Connective Services Pty Ltd v Slea Pty Ltd
[2018] VSCA 229
•10 September 2018
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2018 0007
| CONNECTIVE SERVICES PTY LTD (according to the attached schedule) | Applicants |
| v | |
| SLEA PTY LTD (ACN 106 752 434) & ORS (according to the attached schedule) | Respondents |
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| JUDGES: | FERGUSON CJ, WHELAN and McLEISH JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 3 August 2018 |
| DATE OF JUDGMENT: | 10 September 2018 |
| MEDIUM NEUTRAL CITATION: | [2018] VSCA 229 |
| JUDGMENT APPEALED FROM: | [2017] VSC 609 (Robson J) |
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CORPORATIONS LAW – Application for leave to appeal and appeal – Grant of leave to bring derivative proceeding – Proposed proceeding to allege breach of directors’ duties by transactions circumventing shareholder pre-emptive rights in company constitutions – Whether proposed proceeding in good faith and in best interests of company – Whether serious question to be tried – Relevance of delay – Relevance of relief sought in proposed proceeding – Leave to appeal granted – Appeal dismissed – Swansson v R A Pratt (2002) 42 ACSR 313, Chahwan v Euphoric Pty Ltd (2008) 227 FLR 43 applied – Corporations Act 2001 (Cth) s 237.
PRACTICE AND PROCEDURE – Application for leave to appeal – Dismissal of reopening application – Whether evidence ‘new’ – Reid v Brett [2005] VSC 18, Spotlight Pty Ltd v NCON Australia Ltd (2012) 46 VR 1 applied – Refusal to review exercise of discretion on matter of practice and procedure – Adam P Brown Male Fashions Pty Ltd v Phillip Morris Inc (1981) 148 CLR 170 applied – Application for leave to appeal refused.
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APPEARANCES: | Counsel | Solicitors |
| For the Applicants | Mr A J Myers QC with Mr D G Guidolin and Ms A M Folie | Quinn Emanuel Urquhart & Sullivan |
| For the First Respondent | Mr M H O’Bryan QC with Mr G Dalton QC and Ms K E Foley | Arnold Bloch Leibler |
FERGUSON CJ
WHELAN JA
McLEISH JA:
Introduction
Since 2011 the shareholders in two of the applicant companies, Connective Services Pty Ltd (‘Connective Services’) and Connective Services OSN Pty Ltd (‘Connective OSN’), have been in litigation with each other. The most significant proceeding currently on foot is this oppression proceeding brought by one of the shareholders, Slea Pty Ltd (‘Slea’), which is a company controlled by Sofianos Tsialtas.
By an application made in this proceeding, Slea sought leave to commence a proceeding on behalf of Connective Services and Connective OSN against the companies’ directors (at the relevant time) and shareholders, and against other parties including Macquarie Bank Limited (‘Macquarie Bank’). Leave pursuant to s 237 of the Corporations Act 2001 (Cth) (‘the Act’) was granted by a judge in the trial division.[1] Section 237(2) of the Act sets out five circumstances which, if the Court is satisfied exist, mean that leave must be granted. In brief, the five circumstances are that the company will probably not bring the claim itself, that the applicant is acting in good faith, that leave is in the best interests of the company, that there is a serious question to be tried, and that the requisite notice has been given or that it is appropriate to grant leave even though notice has not been given.
[1]Slea Pty Ltd v Connective Services Pty Ltd [2017] VSC 609 (‘Reasons’).
The applicant companies seek leave to appeal the primary judge’s grant of leave. They contend that the judge was in error in finding that Slea was acting in good faith, that leave was in the companies’ best interests, and that there was a serious question to be tried. The applicant companies also seek leave to appeal determinations the primary judge made concerning an application to reopen after judgment on Slea’s application for leave had been reserved.
The relevant facts[2]
[2]This recitation of the relevant facts is substantially drawn from the undisputed portions of the Summary for the Court of Appeal (‘the Summary’).
Connective Services and Connective OSN (‘the Connective companies’) were incorporated in October 2003. The Connective companies conducted business as a mortgage aggregator. The ‘founders’ of the business were Glenn Lees, his brother Murray Lees and Mr Tsialtas.[3]
[3]The expression ‘founders’ comes from [1] of the Summary. That paragraph is undisputed.
The initial registered shareholders of the Connective companies were Slea as to one third of the shares, and Mr Glenn Lees as to two thirds of the shares. Mr Tsialtas was and remains the sole shareholder and director of Slea. In 2006 Mr Glenn Lees transferred his shares to Millsave Pty Ltd (‘Millsave’).
The initial directors of the Connective companies were Mr Glenn Lees and Mr Tsialtas. Mr Tsialtas ceased to be a director on 8 May 2008. Mark Haron and Graham Maloney became directors on 15 July 2011. Mr Haron is now also a shareholder. He became a shareholder in the circumstances set out below.
The constitution of each of the Connective companies contains pre-emptive rights provisions regarding the issue and sale of shares. Pursuant to those provisions the Connective companies cannot issue shares unless they are first offered to existing shareholders, and shareholders cannot sell shares unless they are first offered to the other shareholders. The provisions set out detailed procedures to be followed in relation to these matters which are not presently relevant. We will refer to these provisions as ‘the pre-emptive rights provisions’.
After ceasing to be a director in May 2008, Mr Tsialtas attempted to sell his shareholding in the Connective companies to third parties.
In October 2008 Mr Tsialtas commenced working for Liberty Financial Pty Ltd (‘Liberty’).
In May 2009 Mr Tsialtas and Liberty’s holding company, then named Minerva Financial Group Pty Ltd (‘Minerva’), entered into a share sale agreement pursuant to which Minerva agreed to acquire from Mr Tsialtas all of the shares in Slea. Following complaints by the Connective companies, Mr Tsialtas and Minerva agreed to rescind that agreement.[4]
[4]The agreed summary misstates the position (at [8]).
On or about 12 August 2010 Mr Tsialtas, Slea and Minerva entered into an agreement entitled ‘Accommodation Agreement’. Amongst other things, the Accommodation Agreement provided that in return for providing financial accommodation to Slea and Mr Tsialtas, if further shares in the Connective companies came to or were offered to Slea, Minerva would consider lending Slea the money to enable Slea to buy those further shares. The Accommodation Agreement also provided that if Slea was to become the owner of all the shares in the Connective companies, and thus the sole shareholder, and therefore the shares would not be subject to the pre-emptive rights, then, at that time, Minerva had the option of buying those further shares.[5]
[5]This paragraph reproduces, save for the name used for Minerva, the applicant companies’ description of the Accommodation Agreement in the Summary at [9]. Slea’s description is relevantly the same but it includes a passage which is disputed by the applicants.
The Accommodation Agreement remains on foot.
In May 2011 Mr Haron commenced a proceeding against Slea, the Connective companies and Millsave. The proceeding was founded upon an alleged agreement that Slea and Millsave would sell Mr Haron 25 per cent of the shares in each of the Connective companies.
In August 2011 Slea commenced this proceeding against the Connective companies alleging oppressive conduct of the companies’ affairs pursuant to s 232 of the Act. The proceeding largely lay dormant while Mr Haron’s proceeding ran its course.
Mr Haron and Millsave settled Mr Haron’s proceeding as between themselves pursuant to a deed of settlement dated 16 August 2011, but otherwise that proceeding continued. The settlement provided for a transfer of shares to Mr Haron by Millsave.
On 1 October 2013 Slea commenced a proceeding against the Connective companies, Millsave and Mr Haron seeking declarations that the pre-emptive rights provisions applied to the proposed transfer of shares by Millsave to Mr Haron under the deed of settlement dated 16 August 2011.
Mr Haron’s proceeding and Slea’s proceeding concerning the pre-emptive rights settled on 22 October 2013. On or about 29 October 2013 and in accordance with the agreed settlement, Millsave transferred 300 of its shares in the Connective companies to Mr Haron, being a 16.67 per cent (or one sixth) interest, and Slea waived its pre-emptive rights in respect of that transfer. At that time, Mr Tsialtas was unaware that the Connective companies had agreed to sell, or were negotiating to sell, a 25 per cent interest in the business conducted by the Connective companies to Macquarie Bank as described below.
In 2012 Macquarie Bank and the Connective companies had commenced negotiations for Macquarie Bank to acquire an interest in the business conducted by the Connective companies. Mr Tsialtas was not informed of those negotiations.
The directors of the Connective companies effected a corporate restructure between December 2012 and February 2013. A number of subsidiary companies were established, being Connective Group Pty Ltd (‘Connective Group’), Connective Broker Services Pty Ltd, Connective Lender Services Pty Ltd, Connective Funder Services Pty Ltd, Connective Group IP Holdings (No 1) Pty Ltd, and Connective Group IP Holdings (No 2) Pty Ltd. The Connective companies held all of the shares in Connective Group which in turn held all of the shares in the other subsidiary companies. We will call this ‘the corporate restructure’. The constitutions of Connective Group and the other subsidiaries do not contain provisions replicating the effect of the pre-emptive rights provisions.
