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
[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.
[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.
[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.
Consideration
[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.
[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.
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AGLC
Chahwan v Euphoric Pty Ltd [2008] NSWCA 52
Case
[2008] NSWCA 52
Decision Date
CaseChat Overview and Summary
The appeal concerned an application by the appellant, Mr Chahwan, for leave to bring proceedings on behalf of Bycoon Pty Ltd (Bycoon) under section 237 of the Corporations Act 2001 (Cth). Mr Chahwan sought to bring these proceedings against Euphoric Pty Ltd (Euphoric) and others, alleging breaches of directors' duties and seeking declarations regarding property ownership. The primary judge had dismissed Mr Chahwan's application for leave, and he appealed this decision to the Court of Appeal of New South Wales.
The central legal issues before the Court of Appeal were whether the appellant, as a member of Bycoon, was entitled to bring a statutory derivative action when the company was in liquidation, and if so, whether he had satisfied the conditions stipulated in section 237 of the Act. Specifically, the court had to determine if the appellant was acting in good faith and if it was in the best interests of Bycoon that the proceedings be brought. A further question arose regarding the interpretation of "company" within the context of the Corporations Act, particularly whether a company in liquidation could be considered a "company" for the purposes of a statutory derivative action.
The Court of Appeal reasoned that the definition of "company" in the Corporations Act, when read in the context of Part 5 of Chapter 2, which deals with statutory derivative actions, did not exclude companies in liquidation. Therefore, a statutory derivative action was available even when the company was in liquidation. The court then considered the requirements of section 237, finding that the appellant had failed to demonstrate that he was acting in good faith or that it was in the best interests of Bycoon for the proceedings to be brought. The appellant's conduct and the circumstances surrounding the proposed litigation did not meet the statutory threshold for granting leave.
Consequently, the Court of Appeal dismissed the appeal. The appellant was ordered to pay the costs of the appeal.
Orders
Orders of the court
Appeal dismissed with costs
Background
Background to the litigation
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.