Blakeney v Blakeney
[2016] WASCA 76
•12/05/16
BLAKENEY -v- BLAKENEY [2016] WASCA 76
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2016] WASCA 76 | |
| THE COURT OF APPEAL (WA) | |||
| Case No: | CACV:60/2015 | 15 FEBRUARY 2016 | |
| Coram: | BUSS JA MURPHY JA BEECH J | 12/05/16 | |
| 26 | Judgment Part: | 1 of 1 | |
| Result: | Appeal upheld Master's orders set aside Application for leave to bring proceedings dismissed | ||
| B | |||
| PDF Version |
| Parties: | TIMOTHY CHARLES BLAKENEY BLAKENEY'S TRANSPORT EARTHMOVING AND CRANE HIRE PTY LTD WILLIAM LESLIE BLAKENEY |
Catchwords: | Corporations Derivative actions Whether it is in company's best interests for leave to be granted to director to bring proceedings Turns on own facts |
Legislation: | Corporations Act 2001 (Cth), s 236, s 237, s 241 |
Case References: | Blakeney v Blakeney [2015] WASC 73 Chahwan v Euphoric Pty Ltd t/as Clay & Michel [2008] NSWCA 52; (2008) 245 ALR 780 Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31 Cooper v Myrtace Consulting Pty Ltd [2014] FCA 480 Ehsman v New Tech Time International Pty Ltd [2006] NSWSC 887; (2006) 58 ACSR 705 El Sayed v El Hawach [2015] NSWCA 26; (2015) 88 NSWLR 214 Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732 Lewis v Condon [2013] NSWCA 204; (2013) 85 NSWLR 99 Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66 Maher v Honeysett [2005] NSWSC 859 McEvoy v Caplan [2010] NSWCA 115; (2010) 78 ACSR 167 McLean v Lake Como Venture Pty Ltd [2004] 2 Qd R 280 Metyor Inc v Queensland Electronic Switching Pty Ltd [2002] QCA 269; (2002) 42 ACSR 398. MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367 Roach v Winnote Pty Ltd [2006] NSWSC 231; (2006) 57 ACSR 138 Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd [2011] NSWSC 1235; (2011) 85 ACSR 432 Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 True Value Solar Holdings Pty Ltd v Fernandez [2013] VSCA 27 Wood v Golf Links Tasmania [No 2] [2013] FCA 143 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA TITLE OF COURT : THE COURT OF APPEAL (WA) CITATION : BLAKENEY -v- BLAKENEY [2016] WASCA 76 CORAM : BUSS JA
- MURPHY JA
BEECH J
- First Appellant
BLAKENEY'S TRANSPORT EARTHMOVING AND CRANE HIRE PTY LTD
Second Appellant
AND
WILLIAM LESLIE BLAKENEY
Respondent
ON APPEAL FROM:
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram : MASTER SANDERSON
Citation : BLAKENEY -v- BLAKENEY [2015] WASC 73
File No : COR 227 of 2014
Catchwords:
Corporations - Derivative actions - Whether it is in company's best interests for leave to be granted to director to bring proceedings - Turns on own facts
Legislation:
Corporations Act 2001 (Cth), s 236, s 237, s 241
Result:
Appeal upheld
Master's orders set aside
Application for leave to bring proceedings dismissed
Category: B
Representation:
Counsel:
First Appellant : Mr M J Feutrill
Second Appellant : Mr M J Feutrill
Respondent : Mr A K Panna QC & Mr G H Lawton
Solicitors:
First Appellant : Bowen Buchbinder Vilensky
Second Appellant : Bowen Buchbinder Vilensky
Respondent : Lawton Gillon
Case(s) referred to in judgment(s):
Blakeney v Blakeney [2015] WASC 73
Chahwan v Euphoric Pty Ltd t/as Clay & Michel [2008] NSWCA 52; (2008) 245 ALR 780
Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31
Cooper v Myrtace Consulting Pty Ltd [2014] FCA 480
Ehsman v New Tech Time International Pty Ltd [2006] NSWSC 887; (2006) 58 ACSR 705
El Sayed v El Hawach [2015] NSWCA 26; (2015) 88 NSWLR 214
Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732
Lewis v Condon [2013] NSWCA 204; (2013) 85 NSWLR 99
Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66
Maher v Honeysett [2005] NSWSC 859
McEvoy v Caplan [2010] NSWCA 115; (2010) 78 ACSR 167
McLean v Lake Como Venture Pty Ltd [2004] 2 Qd R 280
Metyor Inc v Queensland Electronic Switching Pty Ltd [2002] QCA 269; (2002) 42 ACSR 398.
MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367
Roach v Winnote Pty Ltd [2006] NSWSC 231; (2006) 57 ACSR 138
Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd [2011] NSWSC 1235; (2011) 85 ACSR 432
Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313
True Value Solar Holdings Pty Ltd v Fernandez [2013] VSCA 27
Wood v Golf Links Tasmania [No 2] [2013] FCA 143
- REASONS OF THE COURT:
Introduction
1 This is an appeal against an order of the master granting leave to the respondent (William) to institute an action on behalf of a company (Geraldton Builders and Fabricators) against his brother, the first appellant (Tim), and against Tim's company, the second appellant (Blakeney's Transport), for recovery of monies paid by an unrelated company to the appellants in respect of the hire of a 250 tonne crane.
2 For the reasons that follow, we would uphold the appeal. In essence, that is because in our respectful opinion the master erred in concluding that it was in the best interests of Geraldton Builders and Fabricators for William to be given leave to commence the action on its behalf.
Background facts
3 The following background facts, found by the master,1 are, subject to some minor refinements, not in dispute:
(1) Tim and William are brothers. They are the only two shareholders and directors of Geraldton Builders and Fabricators.
