In the matters of Beechworth Land Estates Pty Ltd (Admin apt) and Griffith Estates Pty Ltd (Admin Apt)

[2014] NSWSC 1723

Supreme Court

New South Wales

Medium Neutral Citation:	In the matters of Beechworth Land Estates Pty Ltd (Admin apt) and Griffith Estates Pty Ltd (Admin Apt) [2014] NSWSC 1723
Hearing dates:	20, 25 November 2014
Decision date:	03 December 2014
Jurisdiction:	Equity Division
Before:	Robb J
Decision:	Parties to bring in short minutes to reflect reasons for judgment
Catchwords:	CORPORATIONS – application to amend to plead new claims based on breach of director’s duties owed to companies – whether amendment should be allowed in part-heard proceedings – terms upon which amendment should be allowed - whether Court should give leave to a contributory to prosecute claims for breach of director’s duties on behalf of company – companies in administration – leave unable to be given under ss 236 and 237 Corporations Act 2001 (Cth) - inherent jurisdiction of Court – whether the plaintiffs’ should provide security for indemnities given to companies in relation to costs
Legislation Cited:	Corporations Act 2001 (Cth) ss 236, 237, 436C, 439A, 440D
Cases Cited:	Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 Carpenter v Pioneer Park Pty Ltd (2008) 71 NSWLR 577 Chahwan v Euphoric Pty Ltd t/as Clay & Michel [2008] NSWCA 52; (2008) 245 ALR 780; 65 ACSR 661 Oates v Consolidated Capital Services Ltd [2009] NSWCA 183; (2009) 76 NSWLR 69 Featherston Resources Ltd; Tetley v Weston [2014] NSWSC 1139
Category:	Procedural and other rulings
Parties:	James Photios (first plaintiff) Perri Investments No 3 Pty Ltd (second plaintiff) James Edward Spencer (third plaintiff) Cleary Corporation Pty Ltd (fourth plaintiff) Redhill Estate Developments Pty Ltd (fifth plaintiff) First Debenture Limited (sixth plaintiff) Neil Robert Cussen and Ezio Marco Sentore in their capacity as joint administrators of Beechworth Land Estates Pty Ltd (administrators appointed) (first defendant) Beechworth Land Estates Pty Ltd (administrators appointed) (second defendant) Neil Robert Cussen and Ezio Marco Sentore in their capacity as joint administrators of Griffith Land Estates Pty Ltd (administrators appointed) (third defendant) Griffith Land Estates Pty Ltd (administrators appointed) (fourth defendant) Vangory Holdings Pty Ltd (fifth defendant) Vangory Services Pty Ltd (sixth defendant)
Representation:	Counsel: R Glasson (Plaintiffs) M Condon SC (first – fourth defendants) J T G Gibson (fifth – sixth defendants)   Solicitors: Russells (plaintiffs) O’Neill Partners (first – fourth defendants) Kent Attorneys (fifth – sixth defendants)
File Number(s):	2014/229138

Judgment

1. I have before me a further amended interlocutory process filed in Court by the plaintiffs on 25 November 2014.

2. A hearing concerning the relief sought occurred on 20 and 25 November 2014, before the document was formally filed on the latter date.

Relief sought by plaintiffs

3. In substance the plaintiffs seek leave to amend their claims in the Beechworth proceedings by adding pars 14A to 14C, and 14E to 14G, and in the Griffith proceedings by adding pars 23A to 23C, and 23E to 23G, of a draft amended points of claim that they have served on the defendants. The plaintiffs also seek leave to make consequential amendments and to amend their second further amended originating process.

4. As in both cases the effect of the amendments will be to introduce claims that particular transactions were entered into in breach by the single director of both companies of his directors’ duties to the companies, the plaintiffs will have no right to prosecute the new claims unless the Court makes orders in their favour granting them leave to bring the new claims in these proceedings on behalf of and in the names of the companies.

5. It has been necessary for the Court to decide the application quickly as, in accordance with an order made by the Court on 25 November 2014, the parties will engage in mediation on 5 December 2014 in these proceedings, usually call the “removal proceedings”; and in associated proceedings called the “shareholder proceedings”. It is likely to be important to the parties’ prospects of achieving a resolution of their dispute at the mediation that they know the outcome of the application. Furthermore, the Court is part heard in both proceedings, which are listed for further hearing commencing on 15 December 2014 for five days.

6. It will in the circumstances be necessary for the Court to give abbreviated reasons for its decision on the application.

7. On 6 November 2014 I gave extempore reasons for declining leave to the plaintiffs to make a number of other amendments to their originating process and points of claim. I set out in those reasons much of the background that is relevant to the present application, and I will proceed upon the basis that those matters are understood.

