Chahwan v Euphoric Pty Ltd - [2008] NSWCA 52

NEW SOUTH WALES COURT OF APPEAL

CITATION:
Chahwan v Euphoric Pty Ltd trading as Clay & Michel [2008] NSWCA 52

FILE NUMBER(S):
40690/06

HEARING DATE(S):
15 February 2008

JUDGMENT DATE:
8 April 2008

PARTIES:
Elie Chahwan
Euphoric Pty Ltd t/as Clay & Michel
Bycoon Pty Ltd

JUDGMENT OF:
Beazley JA Tobias JA Bell JA

LOWER COURT JURISDICTION:
Supreme Court

LOWER COURT FILE NUMBER(S):
SC 1787/05

LOWER COURT JUDICIAL OFFICER:
Barrett J

LOWER COURT DATE OF DECISION:
28 September 2006

LOWER COURT MEDIUM NEUTRAL CITATION:
Chahwan v Euphoric Pty Ltd 2006] NSWSC 1002

COUNSEL:
A: R M Smith SC / V McWilliam
R: J E Marshall SC / G Lucarelli

SOLICITORS:
A: Simon Diab & Associates, Parramatta
R: Blake Dawson Waldron, Sydney

CATCHWORDS:
CORPORATIONS LAW – Application to bring proceedings on behalf of company – Statutory derivative action – Whether applicant acting in good faith in bringing proceedings – Whether in the best interests of the company that applicant be granted leave – Liquidation – Whether statutory derivative action available in circumstances of liquidation – Statutory interpretation – Reading down a defined term in relation to a particular part of the legislative scheme.

LEGISLATION CITED:
Companies Act 1993 (New Zealand) s 165
Corporations Act 2001 (Cth) ss 9, 236, 237, 239, 241, 300, 471B, 473, 477, 479, 506, 511, 536 and 1321
Corporations Law (Cth)
Contracts Review Act 1980 (NSW) s 7
Trade Practices Act 1974 (Cth) s 51AC

CASES CITED:
Ayoub & Anor v Euphoric Pty Ltd [2004] NSWCA 457
Aliprandi v Griffiths United Pty Ltd (1991) 6 ACSR 250
Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485
B L & G Y International Co Ltd v Hypec Electronics Pty Ltd [2001] NSWSC 705; (2001) 164 FLR 268
Brightwell v R F V Holdings Pty Ltd [2003] NSWSC 7; [2003] 44 ASCR 186
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384
Cape Breton Co v Fenn (1881) 17 CCh D 198
Carpenter v Pioneer Park Pty Ltd (2004) NSWSC 1007; (2004) 51 ACSR 299
Charlton v Baber [2003] NSWSC 745; (2003) 47ACSR 31
Christianos v Aloridge Pty Ltd (1995) 59 FCR 273
Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation (Cth) (1981) 147 CLR 297
Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732; (2005) 23 ACLC 1100
Foss v Harbottle (1843) 2 Hare 461; 67 ER 189
HPM Pty Ltd v Fear [2002] WASCA 249; (2002) 171 FLR 12
Hedley v Albany Power Centre Ltd (In liq) [2005] 2 NZLR 196
Kamper v Applied Soil Technology Pty Ltd [2004] NSWSC 891; (2004) 211 ALR 337; (2004) 50 ACSR 738
Mahanna v Sovereign Capital Ltd [2004] FCA 1040
Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859
Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589
Promaco Conventions Pty Ltd v Dedline Printing Pty Ltd [2007] FCA 586; (2007) 159 FCR 486
R v Young [1999] NSWCCA 166; (1999) NSWLR 681
Roach v Winnote Pty Ltd (in liq) [2001] NSWSC 822
Scarel Pty Ltd v City Loan & Credit Corporation Pty Ltd (1988) 17 FCR 344
Scuteri v Lofthouse & Another (2006) VSC 317; (2006) 202 FLR 106
Swansson v Pratt (2002) NSWSC 583; (2002) 42 ASCR 313
Williams v Spautz (1992) 174 CLR 509

TEXTS CITED:

DECISION:
Appeal dismissed with costs

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40690/06
SC 1787/05
BEAZLEY JA
TOBIAS JA
BELL JA
Tuesday 8 April 2008

ELIE CHAHWAN v EUPHORIC PTY LTD & ANOR

The Corporations Act 2001 (Cth) establishes, by virtue of Part 2F.1A, a statutory derivative action. The classes of persons listed in s 236(1) may seek the leave of the court to bring proceedings on behalf of a company or intervene in any proceedings to which the company is a party. Such leave may only be granted if, inter alia, the court is satisfied that the applicant is acting in good faith in making the application for leave: s 237(2)(b); and that it is in the best interests of the company that the applicant be granted leave: s 237(2)(c).

The appellant applied for leave under s 237 before Barrett J in the Supreme Court to bring proceedings on behalf of a company which was in liquidation. The respondent was the party against whom proceedings would be brought if leave were granted. It was common ground between the parties that the appellant was a person eligible to make the application in accordance with s 236(1).

The primary judge accepted as “settled law” that the derivative action in Part 2F.1A was available notwithstanding that the company the subject of the application was in liquidation. So much was established by a review of single instance decisions of the Supreme Court. Nevertheless, his Honour refused the application on the basis that the appellant had not established that he was acting in good faith within the meaning of s 237(2)(b); or that the granting of leave was in the best interests of the company within the meaning of s 237(2)(c). From that decision the applicant appealed to the Court of Appeal.

Three issues arose on the appeal:

Whether the derivative action in Part 2F.1A is available where the company the subject of the application is a company in liquidation;

Whether the appellant in this case was acting in good faith within the meaning of s 237(2)(b); and

Whether it was in the best interests of the company that the appellant be granted leave within the meaning of s 237(2)(c).

Held by Tobias JA (Beazley and Bell JJA agreeing) dismissing the appeal:

That Part 2F.1A has no application to a company in liquidation. The statutory context as well as the extrinsic materials identifying the mischief which that Part was intended to remedy (namely, the restrictions relating to the exceptions to the rule in Foss v Harbottle) were indicative of an intention that it apply only to a company as a going concern and not one under the control of a liquidator: para [124]. The following decisions, to the extent to which they held to the contrary, should no longer be followed: Brightwell v R F V Holdings Pty Ltd [2003] NSWSC 7; [2003] 44 ASCR 186; Carpenter v Pioneer Park Pty Ltd [2004] NSWSC 1007; (2004) 51 ACSR 299; Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31; Kamper v Applied Soil Technology Pty Ltd [2004] NSWSC 891; (2004) 211 ALR 337; (2004) 50 ACSR 738; Mahanna v Sovereign Capital Ltd [2004] FCA 1040; Roach v Winnote Pty Ltd (in liq) [2001] NSWSC 822; Scuteri v Lofthouse & Another (2006) VSC 317; (2006) 202 FLR 106.

In the present proceedings, even if Part 2F.1A were available, it was open to the primary judge to hold that the appellant had failed to satisfy s 237(2)(b). The onus fell on him to satisfy the court that he was acting in good faith in applying for leave to bring the proceedings. That enquiry was not confined to a consideration of the two factors identified by Palmer J in Swansson v Pratt (2002) NSWSC 583; (2002) 42 ASCR 313 (namely, whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success; and whether the applicant is seeking to bring the derivative suit for a collateral purpose in circumstances that would amount to an abuse of process). It extended to a consideration of whether the applicant was in reality seeking to further his or her own personal interests other than as a current or former shareholder of the company, rather than the interests of the company as a whole. It matters not that the applicant’s conduct would not constitute an abuse of process: paras [70]-[84].

The requirement in s 237(2)(c) that it be in the ‘best interests of the company’ that leave be granted is a relatively high standard: Swansson v Pratt (2002) NSWSC 583; (2002) 42 ASCR 313 followed. The existence in the applicant of a personal interest is not ordinarily a significant factor given that few if any such actions would be brought but for their personal interest. In this case, however, the personal interest of the appellant was such that it would preclude the company the subject of the application and its unsecured creditors from obtaining any benefit from the successful prosecution of the proposed claim against the respondent. The primary judge was therefore correct to find that the requirements of s 237(2)(c) had not been satisfied: paras [88]-[94].

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40690/06
SC 1787/05
BEAZLEY JA
TOBIAS JA
BELL JA
Tuesday 8 April 2008

