Goozee v Graphic World Group Holdings Pty Ltd

[2002] NSWSC 640

Reported Decision: 42 ACSR 534
(2002) 20 ACLC 1502

New South Wales

Supreme Court

CITATION:	Goozee v Graphic [2002] NSWSC 640
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	SC 2915/02
HEARING DATE(S):	15/07/02
JUDGMENT DATE:	25 July 2002
PARTIES :	Roger George Goozee - First Plaintiff Mary Rose Goozee - Second Plaintiff Graphic World Group Holdings Pty Limited - First Defendant Ronald Francis Hoolahan - Second Defendant Pyomon Pty Limited - Third Defendant The Bentley Printing Company Pty Limited - Fourth Defendant Keyset Phototype Pty Limited - Fifth Defendant Erolmount Pty Limited - Sixth Defendant Toveheld Pty Limited - Seventh Defendant Double Pay Nominees Pty Limited - Eighth Defendant Jem-K Printing Pty Limited - Ninth Defendant Art Etc Pty Limited - Tenth Defendant Les Baddock Pty Limited - Eleventh Defendant Les Baddock & Sons Pty Limited - Twelfth Defendant The Trade Ruling & Binding Co Pty Limited - Thirteenth Defendant
JUDGMENT OF:	Barrett J

COUNSEL :	Mr C R Newlinds - Plaintiffs Mr M D Einfeld QC/Mr A J McInerney - Defendants
SOLICITORS:	Kemp Strang - Plaintiffs Carneys Lawyers - Defendants
CATCHWORDS:	CORPORATIONS - oppression and other conduct within s.232 - whether sole shareholder can be "victim" of such conduct - non-payment of dividend by wholly-owned subsidiary to immediate parent - failure of parent to obtain dividend from wholly-owned subsidiary - consolidated retained earnings position does not indicate capacity of any group company to pay dividend - CORPORATIONS - statutory derivative action - s.237 tests discussed - court cannot grant leave unless all tests satisfied - serious question to be tried not shown - collateral purpose indicates lack of good faith - not in best interests of parent that it pursue s.232 claim against subsidiary based on non-payment of dividend
LEGISLATION CITED:	Corporations Act 2001 (Cth) Corporate Law Economic Reform Program Act 1999 (Cth)
CASES CITED:	Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 76 ALJR 1 Bagot Well Pastoral Co Pty Ltd v Reid (1993) 61 SASR 165 Re D G Brims and Sons Pty Ltd (1995) 16 ACSR 559 Fexuto v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 Re G Jeffrey (Mens Store) Pty Ltd (1984) 9 ACLR 193 Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 Re H R Harmer Ltd [1959] 1 WLR 62 Industrial Equity Ltd v Blackburn (1977) 137 CLR 564 Jeans v Deangrove Pty Ltd [2001] NSWSC 84 Maronis Holdings Ltd v Nippon Credit Australia Ltd (2001) 38 ACSR 404 Nicholas v Soundcraft Electronics Ltd [1993] BCLC 360 QBE Insurance Ltd v ASC (1992) 38 FCR 270 RTP Holdings Pty Ltd v Roberts (2000) 36 ACSR 170 Re Sam Weller Ltd [1990] 1 Ch 683 Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 Swansson v Pratt [2002] NSWSC 583 Walker v Wimborne (1976) 137 CLR 1 Wayde v NSW Rugby League Ltd (1985) 180 CLR 459 Williams v Spautz (1992) 174 CLR 509
DECISION:	Application for leave to commence derivative actions dismissed

- 22 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BARRETT J

THURSDAY, 25 JULY 2002

2915/02 – GOOZEE & ANOR v GRAPHIC WORLD GROUP HOLDINGS PTY LIMITED & ORS

JUDGMENT

Introduction

1 The present application, initiated by the plaintiffs’ interlocutory process filed on 28 May 2002, is founded on Part 2F.1A (ss.236 to 242) of the Corporations Act 2001 (Cth), entitled “Proceedings on behalf of a company by members and others”, which regulates the statutory derivative action procedure introduced by the Corporate Law Economic Reform Program Act 1999 (Cth) with effect from 13 March 2000.

2 The plaintiffs seek, pursuant to s.237, leave to initiate proceedings on behalf of several companies. Their application for leave is best understood in the context of a description of the principal proceedings and the parties to them.

Parties and corporate structure

3 The first plaintiff (“Mr Goozee”) and the second plaintiff, his wife (“Mrs Goozee”), are two of the four shareholders in the first defendant (“Graphic”). The other two shareholders in Graphic are the second defendant (“Mr Hoolahan”) and a Mr Thomas who is not a party to the proceedings. Mr Goozee holds some 14.7% of the shares in Graphic, Mrs Goozee holds some 2.11%, Mr Thomas holds about 13.33% and Mr Hoolahan holds the remaining 69.86%. The constitution of Graphic is in evidence. It shows that the share capital is not divided into classes and that no distinctions are drawn between the shares held by the several shareholders.

