Clunies-Ross v Davis - [2020] WASC 461

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA
CITATION:   CLUNIES-ROSS -v- DAVIS [2020] WASC 461
CORAM:   MASTER SANDERSON
HEARD:   ON THE PAPERS
DELIVERED          :   11 DECEMBER 2020
PUBLISHED           :   11 DECEMBER 2020
FILE NO/S:   COR 114 of 2020
BETWEEN:   JOY DELISSA CLUNIES-ROSS
Plaintiff
AND
GAVIN JOHN DAVIS
First Defendant
SOIL SOLVER PTY LTD
Second Defendant
SUE CHRISTIANSEN
Third Defendant

Catchwords:

Joinder - Whether shareholder who is not directly affected by proposed 'buy-out' order ought be party to proceedings - Turns on own facts

Legislation:

Corporations Act 2001 (Cth)

Result:

Application dismissed

Category: B

Representation:

Counsel:

Plaintiff	:	No appearance
First Defendant	:	No appearance
Second Defendant	:	No appearance
Third Defendant	:	No appearance

Solicitors:

Plaintiff	:	Tan & Tan Lawyers
First Defendant	:	Law Central Legal
Second Defendant	:	Hale Legal
Third Defendant	:	Law Central Legal

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

Acehill Investments Pty Ltd v Incitec Ltd [No 2] [2002] SASC 406
News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410
Re North Coast Transit Pty Ltd [2013] NSWSC 1119
Russell v Lee Holdings Pty Ltd [No 3] [2020] WASC 346
Wurth Australia Pty Ltd v Burgess [2012] WASC 504

MASTER SANDERSON:

This application concerns whether or not the third defendant should remain a party to these proceedings. The first and third defendants seek the following orders:
1.Pursuant to O 18 r 6(2)(a) the Rules of the Supreme Court 1971 (WA) the Third Defendant be removed as a party to the originating process on the ground that no relief is claimed against the Third Defendant in the originating process.
2.The Plaintiff pay the Third Defendant's costs.
In the originating process the plaintiff sought relevantly the following orders:
1. An order under subsection 233(1)(d) of the Corporation Act 2001 (Cth) that the first defendant purchase the plaintiff's shareholding (10 'Ordinary' class and 10 'C' class) in the second defendant.
2. That the Court determine the fair value of the plaintiff's shareholding, having due regard to the sale of 1 Ordinary class share by the first defendant to the third defendant for $30,000 on 25 March 2020.