ELIE CHAHWAN v EUPHORIC PTY LTD & Anor

Judgment

BEAZLEY JA: I agree with Tobias JA.
TOBIAS JA: This is an appeal from the decision of his Honour Justice Barrett in the Supreme Court to refuse the appellant’s application for leave under s 237 of the Corporations Act 2001 (Cth) (the Act) to commence proceedings in the name of and on behalf of Bycoon Pty Ltd (in liquidation) (Bycoon). Before determining the appeal, it is first necessary to outline in some detail the history of this proceeding and a related matter in the District Court.
On 9 June 2006 the appellant filed an Amended Statement of Claim in the Supreme Court (the ASC). In para 1 of the relief claimed he sought a declaration that the second respondent, Bycoon held all its interest in the properties known as Nos. 7-9 Glastonbury Avenue, Unanderra (the properties) being Lots 39 and 40 in DP 30082 upon trust for the appellant. Alternatively, in para 2 of the relief claimed he sought a declaration that Bycoon was holding the properties subject to an equitable charge in favour of the appellant on the basis that he had provided Bycoon with funds with which to purchase them.
Lot 40 is the subject of a first registered mortgage (the mortgage) in favour of the first respondent, Euphoric Pty Ltd (Euphoric), which it was alleged was granted by Mrs M H Ayoub (Mrs Ayoub), at the time of the sale a director of Bycoon, in breach of the general law duties which she owed that company as its director and in contravention of s 323(6) of the Corporations Law (the Law) and s 182 of the Act (Mrs Ayoub’s alleged contraventions).
Euphoric has at all material times asserted that it has a caveatable interest in Lot 39 which it had sought to protect by lodging a caveat against its title. Pursuant to paras 3 to 11 of the relief claimed in the ASC, the appellant sought declarations to the effect that the mortgage over Lot 40 and any equitable charge over Lot 39 were granted or otherwise arose by reason of Mrs Ayoub’s contraventions; that Euphoric therefore had no caveatable interest in Lot 39; that Euphoric acquired the mortgage over Lot 40 and any caveatable interest in Lot 39 with knowledge of the facts and circumstances which constituted Mrs Ayoub’s contraventions and was therefore involved therein within the meaning of s 79 of the Law and/or the Act.
The appellant also sought an order that Euphoric held the mortgage over Lot 40 and any caveatable interest in Lot 39 as constructive trustee for Bycoon. When the relief sought in paras 3 to 11 of the ASC is combined with that sought in paras 1 and 2, the case of the appellant was that, as a consequence of Mrs Ayoub’s contraventions, Euphoric, with knowledge of those contraventions, held the mortgage and the caveatable interest over Lots 40 and 39 respectively as constructive trustee for Bycoon who, in turn, held its interests under that constructive trust upon trust for the appellant. It followed that in order for the appellant to enforce against Bycoon his alleged interest in the properties, it was necessary for Bycoon to first establish that Euphoric held its interests in the properties as trustee for Bycoon.
However, as Bycoon was in liquidation and as the liquidator had declined to be involved in proceedings against Euphoric, the appellant by notice of motion filed on 28 June 2006 sought leave under s 237 of the Act to bring the proceedings the subject of the ASC in the name of Bycoon, against Euphoric, to the extent that they involved the declarations and orders sought for Bycoon against Euphoric: see paras 3 to 11 of the relief claimed. Section 237 sits within Pt 2F.1A of the Act, which provides for a statutory derivative action, and is extracted in full and discussed in detail below.
The appellant further sought an order under s 471B of the Act that he be granted leave to bring the proceedings the subject of the ASC to the extent that they involved the declarations sought against Bycoon in paras 1 and 2 thereof. As Bycoon’s liquidator did not oppose that grant of leave and as the claim was proprietary and could not be accommodated within the proof of debt regime, leave was granted by Barrett J on 28 September 2006. No issue arises with respect to that grant of leave.
That part of the appellant’s notice of motion which sought leave to bring proceedings in the name of Bycoon against Euphoric pursuant to s 237 of the Act was opposed by Euphoric and determined by Barrett J on 28 September 2006. His Honour declined to grant such leave and dismissed that part of the notice of motion with costs. It is against that order that the appellant now appeals to this Court.
A question arose at the commencement of the hearing of the appeal as to whether the primary judge’s order dismissing the notice of motion was a final order or whether it was an interlocutory order in respect of which leave to appeal was required. On the basis that leave was required, the appellant sought that leave nunc pro tunc which was not opposed and which the Court duly granted.
The factual background
In about November 1998, Bycoon acquired and became the registered proprietor of the properties with funds allegedly provided to it by the appellant. The appellant contends he provided the sum of $565,000, said to be the whole of the purchase price paid by Bycoon for the properties. Whether or not those funds were provided only by way of loan will be relevant to whether the appellant is entitled to the declaration sought in para 1 of the relief claimed under the ASC (that Bycoon holds its interest in the properties upon trust for the appellant). The properties were used for commercial purposes, there being a warehouse erected thereon. At no time were they involved in or used for the service station or fuel distribution operations of Bycoon referred to below.
At the time of their purchase and until 2 February 1999, the appellant was the sole director of Bycoon and from 29 May 1997 was the owner of all the issued shares in that company. For the purpose of s 236(1)(a) of the Act it was therefore common ground that he was a member of Bycoon and so entitled to apply to the Court for leave under s 237 to bring the proceedings the subject of the ASC on behalf of Bycoon in its name: see s 236(2).
Mrs Ayoub is the appellant’s sister and was the sole director of Bycoon from 2 February 1999 to May 2002 when she ceased to hold that office and the appellant once again became the company’s sole director.
At all material times Euphoric was a wholesaler of fuel under the Mobil brand and, prior to July 2000 had sold fuel to Madallah Trading Pty Ltd (Madallah) which operated a service station outlet from a fuel distribution operation for other retailers in the area from premises owned by My Five Star Holdings Pty Ltd at Nos. 13-15 Glastonbury Avenue, Unanderra. Mrs Ayoub was the sole director of that company and she and her four children held its issued shares equally.
The day-to-day dealings between Euphoric and Madallah were conducted through Mrs Ayoub’s husband, Mr Michael Ayoub, who was employed as the manager of the service station and who had been made bankrupt in 1991. At all material times the sole director and shareholder of Madallah was a Mr Camille Nasr, who is Mr Ayoub’s cousin.
In late May or early June 2000, Euphoric became concerned that Madallah had accumulated a substantial, albeit disputed, debt to it for fuel purchased in an amount of $293,339.62 (the Madallah debt). Euphoric therefore ceased supply to Madallah, causing Madallah to cease the service station business on or about 30 June 2000. The Madallah debt remained unpaid.
However, Mr Ayoub desired to continue to operate the service station and fuel distribution business from Nos. 13-15 Glastonbury Avenue. To that end he proposed to Euphoric the use of Bycoon as the corporate vehicle to facilitate those operations. Although Mrs Ayoub had originally been the sole shareholder of the four issued shares in Bycoon, her shareholding had ceased in 1997, after which the appellant was shown in the relevant records of the company as being its sole shareholder and was such in 2000. However, Mrs Ayoub was Bycoon’s sole director at this time.
Apart from the unpaid Madallah debt, Euphoric was reluctant to supply fuel to Bycoon as it had previously lost a considerable sum of money in unpaid fuel supplied to a company which had gone into receivership and of which Mr Ayoub’s brother was a director and shareholder. It was also concerned as to the family relationship that Mr Ayoub had with Bycoon through his wife.
Ultimately Euphoric agreed to supply fuel to Bycoon on credit on certain conditions. First, that Bycoon agree to the transfer to it of, and take responsibility for, the Madallah debt; second, that Mrs Ayoub, as the sole director of Bycoon, guarantee to pay Euphoric any money due if Bycoon defaulted; and third, that Bycoon give a first registered mortgage to Euphoric over the properties as security for any unpaid amounts.
Mrs Ayoub completed a credit application and guarantee on 28 June 2000. The transfer of the Madallah debt to Bycoon was the subject of an undated instrument which was referrable to an amount owing by Madallah to Euphoric as at 7 July 2000. Mrs Ayoub signed on behalf of Bycoon and Mr Nasr on behalf of Madallah. Mrs Ayoub executed the mortgage on the same day. Euphoric thereupon commenced the supply of fuel to Bycoon with the first order being made on 7 July 2000.
Bycoon proceeded to trade uneventfully until 31 October 2000 when the first of a series of loads of fuel extending to 17 November 2000 was delivered. A number of invoices were issued by Euphoric with respect to those loads, but Bycoon denied ever having received the invoices or the fuel to which they related. Payment of the invoices was therefore not made. In the result, faced with its refusal to pay the outstanding Madallah debt and the new invoices, Euphoric ceased supply of fuel to Bycoon.
On 16 August 2001 Euphoric instituted proceedings in the District Court against Mrs Ayoub on her personal guarantee and for the unpaid fuel supplied to Bycoon (the District Court proceedings). It later joined Bycoon to those proceedings. The amount claimed was $668,072.96, comprising the Madallah debt of $290,380.41 and the unpaid invoices, which themselves totalled $377,692.55.
The District Court proceedings were heard by his Honour Acting Judge Hungerford who, on 31 March 2004, found in favour of Euphoric and entered a verdict and judgment against Mrs Ayoub and Bycoon on a joint and several basis in the amount claimed plus interest of $234,136.24 resulting in a total judgment amount of $902,209.20. An appeal to this Court by Mrs Ayoub and Bycoon was dismissed on 15 December 2004 (Ayoub & Anor v Euphoric Pty Ltd [2004] NSWCA 457) and the High Court refused their application for special leave on 9 September 2005. Bycoon was wound up by court order on 14 November 2005 and Mrs Ayoub was placed into bankruptcy on 13 December 2005.
Mrs Ayoub and Bycoon’s primary defences were, first, that the Madallah debt did not exist, and, second, that neither any fuel nor any of the invoices relating to that fuel were received. Both defendants maintained that all fuel purchased by Madallah and Bycoon had been paid for. His Honour rejected those defences.
Mrs Ayoub also raised issues with respect to her personal guarantee, arguing that she was unaware that what she was signing was a guarantee and that she was therefore entitled to be relieved from any liability thereunder pursuant to s 7 of the Contracts Review Act 1980. Judge Hungerford also rejected this defence.
The findings of his Honour Acting Judge Hungerford relevant to the appeal

