D'Ortenzio v Charles Parletta Real Estate Pty Ltd
[2020] SASC 9
•31 January 2020
SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Civil)
D'ORTENZIO v CHARLES PARLETTA REAL ESTATE PTY LTD
[2020] SASC 9
Judgment of Judge Bochner a Master of the Supreme Court
31 January 2020
CORPORATIONS
Leave to bring proceedings on behalf of company.
Held: Plaintiff granted leave to commence the proposed proceedings on behalf of the company.
Corporations Act 2001 (Cth), referred to.
Maria D’Ortenzio v Charles Parletta Real Estate Pty Ltd [2018] FWC 1002; Maria Teresa D'Ortenzio v Charles Parletta Real Estate Pty Ltd [2019] SAET 2; O’Meara v FWV Starke Holdings Pty Ltd (No 3) [2007] SASC 305; Chahwan v Euphoric Pty Ltd [2008] NSWCA 52; Re Karinya Haulage Pty Ltd [2017] NSWSC 888; Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859; Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313; Vicad Pty Ltd; Pottie v Dunkley [2011] NSWSC 166; Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732; Re Sirrah Pty Ltd [2018] NSWSC 1802, considered.
D'ORTENZIO v CHARLES PARLETTA REAL ESTATE PTY LTD
[2020] SASC 9
The plaintiff seeks leave to bring proceedings (“the proposed action”) on behalf of Charles Parletta Real Estate Pty Ltd (“the company”) against its directors, Charles Salvatore Parletta (“Mr Parletta”) and Pauline Parletta (“Mrs Parletta”). The relevant provisions of the Corporations Act 2001 (Cth) (“the Act”) provide:
236 Bringing, or intervening in, proceedings on behalf of a company
(1)A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if:
(a) the person is:
(i)a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or
(ii) an officer or former officer of the company; and
(b) the person is acting with leave granted under section 237.
(2)Proceedings brought on behalf of a company must be brought in the company's name.
(3)The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.
Note 1: For the right to inspect company books, see subsections 247A(3) to (6).
Note 2: For the requirements to disclose proceedings and leave applications in the annual directors' report, see subsections 300(14) and (15).
Note 3: This section does not prevent a person bringing, or intervening in, proceedings on their own behalf in respect of a personal right.
237 Applying for and granting leave
(1)A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.
(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.
(3)A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that:
(a) the proceedings are:
(i) by the company against a third party; or
(ii) by a third party against the company; and
(b) the company has decided:
(i) not to bring the proceedings; or
(ii) not to defend the proceedings; or
(iii) to discontinue, settle or compromise the proceedings; and
(c) all of the directors who participated in that decision:
(i) acted in good faith for a proper purpose; and
(ii) did not have a material personal interest in the decision; and
(iii)informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and
(iv)rationally believed that the decision was in the best interests of the company.
The director's belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold.
(4) For the purposes of subsection (3):
(a) a person is a third party if:
(i)the company is a public company and the person is not a related party of the company; or
(ii)the company is not a public company and the person would not be a related party of the company if the company were a public company; and
(b) proceedings by or against the company include any appeal from a decision made in proceedings by or against the company.
Note: Related party is defined in section 228.
The plaintiff, as a member of the company, falls within s 236 as an eligible applicant. The application is opposed by the defendant.
Background
The company was established in 1977 by Mr and Mrs Parletta as the vehicle through which Mr Parletta ran his real estate business. After some years, the company became a franchisee of L J Hooker Ltd, trading under the business name, L J Hooker – Glynde. Initially, Mr and Mrs Parletta were the only shareholders of the company. Throughout, they were (and are) the only directors.
The plaintiff commenced employment with the company in 1990, as a salesperson. Over the years, her responsibilities changed; as well as handling sales, she became a property manager, and by about 1999 - 2000, she was the office manager. Her responsibilities included human resources and payroll.
It seems that the plaintiff and Mr Parletta had a good, albeit somewhat volatile relationship throughout the time that the plaintiff worked for the company. The nature of that relationship has been discussed in proceedings in other courts, and I do not explore it here. In 2007, Mr Parletta gave the plaintiff 10% of the shares in the company. In 2015, he gave her a further 5%. Thus, she holds 15% of the company’s shares.
From about 2015, the relationship between Mr Parletta and the plaintiff began to deteriorate. The causes for that deterioration have been ventilated elsewhere, and I will not discuss them except in so far as is necessary. In May 2017, the plaintiff was suspended from her employment, with pay, while an investigation into her conduct was carried out. Following the investigation, she was dismissed.
The plaintiff says that there is a serious question to be tried as to the liability of Mr and Mrs Parletta for breaches of their fiduciary duties to the company.
The evidence
The plaintiff and Mr Parletta filed a series of affidavits. Each sought to answer the allegations made by the other, or to refute the explanations given.
In her first affidavit, the plaintiff relied on an independent auditor’s report of the company’s 2016 accounts, which was prepared following a direction from the plaintiff pursuant to s 293 of the Act. The report was prepared by HLB Mann Judd (“the auditor’s report).[1] Relevantly, the auditor’s report states:
We have identified certain matters which we consider warrant the attention of the Directors and these have been detailed above at section 2. The results of our testing leave us with no alternative but to disclaim out opinion on the financial statements.
The company does not readily differentiate between private and business expenditure. In our view, the financial report may not represent or disclose the underlying transactions and events in a manner that achieves fair presentation.
Given the pervasive nature of the issues identified, we were unable to determine the likely financial impact on the financial statements for the year ended 30 June 2016.[2]
[1] FDN 2-MD-4.
[2] FDN 1-MD4 at 24.
Section 2 of the auditor’s report set out the problems identified by the auditors which fell into four categories: Management over-ride of controls – expenses of a private nature being put through the company; Overstatement of revenue and expenses – Transactions not related to the company are not recorded; Credit card expenses – Credit cards used for private expenditure; and Classification errors for expenses – Transactions contained in the general leger not representative of the nature.[3] Under the category, “Management over-ride of controls”, the auditor’s report “identified many examples of expenses which appeared to have no relationship with the carrying on of a business”, and then provided nine examples.[4]
[3] FDN 1-MD4 at 22 – 23.
[4] FDN 1-MD4 at 22.
It is the plaintiff’s position that the concerns expressed by the auditors are sufficiently serious to warrant leave being granted.
In Mr Parletta’s first affidavit,[5] he sought to explain the anomalies identified in the auditor’s report. In particular, he focused on the nine items identified by the auditors under the heading “Management over-ride of controls”, and sought to explain those transactions. He deposed that of the nine items, five had been purchased using the company credit card issued to the plaintiff, and one of the items, to the value of $2000 was a gift for the plaintiff.[6] The inference was that the plaintiff herself was responsible for five of the nine items complained of, and benefitted from a sixth. He deposed that after receiving the auditor’s report, he instructed the company’s accountant to examine the company’s books and records and make any adjustments that were required.[7]
[5] FDN 5.
[6] FDN 5 at [15] – [16].
[7] FDN 5 at [19].
He also set out various grievances that he had about the plaintiff’s conduct, including the alleged refusal of the plaintiff to assist in the audit.[8]
[8] FDN 5 at [23] and [27].
Mr Parletta said that in his view, the very minor issues identified by the auditor, the refusal of the plaintiff to provide specific allegations to the auditors, the contribution of the plaintiff’s conduct to the outcome of the audit, and the fact that he has addressed all of the issues identified, meant that leave should not be granted to the plaintiff to bring the proposed action on behalf of the company.
The plaintiff’s second affidavit[9] takes issue with the matters deposed to by Mr Parletta in FDN 5. She notes that the nine items addressed by Mr Parletta were not exhaustive of the problems identified by the auditor’s report, but merely examples of them.[10] She also referred to the following further concerns that she had:
·A number of cheques drawn on the company’s bank account in relation to expenses that were not company related;[11]
·The fact that Mrs Parletta was drawing a salary from the company despite not performing any work for the company of which the plaintiff was aware;[12]
·The company’s 2016 accounts which include a number of items which are not, as far as the plaintiff is aware, business expenses, including charges for gardening, repairs and maintenance, subscriptions and plant and equipment;[13] and
·The depreciation schedule in the 2016 accounts which includes items which as far as the plaintiff is aware, are not owned by the company.[14]
[9] FDN 6.
[10] FDN 6 at [2].
[11] FDN 6 at [3]
[12] FDN 6 at [4].
[13] FDN 6 at [6].
[14] FDN 6 at [7].
In his second affidavit,[15] Mr Parletta deposed:
·In about 2015, he told the plaintiff that he intended to process some of his personal expenses through the company, and to have them applied to his director’s loan account. The plaintiff did not object to this proposal.[16]
·In January 2017, he instructed the company accountant to review the accounts to ensure that all personal expenses had been allocated to his loan account and to make any necessary adjustments.[17]
·On 31 August 2017, he paid the company $200,000 to extinguish his loan account, leaving a surplus. He was uncertain about the specific amount owed.[18]
·The plaintiff did not object to adding Mrs Parletta to the company’s payroll when instructed to do so by Mr Parletta;[19]
·While Mrs Parletta does not work at the company’s premises, she provides administrative support to Mr Parletta and assists with business development and entertaining;[20]
·He addressed, in general terms, the issues raised by the plaintiff in relation to the various items appearing in the 2016 accounts which she says are not business expenses.[21]
[15] FDN 15.