The application is actually brought under s 232(e) of the Corporations Act 2001 (Cth) (the Act). This is what is generally known as the oppression ground. If, and only if, the plaintiff is able to establish the affairs of the company are being conducted in a manner which is oppressive or unfairly prejudicial to a member of the company, then the relief under s 233 of the Act is available. In this case, the plaintiff has been quite specific. It is seeking a buy‑out order against the first defendant.
The relevant facts are as follows. The second defendant was incorporated on 10 June 2014.[1] It has on issue 30 ordinary shares, 20 B class shares and 10 C class shares.[2] Its constitution contains pre‑emptive rights which govern the transfer of shares in the second defendant.[3]
[1] Affidavit of Joy Delissa Clunies-Ross sworn 3 September 2020, p 77, 639.
[2] Affidavit of Joy Delissa Clunies-Ross sworn 3 September 2020, p 78.
[3] Affidavit of Joy Delissa Clunies-Ross sworn 3 September 2020, p 644 – 645.
Until 23 March 2020, Tarau Pty Ltd held 20 ordinary shares, the plaintiff held 10 ordinary shares, Tarau Pty Ltd held 20 B class shares and the plaintiff held 10 C class shares. Since 23 March 2020, Tarau Pty Ltd holds 19 ordinary shares, the third defendant holds 1 ordinary share, the plaintiff holds 10 ordinary shares, Tarau Pty Ltd holds 20 B class shares and the plaintiff holds 10 C class shares. [4] Tarau Pty Ltd is a company controlled by the first defendant.[5]
[4] Affidavit of Joy Delissa Clunies-Ross sworn 3 September 2020, p 78 – 79; 635 – 636.
[5] Affidavit of Joy Delissa Clunies-Ross sworn 3 September 2020, p 55 - 56.
Until 30 March 2020, the second defendant had two directors – the plaintiff and the first defendant.[6] On 30 March 2020, the plaintiff was removed as a director of the second defendant.[7] The first defendant is now its sole director.[8]
[6] Affidavit of Joy Delissa Clunies-Ross sworn 3 September 2020, p 78.
[7] Affidavit of Joy Delissa Clunies-Ross sworn 3 September 2020, p 637.
[8] Affidavit of Joy Delissa Clunies-Ross sworn 3 September 2020, p 78.
The first and third defendants say the third defendant has no interest in these proceedings. If the orders sought by the plaintiff in the originating summons are granted, she will still hold 1 ordinary share. Control of the second defendant, which presently rests with the first defendant, will remain with the first defendant. The plaintiff maintains the third defendant's interests are effected by a combination of the orders sought in the originating process and the pre‑emptive rights provisions in the second defendant's constitution.
In support of their position, the first and third defendants rely principally on two cases. In Wurth Australia Pty Ltd v Burgess [2012] WASC 504 Corboy J referred to and quoted from News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410, 525:
Where, before trial, a question arises whether a necessary party has been joined, attention should be directed to the orders sought in the proceedings. It is the effect of the orders upon the third party that must be determined. The test is not whether the conduct of the third party is raised in the pleadings between the existing parties, or whether the third party is a party to a contract, the meaning or effect of which is pleaded as a matter relevant to the ascertainment of the rights between those parties.
In Acehill Investments Pty Ltd v Incitec Ltd [No 2] [2002] SASC 406 Debelle J said at [22] – [23]:
22.In my view, there is no established practice that majority shareholders should be joined to an action claiming oppression and there are sound policy reasons why there should be no established practice.
23.First, the essence of the action is that the affairs of the company are not being managed in the interests of the members as a whole. Thus, in the ordinary course, the parties will be the plaintiff shareholder or shareholders and the company. While the determination of the question whether there has been oppressive conduct requires the court to weigh the interests of different shareholding interests within the company: Thomas v HW Thomas Ltd (1984) 1 NZLR 687 at 694; Reid v Bagot Well Pastoral Co Pty Ltd (1993) 61 SASR 165 at 173, it is not necessary that all the shareholders be joined. The action is between the plaintiff shareholder and the company and it is for the plaintiff to show that the conduct offends s 232. At the close of the plaintiff’s case the company will decide whether it is necessary to defend its conduct and, if it is, it may lead the necessary evidence. That may include evidence demonstrating that it is having due regard to all interests. It may, if it wishes, call shareholders to assist it in that task. The shareholders may be witnesses but there is no requirement that they be parties. Section 232 does not contemplate that all shareholders will be parties to an action for oppression. If that were so, all actions under s 232 would require all shareholders to be joined. There will be cases when it is appropriate to join other shareholders because their interests will be affected. But this is not such a case.
It was common ground between the parties that the existence of pre‑emptive rights provisions in a company's constitution does not stand in the way of a court making 'buy-out' orders under s 233 of the Act. As Breaton J said in Re North Coast Transit Pty Ltd [2013] NSWSC 1119 [24]:
24.It seems to me that the fundamental principle in this area is that the remedy under s 233 is one that must be calculated to alleviate the consequences of the oppressive conduct and no more; that is to say, to place the oppressed minority in a position equivalent to that in which it would have been but for the oppression, but not to improve its position over and above that which would have prevailed but for the oppression. The cases that hold that the Court is not bound by and may disregard internal rules in respect of pre-emptive rights and the fixing of prices have been concerned with the position of a minority shareholder who is an unwilling seller because of the oppressive conduct. This has been illustrated, for example, in the judgment of Black J in Byrne v AJ Byrne Pty Limited, particularly at [70]. The present case is different, because whereas in the ordinary case the minority, if it wishes to sell its shares, may do so but only pursuant to the restrictions on transfer contained in the articles, normally the minority is not in a position where it can, in any event - oppression or no oppression - be compelled to sell its shares. But here, under the Holders' Agreement, the interest of any minority has always been liable to compulsory acquisition by another interest willing to pay for it pursuant to the auction process, at the election of any other interest in the Group. Thus, even assuming all the matters of oppression alleged were established, in this case from the outset the Holders' Agreement entitled the other shareholders to invoke the auction process at any time. It is easy to see why, in the case of an oppressed minority shareholder whose shares are not otherwise liable to be compulsorily acquired, the Court would not invoke or be bound by the transfer processes in articles of association, the effect of which is to produce a discounted value. That is because, in effect, the Court is requiring a shareholder who otherwise would not wish to be bought out but for the oppression to be bought out and the Court is doing what it can to place that shareholder, at least economically, in the same position it would have been in but for the oppression. It is not so easy to see why an oppressed minority shareholder whose shares were in any event liable to compulsory acquisition by others should, on account of oppression, be able to secure a result superior to that which would have prevailed under the auction process to which it was in any event explained.
