Charlton v Baber

[2003] NSWSC 745

Reported Decision: 47 ACSR 31
(2003) 21 ACLC 1671

Supreme Court

CITATION:	Charlton v Baber [2003] NSWSC 745
HEARING DATE(S):	28/07/03, 30/07/03, 31/07/03
JUDGMENT DATE:	15 August 2003
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Barrett J
DECISION:	Claims of plaintiff personally against first defendant struck out. Leave for plaintiff to bring derivative proceedings on behalf of fourth defendant granted as to some claims and refused as to others.
CATCHWORDS:	CORPORATIONS - duties of directors - whether director owes comprehensive fiduciary duty to individual shareholder - no facts pleaded to show ascendancy, influence, vulnerability or reliance - CORPORATIONS - statutory derivative action - whether available when company in liquidation - s.237 criteria - meaning of "best interests" - court's powers as to costs - possibility of order as to costs (or for security for costs) immediately proceedings brought - CORPORATIONS - leave to proceed against company in liquidation - applicable section where winding up sourced in s.446A
LEGISLATION CITED:	Corporations Act 2001 (Cth), ss.233, 236, 237, 446A, 459A, 471B Supreme Court Rules, Part 15 rule 26(1)
CASES CITED:	Aliprandi v Griffith Vintners Pty Ltd (1991) 6 ACSR 250 Awada v Linknarf Ltd (2002) 55 NSWLR 745 Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 Re B and B (1997) 142 FLR 430 BL & GY International Co Ltd v Hypec Electronics Pty Ltd (2001) 19 ACLC 1622 Breen v Williams (1996) 186 CLR 71 Brightwell v RFB Holdings Pty Ltd (2003) 44 ACSR 186 Brunninghausen v Glavanics (1999) 46 NSWLR 538 CDJ v VAJ (1998) 197 CLR 172 Chan v Zacharia (1984) 154 CLR 178 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 Department of Community Services v Y [1999] NSWSC 644 Elders v Swimbank [1999] FCA 798 ERS Engines Pty Ltd v Wilson (1994) 14 ACSR 531 Fadden v Federal Commissioner of Taxation (1945) 70 CLR 555 Ferrari Investment (Townsville) Pty Ltd (in liq) v Ferrari [2000] 2 QdR 359 Foss v Harbottle (1843) 2 Hare 461 Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534 Herbert v Redemption Investments Pty Ltd [2002] QSC 340 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Jeans v Deangrove Pty Ltd [2001] NSWSC 84 Keyrate Pty Ltd v Harmac Pty Ltd (2001) 38 ACSR 396 Lakshman v Law Image Pty Ltd [2002] NSWSC 888 McCarty v Council of the Municipality of North Sydney (1918) 18 SR (NSW) 210 McGain v Federal Commissioner of Taxation (1966) 116 CLR 173 Metyor Inc v Queensland Electronic Switching Pty Ltd (2002) 42 ACSR 398 Public Trustee v Blackwood (1998) 8 TasR 256 Richard Brady Franks Ltd v Price (1937) 58 CLR 112 Queensland Mines Ltd v Hudson (1978) 52 ALJR 399 (PC) Roach v Winnote Pty Ltd [2001] NSWSC 822 Ron Kingham Real Estate Pty Ltd v Edgar [1999] 2 QdR 439 Russell Kinsella Pty Ltd v Kinsella (1983) 8 ACLR 384 Spies v The Queen (2000) 201 CLR 603 Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313 Walker v Wimborne (1976) 137 CLR 1 Warman International Ltd v Dwyer (1995) 182 CLR 544
PARTIES :	Shane Edward Charlton - Plaintiff Mark Steven Baber - First Defendant Elizabeth Joan Baber - Second Defendant Neville Baber - Third Defendant Newcastle Auto Air Pty Limited (in liq) - Fourth Defendant Griffiths Road Pty Limited - Sixth Defendant
FILE NUMBER(S):	SC 1364/02
COUNSEL:	Ms M.A.C. Painter - Plaintiff Mr A.A. Henskens - First, Second, Third and Sixth Defendants
SOLICITORS:	Mason Lawyers - Plaintiff Bilbie Dan - First, Second, Third and Sixth Defendants

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

BARRETT J

FRIDAY, 15 AUGUST 2003

1364/02 – SHANE EDWARD CHARLTON v MARK STEVEN BABER & 4 ORS

JUDGMENT

The present applications

1 Before the court for determination are questions concerning an amended statement of claim filed on 8 April 2003. The questions are raised by competing interlocutory processes to which I shall come presently. First, it is convenient to outline the general background as it emerges from the provisions of the amended statement of claim, supplemented, in some areas, by the affidavit evidence adduced on the hearing of the two interlocutory processes.

2 The plaintiff, Mr Charlton, and the first defendant, Mr Mark Baber (“Mr Baber”), were the founders of the fourth defendant, Newcastle Auto Air Pty Limited (“NAA”) and, from a point in 1990, each of them held one half of the issued share capital, being 150 ordinary shares. Each remains a shareholder, although Mr Charlton has a reduced holding arising from events which I shall mention presently. Mr Charlton was a director of NAA between 30 June 1989 and 16 June 1998. Mr Baber became a director at the same time as Mr Charlton and remained in office thereafter. NAA encountered financial difficulties and became subject to voluntary administration under Part 5.3A of the Corporations Act 2001 (Cth) on 19 July 2002. Subsequently, on 15 August 2002, NAA passed into the form of creditors voluntary winding up produced by s.446A and the administrators, Mr Lewis and Mr Shaw, became its liquidators. The name of NAA was, in August 2002, changed to ACN 003 828 957 Pty Limited but, for present purposes, it is convenient to continue to refer to it as “NAA”.

3 Mr Charlton, in his capacity as shareholder (being the only capacity he currently possesses qua NAA), wishes to have NAA pursue certain claims he considers it to have arising out of what, in his view, were breaches of the duties owed to NAA by Mr Baber as a director of NAA. Separately and in his own right, Mr Charlton seeks to pursue in the same proceedings claims he considers himself to have against Mr Baber for conduct entailing breach of some form of fiduciary duty owed by Mr Baber to Mr Charlton and also coming within s.233 of the Corporations Act dealing with oppression, unfair prejudice and like matters. With a view to pursuing both sets of claims, Mr Charlton has filed the amended statement of claim to which I have referred.

4 The first of the interlocutory processes with which I am currently dealing is one by which Mr Charlton applies under s.237(1) of the Corporations Act for leave to bring proceedings on behalf of NAA pursuant to s.236. To the extent that relief is sought by Mr Charlton against NAA, there is also an application for leave to proceed even though a winding up of NAA is in progress.