(2) Geraldton Builders and Fabricators is the trustee of the T&B Investment Trust. The brothers are beneficiaries of that trust. The master described them as the primary beneficiaries. The trust deed was not in evidence before the master but a copy of the deed was received in evidence in the appeal. It reveals that the two brothers are members of a widely defined class of potential beneficiaries under a discretionary trust. The two brothers are also joint guardians and joint appointors.2
(3) The T&B Investment Trust was established to own plant, equipment, trailers, vehicles, spare parts and cranes which were utilised by a company known as Geraldton Cranes and Haulage Pty Ltd. Geraldton Cranes and Haulage owned and conducted a crane hire and truck haulage business from premises in Boyd Street, Geraldton. Its only directors and shareholders were William and Tim.
(4) Geraldton Builders and Fabricators has been in deadlock. There have been extensive negotiations between Tim and William in an attempt to resolve that deadlock. Before the master, William contended that the deadlock remained. Tim asserted that an asset split agreement had been reached under which the brothers had agreed to go their separate ways and divide the assets of their company.
(5) It was common ground that Geraldton Builders and Fabricators acquired a Liebherr 250 tonne mobile crane (the Crane), for which it paid $2,666,200. The Crane was financed through an agreement with the National Australia Bank (NAB). Repayments on the loan amounted to $31,123.73 per month. The master described the agreement as a hire purchase agreement, but the instrument itself reveals that Geraldton Builders and Fabricators was the owner of the Crane and granted an equitable mortgage to the bank.
(6) William contended that the Crane is and always has been the property of Geraldton Builders and Fabricators. Tim contended that as part of the asset split agreement he acquired the right, title and interest in the Crane to the exclusion of Geraldton Builders and Fabricators.
(7) It was common ground that the Crane was leased to Norwest Crane Hire in July 2013 naming Blakeney's Transport as lessor.
(8) All payments made by Norwest Crane Hire have been retained by Blakeney's Transport. Blakeney's Transport has paid loan repayments to the NAB.
4 Before the master, William applied for an order under s 236 of the Corporations Act 2001 (Cth)(WA) giving him leave to bring an action on behalf of Geraldton Builders and Fabricators seeking a declaration that the Crane remains its property, and seeking an account from Blakeney's Transport of the profits from the hire agreement with Norwest Crane Hire.
The evidence
The evidence relied on by William in support of the application
5 William relied on his affidavit sworn 4 November 2014 in support of the application. In summary, that affidavit stated that:
(1) the Crane had been acquired by Geraldton Builders and Fabricators, and financed through a hire purchase agreement;
(2) without William's authority, Tim had subleased the Crane to Norwest Crane Hire;
(3) Norwest Crane Hire had made payments to Blakeney's Transport and no payments had been received by Geraldton Builders and Fabricators;
(4) no agreement had been reached relating to the division of the assets of Geraldton Builders and Fabricators; and
(5) William proposed, if granted leave, to bring an action on behalf of Geraldton Builders and Fabricators seeking an account of the profits received by Blakeney's Transport from Norwest Crane Hire.
The evidence relied on by the appellants
6 In opposition to the application the appellants relied on two affidavits sworn by Tim, the first sworn 16 December 2014 (Tim's First Affidavit) and the second sworn 28 January 2015 (Tim's Second Affidavit). They also relied on an affidavit sworn by their solicitor, Mr Vilensky, on 16 February 2015.
Tim's First Affidavit; the correspondence between the parties
7 Tim's First Affidavit annexed extensive correspondence between the brothers and their solicitors from December 2012 until late August 2013. In the affidavit, Tim asserted that an asset split agreement had been reached between the brothers.3 The time at which, and the means by which, this agreement was said to have been made is not clear from the affidavit.
8 The correspondence annexed to the parties' affidavits is, relevantly, to the following effect.
9 By letter of 7 June 2013,4 Tim's solicitor wrote to William. The letter:
(a) expressed Tim's concerns about the manner in which William was running the business of Geraldton Cranes and Haulage;
(b) expressed concern that William had put some of the company's plant and equipment, including the Crane on sale when such assets were essential to the operation of the company's business;
(c) demanded that the process of selling the plant and equipment be brought to an end;
(d) stated that the company would either need to be sold or one of the brothers would need to purchase the other brother's share; and
(e) indicated Tim's willingness to negotiate regarding Tim purchasing William's share.
10 By email of 26 June 2013,5 Tim's solicitor attached a draft share purchase agreement by which Tim would acquire William's share of the business of Geraldton Cranes and Haulage.
11 By letter of 2 July 2013,6 William's solicitors:
(a) alleged that Tim had acted in breach of his duties to Geraldton Cranes and Haulage;
(b) demanded the return of assets of the company; and
(c) stated that the deadlock between the directors meant that the company should be wound up.
12 By letter of 11 July 2013,7 Tim's solicitor set out terms on which Tim was prepared to agree to split the assets and liabilities of Geraldton Cranes and Haulage. Those terms included that Tim would take over the Crane and the debt associated with it while William would retain ownership of the rest of the cranes used by the company. Like some other correspondence between the solicitors, this letter referred to the cranes as assets of Geraldton Cranes and Haulage, whereas the cranes and other significant assets were owned by Geraldton Builders and Fabricators.
13 By email of 31 July 2013,8 Tim's solicitor wrote to William's solicitors. The email:
(a) stated that the Crane was missing, saying it was presumably hidden by William; and
(b) stated that unless agreement was reached by 5 pm that day regarding Tim's asset split proposal, Tim would return permanently to run and manage the brothers' companies.