8. The extempore judgment was in support of the following order that I made on 3 November 2014:

The Court:

1.   Dismisses the plaintiffs’ application for leave to amend their points of claim to include paragraphs 14D, 14H to 14K, 23D and 23H to 23K of the draft amended points of claim in the form that was before the Court on 3 November 2014.

Defendants’ attitude to plaintiffs’ application

9. The Vangory parties (the fifth and sixth defendants) opposed the present application. They submitted that it was too late in all of the circumstances, including the absence of any explanation for the amendment, to grant the amendment. They opposed the Court making a derivative order to permit the plaintiffs to prosecute the amended claims in the names of the companies. They submitted that, if leave to amend is given and a derivative order is made by the Court, the continuation of the hearing on 15 December 2014 should be vacated, a direction should be made that the plaintiffs confine the new claim to specific particulars, the plaintiffs should not be permitted to rely upon any new evidence in chief, and the plaintiffs should be required to provide security for any indemnity that they will have to give to protect the companies against any adverse costs orders.

10. It will be convenient to note that during the course of the hearing I indicated that I would not, in any event, make an order now that vacates the further hearing starting 15 December 2014. I would, however, remain open to any adjournment application made on proper evidence on that date.

11. I also indicated that, if I permitted the plaintiffs to proceed with the new claims, they would be bound strictly by the particulars given (and if necessary those particulars will be settled by the Court); the plaintiffs will not be permitted to rely upon any new evidence in chief (they have stated on a number of occasions that they will not seek to do so); and the plaintiffs will be required to indemnify the companies in relation to adverse costs orders, and costs otherwise incurred by the companies (the plaintiffs have offered an appropriate indemnity). I regard the justification for these requirements as self-evident, and I will not consider them further in these reasons. It will be necessary for me to deal with the question of their need for security to support the plaintiffs’ indemnity below.

12. The administrators (the first and third defendants) did not oppose a grant of leave to the plaintiffs to make the amendment, or the making of a derivative order, but they submitted that the plaintiffs should be required to provide security for any indemnity for costs in favour of the companies, and that security should cover any additional costs that the administrators might incur as a result of the amendment.

Application to amend

13. In the original version of their points of claim the plaintiffs attacked the validity of a loan agreement and general security deed executed on behalf of Beechworth in favour of Vangory Holdings on 10 October 2013 (among other reasons) on the basis that the documents were a sham. The plaintiffs did the same in relation to a loan agreement and general security deed executed on behalf of Griffith in favour of Vangory Services on 24 November 2013. For present purposes the plaintiffs’ claims in relation to the documents entered into by both companies are sufficiently similar to make it convenient for me to set out only the claims as pleaded in the draft amended points of claim in relation to Beechworth (I have omitted the conventional underlining that indicates the wording sought to be added) :

13.   Further, or in the alternative, the Beechworth Documents were unenforceable as at 14 July 2014 because they were a sham.

Particulars

(a)   the Beechworth Documents were not executed on or about 10 October 2013, but at a later date;

(b)   Rory McDonnell was not a director, or a validly appointed director, of Beechworth on 10 October 2013 or at the later date on which the Beechworth Documents were executed;

(c)   no meetings of the director(s) of Beechworth was held on 10 October 2013, alternatively, if any such meetings were held they were invalid and of no effect;

(d)   the minutes of the purported meetings of the director(s) of Beechworth held on 10 October 2013 contained matters that were materially false, including to the knowledge of Greg Huxley (who, as agent of Vangory Holdings, drafted them) and Rory McDonnell (who, nonetheless, signed them as a true record);

(e)   despite the terms of the Drawdown notice dated 10 October 2013, and clause 3 of the Beechworth Loan Agreement, no payment of $1.150 million was made by Vangory Holdings to Beechworth on or about 10 October 2013, or at all (as to which see Schedule A);

(f)   as at 10 October 2013, Beechworth was not indebted to Vangory Holdings in the amount of $1.15 million, or at all (as to which see Schedule A);

(g)   the ledgers which purport to record the amounts advanced by Vangory Holdings to, or paid to third parties by Vangory Holdings on behalf of, Beechworth (including the ledger entitled “VANGORY HOLDINGS PTY LTD atf Vangory Trust – LOAN ACCOUNT TO Beechworth Land Estates Pty Ltd”, covering the period from 1 July 2013 to 30 June 2014) contain entries which were not accurate, were not paid by Vangory Holdings and/or were not legitimate or proper expenses of Beechworth and/or Griffith such that the level of indebtedness of Beechworth was substantially, or completely, overstated in those loan ledgers (as to which see Schedule A);

