CLUNIES-ROSS v Davis [No 2] - [2022] WASC 311

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA
CITATION:   CLUNIES-ROSS -v- DAVIS [No 2] [2022] WASC 311
CORAM:   MASTER SANDERSON
HEARD:   23 JUNE 2022
DELIVERED          :   13 SEPTEMBER 2022
PUBLISHED           :   13 SEPTEMBER 2022
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:

Corporations Act 2001 (Cth) - Application for leave to bring a derivative action - Turn on own facts

Legislation:

Corporations Act 2001 (Cth)
Rules of the Supreme Court 1971 (WA)

Result:

Application dismissed

Representation:

Counsel:

Plaintiff	:	M Crowley
First Defendant	:	K de Kerloy
Second Defendant	:	K de Kerloy
Third Defendant	:	K de Kerloy

Solicitors:

Plaintiff	:	Cullen Macleod Lawyers
First Defendant	:	Hale Legal
Second Defendant	:	Hale Legal
Third Defendant	:	Hale Legal

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

Hassall v Speedy Gantry Hire Pty Ltd [2001] QSC 327
Patterson v Humfrey [2014] WASC 446

MASTER SANDERSON:

By interlocutory application filed 25 March 2022, the plaintiff sought five substantive orders and two procedural orders. The substantive orders sought, as summarised in the Plaintiff's submissions, are directed to:
(a) 'authorising' the plaintiff, as a member of the second defendant, to prosecute allegations of breach of director's duty by the first defendant as a director of the second defendant under s 233(1)(g) of the Corporations Act 2001 (Cth) as already pleaded in the substituted statement of claim filed 23 December 2021;
(b) securing leave to the plaintiff, as a member of the second defendant, to prosecute the same allegations of breaches of director's duties under s 237(1) of the Act;
(c) enabling the plaintiff to inspect the second defendant's books under s 247A in circumstances where the plaintiff alleges there has been significant self-dealing with the second defendant's assets by the first defendant and a refusal or failure to produce financial reports and director reports in contravention of s 293 of the Act;
(d) requiring the first defendant and the second defendant to perform their statutory duties under s 293(1) of the Act to prepare a financial report and a director's report for each of the last three financial years and;
(e)joining another member of the second defendant, Tarau Pty Ltd, which the plaintiff says is the first defendant's alter ego as the fourth defendant.
The last three of the orders the plaintiff seeks can be dealt with quite simply. The defendants raise no objection to Tarau Pty Ltd being joined as the fourth defendant. So an order in terms of (e) was made at the hearing.
As a former director of the second defendant, the plaintiff already has the right to inspect the books and records of the second defendant pursuant to s 198F(2) of the Corporations Act 2002 (Cth) (The Act). In opposition to the plaintiff's application, the defendants relied on an affidavit of the first defendant dated 16 June 2022. In that affidavit the first defendant details the history in relation to the books and records of the second defendant. Essentially, the first defendant says the books and records were in the possession of the plaintiff prior to her removal as a director in March of 2020 and thereafter she retained those books. Despite being asked to do so, she did not deliver the books to the first defendant's solicitors to allow accounts to be prepared. Nonetheless, the first defendant has instructed accountants to prepare financial statements for the financial years ending 2017 through to 2020. As yet, those accounts have not been completed. The first defendant says when the accounts are completed, a copy will be provided to the plaintiff. In those circumstances there is no warrant for making orders (c) and (d) as requested by the plaintiff.
That then leaves the question of whether or not the plaintiff ought have leave to bring a derivative action. That really is what is being sought under proposed order (a) and (b).
As noted above, this present application is an interlocutory process in an action commenced 4 September 2020. The claim was brought under s 232 of the Act - the so‑called oppression section. The order sought by the plaintiff was under s 233(1)(d) of the Act - an order that the first defendant buy her shares in the company. On 5 November 2020, I ordered the matter proceed as if commenced by writ. A statement of claim was duly filed. The defendants took objection to parts of the statement of claim and eventually a substituted statement of claim was filed on 24 December 2021. Particulars of the statement of claim were provided on the same date. Defences of the first and third defendant were filed on 21 December 2020 and have not as yet been amended (assuming amendment is required consequent upon the filing of the substituted statement of claim). It is clear that although these proceedings were commenced over two years ago they are still a long way from trial.