Having found that at the time Madallah ceased trading in June 2000 it owed Euphoric an amount of $290,380.41 for unpaid petroleum and diesel fuel, his Honour then turned to the transaction whereby Euphoric alleged that Bycoon had assumed responsibility for the Madallah debt. His Honour’s findings relevant to the issues in the appeal can be summarised as follows:
(a)By late May 2000 Euphoric’s management became aware of the substantial Madallah debt;
(b)It was then decided to cease fuel supplies to Madallah after which the relevant officer of Euphoric became aware in July 2000 of the existence of Bycoon, a company it understood to be associated with Mr and Mrs Ayoub, as having opened an account with Euphoric for the supply of fuel on credit;
(c)That officer also understood that the account would be supported by a mortgage over property and a personal guarantee and that the outstanding Madallah debt would be assumed by Bycoon in exchange for Euphoric continuing to supply fuel on credit to Mr and Mrs Ayoub’s company; it was only on the basis of those arrangements and the security offered that the relevant officer of Euphoric supplied to Mr Ayoub with fuel;
(d)Bycoon thereupon took over the business formerly conducted by Madallah at the Unanderra service station premises together with its employees and customers;
(e)There was a continuing need for Mr Ayoub to be employed by or engaged in a business with which he was familiar so as to earn income to support his wife and four dependant children: he was therefore anxious to commence trading with Euphoric as Bycoon as soon as Madallah ceased such trading;
(f)That was the reason why Bycoon was prepared to assume the unpaid (albeit disputed) Madallah debt. In other words, because Mr Ayoub wanted to resume trading with Euphoric “so as to make money”;
(g)It was to Mr Nasr’s benefit, he being the sole director and shareholder of Madallah, for Bycoon to take responsibility for the Madallah debt; he was aware that it was a condition of Euphoric supplying fuel to Bycoon that the latter agree to take over responsibility for that debt;
(h)Accordingly, the debt transfer was signed by Mr Nasr and Mrs Ayoub on 7 July 2000 and represented an acceptance between them, in effect, that the Madallah debt (subject to any dispute) being transferred or novated to Bycoon and the latter agreeing to be responsible to Euphoric for its payment. Euphoric thereupon agreed, consistent with the conditions which it had indicated would be required before it was prepared to supply fuel on credit to Bycoon, to supply that fuel on the terms set out in a credit application executed on behalf of Bycoon by Mrs Ayoub on 28 June 2000.
Later, Mrs Ayoub, acting with the appellant, became dissatisfied with Mr Ayoub’s management of Bycoon after it lost the fuel supply from Euphoric in November 2000. They excluded him from the business in early 2001.
In response to Mrs Ayoub’s submission that she was unaware that she was signing a personal guarantee, Judge Hungerford found as follows:
“…She was aware of the proposal for Bycoon to operate the service station, she knew Bycoon wished to obtain fuel from Euphoric, she was aware of the conditions imposed by Euphoric on Bycoon for fuel to be supplied [on credit], and she understood the significance of commercial arrangements in the making of contracts.”
The appellant’s allegations in the Amended Statement of Claim
Paragraph 10 of the ASC alleged the following (the July 2000 agreement):
“On 7 July 2000 Euphoric agreed with Bycoon that:
(a)Bycoon would become liable to Euphoric for the Madallah debt in substitution for Madallah.
(b)Euphoric would release Madallah from liability for the Madallah debt.
(c)Euphoric would supply Bycoon with fuel on credit.
(d)Bycoon would provide security for the Madallah debt for any indebtedness for fuel sold to a limit of $600,000.
(e)[Mrs Ayoub] would guarantee Bycoon’s indebtedness in (d).”
Under the heading “Particulars”, it was asserted that the terms of the agreement referred to were those found by Judge Hungerford in the District Court proceedings.
Paragraph 13 of the ASC alleged that in entering into the July 2000 agreement and in executing the mortgage pursuant to its terms and providing it to Euphoric, Mrs Ayoub was in breach of her duties as a director to first, act in good faith and in the best interests of Bycoon; second, to act for a proper purpose; and, third, not to make improper use of her position as a director to gain directly or indirectly an advantage for herself or for any other person or to otherwise cause detriment to Bycoon. The first two of those duties, it was alleged, were imposed on Mrs Ayoub by the general law and the third was imposed by s 232(6) of the Law and s 182 of the Act.
The particulars to para 13 of the ASC were as follows:
“Euphoric was owed the Madallah debt. It had no security for that debt. Madallah had no, or insufficient, assets to pay the debt. The provision of the mortgage was to cause
(a)Bycoon to become legally liable for $293,000.00 for no benefit to it;
(b)Bycoon to provide Lot 40 of the property as security for the debt in (a);
(c)Euphoric to obtain valuable security for the Madallah debt when, but for the Agreement, it had none;
(d)Madallah to be released (for no consideration) from liability for its debt;
(e)Mr Ayoub to continue fuel trading activities and to remain in employment and obtain money from fuel trading;
(f)The former director to benefit indirectly from (e);
(g)The granting of the mortgage was an objectively improvident transaction entered into for the benefit of Euphoric, Madallah, Mr Ayoub and the former director and to the detriment Bycoon [sic].”
Paragraph 14 of the ASC then alleged that Euphoric knew that Bycoon’s granting of the mortgage was
“(a) Not in the best interests of Bycoon;
(b) Not for a proper purpose;
(c)Resulted from the former director [Mrs Ayoub] using her position as director to secure an advantage for herself and/or for Euphoric and Madallah and to cause detriment to Bycoon.”
Particulars provided to that paragraph asserted that the relevant officers of Euphoric knew that the granting of the mortgage allowed Mr Ayoub (who they wrongly believed to be a director of Madallah) to continue his fuel retailing and distribution operations and, further, that it was for the benefit of Euphoric, Madallah and Mr Ayoub and, indirectly, Mrs Ayoub and not for the benefit of Bycoon.
Paragraph 15 alleged that Euphoric procured the contraventions by Mrs Ayoub referred to in para 13 and that it was knowingly concerned in, or party to, those contraventions.
Paragraph 17 alleged that such conduct, being in connection with the possible supply of goods to Bycoon, was in the circumstances unconscionable and in contravention of s 51AC of the Trade Practices Act 1974 (Cth).
Paragraph 19 alleged that had Mrs Ayoub and Euphoric not engaged in the relevant conduct then
“(a) The July 2000 Agreement would not have been made;
(b)Euphoric would not have supplied fuel to Bycoon;
(c)Bycoon would not have incurred any indebtedness to Euphoric;
(d)The plaintiff’s equitable interest in the properties and Bycoon’s legal ownership would not have been subject to a registered first mortgage for Lot 40, nor any equitable interest (if one is found to exist) as alleged by Euphoric in the existing caveat.”
Finally, para 21 alleged that by reason of Euphoric’s conduct the appellant suffered loss and damage in that his equitable interest in the properties had become subject to the mortgage (Lot 40) and to an alleged equitable mortgage (Lot 39).
The relevant statutory provisions
It was noted above that the focus of this appeal is the question of leave under s 237 of the Act. That provision sits within Pt 2F.1A which is headed “Proceedings on behalf of a company by members and others”. The provisions of that part which are of immediate relevance are as follows:
“236Bringing, or intervening in, proceedings on behalf of a company
(1)A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if
(a)          the person is:
(i)a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or
(ii)an officer or former officer of the company; and
(b)the person is acting with leave granted under section 237.
(2)Proceedings brought on behalf of a company must be brought in the company’s name.
(3)The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.
237         Applying for and granting leave
(1)A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.
(2)The Court must grant the application if it is satisfied that:
(a)it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and
(b)          the applicant is acting in good faith; and
(c)it is in the best interests of the company that the applicant be granted leave; and
(d)if the applicant is applying for leave to bring proceedings—there is a serious question to be tried; and
(e)          either:
(i)at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(ii)it is appropriate to grant leave even though subparagraph (i) is not satisfied.
(3)A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that:
(a)          the proceedings are:
(i)by the company against a third party; or
(ii)by a third party against the company; and
(b)          the company has decided:
(i)not to bring the proceedings; or
(ii)not to defend the proceedings; or
(iii)to discontinue, settle or compromise the proceedings; and
(c)all of the directors who participated in that decision:
(i)acted in good faith for a proper purpose; and
(ii)did not have a material personal interest in the decision; and
(iii)informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and
(iv)rationally believed that the decision was in the best interests of the company.
The director’s belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold.
(4)…
…
239         Effect of ratification by members
(1)If the members of a company ratify or approve conduct, the ratification or approval:
(a)does not prevent a person from bringing or intervening in proceedings with leave under section 237 or from applying for leave under that section; and
(b)does not have the effect that proceedings brought or intervened in with leave under section 237 must be determined in favour of the defendant, or that an application for leave under that section must be refused.
(2)If members of a company ratify or approve conduct, the Court may take the ratification or approval into account in deciding what order or judgment (including as to damages) to make in proceedings brought or intervened in with leave under section 237 or in relation to an application for leave under that section. In doing this, it must have regard to:
(a)how well informed about the conduct the members were when deciding whether to ratify or approve the conduct; and
(b)whether the members who ratified or approved the conduct were acting for proper purposes.
…
241         General powers of the Court
(1)The Court may make any orders, and give any directions, that it considers appropriate in relation to proceedings brought or intervened in with leave, or an application for leave, including:
(a)          interim orders; and
(b)directions about the conduct of the proceedings, including requiring mediation; and
(c)an order directing the company, or an officer of the company, to do, or not to do, any act; and
(d)an order appointing an independent person to investigate, and report to the Court on:
(i)           the financial affairs of the company; or
(ii)the facts or circumstances which gave rise to the cause of action the subject of the proceedings; or
(iii)the costs incurred in the proceedings by the parties to the proceedings and the person granted leave.”
The decision of the primary judge
The primary judge held, first, that the appellant was a member of Bycoon within the meaning of s 236(1)(a)(i) and was therefore entitled to apply to the Court for leave pursuant to s 237; second, that the condition for the grant of leave referred to in s 237(2)(a) was satisfied in that Bycoon’s liquidator had made it clear that he would not set Bycoon in motion to pursue the appellant’s claims against Euphoric; and third, that there was a serious question to be tried within the meaning of s 237(2)(d). None of these findings were challenged by Euphoric although in its Amended Notice of Contention it alleged that there was not a serious question to be tried and this ground of contention, although the subject of submissions, was but faintly pursued. It can therefore be put to one side.
Relevantly there were three issues in contention between the parties before the primary judge. The first was whether Pt 2F.1A applied to a company in liquidation, whether that liquidation was voluntary or pursuant to an order of the Court. The second was whether the appellant had satisfied the Court in terms of s 237(2)(b) that he was acting in good faith. The third was whether the appellant had satisfied the Court in terms of s 237(2)(c) that it was in the best interests of Bycoon that he be granted leave.
As to the first issue, the appellant submitted that the fact that Bycoon was now in liquidation did not render the statutory derivative action procedure in Pt 2F.1A unavailable. Reliance was placed upon the decision of Barrett J in Carpenter v Pioneer Park Pty Ltd (2004) NSWSC 1007; (2004) 51 ACSR 299 where, after reviewing a number of first instance decisions which had endorsed the view that Pt 2F.1A applies to a company in liquidation, his Honour concluded (at [8]) that the question “should now be regarded as settled”.
In the present case, Barrett J records (at [17]) that he did not understand counsel for Euphoric to submit otherwise, so that the question of the availability of leave under s 237 in relation to a company in liquidation need not detain him further. However the issue has been agitated on the appeal and as it involves a question of construction of the Act, the appellant has not opposed its determination.
As to the second issue, the primary judge ultimately concluded (at [38]) that he was not satisfied of the appellant’s bona fides and that he had failed to show affirmatively that he was acting in good faith. Accordingly, his Honour considered that s 237(2)(b) was not satisfied. As to the third issue, his Honour concluded (at [39]) that his finding that the appellant was not acting in good faith meant that it was not in the interests of Bycoon that he should be allowed to pursue its claim against Euphoric. The appellant challenges both those findings on the appeal.
The good faith issue
On the good faith issue the primary judge, in reliance upon a passage from the judgment of Palmer J in Swansson v Pratt (2002) NSWSC 583; (2002) 42 ASCR 313, observed (at [36]) that s 237(2)(b) raised two questions: whether the appellant honestly believed that a good cause of action existed; and whether he was seeking to bring the derivative action for a proper purpose (as distinct from a collateral purpose that would amount to an abuse of process). His Honour observed (at [35]) that Euphoric concentrated on the second of those questions relying, in particular, upon the fact that the appellant first became aware in February 2001 that Bycoon had granted the mortgage; that he became the sole director of Bycoon in May or November 2002; that during the course of the District Court proceedings he was the sole decision-maker for Bycoon but at no point did he assert any personal interest in the properties or, more significantly for present purposes, any interest of Bycoon in the interest in the properties of Euphoric resulting from the mortgage.
Although his Honour acknowledged (at [35]) that the matters now sought to be litigated by the appellant in the ASC could not have been pursued appropriately in the District Court proceedings, they formed part of the overall matrix of the alleged rights and liabilities as among the relevant parties in relation to the properties. The present claims, however, were never asserted by the appellant until the ASC was filed on 9 June 2006 – some seven months after Bycoon was wound up on 14 November 2005.
According to his Honour (at [35]) of particular significance was the following evidence of the appellant:
“Q.         You decided, didn’t you, as director of the company that it would be best not to make this allegation, not to bring this alleged claim against your sister, that is in 2002 and 2003, correct?
A.           Yes.
Q.           You decided it wasn’t in Bycoon’s best interests, as its sole director, to sue your sister for breach of duty, correct, at that time?
A.           That day?
Q.           Back then you decided that, didn’t you?
A.           Yes.”
I pause here to note that the original statement of claim in the proceedings was filed on 3 June 2005 (before Bycoon was wound up) in which the appellant, Mrs Ayoub and Bycoon were the plaintiffs, Euphoric was the first defendant and the members of the firm of solicitors who had acted for Euphoric in 2000 and also in the District Court proceedings, were named as the second to sixth defendants. None of the allegations now made against Mrs Ayoub were made in that statement of claim notwithstanding that by the time it was filed she had been made bankrupt by Euphoric. Furthermore, para 15 of the statement of claim asserted that during the period between June 2000 and November 2000 the appellant was unaware that the fuel distribution business being conducted from the premises at Nos. 13-15 Glastonbury Avenue, Unanderra was being conducted in the name of Bycoon. However, it is clear that he did become aware of that fact as and from November 2000.
It would be reasonable to infer from the fact that from November 2002, when he was reappointed as the sole director of Bycoon, if not before, the appellant was fully aware of the circumstances under which the July 2000 agreement was entered into, particularly as he had the conduct of the District Court proceedings on behalf of Bycoon up until judgment was delivered on 31 March 2004 and beyond.
Accordingly, not only did the appellant not regard it as in Bycoon’s best interests for it to sue his sister for breach of her duties as a director in 2002 and 2003 but it may also be inferred that he did not consider it in the best interests of the company to allege that Mrs Ayoub had entered into the July 2000 agreement in breach of her directorial duties both under the general law and under statute until the ASC was filed on 9 June 2006, after Bycoon had been placed in liquidation and his sister made bankrupt at the suit of Euphoric.
As I have indicated, the primary judge acknowledged that the District Court proceedings would not of themselves have been an appropriate vehicle for the ventilation of the claims now alleged by the appellant, given the limitations upon that Court’s equitable jurisdiction. However, his Honour observed (at [37]) that it would have been logical for Bycoon, under the direction of the appellant, to have pursued its present claim against Euphoric by initiating Supreme Court proceedings and asking that the District Court proceedings be consolidated with them.

