Landsville Huynh Pty Ltd v Huynh

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST

S ECI 2022 02295

LANDSVILLE HUYNH PTY LTD (ACN 634 308 366) and others (according the schedule attached)	Plaintiffs
v
TRI TAM HUYNH	First Defendant
HUYNH ASSET HOLDINGS PTY LTD ATF HUYNH FAMILY TRUST (ACN 634 147 827)	Second Defendant

---

JUDGE:	LYONS J
WHERE HELD:	Melbourne
DATE OF HEARING:	14 September 2022
DATE OF RULING:	23 February 2023
CASE MAY BE CITED AS:	Landsville Huynh Pty Ltd v Huynh
MEDIUM NEUTRAL CITATION:	[2023] VSC 55

---

CORPORATIONS – Derivative leave – Corporations Act 2001 (Cth) ss 236 and 237 -Application by former directors and shareholders of company to bring proceeding - Alleging breaches of fiduciary and statutory duties by sole director – Breach of shareholders agreement where company alleged to be a party – Factors under s 237(2) considered – Whether good faith, best interests and serious question requirements met – Significance of ability of applicants to indemnify company for costs of proceeding – Limited leave to proceed granted in respect of claims related to breach of shareholders agreement – Leave otherwise refused.

---

APPEARANCES:	Counsel	Solicitors
For the First Plaintiff	No appearance
For the Second to Fifth Plaintiffs	Mr S. Bunce	Rennick & Gaynor
For the Defendants	Mr I. Hristovski	HWL Ebsworth

HIS HONOUR:

1. INTRODUCTION AND SUMMARY

In this proceeding, the second to fifth plaintiffs (the applicants) seek leave pursuant to section 237 of the Corporations Act 2001 (Cth) (Corporations Act) to institute a proceeding on behalf of the first plaintiff, Landsville Huynh Pty Ltd (the Company).

The fifth applicant, Landsville Pty Ltd (Landsville) owns 50% of the shares in the Company. Each of the second, third and fourth applicants (Mr Le, Mr Nguyen and Mr Zermati) own Landsville through his own company. Further, each of Mr Le and Mr Zermati were directors of the Company for a short period of time in 2019 soon after it was established.

The second defendant to this proceeding, Huynh Asset Holdings Pty Ltd (HAH), owns the other 50% of the shares in the Company. The first defendant, Mr Huynh, is a director of, and controls, HAH. Mr Huynh has been since late 2019 the sole director of the Company.

In summary, the applicants contend that:

(1) the Company was established in order to give effect to a single purpose joint venture between Mr Zermati, Mr Le and Mr Nguyen (via Landsville) on the one hand and Mr Huynh (via HAH) on the other;

(2) that purpose was to acquire 41 vacant lots of land in the development known as ‘Sinclair Heights’ (the Lots and Sinclair Heights development) from the Vendor pursuant to the Purchase Contracts;

(3) the settlement date under each of the Purchase Contracts was in the future to allow the Company to re-sell Lots (as house and land packages) at a profit to third parties and to nominate the third party under the relevant Purchase Contract;

(4) by an agreement dated 19 July 2019, HAH lent to the Company $661,100 (the Loan Agreement and the Loan) to pay the deposit under the Purchase Contracts for each of the 41 Lots with Mr Le, Mr Nguyen and Mr Zermati being guarantors (the guarantors);

(5) Mr Huynh as sole director of the Company acted in breach of the fiduciary duties and/or statutory duties he owed to the Company (the breach of duty claims) in a number of ways. The applicants contend that Mr Huynh did so by preferring the interests of himself or HAH over the interests of the Company by:

(a) cancelling the Purchase Contracts and failing to negotiate an extension and/or alternative terms with the Vendor (the cancellation claim); and

(b) issuing a default notice under the Loan Agreement to the Company which the Company did not respond to (the default notice claim).

The applicants contend that Mr Huynh also acted in breach of his fiduciary and/or statutory duties:

(a) when Mr Huynh and his family members purchased three of the Lots after the Company cancelled the Purchase Contracts (the personal profit claim); and

(b) by incurring improper expenses (the improper expenses claim).

The applicants contend that the cancellation claim caused damage to the Company in excess of $1.3 million, including by reason of the loss of rebates from the Vendor on settlement of the Purchase Contracts (of $20,000 per Lot, the rebates) and the loss of any increase in value of the Lots. The damage alleged to arise from the personal profit claim includes the loss of the rebates for those 3 Lots ($60,000) and an account of any profit obtained. The damage alleged to arise from the improper expenses claim is estimated in the order of $20,000. As is evident, these claims are against Mr Huynh.

Further, the applicants contend that the joint venture/shareholders and the Company entered into an agreement on or around 25 June 2019 (the shareholders agreement) pursuant to which:

(1) HAH would not charge interest in respect of the Loan (the interest claim) ; and

(2) HAH is required to pay 50% of the losses of the Company including of the Loan (the shared losses claim)

(collectively, the shareholders agreement claims).

The shareholders agreement claims are alleged against HAH and/or Mr Huynh.

As a result, the applicants seek leave to bring proceedings on behalf of the Company for:

(1) the breach of duty claims; and

(2) the shareholders agreement claims

(collectively, the derivative claims).

They do so in a context where, in 2021, HAH issued proceedings in the County Court against the applicants seeking repayment of the Loan plus interest (the County Court proceeding) which have now been transferred to this Court. The second to fourth applicants were sued as guarantors. Landsville was a party to the County Court proceeding but the claim against it has now been discontinued. It would appear that one of the purposes of seeking leave to bring the derivative claims, at least against HAH, would be to bring a set off and counterclaim by the Company in order to reduce the Loan debt and thus the amount guaranteed by the guarantors who are applicants in this proceeding. The guarantors have already raised claims related to the derivative claims against HAH and Mr Huynh by way of defence and counterclaim in the County Court proceeding.

In summary, the defendants oppose leave being granted. First, they contend that Mr Nguyen does not have standing. This was not really disputed by the applicants at the hearing of this application.

Second and more significantly, they contend that a number of the criteria in s 237(2) of the Corporations Act have not been satisfied with the result that leave cannot be granted. First, they contend that the derivative claims do not give rise to serious questions to be tried. Second and relatedly, the defendants contend that the applicants are not acting in good faith. This is because they submit that the primary purpose of the derivative claims is to defeat or reduce both the liability of the Company under the Loan Agreement and the liability of the guarantors in the County Court proceeding. Third, the defendants contend that the applicants have not established that granting leave is in the best interests of the Company given the damages that might be awarded and the inability of the applicants to meet any undertaking in relation to the costs that might be awarded against the Company if the derivative claims are unsuccessful.

For the reasons that follow, I have concluded that:

(1) the breach of duty claims (save for the improper expenses claim) and the shareholders agreement claims each give rise to serious questions to be tried;

(2) the applicants are acting in good faith in seeking to pursue the derivative claims (save for the improper expenses claim); and

(3) it is in the best interests of the Company to pursue the shareholders agreement claims.

As a result, I will grant leave for the applicants to pursue the shareholders agreement claims.

2. THE RELEVANT LAW
2.1 The Corporations Act

Section 237(1) of the Corporations Act provides that a person referred to in s 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings on behalf of a company. Section 236(1)(a) provides that such a 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;...

Section 237(2) provides as follows:

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.

2.2 Relevant principles

In light of the submissions of the defendants. I will focus on the relevant principles relating to the criteria in s 237(2)(b) (the good faith requirement), s 237(2)(c) (the best interests requirement) and s 237(2)(d) (the serious question requirement). Most of these principles were not in dispute: rather the dispute lay in their application to the derivative claims.

Before doing so, it is important to note that leave to bring a derivative action must not be given lightly. An application under s 237 is not interlocutory in character and the applicant bears the onus of satisfying the court that the matters set out in s 237(2) have been met.

In this regard, I note that in Re Fishinthenet Investments Pty Ltd,[1] Black J noted that he was required to assess whether the proposed proceedings were in the best interests of the Company ‘on the basis of the evidence that is presently available, not speculation that something more may turn up’.[2] I would endorse those comments and add that they apply with equal force at least to the serious question requirement.
[1][2014] NSWSC 260.
[2]Ibid [30].

It is also important to note that many of the criteria or requirements in s 237(2) overlap: for example, if there is no serious question to be tried, it would not be possible to establish the proposed claim was in the best interests of the company.

Further, as to the requirement in s 237(2)(a) (that it is probable the company will not itself bring the proceedings), this is not a high threshold. It is sufficient if the court is satisfied there are grounds for finding that it is probable the company itself will not bring proceedings.[3]
[3]Charlton v Baber [2003] NSWSC 745, [39] (Barrett J).

2.3 The good faith requirement in s 237(2)(b)

As to the good faith requirement, as outlined in Swansson v RA Pratt Properties Pty Ltd (Swansson),[4] the court will have regard to two primary interrelated factors:

(1) the first is whether the applicant honestly believes that a good cause of action exists and has reasonable prospects of success; and

(2) the second is whether the applicant is seeking to bring the derivative claim for a collateral purpose which would amount to an abuse of process.[5]

[4][2002] NSWSC 583 (Palmer J) (‘Swansson’).

[5]Ibid [36].

As to the first element, an applicant is likely to be disbelieved that that the applicant possesses an honest belief that a good cause of action exists if no reasonable person in the circumstances could hold that belief.[6]
[6]Ibid.

As to the second element, in Swansson, Palmer J concluded that, if the first element was established, it would still be an abuse of process if the applicant intended to bring the derivative proceeding not to pursue it to conclusion but to use it as a means of obtaining some advantage for which the action is not designed or for some collateral advantage beyond what the court offers.[7] Further, his Honour considered that an applicant may not be acting in good faith because, in reality, the applicant is seeking to vindicate his or her interest as a creditor and not whatever interest he or she may have as a former shareholder.[8]
[7]Ibid [37].
[8]Ibid [40].

However, it is clear that, just because there may be multiple purposes, one of which is collateral, this does not necessarily amount to an abuse of process. Rather, the party alleging the abuse must show that an improper purpose is the predominant one.[9]
[9]Melbourne City Investments Pty Ltd v Treasury Wine Estates Ltd (2016) 243 FCR 474, 494 [84].

2.4 Serious question requirement in s 237(2)(d)

As to the serious question requirement, the applicant has the same relatively low threshold to surmount as in the case of an application for an interlocutory injunction.[10] As a result, the court will not normally enter into the merits of the proposed derivative action to any great degree.
[10]Swansson (n 4) [25].

2.5 Best interests of the company requirement in s 237(2)(c)

As to the best interests requirement, s 237(2)(c) requires that it is (not may be or is likely to be) in the best interests of the company that the applicant be granted leave.[11] The onus is on the applicant to establish the bests interests requirement. In Daiwa Can Company v Barokes Pty Ltd (Daiwa Can Company),[12] Sifris J held that the phrase ‘best interests’ directs attention to the company’s separate and independent welfare and that:

There is no fixed test to determine best interests and there is no special standard of proof or any presumption or disposition against the granting of relief. However, the court will always have regard to whether the benefits of the proceeding are outweighed by the costs and risks that the company would suffer in bringing them.[13]

[11]I note that the defendants did not rely upon the rebuttable presumption in relation to the best interests of a company in s 237(3) of the Corporations Act.

[12](2016) 51 VR 540 (‘Daiwa Can Company’).

[13]Ibid 553 [61].

In Swansson, Palmer J noted that the ‘best interests’ criteria 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 and would ordinarily, at least, include matters relating to:

(1) the nature or the character of the company, including whether it is a small private company or a publicly listed company;

(2) the business of the company, so that the effects of the proposed litigation on its proper conduct may be appreciated;

(3) whether there are any other means of obtaining the same redress which does not require the company to be brought into litigation against its will; and

(4) the ability of the proposed defendant to meet at least a substantial part of any judgement in favour of the company.[14]

[14]Swansson (n 4) [56]-[60]; see also, Pentridge Village Pty Ltd (in liq) v Capital Finance Australia Ltd (2018) 58 VR 1, 52-3 [253]-[256] (Connock J).

In Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd,[15] Ball J listed other relevant matters to consider in relation to the best interests requirement, being:
[15](2011) 86 ACSR 432, 445 [57].

(1) the prospects of success of the proposed claim;

(2) the likely recovery if the proposed claim is successful;

(3) the likely costs of the proposed claim;

(4) the likely consequences if it is not successful;

(5) related to (3) and (4), the nature of any indemnity the applicant has offered to the company if the proposed claim is brought and the likelihood that the company will recover under that indemnity; and

(6) the resources of the company required to be devoted to the proposed claim and the resources it has available, together with the effect that the proposed claim may have on other aspects of its business.

I would add to that list, to the extent it is not already expressed, the likely damages that might be awarded. This is linked to the likely recovery of damages if the proposed claim is successful. The Victorian Court of Appeal recently noted ‘[i]f the applicants could not show at least a reasonable prospect that the proposed proceeding would yield significant damages…then they could not establish that bringing the proceeding was in the best interests of the company’.[16]
[16]Bzezinski v Shaw [2022] VSCA 173, [93].

There have been authorities that suggest that:

(1) where the company in question is a joint venture vehicle and one of the joint venturers alleges the other has acted unlawfully causing the company loss; and

(2) where the derivative claim is an action by or on behalf of the company against an officer for the recovery of compensation for the damage done to the company by the officer’s breach of duty,

it will ‘usually’ be appropriate in the context of the best interests requirement to grant leave to allow the proposed claim though the effective outcome of the litigation, if successful, would be indirectly to benefit the complaining joint venturer/shareholder proportionately to its shareholding. [17]

[17]Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732, 743 [47] (Austin J) (‘Morningstar’). See also, MG Corrosion Consultants Pty Ltd v Vinciguerra (2011) 82 ACSR 367, 379 [60], referred to in Daiwa Can Company (n 12) [66].

However, even in such cases, other factors of the kind set out above must be considered as to whether the proposed claim meets the best interests requirement. I refer, by way of example, to the likely damages to be awarded, the likelihood of recovery of those damages, the costs or likely costs to be incurred by the Company in pursing the proposed claim (in particular if it is unsuccessful) and the ability for the company to call on any indemnity by the applicants for those costs.

As Austin J said in Morningstar (as to any alleged benefit to the company from the proposed litigation to be pursued for the benefit of shareholders in the context of the best interests requirement):

[T]here is a balance to be struck between the prejudice that the company will suffer if claims are pressed unsuccessfully on its behalf and there is an adverse costs order, and the advantage that it will gain, indirectly for the benefit of its shareholders, if the claims are successful.[18]

[18]Morningstar (n 17) 743 [51], cited with approval in Daiwa Can Company (n 12) [63].

His Honour continued:

But where, as here, the assertion of those claims is simply a manifestation of aspects of the overall dispute between the parties, it will often be appropriate for the court to address the question of costs in the event that the claims fail. A suitable way of doing so, addressed during the hearing of the present application, is to grant leave on terms that the applicant is responsible for the costs ordered against the company, and undertakes not to seek contribution or indemnity from the company.[19]

[19]Ibid.

With respect, I would endorse these comments.

3. THE BACKGROUND FACTS

As set out above, I am conscious that s 237(2) of the Corporations Act requires the applicants to establish there is a serious question to be tried. However, the defendants opposed the leave application on the basis that the claim is hopeless and that, as a result, granting leave does not meet the best interests requirement and the good faith requirement under that section.

In this context, I note that the defendants have issued a summary judgment application in the County Court proceeding which is yet to be determined. Indeed, for the purpose of this application, the defendants relied upon affidavits filed in the summary judgment application. In these circumstances, it is appropriate that I address at least some of the background facts relating to the derivative claims sought to be pursued.

In this application, the applicants relied upon the following affidavits:

(1) the affidavits of Mr Le sworn 20 June, 19 August and 7 September 2022;

(2) the affidavits of Mr Zermati sworn 19 August and 7 September 2022; and

(3) the affidavits of Mr Nguyen sworn 19 August and 7 September 2022.

The defendants relied upon an affidavit of Mr Huynh sworn 30 August 2022 which in turn exhibits the affidavits sworn by him on 10 February 2022 and 23 March 2022 in support of the summary judgment application in the County Court proceeding. The defendants also relied upon the affidavits of Mr Le sworn 10 March 2022 and 3 June 2022 in the County Court proceeding.

The applicants relied primarily upon the first affidavit of Mr Zermati. Mr Le and Mr Nguyen each deposed that he had read that affidavit and the contents of it was to the best of his knowledge and belief true and correct. I wish to record that Mr Huynh disputed many of the factual matters set out in those affidavits. Further, in many instances, the affidavit evidence was unclear and/or did not correspond with contemporaneous documents. As a result, I will refer to contemporaneous documents where appropriate.

3.1 The establishment of the Company

Mr Zermati deposed in substance that:

(1) in around April 2019, Mr Zermati became aware of the Sinclair Heights development. Mr Zermati then approached Mr Le and Mr Nguyen as potential investors. Mr Le in turn introduced Mr Huynh as a potential investor;

(2) as a result, Mr Huynh, Mr Zermati, Mr Le and Mr Nguyen discussed the Sinclair Heights development, including a marketing and exit strategy, over multiple meetings in person at Highfield Shopping Centre between April and June 2019;

(3) the joint venture would on sell the Lots as house and land packages with an anticipated profit primarily as a result of sales;

(4) as a result of the discussions in (2), Landsville was incorporated on 30 May 2019 and HAH was incorporated on 17 June 2019; and

(5) the Company was incorporated on 21 June 2019 with Landsville holding 50 shares and HAH holding the other 50 shares in the Company.

As to the directorship of the Company:

(1) Mr Zermati was a director of the Company from 21 June 2019 to 25 June 2019;

(2) Mr Le was a director of the Company from 25 June 2019 to 30 September 2019; and

(3) Mr Huynh has been a director of the Company since 21 June 2019 and has been and remains the sole director since 30 September 2019.

3.2 The 25 June agreements

Mr Zermati deposed that on or around 25 June 2019 there was a meeting between Mr Le, Mr Nguyen, Mr Zermati and Mr Huynh at which arrangements in relation to the joint venture were finalised, including:

(1) a document headed ‘MINUTES OF MEETING OF DIRECTOR AND SHAREHOLDERS’, dated 25 June 2019 (the 25 June 2019 minutes); and

(2) a document headed ‘ACKNOWLEDGEMENT OF LOAN AGREEMENT AND SHAREHOLDERS AGREEMENT’, dated 25 June 2019 (the Acknowledgment).

The 25 June 2019 minutes were signed by Mr Huynh as a director of the Company. Those minutes recorded, in substance, under the heading ‘LOAN AGREEMENT’ that:

(1) the Company will borrow $661,000 from HAH to pay the deposit under the Purchase Contracts;

(2) Mr Le, Mr Zermati and Mr Nguyen were personally liable for the loan amount; and

(3) a loan agreement would be prepared by an independent lawyer within a month of the meeting.

Those minutes also recorded, in substance, under the heading ‘SHAREHOLDER AGREEMENTS’ that:

(1) the control and decision-making of the Company would be 51% to HAH and 49% to Landsville;

(2) all income of the Company must be used to pay off the Loan prior to other expenses or profit shares;

(3) net profit and loss of the Company would be shared equally between HAH and Landsville; and

(4) Landsville would be responsible for buying back the balance of the Lots under the Purchase Contracts (which remained unsold) a month prior to land settlement at the Purchase Contract price.

Further, the 25 June 2019 minutes recorded that:

(1) all shareholders agreed with the ‘Loan Agreement’ and the ‘Shareholder Agreements’; and

(2) ‘signed to Acknowledge of Loan Agreement and Shareholder Agreements [sic]’.

As to the Acknowledgement, it contained two sections. First, under the heading ‘LOAN AGREEMENT’, the Acknowledgement provides, in summary, that:

(1) HAH will lend $661,000 to the Company to pay the deposit under the Purchase Contracts;

(2) HAH ‘won’t charge any interest of the loan amount’;

(3) the term of repayment of the loan amount was at the ‘point of total settlements’;

(4) all shareholders and directors of Landsville are personally liable for the loan amount; and

(5) all income of the Company will be applied to pay the loan amount prior to other expenses or profit shares.

Second, under the heading ‘SHAREHOLDER AGREEMENTS’, the Acknowledgement provides, in summary, that:

(1) the profit and loss of the Company would be equally shared between HAH and Landsville;

(2) the Company’s control and decision-making ‘will be 51% to [HAH] and 49% to Landsville’;

(3) HAH is required to discuss with the ‘shareholders’ prior to making any final decision; and

(4) Landsville is responsible for buying back the balance of the unsold Lots under the Purchase Contracts a month prior to the land settlement at the Purchase Contract prices.

The Acknowledgement also contained a statement that the shareholders and directors of the Company agreed to these conditions and agreed to engage a nominated accounting firm to liaise with a nominated lawyer to prepare the agreements outlined above. The Acknowledgement was signed by Mr Huynh as a director of HAH and by each of Mr Le, Mr Nguyen and Mr Zermati, in his capacity as a director of Landsville.

I note that Mr Zermati and Mr Le deposed, in substance, that each resigned as a director at the request of Mr Huynh because Mr Huynh said he preferred to be in control of the Company as it was inconvenient for him to have to seek consent for every Company activity.

Mr Zermati deposed that the Purchase Contracts were also signed on or around 25 June 2019. There were 41 individual contracts, one for each Lot. A sample Purchase Contract was in evidence. Each provided for a 5% deposit. The Purchase Contracts were signed by Mr Huynh and Mr Le on behalf of the Company in their capacities as directors. The Purchase Contracts provide that settlement was due ‘on the date which is 14 days after the Vendor … gives notice in writing to the Purchaser … of Registration of the Plan’ of subdivision for the Sinclair Heights development.

In addition, the Vendor provided to the Company a letter for each of the Lots which recorded that the Vendor agreed to pay a $20,000 rebate by way of adjustment ‘in favour of [the Company] at settlement or as otherwise directed by the vendor’.

I note that, in the proposed statement of claim (PSOC), the applicants allege that the parties to the shareholders agreement were the Company, Landsville, HAH and Messrs Le, Nguyen, Zermati and Huynh. Further, it is alleged that there were terms of the shareholders agreement, in addition to those set out above, that:

(1) a related company of Landsville called Landsville Realty Pty Ltd (LVR) would prepare marketing and sales material in order to sell house and land packages on the Lots and would place the Lots on the market immediately but would commence a full marketing campaign to sell Lots from six months prior to settlement or when services were connected to the Lots (the agreed timeline);

(2) the house and land packages would be priced so that LVR would receive sales revenue of $15,000 for each sale of a house and land package on a Lot;

(3) Landsville would engage builders to build the houses for each Lot, with the builder to provide a $25,000 ‘Builders Commission’ to Landsville; and

(4) the parties would cooperate and act in good faith towards each other and the joint venture and would not hinder or prevent the fulfilment of the purpose of the shareholders agreement.

They allege that the terms in [53](1)-(3) were agreed in conversations between Mr Huynh, Mr Le, Mr Nguyen, and Mr Zermati between April and June 2019. I will deal with the evidence concerning these allegations in section 3.4 below. The term in [53](4) is alleged to be implied.

3.3 The Loan Agreement

No formal shareholders agreement was ever prepared. Nevertheless, a formal Loan Agreement was prepared dated 19 July 2019. It was executed by:

(1) Mr Huynh on behalf of HAH;

(2) Mr Le on behalf of the Company; and

(3) each of Mr Le, Mr Nguyen and Mr Zermati as guarantors.