14 By email dated 5 August 2013,9 Tim's solicitor stated that the hire agreement for the Crane with Norwest Crane Hire was for $50,000 per month for six months, and that the contract was for the benefit of Geraldton Cranes and Haulage. The email also stated that if agreement on the asset split could not be reached quickly, Tim would return to run the business of Geraldton Cranes and Haulage.
15 By email of 13 August 2013,10 Tim's solicitor attached a draft asset split agreement and annexures. The email stated that the draft had not been signed off by Tim. It also referred to a settlement date of 16 August 2013, stating that it was vital that the parting of the ways took place on that date.
16 Clauses 2.1 to 2.4 of the draft agreement provided that the parties agreed that the assets of Geraldton Cranes and Haulage's business would be divided in the fashion stipulated in those clauses. One element of that arrangement was that William was to take sole possession of the assets in annexure A and Tim was to take sole possession of the assets in annexure B. The assets in annexure B included the Crane.11
17 On 15 August 2013, Tim's solicitor sent a further email to William's solicitors12. The email stated that:
(a) no response had been made to the draft asset split agreement;
(b) Tim was nevertheless preparing to complete settlement the following day, namely 16 August 2013;
(c) in anticipation of settlement, Tim had refinanced the Crane so that William was released from liability in respect of it; and
(d) irrespective of whether the draft agreement was executed, as at the close of business on 16 August 2013 Tim would consider the relationship between him and William to have come to an end as anticipated by the draft agreement, and intended to commence trading on his own account as a truck and haulage business utilising the assets he had with effect from 17 August 2013. The email also stated that William could and should do the same in respect of his own crane hire business under clauses 2 and 15 of the agreement, asserting that this would be the case even though the paperwork and documents required by clause 5 of the draft agreement had not yet been signed.
18 On 14 August 2013, William's solicitors sent an email to Tim's solicitor.13 The email stated that Tim had recently and unlawfully transferred licences belonging to Geraldton Cranes and Haulage and Geraldton Builders and Fabricators into the name of Blakeney's Transport without the consent or authority of William. The email also stated that William rejected the assertion that there was any agreement to split assets. The email demanded that Tim take immediate steps to reverse the unauthorised transfers and to provide confirmation that this had occurred.
19 On 19 August 2013, William's solicitors wrote to Tim's solicitor.14 Their email stated that:
(a) there was no agreement between the brothers;
(b) William would respond to the draft deed when other identified matters had been resolved;
(c) if no agreement could be reached, the Crane and all other assets of the business should be sold at auction, and all moneys received from the hire of cranes should be paid to the account of Geraldton Cranes and Haulage.
20 By email of 20 August 2013,15 Tim's solicitor stated that:
(a) events had overtaken William;
(b) with some exceptions, the assets had already been divided between the brothers, so there was no going back; and
(c) any attempt to wind up the company would be opposed by Tim as an abuse of process.
21 By email of 31 August 2013,16 William's solicitors again asserted that there was no agreement between the brothers and that this was self-evident from the nature and content of the communications between their solicitors, and from the fact that both brothers were still directors and shareholders of the two companies.
22 By letter dated 11 October 2013,17 Tim's solicitor stated that '[b]oth of our respective clients are now in physical possession of the assets that they will each be taking pursuant to the unsigned Asset Split Agreement'. The letter concluded by stating that to the extent there were any loose ends that needed to be tidied up, with goodwill and common sense they could be resolved in a sensible and commercial way.
23 By email of 14 October 2013,18 William's solicitors said that there was no asset split agreement.
24 By letter dated 14 August 2014,19 William's solicitors demanded payment of the Crane hire fees from Tim, saying that they should be paid to Geraldton Builders and Fabricators, and not to Blakeney's Transport.
25 By letter dated 16 September 2014,20 Tim's solicitor stated that the brothers had acted as if the asset split agreement was entered into 'as indeed it has'.
26 By letter dated 10 October 2014,21 William's solicitors stated that there was no evidence that an agreement had been entered into between the parties or that there had been anything more than negotiations between them.
27 Tim says William took possession and ownership of all the cranes apart from the 250 tonne Crane, which Tim took possession of.22 He says that 'for all intents and purposes the terms of the asset split agreement were implemented' and the brothers went their separate ways.
Tim's Second Affidavit
28 In par 5 of Tim's Second Affidavit, he asserts that 'it is not and cannot be in dispute that the assets split that was contemplated in principle by the unsigned draft Asset Split Agreement ... was given effect to in practice'.
29 Tim says that to give effect to the intent of the asset split agreement, all of the cranes which were owned or purchased by Geraldton Builders and Fabricators, apart from the 250 tonne Crane, were taken over by William, and since August 2013 have been used exclusively by William's new business, now owned by Geraldton Cranes Pty Ltd.23 He said there was no substantial dispute in that respect.24
30 In his affidavit in reply dated 13 February 2015, William said that in circumstances where Geraldton Cranes and Haulage had been in deadlock and where he was not in a position to manage its business, he took the cranes and allowed them to be used by his sister's company, Geraldton Cranes, on the basis that it would meet the repayment and other expenses associated with them.25
31 The effect of Tim's evidence is that it was not until November 2014, 15 months after the asset split agreement had been implemented, that William first raised any objection to that implementation, and in particular, to the Crane being owned by the appellants.26 However, as we have said, William's solicitors sent a letter on 14 August 2014 asserting that crane hire fees should be paid to Geraldton Builders and Fabricators and not to Blakeney's Transport.
The master's reasons
32 The master set out the background facts we have already referred to. He identified that three of the criteria in s 237(2) of the Corporations Act were in issue: whether the applicant, William, was acting in good faith; whether it was in the best interests of the company that the applicant be granted leave; and whether there was a serious question to be tried. The master's findings on the first two of those criteria, but not on the third, are challenged in this appeal.
