Malacca Nominees Pty Ltd v Morrone
[2006] WASC 226
MALACCA NOMINEES PTY LTD -v- MORRONE [2006] WASC 226
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2006] WASC 226 | |
| Case No: | CIV:1233/2003 | 15, 18, 21 & 22 SEPTEMBER 2006 | |
| Coram: | EM HEENAN J | 22/09/06 | |
| 22 | Judgment Part: | 1 of 1 | |
| Result: | Leave for plaintiff to bring derivative action in name of Newkey Investments Pty Ltd Leave for Newkey Investments Pty Ltd to be joined as co-plaintiff Leave for plaintiff to amend the statement of claim in terms of the minute of amended statement of claim dated 15 September 2006 | ||
| B | |||
| PDF Version |
| Parties: | MALACCA NOMINEES PTY LTD CHARLES JOSEPH MORRONE |
Catchwords: | Corporations Derivative action Application for leave to bring Proceedings on foot Plaintiff and defendant 50 per cent shareholders in company Allegation of partnership agreement Allegation of breach of contract and breach of fiduciary duty Shareholder unable to vindicate rights owed to company Joinder of company as co-plaintiff sought Application for leave to amend statement of claim Proposed pleading alleges breach of shareholder agreement and breach of duty owed to company Company controlled by defendant Not probable company will bring proceedings Whether applicant is acting in good faith Benefit to shareholder from successful outcome of proceedings a proper motivation Whether in best interests of company to bring proceedings Whether serious question to be tried Whether defendant director owed duty to plaintiff shareholder Availability of limitation defence Necessity to plead limitation defence Application of Limitation Act 1938 (WA) s 38 to action for breach of fiduciary duty Possible application of Limitation Act to cause of action by analogy Possible equitable answers to limitation defence Whether appropriate to grant leave notwithstanding 14 days notice not given Company on notice No immediate prejudice suggested Whether Corporations Act s 237 criteria satisfied Leave granted |
Legislation: | Corporations Act 2001 (Cth) Limitation Act 1935 (WA) |
Case References: | Brunninghausen v Glavanics [1999] NSWCA 199; (1999) 46 NSWLR 538 Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 1007; (2004) 51 ACSR 299 Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31 Coulthard v Disco Mix Club Ltd [2000] 1 WLR 707 Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732 Glavanics v Brunninghausen (1996) 19 ACSR 204 Kamper v Applied Soil Technology Pty Ltd [2004] NSWSC 891; (2004) 50 ACSR 734 Knox v Gye (1872) LR 5 HL 656 Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 19 ACSR 483 Morgan v Banning (1999) 20 WAR 474 State of Western Australia v Wardley Australia Ltd (1991) 30 FCR 245 Swansson v R A Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 The Crown v McNeil (1922) 31 CLR 76 Thomas v D'Arcy [2005] QCA 68; [2005] 1 Qd R 666 Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 Advent Investors Pty Ltd v Goldhirsch [2001] VSC 59; (2001) 37 ACSR 529 Barton v North Staffordshire Railway Co (1888) 38 Ch D 458 Benjamin Corp Pty Ltd v Smith Martis Cork & Rajan Pty Ltd [2003] FCA 1471 Bridge Shipping Pty Ltd v Grand Shipping SA (1991) 173 CLR 231 Brightwell v RFB Holdings Pty Ltd (in liq) [2003] NSWSC 7; (2003) 44 ACSR 186 Chan v Zacharia (1984) 154 CLR 178 Chapman v E-Sports Club Worldwide [2000] VSC 403; (2000) 35 ACSR 462 Coleman v Myers [1977] 2 NZLR 225 Gemstone Corporation of Australia Ltd v Grasso (1994) 62 SASR 239 Goozee v Graphic World Group Holdings Pty Ltd [2002] NSWSC 640; (2002) 42 ACSR 534 Gould v Vaggelas (1985) 157 CLR 215 Green & Clara Pty Ltd v Bestobel Industries Pty Ltd [1982] WAR 1 Herbert v Redemption Investments Pty Ltd [2002] QSC 340 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Johnson v Gore Wood & Co (a Firm) [2000] UKHL 65; [2002] 2 AC 1 Karam v Australia & New Zealand Banking Group Ltd [2000] NSWSC 596; (2000) 18 ACLC 590 Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25; (1999) 199 CLR 413 Keyrate Pty Ltd v Harmarc Pty Ltd [2001] NSWSC 491; (2001) 38 ACSR 396 Metyor Inc v Queensland Electronic Switching Pty Ltd [2002] QCA 269; [2003] 1 Qd R 186 Natural Extracts Pty Ltd v Stotter (1997) 24 ACSR 10 Re a Company (No 00709 of 1992); O'Neill v Phillips [1999] 1 WLR 1092 Re Auschess Pty Ltd; Nestegg Holdings Pty Ltd v Smith [2001] WASC 227 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 SEA Food International Pty Ltd v Lam (1998) 16 ACLC 552 State of Queensland v JL Holdings Pty Ltd [1997] HCA 1; (1997) 189 CLR 146 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
