Hylepin Pty Ltd v Doshay Pty Ltd

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FEDERAL COURT OF AUSTRALIA

Hylepin Pty Ltd v Doshay Pty Ltd [2020] FCA 1370

File number(s): VID 1438 of 2016
Judge(s): O'BRYAN J
Date of judgment: 25 September 2020
Catchwords: CORPORATIONS – share and debt capital invested by the first defendant in various joint venture companies – whether transactions undertaken in breach of fiduciary duties, specifically the conflict rule and the profit rule – whether monies of the first defendant were applied for the purchase of real property – whether real property held on a constructive trust for the first defendant – whether claims are time barred in equity by analogy to claims based upon breach of the statutory duties of directors or by the equitable doctrine of laches – whether share transfer to the first defendant vitiated by mistake – whether decision by the first defendant not to renew a lease of commercial premises a breach of the statutory duty to act in good faith – dividends not declared by the first defendant for a lengthy period – whether the affairs of the first defendant have been either contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, the plaintiff
Legislation:

Companies Act 1981 (Cth) s 229

Corporate Law Reform Act 1992 (Cth)

Corporations Act 1989 (Cth)

Corporations Act2001 (Cth)

Evidence Act1995 (Cth) s 191

Federal Court Rules 2011 (Cth) r 28.61

Limitation of Actions Act 1958 (Vic) s 21

Retail Leases Act 2003 (Vic) s 35(3)

Companies Act 1985 (UK)

Cases cited:

Allco Funds Management Limited v Trust Company [2014] NSWSC 1251

Ananda Marga Pracaraka Samgha Ltd v Tomas (No 6) [2013] FCA 284; (2013) 94 ACSR 199

Australian Securities and Investments Commission v Adler [2002] NSWSC 171 (2002) 168 FLR 253;

Australian Securities and Investments Commission v Drake (No 2) [2016] FCA 1552; (2016) 340 ALR 75

Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 236 FLR 1

Aussie Ideas Pty Ltd v Tunwind Pty Ltd; Hoddinott v Tunwind Pty Ltd [2006] NSWCA 286

Barnes v Addy (1874) LR 9 Ch App 244

Bartlett v Barclays Bank Trust Co Ltd (No 1) [1980] Ch 515

Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1

Bennetts v Board of Fire Commissioners of NSW (1967) 87 WN (Pt 1) (NSW) 307

Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150

Boardman v Phipps [1967] 2 AC 46

Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304

Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55; (2014) 314 ALR 62

Chan v Zacharia (1984) 154 CLR 178

Coombs v Dynasty (1994) 14 ACSR 60

Crawley v Short [2009] NSWCA 410; (2009) 262 ALR 654 Cumberland Holdings Ltd v Washington H Soul Pattinson & Co Ltd (1977) 13 ALR 561; 2 ACLR 307

Daly v The Sydney Stock Exchange (1986) 160 CLR 371

Donaldson v Natural Springs Australia Limited [2015]…

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Details
Case
[2020] FCA 1370
Decision Date

CaseChat Overview and Summary

Hylepin Pty Ltd sued Doshay Pty Ltd, John So, Global 2000 Pty Ltd, and Wendy Cheng in the Federal Court, alleging various breaches of fiduciary duties and seeking relief for oppressive conduct under the Corporations Act 2001 (Cth). The primary issues included whether Doshay's investments in joint ventures and property purchases breached fiduciary duties, whether Doshay's non-renewal of a lease breached its statutory duties, and whether the claims were time-barred. The court examined whether Doshay's transactions with other entities were interest-free loans or improper uses of funds, and if Doshay's decisions, such as not renewing a lease, were made in good faith and in the company's best interests.

The court determined that Doshay's investments were interest-free loans, properly recorded and not dishonest. It held that Doshay's decision not to renew the lease over the Dragon Boat Restaurant premises was not a breach of fiduciary duties or statutory duties as a director, as it was made in good faith and for the company's best interests. The court found that the claims were not barred by limitation periods or the doctrine of laches, as the transactions were adequately documented and traceable through financial records. Consequently, the court granted declaratory relief in favour of Doshay and ordered Global 2000 to correct its register of members to reflect Doshay's ownership of shares. The court dismissed Hylepin's originating application otherwise and directed the parties to submit written submissions on the costs of the proceeding.

Orders

Orders of the court

2. The third defendant do all things necessary to correct its register of members, and lodge a notice of correction with the Australian Securities and Investments Commission, to record that, at all times since 15 June 2000, the first defendant has been the owner of five ordinary shares.

3. The plaintiff’s originating application be otherwise dismissed.

4. Within 28 days of these orders, the parties file and serve written submissions in respect of the costs of the proceeding of no more than five pages in length.

