Li v Dao

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST

S CI 2017 04102

YI LI	Plaintiff
v
HUE HIN DAO	First Defendant
And
TAO YANG	Second Defendant

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JUDGE:	Connock J
WHERE HELD:	Melbourne
DATE OF HEARING:	23, 27 June and 23 August 2018
DATE OF JUDGMENT:	14 September 2018
CASE MAY BE CITED AS:	Li v Dao
MEDIUM NEUTRAL CITATION:	[2018] VSC 530

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CORPORATIONS – Statutory derivative action – Application for leave to bring proceedings – Sections 236 and 237 of the Corporations Act 2001 (Cth) – General principles – Good faith – Best interests of the company – Serious question to be tried – No need for fresh proceeding – Deadlocked company – Notice requirement.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M Tehan	Prudentia Legal Pty Ltd
For the Defendants	Mr J Kohn	Nevile & Co. Commercial Lawyers

HIS HONOUR:

INTRODUCTION

The plaintiff (Ms Li) seeks leave pursuant to s 237 of the Corporations Act 2001 (Cth) (Act) to bring proceedings on behalf of Colourful Kew Pty Ltd (Company) against the first defendant (Ms Dao), the second defendant (Mr Yang) and Burke Road Developments Pty Ltd (Burke Road), and to give effect to such leave by amending the existing statement of claim and joining the Company as the second plaintiff and Burke Road as the third defendant to this proceeding (Proceeding).

The claims sought to be made on behalf of the Company relate to a failed property development venture involving Ms Li, Ms Dao, Mr Yang, and the Company in respect of a former service station site located at 53 Earl Street, Kew, Victoria (Property).

In the Proceeding Ms Li already makes personal damages claims against Ms Dao and Mr Yang in connection with the failed property development venture.

Ms Dao opposes the application[1] and contends that the criteria in s 237(2) of the Act have not been satisfied because Ms Li has not established that she is acting in good faith, that the grant of leave is in the best interests of the Company, or that there is a serious question to be tried in relation to any of the claims sought to be pursued on behalf of the Company.
[1]The documents filed by Ms Dao raised a question as to whether the opposition to the application was being pressed by both defendants or only Ms Dao. Counsel confirmed that although he and his instructing solicitors act for both defendants in the Proceeding generally, he was only appearing on behalf of Ms Dao in opposition to the application.

For the reasons that follow, leave pursuant to s 237 of the Act will be granted to Ms Li to bring proceedings in respect of only some of the claims sought to be made on behalf of the Company. Stated briefly, these claims relate to declaratory relief regarding certain funds received by the Company, alleged misleading or deceptive conduct by Ms Dao and Mr Yang, and alleged breaches of fiduciary and statutory duties by Ms Dao in her capacity as a director of the Company. The claims are identified in greater detail later in these reasons. Leave will also be granted to join the Company as the second plaintiff and Burke Road as the third defendant.

The following matters are addressed in the balance of these reasons:

(a) Evidence and submissions;

(b) Background;

(c) Proposed claims;

(d) The legislation;

(e) The issues;

(f) Consideration:

(i) section 237 - general observations;

(ii) standing and nature of application;

(iii) section 237(2)(a) - probable company will not bring proceedings;

(iv) section 237(2)(b) - good faith;

(v) section 237(2)(c) - best interests of the company;

(vi) section 237(2)(d) - serious question to be tried;

(vii) section 237(2)(e) - notice;

(g) Sections 241 and 242 - general powers to make orders and costs orders;

(h) Adding the Company and Burke Road as parties and amendment; and

(i) Conclusion.

EVIDENCE AND SUBMISSIONS

Ms Li initially relied upon her affidavit affirmed 28 May 2018[2] and an affidavit of her solicitor, Mr Zhu, sworn 14 June 2018. During the course of the hearing of the application Ms Li also sought to rely upon her affidavit affirmed 8 March 2018 in a related winding up proceeding[3] in this court between Burke Road and the Company (Winding Up Proceeding).[4]
[2]But dated 25 May 2018.
[3]S CI 2017 3981.
[4]To which there was no objection.

Ms Dao relied upon her affidavit sworn 19 June 2018, the exhibits to which included Ms Dao’s affidavits in the Winding Up Proceeding sworn 5 February 2018 and 10 April 2018, and the affidavit of Mr Yang, the sole director of Burke Road, affirmed 5 February 2018.

The parties each filed limited written submissions prior to the 23 June 2018 hearing and, pursuant to an order made at the further hearing of the application on 27 June 2018, Ms Li filed further written submissions[5] and provided to the court a revised proposed amended statement of claim (PASOC). Ms Dao filed a further written submission in response[6] and the further submissions of the parties and the PASOC were addressed orally at the continued hearing on 23 August 2018.
[5]Dated 20 July 2018.
[6]Dated 8 August 2018.

BACKGROUND

The background to the dispute and the application is evident from the affidavit material, although it may be observed that as a result of the parties’ reliance upon affidavits filed in the Winding Up Proceeding, the affidavit evidence was less ordered and focused than it might have otherwise been.

Given the fundamentally conflicting and contested positions between the parties regarding that which is said to have transpired at the relevant time, and the issues and submissions that fall for consideration on this particular application, it is necessary to refer to the background and evidence in more detail than might ordinarily occur.

The contract of sale for the Property was entered into on 21 August 2015. The purchaser was named as ‘Jao Chen [and] Yi Li and/or nominee/s’. Ms Dao says it was agreed between her and Ms Li that ‘we would later set up a company to be nominated as the purchaser’.[7]
[7]Ms Dao’s 5 February 2018 affidavit at [5].

The Company was incorporated on 27 July 2016. Ms Li and Ms Dao are each 50 per cent shareholders of the Company and its only directors.

Ms Dao is also a 100 per cent shareholder of Burke Road. Mr Yang is Burke Road’s sole director. There is evidence that Ms Dao is Mr Yang’s business partner.

A large part of the purchase price of the Property was financed through a loan to the Company of $1,855,473 from First Mortgage Capital Pty Ltd (First Capital) who also took a first mortgage over the Property.

Ms Li alleges that she contributed over $700,000 by way of capital to the venture, and that Ms Dao and/or Mr Yang were to do the same.

There appears to be no dispute that an additional $700,000 was received by the Company in about September 2016, but there is a dispute as to the correct characterisation of that receipt. Ms Li contends that the amount constituted Ms Dao’s capital contribution to the venture. Ms Dao disagrees and says that the amount comprised two loans, being a loan of $300,000 and a further loan of $400,000, each from Burke Road to the Company (Alleged Loans), pursuant to two loan agreements each dated 2 September 2016 between Burke Road and the Company (Loan Agreements).

The duration of the loan under the $300,000 loan agreement was stated to be three months, with the principal amount repayable on 3 December 2016. The interest rate was specified as 25 per cent per annum, compounded. The duration of the $400,000 loan agreement was also stated to be three months, with the principal amount being due for repayment on 3 December 2016. The interest rate was specified as 2.5 per cent per month, compounded.

On the evidence before me it appears not to be in dispute for present purposes that in September 2016 Ms Li and Ms Dao signed the documents said to comprise the Loan Agreements.

Ms Li alleges that she was misled regarding the nature of the documents and that representations were made by Ms Dao and Mr Yang that the documents were required by First Capital in connection with the First Capital loan and its first mortgage. In this regard evidence in the affidavit material relied on by Ms Li includes evidence to the following effect:

(a) Ms Li had no experience in real estate or property development, and Mr Yang informed her that he was very successful in real estate;

(b) Ms Dao was introduced to Ms Li as Mr Yang’s business partner;

(c) the only information Ms Li had about the Property was information which Ms Dao or Mr Yang passed on to her;

(d) Mr Yang approached Ms Li and said he had found a great block of land in an excellent location (being the Property) and that it could be sold with a considerable profit;

(e) Mr Yang was going to be the builder to develop the Property and therefore he could not sign the contract of sale;

(f) because of her experience and her English level Ms Dao was going to set up the Company and arrange the financial side of things;

(g) the Company was set up by an accountant engaged by Ms Dao and Mr Yang, and Ms Li was informed that Ms Dao used to work for the Commonwealth Bank of Australia and could set up corporate structures easily;

(h) Ms Li had not made any investigations about the Property because Mr Yang had informed her that he was a professional and there was nothing to worry about;

(i) Ms Li did not know about the contamination on the Property until about August 2016, when settlement was due, and that it was only disclosed by Ms Dao and Mr Yang when Ms Li asked why the major banks were unable to provide finance for the purchase of the Property;

(j) Ms Li’s understanding of the agreement always was that there would be equal contributions of capital between herself and Ms Dao and/or Mr Yang, and that the balance of the purchase price would be borrowed from the mortgagee which Ms Dao would arrange;

(k) Ms Li contributed capital of $730,000 to the venture;

(l) additional funds of about $700,000 were received into the Company’s bank account and Ms Li understood the funds to represent the capital contribution of Ms Dao, reflecting about the same amount of capital Ms Li had earlier contributed to the joint venture;

(m) there was never any discussion about borrowing money from Ms Dao, Mr Yang or Burke Road;

(n) Ms Li was not given the opportunity to read the documents comprising the Loan Agreements as only the execution pages were shown to her and in any event her English is limited and she would not have been able to understand the documents;

(o) Ms Li was forced to sign the Loan Agreements in rushed circumstances and was informed by Ms Dao and Mr Yang that they were documents required by First Capital, that they needed to be signed that night, that they would be signing the documents as well and that there was nothing to worry about;

(p) Ms Li was refused the opportunity to have her lawyers look at the documents despite requesting that opportunity;

(q) Ms Li relied upon assurances from Mr Yang and Ms Dao that the documents were only additional documents required by First Capital in relation to its loan;

(r) Ms Li was not informed about the Alleged Loans, there was no agreement about any loan from Burke Road, and Ms Li would not have agreed to a loan if asked;

(s) the evidence with respect to what were said to be relevant costs included evidence that:

(viii) Ms Li contributed capital of $730,000 which included a $20,000 payment made at Mr Yang’s request to a person with connections to get the good deal; and

(ix) Mr Yang and/or Ms Dao were to contribute $710,000 to represent the other 50 per cent in capital to be contributed to the joint venture;

(t) Ms Li considers her signature to the Loan Agreements to have been obtained by misrepresentation by Ms Dao and Mr Yang.

Ms Li also says that Ms Dao dealt with the Company’s financial matters, unilaterally removed funds from the Company’s bank account, and is in a position of conflict because of her 100 per cent ownership of Burke Road.

She says further that granting the relief sought regarding the proper characterisation of the $700,000 received by the Company is in the best interests of the Company, but not Ms Dao, because it will involve the Company not being liable to Ms Dao’s company, Burke Road, for the Alleged Loans.

The affidavit evidence relied on by Ms Dao records an account of events that is in contrast to that which is set out in the evidence relied on by Ms Li. Not only does this reveal the existence of many disputed matters of fact, it also reveals that the ultimate resolution of these matters will necessarily involve questions of credit of Ms Li, Ms Dao, Mr Yang and others.