[16] FDN 15 at [3.1] – [3.2].
[17] FDN 15 at [3.4] [ 3.5].
[18] FDN 15 at [3.6].
[19] FDN 15 at [4.3].
[20] FDN 15 at [4.4].
[21] FDN 15 at [5] – [6].
In her third affidavit,[22] the plaintiff exhibits a range of cheque butts for cheques drawn on the company’s cheque account. She says that the payments made by way of these cheques are not for business related expenses. Without setting out all of the matters referred to, they include:
·Many cheques which describe the payment being for “advertising”, where the payee was LJ Hooker. To her knowledge, LJ Hooker did not provide advertising services to the company.[23]
·A number of cheques made out to United Discount Chemists where the purpose was also described as “advertising”. United Discount Chemists did not provide any advertising services to the company.[24]
·A number of cheques made out to Scalzi Produce, for the purpose of “advertising”. The business, Scalzi Produce, did not provide any advertising services to the company.[25]
·A number of cheque butts disclosing payments to Rio Coffee, for the purpose of advertising. Rio Coffee did not provide any advertising services to the company.
·A number of cheque butts disclosing payments to O Baldino for advertising. The plaintiff was aware of a plumber by the name of Baldino. Mr Baldino did not provide any plumbing services or advertising services to the company.[26]
·One cheque made out to M Borghetto, a tailor, used by Mr Parletta.[27]
·Payments to Stadhost Pty Ltd for rent and storage. Mr and Mrs Parletta are directors of Stadhost Pty Ltd. One of its shareholders is Poynadore Pty Ltd, of which Mr and Mrs Parletta are the directors and shareholders. The plaintiff was not aware of the company ever storing anything at the premises of Stadhost Pty Ltd, or renting premises owned by Stadhost Pty Ltd.[28]
·A number of cheques for renovations of the premises and made out to a number of businesses and including the purchase of goods and services such as carpet, tiling and painting. To her knowledge, the premises of the company were not renovated or redecorated at the time of the payments.[29]
[22] FDN 39.
[23] FDN 39 at [11].
[24] FDN 39 at [12].
[25] FDN 39 at [13].
[26] FDN 39 at [15].
[27] FDN 39 at [16].
[28] FDN 39 at [18] – [22].
[29] FDN 39 at [23] – [27].
In Mr Parletta’s third affidavit,[30] he addressed the issues raised by the plaintiff in FDN 39. Without setting out the contents of his affidavit in full, he said:
[30] FDN 29.
·He did not consider that the plaintiff was in a position to determine which expenses were not company related, as, despite being the office manager for the business operated by the company, she did not manage its business expenditure and finances and was not involved in or aware of all of its expenditure and financial decisions;[31]
·The description “advertising” was used to describe a range of activities, including sponsorship, marketing, business development, and client relationships and retention;[32]
·The company would purchase tickets to private boxes leased by United Discount Chemists and Scalzi Produce at the Entertainment Centre and Hindmarsh Stadium, to take clients to events;[33]
·He purchased coffee from Rio Coffee for use at the business by staff and clients, and purchased other products from Casa Rio to use as client gifts;[34]
·Mr Baldino was a hospitality manager at Penfolds, from whom Mr Parletta purchased wine to use as client gifts;[35]
·He accepted that the amount paid to Mr Borghetto was a personal expense;[36]
·Property information seminars were held at the premises owned by Stadhost Pty Ltd and it was also used as a storage facility for the company;[37]
·The refurbishment of the upstairs offices at the premises occupied by the company occurred after a sub-tenant vacated the premises and left them in a damaged condition. The renovations were carried out by a company by the name of Nova Group Services;[38]
·He accepted that the payments to Nova Group Services and for carpet, painting and tilting set out in paragraphs 24 – 27 of the plaintiff’s third affidavit were personal expenses and were allocated to his director’s loan account in January 2017;[39]
[31] FDN 29 at [14].
[32] FDN 29 at [15].
[33] FDN 29 at [17].
[34] FDN 29 at [18].
[35] FDN 29 at [19].
[36] FDN 29 at [20].
[37] FDN 29 at [22].
[38] FDN 29 at [23].
[39] FDN 29 at [24.2].
The plaintiff’s fourth affidavit[40] addresses the matters dealt with by Mr Parletta in FDN 29. Without canvassing the detail at length, the salient facts deposed to by the plaintiff are:
·She disputed the explanation given by Mr Parletta about advertising services provided by LJ Hooker;[41]
·She did not recall Mr Parletta ever purchasing tickets for the Entertainment Centre from United Discount Chemists, or, indeed, ever entertaining clients at the Entertainment Centre;[42]
·She did not recall Mr Parletta ever purchasing tickets from Scalzi Produce for sports matches or other events, or, indeed, ever entertaining clients at sports matches or other events;[43]
·The coffee used by the company for staff and clients was not supplied by Rio Coffee;[44]
·The company did not purchase wine and other items to use as client gifts; rather, it was the responsibility of the individual sales representative to purchase their own gifts for clients;[45]
·The plaintiff’s duties included arranging all staff seminars, and she never organised a seminar at the premises owned by Stadhost Pty Ltd;[46]
·The lessee of the company’s premises is Mr Parletta personally not the company and a sub tenant was in the upstairs part of the premises for the period 2012 to 2017.[47]
[40] FDN 30.
[41] FDN 30 at [4].
[42] FDN 30 at [5].
[43] FDN 30 at [8].
[44] FDN 30 at [10.2].
[45] FDN 30 at [10.4].
[46] FDN 30 at [11].
[47] FDN 30 at [13].
The plaintiff filed her fifth affidavit[48] before Mr Parletta filed his fourth affidavit. In her fifth affidavit:
·She referred to the list of documents filed on behalf of the company and noted that documents were destroyed in accordance with a document retention policy implemented by the plaintiff. She said that hard copies of documents relating to the business were retained indefinitely;[49]
·She said electronic documents were regularly backed up to an external server and retained indefinitely;[50]
·She said that no documents relating to the business were ever damaged or destroyed during a flood, as alleged in the list of documents.[51]
[48] FDN 33.
[49] FDN 33 at [5].
[50] FDN 33 at [6].
[51] FDN 33 at [7].
Mr Parletta filed his fourth affidavit[52] after being served with the plaintiff’s fifth affidavit. In his fourth affidavit, he says:
·The plaintiff attended events at the Adelaide Entertainment Centre with Mr Parletta, clients or other staff members;[53]
·It was the practice of the company to purchase goods from Rio Coffee to be used by the company or as client gifts. Some of these goods were purchased through Mr Russo, a former manager at Rio Coffee, in his personal capacity, as Mr Russo was selling premium wine at discounted prices. He provided further details of the items he bought from Rio Coffee, including panettone, Italian spirits, and tins of tomatoes.[54]
·He made an error in his second affidavit where he said that the payment made by cheque number 168 was a personal expense which was allocated to his loan account. It was in fact a company expense, to renovate the premises after the sub-tenant vacated them;[55]
·The upstairs floor of the premises occupied by the company was sub-let personally by Mr Parletta. When the sub-tenant vacated the premises in about May 2012, it left significant unpaid rent and damage to the property. He instructed Nova Group Services to repair the damage and to recoup the cost from the sub-tenant. When the sub-tenant failed to pay Nova Group Services, Mr Parletta arranged for the company to pay their invoice. This did not occur until 2014.[56]
[52] FDN 34.
[53] FDN 34 at [5].
[54] FDN 34 at [6].
[55] FDN 34 at [9].
[56] FDN 34 at [10].
Mr Parletta exhibited to his fourth affidavit the quote from Nova Group Services for the work dated 4 May 2012, and the related invoice, both of which establish that the work occurred at the premises.
After the filing of Mr Parletta’s affidavit, I refused to allow either party to file any further affidavit material.
As well as the affidavits of Mr Parletta and the plaintiff, I had before me some (although not all) transcript and the judgments relating to other claims brought by the plaintiff against the company. It is necessary to refer to those claims in some detail.
Following her dismissal from her employment, the plaintiff brought proceedings against the company in the Fair Work Commission (“the Commission”) for unfair dismissal. In defence of the claim, the company, through Mr Parletta, relied on the following:
·The allegation that the plaintiff increased her wages without the agreement of Mr Parletta;
·The fact that, while still an employee of the company, the plaintiff contacted the company’s banks to enquire about transactions on the company’s cheque accounts;
·The fact that, while still an employee and while Mr Parletta was negotiating to sell the business, the plaintiff contacted the proposed purchaser, Mr Bonomi, and a representative of LJ Hooker, Mr Adcock, and made various allegations of improper conduct against Mr Parletta.
