Blakeney v Blakeney - [2015] WASC 73

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: BLAKENEY -v- BLAKENEY [2015] WASC 73

CORAM: MASTER SANDERSON

HEARD: 16 & 19 FEBRUARY 2015

DELIVERED : 3 MARCH 2015

FILE NO/S: COR 227 of 2014

MATTER :GERALDTON MOTOR BODY BUILDERS & FABRICATORS PTY LTD

BETWEEN: WILLIAM LESLIE BLAKENEY
Plaintiff
AND
TIMOTHY CHARLES BLAKENEY
First Defendant
BLAKENEY'S TRANSPORT EARTHMOVING & CRANE HIRE PTY LTD
Second Defendant

Catchwords:

Corporations law - Application for leave to bring action on behalf of company - Turns on own facts

Legislation:

Corporations Act 2001 (Cth)
Supreme Court Act 1935 (WA)

Result:

Leave granted

Category: B

Representation:

Counsel:

Plaintiff:     Mr G H Lawton
First Defendant             :     Mr D Vilensky
Second Defendant         :     Mr D Vilensky

Solicitors:

Plaintiff:     Lawton Lawyers
First Defendant             :     Bowen Buchbinder Vilensky
Second Defendant         :     Bowen Buchbinder Vilensky

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

Cooper v Myrtace Consulting Pty Ltd [2014] FCA 480
MG Corrosion Consultants Pty Ltd v Vinciguerra (2011) 82 ACSR 367
Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313

