Joinery Products Pty Ltd v Imlach
[2008] TASSC 40
•12 August 2008
[2008] TASSC 40
CITATION: Joinery Products Pty Ltd v Imlach [2008] TASSC 40
PARTIES: JOINERY PRODUCTS PTY LTD
KELLY, Christopher John
CHRIS KELLY INVESTMENTS PTY LTD
as Trustee for the Kelly Family Trust
v
IMLACH, Brian David
GP GLASS PTY LTD
TOP CENTRE PTY LTD
SHARMAN, Philip John
TITLE OF COURT: SUPREME COURT OF TASMANIA
JURISDICTION: ORIGINAL
FILE NO/S: 32/2007
DELIVERED ON: 12 August 2008
DELIVERED AT: Hobart
HEARING DATES: 21 April and 17 July 2008
JUDGMENT OF: Holt AsJ
CATCHWORDS:
Corporations – Members remedies and internal disputes – Proceedings on behalf of company by member – Statutory derivative action – Actions by members and officers – Application for leave to bring proceedings – Criteria for grant of leave considered.
Swansson v RA Pratt Properties Pty Ltd & Anor (2002) 42 ACSR 313 applied.
Corporations Act 2001 (Cth), s237.
Aust Dig Corporations [1104]
Corporations – Management and administration – Duties and liabilities of officers of corporation – Fiduciary and related statutory duties – Duties involving conflicts of interest – Improper use of position – Generally – Director of a solvent company acting with the unanimous informed consent of shareholders.
Aust Dig Corporations [1248]
REPRESENTATION:
Counsel:
2nd & 3rd Plaintiffs: D J Morris (21 April) and P L Jackson (17 July)
Defendants: M E O’Farrell with D Crampton
Solicitors:
2nd & 3rd Plaintiffs: Simmons Wolfhagen
Defendants: Levis Stace & Cooper
Judgment Number: [2008] TASSC 40
Number of paragraphs: 45
Serial No 40/2008
File No 32/2007
JOINERY PRODUCTS PTY LTD, CHRISTOPHER JOHN KELLY and
CHRIS KELLY INVESTMENTS PTY LTD v BRIAN DAVID IMLACH,
GP GLASS PTY LTD, TOP CENTRE PTY LTD and PHILIP JOHN SHARMAN
REASONS FOR JUDGMENT HOLT AsJ
12 August 2008
Introduction
Mr Christopher Kelly and Mr Brian Imlach have, since its incorporation, been the sole directors of Joinery Products Sales Pty Ltd (“the Company”). Mr Kelly and Chris Kelly Investments Pty Ltd (a company controlled by Mr Kelly) own half the shares in the Company. Mr Imlach and RA Imlach Investments Pty Ltd (a company controlled by Mr Imlach) own the other half of the shares.
Prior to 8 September 2004 the Company carried on two businesses from its factory and office complex at Devonport. There was a joinery business engaged in the manufacture, supply and installation of joinery products including bench tops and wardrobes (the joinery business) and a window business engaged in the manufacture, supply and installation of aluminium window frames and windows (the window business).
In about April 2004 Mr Kelly and Mr Imlach entered into negotiations with a view to Mr Kelly acquiring the joinery business and Mr Imlach acquiring the window business.
On 4 June 2004 Joinery Products Pty Ltd was incorporated with all of the shares in it being owned by Mr & Mrs Kelly and Chris Kelly Investments Pty Ltd. On the same day GP Glass Pty Ltd was incorporated with all of the shares in it being owned by Mr & Mrs Imlach and RA Imlach Investments Pty Ltd.
By agreement (“the disaggregation agreement”) dated 8 September 2004, Joinery Products Pty Ltd agreed with the Company to purchase its joinery business and GP Glass Pty Ltd agreed with the Company to purchase its window business. Mr Kelly, Chris Kelly Investments Pty Ltd, Mr Imlach and others were also parties to the agreement. The agreement contained no provision restraining Mr Kelly and Joinery Products Pty Ltd from operating a competing window business and no provision restraining Mr Imlach and GP Glass Pty Ltd from operating a competing joinery business.
By writ issued 23 January 2007, Joinery Products Pty Ltd, Mr Kelly and Chris Kelly Investments Pty Ltd commenced proceedings against Mr Imlach, GP Glass Pty Ltd, Top Centre Pty Ltd (a company controlled by Mr Imlach) and Mr Philip Sharman.