5 The circumstance that NAA is, at the same time, both a potential plaintiff and a potential defendant will, it is envisaged, be accommodated by its being named as a defendant only but on the basis that, in the parts of the amended statement of claim involving relief sought by Mr Charlton on behalf of and for the benefit of NAA, that company, although named as a defendant, is the principal for whom Mr Charlton pursues the relevant claim This, although perhaps at odds with a literal reading of s.236(2) (which requires that a derivative action brought on behalf of a company must be brought in the name of the company, thus suggesting that the company should be a plaintiff), is a course sanctioned by Santow J in Keyrate Pty Ltd v Harmac Pty Ltd (2001) 38 ACSR 396, a decision subsequently endorsed by the Queensland Court of Appeal in Metyor Inc v Queensland Electronic Switching Pty Ltd (2002) 42 ACSR 398 which, in turn, was followed by Windeyer J in Lakshman v Law Image Pty Ltd [2002] NSWSC 888. Keyrate was followed by Austin J in Brightwell v RFB Holdings Pty Ltd (2003) 44 ACSR 186. The amendment envisaged by Ms Painter of counsel, who appeared for Mr Charlton, will thus satisfactorily deal with the dual role of NAA in the litigation and I shall proceed on the footing that the amended statement of claim will be further amended accordingly.

6 The defendants named in the amended statement of claim are Mr Baber, his wife (Mrs Elizabeth Baber), another family member (Mr Neville Baber) and Griffiths Road Pty Limited (the trustee of a Baber family trust), in addition to NAA. Those other defendants seek, by interlocutory process filed on 2 June 2003, orders striking out parts of the amended statement of claim. Since the question of leave under s.237 will be capable of being addressed in a meaningful way only by reference to so much of the amended statement of claim as survives the defendants’ application, it is desirable that that application be dealt with first.

Parts of amended statement of claim attacked by defendants

7 The first part of the amended statement of claim that, in the defendants’ submission, should be struck out is paragraph 6:

“6. At all material times the First Defendant [ie, Mr Baber], in the performance of his functions as a director of the Fourth Defendant [ie, NAA] owed to the Plaintiff [ie, Mr Charlton] duties to:
(a) Act in good faith;
(b) Act in the best interests of the Fourth Defendant;

(c) Avoid conflicts between the interests of the Fourth Defendant and the interests of himself or persons or companies of which he was a director, substantial shareholder or was otherwise associated;

(d) Act honestly;
(e) Exercise care and diligence in the performance of his duties; and
(f) Refrain from using his position as a director of the Fourth Director to gain an advantage for himself or for any other person or company.”

8 Paragraph 6 is juxtaposed with paragraph 6A which should also be set out in full:

“6A. At all material times the First Defendant [ie, Mr Baber], in the performance of his functions as a director of the Fourth Defendant [ie, NAA], owed to the Fourth Defendant [ie, naa] duties to:
(a) Act in good faith;
(b) Act in the best interests of the Fourth Defendant;
(c) Avoid conflicts between the interests of the Fourth Defendant and the interests of himself or persons or companies of which he was a director, substantial shareholder or was otherwise associated;
(d) Act honestly;
(e) Exercise care and diligence in the performance of his duties; and
(f) Refrain from using his position as a director of the Fourth Director to gain an advantage for himself or for any other person or company.”

9 Paragraph 6A does not play any direct part in the claims advanced by Mr Charlton personally against Mr Baber. It is relevant only to the derivate claims Mr Charlton seeks leave to pursue on behalf of NAA. I have quoted paragraph 6A in full only for ease of comparison with paragraph 6 and to show that the two are in identical terms, save that paragraph 6 describes the stated duties as being owed to Mr Charlton (the plaintiff) and paragraph 6A says that they are owed to NAA (the fourth defendant).

10 The other parts of the amended statement of claim that are the subject of the defendants’ strike-out application are related to paragraph 6 in the sense that they plead causes of action referring to or based on the species of duty pleaded in paragraph 6, being a duty said by the plaintiff (Mr Charlton) to be owed to him by the first defendant (Mr Baber) in relation to the performance of Mr Baber’s functions as a director of NAA. I shall describe each of those supposed causes of action briefly.

11 First, in paragraphs 16 to 20, Mr Charlton says, in effect, that he was induced by misrepresentation to transfer some of his shares in NAA to other persons, that Mr Baber was party to or responsible for the misrepresentation and that Mr Baber thereby breached the fiduciary duty pleaded at paragraph 6. Second, Mr Charlton pleads at paragraphs 57 to 63 that Mr Baber caused NAA to issue one “B” class share in the capital of NAA to Mrs Baber, that Mr Charlton, as a shareholder, was not advised of this and did not consent to it, that the issue of the share was improper and that, in acting as he did, Mr Baber breached a duty owed by him to Mr Charlton, being the duty pleaded in paragraph 6. Third, there are, in paragraphs 64 to 70, like matters pleaded in relation to the issue of one “A” class share in NAA to Mr Baber himself at the behest of Mr Baber. Fourth, Mr Charlton pleads in paragraphs 107 to 111 that Mr Baber failed to give him copies of NAA’s financial statements and books of account despite requests and that he also failed to give Mr Charlton notice of shareholders’ and directors’ meetings and, in both respects, breached a duty owed to Mr Charlton, being the duty pleaded in paragraph 6.

Approach to the defendants’ strike out application

12 The basis on which the defendants argue that paragraph 6, paragraphs 16 to 20, paragraphs 57 to 63, paragraphs 64 to 70 and paragraphs 107 to 111 should be struck out is that stated in Part 15 rule 26(1) of the Supreme Court Rules:

“Where a pleading:
(a) discloses no reasonable cause of action or defence or other case appropriate to the nature of the pleading,
(b) has a tendency to cause prejudice, embarrassment or delay in the proceedings, or
(c) is otherwise an abuse of the process of the Court,
the Court may at any stage of the proceedings, on terms, order that the whole or any part of the pleading be struck out.”

13 It is clear that this jurisdiction is exercisable only in obvious cases and that its exercise is not the occasion for any form of extended inquiry into the real merits of the plaintiff’s case. In relation to the defendants’ strike out application, therefore, I take at face value the allegations of fact in the plaintiff’s amended statement of claim and proceed to consider, as the central question, whether the duty pleaded in paragraph 6 is, in reality, a duty that a director of a company can be properly said to owe to a shareholder in that company.