In February 2013 the business operated by the Connective companies was transferred to Connective Group. No shares in the Connective companies were transferred.
On 31 October 2013 Macquarie Bank bought 25 per cent of the shares in Connective Group from the Connective companies for $5 million. Because of the corporate restructure this sale did not enliven the pre-emptive rights provisions.
The sale proceeds from Macquarie Bank were distributed as dividends to the shareholders of the Connective companies, including $1,166,666.67 distributed to Slea as a fully franked dividend.
As at the date of the corporate restructure, the directors of the Connective companies were Mr Glenn Lees, Mr Haron and Mr Maloney. Mr Murray Lees is described by the parties as having been a ‘principal’ of the Connective companies.[6]
[6]He is so described at [23] of the Summary. That paragraph is undisputed.
During November 2013 Mr Tsialtas became aware of the sale of a 25 per cent interest in the Connective business to Macquarie Bank. On 22 November 2013 Slea applied for an injunction and was ultimately given undertakings by the Connective companies and Macquarie Bank not to sell, transfer, encumber or deal with the shares in any Connective group entity until resolution of Slea’s claims in relation to those transactions.
On 6 December 2013 Slea applied to amend its statement of claim in this proceeding and to join Macquarie Bank, Mr Glenn Lees, Mr Haron, Mr Maloney and Millsave as defendants. In the proposed amended statement of claim, Slea alleged that the corporate restructure and the sale to Macquarie Bank breached directors’ duties owed to the Connective companies and that Macquarie Bank was an accessory to those breaches of duty. Slea sought relief which would unwind the corporate restructure and sale.
Efthim AsJ refused leave to amend and to join the directors and Macquarie Bank on 14 March 2014, on the basis that an application under s 237 of the Act was required to allege that the directors had breached their duties to the Connective companies and that Macquarie Bank had knowingly assisted or participated in that breach.[7]
[7]Slea Pty Ltd v Connective Services Pty Ltd (Unreported, Supreme Court of Victoria, Efthim AsJ, 14 March 2014).
On 1 July 2014 Slea amended its statement of claim in this oppression proceeding, pleading, amongst other things, the corporate restructure and the Macquarie Bank sale as further instances of oppressive conduct. It also joined to this proceeding the companies incorporated for the restructure, being Connective Group and the other subsidiaries. Slea did not apply for leave under s 237 of the Act at that time.
In November 2015 Mr Murray Lees was made redundant from the Connective companies.
In 2016 solicitors acting for Slea took a statement from Mr Murray Lees, dated 11 May 2016, concerning, amongst other things, the circumstances of the corporate restructure and the sale to Macquarie Bank.
On 17 May 2016 Slea filed a summons, amended on 27 May 2016, seeking (amongst other things) leave under s 237 of the Act to bring a proceeding on behalf of the Connective companies against Mr Glenn Lees, Mr Haron and Mr Maloney, Macquarie Bank and others, alleging breach of directors’ duties. The Connective companies, Connective Group, and the other subsidiaries were the first, second and fourth to ninth defendants to that summons. Those companies are the applicants for leave to appeal. The primary judge referred to them together as the ‘Connective parties’. When convenient, we will do the same.
On 11 July 2016 Mortgage Results Pty Ltd (‘Mortgage Results’), a company of which Mr Murray Lees is the sole shareholder and director, commenced a proceeding against Millsave seeking to have recognised a legal right to 25 per cent of the shares in the Connective companies. That proceeding has since been stayed by consent.
On 4 October 2017 Mr Murray Lees and Mortgage Results commenced a proceeding against Minerva and Slea alleging that certain agreements entered into with Minerva and Slea are void.
The Murray Lees statement and the proposed proceeding
Slea’s application for leave to bring a proceeding on behalf of the Connective companies was supported by an affidavit sworn by Kimberly Chantelle Mackay, a senior associate at Arnold Bloch Leibler, solicitors for Slea. In that affidavit Ms Mackay produced Mr Murray Lees’ signed statement dated 11 May 2016 and a proposed draft statement of claim.
The statement by Mr Murray Lees dated 11 May 2016 generally supports the allegations made by Slea in the oppression proceeding. As to the corporate restructure and the sale to Macquarie Bank, the statement includes the following passage:
Macquarie offered to purchase an equity stake in Connective of about 25%. We were very concerned to avoid Slea getting in the way of this deal by exercising its pre-emptive rights. We were by this time concerned that Slea and Mr Tsialtas had some sort of arrangement with Liberty and that Liberty might finance Slea to exercise its pre-emptive rights over any share transferred to Macquarie. We did not want Slea to gain control of Connective Services and Connective OSN by exercising its pre-emptive rights.
We therefore kept the discussions with Macquarie secret and we did not put the proposed sale of a 25% stake in the Connective companies out to tender or any other public process. In order to execute the sale to Macquarie without interference from Slea exercising its pre-emptive rights, we decided we needed to restructure the Connective companies. Glenn retained the legal firm Maddocks to assist us with the restructure strategy. We also decided that there needed to be a ‘cone of silence’ and that communications in relation to the restructure and deal with Macquarie needed to be verbal and we should not email each other if possible.
Concealing Connective’s dealings with Macquarie was critical because we were concerned that Slea, with the assistance of Liberty, might be in a position to exercise its pre-emptive rights. From conversations that I had with Glenn and Mr Haron, I understood that the only purpose of the restructure was to prevent Slea from being able to exercise its pre-emptive rights over the sale.
We told Macquarie about our issues with Slea and Liberty and discussed the reasons for the restructure, in particular the need to ensure that any sale to Macquarie was done in such a way that Slea would not be able to interfere by exercising its pre-emptive rights.
In the proposed draft statement of claim, after pleading incorporation and the relevant shareholdings and directorships, the constitutions of Connective Services and Connective OSN are pleaded, in particular the pre-emptive rights provisions. The proposed statement of claim then pleads the steps leading up to, and taken in, the corporate restructure and the sale (paras 21 to 29). Amongst other things, an ‘options paper’ prepared by Macquarie Bank’s solicitors which allegedly sets out as one option the steps eventually taken in the corporate restructure is pleaded (paras 24 and 26).
The particular transactions undertaken to implement the corporate restructure (para 25), and the agreement to sell 25 per cent of the shares in Connective Group to Macquarie Bank (para 27) are pleaded.
Under the heading ‘Breach of Duties’, the proposed pleading reads as follows:
30The transactions referred to in paragraph 25 (the Restructure) and paragraph 27 (the Sale), alternatively, the Restructure, were carried out by the Directors for the purpose of, or for purposes that included as a substantial purpose:
(a)selling a 25% interest in the Connective Business in a manner that would:
(i)circumvent the Pre-Emptive Rights Provisions;
(ii)further or alternatively, circumvent Slea’s rights as a shareholder in Connective Services and Connective OSN under the Pre-Emptive Rights Provisions;
(iii)further or alternatively, enable Millsave and Mark Haron to retain effective control over the Connective Business;
(iv)further or alternatively, ensure that Slea would not acquire effective control over the Connective Business through the exercise of the Pre-Emptive Rights Provisions afforded to it as a shareholder in Connective Services and Connective OSN;
(b)further or alternatively, reducing Slea’s interest in the Connective Business,
(together, the Improper Purposes).
PARTICULARS
The Director’s Improper Purposes can be inferred from all the circumstances, including particularly the matters set out in paragraphs 21 to 29. Further particulars may be provided following discovery.
31Further or alternatively, the Directors negotiated and agreed the Sale to Macquarie without soliciting other offers or otherwise conducting a competitive bidding process as referred to in paragraph 29(b) to keep the proposed Sale concealed from Slea as an integral part of the Improper Purposes.
32In the premises, the Directors breached their duties to Connective Services and Connective OSN referred to in paragraph 6:
(a)by carrying out each of the Restructure and the Sale, alternatively the Restructure.
(b)further or alternatively, by negotiating and agreeing the Sale to Macquarie without soliciting other offers or otherwise conducting a competitive bidding process as referred to in paragraph 29(b).
It is then pleaded that Macquarie Bank had knowledge of relevant matters and that the transactions undertaken are voidable at the election of the plaintiffs. An allegation is made of loss and damage. The particulars of loss and damage rely upon the alleged failure to conduct a competitive bidding process.
The relief proposed to be claimed (other than costs, interest and further or other relief) is as follows:
A.Rescission of the Sale Purchase Deed and the transactions undertaken pursuant to the Share Sale Deed.[8]
[8]The terms ‘Sale Purchase Deed’ and ‘Share Sale Deed’ in para A of the prayer for relief, are probably intended to refer to the ‘Share Purchase Deed’ in para 27 of the proposed statement of claim. In any event, there was no uncertainty about the fact that the relief claimed sought to ‘unwind’ the corporate restructure and the sale to Macquarie Bank.