The statement of claim includes the following allegations. From about July 2004, Mr Imlach and GP Glass Pty Ltd commenced to set up, and did set up, a joinery business to manufacture, supply and install bench tops and wardrobes in competition with the Company’s joinery business. The competing joinery business was transferred to Top Centre Pty Ltd upon the incorporation of that Company on 10 January 2005. Mr Sharman, whilst the manager of Mr Kelly’s company, Joinery Products Pty Ltd, assisted Mr Imlach, GP Glass Pty Ltd and Top Centre Pty Ltd in establishing the competing joinery business and solicited Mr Kelly’s customers to transfer their business to the competing joinery business.
The claim includes an assertion that Mr Imlach was a fiduciary of Joinery Products Pty Ltd and Mr Kelly and owed to each of them an equitable duty of fidelity which he breached by failing to let them know prior to executing the agreement dated 8 September 2004 that he intended to set up a competing joinery business. It is further alleged that Mr Imlach falsely represented in the period leading up to the execution of the disaggregation agreement that he had no intention of setting up a competing joinery business. It is claimed that but for the misrepresentation the agreement would not have come into existence.
The basis for the claim that Mr Imlach owed a fiduciary duty to Mr Kelly and his company, Joinery Products Pty Ltd, is not apparent. In particular the type of features referred to in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 are not identified in the pleadings. At pp96-97 Mason J (as he then was) said:
“The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations (cf. Phipps v. Boardman [1966] UKHL 2; (1967) 2 AC 46, at p 127), viz., trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions ‘for’, ‘on behalf of’ and ‘in the interests of’ signify that the fiduciary acts in a ‘representative’ character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal.”
It may be that the only fiduciary duties owed by Mr Imlach were owed to the Company by virtue of him being a director. Generally a director’s fiduciary duties in relation to the affairs of a company are owed to the company alone and fiduciary duties having identical content cannot be owed both to the company and to one or more of the shareholders. See Brunninghausen v Glavanics [1999] 46 NSWLR 538 at pars 40 and 58 and Charlton v Baber (2004) 47 ACSR 31 at par17. However, the Company is not a plaintiff and Mr Imlach, who controls half the shares is unlikely to agree to it becoming a plaintiff in an action against himself.
The application
The second and third plaintiffs, Mr Kelly and Chris Kelly Investments Pty Ltd, being shareholders have applied for leave to bring derivative proceedings in the name of the Company against the first three defendants being, Mr Imlach, GP Glass Pty Ltd and Top Centre Pty Ltd. It is proposed that the Company be added rather than substituted as plaintiff. There is a concurrent application to have the statement of claim amended to include the following allegations:
h The company was a party to the negotiations which led to the disaggregation agreement.
h Mr Imlach was a fiduciary of the Company and owed to it an equitable duty of fidelity.
hMr Imlach owed to the Company the director’s duties specified in the Corporations Act 2001 (Cth), ss181-183, namely, a duty to act in good faith in the best interests of the Company for a proper purpose and duties not to improperly use his position or information obtained thereby to gain an advantage for himself or someone else or cause detriment to the Company.
hIn breach of these duties Mr Imlach failed to disclose to the Company his intention of setting up a competing joinery business prior to it executing the disaggregation agreement.
hKnowingly and as a result of these breaches the second and third defendants, GP Glass Pty Ltd and Top Centre Pty Ltd received profits from operating a competing joinery business.
hMr Imlach misrepresented to the Company (as well as to the other plaintiffs) that following disaggregation he would undertake the business of the manufacture, supply and installation of aluminium window frames and windows only, upon which representation the Company (as well as the others) acted by executing the disaggregation agreement.
hThe failure of Mr Imlach to disclose his intent to compete amounted to a misrepresentation to the Company (as well as to Joinery Products Pty Ltd and Mr Kelly) upon which the Company (and the others) acted by executing the agreement.
hThe misrepresentation was made in trade or commerce and amounted to misleading or deceptive conduct contrary to the Fair Trading Act 1990 (Tas), s14.
hAs a result of executing the dissagregation agreement which contained no restraint of trade provisions, the Company (as well as the other plaintiffs) has suffered loss and damage.
The Company’s claim for relief in the proposed amended statement of claim is:
hAs against Mr Imlach, GP Glass Pty Ltd and Top Centre Pty Ltd for an account of profits received by reason of the operation of the competing joinery business; payment of the sums found due on the account and a declaration that such profits are held on a resulting or constructive trust in favour of the Company.
hAs against Mr Imlach equitable compensation for breach of his director’s duties and damages for misrepresentation and misleading and deceptive conduct.