Good faith
33 The master quoted the well-known passage on good faith from the judgment of Palmer J in Swansson v RA Pratt Properties Pty Ltd.27 He stated that there was no basis in the evidence to conclude that William had any collateral purpose, observing that the fact that there was animosity between the parties did not amount to a collateral purpose.28
34 While the master accepted that there may have been alternative ways in which William could have proceeded, the master was satisfied that as a director of Geraldton Builders and Fabricators William had a genuine belief that it continued to own the Crane. The master was satisfied that, in the absence of any evidence to the contrary, the fact that a shareholder and director was seeking to vindicate a right of the company was sufficient to establish good faith.29
The best interests of the company
35 The master referred to the submissions of the appellants that the grant of leave was not in the best interests of the company because, if leave were granted, the company would be exposed to an order for costs in the event that the action failed.30
36 The master found that there was nothing in the evidence to suggest that, if leave were granted and the action was successful, any judgment sum could not be recovered from Blakeney's Transport. The master suggested that the authorities show that it is generally reasonable to expect the pursuit of an action by or on behalf of a company against an officer for recovery of compensation for damage done to the company by the officer's breach of duty to be in the best interests of the company.31
37 The master gave detailed consideration to the question of the extent to which the capacity and willingness of William to indemnify the company was a relevant consideration in an application of this kind. The master referred to a passage from the judgment of Davies J in Cooper v Myrtace Consulting Pty Ltd.32 Then the master said as follows:33
It is clear from the authorities cited above leave is often made conditional upon a plaintiff agreeing to indemnify the company in whose name the action is to be taken against any adverse order for costs. It is somewhat difficult to see why that should be so. If a derivative action is commenced it could be anticipated any defendant would seek an order for security for costs under s 1335 of the Act. Indeed it is to be expected that the application for security for costs would be lodged with the appearance. Given in this case the company is deadlocked it is difficult to see how [Geraldton Builders and Fabricators] could argue it could meet any costs order made against it. It is a trustee company and although it may have a right of indemnity from the assets of the trust it could not from its own assets meet any order for security. In those circumstances the most likely outcome is an order for security be provided by the plaintiff.
It seems to me preferable any questions as to security for costs should be resolved in an application under s 1335 rather than on an application for leave to bring a derivative action. Furthermore, it is difficult to see how leave can be given conditionally. As I mentioned above the section is in its terms mandatory. Perhaps it can be said if an indemnity is provided to the company then it can easily be said it is in the best interests of the company to bring an action. In other words, it will only be in the bests interest of the company if it is not exposed to an order for costs.
In my view there are logical inconsistencies in that argument. If there is no question of counterclaim on the part of a defendant sued by derivative action - and there is no suggestion of that here - then it is difficult to see how if a company has an arguable case against the defendant it can be anything other than in its bests interests to bring proceedings. If the touchstone for bringing proceedings is the possibility of exposure to an adverse costs order then very few actions would ever be commenced by companies. There can be no guarantees in litigation. There are strong cases and not so strong cases and whether to proceed is a matter of weighing risks and rewards. The prospect of an adverse costs order is one factor to be taken into account.
If all that were not enough s 37 of the Supreme Court Act 1935 (WA) allows the court to make costs orders against persons who are not party to the proceedings. It is not difficult to imagine such an order being made against a person in the position of the plaintiff when he has caused the company to pursue a derivative action. The section further protects the company's position.
38 The master found that there was nothing in the evidence to show that William intends to provide an indemnity to Geraldton Builders and Fabricators, or that he has the financial means to do so.34 The master referred to William's affidavit of 13 February 2015, in which he said he intended to indemnify the company for costs of up to $50,000. The master also referred to an affidavit of William's mother, Mrs Blakeney, in which she offered an amount of $200,000 to advance any action brought on behalf of Geraldton Builders and Fabricators.
39 The master observed that leave could be made conditional on William providing a bank guarantee or some other acceptable form of security to guarantee the company's position in relation to costs. However the master said that 'this would be better dealt with on an application for security for costs'.35
40 The master then considered the appellants' submission that the contemplated derivative action was not in the best interests of the company because it would not resolve the deadlock which bedevilled it, and that different proceedings would be better placed to do so. While acknowledging there was 'much good sense' in this submission, the master concluded that the fact that the derivative action would not resolve the issues between Tim and William did not mean that the granting of leave was not in the best interests of the company.36 The master found that 'the company must be better off if a court rules that it is the owner of the 250 tonne crane and is entitled to the profits from any rental arrangement for that crane'.37
41 The master concluded that the evidence shows that the commencement of the action would be in the best interests of the company.38
Serious question to be tried
42 The master said that the question of whether there was a serious question to be tried could be answered by considering whether the appellants could obtain summary judgment.39 The master found that the appellants could not obtain summary judgment. He pointed out that the draft asset split agreement was never signed, as was acknowledged by counsel for the appellants.40
43 The master referred to Tim's position that 'in practical terms the asset split agreement was put into effect'.41
44 The master said that:
(a) 'there was clearly no meeting of the minds between the parties - the correspondence makes that abundantly clear';
(b) it seemed that each party had been dealing with the assets of Geraldton Builders and Fabricators for their own benefit, but whether that was pursuant to an agreement or whether it amounted to conversion by both parties was uncertain;
(c) Tim would likely rely on some form of estoppel at trial, but whatever the merits of such an argument it could not be said that the appellants' summary judgment application would succeed; and
(d) it followed that there was a serious question to be tried.42
Grounds of appeal
45 It is not necessary to set the grounds of appeal out in full. There are 10 grounds, running to six pages. In our respectful opinion, they tend to obscure rather than reveal the issues and the appellants' central contentions.