The evidence relied on by Ms Dao includes evidence to the following effect:

(a) Mr Yang has known Ms Li and her husband since about 2012 as a result of being a regular customer at their restaurants in Carlton and the city;

(b) Ms Li has many years of experience in business and real estate, owns various properties, and earns substantial amounts of money from her restaurants;

(c) Mr Yang has limited experience in project management and previously carried out some fit out works for Ms Li and her husband and a related company in respect of which he says he is still owed money;

(d) from about 2014 Ms Li had asked Mr Yang on various occasions to let her know if he knew of any properties to buy and redevelop;

(e) in mid-2015 Mr Yang informed Ms Li about the Property, after which Ms Li did her own investigations about it;

(f) Ms Li was aware that the Property was a former petrol station and was aware of possible contamination, and Mr Yang denies making any representations regarding the state of the Property;

(g) on 21 August 2015 Ms Li signed the contract of sale for the purchase of the Property and it was agreed between Ms Li and Ms Dao that they would later set up a company to be nominated as the purchaser;

(h) in about early 2016 Ms Dao and Ms Li agreed to register the Company to complete the purchase of the Property and potentially develop it in accordance with plans and permits included with the contract of sale;

(i) the Company was incorporated for the sole purpose of settling the purchase and developing the Property;

(j) in about early August 2016 Ms Dao and Ms Li agreed that the Company would borrow $1,855,473 from First Capital plus $300,000 from Burke Road, to complete the purchase on 5 September 2016. It was also agreed to apply for a further loan of $400,000 from First Capital;

(k) on 29 August 2016 First Capital informed Ms Dao that an additional $400,000 loan would need to be secured by properties owned by Ms Li and properties owned by Ms Dao. When Ms Dao informed Ms Li of this requirement, Ms Li said she did not want to use her property as security and asked if the funds could be sourced from elsewhere;

(l) on about 30 August 2016 Ms Li and Ms Dao agreed to borrow the additional $400,000 from Burke Road in addition to the $300,000 that had already been agreed to be borrowed, and Ms Dao informed Ms Li that she was a shareholder of Burke Road and Burke Road was the company providing the loans;

(m) on about 30 August 2016 Ms Li said to Mr Yang that she had to settle the purchase of the Property on 5 September 2016 and that she needed about $700,000 but the banks wanted security over her other property, which she did not want to give, and Ms Li asked if Mr Yang could arrange a loan for $700,000 to complete the purchase;

(n) Mr Yang said he could organise the loan and that the loan would be from Burke Road and that he was its director and Ms Dao was the shareholder;

(o) on about 1 September 2016 Mr Yang asked Ms Li if she wanted to sign the Loan Agreements with lawyers and she said she did not want to waste the time or money;

(p) on 2 September 2016 a meeting took place at Ms Li’s restaurant in Carlton at which Ms Li, Ms Li’s husband, Mr Yang, Ms Dao, and an employee of Ms Li’s, Ms Xu, were present and that is when the Loan Agreements were signed;

(q) in the lead up to the meeting at the restaurant on 2 September 2016 text messages were exchanged between Ms Li and Ms Dao which Ms Dao says are consistent with the existence of the Loan Agreements and Ms Li’s knowledge of what was occurring;

(r) at the meeting at the restaurant on 2 September 2016:

(x) Ms Li read the Loan Agreements and said she agreed with the terms and then Ms Li and Mr Yang signed and initialled each page;

(xi) Ms Li initialled each page and signed the execution page in front of Ms Xu who signed as witness for Ms Li and Ms Dao;

(xii) at no time before or during the signing was any attempt made to disguise or misrepresent the nature of the Loan Agreements and every page was clearly visible and not folded or obscured in any way;

(s) on 2 September 2016 the Company entered into the Loan Agreements;

(t) the Property was never developed because Ms Li did not want to proceed with the development;

(u) in about January 2017 the Company defaulted on the First Capital loan and default notices were issued by First Capital on 16 January 2017;

(v) Ms Li refused to sign refinancing documents which resulted in a forced sale of the Property by First Capital as mortgagee prior to it being developed, with the sale ultimately being settled on 28 August 2017;

(w) the relationship between Ms Dao and Ms Li broke down in December 2016 or early January 2017 following Ms Li’s refusal to sign refinancing documents. Since that time they have not communicated other than through legal advisers, there has been a total breakdown in the relationship that is irretrievable and has caused a management deadlock, and neither Ms Dao nor Ms Li wish to conduct business together; and

(x) the business of the Company has come to an end.

The court was informed, and it appears to be common ground between the parties, that the balance of the purchase monies remaining after repayment of the First Capital loan is $623,000, with $246,000 of that amount being held in a solicitor’s trust account, and $371,000 currently being held elsewhere in connection with a possible tax issue associated with the purchase that has not yet been resolved.[8]
[8]Transcript 22-23 (22 June 2018). $6000 is said to be held in another account.

The court was also informed it is common ground that, with the exception of the amount claimed by Burke Road, there are no other creditors of the Company.

With respect to the Alleged Loans, a notice of default was served on the Company by Burke Road on 4 May 2017. On 30 August 2017, and subsequent to the settlement of the sale of the Property by First Capital as mortgagee, Burke Road served a statutory demand on the Company demanding repayment of the Alleged Loans.

On 5 October 2017 Burke Road commenced the Winding Up Proceeding.

By order made on 22 November 2017 Ms Li was granted leave pursuant to s 237 of the Act to intervene on behalf of the Company[9] in the Winding Up Proceeding, thereby allowing the dispute regarding the alleged Loan Agreements and the proper characterisation of the $700,000 advanced to the Company to be raised in answer to the statutory demand.
[9]Order of Judicial Registrar Matthews made 22 November 2017. There appear to be no written reasons.

On 12 October 2017 Ms Li commenced this proceeding against Ms Dao and Mr Yang in which she makes personal claims against them and seeks damages in relation to, among other things, alleged misrepresentations regarding the Property and other aspects of the failed venture.

By order made 7 June 2018[10] the Winding Up Proceeding was adjourned to 20 September 2018 to allow for the hearing and determination of this application.
[10]Order of Associate Justice Gardiner made 7 June 2018.

The court was also informed that Ms Li will undertake to pay the Company’s costs of and associated with the claims and indemnify the Company in respect of any costs orders made against it.

PROPOSED CLAIMS IN RESPECT OF WHICH LEAVE IS SOUGHT

During the first day of the hearing counsel for Ms Li properly acknowledged that the then proposed amended statement of claim[11] (which had not been drawn by counsel appearing) was defective and did not sufficiently articulate the nature of the claims and related relief sought to be brought and claimed on behalf of the Company.
[11]Exhibit “AZ-01” to Mr Zhu’s 14 June 2018 affidavit.

Orders were made on 27 June 2018 requiring Ms Li to serve a revised proposed amended statement of claim (which became the PASOC) together with a written submission identifying each of the causes of action sought to be pleaded on behalf of the Company, the relief sought in respect of each cause of action, and details of the legal basis upon which it was contended each item of relief was said to be available. An order was also made for the filing by the defendants of submissions in response.

Briefly, the claims referred to in the PASOC and addressed and clarified in Ms Li’s further written and oral submissions comprise:

(a) a claim seeking declaratory relief regarding what is said by Ms Li to be the true character of the $700,000 received by the Company, namely, a capital contribution to the venture by Ms Dao;

(b) a claim seeking what was contended to be declaratory relief in equity that the Loan Agreements are void, but which was not otherwise linked to a pleaded claim or cause of action;

(c) in the alternative to the claim referred to in sub-paragraph (a) above, a damages claim for breach of contract regarding an alleged failure by Ms Dao and Mr Yang to contribute capital to the Company that was said to be based on the reasoning in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (Trident Contract Claim);[12]
[12](1988) 165 CLR 107. It was not alleged that the Company was a party to the alleged agreement.

(d) a misleading or deceptive conduct claim against Ms Dao and Mr Yang for contravention of s 18 of the Australian Consumer Law in connection with alleged representations and non-disclosures regarding the Loan Agreements and the Alleged Loans;

(e) a claim ‘in debt’ against Ms Dao for $319,800 in respect of an alleged unauthorised withdrawal of that amount from the Company’s bank account;

(f) claims against Ms Dao for breaches of fiduciary duty in connection with the Alleged Loans, the misleading or deceptive conduct, and the unauthorised withdrawal; and

(g) claims against Ms Dao for breaches of statutory directors’ duties in connection with the Alleged Loans, the misleading or deceptive conduct, and the unauthorised withdrawal.

Further consideration was given to the proposed claims by Ms Li during the hearing on 23 August 2018 and by the conclusion of Ms Li’s reply submissions the court had been informed that Ms Li no longer pressed the application in respect of the following proposed claims by the Company:

(a) the claim for declaratory relief that the Loan Agreements are void;

(b) the Trident Contract Claim; and

(c) the claim alleging the existence of a ‘debt’ in respect of the alleged unauthorised withdrawal.[13]

[13]The breach of duty claims regarding the alleged unauthorised withdrawal were still pressed.

This change of position related only to the claims sought to be brought on behalf of the Company but did not affect the personal claims brought (or to be brought) by Ms Li against the defendants, which were properly not the subject of the application under s 237 of the Act.

LEGISLATION

Section 236 of the Act provides as follows:[14]
[14]Notes omitted.

(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.

Sections 237(1) and (2) of the Act are in the following terms:

(1)A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.
(2)The Court must grant the application if it is satisfied that:
(a)it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and
(b)the applicant is acting in good faith; and
(c)it is in the best interests of the company that the applicant be granted leave; and
(d)if the applicant is applying for leave to bring proceedings—there is a serious question to be tried; and
(e)either:
(i)at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(ii)it is appropriate to grant leave even though subparagraph (i) is not satisfied.

ISSUES

The central issue for determination is whether the requirements of s 237(2)(a)–(e) of the Act have been met. The primary sub-issues in this case are whether on the evidence currently before me Ms Li has established that she is acting in good faith, it is in the best interests of the Company to grant leave, and there is a serious question to be tried in respect of the claims sought to be brought on behalf of the Company. If the requirements of s 237(2) of the Act have been met then leave must be granted.

CONSIDERATION
Section 237 – General observations

Because the application is contested by reference to most of the substantive criteria in s 237(2), further refinement of the PASOC has been foreshadowed if leave is granted, and the claims are sought to be brought in an existing proceeding by Ms Li against Ms Dao and Mr Yang, it is instructive to refer to some of the general observations that have been made in other cases regarding relevant aspects of the operation of ss 236 and 237 of the Act before turning to the statutory criteria. It must also be kept in mind that each case depends on its own facts.

The applicant bears the onus of establishing the requirements of s 237(2) of the Act on the balance of probabilities.[15]
[15]Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 [24] (Palmer J); Huang v Wang (2016) 114 ACSR 586 [56], [58] (Bathurst CJ, McColl JA and Barrett AJA agreeing).

If the criteria provided for in s 237(2) of the Act are made out there is no discretion and the court is required to grant leave. If any one of the criteria is not made out the court should refuse leave.[16]
[16]Huang v Wang (2016) 114 ACSR 586 [57] (Bathurst CJ, McColl JA and Barrett AJA agreeing). But see Fiduciary Ltd v Morning Star Research Pty Ltd (2005) 53 ACSR 732 [16] (Austin J). Note also the qualification in s 237(2)(e)(ii) of the Act.