5. Subject to further order, the issue of costs will be determined by the Court on the papers.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

A. INTRODUCTION

[1]

B. OVERVIEW OF THE APPLICABLE LEGAL PRINCIPLES

[21]

B.1 Oppression

[22]

B.2 Fiduciary duties

[31]

B.3 Defence based on informed consent

[44]

B.4 Defences based on the application of statutory limitation periods directly or by analogy and laches

[46]

B.5 Loan transactions

[55]

C. OVERVIEW OF THE EVIDENCE

[62]

C.1 Witnesses for Hylepin

[67]

C.2 Witnesses for the defendants

[87]

D. FACTUAL FINDINGS

[107]

D.1 Incorporation of Doshay

[107]

D.2 Incorporation of Hylepin

[117]

D.3 Shareholdings in Doshay

[118]

D.4 Westlake Restaurant

[129]

D.5 Lyleable and Dragon Boat Knox

[135]

D.6 Jadetrex and Dragon Boat Palace

[148]

D.7 Dragon Wall and Dragon Wall Take Away

[159]

D.8 The acquisition of the Exhibition Street Property

[167]

D.9 Evaluator and Café Puccini

[183]

D.10 The acquisition of the Lonsdale Street Property

[201]

D.11 Doshay’s shareholding in Global 2000

[219]

D.12 Dividends

[235]

D.13 Hylepin’s requests for information

[241]

D.14 Offers to acquire Hylepin’s shares

[252]

D.15 Non-renewal of the lease for the Dragon Boat Restaurant

[255]

D.16 Declarations of interest

[272]

E. ALLEGED BREACHES OF FIDUCIARY DUTIES

[273]

E.1 Overview

[273]

E.2 Doshay’s investments in other Chinese restaurants

[281]

E.3 Acquisition of the Exhibition Street and Lonsdale Street Properties

[310]

E.4 Doshay’s investment in Evaluator and Café Puccini

[329]

E.5 Altering the share register of Global 2000

[342]

E.6 Doshay’s decision not to renew the lease over the Dragon Boat Restaurant premises

[346]

F. ALLEGED OPPRESSION

[359]

G. CONCLUSION

[364]

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

For the reasons explained below, I do not consider that the advances of money made by Doshay to various other entities, usually without a formal loan agreement and in a number of instances on an interest free basis, were dishonest misappropriations of Doshay’s funds. I consider that the advances were interest free loans made by Doshay repayable on demand. In my view, each of the advances had the potential to improve Doshay’s financial position for the benefit of its shareholders. The fact that, in some cases, that did not occur does not alter the character of the original transaction. Further, the advances were properly recorded in Doshay’s accounts and the accounts of the borrowing entity. There was nothing dishonest or hidden about the advances. C. OVERVIEW OF THE EVIDENCE Certain primary facts were not in dispute and the parties filed an agreed statement of facts for the purposes of s 191 of the Evidence Act 1995 (Cth) recording the uncontested facts. The parties tendered a large body of documentary evidence relating to the transactions the subject of complaint by Hylepin (which I will refer to as the impugned transactions). The documentary evidence included many financial statements relating to the companies the subject of allegations in the proceeding, including accounting ledger’s relevant to particular impugned transactions. Given the historic nature of most of impugned transactions, many occurring 20 to 30 years ago, it is significant that the transactions undertaken by Doshay and associated companies, and which are the subject of complaint in this proceeding, have been recorded in the accounting and financial records of Doshay and the associated companies. It is possible to trace the transactions through those records. I accept the submission of the defendants that, while aspects of Doshay’s affairs have been conducted with relative informality, Doshay’s directors have ensured that its external accountants, Paul Tjioe & Associates, prepared financial statements for Doshay and associated entities on an annual basis. Section 1305(1) of the Corporations Act provides that a “book” (defined in s 9 to include “financial reports or financial records, however compiled, recorded or stored”) kept by a body corporate under a requirement of the Act “is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book”. In Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 236 FLR 1, Austin J made the following observations about the effect of s 1305(1) (at [396]):The statement in s 1305(1) that the company’s books are prima facie evidence of a matter stated or recorded in them does more than merely to convey that they are the starting point to proof or a “first view”. All other things being equal, the fact that a matter is stated in a book kept by a company is sufficient to prove that matter in civil proceedings. That does not reverse the onus of proof in the proceedings in any general way, but it means that the tendering of the book is evidence of the matter recorded in it, and that matter will be thereby proven unless other evidence convinces the tribunal of fact to the contrary, on the balance of probabilities.