- Plaintiff
AND
CHARLES JOSEPH MORRONE
Defendant
Catchwords:
Corporations - Derivative action - Application for leave to bring - Proceedings on foot - Plaintiff and defendant 50 per cent shareholders in company - Allegation of partnership agreement - Allegation of breach of contract and breach of fiduciary duty - Shareholder unable to vindicate rights owed to company - Joinder of company as co-plaintiff sought - Application for leave to amend statement of claim - Proposed pleading alleges breach of shareholder agreement and breach of duty owed to company - Company controlled by defendant - Not probable company will bring proceedings - Whether applicant is acting in good faith - Benefit to shareholder from successful outcome of proceedings a proper motivation - Whether in best interests of company to bring proceedings - Whether serious question to be tried - Whether defendant director owed duty to plaintiff shareholder - Availability of limitation defence - Necessity to plead limitation defence - Application of Limitation Act 1938 (WA) s 38 to action for breach of fiduciary duty - Possible application of Limitation
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Act to cause of action by analogy - Possible equitable answers to limitation defence - Whether appropriate to grant leave notwithstanding 14 days notice not given - Company on notice - No immediate prejudice suggested - Whether Corporations Act s 237 criteria satisfied - Leave granted
Legislation:
Corporations Act 2001 (Cth)
Limitation Act 1935 (WA)
Result:
Leave for plaintiff to bring derivative action in name of Newkey Investments Pty Ltd
Leave for Newkey Investments Pty Ltd to be joined as co-plaintiff
Leave for plaintiff to amend the statement of claim in terms of the minute of amended statement of claim dated 15 September 2006
Category: B
Representation:
Counsel:
Plaintiff : Mr A O Karstaedt & Mr H R Robinson
Defendant : Mr P Mendelow
Solicitors:
Plaintiff : Haydn Robinson
Defendant : Bowen Buchbinder Vilensky
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Case(s) referred to in judgment(s):
Brunninghausen v Glavanics [1999] NSWCA 199; (1999) 46 NSWLR 538
Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 1007; (2004) 51 ACSR 299
Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31
Coulthard v Disco Mix Club Ltd [2000] 1 WLR 707
Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732
Glavanics v Brunninghausen (1996) 19 ACSR 204
Kamper v Applied Soil Technology Pty Ltd [2004] NSWSC 891; (2004) 50 ACSR 734
Knox v Gye (1872) LR 5 HL 656
Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 19 ACSR 483
Morgan v Banning (1999) 20 WAR 474
State of Western Australia v Wardley Australia Ltd (1991) 30 FCR 245
Swansson v R A Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313
The Crown v McNeil (1922) 31 CLR 76
Thomas v D'Arcy [2005] QCA 68; [2005] 1 Qd R 666
Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514
Case(s) also cited:
Advent Investors Pty Ltd v Goldhirsch [2001] VSC 59; (2001) 37 ACSR 529
Barton v North Staffordshire Railway Co (1888) 38 Ch D 458
Benjamin Corp Pty Ltd v Smith Martis Cork & Rajan Pty Ltd [2003] FCA 1471
Bridge Shipping Pty Ltd v Grand Shipping SA (1991) 173 CLR 231
Brightwell v RFB Holdings Pty Ltd (in liq) [2003] NSWSC 7; (2003) 44 ACSR 186
Chan v Zacharia (1984) 154 CLR 178
Chapman v E-Sports Club Worldwide [2000] VSC 403; (2000) 35 ACSR 462
Coleman v Myers [1977] 2 NZLR 225
Gemstone Corporation of Australia Ltd v Grasso (1994) 62 SASR 239
Goozee v Graphic World Group Holdings Pty Ltd [2002] NSWSC 640; (2002) 42 ACSR 534
Gould v Vaggelas (1985) 157 CLR 215
Green & Clara Pty Ltd v Bestobel Industries Pty Ltd [1982] WAR 1
Herbert v Redemption Investments Pty Ltd [2002] QSC 340
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
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Johnson v Gore Wood & Co (a Firm) [2000] UKHL 65; [2002] 2 AC 1
Karam v Australia & New Zealand Banking Group Ltd [2000] NSWSC 596; (2000) 18 ACLC 590
Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25; (1999) 199 CLR 413
Keyrate Pty Ltd v Harmarc Pty Ltd [2001] NSWSC 491; (2001) 38 ACSR 396
