Brazis v Rosati
[2014] VSCA 264
•17 October 2014
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2014 0112
| PAUL BRAZIS | First Applicant |
| BRAZIS NOMINEES PTY LTD (ACN 102 996 001) | Second Applicant |
| FERNDELL PTY LTD (ACN 110 422 145) | Third Applicant |
| v | |
| EMILIO ROSATI | First Respondent |
| WASYL ROSATI | Second Respondent |
| NICK SPIROPOULOS | Third Respondent |
| ROSATI NOMINEES PTY LTD (ACN 102 995 862) | Fourth Respondent |
| NICK SPIROPOULOS NOMINEES PTY LTD (ACN 102 995 136) | Fifth Respondent |
| BONDILLY PTY LTD (ACN 165 032 593) | Sixth Respondent |
| NRJMD PTY LTD (ACN 160 435 245) | Seventh Respondent |
| KEY PROPERTIES INVESTMENTS PTY LTD (ACN 155 877 857) | Eighth Respondent |
| KIRTAS PTY LTD (ACN 003 231 141) | Ninth Respondent |
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| JUDGES: | KYROU JA and GINNANE AJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 17 October 2014 |
| DATE OF JUDGMENT: | 17 October 2014 |
| MEDIUM NEUTRAL CITATION: | [2014] VSCA 264 |
| JUDGMENT APPEALED FROM: | Re Form 700Holdings Pty Ltd [2014] VSC 385 (Robson J) |
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ARBITRATION – Application for leave to appeal against order staying part of proceeding and referring dispute to arbitration pursuant to s 8 of Commercial Arbitration Act 2011 – Some but not all parties to proceeding also parties to Shareholders’ and Unitholders’ Agreement containing arbitration clause – Claim seeks various relief pursuant to the oppression and derivative action provisions of Corporations Act 2001 (Cth) – Whether decision is wrong or attended with sufficient doubt to justify grant of leave and whether substantial injustice would occur if the decision is not set aside – Application granted.
CORPORATIONS – Oppression – Arbitration clause – Interrelationship between Corporations Act 2001 (Cth) and Commercial Arbitration Act 2011.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicants | Mr P L Ehrlich | Rankin & Co |
| For the Respondents | Mr E N Magee QC with Mr T M Dowling | DLA Piper |
KYROU JA
GINNANE AJA:
Introduction
This is an application for leave to appeal against an order made by a judge in the Trial Division staying a claim pursuant to s 8 of the Commercial Arbitration Act 2011. The judge held that those parties to the proceeding who are also parties to a Shareholders’ and Unitholders’ Agreement (‘Shareholders’ Agreement’) that contains an arbitration clause cannot continue an oppression claim under s 233 of the Corporations Act 2001 (Cth) because it falls within the arbitration clause.[1]
[1]Re Form 700 Holdings Pty Ltd [2014] VSC 385 (‘Reasons’).
The Appendix to this judgment sets out the parties to the proceeding, the parties to the Shareholders’ Agreement and the relationships between those persons and entities. The Appendix indicates that:
·Form 700 Holdings Pty Ltd, the other Corporations listed in item 1 of the Appendix (‘Corporations’) and other companies that collectively comprise the ‘Group’ of companies (‘Group companies’), operate a formwork business.
·The applicants — Mr Paul Brazis, Brazis Nominees Pty Ltd and Ferndell Pty Ltd — are shareholders in the Corporations.
·Mr Brazis is a director and shareholder in Brazis Nominees Pty Ltd and Ferndell Pty Ltd. He is also a former director of the Group companies.
·Brazis Nominees Pty Ltd is a shareholder in RBSC Investments Pty Ltd, which is the trustee of the RBSC Investments Unit Trust.
·Emilio Rosati is the father of Wasyl Rosati, who is a director of the Group companies. Nick Spiropoulos is also a director of the Group companies.
