In the matter of Three Chimneys Pty Ltd (in liquidation)

[2015] NSWSC 1754

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Three Chimneys Pty Ltd (in liquidation) [2015] NSWSC 1754
Hearing dates:	9 and 10 November 2015
Decision date:	24 November 2015
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	Applicant to be allowed a short period to determine whether to offer wider indemnity in support of application to bring derivative proceedings. Parties then to be heard as to orders and costs.
Catchwords:	CORPORATIONS – winding up – application in the Court’s inherent jurisdiction by shareholder for leave to bring derivative proceedings – where liquidator did not oppose leave provided a capped indemnity and security for that indemnity was provided – where shareholder and its directors offered indemnity in a higher capped amount than that proposed by the liquidator – where indemnity expressed to be limited to costs of claims prosecuted by the company pursuant to the leave – whether to grant leave on those terms PRACTICE AND PROCEDURE – application to amend Originating Process – where amendments were as to relief sought in Originating Process to conform it to Points of Claim – whether to allow the amendments under r 19.1 of the Uniform Civil Procedure Rules 2005 (NSW).
Legislation Cited:	- Civil Procedure Act 2005 (NSW) ss 56, 57, 58, 64, 64(2) - Conveyancing Act 1919 (NSW) s 37A - Corporations Act 2001 (Cth) ss 180, 181, 182 - Uniform Civil Procedure Rules 2005 (NSW) r 19.1
Cases Cited:	- Baden v Societe Generale pour Favoriser le Developpement du Commerce et de l’Industrie en France SA (1993) 1 WLR 509 - Brightwell v RFB Holdings [2003] NSWSC 7; (2003) 44 ACSR 186 - Cadima Express Pty Ltd (in liq) v Deputy Commissioner of Taxation [1999] NSWSC 1143; (1999) 33 ACSR 527 - Carpenter v Pioneer Park Pty Ltd [2008] NSWSC 551; (2008) 71 NSWLR 577 - Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 - Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 - Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732 - Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296 - Hu v PS Securities Pty Ltd (as trustee of the Joseph Family Trust) [2011] NSWSC 303 - Karam v Australia & New Zealand Banking Group Ltd [2000] NSWSC 596; (2000) 34 ACSR 545 - Keyrate Pty Ltd v Hamarc Pty Ltd [2001] NSWSC 491; (2001) 38 ACSR 396 - Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 64 - Re Sundara Pty Ltd [2015] NSWSC 1694
Category:	Procedural and other rulings
Parties:	S&B Davies Pty Ltd (Applicant) Three Chimneys Pty Ltd (First Respondent) Domseb Unity Group Pty Ltd (Third Respondent) DRB 56 Pty Ltd (Third Respondent) Caterine Anne Bridget Oleszcuzk (Fourth Respondent) Shane Jaque (Fifth Respondent) Massimo Di Fazio (Sixth Respondent) Francesca Di Fazio (Seventh Respondent)
Representation:	Counsel: R Glasson (Plaintiff) G King (Solicitor – First Defendant) D Wright (Solicitor – Second to Fifth Defendants) M J Dawson (Sixth and Seventh Defendants)   Solicitors: Lancaster Law (Plaintiff) ERA Legal (Second to Fifth Defendants – 9.11.15) C Oleszczuk (in person – Second to Fourth Defendants - 10.11.15) S Jaque (in person – Fifth Defendant – 10.11.15) Maguire & McInerney (Sixth and Seventh Defendants)
File Number(s):	2015/156085

Judgment

1. By Interlocutory Process dated 12 October 2015, the Applicant, S&B Davies Pty Limited (“S&B Davies”) sought three orders. The first was that, under r 19.1 of the Uniform Civil Procedure Rules 2005 (NSW), it have leave to amend an Originating Process dated 26 July 2015 in the form annexed. The second was that leave be granted, in the Court’s inherent jurisdiction, for it to seek the relief claimed in paragraphs 76–94 of its Points of Claim filed on 16 June 2015 and in the Amended Originating Process on behalf of and in the name of the First Defendant, Three Chimneys Pty Ltd (“Company”). S&B Davies also sought an interlocutory order restraining disposal of certain properties of the Third Defendant, DRB 56 Pty Limited (“DRB 56”). That third application has been deferred, by agreement of the parties, until after this judgment, where the first and second issues took significantly longer to argue, requiring a second listing of the matter, than the parties’ original estimate.

