Leahy v Audry
[2013] WASC 134
LEAHY -v- AUDRY [2013] WASC 134
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2013] WASC 134 | |
| Case No: | COR:175/2011 | 2 APRIL 2013 | |
| Coram: | MASTER SANDERSON | 18/04/13 | |
| 13 | Judgment Part: | 1 of 1 | |
| Result: | Application adjourned pending determination of winding up application | ||
| B | |||
| PDF Version |
| Parties: | MICHAEL LEAHY NORMA LEAHY KENNETH JAMES SMITH KENNETH JOHN SMITH MICHEL CHARLES LOUIS AUDRY KATHLEEN ANNE AUDRY |
Catchwords: | Corporations law Application to bring action in name of company Turns on own facts |
Legislation: | Nil |
Case References: | Adams v Meridian Mining Ltd [2009] WASC 176 Charlton v Baber [2003] NSWSC 745 Gerard Cassegrain & Co Pty Ltd v Cassegrain [2010] NSWSC 91 Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- NORMA LEAHY
KENNETH JAMES SMITH
KENNETH JOHN SMITH
Plaintiffs
AND
MICHEL CHARLES LOUIS AUDRY
KATHLEEN ANNE AUDRY
Defendants
Catchwords:
Corporations law - Application to bring action in name of company - Turns on own facts
Legislation:
Nil
Result:
Application adjourned pending determination of winding up application
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Category: B
Representation:
Counsel:
Plaintiffs : Mr M F Holler
Defendants : Mr C P Shanahan SC
Solicitors:
Plaintiffs : Morgan Alteruthemeyer
Defendants : Butcher Paull & Calder
Case(s) referred to in judgment(s):
Adams v Meridian Mining Ltd [2009] WASC 176
Charlton v Baber [2003] NSWSC 745
Gerard Cassegrain & Co Pty Ltd v Cassegrain [2010] NSWSC 91
Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313
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1 MASTER SANDERSON: By originating process filed 25 October 2011 the plaintiffs sought a variety of orders against the defendants. First they make claims (presumably for declaration) the defendants have not discharged their duties as directors in a proper fashion under s 180, s 181, s 182 and s 183 of the Corporations Act 2001 (Cth). Second they bring an oppression action based upon s 232 and s 233 of the Corporations Act. Thirdly they seek an order they be granted leave to bring proceedings in the name of a company against the defendants. They rely upon s 236, s 237 and s 242 of the Corporations Act.
2 The plaintiffs brought an application for directions and by consent it was ordered the application for leave to bring proceedings in the name of a company be dealt with first. The parties filed their evidence and submissions directed only at this issue.
3 Section 236, s 237 and s 242 of the Corporations Act are in the following terms:
236 Bringing, or intervening in, proceedings on behalf of a company
(1) A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if:
(a) the person is:
(i) a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or
(ii) an officer or former officer of the company; and
(b) the person is acting with leave granted under section 237.
(2) Proceedings brought on behalf of a company must be brought in the company's name.
(3) The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.
237 Applying for and granting leave
(1) A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.
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- (2) The Court must grant the application if it is satisfied that:
(a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and
(b) the applicant is acting in good faith; and
(c) it is in the best interests of the company that the applicant be granted leave; and
(d) if the applicant is applying for leave to bring proceedings there is a serious question to be tried; and
(e) either:
(i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied.
(a) the proceedings are:
(i) by the company against a third party; or
(ii) by a third party against the company; and
(b) the company has decided:
(i) not to bring the proceedings; or
(ii) not to defend the proceedings; or
(iii) to discontinue, settle or compromise the proceedings; and
(c) all of the directors who participated in that decision:
(i) acted in good faith for a proper purpose; and
(ii) did not have a material personal interest in the decision; and
(iii) informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and
- (iv) rationally believed that the decision was in the best interests of the company.
- The director's belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold.
- (4) For the purposes of subsection (3):
(a) a person is a third party if:
(i) the company is a public company and the person is not a related party of the company; or
(ii) the company is not a public company and the person would not be a related party of the company if the company were a public company; and
(b) proceedings by or against the company include any appeal from a decision made in proceedings by or against the company.
...
242 Power of the Court to make costs orders
The Court may at any time make any orders it considers appropriate about the costs of the following persons in relation to proceedings brought or intervened in with leave under section 237 or an application for leave under that section:
(a) the person who applied for or was granted leave;
(b) the company;
(c) any other party to the proceedings or application.
An order under this section may require indemnification for costs.
4 Based upon concessions made by the defendants there were three issues between the parties. First the defendants said the plaintiffs were not acting in good faith. Second, they said it was not in the best interests for the company that the plaintiffs be granted leave to bring proceedings. Finally, it was said, there was no serious question to be tried.