Metyor Inc v Queensland Electronic Switching Pty Ltd [2002] QCA 269; [2003] 1 Qd R 186
Natural Extracts Pty Ltd v Stotter (1997) 24 ACSR 10
Re a Company (No 00709 of 1992); O'Neill v Phillips [1999] 1 WLR 1092
Re Auschess Pty Ltd; Nestegg Holdings Pty Ltd v Smith [2001] WASC 227
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
SEA Food International Pty Ltd v Lam (1998) 16 ACLC 552
State of Queensland v JL Holdings Pty Ltd [1997] HCA 1; (1997) 189 CLR 146
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107
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1 EM HEENAN J: Since this action was called on for trial on Friday 15 September, I have been dealing on several occasions with applications by the parties to deal with preliminary matters. I adverted to these briefly in the oral reasons which I announced on Monday 18 September but it is perhaps appropriate to recapitulate to some degree.
2 This action presently between Malacca Nominees Pty Ltd and Mr Charles Joseph Morrone came to trial on the basis of a set of pleadings comprising a Statement of Claim of 15 May 2003, a Substituted Defence of 21 April 2005 and a Reply to Substituted Defence dated 1 December 2005.
3 Essentially, what the plaintiff alleged, in those pleadings, was that there was a partnership between itself and the defendant for the conduct of real estate business and that in breach of the express or implied terms of that partnership agreement, the defendant failed to devote the whole or a substantial part of his time to the partnership business as alleged in par 9, breached certain fiduciary duties owed to the plaintiff as alleged in par 10, did not render true accounts or provide full information to the plaintiff as alleged in par 11; failed to account to the plaintiff for benefits derived by him from transactions concerning the partnership as alleged in par 12; and, finally, that the defendant in breach of s 41 of the Partnership Act carried on a business of the same nature in competition with that of the partnership business.
4 Each of those various allegations of breach of fiduciary duty relates to a series of transactions particularised in par 9 of the existing statement of claim which, essentially, relate to five transactions in which it is alleged that the defendant obtained remuneration directly or indirectly, by commission or other reward, for acting in real estate or real estate related transactions without disclosing the performance of those transactions or the remuneration earned to the plaintiff or accounting for them. The substance of all the allegations being made is that the defendant was engaged in a series of transactions by which he derived a profit for which he should have accounted to the partnership.
5 The defence, as it stood and still stands, denies the existence of the alleged or any partnership and pleads instead that the plaintiff was a company controlled by Mr Ross and that negotiations were opened between Mr Ross on behalf of Malacca and the defendant which led to an agreement for the plaintiff to invest in another company, Newkey Investments Pty Ltd, which was to be owned and controlled equally by
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- Ross, via Malacca, and by Mr Morrone personally and that it would be Newkey which conducted the proposed real estate business.
6 That is not a fully adequate description of the defence propounded because the defence goes on to deal with exactly how the shareholding in Newkey was held and the type of business activities or ventures which were to be conducted by it, and also asserts that at the time that this commercial arrangement, the one which the defendant, as distinct from the plaintiff, propounds was agreed, there was disclosure by Mr Morrone to Mr Ross, Malacca and Newkey that Morrone, through a company which he controlled, Royal International (WA) Pty Ltd, had been carrying on and intended to carry on real estate development activities.
7 The defendant in his pleading and in the submissions which have been made to me throughout the course of the applications, which I will soon describe, obviously seeks to make an important distinction between the "real estate development activities" to be conducted or continued by Royal International (WA) Pty Ltd and the "real estate activities" which were agreed to be conducted through Newkey.