B.An order pursuant to s 1324 of the Corporations Act requiring Macquarie and Connective Services to pass resolutions amending the constitution of Connective Group by:
I.deleting clauses 8.2, 8.3, 9, 10, 11, 12, 13, 14, 21.2, 33, 36 and Schedule 1; and
IIinserting new clauses replicating the effect of the Pre-Emptive Rights Provisions in the Constitution of Connective Services such that:
(a)before issuing shares in the capital of Connective Group, the directors of Connective Group must first offer them to the existing holders of shares in Connective Services in proportion to their holding; and
(b)before transferring shares in the capital of Connective Group, the transferor must first offer them to the existing holders of shares in Connective Services in proportion to their holding.
C.Alternatively to A and B, rescission of each of the transactions comprising the Restructure.
D.Alternatively to A and C, an order pursuant to section 1317H of the Corporations Act for the first, second and third defendants to compensate the Plaintiffs for the loss and damage suffered or, alternatively, to pay damages.
Issues before the primary judge
The summons before the primary judge sought leave pursuant to s 237 of the Act to bring a proceeding on behalf of the Connective companies. It also sought leave to use certain specified documents for the purpose of that proceeding should leave to bring the proceeding be granted.
The application for leave under s 237 of the Act was heard before the primary judge over several days in August 2017. The decision was reserved. On 6 October 2017, after being notified that a decision would be handed down, the Connective parties issued a summons seeking a reopening of the leave application, and seeking leave to adduce ‘new’ evidence. A notice to produce certain documents was served on the solicitors for Slea and, after the delivery of judgment had been delayed by reason of the application to reopen, subpoenas were issued by the Connective parties. Slea then issued a summons seeking to have those subpoenas set aside.
As has been indicated, the primary judge determined to grant the application for leave to issue a derivative proceeding under s 237 of the Act. The primary judge also determined to dismiss the application to reopen and he set aside the subpoenas. Slea’s application to rely on specified documents in the derivative proceeding was adjourned to a date to be fixed.
The issues the subject of this application for leave to appeal concern both the primary judge’s determination to grant leave to bring the derivative proceeding and his determination to dismiss the application to reopen and to set aside the subpoenas.
The application for leave to appeal sets out proposed grounds of appeal under the separate headings ‘Derivative Leave application’ and ‘Reopening application’. This reflects the manner in which the trial judge addressed the relevant issues in the Reasons. We will adopt the same approach.
The Reasons — derivative leave application
The primary judge in his introduction described the general nature of the litigation between the parties and set out some of the procedural history.[9] He set out the relevant facts.[10]
[9]Reasons [1]–[11].
[10]Reasons [12]–[47].
The primary judge set out the provisions of s 236 and s 237 of the Act in full.[11] Pursuant to s 236 specified persons (including a member) may bring proceedings on behalf of a company if granted leave under s 237. As indicated previously, amongst other things, s 237 provides that the Court must grant leave if five specified matters are established. The relevant provision is s 237(2) which reads as follows:
[11]Reasons [49]–[50].
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.
The judge observed that Slea bore the onus of establishing each of the five matters set out in s 237(2) on the balance of probabilities.[12]
[12]Reasons [51].
The judge then set out the relevant substance of the pre-emptive rights provisions,[13] and summarised the allegations made in the proposed statement of claim.[14]
[13]Reasons [52].
[14]Reasons [53].
The judge referred to the fact that similar allegations to those made in the proposed statement of claim were already made in the oppression proceeding. He referred to the application which had been made to amend the oppression claim and to join the directors and Macquarie Bank. The primary judge said:
Mr Moshinsky QC, counsel for Slea in the oppression proceeding, when seeking leave to amend the claims in the oppression proceeding to rely on the breach of duties by the directors to the company and to join Macquarie Bank, informed Efthim AsJ that these were bare allegations without particulars and that Slea did not have the transaction documents, but that the claim was based on the sole inference that they could not see any other purpose for the restructure and transaction than to circumvent Slea’s rights.[15]
[15]Reasons [55].
The judge referred to Efthim AsJ’s decision on 14 March 2014 to the effect that to bring the claims against the directors it was necessary to make a leave application under s 237.[16]
[16]Reasons [56].
The judge addressed the Murray Lees statement dated 11 May 2016 and unsuccessful objections which had been taken by the Connective parties to reliance upon that statement.[17] He then addressed the evidence in addition to the Murray Lees statement which supported the proposition that the corporate restructure had been undertaken to avoid Slea’s pre-emptive rights.[18] Given the manner in which the submissions on the question of purpose were made to us by senior counsel for the Connective parties, it is unnecessary to review these aspects of his Honour’s reasoning.
[17]Reasons [57]–[71].
[18]Reasons [72]–[84].
His Honour then turned to a separate consideration of each of the five matters provided for in s 237(2).
The primary judge observed that there was no dispute that it was probable the Connective companies would not bring proceedings themselves if leave were not granted.[19]
[19]Reasons [85]–[86].
On the issue of good faith the primary judge began by quoting a passage from the judgment of Palmer J in Swansson v R A Pratt Properties Pty Ltd.[20]
[20](2002) 42 ACSR 313 (‘Swansson’).
The primary judge recorded that both parties had referred to this passage, and it was also relied upon by both parties before us. It is necessary to quote it in full. Palmer J said:
At this early stage in the development of the law on the statutory derivative action created by Pt 2F.1A it would be unwise to endeavour to state compendiously the considerations to which the courts will have regard in determining whether applicants in all categories defined by s 236(1) are acting in good faith. The law will develop incrementally as different factual circumstances come before the courts.
Nevertheless, in my opinion, there are at least two interrelated factors to which the courts will always have regard in determining whether the good faith requirement of s 237(2)(b) is satisfied. The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. Clearly, whether the applicant honestly holds such a belief would not simply be a matter of bald assertion: the applicant may be disbelieved if no reasonable person in the circumstances could hold that belief. The second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process.
...
Where the application is made by a current shareholder of a company who has more than a token shareholding and the derivative action seeks recovery of property so that the value of the applicant’s shares would be increased, good faith will be relatively easy for the applicant to demonstrate to the court’s satisfaction. So also where the applicant is a current director or officer: it will generally be easy to show that such an applicant has a legitimate interest in the welfare and good management of the company itself, warranting action to recover property or to ensure that the majority of the shareholders or of the board do not act unlawfully to the detriment of the company as a whole.[21]
[21]Reasons [88], quoting Swansson (2002) 42 ACSR 313 [35]–[38].
The primary judge continued:
Thus, Palmer J states that there are at least two interrelated factors:
(a)whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success;
(b)whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process.[22]
[22]Reasons [89].
The primary judge referred to submissions made by the parties in relation to what constitutes ‘good faith’ in this context and he set out relevant parts of an affidavit sworn by Mr Tsialtas on 2 August 2016 in support of the application, including a statement deposed to by Mr Tsialtas that he believed there was a good cause of action.[23]
[23]Reasons [90]–[93].
Mr Tsialtas had been cross-examined in the course of the application. The judge observed that Mr Tsialtas had not been challenged on his evidence that he believed there was a good cause of action.[24] The judge said that he was satisfied on the balance of probability that Mr Tsialtas did believe that there is a good cause of action pleaded in the draft proposed statement of claim.[25] It was not contended before us that he made any error in this conclusion.
[24]Reasons [95].
[25]Reasons [96].
The primary judge then referred to the contention of the Connective parties that Slea was not acting in good faith because it was seeking to bring the proceeding for a collateral purpose. The primary judge summarised the contention as follows:
The Connective parties relied upon the 2010 accommodation agreement, discussed above. The Connective parties contend that it is apparent under the 2010 accommodation agreement that Liberty has the option of obtaining all of Slea’s shares in the Connective companies and that therefore Slea has nothing obvious to gain directly from the success of the derivative action, that the action is not brought with reference to the company’s interests; but rather it is serving a collateral purpose of giving effect to the objectives of the 2010 accommodation agreement.
Secondly, that Liberty is funding the proceedings is pointed to as evidence of a collateral purpose.[26]
[26]Reasons [98]–[99].
The primary judge set out the submission on behalf of Slea that the problem with the Connective parties’ submission was that any interest that Liberty might have in the proceeding is contingent upon, and derivative from, Slea’s interest in the proceeding. The primary judge then said:
The terms and conditions agreed between Slea and Minerva in consideration of the funding provided by Minerva, both for the litigation and any purchase of Connective shares, are consistent with Slea’s objective to restore full value to its shareholding in the Connective companies.[27]
[27]Reasons [104].
The primary judge said that Slea did not deny that Liberty had an ‘interest’ in the proceeding and that the interests of Liberty and Slea were ‘aligned’.[28]
[28]Reasons [107].
The primary judge then turned to an analysis of the significance of what was contended to be the collateral purpose. He began that analysis as follows:[29]
A collateral purpose is that which would amount to an abuse of process within the test laid down in Williams v Spautz.[30]
[29]Reasons [108].
[30](1992) 174 CLR 509.