Before considering each of the criteria it is necessary to consider the claim sought to be brought on behalf of the Company and the evidence that is relied on to support it.[17]
[17]Slea Pty Ltd v Connective Services Pty Ltd [2017] VSC 609, [52] (Robson J).

Whilst a concession can be taken into account when a court is undertaking the exercise required by s 237(2) of the Act, because that section requires the court to be satisfied of each criterion a concession does not entirely relieve the court from examination of the matter, although it may reduce the extent of the court’s inquiry.[18]
[18]Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 [20] (Brereton J) c.f. Harris v Caladine (1991) 172 CLR 84, 96 (Mason and Deane JJ), 103 (Brennan J), 133 (Toohey J).

Nothing in part 2F.1A of the Act requires that a derivative action be in a separate proceeding in which no personal claims are made by the person who has carriage of the proceeding. It is permissible to grant leave under s 237 so as to permit an individual plaintiff to assert rights of a company in a proceeding in which that plaintiff also asserts rights of his or her own.[19] But where personal claims are also made, care must be taken to distinguish between the two categories of claims and the ingredients required for each category.[20]
[19]Ehsman v Nutectime International Pty Ltd (2006) 58 ACSR 705 [26] (Austin J) citing Fiduciary Ltd v Morning Star Research Pty Ltd (2005) 53 ACSR 732 (Austin J).
[20]Ehsman v Nutectime International Pty Ltd (2006) 58 ACSR 705 [56] (Austin J).

Notwithstanding the literal wording of s 236(2) of the Act, leave under s 237 can be given where the company is a party to the proceeding as a necessary defendant in respect of other claims without requiring the company to become a plaintiff or insisting that a derivative action be brought in a separate proceeding.[21]
[21]Ibid [27] (Austin J) and the cases there cited.

If the matter is to be pursued through an existing proceeding, a question may arise as to whether the application is to be characterised as an application to bring a proceeding or an application to intervene in a proceeding. This can be important because if it is characterised as an application to intervene then s 237(2)(d) of the Act is not engaged and therefore the applicant is not required to establish that there is a serious question to be tried.[22]
[22]See s 237(2)(d) of the Act and the discussion in Ehsman v Nutectime International Pty Ltd (2006) 58 ACSR 705[53]–[57] (Austin J).

Part 2F.1A does not explain the word ‘proceedings’ or give any direct indication of the level of specificity of pleaded allegations and prayers for relief that the applicant for leave must achieve. Typically an applicant will provide a draft statement of claim or some other document giving particulars of the derivative claims. However, it is not the case that a full statement of the derivative claims must be presented before the court can consider and determine a leave application.[23] The applicant must identify the proposed proceedings with sufficient precision so that the court can properly assess the application having regard to the criteria that it is required to consider under s 237(2) of the Act, and the opponents can respond to the application in terms of those criteria. That may be achieved by presenting the court with a draft pleading, but it may be achieved in other ways such as by outlining the claims in affidavit evidence.[24]
[23]Ibid [43] (Austin J).
[24]Ibid [44] (Austin J).

Where a proposed amended statement of claim or other like document is defective, if the criteria in s 237(2) of the Act have been satisfied it may be appropriate to refuse leave in respect of the claims articulated in that document but grant leave to bring proceedings asserting causes of action that are identified in some other way.[25]
[25]See, for example, ibid [42]–[44] (Austin J).

It is not necessary for disputes between members of the company to be resolved before leave is granted to bring proceedings on behalf of the company as that may defeat the purpose that the statutory provisions are designed to serve and for which derivative proceedings were formerly permitted under the relevant exception to the rule in Foss vHarbottle.[26] Whilst ss 236 and 237 of the Act were not intended to preserve the former law, they should be approached as measures of reform designed to improve rather than to place obstacles in the way of such proceedings.[27]
[26](1843) 67 ER 189.
[27]Metyor Inc. v Queensland Electronic Switching Pty Ltd [2003] 1 Qd R 186 [10] (McPherson JA, Williams and Wilson JJA agreeing).

Different views have been expressed as to whether an application under s 237 of the Act is interlocutory or final in nature. In McEvoy v Caplan,[28] the New South Wales Court of Appeal concluded that an order refusing the grant of leave under s 237 of the Act was interlocutory and this was referred to with apparent approval by Bathurst CJ and McColl JA in Huang v Wang.[29] In the same case Barrett AJA explored the issue further and concluded that whether an order under s 237 of the Act is final or interlocutory may depend upon the manner in which the application is brought, including whether it is brought by way of application in an existing proceeding.[30]

Standing of Ms Li

[28](2010) 78 ACSR 167 (Macfarlan JA, Allsop P and Beazley JA agreeing).

[29](2016) 114 ACSR 586 [58] (Bathurst CJ, McColl JA and Barrett AJA agreeing) citing McEvoy v Caplan (2010) 78 ACSR 167 [4] (Macfarlan JA, Allsop P and Beazley JA agreeing).

[30]Ibid [82]–[87].

Ms Li has standing to bring the application. She is a shareholder and director of the Company and therefore the requirements of s 236(1)(a) of the Act are satisfied.

Nature of Ms Li’s Application

Although Ms Li’s summons and submissions dated 19 June 2018 refer to the application as seeking leave ‘to intervene’ in a proceeding on behalf of the Company, the application proceeded on the basis that it was an application to ‘bring proceedings’ on behalf of the Company rather than to intervene. This is relevant for two reasons. As is evident from the language of s 236(1) of the Act, the right of a person to ‘intervene’ in a proceeding pursuant to s 236 of the Act can only be exercised where the relevant company is already a party to the proceeding. Further, the requirement in s 237(2)(d) of the Act, that there be a serious question to be tried, need not be satisfied where the application is properly characterised as an application for leave to intervene.[31]
[31]See s 237(2)(d) of the Act and Ehsman v Nutectime International Pty Ltd (2006) 58 ACSR 705[53]–[57] (Austin J).

Because the Company is not yet a party to the Proceeding, it follows that Ms Li therefore seeks to ‘bring proceedings’ on behalf of the Company rather than intervene. This is sought to be achieved by the joinder of the Company to the Proceeding in which Ms Li currently brings personal claims against Ms Dao and Mr Yang. As earlier observed, this approach is permissible and there is no need for an applicant to proceed by issuing a fresh proceeding,[32] and Ms Dao did not contend otherwise.
[32]Ibid [26] (Austin J).

I turn to the criteria in s 237(2) of the Act.

Section 237(2)(a) — Probable that the Company will not bring the proceedings

As observed by Palmer J in Swansson v RA Pratt Properties Pty Ltd,[33] in many cases it will be readily apparent whether it is probable that the Company will not itself bring the proceedings. If there is not a clear refusal by the Company to take specific proceedings after receipt of a properly particularised request to do so, the applicant bears the onus of establishing that actual refusal or its probability is to be inferred.
[33](2002) 42 ACSR 313 [29] (Palmer J).

Ms Dao conceded that the Company will not itself bring the proceeding and there was no issue on the point between the parties. The section requires that the Court be ‘satisfied’ of the requirement so something further should be said.[34]
[34]Ibid [28], [31] (Palmer J).

Ms Li and Ms Dao are equal shareholders and directors of the Company and it is common ground that their relationship has broken down and that the Company is deadlocked. Ms Dao is also the 100 per cent shareholder of the alleged lender, Burke Road. It is evident that it is not in Ms Dao’s interests for the claims to be brought against her. Having regard to these matters, Ms Dao’s concession, and Ms Dao’s opposition to the application, I am satisfied that it is (at least) probable that the Company will not itself bring the proceeding and that s 237(2)(a) of the Act is therefore satisfied.

Section 237(2)(b) — Applicant acting in good faith
Good faith requirement – general observations

Relevant observations that have been made in other cases regarding the good faith requirement in s 237(2)(b) of the Act include those referred to below. It may also be observed that factual circumstances relevant to the satisfaction (or otherwise) of one of the requirements in s 237(2) of the Act may also be relevant to the satisfaction (or otherwise) of the other requirements in s 237(2) of the Act. Overlap between considerations relevant to different criteria is common.

There is no elaboration in s 237 of the Act as to what matters the court should take into account when determining whether an applicant is acting in good faith. Two interrelated matters that will be taken into account are whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success, and whether the applicant is seeking to bring the derivative suit for a collateral purpose of a kind that would amount to an abuse of process.[35] The enquiry as to good faith is not limited or confined to these two factors. Further, a collateral purpose or related conduct may still be germane even if the applicant’s purpose or conduct would not constitute an abuse of process.[36]
[35]Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 [36] (Palmer J); Daiwa Can Company v Barokes Pty Ltd [2016] VSC 296 [38]–[40] (Sifris J).
[36]Chahwan v Euphoric Pty Ltd (2008) 65 ACSR 661 [82]–[83] (Tobias JA, Beazley and Bell JJA agreeing); Connective Services Pty Ltd v Slea Pty Ltd [2018] VSCA 229 [105]-[110] (Ferguson CJ, Whelan and McLeish JJA).

In Swansson, Palmer J identified a state of mind which must be found to exist in the applicant, rather than any particular means by which that state of mind is to be proved. While in some cases the presence or absence of a sworn assertion of the relevant state of mind might be important, generally speaking such statements will be of limited weight or utility and the objective facts and circumstances will speak louder than the applicant’s words.[37]
[37]Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 [33] (Brereton J); Daiwa Can Company v Barokes Pty Ltd [2016] VSC 296 [40] (Sifris J).

Where an application is made by a current shareholder who has more than a token shareholding, and the derivative action seeks recovery of property so that the value of the applicant’s shares would be increased, it has been said that good faith should be relatively easy to demonstrate.[38] So also where the applicant is a current director or officer.[39]
[38]Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 [38] (Palmer J).
[39]Ibid.

A derivative action sought to be instituted by a current shareholder for the purpose of restoring value to his or her shares may not be an abuse of process even if the applicant is spurred by personal animosity, even malice, against the defendant. It is not the law that only a plaintiff who feels goodwill towards a defendant is entitled to sue. However, an action sought to be instituted by a former shareholder with a history of grievances against the current majority of shareholders or the current board may be easier to characterise as being brought for the purpose of satisfying nothing more than the applicant’s private vendetta and therefore reveal an absence of good faith.[40]
[40]Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 [41] (Palmer J).

Where the applicant is a former shareholder or officer with nothing obvious to gain directly by the success of the derivative action the court will scrutinise with care the purpose for which the derivative action is said to be brought.[41] If an applicant for leave seeks by the derivative action to receive a benefit which, in good conscience, he or she should not receive, an application may not be made in good faith even though the company itself stands to benefit if the derivative action is successful.[42]
[41]Ibid [39] (Palmer J).
[42]Ibid [43] (Palmer J).

There is no collateral purpose in bringing an application in order to restore full value to a shareholder’s shareholding enabling it at some future point in time to realise that value as well as increasing through dividends a higher share of the profits.[43]

Ms Li and good faith

[43]Slea Pty Ltd v Connective Services Pty Ltd [2017] VSC 609 [108] (Robson J). See also Connective Services Pty Ltd v Slea Pty Ltd [2018] VSCA 229 [105]–[111] (Ferguson CJ, Whelan and McLeish JJA).