The fiduciary duty pleaded

14 As I have already noted, the terms of paragraph 6 are identical with those of paragraph 6A except that the latter purports to define the duty owed by Mr Baber to NAA, as distinct from the duty owed by Mr Baber to Mr Charlton. A comparison of paragraph 6 with paragraph 6A shows Mr Baber is said to have owed identical duties, in his capacity as a director of NAA, to NAA itself and to Mr Charlton. Furthermore, the content of the duty reflects, in each case, well known formulations of the general law fiduciary duties owed by directors to companies, being formulations also found in Division 1 of Part 2D.1 of the Corporations Act. Ms Painter submitted on behalf of Mr Charlton that such a formulation is correct, insofar as the duty owed by a director to an individual shareholder is concerned, and that this is borne out by the decision of the Court of Appeal in Brunninghausen v Glavanics (1999) 46 NSWLR 538. Mr Henskens of counsel, who appeared for the applicant defendants, submitted to the contrary and likewise relied on Brunninghausen v Glavanics. Indeed, both Ms Painter and Mr Henskens took me to the same passages in the comprehensive analysis contained in the judgment of Handley JA (with whom Priestley JA and Stein JA agreed). The conclusion in that case was that a director did owe a fiduciary duty to the particular plaintiff shareholder in the circumstances of the case. In the course of his judgment, Handley JA said:

“If a fiduciary duty exists here it must arise from the bare facts of the relationship. These include the position of the defendant as the sole effective director, the existence of only one other shareholder, their close family association, the intervention of the mother-in-law to secure a family reconciliation, and the exclusive advantage or opportunity which the defendant's position conferred on him to receive any offers to purchase the company's business from third parties.

Any fiduciary duty arising from these facts must be one imposed by law. The defendant did nothing which could be construed as a voluntary assumption of such a duty. The Judge held that the relationship between the parties did not create a comprehensive fiduciary duty but one which was limited to the disclosure of the unexpected offer by third parties to purchase the entire business. The existence of such a duty was denied in Percival v Wright [1902] 2 Ch 421 and that case cannot be distinguished from the present. We can only hold that the defendant owed the fiduciary duty found by the Judge if we decline to follow Percival v Wright.

The decision is not binding on this Court and the comments in Winthrop Investments Ltd v Winns Ltd (1975) 2 NSWLR 666, 680 and the decision in Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACSR 543, which is distinguishable, do not prevent us from re-examining the decision. It has not been followed in Australia in circumstances comparable with the present.

The general principle that a director's fiduciary duties are owed to the company and not to shareholders is undoubtedly correct, and its validity is undiminished. The question is whether the principle applies in a case, such as the present, where the transaction did not concern the company, but only another shareholder.

Any statement that the defendant owed a duty to the company in relation to his dealings with the plaintiff over his shares is meaningless. Such a duty would lack all practical content. The company could not suffer any loss from the breach of such a duty, and had no interest in its loyal and disinterested performance. Where a director's fiduciary duties are owed to the company this prevents the recognition of concurrent and identical duties to its shareholders covering the same subject matter. However this should not preclude the recognition of a fiduciary duty to shareholders in relation to dealings in their shares where this would not compete with any duty owed to the company.”

15 Handley JA then proceeded to review decided cases about different facets of the responsibilities of directors which, on analysis, were seen to involve, in reality, duties owed to shareholders as such. His Honour found in all those cases a strong thread of fiduciary responsibility involving not only the familiar principle that the interests of members are the main determinant of duties owed by directors to their companies but also the notion that fiduciary duties are in some circumstances owed by directors direct to shareholders themselves.

16 In Brunninghausen v Glavanics, the proceedings arose from a sale of shares by the plaintiff (a minority shareholder and director) to the defendant (majority shareholder and director), where the defendant was the dominant party and the plaintiff was virtually excluded from participation in the affairs of the company. The defendant did not tell the plaintiff that he was negotiating on the company’s behalf for the sale of its business for a price substantially in excess of that reflected in the price attributed to shares in the agreement for the sale of the plaintiff’s minority shareholding to the defendant. It was held by the primary judge and confirmed on appeal that the defendant had acted in breach of a particular fiduciary duty owed by him to the plaintiff as a shareholder.

17 The significant point, for present purposes, about the decision of the Court of Appeal in Brunninghausen v Glavanics emerges from the observations of Handley JA already quoted. The situation was one in which there was, on the facts, a particular relationship between the parties. That, it was said, did not create “a comprehensive fiduciary duty”. It did, however, create a fiduciary duty that was “limited” to actions by the defendant necessary to negate the effect, in the particular circumstances, of his taking advantage in an unconscionable way of the superior position occupied by him as against the plaintiff. The Court of Appeal emphasised that fiduciary duties having identical content cannot be owed both to the company and to one or more of its shareholders in relation to the same subject matter; and that, to the extent that they exist at all, fiduciary duties owed by directors to shareholders can be recognised only where they “would not compete with” any duty owed to the company. In short, the company remains the beneficiary of the comprehensive fiduciary duties to which directors are subject by virtue of their office; and parallel duties in corresponding form are not owed to any shareholder, although particular circumstances may give rise to a particular duty owed by a particular director to a particular shareholder or particular shareholders.

Decision on defendants’ strike out application

18 In paragraph 6 of the amended statement of claim, Mr Charlton seeks to propound a fiduciary duty owed by Mr Baber, as a director, to Mr Charlton himself in precisely the same terms as the fiduciary duty said, in paragraph 6A, to be owed by Mr Baber, as a director, to NAA. This is at odds with the principles by which, according to the Court of Appeal, it may be possible to recognise a fiduciary duty owed by a director to a shareholder personally. If any such duty is to be pleaded, it cannot be pleaded in comprehensive terms corresponding with what I have called generally accepted formulations of the fiduciary duties owed by directors to their company. Rather, it must be pleaded specifically and in such a way as to be both circumscribed and defined by allegations of fact giving rise to some form of relationship involving ascendancy or influence and vulnerability or dependence requiring subordination of personal interest which, according to cases such as Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, Chan v Zacharia (1984) 154 CLR 178 and Breen v Williams (1996) 186 CLR 71, must always be the foundation upon which a fiduciary duty is built.

19 Mr Charlton has not sought to frame his amended statement of claim in any way that indicates a factual basis, having regard to the circumstances of the parties and the context of their relationship, for an allegation that a fiduciary duty was owed by Mr Baber to Mr Charlton, much less the far-reaching and comprehensive fiduciary duty described in paragraph 6. The parts of the pleading to which the defendants object must therefore be regarded as disclosing no reasonable cause of action, as well as being embarrassing in that the defendants are not informed (in a way permitting meaningful response) of the matters by reference to which the alleged fiduciary duty is said to arise.

20 The application of the defendants that paragraphs 6, 57 to 63, 64 to 70 and 107 to 111 of the plaintiff’s amended statement of claim be struck out will therefore be granted. Paragraph 112 (the s.233 count) will also fall with the other paragraphs, no foundation for it remaining, as will paragraph 113 to the extent that it is a claim by Mr Charlton personally for damages and costs.

The plaintiff’s claim to bring derivative proceedings

21 I turn now to the application of Mr Charlton for leave under s.237. It is necessary to outline the claims he wishes to pursue on behalf of NAA and for its benefit.

