In the matter of Hermitage Engadine Pty Ltd

[2024] NSWSC 1308

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Hermitage Engadine Pty Ltd [2024] NSWSC 1308

Hearing dates:

9 October 2024

Date of orders:

9 October 2024

Decision date:

09 October 2024

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Dismiss application for leave under s 237 of the Corporations Act 2001(Cth) to bring derivative proceedings.

Catchwords:

CORPORATIONS – Statutory derivative action – Application to bring proceedings on behalf of company – Whether leave to bring derivative action should be granted.

Legislation Cited:

- Corporations Act 2001 (Cth), ss 236-237

Cases Cited:

- Admirable 1 Pty Ltd v Leighton Contractors Pty Ltd [2005] NSWSC 1005

- Hobart International Airport Pty Ltd v Clarence City Council (2022) 276 CLR 519; [2022] HCA 5

- Huang v Wang [2016] NSWCA 164

- Maher v Honeysett and Maher Electrical Contractors Pty Ltd [2005] NSWSC 859

- Re Gladstone Pacific Nickel Ltd (2011) 86 ACSR 432; [2011] NSWSC 1235

- Re Legal Practice Management Group Pty Ltd [2018] NSWSC 527

- Swansson v RA Pratt Properties Pty Ltd (2022) 42 ACSR 313 at [26]; [2022] NSWSC 583

Category:

Principal judgment

Parties:

Ashelford Engadine Development Pty Ltd (First Plaintiff)
Peter Ashelford (Second Plaintiff)
Hermitage Engadine Pty Ltd (First Defendant)
Central Real Development Pty Ltd (Second Defendant)

Representation:

Counsel:
J Horowitz (Plaintiff)
S Robertson SC/C Hartcher (Second Defendant)

Solicitors:
TPS & Co Lawyers (Plaintiff)
Thomson Geer (Second Defendant)

File Number(s):

2024/260069

Judgment – ex tempore (Revised 9 October 2024)

Nature of the application

1. By Originating Process filed on 15 July 2024, the Plaintiffs, Ashelford Engadine Development Pty Limited (“AED”) and Mr Ashelford, seek several orders against Hermitage Engadine Pty Ltd (“Company”) and Central Real Development Pty Limited (“Central Real”), which is a security holder in the Company. The Plaintiffs, first, seek interlocutory relief in the nature of leave to bring proceedings on behalf of the Company against Central Real, which is the subject of this hearing.

2. Second, the Plaintiffs seek two declarations, identified as being sought on behalf of the Company, that a purported Loan Deed dated 26 September 2023 between the Company and Central Real is void and of no effect and that a purported mortgage in favour of Central Real over certain land at Engadine is void and of no effect. Further relief is sought by AED, apparently in its own right in its capacity as a securityholder in the Company, and is not the subject of an application for leave to bring derivative proceedings. The Court has ordered the filing of Points of Claim and Points of Defence, which have crystallised the matters in issue, at least to some extent.

Affidavit and other evidence

3. The Plaintiffs rely on an affidavit dated 25 July 2024 of Mr Ashelford and I have been taken to several documents that are exhibited to that affidavit. Mr Ashelford indicates that he is the sole director and shareholder of AED and also a director of the Company, and that AED holds about 25% of the total issued shares in the Company. He refers to a property development at Engadine which is being undertaken by the Company, and to the circumstances in which Mr Denny, who was the sole director of Central Real, became involved with the Company and the development. Mr Ashelford also refers to correspondence relating to loan advances made by Mr Denny or Central Real to the Company, and to a request by Central Real to execute a Loan Deed and mortgage in respect of those loan advances. Mr Ashelford's evidence is that he, or Mr Duffy who is also a director of the Company, did not approve the entry into the Loan Deed or mortgage, and it is also contended that Mr Duffy’s electronic signature, by Docusign, of those documents was applied to them without his authority.