The Loan Agreement was generally consistent with the 25 June 2019 minutes and the Acknowledgement. I note that the Loan Purpose is defined as ‘making a deposit to the purchased [sic] of all the real estate properties listed in Schedule 3 of this Agreement’ (i.e. the Lots). There are some differences in relation to interest. Relevantly, it provided that:

(1) a ‘Default Event’ included:

(a) the Company ceasing, or threatening to cease, to carry on all or a substantial part of its business; or

(b) any other event occurring (including a material adverse change in the Company’s financial position) which in the opinion of HAH could affect the Company’s ability or willingness to perform any of its obligations under the Loan Agreement;

(2) at any time after a Default Event has occurred, HAH may:

(a) require the Company to pay simple interest at the ‘Default Rate’ from the date of default until the Loan is paid; and/or

(b) demand and require immediate payment of the principal sum and interest on the principal sum and recover the same from the Company;

(3) the Default Rate is defined to mean 2% higher than the rate fixed under s 2 of the Penalty Interest Rates Act 1983 (Vic), as at the date of default.

Mr Le deposed that Mr Huynh provided him with a blank copy of the Loan Agreement prepared by lawyers recommended by Mr Le and that Mr Huynh advised Mr Le that he needed to obtain independent legal advice prior to execution of the Loan Agreement. Mr Le deposed that he obtained independent legal advice from a lawyer at Angelowitsch & Associates, who witnessed Mr Le’s execution of the Loan Agreement. It is unclear whether this advice was obtained by Mr Le for the purpose of him signing the Loan Agreement as a director of the Company or as a guarantor. I note Mr Zermati, who signed the Loan Agreement as a guarantor, also received independent legal advice from a lawyer at Angelowitsch & Associates.

It would appear that the Loan funds of approximately $661,100 were advanced in early July 2019 to pay the deposits under the Purchase Contracts.

3.4 Marketing and Sales

As to the marketing of the Lots for sale and development, Mr Zermati deposed, in substance, that:

(1) it was always intended that the joint venture would on sell the Lots as house and land packages (i.e. for the construction of residential homes) with an anticipated profit primarily as a result of sales;

(2) on 28 June 2019, LVR was incorporated to act as the exclusive marketing and sales agent for the joint venture; and

(3) Mr Huynh was aware of the role of LVR. In this regard, Mr Zermati relied, for example, on a WhatsApp exchange dated 27 June 2019 which refers to LVR in the context of the joint venture.

Mr Huynh disputed many of these allegations, in particular, that he knew of the existence of LVR before the Loan Agreement and Purchase Contracts were executed, or that he knew of the agreement between LVR and the Vendor (by which LVR became entitled to a commission from the Vendor for $5,000 per Lot). By contrast, Mr Le deposed that Mr Huynh knew about and agreed to the creation of LVR prior to its incorporation and re-executed the Purchase Contracts on 24 July 2019 which acknowledged LVR as the Vendor’s estate agent in the particulars of sale for each Purchase Contract. He also deposed that these issues were discussed between Mr Huynh, Mr Zermati, Mr Nguyen and himself at the Highpoint Shopping Centre on 27 June 2019. This was confirmed by Mr Zermati and Mr Nguyen.

Further, Mr Zermati deposed that at that meeting it was discussed that:

(1) LVR would be incorporated to market and sell all the Lots on behalf of the Company;

(2) LVR would prepare a general sale authority for the Vendor to sign for all Lots so LVR could earn a commission on the sales on behalf of the Vendor; and

(3) an agreement would be prepared so that LVR would pay an amount of $20,000 to the Company for each Lot sold.

As to the marketing work undertaken, Mr Zermati deposed that immediately after the Loan Agreement was formalised, LVR started preparing for the marketing and sale of all the Lots as house and land packages. He deposed that at that time, the major sales and marketing campaign was to commence around February 2020 but was later pushed back to mid-2020 because the development was progressing slower than expected.

Further, Mr Zermati deposed that there was a significant amount of work completed by LVR during this period, including:

(1) the preparation of detailed, professional marketing material;

(2) engaging multiple marketing/estate agents; and

(3) engaging with builders for their proposed site plans with the result that:

(a) house and land package site plans/measurements, costings, house designs, builders’ inclusions and plans/specifications for the fixtures and fittings were produced for each of the Lots. Costings were prepared on this basis estimating total profit/sales revenue in the amount of approximately $1.5 million; or

(b) in the alternative, LVR had arranged builders who would build houses on each of the Lots for their normal price and pay a commission to LVR of $25,000 per Lot. The expected profit would then be $1.025 million.

Mr Zermati deposed that the Vendor also agreed to pay LVR a marketing commission of $15,000 per Lot on the sale of each Lot. This is recorded in a written agreement between the Vendor and LVR dated 15 July 2019.

As to the time of the commencement of the sales and marketing campaign, Mr Zermati deposed that ‘[i]t was discussed multiple times between the participants that the intention of [LVR]’ was to commence its sales and marketing campaign:

(1) ‘around 6 months prior to the Vendor’s settlement date(s) for the 41 lots’; or

(2) ‘upon connection of the major services/infrastructure at Sinclair Heights’.

The details of these discussions or the participants in them was not disclosed. Nor was it deposed that the intention of LVR, as described in [65] above, was the subject of agreement. Mr Zermati deposed that all of the marketing material, referred to in [63] above, was prepared well in advance of the proposed start date of the sales and marketing campaign and that ‘everyone was ready to go as soon as the time was right’. Once again, Mr Huynh disputed many of these matters.

3.5 Proposed cancellation rejected by Mr Le, Mr Nguyen and Mr Zermati

Mr Zermati deposed that in or around April 2020, he was approached by a Mr Brar on behalf of the Vendor who in substance:

(1) had been advised that the Vendor’s lender was not keen to advance funds to undertake infrastructure works at the Sinclair Heights development in light of the fact that all Lots had been sold to one entity (i.e. the Company);

(2) was concerned that the Company/LVR may not be able to sell all Lots without these infrastructure works being undertaken; and

(3) as a result, the Vendor needed the Lots to be ‘returned’.

Mr Zermati deposed that in April or May 2020, Mr Huynh contacted him to advise that he had been approached by the Vendor and advised the settlement of the Lots was near and that he (Mr Huynh) was concerned that no Lots had been sold and that all the Lots would not be sold prior to settlement. Mr Zermati deposed that there was then a meeting between Mr Huynh, Mr Nguyen and Mr Zermati on 1 May 2020. It is apparent that Mr Le was also at that meeting. Mr Zermati deposed that at the meeting they discussed, among other things:

(1) doubts about whether the Lots would settle in the time frame proposed by the Vendor (November 2020);

(2) the complete lack of viability of the Sinclair Heights development being successful if 21 Lots were returned and (by contrast) the significant profits that would be gained from the sale of all 41 Lots; and

(3) the real reason why the Vendor wanted to have the Lots returned, namely to secure funding for infrastructure works.

Mr Zermati deposed that it was agreed that the Company would not return the Lots to the Vendor and, in return, Mr Le would agree to caveat his property to further secure the Loan (the Caveat Agreement). Mr Huynh, in substance, disputed that the Caveat Agreement was entered into in his 30 August 2022 affidavit. However, Mr Le deposed that there was an agreement with Mr Huynh not to terminate 21 of the Purchase Contracts in exchange for the caveat from Mr Le (i.e. the Caveat Agreement). Mr Le did not execute the caveat pursuant to the Caveat Agreement until May 2021.

I note that the minutes of a meeting of the director and shareholders of the Company dated 1 May 2020 (signed by Mr Huynh, Mr Le, Mr Nguyen and Mr Zermati) are not consistent with Mr Zermati and Mr Le’s version that, in some way, the caveat was in return for the Company not cancelling the Purchase Contracts. It simply records that:

(1) that the guarantors agreed to caveat their properties ‘to secure the Loan’; and

(2) ‘[t]he board disagreed to terminate 21 contracts’.

Of course, at that time, the only director of the Company was Mr Huynh who had been granted control and decision making power in respect of the Company by reason of the 25 June 2019 minutes and the Acknowledgement referred to above.

On 14 May 2020, the solicitors for the Vendor wrote to the conveyancers for the Company advising that it was the Vendor’s ‘best estimate that construction will be completed, and that settlements will be occurring, in November or December 2020’. The letter noted that it was the Vendor’s understanding that the Company proposed either to on sell the properties or nominate substitute purchasers under the Purchase Contracts. However, the Vendor’s solicitors noted that the Company was itself to complete the Purchase Contracts.

It is important to note that at this stage, in April and May 2020, there was much uncertainty due to the COVID-19 pandemic, including in the property market. That uncertainty continued for much of 2020.

Mr Huynh organised a ‘meeting’ of the director and shareholders of the Company via email on 8 July 2020. The covering email recorded that:

(1) no Lots had been sold since the last meeting on 1 May 2020;

(2) new (COVID-19) lockdown restrictions could ‘freeze’ the entire market as well as increasing unemployment;

(3) the solicitors for the Vendor advised that stage 1B (which appears to consist of 34 Lots) will be able to be settled in November 2020 (i.e. the plan of subdivision will be lodged);

(4) the chance to sell all 41 Lots was ‘0%’ given that developers have started to reduce their prices by $20-$30,000 in light of the COVID-19 crisis; and

(5) as a result, Mr Huynh considered that the best option for the Company would be to return ‘21 Lots of Stage 1B to the Developer to minimise the loss which may be suffered’.

This was also recorded in a ‘minutes of a meeting of the director and shareholders’ dated 8 July 2020 (the 8 July 2020 minutes) authorising the ‘return’ of (i.e. the cancellation) of the Purchase Contracts in respect of the ‘21 lots of land of stage 1B’. This minute was executed only by Mr Huynh.

The guarantors did not agree with this approach. By email dated 8 July 2020, Mr Zermati wrote that:

(1) they did not support the cancelling of the 21 Purchase Contracts due to disagreement with the Vendor’s conditions ‘as per our previous discussions’;

(2) the 8 July 2020 minutes were not genuine;

(3) the Vendor’s dates for settlement of the 21 Lots were estimates only;

(4) if the Company failed to sell any of the Lots, Landsville and its shareholders were responsible for the deposits of $661,000 paid for the Lots (which I have understood to be a reference to Landsville’s obligation to purchase any unsold Lots); and

(5) Mr Huynh should inform the Company’s conveyancer that the Company would require an additional three months after the announcement of the settlement date to organise ‘the settlement fund’ (i.e. in order to give Landsville appropriate time to seek finance for such a sizeable project).

3.6 Cancellations in July 2020, in late 2020 and early 2021

Mr Huynh executed a Deed of Cancellation dated 10 July 2020 (the July 2020 Deed) cancelling 22 Lots. The July 2020 Deed related to 22 Lots in Stage 1B and 1C: these matters were not explained to me. The July 2020 Deed provides, among other things, that:

(1) a retention sum of $5,000 for each Lot would be forfeited to the Vendor (totalling $110,000); and

(2) the balance of deposits paid from the cancelled contracts would be applied for the benefit of the 19 Lots remaining under contract.

Mr Huynh deposed, in substance, that this decision and later decisions to cancel the Purchase Contracts were made in the best (commercial) interests of the Company in order to minimise the loss occasioned by the need for the Company to purchase all the Lots at settlement in circumstances where no Lots had been sold.

Mr Zermati deposed that Mr Huynh’s cancellation of the Purchase Contracts for 22 Lots seriously undermined the relationship which the Company and LVR had established with marketing/selling agents and builders. As a result, many of the marketing/selling agents and builders ultimately terminated their agreements and relationships with LVR.

Further, Mr Le deposed that the cancellation of the purchase of these Lots ‘completely destroyed’ the trust and goodwill with marketing agents: he said that the agents had told him that they had customers enquiring to buy Lots that were no longer there and these customers were let down.