Decision

Reasons for decision

It is appropriate to grant declaratory relief in favour of Doshay. I will also order, pursuant to s 175 of the Corporations Act, that Global 2000 do all things necessary to correct its register of members, and lodge a notice of correction with ASIC, to record that, at all times since 15 June 2000, Doshay has been the owner of five ordinary shares.E.6 Doshay’s decision not to renew the lease over the Dragon Boat Restaurant premises Hylepin submitted that the conduct of John So in resolving, in May 2019, that Doshay should not exercise the option to renew the lease over the Dragon Boat Restaurant premises was in breach of his fiduciary duty to Doshay and in breach of his duties as a director of Doshay under s 180(1) of the Corporations Act. Hylepin submitted, and I accept, that in order for an interest of the fiduciary to be a “personal interest” for the purposes of the conflict rule, the interest does not have to be a pecuniary one: Bell v Westpac at [4509]. Section 180(1) of the Corporations Act provides that:(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a) were a director or officer of a corporation in the corporation’s circumstances; and(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer. The duty in s 180(1) is subject to the business judgment rule set out in s 180(2) as follows:(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of sub-section (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:(a)make the judgment in good faith for a proper purpose; and(b) do not have a material personal interest in the subject matter of the judgment; and(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and(d) rationally believe that the judgment is in the best interests of the corporation.The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold. Section 180(3) defines “business judgment” to mean “any decision to take or not to take action in respect of a matter relevant to the business operations of the corporation.” In determining whether a director has exercised reasonable care and diligence, the inquiry focuses on what an ordinary person, with the knowledge and experience of the defendant, might be expected to have done on their own behalf: ASIC v Adler at [372] per Santow J. The question whether a director has exercised a reasonable degree of care and diligence is answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question: Australian Securities and Investments Commission v Drake (No 2) [2016] FCA 1552; (2016) 340 ALR 75 at [395] per Edelman J.

Ratio Decidendi

Legal Principle Established

The proceeding was commenced by Hylepin on 15 December 2016. At that time, the proceeding was brought under ss 232 and 233 of the Corporations Act 2001 (Cth) (Corporations Act), alleging that the conduct of the affairs of Doshay (as summarised above) has been either contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, Hylepin. Hylepin seeks relief under s 233 of the Corporations Act, including that Doshay declares and pays a dividend, John So or Doshay buy Hylepin’s shares at fair value (that is, at a price that removes the effect of the oppression), or alternatively that Doshay be wound up. On 23 October 2018, the Court gave Hylepin leave pursuant to ss 236(1) and 237(1) of the Corporations Act to intervene in the proceeding in the name of Doshay to bring and prosecute derivative claims against John So for breach of fiduciary duty in respect of the transactions summarised above (other than the non-payment of dividends), and against Global 2000 and Wendy Cheng for their knowing involvement in the breaches and receipt of trust property. In that respect:(a)The claims against John So relate to each of the impugned transactions. The relief sought against John So includes the payment of equitable compensation, a declaration that the one share in Global 2000 registered in the name of John So is owned by Doshay and orders to correct the register of Global 2000.(b)The claims against Global 2000 principally relate to the acquisition of the Exhibition Street Property and the Lonsdale Street Property. The relief sought includes declarations of trust over the Exhibition Street and Lonsdale Street Properties in favour of Doshay and that the properties be transferred to Doshay or orders that Global 2000 account to Doshay for benefits derived. (c)The claims against Wendy Cheng relate to the Evaluator transactions and the relief sought is the payment of equitable compensation to Doshay. Given the length of time between the transactions the subject of complaint and the commencement of the proceeding, almost 30 years for the earliest transactions, the possible application of limitation periods looms large. All of the transactions, other than the non-renewal of the lease of the premises of the Dragon Boat Restaurant, occurred prior to 15 December 2010 being the date six years prior to the commencement of the proceeding. Limitation law is not some “unmeritorious procedural technicality”. Rather, as McHugh J observed in Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541 (at 553), a limitation period represents the legislature’s judgment that “the welfare of society is best served by causes of action being litigated within the limitation period, notwithstanding that the enactment of that period may often result in a good cause of action being defeated”. His Honour explained (at 551) that the enactment of time limitations has been driven by the general perception that "[w]here there is delay the whole quality of justice deteriorates", citing R v Lawrence [1982] AC 510 at 517, per Lord Hailsham of St Marylebone LC, and that the “longer the delay in commencing proceedings, the more likely it is that the case will be decided on less evidence than was available to the parties at the time that the cause of action arose”. His Honour further observed (at 552, citations omitted):The effect of delay on the quality of justice is no doubt one of the most important influences motivating a legislature to enact limitation periods for commencing actions. But it is not the only one. Courts and commentators have perceived four broad rationales for the enactment of limitation periods. First, as time goes by, relevant evidence is likely to be lost. Second, it is oppressive, even "cruel", to a defendant to allow an action to be brought long after the circumstances which gave rise to it have passed. Third, people should be able to arrange their affairs and utilise their resources on the basis that claims can no longer be made against them. Insurers, public institutions and businesses, particularly limited liability companies, have a significant interest in knowing that they have no liabilities beyond a definite period.…The final rationale for limitation periods is that the public interest requires that disputes be settled as quickly as possible.