to assert claims to relief on behalf of EMA and ABH when they were not plaintiffs in the proceedings.

   Interlocutory application by the plaintiffs

5. By an interlocutory application brought at the end of January 2021, the plaintiffs seek to (a) join Mrs Farrell as a defendant; (b) amend their originating process; and (c) bring derivative proceedings on behalf of EMA and ABH.  They have provided a draft statement of claim that they propose to file if leave is given to amend and to bring the proposed derivative proceedings.

6. By the proposed amendments to the originating process, the plaintiffs would no longer seek an order requiring Mr Farrell to transfer his shares in EMA to them.  Rather, they would seek an order that would require Mr Farrell to acquire the shares of Austwide in EMA.  In effect, instead of requiring Mr Farrell to sell out his interest to the plaintiffs, they now seek to require Mr Farrell to buy out Austwide's interest.  The plaintiffs say that in order to pursue that relief it is appropriate that claims that EMA has against Mr and Mrs Farrell (and East Coast and Southern) (together, the defending parties) should be determined because, if they are determined favourably to the interests of Mr Musca they will result in an increase in the value of the shareholding in EMA.  Consequently, a greater amount will be required to be paid by Mr Farrell if the plaintiffs succeed in their claim to relief requiring Mr Farrell to purchase the shares of Austwide in EMA.  For the plaintiffs it is said that it is appropriate for leave to be given to bring the derivative proceedings so that there can be adjustments for the alleged losses caused to EMA and ABH before relief is granted on their oppression claim.

7. The submission to the effect that the proposed derivative proceedings should be allowed to proceed because of their significance for 'adjustments' to be made in formulating orders on the oppression claim differentiates this case from the more usual instance where leave is sought to bring derivative proceedings.  The justification for the derivative claims is said to be found in the need to determine the extent to which there is property and compensation due to EMA and ABH by reason of the alleged misconduct of the defending parties so that appropriate orders can be made to end the involvement of the plaintiffs in EMA and ABH.

8. The joinder of Mrs Farrell is sought to be justified on the basis of a claim that she was knowingly involved in the alleged breaches of duties as a director by Mr Farrell (being claims to be advanced on a derivative basis if leave is given), alternatively on the basis that as a shareholder in EMA she is a necessary party having regard to the nature of the relief sought.

   Response to the interlocutory application by the defending parties

9. Mr Farrell has indicated that he is a willing seller of his share in EMA (a position that also appears to pertain to the share held by Mrs Farrell).  However, if that course cannot be agreed then he says that the appropriate course is for orders to be made to wind up the affairs of EMA and ABH.  The position of the defending parties is that EMA is a vehicle for a quasi-partnership in respect of which there has been a breakdown in the relationship of trust and confidence and the appropriate remedy is a winding up.

10. Mr Farrell has filed an affidavit in the substantive proceedings in which he admits material aspects of the conduct alleged against him.  Therefore, certain aspects of the factual foundation for the claims against Mr Farrell, East Coast and Southern (sought to be pursued on a derivative basis) are not in issue.  However, there remain factual disputes as to some aspects as well as disputes as to the extent to which there should be relief and the form of relief.

11. Mr Farrell also points to aspects of the conduct of Mr Musca in relation to the affairs of EMA that he says gives rise to a proper basis for complaint.  There is some reference to these matters in correspondence but they are not yet the subject of any formal articulation in the proceedings.  By reason of their character, they are matters that might be raised in answer to the application by the plaintiffs for orders based upon alleged oppressive conduct or they might form the basis for claims that EMA might make against Mr Musca concerning the manner in which he has discharged his duties as a director.  I express no view as to their merits.  All that is relevant for present purposes is that the existence of the claims has been raised as a matter that is relevant to the resolution of the interlocutory application by the plaintiffs.

12. In the course of argument on the plaintiffs' interlocutory application, an application for appointment of a liquidator to each of EMA and ABH was foreshadowed on behalf of Mr Farrell.  The plaintiffs objected to any reliance being placed upon the prospect of such an application as a basis for opposing the plaintiffs' interlocutory application.  It was submitted that an application to wind up the companies was mere speculation because no such application was on foot.  Senior Counsel for Mr Farrell indicated that he held instructions to bring such an application and that Mr Farrell would give an undertaking to do so if that was considered necessary.