Further, between 18 September 2020 and 24 February 2021, Mr Huynh, on behalf of the Company, entered into further Deeds of Cancellation for another 8 Lots (the Further Deeds). Mr Huynh deposed, in substance that the Further Deeds provided that:

(1) a ‘Retention Amount’ of $500 for each Lot would be forfeited to the Vendor (totalling $4,000); and

(2) the balance of the deposit paid in respect of these 8 Lots would be refunded to the Company by the Vendor (totalling $238,400).

Mr Zermati deposed that the Further Deeds ‘killed off all opportunities for us to successfully market and sell the properties’.

Mr Zermati deposed that the bulk of the Lots settled in or around March 2021. By this, I understand him to mean that the relevant plan of subdivision was registered at about this time. In these circumstances, Mr Zermati deposed that the cancellation of the Purchase Contracts for 22/1 Lots (by the July 2020 Deed) was extremely early and in breach of the shareholders agreement, the Loan Agreement and the Caveat Agreement.

I note that by letter received on or about 2 February 2021,[20] the Vendor’s solicitors advised the Company that:
[20] At [24] of Mr Huynh’s affidavit of 10 February 2022, he deposed that the letter was received ‘[o]n or about 2 February 2021’, however as noted in [83](2), the letter refers to the Vendor’s expectation of lodging the plan of subdivision in or about late January 2021.

(1) ‘completion of construction of the lot [sic] purchased by your client is imminent’;

(2) the Vendor expected to be in a position to lodge the plan of subdivision for registration in about late January 2021; and

(3) the Vendor ‘anticipates (but does not represent or warrant) that settlement is likely to fall due in or about mid to late February 2021’ and requested that the Company had in place all necessary arrangements to ensure that it was in a position to affect settlement (of the Purchase Contracts) when due.

By Deed of Settlement and Release executed 20 April 2021 between the Vendor, the Company, HAH and Mr Huynh (the April 2021 Deed), the Purchase Contracts for the remaining 11 Lots were cancelled.[21] There were terms of the April 2021 Deed that:

(1) the Company forfeited the deposits in respect of the 11 Purchase Contracts (totalling $308,700); and

(2) the Vendor pay the Company $150,000.

[21] A letter dated 7 April 2022 from the defendants’ solicitors states that the date of the Deed of Settlement and Release is 20 April 2021. This also appears to have been the date relied on during oral argument: T87:l23-26; T109:l16-19.

Mr Huynh deposed that approximately $210,000 of the refunds under the Purchase Contracts were paid in partial reduction of the Loan. In addition, the April 2021 Deed contained a discharge and release by the Vendor to HAH and Mr Huynh (the HAH releases). It was not explained to me why HAH and Mr Huynh were parties to the April 2021 Deed or entitled to the HAH releases.

There is one further matter to note following the cancellation of the relevant Purchase Contracts: Mr Huynh and his immediate family members purchased and became registered proprietors of 3 of the Lots.

(1) By contracts of sale dated 21 January 2021 and 30 December 2020 respectively Mr Huynh and his wife purchased Lot 139 and Lot 157: they became registered proprietors on 15 March 2021; and

(2) By a contract of sale dated 19 October 2020, Tran Huynh, a member of Mr Huynh’s immediate family, purchased Lot 147 and became the registered proprietor on 22 March 2021.

3.7 The Loan Agreement notices

On 10 February 2021, Mr Huynh caused HAH to issue a letter seeking remedy of an Event of Default under the Loan Agreement to the Company and the guarantors (the Default Notice). The Default Notice stated that the Company was in default under the Loan Agreement due to the cancellation of the Lots to that time and as a result:

(1) the Loan Agreement had become void, voidable or unenforceable because the Loan Purpose no longer existed in respect of the majority of the Lots; and

(2) the Company could no longer carry on a substantial part of its business.

The Default Notice required that the Company remedy the defaults within seven days, failing which HAH would demand immediate repayment of the Loan together with interest and all other monies payable under the Loan Agreement.

The Company, of which Mr Huynh was the sole director, failed to respond to the Default Notice, with the result that the Loan money became due and payable.

On 27 May 2021, HAH commenced the County Court proceeding. I will deal with the defences raised to the County Court proceeding by the applicants in section 4 below.

4. THE PROPOSED CLAIMS
4.1 The breach of duty claims

The PSOC alleges a number of the matters referred to in section 3 above, including:

(1) the joint venture between Mr Le, Mr Nguyen and Mr Zermati on the one hand and Mr Huynh and HAH on the other;[22]
[22]It is not alleged that Landsville is a party to the joint venture, notwithstanding that each of Mr Le, Mr Nguyen and Mr Zermati signed the Acknowledgment as directors of Landsville.

(2) the steps taken to effect the joint venture including the incorporation of the Company to purchase the Lots, the incorporation of LVR to act as the exclusive marketing and sales agent and the incorporation of Landsville;

(3) the shareholders agreement (between the Company, Mr Le, Mr Nguyen, Mr Zermati, Landsville, Mr Huynh and HAH) comprising the Acknowledgment, the 25 June 2019 minutes and conversations around April to June 2019;

(4) the Loan Agreement and the Caveat Agreement;

(5) the cancellation of the Purchase Contracts;

(6) the LVR marketing and sales activities, including the adverse effect of the cancellation of Purchase Contracts on LVR’s agreements and relationships with third parties;

(7) the calling up of the Loan based on the Default Notice; and

(8) the Company incurring improper expenses, including by reason of the employment of ‘An Le’.

As to the terms of the shareholders agreement, I refer to my comments in [53] and [54] above.

The breach of duty claims are contained in [37] of the PSOC and allege that Mr Huynh, as the sole director of the Company, breached his fiduciary and statutory duties (which statutory duties are owed to the Company under ss 180-183 of the Corporations Act). This is because:

(1) Mr Huynh:

(a) negotiated the cancellation of the Purchase Contracts when Mr Huynh was aware of, and agreed to, the agreed timeline up to 8 months prior to the settlement under the Purchase Contracts and when he was required to confer with Mr Le, Mr Nguyen and Mr Zermati prior to making decisions for the Company and when Landsville was obliged to purchase the remaining Lots if they were unsold one month prior to the settlement;

(b) as a result, caused the Company to cancel the Purchase Contracts and enter into the April 2021 Deed, including the HAH releases

(i.e the cancellation claim);

(2) Mr Huynh:

(a) caused HAH to issue the Default Notice using information obtained as director of the Company when:

(i) the Purchase Contracts for 12 Lots were on foot and would provide profit to the Company by the rebates and capital growth which would have been sufficient to repay the Loan;

(ii) Mr Huynh was aware of the agreed timeline and the provision for Landsville to purchase any unsold Lots;

(b) failed to ensure the Company responded to the Default Notice (resulting in the Loan becoming due and payable) (i.e. the default notice claim);

(3) Mr Huynh purchased cancelled Lots personally or allowed immediate family members to purchase those Lots (i.e. the personal profit claim);

(4) Mr Huynh caused the Company to incur expenses improperly, being the unnecessary employment of Ms An Le (i.e. the improper expenses claim); and

(5) Mr Huynh caused the Company to enter into the April 2021 Deed to which Mr Huynh and HAH are parties and derived benefit by compromising various disputes in exchange for fulfilling the Company’s deposits to the Vendor.

The PSOC alleges that these factual allegations give rise to breaches of the fiduciary duties owed by Mr Huynh as a director of Company. It also alleges that these factual allegations give rise to breaches of ss 180 to 183 of the Corporations Act.

The damages claimed by the plaintiffs in the PSOC (which include the Company) for the breach of duty claims are:

(1) loss of bargain relating to lost rebates in the amount of $820,000;

(2) loss of rebates relating to Lots 147, 157 and 139 in the amount of $60,000;

(3) damages relating to the improper expenses claim; and

(4) ‘[d]efaulting on the Loan resulting in the default interest and costs claimed in the [County Court proceeding]’.[23]

[23] I note in passing that other damages are claimed by Mr Le, Mr Nguyen and Mr Zermati, namely, the loss of bargain relating to lost sales revenue of $615,000, the loss of bargain relating to the lost builders’ commission of $1.025 million, loss of builders’ commissions relating to Lots 147, 157 and 139 of $75,000, expenses incurred in establishing and operating LVR and loss resulting from ‘[d]efaulting on the Loan resulting in the outstanding Loan principle [sic], default interest and costs’ claimed against the guarantors in the County Court proceeding.

In oral argument, the applicants submitted there were three categories of claim. The first related to the cancellation of the Purchase Contracts (i.e. the cancellation claim and the default notice claim). The second related to the improper expenses claim. The third related to the personal profit claim.

As to the first category, counsel for the applicants submitted that there are three kinds of loss, which were not the same as those alleged in the PSOC, namely:

(1) the loss to the Company of the expected return of the 5% deposits for each Lot that the Company would have received when the Lots were sold or ‘reassigned’, the balance outstanding of which is $272,600;

(2) the loss of the rebate of $20,000 per Lot payable to the Company when the Lots were sold or reassigned, totalling $820,000; and

(3) the loss of the capital growth on Lots which would have been realised when the Lots were sold or reassigned.

In relation to the alleged lost capital growth, the applicants acknowledged that this would require expert valuation evidence. Nevertheless, they asserted that residential house prices increased during the COVID-19 pandemic, including due to home owners’ assistance grants. In my view, I am able to take judicial notice of the fact that:

(1) there was some increase in house and land prices in greater Melbourne in the first half of 2020; and

(2) there has been some decrease since that time.

As to the improper expenses claim, counsel for applicants submitted that, when the Purchase Contracts were cancelled, some of the deposits were returned to the Company and some of those deposits were used to reduce the amount owing on the Loan. In oral argument, counsel for the applicants submitted that:

(1) $388,400 was returned from the Vendor by reason of the cancellation of the Purchase Contracts;

(2) if that sum had been paid towards the Loan, the balance of the Loan should have been $272,600. In fact, the Loan debt is recorded as $293,400;

(3) the difference of $20,800 (which is unaccounted for) constitutes the improperly incurred expenses which counsel submitted comprised:

(a) the employment expenses of Ms An Le; and

(b) legal costs relating to the July 2020, April 2021 and Further Deeds.

It is appropriate to record that Mr Huynh also disputes that the Company incurred any improper expenses. He produced a letter from his solicitors stating that Ms An Le was employed by the Company to find buyers for some of the Lots and that other fees were paid to the solicitors in relation to the April 2021 Deed.

As to the personal profit claim, the applicants claimed that the Company was entitled to an account of profits in respect of the purchase of 3 Lots by Mr Huynh and his wife as well as another member of Mr Huynh’s family. The applicants claimed that the Company was entitled to the lost rebates totalling $60,000 for these 3 Lots. Thus, the rebate for these 3 Lots were claimed in two different ways as this loss was also included in the amount of $820,000 claimed for the loss of rebates (as discussed in [97](2) above).

4.2 The shareholders agreement claims

The PSOC also contains a number of claims for breach of the shareholders agreement. These claims were premised on the basis that the Company was a party to the shareholders agreement. The claims for breach of the shareholders agreement include that:

(1) ‘HAH demanded and/or Huynh caused HAH to exercise a discretion to demand default interest payable under the Loan Agreement’ which caused the Company, Landsville and the guarantors loss in the amount of the interest in fact charged by Huynh/HAH ($35,928 as at February 2022) (i.e. the interest claim);

(2) HAH failed to pay and/or Mr Huynh caused HAH to not pay 50% of the losses incurred by the Company, in the sum of $150,857, being half of the balance of the Loan (of $149,700) and half of the outstanding liability on the Company ledger (of $1,157) (i.e. the shared losses claim); and

(3) Mr Huynh caused the Company to pay other expenses prior to the repayment of the Loan.

The PSOC also contains other breaches of the shareholders agreement, most relevantly in [46]:

In breach of terms of the Shareholders Agreement…Huynh caused [the Company] to cancel the [Purchase Contracts], contrary to his obligations to act in good faith, co-operate, do such things as necessary to enable the other parties to have the benefit of the contract, and not hinder or prevent the fulfilment of the purpose of the contract.[24]

[24]I assume a reference to ‘the contract’ is a reference to the shareholders agreement.