Commissioner Platt delivered his decision on 20 February 2018.[57] The Commission found:
·At times [the plaintiff’s] evidence was simply not credible.[58]
·…Mr Parletta…appeared to be a witness of truth.[59]
·I have taken a cautious approach to Ms D’Ortenzio’s evidence and where it was inconsistent with others, I prefer the alternative account. For example, I do not accept Ms D’Ortenzio’s evidence that Mr Parletta agreed to increase her wage, the documentary material tendered in support of this agreement was self-serving and objectively did not represent a concluded agreement[60]
[57] Maria D’Ortenzio v Charles Parletta Real Estate Pty Ltd [2018] FWC 1002.
[58] [2018] FWC 1002 at [191]
[59] [2018] FWC 1002 at [192]
[60] [2018] FWC 1002 at [193]
In relation to her contact with the banks, the Commissioner found:
I find that this communication was in breach of the specific terms of Ms D’Ortenzio’s contract of employment relating to her obligation to further the business and reputation of the employer, and not to damage or expose the property or goodwill of the employer and adversely impacted the working relationship between Ms D’Ortenzio and Mr Parletta.[61]
[61] [2018] FWC 1002 at [213]
In relation to her contact with Mr Bonomi, the Commissioner found:
I find that Ms D’Ortenzio’s conduct in instructing Mr Minicozzi to communicate the information about Mr Parletta’s alleged breaches of the Land Agents Act 1994 (SA) to Mr Bonomi was treacherous, a breach of the express terms of her employment contract and fatally damaged her working relationship with Mr Parletta.[62]
[62] [2018] FWC 1002 at [219]
In relation to the allegation that Ms D’Ortenzio had increased her salary without the consent of Mr Parletta, the Commissioner found:
I find that Ms D’Ortenzio increased her salary without express permission from Mr Parletta.
Ms D’Ortenzio grew into her role over a long period of time. Considering her lengthy experience, she should have known that the conduct described above was not an appropriate course to take.[63]
[63] [2018] FWC 1002 at [224] – [225].
Ultimately, Commissioner Platt found:
I have no hesitation in finding that Ms D’Ortenzio’s conduct has resulted in the complete breakdown of the working relationship between Ms D’Ortenzio and Mr Parletta at the time of the dismissal and that this was a valid reason for dismissal.
In this matter the contract of employment contained a specific term requiring Ms D’Ortenzio to further the business and reputation of the employer and not to damage or expose the property or goodwill of the employer.
It is clear to me that Ms D’Ortenzio’s conduct in instructing Mr Minicozzi to communicate with the Banks and Mr Bonomi was antithetical to furthering the business and reputation of LJ Hooker Glynde and would have had an adverse impact on the property or goodwill, either through loss of reputation or the cancellation or delay of the sale. I find that Ms D’Ortenzio’s conduct in this regard was a valid reason for dismissal.
Ms D’Ortenzio was a senior employee, I find that her failure to disclose the true nature of transactions made in the course of her sales duties concerning transactions on behalf of Mr Mazzone and Mr Minicozzi in a manner which denied the LJ Hooker franchisor of a contractual benefit was a valid reason for her dismissal.
Finally I find that the poor execution of her responsibilities as Office Manager, specifically the unilateral reduction of Ms D’Angelo’s remuneration as a result of a disciplinary matter, failing to appropriately document conditions of employment of personnel employed at LJ Hooker Glynde and increasing her personal remuneration absent of any express agreement with Mr Parletta was a breach of her employment obligations and which despite her lack of human resources knowledge, should have been recognised as obvious departures from the standard required.[64]
(Citations omitted)
[64] [2018] FWC 1002 at [235] – [239].
At the same time that the plaintiff issued her proceedings in the Fair Work Commission, she also issued a claim in the South Australian Employment Tribunal, for under payment of wages, seeking payments for long service leave, annual leave, car allowance during leave, superannuation and payment in lieu of notice. The quantum that she sought was based on a salary of $1900 per week, or $50 per hour. Mr Parletta’s position was that the plaintiff was not entitled to payment at a rate of $50 per hour, and that she had increased her salary to that amount without his approval. This was the increase in remuneration which Commissioner Platt found was in breach of her employment obligations. Mr Parletta also submitted that the plaintiff was not entitled to receive any payment in lieu of notice because she had been dismissed for serious misconduct. Mr Parletta counterclaimed against the plaintiff for the amount that he said she was overpaid as a result of her alleged unilateral increase in salary.
The hearing in the Tribunal canvassed many of the same issues that were covered in the Fair Work Commission, including whether Mr Parletta agreed to the increase in her wages, the plaintiff’s contact with Mr Bonomi, and her contact with the company’s banks. The Tribunal hearing took place after the Commission had delivered its decision.
Deputy President Magistrate Ardlie delivered his judgment on 15 January 2019.[65] He said:
For me to accept Mr Parletta’s position, I would need to reject the applicant’s evidence and that of Mr Mazzone and Mr Bonomi. I do not.[66]
…
I found Mr Bonomi to be a convincing witness and where his statement and evidence contradicts that of Mr Parletta, I accept what Mr Bonomi has said in preference to that of Mr Parletta. This means therefore that I find that Mr Parletta was well aware as at November 2016 what the applicant was earning.[67]
…
The respondent highlighted the applicant’s feelings of animosity towards Mr Parletta in an attempt to undermine her credit. Whilst the applicant has embarked on various forms of litigation my view is that she is pursuing her claims as a minority shareholder and an interested party. I do not consider that her animosity undermines her overall credibility.
The respondent asserts that the applicant was in breach of her contract such that her conduct should be categorised as ‘serious and wilful misconduct’. My opinion is that the action taken by her as regards the cheque butts and other financial records was pursuant to her rights as a shareholder. Her approach to Mr Adcock concerned alleged conduct which was unlawful. Further her challenge as to the incorrect allocation of Mr Parletta’s personal expenses to the respondent’s accounts was justified. The respondent’s returns after audit were amended. Her conduct was in all respects justified and was not in breach of her contract.[68]
[65] Maria Teresa D'Ortenzio v Charles Parletta Real Estate Pty Ltd [2019] SAET 2.
[66] [2019] SAET 2 at [201].
[67] [2019] SAET 2 at [212].
[68] [2019] SAET 2 at [223] – [224].
Mr Parletta’s counterclaim was dismissed.
The plaintiff has issued further proceedings in this Court, against Mr Parletta and Mrs Parletta[69] (“the oppression action”). The Company was recently joined as a defendant to the oppression action. The plaintiff alleges breach of contract by Mr Parletta as a result of his refusal to purchase her shareholding in the company, contrary to an agreement that says they entered into on 8 August 2016. She also alleges that Mr Parletta and Mrs Parletta have conducted the affairs of the company in a manner that is oppressive and unfair to her, and seeks remedies under the Corporations Act.
[69] SCCIV 1088 of 2017.
The plaintiff’s submissions
The plaintiff discussed the criteria required by s 237(2) of the Act, which must be established for leave to be granted to issue proceedings on behalf of a company. Mr Wells QC, on behalf of the plaintiff, noted that while all five criteria must be established, once they have been, then leave must be granted; there is no discretion in this regard.
A serious question to be tried
Mr Wells referred me to the statement of Vanstone J in O’Meara v FWV Starke Holdings Pty Ltd (No 3),[70] where she said:
In considering whether there is a serious question to be tried the plaintiff has “the same relatively low threshold to surmount as in the case of an application for an interlocutory injunction”: Swansson at [25]; Carpenter at [17]. Barrett J put it slightly differently in Chahwan v Euphoric Pty Ltd [2006] NSWSC 1002 at [27]:
On an application such as this, it is not the function of the court to probe in depth the issue of serious question to be tried. The process is essentially a screening process designed to exclude cases with insufficient prospects of success to warrant the proceedings being pursued.[71]
[70] [2007] SASC 305.
[71] [2007] SASC 305 at [27].
He relied on the evidence adduced by the plaintiff, which he said showed that there was a reasonable suspicion that the company paid for a number of expenses unrelated to its business or did not gain the benefit of various payments that should have gone to it, including misleading statements on cheque stubs, rent paid by a sub-tenant which was not accounted for, payments to Mrs Parletta in the absence of any, or any significant, duties carried out by her, anomalies in the company’s accounts in relation to items which did not belong to the company, and repairs and maintenance which was not attributable to the premises leased by the company. He pointed out that the auditors had noted serious deficiencies in the record keeping of the company and that the directors used company funds for personal expenditure.
Mr Wells submitted that Mr Parletta paid $200,000 into his director’s loan account in late 2017, but only after the independent audit requested by the plaintiff, and on the basis that he did not know the exact amount of the loan account. He submitted that the explanations given by Mr Parletta for the various issues raised by the plaintiff were internally contradictory and evasive. A large number of issues were not addressed by Mr Parletta.
