Edelsten v Main and Greywater Recycler International Pty Ltd

[2013] VSC 270

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL & EQUITY DIVISION

S CI 2011 04335

BETWEEN

GEOFFREY WALTER EDELSTEN	Plaintiff
and
PAUL DANIEL MAIN	First Defendant
and
GREYWATER RECYCLER INTERNATIONAL PTY LTD (ACN 130 212 529)	Second Defendant

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JUDGE:	Sifris J
WHERE HELD:	Melbourne
DATE OF HEARING:	14 May 2013
DATE OF JUDGMENT:	30 May 2013
CASE MAY BE CITED AS:	Edelsten v Main & Greywater Recycler International Pty Ltd
MEDIUM NEUTRAL CITATION:	[2013] VSC 270

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CORPORATIONS – Statutory derivative action – Corporations Act s 237 – Former director applies for leave to bring derivative action against other former director (undischarged bankrupt) for various breaches of duty – Whether company will not bring proceedings – Whether such action is in the best interests of the company.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr I Upjohn	Tiller Solicitors
For the First Defendant	Mr G Goldsmith	Goldsmith Lawyers
For the Second Defendant	No appearance

HIS HONOUR:

Introduction

1. Greywater Recycler International Pty Ltd (the ‘Company’) is a dormant company.  It does not have any directors.  Paul Daniel Main (‘Main’), one of the original directors, is no longer a director.  He is an undischarged bankrupt.  On 25 January 2013, the plaintiff, Geoffrey Walter Edelsten (‘Edelsten’), the other original director, resigned as a director effectively leaving the company without a director.

1. The shareholders of the company are Lelumenic Holdings Pty Ltd (‘Lelumenic’) and Altels Bridge Pty Ltd (‘Altels Bridge’).  Lelumenic, a company associated with Main, is now deregistered.  It holds one half of the shares in the Company.  The other equal shareholder is Altels Bridge, a company associated with Edelsten.

1. Edelsten and Main, and their respective entities, entered into a joint venture agreement for the exploitation of an invention by Main known as the “Greywater Recycler”.  The idea is to harvest waste or grey water following domestic use.  The Company, it is alleged, was the incorporated joint venture vehicle.

1. In this proceeding, commenced in August 2011, Edelsten makes claims against Main for breach of the joint venture agreement.  The Company is a defendant but has not taken any part in the proceeding.  On 17 August 2011 the Court made a search order against Main.  In the proceeding Edelsten seeks various orders including the winding up of the Company.  As an alternative, leave is sought to bring proceedings in the name of the Company for similar relief.  However, no leave was sought until this application.  No explanation for the delay has been given.

1. Edelsten, having resigned as a director, and notwithstanding the existing claims and the status of Main, now seeks leave to proceed in the name of the Company against Main.  The causes of action that Edelsten proposes to bring in the name of the Company against Main relate to the breach of fiduciary duty by Main in his capacity as a director of the Company, and damages.  Importantly, there is no existing or proposed claim for the recovery from Main of any of the intellectual property (’IP’) of the Company.

1. The application is opposed by Main.

Relevant criteria pursuant to s 237(2)

1. Pursuant to s 237(2) of the Corporations Act 2001, the Court must grant the application for leave 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 sub‑para (i) is not satisfied.

1. Each of the five criteria must be satisfied in order for leave to be granted[1] and Edelsten bears the onus of proof.[2]  It should also be observed that leave to bring a derivative action should not be given lightly.[3]

   [1]Goozee v Graphic World Group Holdings Pty Ltd [2002] NSWSC 640, [27].

   [2]Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583, [26] (Swansson).

   [3]Ibid [24].

Company itself will not bring proceedings

1. Edelsten resigned as a director of the Company on 25 January 2013, leaving the Company without a director.[4]  Having effectively deserted the Company, perhaps for good reason (although this is not sufficiently explained), he now seeks leave for the Company to make the proposed claim, which is in addition to and overlaps with his pre-existing claim against Main.

   [4]This may be an offence.  Ford Principles of Corporations Law (12^th Ed) [7.220].

1. Edelsten has provided no reason as to why he cannot simply re‑appoint himself (or someone else) as director of the Company, and resolve that the Company bring proceedings against Main.  If he did not resign he could have done this.  In the circumstances it is most unlikely that Lelumenic would have done anything.  In the unlikely event[5] that Lelumenic is reinstated and there is a deadlock the better course would be to wind up the Company — part of the relief sought by Edelsten in any event.

   [5]It is unlikely that Lelumenic would be reinstated simply to bring about the necessary deadlock.

1. As there is no satisfactory explanation as to why Edelsten could not cause the Company to bring this proposed proceeding, I am not satisfied that the requirement of s 237(2)(a) has been met.

Applicant acting in good faith

1. The onus is on Edelsten to prove that he is acting in good faith and that he would suffer a real and substantial injury if leave was not granted to bring proceedings against the first defendant.

1. In Swansson, the Court considered that there were two factors to which the courts will always have regard in determining whether the plaintiff satisfies the requirement of good faith.  The two factors are:

(a)the plaintiff honestly believes that a good cause of action exists and has a reasonable prospect of success;  and

(b)whether the plaintiff is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process.[6]

[6]Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583 ,[36].

1. Edelsten has not offered to indemnify the Company for its costs of the proceedings as well as against any adverse costs order.  This is a relevant factor in determining whether a plaintiff brings the application in good faith.  I am not able to conclude on the evidence that there is good faith on the part of Edelsten.  I refer in particular to the matters referred to in paragraphs 4, 5, 9, 10 and 16 to 18.  These factors, in my view, indicate a lack of good faith.

Bests interests of the Company

1. Edelstein has failed to establish that it is in the best interests of the Company to bring the contemplated proceeding in the name of the Company.

1. First, Edelsten has failed to provide adequate evidence of the business of the Company and in particular the effects of proposed litigation on its future.  A significant factor so far as the future is concerned is that the Company does not have any directors.

1. Secondly, there is no evidence of the ability of Main, an undischarged bankrupt, to meet any part of a judgment in favour of the Company so that the Court may ascertain whether the action will be of any practical benefit to the Company.[7]  In this regard it should again be noted that there is no claim for delivery up of the IP of the Company but only a claim for damages against an undischarged bankrupt.

   [7]Ibid [56]–[60].

1. It was submitted that unless leave was given the Company would not be able to exploit and develop its intellectual property which has real potential.  There is no evidence of the financial position of the Company.  Further, as pointed out, there are no directors.  In addition, exploiting and developing the IP of the Company in circumstances where there may well be a deadlock in the future — a point emphasised by Edelsten — would only create other difficulties for the future.  The preferred course is the winding up of the Company, the very relief sought by Edelsten in the existing proceeding.  Finally, it seems to me that the existing claim against Main may well be a convenient way of determining the extent of the joint venture assets and proprietorship and related issues that allegedly underpin in part the proposed proceeding.

Disposition

1. In all of the circumstances and for these brief reasons which are sufficient to dispose of the case, I am not satisfied that Edelsten should be given leave to commence proceedings in the name of the Company.  The application will be dismissed.