The primary judge quoted a long passage from this Court’s judgment in Melbourne City Investments Pty Ltd v Myer Holdings Ltd,[31] where the issue of abuse of process where a proceeding is brought for an improper purpose was addressed.[32] The primary judge then said:
It is difficult to categorise the rights and obligations under the 2010 accommodation agreement as a collateral purpose as defined by the cases discussed. Nonetheless, the Connective parties also rely on the fact that litigation funding is being provided by Liberty under a further funding agreement. The fact that Liberty believes it is in its own interests to fund Slea to pursue the proposed claim does not mean that Slea does not have legitimate grounds for pursuing the claim. The critical issue is whether Slea is genuinely seeking relief to its own advantage within what the law allows.
The submissions of the Connective parties on this issue failed to meet the fact that Slea has legitimate claims that may be properly pursued through a derivative proceeding. Liberty’s interest in Slea pursuing those grounds does not convert what is otherwise a legitimate claim by Slea into an improper claim for a collateral purpose. The issue is to characterise Slea’s purpose and objective.
Slea has satisfied me on the balance of probabilities that, on the evidence before the Court, it is acting in good faith in seeking leave to bring the derivative proceedings. Insofar as it is relevant, I am also not satisfied that the predominant purpose of Slea bringing the proceedings is improper or constitutes an abuse of process.[33]
[31][2017] VSCA 187.
[32]Reasons [109]–[111].
[33]Reasons [112]–[114].
The primary judge turned to the issue of whether the proposed proceeding was in the best interests of the Connective companies and, in that context, addressed evidence given by a witness named James Atkins in two affidavits and orally, the nature of the claim proposed to be made, and the issue of delay.
Since 1 April 2016 Mr Atkins has been a non-executive director of Connective Group and of the other subsidiaries established in the corporate restructure. He is a professional corporate consultant. He holds no shares in any of the relevant companies.
The judge referred in detail to the evidence of Mr Atkins both in his affidavits and in his cross-examination.[34] The judge said that Mr Atkins was of the opinion that the proposed proceeding was not in the best interests of the ‘business’ conducted by the ‘group’. The judge observed that the ‘key to his opinion’ was the fact that Slea was seeking to unwind the transactions whereby Macquarie Bank had been introduced as a significant equity participant in the business.[35] Mr Atkins had explained at length the advantages which had been obtained as a result of what Mr Atkins described as Macquarie Bank’s significant positive contribution to the business.
[34]Reasons [118]–[134].
[35]Reasons [119].
The judge referred to authorities concerning abuse by directors of their power to issue shares,[36] including Smith (Howard) Ltd v Ampol Petroleum Ltd.[37]
[36]Reasons [147]–[154].
[37][1974] AC 821 (‘Howard Smith’).
The judge said that the alleged breach of duty by the directors here ‘went to the heart of the joint venture’ between the three founders of the business and that, in substance, the pre-emptive rights provisions ‘ensured each party had the power to control who could participate in the business’.[38]
[38]Reasons [158].
The judge then said:
In my opinion, the proceeding to protect the interests of members as members from breaches of duty by the directors is a proceeding in the best interests of the company as a whole, irrespective of the alleged commercial advantages that Mr Atkins refers to. In any event, I am not satisfied that these commercial advantages could not be procured by the Connective companies without the directors misusing their powers in respect of the share ownership of the companies. Further, the criteria is whether it is in the best interests of the company that the applicant be granted leave; not whether it is in the best interests of the company that the possible orders for relief are all in the best interests of the company.[39]
[39]Reasons [159].
The judge referred to the fact that Slea had agreed that it would fund the proposed litigation. He said that should be a condition of the order.[40]
[40]Reasons [160].
The primary judge then referred to the oppression proceeding and to the fact that similar allegations to those proposed to be made in the derivative proceeding were made in that proceeding. He concluded that that position supported a conclusion that leave ought to be granted so that the claims in the oppression proceeding and the claims in the derivative proceeding could be heard together.[41]
[41]Reasons [161]–[165].
The judge was satisfied on the evidence that it was in the best interests of the Connective companies to bring the proposed proceeding ‘to protect the interests of members, as members, from breaches of duty by the directors’.[42]
[42]Reasons [165].
The judge addressed the question of delay. The argument made by the Connective parties was that four years had passed since Macquarie Bank had acquired its shareholding, that the allegations now sought to be made had been the subject of the application which Efthim AsJ had refused in 2014, and that the delay in bringing the application for leave was relevant to the issue of whether granting leave was in the best interests of the companies.
The primary judge observed that the fact that the delay had not been in the best interests of the Connective companies was not the relevant issue. The relevant issue was whether the proposed proceeding was in the best interests of the Connective companies. The primary judge said that ‘accepting for argument’s sake’ that delay was relevant, it did not in this case lead to a conclusion that the proceeding was other than in the best interests of the companies.[43] He went on to say that ‘in any event’ he did not accept that there had been an unacceptable delay. The judge said:
Before Slea received the Murray Lees statement, that case was based on inference and, by Slea’s own admission, was thin. The case has also been strengthened by the discovery of the options paper and emails discussed above …[44]
[43]Reasons [170].
[44]Reasons [171].
In dealing with the question of whether there was a serious question to be tried, the primary judge recorded that Slea took no issue with the proposition that the directors had power to restructure the company and to move the operating business out of the Connective companies into subsidiaries. The primary judge said that Slea’s allegation did not concern whether the directors had power to do what they did but rather whether they did what they did for ‘a purpose other than for which the power was granted’, being, the ‘purpose of circumventing pre-emptive rights of the members’.[45]
[45]Reasons [176].
The judge referred to the fact that there was evidence that would, if accepted, establish that the corporate restructure had been undertaken to avoid Slea being able to exercise its pre-emptive rights.[46]
[46]Reasons [177]–[181].
The primary judge then said:
Directors may only exercise their powers for the purpose for which they were given. The exercise of a power for an improper purpose may be set aside in equity if the improper purpose was a substantial purpose. In this case it is said that the directors exercised their powers to create subsidiaries and to transfer the sole business of the company to those subsidiaries to enable Macquarie Bank to take a 25 per cent interest in the company to avoid the pre-emptive rights of the existing shareholders being exercised.
In doing so, the directors may be found to have exercised their powers for the substantial purpose of interfering with and defeating the rights of the shareholders under the constitution of the company. As was said in Howard Smith, the directors were interfering with ‘that element of the company’s constitution which is separate from and set against the powers’.[47]
[47]Reasons [182]–[183].
The judge then referred to a submission made on behalf of the Connective parties that Slea must establish that the Connective companies had suffered loss and damage. The primary judge rejected the proposition that that was a requirement for a successful application under s 237.[48] He then said that if damage did have to be shown, he found that on the evidence before the Court relevant damage had been shown. He said ‘the evidence at this stage shows the interests of Slea, as a shareholder, have been damaged’.[49]
[48]Reasons [185]–[187].
[49]Reasons [188].
The primary judge was satisfied that there was a serious question to be tried.[50]
[50]Reasons [189].
As to notice, the primary judge recorded that the Connective parties did not challenge the proposition that it was appropriate to grant leave without the statutory notice.[51]
[51]Reasons [192].
The primary judge concluded that the five elements of s 237(5) had been made out and that he was required to grant leave.[52]
[52]Reasons [195].
Proposed grounds of appeal on the derivative leave application
The proposed grounds of appeal in the application for leave to appeal under the heading ‘Derivative Leave application’ read as follows:
1The learned primary judge erred in failing to hold that the application for leave to bring a derivative proceeding was brought by Slea Pty Ltd for a collateral purpose, such that Slea was not acting in good faith for the purposes of s 237(2)(b) of the Act [J108, 112-114, 195].
2The learned primary judge erred in failing to hold that there was an unacceptable delay in Slea making the application for leave to bring a derivative proceeding [J171].
3The learned primary judge erred in failing to hold that, for the purposes of s 237(2)(c) of the Act, it was not in the best interests of the First and Second Applicants, Connective Services Pty Ltd and Connective OSN Pty Ltd (the Connective companies), that Slea have leave to bring the derivative proceeding given: (a) the unacceptable delay in bringing the application; and (b) Liberty Financial Pty Ltd’s interest in the application and proceeding [J159, 165, 173, 193, 195].
4The learned primary judge erred in holding that Slea had established, for the purposes of s 237(2)(d) of the Act, that there was a serious question to be tried whether, in effecting the restructure, the directors of the Connective companies, in breach of s 181 of the Act, did not act in good faith in the interests of the Connective companies and for a proper purpose [J183, 189, 195].
Derivative leave application — submissions
In relation to proposed ground 1 (collateral purpose and absence of good faith), the Connective parties submitted that the judge made two errors in failing to conclude that Slea was seeking to bring the derivative proceeding for a collateral purpose and was not acting in good faith.
The first error contended for was that the judge had taken too restrictive a view of what constitutes a relevant collateral purpose. It was submitted that the judge had held that a collateral purpose was a purpose which would amount to an abuse of process within the meaning of Williams v Spautz.[53] It was submitted that this was an erroneously narrow approach. In that respect the Connective parties relied upon the decision of the New South Wales Court of Appeal in Chahwan v Euphoric Pty Ltd.[54]
[53](1992) 174 CLR 509.