Further, in [47], the PSOC alleges that, in breach of the Caveat Agreement, Mr Huynh caused the Company to cancel the Purchase Contracts. The PSOC then alleges that by reason of the breaches in [46] and [47] of the PSOC, the applicants suffered the following loss and damage:

(1) loss of bargain relating to lost rebates of $820,000;

(2) loss of bargain relating to lost builders’ commissions of $1.025 million;

(3) loss of bargain relating to loss of sales revenue of $615,000; and

(4) reliance damages (relating to LVR).

As is evident, these particulars of loss do not identify which person or entity suffered the loss. In oral argument it appeared that counsel for the applicants accepted that the only loss of the Company related to the rebates.

4.3 The County Court proceeding

Each of the second to fourth applicants (i.e. the guarantors) filed a separate defence in the County Court proceeding in October 2021, albeit in similar terms (the October defences). In the October defences, the second to fourth applicants deny the allegations made and seek to raise positive defences. However, the substance of those defences in light of the language used is, to say the very least, difficult to ascertain and in my view, unintelligible. It is alleged that, among things:

(1) there was no default on the Loan Agreement and thus no obligation to pay default interest [11(i)];

(2) there had been ‘no official “Final” Notice of contract settlement coming from the Vendor that put [the Company] into to decide to return all lots’ [11(ii)];

(3) the Company has not prepared ‘financial documents…since its establishment’ [11(iii)];

(4) the defendant required the Company and Mr Huynh to provide ‘the conditions and any arrangement of its decision with the Vendor’ to cancel the Purchase Contracts [15];

(5) the shareholders of the Company relied upon Mr Huynh as director ‘to lead the company in the right direction to protect its shareholders best interest…and its associate businesses to incur over $1.8 million of income losses due to the cancellation of the [Purchase Contracts]’ which were returned at least 6 months before settlement [17]; and

(6) in breach of the shareholders agreement (between the Company, Mr Le, Mr Nguyen, Mr Zermati, Mr Huynh and HAH), Mr Huynh has ‘committed’ a conflict of interest by returning the Lots without the shareholders’ consent [22].

It is these defences that resulted in the summary judgment application referred to above. In response to the summary judgment application, the second to fourth applicants prepared a proposed amended defence dated 3 June 2022 (PAD).[25] In the PAD, they deny the substantial allegations made. They also raise positive defences which are far from clear, including that:
[25]I note the notice of discontinuance against Landsville was filed in December 2021.

(1) ‘it was agreed between the parties to the joint venture that the time to commence a full marketing campaign in order to sell Lots was 6 months prior to settlement (which occurred on 15 March 2021), or when the services were connected to the Lots’ [PAD [15](iv)];

(2) the cancellations on 10 July 2020 (i.e. the July 2020 Deed) were not a result of the Company being unable to complete the re-sale to or nomination of a third party purchaser as the planned time for the resale/nomination had not yet arrived [PAD [15](v)];

(3) the cancellation of the Purchase Contracts was against the interests of the Company and the joint venture [PAD [15](vii)];

(4) ‘causing [the Company] to cancel [the Purchase Contracts] was in breach of the duties of good faith and to co-operate under the Loan Agreement and/or [the shareholders agreement]’ by reason of which ‘the [d]efendants suffered loss and damages’ including loss of bargain relating to rebates of $820,000, loss of bargain relating to lost builders’ commissions of $1.025 million and loss of bargain relating to lost sales revenue of $615,000 [PAD [34]–[35]];

(5) by serving the Default Notice under the Loan Agreement, HAH was in breach of the terms of the Loan Agreement ‘of reasonableness, good faith and co-operation’ [PAD [20](c)];

(6) in breach of the shareholders agreement, HAH demanded payment of default interest under the Loan Agreement and has failed to pay 50% of the losses of the Company [PAD [25]-[29]].

The language of some of the allegations in the PAD seems to mirror aspects of the fiduciary duties and the statutory duties which form the basis of the breach of duty claims e.g. the cancellation of the Purchase Contracts was against the ‘interests of [the Company]’ and in breach of the duty ‘of good faith’.

5. THE SUBMISSIONS
5.1 The applicants’ submissions

First, the applicants submitted that the Court should be satisfied it was probable that the Company will not bring the derivative claims given that the proceeding sought to be issued is against Mr Huynh, who is the sole director of the Company.

Second, the applicants submitted that they were acting in good faith. As to the first factor identified in Swansson, they submitted that they had a good cause of action with reasonable prospects of success for each of the derivative claims. Relatedly, as to the serious question requirement, the applicants submitted that the court will not normally enter into the merits of the proposed derivative proceeding to any great degree.

As to the breach of duty claims, the applicants submitted that Mr Huynh breached the central obligation of a fiduciary to give his or her undivided loyalty to the person to whom the fiduciary duty is owed (i.e. the Company).

They also alleged breaches of statutory duties owed to the Company by Mr Huynh in his capacity as director, being:

(1) in s 180 of the Corporations Act: to exercise the powers and discharge the duties of a director with the degree of care and diligence that a reasonable person would exercise in his position;

(2) in s 181 of the Corporations Act: to act in good faith in the best interests of the Company and for a proper purpose;

(3) in s 182 of the Corporations Act: not to improperly use his position to gain an advantage for himself or someone else or to cause detriment to the Company; and

(4) in s 183 of the Corporations Act: not to improperly use information obtained by reason of his position as a director of the Company to gain an advantage for himself or someone else or to cause detriment to the Company.

In summary, the applicants contended that, in breach of his fiduciary and statutory duties as a director of the Company, Mr Huynh:

(1) put himself in a position where he had a conflict of interest and duty (by his personal interest in the Loan via HAH) and a conflict of duty and duty (being a director of both the borrower (i.e. the Company) and the lender (i.e. HAH)) in circumstances where a prudent director in Mr Huynh’s circumstances would have:

(a) resigned as a director of the Company; or

(b) brought in an independent director; or

(c) requested that one of the other participants in the joint venture assume directorship of the Company; or

(d) put ‘problematic’ transactions to the shareholders for ratification;

(2) caused the Company to cancel the Purchase Contracts which was not in the best interests of the Company or consistent with acting with care and diligence, especially as Landsville was obligated to purchase the unsold Lots;

(3) used information obtained as a director to cause HAH to issue the Default Notice against the Company and then, as sole director of the Company, failed to respond to the Default Notice in circumstances where the sale of the Lots that were still on foot at that time would have satisfied the full repayment of the Loan;

(4) used information obtained as a director to purchase, or cause his immediate family to purchase, 3 of the Lots;

(5) caused the Company to improperly incur expenses; and

(6) in addition to Mr Huynh, HAH appeared to have received benefits under the April 2021 Deed in exchange for forfeiting the Company’s deposits to the Vendor.

As to the nature of the fiduciary duties relied upon, the applicants submitted that a conflict arises where there is a real and sensible possibility that the personal interests of the director divide his or her loyalty with the result that he or she could not properly discharge the duties to the beneficiary.[26]
[26]Coope v LCM Litigation Fund Pty Ltd [2016] NSWCA 37, [105].

As to the nature of the statutory duties, the applicants contended that honest or altruistic behaviour by directors will not prevent a finding of improper conduct: the issue is not whether a management decision was good or bad – it is whether the directors acted in breach of their duties.[27]
[27]VicBeef Holdings Pty Ltd v Chen [2021] VSC 546, [117] (‘VicBeef Holdings’).

Further, the applicants submitted that, in respect of ss 182 and 183 of the Corporations Act, there is no need to demonstrate that an opportunity taken by Mr Huynh was one that could have been exploited by the Company.[28] They also submitted that loss is not required to establish any such liability for the statutory breaches relied upon. I pause to note that, while this may be true for a breach to be established, it does not address the need to have regard to the likely damages or recovery of damages in the context of the best interests requirement.
[28]Stellar Vision Operations Pty Ltd v Hills Health Solutions Pty Ltd [2022] NSWSC 144, [418].

In all these circumstances, the applicants submitted that they were acting in good faith as they had a good cause of action.

As to the second factor in Swansson, the applicants submitted that, just because there may be multiple purposes of a proceeding, this does not necessarily amount to an abuse of process. They submitted that the party alleging the abuse of process must show that the improper purpose was the predominant one. In this case the applicants submitted that:

(1) the derivative claims have reasonable prospects of success which the applicants wish to prosecute to their conclusion;

(2) Landsville is a 50% shareholder and is seeking to advance its interests and restore the value of its shares; and

(3) while there may be other effects of the proceeding, such as advancing the interests of the applicants as guarantors, they are related purposes and do not invalidate the primary purpose of the proceeding or constitute an abuse of process.

Third, the applicants submitted that the derivative claims were in the best interests of the Company given:

(1) the derivative claims have at least reasonable prospects of success and, if successful, will enrich the Company;

(2) the derivative claims are to protect (i.e. to rectify or restore) the interests of members (in their capacity as members) from breaches of duty by a director;

(3) the conduct of Mr Huynh was not approved by the members of the Company and there was specific refusal by the members to agree to the course of action proposed;

(4) there is evidence that the defendants could meet a judgment against them;

(5) the business of the Company will not be adversely affected by the proceedings as it is not trading: it is not required to devote resources to the proceedings outside of providing documents (which in any event are available to the applicants under s 198F of the Corporations Act) and the proceedings are limited to those claims brought directly by the applicants;

(6) there are no other means of obtaining the same redress which avoid litigation; and

(7) the applicants will provide protection to the Company for its exposure to costs.

After the conclusion of oral argument, I requested the parties address the issue of whether there was a serious question to be tried in relation to the shareholders agreement claims given that it appeared that the Company was not a party to the shareholders agreement.

By written submissions dated 7 November 2022, the applicants contended that:

(1) the identification of the parties to a contract must be determined in accordance with the objective theory of contract i.e. by reference to the intention that a reasonable person, with knowledge of the words and actions of the parties communicated to each other, and the knowledge that the parties had of the surrounding circumstances, would conclude that the parties had;

(2) whether a company is a party to an agreement can be implied or inferred from the circumstances and content of any written agreement;

(3) the shareholders agreement (which was alleged to be partly in writing, partly oral and partly implied) constituted an ‘overarching agreement as to how the joint venture…would operate, to which the natural persons and relevant companies are parties’; and

(4) the terms of the shareholders agreement strongly suggested that the Company was a party, most relevantly, the term that HAH would lend $661,000 to the Company and that all income of the Company would be applied to pay the Loan prior to other expenses.

Further, the applicants contended that, if the Company was not a party:

(1) the directors of the Company, as fiduciaries and as parties to the shareholders agreement, hold those obligations on trust for the Company so that the Company can enforce the contractual obligations in equity, relying upon Nurisvan Investment Ltd v Anyoption Holdings Ltd (Nurisvan);[29] and

(2) the Company is entitled to sue because it has a sufficient or real interest to seek declaratory relief as to the meaning and effect of the shareholders agreement in line with the principles from Hobart International Airport Pty Ltd v Clarence City Council.[30]

[29][2017] VSCA 141, [59]-[60] (‘Nurisvan’).

[30][2022] HCA 5, [32]-[33];[36];[38]-[39];[65]-[66] and [70].

5.2 The defendants’ submissions

In substance, the defendants submit that leave should not be granted because:

(1) the applicants are not acting in good faith, including for the reasons set out in (2) and (3) below;

(2) there is no serious question to be tried as the Company does not have a good cause of action or reasonable prospects of success in respect of the derivative claims; and

(3) the proceeding is not in the best interests of the Company.

As to the good faith requirement, the defendants submitted, in summary, that:

(1) a reasonable person would not hold the view that the Company had a good cause of action for the derivative claims; and

(2) leave to bring the derivative claims was sought for a collateral purpose and is an abuse of process.