2. The background to the proceedings and the application is set out in the written submissions of Mr Glasson, who appears for S&B Davies, and I need address it only briefly. The Company conducted a café, bakery and bar business known as “Three Chimneys” in Wollongong. S&B Davies was a 40% shareholder in the Company and the Second Defendant, Domseb Unity Group Pty Ltd (“Domseb”) held the balance of the shares. A dispute arose between the shareholders by July or August 2014 and, in late February 2015, solicitors acting for S&B Davies wrote to Domseb making allegations, including of oppression, in respect of the conduct of the business. On 13 March 2015, the Company sold the business to DRB 56 for a consideration of $60,000, under a sale of business contract which provided for completion on the same day. Domseb, which was a shareholder in the Company as I noted above, is also a 60% shareholder in DRB 56. The business had not previously been advertised for sale. Although the business had previously been valued at $58,000 in February 2015, there is a substantial challenge to the adequacy of that valuation in these proceedings. The Company was subsequently placed in administration on 20 March 2015 and in liquidation on 30 June 2015. The proceedings brought by S&B Davies claim oppression, allege that the business was sold at an undervalue and claims for breaches of directors’ duties that could only be brought as a derivative claim by the Company.

Leave to amend the Originating Process

3. The initial question raised in the application is whether S&B Davies should have leave to amend the Originating Process dated 26 May 2015. The amendment deletes earlier claims to interlocutory relief, which appear now to be superseded or no longer pressed, and introduces three additional paragraphs, which claim a declaration that the Sixth and Seventh Defendants, Mr Massimo Di Fazio and Ms Francesca Di Fazio, participated in breaches by the Fourth or Fifth Defendants, Ms Oleszczuk and Mr Jaque, of equitable and fiduciary obligations owed by them to the Company and were involved in contraventions by them of ss 180, 181 and 182 of the Corporations Act 2001 (Cth). Damages and equitable compensation are also sought.

4. The applicable principles in respect of an amendment to a pleading, or leave to file a new pleading, are well established and it is not necessary to set them out at length. I am required to exercise my discretion whether to allow the amendments having regard to the provisions of ss 56-58 and 64 of the Civil Procedure Act 2005 (NSW). Section 58 requires the Court to have regard to the dictates of justice when considering an order for the amendment of a document and requires the Court to have regard to the provisions of ss 56 and 57. Section 56 identifies the overriding purpose of the just, quick and cheap resolution of the real issues in dispute in the proceeding and s 57 requires proceedings to be managed having regard, inter alia, to the just determination of the proceedings. Section 64(2) provides, subject to s 58, for all necessary amendments to be made for the purpose of determining the real questions raised by the proceedings.

5. Mr Dawson, who appears for the Sixth and Seventh Defendants, resisted the grant of leave to amend the Originating Process by reference to several complaints as to the form of the Points of Claim previously filed by S&B Davies. The relief sought in the proposed Amended Originating Process appears to be founded in claims for breach of a range of statutory and equitable duties pleaded against Ms Oleszczuk in paragraphs 76–79 of the Points of Claim and against Mr Jaque in broadly corresponding form in paragraphs 80 – 84 of the Points of Claim. The pleading of those matters is by no means ideal, so far as these paragraphs involve conclusory allegations of breach of duty which are said to have occurred “by reason of” numerous paragraphs pleading factual matters earlier in the Points of Claim.

6. Paragraph 85 of the Points of Claim in turn alleges that the “Scheme” (as defined) was, or involved, a dishonest and fraudulent design intended to obtain financial advantage or gains by Ms Oleszczuk, Mr Jaque, Domseb, DRB 56 and the Di Fazios and to cause financial disadvantage or loss to the Company, and that proposition is particularised by repeating numerous paragraphs of the Points of Claim. The concept of “Scheme” is described in paragraph 24 of the Points of Claim as follows:

“At some time between August 2014 and late February 2015/early March 2015, each of Domseb, Oles[z]czuk, Jaque, DRB 56 and the Di Fazios agreed to embark on a scheme to undertake such steps and actions as may be necessary to procure and effect the alienation of the Business from Three Chimneys and the transfer of the Business to an entity related to them, namely DRB 56.”

That pleading seems to me to be at least sufficient to identify the allegation that the relevant business was improperly transferred from Three Chimneys to DRB 56, and that each of the relevant companies and individuals was involved in bringing about that result.