22 Paragraphs 55 and 56 allege that Mr Baber allowed NAA to make loans to a company called Combined Auto Services Pty Ltd “on uncommercial terms and without any or adequate security”, thereby breaching the duty owed by him to NAA as pleaded in paragraph 6A. Paragraphs 71 to 75 allege like breach of duty by Mr Baber by allowing NAA to pay wages and give other benefits to Mrs Baber that were “excessive in relation to the work performed by her”. Paragraphs 76 to 81 allege like breach of duty by Mr Baber in causing or allowing NAA to pay dividends to Mrs Baber, as the holder of the “B” class share, when no dividend was paid to Mr Charlton and he had not consented to the payment. Paragraphs 82 to 89 involve a claim of breach by Mr Baber of the paragraph 6A fiduciary duty owed to NAA in respect of allegedly excessive wages and benefits made available by NAA to Mr Baber himself. That claim is, in concept, the same as that in paragraphs 71 to 75 in respect of Mrs Baber’s employee benefits. Paragraphs 90 to 106 plead breach of the paragraph 6A fiduciary duty by Mr Baber, as against NAA, in causing or allowing NAA to participate in certain transactions with Griffiths Road Pty Ltd, a Baber family company, involving leases of premises which, it is said, were disadvantageous to NAA.

23 Mr Charlton’s application, in relation to each of these claims, is that he be granted leave, in the words of s.236(1), to “bring proceedings on behalf of the company”. Because he is a member of NAA, he is within s.236(1)(a). Two issues therefore remain to be considered: first, whether leave may be granted under s.237 in respect of proceedings to be brought by a company in liquidation; and, second, whether, having regard to the provisions of s.237 itself, leave is to be granted.

Significance of the winding up of NAA

24 There has been some debate, since Part 2F.1A was introduced by the Corporate Law Economic Reform Program Act 1998, whether the form of statutory derivative proceeding it creates may be instituted in relation to a company that is in the course of being wound up.

25 In BL & GY International Co Ltd v Hypec Electronics Pty Ltd (2001) 19 ACLC 1622, Einstein J expressed the view that Part 2F.1A does not apply to a company in liquidation. His Honour was influenced by the fact that s.237(3)(c) appears to assume that a company’s directors will play a part in deciding whether it will itself engage in the particular litigation. Once creditors voluntary winding up commences, the directors will ordinarily have no power to make such decisions for the company: see s.499(4). Einstein J eventually did not need to decide this point. In Roach v Winnote Pty Ltd [2001] NSWSC 822, Santow J, who was apparently not referred to Einstein J’s earlier decision, inclined to the view that Part 2F.1A continues to apply despite the intervention of winding up, describing s.237(3) and its reference to directors’ decision making as merely adjectival to the earlier substantive provisions of s.237.

26 The question has recently been addressed by Austin J in Brightwell v RFB Holdings Pty Ltd (above). With “some hesitation”, his Honour expressed a preference for the view of Santow J:

“Sections 236(3) and 237 literally apply to proceedings brought on behalf of a "company". That word is defined in s 9 in a manner that extends to a company in liquidation. I respectfully agree with Santow J that s 237 (3) is adjectival. The matters to be taken into account by the Court in exercising its discretion to grant leave are set out in s 237(2). Section 237(3) operates in aid of subsection (2)(c) by creating a rebuttable presumption in specified circumstances. Those circumstances apply to a case where the directors of the company have made a decision of a kind that could not be made by them if the company were in liquidation. But the fact that the rebuttable presumption arising out of s 237 (3) cannot arise in a case where at all relevant times the company is in liquidation should not be taken to imply that where a liquidator is in control the Court cannot exercise its discretion under subsection (2). Each of the criteria specified in subsection (2) is perfectly comprehensible in the case of the company in liquidation.

If Part 2F.1A were held to be inapplicable to a company in liquidation because of the wording of s 237 (3) (c), it would be equally inapplicable if a receiver and manager had been appointed to the company. As Santow J observed in the Roach case (at para [4]), it would be an incongruous result if the statutory derivative action were not available where a receiver has displaced the board, as regards its external relations which would embrace litigation.”

27 My views coincide with those of Santow J and Austin J and I respectfully adopt the approach that commended itself to them. Section 237(3), which refers to decision making by directors, does no more than cause a rebuttable presumption to arise as to one of the matters to be examined by the court under s.237(2). If the facts as found (including as to directors’ decision making) cause the case to fit within s.237(3), the presumption arises. If they do not – because directors did not participate in a relevant decision, or for any other reason – the presumption does not arise. In either event, there is no reason why the substantive provisions of ss.237(1) and 237(2) cannot operate perfectly well according to their terms.

28 The fact that a creditors’ voluntary winding up pursuant to s.446A is in progress in respect of NAA therefore presents no barrier to the grant of the leave Mr Charlton seeks under s.237.

29 In both Roach and Brightwell, the orders made were framed so as to rely as well on the court’s inherent jurisdiction to allow a contributory to institute proceedings on behalf of a company in liquidation and to use the name of the company as plaintiff accordingly. A similar order was made in BL & GY International. It was the view of Santow J and Austin J that that general law jurisdiction (described by McLelland J in Aliprandi v Griffiths Vintners Pty Ltd (1991) 6 ACSR 250 as “of respectable antiquity” and “sanctioned by high authority”) has survived the enactment of Part 2F.1A and, in particular, s.236(3):

“The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.”

30 In referring to a “right”, this provision should, I think, be taken to refer to situations in which, despite the proper plaintiff rule in Foss v Harbottle (1843) 2 Hare 461, a shareholder can show an entitlement to sue in the company’s name, as distinct from asserting a claim, to be assessed on its merits, that the court should assist him or her in achieving that end. On that footing, the particular jurisdiction to allow a contributory to sue for a company in liquidation may be said to have survived the introduction of Part 2F.1A but, since Mr Charlton’s claim is advanced by reference to the statutory provisions alone, I shall deal with it on that basis only.

The s.237 criteria

31 The terms of s.237(2) are such that the court is compelled to grant leave if it is satisfied that all of the criteria in paras (a) to (e) have been met. If the court is not so satisfied, it must, I think, refuse leave: see RTP Holdings Pty Ltd v Roberts (2000) 36 ACSR 170, Jeans v Deangrove Pty Ltd [2001] NSWSC 84, Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534, Herbert v Redemption Investments Pty Ltd [2002] QSC 340. Given the statutory language, I do not regard the court as possessing any residual discretion in the matter.

32 The criteria in s.237(2) must be addressed individually. I shall deal with them in the order in which they appear in the section which is as follows:

“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. “

Probability of the company’s bringing the proceedings – s.237(2)(a)

33 Decision making for NAA is currently in the hands of its liquidators. There is in evidence a report dated 6 August 2002 made by the then administrators (now liquidators) pursuant to s.439A(4). According to information obtained by them, NAA had, at 30 July 2002, total assets of $52,258 and total liabilities of $295,501 of which $16,108 was owing to priority employee creditors and $140,489 was owing to a secured creditor, being the National Australia Bank which held a fixed and floating charge over the whole of NAA’s assets.