4 Until Mr Goozee’s recent departure, the board of directors of Graphic consisted of Mr Hoolahan, Mr Goozee, Mr Thomas and a non-shareholder, Mr Parker. Mr Hoolahan is the managing director and also acts as chairman at board meetings, although whether he holds a formal and ongoing appointment as chairman is not shown by the evidence and is beside the point for present purposes. All the directors were employed in the group’s business, together with other employees,

5 Graphic has several subsidiaries. It holds all the shares in the third defendant (“Pyomon”), the fourth defendant (“Bentley”), the fifth defendant (“Keyset”), the sixth defendant (“Erolmount”) and the seventh defendant (“Toveheld”). Two of these directly and wholly owned subsidiaries of Graphic themselves have directly and wholly owned subsidiaries: Bentley holds all the shares in the ninth defendant (“Jem-K”) and Erolmount holds all the shares in the tenth defendant (“Art Etc”). Art Etc, in turn, holds all the shares in each of the eleventh defendant (“Les Baddock”), the twelfth defendant (“Baddock & Sons”) and the thirteenth defendant (“Trade Ruling”). There is nothing to suggest that shares held are not also beneficially owned.

6 The position may be more readily gathered from the following diagram in which all connecting lines (except those between the four individual shareholders and Graphic) denote both holding and beneficial ownership of all shares issued.

7 It is necessary to mention also the eighth defendant (“Double Pay”) which stands apart from the structure depicted in the diagram. The shares in Double Pay are held as to 40% by Mr Hoolahan, 24% by Mr Goozee, 16% by Mr Thomas and 20% by Pyomon.

8 The several companies to which I have referred operate as a group and carry on business in the printing industry. There is no evidence about the separate operations of the individual companies or about their respective financial positions, except that Pyomon is the employer of the group’s workforce and that, as a group, the companies have operated profitably for several years. Mr Googee was, until recently, an employee of Pyomon. As I have already noted, the three continuing directors are employees and there are also non-director employees.

The substantive proceedings

9 By their originating process filed on 28 May 2002, the plaintiffs seek as principal relief declarations that the affairs of Graphic and Double Pay, being the two companies in which they are shareholders, are being conducted in a manner that is oppressive or unfairly prejudicial to or unfairly discriminatory against the plaintiffs as members, or in a manner that is contrary to the interests of the members as a whole, these being claims based on s.232 of the Corporations Act. The plaintiffs also seek orders that Graphic, Pyomon, Bentley, Keyset, Erolmount, Toveheld, Double Pay, Jem-K, Art Etc, Les Baddock, Baddock & Sons and Trade Ruling – in other words, all of the companies in the corporate group - be wound up pursuant to s.233(1)(a).

10 As adjuncts to this, there are several claims for leave to initiate proceedings on behalf of Graphic and the other holding companies within the group. In each such proceeding, the plaintiffs would assert on the relevant holding company’s behalf a claim for relief based on conduct caught by s.232 in the affairs of a subsidiary directly and wholly owned by that holding company. The relief claimed in each instance would be an order that the subsidiary be wound up.

11 The central allegation, therefore, is that conduct of the affairs of each company shown on the diagram is “contrary to the interests of the members as a whole” or “oppressive to, unfairly prejudicial to or discriminatory against, a member or members”. I have used here the words found in s.232, including the plural “members”. In the case of all but two of the companies concerned (the exceptions being Graphic and Double Pay), there is only one member. I shall come presently to the question how the statutory formulations apply in such a case.

The present application

12 By the interlocutory process presently before the court, the plaintiffs seek, under Part 2F.1A (or, more precisely, s.237), the leave to which I have referred, that is, leave to bring proceedings on behalf of Graphic and each other immediate holding company in the group depicted in the above diagram seeking the winding up of the holding company’s wholly and directly owned subsidiary (or each of its wholly and directly owned subsidiaries) on the grounds of oppression, unfair prejudice or unfair discrimination in relation to the affairs of the subsidiary, or conduct in those affairs inconsistent with the interests of the members as a whole.

13 There is thus a claim by the plaintiffs, in relation to each such holding company (that is, Graphic, Bentley, Erolmount and Art Etc), that they should be allowed to act for it in pursuing a claim to an order for winding up in respect of conduct in relation to the affairs of the company of which it is the sole member falling within the oppressive and related specifications.

14 According to the interlocutory process, the various winding up orders would be sought under s.233(1)(a).

Standing

15 The question of standing must be approached at two levels. First, there is the question of who has standing to invoke s.232 and to seek winding up orders under s.233(1)(a) in relation to a particular company because of conduct related to the affairs of that company. Second and where the person having such standing is itself a company, there is the question of who is competent to apply for authority to activate that company through Part 2F.1A derivative action to seek such orders.

16 The first question must be approached by reference to s.234 which identifies the persons who may apply for an order under s.233 in relation to a company. Basically, the competent applicants are a present member of that company, a transmittee of shares in that company, certain past members of that company and a person identified in a particular way by ASIC.

17 In relation to the affairs of each company presently relevant (that is, each on the above diagram except Graphic itself), any claim for s.233 relief must therefore be made by the company shown as holding all the shares in that company. In each of five cases, the plaintiff must be Graphic, in a sixth case (Jem-K) it must be Bentley, in a seventh case (Art Etc) it must be Erolmount and in each of the remaining three cases (Les Baddock, Baddock & Sons and Trade Ruling) it must be Art Etc.

18 If each appropriate plaintiff company to which I have just referred is to be activated by the plaintiffs pursuant to leave granted under s.237, it must first appear that they stand in such a relationship to that plaintiff company as to entitle them to be applicants for such leave. This is the second of the issues about standing.

19 Section 236(1) is in the following terms:

“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.”