7. Paragraphs 86–89 of the Points of Claim in turn allege knowing assistance, knowing receipt, participation in breach of duty or involvement in a contravention of the relevant statutory provisions by DRB 56, with the consequence that DRB 56 is said to hold the business on trust for Three Chimneys. Paragraph 92 of the Points of Claim alleges knowing assistance and participation in breaches of fiduciary duties by the Di Fazios. In each case, there is an allegation of knowledge or “reason to know” of various matters by reason of a list of earlier paragraphs in the Points of Claim.

8. Mr Dawson criticises the pleading of “reason to know” in paragraphs 86–89 of the Points of Claim as ambiguous as to the nature of the knowledge that is alleged to support a claim for accessorial liability or knowing involvement in a breach of fiduciary duty. In the second part of the hearing on 10 November, I granted leave to any party who sought to make any submission, with reference to authority, as to the language “reason to know” in the Points of Claim to do so by a specified time. Mr Glasson made further submissions in that respect and the other parties did not seek to do so.

9. Mr Glasson submitted that the phrase “reason to know” was properly used as a compendious description of those categories which were sufficient to satisfy the knowledge requirement for liability for knowing receipt or knowing involvement in a breach of trust or breach of fiduciary duty. Mr Glasson referred to Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 400, where Gibbs J referred to the absence of actual knowledge or “reason to believe” that a fiduciary was violating his duty, in holding that a third party was not liable for knowing participation, and Mr Glasson pointed out that the High Court also used the language “known, or to have had reason to know” in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at 145. Mr Glasson also referred to the observations of the Full Court of the Federal Court of Australia in Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296 at [259] that:

“Put compendiously liability both for knowing receipt and knowing assistance turns on what the third party knew, or had reason to know, of the circumstances constituting the breach of ‘trust’ (Recipient Liability) or the ‘dishonest and fraudulent design’ (Assistance Liability).”

The Court there referred the first four categories of knowledge identified in Baden v Societe Generale pour Favoriser le Developpement du Commerce et de l’Industrie en France SA (1993) 1 WLR 509 at [250], namely actual knowledge, the wilful shutting of eyes to the obvious, a wilful and reckless failure to make such inquiries as an honest and reasonable person would make, or knowledge of circumstances that would indicate the facts to an honest and reasonable person, although it noted that caution as to that classification was justified, so far as it had the capacity to invite a formulaic approach.

10. I accept that the authorities have used the language “reason to know” in broadly describing the knowledge necessary to establish a claim in knowing receipt or knowing assistance. It does not necessarily follow that the use of that language in a summary way, in the Points of Claim, is sufficient to identify the nature of the particular knowledge of the Defendants alleged to support a knowing receipt or knowing involvement claim, to allow them to know the case they have to meet. It is not necessary to determine that question in this application, for the reasons noted below.

11. Mr Glasson indicated, in his further submissions as to that issue, that S&B Davies proposes to amend paragraph 90 of the Points of Claim to identify particular matters that are alleged to have been known to the Di Fazios, or alternatively as to which the Di Fazios are alleged to have wilfully shut their eyes, or wilfully and recklessly failed to make such inquiries as an honest and reasonable person would make, or as to which they knew circumstances that would have indicated those matters to an honest and reasonable person. The proposed amendment reflects the categories of knowledge identified in Baden above. It is not necessary or appropriate to address that proposed amendment in this application. First, the possibility of amendment has only been raised in supplementary submissions, where the leave for those submissions was limited; second, the amendment application is foreshadowed, rather than made, by those submissions; third, other parties have not had an opportunity to address the formulation of the proposed amendment or whether it should be permitted; and, fourth, in any event, it is possible to determine this application without dealing with that amendment, for the reasons noted below.

12. As Mr Glasson points out, no attack has previously been made on the Points of Claim which have taken their present form for a considerable time and, on 25 June 2015, several months ago, the Defendants including Mr and Mrs Di Fazio filed Points of Defence in respect of them. The amendment sought in the proposed Further Amended Originating Process merely inserts relief that corresponds to relief that was already claimed in the Points of Claim at least since June 2015. It does not seem to me that an amendment application in respect of the Originating Process, to conform it to the relief sought in the existing Points of Claim, is a proper forum for a collateral attack on the Points of Claim. The Defendants have had, and possibly still have, the opportunity to seek further particulars of the Points of Claim or to seek such relief in respect of aspects of them as they may be advised. It does not seem to me that the matters raised, in respect of the criticisms of the Points of Claim, provide any reason not to amend the Originating Process to conform the relief sought in it to that which is already claimed in the Points of Claim.