34 Three of the claims in respect of which Mr Charlton seeks leave to bring proceedings on NAA’s behalf are referred to in the administrators’ report. These are the claim in respect of Mrs Baber’s remuneration and benefits (paragraphs 71 to 75 of the amended statement of claim), the corresponding claim in respect of Mr Baber’s remuneration and benefits (paragraphs 82 to 89) and the claim in respect of the lease matters (paragraphs 90 to 106).

35 In relation to the two remuneration matters, the administrators reported that Mrs Baber’s remuneration formed part of a “wage splitting arrangement” which “split Mr Baber’s wage between Mr and Mrs Baber for taxation purposes”. Their expressed view, as at the date of their report, was that “the compensation received by Mr Baber does not appear excessive” and “we do not consider the combined wage split between Mr and Mrs Baber to be excessive”. Although nothing is said about whether the administrators proposed to initiate any legal proceedings in respect of any breach of duty there may have been on Mr Baber’s part in committing the company to these remuneration arrangements, I was invited by Ms Painter to infer from the content of their report that it is probable that NAA, under their direction as liquidators, will not itself bring the proceedings. That is, in my view, a fair inference reasonably open and I find accordingly.

36 In relation to the matter involving the leases (paragraphs 90 to 106 of the amended statement of claim), the report of the administrators says that, at the date of their report, they do “not believe that a liquidator would be successful in a claim against the company directors for breach of duty in relation to this arrangement”. Again, I am asked to infer from this, and do infer, that it is probable that, with the authors of the report now in office as liquidators, NAA itself will not bring proceedings in respect of this claim.

37 A fourth claim – the claim concerning loans to Combined Auto Services (paragraphs 55 and 56 of the amended statement of claim) – is dealt with in the administrators’ corresponding report in relation to that company (as distinct from NAA itself). They said in that report that it did not appear that interest had been charged or security taken. They continued:

“As such a loan on this basis may constitute a breach of the directors’ duty to act in the best interests of the company. Having regard to the quantum of the debt, however, it is our view that any claim would not be commercial to pursue.”

This must have been a reference to breach of the duties owed by directors of NAA, rather than directors of Combined Auto Services. I accept that the inferences I have drawn from the references in the NAA report should be drawn here also and that, in respect of the claim at paragraphs 55 and 56 of the amended statement of claim, I should accept that it is likely that NAA will not itself bring proceedings.

38 The administrators’ reports do not deal at all with the fifth and last claim, being that in paragraphs 76 to 81 of the amended statement of claim in relation to payment of dividends to Mrs Baber. On that, however, Mr Charlton relies on the other evidence regarded as pertinent to the s.237(2)(a) criterion as it applies to all the claims Mr Charlton seeks to pursue on NAA’s behalf. This comes from relatively recent correspondence between his solicitors and the liquidators. On 10 April 2003, his solicitors wrote to the liquidators enclosing a notice in terms of s.237(2)(e) (to which was attached a draft of the amended statement of claim) and asking for a further copy of each of the liquidators’ reports to creditors. By letter dated 14 April 2003, a representative of the liquidators’ firm sent the copies. That reply said nothing about the liquidators’ attitude to the question of NAA’s taking action in respect of any of the claims.

39 I am satisfied that there are grounds for finding, in relation to all the claims Mr Charlton wishes to pursue, that it is probable that the company itself will not bring proceedings. The condition referred to in s.237(2)(a) is therefore satisfied in relation to each such claim.

The good faith question – s.237(2)(b)

40 Section 237(2)(b) poses the question, for the present application, whether Mr Charlton is “acting in good faith”. In Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313, Palmer J expressed the opinion that at least two questions will generally be relevant to this issue: first, whether the applicant honestly believes that a good cause of action exists and has reasonable prospects of success; and, second, whether the applicant is seeking to bring the derivative action for such a collateral purpose as would amount to an abuse of process.

41 Those questions (as well as others to be considered presently) must be addressed in light of the circumstances in which NAA currently finds itself. The administrators’ report of August 2002 stated that NAA had ceased trading and was insolvent. Having regard to the priority afforded to employees’ claims and the secured position of National Australia Bank, it was the administrators’ opinion that there would be no dividend to unsecured creditors. Evidence adduced on behalf of Mr Baber is to the effect that he and Mrs Baber have paid out $129,773.79 in response to demands made by NAB upon them as guarantors of NAA’s secured indebtedness. As a result, Mr and Mrs Baber consider themselves to be subrogated, to the extent of that payment, to the bank’s secured creditor position as against NAA. It follows that, with employees’ priority claims having been satisfied, Mr and Mrs Baber would appear to enjoy a priority claim, to the extent of at least $129,773.79, upon such recoveries as NAA might obtain in the derivative proceedings Mr Charlton wishes to have it pursue.

42 A list of unsecured creditors forms part of the administrators’ report. Mr Charlton’s name does not appear in it. I infer from this that, even if the claims he wishes to pursue on behalf of NAA were successful, they would have to yield enough, after allowing for both related expenses and the claims of Mr and Mrs Baber afforded priority by subrogation, to ensure a dividend of more than 100 cents in the dollar for such creditors as remain unpaid, if Mr Charlton himself were to derive any benefit. As the evidence stands, Mr Charlton is a shareholder only. He will receive nothing in the winding up unless the derivative proceedings produce a net return to NAA exceeding the total shortfall for creditors. In the report of August 2002, that shortfall was estimated at $243,244.

43 The evidence before me does not enable me to estimate with any certainty what the proceedings Mr Charlton has in mind would yield to NAA even if entirely successful. It may be that the proceeds, even on the most optimistic basis, would be insufficient to cause him, as a shareholder only, to enjoy any reward. But that, I think, is something that is essentially irrelevant to his bona fides. He may have motives that go beyond mere personal gain. As a former director, he may feel a sense of responsibility to creditors who have suffered losses. Such an attitude would be entirely consistent with the exercise of good faith.

44 On the evidence, there is nothing calling in question Mr Charlton’s motives. I am satisfied that he is acting in good faith.

The best interests of the company – s.237(2)(c)

45 Section 237(2)(c) directs an inquiry into the question whether “it is in the best interests of the company that the applicant be granted leave”. The true nature of that inquiry is emphasised by the following observation of Palmer J in Swansson v Pratt (above):

“At the outset, it is important to note that s.237(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.”

46 The expression “best interests”, taken literally, is apt to create a false impression that some absolute or superlative is in contemplation. Its true meaning emerges from a consideration of other contexts in which it is used.