20 Under this provision, leave to sue on behalf of a particular company is not to be given to a person who does not occupy, in relation to that company, a position described in s.236(1)(a)(i). I read the provision this way because it would be, I think, an odd and unintended result that the court should embark upon the s.237 inquiry in relation to a particular cause of action on the company’s behalf asserted by a person who, even if leave were granted, would not be allowed by s.236 to pursue the company’s claim based on the cause of action.

21 The plaintiffs, being members of Graphic, occupy in relation to each of the other companies on the above diagram a position contemplated by s.236(1)(a)(i). Having regard to the definitions of “related body corporate” and “holding company” in s.9 and to the provisions in Division 6 of Part 1.2, Graphic is a “related body corporate” of each of the other companies depicted. Each of the plaintiffs is accordingly, in relation to each of those other companies, “a member … of a related body corporate”, being Graphic.

22 It follows that the court may, under s.237, grant leave to the plaintiffs to initiate proceedings based on s.232 on behalf of each potential plaintiff company mentioned in paragraph 17 above in respect of conduct in relation to the affairs of the company standing immediately beneath that plaintiff company in the diagram. The remoteness of the plaintiffs’ position from each company on behalf of which they would sue (being members of its holding company, in some instances several places removed) does not affect the standing afforded to the plaintiffs by the Act, but it may affect other aspects of their application.

The causes of action to be asserted in the derivative actions

23 The cause of action the plaintiffs wish to see each of Graphic, Bentley, Erolmount and Art Etc pursue is based on the proposition that adoption and implementation of certain financial policies within the subsidiary (or each subsidiary) wholly owned by that plaintiff amounts to conduct in the affairs of that subsidiary within the purview of s.232. The identical cause of action is asserted directly by the plaintiffs, as members, in relation to the affairs of Graphic and Double Pay. The nature of their complaints may conveniently be explained by quoting the following extract from the written outline of submissions handed up by Mr Newlinds of counsel who appeared for them on the hearing of the application:

“9. In essence, Mr and Mrs Goozee’s case is as follows:

(i) Mr Hoolahan is the managing director of the Group. The four directors of the First Defendant until recently, were Mr Hoolahan, Mr Thomas, Mr Parker and Mr Goozee;

(ii) from December 1991 until May 2002 Mr Goozee was employed by Pyomon as a sales officer. For this he was paid a salary;

(iii) Mr Goozee has never received a dividend as a shareholder from any of the Companies since the business commenced approximately in 1973;

(iv) the Companies, either individually or as a group, appear to have a policy of not declaring dividends;

(v) over the years Mr Goozee has enquired of Mr Hoolahan as to dividends and has been told that dividends could not be paid and needed to be put back into the business;

(vi) Mr Goozee was content with this state of affairs, i.e. him receiving his return by way of salary and profits being reinvested until the late 1990s;

(vii) in 1997 the Group reported an operating profit after tax of $631,626.00 and had retained profits of $1,170,610.00;

(vii) in the 1998/99 financial year the Group reported an operating profit of $617,975.00 and retained profits of $1,788,585.00;

(ix) in the 1999/2000 financial year the Group reported an operating profit of $1,203,413.00 and had retained profits of $2,991,998.00;

(x) in the 2000/2001 financial year the Group reported a net trading profit of $1,280,186.00. Financial reports are not available, but it is assumed that the retained profits have increased commensurably;

(xi) in the 2001/2002 financial year the Group reported a year-to-date trading profit up to 31 December 2001, of $720,567.25;

(xii) it is clear that since about 1997 the Group has been making substantial profits. The profits have not been reinvested into the printing business and apparently sit in bank accounts and upon deposit;

(xiii) since 1997 Mr Goozee has been pressing Mr Hoolahan in relation to the Companies’ dividend policy (or lack thereof);

(xiv) in April 2000 there was a resolution of Pyomon whereby a ‘bonus pool’ of $300,000 was created apparently with the intention that it could be distributed at the discretion of the managing director (Mr Hoolahan) to ‘employees’;

(xv) on 28 June 2001 a further ‘bonus pool’ was created (the $300,000 apparently to be shortly distributed). This new ‘bonus pool’ to be calculated ‘up to 10% of Group gross profit’. Once again, this ‘bonus pool’ was to be distributed at the discretion of the directors of the First Defendant. Part of the resolution was in the following terms;
‘Should any employee or director resign from the Company before determination of their bonus entitlement, their entitlement shall be forfeited and shared among the remaining members of the pool.’
(xvi) in June 2001 Mr Goozee confronted Mr Hoolahan in relation to the ‘bonus pool’ for the benefit of employees and pointed out that the Company had an obligation to ‘think of shareholders as well’. Mr Goozee’s enquiry was rebuffed.
(xvii) since that time Mr Goozee has objected to the ‘bonus pool’ and does not know whether it has or has not been distributed, and Mr Goozee did not receive any distribution from either of the bonus pools;
(xviii) in August 2001 Mr Hoolahan made various offers to Mr Goozee in relation to purchasing his shareholding. During these negotiations Mr Hoolahan told Mr Goozee that no one else would buy his shares except Mr Hoolahan;
(xix) during the period August 2001 through to May 2002 the relationship between Mr Goozee and Mr Hoolahan deteriorated and there were discussions about the Company being sold;

(xx) these seemed to culminate in a meeting on 27 March 2002 and a further meeting on 2 May 2002;

(xxi) after more acrominious discussions Mr Goozee’s employment was terminated on 3 May 2002. That termination was confirmed by letter;