MASTER SANDERSON: This is the plaintiff's application for leave to bring an action in the name of Geraldton Motor Body Builders & Fabricators Pty Ltd (GMBB) against the first and second defendants. The application is brought under s 237(1) of the Corporations Act 2001 (Cth) . The applicant must satisfy the criteria for leave which are found in s 237(2) of the Act. That section reads as follows:
(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.
For the purpose of this action the background facts are relatively simple. The plaintiff and the first defendant are brothers. They are the only two shareholders and directors of GMBB. GMBB is the trustee of the T&B Investment Trust. The primary beneficiaries of the T&B Investment Trust are the plaintiff and the first defendant. 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 & Haulage Pty Ltd which for many years owned and conducted a crane hire and truck haulage business known as Geraldton Cranes & Haulage from premises in Boyd Street, Geraldton.
The plaintiff and the first defendant have fallen out. The reasons for the fracturing of the relationship are not relevant. The result is GMBB is deadlocked. There have been extensive negotiations between the parties in an attempt to resolve this deadlock. The plaintiff says the deadlock remains. The first defendant says an 'asset split agreement' has been reached and the parties have agreed to go their separate ways. In essence this is the nature of the present dispute between the plaintiff and the first defendant - the plaintiff says there is no agreement to split the assets of GMBB whereas the first defendant says there is such an agreement which has been put into effect and the parties are no longer connected.
It is common ground between the parties that in 2012 GMBB acquired a Liebherr 250 tonne mobile crane. GMBB paid $2,666,200 for the crane which was financed by a hire purchase agreement with the National Australia Bank. Repayments on the loan amount to $31,123.73 per month.
The plaintiff says the crane is and always has been the property of GMBB. The first defendant says as part of the asset split agreement he acquired right, title and interest to the crane to the exclusion of GMBB. It is common ground between the parties the crane is presently leased to Norwest Crane Hire. The lease agreement which was entered into on 29 July 2013 names as lessor the second defendant. This is because the first defendant says the asset split agreement gave him the crane and he in turn has transferred ownership to the second defendant. It is also common ground all payments made by Norwest Crane Hire have been retained by the second defendant. The second defendant has paid the lease payments to National Australia Bank.
The plaintiff now wants to take action seeking a declaration the crane remains the property of GMBB and seeking an account from the second defendant of the profits from the hire agreement with Norwest Crane Hire.
Turning to the criteria found in s 237(2) two points can be made. First, each of the five criteria must be satisfied if leave to proceed is to be given. If the plaintiff fails to establish one of the criteria the application fails. Second, if all five criteria are established then leave 'must' be given. The section does not embody a discretion. In its terms it is mandatory.
In this case the first and last of the criteria are easily satisfied. The company is deadlocked and there is no chance it will itself bring proceedings. The defendants conceded that point. The plaintiff had not given the 14 days notice as required by s 237(2)(e)(i). But it is clear if the notice had been given it would have made no difference to the company. That being so, I was satisfied it was appropriate to grant leave under s 237(2)(e)(ii). The real dispute between the parties was as to whether any or all of the remaining three criteria was satisfied.
The first question is whether or not the plaintiff was acting in good faith. What is meant by this requirement of good faith was considered by Palmer J in Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313. His Honour said:
[T]here are at least two interrelated factors to which the Courts will always have regard in determining whether the good faith requirement of s 237(2)(b) is satisfied. The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. Clearly, whether the applicant honestly holds such a belief would not simply be a matter of bald assertion: the applicant may be disbelieved if no reasonable person in the circumstances could hold that belief. The second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process.
These two factors will, in most but not all, cases entirely overlap: if the Court is not satisfied that the applicant actually holds the requisite belief, that fact alone would be sufficient to lead to the conclusion that the application must be made for a collateral purpose, so as to be an abuse of process. The applicant may, however, believe that the company has a good cause of action with a reasonable prospect of success but nevertheless may be intent on bringing the derivative action, not to prosecute it to a conclusion, but to use it as a means for obtaining some advantage for which the action is not designed or for some collateral advantage beyond what the law offers. If that is shown, the application and the derivative suit itself would be an abuse of the Court's process: Williams v Spautz (1992) 174 CLR 509, at 526. The applicant would fail the requirement of s 237(2)(b) [36] ‑ [37].
Although counsel for the defendants maintained there was a lack of good faith on the part of the plaintiff in this matter he was not able to point to any collateral purpose which the plaintiff had in bringing these proceedings. It is true there is animosity between the plaintiff and the first defendant. But that in and of itself cannot amount to a collateral purpose. It was submitted on behalf of the defendants the plaintiff was bringing this action in an attempt to establish there was no asset split agreement. Counsel for the defendants maintained the proper course of action was for the plaintiff to sue the first defendant seeking a declaration in relation to the asset split agreement.
It may be that there are alternative ways the plaintiff can proceed to bring to an end the financial relationship with the first defendant. But the question is whether when the plaintiff is seeking to take action in the name of GMBB he is acting in good faith. In my view there is no evidentiary basis to suggest otherwise. He is a director of the company and I accept based upon his evidence he has a genuine belief the 250 tonne crane is still owned by GMBB. The fact a shareholder and director is seeking to vindicate the rights of the company seems to me in the absence of evidence to the contrary to establish the plaintiff is acting in good faith. So that criteria is satisfied.
The plaintiff maintained it was in the best interests of the company to seek to recover funds to which it was entitled as a consequence of the hire of the 250 tonne crane. The defendants maintained it was not in the best interests of the company to take such action. In particular they focused on the fact the company would, contrary to its wishes, be dragged into litigation in which it would be exposed to an order for costs should the action fail. Referring to the explanatory memorandum to the CLERP Bill 1998 and Swansson counsel pointed out the test was not whether the derivative action 'may be, appears to be or is likely to be' in the best interests of the company. The plaintiff must establish the action is actually in the best interests of the company.