46 In substance, the 10 grounds assert that the master erred in being satisfied that William was acting in good faith and in being satisfied that it was in the best interests of Geraldton Builders and Fabricators that William be granted leave.
47 Grounds 2 to 5 and 7 attack the master's finding that it was in the best interests of Geraldton Builders and Fabricators for William to be granted leave in various respects. In summary, by those grounds the appellants assert that:
(1) the master failed to find, and to take into account, that Geraldton Builders and Fabricators was a trustee and had no beneficial interest in the rights the subject of the proposed derivative action (ground 2);
(2) the master failed to find, and to take into account, that, as a member of the class of beneficiaries of the trust, William could have commenced an action that would resolve the substantial issues in dispute (ground 3);
(3) the master failed to find, and to take into account, that William had a conflict of interest in that, as a director of Geraldton Builders and Fabricators, he had caused assets of the company to be used by his sister's company without accounting to Geraldton Builders and Fabricators and without authority from that company (ground 4);
(4) in weighing the potential exposure of Geraldton Builders and Fabricators to a costs order as part of assessing the question of whether it was in its best interests for leave to be granted, the master erred in taking into account:
(a) the likelihood of a security for costs order being made in that derivative action as a relevant factor; and
(b) that it was preferable to deal with costs in that context, rather than in the context of an assessment of the best interests of Geraldton Builders and Fabricators.
In circumstances where that company had no assets from which to satisfy an adverse costs order, and was not provided with the offer of a full indemnity by William and where, in any event, William did not have sufficient assets to meet such an indemnity, the potential exposure of the company to an adverse costs order militated against the conclusion that it was in its best interests for leave to be granted (ground 5); and
(5) taking into account the matters already referred to, the master erred in finding that it was in the best interests of Geraldton Builders and Fabricators that William be granted leave to commence the proposed derivative action (ground 7).
48 For reasons we will explain, it is not necessary to deal with the grounds of appeal insofar as they relate to the finding of good faith.
Derivative actions: statutory provisions
49 Section 236 of the Corporations Act permits a member or officer of a company to bring proceedings on its behalf if they are acting with leave granted under s 237.
50 Section 237(2) provides as follows:
Applying for and granting leave
(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.
Derivative actions: best interests of the company; legal principles
52 Section 237(2)(c) requires the court to be satisfied that it is in the best interests of the company that the applicant be granted leave. That requires more than satisfaction that the grant of leave may be, appears to be or is likely to be in the interests of the company. Rather, the court must be satisfied that it is in the best interests of the company for leave to be granted.43
53 The expression 'best interests of the company' imports the familiar concept of the interests of the company as a whole.44 The concept of the best interests of a company is concerned with the company's separate and independent welfare.45
54 The enquiry as to whether granting leave to bring the proposed derivative action is in the best interests of the company will normally invite attention to at least the following matters. First, the character and scale of the company. Second, the nature of the company's business, so that the effects of the proposed litigation on that business may be considered. Third, whether the substance of what the applicant seeks to achieve can be achieved by means other than a derivative action and without the involvement of the company in any litigation. Fourth, evidence as to the ability of the defendant to meet the judgment, or at least a substantial part of it, so as to assess whether the action will be of practical benefit to the company.46
55 In Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd47 Ball J identified the following matters as also relevant to the assessment of whether the grant of leave is in the best interests of the company: the prospects of success of the proposed action, the likely costs and likely consequences if it is not successful; and the nature of any indemnity the applicant has offered to the company. The likelihood of the company recovering under an indemnity is also relevant, as are the resources that the company will need to devote to the proceedings and the resources it has available.
56 A company may have sound reasons for not pursuing a cause of action and may legitimately have decided that the best interests of the company would be served by not taking action.48
57 It has been said that generally it is reasonable to expect that the pursuit of an action by or on behalf of a company against an officer for recovery of compensation for damage done to the company by the officer's breach of duty is in the best interests of the company.49 That will ordinarily be so at least as long as there are reasonable prospects of success, appropriate arrangements have been made in relation to costs and it is expected that a judgment can be successfully executed in whole or in substantial part.