(xxii) on 9 May 2002 Mr and Mrs Goozee’s solicitors wrote to Graphic World asking for a statement of the Group’s dividend policies, enquiring as to whether there was any intention to declare a dividend for the year ended 30 June 2002 and enquiring as to whether undertakings would be given in relation to the ‘bonus pool’ and the like;

(xxiii) to that request the Group’s solicitors wrote to Mr and Mrs Goozee’s solicitors on 29 May 2002 seeking to justify the dividend policy (or lack thereof) and the appropriateness of distributions to employees by way of a ‘bonus pool’.
10. In short, Mr and Mrs Goozee say that Mr Hoolahan is conducting the affairs of the Group in such a way so as to effectively neuter their rights as a shareholder to receive a return on their shares by way of dividends.
11. A mechanism has been devised whereby all the other shareholders (who are also employees) receive effectively a return on their shares by way of ‘bonus pool’ which are distributed at the complete discretion of Mr Hoolahan.”

24 It should be added, for completeness, that, although the “bonus pool” has been “established” (whatever that entails), the solicitors for the defendants have stated that it has been “preserved” and have, on their clients’ behalf, given an undertaking that no distributions will be made from it without prior notice to the plaintiffs. I infer from this that no payments have been made in accordance with the bonus arrangements and I do not see anything in the evidence as it presently stands to contradict this.

25 The complaint of the plaintiffs is quite narrow. They do not complain that profits have been inappropriately syphoned off by means of employee bonuses, whether out of proportion to individuals’ contributions or at all, although they may have some apprehension that this may happen in the future. Nor do they complain that there has been any misapplication of funds or improvident dealing. They say merely that the group of companies consisting of Graphic and its subsidiaries has generated significant profits on a consolidated basis in each of the last five years, yet dividends have not been paid and surplus funds “have not been reinvested into the printing business and apparently sit in bank accounts and upon deposit”.

26 Just as the plaintiffs’ complaint is quite narrow, so too is the relief they would have each of the immediate holding companies seek in the derivative action asserting oppressive and analogous conduct in relation to the affairs of each directly and wholly owned subsidiary. The only order sought, in each case, would be an order that the subsidiary be wound up.

The s.237 criteria

27 Section 237(2) prescribes conditions which, if satisfied, compel the court to grant leave to a competent applicant. While Part 2F.1A does not say, in so many words, that the court must not grant leave if any of the prescribed conditions is not satisfied, that must be its meaning. It cannot be intended that there should be judicial carte blanche permitting the grant of leave to proceed on a company’s behalf where a competent applicant makes out a case on grounds foreign to those enumerated in s.237(2) or fails to bring himself or herself wholly within the parameters which, if they are found to exist, compel the grant of leave. On that footing, the court will grant leave where it finds that all the stated prerequisites are satisfied but will otherwise refuse leave. Such a course is, I think, consistent with the approaches taken in RTP Holdings Pty Ltd v Roberts (2000) 36 ACSR 170 (Lander J) and Jeans v Deangrove Pty Ltd [2001] NSWSC 84 (Santow J).

28 Section 237(2) reads as follows:

“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.”

29 I do not propose to address these criteria in the order in which they appear in the section. It is convenient to begin with the fourth criterion – that in s.237(2)(d).

Serious question to be tried?

30 The question posed by s.237(2)(d) is whether the court considering an application by a person to sue on behalf of a company is satisfied, in relation to the proceedings the person wishes to pursue for the company, that “there is a serious question to be tried”.

31 As it relates to the wrong supposedly done to the single member (immediate holding company) of each wholly owned subsidiary in respect of the affairs of which the plaintiffs wish to have leave to proceed on the single member’s behalf, the above description of their complaints shows that the question posed by s.237(2)(d) is whether there is disclosed a serious question to be tried as to conduct in relation to the affairs of the wholly owned subsidiary caught by s.232.

32 The “serious question to be tried” test has obviously been adopted by the legislature because of its existing place in civil procedure. If there were any doubt about that, it might be resolved by reference to the explanatory memorandum which accompanied the Corporate Law Economic Reform Program Bill which, at page 23, described a test formulated in those words as “familiar and regularly employed by the Courts in the context of interim injunction applications”.

33 The most recent statements in the High Court about the nature of the “serious question to be tried” test as it applies to interlocutory injunctions are found in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 76 ALJR 1. Gleeson CJ referred to the purpose of an interlocutory injunction, as stated by sir Frederick Jordan in “Chapter on Equity in New South Wales”, 6th edition (1947), as being “to keep matters in statu quo until the rights of the parties can be determined at the hearing of the suit”. The Chief Justice continued:

“The corollary of the proposition stated by Sir Frederick Jordan is that a plaintiff seeking an interlocutory injunction must be able to show sufficient colour of right to the final relief, in aid of which interlocutory relief is sought. Lord Cottenham LC in Great Western Railway Co v Birmingham Railway Co formulated the issue as to whether ‘this bill states a substantial question between the parties’. In McCarty v Council of the Municipality of North Sydney , the Chief Judge in Equity described the proposition that a plaintiff seeking an interlocutory injunction must show at least a probability that he will succeed in establishing his title to the relief sought at the final hearing as ‘so well established that no authority is really needed in support of it’.”

34 It is also made clear in ABC v Lenah that a serious question to be tried can be found only by reference to an infringement of some legal or equitable right or the commission of some legal or equitable wrong, with the result that the issue needs to be approached by inquiring whether there exists, in the circumstances and on the evidence, a sufficiently cogent showing of some such infringement or wrong to warrant the imposition of an order to preserve the status quo pending full investigation.