The primary judge then remarked that the fact that the appellant did not pursue the present claim until after the conclusion of the District Court proceedings and only then once his sister, through whom accessorial liability is sought to be fixed to Euphoric, was bankrupt and thus in practical terms insulated, was “strongly indicative of improper motive and purpose.”
His Honour’s conclusion with respect to the issue of good faith was as follows:
“38I am not satisfied as to Mr Chahwan’s bona fides. It is for him to show affirmatively that he is acting in good faith in what he proposes to have the company do now. The evidence suggests to me that he is seeking to have the company run a case now that it could – and should logically – have run several years ago in the context of the litigation brought by Euphoric, that he desisted from doing so for reasons which may well have been improper from the point of view of his duties as a director of Bycoon (i.e, unwillingness to expose his sister to the allegation of direct liability) and that he would never have bothered to resurrect the matter had Bycoon not failed in its attempt to defend the action brought by Euphoric in the District Court. His motive, briefly stated, is to attempt, after the event, to have Bycoon mount now a cross-claim that it should have mounted years ago – and to do so, moreover, by way of collateral attack on the District Court judgment. That he did not see fit to have Bycoon do this at the time but professes to consider it appropriate now at a point when he can arguably bring it without harm to his sister calls in question the motivation to such an extent to preclude the necessary finding of good faith in terms of s 237(2)(b).”
The appellant’s primary submissions to this court on the question of good faith may be summarised as follows:
(a)The primary judge was correct to hold that whether the appellant was acting in good faith involved two questions of which the first was whether the appellant honestly believed that a good cause of action existed. As he swore that he held such a belief and it was not suggested to him in cross-examination that he did not, the first question required an answer in his favour.
(b)The second question required the court to be satisfied that the appellant was seeking to bring the derivative action for a proper purpose as distinct from a collateral purpose that would amount to an abuse of process. As the primary judge had held (at [26]) that, first, the District Court had no jurisdiction to grant the relief now sought under the Act and, second, that it only had a very limited equitable jurisdiction which did not extend to the relief claimed in the Act, it followed that there was no bar by way of an Anshun estoppel to the appellant bringing the present proceedings in the name of Bycoon: Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 at 605.
(c)It accordingly followed that as there was no Anshun estoppel the bringing of the present proceedings by Bycoon could not amount to an abuse of process unless the claim fell within the principles articulated by the High Court in Williams v Spautz (1992) 174 CLR 509 at 526. That would require the court to be satisfied that the dominant purpose of the appellant in seeking an order under s 237 was to cause Bycoon to sue Euphoric as a means of obtaining some advantage for which the proceedings were not designed or some collateral advantage beyond that which the law offers (Spautz at 526-527). Such a suggestion was not put to the appellant in cross-examination and, as his Honour found that there was a serious question to be tried, it must follow that the appellant was doing no more than seeking to exercise the lawful rights of Bycoon with the result that his conduct in applying for leave to pursue those rights could not be said to lack bona fides.
The appellant also submitted that the primary judge’s reasoning involved three errors. The first was his conclusion that the appellant’s motive was to have Bycoon now mount a claim which “it should have mounted years ago” (emphasis provided in the submission). Having rejected any question of an Anshun defence, his Honour had not identified any principle of law which required the appellant as the directing mind of Bycoon at the relevant time to mount its present claim against Euphoric by instituting proceedings in the Supreme Court, having the District Court proceedings removed into that Court and having the two sets of proceedings consolidated. His failure to do so, so it was submitted, could not amount to a lack of good faith.
The second error said to be made by his Honour was the statement in [38] that Bycoon’s claim against Euphoric constituted a collateral attack on the judgment of the District Court. The issue in the District Court proceedings was that Bycoon was liable to Euphoric on the contractual causes of action alleged in those proceedings. Euphoric did not in those proceedings seek to sue on the mortgage, no doubt for forensic reasons best known to itself. No question arose in those proceedings as to the validity of the mortgage granted by Bycoon to Euphoric or Bycoon’s liability under it. In other words, Bycoon was not sued on its personal covenant under the mortgage. Nor was there any issue as to whether Bycoon had agreed to give security over Lot 39 and whether Euphoric had a caveatable interest in relation to that parcel of land. It was therefore submitted that a determination in the present proceedings that Bycoon was not liable under the mortgage is quite separate from Bycoon’s liability under the July 2000 agreement.
The third error identified related to his Honour’s reference to the appellant’s evidence that it would not be in Bycoon’s interest to have proceeded against his sister Mrs Ayoub in the earlier proceedings. That he did not want to sue his sister was, it was submitted, readily explicable. That did not mean that his predominant purpose for bringing the proceedings now was to obtain a result for which the law did not provide within the meaning of Spautz. He was never under any legal obligation to sue his sister and it was a matter for him as to when he did, provided that there was a serious question to be tried as to whether his sister breached her duties as a director of Bycoon in the respects alleged (which his Honour found there was). It was thus submitted that the fact that the appellant did not wish to sue his sister at the time of the District Court proceedings said nothing as to whether his application for leave to bring the present proceedings in the name of Bycoon was for a purpose for which the law did not provide and, therefore, an abuse of process.
Euphoric sought to uphold the primary judge’s finding with respect to the good faith issue on a number of bases, not all of which form part of his Honour’s reasoning process on that issue. At the outset, it was asserted that the appellant had verified a false allegation in para 13(a) of the ASC that:
“13. … the provision of the mortgage was to cause:
(a)Bycoon to become legally liable for $293,000 for no benefit to it; …” (Emphasis added)
It was submitted that that allegation was at the core of the appellant’s claim, but that the mortgage did not cause Bycoon to become liable for the $293,000 which was the Madallah debt. Rather, Bycoon became liable for that debt under the terms of the July 2000 agreement.
The appellant responded to this submission by asserting, correctly, that it was never suggested to him in cross-examination that para 13(a) of the ASC was a false allegation because Bycoon did in fact receive a benefit for taking legal responsibility for the repayment of the Madallah debt as that was the condition upon which Euphoric agreed to supply fuel to Bycoon on credit in circumstances where Bycoon had decided to take over the service station and fuel distribution business of Madallah.
Further, the appellant contended that the allegation in para 13(a) was not false. The evidence established that prior to July 2000, Bycoon was not involved in any way in the petrol retailing or distribution business. In para 16 of his affidavit sworn 7 March 2005, the appellant deposed that he transferred control of Bycoon to his sister in February 1999 at her request so that she could direct that company in proceedings against certain family members concerning real estate transactions in which the company had been involved in 1995. At that time he informed his sister that he wished to keep the shares in Bycoon in his name as he had paid for the Wollongong warehouse (which was erected upon the properties) from his own pocket and those properties were in the name of Bycoon. As he did not wish to be responsible for the litigation proposed by his sister, he informed her that its cost would be her personal responsibility.
Further still, the appellant deposed in the same affidavit to the fact that it was not until February 2001 that he became aware from speaking to his sister that, first, Bycoon was carrying on the fuel distribution business previously carried on by Madallah and that in so doing it was purchasing fuel from Mobil; and, second, that Bycoon had given a first mortgage to Euphoric over the properties. Contrast this with [47] above, which notes that para 15 of the original statement of claim asserted that the appellant became aware of the above facts in November 2000.
The appellant then submitted that there was an issue estoppel arising from Judge Hungerford’s judgment in the District Court which established the truth of the allegation that the mortgage was to cause Bycoon to become legally liable for Madallah’s debt “for no benefit to it”. In this context it was asserted that Judge Hungerford had accepted the evidence of the relevant officer of Euphoric that Bycoon would only be permitted to open an account with Euphoric if its credit application was supported by a mortgage over the properties and the assumption by Bycoon of the Madallah debt in exchange for Euphoric continuing to supply fuel to Mr and Mrs Ayoub’s company. It was only on the basis of those arrangements and the security offered that it was agreed that Euphoric would supply Mr Ayoub with fuel.
In the foregoing circumstances it was submitted that it was clear that the July 2000 agreement, including the giving of the mortgage, was improvident and of no benefit to Bycoon in circumstances where, first, its one and only shareholder was not made aware of the transaction; second, where the clear purpose of the transaction was to permit Mr and Mrs Ayoub, and in particular Mr Ayoub, to continue to conduct the business previously carried on by Madallah and which was now to be carried on by Bycoon; and third, where the Madallah debt had not previously been secured over any asset of Mr and Mrs Ayoub.
But for the agreement to give the mortgage as security for Bycoon’s future purchases of fuel from Euphoric, the July 2000 agreement would never have been entered into as Euphoric was never going to deal with Bycoon unless it obtained security. Accordingly, it was submitted, the assertion in para 13(a) of the ASC was not false: there had been no security provided by the mortgage nor any agreement made to supply fuel on credit.
In my opinion there is prima facie substance in those submissions of the appellants. Euphoric cannot, therefore, legitimately rely upon the assertion that para 13(a) of the ASC made a false allegation to the knowledge of the appellant so as to constitute a lack of good faith on his part in applying for leave under s 237. That observation is, of course, not intended to pre-empt any findings which may be made in the event that there is a trial of the issue raised by para 13(a).
Of greater difficulty to the appellant is Euphoric’s submission that, in asserting that it was in the best interests of Bycoon that he be granted leave, the appellant ignored the undoubted fact that his primary purpose in seeking leave was to obtain a declaration that the properties are held by Bycoon on trust for the appellant beneficially. In other words, it was submitted that the appellant sought to take all the proceeds of the claim, if successful, for himself personally and neither Bycoon nor its creditors would receive any benefit whatsoever.
The appellant submitted that if leave was granted and the claims in the ASC succeeded, then the consequence that the appellant, as against Bycoon, would benefit did not demonstrate that the appellant was not acting in good faith in applying for that leave. This is said to be because if Bycoon is found to have a legal obligation to the appellant then it would be legally bound, and commercially able, to honour that obligation. In other words, it cannot be said that the appellant was acting other than in good faith in seeking leave to institute the proceedings where the ultimate outcome hoped for is that Bycoon might be able to honour its obligations to the appellant with respect to the properties once they have been relieved of the mortgage.
On one view of it, this submission is more relevant to the issue raised by s 237(2)(c), namely, whether it is in the best interests of Bycoon that the appellant be granted leave. However, it is clear that there is some overlap between subparagraphs (a), (b) and (c) of s 237(2): they are not mutually exclusive. Thus, for example, if there was no serious question to be tried to the knowledge of an applicant for leave in that he had been advised that the case was hopeless or highly unlikely to succeed, then that might well constitute evidence of bad faith or at least lack of good faith. This would be particularly so if the applicant’s purpose in pursuing leave, notwithstanding such advice, was to hopefully achieve some form of nuisance-based settlement. This might be an abuse of proceedings in the sense contemplated in Spautz.
However, the appellant’s submissions assume that lack of good faith can only be proven where there is an abuse of process of the nature referred to in Spautz or, for that matter, where Anshun estoppel is established (see [51]). In my opinion these submissions overlook two factors. The first is that it is for the applicant to affirmatively establish that he or she is acting in good faith to the satisfaction of the court. It is not for the respondent to any such application to establish bad faith. The second is that I see no reason why the expression “good faith” in s 237(2)(b) should be restrictively construed in the manner asserted by the appellant.
It was pointed out by Palmer J in Swansson that the phrase “acting in good faith” must take its content in any particular case from the context in which it is used. His Honour then continued in these terms (at 319-320):
“33As I have observed, prior to the commencement of Pt 2F.1A only current shareholders could take advantage of the exceptions to the rule in Foss v Harbottle. Part 2F.1A now gives a right to initiate proceedings to some persons who, but for those provisions, would have had no such right at all under the general law. Such persons are all those within the categories created by s 236(1)(a) who are not shareholders of the company when the application for leave is made. Further, there is no requirement in s 236 that a person seeking leave must have been a shareholder or officer when the alleged wrong was committed against the company. Accordingly, under Pt 2F.1A a former shareholder or director may seek to sue in the company's name for a wrong which was committed after he or she had disposed of all shares in the company or had ceased to hold office.
34The court is not given power in Pt 2F.1A to grant final relief in a suit instituted in a company's name to any person other than the company itself. Accordingly, applicants for leave who are not current shareholders of the company cannot gain by increase in the value of their shares if the derivative action succeeds and the company recovers compensation. Likewise, applicants who are former officers of the company cannot obtain orders resolving conflicts in which they themselves are engaged. Yet such persons are entitled to be given leave if they satisfy the requirements of s 237(2). The section, therefore, suggests that it must be possible for persons to satisfy the requirement of good faith even when they have no financial interest in the company and no present involvement in its management.
35At this early stage in the development of the law on the statutory derivative action created by Pt 2F.1A it would be unwise to endeavour to state compendiously the considerations to which the courts will have regard in determining whether applicants in all categories defined by s 236(1) are acting in good faith. The law will develop incrementally as different factual circumstances come before the courts.
36Nevertheless, in my opinion, there 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.
37These 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; 107 ALR 635 at 648. The applicant would fail the requirement of s 237(2)(b).
38Where the application is made by a current shareholder of a company who has more than a token shareholding and the derivative action seeks recovery of property so that the value of the applicant's shares would be increased, good faith will be relatively easy for the applicant to demonstrate to the court's satisfaction. So also where the applicant is a current director or officer: it will generally be easy to show that such an applicant has a legitimate interest in the welfare and good management of the company itself, warranting action to recover property or to ensure that the majority of the shareholders or of the board do not act unlawfully to the detriment of the company as a whole.
39However, where the applicant is a former shareholder or officer with nothing obvious to gain directly by the success of the derivative action, the court will scrutinise with particular care the purpose for which the derivative action is said to be brought.
40For example, a creditor may happen to be a former shareholder of the company and may seek, by the derivative action, to place the company in a financial position to repay the debt. There would be no abuse of process in commencing and maintaining the derivative action itself in that the action is commenced and maintained in order to achieve the purpose for which it is designed, namely, to recover property for the company. However, it may well be said that, in making an application for leave under Pt 2F.1A, the applicant is not acting in good faith because he or she is, in reality, seeking to vindicate his or her interest as a creditor and not whatever interest he or she may have as a former shareholder.”