[54](2008) 227 FLR 43 (‘Chahwan’).
The Connective parties submitted that the judge had also erred in finding that the ‘key question’ was whether Slea was genuinely seeking relief to its own advantage, and that he had erred in placing excessive reliance on the finding that Slea had legitimate claims. The Connective parties submitted that Slea’s derivative application was brought for the collateral purpose of ‘advancing Liberty’s interests pursuant to the Accommodation Agreement’. The Connective parties relied upon the fact that Liberty was ‘integrally involved in bringing and conducting the application’. They submitted that the application had to be ‘seen in the context of the terminated 2009 share sale agreement’.
In oral submissions senior counsel for the Connective parties submitted that Slea’s lack of good faith was to be found in the provisions of the Accommodation Agreement. He relied upon recital C and clause 8.6. He also relied upon evidence given in cross-examination by Ms Mackay as to Liberty’s direct involvement in the application and the proceeding. Reliance was also placed upon evidence the subject of the reopening application which we will address in that context.
In relation to proposed ground 1 (collateral purpose and absence of good faith), Slea submitted that the primary judge had found that Mr Tsialtas believed Slea had a good cause of action, and that there was no challenge to that finding. Slea submitted that the issue under the statute is whether the applicant is acting ‘in good faith’ and that it is wrong to substitute other concepts, such as the absence of any ‘collateral purpose’, for the words of the statute. It was submitted that the judge had correctly understood and applied what Palmer J had said in Swansson. The primary judge had considered Williams v Spautz[55] as ‘illuminating the issues’ but had not suggested that that consideration was exhaustive of the matters to be considered.
[55](1992) 174 CLR 509.
Slea submitted that Liberty’s interest in Slea pursuing its own claims did not lead to a conclusion that Slea was not acting in good faith. Relying on passages from the transcript and upon the provisions of the Accommodation Agreement, senior counsel for Slea submitted that it was uncontroversial that Liberty wished to acquire a shareholding in the Connective companies and a controlling interest if possible, that Liberty was funding Slea in the proceeding, that Liberty wished to have a commercial relationship with the Connective companies in order to further their own interests as a lender, and that the arrangements made in that regard were all contingent on compliance with the pre-emptive rights provisions.
In relation to Chahwan senior counsel for Slea submitted that the interest pursued by the applicant in that case had been entirely outside its interest as a shareholder, and that the position here fell squarely within the explanation given by Tobias JA in Chahwan of what Palmer J had said in Swansson.[56]
[56]Chahwan (2008) 227 FLR 43, 60 [73]–[74].
In relation to proposed ground 2 (delay) it was submitted on behalf of the Connective parties that the judge had erred in finding that there had not been an unacceptable delay. Reliance was principally placed upon the application for leave to amend made in 2013 and rejected in 2014. It was submitted that Slea had considered that it had a proper basis for making the allegations in 2013 and the fact that more information may have come to light since did not justify the delay.
On behalf of Slea it was submitted that delay could only be relevant if it bore upon one of the five statutory matters. It referred to the fact that delay was relied upon in that context in proposed ground 3 concerning whether the proceeding is in the best interests of the Connective companies. Slea submitted that the Connective parties had not addressed the primary judge’s reasons in relation to delay or identified any error in those reasons. The judge had found that before the Murray Lees statement in 2016 the case was based on inference and was ‘thin’. The case has been further strengthened by the discovery of additional documents. It was submitted that there was no error in the judge’s findings on these issues.
In relation to proposed ground 3 (not in companies’ best interests), it was submitted by the Connective parties that the judge had failed to focus on the true nature and purpose of the proposed proceeding. It was submitted that Liberty is a competitor of the Connective parties and that this application is being brought to further its interest in gaining control of the Connective companies.
In the context of this proposed ground the Connective parties submitted that it was significant that the judge had failed to consider the impact on the Connective parties of the delay which had already occurred, and which would now occur in future in the hearing of the oppression claim because of the introduction of this new proceeding with additional parties. It was also submitted that the primary judge had failed to properly consider the ‘commercial effect on the Connective parties’ of granting leave so that ‘the Connective companies’ would bring proceedings against ‘their directors and cornerstone investor’. It was submitted that the proposed proceeding would cast uncertainty over the companies’ governance and the market’s perception of their standing. It was submitted that these matters had been the subject of ‘cogent evidence’ and that there had been no contradictory evidence.
In oral submissions it was submitted on behalf of the Connective parties that it could not be in the best interests of the Connective companies to have a proceeding brought where the relief sought would inevitably damage the business. In that respect particular reliance was placed upon the relief sought whereby the transactions by which Macquarie Bank had acquired its interest would be unwound. Reliance was also placed upon what was said to be the ‘reputational damage’ that would be suffered by the proceeding being issued. It was submitted that it could not possibly be to the benefit of the Connective companies to allow a proceeding to be instituted seeking to overturn a transaction which had been immensely beneficial to them and which had been undertaken over four years ago. Senior counsel emphasised that this was not a case of deadlock and that the companies are functioning well.
In relation to proposed ground 3 (not in companies’ best interests), Slea submitted that the primary judge had correctly found that there had been no ‘unacceptable delay’ in bringing the proceeding. It was submitted that Liberty did not control Slea, although the existence of its interest in the proceeding was uncontroversial. It was submitted that the primary judge had correctly found, on the evidence, that Slea was bringing the application to pursue its own legitimate claim and to protect its shareholding interest.
In relation to the submission that the primary judge had failed to consider the commercial effect on the Connective parties, it was submitted that the judge had considered that evidence in detail and that no error in what he had said had been identified. It was submitted that Mr Atkins’ evidence primarily concerned issues of the relief which might be granted and those issues were best addressed at trial.
In the submissions made before us senior counsel for the Connective parties placed significant emphasis on proposed ground 4 (serious issue to be tried).
In their written case the Connective parties submitted that the primary judge had erroneously found that the pre-emptive rights provisions had been introduced into the constitutions of the Connective companies to ensure that the founding members had the power to control who participated in the business. It was submitted that the pre-emptive rights provisions were not concerned with that but were concerned with the issue and sale of shares. In the transactions which are the subject of the proposed proceeding there was no issue or sale of shares. It was submitted that the directors were ‘merely exercising their powers to deal with and transfer the assets of the business’.
In oral submissions senior counsel for the Connective parties emphasised that the constitutions gave the directors the power to issue shares and the power to sell the business. It was submitted that neither power was ‘paramount’. It was submitted that the directors had decided to sell the business. Senior counsel submitted that the alleged improper purpose was to avoid the pre-emptive rights provisions, but, he submitted, the directors were not bound to ‘activate’ the pre-emptive rights provisions. The directors wished to bring Macquarie Bank into the business. They did so by the corporate restructure. That restructure did not disturb the relationship between shareholders in the Connective companies. It was submitted that the case proposed to be put in the derivative proceeding must involve the proposition that Macquarie Bank had to be introduced by way of an issue of shares, which is untenable. It was submitted that the course taken by the directors did not ‘circumvent’ the pre-emptive rights provisions. Rather, the directors employed their powers in a way that did not enliven those provisions. It was submitted that if the transactions structured in this way were in the companies’ best interests then the directors were obliged to take that course.
Senior counsel for the Connective parties was asked whether the effect of the corporate restructure was to remove assets held in a structure where Slea had certain rights and to place them in a structure where those rights did not exist. Senior counsel responded that that was not the case as proposed to be pleaded and that in any event the directors’ purpose was to introduce Macquarie Bank not to place the assets into a structure where the rights of pre-emption did not exist.
On behalf of Slea it was submitted that the issue is not whether the directors had power to deal with and transfer the assets, but whether they did so for a purpose other than that for which the power had been conferred, and, in particular, ‘for the purpose of ensuring that Slea could not exercise its pre-emptive rights’. In oral submissions senior counsel for Slea emphasised that the primary judge’s analysis was correct and that it was irrelevant that the corporate restructure was within power, because it had been undertaken for an improper purpose, as alleged in the proposed pleading. It was submitted that the primary judge had made no error of law or fact in determining that there was a serious question to be tried. Slea submitted that the assets had been moved from a structure where Slea had pre-emptive rights to a structure where those rights did not exist and that that was within the proposed pleading in paragraph 30 where it was alleged that the transactions had been undertaken so as to ‘circumvent’ the pre-emptive rights provisions.
Proposed ground 2 — delay —analysis
Pursuant to s 237(2) of the Act the Court must grant the application for leave if satisfied of the five specified matters. The existence or otherwise of delay is not one of those matters. It may be relevant to them, and the Connective parties rely on delay in the context of proposed ground 3 concerning the requirement that leave be in the companies’ best interests. A finding as to delay, divorced from a consideration of the five specified matters, cannot found a conclusion that leave should have been refused. In these circumstances proposed ground 2, relying solely upon delay, is not well founded, in our view. Perhaps more precisely, the proposed ground cannot succeed unless it results in a conclusion that the Court ought not to be satisfied one of the five specified matters exists, as the Connective parties do seek to contend in proposed ground 3. The submissions as to delay should be addressed in that context.