Ms Li contends that the court should be satisfied that she is acting in good faith. She submits that the relief sought will benefit both shareholders in their capacity as such, that she has a genuine and real interest as an affected shareholder which underscores that she is acting in good faith, that the declaratory relief is sought so as to reflect the true nature of the $700,000 receipt by the Company and the circumstances regarding the Alleged Loans, and that there is no sound basis for Ms Dao contending that Ms Li is acting for an improper purpose.

Ms Dao takes a different position. She submits that the application is brought for a ‘collateral purpose’ which is said to be evidenced by: the challenge to the Alleged Loans not being raised until after Burke Road commenced the Winding Up Proceeding; Ms Li knowing what she was signing; the allegations appearing to have been raised as a mechanism to oppose or delay the winding up of the Company; and the fact that a successful outcome ‘would only increase Ms Li’s expected dividend from the surplus proceeds of the sale of the Property’.

During the hearing on 23 June 2018 it was submitted that the absence of affidavit evidence from Ms Li herself regarding the circumstances in which the Loan Agreements were signed and what had transpired in relation to the Alleged Loans also supported Ms Dao’s submissions that good faith was not established by Ms Li. When it became clear that Ms Li was also seeking to rely on her affidavit affirmed on 8 March 2018 in the Winding Up Proceeding, which directly addresses what Ms Li says occurred, this submission was understandably not pressed in the same way.

Counsel for both parties correctly recognised and acknowledged that on the hearing of this application I could not and should not seek to determine the many contested issues of fact and credit that exist between the parties.

Mindful of the observations referred to in paragraphs 60 to 66 above regarding the operation of s 237(2)(b) of the Act, I am satisfied on the evidence before me that in the circumstances of the present case the good faith requirement has been met.

First, Ms Li is a current director and shareholder with a real interest in the financial position of the Company given her 50 per cent shareholding.

Second, although disputed, it is evident that the claims are directed towards enhancing or restoring the value of Ms Li’s (and therefore also Ms Dao’s) shareholding, noting also that there are said to be no other creditors of the Company. As earlier observed, bringing an application directed to restoring full value to a member’s shareholding does not of itself demonstrate a collateral purpose or undermine good faith and in this regard I echo the observations referred to in paragraphs 63, 64 and 66 above.

Third, the benefit that is sought to be gained for the Company will benefit Ms Li and Ms Dao in equal measure in their capacity as shareholders.

Fourth, it is common ground that there is a surplus of funds remaining following the sale of the Property. That surplus will increase if the claims are brought and succeed.

Fifth, Ms Li previously sought and was granted leave to intervene in the Winding Up Proceeding on behalf of the Company on the basis that the Alleged Loans were disputed, and she also sets out what she says occurred in her March and May 2018 affidavits and through the affidavit of her solicitor, Mr Zhu.

Sixth, if the Alleged Loans are ultimately determined not to be loans but capital contributions; the alleged unauthorised withdrawal of funds from the Company by Ms Dao is established; or Ms Dao is liable to the Company for breaching fiduciary duties or her duties as a director; the financial position of the Company is likely to be materially improved.[44]
[44]But note the observations below regarding the limited evidence currently before me regarding the alleged unauthorised withdrawal.

Seventh, the Proceeding is already on foot and there are existing claims[45] brought against Ms Dao and Mr Yang by Ms Li in connection with the failed venture which essentially involve much of the same substratum of facts relevant to the claims sought to be brought on behalf of the Company.
[45]And which are sought to be amended in the manner referred to in the PASOC.

Eighth, it may also be inferred from the matters referred to above, the evidence relied on by Ms Li, and her statement that she considers bringing the claims is in the best interests of the Company, that Ms Li has a genuine belief that there are good causes of action.[46]
[46]As observed in paragraph 62 above, generally speaking objective facts and circumstances will speak louder to the question of good faith and genuine belief than statements to that effect by an applicant. See footnote 37 above.

I do not accept the submission that the evidence before me establishes the existence of an impermissible or collateral purpose on the part of Ms Li that tells against good faith. The fact that Ms Li’s ‘expected dividend’ from the surplus proceeds of the sale of the Property ‘would only increase’ if the proposed claims are successful serves to detract from Ms Dao’s improper purpose submission rather than support it.

As to the submission that Ms Li knew what she was signing and belatedly raised the challenge to the Alleged Loans for an improper purpose, this submission is inconsistent with Ms Li’s as yet untested evidence but is inextricably linked to the conflicting evidence of Ms Dao and Ms Li on issues of fact involving questions of the credit of Ms Li, Ms Dao, Mr Yang, and likely others. It is not appropriate for the court to speculate about, or possible for the court to determine, such matters on this application. It is sufficient to say that having regard to the whole of the evidence before me, and particularly the evidence relied on by Ms Li and referred to earlier in these reasons, I am not persuaded that there is a sound basis for concluding on the untested evidence that Ms Dao has established the existence of the asserted improper purpose.

Section 237(2)(c) — Best interests of the Company that leave be granted
Best interests requirement – general observations

Section 237(2)(c) of the Act requires the court to be satisfied that the proposed derivative action is in the best interests of the Company, not that it may be, appears to be, or is likely to be.[47] Instructive observations that have been made regarding the operation of the ‘best interests’ requirement follow.
[47]Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 [55] (Palmer J).

The phrase ‘best interests’ directs attention to the company’s separate and independent welfare which imports the familiar concept of the interests of the company as a whole.[48] Best interests, at least assuming the company concerned is solvent, will predominantly reflect the interests of shareholders in that capacity and the fact that such shareholders may derive some collateral benefit from the bringing or otherwise of the proceedings will often be of no concern.[49]
[48]Daiwa Can Company v Barokes Pty Ltd [2016] VSC 296 [60] (Sifris J) citing Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 [44] (Brereton J). See also Ehsman v Nutectime International Pty Ltd (2006) 58 ACSR 705 [53]–[57] (Austin J).
[49]Huang v Wang (2016) 114 ACSR 586 [59] (Bathurst CJ, McColl JA and Barrett AJA agreeing).

The section requires the applicant to establish a fact which can only be determined by taking into account the relevant circumstances. This will normally require the applicant to adduce evidence regarding at least the following matters:[50] the character of the company; the business, if any, of the company so that the effects of the proposed litigation on its proper conduct may be appreciated; evidence enabling the court to form a conclusion whether the substance of the redress which the applicant seeks to achieve is available by a means which does not require the company to be brought into litigation against its will; and the ability of the defendant to meet at least a substantial part of any judgment in favour of the company in the proposed action so that the court may ascertain whether the action would be of any practical benefit to the company.
[50]Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 [56]–[60] (Palmer J).

Other matters that have been considered in the context of best interests of the company include prospects of success, the likely costs and likely recovery if the proceedings are successful, the likely consequences if the proceedings are not successful, the nature of any indemnity the applicant has offered to the company, the likelihood of the company recovering under the indemnity, the resources the company will need to devote to the proceedings and the resources it has available, and the effect that the proceedings may have on other parts of the company’s business.[51]
[51]Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd (2011) 86 ACSR 432 [57] (Ball J).

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. 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.[52] Whether or not an application under s 237 of the Act is final or interlocutory does not alter the requirement that an applicant satisfy the court on the balance of probabilities that the proceedings are in the best interests of the company.[53]
[52]Daiwa Can Company v Barokes Pty Ltd [2016] VSC 296 [61] (Sifris J) citing True Value Solar Holdings Pty Limited v Fernandez [2013] VSCA 27 [13] (Osborn JA, Neave JA and Priest JJA agreeing); Fiduciary Ltd v Morning Star Research Pty Ltd (2005) 53 ACSR 732 [15] (Austin J); Oates v Consolidated Capital Services Limited (2009) 76 NSWLR 69, 93 [119] (Campbell JA, Spigelman CJ and Allsop P agreeing).
[53]Huang v Wang (2016) 114 ACSR 586 [58] (Bathurst CJ, McColl JA and Barrett AJA agreeing).

In determining whether granting leave to an applicant is in the best interests of the company the fact that the applicant has a personal interest in the outcome of the action or the applicant has personal animus against other members of the company is not significant or decisive because this is common in the types of disputes that lead to derivative actions.[54]
[54]Robert P Austin and Ian M Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law (LexisNexis, 17^th ed, 2018) 762 [10.240.9] citing Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 (Brereton J); Ehsman v Nutectime International Pty Ltd (2006) 58 ACSR 705 (Austin J); Ragless v IPA Holdings Pty Ltd (2008) 65 ACSR 700 [55]–[60] (Debelle J, Sulan and Vanstone JJ agreeing). See also Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 [41] (Palmer J).

A proceeding to protect the interests of members as members from breaches of duty by the directors is likely to be in the best interests of a company as a whole, although that may not invariably be the position.[55]
[55]Connective Services Pty Ltd v Slea Pty Ltd [2018] VSCA 229 [120] (Ferguson CJ, Whelan and McLeish JJA) citing with approval Slea Pty Ltd v Connective Services Pty Ltd [2017] VSC 609 [159] (Robson J).

It may be in the best interests of the company to grant leave for the company to bring proceedings against shareholders where there is a deadlock and the proceeding is a suitable means by which the deadlock can be resolved.[56] Joint venture companies in which no one shareholder has a controlling interest have a real potential to become bogged down in a stalemate where shareholders cannot agree how to conduct the business of a company. A grant of leave may be a suitable means by which to resolve deadlocks of that kind.[57]
[56]Metyor Inc. v Queensland Electronic Switching Pty Ltd [2003] 1 Qd R 186 [10] (McPherson JA, Williams and Wilson JJA agreeing); Fiduciary Ltd v Morning Star Research Pty Ltd (2005) 53 ACSR 732 [47], [51] (Austin J); Ragless v IPA Holdings Pty Ltd (2008) 65 ACSR 700, 709–10 [35] (Debelle J, Sulan and Vanstone JJ agreeing); Daiwa Can Company v Barokes Pty Ltd [2016] VSC 296 [62]–[65] (Sifris J).
[57]Ragless v IPA Holdings Pty Ltd (2008) 65 ACSR 700 [35] (Debelle J, Sulan and Vanstone JJ agreeing).

If there is a common or similar substratum of facts that underlie the personal dispute in a proceeding and the dispute in respect of which the leave is sought, this may make it desirable and in the interests of a company that the subject matter be litigated concurrently.[58]
[58]Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 [51] (Brereton J).

Where a company is being wound up the question as to what is in the best interests of the company will, as a general rule, be answered by having regard to what is in the best interests of the creditors.[59] Where there are no creditors the question may then be what is in the best interests of the contributories, being the shareholders. It may often be to their advantage to resolve the issues between them and to have the assets distributed to them.[60]
[59]Charlton v Baber (2003) 47 ACSR 31 [53] (Barrett J).
[60]See Ragless v IPA Holdings Pty Ltd (2008) 65 ACSR 700 [38] (Debelle J, Sulan and Vanstone JJ agreeing).

Where the company is a joint venture vehicle and one of the venturers alleges that the other has acted unlawfully causing the company loss, it will usually be appropriate to allow the complaining venturer to bring proceedings in the company’s name against the other venturer and its representatives on the board, even though there are no shareholding interests other than those of the litigants and that the effect of success will be indirectly to benefit the complaining venturer proportionately to its shareholding.[61]

Ms Li’s application and the best interests of the Company

[61]Fiduciary Ltd v Morning Star Research Pty Ltd (2005) 53 ACSR 732 [47] (Austin J).