47 In circumstances where a court exercises the jurisdiction of the Crown as parens patriae or plays some other protective role, it is concerned with the “best interests” of the person the subject of the proceedings: see, for example, Department of Community Services v Y [1999] NSWSC 644. In that context, it was said in Public Trustee v Blackwood (1998) 8 TasR 256 that “the expression ‘best interests’ … does no more than reinforce the general concept that the paramount concern is the overall interest of the patient”.

48 A particular requirement that the “best interests” of persons under legal disability (namely, children) be the guiding principle in decision making arises in the family law context. Under the Family Law Act, “best interests”, in relation to children, are equated generally with older notions of “welfare”: Re B and B (1997) 142 FLR 430. Courts are required to make decisions with respect to children which are in their “best interests” – a task which necessarily involves looking to the future and all the uncertainties that that involves: CDJ v VAJ (1998) 197 CLR 172.

49 The central theme of trusteeship has been defined in terms of ”best interests”. Thus, for example, in Ron Kingham Real Estate Pty Ltd v Edgar [1999] 2 QdR 439 a trustee was said to be under a duty “to act in the best interests of the trust in an impartial and disinterested manner”. This is a reflection of the expectations to which fiduciaries more generally are subject. It was said in Elders Ltd v Swimbank [1999] FCA 798 that “the underlying obligation and basis for a fiduciary duty lies in the requirement that the fiduciary act in the best interests of the party to whom that duty is owed”.

50 It is not surprising, therefore, that some formulations of duties of company directors are to like effect. The judgment of Powell J at first instance in Russell Kinsella Pty Ltd v Kinsella (1983) 8 ACLR 384 recites a number of judicial statements about the nature of directors’ duties. One framed in terms of “best interests” is that of Latham CJ in Richard Brady Franks Ltd v Price (1937) 58 CLR 112: “The powers of directors must be exercised not only in the manner required by law but also bona fide in the best interests of the company as a whole”. In Ferrari Investment (Townsville) Pty Ltd (in liq) v Ferrari [2000] 2 QdR 359, there was reference to “the obligations which the law casts on the directors … to act honestly and in the best interests of [the] company and its shareholders”.

51 In the field of unconscionability and undue influence, the relevant inquiry is whether a person is able “to make a worthwhile judgment as to what is in his best interests” (per Deane J) or suffers from “a disabling condition which seriously affects his ability to make a judgment as to his own best interests” (per Mason J): Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447.

52 “Best interests” is thus an expression concerned with a person’s separate and independent welfare. Where the concern to which the “best interests” assessment is relevant centres upon possibilities of undue influence and, perhaps, improper purpose, the task is to consider what the putative victim would have done in seeking to protect his or her own position and promote his or her own advantages with such a degree of selfishness as the circumstances will admit.

53 NAA is in the course of being wound up and, on the evidence, is insolvent. In those circumstances, its “best interests” must be regarded as reflecting entirely – or, at least, predominantly – the interests of the general body of its creditors: Walker v Wimborne (1976) 137 CLR 1, Spies v The Queen (2000) 201 CLR 603. The question to be answered in the present case is therefore whether the proceedings Mr Charlton wishes to have the company institute present genuine prospects of a result that will enhance returns to creditors and promote the welfare of creditors. The answer is, clearly enough, in the affirmative, assuming the criterion mentioned in s.237(2)(d) is satisfied. Success will see an enhancement of the assets available to be applied to the liquidators towards creditors’ claims. That, of its very nature, promotes creditors’ interests and, in the circumstances of this particular company, must be regarded as in “the best interests of the company”.

54 In saying this, I do not lose sight of the fact that some of the claims may involve relatively small returns. In the case of the claim for “uncommercial loans” (paragraphs 55 and 56 of the amended statement of claim), for example, the administrators, in their report, referred to an amount of $6,168.31. That, of itself, is not a reason for concluding that pursuit of the claim is not in the best interests of the company, provided that, in the overall context (particularly as it relates to costs), some potential benefit can be foreseen. I shall say more about costs in due course.

Serious question to be tried – s.237(2)(d)

55 Section 237(2)(d) has the effect that, in a case such as the present (where leave is sought to initiate proceedings, rather than to intervene), the applicant must show that there is “a serious question to be tried”. In Goozee v Graphic World Group Holdings Pty Ltd (above), I referred to the explanatory memorandum accompanying the Corporate Law Economic Reform Program Bill as confirming the impression that the legislature, by using those words, intended to direct the kind of inquiry undertaken by a court upon an application for an interlocutory injunction, the question being, in the words of Gleeson CJ in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199, whether the applicant can show “sufficient colour of right to the final relief, in aid of which interlocutory relief is sought”. The Chief Justice also endorsed the proposition stated by Street CJ in Eq in McCarty v Council of the Municipality of North Sydney (1918) 18 SR (NSW) 210 that a plaintiff must show at least a probability that he will succeed in establishing his title to the relief sought at the final hearing. It is therefore necessary to consider the several complaints or claims separately.

56 The first complaint is that in paragraphs 55 and 56 concerning supposedly “uncommercial” loans by NAA to Combined Auto Services. I have already quoted the observation of the administrators of the latter company that the making of the loans may have entailed a breach of “the directors’ duty to act in the best interests of the company”. That may well be a conclusion that was available on the evidence before the administrators. But the problem with the amended statement of claim and the evidence adduced on the present applications is that, while paragraphs 55 and 56 refer to loans “on uncommercial terms and without any or adequate security”, there is nothing to show what the terms actually were. The court therefore cannot come to grips in any satisfactory way with the question whether there is a serious question to be tried as to breach of directors’ duties. A loan unsecured at 15% per annum and a loan secured by first mortgage of real estate at 4% per annum might be viewed differently from loans without security and without interest; added to which the question whether loans are repayable on demand or at some fixed future time will have a bearing on the general question whether there is a discrepancy in value between what the lender gave and what the lender received in return: Fadden v Federal Commissioner of Taxation (1945) 70 CLR 555; McGain v Federal Commissioner of Taxation (1966) 116 CLR 173.

57 On the relatively uninformative material presently available, it is not possible to find that there is a serious question to be tried under paragraphs 55 and 56 of the amended statement of claim. The court is simply unable, at this stage, to say positively that there is a serious question to be tried. The question posed by s.237(2)(d) must be answered adversely to Mr Charlton so far as those paragraphs are concerned.