·Mr Brazis, Brazis Nominees Pty Ltd, Emilio Rosati, Mr Spiropoulos, Rosati Nominees Pty Ltd and Nick Spiropoulos Nominees Pty Ltd are the only parties to the proceeding who are also parties to the Shareholders’ Agreement. Thus Ferndell Pty Ltd, Wasyl Rosati and the sixth to ninth respondents are parties to the proceeding but not to the Shareholders’ Agreement.
·The Group companies are not parties to the proceeding or the Shareholders’ Agreement.
The Shareholders’ Agreement states that it was entered into in 2003 to regulate, among other things, the management and operation of the Group companies in relation to the ‘Business’. The term ‘Business’ is defined in cl 1.1 as: ‘the new formwork business to be carried out by the Group under this Agreement.’
Clause 4.5 of the Shareholders’ Agreement is headed ‘Equitable Dealing’ and provides that each shareholder agrees with each other shareholder to be just, equitable and faithful in its activities and dealings with the other shareholders and to use all reasonable endeavours to ensure the success of the Business. Clause 5.2 provides that each shareholder must use its reasonable endeavours to ensure that the board of directors carries out its responsibilities in a manner consistent with the Shareholders’ Agreement. Under cl 5.23, the shareholders agree not to interfere with the management or operations of a Group company.
Clause 12 of the Shareholders’ Agreement provides for a cascading set of dispute resolution steps, commencing with the issuance of a notice of dispute. Clause 12.1 states:
If a dispute arises in connection with this Agreement or in relation to the Business, a party to the dispute must give the other party or parties to the dispute notice specifying the dispute and requiring its resolution under this clause 12 (‘Notice of Dispute’).
If a dispute is not resolved within seven days after the notice of dispute is given, the dispute is to be mediated. Clause 12.6 of the Shareholders’ Agreement provides as follows:
If the dispute is not resolved within 28 days after the appointment of the mediator … the dispute is by this clause referred to arbitration. The arbitration must be conducted in Victoria by a single arbitrator.
We will refer to cll 12.1 and 12.6 of the Shareholders’ Agreement as ‘the Arbitration Agreement’.
Clause 15.4 of the Shareholders’ Agreement provides that the rights of a shareholder under the agreement are cumulative and in addition to any other rights of that shareholder.
On 23 August 2013, the applicants gave a notice of offer in accordance with the Shareholders’ Agreement to sell their shares in the Corporations and RBSC Investments Pty Ltd and their units in the RBSC Investments Unit Trust. The offer was not accepted.
The proceeding
In the proceeding, the applicants sought relief under the oppression and derivative action provisions of the Corporations Act 2001 (Cth).
The oppression claim is made against the first to fifth respondents. The applicants allege that the affairs of each of the Corporations and the affairs of the RBSC Investments Unit Trust are being conducted oppressively within the meaning of s 232 of the Corporations Act 2001 (Cth) (‘Oppression Claim’). They allege that Wasyl Rosati and Mr Spiropoulos carried out their duties as directors of the Group companies under the dictation of Emilio Rosati, and that Emilio Rosati and Mr Spiropoulos pressured Mr Brazis to resign as an executive and later as a director of the Group companies.
The applicants also allege that DLA Piper, in their capacity as solicitors for, variously, Emilio Rosati, Rosati Nominees Pty Ltd and Form 700 Holdings Pty Ltd, sent inappropriate correspondence to Mr Brazis’ lawyers. In that correspondence, DLA Piper allegedly complained about Mr Brazis’ performance, stated that the goodwill in the Group companies rests solely with Emilio Rosati and made threats about the value of Mr Brazis’ investment in the Group companies and his involvement in them as well as threats of winding up.
The applicants further allege that Emilio Rosati has caused the Group companies to incur unreasonable and significant expenses and to assume unreasonable risks for the Business.