In substance Ms Li submitted that the grant of leave was in the best interests of the Company because:

(a) if successful, the claims would enhance the financial position of the Company because it would absolve the Company of the obligation to repay the Alleged Loans, see damages recovered by the Company against Ms Dao and/or Mr Yang, and result in the alleged unauthorised withdrawal amount being repaid to the Company;

(b) even though the financial position of Ms Dao and Mr Yang is not known, if the $700,000 receipt is determined to be a capital contribution to the venture (as Ms Li contends) and not loans from Burke Road (as Ms Dao contends), then the benefit to the Company would be material even if the defendants’ financial position turns out to be questionable;

(c) the substance of what is sought to be achieved through the Proceeding cannot be achieved by another or better means because liquidation of the Company has not yet occurred, the Winding Up Proceeding was specifically adjourned to enable this application to be heard and determined first, and even if the Company was wound up, a liquidator may not bring the proceedings;

(d) in any event, the bringing of proceedings by a liquidator would be less efficient and more costly, and the existing Proceeding is on foot and proceeding anyway;

(e) if leave is to be granted Ms Li agrees to pay the Company’s costs of the litigation and indemnify the Company in respect of adverse costs orders, and therefore the costs risk to the Company is minimal.

Ms Dao submitted that there is no utility in granting leave because the Company will ultimately be wound up and a liquidator will have full power to deal with any claims which, it was submitted, is the best course because it will allow an independent person to take control. Ms Dao also submitted that the liquidator ‘would not necessarily stymie any proposed litigation’ (emphasis added) and the same remedies should be available if the liquidator brings the proceeding as would be available to the Company if the litigation proceeded through the grant of leave in this application.

Ms Dao further submitted that I cannot be satisfied on the evidence that there is a serious question to be tried in respect of any of the claims and therefore it cannot be in the best interests of the Company to grant leave to proceed.

Conscious of the observations referred to in paragraphs 82 to 92 above regarding the operation of the ‘best interests’ requirement in s 237(2)(c) of the Act, on the evidence before me I am satisfied that the grant of leave to bring proceedings in respect of the particular claims to which I refer in the next section of these reasons is in the best interests of the Company. I elaborate below.

If the claims to be brought are successful, the financial position of the Company is likely to be enhanced in circumstances where the business of the Company has concluded, there is already a surplus of funds following the sale of the Property, and where the court has been informed that there are no other creditors of the Company.

The business of the Company will not be adversely affected. The Company’s only purpose or business was the development of the Property and that venture has been concluded unsuccessfully and the Property has been sold. It is apparent from the evidence regarding the breakdown in the relationship between the only shareholders of the Company that no new business or venture is contemplated or proposed.

Having regard to the character of the Company as just described, it is also evident that the proposed litigation will not be occupying physical, human or other resources of the Company other than the time and effort that might be required of Ms Li.

So far as the cost to the Company of the litigation is concerned, the claims that will be permitted to proceed are directed at improving the financial position of the Company in circumstances where Ms Li has informed the court that she will undertake to pay the Company’s costs of the Proceeding and indemnify the Company against adverse costs orders. Consequently, the financial risk to the Company is limited.

Next, there is a substantial existing dispute between Ms Li and Ms Dao regarding the existence or otherwise of the Alleged Loans and the proper characterisation of the $700,000 receipt by the Company. It seems likely that determination of this major dispute between Ms Li and Ms Dao through the mechanism of the Proceeding will facilitate the breaking of the deadlock that currently exists, which is in the best interests of the Company.

Further, because the Company no longer conducts a business of any kind and Ms Li and Ms Dao are its only shareholders, the best interests of the Company might, in the present circumstances, be seen to be aligned with the best interests of the shareholders in their capacity as shareholders. If that is so, it is in the interests of the shareholders, and therefore the Company, to have the substantial disputes between them resolved. It will be recalled in this regard that in her capacity as a 50 per cent shareholder Ms Dao will also benefit from any successful outcomes that flow through to the two shareholders.

Even if it were to be assumed for the purpose of argument that there were additional creditors and it is to their interests that attention should be directed, resolution of the dispute regarding the Alleged Loans is central to the financial health of the Company, and therefore the interests of such (assumed) creditors would be well served by facilitating the determination or resolution of the claims through the Proceeding.

In the circumstances of this case, I am not persuaded by the submission that the likelihood of the Company being wound up at some point in the future or near future should lead to a different conclusion. As things stand, the Company has not been wound up and the Winding Up Proceeding was adjourned to allow this application to be heard and determined first. No winding up order has been made and, at least insofar as the Winding Up Proceeding is based upon non-payment of the Alleged Loans, it is being contested.

Even if a winding up order is made in the future, it is not known when that would occur, whether a liquidator will seek to bring any or all of the claims or, if he or she was so minded, when that would occur, in what circumstances, and at what cost or risk to the Company. So much is implicitly recognised by Ms Dao’s submission that a liquidator would not ‘necessarily stymie’ the litigation.

It may also be inferred that, if circumstances have not changed, it is at least likely that any later appointed liquidator would be faced with the same allegations from Ms Li regarding the $700,000 receipt and the Alleged Loans (and the alleged unauthorised withdrawal). Although the future cannot be predicted, there are many possibilities. For example, a liquidator could decide to proceed to bring one or more of the claims in a separate proceeding which would or could involve additional time, expense and cost risks. Another possibility is that a liquidator allows or disallows a proof of debt lodged in respect of the Alleged Loans and that decision is sought to be challenged in a separate proceeding, again with time, efficiency and cost consequences. There is also a risk of inconsistent findings given that the Proceeding is on foot, involves much of the same substratum of facts, and will be proceeding in the meantime.

Further, it is not open to the court to infer on the available evidence that the commencement of proceedings by a liquidator of the same character as proposed by Ms Li would ultimately be more efficient and less costly to the Company than bringing the claims in the Proceeding.

When Ms Dao’s submission regarding the liquidation alternative is considered against the other matters I have referred to above, including facilitating the resolution of the dispute as part of an existing Proceeding where Ms Li has agreed to pay the Company’s costs and indemnify it in respect of adverse costs orders, it can be seen why the submission regarding likely liquidation does not tip the balance in the way that Ms Dao submits that it should.

Ms Dao also submitted that the court could not be satisfied on the evidence that if the claims were successful the Company would be able to recover the relevant amounts from the defendants. In response, counsel for Ms Li acknowledged that the financial position of Ms Dao and Mr Yang was not known and that the court did not have evidence before it, but also observed that neither Ms Dao nor Mr Yang had put on evidence regarding their respective inability to meet any judgment.

In these circumstances, on the evidence before me I am unable to reach a clear conclusion regarding the likelihood or otherwise of the Company ultimately being able to recover from Ms Dao or Mr Yang any amount required to be paid by one or other of them if one or more of the claims proceed and succeed. However, the personal claims are proceeding in any event and I accept Ms Li’s submission that even if the financial position of the defendants turned out to be weak, if the $700,000 receipt is determined to be a capital contribution to the venture (as Ms Li contends) and not loans from Burke Road (as Ms Dao contends) then, given the financial position of the Company referred to earlier, this will be a substantial financial benefit for the Company in any event because it will not have the same liability to repay the Alleged Loans.

It must also be remembered that the likelihood of the defendants being able to meet a judgment for a monetary amount is only one of the many circumstances to be weighed in the balance when considering the best interests of the Company.

Having regard to the matters referred to above, I am satisfied that it is in the best interests of the Company to grant Ms Li leave to bring a proceeding in respect of the claims referred to in the Introduction above and addressed in further detail in the following section of these reasons.

In respect of the claims where I have concluded below that, on the evidence currently before me, Ms Li has not discharged the onus of establishing that they raise a serious question to be tried, this matter alone leads me to conclude that Ms Li has not discharged the onus of establishing that the bringing of such claims is in the best interests of the Company. As will become apparent, this conclusion has been reached in relation to the claims relating to the alleged unauthorised withdrawal and the breach of fiduciary duty claim insofar as it is based upon the alleged uncommerciality of the interest rate and other terms of the Loan Agreements.

Section 237(2)(d) — Serious question to be tried
Serious question to be tried — general observations

Section 237(2)(d) of the Act requires that where an applicant is applying for leave to bring a proceeding on behalf of a company, it is necessary for the applicant to establish that there is a serious question to be tried.

In Swansson, Palmer J observed that the court will not normally enter into the merits of the proposed action to any great degree and that the applicant has the same relatively low threshold as in the case of an interlocutory injunction.[62] In this context Austin J observed in Ehsman v Nutectime International Pty Ltd[63] that the court does not make factual determinations concerning the case that the applicant seeks leave to bring but only considers whether there is a serious question to be tried.[64] When referring to Maher v Honeysett & Maher Electrical Contractors Pty Ltd,[65] his Honour also observed that the standard has been described as relatively low.[66]
[62]Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 [25] (Palmer J); Ehsman v Nutectime International Pty Ltd (2006) 58 ACSR 705 [58] (Austin J); Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 [19] (Brereton J).
[63](2006) 58 ACSR 705 [6] (Austin J).
[64]Ibid [6], [27] (Austin J).
[65][2005] NSWSC 859 [19] (Brereton J).
[66]Ehsman v Nutectime International Pty Ltd (2006) 58 ACSR 705 [59] (Austin J). But note that this decision was decided four weeks before the High Court handed down its reasons in Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57.

In MG Corrosion Consultants Pty Ltd v Vinciguerra,[67] it was emphasised that an application for leave pursuant to s 237 of the Act is not intended to be like a trial or determination of the issues sought to be raised in the proposed proceeding, observing also that there would be little point in the amendments to the legislation that introduced ss 236 and 237 of the Act if that was the case.
[67](2011) 82 ACSR 367 (North, McKerracher, Jagot JJ).

Middleton J in South Johnstone Mill v Dennis[68] referred to the decisions in Swansson, Ehsman[69] and Australian Broadcasting Corporation v O’Neill[70] and also observed that the requirement may be equated with that applying on an application for an interlocutory injunction, and that there is no requirement for the court to make factual determinations about contested issues.[71] His Honour noted the need for the application to be supported by evidence and also that which was said in O’Neill regarding the need to show a ‘sufficient likelihood of success at trial’ in the sense explained by Gummow and Hayne JJ.[72]
[68](2007) 163 FCR 343 [79]-[80] (Middleton J).
[69]Ehsman v Nutectime International Pty Ltd (2006) 58 ACSR 705.
[70](2006) 227 CLR 57.
[71]South Johnstone Mill v Dennis (2007) 163 FCR 343 [80] (Middleton J).
[72]Ibid [79],[81] (Middleton J).

In Ragless v IPA Holdings Pty Ltd,[73] the Full Court of the Supreme Court of South Australia made related observations regarding the parallel with the test for an interlocutory injunction and, by reference to the terms of the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 (Cth),[74] drew attention to this being the reason for the inclusion of the ‘serious question to be tried’ language in the section.
[73](2008) 65 ACSR 700.
[74](2008) 65 ACSR 700 [40] (Debelle J, Sulan and Vanstone JJ agreeing) at page 23.