(h) despite having purportedly been executed on 10 October 2013, the Beechworth Security Deed was not registered under the PPSA until about 11 June 2014;

(i)   despite having purportedly been executed on 10 October 2013, Vangory Holdings did not lodge a caveat on the land owned by Redhill the subject of the mortgage assigned by Suncorp to Beechworth, until on or about 22 May 2014, alternatively 30 June 2014;

(j)   Greg Huxley drafted the Beechworth Documents and the minutes of meetings of the director(s) of Beechworth purportedly held on 10 October 2013;

(k)   the Beechworth Documents were contrary to the interest of Beechworth, were grossly improvident and disadvantageous to Beechworth and advantageous to Vangory Holdings, so as to confer an uncommercial benefit or advantage on Vangory Holdings to the detriment of Beechworth by reason of:

(i)   the excessive and uncommercial rates of interest charged (60% per annum, but 96% per annum on default);

(ii)   the substantial, or complete, overstatement in the Beechworth Documents, and the minutes of 10 October 2013, of the level of indebtedness of Beechworth to Vangory Holdings (as to which see Schedule A); and

(iii)   the security being granted over all the assets and undertakings of the company;

(l)   Beechworth and/or Rory McDonnell failed to obtain any advice as to the Beechworth Documents, including legal, financial and/or commercial advice, which advice would ordinarily be expected in the circumstances given the size and terms of the asserted loan and the type of security being granted;

(m)   before he executed the Beechworth Documents, Rory McDonnell failed to take any, or any reasonable steps, to confirm the accuracy of:

(i)   the loan ledger(s) provided by Greg Huxley, given or purportedly given to him shortly before he executed the Beechworth Documents, which ledgers were substantially inaccurate including as to payments made and receipts omitted (as to which see Schedule A);

(ii)   the true or asserted level of indebtedness of Beechworth to Vangory Holdings as at 10 October 2013 (as to which see Schedule A); or

(iii)   the matters asserted in the minutes of meetings of directors of Beechworth drafted by Greg Huxley and dated 10 October 2013, given or purportedly given to him shortly before he executed the Beechworth Documents and those minutes, which steps would ordinarily be expected to be taken by a director and/or company exercising reasonable or any care in the circumstances of Beechworth given the size of the loan and the type of security being granted;

(n)   before he executed the Beechworth Documents, Rory McDonnell failed to take any, or any reasonable steps, to confirm the ability or potential ability of Beechworth to repay the asserted loan on or about 10 April 2014, or at all, or the financial position of Beechworth as at 10 October 2013;

(o)   Vangory Holdings, alternatively, Greg Huxley, as agent of Vangory Holdings, knew or suspected the matters in paragraphs (a) – (n) above;

(p)   despite the repayment date of the purported loan to Beechworth being 10 April 2014, no demand for repayment of the loan nor any assertion of default in any regard was made by, or on behalf of Vangory Holdings at that time, or at all;

(q)   the total absence of any reference to the Beechworth Documents in the contemporaneous documents, notably in October/November 2013, including those authored by Greg Huxley and/or Rory McDonnell;

(r)   James Spencer, the sole director of Beechworth from its incorporation on 17 October 2012 to date, save for short periods in late 2013, was not provided with a copy of the Beechworth Documents by Rory McDonnell, Greg Huxley or Vangory Holdings until late July 2014 and/or was not aware of the existence of the Beechworth Documents until late June/July 2014 nor did either of Greg Huxley or Rory McDonnell inform him of the existence and/or execution of the Beechworth Documents in October 2013, whether in writing or at all; and

(s)   Beechworth received no legal advice as to the Beechworth Security Deed or any proposal to execute it, despite having solicitors (including Dib Lawyers) otherwise acting for it in October 2013 and despite the size of the loan, the improvident terms and the type of security being granted.

14. I will set out below the proposed amendments to the points of claim concerning the breach of directors’ duties owed to Beechworth by the director of that company. Again, the structure of the equivalent claim concerning Griffith is sufficiently similar that it will only be necessary to set out the pleading of the proposed new claim in relation to Beechworth (underlining omitted) :

14A.   Further, or in the alternative, Rory McDonnell, as director of Beechworth, owed duties to Beechworth, including fiduciary and/or equitable duties, to:

(a)   exercise his powers and discharge his duties as director with the degree of care, skill and diligence that a reasonably diligent person with his skill, experience and knowledge of the company and its circumstances would exercise in the circumstances of Beechworth;

(b)   exercise his powers and discharge his duties as director in good faith in the best interests of Beechworth;

(c)   exercise his powers and discharge his duties as director for a proper purpose; and

(d)   not improperly exercise his powers and discharge his duties as director so as to cause detriment to Beechworth and/or gain an advantage or benefit for himself or a third party.