Pursuant to s 233 of the Corporations Act 2001 (Cth), the applicants sought an order that such of the first to fifth respondents as the Court may determine purchase the applicants’ shares in the Corporations and RBSC Investments Pty Ltd and their units in the RBSC Investments Unit Trust at fair value, and after making all necessary adjustments and the taking of all necessary accounts.[2] The order was sought on the basis that ‘fair value’ would be assessed as if alleged breaches of ss 180 and 182 of that Act, fiduciary obligations and breaches of trust had not occurred.
[2]The originating process also sought interlocutory relief including an order that Emilio Rosati, Wasyl Rosati and Mr Spiropoulos account on oath for all profits paid or credited to any of them or their respective alter egos by any of the Corporations or RBSC Investments Pty Ltd since 1 July 2012.
The applicants also sought, either in addition to the other relief claimed or in the alternative, an order that Emilio Rosati, Wasyl Rosati and Mr Spiropoulos pay statutory compensation to the Corporations and RBSC Investments Pty Ltd for breaches of their duties as directors of those companies pursuant to s 1317H of the Corporations Act 2001 (Cth).
Further, or in the alternative, the applicants also sought a declaration that the eighth respondent, Key Properties Pty Ltd, holds certain land in Altona on trust for Form 700 Holdings Pty Ltd.
Pursuant to the derivative action provisions in s 237 of the Corporations Act 2001 (Cth), the applicants sought, if necessary, leave to commence two actions in the name of the Corporations and RBSC Investments Pty Ltd.
The first proposed derivative action would involve a claim against Emilio Rosati, Wasyl Rosati and Mr Spiropoulos for statutory compensation for loss arising out of alleged breaches of ss 181 and 182 of the Corporations Act 2001 (Cth) by them. The applicants allege that various transactions have been undertaken by Emilio Rosati and the Group companies without the applicants’ consent and that Emilio Rosati, Wasyl Rosati and Mr Spiropoulos are using funds and resources of the Group companies to obtain substantial benefits for themselves to which they are not entitled at law.
The second proposed derivative action would involve a claim against Emilio Rosati, Wasyl Rosati and Mr Spiropoulos for equitable compensation and or an account of profits.
The respondents sought an order that the proceeding be stayed pursuant to s 8 of the Commercial Arbitration Act 2011 on the basis that the Arbitration Agreement requires that the proceeding be resolved by arbitration. Section 8(1) of that Act provides:
A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests not later than when submitting the party’s first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.
The decision below
The trial judge relied on ACD Tridon Inc v Tridon Australia Pty Ltd,[3] in which Austin J stated that an oppression proceeding may be within the scope of an arbitration clause, subject to two limitations. The first is that an arbitrator does not have jurisdiction to determine whether the contract containing the arbitration clause is valid, and the second limitation is one of arbitrability.[4] As Austin J held that the arbitration clauses before him did not extend to the oppression proceeding under consideration,[5] his statement that an oppression claim is capable of falling within an arbitration clause was an obiter dictum.[6]
[3][2002] NSWSC 896 (‘ACD Tridon’).
[4]ACD Tridon [2002] NSWSC 896, [184]–[185], [187], [189]–[194].
[5]ACD Tridon [2002] NSWSC 896, [165]–[166], [170].
[6]ACD Tridon [2002] NSWSC 896, [178].
The trial judge accepted the proposition that an arbitration agreement may invest in an arbitrator the power to exercise statutory powers that a court would have in the same circumstances.[7] The judge reviewed the authorities and concluded that the words ‘in connection with’ in the Arbitration Agreement must be given a wide compass. In his Honour’s view, the connecting words go beyond disputes relating to the breach, construction, formation and performance of the Shareholders’ Agreement.[8]
[7]Reasons [74].
[8]Reasons [113].