5 In support of the application the plaintiffs relied on an affidavit of the third-named plaintiff sworn 18 October 2011. Appearing as annexure KJS1 to that affidavit is a copy of a letter from the plaintiffs' solicitors to Raylane Holdings Pty Ltd (Raylane) the company at the
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- centre of this dispute. Annexed to that letter was a document entitled 'SUMMARY OF REASONS FOR LEAVE TO BRING PROCEEDINGS ON BEHALF OF THE COMPANY PURSUANT TO SECTION 236 OF THE CORPORATIONS ACT 2001'. Both counsel agreed this document was an accurate reflection of the material facts and the plaintiffs' contentions in support of its application. The document is in the following terms:
BACKGROUND
1. Raylane Holdings Pty Ltd (ACN 009 420 446 ('the Company') was incorporated on 14 September 1989.
2. The Company has two directors being: Michel Charles Louis Audry ('Mr Audry') appointed 21 September 1989 and his wife Kathleen Anne Audry ('Mrs Audry') appointed 8 August 1994 ('the Directors').
3. As at 1 July 2011 the Company has issued 123,886 ordinary shares.
4. Mr Audry owns 90,000 ordinary shares in the Company and Mrs Audry owns 10,000 shares in the Company.
5. The remaining issued ordinary shares in the Company are registered to:
5.1 Michael Leahy 4,545 ordinary shares;
5.2 Norma Leahy 4,545 ordinary shares;
5.3 Kenneth John Smith 478 ordinary shares;
5.4 Kenneth James Smith 10,048 ordinary shares;
- 5.5 Bernard Bleschet 4,270 ordinary shares.
6. Michael Leahy, Norma Leahy, Kenneth John Smith and Kenneth James Smith ('the Minority shareholders') all consent and approve of the Company commencing action on behalf of the Company against the Directors.
INVESTMENT IN THE COMPANY
7. Each of the Minority Shareholders have provided the following funds in the Company after being invited by Mr Audry to do so:
7.1 Michael and Norma Leahy
29 April 1994 $25,000.00
22 June 1996 $15,000.00
- 7.2 Kenneth John Smith
24 February 1994 $1,250.00
7.3 Kenneth James Smith
1 February 1994 $1,250.00
24 February 1994 $1,250.00
16 December 1994 $2,500.00
Late December 1995 $19,500.00
- 8. The Minority Shareholders contend that they were to be confirmed as initial and subsequent shareholders of the Company each time they provided funds to the Company. The Company directors contend that the Minority Shareholders were not shareholders in the Company until 1 February 2003.
BUSINESS OF THE COMPANY
9. Since 1994 the Company has traded as Eyres Safety Optics ('the Business'). The Business trades in the safety optical market within Australia and internationally.
10. The Company is the registered owner of Trade Mark number 1037731 which comprises the 'Eyres' logo in Class 9. A Class 9 Trade Mark covers amongst other items: eyeglasses; eyeglass frames; and protective devices for personal use against accidents.
11. Through extensive advertising and sales and marketing campaigns the Business has now become a market leader in the safety optical market.
12. The Minority Shareholders are in favour of the Company utilizing its knowhow and business contacts to continue to develop other streams of income for the Company arising from its existing business.
DIRECTORS OTHER COMMERICAL INTERESTS
13. Both Mr Audry and Mrs Audry have commercial interests in other companies these being:
13.1 Name: D'Arassus Pty Ltd ACN 112 054 430
Registered: 2 December 2004
Director: Mr Audry
Shares Issued: 1 ordinary share
Shareholder: Mr Audry 1 ordinary share
- 13.2 Name: Ioptixx Pty Ltd ACN 142 166 470
Registered: 19 February 2010
Directors: Mr & Mrs Audry
Shares Issued: 100 ordinary shares
Shareholders: Mr Audry 75 ordinary shares &
Mrs Audry 25 Ordinary shares
Registered: 19 February 2010
Directors: Mr & Mrs Audry
Shares Issued: 10 ordinary shares
Shareholders: Mr Audry 5 ordinary shares &
Mrs Audry 5 ordinary shares
Registered: 10 September 2009
Directors: Mr & Mrs Audry
Shares Issued: 2 ordinary shares
Shareholders: Mr Audry 1 ordinary share &
Mrs Audry 1 ordinary share
- 14. The Directors did not ever notify the Minority Shareholders of their interests in the above Companies.
BASIS FOR BRINGING PROCEEDINGS
15. The Directors failed to register the Minority Shareholders as shareholders in the Company in a timely manner.
Particulars
- The Minority Shareholders provided money to the Company during the period from 1994 to 1996 yet they were not registered as shareholders in the Company until 1 February 2003.