Particulars

These duties arise in equity, at common law and/or by reason of sections 180 and 181 of the Corporations Act.

14B.   Before he executed the Beechworth Documents, the drawdown notice and minutes on or about 10 October 2013, Rory McDonnell, as director of Beechworth, failed to:

(a)   obtain any legal, financial and/or commercial advice as to the Beechworth Documents, the drawdown notice or minutes;

(b)   take any, or any reasonable, steps to confirm the accuracy of the loan ledger(s) and the level of indebtedness of Beechworth and/or Griffith to Vangory Holdings asserted in the Beechworth Documents and minutes of 10 October 2013;

(c)   take any, or any reasonable, steps to confirm the accuracy of the drawdown notice dated 10 October 2013;

(d)   take any, or any reasonable, steps to confirm the accuracy of the minutes of meetings drafted by Greg Huxley and given to him shortly before he executed the Beechworth Documents;

(e)   take any, or any reasonable, steps to confirm the ability or potential ability of Beechworth to repay the asserted loan on or about 10 April 2014, or at all, or the financial position of Beechworth as at 10 October 2013; and

(f)   take any, or any reasonable, steps to consider whether the Beechworth Documents were contrary to the interests of Beechworth, were improvident or disadvantageous to Beechworth and/or conferred any benefit or uncommercial benefit or advantage on Vangory Holdings to the detriment of Beechworth.

Particulars

(i)   paragraphs 19 - 24 of the affidavit of Rory McDonnell sworn on 3 October 2014; and

(ii)   paragraphs 19 - 21 of the affidavit of Greg Huxley sworn on 30 September 2014.

14C.   The Beechworth Documents were contrary to the interests of Beechworth, were improvident and disadvantageous to Beechworth and advantageous to Vangory Holdings so as to confer an uncommercial benefit on Vangory Holdings to the detriment of Beechworth by reason of:

(a)   the excessive and uncommercial rates of interest charged (60% per annum, but 96% per annum on default);

(b)   the substantial, or complete, overstatement of the level of indebtedness of Beechworth and/or Griffith to Vangory Holdings (as to which see Schedule A); and

(c)   the lack of any requirement for notice or demand to be made or given to Beechworth in the event of a default or purported default.

14E.   Vangory Holdings, alternatively Greg Huxley as agent of Vangory Holdings, knew, or had reason to know, that:

(a)   Greg Huxley had drafted the Beechworth Documents;

(b)   Greg Huxley had provided the Beechworth Documents, drawdown notice and minutes to Rory McDonnell shortly before or at the very same time as their execution by Rory McDonnell and without any or any reasonable notice to Beechworth or Rory McDonnell of those documents or their contents, whether in writing or at all and without with sufficient time for those documents to be considered properly or adequately by Rory McDonnell;

(c)   the Beechworth Documents were contrary to the interests of Beechworth, were improvident and disadvantageous to Beechworth and advantageous to Vangory Holdings so as to confer an uncommercial benefit on Vangory Holdings to the detriment of Beechworth by reason of:

(i)   the excessive and uncommercial rates of interest charged (60% per annum, but 96% per annum on default);

(ii)   the substantial, or complete, overstatement of the level of indebtedness (as to which see Schedule A); and

(iii)   the lack of any requirement for notice or demand to be made or given to Beechworth in the event of a default or purported default.

(d)   Beechworth was not indebted to Vangory Holdings in the amounts asserted (as to which see Schedule A);

(e)   the loan ledger(s) prepared by Greg Huxley in respect of the alleged loan from Vangory Holdings to Beechworth included entries which referred to payments which had not actually been made by Vangory Holdings, and payments, even if actually made by Vangory Holdings, were not payments made to legitimate creditors or in respect of legitimate debts of Beechworth and/or Griffith so that the asserted level of indebtedness in those loan ledger(s) was substantially, or completely, overstated (as to which see Schedule A);

(f)   before he executed the Beechworth Documents, Rory McDonnell, as director of Beechworth, had failed to:

(i)   obtain any legal, financial and/or commercial advice as to the Beechworth Documents;

(ii)   take any, or any reasonable, steps to confirm the accuracy of the loan ledger(s) and the asserted level of indebtedness of Beechworth to Vangory Holdings in the Beechworth Documents and minutes of 10 October 2013;

(iii)   take any, or any reasonable, steps to confirm the accuracy of the Drawdown notice dated 10 October 2013;

(iii)   take any, or any reasonable, steps to confirm the ability or potential ability of Beechworth to repay the asserted loan on or about 10 April 2014, or at all, or the financial position of Beechworth as at 10 October 2013;

(iv)   take any, or any reasonable, steps to confirm the accuracy of the minutes of meetings drafted by Greg Huxley and given to him shortly before he executed the Beechworth Documents;

(g)   the steps in paragraph (f) above would ordinarily be taken by a director and/or company exercising reasonable or any care in the circumstances given the size and terms of the asserted loan and the type of security being granted in respect of that loan.