Thus, the serious question to be tried is the liability of Mr Parletta and Mrs Parletta for breaches of their fiduciary duties to the company, in using the company’s finances as their own. Given that the auditors disclaimed their opinion in the audit for the years ending 2016 and 2017, it is clear that there are significant irregularities in the company’s accounts, which have existed for a significant period of time.
The good faith of the applicant
Mr Wells submitted that, while the plaintiff must show that she would suffer a real and substantive injury if leave was not granted,[72] the fact that she has a personal interest in the outcome of the litigation does not amount to a lack of good faith.[73] He referred to the statement of Tobias JA in Chahwan v Euphoric Pty Ltd t/as Clay and Michel,[74] where he said:
In other words, I take his Honour to be saying that an applicant will only be acting in good faith for the purpose of s 237(2)(b) where, as a current or former shareholder or director of the company, he or she would suffer a real and substantive injury if a derivative action were not permitted provided that that injury was dependant upon or connected with the applicant’s status as such shareholder or director. It might be a positive indication of the good faith of a shareholder if he or she sought to institute a derivative action which would have the effect, if successful, of restoring value to his or her shares in the company.[75]
[72] Relying on Chahwan v Euphoric Pty Ltd [2008] NSWCA 52.
[73] Relying on Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859.
[74] [2008] NSWCA 52.
[75] [2008] NSWCA 52 at [74].
He also relied on the following statement of Brereton J in Re Karinya Haulage Pty Ltd,[76] where he said:
The “good faith” criterion in s 237(2)(b) involves first, whether the applicant for leave honestly believes that a cause of action exists and has a reasonable prospect of success — although that may be tested against whether a reasonable person in the circumstances would hold that belief — and second, whether the applicant is seeking to bring the derivative suit for such a collateral purpose which would amount to an abuse of process. The first element of this is closely connected with whether there is a serious question to be tried. Mr Hargraves is a current 50% shareholder, who proposes an arguable action which if successful will recover property of the company and increase the value of his shares. No “improper” collateral purpose has been suggested. For the purposes of s 237(2)(b), I am satisfied that he is acting in good faith.[77]
[76] [2017] NSWSC 888.
[77] [2017] NSWSC 888 at [13].
Mr Wells submitted that the plaintiff’s motivation in bringing the proposed action was to determine if there has been misappropriation of company funds by its directors. The findings of the independent auditors, that the directors failed to distinguish between private and business expenditure means that she is unable to determine the true financial position of the company. Thus, the proposed action is brought to further the company’s interests, not the plaintiffs, although as a shareholder, she may obtain a benefit in the event that the proposed action is successful.
Best interests of the company
In relation to the meaning of “best interests” of the company, Mr Wells relied on Brereton J in Maher v Honeysett & Maher Electrical Contractors Pty Ltd,[78] where he said:
The force of this response is, however, much weakened by the form of s 237(3), which creates a rebuttable presumption that granting leave is not in the best interests of the company in certain events. The matters there referred to do not suggest that personal qualities of the applicant are relevant. The phrase “best interests” directs attention to the company’s separate and independent welfare. Charlton v Baber (2003) 47 ACSR 31, [52]; Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442, [46]. This imports the familiar concept of the interests of the company as a whole. As to which, see, for example, Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457; Russell Kinsella Pty Ltd (in liq) v Kinsella [1983] 2 NSWLR 452 (Powell J); Richard Brady Franks Ltd v Price (1937) 58 CLR 112; Charlton v Baber (2004) 47 ACSR 31, 44 [50]. Whether the “best interests” of the company as a whole reflect those of the shareholders taken together in light of the corporate objects, or those of the creditors which will prevail in the context of insolvency, will be influenced by the status of the company. Walker v Wimborne (1976) 137 CLR 1; 3 ACLR 529; Spies v R (2000) 201 CLR 603; 173 ALR 529 ; 35 ACSR 500; Charlton v Baber (2004) 47 ACSR 31, (53].[79]
[78] [2005] NSWSC 859.
[79] [2005] NSWSC 859 at [44].
He submitted that it is in the best interests of the company to determine the questions of whether there has been misappropriation of company funds, and breach of duty by its directors. As the only shareholder apart from the directors themselves, it is in the best interests of the company that the proposed action be brought by the plaintiff.
Inaction by the company
The company acknowledges that it will not bring the proceedings proposed by the plaintiff.
Notice requirements
The plaintiff says that she has satisfied this criterion, in that she gave appropriate notice to the company on 6 September 2017. This application was filed on 26 September 2017, thus satisfying the time requirement.
The defendant’s submissions
Mr Bullock appeared on behalf of the defendant. He acknowledged at the outset that the plaintiff had standing to bring this application, and that the defendant was unlikely itself, to bring the proceedings which the plaintiff seeks leave to institute on its behalf.
Mr Bullock submitted that the plaintiff started with the presumption of wrongdoing on the part of Mr Parletta and Mrs Parletta, and then sought to obtain evidence to support this presumption. He said that the affidavits filed by the plaintiff were evasive and contradictory, and that her position changed whenever Mr Parletta provided an explanation for the issues raised by her. He noted that the first statement of claim prepared on behalf of the plaintiff provided no particulars of the conduct impugned by the plaintiff, despite making serious allegations against the directors. She provided no direct evidence for the allegations that she makes.
The plaintiff’s first affidavit relied on the auditor’s report as the basis for the proposed action. Mr Bulllock submitted that, of the nine transactions detailed in the auditor’s report, the most valuable of those was for the benefit of the plaintiff, a fact which she failed to disclose. He also noted that five of the transactions were effected using the plaintiff’s own credit card, the inference being that she was herself responsible for those transactions. Mr Bullock described the transactions listed in the report as “a limited number of low value transactions” which had not been described sufficiently in the company’s accounts.[80]
[80] Defendant’s written submissions dated 19 June 2018 at [38].
Mr Bullock submitted that the plaintiff’s second affidavit brought forward an entirely new set of allegations against Mr Parletta, based on cheque payments made by the company, and its financial reports. He said that the plaintiff adopted the misguided position that, if she did not know what a payment was for, then it must be inappropriate. She also simply misread the company accounts provided to her, which led her into error in making allegations of wrong doing, where no wrongdoing existed. The other concerns raised by the plaintiff are either based on out dated documents or misinterpretations of the documents, or are the subject of non-disclosure by the plaintiff of relevant matters relating to the items of expenditure questioned by her.
Mr Bullock made similar criticisms of the plaintiff’s third affidavit. The third affidavit outlined various payments made by cheque from the company’s bank accounts, which, in her view, were not company related expenses. He noted that the plaintiff had again taken the position that if she was unaware of the payment, then it must be wrongful. He also noted that the cheque butts on which the plaintiff relied had unlawfully been taken from the company’s premises by the plaintiff during the period of her employment. Mr Bullock also submitted that as the plaintiff was, on her own admission, not computer literate, it is impossible that she would be aware of all of the business affairs of the company, except in so far as they were directly related to her employment.
Mr Bullock submitted that Mr Parletta has provided comprehensive responses to the allegations raised by the plaintiff, and that his responses should be preferred to the very limited evidence provided by the plaintiff. While Mr Parletta has elected not to respond to some of the issues raised, this should not be seen as conceding those issues. Rather, he has elected not to respond to allegations made without any real foundation.
In relation to the criteria set out in s 237 (2), Mr Bullock made the following submissions.
Good faith
Mr Bullock relied on Chahwan, to submit that the onus to prove good faith rested with the plaintiff,[81] and Swansson v R A Pratt Properties Pty Ltd,[82] in support of the proposition that the plaintiff must show that she honestly believes that a good cause of action exists, that it has reasonable prospects of success, and that she is not acting for a collateral purpose.
[81] (2008) 245 ALR 780 at [69].
[82] (2002) 42 ACSR 313.
Mr Bullock submitted that the plaintiff failed to discharge this onus; indeed, he submitted that the evidence indicated a lack of good faith on the part of the plaintiff. In this regard, he relied on a number of specific factors which he said indicated a lack of good faith, including the plaintiff’s past conduct toward the company and its directors, her failure to be frank to the Court, her making of very serious allegations without any proper basis, and the changing nature of her allegations against Mr Parletta.
It is the defendant’s case that the plaintiff has a long history of grievances against the company and its directors. The dispute between the plaintiff and Mr Parletta arose initially over her desire for him to purchase her shares in the company. Mr Parletta dismissed her from her employment with the company for a range of offences, including making allegations to Mr Bonomi and Mr Adcock of improper conduct by Mr Parletta, taking company cheque butts during the course of her employment, and unilaterally increasing her salary. Following her dismissal, the plaintiff brought proceedings for unfair dismissal against the company, and proceedings for underpayment of wages. She has instituted the oppression action against the directors. Mr Bullock submitted that the findings made in the Fair Work Commission unequivocally dispel any suggestion that this action was brought in good faith. He also put to me that the plaintiff has chosen to conduct this matter in an unnecessarily aggressive manner, with the effect that the costs associated with the action have been increased, and the progress of the matter has been significantly delayed.