58 An assessment of whether the grant of leave is in the best interests of the company does not involve the court in a detailed cost-benefit analysis of possible outcomes of the prospective litigation; an analysis that would be almost impossible for it to undertake with any degree of confidence or accuracy.50 The court should not permit an application for leave to become a trial of the proposed action.51
59 Section 237(2)(c) invites attention not simply to whether it is in the best interests of a company that proceedings be brought on its behalf, but whether it is in the best interests of the company that the particular applicant be granted leave.52
60 It cannot be said that an application is not in the best interests of the company merely because the applicant may also have a personal claim against the proposed defendant.53 Further, the existence on the part of an applicant of a personal animus against other members of the company does not, of itself, weigh significantly or decisively against the conclusion that the grant of leave is in the company's best interests, because this situation is likely to be common in the types of disputes which lead to derivative actions.54
61 In some cases,55 the application by a shareholder for leave is made in the context of litigation between shareholders. In one of those cases, McPherson JA observed that the fact there were two conflicting groups of shareholders, one of whom was unable to set the company in motion to vindicate its alleged rights, provided appropriate circumstances, in that particular case, for the grant of leave under s 237.56
62 The existence of other means for the applicant to pursue their grievance may be relevant to whether it is in the bests interests of the company for leave to be granted.57 However, the existence of alternative mechanisms for the pursuit by the applicant of their grievance is not in itself fatal.58
63 It is not or is most likely not in the best interests of the company for an applicant to be granted leave in circumstances where, because of the applicant's relationship with other companies involved in the proposed litigation, the applicant would have a conflict of duties if the litigation proceeded.59
64 In determining whether the grant of leave is in the best interests of the company, a balance is to be struck between the prejudice that the company will suffer if claims are pressed unsuccessfully on its behalf and there is an adverse costs order, and the advantage that it will gain if the claims are successful.60
65 Where the assertion of the company's claims is a manifestation of aspects of the overall dispute between the parties, it will often be appropriate for the court to address the question of costs in the event that the claims fail. One suitable way of doing that is to grant leave on terms that the applicant is responsible for the costs ordered against the company, and undertakes not to seek contribution or indemnity from the company.61
66 There are many cases in which the grant of leave has been made conditional on an undertaking from the applicant to indemnify the company for the costs of the action, and for any liability for costs incurred by the company, and not to claim contribution from it in respect of any adverse costs order. Some of these cases were collected by Barrett J in Roach v Winnote Pty Ltd62 and by Davies J in Cooper v Myrtace Consulting Pty Ltd.63
67 It has been said that, at least in some cases, in order to demonstrate that the grant of leave would be in the best interests of the company, it may be necessary for the applicant to demonstrate that, if the proceedings are unsuccessful, the company would be in no worse a financial position.64
68 If the applicant offers an indemnity, but does not have the financial capacity to provide it, the court may find it difficult to conclude that the grant of leave is in the best interests of the company.65
The nature of the appeal
69 The primary decision to grant leave involved the master making evaluative judgments about whether all of the criteria in s 237(2) were satisfied. As a result, the principles applicable to appeals against discretionary decisions apply.66
The disposition of the appeal: the grant of leave was not in the best interests of the company
70 The starting point is the recognition of the need for appellate caution before interfering with the evaluative judgment of the master that the grant of leave to William was in the best interests of Geraldton Builders and Fabricators.
71 In our respectful opinion, the learned master made errors of principle that warrant this court's interference with his evaluative judgment. Further, in all the circumstances of the case, we are satisfied that the conclusion that the grant of leave to William was in the company's best interests was one that was not open. We proceed to explain those conclusions.
72 In considering the relevance of the company's exposure to a costs order if the action failed, the master said that:
(a) it was difficult to see why orders granting leave have in many cases been made conditional on the applicant agreeing to indemnify the company for costs. The master stated that in the case of a deadlocked company one would expect an application for security for costs to be made and to be successful. He said that it was preferable for questions as to security for costs to be resolved on an application under s 1335 of the Corporations Act, rather than on an application for leave to bring a derivative action;
(b) it was difficult to see how leave could be given conditionally in circumstances where s 237 was in mandatory terms;
(c) 'it [was] difficult to see how if a company has an arguable case against the defendant it can be anything other than in its best interests to bring proceedings';
(d) whether to proceed is a matter of weighing risks and rewards;
(e) the prospect of an adverse costs order is one factor to be taken into account; and
(f) the availability and prospect of an order for costs against a person who is not a party to the proceedings provides further protection to the company's position.
73 While we agree with the observations outlined in (d) and (e), in our respectful view some of the other observations reveal errors of principle. The master's observation that it is preferable that questions as to security for costs be resolved on an application under s 1335 rather than on an application for leave to bring a derivative action seems to us to overlook the different framework in which questions of costs arise in the context of those two types of application. Questions of costs in the context of an application for leave under s 236 and an application under s 1335 for security for costs arise at different stages in different proceedings, requiring attention to different interests. When a person applies for leave to bring a derivative action, costs questions direct attention to the interests of the company that will in substance be the plaintiff in the proposed action. One facet of the interests of the company is the potential exposure of the company to an adverse costs order. In an application for security for costs under s 1335, the focus of attention is on the position of the defendant in the action, and the risk that, in the event that the defendant succeeds, its costs will not be paid.
74 Moreover, we do not think it can be safely assumed that the likelihood of an order for security for costs being sought and made removes the potential detriment to the company, arising from its exposure to an adverse costs order, in the grant of leave to a person to bring a derivative action on its behalf. For example, it is unlikely to be in the interests of a company for proceedings to be commenced if the likelihood is that, subsequently, an application for security for costs would be successfully made, and no security provided. In those circumstances, the company would (almost certainly) be liable for the defendant's costs incurred in the proceedings up to that point, and the proceedings would be stayed.
75 In our view, similar criticisms can be made of the master's statement that the availability of an order under s 37 of the Supreme Court Act that a non-party pay the defendant's costs provides further protection to Geraldton Builders and Fabricators. Whether such an order for costs may be made is a discretionary decision that would be made after the conclusion of the proceedings instituted by William on behalf of the company. In determining whether to make such an order, the focus is on the interests of the defendant to the proceedings, not on the interests of the plaintiff company.
76 Further, the master's observation that it is difficult to see how, if a company has an arguable case against the defendant, it can be anything other than in its best interests to bring proceedings is, with respect, as a general proposition, erroneous. Commencement of proceedings on the basis of an arguable case need not be in the best interests of the company. All of the relevant factors require careful consideration. Many arguable cases do not succeed, and unsuccessful cases generally result in an adverse costs order.
77 The master said there was no evidence that William had the financial means to provide an indemnity, nor that he intended to do so beyond a limited amount. The master concluded that, notwithstanding that, it was preferable for any requirement for a bank guarantee or other security from William to be dealt with on an application for security for costs.67 In our view, for the reasons that we have already given, that approach reveals an error of principle.
78 The master said that it is difficult to see how leave could be given conditionally in circumstances where s 237 is in mandatory terms. Under s 241(1) the court has a broad power to make any orders and give any directions that it considers appropriate in relation (among other things) to an application for leave. In our view, when s 237 and s 241 are read together, the court has power to grant leave on conditions, including a condition that the applicant undertake to indemnify the company in respect of its costs and any liability for costs. As we have said, there are many cases in which leave has been granted on such a condition; see [66] above.