Particulars

(i)   the Plaintiffs repeat particulars (e), (f), (g), (k), (l), (m) and (n) to paragraph 13 above;

(ii)   the Plaintiffs repeat paragraphs 14, 14B and 14C above;

(iii)   paragraphs 19 - 24 of the affidavit of Rory McDonnell sworn on 3 October 2014; and

(iv)   paragraphs 19 - 21 of the affidavit of Greg Huxley sworn on 30 September 2014.

14F.   By reason of the matters in paragraph 14E above, Vangory Holdings, alternatively Greg Huxley as agent of Vangory Holdings:

(a)   procured or induced the contravention referred to in paragraph 14D above by Rory McDonnell of the duties referred to in paragraph 14A above; or

(b)   were directly or indirectly knowingly concerned in, or a party to, or participated or assisted in the contravention.

14G.   By reason of the matters in paragraphs 14A to 14F above, the Beechworth Documents were voidable and ought be set aside ab initio.

15. In my judgment it is appropriate for the Court to give leave to the plaintiffs to make these amendments to the points of claim (and the equivalent amendments in relation to the claim concerning Griffith).

16. In coming to this decision I have had regard to the observations of the High Court in Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 at [94] - [102] and [106] - [110] relied upon by the Vangory parties. These proceedings were commenced on 4 August 2014. The Court set the proceedings down for hearing on an extremely expedited basis commencing on 14 October 2014. That was done to protect the position of the administrators, who remained in office pending the determination of the proceedings, but whose performance of their duties was effectively impeded by the existence of the proceedings, in which the plaintiffs challenge the validity of the securities under which the administrators were appointed under s 436C of the Corporations Act 2001 (Cth).

17. Whether it be as a result of a considered tactical decision, or a hasty approach to the formulation of the plaintiffs’ claim, it is clear that in the plaintiffs’ solicitor’s correspondence before suit the plaintiffs confined their claim, relevantly, to the allegation that the documents entered into by Beechworth and Griffith were mere shams. The plaintiffs did not advert to the possibility that essentially the same facts and circumstances may have had the consequence that the director of the companies who executed the documents did so in breach of his duties to the companies. When counsel for the plaintiffs opened their case on 14 October 2014, he clearly confined the plaintiffs’ claim to the sham case.

18. It would appear that, as a result of the discussion between counsel and the bench that took place during the course of the opening, the plaintiffs came to appreciate that the alternative breach of directors’ duties case may be available to them. They promptly notified the defendants of the proposal to seek leave to amend their points of claim to make the new claim. It is true that the plaintiffs vacillated to some extent in prosecuting their application for leave. The parties generally engaged in some tactical manoeuvring that related to which of the removal proceedings and the shareholder proceedings should proceed first, and the hearing time that might be available. I regard these as being neutral considerations.

19. On 3 November 2014 Mr Dubler, senior counsel for the Vangory parties, acknowledged, quite properly in my view, that the Vangory parties should be in a position to prepare to respond to the narrow amendment now sought to be made by the plaintiffs by 15 December 2014

20. It is not true to say that the breach of directors’ duties case that the plaintiffs now seek leave to make does no more than to place a different legal complexion on the facts and circumstances upon which the plaintiffs rely to make out their case that the documents executed by Beechworth and Vangory were mere shams. However, it is true in my view that the new claims are substantially confined to the same controversy that arises in relation to whether the documents were shams. The particulars that the plaintiffs originally gave to support their sham case in pars 13 and 22 of their points of claim extended outside the events that precisely concerned the circumstances in which the documents were executed by Mr McDonnell, at the urging of Mr Huxley, on 10 October 2013 and 24 November 2013 respectively. The particulars raised issues such as the documents not being executed on the stated date, Mr McDonnell not being validly appointed a director, no meetings of directors were held, and the minutes of the meetings were materially false. However, at least on the plaintiffs’ claim, Mr McDonnell executed documents presented to him by Mr Huxley within an extremely brief time after he was appointed sole director of each of the companies (assuming he was so appointed, and the documents were signed on the days they were dated). Mr McDonnell acted upon assurances given by Mr Huxley as to the amount that the companies owed to Vangory Holdings or Vangory Services, as the case may be, and Mr McDonnell did not trouble himself with a number of extraordinary terms in the documents. Relevantly, the plaintiffs seek to found the claims upon the evidence contained in the affidavits of Mr McDonnell and Mr Huxley that have already been filed in the proceedings: see the particulars to pars 14B and 14F, in the case of Beechworth. The plaintiffs’ case that Mr McDonnell executed the documents without taking the steps listed in par 14B appears to arise out of evidence that is already contained in the affidavits; and it would seem unlikely that Mr McDonnell would have had the time to take those steps after his appointment, even if he saw fit to do so.