I will deal with the submissions relating to whether there is a serious question to be tried later in these reasons.

As to the alleged abuse of process, the defendants submitted that:

(1) the main purpose of the derivative claims is for Mr Le, Mr Zermati and Mr Nguyen to avoid or delay liability under the Loan Agreement and their personal guarantees under the Loan Agreement;

(2) in the PAD, the guarantors claim a set off based upon many of the same matters which they seek to raise in the derivative proceeding; and

(3) thus, the derivative leave application was made with the primary purpose of advantaging the guarantors personally and not to advance the interests in respect of the Company in which Mr Le and Mr Nguyen in particular have no commercial or legal interest.

As to the best interests requirement, the defendants contended that the applicants had not demonstrated that the derivative claims were in the best interests of the Company. This is in circumstances where:

(1) the Company is no longer trading and has no business: indeed, the purpose for which the Company was set up has failed;

(2) the applicants are simply seeking to vindicate their ‘positions’ (presumably both in their capacity as guarantors and as members of LVR) because they do not like the commercial decisions made by Mr Huynh as sole director of the Company. They referred to the primary purpose of the derivative leave application referred to above at [126](3);

(3) many of the matters sought to be raised in the derivative claims (for example, the shareholders agreement claims) could be pursued without the Company, which I understood to mean that such claims could be pursued by the guarantors or Landsville;

(4) the derivative claims have no real prospects of success;

(5) there is no evidence that the position of the Company would have been any better had the cancellation of the Purchase Contracts not occurred: any suggestion that a better deal could have been negotiated with the Vendor or that the Vendor had issues with its funder is unsupported by any evidence and is pure speculation; and

(6) none of Mr Le, Mr Zermati and Mr Nguyen have offered, or proposed to provide, any security for the costs or support to pay for the Company’s costs of the proposed proceeding. Further, they have not shown that they have sufficient assets to meet any such costs order. In this regard, the defendants referred to the evidence of Mr Le.

As to the serious question requirement, the defendants contended that this requirement had not been met in respect of the derivative claims. This was for a variety of reasons, including that, based on the affidavit evidence, there was an inability to show a prima facie case of breach of the relevant duties (including under the shareholders agreement) or that any loss had been suffered as a result.

As to the cancellation claim (and the related default notice claim), the defendants contended that the decision by Mr Huynh to cancel the Purchase Contracts was a commercial decision which he believed was in the best interests of the Company in circumstances where:

(1) no Lots were sold or could be sold;

(2) no buyers were found whom the Company could nominate to take over the Purchase Contracts in circumstances where the Company had no money to complete the Purchase Contracts;

(3) Landsville did not offer or provide any evidence that it was in a position to complete the Purchase Contracts;

(4) the Vendor was placing pressure on the Company to be ready to settle and that by May 2020 an expected time for settlement had been identified;

(5) there was uncertainty as to whether any of the Vendor rebates would be available to the Company; and

(6) in respect of many of the cancelled Purchase Contracts, the Company was able to negotiate a refund of the deposits paid and to avoid claims for damages if the Company had not been able to complete the them.

The defendants contended that the individual applicants did not like the commercial decision made by Mr Huynh because they were more concerned with their own positions and that of LVR rather than the Company. They allege that the marketing agreement between LVR and the Vendor placed the applicants in a position of conflict with the Company. This is because the applicants (given their interest in LVR) had an interest in opposing the cancellation of the Purchase Contracts to improve LVR’s chances of being paid by the Vendor. Further and significantly, the defendants contended that most of the loss sought to be recovered was the loss of LVR rather than the loss of the Company.

Further, to the extent that the applicants relied upon other kinds of loss, such as lost capital growth, they had not filed evidence to support such loss.

As to the improper expenses claim, the defendants contended that there is no evidence of any improperly incurred liabilities by the Company. They submit that this derivative claim is based upon ‘suspicion and mistrust’. They noted that the evidence of Mr Huynh was that Ms An Le was employed in order to assist the Company in finding buyers for the Lots.

As to the shareholders agreement claims, the defendants contended there was never any consideration for such an agreement. In oral argument, the defendants submitted that the Company was not a party to the shareholders agreement in any event: the parties were HAH and Landsville (and perhaps their shareholders). The defendants submitted that no loss could therefore be suffered by the Company as a result of the shareholders agreement (or the Caveat Agreement, which was not relied upon in oral argument by the applicants).

The defendants filed further written submissions dated 14 November 2022 in response to the supplementary submissions of the applicants dated 7 November 2022 in relation to the shareholders agreement claims. The defendants submitted that:

(1) while the alleged shareholders agreement was said to be concluded by 25 June 2019, text messages dated 27 June 2019 indicated that no final agreement had been concluded by that time;

(2) the terms in [16](i) to (k) of the PSOC (relating to the agreed timetable for the preparation of marketing and sales material, as well as the commencement of a full marketing campaign) were not the subject of the 25 June 2019 minutes or the Acknowledgment;

(3) the Company was not a party to the 25 June 2019 minutes or the Acknowledgment;

(4) it is difficult to identify what evidence the applicants rely upon in support of the contention that the Company agreed to be bound by the terms set out in [16](i) to (k) of the PSOC;

(5) the decision in Nurisvan does not support the proposition asserted by the applicants as the facts of that case did not involve a shareholders’ dispute as alleged in this proceeding;

(6) as to the interest claim:

(a) the liability for interest is created in the Loan Agreement which was executed by the Company: that liability is not created in the shareholders agreement which was not executed by the Company;

(b) in any event, s 58 of the Supreme Court Act1986 (Vic) provides for default interest payable in the same terms as the Loan Agreement; and

(7) as to the shared losses claim, the alleged failure by HAH to pay 50% of the Company’s losses is not for the benefit of the Company.

6. CONSIDERATION

It was not in dispute at the end of the oral hearing that:

(1) each of Landsville (as a shareholder), and Mr Le and Mr Zermati (as former directors) have standing under s 236(1)(a) of the Corporations Act but that Mr Nguyen did not;

(2) it was probable that the Company would not issue or pursue the derivative claims; and

(3) the relevant notice under s 237(2)(e)(i) had been provided.

For completeness, I am satisfied that:

(1) each of Landsville, Mr Le and Mr Zermati have standing under s 236(1)(a) of the Corporations Act;

(2) it was probable that the Company (whose sole director is Mr Huynh) would not issue or pursue the derivative claims against Mr Huynh and HAH (which is also controlled by Mr Huynh); and

(3) the relevant notice had been provided to the Company in accordance with s 237(2)(e)(i) of the Corporations Act.

I will now address the other requirements of s 237(2).

6.1 Serious question requirement
The law relating to the breach of duty claims

As to the serious question requirement, I note, without any criticism of counsel, that there was little analysis of the basis of each of the derivative claims. I refer in particular to the breach of duty claims: there was little analysis of the elements of each claim and how those elements were established for the purpose of the serious question requirement. Rather, the analysis of each of the parties was rolled up, consistent with the submissions set out above.

Nevertheless, in my view, it is necessary to consider each group of factual allegations and the elements necessary to establish a serious question to be tried for each of the causes of action alleged to give rise to liability in relation to them. In light of the submissions before me, I have grouped the factual allegations as set out above: the cancellation claim, the default notice claim, the personal profit claim, the improper expenses claim and the shareholders agreement claims.

Before addressing the cancellation claim and the default notice claim, it is appropriate that I note the nature of the fiduciary and statutory duties relied upon by the applicants.

As to the alleged fiduciary duties, it was not in dispute that Mr Huynh as a director of the Company owed fiduciary duties to the Company. In Australia, fiduciary obligations are proscriptive rather than prescriptive in nature. Relevantly:

(1) a fiduciary is under an obligation not to obtain any unauthorised benefit arising from the relationship pursuant to which the duty is owed (the unauthorised profit rule) and not to be in a position of conflict (the conflict rule); and

(2) if these obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach;[31]

The rationale and central purport of these duties is the obligation on the fiduciary not to prefer their interests over the interests of the person to whom these duties are owed.

[31]Breen v Williams (1996) 186 CLR 71, 113 (Gaudron and McHugh JJ); Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165, 197-98 [74] (McHugh, Gummow, Hayne and Callinan JJ).

As to the nature of the conflict rule, I would adopt the helpful summary of M Osborne J who observed in VicBeef Holdings:

Allied to, but not subsumed by, s 182 of the Corporations Act is the equitable rule that restricts fiduciaries from exercising powers where there is a conflict of interest. It is well established that a director is a fiduciary and thus under an obligation not to place themselves in a position of conflict where there is a real or substantial possibility of conflict between the director’s interests and the director’s duty to the company.
The test for whether there is a real or substantial possibility of a conflict between a director’s personal interests and their duties as a director is objective, and is to be determined from the standpoint of an observer with knowledge of all the material facts and circumstances.
The conflict rule applies to an actual or possible conflict between the director’s duty to the company and their personal interest. It also applies where a conflict arises between the director’s duty to the company and their duty to someone else – for example, to another company of which they are a director, or to a trust of which they are a trustee.[32]

[32]VicBeef Holdings (n 27) [121]-[123] (citations omitted).

I note that there is some disagreement in the authorities as to whether the existence of the conflict is enough or whether a director actually has to pursue the conflict. In light of the nature of the allegations in this proceeding, it is unnecessary for me to express a concluded view. Further, I do not consider it would be appropriate to express a concluded view on such an application. However, it is clear that loss or damage is not required for a breach of the conflict rule.

As to the breaches of statutory duties alleged, I would also adopt the summary of the principles relating to ss 180 to 182 of the Corporations Act of M Osborne J in VicBeef Holdings.[33]
[33]Ibid [109]–[120].

I would note that:

(1) s 180(1), the duty of care and diligence: this duty focuses on the nature of the decision made in all the circumstances weighing the benefits and potential risks but that ‘special vigilance’ and ‘scrupulous concern’ are required when a director is in a position of potential conflict;[34]
[34]Ibid [111]-[112].

(2) s 181(1)(a), the duty to act in good faith in the best interests of the company: this duty is similar to the common law duties and also involves a consideration of all relevant circumstances;

(3) s 181(1)(b), the duty to act for a proper purpose: this duty is similar to the fiduciary duties imposed on a director. In assessing an alleged breach of this duty, it is necessary to identify whether the substantial purpose of the director in exercising the relevant power was improper, objectively determined in all the relevant circumstances;[35]
[35]Ibid [117].

(4) s 182, the duty not to improperly use the director’s position: this duty looks at the purpose for which the director made use of their position, i.e. not to gain an advantage or to cause detriment to the company. Its operation often overlaps with the conflict rule which is ‘[a]llied to, but not subsumed by’ this section;[36] and

(5) s 183, the duty not to use information obtained as a director improperly: once again, this duty looks at the purpose for which the information was used, i.e. not to gain an advantage or to cause detriment.

The cancellation claim and default notice claim

[36]Ibid [121].

The factual allegations giving rise to the cancellation claim and the default notice claim are said to be breaches of the fiduciary duties and the statutory duties owed by Mr Huynh to the Company. However, as set out above, each of the fiduciary duties and statutory duties relied upon involve different elements, although there is some overlap between them.

As to the factual allegations in relation to the cancellation claim and the default notice claim, the submissions of the applicants proceeded on the basis that the two claims were linked in the sense that:

(1) it was the desire of Mr Huynh to protect and recover the Loan made by HAH that is alleged to be the improper purpose/bad faith motivating the cancellation of the Purchase Contracts; and

(2) the Default Notice would not have been sent unless some or all of the Purchase Contracts were cancelled.

I accept that there is a proper basis in fact for these submissions and the link between the cancellation claim and the default notice claim.