79 In assessing whether the grant of leave was in the best interests of Geraldton Builders and Fabricators, the master did not refer to the fact that the company is a trustee and that the trust assets include the Crane. The master put weight on the fact that success in the proceedings could result in the recovery of compensation.68 The master did not refer to the fact that, given it is a trustee, success in the proposed action would not increase the assets to which the company is beneficially entitled and would not increase the value of its shares. The master did not address the question of whether Geraldton Builders and Fabricators' duties as a trustee would require it to commence the proposed action.
80 On appeal, William's counsel submits that one primary duty of a trustee is to protect the assets of the trust,69 and that if a trustee company does not take action to recover assets of the trust, that would be a breach of this duty.70 The submission was that this was 'self-evident'.71 We do not think the position is as simple as is asserted on William's behalf. Whether the failure by Geraldton Builders and Fabricators to bring an action against the appellants amounts to a breach of trust would depend upon an assessment of all the facts and circumstances. Where, as here, there is a real likelihood that the assets of the trust would be insufficient to satisfy the trustee's right to be indemnified for its liability for costs, if the action failed, and where no person of significant means has provided an indemnity to the trustee company, the company may well be justified in refraining from commencing proceedings. Further, Geraldton Builders and Fabricators was liable to make monthly payments to the bank in respect of the Crane, did not have ready funds to do so, and was in deadlock due to the dysfunctional relationship between its two directors. In these circumstances, there may well have been room for the view that maintaining the status quo, in which the trust assets were being dealt with by others and the repayments on the debts associated with those assets were being met by others, was in the interests of the company and the trust beneficiaries.
81 In any event, it was not demonstrated before the master, or before this court on appeal, that the failure by Geraldton Builders and Fabricators to bring an action against the appellants amounted to a breach of trust by Geraldton Builders and Fabricators.
82 In the circumstances, in our respectful opinion, the master erred in his exercise of discretion in that, in assessing whether the grant of leave was in the company's best interests, he failed to take into account that the company is a trustee of the Crane, and has no beneficial interest in it.
83 The preceding point should not be viewed in isolation. In our view, its significance should be seen in the light of the other circumstances of the case, to which we now turn.
84 In substance, the real dispute was one between the two brothers: Tim asserted that an asset split agreement had been reached, while William denied that this was so. Other avenues existed for the ventilation and determination of that dispute. In circumstances where Geraldton Builders and Fabricators was in deadlock, an application for the appointment of a new trustee could have been made. Alternatively, if the trustee, Geraldton Builders and Fabricators, refused to bring proceedings against the appellants, there is at least a respectable argument that William, as a beneficiary, guardian and appointor under the trust deed, would be 'the person best placed to advance the claim' and could have commenced proceedings on behalf of the trust.72 There is some uncertainty as to whether and in what circumstances the object of a discretionary trust can commence proceedings if the trustee refuses to do so. It is not necessary to determine whether, in this case, special circumstances would have existed to justify the commencement of proceedings by an object of a discretionary trust. In any event, William could have brought and could bring proceedings against his brother seeking a declaration that no asset split agreement had been reached. Geraldton Builders and Fabricators would be a necessary party to those proceedings. However, it could be made a defendant, adopting an essentially passive role. Instead, the grant of leave under s 237 makes it the primary moving party, with its interests being represented by one of the protagonists in the dispute between the brothers.
85 As we have said, we accept that the existence of alternative mechanisms for the pursuit by an applicant of their grievances is not in itself fatal to the grant of leave. Nevertheless, the existence of such other means may be relevant to whether it is in the best interests of the company for leave to be granted (see [62] above). In the circumstances of this case, we do not think it was open to find that it was in the company's best interests for it to be the sole moving party in proceedings involving a dispute about an asset of which it is trustee, where the dispute was, in substance, between the two brothers and which may ultimately involve a number of parties, thereby exposing the company to costs, in circumstances where its interests would be represented by one of the warring parties.
86 Further, the master found that each of the brothers had been dealing with the assets of Geraldton Builders and Fabricators for his own benefit, observing that whether that was pursuant to an agreement or whether it amounted to conversion of the company's assets by both brothers was uncertain.73 In our view, the circumstance that William had been dealing with other assets of Geraldton Builders and Fabricators for his own benefit, or, on his evidence, had caused his sister's company to do so, militated firmly against a conclusion that it was in the interests of Geraldton Builders and Fabricators for William to be granted leave to commence the contemplated proceedings. At least arguably, those circumstances would give rise to a conflict of interest on the part of William if leave were granted. If, as he contends, there was no asset split agreement, the question would arise as to whether the company should also bring a claim against William.
87 William submits that this matter should not weigh against the grant of leave, but rather should be dealt with at trial.74 We do not accept that submission. The existence or substantial prospect of a conflict of interest on the part of a person proposing to bring a derivative action is a circumstance militating against the conclusion that it is in the best interests of the company that the person be granted leave to do so.
88 William also submits that the grant of leave to him is in the interests of Geraldton Builders and Fabricators because no one else will bring this claim on its behalf.75 We do not accept that submission. As we have said, it was (and is) open to William to bring proceedings against his brother, in which the issues relating to the alleged asset split agreement can be ventilated and in which Geraldton Builders and Fabricators can be an essentially passive party, rather than being the moving party.
89 In these circumstances and for these reasons, in our view it was not open to the master to be satisfied that it was in the best interests of Geraldton Builders and Fabricators to grant leave to William to commence the proposed action by it against the appellants.