The law
The application to bring proceedings on behalf of the Company is expressed to be made pursuant to Part 2F.1A of the Corporations Act 2001 (Cth). The part includes ss236 and 237(1) & (2) which are as follows:
“236 Bringing, or intervening in, proceedings on behalf of a company
(1) A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if:
(a) the person is:
(i) a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or
(ii) an officer or former officer of the company; and
(b) the person is acting with leave granted under section 237.
(2) Proceedings brought on behalf of a company must be brought in the company’s name.
(3) The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.
237 Applying for and granting leave
(1) A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.
(2) The Court must grant the application if it is satisfied that:
(a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and
(b) the applicant is acting in good faith; and
(c) it is in the best interests of the company that the applicant be granted leave; and
(d) if the applicant is applying for leave to bring proceedings -- there is a serious question to be tried; and
(e) either:
(i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied.”
The legislation requires the Court to grant leave to a person referred to in s236(1)(a) if the criteria set out in s237(2) are satisfied. The converse was conceded by counsel for the applicants. That is to say, it was conceded that if the applicants fail to satisfy the Court as to the existence of any one or more of the criteria the application must be refused. This concession is in accordance with the prevailing view. In South Johnstone Mill Ltd v Dennis & Scales [2007] 163 FCR 343, Middleton J said at par60:
“As set out above, a person referred to in s 236(1)(a) may apply to the court for leave to bring proceedings. On such application, the court must grant leave if the criteria set out in s 237(2) are satisfied. The prevailing view is that failure to satisfy any one of these criteria means that leave must be refused: see Jeans v Deangrove Pty Ltd [2001] NSWSC 84 at [9] per Santow J; Goozee v Graphic World Holdings Pty Ltd [2002] NSWSC 640; (2002) 42 ACSR 534 at [27] per Barrett J; Herbert v Redemption Investments Ltd [2002] QSC 340 at [25] per Mackenzie J; Maher v Honeysett [2005] NSWSC 859 at [12] per Brereton J; compare Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732 at [16], where Austin J found it unnecessary to decide the point.”
A succinct statement of the rationale for the prevailing view is set out in the passage from Goozee referred to by Middleton J above. There Barrett J said at par27:
“Section 237(2) prescribes conditions which, if satisfied, compel the court to grant leave to a competent applicant. While Pt 2F.1A does not say, in so many words, that the court must not grant leave if any of the prescribed conditions is not satisfied, that must be its meaning. It cannot be intended that there should be judicial carte blanche permitting the grant of leave to proceed on a company’s behalf where a competent applicant makes out a case on grounds foreign to those enumerated in s237(2) or fails to bring himself or herself wholly within the parameters which, if they are found to exist, compel the grant of leave. On that footing, the court will grant leave where it finds that all the stated prerequisites are satisfied but will otherwise refuse leave. Such a course is, I think, consistent with the approaches taken in RTP Holdings Pty Ltd v Roberts (2000) 36 ACSR 170 (Lander J) and Jeans v Deangrove Pty Ltd [2001] NSWSC 84; BC200100441 (Santow J)”.
The applicants bear the onus. In South Johnstone Mill (supra), Middleton J said at par61:
“The applicants bear the onus of satisfying the Court, on the balance of probabilities, that the criteria identified in s 237(2) have been met: Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 at [24]-[26] per Palmer J; Fiduciary v Morningstar 53 ACSR at [15] per Austin J; Re Varsity Queensland Pty Ltd [2006] QSC 356 at [9] per Mullins J.”
The s237(2) criteria in dispute
The defendants concede the existence of the criteria specified in s237(2)(a) and (e). Plainly it is probable that the Company will not itself bring the proposed proceedings against Mr Imlach and his companies as Mr Imlach controls half of the shares in the Company. There is uncontested evidence that the applicants gave written notice to the Company of their intent to make this application and the reasons for it in accordance with s237(2)(e)(i). The defendants say, however, that the applicants have failed to meet the criteria which require them to satisfy the Court that:
h there is a serious question to be tried;
h it is in the best interests of the Company that the applicants be granted leave; and
h the applicants are acting in good faith.
Serious question to be tried
In Swansson v RA Properties Pty Ltd (2002) 42 ACSR 313, Palmer J said at par25:
“In order to ascertain whether there is a serious question to be tried for the purposes of a s237(2)(d), the court will not normally enter into the merits of the proposed derivative action to any great degree. The applicant has the same relatively low threshold to surmount as in the case of an application for an interlocutory injunction: Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 at 622.”
In Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534, Barrett J said at pars32-34:
“The ‘serious question to be tried’ test has obviously been adopted by the legislature because of its existing place in civil procedure. If there were any doubt about that, it might be resolved by reference to the explanatory memorandum which accompanied the Corporate Law Economic Reform Program Bill which, at p23, described a test formulated in those words as ‘familiar and regularly employed by the Courts in the context of interim injunction applications’.
The most recent statements in the High Court about the nature of the ‘serious question to be tried’ test as it applies to interlocutory injunctions are found in Australian Broadcasting Corp v Lenah Game Meats Pty Ltd (2001) 185 ALR 1; 76 ALJR 1. Gleeson CJ referred to the purpose of an interlocutory injunction, as stated by Sir Frederick Jordan in Chapter on Equity in New South Wales, 6th ed 1947, as being ‘to keep matters in statu quo until the rights of the parties can be determined at the hearing of the suit’. The chief justice continued (at [11]):
The corollary of the propositions stated by Sir Frederick Jordan is that a plaintiff seeking an interlocutory injunction must be able to show sufficient colour of right to the final relief, in aid of which interlocutory relief is sought. Lord Cottenham LC in Great Western Railway Co v Birmingham Railway Co (1848) 41 ER 1074 formulated the issue as to whether ‘this bill states a substantial question between the parties’. In McCarty v Council of the Municipality of North Sydney (1918) 18 SR (NSW) 210; 35 WN (NSW) 85, the Chief Judge in Equity described the proposition that a plaintiff seeking an interlocutory injunction must show at least a probability that he will succeed in establishing his title to the relief sought at the final hearing as ‘so well established that no authority is really needed in support of it’.
It is also made clear in ABC v Lenah that a serious question to be tried can be found only by reference to an infringement of some legal or equitable right or the commission of some legal or equitable wrong, with the result that the issue needs to be approached by inquiring whether there exists, in the circumstances and on the evidence, a sufficiently cogent showing of some such infringement or wrong to warrant the imposition of an order to preserve the status quo pending full investigation.”
In Maher v Honeysettand Maher Electrical Contractors (2005) NSWSC 859, Brereton J said at par19:
“On an application of this type, while the Applicant must provide the Court with sufficient material to enable it to determine that there is a serious question to be tried, Charlton v Baber (2003) 47 ACSR 31 the Court will not normally enter into the merits of the proposed derivative action to any great degree, the applicant bearing the same relatively low standard as applies in an application for an interlocutory injunction. Swansson v RA Pratt Pty Limited (2002) 42 ACSR 313, 320.”
In Ehsman vNutectime International Pty Ltd (2006) 58 ACSR 705 Austin J said at par59:
“Ás Barrett J explained in Charlton v Baber (2003) 47 ACSR 31 at [55], the applicant bears the onus of providing sufficient material to enable the court to make this determination. But as I explained above, referring to Palmer J’s judgment in Swansson (and see Maher v Honeysett (2005) NSWSC 859 at par19), the court does not normally enter into the merits of the proposed derivative action to any great degree. The evidence must reach the same standard as applies for an interlocutory injunction, set out in such cases as Castlemaine Tooheys Ltd v State of South Aust (1986) 161 CLR 148; 67 ALR 553 and Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199; 185 ALR 1; 54 IPR 161; [2001] HCA 63. The standard has been described as ‘relatively low’: Maher v Honeysett at [19].”
In South Johnstone Mill (supra), after referring to these cases, Middleton J said at par79:
“The High Court of Australia recently revisited the question of applications for interlocutory injunctions in Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 (see especially at [19] per Gleeson CJ and Crennan J, and at [65]-[72] per Gummow and Hayne JJ). Justices Gummow and Hayne at [65] stated:
The relevant principles in Australia are those explained in Beecham Group Ltd v Bristol Laboratories Pty Ltd [1968] HCA1; (1968) 118 CLR 618. This Court (Kitto, Taylor, Menzies and Owen JJ) said that on such applications the court addresses itself to two main inquiries and continued [at 622-623]:
‘The first is whether the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief ... The second inquiry is ... whether the inconvenience or injury which the plaintiff would be likely to suffer if an injunction were refused outweighs or is outweighed by the injury which the defendant would suffer if an injunction were granted.’
By using the phrase ‘prima facie case’, their Honours did not mean that the plaintiff must show that is more probable than not that at trial the plaintiff will succeed; it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial. (Emphasis added).”