The judge stated that in determining whether the Arbitration Agreement has been enlivened, it was necessary to consider whether the applicants were bringing the proceeding in their capacity as shareholders or in some other capacity. Likewise, it was relevant to consider whether the conduct of the respondents was performed in their capacity as shareholders or in their capacity as directors. His Honour stated that if it were the latter, the argument for the claim falling within the Arbitration Agreement was weaker. This is because, as the agreement in question is the Shareholders’ Agreement, the scope of matters ‘in connection with the Agreement or in relation to the Business’ may be limited to matters between the shareholders in their capacity as shareholders.[9]
[9]Reasons [118]–[121].
The judge concluded that where the allegedly oppressive conduct was conduct against the applicant shareholders in their capacity as shareholders and by the respondent shareholders in their capacity as shareholders, the dispute arises in connection with the Shareholders’ Agreement. There was less of a basis for such a finding in respect of conduct which did not affect the applicants in their capacity as shareholders, or by the respondents acting other than in their capacity as shareholders.[10] His Honour found that the applicants’ complaint is against the conduct of Emilio Rosati and Mr Spiropoulos, who are both shareholders, and relates to the conduct of the affairs of the Corporations the subject of the Shareholders’ Agreement.[11]
[10]Reasons [126]–[127].
[11]Reasons [119].
The judge considered that a proceeding taken to force one shareholder to purchase the shares of another shareholder, and therefore effectively end the relationship between the shareholders under the Shareholders’ Agreement, is a proceeding touching on and related to the agreement as it will affect the relationship of the shareholders under the agreement.[12] In his Honour’s view, the fact that the relief sought in the present case is akin to the relief available under the Shareholders’ Agreement where there is a breach of contract and that the result of the Oppression Claim might be to terminate the relationship between the shareholder applicants and the shareholder respondents means that the matter is a dispute arising in connection with the agreement or in relation to the Business.[13] Accordingly, his Honour found that the dispute between the applicant shareholders and the respondent shareholders encompassed in the Oppression Claim must be stayed pursuant to s 8 of the Commercial Arbitration Act 2011.[14]
[12]Reasons [116].
[13]Reasons [128].
[14]Reasons [130].
The Oppression Claim was not stayed to the extent that any of the parties to the proceeding are not parties to the Shareholders’ Agreement. In the judge’s opinion, the fact that not all the parties to the proceeding would be parties to an arbitration would not prevent an effective arbitration of the matter. This is because an arbitrator would be able to determine whether the defendants to the arbitration have conducted the affairs of the relevant companies in an oppressive manner. Moreover, if Mr Brazis and or Brazis Nominees Pty Ltd are successful in the arbitration, the arbitrator will be able to order the defendants to the arbitration to purchase the applicants’ shares.[15]
[15]Reasons [134].
The judge declined to stay the following claims which are not subject to the Arbitration Agreement:
(a) the applicants’ oppression claims against Wasyl Rosati;
(b) Ferndell Pty Ltd’s oppression claims against the first to fifth respondents; and
(c) the applications for leave to bring derivative proceedings on behalf of the Corporations and RBSC Investments Pty Ltd.[16]
[16]Reasons [144].
Application for leave to appeal and proposed grounds of appeal
Pursuant to s 17A(4)(b) of the Supreme Court Act 1986, the applicants require leave to appeal because an order staying a proceeding and referring a dispute to arbitration is an interlocutory order.[17]
[17]Hi-Fert Pty Ltd v Kiukiang Maritime Carriers Inc [No 3] (1998) 86 FCR 374, 388, 397.
It was common ground that the application for leave to appeal cannot succeed unless this Court is satisfied that the judge’s decision is wrong or attended with sufficient doubt to justify the grant of leave and that substantial injustice would occur if the decision is not set aside.[18]
[18]Niemann v Electronic Industries Ltd [1978] VR 431, 439–42.
In X v DPP (Vic),[19] Callaway JA stated that ‘the question whether a decision is attended with sufficient doubt to justify the grant of leave poses a flexible test and … the importance of the legal issues raised by a proposed appeal is one of the matters that may properly be taken into account.’[20]
[19][1995] 2 VR 622 (‘X’).
[20]X [1995] 2 VR 622, 626.