4. It is common ground that Central Real has in fact made a substantial loan to the Company, although there is a contest as to whether certain legal costs are properly treated as within that loan, and there is also a contest as to amount of interest, or indeed whether any interest, is payable on that loan. The position which the Plaintiffs seek to put, for the Company, in the proceedings is that the Loan Deed and mortgage are void, either because their execution did not comply with the terms of the Securityholders Agreement in respect of the Company, or because they were not properly executed by Mr Duffy, so far as the application of his electronic signature to them was not authorised. As will emerge below, they give less attention to the question of the practical consequences for the Company if the Loan Deed is in fact void and it is set aside.

5. I was taken, in the course of submissions, to correspondence from Mr Duffy which raises a challenge to his apparent execution of the Loan Deed and the mortgage by Mr Duffy, and to Mr Duffy's contention that he had not authorised the execution of his signature to those documents (Ex A1, CB 101). I was also taken to correspondence where the Plaintiffs’ solicitors have challenged the execution of the Loan Deed and mortgage (Ex A1, CB 106) and Central Real has in turn contended that, so far as Mr Duffy has stated that he did not execute the Loan Deed or the mortgage, that amounts to a false and misleading statement which in turn gives rise to an event of default under the Loan Deed, as to which Central Real has reserved its rights (Ex A1, CB 109). The solicitors for Central Real then pointed out, in a critical observation, that, if the position put by the Plaintiffs were correct, then:

“There would be no agreement governing the advances made by [Central Real] to [the Company] and those amounts would be repayable on demand.”

6. The solicitors for Central Real also foreshadowed that, if the Plaintiffs commenced these proceedings, Central Real would bring a Cross-Claim seeking judgment for the amounts advanced to the Company, together with costs and interest. That has not yet occurred. Plainly, that will be one possible step that could be taken, where it is contended that the Loan Deed and mortgage are void; another, relying on a restitutionary right, would be for Central Real to serve a creditor's statutory demand for at least the principal amount of the Loan, if the Loan Deed which provides the basis for the loan is set aside.

7. I have also been taken to the terms of the Securityholders Agreement (Ex A1, CB 125) which limits the board's authority, such that the board may not authorise or cause the Company to do certain things, without the approval of, relevantly, a Special Securities Resolution (as defined) (cl 15.2, Ex A1, CB 151). Clause 25 of that agreement in turn contains a dispute resolution provision, on which Central Real relies, and cl 26 contains a board deadlock provision, which allows matters to be referred for a Special Securityholders Resolution. There is no suggestion that such a referral would resolve the deadlock which presently exists in respect of the commencement of the proceedings which the Plaintiffs seek to bring on the Company's behalf.

8. A schedule to that Securityholders Agreement in turn requires that a "Securityholder loan", being a loan from a securityholder to the Company, requires approval of a Special Securityholder Resolution of 80%. That schedule also refers to the need for a Special Securityholder Resolution in respect of the grant of security or encumbrance over assets of the Company. The Plaintiffs contend that those terms of the Securityholder Agreement have been breached; that may in turn raise a question as to the status of the Loan Deed or mortgage, which would depend on complex questions as to whether the Company's constitution has been impliedly amended by the Securityholders Agreement, and the effect of any breach of the Securityholders Agreement on the validity of documents that were executed in breach of it. If is not necessary to address those questions for the purposes of this application.

9. I was in turn taken to the Loan Deed dated 26 September 2023 (Ex A1, CB 196), which is in dispute. The reference schedule to that document, and a schedule attached to it, provides that the amount of the advance is $12,865,946.28, comprising the amount set out in the schedule; the repayment date is no later than seven years after the Advance Date or the Completion Date (each as defined) whichever first occurs; there is provision for a discounted rate of interest of 8% per annum up to the execution date of the Loan Deed and 12% per annum thereafter; and a standard rate, in the event of default, of 18% per annum which Central Real contends is now applicable. Plainly, those provisions, including the provision which sets the term of the loan as extending to the Completion Date, would have no application if the Plaintiffs were successful, on the Company's behalf, in obtaining a declaration that the Loan Deed was void. That Loan Deed is apparently executed by Mr Denny and Mr Duffy for the Company, and by Mr Denny for Central Real, and an unregistered mortgage which is attached to it is also purportedly executed by Mr Denny and Mr Duffy for the Company, although I have noted above that there is a challenge to the attachment of Mr Duffy's electronic signature to those documents.