In Chahwan v Euphoric Pty Ltd [2006] NSWSC 1002, Barrett J said at par27:
“On an application such as this, it is not the function of the court to probe in depth the issue of serious question to be tried. The process is essentially a screening process designed to exclude cases with insufficient prospects of success to warrant the proceedings being pursued.”
Mr Imlach did not engage in criminal conduct and the solvency of the Company was not under threat. The directors, Mr Kelly and Mr Imlach, agreed to appropriate to themselves the Company’s businesses. The disaggregation agreement provided for the Company to make unsecured loans to Mr Kelly and Mr Imlach through their newly formed trading companies (there is no record of these loans in the Company’s balance sheet for the year ending 30 June 2005 and so it appears that either the loans were not ultimately provided or that they have since been repaid or forgiven). Each director had an interest in getting from the Company the best deal he could for himself and the trading company which he had set up to benefit from the arrangement. There was a clear conflict between the directors personal interests and the interests of the Company. But the acquisition of the Company’s businesses by the directors (or entities controlled by them) could not occur without the Company’s interests being subordinated. Mr Kelly and Mr Imlach controlled all of the shares and so their conduct in subordinating the interests of the Company, must be taken to have been authorised by the Company by the unanimous agreement of the shareholders. In this circumstance, I am unpersuaded that a serious question to be tried for breach of directors duties (equitable or statutory) arises by reason of Mr Imlach, during negotiations, concealing an intent to establish a competing joinery business (if in fact there was such an intent).
In Angas Law v Carabelas (2005) 53 ACSR 208 the High Court was considering s229 of the Companies (South Australia) Code which imposed a statutory obligation on officers of corporations not to make improper use of their position to gain directly or indirectly an advantage for themselves or other persons to the detriment of the corporation. There Mr & Mrs Carabelas were the sole directors and shareholders of the company Angas Law Services Pty Ltd (ALS). The principal asset of the company was a property in Angas Street, Adelaide, from which Mr Carabelas, a legal practitioner, conducted his legal practice. ALS granted a mortgage to a bank to secure a loan to be made by the bank to Mr Carabelas. The mortgaged property was later sold and the bank took the entire proceeds to recover the money which it had lent to Mr Carabelas. Several years later the company went into liquidation. The liquidator brought claims in the name of ALS against Mr & Mrs Carabelas. One of the claims was for compensation based upon an alleged contravention of s229.
Gummow & Hayne JJ said at pars66 to 69:
“In oral submissions on the present appeal, the liquidator submitted that it is ‘a basic principle of corporate law’ that its assets be dealt with for the purposes of the corporation and not for the purpose of ‘appropriation’ by those who control and own all the issued shares. The corporators necessarily acted improperly if they so acted as to bring about the appropriation of the company's assets as their own. The liquidator contended that any act of ‘appropriation’ caused by an officer of the corporation is a breach of the standard of propriety required by s 229(4) of the Code. … .
This proposition concerning ‘appropriation’ is too broad. It insufficiently allows for the significance from case to case of the commercial context, and assumes a standard of conduct that is inflexible. The starting point must be the general duty of a director to act in the best interests of the company. The best interests of the company will depend on various factors including solvency. In Kinsela v Russell Kinsela Pty Ltd (In Liq), (1986) 4 NSWLR 722 at 730 Street CJ said:
‘In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets. It is in a practical sense their assets and not the shareholders' assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.’
Nothing said in Macleod v The Queen (2003) 214 CLR 230 suggests the contrary. It was decided in Macleod that the ‘consent’ of a single shareholder company could not cure what otherwise would be a breach of s173 of the Crimes Act 1900 (NSW). Section 173 created an offence where a director or officer of a body corporate fraudulently took or applied any of the property of the body corporate for his own use or benefit, or for any use or purpose other than that of the body corporate. Gleeson CJ, Gummow and Hayne JJ said at 240:
‘The self-interested “consent” of the shareholder, given in furtherance of a crime committed against the company, cannot be said to represent the consent of the company.’
In the present case, the mortgage was granted by ALS whilst it was solvent and at a time when there appeared to be no real chance of insolvency. In its internal memorandum concerning the loan application, the bank noted that Mr Carabelas, by reference to the properties held by his companies including ALS, was in ‘a very strong financial position’. Further, the granting of the mortgage was authorised by the shareholders of ALS. The combination of these two factors, solvency and authorisation, indicates that the standards of propriety expected of the directors was not breached.”