In the context of a discussion of O’Neill and the reference in that case to the need for a ‘sufficient likelihood of success to justify the preservation of the status quo pending trial’, Debelle J in Ragless raised the ‘interesting question whether s 237(2)(d) requires that the applicants be able to show a sufficient likelihood of success to justify the grant of leave or merely that there is a real question to be tried that is not frivolous or vexatious’.[75] In the circumstances of that case the Court concluded that it was not necessary to determine the issue (which was not argued), noting also that if the test in O’Neill applied, the applicant in that case had a sufficient likelihood of success to justify a grant of leave.[76]
[75]Ibid [40] (Debelle J, Sulan and Vanstone JJ agreeing).
[76]Ibid [40] (Debelle J, Sulan and Vanstone JJ agreeing). This aspect was also raised by Sifris J in Daiwa Can Company v Barokes Pty Ltd [2016] VSC 296 in circumstances where it was not necessary for the issue to be resolved because his Honour found that the sufficient likelihood of success test was satisfied in any event.

Recently in this court, Robson J in Slea Pty Ltd v Connective Services Pty Ltd[77] and Kennedy J in In the matter of Innovateq Pty Ltd[78] adopted the approach taken by Middleton J.[79]
[77][2017] VSC 609 [176] (Robson J).
[78][2018] VSC 124 [79] (Kennedy J).
[79]Although the issue does not appear to have been raised by the parties in those cases. See also the observations of Sifris J in Daiwa but note that the issue was not raised on appeal from Slea Pty Ltd v Connective Services Pty Ltd [2017] VSC 609 (Robson J). See Connective Services Pty Ltd v Slea Pty Ltd [2018] VSCA 229 [124]-[129] (Ferguson CJ, Whelan and McLeish JJA).

Given that both Ms Li and Ms Dao submitted that it is the O’Neill approach that ought to be adopted,[80] and the conclusions that I have reached, it is not necessary for me to seek to resolve the question identified in Ragless. I have adopted the approach described by Middleton J in South Johnstone Mill.[81]
[80]Although no reference was made by the parties to the issue raised by Debelle J in Ragless.
[81](2007) 163 FCR 343 [79] (Middleton J).

I add that paragraph 6.46 of the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 (Cth) expressly states that the serious question to be tried test is familiar and regularly employed by the courts in the context of injunction applications and that this test ‘was preferred to the alternative of requiring the applicant to show a prima facie case’. It was further stated that it is important that the application for leave to bring proceedings is not turned into a trial of the substantive issues.[82] This appears to confirm the legislative intention to equate the requirement with that applying on an application for an interlocutory injunction in the way that Palmer J, Middleton J, and others have observed. And if that is correct, which in my respectful view it is, it necessarily leads to a consideration of that which was addressed by the High Court in O’Neill and what was there said regarding the phrase ‘serious question’.[83]

Ms Li’s application — serious question to be tried

[82]Explanatory Memorandum, Corporate Law Economic Reform Program Bill 1998, 23 [6.46].

[83]Australian Broadcasting Corp v O’Neill (2006) 227 CLR 57 [65]–[72] (Gummow and Hayne JJ, Gleeson CJ and Crennan J agreeing). In any event, the approach in South Johnstone Mill has been followed and adopted by other judges at first instance and such a conclusion cannot be regarded as ‘plainly wrong’. See Australian Securities Commission v Marlborough Gold Mines (1993) 117 CLR 485.

The parties differ in their view as to whether the criterion in s 237(2)(d) of the Act has been satisfied. Ms Li submitted that all of the claims in the PASOC sought to be made on behalf of the Company raise a serious question to be tried whereas Ms Dao submitted that none of them do.

The claims are identified in paragraph 35 above and are addressed in turn below.

Claims for breach of contract, a declaration that the Loan Agreements are void, and the claim in debt in respect of the alleged unauthorised withdrawal

As mentioned above,[84] by the conclusion of Ms Li’s reply submissions the court had been informed that the application for leave pursuant to s 237 of the Act was no longer pressed in relation to the Trident Contract Claim, the claim seeking a declaration that the Loan Agreements are void, and the claim in ‘debt’ in respect of the alleged unauthorised withdrawal.
[84]At paragraph 36.

It follows that these claims need not be considered further.

Claim for a declaration that the $700,000 receipt was a capital contribution and not a loan from Burke Road

Ms Li contends that the $700,000 received by the Company was a capital contribution to the venture by Ms Dao and not loan advances from Burke Road and she seeks leave to bring a claim on behalf of the Company for declaratory relief to that effect. Ms Dao alleges otherwise and says that the $700,000 comprised loan advances pursuant to the Loan Agreements. There is a heated contest between the parties on this issue.

The limited question I am required to address is whether, on the evidence before me, Ms Li has established that there is a serious question to be tried on the issue. I am satisfied that she has.

Ms Dao initially submitted that there was no serious question to be tried as no evidence had been filed by Ms Li to substantiate the allegation. As mentioned, when it became clear that Ms Li was also relying on her March 2018 affidavit in the Winding Up Proceeding, Ms Dao’s position was understandably recalibrated.[85] Ms Dao acknowledged that ‘there appears to be a question to be tried’[86] but contended that, having regard to the evidence, and particularly the fact that the documentary evidence including text messages had not been expressly dealt with, the question to be tried or the dispute could not be regarded as ‘serious’.
[85]At that time it was said that the point was not ‘pressed as strongly’ and that it could be put back ‘one gear’: see Transcript 71 (22 June 2018).
[86]Transcript 72 (22 June 2018).

In further written and oral submissions[87] Ms Dao attacked the nature and extent of the evidence in relation to the Trident Contract Claim, and emphasised the need for the serious question requirement to be established on the evidence. It was submitted that there was either no evidence or insufficient evidence for the court to be satisfied that there was a serious question to be tried regarding the existence of the agreement and, in any event, Trident v McNiece[88] had no application to the alleged facts and this alone was sufficient to dispose of the issue.
[87]For and at the hearing on 23 August 2018.
[88]Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107.

Although Ms Li ultimately did not press her application in relation to the Trident Contract Claim, it was largely in the context of this claim that Ms Dao’s submissions regarding the characterisation of the $700,000 receipt emerged.[89] Ms Dao submitted that there was insufficient evidence to establish that there was a serious question to be tried and the matters to which attention was drawn were: an absence of evidence from Ms Li regarding how the ‘capital contributions were to be classified’; the absence of contemporaneous documentary evidence supporting the characterisation contended for by Ms Li; that the shareholdings as revealed by the company search did not reflect the alleged capital contribution; the contention that the advance could only be share capital or a loan, and because it was not reflected in the company search, it must be a loan; and a contention that Ms Li’s characterisation did not make sense because there would be a tax burden if it was to be paid out as a dividend.
[89]Which was understandable given that it was only during Ms Li’s reply that the court was informed that the application was no longer pressed in relation to the Trident Contract Claim. Transcript 50 (23 August 2018).

Ms Li relied upon the affidavit evidence and submitted that there was sufficient evidence to establish that there was a serious question to be tried regarding the correct characterisation of the $700,000 receipt. In response to Ms Dao’s emphasis on the company search and the asserted absence of contemporaneous documents, Ms Li relied on the account given in the affidavit material and also made submissions regarding what was said to be the unsophisticated nature of the parties in the venture, that it is not unusual for ventures of the kind in question between unsophisticated parties to be marked by an absence of formality, and that the venture had commenced as an unincorporated venture with incorporation being contemplated but not occurring until nearly a year after the alleged oral agreement was entered into. It was also submitted that it was not the case that a contribution to a joint venture could only be characterised as share capital or a loan.

Although there is a contest and conflict between the parties on the evidence, there is before me as yet untested evidence relied on by Ms Li to the effect referred to in paragraphs 12 to 22 above. Without repeating all of its detail, it will be recalled that this includes evidence regarding: the apparently informal way in which the venture came about and was proceeded with; what is said to be Ms Li’s absence of experience and limited understanding; the introduction of the venture by Mr Yang and Ms Dao being his business partner; Ms Li signing the contract on 21 August 2015 and agreement being reached between Ms Li and Ms Dao that they would later set up a company to be nominated as the purchaser; Ms Li and Ms Dao having equal shares in the venture which was reflected in equal shareholdings in the Company; the venture initially proceeding in an unincorporated way; Ms Li having contributed capital of $730,000; additional funds of $700,000 being received into the Company’s bank account; Ms Li’s understanding that there would be equal contributions of capital between herself and Ms Dao and/or Mr Yang; Ms Li’s understanding that the $700,000 receipt represented the capital contribution of Ms Dao being about the same amount of capital Ms Li had earlier contributed; there never being any discussion about borrowing money from Ms Dao, Mr Yang or Burke Road, with Ms Li saying she would not have agreed to do so if asked; and Ms Li being misled regarding the Loan Agreements and signing them as a result of alleged misrepresentations.

It may also be observed that the evidence relied upon by Ms Dao does not appear to contest that Ms Li and Ms Dao intended to have (and had) equal shares in the venture or that Ms Li contributed $730,000 by way of capital.[90] Ms Dao’s evidence also does not address the apparent imbalance if Ms Li is correct that she provided $730,000 to the venture by way of capital but Ms Dao is correct that she (Ms Dao) did not.
[90]Although in answer to a question during the hearing counsel for Ms Dao appeared to accept that if Ms Dao’s contention regarding a loan was correct it would follow that Ms Li’s contribution must also be so characterised.

Further, whilst Ms Li’s account was challenged by the evidence of Ms Dao and Mr Yang, it appears that there may also be inconsistencies between Ms Dao and Mr Yang’s evidence regarding the genesis of the Alleged Loans. For example, Ms Dao’s evidence refers to the two separate loan amounts and the loans arising in different circumstances,[91] whereas Mr Yang refers to what on its face appears to be a separate and different conversation regarding the need for a loan of a single sum of $700,000.[92] Of course these differences may ultimately be readily explicable, and given the limited nature of this application it is desirable to say no more about them at this point.
[91]See paragraph 18 of Ms Dao’s 19 June 2018 affidavit.
[92]See paragraph 17 in Mr Yang’s 5 February 2018 affidavit.

Having regard to the above, and recognising the limited nature of the task before me, I do not accept Ms Dao’s submission that there is insufficient evidence before me to establish the existence of a serious question to be tried regarding the proper characterisation of the $700,000 receipt.

When weighed against the as yet untested evidence of Ms Li I am also not persuaded that the other matters raised by Ms Dao, either individually or collectively, tip the balance the other way or otherwise demonstrate that there is not a serious question to be tried.

First, although the matters raised (and other matters) may be raised or addressed by the parties at trial, this is an application for leave to proceed and is not to be addressed as though the issues are being finally determined.

Secondly, the evidence of Ms Li, Mr Yang and Ms Dao reveals a level of informality in the commencement and continuation of the venture of the kind referred to in the submissions of Ms Li.

Thirdly, there was evidence from Ms Li as to how the receipt should be classified. She says she made a capital contribution of $730,000 and she understood that the $700,000 receipt was a capital contribution to the venture by Ms Dao. Neither Ms Dao nor Mr Yang suggest in their evidence that Ms Li’s contribution was not a capital contribution to the venture.