As a result, I am satisfied that the applicants have established that there is a serious question to be tried as to whether, in respect of the cancellation claim and the default notice claim, Mr Huynh breached at least:

(1) the conflict rule (by reason of him being a director of the Company and a director of HAH);

(2) the duty to act in good faith in the best interests of the Company under s 181(1)(a) of the Corporations Act;

(3) the duty to act for a proper purpose under s 181(1)(b); and

(4) the duty not to use his position as a director improperly under s 182 of the Corporations Act.

This is primarily because there appears a substantial possibility of a conflict between Mr Huynh’s personal interest in HAH (which lent the Company $661,100) and his position as a director of the Company, in circumstances where the cancellation of the Purchase Contracts led to the call up of the Loan.

I am also satisfied there is a serious question to be tried as to whether, in respect of the cancellation claim, Mr Huynh breached his duty under s 180 of the Corporations Act. This is in light of the ‘special vigilance’ and ‘scrupulous concern’ to be applied under that section where conflicts are involved referred to above.

I make these findings conscious that, for the most part, a breach of these duties does not require proof of damage. I will comment further on the relevance of damage when considering the best interests requirement.

As noted above, for many of these breaches of duty to be established, it is necessary to look at all the relevant circumstances to determine whether the decision was made reasonably, for a proper purpose, in good faith and/or in the best interests of the Company.

While I am satisfied there is a serious question to be tired, I am far from satisfied that the statutory breaches in relation to the cancellation claim give rise to a strong case. In short, this is because there was no evidence before me as to what other options were commercially available to Mr Huynh in the circumstances faced by the Company from mid-2020, such as to make his decision to cancel the Purchase Contracts unreasonable, improper, or otherwise than in good faith and in the best interests of the Company.

In the argument before me, it appeared central to the applicants’ claims that it was always intended that the marketing campaign would commence in earnest around six months prior to the Vendor’s settlement date or on completion of major services/infrastructure at Sinclair Heights (i.e. the agreed timeline). In this regard, as noted above, Mr Zermati deposed that ‘the participants’ discussed ‘multiple times’ that ‘it was the intention of [LVR]’ to commence the sales and marketing campaign in accordance with the agreed timeline.

However, there are a number of important matters to note. First, Mr Zermati does not identify the participants to those discussions and, most relevantly, whether they included the Vendor. Second, Mr Zermati does not depose that this ‘intention’ of LVR was agreed to by the participants in those discussions, let alone the Vendor.

I am conscious that the PSOC alleges that it was a term of the shareholders agreement that LVR would place the Lots on the market immediately, but would commence a full marketing campaign to sell the Lots in accordance with the agreed timeline. Nevertheless, it is not alleged that any agreement with the Vendor contained a term to such effect. In this context, as set out above, the Purchase Contract in evidence provides, in substance, that settlement is due 14 days after the Vendor gives notice in writing to the Purchaser of the registration of the plan of subdivision.

This is significant. The decision to cancel the Purchase Contracts was made in circumstances where:

(1) the applicants had no purchasers for any of the Lots (I will deal with this further in section 6.3 below);

(2) by Mr Zermati’s 8 July 2020 email, Landsville was requesting a further extension of at least three months from the anticipated settlement date to seek finance given the size of the Sinclair Heights development;

(3) the settlement date under the Purchase Contracts was 14 days after notice of registration of the plan of subdivision; and

(4) the settlement date with the Vendor was anticipated in May 2020 to be at least November or December 2020.

In all these circumstances, there was no evidence before me as to what other options were commercially available to Mr Huynh at this time. Further, to the extent that it was suggested that Mr Huynh should have stepped aside as a director of the Company before deciding to cancel the Purchase Contracts, there is no evidence that would allow me to conclude that any other independent reasonable or responsible director would or could have made any other decision in light of the then legal and financial position of the Company.

Further, I wish to record that, while the PSOC appears to allege that Mr Huynh never consulted with Landsville or the guarantors in relation to the cancellation of the Purchase Contracts in breach of the shareholders agreement, the evidence before me was to the contrary. As set out in section 3.5 above, these matters were the subject of discussion and communication between the shareholders of the Company: in May 2020 and the email exchanges on 8 July 2020.

As noted above, the argument of the applicants proceeded on the basis that the cancellation claim was linked to the default notice claim. As is apparent from what I have set out above, I have considered that Mr Huynh’s position as a director of HAH was relied upon primarily to establish that the decision to cancel the Purchase Contracts was made unreasonably, improperly and otherwise than in good faith and in the best interests of the Company. In oral argument, counsel for the applicants did not address any breaches of fiduciary or statutory duty relating to the default notice claim. For completeness, I have formed the view that there is a serious question to be tried as to whether Mr Huynh breached the conflict rule in failing to ensure that the Company responded to the default notice.

I have reached these conclusions as to the breach of fiduciary and statutory duties conscious that a breach of these duties does not require proof of damage. I will comment on the relevance of damage when considering the best interests requirement.

The personal profit claim

I am satisfied that there is a serious question to be tried as to whether Mr Huynh breached the unauthorised profit rule and the statutory duties in ss 182 and 183 not to use his position improperly and not to use information obtained improperly, insofar as he and his family members purchased 3 of the cancelled Lots (i.e. the personal profit claim). This is because, on the evidence before me, Mr Huynh became aware of the opportunity to purchase those 3 Lots by reason of his position as a director of the Company and by reason of the cancellation of the Purchase Contracts.

The improper expenses claim

I am not satisfied that there is a serious question to be tried in relation to the improper expenses claim. In my view, there is insufficient evidence before me to be so satisfied. Rather, such a claim is based on inference and speculation. Indeed, counsel for the applicants conceded the quantum of this claim, determined by reference to the difference between the amount received from the Vendor and the amount paid off against the Loan and the amount in excess of the employment expenses, was assumed to be legal expenses relating to the cancellation of the Purchase Contracts.

Further and relatedly, I do not accept on the evidence before me that there is an arguable basis to assert that incurring the wage expenses of Ms An Le by the Company in an attempt to market the Lots was in some way improper or in breach of any fiduciary or statutory duty given that there were no potential purchasers put forward by LVR or Landsville from the time of the Purchase Contracts.

The shareholders agreement claims

I am satisfied that there is a serious question to be tried as to whether the Company was a party to the shareholders agreement and as to whether it is entitled to sue for the benefit of the obligations relating to interest and the sharing of losses under the shareholders agreement.

As to whether the Company is a party to the shareholders agreement, I have formed this view in light of the law establishing the parties to an agreement, set out in [121]–[122] above, with which I generally agree. Further, I have had regard in particular to the 25 June 2019 minutes (of the Company) and the Acknowledgment relied upon by the applicants as particulars of the shareholders agreement. The minutes record the following terms:

(1) the Company ‘will borrow…$661,000’ from HAH to fund the deposits for the Purchase Contracts with a loan agreement to be prepared; and

(2) the ‘Net Profit and Loss [of the Company] will be equally shared between [HAH] and [Landsville]’.

The Acknowledgement also contained similar terms and included a term that HAH ‘wont charge any interest of the loan amount’. Further, the Acknowledgement contained a statement that the ‘shareholders and directors of [the Company] agreed to the above conditions and agreements’ and to engage a nominated accounting firm to liaise with a nominated lawyer to prepare the ‘the agreements above’ (i.e. the Loan Agreement and the shareholders agreement).

In all these circumstances, in my view, there is a serious question be tried as to whether, viewed objectively, the Company was a party to the shareholders agreement. It is then necessary to consider whether there is a serious question to be tried in relation to the interest claim and the shared losses claim.

As to the interest claim, the applicants allege that Mr Huynh as director of HAH exercised the discretion to demand default interest in breach of the shareholders agreement. I consider that is an arguable claim, particularly in light of my conclusion that it is arguable that the Company is a party to the shareholders agreement. This is in light of the nature of the obligation relating to the Loan in the shareholders agreement (i.e. for the apparent benefit of the Company alone) and the terms of the Loan Agreement. Thus, there is an arguable claim as to whether the Company can bring the interest claim. In this context, I am conscious that the Loan Agreement, which was executed by Mr Le as a director of the Company, contained an express term to that effect on default. Thus, there may be questions of variation to, or waiver of, any rights under the shareholders agreement.

As to the shared losses claim, I am satisfied that there is a serious question to be tried in relation to that claim. In my view, there is an arguable claim as to whether the Company can bring a claim directly against the shareholders to meet the losses of the Company. This is in light of the nature of that obligation in relation to sharing the losses of the Company under the shareholders agreement and my conclusion that it is arguable that the Company is a party to that agreement.

There is one more issue to address. The PSOC alleged that the relevant breach of the shareholders agreement was that HAH or that Mr Huynh ‘caused HAH’ to breach the shareholders agreement. In my view, in light of the terms of the documents evidencing the shareholders agreement, it is not open to allege that Mr Huynh breached the relevant terms of the shareholders agreement relating to interest and shared losses. This is because the objective contemporaneous documents only imposed these obligations on HAH.

6.2 The good faith requirement

I am satisfied that the applicants have met the good faith requirement in relation to all the derivative claims except for the improper expenses claim. As to the improper expenses claim, I have concluded that there is no serious question to be tried in relation to that claim: given the evidence before me in relation to that claim, I am not satisfied that a reasonable person in the shoes of the applicants could hold an honest belief that a good cause of action exists.

As to the other derivative claims, I am satisfied that they give rise to serious questions to be tired. I refer to my conclusions in section 6.1. This is notwithstanding the fact that I have raised concerns about the way in which some of these derivative claims have been pleaded and that I am not satisfied that all of them give rise to strong claims. As a result, in these circumstances, I consider that the applicants have established that they have an honest and reasonable belief in the success of all of the other derivative claims.

Further, I am satisfied that the bringing of these derivative claims would not amount to an abuse of process. I am conscious that one of the purposes of bringing these claims may be to extinguish or limit the liability of the Company or the guarantors under the Loan Agreement, which is the subject of the County Court proceeding. However, I do not consider that there is anything improper in seeking to bring these claims. This is in light of the nature of the claims which I consider give rise to serious questions to be tried as set out in section 6.1 above.

6.3 Best interests requirement

It is then necessary to consider whether it is in the best interests of the Company to grant leave to the applicants to pursue the claims which I consider give rise to serious questions in section 6.1 above.

In doing so, I am conscious of the suggestions in the authorities set out in [31] above. In this context, I acknowledge that the Company was, in effect, a joint venture vehicle and the derivative claims seem to bring causes of action including for breaches of duties by an officer of the Company/joint venture. Nevertheless, consistent with the conclusion in [32], it is necessary to have regard to other relevant factors relating to the best interests requirement.

I have also had regard to the suggestion in the authorities (referred to above) that when joint venturers are deadlocked, it may be in the best interests of the company to grant leave to pursue derivative claims. However, in my view, the court is more likely to conclude that granting leave is in the best interests of the company if the deadlock is affecting the ongoing operations of the company. In any event, the factors identified in section 2.5 need to be addressed in the context of the best interests requirement.

Relevantly, I have had regard to the fact that:

(1) the Company was a small private company akin to a joint venture;

(2) the Company was a sole purpose company, the purpose of which has now ceased and the Company no longer trades, albeit in light of the cancellation of the Purchase Contracts, the propriety of which is sought to be challenged in some of the derivative claims;

(3) the unwillingness of the Company to pursue the claims is because of the position of Mr Huynh as the sole director both of the Company (as borrower) and HAH (as lender); and

(4) there was no suggestion that the defendants were not able to meet at least a substantial part of any judgement in favour of the Company for the derivative claims.

As to the prejudice that the Company may suffer if leave is granted, while the second to fifth applicants have undertaken to meet any costs of the Company, including in the costs that might be ordered against the Company if any of the derivative claims pursued are unsuccessful, there is no evidence before me that any of these applicants are in a position to meet any such costs. In my view, that is a significant factor in determining whether the best interests requirement has been established.