Here the features of solvency and authorisation exist and accordingly I have not been persuaded that there is a case for breach of duty on the part of Mr Imlach by advancing his own interests in preference to those of the Company.
There is another matter. The defendants contend that the evidence presented so far is insufficient to support a finding that Mr Imlach had any intention during the negotiations of setting up a competing joinery business and that the evidence is also insufficient to support a finding that the activities of Top Centre Pty Ltd were, in any event, in competition with the joinery business formerly conducted by the Company. Because the applicants have failed to persuade me that even if the allegations in the proposed amended statement of claim are proved there will be a serious question to be tried as to the claimed breach by Mr Imlach of his director’s duties, there is no need for me to deal with this contention. However, I record that had it been necessary for me to make a finding on the submission I would have rejected it for the following reasons.
There is evidence that:
hIn July 2004 Mr Imlach acquired three commercial fan heaters of a type used in joinery for spot drying glue on laminates.
hOn 22 September 2004, two weeks after the date of the disaggregation agreement, Mr Imlach purchased a post former for $44,000 and a spindle moulder for $18,000. Post formers and spindle moulders are used exclusively in the process of bench top manufacturing.
hOn 10 January 2005 the Company, Top Centre Pty Ltd was incorporated with Mr & Mrs Imlach being the sole directors and shareholders.
hTop Centre had in its inventory of plant and equipment a post former and a spindle moulder.
hTop Centre had as its principal place of business a location near to the Devonport factory formerly operated by the Company.
hIn the 5½ months to 30 June 2005 Top Centre achieved sales of $423,412.
hTop Centre by an agreement dated 3 February 2006 sold its assets including goodwill for $450,000. The goodwill referred to was the goodwill of the business of “Benchtop Manufacturing”.
If at the trial these matters are proved it is open to inference that prior to the execution of the disaggregation agreement Mr Imlach intended to set up a bench top manufacturing business in competition with the joinery business to be acquired by Mr Kelly’s company. It is also open to inference that Mr Imlach’s company, Top Centre Pty Ltd, operated its business in competition with the joinery business acquired by Mr Kelly’s company.
Next there is the misrepresentation claim. It is in the existing pleadings, but it is proposed to add the Company as an alleged victim. I set out below paragraphs 14 to 19 of the proposed statement of claim. The references to “JP Sales” and “the deed” are respectively references to the Company and the disaggregation agreement.
“14 Further, in the premises, the failure of Imlach to notify, disclose or reveal to Joinery Products or to Kelly or to JP Sales his (Imlach’s) true state of mind constituted a representation to the effect that neither Imlach nor any entity controlled or to be controlled by him had any present intention to, or had commenced to or was continuing to set up the Competing Business (‘the First Representation’) but for which none of the Plaintiffs would have executed the Deed in the form in which they did.
15 Further or alternatively, on diverse dates between in or about April and September 2004 Imlach represented to the Plaintiffs and to each of them that it was his intention that he or any entity controlled or to be controlled by him would, following the execution of the deed referred to in paragraph 9 hereof, only operate the Glass Business (‘the Second Representation’) whereas the fact was that at all material times from at least in or about July of 2004 Imlach intended that he or some entity controlled or to be controlled by him would operate the Competing business.
16 Further, the First Representation and the Second Representation were made in trade or commerce within the meaning of s14 of the Fair Trading Act (Tas) 1990.
17 Both the First Representation and the Second Representation were untrue and were false and/or misleading and deceptive or were likely to mislead and deceive within the meaning of s14 of the Fair Trading Act (Tas) 1990 in that the fact was that Imlach and/or some entity controlled or to be controlled by him intended to, or had commenced to or was continuing to set up the Competing Business.
18 Acting upon the faith and truth of the First Representation and/or the Second Representation the Plaintiffs executed the deed as aforesaid.
19 As a result of Imlach’s breach of fiduciary duties, breach of duty in his capacity as a director of JP Sales, misrepresentation and/or misleading and deceptive conduct as aforesaid, the Plaintiffs have suffered loss and damage.
Particulars
Trading losses from on or about 1 October 2004 to 30 June 2006 $520,038.00
Losses from 1 July 2006 to date and continuing (estimated) $128,000.00
Opportunity cost of funds not received (to be supplied)”
There is no evidence that Mr Imlach made the representation referred to in par15. There is no evidence that the Company entered into the disaggregation agreement influenced by a belief that Mr Imlach would not conduct a competing joinery business. There is no evidence that the Company has suffered loss or damage. The applicants have not discharged their onus of showing that there is a serious question to be tried on the misrepresentation claim which they wish to bring in the Company’s name.