13. In those circumstances, it was submitted for the defending parties that the proposed derivative proceedings were not in the best interests of ABH and EMA.  Rather, any adjustments that were appropriate could and should be made through the process of winding up the affairs of EMA and ABH.  In that regard it may be observed that a liquidator would be responsible for considering whether to bring proceedings against the defending parties based upon the claims made by the plaintiffs and if so the terms upon which such proceedings might be resolved including by way of a court approved adjustment of distributions of the proceeds of administering EMA and ABH.

14. As to the amendment of the originating process, the defending parties did not oppose the application insofar as it sought to change the relief sought on the oppression claim.  However, to the extent that amendment was sought in order to bring the proposed derivative proceedings the application was opposed.

15. As to the proposed joinder of Mrs Farrell, it was submitted that leave to pursue the derivative proceedings should be refused and for that reason those claims did not support the proposed joinder.  It was then submitted that there was no proper basis disclosed for any claim of oppression as against Mrs Farrell and that relief was not sought against Mrs Farrell in relation to the oppression claim as the proposed relief by way of purchase of Austwide's shares was sought only against Mr Farrell.  As to the final point, in the course of oral submissions in reply, counsel for the plaintiffs moved an amendment to the interlocutory application to include an order allowing leave to amend the originating process to claim relief in terms that Mr Farrell, Mrs Farrell or both of them be required to purchase the shares of Austwide in EMA.

    A standstill for a time

16. After hearing argument on the application, the Court's decision was reserved with an indication to the parties that the decision would not be delivered prior to 14 May 2021 to enable an application of the kind foreshadowed by Senior Counsel for Mr Farrell to be brought.  On 12 May 2021, Mr Farrell filed an interlocutory application for an order that each of EMA and ABH be wound up and a liquidator be appointed.  As to the application to wind up ABH, application was made for leave for Mr Farrell to bring the application on behalf of EMA (by reason that EMA was the sole shareholder in ABH).

17. The matter came back before the Court on 31 May 2021 at which time the matter was further adjourned until 1 July 2021 to enable the parties to consider their respective positions and to explore the possibility of resolving their dispute.  It was indicated that delivery of reasons would be held in abeyance until after the adjourned hearing scheduled for 1 July 2021.

18. On 1 July 2021, the parties informed the Court that the dispute between them had not been resolved and the plaintiffs pressed their interlocutory application.  They made submissions to the effect that the application should be acceded to notwithstanding the application to wind up EMA and ABH.  It was submitted that it would be quite wrong to allow the application to wind up EMA and ABH to be a means by which the defending parties could circumvent the application to pursue 'the main action' (being a reference, it would seem, to the proposed  derivative proceedings).  I took this to be a submission as to the consequence that would flow if the plaintiffs' application was deferred pending the hearing of the application to wind up rather than any contention that there was something improper in the making of the application.

19. It was also asserted that the extent of any adjustment to be made to the value of the shareholding in EMA by reason of the conduct alleged as against the defending parties was 'very much a matter that the Court is appropriate to determine and it's very much not a matter which it's appropriate for a liquidator to attempt to determine'.  The import behind this submission is not apparent.  It was not suggested that the liquidator would adjudicate the matters the subject of the complaints made by the plaintiffs concerning claims that might be brought on behalf of EMA and ABH.  Rather, the defending parties suggested that a liquidator may be an appropriate person to make the judgment whether to bring those proceedings given the nature of the underlying dispute between the shareholders in EMA.  In considering whether to bring a claim against a third party a liquidator acts independently in the interests of all parties entitled to share in the proceeds of the liquidation.  The liquidator makes an assessment as to merits and likely recovery and decides whether to bring the claim.  Where appropriate, the decision may be the subject of an application to the Court for advice by way of directions.  Ultimately, if the liquidator decides for good reason that the claims should be brought, it is the Court (not the liquidator) that determines the merits of the claims.  In circumstances such as the present where the plaintiffs do not seek to continue their involvement in EMA and ABH but rather seek favourable terms on which they could exit and there appear to be counter-allegations between the parties, it might be thought that there is reason why an independent party such as a liquidator might consider whether the proposed claims should be brought.