We will not grant leave to appeal on this proposed ground.
Proposed ground 1 — good faith — analysis
The Connective parties contend that the primary judge made errors both in his identification of the relevant principles to be applied and in his application of those principles. It is submitted that he misapplied what Palmer J had said in Swansson and in that respect reliance is placed upon the New South Wales Court of Appeal decision in Chahwan. It is said he also made errors in his application of the relevant principles by failing, in substance, to identify the significance of Liberty’s involvement in the application.
As the passage earlier quoted from Palmer J in Swansson makes clear, Palmer J was not intending to set out a comprehensive and exhaustive statement of the principles to be applied when considering whether an applicant was acting in good faith. He began by observing that the law would develop ‘incrementally’ and that it would be ‘unwise to endeavour to state compendiously the considerations to which the courts will have regard’. He then explained that there would always be ‘at least’ two factors to which the Court would have regard. The first was whether the applicant honestly believed there was a good cause of action. The second was whether there existed a collateral purpose which would amount to an abuse of process.
Tobias JA, with whom Beazley and Bell JJA agreed, in Chahwan made it clear (if it was not already clear) that Palmer J was not intending to confine the consideration of the issue of good faith to circumstances where there was no genuine belief that there was a good cause of action or where there existed a collateral purpose which would amount to an abuse of process. Tobias JA explained (correctly, in our view) the position as follows:
the expression ‘acting in good faith’ in section 237(2)(b) of the Act need not be confined, as the appellant submitted it should, to those two grounds. In particular, it extends beyond conduct that would constitute an abuse of process.
As Palmer J made clear in Swansson, in my respectful view correctly, although those two factors are required to be considered when a Court is determining whether the good faith requirement of section 237(2)(b) is satisfied, the issue of good faith is not confined to those factors. His Honour noted (at [35]), ‘the law will develop incrementally as different factual circumstances come before the courts’.[57]
[57]Chahwan (2008) 227 FLR 313, 62 [81]–[82].
The factual situation in Chahwan was such that the Court in that case concluded that the applicant was seeking to further his own personal interest rather than his interest as a current or former shareholder. The factual situation there is not analogous to the position here.
Turning then to what the primary judge said, he addressed the two issues identified by Palmer J as ‘always’ having to be addressed. He was clearly right to do so. He found that the applicant did have a genuine belief that there was a good cause of action. He found that there was no collateral purpose which would amount to an abuse of process. The complaint is not that he should not have addressed those matters, or that his conclusions on those matters are wrong, the complaint is that in relation to collateral purpose he confined himself, wrongly, to purposes such as would constitute abuse of process.
It is true that at one point in the judgment the primary judge expressed himself in a way which can be interpreted (taken in isolation) as suggesting that a collateral purpose would only be relevant if it constituted an abuse of process. In that respect we refer to the passage quoted earlier where he said that a collateral purpose is that which would amount to an abuse of process as laid down in Williams v Spautz.[58] However, when all that the judge said is considered, in our view it is clear he did not confine himself to that narrow consideration.
[58](1992) 174 CLR 509, quoted at [62] above.
The primary judge explicitly recognised at the outset that the two matters Palmer J had identified as always having to be addressed were not exhaustive. He quoted the passage in which Palmer J made that quite clear. The primary judge then said that there were ‘at least’ those two interrelated factors identified by Palmer J to be addressed. He then addressed all of the contentions put on behalf of the Connective parties. The primary judge’s conclusion reveals that he had not confined his consideration of the issue of good faith in the way contended by the Connective parties. The judge said (the emphasis is ours):
Slea has satisfied me on the balance of probabilities that, on the evidence before the Court, it is acting in good faith in seeking to bring the derivative proceedings. Insofar as it is relevant, I am also not satisfied that the predominant purpose of Slea bringing the proceeding is improper or constitutes an abuse of process.[59]
The judge found Slea was acting in good faith for a purpose which was neither an abuse nor improper.
[59]Reasons [114].
In relation to the primary judge’s application of the relevant principles, no error in the judge’s analysis has been demonstrated. As the primary judge observed, the Connective parties’ reliance upon the fact that Liberty’s interests are aligned with Slea, that Liberty is financing the proceeding, and that Liberty has agreed to finance or consider financing Slea if Slea has the opportunity to purchase further shares in the Connective companies, fails to ‘meet’ the fact that the claims Slea proposes to pursue are legitimate claims that it brings in its capacity as a shareholder. Any advantages Liberty might eventually obtain will only be obtained by Slea vindicating its rights as a shareholder.
In this connection, the Connective parties place principal reliance upon the Accommodation Agreement. Senior counsel relied upon recital C and clause 8.6.
Recital C relevantly reads as follows:
Minerva is Interested in providing financial support to Slea and [Mr Tsialtas], and to be able to consider purchasing an interest in the [shares in the Connective companies] in the future. Slea, Minerva and [Mr Tsialtas] have agreed a process to be followed should the circumstances arise that would enable the purchase of part or all of the Shares in the [companies] (‘Agreed Purpose’).
Clause 8.6 reads:
Slea will do everything necessary to assist Minerva in achieving the Agreed Purpose.
The Accommodation Agreement provides for circumstances in which Minerva will consider financing Slea to acquire further shares (cls 2.3 and 2.4), and, if Slea were to acquire 100 per cent of the shareholding, Minerva would then have an option to purchase those shares (cl 2.4). These provisions are expressly premised upon the other shareholders in the Connective companies offering all or part of their shareholding to Slea pursuant to the pre-emptive rights provisions. The passage in recital C which reads: ‘should the circumstances arise that would enable the purchase’ is explicable by those provisions. In our view, the Accommodation Agreement does not support the existence of a lack of good faith in Slea pursuing the proposed claim.
Proposed ground 1 is arguable and we will grant leave to appeal. For the reasons given we will dismiss the appeal on that ground.
Proposed ground 3 — best interests of the companies — analysis
In substance, the Connective parties contend that the judge erred in failing to hold that it was not in the best interests of the companies for leave to be given by virtue of the unacceptable delay, Liberty’s interest in the application, Mr Atkins’ evidence as to the potential effect on the business conducted by the group because Slea is seeking to unwind the transactions whereby Macquarie Bank took up an equity position, and the associated reputational damage.
In relation to delay, in our view the Connective parties’ contentions are to be rejected for the reasons which the judge gave. The Connective parties principally rely upon the application made to amend and to join parties to the oppression proceeding in 2013, which was rejected in 2014. We do not see any error in the primary judge’s conclusion that the case at that time was ‘thin’ and that the evidence in support of the allegations proposed to be made was significantly strengthened as a result of the statement of Mr Murray Lees taken in May 2016 and the additional documents discovered since then. Further, as the judge said, the issue is not whether the delay has been in the companies’ best interests, it is whether the proposed proceeding is in the companies’ best interests.
There will be delay in the hearing of the oppression proceeding as a consequence of the new proceeding, as one would expect that they will be heard together. The extent of any such delay will depend upon the parties’ willingness to expeditiously advance the matters. That is not a consideration which, in our opinion, should lead to leave being refused.
As to the significance of Liberty’s interest in the application and the proceeding, Liberty can only obtain advantage from the proceeding if Slea succeeds in vindicating its claimed rights as a member. Slea’s claim that there has been a breach of duty is a genuine one, advanced, as the judge held, in good faith. Whether its claim will succeed or not is, of course, a different issue. As the judge said, a ‘proceeding to protect the interests of members as members from breaches of duty by the directors is a proceeding in the best interests of the company as a whole’.[60] We would only add the proviso that that may not invariably be the position, but it is, in our view, the position here.
[60]Reasons [159].
In relation to Mr Atkins’ evidence, the judge considered it in detail. As the primary judge observed, the ‘key’ to Mr Atkins’ opinion was his concern that Macquarie Bank’s equity acquisition will be unwound. That is a matter best addressed in the context of the relief to be granted should the proposed proceeding succeed. In this context the judge correctly observed that it was not appropriate to speculate on the possible relief as that would turn on the evidence rather than Mr Atkins’ opinions. He added, again correctly, that the issue is whether it is in the best interests of the Connective companies to have the proposed proceeding determined.
In relation to reputational damage, the relevant allegations are already made in the oppression proceeding. To the extent that the reputational damage might be said to flow from unwinding the Macquarie Bank transaction, that is a matter for trial.
In our view this proposed ground was also arguable. We will grant leave to appeal, but for the reasons given we will dismiss the appeal.
Proposed ground 4 — serious question to be tried — analysis
It emerged, or became clear, in the course of oral submissions that the parties are not greatly apart in their characterisation of the purpose for which the corporate restructure was undertaken.
The Connective parties characterise the purpose as pursuit of a course of action decided upon so as not to ‘enliven’ the pre-emptive rights provisions. Slea characterises it as pursuit of a course of action decided upon so as to ‘circumvent’ the pre-emptive rights provisions, not just in relation to the transaction with Macquarie Bank but for the future as well.