The approach of Palmer J in Swansson has been followed in a number of first instance decisions: Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 1007; Charlton v Baber [2003] NSWSC 745; (2003) 47ACSR 31; Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732; (2005) 23 ACLC 1100.
In Fiduciary Ltd, Austin J referred (at [20]) to the explanation of the “good faith” criterion given in the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 (the Explanatory Memorandum) which was in the following terms:
“Applicant’s Good Faith
6.36        In assessing whether an applicant is acting in good faith, the Court could be expected   to have regard to whether:
·              there was any complicity by the applicant in the matters complained of;
·              the application is being made in pursuit of an interest other than that of the   company.
6.37The good faith requirement is designed to prevent proceedings being used to further the purposes of the applicant, rather than the company as a whole.”
The foregoing paragraphs of the explanatory memorandum are, in my view, reflected in the passage from the judgment of Palmer J in Swansson at 321 [42] where his Honour observed that where those in control of a company refuse to take proceedings to redress a wrong which appears to have been done to it, the court should permit a derivative action to be instituted by those within the categories allowed by s 236(1). Otherwise, those persons:
“would suffer a real and substantive injury if the action were not permitted. The injury must be necessarily dependent upon or connected with the applicant’s status as a current or former shareholder or director and the remedy afforded by the derivative action must be reasonably capable of redressing the injury.” (Emphasis added)
In other words, I take his Honour to be saying that an applicant will only be acting in good faith for the purpose of s 237(2)(b) where, as a current or former shareholder or director of the company, he or she would suffer a real and substantive injury if a derivative action were not permitted provided that that injury was dependant upon or connected with the applicant’s status as such shareholder or director. It might be a positive indication of the good faith of a shareholder if he or she sought to institute a derivative action which would have the effect, if successful, of restoring value to his or her shares in the company.
However, as his Honour also pointed out in Swansson (at 321 [40]), although there would be no abuse of process where a creditor who happens to be a former shareholder seeks, by the derivative action, to place the company in a financial position to repay his or her debt as the action would be commenced and maintained in order to achieve the purpose for which it was designed, namely, to recover property for the company, such an applicant would not be acting in good faith where, in reality, he or she was seeking to vindicate his or her interest as a creditor and not whatever interest he or she may have had as a former shareholder. In this context it must be noted that the definition of “officer” in s 9 of the Act for the purpose of s 236(1)(a)(ii) does not include a creditor of a company.
In my view, therefore, there is substance in Euphoric’s submission that one cannot ignore, for the purposes of determining whether the appellant was acting in good faith in applying for leave, the fact that the primary purpose of the appellant in seeking such leave was to first, relieve the properties of the burden of the mortgage in favour of Euphoric; and second, to obtain a declaration that Bycoon holds the properties in trust for himself. As such, it would not appear that any injury that the appellant would suffer if the action were not permitted to proceed would be necessarily dependant upon or connected with his status as a shareholder or former director of Bycoon.
On the contrary, the appellant is seeking to assert and then vindicate a beneficial entitlement to the properties as a consequence of actions on his part when the properties were acquired by Bycoon which not only were not dependant upon or connected with his status as a shareholder, but also were for the purpose of benefiting himself personally rather than the company. This is because his alleged interaction, as appears below, was that although Bycoon would be the legal owner of the properties, the beneficial owner would be him. In other words, Bycoon was to hold the properties as a bare trustee and to have no beneficial interest therein.
It is true that in order to achieve that outcome it was first necessary for the appellant to establish Bycoon’s right to have the properties relieved from the burden of the mortgage, but that was only a step towards the real purpose of seeking leave which was to further his own personal interests rather than those of the company.
In the foregoing context it is also of significance that the appellant’s claim to the properties is the very antitheses of any claim by him to be a creditor of the company in the amount he provided to the company to enable it to purchase the properties. However, even if he was acknowledged as a creditor and the monies advanced by him were in fact a loan, that would not assist the appellant if, in reality, he was seeking to vindicate his interest as such a creditor and not whatever interest he may have had as a shareholder.
It is thus of interest to note that in his affidavit sworn 7 March 2005 relating to the circumstances under which the properties were acquired by Bycoon, the appellant relevantly deposed as follows:
“13.With the exception of an amount of $8,000 which I believe may have been sourced from Bycoon, I paid the whole of the purchase price for the properties with my own money. The money was obtained from a number of sources including money held in accounts in my name, money held in accounts in the name of companies of which I was director and shareholder, payment directions to debtors and borrowings made by me from third parties
…
15.Bycoon did not have the financial means to purchase the properties and could not have become registered proprietor unless I made the payment of the purchase price. At all times I believe that even though Bycoon was the registered proprietor of the properties, I was in fact the owner of the properties because I had paid for them. I believe that Bycoon was holding the properties on trust for my benefit.”
I would therefore reject the appellant’s submissions on the question of good faith when assessed against the two grounds identified by Palmer J in Swansson: namely, whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success and whether the applicant is seeking to bring the derivative action for a collateral purpose that would amount to an abuse of process. In any event, the expression “acting in good faith” in s 237(2)(b) of the Act need not be confined, as the appellant submitted it should, to those two grounds. In particular, it extends beyond conduct that would constitute an abuse of process.
As Palmer J made clear in Swansson, in my respectful view correctly, although those two factors are required to be considered when a court is determining whether the good faith requirement of s 237(2)(b) is satisfied, the issue of good faith is not confined to those factors. His Honour noted (at 320 [35]), “the law will develop incrementally as different factual circumstances come before the courts”.
As I have already observed, it must be kept well in mind that the onus lies upon the applicant to satisfy the court that, in applying to it for leave to bring the relevant proceedings, he or she is acting in good faith. If such an applicant is in reality seeking to further his or her own personal interests other than as a current or former shareholder of the company, rather than the interests of the company as a whole, then in my view that onus will not have been discharged. Such a finding would give effect to paras 6.36 and 6.37 of the Explanatory Memorandum, which I have recorded in [72] above. It thus matters not that the conduct in question would not support a finding of abuse of process. I would therefore uphold the primary judge’s finding that he was not satisfied that the appellant was acting in good faith, albeit for reasons that differ from those adopted by him.
In these circumstances it is unnecessary to deal either with Euphoric’s submissions on the issue of good faith based upon the absence of any enquiry of or communication with Mr Nasr or with those of the appellant that the primary judge’s finding that the appellant’s delay in seeking to bring proceedings called into question his motivation. It is sufficient for present purposes that the appellant was applying to the court for leave to institute proceedings in the name of Bycoon which, if successful, would only benefit himself in a capacity unrelated to his status as a former shareholder or director of that company.
The best interests issue
The primary judge dealt with this issue only briefly in view of his finding that the appellant was not acting in good faith from which it was said to follow that it was not in the interests of Bycoon that he should be allowed to pursue its claim against Euphoric. Palmer J dealt with this issue in Swansson in the following terms (at 324) (omitting citations):
“55At the outset, it is important to note that s237(2)(c) requires the court to be satisfied, not that the proposed derivative action may be, appears to be, or is likely to be, in the best interests of the company but, rather, that it is in its best interests. In this respect, s237(2) differs significantly from its counterpart in the Canadian legislation, which requires the Court to be satisfied that the proposed derivative action "appears to be" in the interests of the company, and from s165(3) of the New Zealand Act which requires that the court "have regard to ... the interests of the company". These provisions seem to have led the courts of those countries to the view that the best interests of a company need be considered only in a prima facie way.
56The requirement of s237(2)(c) that the applicant satisfy the court that the proposed action is in the best interests of the company is a far higher threshold for an applicant to cross. It requires the applicant to establish, on the balance of probabilities, a fact which can only be determined by taking into account all of the relevant circumstances. …”
In Fiduciary Ltd Austin J (at [44]) referred to what the Explanatory Memorandum had to say about the “best interests of the company” criterion:
“6.38This criterion would allow the court to focus on the true nature and purpose of the proceedings. It would recognise that a company might have sound business reasons for not pursuing a cause open to it and that its management might legitimately have decided that the best interests of the company would be served by not taking action. For example, a decision may be taken in a case where, although it may be clear that there has been a breach of duty by a director, the loss to the company may only be nominal. In this case, the costs of taking proceedings may outweigh any benefit to the company.
6.39The inclusion of this criterion will allow the court to refuse to grant leave in these circumstances because the applicant for leave would not be able to show that to do so would be in the best interests of the company.”
As in the present case, Austin J considered that the case before him bore no resemblance to the hypothetical example described in the Explanatory Memorandum. Nevertheless, according to his Honour, s 237(2)(c) led “to a broader enquiry”. His Honour then referred to a passage in Charlton v Baber at [52] where it was said that the phrase “best interests” is concerned with the company’s separate and independent welfare. His Honour then referred to what Palmer J said in Swansson (at 324 [55]), which I have recorded in [86] above.
What is it about the circumstances of the present case, therefore, that would permit a positive finding that the granting of leave to the appellant to bring the derivative action would be in Bycoon’s “best interests” in the sense of its separate and independent welfare? In Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859 at [44] Brereton J noted that that expression imported the familiar concept of the interests of the company as a whole. His Honour further observed that whether
“the ‘best interests’ of the company as a whole reflect those of the shareholders taken together in light of the corporate objects, or those of the creditors which will prevail in the context of insolvency, will be influenced by the status of the company.”
Although Brereton J (at [45]) considered that the existence in an applicant of a personal interest in the outcome of a proposed derivative action cannot be significant let alone decisive as few if any such actions would be brought but for the personal interest on the part of the relevant applicant in doing so, in the present case the personal interest of the appellant in the outcome of the proposed action against Euphoric is of a different character to that of the interest to which his Honour was referring. The difference is that in the present case the personal interest of the appellant is one which, if established, will preclude Bycoon and its unsecured creditors (if any) from obtaining any benefit whatsoever from the successful prosecution of its claim against Euphoric with respect to the mortgage. How, in those circumstances, can it be said that the granting of leave to institute the proceedings will advance the separate and independent welfare of Bycoon?
The appellant’s response to this question is two-fold. First, that Bycoon obtained no corporate benefit in mortgaging the properties to secure a previously unsecured debt of $293,000, which was not incurred by it but by an unassociated company (Madallah). Second, that Bycoon has a strong case that the mortgage was granted by Mrs Ayoub in breach of her fiduciary duties at the instigation of Euphoric. Third, it is in Bycoon’s interest for it to honour its legal obligations to the appellant. If it fails in establishing a trust then its alternative claim is that of an equitable charge over the properties which would make the appellant a secured creditor of Bycoon. In these circumstances, it is in Bycoon’s interests that it honours its obligations either as a trustee or pursuant to the charge.
It complicates matters that Bycoon is in liquidation. Assuming, as the primary judge did (at [28]) that for the purposes of s 237(2)(c) it must be accepted that the interests of Bycoon are, in substance, the interest of its creditors, one is required to ask how the interests of Bycoon’s creditors will be advanced by Bycoon being required to honour its obligations as a trustee of the properties in favour of the appellant. If the appellant is successful in his primary claim, then the only impact on the unsecured creditors, if any, of Bycoon is that Euphoric will become an unsecured rather than a secured creditor. However, the appellant did not lead any evidence to suggest that there were still any creditors of Bycoon other than Euphoric. But even if there were, the interests of those creditors would, if anything, not be enhanced but be further diminished if Euphoric was to join the class of unsecured creditors.
In other words, if there are assets of the company other than the properties to which the class of unsecured creditors are entitled, then any distribution to those creditors from the sale of those assets will only be reduced if Euphoric loses its security and joins that class. The only party who will benefit from the exercise will be the appellant.
The same result follows in the event that the appellant fails on his primary claim but succeeds on his alternative claim for an equitable charge in that, as the appellant himself submits, he will become a secured creditor of Bycoon. As on his case he is not a creditor of Bycoon at present, then the effect of the appellant’s success on his alternative claim would be that the properties will be subject to a charge in favour of the appellant rather than Euphoric. In other words, one secured creditor will be substituted for another. This will not enhance the position of the unsecured creditors. On the contrary, they will be further prejudiced because even on the appellant’s alternative claim, if successful, Euphoric will become an additional unsecured creditor thereby diminishing the distribution to which the existing unsecured creditors will be entitled.
Accordingly, it must follow that the trial judge was correct in finding that the requirements of s 237(2)(c) were not satisfied, notwithstanding that I find so for reasons not articulated by the trial judge.
Does Pt 2F.1A apply to a company in liquidation?
In view of my conclusion that the primary judge was correct in finding that the requirements of s 237(2)(b) and (c) were not satisfied, the appellant’s application for leave should be dismissed. Those findings are sufficient to dispose of the appeal. However, the question of whether Pt 2F.1A applies to a company in liquidation has been fully argued by counsel in this case and there are conflicting authorities. The issue is one of general importance and should be resolved by this court.
I have already referred to the fact that the primary judge in the present case considered this issue to be settled in favour of the proposition that Pt 2F.1A applied to companies in liquidation. The purpose of Pt 2F.1A was to abolish the rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 and its exceptions pursuant to which the ability to bring a derivative action was confined to the shareholders of a company as being the only persons who could represent the interests of the company as a whole. Thus, s 236(3) provides:
“The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.”
The effect of the foregoing is that s 236(1) significantly extends the categories of persons who may apply for leave to institute proceedings on behalf of a company where those who control the company refuse to do so.
Euphoric accepted that there were a series of first instance decisions in which it has been held that Pt 2F.1A applied to companies in liquidation. Those decisions are Roach v Winnote Pty Ltd (in liq) [2001] NSWSC 822; Brightwell v R F V Holdings Pty Ltd [2003] NSWSC 7; [2003] 44 ASCR 186; Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31; Mahanna v Sovereign Capital Ltd [2004] FCA 1040; Kamper v Applied Soil Technology Pty Ltd [2004] NSWSC 891; (2004) 211 ALR 337; (2004) 50 ACSR 738; Carpenter v Pioneer Park Pty Ltd [2004] NSWSC 1007; (2004) 51 ACSR 299; Scuteri v Lofthouse & Another (2006) VSC 317; (2006) 202 FLR 106.
However, there are a number of decisions that originally or more lately have taken a contrary view and have either upheld or suggested in obiter that Pt 2F.1A does not apply to a company in liquidation: B L & G Y International Co Ltd v Hypec Electronics Pty Ltd [2001] NSWSC 705; (2001) 164 FLR 268; HPM Pty Ltd v Fear [2002] WASCA 249; (2002) 171 FLR 12; Promaco Conventions Pty Ltd v Dedline Printing Pty Ltd [2007] FCA 586; (2007) 159 FCR 486.
In Hypec Electronics, the first case to address this issue, Einstein J considered the legislative intention behind Pt 2F.1A. After setting out paras 6.11, 6.14-6.17, 6.23-6.24, 6.31-6.32 and 6.36-6.37 of the Explanatory Memorandum he observed (at 294)(omitting citations):
“69.It seems clear that the legislature had no intention of removing the well-established inherent power of the court to permit proceedings to be taken in the company's name where a company was in liquidation [See Aliprandi v Griffith Vinters Pty Ltd (in liq); Wenham v General Credits Ltd …]. An application in this regard might be made to the Court to give a direction to the liquidator to take such proceedings. Another approach to the same end, would be for the court simply to order that a particular creditor or contributory be authorised to use the company's name in taking the proceedings.
70The matter that the legislature sought to address appears to have been the difficulties which had arisen when under the common law, a party sought to proceed on the basis of an exception to the rule in Foss v Harbottle. The intention behind the enactment of sections of 236 and 237 appears to have been to avoid confusion in that regard and to codify that form of entitlement and right of action. The Explanatory Memorandum gave no attention whatsoever to questions involving the jurisdiction of the court to permit actions to be taken in the name of a company in liquidation. As has already been seen, this jurisdiction is grounded upon the same principle on which a person could always have filed a bill in the old court of Chancery against his or her trustee to be allowed to use his or her name to recover the trust property.”