21. While the amendment of the points of claim to plead this confined breach of directors’ duty claim will probably introduce issues into the proceedings that are not immediately apparent, and which will make the proceedings more complex, I am satisfied that the amendments are not so extensive as to warrant the Court refusing leave to make the amendments.

22. Although it is now less than two weeks to the recommencement of the hearing, the Vangory parties have known of the plaintiffs’ application to amend since mid-October, and as I have noted above, Mr Dubler on 3 November 2014 indicated that his clients could deal with the narrow amendment in the time that remained before the hearing recommenced. Though the Vangory parties have steadfastly resisted the amendment, they have been on notice that the leave sought might be given.

Leave to prosecute the new claim in the name of the companies

23. The next question for consideration is whether the Court should give leave to the plaintiffs to make the amendments and to prosecute the claims that will thereby arise on behalf of and in the name of the companies.

24. I accept the submission made on the half of the Vangory parties that leave cannot be granted under ss 236 and 237 of the Corporations Act. It has been decided in Chahwan v Euphoric Pty Ltd t/as Clay & Michel [2008] NSWCA 52; (2008) 245 ALR 780; 65 ACSR 661 at [124], [125]; and Oates v Consolidated Capital Services Pty Ltd [2009] NSWCA 183; (2009) 76 NSWLR 69 at [21] that the Court may not make an order under these provisions at a time when the relevant company is in liquidation. In such a case only of the liquidator may decide to bring proceedings. I also accept that the decision of Brereton J in Featherston Resources Ltd; Tetley v Weston [2014] NSWSC 1139 at [31] establishes that the same restriction applies in cases where the company is in administration under Part 5.3A of the Corporations Act.

25. The Court may, however, authorise the bringing of proceedings by a contributory or a creditor in the exercise of its inherent jurisdiction in a case where, as at present, the company is in administration: see Chahwan at [114]; and Carpenter v Pioneer Park Pty Ltd (2008) 71 NSWLR 577 at [35] per Barrett J (as His Honour then was). In the latter case Barrett J said:

[34] The decided cases thus cause attention to be focused on three main matters when the court is invited to exercise its discretion upon an application such as the present:

1. The question whether the proceedings proposed to be pursued have some solid foundation, in that they exhibit such a degree of merit as to be neither vexatious nor oppressive and to present reasonable prospects of success.

2. The attitude of the liquidator to the question whether the proceedings should be pursued.

3. The question whether “practical considerations support the initiation of the proceedings”, with particular reference to financial protection of the liquidator and the estate of the company by means of indemnity and, if indicated, security.

[35] In both Chahwan v Euphoric Pty Ltd (above) and Ragless v IPA Holdings Pty Ltd (2008) SASC 90 ; (2008) 65 ACSR 700, Australian intermediate appellate courts have recently held that the availability of the jurisdiction to allow a member or creditor to sue in the name of a company in liquidation is unaffected by the existence of the statutory derivative procedure under ss 236 and 237 of the Corporations Act. In the latter case, Debelle J (with whom Sulan J and Vanstone J agreed) observed that that jurisdiction is “entirely consistent with” s 447(6) and s 511(1) of the Corporations Act.

[36] Another point of significance must be mentioned. It is accepted that if, in a case under s 237, all the specified criteria are satisfied, the court must grant leave. In a case such as the present, however, the court is called upon to exercise general equitable jurisdiction which is discretionary.

26. As to the first of the considerations listed by Barrett J in [34], I am satisfied that the claims proposed to be prosecuted have reasonable prospects of success, and are neither vexatious nor oppressive. They therefore have the required solid foundation. Indeed, the conduct of Mr McDonnell and Mr Huxley in relation to both companies concerning the execution of the documents calls for some explanation, which is not readily apparent.

27. As to the second matter, the attitude of the administrators to the question of whether the proceedings should be pursued is clear in this case. As the administrators have been appointed under s 436C of the Corporations Act, they have a conflict of interest, which they acknowledge, in relation either to pursuing or resisting the proceedings. That is so because the purpose of the new claim is to obtain an order setting aside the securities that were the basis of the appointment of the administrators. The administrators will therefore not commence proceedings in terms of the proposed amendments themselves. Furthermore, as I have recorded above, the administrators have not opposed the leave sought by the plaintiffs being given, or the plaintiffs being authorised to prosecute the new claims on behalf of the companies, provided that the indemnity given by the plaintiffs is properly secured.