There is no issue between the parties as to whether what was done was within power. The only issue is to whether the power was exercised for a proper purpose.
In relation to the issue of misuse of directors’ powers, the Privy Council in Howard Smith said the following (concerning the exercise by directors of a power to issue shares):
Thus, and this is not disputed, the issue was clearly intra vires the directors. But, intra vires though the issue may have been, the directors’ power under this Article is a fiduciary power: and it remains the case that an exercise of such a power, though formally valid, may be attacked on the ground that it was not exercised for the purpose for which it was granted.
…
To define in advance exact limits beyond which directors must not pass is, in their Lordships’ view, impossible. This clearly cannot be done by enumeration, since the variety of situations facing directors of different types of company in different situations cannot be anticipated. No more, in their Lordships’ view, can this be done by the use of a phrase — such as ‘bona fide in the interests of the company as a whole,’ or ‘for some corporate purpose.’ Such phrases, if they do anything more than restate the general principle applicable to fiduciary powers, at best serve, negatively, to exclude from the area of validity cases where the directors are acting sectionally, or partially: ie improperly favouring one section of the shareholders against another. Of such cases it has been said in Mills v Mills[61] per Latham CJ:
‘The question which arises is sometimes not a question of the interests of the company at all, but a question of what is fair as between different classes of shareholders. Where such a case arises some other test than that of “interests of the company” must be applied.’
In their Lordships’ opinion it is necessary to start with a consideration of the power whose exercise is in question, in this case a power to issue shares. Having ascertained, on a fair view, the nature of this power, and having defined as best can be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the Court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not.[62]
[61](1938) 60 CLR 150, 164.
[62][1974] 1 NSWLR 68, 76–7.
The contentions advanced on behalf of the Connective parties in relation to purpose may be found to be meritorious after a trial. It is neither necessary nor desirable to assess the competing contentions as to whether the purpose was improper or not at this stage. The Connective parties’ submissions proceeded, it seems to us, upon the assumption that provided the directors had power to do what they did that was the end of the inquiry. As the Privy Council explained, that is not so.
For the reasons the primary judge gave, there is a serious question to be tried here. We do not consider the contrary to be arguable and we will not grant leave to appeal on this proposed ground.
Conclusion — derivative leave application
In relation to the four proposed grounds of appeal in the application for leave to appeal under the heading ‘Derivative Leave application’, we will grant leave to appeal on grounds 1 and 3 but dismiss the appeal on those grounds. We will not grant leave to appeal on grounds 2 and 4.
The application to reopen
On 6 October 2017 the parties were notified by the Court that the primary judge intended to deliver judgment on the application for leave to bring a derivative proceeding on 10 October 2017. That same day the Connective parties issued a summons seeking to have the hearing reopened and seeking leave to adduce ‘new evidence’. On 9 October 2017 the Connective parties sent to Slea a notice to produce. The notice sought the production of the following documents:
1.A copy of the litigation funding agreement between Slea Pty Ltd and/or Mr Sofianos Tsialtas and Liberty Financial Group Pty Limited (formerly Minerva Financial Group Pty Limited) and/or any of its related entities (Liberty), as referred to by Mr O’Bryan QC before Robson J on 16 August 2017 (see transcript p 190).
2.A copy of the Cooperation Deed between Slea Pty Ltd and Mr Murray Lees and/or Mortgage Results Pty Ltd executed on or around 11 January 2016.
3.A copy of the Financial Support Agreement between Liberty and Mr Murray Lees and/or Mortgage Results Pty Ltd executed on or around 11 January 2016.
4.A copy of the Guarantee and Indemnity in favour of Liberty executed by Mr Murray Lees and/or Mortgage Results Pty Ltd on or around 11 January 2016.
Slea produced the four documents without objection pursuant to the notice.
The matter came on before the primary judge on 10 October 2017. Counsel for the Connective parties applied for an adjournment. After a further hearing on 20 October 2017, the application to reopen was adjourned to 13 November 2017. Judgment on the leave application was not delivered.
On 27 and 31 October 2017 the Connective parties issued subpoenas in connection with the application to reopen. On 8 November 2017 Slea filed a summons seeking to have those subpoenas set aside.
On 13 November 2017 the primary judge heard the application by the Connective parties to reopen and Slea’s application to set aside the subpoenas.
On 29 November 2017 the matter was listed for the purpose of delivering judgment on the application for leave to issue a derivative proceeding, on the summons seeking to reopen the hearing, and on the application to set aside the subpoenas. Counsel for the Connective parties unsuccessfully attempted to make an application to again have the delivery of judgment adjourned.
The ‘new/fresh’ evidence
The evidence, said to be variously ‘new’ or ‘fresh’, upon the basis of which the Connective parties sought a reopening was constituted by four documents. The Written Case of the Connective parties on this application states:
The fresh evidence was: (a) Lees 2017 Statement; (b) Cooperation Deed; (c) Lees Financial Support Agreement; and (d) Slea Funding Agreement.
The ‘Slea Funding Agreement’ is the document referred to at paragraph 1 of the notice to produce. The ‘Lees Financial Support Agreement’ is the document referred to at paragraph 3 of the notice to produce (the document at paragraph 4 of the notice is a guarantee in relation to that agreement), and the ‘Cooperation Deed’ is the document referred to at paragraph 2 of the notice to produce. We will use the same terms as the Connective parties employ in the written case.
The Lees 2017 Statement was produced as an exhibit to an affidavit by a solicitor for the Connective parties. The statement is described as a ‘preliminary statement’. The solicitor deposed to the fact that a person to whom he had spoken by phone had confirmed witnessing Mr Murray Lees signing the statement. In the Lees 2017 Statement Mr Murray Lees begins by referring to his 11 May 2016 Statement. He does not retract anything which he said in that earlier statement. The portion of the statement upon which the Connective parties particularly relied concerns meetings held between Mr Murray Lees and an officer of Liberty named James Boyle in late 2015. The statement reads (italics in original):
During those meetings Mr Boyle and I discussed Connective, and Mr Boyle made statements to the following effect:
―Liberty wants to gain control of Connective, and to change its operations and governance to benefit Liberty, Sof and yourself.
―It is key to Liberty to return to Connective’s panel of lenders: it would give us more effective and efficient access to the brokers with whom Connective deals.
―Liberty’s key objective, as a non-conforming lender, is to gain exclusive access to loans declined by other lenders on Connective’s panel.
The Cooperation Deed is dated 11 January 2016. The parties to the agreement are Mortgage Results, Mr Murray Lees, and Slea. Liberty is not a party. The agreement recites the fact that Slea holds 600 shares in each of the Connective companies and that Mortgage Results and Murray Lees claim ownership of 450 shares in each of the Connective companies. In substance, the deed provides that the parties will consult and discuss in good faith the business of the Connective companies, and that, if Mortgage Results becomes registered owner of the shares which it claims, they will take action together to procure the appointment of Mr Murray Lees as chairman, the appointment of at least two directors to represent ‘Slea’s majority shareholding’, and to improve governance of the boards by the removal of existing directors and the appointment of additional directors. The ‘Lees Parties’ undertake to vote collectively with Slea.
The Lees Financial Support Agreement is an agreement between Mortgage Results, Mr Murray Lees and Minerva dated 11 January 2016 under which Minerva agrees to lend to the ‘Murray Parties’ $2.8 million. The Murray Parties agree to take ‘all actions’ to have their claimed interest in shares in the Connective companies registered. If the Murray Parties are offered the opportunity to exercise pre-emptive rights, they are required to consult with Minerva. If the Murray Parties determine to transfer their shares, then ‘after complying with any applicable pre-emptive rights process’ they must offer the shares to Minerva.
The parties to the Slea Funding Agreement, which is undated save for the year ‘2012’, are Slea and Minerva. Minerva agrees to fund Slea’s legal costs in relation to Mr Haron’s proceeding and the oppression proceeding. Slea is obliged to use Arnold Bloch Leibler as its solicitors. Slea agrees that it must, upon a reasonable request from Minerva, instruct Arnold Bloch Leibler to keep Minerva informed, to consult with and take instructions from Minerva, and to undertake any action specified in a fee agreement between Minerva and Arnold Bloch Leibler. The agreement provides that Minerva’s participation in respect of these matters is subject to Arnold Bloch Leibler’s overriding duty to Slea and ‘the primacy of Slea’s right to instruct’ Arnold Bloch Leibler.
The application to reopen ― Reasons
The primary judge accepted that he had power to reopen the matter.[63] He adopted a statement of certain criteria that ought to be taken into account when exercising the court’s discretion to reopen set out by Habersberger J in Reid v Brett.[64] Those criteria are: whether the further evidence is so material that the interests of justice require its admission, whether the further evidence if accepted would most probably affect the result, whether the further evidence could not by reasonable diligence have been discovered earlier, and whether there would be prejudice to the other party. The primary judge also referred to the observations of this Court in Spotlight Pty Ltd v NCON Australia Ltd,[65] to the effect that the circumstances must be exceptional before a court will allow a case, having been closed and judgment reserved, to be reopened, but that the overriding consideration is whether taken as a whole the justice of the case favours reopening.[66]
[63]Reasons [216].