However, his Honour then concluded that he was unable to refuse leave solely on this basis. This was because the decision of the High Court in the case of Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 required, in the words of Siopis J at [38]:
“a single judge interpreting a statute applied nationally, to give effect to the decisions of other single judges construing that statute, unless the single judge is of the view that the previous decisions of those single judges are "plainly wrong". This test requires a high degree of assurance on the part of the single judge departing from the existing view. As I have said, I am of the opinion, that the better view is that Pt 2F.1A has no application where a company is in liquidation, but in light of the considerable number of other single judges who have come to a different view, I do not have the high degree of assurance necessary for me to characterise the contrary view a "plainly wrong".
In Ford’s Principles of Corporation Law, Butterworths (Looseleaf Edition) at para 11.270, the learned authors state that Pt 2F.1A does not address the effect of liquidation. They refer to the common law principle that once a company goes into liquidation it is the liquidator who decides whether the company should commence or continue proceedings, the directors and members ordinarily losing their respective powers to have the company conduct litigation other than proceedings to have the winding up order stayed. Scarel is referred to before the authors note that prior to the commencement of Pt 2F.1A, a member who was dissatisfied with the liquidator’s reluctance to sue or continue proceedings could use the statutory procedure to ask the court to order the liquidator to commence proceedings: see ss 477(6), 511.
The learned authors then refer to the court’s inherent power in the course of a winding up to permit proceedings to be taken in the name of the company at the instigation of a member or creditor and note that this inherent power has survived the commencement of Pt 2F.1A, as confirmed in Brightwell, Hypec Electronics and Carpenter. However, whether Pt 2F.1A is available when a company is in liquidation was a different question. Whilst noting there were initially conflicting views, the authors conclude:
“[I]t is now clear that Pt 2F.1A is available when a company is in liquidation.”
Carpenter, Kamper and the other single instance decisions to which I have referred are cited for that proposition. The authors therefore considered that it was:
“now settled law that Pt 2F.1A is available when a company is in liquidation.”
There is no reference to HPM or the recent decision of Promaco Conventions.
However, that may not be the position in New Zealand, where the issue was discussed by Wild J in Hedley v Albany Power Centre Ltd (In liq) [2005] 2 NZLR 196. At 208 [53], after referring to two earlier New Zealand cases and noting that they were not directly on point, his Honour tentatively concluded that there was general support for the view that the statutory derivative jurisdiction was not available when the company subject of proceedings was in liquidation; but that, even if it was, it ought not to be exercised.
It should be noted that the relevant derivative action provision of the Companies Act 1993 (NZ), s 165, is in somewhat different terms to ss 236 and 237 of the Act. Relevantly, s 165(1) provides that subject to subsection (3), the court may on the application of a shareholder or director of the company, grant leave to that shareholder or director to bring proceedings in the name and on behalf of the company. Section 165(3) provides that such leave may only be granted if the court is satisfied of certain factors that generally mirror s 237(2) of the Act. What is of significance is that satisfaction of the conditions referred to in s 165(3) of the New Zealand Act does not mandate the granting of leave but are the minimum conditions which must be satisfied if the court is otherwise to grant leave as a matter of discretion.
In this sense, the question of the granting of leave under the New Zealand and Australian derivative action regimes differ. As Hely J observed in Mhanna v Sovereign Capital Ltd (at [9]), the decision of Barrett J in Charlton was authority for the proposition that if the s 237(2) criteria are satisfied, the court must grant leave: there is no residual discretion. In my opinion this proposition is correct and, as will appear, it is in my view a critical consideration in the resolution of the present issue.
In his discussion of the issue in Hedley, Wild J (at 204 [35]) noted the submission that once a liquidation is commenced, the liquidators have custody and control of the company’s assets, and all claims by the company should be brought by the liquidator and be under their control.
His Honour then referred (at 205 [41]) to the decision of the Full Federal Court in Christianos and (at 206 [47]) observed that it was authority for the proposition that the rights of action of the company in a provisional liquidation reside in the company, and thus in the provisional liquidator, and should be dealt with in the course of the winding up proceedings and not outside it.
In referring to New Zealand company law texts (at 208 [54]) his Honour noted that it was acknowledged that s 165 did not address whether the appointment of a liquidator removed the shareholder’s right to bring a derivative action but that they stated that it was undesirable for that section to apply where a company is in liquidation as a minority shareholder should not hold such power and because the shareholder has other remedies available to him or her. His Honour then concluded in the following terms (at 208 [55]):
“In my view, once a company is placed in liquidation, the Court no longer has – or at least ought not to exercise – its s 165 jurisdiction. My view rests upon the following three factors:
(a)As a matter of principle, a s 165 application ought not to be granted when the company is in liquidation, because it potentially undermines the liquidator's principal duty of gathering in and distributing the company's assets, as efficiently as is reasonably possible. …
(b)Section 284 [which compendiously sets out the supervisory process of the court over liquidators which are similar, though framed differently, to those dispensed throughout Parts 5.4B (winding up in insolvency or by the court) and 5.5 (voluntary winding up) of the Act] provides not only an adequate, but the most appropriate remedy when a company is in liquidation. That is essentially the basis for the decisions in Ferguson v Wallbridge and Christianos with which I respectfully agree. It could be said that Ferguson v Wallbridge goes a step further in holding that a derivative proceeding is no longer the appropriate remedy once the company is wound up, although the rationale is essentially the existence of a more appropriate remedy ie an application under s 284.
(c)An application under s 284 directly engages the liquidator, being an application for a direction to the liquidator, whereas an application under s 165 does not. Further, the s 284 application will enable the liquidator (or company in liquidation) to use the s 301 procedure. That procedure is arguably more straightforward and therefore economical than a conventional proceeding against directors.”
I turn now to the submissions of the parties. Those of Euphoric may be summarised as follows (incorporating some comments of my own):
(a)Part 2F.1A is in Chapter 2F of the Act, which deals with matters concerning members’ rights and remedies, meaning thereby the rights of shareholders in a company which is a going concern. The matters the subject of Pts 2F.1 and 2F.2 relate to the conduct of directors and other matters that may affect the rights of members of a company that is necessarily operating as a going concern. None of the matters to which those provisions are directed are capable of relating to a company in the control of a liquidator. The fact that Pt 2F.1A was inserted between Pts 2F.1 and 2F.2 is an indication that Pt 2F.1A was to operate in relation to companies other than those in the control of a liquidator.
(b)There are powerful indications in ss 237(3)(c) and 239 that Pt 2F.1A was intended to deal with companies other than those in the control of a liquidator under Chapter 5 of the Act, which relates to the external administration of a company.
(c)Sections 300(14) and (15), which require the annual directors’ report of a company to include details of any application for leave under s 237 as well as details of any proceedings brought on behalf of a company with leave under that section, are clearly directed at a company as a going concern. There is no equivalent provision in relation to reports of liquidators.
(d)Prior to the insertion of Pt 2F.1A, shareholders or creditors could only institute proceedings in the name of the company over the opposition of the company’s directors if they came within an exception to the rule in Foss v Harbottle. There was no such exception where a company was in liquidation, although the following considerations were relevant:
· The exercise or proposed exercise by a liquidator of his or her power pursuant to s 477(2)(a) to bring any legal proceedings in the name and on behalf of the company is subject to the control of the court pursuant to s 477(6) and any creditor or contributor could apply to the court with respect to any such exercise or proposed exercise: s 506(1) confers on a liquidator in a voluntary winding up the powers conferred on a liquidator in a court winding up including the power under s 477(2)(a).
· Pursuant to s 479(3) the liquidator is empowered to apply to the court for directions in relation to any particular matter arising under the winding up, s 511(1) vesting an equivalent power on the liquidator in a voluntary winding up.
· Section 536 empowers the court to take such action as it thinks fit where it appears to the court that a liquidator has not or is not faithfully performing his or her duties or where a complaint is made to the court by any person with respect to the conduct of the liquidator in connection with the performance of those duties.
· Section 473(1) empowers the court to remove a liquidator.
· Section 1321 enables a “person aggrieved” by any act, omission or decision of a liquidator or provisional liquidator to appeal to the court in respect thereof, the court having power to reverse or modify that act or decision or to remedy the omission, as the case may be, and to make such orders and give such directions as it thinks fit.
(I would interpolate here that where a liquidator refuses to exercise his power to bring legal proceedings pursuant to s 477(2)(a) it is probable that s 477(6) will be of no assistance to the member or creditor who seeks that the liquidator exercise that power as the subsection only empowers the liquidator to apply to the court with respect to any exercise or proposed exercise of such power and not to any refusal to exercise it. Where there is any such refusal or omission to exercise the power, a shareholder or creditor’s remedy is to appeal to the court pursuant to s 1321 for an order or direction that the liquidator exercise his power under s 477(2)(a) to institute legal proceedings in the name and on behalf of the company).
(e)Given that Pt 2F.1A was intended to be a statutory substitution for the exceptions to the rule in Foss v Harbottle, there is no reason why the following statement of Gummow J in Scarel at 350 should not equally apply to ss 236 and 237:
“The scheme of the statute is that it is the liquidator who is the appropriate party to decide whether to continue for the company litigation such as this, subject to the control of the Company’s Court over the liquidator. The cases dealing with Foss v Harbottle the exceptions to it involved going concerns where, by reason of particular circumstances, the orderly exercise of the respective powers of the directors and shareholders did not produce a result whereby the company was taking action to enforce its rights, whether against directors, shareholders or third parties. The situation is very different where the company is in liquidation. The ordinary rule there is that the liquidator, in the ordinary case, is the appropriate person in whom is vested the authority to decide whether the company should take or continue action to recover damages or secure other relief for an injury done to the company.” (Emphasis added).
Accordingly, as the cases dealing with Foss v Harbottle and its exceptions involve going concerns, then the statutory provisions contained in Pt 2F.1A which were intended to replace that rule and its exceptions should also apply only to companies which are going concerns in the absence of any contrary indication.
(f)The mischief identified by the Explanatory Memorandum and the report of the Companies and Securities Law Review Committee entitled “Enforcement of the Duties of Directors and Officers of the Company by Means of a Statutory Derivatory Action” (Report 12), was that the exceptions to the rule in Foss v Harbottle were insufficient to deal with a situation where the powers of directors and shareholders did not properly produce a result if proceedings were commenced or defended. No part of the mischief identified dealt with a situation where the company was under the control of a liquidator.
(g)Paragraphs 93 and 94 of Report 12 give a strong indication of the mischief to which Pt 2F.1A was ultimately directed where they refer to “the inactivity on the part of the Board of Directors with which this Report is concerned…”. It is clear that that report did not purport to deal with other than a company which was a going concern. The same observation can be made with respect to the Explanatory Memorandum, which is replete with references to decisions by the Board of Directors.
(h)Nothing in the Explanatory Memorandum or Report 12 indicated that the remarks of the Gummow J in Scarel to which reference has been made as to the control of litigation by a liquidator constituted any part of the mischief to which Pt 2F.1A was to be directed. Report 12 post-dates the decision in Scarel and was directed at the situation of a company as a going concern.
(i)As to the various decisions at first instance in which it has been held that Pt 2F.1A does apply to a company in liquidation:
·  In Roach Santow J gave insufficient weight to the purpose behind ss 237(3) and 239 and their importance as indicators that Pt 2F.1A did not apply to a company in the control of a liquidator. Where a company is so controlled, the concern that a claim may not be brought because of wrong-doers being in control of the board of the company or lack of appropriate response from the shareholders at a general meeting does not arise.
·  In Brightwell Austin J preferred the view of Santow J to that of Einstein J in Hypec Electronics “with some hesitation”. His Honour noted that the word “company” used in ss 236(3) and 237 is defined in s 9 of the Act in a manner which extended to a company in liquidation. Of particular significance for his Honour was] that (at 198 [48]):
“the matters to be taken into account by the Court in exercising its discretion to grant leave was set out in s 237(2)” (Emphasis added).
· The foregoing observation was incorrect: there is no discretion to grant leave once the court is satisfied of the matters set out in s 237(2): see [117] above. Furthermore, s 237(3) is an important protection in providing a balance between the position of an applicant seeking to institute proceedings and the position of a potential respondent. The existence of that protection and the further protection in s 239 are of significance as there would be no opportunity for potential respondents to avail themselves of those protections where a company is in the control of a liquidator. This would have the curious and unintended result that it would be easier for there to be a statutory derivative action where a company is in the control of a liquidator than where the company is a going concern under the control of directors. This is the case where the directors who participated in the decision not to bring proceedings have complied with the four requirements of s 237(3)(c) so that the rebuttable presumption against the granting of leave is established. No such rebuttable presumption against the granting leave arises where the liquidator decides not to bring proceedings. This would be an odd result given the weight normally extended to a decision of a liquidator in such circumstances, especially one appointed by the court. (I should note here that I agree on this point).
·  A similar error to that made by Austin J in Brightwell was made by Whelan J in Scuteri when his Honour observed (at 108 [13]) that that the judgment of Gummow J in Scarel (to which reference has already been made) has been:
“interpreted by some… as supporting a conclusion that Pt 2F.1A did not apply to a company in liquidation. In my view, that was a misconception of what his Honour had said. What he said was that the ordinary rule is that in an ordinary case the court should not entertain a derivative action where a company is in liquidation. That does not mean that in extraordinary cases leave might not properly be given under s 237.”
·  Whelan J agreed with the conclusion of Barrett J in Carpenter that Pt 2F.1A did apply to a company in liquidation and also that the question should be regarded as settled. His honour continued (at 108):
“15.This conclusion does not, in my view, detract from the cogency of Gummow J’s observations as to what should be the ordinary rule. It ought to be only in an extraordinary case where the court will consider permitting the liquidator’s role to be supplanted in the pursuit of vindication on behalf of the company.”
In my respectful view this statement of his Honour bespeaks error. It assumes that where an application is made under s 237 in respect of a company in liquidation, it would need to be an extraordinary case before a court will grant leave to a qualified applicant to commence proceedings in the name of the company over the opposition of the liquidator. This is the language of discretion but there is no such discretion in s 237(2) to refuse leave once the requirements of that subsection are satisfied. Of particular significance is that if Pt 2F.1A applies to a company in liquidation, the bare refusal of the liquidator to bring proceedings will satisfy the requirements of s 237(2)(a) but that otherwise his opposition to the bringing of any such proceedings and his reasons for that view are irrelevant except to the extent to which they may be relevant to the requirement in s 237(2)(c) that it be in the best interests of the company that the applicant be granted leave. However, it is in that context that the provisions of s 237(3) assume importance as they provide for a rebuttable presumption that granting leave is not in the best interests of the company where the four criteria in s 237(3)(c) are satisfied. Yet there is no such rebuttable presumption if a liquidator, when determining not to bring the proceedings in respect of which leave is sought, also satisfies those four criteria.
I now turn to the appellant’s response to Euphoric’s submissions on the jurisdictional issue, which may be summarised as follows (again with my comments where appropriate):
(a)The fact that neither the Explanatory Memorandum, the CLERP Report nor Report 12 expressly refer to companies in liquidation does not lead to the conclusion that Pt 2F.1A was not intended to extend to such companies.
(b) Reliance is placed on [29] of the CLERP Report which refers to
“limited options open to any director or officer particularly of a solvent company …” (Emphasis added).
(I would interpolate here that, in my view, this paragraph should be contrasted with para 32 of the same report which states:
“a statutory derivative action would not impose a new form of liability on directors but would provide a more effective avenue of enforcement than has previously been available. In the past, relatively few breaches of director’s duties have been able to be litigated, other than in the insolvency context especially where there has been no involvement by the [then Australian Securities Commission].” (Emphasis added)
This seems to indicate that the report was not concerned with the context of insolvency, but was merely using that context as a point of contrast).
(c)The approach to construction adopted by Euphoric involves a two-fold error. First, the extrinsic materials relied upon give no clear indication that companies in liquidation were not within the mischief to which Pt 2F.1A was directed; and, second, its submissions fail to reason by reference to the language of the statute, which must be given primacy (for instance, the definition of company which includes companies in liquidation). As such, there is nothing in that language that militates against the application of Pt 2F.1A to a company in liquidation. (Again, I would interpolate that, in my respectful opinion, this submission overlooks the significance of s 237(3) to which I have referred above when dealing with Euphoric’s submissions).
(d)Although the court has an inherent jurisdiction (which has survived the enactment of Pt 2F.1A) pursuant to its control over liquidators to grant leave to an appropriate party to institute proceedings in the name of a company in liquidation against a third party, that jurisdiction is much more limited than that in Pt 2F.1A. Thus, whereas the latter extends to not only current members and officers of a company but also former members and officers as well as persons entitled to be registered as a member, it would be appear that the inherent jurisdiction has only been exercised to allow a creditor or contributory of a company in liquidation to institute proceedings on its behalf: Aliprandi v Griffiths United Pty Ltd (1991) 6 ACSR 250 at 252. Further, s 236(1)(a)(i) extends to current and former members of a related company. (On the other hand it should be noted that s 236(1)(a) does not extend to a creditor whereas the inherent jurisdiction does).
(e)Although s 237(2)(a) speaks of “the company” not itself bringing proceedings, those words need to be read in the light of the powers of a liquidator under ss 477(2)(a) and (b), which empower him or her to bring proceedings on behalf of and in the name of the company of which he or she is liquidator. Accordingly, when the liquidator brings such proceedings, they are the proceedings of the company.
(f)Furthermore, s 237(2)(a) supports the appellant’s contention. Where a company is in liquidation and the liquidator does not wish to cause the company to bring proceedings or to take responsibility for them, then the provision of that subsection will be met. That is, if Pt 2F.1A applies to companies in liquidation, a relevant consideration will be whether or not the liquidator wishes to bring the proceedings. If the liquidator does, then leave will ordinarily not be granted under s 237(2). This “safeguard” will, so it was submitted, apply if Pt 2F.1A extends to a company in liquidation.
(g)Finally, the position will commonly be that a liquidator does not have sufficient funds to bring the relevant proceedings on behalf of the company. It is in those circumstances, if Euphoric’s submission is correct, that there would be a significant limitation on the scope of Pt 2F.1A.