20. It would also be open to a liquidator to consider the terms of a settlement by which the claims of all interested parties are resolved on the basis of an agreed distribution to shareholders.

21. One further advantage of a liquidation may be that it could enable the orderly sale of the business being undertaken by EMA and by its subsidiary ABH in circumstances where the existence of the dispute between the shareholders and directors of EMA makes that difficult to achieve.

22. It may well be that a reason why the liquidation should not be ordered on the application of Mr Farrell is that it would frustrate the claim by the plaintiffs to an order requiring Mr Farrell or Mrs Farrell or both of them to buy out Austwide on terms determined on the oppression claim, but it is not self-evidently the case that the determination of the dispute by derivative proceedings brought by the plaintiffs is the only appropriate course.

23. It was also submitted for the plaintiffs that the issue raised by the application for winding up was effectively an argument about the appropriate relief to be granted on the oppression claim.  However, with respect, that is not a correct characterisation of the nature of the issue that the Court must address now that there are competing interlocutory applications brought by the parties.  The basis for the application by Mr Farrell for winding up orders is not to be found in a counter-allegation of oppression or that winding up is the appropriate relief to be granted if the plaintiffs were successful on the oppression claim.  Rather, the claim is articulated as one which should be allowed based upon the just and equitable ground as applied to a quasi‑partnership arrangement where there has been a breakdown in trust and confidence.  In effect the affairs of the companies cannot be conducted when two camps with equal interests are unable to get along.  It is a separate basis for relief that is not dependent upon the outcome of the oppression claim.

24. All of which is not to accept the truth of the matters relied upon as the foundation of the application for winding up orders.  Rather, it is to expose the nature of the issues for resolution now that the application has been commenced by Mr Farrell.

25. Therefore, as matters presently stand, the question for the Court is whether to accede to the plaintiffs' interlocutory application in circumstances where an application to wind up EMA and ABH on the basis just described is pending.

    Determination of appropriate course

26. In my view, the appropriate course is to consider argument in support of the application to wind up EMA and then determine together both that application and the application by the plaintiffs for leave to bring derivative proceedings.  This course should be followed because one of the matters that will properly bear upon whether to order the winding up of EMA is the pending application to bring derivative proceedings against the defending parties and one of the matters that will properly bear upon whether to grant leave to bring the proposed derivative proceedings is the pending application for winding up orders.  Further, if the Court was to accede to the winding up application then the question whether the derivative proceedings should be allowed would fall for consideration in a context where EMA was in liquidation and its affairs were under the control of a liquidator.

27. Further, as matters presently stand, it seems to me that the only winding up application that need be considered is the application that is brought by Mr Farrell in his capacity as a shareholder to wind up EMA.  If an order was made to wind up EMA then it would be a matter for the liquidator to make a commercial decision as to whether it was in the best interests of EMA to wind up ABH or to sell its business undertaking or to sell the shareholding of EMA in ABH.

28. Therefore, I would re-list the application for leave to bring the proposed derivative action at the same time as the hearing of the application by Mr Farrell for an order winding up EMA.

29. As to the joinder of Mrs Farrell, I would order the joinder of Mrs Farrell to the substantive proceedings in any event.  In my view, she is a necessary party to the oppression action brought by the plaintiffs irrespective of whether any allegation is made against her of oppressive conduct.  Her joinder is required because her interest as a shareholder is affected by the proposed terms of any order for the purchase of the shares of Austwide in EMA.

1. I would allow the application to amend the originating process to a limited extent.  I note, in that regard, that the proposed amendments include a claim for leave to pursue the proposed derivative proceedings.  Leave should be given to include a claim for leave to bring identified derivative proceedings that will form part of the substantive claim made in the originating process.  However, much of the existing originating process appears to concern relief that is sought on a derivative basis and it is confusing to have an application that both seeks leave to bring derivative proceedings and includes claims that can only be brought if such leave is given.  There should be leave to the plaintiffs to regularise the position by filing an appropriate amended originating process that is confined to the relief sought on the oppression action and the application for leave to bring in the proceedings specified claims on a derivative basis.