35 Applied to the present circumstances, the s.237(2)(d) test imported from equity’s approach to the grant of interlocutory injunctions raises the question whether the complaints of the plaintiffs outlined in the submissions quoted above entail, for the immediate holding company which is the plaintiff on whose behalf they would assert conduct in the affairs of that company is directly and wholly owned subsidiary within the s.232 specification, entail consequences of a kind which would properly be made the subject of relief by reference to that section.

36 The submissions do not refer separately to the affairs of or situation within any such wholly owned subsidiary or the effect of conduct at the level of that subsidiary upon the company by which all shares in the subsidiary are held. They focus exclusively on the affairs of “the group” as a whole and the effect of conduct within the “group” upon the plaintiffs as members of Graphic. There is thus an immediate difficulty in identifying any serious question to be tried in relation to the consistency of conduct in the affairs of any of the wholly owned subsidiaries, viewed alone, with the norms laid down by s.232. I shall return to that in due course.

Can a sole member be a victim under s.232?

37 I digress to consider an issue which is central to the claims the plaintiffs wish to prosecute on behalf of the several immediate holding companies, namely, whether a single shareholder can ever be the “victim” of conduct within s.232. The action the plaintiffs would, if granted leave, set in motion on behalf of each such holding company is based on the proposition the affairs of its wholly owned subsidiary – a company in relation to which it occupies the most powerful position that can be occupied in relation to any company - have been conducted in a way which is “contrary to the interests of the members as a whole” or “oppressive to, unfairly prejudicial to or unfairly discriminatory against, a member or members”.

38 In advancing such a case, the immediate holding company, speaking through the plaintiffs, would, of necessity, say that it had been, as it were, the victim of conduct in the affairs of the directly and wholly owned subsidiary that was “burdensome, harsh and wrongful” (to adopt the version of “oppressive” derived from the speech of Viscount Simonds in Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324) or of some “prejudice” that was “unfair”; or that it had suffered because the criterion defined by reference to “the interests of the members as a whole” had not been observed within or in relation to the subsidiary. I omit here reference to the “unfairly discriminatory” criterion since, as a matter of plain words, I do not consider it possible for a single shareholder to be the object of discrimination within the company of which he or she is sole shareholder, given that discrimination must always involve differentiation or different treatment.

39 There is an air of unreality about the notion that the sole shareholder of a company can, in relation to the affairs of that company, become subject to oppression or unfair prejudice. The immediate riposte is that the sole shareholder had it entirely within its power at all times to cause the wholly owned subsidiary to act in any way whatsoever that the shareholder might lawfully require and that, if it incurred harm, it has only itself to blame. It could, if it wished, replace the board of directors and amend the constitution at will. It lay entirely within its power to achieve anything and everything it is possible for a resolution of members to achieve. Absent any impact on creditors’ interests and subject to statutory constraints, it might ratify past breaches of duty by directors and authorise such breaches in advance. Everything that happened in the conduct of the affairs of the subsidiary happened because the sole shareholder either made it happen or was content to stand by and allow it to happen – and likewise in relation to everything that was omitted to be done.

40 These considerations point towards a conclusion that the member of a single-member company can never be a complainant under s.232. But closer analysis shows, I think, that such a conclusion cannot be supported. This is because what the section really does is to prescribe statutory norms of conduct non-adherence to which vests a cause of action. The section is concerned with conduct within or in relation to the company which is, according to accepted standards of corporate behaviour, burdensome harsh and wrongful, productive of unfair prejudice or “contrary to the interests of the members as a whole”. The several descriptions probably reflect a single concept unconfined by “technical distinction”: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 per Spigelman CJ.

41 What I have termed “accepted standards of corporate behaviour” are formulated, in part, by reference to the way in which “reasonable directors” would act in attending to the affairs of the company: Wayde v NSW Rugby League Ltd (1985) 180 CLR 459. Reference may also be made to the comments of Lord Denning in the Scottish Co-operative case (above) to the effect that, by acting inconsistently with their duties, directors conducted the company’s affairs in an oppressive manner. Courses that would be taken by responsible and diligent directors in the due and proper discharge of their duties thus represent one aspect of the standards of corporate behaviour which go to make up the norms of conduct with which the provisions are concerned.

42 A decision as to what is “contrary to the interests of the members as a whole” focuses attention not on the interests of the persons who are in fact the members for the time being but on the interests of “an individual hypothetical member”: Bagot Well Pastoral Co Pty Ltd v Reid (1993) 61 SASR 165, reflecting Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286. This is another aspect of the relevant standards of corporate behaviour.

43 It must also be remembered that the section is concerned with the impact of the conduct of the company’s affairs regardless of the identity of the person who in fact conducts them and even if that person is an interloper who exercises de facto control only, a possibility adverted to by Jenkins LJ in Re H R Harmer Ltd [1959] 1 WLR 62. The section thus applies regardless of the source of influences actually at work within the company.

44 For all these reasons, the norms of conduct by reference to which s.232 operates must be accepted as having a wholly objective content and as existing independently of the identity and will of the totality of the shareholders for the time being or as in this case, the entity which is the single shareholder for the time being.

45 I conclude that the fact that the proceedings the present plaintiffs have in contemplation for each of the companies they wish to represent are proceedings in which that company, as sole shareholder, asserts claims pursuant to s.232 does not adversely affect the inquiry under s.237(2)(d) as to serious question to be tried.