In the application for leave to appeal, the applicants rely on the folowing proposed grounds of appeal:
1. The learned judge erred:
(a)by positing and answering an incorrect question in law; the incorrect question being — is the matter a dispute arising in connection with the Shareholders Agreement or in relation to the Business (Reasons 128);
(b)by failing to posit and answer the correct question in law; the correct question being — is the proceeding an action brought in a matter which is the subject of an arbitration agreement within the meaning of s 8 of the Commercial Arbitration Act 2011 (Vic) (the ‘Act’).
2.The learned judge further erred at paragraph 128 of the Reasons by reasoning that ‘the fact that the relief sought is akin to the relief available under the Shareholders Agreement where there is a breach of contract and that the result of the Oppression Proceeding might be to effectively terminate the relationship between the shareholder plaintiffs and the shareholder defendants, in my view, means that the matter is a dispute arising in connection with the Shareholders Agreement or in relation to the Business …’ in circumstances where:
(a)the plaintiffs make no claim of breach of contract in this proceeding;
(b)such analogy is not relevant in determining whether the proceeding is an action brought in a matter which is the subject of an arbitration agreement within the meaning of s 8 of the Act;
(c)the possibility of termination of the relationship between the shareholder plaintiffs and the shareholder defendants is not relevant in determining whether the proceeding is an action brought in a matter which is the subject of an arbitration agreement within the meaning of s 8 of the Act. To the contrary, it is merely a result that may occur if the proceeding is not held to be an action brought in a matter which is the subject of an arbitration agreement within the meaning of s 8 of the Act and the plaintiffs succeed at trial.
3. Further to Grounds 1 and 2 above, having:
(a)(at paragraph 117 of the Reasons) accepted that the Group companies are not parties to the Shareholders Agreement; the Shareholders Agreement does not purport to govern the conduct of the affairs of the Group companies; no express allegation has been made that the defendants are in breach of the Shareholders Agreement; the matter does not involve any direct allegation involving the construction or performance of the Shareholders Agreement; and
(b)(at paragraph 129 of the Reasons) noted that clause 15.4 of the Shareholders Agreement provides that the rights of shareholders are cumulative,
the learned judge should have found that the proceeding was not an action brought in a matter which is the subject of an arbitration agreement within the meaning of s 8 of the Act.[21]
[21]In the notice of appeal, references to ‘the proceeding’ include a footnote which states: ‘Insofar as it seeks relief against the first and third to fifth defendants for relief pursuant to section 233 of the Corporations Act.’
Decision on application for leave to appeal
The application for leave to appeal raises important questions of law relating to the interrelationship between the Corporations Act 2001 (Cth) and the Commercial Arbitration Act 2011. The Commercial Arbitration Act 2011 removed the discretion that the Court previously had under s 53(1) of the Commercial Arbitration Act 1984 to refuse a stay, and established a new regime upon which, understandably, there is as yet little authority.
The matters pleaded by the applicants in relation to the Oppression Claim are directed to the questions arising under ss 232 and 233 of the Corporations Act 2001 (Cth) for the purpose of attracting the Court’s powers under s 233. A key issue is whether those questions also arise ‘in connection with’ the Shareholders’ Agreement or in ‘relation to the Business’ in circumstances where the rights sought to be enforced and the grounds relied upon are statutory rather than contractual. The reference to ‘a defined legal relationship, whether contractual or not’ in s 7(1) of the Commercial Arbitration Act 2011 is potentially relevant to this issue.
In their submissions before us, the parties largely focused on the degree to which the Oppression Claim raised matters that are regulated or governed by the Shareholders’ Agreement and the extent to which the disputes covered by the Arbitration Agreement extend beyond those relating to the breach, construction, formation and performance of the Shareholders’ Agreement.
On the basis of the nature and importance of the matters raised in the proposed notice of appeal, we are satisfied that the judge’s decision is attended with sufficient doubt to justify the grant of leave to appeal. Accordingly, the first limb of the test in Niemann v Electronic Industries Ltd[22] is satisfied.