In relation to his submission that the plaintiff had not been frank with the Court, Mr Bullock pointed to the fact that she did not disclose to the Court that, of the nine transactions listed in the auditor’s report, five of them were undertaken by the plaintiff, and the most valuable one was for her benefit. He noted that there has been no explanation of this fact by the plaintiff. She also failed to explain how she obtained the cheque stubs.
Mr Bullock submitted that the plaintiff’s willingness to make extremely serious allegations against Mr Parletta and Mrs Parletta on the basis of inadequate evidence is further evidence of bad faith. In this regard, he pointed to the fact that some of the allegations were made on incorrect interpretations of the company’s financial documents, and that the only evidence in fact relied on by the plaintiff is the auditor’s report.
Mr Bullock submitted that the allegations relied on by the plaintiff in her final affidavit bore little resemblance to the allegations made in her first affidavit. Thus, he says that the constantly shifting nature of the plaintiff’s case indicates a lack of good faith.
Mr Bullock submitted that the plaintiff refused to assist in the audit, which amounts to further evidence of her lack of good faith. She has also sought to obtain documents improperly, by approaching the company’s banks without its permission, she has failed to correct inaccuracies in her affidavit material and has not offered to indemnify the company in the event that the proposed action is unsuccessful. He impugns her allegations about Mrs Parletta’s employment being a sham, on the basis that the plaintiff herself was personally responsible for effecting the arrangement.
Best interests of the company
It is Mr Bullock’s submission that the proposed action would be complex and expensive to run. Given that the business operated by the company has now been sold, and the company only trades on a very limited basis, it is difficult to envisage how the proposed action would be in the best interests of the company. This problem, says Mr Bullock, is further compounded by the fact that the transactions relied on by the plaintiff are of low value and small in number. Thus, any benefit to the company would be far outweighed by the legal costs incurred. He says that, following receipt of the auditor’s report, the directors acted promptly to remedy any errors in accounting; thus, there are no outstanding issues to be addressed.
Mr Bullock submitted that a clear conflict of interest existed, which could not be reconciled, as a result of the plaintiff’s oppression action. On the one hand, the plaintiff seeks to bring the proposed action on behalf of the company as plaintiff; on the other, she is suing the company. This conflict is irreconcilable.
Serious question to be tried
It is the company’s position that there is no serious issue to be tried. The plaintiff has failed to adduce any evidence which goes to establishing the matters alleged in the draft statement of claim. The plaintiff has not provided a draft pleading which gives notice of the case that the directors would be required to meet, nor has she provided legal advice in support of the position that there is a proper basis for a claim against Mr Parletta and Mrs Parletta. The plaintiff’s case is purely speculative.
Notice requirement
While the company concedes that notice of a sort was given, Mr Bullock submitted that the notice fell short of the requirements of the Act. The matters set out in the notice did not contain any substance, other than the issues raised in the auditor’s report, which the company maintains are business related expenses. The matters raised in the plaintiff’s subsequent affidavits were not addressed in the notice; given the changing nature of the plaintiff’s case, the notice given by her should not be regarded as adequate.
Consideration
Preliminary matters
Before I turn to the issues addressed by the parties, it is necessary to mention briefly the timing of the hearing of this application. The application first came on for hearing on 21 August 2018, at which time Mr Wells made submissions on behalf of the plaintiff. At that time, the plaintiff’s unfair dismissal claim had been heard and judgment delivered. The plaintiff’s claim for underpayment of wages had been heard, but judgment had not been delivered. Following argument on 21 August 2018, the parties agreed to enter into mediation. The mediation lasted for a period of about twelve months; it was ultimately unsuccessful. The defendant’s submissions and the plaintiff’s reply took place on 4 September 2019, more than a year later. At this hearing, Mr Ross-Smith appeared on behalf of the plaintiff. By this time, the Tribunal decision had been delivered. I agreed to the parties’ providing written submissions on the use that might be made of the Tribunal decision, noting that the defendant had relied extensively on the findings in the Fair Work Commission in support of his case. Those submissions were provided a short time after the oral arguments were completed.
In addition, shortly after the completion of the argument in this matter, the company was joined as a defendant in the oppression action, the defendants to that claim previously being only Mr and Mrs Parletta. I allowed the parties to provide further written submissions on the question of conflict of interest, which I will also address in due course.
The proceedings in the Tribunal and the Commission
Before dealing with the criteria prescribed by the Act, I turn first to the decision of the Commission and the Tribunal, and the use that may be made of them. This is important, because each body reached very different conclusions on the evidence relied on by the parties, which evidence is very much that relied on by the parties in this matter. I note that Mr Ardlie referred to the proceedings in the Commission,[83] but did not address his very different assessment of credibility of the plaintiff and Mr Parletta and the fact that some of his factual findings, on several pivotal matters, were inconsistent with those made in the Commission.
[83] See for example [2019] SAET 2 at [56], [71] and [83].
Without intending to be exhaustive, it is necessary to outline the different findings made by the Commission and the Tribunal. This is because the evidence relied on by the parties in this matter overlaps to a significant extent with the evidence relied on in those proceedings. In addition, important findings of credit were made in each of them.
In summary:
·Commissioner Platt found the plaintiff’s evidence “at times…not credible”[84] and that Mr Parletta “appeared to be a witness of truth.”[85] Where the plaintiff’s evidence conflicted with that of another witness, Commissioner Platt preferred the evidence of the other witness.[86] Mr Ardlie, on the other hand, preferred the evidence of other witnesses to that of Mr Parletta, where that evidence was in conflict.[87] At times, he preferred the evidence of the plaintiff to that of Mr Parletta. In relation to the question of the plaintiff’s motor vehicle allowance, for example, he said, “I reject the contrary evidence of Mr Parletta where it conflicts with that of the applicant.”[88]
[84] [2018] FWC 1002 at [191].
[85] [2018] FWC 1002 at [192].
[86] [2018] FWC 1002 at [193].
[87] [2019] SAET 2 at [201].
[88] [2019] SAET 2 at [219].
·Commissioner Platt rejected documentary evidence produced by the plaintiff in relation the increase in her salary, saying “the documentary material tendered in support of this agreement was self-serving and objectively did not represent a concluded agreement.”[89] In relation to the same evidence, Mr Ardlie found:
[89] [2018] FWC 1002 at [193].
The notes appearing were authored by the applicant. I accept what the applicant said happened namely the notes on the lower part of MD 10 reflected a discussion separate to the matter of the wage increase. Both MD 10 and MD 11 refer to $50 and CA (car allowance). MD 11 according to the applicant was a note of what Mr Parletta finally agreed to. She delivered it to him not keeping a copy for herself. It was only produced at the unfair dismissal proceedings. The originals were called for and produced at this hearing. Her evidence was she wrote MD 11 using a felt tip marker as she could not find a pen. MD 11 is clearly written with something other than a pen, perhaps pencil. It confirms the applicant’s recollection that she used something other than a pen.[90]
[90] [2019] SAET 2 at [216].
(emphasis added, citations omitted)
·Commissioner Platt was critical of the plaintiff’s contact with the banks, finding that it was “antithetical to furthering the business and reputation of the employer… [her] conduct in this regard was a valid reason for dismissal.[91] Mr Ardlie found:
[91] [2018] FWC 1002 at [237].
My opinion is that the action taken by her as regards the cheque butts and other financial records was pursuant to her rights as a shareholder.[92]
·Commissioner Platt found that the plaintiff had increased her salary without Mr Parletta’s permission. Mr Ardlie said,
… I find that Mr Parletta was well aware as at November 2016 what the applicant was earning.
Mr Parletta was aware of what the applicant was earning well before November 2016. He signed PAYG statements for the entire business. For the year ending 30 June 2015 the PAYG statement relating to the applicant shows gross payments of $127106 superannuation, $12320 and car $15000. For the year ending 30 June 2016 the PAYG statement shows gross payments $129311 and car $15600. Mr Parletta also signed all BAS statements.
…
… To say he did not know ‘the package’ when he is the signatory to the PAYG statements beggars belief.[93]
(citations omitted)
[92] [2019] SAET 2 at [224].
[93] [2019] SAET 2 at [212]-[215].
The findings and conclusions reached by Commissioner Platt and Mr Ardle could not be more different. They are impossible to reconcile.
Mr Ross-Smith submitted that I should prefer the decision of the Tribunal, on the basis that it is the more recent decision, that Mr Ardlie had the benefit of the decision in the Commission, and Mr Ardlie is a judicial officer, while Commissioner Platt is not. He put to me that Mr Ardlie effectively reversed the findings of credit made by Commissioner Platt, and supports the plaintiff’s application in this matter is brought in good faith. In this regard, he directed me to Mr Ardlie’s judgment, where he said:
My opinion is that the action taken by her as regards the cheque butts and other financial records was pursuant to her rights as a shareholder. Her approach to Mr Adcock concerned alleged conduct which was unlawful. Further her challenge as to the incorrect allocation of Mr Parletta’s personal expenses to the respondents accounts was justified. The respondent’s returns after audit were amended. Her conduct was in all respects justified and was not in breach of her contract.[94]
[94] [2019] SAET 2 at [224].