Fourthly, it does not necessarily follow that, because shareholdings as reflected in a company search do not appear to reflect what is said by Ms Li, a lay person, to be a capital contribution, that such a contribution was not intended to be, or was not, a contribution by way of capital — and arguably all the more so when the venture is commenced as an unincorporated joint venture in the informal way in which the evidence of all parties suggest occurred in this case. It may also be noted that what Ms Li says was her capital contribution is similarly not reflected in the company search details.

Fifthly, for present purposes there is no persuasive force in the speculative contention regarding tax considerations, and there is no evidence on the point.

Sixthly, whilst it is accepted on the evidence that Ms Li has not produced on this application documentary evidence regarding the $700,000 receipt and does not directly address in her evidence the potentially ambiguous and as yet untested text messages relied on by Ms Dao, these matters do not alter my conclusion regarding a serious question to be tried given the overall effect of the evidence relied on by Ms Li and referred to above. That said, it is accepted that the matters raised may be relevant to the issues at trial, but that is for another day.

I add that when addressing the criterion of serious question to be tried in s 237(2)(d) of the Act care must be taken not to allow the task to descend into a forensic evidentiary exercise of the kind that would occur at trial rather than on an application for leave to proceed. Although sufficient evidence is required for an applicant to discharge the onus regarding the existence of a serious question to be tried, it does not follow that an applicant is required to bring forward all of the evidence that might be presented on the issue at trial or seek to address by the evidence all the questions that might conceivably be raised. Whilst gaps or weaknesses in the evidence relied upon may be able to be identified or contended for, in the end the question for the court is whether on the whole of the evidence before it there is sufficient evidence for it to be satisfied on the balance of probabilities that a serious question to be tried has been demonstrated.

Having regard to the evidence before me I am satisfied that there is a serious question to be tried regarding the proper characterisation of the $700,000 receipt.

Misleading or deceptive conduct claim

The claim in paragraphs 25 to 31 of the PASOC is described by Ms Li as a claim for damages arising out of misleading or deceptive conduct by Ms Dao and Mr Yang and is said to arise ‘from the circumstances in which [Ms Li] was induced to sign the purported loan documents from [Burke Road]’.[93] A review of the relevant parts of the PASOC reveals that the alleged misleading conduct comprises representations by Ms Dao and Mr Yang regarding the nature of the documents, the need for urgent signature, there being nothing to be concerned about, and misleading conduct by silence by failing to disclose that the documents were loan agreements from Burke Road, that Mr Yang was a director of Burke Road, and that Ms Dao was its 100 per cent shareholder.
[93]Ms Li’s further written submission at [5].

It is alleged that this conduct was relied upon and resulted in the Loan Agreements being signed, and that had this conduct not been engaged in, the Loan Agreements would not have been signed. Ms Li also confirmed during the hearing on 23 August 2018 that the claim is intended to allege that the representations were made to, and the conduct was relied upon by, Ms Li and the Company. Loss and damage is said to have been suffered by reason of any exposure to repayment and other obligations under the Loan Agreements, although it was recognised that the quantum of loss and damage may need to be further considered. It was also evident that this issue would be influenced by the success or otherwise of the primary claim regarding the proper characterisation of the $700,000 receipt.

Ms Li again relied on the affidavit evidence and particularly the evidence regarding the circumstances in which the documents were signed.

In her written submission Ms Dao contended that no evidence had been filed to substantiate the allegations, that they were not supported by the documentary evidence and, in any event, the claim must fail because there was no allegation that the Company relied on the representations, and it is not alleged that Ms Dao or Mr Yang had any obligation to inform the Company that the document was a loan agreement. During the hearing on 23 August 2018 Ms Dao also submitted that:

(a) Ms Dao has to be saying something in order to make a representation and there was no evidence that Ms Dao had said anything;

(b) there was no allegation that there was misleading conduct by silence and no evidence that there was an obligation to inform Ms Li or the Company of the position regarding the Loan Agreements;

(c) whatever evidence there was before the court was not sufficient to establish a serious question to be tried regarding the making of the representations or the engaging in misleading conduct by silence;

(d) there was no evidence that the Company relied upon the conduct and, in any event, reliance by the Company was incapable of being established because it would be necessary to show that the controlling mind of the Company relied upon the conduct and this could not be shown because of the deadlocked position of Ms Li and Ms Dao, and also because Ms Dao understood the position regarding the Loan Agreements in any event.

I am satisfied on the evidence before me that there is a serious question to be tried as to whether Mr Yang and Ms Dao engaged in misleading or deceptive conduct of the kind alleged and whether such conduct caused the Company loss and damage.[94]
[94]But recognising that the extent of loss and damage is necessarily influenced by the outcome of the primary claim regarding the characterisation of the $700,000 and, potentially, other matters.

In this regard I again refer to, without repeating, the as yet untested evidence referred to in paragraphs 12 to 22 and 133 above. It is also evident that Ms Dao knew Ms Li was a director, that Ms Li’s signature was being sought in her capacity as such in order to bind the Company and, as the documents appear to record, Ms Li signed them in her capacity as a director of the Company.[95]
[95]See exhibit “HHD-08” to Ms Dao’s 19 June 2018 affidavit at page 6.

Although acknowledging the conflict that exists on the untested evidence between the parties that cannot be resolved on this application, it follows from the above that I do not accept the submission that there is insufficient evidence to conclude that there is a serious question to be tried as to whether Ms Dao and Mr Yang engaged in misleading or deceptive conduct. I make the following further observations.

I do not accept the submission that it is necessary for direct evidence to have been presented to the effect that Ms Dao and Mr Yang had an obligation or duty to speak in order to establish a serious question to be tried regarding the alleged misleading conduct by silence. Such an obligation is often, if not typically, inferred from the relevant circumstances. In any event, given that Ms Li and Ms Dao were directors, that they and Mr Yang were all involved in the venture, that the Alleged Loans were to be between the Company and Burke Road (being a company 100 per cent owned by Ms Dao and of which Mr Yang was the sole director), and that on the evidence of Ms Dao she says that she informed Ms Li of the position, I am satisfied that there is a serious question to be tried as to the existence of an obligation or duty on the part of Ms Dao and Mr Yang to have informed Ms Li of the position.

I also do not accept the submission that there was no allegation of misleading conduct by silence. In paragraph 26 of the PASOC it is specifically alleged that Ms Li and Mr Yang failed to disclose that the document was a loan agreement and their respective roles within Burke Road, and it is expressly alleged in paragraph 30 of the PASOC that this conduct by silence forms part of the alleged misleading or deceptive conduct. This allegation is also supported by Ms Li’s as yet untested evidence that she was not informed about the Alleged Loans and that if she had been, she would not have agreed to money being borrowed from Burke Road.

To the extent that a pleading point is raised regarding an absence of an allegation in the PASOC that Ms Dao and Mr Yang were under an obligation or duty to disclose the non-disclosed matters, this can readily be addressed and does not militate against the conclusion reached on the substantive issue for consideration.

Further, even if it was to be accepted for the purpose of argument that Ms Dao cannot have made a representation without saying something (which is not correct), I do not accept the submission that there is no evidence of Ms Dao saying anything on the relevant topics to Ms Li. Paragraph 25 of the PASOC alleges in the particulars that the representations were oral and comprised statements made by Mr Yang and Ms Dao, and paragraphs 12 to 16, 29, 30, 31 and 34 of the 8 March 2018 affidavit of Ms Li, and paragraph 9 of Mr Zhu’s affidavit, refer to Ms Dao and Mr Yang making relevant statements. Whilst it is correct that in some instances this evidence employs the word ‘they’ when referring to statements said to have been made, as things stand that evidence, whilst contested, is untested. No doubt these and other matters will be raised by each of the parties at trial in relation to the contested issues of fact and credit, but the evidence is before me and it is preferable that no more be said on the topic in this application.

Insofar as it is said that no serious question can arise and/or the claim cannot succeed because it is not alleged that the Company relied upon the representations, I do not accept this submission for two reasons. First, Ms Li has confirmed that it was intended to allege, and is alleged, that the representations and conduct were made to and relied upon by both the Company and Ms Li. Secondly, even if that had not been the case, it is not the law that a person claiming damages for misleading or deceptive conduct has to have been the recipient of the representation and to have relied upon it. Whilst that might be a frequent way in which a cause of action will arise, it is not the only way.[96] Section 236 of the Australian Consumer Law is engaged where the loss and damage is suffered ‘because of’ the conduct and this requires no more than that there be a sufficient cause or direct link between the conduct and the recoverable loss or damage.[97]
[96]Eggerth v EPI International Pty Ltd [2017] FCA 1547 at [9] (Derrington J).
[97]See for example Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526 at 529-537 (Lockhart J); Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at [101] (Gummow J); McCarthy v McIntyre [1999] FCA 784 at [48]-[52] (Hill, Sackville and Katz JJ); and Eggerth v EPI International Pty Ltd [2017] FCA 1547 (Derrington J).

Further if, as Ms Li’s evidence contends, representations were made to her regarding the documents, their true nature was not disclosed, and this induced Ms Li to sign them in her capacity as a director of the Company in circumstances where she says they would not have been signed if the true position had been known, in my opinion this raises a serious question to be tried as to whether any consequent loss and damage of the Company was caused ‘because’ of the alleged misleading or deceptive conduct.

Finally, I do not accept the submission that there can be no serious question to be tried regarding the misleading conduct claim because, for the Company to have relied on the conduct, it would be necessary for the ‘controlling mind’ of the Company to have actively done so and this cannot occur in circumstances where the only officers of the Company are deadlocked, and Ms Dao knew the true position regarding the documents.

There is evidence that Ms Li signed the documents in her capacity as a director on behalf of the Company. The fact that Ms Dao, who is alleged to have misled a co-director, knew of the true position, does not detract from the fact that there is a serious question to be tried as to whether the Company relied upon or was induced by the alleged misleading or deceptive conduct through Ms Li acting upon it in her capacity as a director by signing the Loan Agreements on behalf of the Company.[98]
[98]No submission was made that if such conduct by Ms Dao was or could be conduct by her in her capacity as a director of the Company it would not be in trade or commerce. If such a submission had been made this would have raised a serious question to be tried in any event. See for example Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594; Cleary vAustralian Co-operative Foods Ltd (1999) 32 ACSR 701 at [114] (Austin J); New Cap Reinsurance Corporation Ltd v Daya (2008) 66 ACSR 95; Vanguard Financial Planners Pty Ltd v Ale (2018) 354 ALR 711 at [204]–[208] (Black J); Groeneveld Australia Pty Ltd v Nolten (No. 3) (2010) 80 ACSR 562 at [65]–[69] (Davies J).

In any event, given that Ms Dao was the 100 per cent owner of Burke Road, the alleged lender, there would also be a serious question to be tried as to whether Ms Dao’s alleged misleading or deceptive conduct was, or was capable of being, conduct of Ms Dao in her capacity as a director of the Company.

Unauthorised withdrawal

In paragraphs 32 to 36 of the PASOC it is alleged that Ms Dao withdrew $319,800 from the Company’s bank account and that this was not authorised and was not used for the purposes of the Company. It is alleged that the amount has not been repaid and Ms Dao is therefore liable in debt to the Company for that amount. It is also claimed that by making the unauthorised withdrawal Ms Dao breached fiduciary and statutory duties that she owed to the Company as a director.

As earlier noted, the court was informed during the hearing that the debt claim was not to be pressed, but that the breach of duty claims in respect of the unauthorised withdrawal are.