10. By a second affidavit dated 2 October 2024, Mr Ashelford addresses the position in respect of the decision-making in respect of the project and offers certain undertakings in respect of the conduct of the proceedings; notes that it is “anticipated” that the development will reach practical completion by late October or early November 2024; and notes that some 41 of the 64 apartments have been pre-sold. He annexes minutes of a directors meeting held on 8 October 2024, where the directors of the Company were deadlocked as to whether the proceedings should be commenced in the Company's name, with Mr Ashelford and Mr Duffy voting in favour of that proposition and an alternate director representing Central Real voting against that proposition. By a further affidavit dated 8 October 2024, Mr Ashelford addressed aspects of his property holdings, as to which he relies to contend that he has sufficient assets to support an indemnity that he has offered as to the costs incurred by, and that may be ordered against, the Company in the proceedings. It is not necessary to determine the adequacy of that indemnity given the conclusion that I reach on other grounds below.

11. The Plaintiffs also read the affidavit dated 8 October 2024 of the Plaintiffs' solicitor, Mr Sperber, which annexes a copy of the minutes of the meeting held on 8 October 2024.

12. Central Real in turn relies on the affidavit dated 18 September 2024 of Mr Denny, which referred to Central Real's involvement in the Engadine project and the loan to the Company. It is ultimately neither necessary nor appropriate for me to reach any substantive findings as to those matters for the purposes of this application, where Central Real acknowledges that an arguable case would be available to the Company, a matter to which I return below.

13. Central Real also relies on an affidavit dated 24 September 2024 of its General Counsel, Mr Felstead, which refers to correspondence in respect of the development and takes issue with the record of at least one board meeting in respect of the Company on 11 September 2024. It is also not necessary to determine that dispute in order to determine this application.

14. Central Real relies on a further affidavit dated 8 October 2024 of Mr Felstead, which addresses, among other things, the further meeting of the board of directors of the Company held on 8 October 2024, and seeks to support the reasons why Central Real does not consider it is in the Company's interests to commence proceeding against Central Real. It is also not necessary to address the adequacy or otherwise of those reasons to determine this application.

15. Ultimately, the issues in respect of this application are in relatively narrow scope, and its determination does not require any detailed findings as to the affidavit evidence, once the matters in dispute and the consequences of the proceedings are identified.

Applicable principles and submissions

16. The applicable principles in respect of an application of this kind are well established. I have drawn here on Counsel's submissions and my summary of those principles in Re Legal Practice Management Group Pty Ltd [2018] NSWSC 527 at [50]-[54], although I recognise that many decisions before and since have addressed those principles.

17. In their application for leave to bring the proceedings, the Plaintiffs need to satisfy the criteria for the grant of leave specified in s 237(2) of the Corporations Act 2001 (Cth) (“Corporations Act”). In order to grant leave under that section, the Court must be satisfied of five matters, and must grant that leave if satisfied of those matters. Those matters are that it is probable that the Company will not itself bring the proceedings; the Plaintiffs are acting in good faith; it is in the best interests of the Company that the Plaintiffs be granted the leave sought; there is a serious question be to tried; and, at least 14 days before making the application, the Plaintiffs gave written notice of their intention to bring the proceedings or the Court dispenses with that requirement. The Plaintiffs bear the onus of establishing each of those matters on the balance of probabilities: Swansson v RA Pratt Properties Pty Ltd (2022) 42 ACSR 313 at [26]; [2022] NSWSC 583 (“Swansson”); Huang v Wang [2016] NSWCA 164. If all of the requirements of s 237(2) are satisfied, the Court must grant leave to bring the proposed proceedings. If any or all of the criteria specified in that section are not satisfied, then the Court should not grant that leave: Maher v Honeysett and Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 at [12]-[13].