16. The Directors used their positions as directors of the Company for their own personal gain as on or about 1 February 2003 they issued shares to themselves without reference to the interests of the Minority Shareholders.
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- On 1 February 2003 the Directors converted their shares on a ration of 1 1000.
17. The Directors used their positions as directors of the Company for their own personal gain which has harmed the commercial interests of the Company.
Particulars
- 17.1 Mr Audry a director of the Company caused D'Arassus Pty Ltd ACN 112 054 430 ('D'Arassus') to be incorporated to provide safety testing services to the Company. The Minority Shareholders were not informed of D'Arassus being incorporated nor were they informed of the terms of the commercial arrangement between the Company and D'Arassus.
17.2 On or about 1 October 2007 Mr Audry failed to disclose to the Minority Shareholders the existence of an Intellectual Property Licence Agreement between the Company as licensee and D'Arassus as owner in which a licence fee of 5% of the Company's value of gross sales would be paid to D'Arassus.
17.3 Mr Audry has failed to disclose the intellectual property alleged to be owned by D'Arassus and the Minority Shareholders believe any intellectual property asserted by D'Arassus is the rightful property of the Company.
17.4 The Directors have without the consent of the Minority Shareholders incorporated Ioptixx Pty Ltd ACN 142 166 470 ('Ioptixx') for the purposes of developing a business in the prescription safety eyewear market to the exclusion of the Company and which opportunity properly belonged to the Company.
17.5 The Directors have without the consent of the Minority Shareholders and on behalf of the Company, entered into agreements with Ioptixx on unfavourable commercial terms for the Company.
17.6 On or about 24 December 2009 the Directors as directors of Makd Global Pty Ltd ACN 139 395 761 ('Makd') purchased the commercial property at 3 Bramall Street, East Perth, Western Australia ('the Property').
17.7 The Directors did not disclose to the Minority Shareholders that they intended to purchase the Property on behalf of Makd. The Directors then on behalf of the
- Company, without disclosure to the Minority Shareholders, entered into a commercial lease with Makd to lease the Premises for a period of 5 years commencing on 1 January 2010 at a rental amount of $7,000.00 plus GST per month. Despite the Company paying the rental amount as required under the lease it did not enter into occupation of the Premises.
- 18. Despite the Minority Shareholders requesting formal responses from the Company to the behavour [sic] outlined above, as set out in a letter dated 3 March 2011 from the solicitors for the Minority Shareholders to the solicitors for the Company, neither the Directors nor the Company have disclosed the reasons for entering into the related party transactions or why the Minority Shareholders were not informed of the proposed related party transactions.
19. The Company has failed to investigate the complaints of the Minority Shareholders into the actions of the Directors with respect to related party transactions.
20. The Minority Shareholders application to bring proceedings on behalf of the Company is in good faith and in the best interests of the Company as it will restore value to the Company.
6 In my view the plaintiffs have established there is a serious question to be tried. In response to the allegations made by the plaintiffs, which I have quoted above with respect to Ioptixx Pty Ltd (Ioptixx), the defendants made the following response. It is found in a letter from the defendants' solicitors to the plaintiffs' solicitors dated 7 December 2010 and appearing as annexure MCLA12 to the affidavit of the first-named defendant sworn 7 December 2011 and filed in opposition to this application, as follows:
2.Sale of Assets by the Company to Ioptixx Pty Ltd
These assets (identified in the Schedule to the written agreement) were items of plant and equipment required by Ioptixx Pty Ltd. However, it did not have sufficient funds available to do so.
The Company therefore purchased the assets which it used for a few months before selling them to Ioptixx Pty Ltd. During the time that the Company had the use of the assets it was able to generate sales of approximately $150,000.00 (which it retained) from them.
As was always the intention, the assets were ultimately sold to Ioptixx Pty Ltd at cost (less GST for which the Company received the input credit). This sale was financed by the directors of Ioptixx Pty Ltd (Mr and Mrs Audry) entering into a Division 7A loan agreement with the Company (Raylane Holdings Pty Ltd). This agreement and all of its terms (including
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- the term of the loan, and the rate and calculation of interest) has been prepared strictly in accordance with ATO guidelines and rulings. It is difficult in such circumstances to understand why this arrangement ought cause any party any concern in my respectful view. The Company has not been disadvantaged in any way. To the contrary, it seems to me to have derived a significant benefit from the transaction.
3. The Difference between the Company and Ioptixx Pty Ltd
There seemed to be an implication arising from comments made during the course of the recent general meeting that the Audrys were in some way diverting income from the Company, and thereby causing it prejudice, by redirecting work to Ioptixx Pty Ltd. A question was asked of Mr Audry regarding the difference between the two companies. His response did not seem to satisfy some of those present at the meeting. Therefore, by way of further explanation, I am instructed that the Company was originally established, and continues to this day, to manufacture plain sunglasses (i.e. non-prescription) and safety glasses. Ioptixx Pty Ltd, on the other hand, sells prescription glasses (not just sunglasses) to opticians. It is a customer of the Company and purchases frames at wholesale prices (it does not get preferential pricing) just like any other customer.