The only evidence that Ms Li was able to refer to was a single sentence in paragraph 38 of Ms Li’s March 2018 affidavit in the Winding Up Proceeding that reads:[99]

Anna has also unilaterally removed funds from the Defendant company account.

[99]Upon enquiry as to whether this was the only evidence able to be identified, counsel for Ms Li indicated that he thought there may be additional evidence in a further affidavit filed in the Winding Up Proceeding and therefore an opportunity was provided for this to be considered further and for an application to be made. The court was informed during Ms Li’s reply submissions that no application was to be made in respect of further evidence on the point.

Ms Dao submitted that I could not be satisfied that Ms Li had discharged the onus of establishing a serious question to be tried regarding the alleged unauthorised withdrawal of $319,800.

I accept that submission.

Notwithstanding that the onus is on Ms Li to establish on the evidence that there is a serious question to be tried, there was no evidence before me as to when the amount is said to have been withdrawn,[100] by what means, in what amount or amounts, how it came to be withdrawn, or what it has or may have been used for. There is also no documentary evidence and the court and Ms Dao can only speculate about many relevant matters. Whilst it may be the case that there is an issue of this kind between the parties, I am not satisfied on the evidence currently before me that Ms Li has discharged her onus of establishing that there is a serious question to be tried regarding the alleged unauthorised withdrawal.

Breach of fiduciary duties and breach of statutory duties

[100]It is pleaded that it was withdrawn in November 2016.

In paragraphs 37 to 42 of the PASOC Ms Li alleges that by reason of the conduct referred to in paragraphs 25 to 36 of the PASOC Ms Dao breached:

(a) fiduciary duties by putting herself in a position of conflict between her own interests and the interests of the Company and by making an unauthorised profit by reason of her position as a director of the Company; and

(b) directors’ duties under the Act by: failing to act in good faith in the best interests of the Company; failing to act for a proper purpose; and by improperly using her position as a director of the Company to gain an advantage for herself.

The collective references to the conduct in paragraphs 25 to 36 of the PASOC result in the claim as currently drafted being a little opaque. Looking to the substance of the matter it can be seen that the conduct referred to includes making the alleged unauthorised withdrawal, engaging in the conduct that is said to constitute misleading or deceptive conduct, and causing the Company to execute the documents comprising the Loan Agreements.

The particulars of the alleged breach of fiduciary duty arguably sit in tension with the earlier reference to the broader conduct (being the conduct referred to in paragraphs 25 to 36 of the PASOC) because the particulars refer to narrower breaches of fiduciary duty arising by reason of Ms Dao’s 100 per cent shareholding in Burke Road, her position as a director of the Company, and the fact that the terms of the loan, including its rate of interest, were not at market rates and were disadvantageous to the Company. However, it is clear enough from the submissions that the particulars are not intended to detract from reliance also on the broader conduct.

Ms Dao relied on the submissions that she had made with respect to the unauthorised withdrawal and misleading conduct allegations, in effect submitting that because (as she contended) it had not been established on the evidence that there is a serious question to be tried with respect to those claims, it cannot be successfully contended that there is a serious question to be tried that the fiduciary duties and the directors’ duties were breached by engaging in such conduct. She submitted further that there was no evidence at all regarding the alleged uncommerciality of the interest rate and terms of the Loan Agreements and therefore this allegation did not raise a serious question to be tried.

Ms Li similarly relied on the submissions and evidence she had relied on with respect to the underlying conduct claims and also confirmed that part of the conduct relied upon was the entry into the Loan Agreements, irrespective of the commerciality of their terms. With respect to the question of the terms and interest rates, Ms Li was not able to point to any evidence on the issue. She also properly acknowledged that the calculation of loss may have greater complexity than is currently reflected in the PASOC.

I have already concluded that on the evidence before me Ms Li has not established that there is a serious question to be tried regarding the unauthorised withdrawal. It follows that she has not established on the evidence that there is a serious question to be tried as to whether Ms Dao breached fiduciary duties or directors’ duties by making the alleged unauthorised withdrawal.

I accept that there is no direct evidence before me regarding the ‘commerciality’ or otherwise of the interest rate and loan terms for a loan of the character referred to in the Loan Agreements and accept the submission that Ms Li has not established a serious question to be tried regarding a breach of fiduciary duty in relation to the ‘commerciality’ or otherwise of the terms of the Loan Agreements.

Insofar as the breach of fiduciary duty and breach of directors duty claims are based upon the alleged misleading conduct and the execution of the Loan Agreements on behalf of the Company, Ms Li has established that there is a serious question to be tried. In this regard I refer to the evidence and observations made above regarding these underlying claims,[101] and Ms Dao’s position as a director of the Company and her separate and distinct financial and other interests as a result of being the 100 per cent shareholder of the alleged lender, Burke Road. There is a serious question to be tried as to whether Ms Dao breached the alleged fiduciary and statutory duties and caused loss to the Company by reason of making representations regarding the nature of the documents, and/or not informing Ms Li about the Alleged Loans, the character of the documents, or Ms Li’s ownership of Burke Road and Mr Yang’s position as director.

Section 237(2)(e) — 14-Day notice requirement

[101]See paragraphs 127 to 161 above.

Section 237(2)(e) of the Act requires an applicant to satisfy the court that either at least 14 days’ notice was given (before making the application) of the intention to apply for leave and of the reasons for applying, or that it is appropriate to grant leave even though notice of the kind referred to was not given.

Ms Li submits that the notice requirement is satisfied because, so it is said, in addition to filing the summons on 1 June 2018 Ms Li engaged in ‘significant correspondence’ with the defendant about her intention to seek leave to file a proposed amended statement of claim and proceed.

Ms Dao submits that the required notice was not given but expressly concedes that if the court is satisfied that the remaining criteria in s 237(2) of the Act have been satisfied then it is appropriate for s 237(2)(e)(ii) to be relied upon and for leave to be granted.

Whilst it is possible that the required notice has been given as a result of the ‘significant’ exchange of correspondence, that material is not in evidence before me and I cannot be satisfied that the notice requirement has been met. However, I am satisfied that it is appropriate to grant leave notwithstanding this position. The evidence reveals that both parties have been aware of the issue for a considerable period, that it has been relevant in the context of the Winding Up Proceeding, that the application was filed some time ago, that submissions and evidence were provided by Ms Li well in advance of the application being heard, and it is not suggested by Ms Dao that the failure to provide notice of the kind contemplated in s 237(2)(e) has caused prejudice to Ms Dao. Further, Ms Dao concedes that any failure to comply with the notice requirement ought not to stand in the way of the application. This was a proper and responsible concession to make. Section 237(2)(e)(ii) has been satisfied.[102]

Sections 241 and 242 — General powers of the court and power to make costs orders

[102]I add that this conclusion does not involve an impermissible exercise of discretion pursuant to s 237 of the Act. This is because, unlike the other criteria in s 237(2) of the Act, s 237(2)(e) expressly contemplates and provides for the exercise of a judicial discretion in circumstances where the 14-day notice requirement has not been established.

Section 241 of the Act provides the court with broad powers in connection with leave or intervention applications and proceedings brought or intervened in with leave. This includes the power to make any orders and give any directions it considers appropriate in relation to an application for leave, including directions about the conduct of the proceedings.[103]
[103]Section 241(1) of the Act.

Pursuant to s 242 of the Act the court may at any time make any orders it considers appropriate about the costs of the person who applied for or was granted leave, the Company, and any other party to the proceedings or application. An order under this section may require indemnification for costs.[104]
[104]Section 242 of the Act.

Where a company is essentially a vehicle to pursue the commercial interests of parties who are at odds with one another and the bringing of the derivative claim is opposed, or where a plaintiff wishes to combine derivative claims with personal claims largely arising out of the same facts, it may be appropriate to require the plaintiff to indemnify the Company in respect of costs it may incur.[105]
[105]Ehsman v Nutectime International Pty Ltd (2006) 58 ACSR 705 [61] (Austin J).

In the present case Ms Li has indicated that she will undertake to pay the Company’s costs of bringing the proceeding and indemnify the Company in respect of any adverse costs orders and this was a consideration material to the satisfaction of the good faith and best interests of the Company requirements. That being so, and subject to an appropriate undertaking being given, it is not necessary to make an order of the character made by Austin J in Ehsman.[106]
[106]See, for example, ibid [61]–[65] (Austin J).

It is proposed that the undertaking be qualified by being made subject to further order so that it does not apply to any costs order later made by the court that is intended to override the effect of the undertaking. As observed by Austin J in Ehsman, the main purpose of such a qualification is to enable the trial judge to make such orders as to costs as he or she thinks appropriate after the final hearing, and may also be useful to allow the court to override the undertaking in circumstances not presently foreseeable.[107]
[107]Ibid [62] (Austin J).

ADDING THE COMPANY AND BURKE ROAD AS PARTIES AND AMENDMENT

Because leave is to be granted to Ms Li pursuant to s 237 of the Act to bring the proceeding on behalf of the Company, and keeping in mind the observations referred to in paragraphs 46 to 49 above, and the operation of s 236(2) of the Act, it is appropriate to order that the Company be joined as a plaintiff in the Proceeding.

Similarly, because of the operation of s 236(2) of the Act, the matters earlier mentioned, and the declaratory relief sought directly affects the rights of Burke Road, it is appropriate to order that it be joined as a defendant to the Proceeding. Burke Road’s joinder will be without prejudice to all of its rights.

Ms Li has indicated that the PASOC is to be further refined, which would have needed to occur in any event to take into account these reasons.

CONCLUSION

Subject to Ms Li giving the undertaking to the court regarding the Company’s costs and any adverse costs orders, and addressing the precise form of the orders with the parties, it is proposed that leave will be granted to Ms Li pursuant to s 237 of the Act to bring a proceeding on behalf of the Company in respect of the claims for declaratory relief, and for the claims for damages or other relief in respect of the alleged misleading or deceptive conduct and alleged breaches of fiduciary duty and directors’ duties referred to in these reasons. Leave will also be granted to join the Company and Burke Road as the second plaintiff and third defendant respectively.

Following the giving of the undertaking by Ms Li it is proposed to make orders to the following effect:

(a) Leave is granted to the plaintiff pursuant to s 237 of the Corporations Act 2001 (Cth) to bring proceedings on behalf of and in the name of Colourful Kew Pty Ltd (ACN 613 896 245) against the first defendant, the second defendant and Burke Road Developments Pty Ltd (ACN 608 635 230) in respect of the claims and causes of action identified in paragraphs 127 to 145, 146 to 161, and 168 to 175 of these reasons and seeking all or any appropriate remedies.

(b) Colourful Kew Pty Ltd (ACN 613 896 245) be joined as the second plaintiff to this proceeding.

(c) Burke Road Developments Pty Ltd (ACN 608 635 230) be joined as the third defendant to this proceeding.

(d) The plaintiff’s application by summons filed 25 May 2018 is otherwise dismissed.

(e) The originating process be amended to reflect the joinder of the parties referred to in orders (b) and (c).

(f) By a date to be fixed the plaintiffs file and serve an amended statement of claim incorporating the claims and causes of action referred to in order (a).

(g) By a date to be fixed the defendants file and serve their defence to the amended statement of claim.

[2018] VSC 530

14 September 2018