13. However, leave to amend could only be granted in respect of the relief sought in paragraphs 21 – 23 of the Amended Originating Process if leave is granted to S&B Davies to bring a derivative claim on behalf of the Company, since the relief sought in those paragraphs would only be available to the Company and not its shareholders. I address the question whether that leave should be granted below. I note, for completeness, that several other paragraphs of the Amended Originating Process and Points of Claims also could not proceed, absent the grant of such leave.

Application for leave to bring derivative proceedings

14. The issues raised in this aspect of this application overlap with issues addressed in my ex tempore judgment delivered on 27 July 2015 (“earlier judgment”), in respect of a broadly similar application. I referred to the authorities that deal with the circumstances in which leave should be given to bring a derivative action against a company in liquidation in the earlier judgment. In particular, I there referred to Carpenter v Pioneer Park Pty Ltd [2008] NSWSC 551; (2008) 71 NSWLR 577 at [34], where Barrett J had identified the relevant questions as whether the proceedings had some solid foundation, the liquidator’s attitude to the question whether the proceedings should be pursued and whether practical considerations supported the initiation of the proceedings, with particular reference to financial protection of the liquidator and the Company’s estate by means of indemnity and, if indicated, security. I also referred to other decisions addressing that question, including the decision in Hu v PS Securities Pty Ltd (as trustee of the Joseph Family Trust) [2011] NSWSC 303 at [38] and my review of the relevant authorities in Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 64.

15. I also referred in the earlier judgment to the importance of an adequate indemnity to protect the assets of a company in liquidation, where leave to bring a derivative action is sought, and referred to the consideration of that matter in Cadima Express Pty Ltd (in liq) v Deputy Commissioner of Taxation [1999] NSWSC 1143; (1999) 33 ACSR 527 at [49], where Austin J observed that an applicant for such leave typically:

“offers to indemnify the company in liquidation and the liquidator in respect of the proceedings, and to conduct the proceedings in such a fashion that liability to pay costs is undertaken by the applicant rather than the company to the extent that it is possible to do so. The Court will wish to be satisfied that the assets of the company in liquidation are not put at risk by the proceedings and that the liquidator is not exposed to personal liability without proper protection, and may also properly have regard to the risks which the litigation poses for the other party, given that the plaintiff is a company in liquidation, the assets of which are to be protected. To these ends, the Court may require that the person who conducts the litigation gives an indemnity supported by security for the benefit of the company and the liquidator, and perhaps also security for costs to protect the other party to the litigation.”

16. I also referred, in the earlier judgment, to Barrett J’s similar observation in Carpenter v Pioneer Park Pty Ltd above at [57], [59], that a company’s interests would not be served by a grant of leave, unless suitable and adequate security for the applicant’s provision of an indemnity was provided. His Honour also there rejected the argument that a company which had no assets suffered nothing if more liabilities were heaped upon it. I followed the approach in Cadima Express and Carpenter v Pioneer Park above in Re Colorado Products Pty Ltd (in prov liq) above at [10] in the context of a company in provisional liquidation. I also there noted that an adequate indemnity in favour of the liquidator and the relevant company may well operate to the indirect benefit of a defendant, by allowing a resource from which its costs may be met, and that I saw nothing inappropriate as to that result, although it is collateral to the question whether a proposed indemnity is adequate for the protection of the relevant company. I have since undertaken a further review of the case law concerning whether the Court should grant leave for proceedings in its inherent jurisdiction, and of the importance of an adequate indemnity in that respect, in Re Sundara Pty Ltd [2015] NSWSC 1694 at [8]–[12], [68]–[73], a judgment delivered after I had reserved judgment in this application, which adopts the same approach as the authorities to which I have referred above.

16. The parties relied in respect of this aspect of this application on substantially the same evidence as was read in the earlier application. S&B Davies again read the affidavits of Mr Brad Davies dated 26 May 2015 and 26 June 2015 which had been read before me in the earlier application, and related to the circumstances giving rise to the proceedings. Mr Dawson, who appeared for the Sixth and Seventh Defendants accepted, as he had accepted in the earlier application, that the Court should proceed on the basis that a serious question to be tried exists in respect of the question whether the Company disposed of its assets at an undervalue to DRB 56.