The Company and Ioptixx Pty Ltd do not compete and, in fact, the Company benefits to the extent that a significant part of its income is derived from sales of its frames to Ioptixx Pty Ltd.
7 The plaintiffs have to overcome a relatively low threshold to establish there is a serious question to be tried similar to the test applied on the grant of an interlocutory injunction: see Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 as applied in Adams v Meridian Mining Ltd [2009] WASC 176 [12]. Clearly in this case there is a question as to why a commercial opportunity was not developed by Raylane but by Ioptixx. Without in any way determining the issue it seems to me there is a serious question to be tried as to whether the defendants have inappropriately diverted a commercial opportunity from Raylane to the benefit of their own interests.
8 In my view there is no question about the good faith of the plaintiffs. Senior counsel for the defendants maintained the very fact the plaintiffs brought an application for leave to commence a derivative action at the same time as bringing an oppression action showed bad faith. Indeed counsel submitted the fact the plaintiffs would have Raylane pay the costs of the derivative action further confirmed the point. The plaintiffs for their part say they honestly believe a good cause of action exists and has reasonable prospects of success. In addition they maintain they are not bringing the action for any collateral purpose. These were two factors said to be of prime importance by Palmer J in Swansson [36].
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9 In my view the evidence discloses the plaintiffs do believe they have a good cause of action. They have examined the facts, corresponded with Raylane and their solicitors, and raised the matter at a meeting of the company. Short of obtaining leave to bring the derivative action it is hard to know what more they could do. I am not satisfied there is anything in the evidence which suggests a collateral purpose. The authorities show it is proper for a plaintiff to bring an application for leave to issue proceedings in the name of the company at the same time as bringing a winding up application on the grounds of oppression: see Gerard Cassegrain & Co Pty Ltd v Cassegrain [2010] NSWSC 91 [124] (Austin J). The plaintiffs have satisfied this ground.
10 The remaining question is whether or not it is in the best interests of the company to bring these proceedings. Just what is meant by the phrase 'in the best interests of the company' has received considerable judicial attention. It is enough if I mention the judgment of Barrett J in Charlton v Baber [2003] NSWSC 745 [45] - [54]. There is also a detailed discussion in Ford's Principles of Corporations Law (14th ed) s 11.240, pages 731, 733 - 734. I would respectfully adopt the principles outlined therein without repetition.
11 In my view there are two interrelated difficulties faced by the plaintiffs under this head. First, the plaintiffs have a relatively modest minority shareholding and are not involved in the day to day management of the company. If proceedings are issued in the name of the company against the majority shareholders and directors at the very least it will distract management from conducting the business of the company. This must always be a concern when leave is given to issue a statutory derivative action. But in this case the difficulties are stark. All of the information necessary for the plaintiffs to conduct the derivative action will have to be derived from Raylane and its directors. Yet it is the company and its directors who will be the subject of the action.
12 Second, if any benefit is to be obtained it will be for the benefit of the company and the advantage to the present plaintiffs will be modest. They are holders of a limited number of shares. There is nothing in the material to suggest any clawback from Ioptixx or any other company will be in an amount to offset the costs occasioned to the company. Still less is there any evidence to show the plaintiffs will obtain some real benefit from the action.
13 Added to all of this is the possibility the company will be wound up. If a winding up order were to be made and a liquidator on reviewing the
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- books of the company was satisfied the directors had not fulfilled their obligations then the liquidator could take proceedings. Ultimately that would benefit all of the shareholders (assuming the action was successful). A liquidator may well be better placed to conduct any proceedings against the present defendants than the plaintiffs.
14 Having expressed those doubts it does seem to me that the proper course here is to not finally determine the application. Rather in my view it would be preferable if the winding up application were pursued at least to the point of mediation. I appreciate in attempting to settle the matter the parties may have differing views as to whether the company has any rights to bring proceedings against the defendants. Doubtless that will form part of the cut and thrust of the mediation process. If I were to grant leave to bring the action the winding up application would presumably be put on hold pending determination of any proceedings. Experience shows that could take years. Meanwhile the toxic relationship between the shareholders continues. Far better it be determined whether or not the company should be wound up before the question of leave is determined. After all if the ultimate result of that application is the company continues in its present form then perhaps leave could be given.
15 The orders I will make are as follows:
1. The application to bring the statutory derivative action be adjourned sine die; and
2. The costs of this application be reserved.
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