Mr Ross-Smith submitted that Mr Ardlie found that the plaintiff’s conduct, which the defendant characterises as evidence of bad faith, was justified. The plaintiff has been found to be credible, justified in her actions, and more credible than Mr Parletta, in a decision making body superior to the Fair Work Commission. This decision should be preferred.
Mr Bullock, on the other hand, submitted that Commissioner Platt’s decision was a compelling indicator that the plaintiff was not acting in good faith. The plaintiff’s own evidence led the Commissioner to make the findings that he did.
He submitted that findings regarding Mr Parletta’s evidence in the Tribunal cannot support an indication that the plaintiff is acting in good faith, because the onus to prove good faith lies with the plaintiff. Findings in relation to Mr Parletta’s credibility do not in any way tell in favour of the plaintiff’s good faith – this is a matter that must be determined on the basis of the plaintiff’s own evidence. Mr Bullock submitted that Mr Ardlie’s findings did not reverse the findings of Commissioner Platt. Each decision maker was operating in a different context, and determining different issues; thus the decision of Mr Ardlie does not cut across the findings of Commissioner Platt.
In my view, the only approach that I can take in the circumstances is to disregard both decisions. They are irreconcilable. They deal with the same questions of fact, many of those being the same issues raised in this application. While I accept that the South Australian Employment Tribunal may be a superior body to the Fair Work Commission, my ability to rely on Mr Ardlie’s findings is hampered by the fact that he did not address in any way the conflicts between his decision and that in the Commission; indeed, he does not refer to the decision at all, despite its being clear that he was aware of the matter before it. I am left with no option but to disregard them both, and make my decision on the basis of the other evidence before me.
The legal principles
The relevant legal principles are not in dispute between the parties. As a result, I will deal with the authorities as required, as I address each of the criteria of s 237(2). It is useful, however, at this point, to refer to the decision of Palmer J in Swansson where he said:
[24] It is clearly the intent of Pt 2F.1A that leave to bring a derivative action must not be given lightly. An application under s 237(2) is not interlocutory in character; the relief sought is final and the applicant bears the onus of establishing the requirements of the subsection to the court’ satisfaction.
[25] In order to ascertain whether there is a serious question to be tried for the purposes of s 237(2)(d), the court will not normally enter into the merits of the proposed derivative action to any great degree. The applicant has the same relatively low threshold to surmount as in the case of an application for an interlocutory injunction: Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 at 622; [1968] ALR 469 at 472. Thus, cross-examination on the merits of the proposed derivative action will usually be permitted only with leave of the court and to a limited extent.
[26] However, because of the possibly serious consequences to the company if the application is allowed and the company is thereby compelled to engage in litigation as a plaintiff against its will, all facts and circumstances relevant to the consideration of the requirements of s 237(2)(a), (b), (d) and (e) must be considered and the applicant bears the onus of satisfying the court that, on the balance of probabilities, those requirements have been fulfilled.[95]
[95] (2002) 42 ACSR 313 at [24] – [26].
This makes it abundantly clear that the onus of establishing, on the balance of probabilities, the factors set out in s 237(2) lies squarely with the plaintiff. It is not the responsibility of the defendant to refute the allegations made by the plaintiff, although the evidence relied on by the defendant will go some way to establishing whether the plaintiff has satisfied her onus. I also note that I am not to consider in any detail the merits of the proposed action; however, once all of the facts and circumstances are taken into consideration, the merits of the action may, in a broad sense, become apparent.
Is there a serious question to be tried?
In my view, the plaintiff has established that there is a serious question to be tried. The audit report made damning findings as to the financial management of the company, which led the auditor to disclaim his opinion. He identified the problems as being “pervasive’.[96] He identified “many examples” of apparently non-business related expenses, and detailed nine as examples.[97] It is the plaintiff’s position in her first affidavit that the treatment of the company’s finances as the directors’ own is a sufficient serious matter to require investigation.
[96] FDN 2 Exhibit MD4 at 24.
[97] FDN 2 Exhibit MD4 at 22.
The way in which Mr Parletta responded to this issue is disingenuous and misconceived. He focussed only on the nine examples of allegedly non-business related expenses set out in the report and described them as “very minor issues”.[98] He did not seek to address the auditor’s statement that the problems were pervasive and that many examples had been identified. He conceded that he did not know the amount of his director’s loan account.
[98] FDN 5 at [27].
He sought to implicate the plaintiff in the transactions, by focussing on the fact that five of them had been undertaken on the plaintiff’s credit card, and one of them had been for her benefit. There is no suggestion that the transactions were undertaken other than at his direction. Thus, the fact that the transactions were undertaken on the plaintiff’s credit card does not regularise them. It was always the responsibility of the directors to ensure that the transactions were recorded appropriately in the company’s accounts. This did not occur. It is neither here nor there that the plaintiff benefitted from one of them, or undertook others. Mr Parletta’s response in no way addressed the concerns raised.
I further note that Mr Parletta sought to make the plaintiff complicit in the failures identified by the auditor, by deposing that, when he advised her that he intended to process some of his personal expenses through the company, she did not object.[99] Again, I am of the view that this argument is misconceived. There is no objection to the processing of personal expenses through the company’s bank accounts, if they are appropriately accounted for by way of loan accounts or some other equivalent measure. It was Mr Parletta’s responsibility to ensure that this occurred. It was not for the plaintiff to object to the proposal.
[99] FDN 15 at [3.1] – [3.2].
Mr Parletta further sought to make the plaintiff complicit in relation to the salary paid to Mrs Parletta, in that she did not object when he asked her to add Mrs Parletta to the company payroll. Again, in my view, the appropriate accounting of these payments is a matter for the director of the company, not an employee.
I reject the submission made by Mr Bullock that the plaintiff’s position continued to change as Mr Parletta addressed the various issues raised by her, and that the allegations made in her final affidavit bore little resemblance to those in her first affidavit. In my view, the allegations made by the plaintiff remained the same throughout: that the directors had breached their fiduciary duties to the company, by treating the company’s bank accounts as their own. What changed was the particularity of the allegations made by the plaintiff. Initially, she relied on the auditor’s report; as Mr Parletta sought to counter her attack, she provided more particular allegations in relation to the company’s alleged expenditure.
I consider that there are two allegations which indicate that there is a serious question to be tried. The first is in relation to allegedly misleading descriptions on cheque butts, which attributed many payments to “advertising”. Mr Parletta’s explanations in relation to these matters are unconvincing.
The cheques made out to cash and said to be for the benefit of Rio Coffee or Casa Rio are useful examples. Mr Marin, the general manager of Rio Coffee has stated that Rio Coffee did not receive those payments, having made extensive searches. Mr Parletta then said that the cheques were used to pay for coffee beans for use at the premises of the company and to purchase products to be used as gifts for clients.[100] After the plaintiff deposed to the company not using Rio Coffee at its premises, Mr Parletta swore a further affidavit, in which he said he bought tins of tomatoes and Italian cakes from Rio Coffee and also purchased wine from the manager’s private wine supplies for use as client or staff gifts. He did not disclose any supporting documents, such as invoices or documents to show that the expenditure was claimed as tax deductions, or that the items were otherwise used within the business.
[100] FDN 29 at [18].
Thus, Mr Parletta presented three different stories as to the payments allegedly made to Rio Coffee, each story changing as his previous story was refuted. His changing story does nothing to address the allegations made by the plaintiff; rather, it tends to reinforce the conclusion that there is a serious question to be tried.
A further example of this concern is in relation to the cheque made out to Mr Parletta’s tailor, which was described as “advertising”. Clearly, this is a misdescription, as has been conceded by Mr Parletta.
I note, too, that many payments described as advertising are made out to companies which do not provide advertising services, such as United Discount Chemists and Scalzi Produce. Mr Parletta’s explanation is that he bought tickets for venues such as the Adelaide Entertainment Centre and Hindmarsh Stadium for client and staff functions from these businesses. There is no evidence, however, that this is the case; for example, no invoices have been produced, nor is there any evidence that these payments were claimed as tax deductions. I am of the view that these factors indicate that there is a serious question to be tried.
The other allegation which I consider indicates that there is a serious question to be tried is the question of the sub-lease of the upstairs floor of the premises occupied by the company. The evidence establishes that:
·Mr Parletta, in his own name, subleased the upstairs floor to a third party.[101] This tends to indicate that the rent was paid to him personally, not to the company. The company paid significant amounts for rent and rates and taxes.[102] There is no explanation from Mr Parletta as to why the sub-lease was in his name not the company’s and no deposition from him that the rent he received was paid by him to the company.