The plaintiff's claims may be summarised as follows. She alleges that between 2015 and 2019, the first defendant, without authorisation, in his capacity as a director of the second defendant and in his capacity as a monopoly supplier of a product known as 'Soil Solver' to the second defendant, appropriated for his own benefit the property and business opportunities of the second defendant. Without going through the detail of what is alleged by the plaintiff, I can give the flavour of the plaintiff's claim by one example. The plaintiff alleges the first defendant caused the second defendant to overpay him about $143,000 on account of production costs for supplying the second defendant with 'Soil Solver' product, for which he was already being renumerated by the second defendant inclusive of production costs. These allegations are pleaded out in more detail in paragraph 12F of the substituted statement of claim.
It is the plaintiff's position that if some or all of the breaches of director's duties by the first defendant, as alleged, are established, the valuation of the plaintiff's shares on any compulsory buy-out will recognise the value they would have had but for the breach so established.
As I understand the plaintiff's position, the derivative action would run in parallel and be heard with the plaintiff's oppression claim. So really the derivative action is seen as necessary and ancillary to the plaintiff's oppression claim and is designed to ensure the plaintiff receives full value for her shares. It is the plaintiff's position that, absent the derivative action, and the liability of the first defendant to the second defendant for breach of director's duties, full value for the plaintiff's shares might not be realised.
The application is brought under s 236 of the Act and falls to be determined under s 237(2). That section reads as follows:
(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.
It is the defendant's position the plaintiff has not established the applicant is acting in good faith and that it is in the best interests of the company the applicant be granted leave. There was no dispute that the other three criteria for the grant of leave was satisfied. (The defendants did raise the question of whether there had been adequate conferral under O 59 r 9 of the Rules of the Supreme Court (WA) but this is a different question and does not impact upon the statutory requirements for the grant of leave.)
The defendants' say the plaintiff's concerns are unfounded. They say that in the context of the oppression action, the plaintiff can raise the issue of the first defendant's alleged breach of statutory duties. In fact, those allegations are the basis upon which the compulsory buy-out order is sought. If the plaintiff makes good her case, then the value placed by the Court on the plaintiff's shares will reflect the fact the first defendant has breached his duty as a director and that the second defendant has suffered loss. In other words, the value put on the shares when the compulsory buy-out order is affected will reflect any losses imposed on the second defendant by the first defendant's breach of his duties.
In support of their position, the defendants rely in particular on two cases. The first is the decision of Moynihan J in Hassall v Speedy Gantry Hire Pty Ltd [2001] QSC 327. His Honour said at [11] - [12]:
[11] Put shortly the proposed proceeding will largely duplicate and is founded essentially on the same complaints as those pursued in the oppression action, and it has not been satisfactorily demonstrated that the relief available in the oppression proceeding will not be adequate.
[12] Moreover there is no satisfactory explanation as to why this application has been brought at this stage of the litigation where the issues the applicants are seeking to pursue in the derivative proceeding have been apparent since at least the institution of the oppression proceeding. This is in the context of the applicant's proposed course adding complexity to and potentially increasing the costs of and delays to the trial of the current actions. There is evidence that Speedy will be disadvantaged if this occurs.
The defendants say those comments are applicable to this case. In particular, they note the delay in bringing the application and the likelihood of adding complexity to the present proceedings. On that basis, the defendants say it is not in the best interests of the second defendant to grant leave.
The second case relied upon is the decision of Le Miere J in Patterson v Humfrey [2014] WASC 446. His Honour said at [56] - [58]:
[56] The defendants say that what the plaintiffs claim is in effect for orders for monetary compensation of the company whose affairs were conducted oppressively and that such orders are not usually made when the company could have pursued a claim for compensation or leave to pursue a derivative action could have been sought. The court has power under Corporations Act s 233 to order compensation in favour of the companies whose affairs are in question, notwithstanding the availability of a derivative action: LPD Holdings (Aust) Pty Ltd v Phillips, Hickey and Toigo[2013] QSC 225 (McMurdo J) [44] referring to Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672; Atlasview Ltd v Brightview Ltd [2004] 2 BCLC 191; Re Chime Corp Ltd (2004) 7 HKCFAR 546; Gamlestaden v Baltic Partners Ltd [2007] 4 All ER 164, 172. In Re North Coast Transit Pty Ltd [2013] NSWSC 1119 Brereton J observed that whilst he was not aware of any case in which the remedy for oppression has been a monetary compensation order he readily acknowledged that a similar result can be obtained, as it was in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 2) (1998) 29 ACSR 290, by requiring accounts to be taken before striking a valuation. In this case, if the court makes a share buy back order then a similar result to an order for monetary compensation can be obtained by ordering that before a valuation of the shares there be an adjustment to the accounts to reflect any unauthorised payments Mr Humfrey caused Skybow to make to Kenesta.
[57] The court's primary objective in providing for a valuation of the company's shares is to determine the fair value of the company's shares. Where the defendants' oppressive conduct has reduced the value of the shares then it must logically follow that the valuation must disregard the adverse effects of the oppressive conduct. That principle has been adopted in Australia: Re Golden Bread Pty Ltd [1977] Qd R 44, 54 ‑ 55. In Sanford v Sanford Courier Service Pty Ltd (1986) 10 ACLR 549 the oppressive conduct complained of included the majority remunerating themselves with excessive salaries and emoluments to the financial detriment of the minority shareholder. The court ordered a valuation of the shares to be conducted as if the salaries actually paid were set at a commercial level which had regard to the prudent financial management of the company. Re National Building Maintenance Ltd [1971] 1 WWR 8 was an action brought in the British Columbia Supreme Court by a minority shareholder who claimed relief under the Companys Act 1960 (BC) s 185 on the ground that the affairs of the company were being conducted in a manner oppressive to some of the members. The majority shareholder had taken secret and unauthorised management fees, which were held by Aickins J to be oppressive to the minority shareholder because it reduced the company's profits available for distribution as dividends. His Honour held that the majority shareholder was entitled to relief in the form of a purchase order. The valuation of the minority shares was to be based upon the financial position the company would have been in if the management fees had not been taken. The decision was affirmed by the British Columbia Court of Appeal: National Building Maintenance Ltd v Dove [1972] 5 WWR 410.
[58] When making an order for the purchase of shares the task of the court is to fix a price that represents a fair value in the circumstances. If the oppressive conduct takes the form of misappropriation of the company's assets then the valuation should be carried out in a manner which compensates the applicant for the loss in the company's worth due to the misappropriation or other conduct which is oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member within the meaning of s 232. The purpose of an order or orders under s 233 is to remedy the oppressive conduct, usually by bringing it to an end. That may include the purpose of compensating for detriment including any loss that the oppressive conduct has caused. Those purposes may lead to a variety of orders in different circumstances.
This concise statement of the law in this area, in my view, puts an end to the plaintiff's application. The concern she has about her shares being undervalued are misplaced. There is no question of that happening. The mechanisms of the Court are suited to ensuring that if her claim is made out she receives full value for her shares. There is nothing to be gained by granting leave to bring the derivative action. It simply is not in the best interests of the company.
I should note for the sake of completeness, this was not a case where it was suggested leave ought be granted because some of the causes of action the plaintiff alleges against the first defendant might become statute barred: see Stanisis v Tracc Pty Ltd [2022] WASC 281.
The plaintiff's application will be dismissed. The plaintiff should pay the defendants' costs of the application including reserved costs.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
AH
Associate to Master Sanderson
13 SEPTEMBER 2022