Whether the company would bring the proceedings

18. It is likely common ground, and it is in any event clear enough, that the first of the requirements for a grant of leave to bring a derivative action under s 237(2)(a) of the Corporations Act, that it is likely that the Company would not itself bring the proceedings, is satisfied. A resolution to bring the proceedings has been put before the Company's board, which is deadlocked in respect of the resolution where the representative of Central Real has voted against it. In those circumstances, this requirement is satisfied.

Whether the plaintiffs are acting in good faith

19. The second requirement for a grant of leave to bring a derivative action, under s 237(2)(b) of the Corporations Act, is that the Plaintiffs must establish to the Court's satisfaction that they are acting in good faith. Factors relevant to that requirement include that they have an honest belief that a good cause of action exists and has reasonable prospects of success, although that belief will be tested against whether a reasonable person in the circumstances would hold that belief, and whether the Plaintiffs are seeking to bring the action for a collateral purpose: Swansson at [36]. The case law has recognised that it is relatively easy to satisfy this requirement if an application is made by a current shareholder who has more than a token shareholding, as AED here has, and the derivative action seeks relief which would have the consequence that the value of the applicant's shares would be increased: Swansson at [38]; Re Gladstone Pacific Nickel Ltd (2011) 86 ACSR 432 at [58]; [2011] NSWSC 1235 (“Re Gladstone Pacific Nickel”).

20. Mr Horowitz, who appears for the Plaintiffs, contends that the Plaintiffs are acting in good faith, where the Loan Deed and mortgage were executed without their knowledge or approval, and they seek to bring the proceedings in order to remedy the breaches of the Securityholders Agreement in that regard. Mr Robertson, with whom Mr Hartcher appears for Central Real, responded, in his written outline of submissions, that the Court could not conclude that the Plaintiffs were acting in good faith in the relevant sense, where they had not led evidence of that matter. That proposition, rightly, received lesser focus in his oral submissions.

21. It is apparent that (putting aside the difficulties that will emerge below) the Plaintiffs would potentially benefit from a finding that the Loan Deed and mortgage was void, at least if they could then reach the result that the Company had the benefit of the loan funds without having to pay interest for the period in which it had that benefit. That benefit would be to the economic advantage of the Company and the Plaintiffs. In those circumstances, I will assume, without deciding, that the Plaintiffs are acting in good faith, although that will not be determinative of the application for the reasons noted below.

Whether the proceedings are in company's best interests

22. The third requirement for the grant of leave to bring a derivative action, under 237(2)(c) of the Corporations Act, is that the grant of such leave is in the Company's best interests. This was the primary issue in contest between the parties. The relevant principles were summarised in Swansson at [55]-[56], where Palmer J noted that this requires that the Court be satisfied that the proposed action actually is, on the balance of probabilities, in the relevant company's best interests. His Honour observed that, in order to prove that leave is in a company's best interests, an applicant should generally give evidence of the character of the company, in the sense of the nature of its operations; its business so that the effects of the proposed litigation on the conduct of the business may be appreciated; whether there are other means of obtaining the same redress so that company does not have to be brought into litigation against its will; and the proposed defendants have the ability to meet at least a substantial part of any judgment in favour of the company so that the Court may ascertain whether the action would be a practical benefit to the company. That last factor is less relevant here, where the relief sought is to set aside the Loan Deed and the mortgage. These factors have also been addressed in subsequent case law, including, for example, Re Gladstone Pacific Nickel. Perhaps surprisingly, the parties did not address whether there would be any detriment to the Company in the conduct of the proceedings between its shareholders prior to the completion of the development.