2. The consequence of these orders will be that the question that will remain on the plaintiffs' interlocutory application will be whether to give leave to bring the proposed derivative proceedings as part of the substantive proceedings.

3. It follows that the appropriate order as to costs on the interlocutory application is to reserve those costs.

4. Otherwise, I will list the matter for a case management hearing for the purpose of listing for hearing the interlocutory application by Mr Farrell for an order winding up EMA and for any further submissions on the plaintiffs' interlocutory application for leave to bring derivative proceedings as part of the substantive proceedings, and for making directions as to the filing of materials for that hearing.

5. In the balance of these reasons I will identify some issues that may arise given the competing applications before the Court.  The fact that these matters have not yet been addressed by the parties further explains the course that I propose to follow given the two interlocutory applications.

   Issues to be addressed at the hearing of the interlocutory application by Mr Farrell and the further hearing of the interlocutory application by the plaintiffs for leave to bring derivative proceedings

6. The following is not intended to be a complete list, nor is it intended to suggest that any views have been formed as to the relevance of these matters.  However, as matters presently stand, the Court would be assisted by submissions that address the following matters.

7. It appears that the plaintiffs do not wish to continue their involvement in EMA (and its subsidiary ABH).  They say the Court should order Mr Farrell to acquire their shares in EMA.  Nevertheless they wish to agitate derivative proceedings on behalf of EMA against the defending parties.  They seek to do so at the cost of Mr Farrell.  The conduct that they wish to rely upon in bringing those claims appears to be, in substance, the same conduct that they rely upon to support their claim of oppression.  Therefore, it appears that the interest of the plaintiffs in pursuing the derivative proceedings is their interest in demonstrating that the value of their shareholding in EMA for the purposes of the terms of any order to be made in the oppression action includes the value of the claims that EMA can bring against Mr Farrell, East Coast and Southern.  The Court has power to bring matters of that kind to account in determining appropriate orders to be made if the oppression claim by the plaintiffs is upheld.  Assuming the position of the plaintiffs is as described, should that position be brought to account in deciding whether it is in the interests of EMA and ABH to give leave to bring the derivative proceedings?

8. It appears that in financial terms, the claims against East Coast and Southern are alternatives that overlap claims against Mr Farrell (or Mrs Farrell) personally.  Therefore, as the plaintiffs wish to end their involvement in EMA and ABH it appears that there may be little to be achieved by allowing the plaintiffs to pursue claims concerning the ownership of the pontoons or recovery from East Coast and Southern if Mr Farrell is said to be liable to the same extent as those claims and there can be adjustments made to reflect those claims if substantiated.  So to what extent and on what basis is it claimed that the purchase price to be paid by Mr Farrell (or Mrs Farrell) for Austwide's shares or a distribution to Mr Farrell (or Mrs Farrell) in any winding up of the affairs of EMA could not be adjusted to take account of the commercial value of such claims?

9. Do the defending parties oppose the making of orders on the oppression action that would adjust for any loss that is proved by the plaintiffs to have been suffered by EMA or ABH by reason of breaches by Mr Farrell (or Mrs Farrell) of duties as a director?

10. Precisely what is the nature of the property and the financial losses that the plaintiffs seek to recover on behalf of each of EMA and ABH by the proposed derivative proceedings?

11. If leave is given to bring the proposed derivative proceedings, it appears to be claimed that Mr Farrell should be ordered to bear the costs of the conduct of those proceedings.  The submissions in support of such an order seem to call in aid the matters that are alleged in support of the claims and assume those allegations are resolved favourably to the plaintiffs.  On what basis is it submitted that there should be a departure from the usual approach whereby the party given leave to bring derivative proceedings seeks any costs orders in those proceedings but otherwise indemnifies the company (or the company and the liquidator) as to any claims to costs?

I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Colvin.

Associate:

Dated:       27 July 2021