90 In light of the conclusions we have reached in relation to the master's judgment about the best interests of Geraldton Builders and Fabricators, it is not necessary to deal with the grounds of appeal insofar as they relate to his finding of good faith.
91 Assuming, without deciding, that leave to appeal is required, we would grant leave to appeal. For the reasons and in the circumstances already outlined, we think the master's decision reveals error, and substantial injustice would be done if it remains unreversed. It is in the interests of justice to grant leave.
Conclusion
92 For these reasons we would, insofar as it may be necessary, grant leave to appeal, uphold the appeal, set aside the master's orders and instead order that the application for leave to bring proceedings be dismissed.
93 We would hear the parties as to costs.
1Blakeney v Blakeney [2015] WASC 73 (Primary Reasons) [2] - [6].
2 Affidavit of Garry Hamilton Lawton dated 25 June 2015, attachment GHL1, pages 32 - 33.
3 Tim's First Affidavit [24] - [29].
4 Tim's First Affidavit, annexure TB10.
5 Tim's First Affidavit, annexure TB11.
6 Tim's First Affidavit, annexure TB12.
7 Tim's First Affidavit, annexure TB13.
8 Tim's First Affidavit, annexure TB15.
9 Affidavit of William Leslie Blakeney sworn 16 January 2015, annexure WLB 6.
10 Tim's First Affidavit, annexure TB16.
11 Tim's First Affidavit, annexure TB17.
12 Tim's First Affidavit, annexure TB18.
13 Affidavit of William Leslie Blakeney sworn 16 January 2015, annexure WLB2.
14 Tim's First Affidavit, annexure TB19, page 89.
15 Tim's First Affidavit, annexure TB19, page 88.
16 Affidavit of William Leslie Blakeney sworn 16 January 2015, annexure WLB8.
17 Affidavit of William Leslie Blakeney sworn 4 November 2014, annexure WLB6, page 12.
18 Affidavit of William Leslie Blakeney, sworn 16 January 2015, annexure WLB2.
19 Affidavit of William Leslie Blakeney sworn 4 November 2014, annexure WLB6.
20 Affidavit of William Leslie Blakeney sworn 4 November 2014, annexure WLB8.
21 Affidavit of William Leslie Blakeney sworn 4 November 2014, annexure WLB9.
22 Tim's First Affidavit [29].
23 Tim's Second Affidavit [8] - [11], [13].
24 Tim's Second Affidavit [12], [16].
25 Affidavit of William Leslie Blakeney sworn 13 February 2015 [6].
26 Tim's Second Affidavit [15] - [16]. See also Tim's First Affidavit [41].
27Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 [36] - [37].
28 Primary Reasons [10].
29 Primary Reasons [10] - [11].
30 Primary Reasons [12].
31 Primary Reasons [13] referring to MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367.
32Cooper v Myrtace Consulting Pty Ltd [2014] FCA 480 [29] - [30].
33 Primary Reasons [16] - [19].
34 Primary Reasons [22].
35 Primary Reasons [24].
36 Primary Reasons [25] - [27].
37 Primary Reasons [27].
38 Primary Reasons [28].
39 Primary Reasons [29].
40 Primary Reasons [30].
41 Primary Reasons [30].
42 Primary Reasons [31].
43Swansson [55] - [56]; Chahwan v Euphoric Pty Ltd t/as Clay & Michel [2008] NSWCA 52; (2008) 245 ALR 780[85].
44Maher v Honeysett [2005] NSWSC 859 [44]; Chahwan [88]; True Value Solar Holdings Pty Ltd v Fernandez [2013] VSCA 27 [13].
45Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31 [52]; Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732 [46].
46Swansson [57] - [60].
47Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd [2011] NSWSC 1235; (2011) 85 ACSR 432 [57].
48 Explanatory Memorandum, Corporate Law Economic Reform Programme Bill 1998 (WA) [6.38]; Fiduciary v Morningstar Research [44]; Wood v Golf Links Tasmania [No 2] [2013] FCA 143[27].
49MG Corrosion Consultants [60].
50Metyor Inc v Queensland Electronic Switching Pty Ltd [2002] QCA 269; (2002) 42 ACSR 398 [19].
51MG Corrosion Consultants [59].
52Metyor [17].
53Metyor [17] - [18]; Ehsman v New Tech Time International Pty Ltd [2006] NSWSC 887; (2006) 58 ACSR 705 [54]; Maher [45].
54Maher [45]; Ehsman[54].
55 For example, Metyor; Ehsman; and True Value Solar Holdings.
56Metyor [19].
57Cooper [33] - [34]; Swansson [59].
58MG Corrosion Consultants [60].
59McEvoy v Caplan [2010] NSWCA 115; (2010) 78 ACSR 167 [9] - [15].
60McLean v Lake Como Venture Pty Ltd [2004] 2 Qd R 280 [7]; Fiduciary v Morningstar Research [51].
61Fiduciary v Morningstar Research [51].
62Roach v Winnote Pty Ltd [2006] NSWSC 231; (2006) 57 ACSR 138 [25] - [29].
63Cooper [29].
64Wood [31].
65Cooper [30] - [32].
66 See, for example, Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66 [157] - [158].
67 Primary Reasons [24].
68 Primary Reasons [13], [27].
69 Appeal ts 18.
70 Appeal ts 23.
71 Appeal ts 23.
72El Sayed v El Hawach [2015] NSWCA 26; (2015) 88 NSWLR 214 [47] - [57]; Lewis v Condon [2013] NSWCA 204; (2013) 85 NSWLR 99 [106] - [110].
73 Primary Reasons [31].
74 Respondent's submissions [148]; appeal ts 30.
75 Appeal ts 31.
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