17. There is evidence, read in this application, to which I also referred in the earlier judgment, that supports a conclusion that S&B Davies’ claims have a solid foundation, including a valuation obtained by the then administrator of the business at a significantly larger amount than it had been valued prior to its sale. Mr Glasson submits, and I accept, that the existence of a case with a solid foundation is also supported by the challenge to the valuation of the business undertaken prior to its sale, including whether the person who undertook it was properly qualified to undertake that valuation, and as to the nature of, and the accuracy of, the information on which the valuer relied. It does not seem to me that the matters raised by Mr Dawson in respect of the Points of Claim to which I referred above, are such as to deprive the case sought to be brought on behalf of S&B Davies of a solid foundation although I would not adopt Mr Glasson’s characterisation of them as mere “pleading points”. As I noted above, Mr Dawson did not contend to the contrary. It seems to me that the evidence led in the earlier application and this application, combined with the concession made by Mr Dawson in this regard and the absence of a submission to the contrary by any other party, indicate that the claims sought to be pursued by S&B Davies on the Company’s behalf have a solid foundation.

18. Mr Dawson also submitted that leave should not be granted because the Company would be both plaintiff and defendant in the proceedings. I do not accept that submission. The Company would remain as First Defendant in the proceedings, although claims would be brought by S&B Davies on its behalf by way of derivative claims. That approach is well-established, having been accepted in, for example, Karam v Australia & New Zealand Banking Group Ltd [2000] NSWSC 596; (2000) 34 ACSR 545 at [39]–[44], Keyrate Pty Ltd v Hamarc Pty Ltd [2001] NSWSC 491; (2001) 38 ACSR 396 at [16]–[19], RFB Brightwell v RFB Holdings [2003] NSWSC 7; (2003) 44 ACSR 186 at [25] and subsequent case law taking the same approach.

19. The second relevant factor to whether leave should be granted is the liquidator’s attitude. The liquidator now has indicated that he will not himself commence the proceedings, in circumstances that he does not appear to be funded to do so and, subject to the terms of any indemnity offered by S&B Davies and persons associated with it, the liquidator does not oppose the commencement of the proceedings. By letter dated 25 September 2015 (Ex A3), the liquidator’s solicitors advised S&B Davies’ solicitor that the liquidator did not oppose the grant of leave subject to provision of an appropriate indemnity to both the liquidator and the Company in respect of costs, charges and expenses incurred by the liquidator and the Company in connection with or arising out of the proceedings, including but not limited to any adverse costs orders in the proceedings; any security determined to be appropriate and necessary in support of that indemnity; and directions regarding settlement or conduct of the proceedings and regarding the payment of any proceeds or recoveries to the liquidator. By a further letter dated 20 October 2015, the liquidator confirmed that he did not intend to oppose leave, on conditions that, inter alia, an indemnity be given in favour of the Company and the liquidator in respect of costs that the Company incurred, including pursuant to Court order, up to a limit of $20,000, on condition that that indemnity be given without prejudice to the liquidator’s right to seek further indemnity at a subsequent stage of the proceedings, and S&B Davies provide security in the amount of $20,000 for that indemnity. However, when the matter was first argued before me, S&B Davies did not consent to the latter position. As matters have developed, as I will note below, S&B Davies has ultimately offered a position which was more favourable to the Company and the liquidator than that which the liquidator was prepared to accept.

20. The third issue to be addressed is whether practical considerations support the grant of leave, including the protection of the Company’s and liquidator’s interests. In S&B Davies’ earlier, and unsuccessful, application for leave to bring the proceedings, it offered an undertaking to indemnify the Company for any costs and expenses of and incidental to the bringing of those parts of the claim which are derivative claims. However, as I noted in the earlier judgment, that indemnity was worthless, since it was apparent that S&B Davies would not have the capacity to honour it if it were called upon. I there held that that was sufficient reason to decline to grant the leave sought, and noted that that would not prevent a further application by S&B Davies for such leave, if it was then in a position to offer an adequate undertaking to the Court by a party which had the capacity to meet it in respect of the indemnification of the Company in respect of the proceedings.