28. It is the third consideration raised by Barrett J that gives rise to the most difficulty in this case. The question is whether practical considerations support the initiation of the proceedings that will be constituted by the proposed amendments.

29. That is a difficult question to answer in the circumstances of the present case, and on the basis of the evidence that is before the Court. That evidence includes reports to creditors pursuant to s 439A of the Corporations Act dated 8 August 2014 prepared by the administrators in relation to the affairs of Beechworth and Griffith. Unsurprisingly, the creditors’ reports are in a number of respects inconclusive, given the inherent limitations in the investigations that the administrators have been able to complete, and the fact that the pendency of the present proceedings has in significant ways hamstrung the performance by the administrators of their duties.

30. I will simply note that, upon a reading of the creditors’ reports, a strong impression is created that it would be in the best interests of the two companies, and their creditors, for the companies’ affairs to be conducted on the basis of an appropriate external administration. However, the fact is that the administrators have not made any application to the Court to validate their appointment, notwithstanding the doubt about the basis of their appointment. There is no implicit criticism of the administrators in that observation, and they may well have felt they were constrained by a possible conflict of interest not to make an application themselves for the validation of their appointment. Both companies appear to have many creditors whose debts may be overdue, but no creditor has applied under s 440D of the Corporations Act for leave to commence any proceedings to validate the administration, or to wind up by the companies.

31. Consequently, the proceedings, as well as the shareholder proceedings in the case of Beechworth, remain a battle royal between the present parties to the proceedings, with the administrators and the other creditors of the companies largely sitting on the sidelines.

32. It must also be borne in mind that, even if the plaintiffs are not given leave to prosecute the new claims on behalf of the companies, the proceedings will continue unless they are resolved, even though the plaintiffs’ attack on the securities under which the administrators were appointed would relevantly be limited to the sham argument. (I have not forgotten the other arguments upon which the plaintiffs might be entitled to orders declaring void or setting aside the documents).

33. If the new claims are permitted to be pursued in these proceedings, there will no doubt be some increase in the complexity of the proceedings and the costs that are incurred. However, the increase in both complexity and costs will be marginal in the sense that, while perhaps not insignificant, they will be in addition to that which will flow in any event from the proceedings as presently constituted. In particular, the two companies are already parties, as the second and fourth defendants.

34. The effect of the documents that were executed on 10 October 2013, in the case of Beechworth, was that Beechworth agreed that it was indebted to Vangory Holdings in the sum of $1.15 million. Beechworth agreed to pay interest at an ordinary rate of 60% per annum, and a default rate of 96%. Vangory Holdings was granted a security over Beechworth’s assets, which it previously did not have. In the case of the documents executed by Griffith on 24 November 2013, the amount of the agreed debt was $1.19 million. The interest rate agreed was 72% per annum, and 96% per annum on default. Security was also granted by Griffith to Vangory Services.

35. If the proposed amendments are made, and leave is given to the plaintiffs to conduct the claims on behalf of the companies, and the plaintiffs succeed, then the debts owed by Beechworth and Griffith may be reduced, the apparently usurious interest rates will be negated, and the Vangory parties will lose their status as secured creditors, which should be to the benefit of the general body of unsecured creditors.

36. As part of the proceedings to date the Vangory Holdings have already conceded that some of the amounts that composed the total debts to which Mr McDonnell bound the two companies were not true debts of those companies. That outcome will be to the benefit of the other unsecured creditors, and it is at least possible that the plaintiffs will succeed in establishing that the amounts owed by the companies are much less than has been established to date.

37. The informal proofs of debt submitted by Vangory Holdings and Vangory Services in the administration of the two companies show that, in the former case, of the total claim of $2,070,231 fully $1,190,837 is interest. In the case of Vangory Services’ claim the figures are respectively $1,789,093.81 claim and $860,430.08 interest. As the informal proofs of debt were dated 21 July 2014, the effect of the high rates of interest contained in the documents is obvious.

38. The reality is that the only way that the documents will be challenged on the ground that they were entered into in breach of directors’ duty by Mr McDonnell will be if the Court gives leave to the plaintiffs to prosecute the claim on behalf of the companies.