23. Mr Horowitz submits that the Loan Deed is disadvantageous to the Company in several respects and highlights a challenge as to the inclusion of particular legal fees in the schedule of moneys which are covered by the loan, and the provision for payment of interest, where no monthly interest had "previously been payable". That proposition appears to involve the unstated premise that moneys would have been advanced by Central Real to the Company, whether for a short-term or a long-term, other than on terms that the Loan Deed would be executed, which provided for payment of interest on those monies. Mr Horowitz also points to the fact that interest now accrues at 18 per cent, compounded monthly, and that the Company had paid no interest to Central Real, although that proposition in turn depends on a matter that the Plaintiffs do not necessarily accept, namely that default interest is presently payable. I recognise that Central Real at least has contended for that proposition. Mr Horowitz then submits that, by reason of these aspects of the Loan Deed, it is in the best interests of the Company that the Loan Deed and mortgage are declared void. I will return, shortly, to the immediate and obvious difficulty with that proposition.

24. Mr Robertson in turn submits that the grant of leave to bring the proceedings has not been shown to be in Company's best interests. The first proposition that he puts in support of that matter was that AED had standing to seek the relief that it sought, without the need to bring the proceedings in the Company's name. Mr Robertson referred in that respect to the decision in Hobart International Airport Pty Ltd v Clarence City Council (2022) 276 CLR 519; [2022] HCA 5 although he rightly acknowledged in oral submissions that that decision was not precisely on point. Mr Horowitz in turn pointed to authority that different minds may come to different conclusions as to what constitutes a sufficient or real interest to allow standing to seek declaratory relief.

22. It seems to me that, at least so far as the application turns on an alleged breach of the Securityholders Agreement, then AED would plainly have standing to bring that claim without the need to bring it in the Company's name. However, so far as the allegation is that the Loan Deed and mortgage do not bind the Company, because Mr Duffy had allegedly not authorised the application of his electronic signature so as to bind the Company, there is at least a question whether the Plaintiffs or AED would have standing to bring that claim, and a further question whether the Court would exercise a discretion to grant declaratory relief if that claim were brought by the Plaintiffs or AED rather than by the Company. It seems to me that the Plaintiffs, and indeed the Company, should not be exposed to the risk that relief would be declined on that basis, and I would not find that the proceedings are not in the Company's best interest on the basis that the relief in respect of the execution of the Loan Deed and mortgage could be brought by the Plaintiffs personally.

23. Second, Mr Robertson submits that the Plaintiffs’ commencement and conduct of the proceedings has been in breach of a dispute resolution regime in cl 25 of the Securityholders Agreement. Mr Horowitz responds that, and it seems to me that there is force in the proposition, that the relevant dispute is not, or not only, a dispute between the securityholders in the Company, so far as it involves a potential claim by the Company that the Loan Deed and mortgage is not binding upon it, and that claim is outside the scope of the dispute resolution provisions. Second, Mr Horowitz points to the fact that Points of Claim and Points of Defence have to date been filed in the proceedings, without any point being taken whether the matter fell within the scope of the dispute resolution clause, and that undermines Central Real’s late reliance on that clause. I note that Barrett J (as his Honour then was) took a somewhat similar view in Admirable 1 Pty Ltd v Leighton Contractors Pty Ltd [2005] NSWSC 1005 at [41]. I also recognise that there has been correspondence between the parties in which the issues have been agitated without any suggestion that any resolution of those issues is likely to be forthcoming between the parties. In those circumstances, there would be little utility in, for example, deferring the proceedings for the parties to first resolve the matter by discussion or requiring a mediation before the proceedings continue. For these reasons, I would not find that the proceedings were not in the Company's best interests, by reason of any non-compliance with the dispute resolution clause, if it applied. In any event, the better view is that it does not apply in respect of a claim brought in the name of the Company to seek to set aside the Loan Deed and the mortgage.

24. Third, Mr Robertson put that the use of the Company in a shareholders’ dispute would not be in the Company's best interests, and he expanded the scope of that submission somewhat in the course of oral submissions.

25. Mr Robertson points to the fact that the dispute involves at least aspects of a dispute between the securityholders, not only as to the manner in which the Loan Deed and mortgage were executed but also, more widely, on Central Real's case, as to whether the Loan Deed and mortgage had been informally approved by the securityholders, given the necessity of the Company obtaining the relevant loan.