The dividend complaint

46 Whether the matter is approached according to the position of an individual wholly owned subsidiary or as a “group” concern, it is necessary to address the question whether failure to pay dividends can amount to conduct within s.232.

47 It can be said at once that a decision not to pay dividends or to pay at a rate below that fairly allowed by the profits cannot, without more, attract the intervention of the court under s.232. This has been recognised in many cases. Intervention may, however, be appropriate where it is shown that the dividend rate (or the decision not to pay) was reached “other than by resort to properly exercised commercial judgment” (Re G Jeffrey (Mens Store) Pty Ltd (1984) 9 ACLR 193), with that question being addressed by reference to the company’s history, policies, financial position and economic circumstances: Re D G Brims and Sons Pty Ltd (1995) 16 ACSR 559. As the following passage in the judgment of Peter Gibson J in Re Sam Weller Ltd [1990] 1 Ch 683 emphasises, the relevant “properly exercised commercial judgment” can only be assessed by reference to the whole of the surrounding circumstances:

“To return to the facts alleged in the present case, here it is asserted by the petitioners that the sole director is conducting the affairs of the company for the exclusive benefit of himself and his family, and that while he and his sons are taking an income from the company, he is causing the company to pay inadequate dividends to the shareholders. The facts are striking because of the absence of any increase in the dividend for so many years and because of the amount of accumulated profits and the amount of cash in hand. I ask myself why the payment of low dividends in such circumstances is incapable of amounting to conduct unfairly prejudicial to the interests of those members, like the petitioners, who do not receive directors’ fees or remuneration from the company. I am unable to see any sufficient reason. It may be in the interests of Mr Sam Weller and his sons that larger dividends should not be paid out and that the major part of the profits of the company should be retained in order to enhance the capital value of their holdings. Their interests are not necessarily identical with those of other shareholders. It may well be in the interests of other shareholders, including the petitioners, that a more immediate benefit should accrue to them in the form of larger dividends. As their only income from the company is by way of dividend, their interests may be not only prejudiced by the policy of low dividend payments, but unfairly prejudiced.
I do not intend to suggest that a shareholder who does not receive an income from the company except by way of dividend is always entitled to complain whenever the company is controlled by persons who do derive an income from the company and when profits are not fully distributed by way of dividend. I have no doubt that the court will view with great caution allegations of unfair prejudice on this ground. Nevertheless, concerned as I am with an application to strike out, I must be satisfied, if I am to accede to the application, that the allegations in the petition relating to the payment of dividends are incapable of amounting to unfair prejudice to the interests of some part of the members, including the petitioners. For the reasons that I have given, I cannot be so satisfied.”

48 It is noteworthy, in the present context, that these comments were made on an application to strike out a claim for relief based on alleged oppression. The tests to be applied in determining an application of that kind bear some broad similarity to those employed in determining whether there is a serious question to be tried.

49 In the present case, there is no evidence of the profitability of any wholly owned subsidiary, viewed separately, or of the extent of its distributable reserves. Nor is there evidence about the activities of any wholly owned subsidiary, with the exception of Pyomon which is said to be the sole or, at any rate, the main employer within the group and may therefore be assumed to enjoy revenues sufficient to meet its obligations to pay its employees. Whether Pyomon, with the aid of its workforce, performs services for other group members in turn for payment or sub-contracts the services of those employees for reward or conducts operations of its own in which its employees are deployed simply does not emerge from the evidence at this stage.

50 There is evidence of consolidated profits of the group consisting of Graphic and all its subsidiaries. But there is no evidence of where components of that consolidated profit were generated within the group or in which individual balance sheets the resultant revenue reserves are located. It may be that one company is profitable and the others are not; or that several generate profits and others generate losses. The dividend paying capacity of any subsidiary can be judged on an individual basis only by reference to the state of its own separate retained earnings and reserves and, as I have said, there is no evidence on those matters.

51 As things stand, it is impossible to say that any of the wholly owned subsidiaries has failed to pay dividends in accordance with “properly exercised commercial judgment”. It is also impossible to see any basis on which a plausible contention to that effect could be advanced. At the threshold, the evidence does not even show that any of the wholly owned subsidiaries has ever possessed the ability to pay dividends consistently with the statutory prohibition upon payment of dividends otherwise than out of profits. Nor does it show the extent that dividend-paying capacity existed within any particular company at any particular time, assuming it existed at all.

52 With the evidence as it is, and given that the articulated complaints upon which the s.237 application is based are confined to non-payment of dividends by the several subsidiariess, the only available conclusion is that the plaintiffs have not shown that there is a serious question to be tried in relation to a claim by any immediate holding company that there has occurred, in the affairs of its wholly owned subsidiary, conduct caught by s.232.

Probability of action by holding company

53 Section 237(2)(a) poses the question whether it is probable that the company (here, the immediate holding company of each directly and wholly owned subsidiary) will not take the proceedings and prosecute them diligently. The answer, in this case, is provided in the outline of submissions provided by Mr Einfeld QC and Mr McInerney of counsel who appeared for the defendants:

“The first, fourth, sixth and tenth defendants do not intend to prosecute the proceedings on their own behalf, not least because none of them have a claim (cause of action) against the other defendants.”

54 The question posed by s.237(2)(a) must therefore be answered favourably to the plaintiffs.

Is the application made in good faith?.