58 The next two items may be taken together. Paragraphs 71 to 75 concern allegedly excessive remuneration and benefits given by NAA to Mrs Baber, while paragraphs 82 to 89 deal with similar allegations in respect of Mr Baber. Again, there is a paucity of particulars. Wages and superannuation for Mrs Baber are stated in paragraph 72 for each of six years (1992/3 to 1997/8) in amounts ranging from $13,112 to $48,833, with the most prevalent figures being in the vicinity of $30,000. There is also a reference to Mrs Baber’s having had the use of a company motor vehicle. For Mr Baber, there are wages and superannuation figures for the same years, ranging from a low of $42,732 to a high of $66,285, with reference also to use of a particular motor vehicle. General knowledge would suggest that, in each case, the remuneration was within ordinary expectations for full time employees, although I emphasise that I say that by way of broad observation only. The problem with the pleading is that it does not, except in one respect, contain anything to show why the remuneration and benefits of Mrs Baber and Mr Baber might be said to be “excessive”, in the sense that corporate resources were paid away to a director and his wife without any countervailing benefit to the company by way of services or in return for services that could not be regarded as commanding such remuneration and benefits. The exception is in relation to Mr Baber. It is said in the amended statement of claim that Mr Baber’s remuneration exceeded that of Mr Charlton during the period when they both worked in the business and that this, of itself, is an indication of misapplication of resources. This, if I may say so, is simply a non sequitur.

59 The problem Mr Charlton faces here is that the court again has no material from which to draw even preliminary or provisional conclusions on the question whether there has been any misapplication of company funds in favour of a director and his wife. For the court to determine that there was a serious question to be tried, it would have to know more than is disclosed by the pleading and the evidence so far adduced. To the extent that the evidence touches upon the matter (as it does in the administrators’ report, as already noted), it does not contribute to the position Mr Charlton would have the court reach. Section 237(2)(d) is not satisfied in relation to the claims in paragraphs 71 to 75 and 82 to 89.

60 The next matter to be considered is the claim pleaded in paragraphs 76 to 81 concerning “improper” payment of dividends to Mrs Baber as the holder of the “B” class share. Three matters are advanced in these paragraphs in support of the “improper” quality of the dividend payment: first, that no dividends were paid on Mr Charlton’s ordinary shares; second, that Mr Charlton was not informed of and did not consent to the payment of dividens on Mrs Baber’s “B” class share; and third (apparently repeating, in different words, the first point), that the payment of dividends to Mrs Baber was to the exclusion of Mr Charlton.

61 The constitution of NAA is in evidence. The “B” class shares are dealt with in article 13:

“The ‘B’ Class Shares shall confer on the holders thereof the right to receive Dividends, franked or unfranked, at the rate (which may be a fixed or variable rate) determined by the Directors, and no other rights or privileges.”

62 The constitution also provides for the issue of ordinary shares, “A” class shares, “C” class shares, “D” class shares and redeemable preference shares. Some of these (specifically, the “C” and “D” class shares) also carry “the right to receive Dividends, franked or unfranked, at the rate (which may be a fixed or variable rate) determined by the Directors”, while others (the ordinary shares) carry the right “to receive in common with other holders of ordinary shares all dividends, distributions, bonuses and other profits”. The “A” class shares carry no dividend rights. The redeemable preference shares carry a right to a fixed, cumulative preferential dividend at a rate fixed by the terms of issue and ranking for dividend before the ordinary shares but after the “B”, “C” and “D” class shares.

63 The provisions with respect to dividends include articles 113 and 116 as follows:

“113. (1) Subject as herein mentioned to any rights or
privileges for the time being attached to any shares in the capital of the Company having preferential or special rights in regard to Dividends and subject to the provisions of these Articles as to the reserve fund the profits of the Company which it shall from time to time determine to distribute by way of Dividend shall be applied in payment of Dividends upon the shares of the Company in proportion to the amounts paid up thereon respectively otherwise than in advance of calls.
(2) The Directors may fix the time for payment of a Dividend but if no time is so fixed the Dividend shall be payable forthwith upon its declaration.
116. The Directors may from time to time pay to the members such interim Dividends as in their judgement the position of the Company justifies. Subject as aforesaid the Dividends shall be declared by the Company at its annual general meetings.”

64 There is no clear indication here that dividends may be paid upon and in respect of some shares (such as the “B” class shares) to the exclusion of the others or, at least, those of them that are not expressed not to carry a right to dividends. It cannot be regarded as certain that the “B” class shares have “preferential or special rights in regard to Dividends”, although article 13 might, on one reading, be the source of such “preferential or special rights”. But if that is not its true meaning (and I am inclined to regard this as the better view), dividends must, in obedience to article 113, be paid upon all shares, other than those expressly deprived of dividend rights, in proportion to the amounts paid up on those shares. Dividends may only be declared “by the Company at its annual general meetings”, although the directors may pay interim dividends. Both these matters are deal with in article 116.

65 In the light of these provisions of the constitution, I am satisfied that there is, as contemplated by s.237(2)(d), a serious question to be tried as to whether it was permissible for dividends to be paid upon and in respect of the “B” class shares to the exclusion of other shares, including Mr Charlton’s ordinary shares. That question exists whether a particular dividend was declared by the company in general meeting or paid as an interim dividend by the directors and regardless of its quantum.

66 The final matter to be considered against the s.237(2)(d) criterion is that pleaded in paragraphs 90 to 106 concerning lease and sublease arrangements. It appears that NAA, at all material times, carried on business in premises in Griffiths Road, New Lambton owned by third party lessors. Mr Charlton says that, when the initial lease in favour of NAA as lessee expired, the sixth defendant (Griffiths Road Pty Ltd, the trustee of a Baber family trust), took a lease from the landlords, which lease was afterwards “extended” (presumably by agreement of lessors and lessee) to cover adjoining premises as well. NAA took a sublease of the original premises from Griffiths Road Pty Ltd at what Mr Charlton says was a greater rent than was payable by the sixth defendant to the head lessors, with the result that Mr Baber and his family interests derived a profit at the expense of NAA in circumstances where Mr Baber should instead have caused NAA to be the immediate tenant at the lower rent.

67 I have already referred, in connection with the s.237(2)(a) aspect of these lease matters, to the administrators’ expression of opinion that a liquidator would not be successful “in a claim against the company directors for breach of duty in relation to this arrangement”. The administrators also said:

“It is our view, on the information that we have received to date, that it was reasonable for Griffiths Road to increase the rent, however, having regard to the cost of the fit out the quantum of the increase would appear to be excessive. We also note, however, that Griffiths Road is owed approximately $5,730 by the company.”

68 This is, in my opinion, sufficient to show that there is, in relation to the matters in paragraphs 90 to 106 of the amended statement of claim, a serious question to be tried on the bases of principles enunciated in cases such as Queensland Mines Ltd v Hudson (1978) 52 ALJR 399 (PC) and Warman International Ltd v Dwyer (1995) 182 CLR 544.

Notice to NAA – s.237(2)(e)

69 The condition laid down by s.237(2)(e) is, on the evidence, satisfied by reason of the letter of 10 April 2003 from Mr Charlton’s solicitors to the liquidators of NAA.

Conclusions on s.273(2) criteria

70 The claims in respect of which all conditions in s.237(2) are satisfied are those in paragraphs 76 to 81 and 90 to 106 of the amended statement of claim. That being so, the court is compelled by the section to grant leave for Mr Charlton to bring on NAA’s behalf proceedings in which those claims are asserted by him on behalf of NAA.