21. In the first portion of this further application before me, on the morning of 9 November 2015, S&B Davies contended that leave should be granted on the basis of an indemnity given each of Mr Davies, Ms Crocco and S&B Davies would pay and bear, and indemnify, the Company and its liquidator up to a value of $20,000, against the costs and expenses of and incidental to bringing and continuing the proceedings on behalf of and in the name of the Company for the claims pleaded in the paragraphs of the Points of Claim and Originating Process that are referable to the derivative claims, and would give certain further undertakings. I recognise that the position put by S&B Davies partly met the liquidator’s requirements to consent to leave, so far as he would have accepted an indemnity with a monetary cap in that amount, provided it was secured. However, S&B Davies then resisted the order sought by the liquidator that it provide security in the amount of $20,000 for that indemnity. Mr Glasson, in submissions, contended that S&B Davies, its director Ms Crocco and its other shareholder Mr Davies had undertaken to the Court to pay the costs of the Company in respect of the claim and not to claim contribution from the Company for such costs or adverse orders if the proceedings are unsuccessful. Mr Glasson also pointed out that, in Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732 at [51], Austin J noted that such an undertaking provided a way to balance the advantage to a company, if its claims were successful, and the disadvantage it would suffer if the claims were lost and an adverse costs order was made. Mr Glasson’s submission failed to have regard, however, to the limitations that were sought to be imposed on the indemnity given by S&B Davies, Ms Crocco and Mr Davies, which would have had the result that it was unlikely to protect the Company or the liquidator if the Company was ultimately unsuccessful in the proceedings.

22. At the conclusion of Mr Glasson’s oral submissions in that first portion of the hearing, I advised Mr Glasson of my preliminary view that, in determining whether to grant leave to bring proceedings in the Court’s inherent jurisdiction, the Court would have regard to the interests of the Company and its creditors; that other creditors of the Company should not generally be exposed to the risks that their claims would be diluted by costs orders made against it if the proposed proceedings failed; that the position of the defendants in the proceedings, who may become potential claimants as to costs, was a matter that could also properly be taken into account in that regard; that the limitation of the proposed indemnity to an amount of $20,000 would have the result that other creditors of the Company would be left to bear the risk that costs ordered against the Company would ultimately exceed that amount; and that it was therefore unlikely that I would grant leave having regard to the form of that indemnity. The submissions subsequently put in the balance of the application have not altered my preliminary view in that regard, although it is not necessary to express a final view where S&B Davies has subsequently altered its position in respect of the indemnity.

23. When the application continued before me on the afternoon of 10 November 2015, S&B Davies had modified its position, so far as it initially offered to submit to an order (and clarified that it would offer an undertaking) that it, Mr Davies and Ms Crocco, would provide a written indemnity in favour of the Company and its liquidator:

“In respect of the reasonable costs the [Company] incurs, including pursuant to Court order, in respect of any claims prosecuted by [S&B Davies] pursuant to leave in these proceedings in the name of or on behalf of the [Company] (“Claims”), up to a limit of $60,000, on condition that such indemnity be without prejudice to the right of the [l]iquidator to seek further indemnity at a subsequent stage of the proceedings, but not before the allocation of a final hearing date.”

S&B Davies, Mr Davies and Ms Crocco also offered to provide security in the amount of $60,000 for that indemnity, offered to submit to other orders sought by the liquidator in respect of the process of settlement of the proceedings and the treatment of any amount payable in respect of the claims, and offered certain other undertakings.

25. The form of undertaking offered by S&B Davies, Mr Davies and Ms Crocco was further modified by Mr Glasson, in the course of oral submissions. He accepted that not only the liquidator but any other party should be entitled to seek further indemnity at a subsequent stage of the proceedings, or to seek an order that leave to bring the proceedings on behalf of the Company be revoked on the basis that the capped indemnity had become insufficient. Mr Glasson also accepted that, where such liberty was to be reserved, the limitation that such an application could not be brought before the allocation of a final hearing date ought not be pressed. Mr Glasson also accepted that the limitation to “reasonable costs” should only apply to costs incurred by the liquidator and that the indemnity should extend to any costs ordered against the Company in the proceedings, subject to the monetary cap, since the determination whether the relevant costs were reasonable would be made by the Court in ordering them, or alternatively in an assessment process.