In my opinion, Euphoric’s submissions should be accepted: Pt 2F.1A should not be available in circumstances where the company subject of the leave application is in liquidation. I have already expressed reasons in my comments above with respect to the submissions of Euphoric and the appellant and in my treatment of the cases already reviewed which decided that Pt 2F.1A was not available where a company is in liquidation. I now add the following:
(a)It is well established that it is important, when construing statutory provisions, to have regard to the context in which the statutory language appears. Thus, in CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408, Brennan CJ, Dawson, Toohey and Gummow JJ said:
"Moreover, the modern approach to statutory interpretation
(a)insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and
(b)uses “context” at its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those mentioned, one may discern the statute was intended to remedy. Instances of general words in the statute being so constrained by their context are numerous. In particular, as McHugh JA pointed out in Isherwood v Butler Polnow Pty Ltd, if the apparently plain words of a provision are read in the light of the mischief which a statue was designed to overcome and of the objects of the legislation, they may wear a very different appearance.”
(b)The word “company” in the present context is sought to be read down as excluding a company in liquidation. In R v Young [1999] NSWCCA 166; (1999) NSWLR 681 Chief Justice Spigelman noted (at [25]) that the “process of reading down general words is a well-established means of construction…”. After referring to the judgments of the High Court in Cooper-Brookes (Wollongong) Pty Ltd v Commissioner of Taxation (Cth) (1981) 147 CLR 297, his Honour then observed (at 689 [22]):
“Cooper-Brookes is not, in my opinion, authority for reading words into a statute. It is a case in which words of general application were read down.”
(c)In my opinion the context as well as the extrinsic materials identifying the mischief which Pt 2F.1A was intended to remedy, namely, the restrictions relating to the exceptions to the rule in Foss v Harbottle, are indicative of an intention that the statutory derivative action was intended to apply only to a company as a going concern and not one under the control of a liquidator. This is because the rule in Foss v Harbottle and its exceptions did not apply and were irrelevant to a company in liquidation.
(d)That this is so is supported by the fact, not always appreciated by some of the first instance decisions to which I have referred, that once the requirements of s 237(2) are satisfied, the Court must grant leave, there being no residual discretion.
(e)Section 237 is only concerned with the situation where the company will not itself bring the relevant proceedings, a decision which, where the company is in liquidation, can only be made by the liquidator. It is therefore beside the point for the appellant to submit that if a liquidator does wish to bring proceedings then leave would ordinarily not be granted under s 237(2). That is not, with respect, a relevant safeguard in the event that Pt 2F.1A extends to a company in liquidation. This is because if a liquidator determines not to institute proceedings on behalf of the company notwithstanding his power to do so under s 477(2)(a) then, if Pt 2F.1A otherwise applies to such a company, the provisions of s 237(2)(a) will be satisfied and the liquidator’s opposition to the bringing of such proceedings, including his reasons therefore will be, with one limited exception, irrelevant as the grant of leave is mandatory once the relevant subparagraphs of s 237(2) are satisfied.
(f)As I have already indicated, that exception is the possible relevance of the liquidator’s reasons to the requirement of s 237(2)(c). But even there, it is still open to the court to be satisfied that the requirements of that provision have been satisfied notwithstanding the liquidator’s opposition.
(g)In any event, the position of the liquidator and his or her significance in the regime of the Act as being the independent controller of the company free from the biases and agendas of the directors and shareholders is not recognised by the provisions of s 237. As I have already observed, there is no explanation as to why a bona fide decision of the directors not to bring proceedings should give rise to a presumption, albeit rebuttable, that it is not in the best interests of the company that leave be granted; but that no such presumption should apply where the decision not to bring the proceedings is that of the liquidator. In my view, and with great respect to those highly experienced judges such as Austin J and Barrett J who are acknowledged experts in the area of corporations law, their Honours have failed to give appropriate weight and significance to the language and intent of s 237(2) or to the requirement that leave must be granted if the requirements of that subsection are satisfied, there being no residual discretion. These factors in my view tell strongly against the correctness of the decisions which have held that Pt 2F.1A applies to a company in liquidation. In my view it does not.
(h)The appellant submits that it will commonly be that a liquidator does not have sufficient funds to bring proceedings on behalf of the company and that that is a circumstance which makes it more likely that Pt 2F.1A should apply to a company in liquidation. The first part of that submission is no doubt true – but not the second part. It is not unusual for a liquidator to bring proceedings on behalf of the company where he is put in funds to do so with appropriate indemnities by shareholders or creditors who have requested him or her to proceed with particular litigation. In my view that fact tells against any necessity to construe Pt 2F.1A as extending to a company in liquidation.
(i)In Roach, Santow J considered that it would be incongruous if the statutory derivative action provided by Pt 2F.1A were to have a narrower ambit than the general law exceptions to the rule in Foss v Harbottle. His Honour’s view was based on what he said was the application by McLelland J in Aliprandi of such an exception to a company in liquidation permitting the relevant proceedings to be brought. But in Aliprandi, McLelland J was exercising the court’s inherent jurisdiction to authorise the bringing of such proceedings by a contributory or creditor in the name of the company over the opposition of the liquidator.
(j)McLelland J in Aliprandi did not suggest that the jurisdiction was an application of the general law exception to the rule in Foss v Harbottle to a company in liquidation. On the contrary, he cited a passage from the judgment of Jessel M R in Cape Breton Co v Fenn (1881) 17 CCh D 198 at 207 that the jurisdiction was based on:
“the same principle on which a man could always have filed a bill in the old Court of Chancery against his trustee to be allowed to use his name to recover the trust property.”
The inherent jurisdiction remains together with the statutory provisions already referred to such as s 1321.
(k)The fact that the inherent jurisdiction does not extend to all the categories of applicants referred to in s 236(1)(a) is not, with respect, incongruous when one considers the significant differences between a derivative action brought with respect to a solvent company over the opposition of its board of directors as of right pursuant to the general law exception to the rule in Foss v Harbottle (now abolished by s 236(3) of the Act) and that brought with the imprimatur of the court in the exercise of its inherent jurisdiction with respect to an insolvent company over the opposition of its liquidator. It is not unimportant that in the latter case the court should determine whether the conduct of litigation in the name of the company should be taken out of the control and supervision of a liquidator as an officer of the court: cf Alibrandi at 252 ([24]-[27]).
(l)In any event, the only potential applicants under s 236(1)(a) who cannot avail themselves of the inherent jurisdiction are former members and persons entitled to be registered as a member of the company or of a related company, current members of a related company and current and former officers of the company other than creditors or prospective creditors. I do not find that incongruous.
(m)Furthermore, the lack of any discretion in the granting of leave under Pt 2F.1A makes it incongruous to apply those provisions to a company in liquidation. As the court has no discretion to refuse leave where the requirements of s 237(2) are satisfied, there is a significant potential for conflict with the established notion recognised in the Act of the overriding control by the court under Chapter 5 over the whole of the winding up process of an insolvent company, including the conduct of the liquidator. That control would be lost or at least diminished given the mandatory terms of the chapeau of s 237(2) if it were to apply to such a company: the “court must grant the application if it is satisfied that…”
(n)Finally, I reiterate that the statutory provisions to which I have referred above and, in particular, s 1321 in its application to a decision of a liquidator to refuse to exercise his or her power under s 477(2)(a) to bring proceedings in the name of the company, provide an appropriate remedy to a person otherwise qualified to make an application under s 237(1) notwithstanding that it is in the court’s discretion where s 1321 is engaged whether or not to grant the relief sought. In my view it seems entirely appropriate that there should be such a discretion in the case of a company in liquidation so as to ensure that the liquidator’s views are properly considered and given the weight they normally command.
Conclusion
In my opinion Pt 2F.1A of the Act has no application to a company in liquidation, whether that be a voluntary liquidation (shareholders or creditors) or a court ordered liquidation. Accordingly, in my opinion, those single instance decisions of judges of the Supreme Court which hold to the contrary should not be followed.
However, even if Pt 2F.1A does apply to a company in liquidation, in the present case it was open to the primary judge to hold that he was not satisfied that the appellant was acting in good faith (as required by s 237(2)(b)) or that it was in the best interests of the company that the appellant be granted leave (as required by s 237(2)(c)).
Accordingly, I would propose that the appeal be dismissed with costs.
BELL JA: I agree with Tobias JA.

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LAST UPDATED:
10 April 2008