55 Under s.237(2)(b) it must be decided whether the plaintiffs are acting in good faith in seeking to activate the various immediate holding companies to seek, by reference to s.232, orders for the winding up of their respective directly and wholly owned subsidiaries. The defendants invite the court to draw the inference that the true purpose of the plaintiffs is to place pressure on the other shareholders in Graphic, particularly Mr Hoolahan, to buy their shares in Graphic (and presumably Double Pay).

56 The “good faith” concept, as it applies for the purposes of Part 2F.1A, was the subject of discussion by Palmer J in Swansson v Pratt [2002] NSWSC 583 (3 July 2002). His Honour observed that “good faith”, in this relatively new statutory context, will acquire a developed meaning as courts have occasion to consider particular cases. He nevertheless identified two interrelated factors which he regarded as the minimum content of “good faith” in this area: first, whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success; and, second, whether the applicant is seeking to bring the derivative action for such a collateral purpose as would amount to an abuse of process.

Reasonable belief in the existence of a good cause of action?

57 The considerations I have identified as contributing to the conclusion that there is no serious question to be tried, at least on the evidence as it stands, make me think also that the plaintiffs cannot reasonably believe that a good cause of action exists on the part of each immediate holding company on behalf of which they wish to sue; or that there are reasonable prospects of success on the part of each such immediate holding company.

58 The plaintiffs therefore seem to me to fail the first of the tests emerging from the observations of Palmer J.

Collateral purpose?

59 The plaintiffs’ real complaint, in so far as it is relevant to the several wholly owned subsidiaries, is a complaint against the ultimate holding company, Graphic, in which the plaintiffs hold shares. To the extent that they seek to vindicate what they consider to be unfairness within each wholly owned subsidiary contributing to the absence of dividend payments by Graphic to its shareholders, they are not really asserting conduct within or related to the subsidiaries. They are focussing, rather, on conduct within and related to Graphic.

60 It is axiomatic that the consolidated profits of Graphic and its subsidiaries, as disclosed by group accounts, cannot be the source of dividends paid by Graphic; and that, as it applies to a holding company, the prohibition upon payment of dividends otherwise than out of profits pays attention to the separate profits of that holding company alone, with any species of unrealised profits represented by an unexercised power to obtain dividends from subsidiaries being left out of account. The clear decision to this effect in relation to s.376(1) of the Companies Act 1961 in Industrial Equity Ltd v Blackburn (1977) 137 CLR 564 applies also to the provision now in force, being s.254T of the Corporations Act.

61 The ability of Graphic to enhance its own distributable reserves (and thus its capacity to pay dividends) by causing wholly owned subsidiaries with distributable reserves of their own to pass dividends up the corporate chain is clearly an aspect of the affairs of Graphic as a separate company. It is an aspect of Graphic’s direct power to shape the behaviour of its directly and wholly owned subsidiaries and of its indirect power to shape the behaviour of its indirectly but wholly owned subsidiaries. Such power is at Graphic’s disposal and may be exercised by it virtually at will, subject only to exigencies referable to the interests of the creditors of any individual subsidiary and related considerations concerning the subsidiary’s solvency, given the general law prohibition on the payment of dividends which would result in or compound insolvency: see the discussion by Lockhart J in QBE Insurance Ltd v Australian Securities Commission (1992) 38 FCR 270.

62 It follows that if dividend policies adopted within the group as a whole resulting in non-payment of dividends by Graphic can be shown to entail conduct of the composite s.232 description involving failure by Graphic to exercise its powers over other companies so as to cause them to pay appropriate dividends benefiting it, the plaintiffs may rely upon that as conduct in the affairs of Graphic itself. They have no need to cause each immediate holding company to rely on corresponding conduct in the affairs of each wholly owned subsidiary.

63 The motives of the plaintiffs in seeking to activate the several immediate holding companies to seek orders for the winding up of their directly and wholly owned subsidiaries must be considered in the context just described. Those motives emerge from several letters written by the solicitors for the plaintiffs and dated 9 May 2002. Each letter is addressed to the directors of one of the immediate holding companies on behalf of which the plaintiffs seek leave to sue. The letter outlines the plaintiffs’ requirements. The first is that they be given a statement of the dividend policy of Graphic, “its related companies (or any of them individually) and Double Pay or any combination of these companies”. The second and third demands are:

“2. A declaration of dividends by [Graphic], its related companies and/or Double Pay in respect to a substantial portion of the retained profits for the financial year ended 30 June 2001.
3. Alternatively, that our clients’ shares in Graphic be purchased for their fair market value at a price to be agreed between the parties or, if a price cannot be agreed, that [Graphic], its related companies and Double Pay be wound up so that their wealth can be distributed to the shareholders”.

64 The message in each letter is clear. The plaintiffs’ primary aim is to receive dividends or to have their shares bought. The threat to move for the winding up of all companies is put forward to enhance the possibility that “the other parties” will accede to the request for dividends or buy out. The desire to bring about the winding up of all group companies does not exist as an independent objective. It is expressed purely as a pressure tactic to enhance the possibility of achieving one or other of the two primarily expressed aims.

65 Winding up of all subsidiaries of Graphic in the way the plaintiffs seek to achieve through their proposed derivative actions is foreign to the attainment of their real purpose in relation to the Graphic group, which is the legitimate purpose of realising value they see to be locked up in their Graphic shares. If, as they contend, the group behaviour with respect to non-payment of dividends is oppressive or unfair or contrary to members’ interests, proceedings by the plaintiffs in their own right, based on s.232 and seeking winding up of Graphic alone or an order for purchase of their shares in Graphic is a course properly and logically open to the plaintiffs.