There is nothing in the evidence to suggest if leave was given and GMBB took action against the plaintiff any judgment sum could not be recovered from the second defendant. Furthermore, the authorities show 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 is in 'the best interests of the company': see MG Corrosion Consultants Pty Ltd v Vinciguerra (2011) 82 ACSR 367.
Counsel for the defendants maintained one of the reasons why any proposed action would not be in the best interests of the company was that the plaintiff had not established he had the financial capacity to indemnify GMBB in the event any action was unsuccessful and costs were awarded against GMBB. There was some evidence led by the plaintiff on this issue which I will detail below but for the moment it is worth considering the extent to which the capacity of the plaintiff to indemnify GMBB is a relevant consideration in an application such as this.
Counsel for the defendants relied heavily in his submissions on the decision of Davies J in Cooper v Myrtace Consulting Pty Ltd [2014] FCA 480. In particular counsel relied upon the following two paragraphs from that judgment:
Another of the issues for the court to consider in determining whether the proposed action is in the best interests of the company is whether the company would be prejudiced by being exposed to the costs and expenses of litigation and the risk of an adverse costs order. The grant of leave has often been made conditional upon the applicant for leave indemnifying the company for its costs of the proceeding and any adverse costs order against the company arising out of the proceeding. The case law emphasises the importance of such an indemnity as a means of addressing the risk of prejudice to the company from the commencement of the proceedings: Power v Ekstein (2010) 77 ACSR 302 ; [2010] NSWSC 137 at [108]; Fiduciary v Morningstar at [51]; South Johnstone at [69], [72] ‑ [73]; Wood v Links Golf Tasmania Pty Ltd (No 2) [2013] FCA 14 at [31]; Gaertner v Dharah Gibinj Aboriginal Medical Service Aboriginal Corp [2013] FCA 1330 at [53]; Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd (2011) 86 ACSR 432 ; [2011] NSWSC 1235 at [57]; Re Fishinthenet Investments Pty Ltd and Coastal Waters Seafood Pty Ltd [2014] NSWSC 260 at [30] ‑ [31].
Mr Cooper has deposed that he will indemnify the company for the costs in prosecuting the proceeding and for any adverse costs order but he has also frankly admitted that he does not have the financial capacity to meet those costs and that his only 'real' asset is his share in the company. It was contended for Mr Cooper that his inability to indemnify the company for its costs should not be determinative of the application against him and should be weighed in the balance with the factor that it would otherwise be in the interests of the company to permit Mr Cooper to bring an action in its name against Mr Ambrose to recoup the loss caused to the company by Mr Ambrose, as sole director, misappropriating the company's funds in breach of fiduciary duty. It was also submitted that real injustice will be done to Mr Cooper if leave is not given because he is a 50% shareholder with an interest in a fund that is entirely out of his control and which Mr Ambrose is diminishing by paying himself salary to which he is not entitled [29] ‑ [30].
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 GMBB 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.
It is convenient at this point to say something above the evidence in this action. When the proceedings were commenced they were supported by an affidavit of the plaintiff sworn 4 November 2014. The matter came on for hearing on 25 November 2014 and I made certain programming directions. The defendants then filed an affidavit sworn 16 December 2014. The plaintiff filed an affidavit in reply dated 20 January 2015 and the defendants filed an affidavit in reply on 30 January 2015. Given the matter had a fixed hearing date it might reasonably have been expected the parties would by then have filed all the evidence upon which they intended to rely. Regrettably that was not the case. The plaintiff filed a further affidavit of 13 February 2015 and the defendants filed an affidavit of Mr Vilensky sworn 16 February 2015 - the date of the hearing. The matter was adjourned part heard on 16 February 2015 and at the resumed hearing on 19 February 2015 the plaintiff sought to tender a further affidavit dealing with matters raised by counsel for the defendants during the course of his submissions. He also sought to tender an affidavit of Lesley Sophia Blakeney, the plaintiff and first defendant's mother.
Applications to rely upon late affidavits are, and probably always have been, an unfortunate feature of Master's Chambers. There are some occasions when to allow reliance upon a late affidavit would be patently unfair and leave will be refused. Sometimes the affidavit is innocuous and can be admitted without causing any injustice. The majority of cases fall in between. I determined in this case it was in everyone's interests if all relevant evidence was before the court and the matter proceeded as expeditiously as possible. I was not satisfied any of the evidence led in the late affidavits so prejudiced any party and adjournment was required to prevent an injustice. Accordingly I was satisfied all affidavit material relied on by the parties should be taken into account in determining this application.
There is nothing in the evidence to show either that the plaintiff intends to provide an indemnity to GMBB in relation to costs or that he has the wherewithal to do so. In pars 25 and 26 of his affidavit of 13 February 2015 the plaintiff says he has an intention to indemnify GMBB for costs up to $50,000. The affidavit of Mrs Blakeney is directed squarely at the question of costs. Attachment LSB1 to that affidavit is an invitation by Mrs Blakeney to the plaintiff to use an amount of $200,000 she has on deposit with the Bank of Queensland to advance any action which might be taken on behalf of GMBB.
Counsel for the defendants made the point that this evidence falls well short of being an undertaking as to costs backed with sound evidence of the plaintiff's financial position. Experience suggests $50,000 would not advance any action GMBB might take against the first defendant to any significant extent. Mrs Blakeney's affidavit does nothing more than show as at the date the affidavit was sworn she had available $200,000 which she was prepared to put at the disposal of the plaintiff. By now that situation may have changed.
One way to overcome that problem is to make the granting of leave subject to the plaintiff providing a bank guarantee or some other acceptable form of security to guarantee the position of GMBB in relation to costs. But as I have said it seems to me this would be better dealt with on an application for security for costs. For the present what can perhaps be said is that it would appear if action is taken in the name of GMBB there is a prospect of any order for security for costs being satisfied by the plaintiff personally.
There was one further matter raised by counsel for the defendants which is of some significance. Counsel submitted if a derivative action was permitted it would not actually resolve the difficulties which presently bedevil GMBB. If the action was successful then GMBB would be confirmed as the owner of the 250 tonne crane and would receive from the second defendant profits resulting from the hire. That would improve the position of GMBB in financial terms but it would not advance overall resolution of the dispute. That is to say, GMBB would still be deadlocked and some mechanism would need to be found to resolve that problem. Otherwise the crane may well remain idle at the end of the lease resulting in default under the chattels security held by National Australia Bank.