26. In oral submissions, Mr Robertson took up an issue that I had raised with Mr Horowitz in submissions, that the Plaintiffs, and Mr Horowitz in submissions, move too readily from the proposition that there are several disadvantages in the Loan Deed and the mortgage and its terms to the conclusion that it is in the Company's best interest that the Loan Deed and mortgage be declared void. It does not seem to me that that proposition has been established, where the Plaintiffs give no attention to the question of the consequences for the Company of that result, so as to allow the Court to reach any conclusion that the proceedings are in the Company’s best interests.

27. On the face of it, the effect of a declaration that the Loan Deed and mortgage would be void would be that the Company has no entitlement to retain the funds that had been advanced to it. Central Real has already foreshadowed a Cross-Claim for the repayment of those funds if the Loan Deed is void, and it would also likely be open to it to issue a creditor's statutory demand, at least for the principal of the loan. There is no suggestion that the Company presently has funds to repay that loan, and the Plaintiffs have not addressed the question of what would occur if they were ultimately to succeed in obtaining the relief they seek on the Company's behalf. Instead, the Plaintiffs seem to have assumed that they can achieve a situation where the Loan Deed and mortgage is set aside but the loan remains in place as an interest-free loan. It is not apparent that there is any realistic basis for that assumption.

28. When this issue was raised, Mr Horowitz retreated to several defensive propositions. The first was that the development would be complete by the time the litigation was resolved and the Company would have sold the relevant units so that the loan could be repaid. It is, of course, not particularly attractive for the Plaintiffs to contend, in effect, that their hope is that the litigation will move slowly, so that the completion of the developments may have the consequence that the Company may be able to pay the amounts that are owed under the loan, if the Company is successful and the Loan Deed and mortgage is set aside. The Plaintiffs cannot in any event establish that proposition. First, it is not apparent how quickly the development will be concluded, or how quickly the sales that are pre-sales will be completed, where the evidence of that matter is limited. Second, and importantly, there is not sufficient evidence of the amounts that are due to the secured lender, or what will be available to repay the amount due to Central Real, in the event that a demand for repayment was made, because the Loan Deed and mortgage were set aside. I have not neglected that there was some limited evidence, admitted as Mr Ashelford's understanding only, of his expectation as to the surplus from the development.

29. Mr Horowitz also submitted that Central Real claims that the Company is in default and that it is already entitled to require repayment of the loan. The difficulty with that contention is that, first, the Plaintiffs do not appear to accept that proposition, and, second, Central Real has not in fact claimed repayment of the loan, although it has reserved its rights in that regard. It may be that, if Central Real were now to demand repayment, on the basis of a default, the position would change, and it would then be in the Company's best interests to seek to set aside the Loan Deed and mortgage. It does not follow that, because it could be in the Company's best interests to take that course in the future, it is now in the Company's best interest to take that course and bring the consequences of a potential order for immediate repayment upon itself, where there is no suggestion that it can comply with that order.

30. It seems to me that, where the Company does not have any apparent funding to repay the loan if it were successful in obtaining the relief that it seeks, and it were immediately required to repay the amount due to Central Real, then the Court cannot conclude that the grant of leave to bring the proceedings seeking that relief is in the Company's best interest.

Other matters

34. It is therefore not necessary to determine whether there is a serious question to be tried, although the parties proceeded on the basis that there was a serious question to be tried in the relevant circumstances. It is common ground that the Plaintiffs complied with the requirement to give written notice to the Company of their intention to apply for leave, and that requirement for leave is satisfied.

Orders

35. For these reasons, the application for leave for the Plaintiffs to bring the suggested proceedings in the name of the Company against Central Real must be dismissed, with costs. It will likely be necessary for the parties to consider whether any amendments should now be made to the Originating Process and the Points of Claim and Points of Defence. I recognise that one oddity of this application was that, on Central Real's case, only minimal amendments would be necessary, because no application for leave was necessary where, on Central Real's case, the Plaintiffs already had the entitlement to bring the claims in their own right.

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Decision last updated: 18 October 2024