[64][2005] VSC 18.
[65](2012) 46 VR 1.
[66]Reasons [217]–[218].
In relation to the Slea Funding Agreement, the primary judge quoted a portion of the cross-examination of Ms Mackay, the solicitor at Arnold Bloch Leibler, during the course of the initial hearing before him on 16 August 2017 in which express reference was made to the existence of that agreement.[67] The primary judge referred to the fact that the Connective parties contended that they had not called for the document because senior counsel for Slea had advised the Court that it was privileged. That is the reference made to what had been said by Mr O’Bryan QC in paragraph 1 of the notice to produce. The primary judge referred to the fact that the Slea Funding Agreement had been produced without privilege being claimed on 10 October 2017. The judge then said:
Thus the position was that the Connective parties were aware of the existence of the funding agreement during the hearing of the derivative leave application, elected not to call for the document, and accordingly did not test whether the call would be opposed on the ground that the document was in fact privileged. Accordingly, I am not satisfied that with reasonable diligence the funding agreement could not have been uncovered by the Connective parties prior to the hearing concluding.[68]
[67]Reasons [224], quoting Transcript of Proceedings (16 August 2017) 201–2.
[68]Reasons [227].
In relation to the Cooperation Deed the judge referred to the fact that on 8 July 2016 the Connective parties had requested that Slea provide copies of any documents relating to Mr Murray Lees’ disclosure of information to them including ‘any agreement … in respect of that disclosure’.[69] The primary judge observed that the possibility that there was such an agreement had ‘entered the minds of the Connective parties’. The judge was thus not satisfied that with reasonable diligence the Cooperation Deed could not have been uncovered prior to the hearing. He did not consider the evidence to be relevantly fresh.[70]
[69]Reasons [229].
[70]Reasons [231]–[233].
In relation to the Lees Financial Support Agreement the primary judge quoted at length passages from Ms Mackay’s cross-examination on 16 August 2017 in which the existence or possible existence of such an agreement had been canvassed.[71] The primary judge observed that the Connective parties had not sought to call for the loan agreement and had instead chosen to rely upon the fact that Slea had not proffered the material.[72] The judge concluded that he was not satisfied that the Connective parties could not by reasonable diligence have obtained evidence of the agreement.[73]
[71]Reasons [236].
[72]Reasons [238].
[73]Reasons [239].
As to the Lees 2017 Statement the primary judge noted that Mr Murray Lees had not withdrawn anything said in his previous statement.[74] The judge considered that the Lees 2017 Statement did not ‘raise any new issues not otherwise already raised during the derivative leave application’.[75]
[74]Reasons [241].
[75]Reasons [244].
The judge then addressed the issue of whether the evidence said to be ‘fresh’ or ‘new’ would alter the outcome in any event, concluding that it would not.[76] The judge said:
In substance, the new evidence referred to seeks to further the argument maintained during the derivative leave application that the derivative proceedings are being conducted by Slea for a collateral purpose of advancing the interests of Liberty. That was the main contention of the Connective companies in the hearing before me. That case misconceives and ignores the genuine and bona fide interest that Slea has in seeking to protect its interest in the Connective companies from being damaged and diminished by the directors exercising their powers for the improper purpose of circumventing Slea’s pre-emptive rights.
None of the evidence can establish that Slea is bringing the proceedings on behalf of Liberty as opposed to Slea bringing the proceedings in its own interest, which includes advancing the arrangements Slea has with Liberty. The fresh evidence does not contradict the existing evidence before the Court, that the derivative proceedings constitute a discrete benefit to Slea. In any event, I am not satisfied that it is in the interests of justice to allow the hearing to be re-opened on grounds of fresh evidence.[77]
[76]Reasons [245]–[274].
[77]Reasons [273]–[274].
The application to reopen — submissions and analysis
Proposed ground 5 of the application for leave to appeal contends the judge ‘erred’ in failing to hold that the evidence could not have been discovered with reasonable diligence prior to the application to reopen, and proposed ground 6 contends that he ‘erred’ in failing to hold it was in the interests of justice to allow the reopening.
Proposed ground 7 concerns the subpoenas. It was accepted before the primary judge, and accepted before us, that if the application to reopen was properly dismissed the decision to set aside the subpoenas was correct.
The judge’s decision to dismiss the application to reopen was a discretionary judgment. As such, the decision ought not to be interfered with on appeal unless it is demonstrated that the judge had acted on a wrong principle, had allowed extraneous or irrelevant matters to guide or affect him, had mistaken the facts, had failed to take into account some material consideration, or had reached a conclusion so unreasonable or plainly unjust that the appellate court may infer the existence of error.[78]
[78]House v The King (1936) 55 CLR 499, 505.
Further, this is a decision made by a judge in the Trial Division on a matter of practice and procedure. In Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc,[79] Gibbs CJ, Aickin, Wilson and Brennan JJ observed, in relation to appellate intervention in such matters, the following:
For ourselves, we believe it to be unnecessary and indeed unwise to lay down rigid and exhaustive criteria. The circumstances of different cases are infinitely various. We would merely repeat, with approval, the oft-cited statement of Sir Frederick Jordan in In re the Will of F B Gilbert (dec):
‘... I am of opinion that, ... there is a material difference between an exercise of discretion on a point of practice or procedure and an exercise of discretion which determines substantive rights. In the former class of case, if a tight rein were not kept upon interference with the orders of Judges of first instance, the result would be disastrous to the proper administration of justice. The disposal of cases could be delayed interminably, and costs heaped up indefinitely, if a litigant with a long purse or a litigious disposition could, at will, in effect transfer all exercises of discretion in interlocutory applications from a Judge in Chambers to a Court of Appeal’.
[79](1981) 148 CLR 170, 177 (citations omitted).
The Connective parties in their Written Case contend that the primary judge ought to have reached different conclusions on the material before him on the issues set out in proposed grounds 5 and 6. They do not contend that the judge acted on any wrong principle. Other than in relation to the Lees 2017 Statement, they do not contend that he made any factual error, overlooked a relevant matter, or failed to address a relevant matter. They contend that he ought to have reached different conclusions on the material which he considered and addressed.
In relation to the Lees 2017 Statement the Connective parties submit the judge ‘failed to consider whether the Lees 2017 Statement was not previously discoverable’, and also erroneously found that the statement did not disclose any fresh evidence. This latter finding was said to be erroneous as the statement disclosed for the first time that Liberty’s commercial reason for seeking control of the Connective companies was to reappoint itself to the panel of lenders and to have access to declined loans. In oral submissions, senior counsel for the Connective parties emphasised that this was the significant new matter revealed by the documents upon which they sought to rely.
As to the judge’s failure to consider if the statement was not previously discoverable, in our view the judge implicitly accepted that the statement had not been discoverable earlier. But the reason he rejected a reopening so as to enable reliance on the 2017 Lees Statement was because he considered that it did not raise any new issues.
It was uncontroversial during the hearing of the substantive application that Liberty was financing Slea, that it was integrally involved in the proceedings, and that its interests and Slea’s interests were ‘aligned’. It does not seem to us the judge made any error of the requisite kind in concluding that the added feature (even if it is in fact new) that Liberty was motivated by a desire to return to a panel of lenders or to have access to declined loans relevantly alters the analysis or relevantly affects the conclusions otherwise reached by the primary judge.
We do not accept that any error of the requisite kind has been established in relation to the primary judge’s treatment of the Lees 2017 Statement.
Otherwise, the Connective parties in substance seek to have this Court re-consider and re-exercise the discretion exercised by the judge based upon the material he considered and addressed. That course should not be taken for the reasons given by the High Court.
We will refuse leave to appeal on proposed grounds 5, 6 and 7.
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SCHEDULE OF PARTIES
S APCI 2018 0007
| CONNECTIVE SERVICES PTY LTD (ACN 107 366 496) | First Applicant |
| CONNECTIVE OSN PTY LTD (ACN 106 761 326) | Second Applicant |
| CONNECTIVE GROUP PTY LTD (ACN 162 397 060) | Third Applicant |
| CONNECTIVE BROKER SERVICES PTY LTD (ACN 161 731 111) | Fourth Applicant |
| CONNECTIVE LENDER SERVICES PTY LTD (ACN 161 731 460) | Fifth Applicant |
| CONNECTIVE FUNDER SERVICES PTY LTD (ACN 161 732 645) | Sixth Applicant |
| CONNECTIVE GROUP IP HOLDINGS (NO 1) PTY LTD (ACN 165 282 084) | Seventh Applicant |
| CONNECTIVE GROUP IP HOLDINGS (NO 2) PTY LTD (ACN 165 281 925) | Eighth Applicant |
| - and - | |
| SLEA PTY LTD (ACN 106 752 434) | First Respondent |
| MILLSAVE HOLDINGS PTY LTD (ACN 115 160 927) | Second Respondent |
| MARK SEAMUS HARON | Third Respondent |
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7
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