·According to Mr Parletta’s fourth affidavit, the company paid for repairs to the upstairs floor of the premises, after a sub-tenant left it damaged. He says that this is a legitimate company expense.
[101] FDN 39 at MD-19 and FDN 34 at [10.1].
[102] See for example FDN 6 at MD-9.
This raises a concern that Mr Parletta has improperly benefitted at the expense of the company. Any rent paid to Mr Parletta by an upstairs tenant should have been paid to the company, at it had leased, and was paying rent and outgoings for, the entirety of the building. Further, if Mr Parletta was taking the benefit of the rent, then it is difficult to conclude that any repairs to the upstairs floor would be a legitimate business expense of the company.
Many other issues were raised by the plaintiff, some of which were explained by Mr Parletta, and some of which were not. Given my findings set out in [85] – [91] I do not deal with those issues. In my view, the matters involving the cheques stubs and the sub-lease are sufficient to lead to a conclusion that there is a serious question to be tried, without the need to consider the other issues raised. The explanations given by Mr Parletta have not dealt with any of the concerns raised by the plaintiff; on their face, the allegations made by her are sufficient to satisfy this criterion.
I note that Mr Wells asked me draw an inference in relation to the failure of Mr Parletta to produce documents which he said had been destroyed. For the purpose of this application, I do not consider that I need to draw such an inference, on the basis that I consider that there are sufficient other reasons for finding that there is a serious question to be tried. This is a matter that is better left to the trial judge.
I am satisfied that the evidence establishes that there is a serious question to be tried as to whether Mr Parletta used the company’s finances to fund his personal expenses and took financial benefits for himself that should have been for the benefit of the company.
Is the plaintiff acting in good faith?
In Swansson, the Court discussed the factors which the Court should have regard to, in determining whether the applicant is acting in good faith:
[36] 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.[103]
[103] (2002) 42 ACSR 313 at [36].
It is the defendant’s position that the plaintiff is motivated by her antipathy to Mr Parletta, and her desire to sell her shares in the defendant, rather than holding an honest belief that there is a good cause of action. The defendant has relied very heavily on the conduct of the plaintiff, in arguing that she has not established that she is acting in good faith. He described her as having a long history of grievances against the defendant and its directors and as being prepared to make a range of serious, but unsubstantiated allegations against the directors. He relied on the findings made in the Fair Work Commission to impugn her motivation in seeking leave to bring the proposed action.
I do not accept a number of submissions made by the defendant. In particular, for the reasons set out in relation to the requirement of a serious question to be tried, I reject the submission that the plaintiff has made a series of unsubstantiated allegations. I have also already rejected the submission that the plaintiff’s allegations have changed substantially throughout the conduct of this proceeding. I have already indicated that I do not intend to have regard to the findings of fact or credit made in the Fair Work Commission. I have already rejected the submission that the plaintiff has not been frank with the Court for failing to disclose that various of the impugned credit card transactions were made by her, and one was for her benefit. I do not accept that the plaintiff is a person with a long history of grievances against the company and Mr Parletta. On the contrary, the evidence is that she and Mr Parletta worked harmoniously together for many years; it was only in the last twelve to eighteen months of her employment that their relationship soured.
I note that the plaintiff has stated on oath that she believes that there is a serious question to be tried and that it is in the best interests of the company that leave be granted.[104] She has also exhibited to her first affidavit her letter to the company, dated 6 September 2017, giving it notice of her intention to apply for leave pursuant to s 236 of the Act.[105] In this letter, she says:
She honestly believes that good causes of action exist in relation to the above allegations set out in this notice and that such causes of action have a reasonable prospect of success.
[104] FDN 2 at [4].
[105] FDN 2 at MD-5.
I accept that there is significant personal animosity between the plaintiff and Mr Parletta. This does not mean, however, that the plaintiff must be acting in the absence of good faith. In discussing this requirement, the Court in Vicad Pty Ltd; Pottie v Dunkley[106] (“Vicad Pty Ltd”) said:
I am satisfied that in seeking leave to bring the claim for breach of fiduciary or statutory duty on behalf of the company, Mrs Pottie is acting in good faith (even though she may bear some personal animosity towards her brother and even though she may have commenced these proceedings due to dissatisfaction with the succession arrangements within the family), noting that as a current shareholder whose shares may increase in value as a result of the suit it is recognised that this is a relatively low threshold to meet.[107]
[106] [2011] NSWSC 166.
[107] [2011] NSWSC 166 at [58].
Similarly, it is not inconceivable that the plaintiff is acting in good faith despite the clear animosity that she feels towards Mr Parletta. She should not be precluded from leave to bring an action for breach of fiduciary duty by the directors, in the event that a good cause of action is identified, simply because it is established that she and Mr Parletta have an acrimonious relationship.
I do not consider that the other court actions, particularly the oppression action, should be regarded as an indication of bad faith; to the contrary. If the plaintiff was concerned only with fulfilling her personal ends, the oppression action would be sufficient to satisfy this. In my view, the plaintiff’s willingness to incur the costs associated with this application to achieve a remedy that is not personal to her indicates that she is acting in good faith. As the Court said in Fiduciary Ltd v Morningstar Research Pty Ltd:[108]
…an application for leave under s 237 should not be granted lightly.
[108] (2005) 53 ACSR 732 at [15].
There are significant risks to any plaintiff making such an application because of the rigorous nature of the inquiry and the need to satisfy each element set out in s 237(2). The fact that the plaintiff has been prepared to take this risk, despite having already issued proceedings which would address her personal claims in their entirety if successful, is an indicator of good faith.
I accept the plaintiff’s submission that she is unable to ascertain the true state of the company’s financial affairs, despite requiring an independent audit. Given the broad statements made by the auditor in disclaiming his opinion, I am satisfied that the plaintiff is motivated by concern that there has been misappropriation of company funds by its directors.
Mr Bullock relied on the conduct of the plaintiff as evidence of her bad faith, including her contact with the company’s banks, her removal of the cheques from the company’s premises without permission, and her contact with Mr Bonomi and Mr Adcock. While the plaintiff’s conduct may warrant some criticism, this is not the forum in which to make it. Indeed, this issue has been ventilated extensively in other fora, which have reached conflicting conclusions. In the face of my other conclusions in relation to the plaintiff’s good faith, and whether the action would be in the best interests of the company, I do not consider that the evidence about the plaintiff’s own conduct is sufficient to lead me to doubt the good faith of the plaintiff.
The criterion of good faith is made out.
Is the proposed action in the best interests of the company?
The Court in Swansson outlined a number of factors to be taken into account in determining whether an action would be in the best interests of the company. Palmer J said:
[56] The requirement of s 237(2)(c) that the applicant satisfy the court that the proposed action is in the best interests of the company is a far higher threshold for an applicant to cross. It requires the applicant to establish, on the balance of probabilities, a fact which can only be determined by taking into account all of the relevant circumstances. Accordingly, the inquiry will normally require the applicant to adduce evidence at least as to the following matters.
[57] First, there should be evidence as to the character of the company: different considerations may well apply depending on whether the company is a small, private company whose few shareholders are the members of a family or whether it is a large public listed company. If the company is a closely held family company, it may be relevant to take into account the effect of the proposed litigation on the purpose for which the company was established and on the family members who are the shareholders. If the company is a public listed company, such considerations will be irrelevant. Again, the company may be a joint venture company in which the venturers are deadlocked so that the proposed derivative action is seen as being for the purpose of vindicating one side's position rather than the other's in a way which will not achieve a useful result: see eg Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd [2001] QSC 324; BC200105274.
[58] Second, there should be evidence of the business, if any, of the company so that the effects of the proposed litigation on its proper conduct may be appreciated.
[59] Third, there should be evidence enabling the court to form a conclusion whether the substance of the redress which the applicant seeks to achieve is available by a means which does not require the company to be brought into litigation against its will. So, for example, if the applicant can achieve the desired result in proceedings in his or her own name it is not in the best interests of the company to be involved in litigation at all. This was the case in Talisman Technologies in which it appeared from the evidence that the most desirable outcome for the applicant was to obtain an order for specific performance of a contract, which it could do in a suit in which the company did not need to be a party.
[60] Fourth, there should be evidence as to the ability of the defendant to meet at least a substantial part of any judgment in favour of the company in the proposed derivative action so that the court may ascertain whether the action would be of any practical benefit to the company.[109]
[109] (2002) 42 ACSR 313 at [56]-[60].
This seems to me to be a practical and useful approach to take to the analysis of this question, and I will deal with each of the issues raised by Palmer J in turn.
From the affidavit material filed by the parties, the following can be ascertained.
The company is a small company. The plaintiff is the only shareholder other than the two directors, who are husband and wife.
The company has sold its core business and is trading in a very limited capacity.