I am conscious that it is difficult at this point in time to assess the extent of any costs in respect of the claims which might be pursued. The costs will depend in part upon the way in which each of the derivative claims are prosecuted and the extent of overlap with the issues raised in the County Court proceeding. As is evident from my comments in section 4.3 above, the claims and issues to be raised in the County Court proceeding are far from clear. Leave has not yet been granted to file the PAD. Further, as noted above, while some of the claims in the PAD raise similar issues to those raised in the PSOC, many are raised in a very different legal context. Nevertheless, in the context of an application of this kind, it is necessary for the applicants to establish each of the requirements under s 237. Thus, this includes the onus of demonstrating that the extent of any prejudice that may be suffered by the Company, including potential costs arising from leave being granted, can be alleviated by an undertaking from the relevant applicants.

I wish to emphasise that it is an important factor in determining whether any of the derivative claims are in the best interests of the Company that no meaningful undertaking has been given in respect of any adverse costs orders which might be made against the Company in respect of any of the derivative claims pursued.

In light of these conclusions, I will consider the benefits which might flow to the Company if the derivative claims are successful. Consistent with my comments in the previous sections, it is necessary to consider each derivative claim separately given that many of them involve distinct and separate issues of fact and law. This is particularly so as in this case I have concluded that only some of the derivative claims raise a serious question to be tried. It is to those claims that I now turn.

The cancellation claim and the default notice claim

I am not satisfied that there will be any, or any significant, damages awarded in respect of the cancellation claim or the default notice claim.

In relation to the cancellation claim, counsel submitted that the loss included unpaid rebates and the lost capital growth, both of which depended upon the completion of the Purchase Contracts, either by a third party purchaser or Landsville. At its highest, there was evidence that:

(1) the cancellation of the Purchase Contracts from July 2020 seriously undermined the relationship which the Company and LVR had established with marketing/selling agents and builders;

(2) the agents had told Mr Zermati that they had customers enquiring to buy Lots that were no longer there and these customers were let down; and

(3) in relation to the position of Landsville, at best, the evidence was it required some time to seek finance.

This is far from evidence to the effect that a third party purchaser would purchase all or any of the Lots, or that Landsville could obtain finance and be in a position to settle any of the Purchase Contracts. Thus, I have no evidence that would allow me to conclude that the cancellation of the Purchase Contracts would result in any substantial damages. I refer to my comments in [19] as to the need to decide this application on the evidence before me. Further, and relatedly, I refer to my comments in [157] above to the effect that there is no evidence that would allow me to conclude that any independent reasonable or responsible director would or could have made any other commercial decision in light of the then legal and financial position of the Company.

As to the alleged loss of the return of the 5% deposits, the entitlement to the return of the deposits would prima facie depend upon whether the Company was in breach of the Purchase Contracts. On the evidence before me, and in particular in light of the settlement date under the Purchase Contracts, there is no evidence before me that the Company was not or would not be in breach of the Purchase Contracts, with the result that there would be no obligation on the Vendor to return the deposits.

If the true nature of the damages based on the cancellation claim is the lost opportunity to obtain the rebates, the capital growth or to obtain the deposits back, once again, there was no evidence as to the value of that lost opportunity. I refer again to my comments in [19].

Further, in my view, the cancellation claim raises complex factual and legal issues. For my part, I am not satisfied that the factual or legal basis of the cancellation claim is raised (or that it could legitimately be raised) by the second to fourth applicants in the County Court proceeding.

This is notwithstanding the allegations in the PAD. I note the allegations in the PAD set out in [107] include that ‘causing [the Company] to cancel [the Purchase Contracts] was in breach of the duties of good faith and to co-operate under the Loan Agreement and/or Shareholders Agreement’. However, as set out above, those allegations are raised in a different legal context (i.e. the obligations arise by reason of the shareholders agreement). While I acknowledge that there may be some overlap in the factual enquiry between the allegations in the PAD and the cancellation claim, the extent of that overlap is not clear: at least, it was not made clear by the applicants.

In these circumstances, I am not satisfied that no extra or additional cost would need to be incurred in pursing the factual and legal enquiries arising from the cancellation claim: rather, it seems likely that additional or extra costs would be incurred if leave were granted to pursue the cancellation claim. It has not been demonstrated to me that those costs would be insubstantial.

In any event, as set out above, without identifying the relevant terms of the Purchase Contracts with the Vendor or some other relevant allegations, I cannot see how such a claim would sound in damages.

In all these circumstances, in particular:

(1) the absence of any evidence which would suggest that damages, let alone substantial damages, may be awarded;

(2) the extra and additional costs of the factual and legal issues arising from the cancellation claim which would not otherwise be incurred in the County Court proceeding;

(3) the potential liability of the Company for those costs if the cancellation claim is unsuccessful; and

(4) the fact that there is no evidence before me that any of the applicants are in a position to meet any such costs order,

the applicants have not satisfied me that the cancellation claim is in the best interests of the company.

In relation to the default notice claim, as set out above, the default notice claim seemed closely interrelated to the cancellation claim. The PSOC claimed rolled up damages in respect of both claims. I note that it was not alleged in the PSOC, or made clear in oral submissions what, if any, separate loss would arise by reason of any breach of duty established in relation to the default notice claim, save for interest and costs. To the extent that it might be suggested that the calling up of the Loan was the loss suffered, in my view, that was the result of the cancellation of the Purchase Contracts.

Further, in so far as it is alleged that the Default Notice was issued when the Purchase Contracts were still on foot, there was no evidence before me of the ability of any third party purchaser or of Landsville to purchase those Lots at the time the Default Notice was issued and when the Company failed to respond. I refer again to my comments in [19] above.

As a result, and in light of the matters set out above, the applicants have not satisfied me that the default notice claim is in the best interest of the Company.

The personal profit claim

As set out above, I am satisfied that there is a serious question to be tried as to the personal profit claim. However, on the evidence before me, it seems likely that any damages which might be awarded would be small, namely the lost rebates to the Company totalling $60,000.

In oral argument the Company also claimed an account for profits. However, there is no evidence to suggest the quantum of those profits. I refer to my comments in relation to residential house prices referred to in [98] above. Thus, I have no evidence that would allow me to conclude the personal profit claim would result in any substantial damages.

Further, in this context, I am unsure of the extent of the costs that might be incurred in relation to the personal profit claim. I am not satisfied that issues relating to the personal profit claim are raised in the County Court proceeding or the PAD. Thus, it seems likely that additional or extra costs would need to be incurred in pursuing the factual and legal enquiries arising from the personal profit claim which would not otherwise be incurred in the County Court proceeding.

In all these circumstances, relevantly:

(1) the absence of any evidence that anything other than $60,000 might be awarded;

(2) the extra and additional costs of pursuing the personal profit claim which would not otherwise be incurred in the County Court proceeding;

(3) the potential liability of the Company for those costs if the personal profit claim is unsuccessful; and

(4) that there is no evidence before me that any of the applicants are in a position to meet any such costs order,

the applicants have not satisfied me that the personal profit claim is in the best interests of the company.

The shareholders agreement claims

As set out above, I am satisfied that there is a serious question to be tried in relation to:

(1) the interest claim, with damages in the order of $35,000; and

(2) the shared losses claim with damages/quantum in the order of $150,000.

Further, the damage suffered for each of these claims relates to the amount of the Loan debt sued for in the County Court proceeding.

In my view, there is a close link between these two claims and the claims made by HAH against the Company and the guarantors in relation to the Loan in the County Court proceeding. Indeed, I have concluded that the shareholders agreement claims involve, for the most part, the same factual enquiry as the breaches of the shareholders agreement alleged in the County Court proceeding and the PAD, namely, the circumstances in which the shareholders agreement was entered into, its meaning and effect.

I acknowledge that the shareholders agreement claims give rise to a separate question of law, namely, whether the Company was a party to that agreement and can sue on it. Nevertheless, I do not consider that these legal issues will increase the legal costs already raised in the County Court proceeding in any material way.

Further, I consider it is appropriate that the issue of whether the shareholders or the Company are entitled to enforce the shareholders agreement is important to be determined so that all obligations and liabilities arising from the shareholders agreement are determined at one time.

In all these circumstances, and notwithstanding the absence of evidence of the ability of the individual applicants to meet any costs undertaking, I have concluded that the pursuit of the shareholders agreement claims are in the best interests of the Company.

The improper expenses claim

For completeness, in the event that I am wrong and there is a serious question to be tried in relation to the improper expenses claim, I am not satisfied that the applicants have established that it is in the best interests of the Company to grant leave to pursue this claim. This is in light of the fact that this claim does not appear to be raised in the County Court proceeding and there is no evidence before me of the damages that might be awarded.

Further, as noted in [113](6) above, in oral argument the applicants submitted that Mr Huynh and HAH may have received benefits under the April 2021 Deed in exchange for forfeiting the Company’s deposits to the Vendor. I note that no such proposed claim is made in the PSOC. There was no evidence before me whatsoever as to the nature and extent of the ‘benefits’ allegedly received by Mr Huynh and HAH. Thus, I am not satisfied that there is a serious question to be tried, or, more importantly, that it is in the best interests of the Company to bring such a claim.

Finally, and for completeness, while the applicants allege breaches of the Caveat Agreement in the PSOC, such a claim was not the subject of detailed argument before me. I note that in the PSOC, it is alleged that in breach of the Caveat Agreement, Mr Huynh caused the Company to cancel the Purchase Contracts. These particulars of loss are a subset of the loss as alleged in respect of the cancellation claim, including for loss of rebates and builders’ commission. As a result, and for similar reasons relating to the cancellation claim, I do not consider that granting leave in respect of any breaches of the Caveat Agreement is in the best interests of the Company. Further, in light of the evidence referred to in section 3.5 above, I am not satisfied that the serious question requirement has been met for any such claim given the inconsistency between the evidence of Mr Zermati and Mr Le and the minutes of the meeting of the director and shareholders of the Company dated 1 May 2020. I refer to my comments in [70] above. This is also in light of the fact that Mr Le did not prepare the caveat for lodgement until May 2021, i.e. after the cancellation of the Purchase Contracts.

7. CONCLUSION

In all these circumstances, I have determined to grant leave pursuant to s 237(2) of the Corporations Act in respect of the shareholders agreement claims. In summary, the effect of the form of order should be that the second to fifth applicants have leave to bring a proceeding on behalf of the Company alleging that the Company is a party to the shareholders agreement and is entitled to enforce the shareholders agreement in so far as that agreement provides that HAH would not charge interest in respect of the Loan and that HAH is required to pay 50% of the losses of the Company, including of the Loan. The parties are requested to confer on the final form of order and on the issue of the costs of this application.

---

SCHEDULE OF PARTIES

S ECI 2022 02295

BETWEEN:
LANDSVILLE HUYNH PTY LTD (ACN 634 308 366)	First Plaintiff
DAT TAN LE	Second Plaintiff
KHUYEN TRI NGUYEN	Third Plaintiff
MOHAMMAD IBRAHIM ZERMATI	Fourth Plaintiff
LANDSVILLE PTY LTD (ACN 633 819 799)	Fifth Plaintiff
- and -
TRI TAM HUYNH	First Defendant
HUYNH ASSET HOLDINGS PTY LTD ATF HUYNH FAMILY TRUST (ACN 634 147 827)	Second Defendant

Citations

Landsville Huynh Pty Ltd v Huynh [2023] VSC 55

Most Recent Citation

Cases Citing This Decision

4

Mitchell Asset Management Pty Ltd v Di Pasquale [2025] VSC 307

Re Stirloch Constructions Pty Ltd [2024] VSC 322

Landsville Huynh Pty Ltd v Huynh (No 2) [2023] VSC 304

Cases Cited

8

Statutory Material Cited

0

Re Fishinthenet Investments Pty Ltd and Coastal Waters Seafood Pty Ltd [2014] NSWSC 260

Charlton v Baber [2003] NSWSC 745

Melbourne City Investments Pty Ltd v Treasury Wine Estates Ltd [2016] FCA 787

Actions

Download as PDF Download as Word Document

[2023] VSC 55

23 February 2023