In light of my findings that no serious question to be tried has been shown to exist in respect of the matters which the applicants wish the company to litigate, it is unnecessary to deal with the other criteria referred to in s237(2). However, in case these findings are wrong I set out below what my findings would have been in relation to the questions of whether it would be in the best interests of the Company that the applicants be granted leave and whether the applicants are acting in good faith.
Best interests of the Company
In assessing the best interests requirement the focus is on the Company’s interests and not the characteristics of the applicants. It is the interests of the Company as a whole which must be taken into account. In Maher v Honeysett (supra) Brereton J said at p44:
“… The matters there referred to do not suggest that personal qualities of the applicant are relevant. The phrase ‘best interests’ directs attention to the company’s separate and independent welfare. Charlton v Baber (2003) 47 ACSR 31, [52]; Fiduciary Limited v Morningstar Research Pty Limited [2005] NSWSC 442, [46]. This imports the familiar concept of the interests of the company as a whole. As to which, see, for example, Peters’ American Delicacy Co Limited v Heath [1939] HCA 2; (1939) 61 CLR 457; Russell Kinsella Pty Limited (in liq) v Kinsella [1983] 2 NSWLR 452 (Powell J); Richard Brady Franks Limited v Price [1937] HCA 42; (1937) 58 CLR 112; Charlton v Baber (2004) 47 ACSR 31, 44 [50]. Whether the ‘best interests’ of the company as a whole reflect those of the shareholders taken together in light of the corporate objects, or those of the creditors which will prevail in the context of insolvency, will be influenced by the status of the company. Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1; 3 ACLR 529; Spies v The Queen [2000] HCA 43; (2000) 201 CLR 603; 173 ALR 529; 35 ACSR 500; Charlton v Baber (2004) 47 ACSR 31, (53].”
A more elaborate exposition of the types of matters which need to be considered in assessing whether or not the proposed derivative action is in the best interests of the Company is contained in the judgment of Palmer J in Swansson (supra). He said at pars56 to 60:
“The requirement of s237(2)(c) that the applicant satisfy the court that the proposed action is in the best interests of the company is a far higher threshold for an applicant to cross. It requires the applicant to establish, on the balance of probabilities, a fact which can only be determined by taking into account all of the relevant circumstances. Accordingly, the inquiry will normally require the applicant to adduce evidence at least as to the following matters:
First, there should be evidence as to the character of the company; different considerations may well apply depending on whether the company is a small, private company whose few shareholders are the members of a family or whether it is a large public listed company. If the company is a closely held family company, it may be relevant to take into account the effect of the proposed litigation on the purpose for which the company was established and on the family members who are the shareholders. If the company is a public listed company, such considerations will be irrelevant. Again, the company may be a joint venture company in which the venturers are deadlocked so that the proposed derivative action is seen as being for the purpose of vindicating one side’s position rather than the other’s in a way which will not achieve a useful result.: see eg Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd [2001] QSC 324; BC 200105274.
Second, there should be evidence of the business, if any, of the company so that the effects of the proposed litigation on its proper conduct may be appreciated.
Third, there should be evidence enabling the court to form a conclusion whether the substance of the redress which the applicant seeks to achieve is available by a means which does not require the company to be brought into litigation against its will. So, for example, if the applicant can achieve the desired result in proceedings in his or her own name it is not in the best interests of the company to be involved in litigation at all. This was the case in Talisman Technologies in which it appeared from the evidence that the most desirable outcome for the applicant was to obtain an order for specific performance of a contract, which it could do in a suit in which the company did not need to be a party.
Fourth, there should be evidence as to the ability of the defendant to meet at least a substantial part of any judgment in favour of the company in the proposed derivative action so that the court may ascertain whether the action would be of any practical benefit to the company.”`
If I had found that the applicants had demonstrated that there was a serious question to be tried on the claim of breach of directors duties I would have concluded that it is in the best interests of the Company that the applicants have leave to pursue this claim.