Counsel further submitted the best way to resolve the impasse between the plaintiff and the first defendant was for the plaintiff to apply to wind‑up GMBB on the just and equitable ground. If that application was successful - and counsel did not concede that it would be - then the liquidator could consider the question of who owned the 250 tonne crane and if he or she was of the view it was owned by GMBB action could be commenced. If the company did not have the capacity to finance the action then the plaintiff could provide the liquidator with funds. The plaintiff would be in no worse position than he would be if leave was given to bring the derivative action; and one way or another all disputes between the parties could be resolved.
It must be acknowledged there was much good sense behind counsel's submission. The difficulty is it conflates two issues - on the one hand the question of whether the 250 tonne crane is the property of GMBB and on the other the question of how the overall issues between the plaintiff and the first defendant are to be resolved. The fact that a derivative action will not resolve the issues between the plaintiff and the first defendant does not seem to me to mean the granting of leave is not in the best interests of the company. It may not be in the best interests of the plaintiff and the defendants (and perhaps the plaintiff ought to recognise that is the case) but that does not mean it is not in the best interest of the separate legal entity which is the company. In my view the company must be better off if a court rules it is the owner of the 250 tonne crane and it is entitled to the profits from any rental arrangement for that crane.
In all of the circumstances I am satisfied the evidence shows taking this action would be in the bests interests of GMBB. This criteria is satisfied.
That leaves the question of whether there is a serious question to be tried. It is commonly the case in matters such as this a party seeking leave will include a draft statement of claim which would be lodged if leave were granted. That was not done in this case. But that really does not matter. The claim would be a fairly simple one to plead. The company would plead ownership of the crane, conversion by the first and/or second defendants of the hire agreement, seek a declaration as to ownership and an account of the profits. Assuming such a pleading was advanced by the company the real question is whether or not the defendants, when met with such a claim, could obtain summary judgment. That really is the way the test set out in the statute is to be looked at.
Clearly the answer in this case is the defendants could not obtain summary judgment. The correspondence attached to various affidavits makes it plain the first defendant thought he and the plaintiff should go their separate ways and should enter into an asset split agreement to allow that to occur. He had his solicitors draft such an agreement and forward a copy to the plaintiff's then solicitors. But that agreement was never signed. Counsel for the defendants acknowledged that to be the case. However it is the position of the first defendant that in practical terms the asset split agreement the first defendant proposed was put into effect.
With respect to counsel the jurisprudential basis of this submission was never fully articulated. There was clearly no meeting of the minds between the parties - the correspondence makes that abundantly clear. It does seem each party has been dealing with assets of GMBB for their own benefit. But whether that is pursuant to some 'agreement' or whether it amounts to conversion of GMBB's assets by both the plaintiff and the first defendant is uncertain. There cannot be part performance of an agreement because no agreement was reached. Presumably the first defendant, if he was to advance what might be called the de facto asset split agreement, would have to rely on some form of estoppel. Whatever may be the merits of that defence at trial this is not a case where a defendant's summary judgment application would have any chance of succeeding. It follows in my view there is a serious question to be tried and this criteria is satisfied.
In the circumstances then I am satisfied that each of the requirements of the section has been met and the plaintiff should have leave to bring the derivative action. I will hear the parties as to the form that leave should take and as to costs.