In written submissions, counsel for the first and third defendants offered one caveat to that general proposition. In Russell v Lee Holdings Pty Ltd [No 3] [2020] WASC 346 Kenneth Martin J made buy‑out orders and qualified that order by saying they were to take effect 'notwithstanding any pre‑emptive rights provisions in the constitutions of the Lee companies'.[9] This qualification can probably be regarded as clarifying the position when pre‑emptive rights are found in a company's constitution. But nowhere in the decision does his Honour suggest pre‑emptive rights will fetter the court's capacity to make buy‑out orders.
[9] First and third defendants' submissions as to joinder of third defendant filed 12 November 2020 [24].
The first and third defendants point out that the third defendant is the holder of 1 ordinary share. As I have said above, that position will not change. Nor will the control of the company change if the orders are made. The first and third defendants say the impact of these orders has no real consequence for the third defendant. They also point out that if, in every case, it was necessary to join all shareholders in a proprietary company that would be a cumbersome process. They refer again to Debelle J's decision in Acehill, particularly at [23].[10]
[10] First and third defendants' submissions as to joinder of third defendant filed 12 November 2020 [21].
The plaintiff says it is proper to join a party where that party's rights or liabilities in relation to any other party in the proceedings would be directly affected by an order the court might make.[11] In this case, it is said, the second defendant's constitution is prescriptive.[12] Clauses 28 to 37 allocate rights and duties of directors and shareholders in disposing and acquiring shares.[13] In particular, cl 28 prohibits a transfer of shares as between the plaintiff and the first defendant unless a range of conditions are satisfied.[14]
[11] Plaintiff's submissions on third defendant's motion to remove filed 12 November 2020 [3].
[12] Plaintiff's submissions on third defendant's motion to remove filed 12 November 2020 [4].
[13] Affidavit of Joy Delissa Clunies-Ross sworn 3 September 2020, JCR-37, p 645.
[14] Plaintiff's submissions on third defendant's motion to remove filed 12 November 2020 [4].
Moreover, cl 28(2) of the constitution confers on the third defendant rights in the nature of 'pre‑emption' of the share offering. These are rights of the third defendant which are capable of being enforced. The plaintiff says, rights of pre‑emption in a company's constitution, being part of the contractual arrangements between a shareholder and a company, carry with them the right to seek injunctive relief against the company to restrain registration of a share transfer or, if the transfer has been effected, to rectify the register.[15]
[15] Plaintiff's submissions on third defendant's motion to remove filed 12 November 2020 [5].
In relation to the Acehill decision, counsel points out the relevant constitution in that case did not involve rights of pre‑emption.[16] Debelle J noted in the course of his judgment, that every case depends on its merits. His Honour said at [21]:
Ms Gordon, who appeared for Orica, submitted that the joinder of Orica would accord with the usual practice and relied on the following five decisions, Hassall v Johnden Engineering Pty Ltd [2001] QSC 211; Aqua Max Pty Ltd v MT Associates Pty Ltd (unreported, 19 June 1998, Supreme Court of Victoria, Gillard J); Hurley v BGH Nominees Pty Ltd (1982) 31 SASR 250; Catto v Hampton Australia Ltd (1998) 12 ACLC 1691; Coombs v Dynasty Pty Ltd (unreported, von Doussa J, July 1994). In Hassall the majority shareholders had been joined as a party at an earlier stage. The decision dealt with an application for amendment so that the reasons for joinder do not appear. In Aqua Max, the nature of the litigation required that there be several parties including the major shareholders. In that case, the judge proposed to set aside a share issue. The intended order was going to affect a shareholder not a party to the proceedings. The judge decided to join that shareholder after publishing his reasons for holding that oppression had occurred but before making the orders. In Hurley, all shareholders were parties but the issues the subject of the reported decision concerned the standing of the plaintiffs. In Catto and in Coombs, the shareholders were parties but there is nothing which indicates whether they were all original parties or were joined at some later stage.
[16] Plaintiff's submissions on third defendant's motion to remove filed 12 November 2020 [8].
The plaintiff also notes that although the relief sought in the originating process is a 'buy‑out' order, the court is not confined to the relief which the plaintiff seeks in the originating application. There are a range of options in s 233(1), which the court might apply depending on the circumstances. For instance, if the court was to find the parties have oppressed each other, the appropriate order may be winding up.[17] The available remedies are discretionary and while the views of the parties may be relevant, it is ultimately a matter for the court as to what remedy, if any, is appropriate.
[17] Plaintiff's submissions on third defendant's motion to remove filed 12 November 2020 [11].
On balance, I am satisfied the third defendant is a proper party to these proceedings. The rights of pre‑emption are rights which, under the constitution, are held by the third defendant. It is one aspect of being a shareholder in the second defendant. If a buy‑out order was made, that order may, as in the Lee decision, override the third defendant's pre‑emptive rights. But if her rights are to be effected, she should be given the opportunity to take part in the proceedings. She may chose not to do so. That is a matter for her. But this is a case where, incidentally, the third defendant's rights might possibly be affected by the ultimate decision. She will be bound by that decision and she should have the opportunity to participate in the proceedings.
The first and third defendants' application will be dismissed. Costs of the application should be costs in the cause.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
CB
Associate to Master Sanderson
11 DECEMBER 2020