39. The available evidence is too inconclusive to allow me to work out what, at the end of the day, if the plaintiffs succeed, or do not succeed, the consequences will be for the future financial affairs of the companies, their creditors and contributories. It is by no means clear that any outcome in these proceedings will lead to any benefit to the contributories. That is so even in relation to the third plaintiff, Mr Spencer, who has guaranteed substantial debts owed by the companies. It is equally unclear whether, at the end of the day, the grant of the leave now sought will be for the benefit of the unsecured creditors generally.

40. All that I can say is that, starting from a position of complete lack of clarity and certainty, and given the inevitability of the existing proceedings continuing, subject to a compromise arising, and the inability of the administrators to pursue the claim, it is likely to be for the benefit of the companies as a whole if the debts claimed by the Vangory parties are reduced, as are the rates of interest to which those parties are entitled, and they lose their status as secured creditors.

41. The Vangory parties submitted that Mr Spencer is not a suitable person to be authorised by the Court to prosecute the new claims on behalf of the companies. The reason arises out of a complex and obscure series of transactions in which a number of properties over which the companies held mortgages were transferred to companies that then borrowed money on the security of the properties. There is some evidence that Mr Spencer resigned as the director of the companies in order to become the director of the transferee companies. The companies apparently could not borrow funds on the security of their mortgages over the properties. The companies needed to raise funds. It is apparent (and is the subject of comment in the creditors’ reports prepared by the administrators) that, while the transferee companies were under the control of Mr Spencer, not all of the funds raised by the borrowing on the security of the properties found their way to the companies. It would be an understatement to describe these events on the present state of the evidence as murky. While Mr Spencer’s position has not been clarified, there is also some suggestion that the missing money found its way into the hands of the Vangory parties. I would not on the evidence refuse Mr Spencer leave to prosecute the proposed new claims against the Vangory parties on behalf of the companies.

Should the plaintiffs’ indemnity in favour of the companies be secured?

42. The plaintiffs have offered to give indemnities to the companies to protect them against the risk of adverse costs consequences if the new breach of directors’ duties claims fails.

43. The question is whether the Court should decline to make the derivative orders sought unless the plaintiffs provide security for the indemnities.

44. I accept the defendants’ submissions that the plaintiffs have not provided adequate evidence to the Court to establish that they collectively have the financial resources that would enable the Court to be confident that the plaintiffs will be able to satisfy the indemnities. The plaintiffs have had adequate time to do so. Additionally, it is probable that the overall costs of the proceedings will be increased as a result of the failure by the plaintiffs to make the applications that they have now made at the outset. In various ways the defendants will have to re-cover past ground in preparing the matter for hearing.

45. On the other hand, the companies have been parties to the proceedings since their inception; in the case of Beechworth the fight is between warring shareholders; and the administrators have been required to take a neutral stance in the proceedings, subject to their right to protect their own interests that legitimately arise out of the attack on the validity of their appointment.

46. Significantly, the increase in costs of the proceedings that will follow from the amendment of the points of claim will be marginal, in the sense that there will be an increase above the costs that would be incurred in any event as a result of the determination of the controversy concerning whether the documents executed by the companies were shams.

47. The solicitors for the parties gave evidence of their estimate of the increase in costs that would flow from the amendments. The solicitor for the Vangory parties gave an estimate, after allowing for the possible reduction of the costs allowed on an assessment, of $41,827.50. The solicitor for the administrators estimated the administrators’ additional costs would be $64,240. The solicitor for the plaintiffs disputed the reliability of these estimates. It is not feasible for the Court at this stage of the proceedings, and in the present circumstances, to resolve these differences in any logical way.

48. I would observe, however, that as a result of the relatively neutral stance that has been imposed upon the administrators, it would be expected that they would approach the determination of the breach of directors’ duty claims in an economical way, and largely leave the prosecution and defence of those claims to the other parties. For that reason I am inclined to discount the estimate made by the administrators’ solicitor.

49. In my view it is appropriate that the grant of leave to the plaintiffs to prosecute the new claims in the name of the companies should be subject to the condition that the plaintiffs first provide an appropriate amount of security. However, in determining the amount of the security, it is not necessary that the security be absolutely sufficient to protect the companies against all eventualities. There is no other course available to the Court than to make a broad judgment as to an amount of security that should be appropriate in all of the circumstances.

50. I propose in the exercise of my discretion to give to appropriate plaintiffs leave to prosecute the claims that will flow from the amendments to the points of claim in the name of and on behalf of the companies, on condition that the plaintiffs provide security in the sum of $50,000 before 15 December 2014, in favour of the companies. It will be necessary for the detail of the security to be determined, particularly in regard to the identification of the relevant plaintiffs in the case of each of the companies, and the nature of the security to be provided.

51. Given the need for haste, I will ask the parties to bring in short minutes to reflect these reasons for judgment.

**********

Decision last updated: 20 May 2015