While the plaintiff has brought other proceedings against the company where she has sought a variety of remedies, those other remedies are personal to her. The redress sought by the plaintiff in the proposed action is redress which is due to the company alone; the remedy for misuse or misappropriation of company property would be an account. This is redress that can only be achieved by the company, not by the plaintiff in her personal capacity. The primary remedy sought by the plaintiff in the oppression action is the purchase of her shares by Mr Parletta, a remedy which cannot be achieved in the proposed action.
In Re Sirrah Pty Ltd[110] the Court examined a situation where the plaintiff sought to bring both a derivative action and an action for oppression. The Court said:
… there is at least some potential that the issues raised in respect of the derivative action could be addressed in aspects of an oppression claim. For example, if it were established that the Company's assets had been dissipated by related party transactions with Mr William Harris or Harris Health Care, then it is at least possible that the Court in an oppression claim could order a buy out of the Plaintiffs’ shares, at a value that is adjusted for the effect of those transactions upon the Company's assets.
However, the Plaintiffs point out, correctly, in my view, that there are potential limits to the availability of such relief. First, an adjustment of that kind can only be made if a buy-out order is made. If a winding up order were made, then it will be much more difficult to adjust contributories’ interests in that way. Second, the Plaintiffs point out that, so far as a personal claim is brought by them, it cannot extend to a loss in the value of their shares which is reflexive of the Company's loss suffered by reason of a breach of the duties owed to it: Re JGS Investment Holdings Pty Ltd [2014] NSWSC 1532 at [21]; Taxa Australia Pty Ltd v Wang [2016] NSWSC 1913 at [23]. The Plaintiffs point out that in those circumstances, their personal claim properly does not seek to recover loss which is the Company's loss, albeit they contend that it would be reflected in a diminution in the value of their shares. The Plaintiffs also point out that here there will be no issue as to multiplication of proceedings where there is an overlap in the issues raised in the oppression claim and the proposed derivative action.
I recognise that, in some circumstances, it may not be necessary to seek leave to bring a derivative action, because all relevant issues can be determined in the context of an oppression claim. However, there are many cases in which the availability of oppression proceedings, as an alternative to or in addition to the derivative proceedings, have not been treated as preventing a grant of leave to bring derivative proceedings, see for example, those to which I referred in Re Legal Practice Management Group Pty Ltd above at [61]. In these circumstances, I am not satisfied that the availability of an oppression claim to the Plaintiffs and the possible availability of an adjustment for the value of their shares for the conduct alleged in such a claim, has the result that it is not in the best interests of the Company that leave be granted to bring the relevant proceedings, where I would otherwise be satisfied that that was the case. For these reasons, I am also satisfied on the balance of probabilities that it is in the best interests of the Company that the Plaintiffs be granted leave.[111]
[110] [2018] NSWSC 1802.
[111] [2018] NSWSC 1802 at [23]-[25].
Similarly in this matter, success in the plaintiff’s oppression action would not result in a remedy to the company. The company’s loss is not the same as the plaintiff’s loss; it must be pursued through different causes of action, in proceedings where the plaintiff is the company.
Both plaintiff and defendant provided written submissions as to whether an unacceptable conflict of interest would be created if the plaintiff were given leave to bring the proposed action on behalf of the company. It was the plaintiff’s contention that no conflict exists, and relied on Re Sirrah Ltd and a number of other authorities where it was clear that an oppression action was brought concurrently with a derivative action. The defendant submitted that the dual positions of the plaintiff, acting for the company in one proceeding and against it in another, are irreconcilable. Mr Bullock also noted that the plaintiff is also subject to an adverse costs order in favour of the company, which further increases any conflict that she might have.
In my view, the prospect of conflict is more illusory than real. The primary relief sought by the plaintiff in the oppression action is against Mr Parletta, that is, purchase of her shares. The primary relief sought in the proposed proceedings is also against Mr Parletta, that is, an account. Any conflict which might exist would be negligible. It is also implicit in the decision in Re Sirrah Ltd that no insurmountable conflict of interest existed, in circumstances very similar to the matter at hand.
I am satisfied that Mr and Mrs Parletta would be in a position to meet at least a substantial part of any judgment awarded in the company’s favour against them. Exhibited to the plaintiff’s third affidavit were records which demonstrate that Mr and Mrs Parletta own a number of properties. They are also directors and shareholders of a number of companies which are the registered proprietors of real property. This satisfies me that they would be able to meet any judgement against them.
I raised the question with counsel whether there was a risk that the costs of the proposed action would outweigh any benefit to the company even if it were successful. I have reached the view that the seriousness of the issues relating to the misdescription of cheques and the arrangements in regard to the sublease of the upper floor is sufficient to warrant the proposed action being brought.
I further note the submissions of Mr Bullock that, given that the plaintiff owns only 15% of the company, any action proposed by her would be disproportionate to the remedy obtainable. In my view, the value of the plaintiff’s shareholding is beside the point. Once the company is the plaintiff, the loss that would be recovered is the entire loss to the company. The plaintiff’s share or percentage of that loss is not a relevant factor in determining whether the action is in the company’s best interests. It may be that, given the value of her shareholding, the action may not be in the plaintiff’s best interests on the basis that it is disproportionate. This is not the test.
I further note that there is significant overlap between the proposed action and the oppression action. In Re Sirrah Ltd, the Court said:
It will also be relevant, in determining whether the proceedings are in the Company's best interests to have regard to whether the Company will be protected against the costs of an adverse result. The case law has recognised the desirability of an indemnity to be given to the relevant company to protect it from adverse costs exposure, or at least that the Court may more readily conclude that it is in a company's best interests to bring such proceedings where such an indemnity is available: Cassegrain v Gerard Cassegrain and Co Pty Ltd [2008] NSWSC 976; (2008) 68 ACSR 132 at [73]; and see my observations in Re Legal Practice Management Group Pty Ltd above at [68]. Here, the Plaintiffs offer such an indemnity for the costs of the conduct of the proceedings by the Company, and for any order as to costs against it, and the Court may note that offer in granting such leave. I recognise that the question of costs may be less significant where a derivative application is to be brought at the same time as an oppression claim, and there is likely to be overlap of relevant issues.[112]
[112] [2018] NSWSC 802 at [22].
It appears to me that the oppression action is likely to be broader than the proposed action, while covering many of the same, if not all of the same allegations made by the plaintiff; in the event that the matters are heard concurrently, or the evidence in one is taken as the evidence in the other, the costs incurred by the parties will be minimised, and the company will be provided some protection both in relation to costs and in relation to a multiplicity of judgments dealing with the same factual circumstances. Given what has transpired in the Fair Work Commission and the South Australian Employment Tribunal, this is most desirable.
The plaintiff has given an undertaking to indemnify the company against any adverse costs orders made in the proposed proceedings. The undertaking given by her is in the terms envisaged by the Court in Re Sirrah Ltd, where an indemnity against adverse costs orders was contemplated. In Vicad Pty Ltd, the indemnity went further, and was in the following terms:
…an undertaking by Mrs Pottie to pay and bear and indemnify Vicad against all costs, charges and expenses of and incidental to the bringing and continuation of the derivative claims for which leave is granted (noting that if successful in the proceedings, Mrs Pottie on behalf of the company would no doubt seek costs orders against the defendants and reimbursement of those costs).[113]
[113] [2011] NSWSC 166 at [63] and [89].
I take this to mean that Mrs Pottie was to pay, personally, any gap between the amount recoverable on a party party costs order, and the actual costs of the company, rather than the company being liable for any shortfall.
In my view, I do not consider that the plaintiff’s indemnity should extend further than adverse costs orders. In the event that the proposed action is successful, the company and its other shareholders will have the benefit of the outcome, as well as the plaintiff. There is no good reason why the plaintiff should bear all of the risk, in the event of a successful outcome. I accept that she should bear the risk of an unsuccessful outcome, given that the proposed action would be brought in the face of the opposition of the other shareholders.
The indemnity offered by the plaintiff is in acceptable terms, and is an indication both of her good faith, and that the proposed action is in the company’s best interests.
I am satisfied that the proposed action is in the best interests of the company.
Did the plaintiff give the defendant appropriate notice of this application?
The defendant has submitted that the plaintiff did not give appropriate notice of her reasons for bringing this application, because she relied only; on the auditor’s report, and did not refer to any of the matters raised in her subsequent affidavits.
As I have already set out, I am of the view that the matters raised by the plaintiff in her subsequent affidavits merely particularised her underlying reason, that significant private expenses were being paid by the company, without proper accounting. In the circumstances, I am of the view that appropriate notice was given.
I note, further, that at the first hearing of this application in August 2018, the plaintiff provided to the defendant an amended draft statement of claim, with significantly more particularity. This was provided more than twelve months before the defendant was required to make its submissions. There can be no question, given the length of time between receiving the amended draft and being required to make submissions that the defendant did not receive adequate notice.
Conclusion
All of the criteria set out in s 237(2) of the Act have been made out. Consequently, I have no discretion but to grant the plaintiff leave to commence the proposed proceedings on behalf of the company. I will hear the parties on the terms of the orders, and on the question of costs.
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