26. It seems to me that the remaining question is whether, with the modifications made by Mr Glasson in oral submissions, the Court should now grant leave on the basis of an indemnity which is expressly limited to the costs of claims prosecuted by the Company pursuant to leave in the proceedings and is subject to a monetary cap. I am satisfied that the Court should grant leave to bring the proceedings, where the indemnity is capped in amount, but not if it is limited in scope. The primary reason I reach the view that a cap should be accepted is that the liquidator, who has the carriage of the Company’s liquidation, did not oppose the grant of leave on significantly less favourable terms to the Company, and the liquidator’s, the Company’s (and, indirectly, the Defendants’ interests) are significantly protected by their ability to seek to increase the cap on the indemnity, or revoke leave, if it ultimately proves insufficient.

27. S&B Davies’ primary position is that the costs to which the Company would be exposed, in bringing the proceedings, at least up to the point of an allocation of a final hearing date, would be substantially less than the amount of $60,000 which is its proposed monetary cap. I am conscious that, if that is correct, then there is no real need for the monetary cap on the indemnity which S&B Davies proposes, since it will not take effect. I am also conscious that the only circumstance in which that monetary cap would take effect would be if, contrary to S&B Davies’ submissions, the costs incurred up to the point of the allocation of a hearing date do exceed $60,000; and, in that situation, the monetary cap may operate inappropriately, so as to shift liability for the costs of the proceedings away from those who have sought leave to bring them on the Company’s behalf to other creditors or the liquidator. However, that is a risk which, it appears, the liquidator considers is in his and the Company’s interest to run, and it is significantly mitigated by the liquidator’s (and other parties’) ability to restore the matter, in that case, to have the cap increased, removed or leave revoked.

28. There was also a dispute between the parties as to the quantum of costs that were likely to be incurred in the proceedings, which is relevant to whether the monetary cap proposed in the indemnity offered by S&B Davies is set at a reasonable level, if such a cap were otherwise appropriate. Mr Dawson relied on an affidavit of Mr Thomas Russell dated 23 June 2015 which indicated, at a broad level, his estimate of the costs which would be incurred in defending the proceedings on behalf of all Defendants. Mr Glasson advanced several criticisms of that affidavit, and I observed, in dealing with the Defendants’ application for security for costs in my earlier judgment, that that affidavit was not sufficiently detailed to allow an assessment of the costs that would be incurred at particular stages of the proceedings. It is ultimately not necessary to address that question. As Mr Dawson rightly pointed out, if Mr Russell’s estimate is inadequate, then the Court has no other evidence available to it as to the likely costs of the proceedings, and that would tend against, rather than support, the grant of leave based on an indemnity offered by S&B Davies in a capped amount.

29. I am conscious that the Court may arguably also have regard to its own experience in the conduct of complex proceedings, as has been done from time to time in security for costs applications. It seems to me that the complexity of the pleading (including, as I have noted above, allegations of knowing receipt, knowing assistance and knowing participation in breach of fiduciary duty, claims for breach of fiduciary duty and for breach of statutory duties, as well as claims under s 37A of the Conveyancing Act 1919 (NSW)) is such that the preparation of these proceedings for hearing, or the hearing itself, may well be more costly than S&B Davies was prepared to acknowledge. That also does not assist S&B Davies in establishing that leave should be granted on the basis of an indemnity that is capped in amount as it proposes. However, the risk arising from the level of the cap is addressed by the significant increase in the capped figure and the ability further to increase it, remove the cap or revoke leave if the capped level is exceeded.

30. I am, however, not satisfied that the indemnity should be specifically limited to claims prosecuted by the Company pursuant to leave in the proceedings, as S&B Davies proposed. The Company is only exposed to an order for costs in the proceedings by reason of actively participating in them, by way of any leave granted to S&B Davies to bring a claim on its behalf, rather than filing a submitting appearance as it could otherwise do. Any costs order made against it will result from the fact that it has brought that derivative claim. On that basis, the limitation to any claims prosecuted by the Company pursuant to leave in the proceedings may well be superfluous, because any costs order made against it is necessarily made by reason of those claims. However, in practical terms, the Court may make an order for costs against the Company jointly and severally with an order for costs against S&B Davies, if both pursue overlapping claims and both are unsuccessful. That order will still be made by reason of the Company’s participation in respect of the derivative claim, since it would not have been made against the Company had it merely filed a submitting appearance. In that case, it should not be open to S&B Davies, Mr Davies or Ms Crocco to limit the indemnity to only part of the costs ordered against the Company, again shifting the risk of those costs to the liquidator or other creditors, where the only reason that order for costs has been made is by reason of the derivative proceedings which S&B Davies brought on the Company’s behalf. It would also be inappropriate, in practical terms, if such an indemnity could then not be enforced without a further dispute as to the amount that was properly the subject of it, requiring an inquiry as to whether particular costs were applicable to particular aspects of the proceedings.