[22][1978] VR 431, 439–42.
In the light of this conclusion, and our ultimate finding that it is appropriate to grant leave to appeal, it would be inappropriate for us to analyse the parties’ submissions on the correctness of the judge’s reasoning and on the grounds of appeal.
In relation to the second limb of the test in Niemann, the applicants submitted that substantial injustice will arise if the decision below is not set aside because it splits the applicants’ case and gives rise to the possibility of inconsistent factual findings. The respondents submitted that substantial injustice would not arise because there is little overlap between the claims that have not been stayed and the part of the Oppression Claim that has been stayed and that, in any event, the former claims are without substance. The respondents have also submitted that the grant of leave to appeal would be contrary to the overarching purpose of the Civil Procedure Act 2010 because the claims that have not been stayed are unmeritorious and might never be pursued.
In our opinion, the second limb of the test in Niemann is satisfied. Substantial injustice would occur if the decision is not set aside, as the applicants would experience delays and incur additional costs due to the bifurcation of their dispute with the respondents. The applicants ought not be compelled to arbitrate a claim unless it falls within the Arbitration Agreement.
Further, the applicants may not be able to obtain complete relief if they are unable to pursue all their claims in the Supreme Court. For example, insofar as the arbitration is successfully completed before the proceeding is finalised, the benefit of any judgment in any derivative action that is authorised by the Court will not enure for the benefit of the applicants. This is because, at the time of any such judgment, the applicants’ shares and units may have been sold pursuant to the arbitrator’s award, and any increase in the net assets of the Corporations or the RBSC Investments Unit Trust resulting from the derivative actions would benefit only the then current shareholders and unitholders.
It is inappropriate for this Court to speculate on whether the claims that have not been stayed will be pursued. Similarly the Court is not in a position at present to assess whether those claims lack substance. The respondents’ submissions in relation to the Civil Procedure Act 2010 can cut both ways. If the decision below is wrong, then it would be contrary to the overarching purpose of the Act for some of the applicants’ claims to be heard in the Supreme Court and a part of the Oppression Claim to be the subject of an arbitration.
For the above reasons we would grant the application for leave to appeal.
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Appendix
| Item | Name | Status | Party to proceeding? | Party to Shareholders’ Agreement? |
| Form 700 Holdings Pty Ltd | Members of the Group of companies carrying on the formwork business. Other companies are also members of the Group. | No | No | |
| RBSC Investments Pty Ltd | Trustee of the RBSC Investments Unit Trust. | No | No | |
| Paul Brazis | Director and shareholder in Brazis Nominees Pty Ltd and Ferndell Pty Ltd. Shareholder and former director of the Corporations. | Yes, first applicant | Yes | |
| Brazis Nominees Pty Ltd | Shareholder in some of the Corporations and RBSC Investments Pty Ltd. Unitholder in the RBSC Investments Unit Trust. | Yes, second applicant | Yes | |
| Ferndell Pty Ltd | Shareholder in some of the Corporations. | Yes, third applicant | No | |
| Emilio Rosati | Father of Wasyl Rosati. | Yes, first respondent | Yes | |
| Wasyl Rosati | Son of Emilio Rosati, director of the Corporations. | Yes, second respondent | No | |
| Nick Spiropoulos | Director of the Corporations. | Yes, third respondent | Yes | |
| Rosati Nominees Pty Ltd | Yes, fourth respondent | Yes | ||
| Nick Spiropoulos Nominees Pty Ltd | Yes, fifth respondent | Yes | ||
| Bondilly Pty Ltd | Yes, sixth respondent | No | ||
| NRJMD Pty Ltd | Yes, seventh respondent | No | ||
| Key Properties Investments Pty Ltd | Yes, eighth respondent | No | ||
| Kirtas Pty Ltd | Yes, ninth respondent | No |
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