66 If Graphic were wound up, its liquidator would have the task of deciding what ought prudently be done with the shares in its subsidiaries. If, as the evidence indicates, the group as a whole is profitable and financially sound, it is very likely that the liquidator would realise greater value by selling the assets of Graphic (including shares in subsidiaries) on a going concern basis, than he or she would by dismantling the profit making structure by liquidation of all the subsidiaries and realisation of their assets in a piecemeal and break-up way. Nothing would then be realised for goodwill, while tangible assets such as machinery would likely realise scrap value only.

67 The plaintiffs’ threat to seek to have all group companies put into liquidation with the aid of the several derivative proceedings they wish to launch must therefore be regarded as tantamount to saying that, if the other shareholders in Graphic do not co-operate in achieving the plaintiffs’ primary objectives (release of retained earnings at the Graphic level or buy-out of Graphic shares), the plaintiffs will seek to embark upon a course which diminishes or destroys value for all Graphic shareholders.

68 In these circumstances, I am satisfied that the plaintiffs propose to initiate the derivative action on behalf of each immediate holding company not to prosecute that action to its conclusion (being the making of a winding up order in respect of the subsidiary concerned) but as a means of seeking to persuade the other shareholders of Graphic either to concur in and procure the payment of dividends by Graphic or to buy the plaintiffs’ shares in Graphic, that being a collateral purpose beyond that offered by any of the proposed derivative actions. There are thus good grounds for regarding each such derivative action as an abuse of process in the sense described by members of the High Court in Williams v Spautz (1992) 174 CLR 509.

69 The plaintiffs’ application accordingly fails the s.237(2)(b) test by reference to the two interrelated factors to which Palmer J referred in Swansson v Pratt (above).

The best interests of the putative plaintiff company

70 Turning to s.237(2)(c), the question is whether it is in the best interests of each immediate holding company that the plaintiffs be entitled to assert on its behalf the particular causes of action involving conduct related to its wholly owned subsidiary (or subsidiaries) and, on that basis, to initiate proceedings seeking on the immediate holding company’s behalf an order for the winding up of its directly and wholly owned subsidiary.

71 Section 237(3) defines circumstances in which there arises a rebuttable presumption that granting leave is not in the best interests of the company. However, no submissions were addressed to me by reference to that section and the evidence does not allow me to make findings on the matters to which it directs attention. I therefore proceed to consider the matter without reference to the presumption.

72 As Palmer J observed in Swansson v Pratt (above), the question here is specific:

“At the outset, it is important to note that s.237(2)(c) requires the Court to be satisfied, not that the proposed derivative action may be, appears to be , or is likely to be , in the best interests of the company but, rather, that it is in its best interests.”

73 This question cannot be answered favourably to the plaintiffs in this case. For reasons I have stated, it cannot be concluded that the statutory remedy under s.232 is of its nature unavailable to a single shareholder. But why should it, in this case, be regarded as in the best interests of each immediate holding company that its directly and wholly owned subsidiary be wound up? That is the sole remedy the holding company would seek in the derivative proceedings. No argument justifying, from the perspective of the interests of its immediate holding company, the winding up of each wholly owned subsidiary has been advanced. Such a winding up might suit the plaintiffs as a means of causing cash to flow through to the ultimate holding company (Graphic) in which they hold shares. But the several liquidations the immediate holding companies sought would effectively put an end to the business of the group which, on the evidence, is trading profitably and is in a sound financial state. There is no basis on which that result can be seen as conducive to the separate interests of any of the immediate holding companies on whose behalf the plaintiffs wish to seek the winding up of each wholly owned subsidiary.

74 Implicit in what I have just said is the proposition that, in the context of a group of companies such as the present, the “best interests” to which s.237(2)(c) directs attention are those of the particular putative plaintiff company, not those of the group. That, in my view, is the clear meaning and intent of the provision. It may be that the separate interests of a particular group company will be coloured or shaped by the wider interests of the group: Maronis Holding Ltd v Nippon Credit Australia Ltd (2001) 38 ACSR 404. It may also be that something which, in isolation, would appear harmful to the interests of the particular group company will be seen in a different light when its interests are viewed in the totality of the group context: Nicholas v Soundcraft Electronics Ltd [1993] BCLC 360. But it is to the particular company’s separate interests alone, whether or not so coloured, shaped or modified, that attention must be directed. Such an approach is consistent with the definition of directors’ duties by reference to the interests of the company as a whole which emerges from the decision of the High Court in Walker v Wimborne (1976) 137 CLR 1.

75 It is not possible, on the evidence, to conclude that any of the proposed derivative actions would be in the best interests of the company on behalf of which it is proposed that the action be brought.

The s.237(2)(e) criterion

76 Section 237(2)(e) imposes a procedural requirement as to which no issue arises in this case.

Conclusion

77 In relation to each of the proposed proceedings in respect of which the plaintiffs seek leave under s.237(2), I am satisfied as to the matters in ss.237(2)(a) and 237(2)(e). I am not, for the reasons I have stated, satisfied as to the matters in ss.237(2)(b), 237(2)(c) and 237(2)(d).

78 The interlocutory process by which the plaintiffs advance their several claims for leave to institute derivative actions under Part 2F.1A is therefore dismissed.

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Last Modified: 07/29/2002