31. I should note, for completeness, that Mr Dawson submitted that an indemnity should not be accepted because of evidence that the Company and Mr Davies are impecunious. However, Ms Crocco, who also offers the relevant indemnity, has an interest in real property, and Mr Glasson points to evidence that she has significant equity in that property, as well as a redraw of approximately $94,000 available in the mortgage against that property. Although the evidence as to the value of the property is limited, I accept that the fact that both a substantial redraw and significant equity are available has been established. It seems to me that the security and undertakings which are offered by Ms Crocco would be sufficient to support the indemnity if it were amended, as noted above, so as to be appropriate. It also seems to me that, even if I had not accepted that the indemnity should be limited to a monetary cap, with liberty to restore the matter if that cap is likely to be exceeded, it would be unreasonable to require that S&B Davies, Mr Davies or Ms Crocco give security for an indemnity in an unlimited amount, given the evidence as to Ms Crocco’s equity in her property and the undertaking which she offers not to dispose of or further encumber that property, and where the security that S&B Davies, Mr Davies or Ms Crocco now offer in the capped amount of $60,000 would support the value of the indemnity.

Whether S&B Davies should be permitted an opportunity to offer a wider indemnity

32. The Court’s role in determining an application for leave to bring derivative proceedings, so far as a question of indemnity arises, is ordinarily to consider the adequacy of the indemnity which is offered by the party seeking leave and the Court will, in the ordinary course, either be satisfied with the form of indemnity offered and grant the relevant leave, or will not be satisfied with the form of indemnity offered and will not grant that leave. Where an indemnity is offered which is not satisfactory, it does not seem to me that the Court should ordinarily go on to advise the applicant as to what might be an adequate indemnity: Re Colorado Products Pty Ltd (in prov liq) above at [17]; Re SundaraPty Ltd above at [78]. However, this is the second application by S&B Davies for leave to bring a derivative proceeding and the parties will have incurred significant costs in these applications. It seems to me, in the particular circumstances, that the just, quick and cheap resolution of the real issues in dispute in the proceedings, which the Court is required to promote by s 56 of the Civil Procedure Act, would not be served by my simply dismissing this application for a second time, with the possibility that S&B Davies would then be left to bring a third application, potentially then offering an indemnity that addresses the deficiencies that I have identified above.

32. It seems to me that, in the particular circumstances, the just, quick and cheap resolution of the real issues in dispute will better be served by my affording S&B Davies, Mr Davies and Ms Crocco the opportunity to offer an undertaking to give an indemnity which incorporates the changes offered by Mr Glasson in oral submissions, to which I referred in paragraph 25 above, and deleting the limiting words “of any claims prosecuted by the [Company] pursuant to leave in these proceedings”. If S&B Davies, Mr Davies and Ms Crocco offer an indemnity that addresses those matters, and security and the other undertakings in the form presently proposed, then I would grant the leave which is sought and grant the corresponding leave to amend the Originating Process, with liberty to the liquidator and the other parties to restore the matter to increase the cap or revoke the leave if it becomes inadequate as noted above.

33. If an indemnity in that wider form is not offered, the consequence is that I should again dismiss the application for leave to bring the derivative proceedings. In that case, leave also could not be granted to file the Amended Originating Process, since the amendments could not be supported without leave to bring a derivative action, and issues will also arise as to several claims already included in the Points of Claim. Where two unsuccessful applications would then have been brought for leave to bring the proceedings, it seems to me that no further application should ordinarily be permitted unless there is a significant change in circumstances.

34. I will offer S&B Davies, Mr Davies and Ms Crocco a short time in which to consider their position in that regard, and will hear the parties as to the necessary orders and as to costs. It does not seem to me that the application for interlocutory restraints on dealings with DRB 56’s assets could sensibly be determined until the scope of the claims that will be pursued by S&B Davies is clarified.

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Decision last updated: 27 November 2015