The duties are alleged to be owed to the Company and so plainly the Company is an appropriate plaintiff. As I have already said fiduciary duties having identical content cannot be owed both to the company and to one or more of the shareholders. The applicants have undertaken to the Court that they will bear and indemnify the Company in respect of any costs incurred in the litigation which the Company does not recover from the defendants. The 2005 balance sheet for the Company shows that just prior to the disaggregation of its two businesses in 2004 it had net assets of about $1.5 million. The Company’s profit and loss statement shows that the operating profit of the Company for the financial year ending 30 June 2004 was about $850,000 for the joinery business and about $550,000 for the window business. It is because of these figures that I have no cause to doubt Mr Kelly’s capacity to honour the undertaking which he has given nor to doubt Mr Imlach’s capacity to satisfy a judgment which may be awarded against him in favour of the Company. The Company no longer trades and so the litigation would not adversely affect the conduct of the Company’s affairs.
If it had been shown that the misrepresentation claim had raised a serious question to be tried and if leave was to be granted in respect of the breach of directors duties claim I would also have concluded that it is in the best interests of the Company that the applicants have leave in respect of the misrepresentation claim. There are overlapping issues of fact and the most convenient course would have been to allow the Company to pursue both claims together.
If, however, no leave was to be given in respect of the breach of directors duties claim I would have withheld leave on the misrepresentation claim on the ground that it is not in the best interests of the Company that it be pursued by the Company. It is already alleged in the existing proceedings that the misrepresentation was made to Mr Kelly and his company Joinery Products Pty Ltd during the negotiations for the disaggregation agreement. Mr Kelly and Joinery Products Pty Ltd are parties to that agreement and it is alleged in the existing proceedings that they executed it acting upon the truth of the representation and thereby suffered loss. No basis upon which the Company might succeed on the misrepresentation claim where the existing plaintiffs might not was suggested and I cannot conceive of such a basis. No purpose would be served by having the Company’s name added to the list of plaintiffs on the misrepresentation claim against its will.
Good faith
I direct myself in accordance with the analysis of Palmer J in Swansson (supra) on this criterion. He said at pars36 to 38:
“… In my opinion, there are at least two interrelated factors to which the courts will always have regard in determining whether the good faith requirement of s237(2)(b) is satisfied. The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. Clearly, whether the applicant honestly holds such a belief would not simply be a matter of bald assertion: the applicant may be disbelieved if no reasonable person in the circumstances could hold that belief. The second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process.
These two factors will, in most but not all, cases entirely overlap: if the court is not satisfied that the applicant actually holds the requisite belief, that fact alone would be sufficient to lead to the conclusion that the application must be made for a collateral purpose, so as to be an abuse of process. The applicant may, however, believe that the company has a good cause of action with a reasonable prospect of success but nevertheless may be intent on bringing the derivative action, not to prosecute it to a conclusion, but to use it as a means for obtaining some advantage for which the action is not designed or for some collateral advantage beyond what the law offers. If that is shown, the application and the derivate suit itself would be an abuse of the court’s process: Williams v Spautz (1992) 174 CLR 509 at 526; 107 ALR 635 at 648. The applicant would fail the requirement of s237(2)(b).
Where the application is made by a current shareholder of a company who has more than a token shareholding and the derivative action seeks recovery of property so that the value of the applicant’s shares would be increased, good faith will be relatively easy for the applicant to demonstrate to the court’s satisfaction So also where the applicant is a current director or officer: it will generally be easy to show that such an applicant has a legitimate interest in the welfare and good management of the company itself, warranting action to recover property or to ensure that the majority of the shareholders or of the board do not act unlawfully to the detriment of the company as a whole.”
The evidence is that the first applicant, Mr Kelly, is a director and shareholder of the Company and with the second applicant (a company in which Mr Kelly is a director and the majority shareholder) holds half of the shares. This is more than a token shareholding. The existence of a serious question to be tried would be evidence that the application was being brought in the honest belief that there were good causes of action with prospects of success. The applicants have offered an undertaking to indemnify the Company for costs. If I had found that there was a serious question to be tried I would have been also satisfied that the applicants are acting in good faith.
Summary
The applicants have applied for leave to bring derivate proceedings on behalf of a company under the Corporations Act 2001 (Cth). The claims which the applicants seek to bring in the Company’s name are claims arising from an alleged breach of directors duties by Mr Imlach and from an alleged misrepresentation made by him.
Section 237(2) specifies the criteria which must be satisfied before leave to bring the proceedings can be granted. Amongst other things, the Court must be satisfied that there is a serious question to be tried and that it is in the best interests of the Company that leave be given.
As to the breach of directors duties claim I have not been persuaded that there is a serious question to be tried. As to the misrepresentation claim I have not been persuaded either that there is a serious question to be tried or that it is in the best interests of the Company that the claim be brought.
It follows that the application must be dismissed and there will be an order accordingly.
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