71 It is necessary, however, to say something about the commercial realities of the matter. As has been noted, Mr Baber and Mrs Baber are, by subrogation, secured creditors of NAA in a sum of approximately $130,000. To the extent that NAA succeeds, through derivative proceedings, in recovering less than that sum from Mr Baber there will, in an overall economic sense, be no real result, as the recoveries (net of any expenses) will go to Mr Baber and Mrs Baber. The evidence does not enable me to form any opinion as to how much will be recovered if NAA, at Mr Charlton’s behest, is wholly successful in the claims related to dividends on the “B” class shares. In the case of the claims concerning the leases, there is material to suggest that the gross mark up over six years was of the order of $60,000. Even if the whole of that were found to be recoverable by NAA without off-set or deduction, the result would, for the reason stated, be no more than a recycling of funds from one pocket of the Baber family to another.

72 In these circumstances, the grant of leave s.237(2) compels may need to be supplemented at an appropriate but early stage by some order as to costs made in advance of the determination of the derivative proceedings and designed to cater for the possibility that those proceedings will achieve no more than a pointless recycling of funds. It would, of course, be an entirely different matter if the derivative claims produced enough to see some return generated for unsecured creditors or even contributories. Section 242 enables the court to make “at any time” any order it considers appropriate “about the costs” of the company on behalf of which derivative proceedings are brought, including costs in relation to the “proceedings brought … with leave under section 237”. The fact that the proceedings are described in this way (that is, as proceedings “brought”) suggests that an order in respect of the company’s costs cannot be made (at least under s.242) until the leave to bring proceedings on behalf of the company has been exercised and the applicant for leave, having been successful in obtaining it, has actually taken steps to bring on the company’s behalf the proceedings the court has allowed him or her to institute in its name and for its benefit. Given the comprehensive nature of s.242, there is no apparent reason why it does not allow the making of an order for security for costs to protect the subject company. Such an order would plainly be an order “about” the company’s costs.

73 There is also the possibility that the matter of costs could be dealt with in the general way I have outlined apart altogether from s.242. I have in mind the kind of approach found in the judgment of McLelland J in Aliprandi v Griffiths Vitners Pty Ltd (above) at p.254.

74 These are matters about which no more need be said at this point – except that, while Mr Charlton may now pursue the possibility of augmenting the resources of NAA by pursuit of the claims in respect of which he has succeeded in showing an entitlement to leave under s.237, he should have no expectation of doing so in such a way that those resources are called upon to fund the litigation, unless the result is clearly seen to involve some distinct benefit to the general body of creditors going demonstrably beyond the kind of pointless recycling of money to which I have referred. Much less, of course, should he expect to see corporate resources expended on the litigation if his claims fail.

The s.471B application

75 Because it was conceived that certain of the relief Mr Charlton sought would be sought against NAA itself, his interlocutory process sought leave under s.471B which, in the absence of leave, precludes initiation or continuation of proceedings against a company or in respect of its property “while the company is being wound up in insolvency or by the Court”. The relief in question entails orders against NAA setting aside allotments of shares to Mrs Baber and Mr Baber and orders rectifying the register of members accordingly (paragraphs 63 and 70 of the amended statement of claim).

76 In the result, there is no need for this aspect of Mr Charlton’s interlocutory process to be pursued. Paragraphs 63 and 70 are among those in relation to which the defendants’ strike out application has been successful. It should nevertheless be noted that an application based on s.471B is misconceived. That section appears in Part 5.4B of the Corporations Act headed “Winding up in insolvency or by the Court”. This follows Part 5.4 and Part 5.4A headed respectively “Winding up in insolvency” and “Winding up by the Court on other grounds”. Section 459A, contained in Part 5.4, empowers the court to “order that an insolvent company be wound up in insolvency”. Section 461, the first section in Part 5.4A, begins:

“The Court may order the winding up of a company if”.

Section 9 contains the following definitions:

“ ‘winding up by the Court’ includes winding up in insolvency.”
“ ‘wound up by the Court’ includes wound up in insolvency.”

77 The winding up to which NAA is subject is the form of creditors voluntary winding up created by s.446A in consequence of Part 5.3A administration. That a company subject to this form of winding up is not, in terms of s.471B, “being wound up in insolvency or by the Court” is made clear by s.446A itself. Section 446A(6) says, in relation to the form of winding up it creates:

“Section 482 applies in relation to the winding up as if it were a winding up in insolvency or by the Court.”

Section 446A(6) thus causes to apply, on an “as if” basis, a provision that does not apply of its own force, being a provision that, like s.471B, is in Part 5.4B headed “Winding up in insolvency or by the Court”. That provision applies to a s.446A winding up only because s.446A itself so directs. Because there is no similar direction in relation to s.471B, being a provision applicable only to winding up by the court or in insolvency, it does not apply to a winding up of the kind currently under discussion: see also ERS Engines Pty Ltd v Wilson (1994) 14 ACSR 531.

78 The provision that does apply, however, is s.500(2) which is concerned with cases of creditors voluntary winding up (Awada v Linknarf Ltd (2002) 55 NSWLR 745):

“After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes.”

79 However, as I have already said, it is not necessary to deal with any application for leave to proceed against the company in liquidation as the relevant paragraphs of the amended statement of claim are among those that are to be struck out.

Disposition of applications

80 Upon the interlocutory process of the first, second, third and sixth defendants filed on 2 June 2003, it is ordered that paragraphs 6, 16 to 20, 21 to 29, 57 to 70, 107 to 111, 112 and 113 of the amended statement of claim filed on 8 April 2003 be struck out.

81 Upon the interlocutory process of the plaintiff filed on 29 April 2003, it is ordered that the plaintiff have leave under s.237 of the Corporations Act to bring proceedings on behalf of the fourth defendant upon the causes of action pleaded in paragraphs 76 to 81 and 90 to 106 (together with paragraph 6A) of the amended statement of claim filed on 8 April 2003.

82 Having regard to what I have said about the possible need for NAA to be protected in advance in respect of costs, I grant liberty to the first, second, third and sixth defendants to apply on seven days notice.

83 The plaintiff as respondent is to pay the applicants’ costs of the interlocutory process filed on 2 June 2003. There will be no order as to costs in respect of the plaintiff’s interlocutory process filed on 29 April 2003, each side having achieved a measure of success. In case an assessment of costs needs to be undertaken, I record that, although the applications were before the court on three days (28, 30 and 31 July 2003), the time spent was only 40 minutes on the first occasion, two hours on the second and 40 minutes on the third. It was a shortage of time in the Corporations List, rather than the parties’ requirements, that necessitated this piecemeal approach.

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Last Modified: 08/18/2003