8 I will leave aside for the present whether that is a real distinction and what the difference, if any, is that exists between those two types of business. But that is only part of Mr Morrone's explanation because, in his defence, he also asserts that the continuation of the proposed real estate development activities through Royal International (WA) Pty Ltd was expressly accepted and agreed upon by Mr Ross and Malacca at the time they entered into these commercial arrangements together, and that the activities of Mr Morrone, either alone or through Royal International (WA) Pty Ltd, in conducting the other business alleged in par 9 of the statement of claim and in taking the remuneration associated with that work was therefore entirely legitimate and gave rise to no obligation to account either to Malacca or to Newkey.
9 When the case was called on for trial, Malacca propounded a substantial amendment to the statement of claim to allege that initially in addition to (as the argument progressed, it became more and more evident that it was intended to be in substitution for) the original claim for partnership, there was a "shareholders' agreement", as it was termed, between Malacca Nominees Pty Ltd and Mr Morrone which arose from the fact that Newkey was, in effect, a two-man company controlled equally by Morrone on the one hand and Malacca on the other, of which Ross was the sole owner and controller, and that Ross and Morrone were the two directors and that it was run in such a way that the benefit of any
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- profits would be distributed equally to the two shareholders either as dividends or by wages or salaries paid to the directors, and that because of the closeness of the association and the way in which the business relationship had become established, the usual rule that a director of a company owes no duties of a fiduciary nature to the shareholders (excluding special statutory duties or special contractual duties or the kind of duties which can arise if the company is passing through a crisis such as an imminent insolvency) did not apply and that, by virtue of this proposed "shareholders' agreement" there were fiduciary duties and/or contractual duties owed by Morrone to Malacca which meant that the remuneration derived by Mr Morrone through his activities of a "real estate development" character carried with them an obligation for him to account to Newkey, and that his failure to do so rendered him liable in damages to Malacca.
10 That application to amend was opposed by counsel for Mr Morrone, not surprisingly, and in the course of the objections to the proposed amendment, Mr Morrone's counsel and solicitors pointed out, as one would naturally expect them to do, that other than in unusual circumstances the appropriate plaintiff for the vindication of the alleged failure to account should be the company, Newkey itself, and that circumstances had not been shown or alleged by Malacca which would give rise to the kind of quasi-partnership or to extended fiduciary duties which are recognised in some of the authorities - for example, the decision of Bryson J in Glavanics v Brunninghausen (1996) 19 ACSR 204, referred to by Young J in Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 19 ACSR 483 particularly at 492 and 493, affirmed by the New South Wales Court of Appeal in Brunninghausen v Glavanics [1999] NSWCA 199; (1999) 46 NSWLR 538.
11 At that stage I adjourned the proceedings to allow the plaintiff to give further consideration to the proposed amendment to the statement of claim and whether or not to seek to join any other party. The result was that renewed applications were initiated by the plaintiff of which two are significant.
12 The first significant application was an application for leave under s 237 of the Corporations Law for Malacca Nominees Pty Ltd to bring derivative proceedings on behalf of the company Newkey and for Newkey to be joined to allow that to be done.
13 The second application proceeded on the expectation or hope that leave would be granted for Newkey to be joined and for Malacca to sue in
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- its name. It involved a further extensive amendment to the proposed statement of claim which not only had Newkey Investments Pty Ltd as a second co-plaintiff but pleaded a different variety of the shareholders' agreement that had been the subject of the first application to amend the statement of claim.
14 The version of the new pleading to be advanced is set out in a minute of proposed pleading dated 18 September 2006, a copy of which is annexed to an affidavit of Mr Ross sworn that same date. I have been hearing submissions by both parties since then on whether or not leave should be granted under s 237 and if so, whether the statement of claim should be amended as proposed in this new minute.
15 There is a certain interdependence between those two applications because the question of whether or not leave should be granted depends to some extent upon whether or not it is in the interests of the company to bring the proposed proceedings. That question in turn depends upon the nature of the proposed proceedings and their prospects of success or at least arguability. Any assessment of either of those matters inevitably involves some scrutiny of the proposed statement of claim.
16 I shall defer for the moment a description of the details of the application for leave for Malacca to sue on behalf of Newkey and go straight to the details of the proposed amended statement of claim because they have prompted a number of objections by counsel for the defendant, which objections are secondary to his main submission that compliance with the statutory tests for the grant of leave under s 237 has not been demonstrated in the first place.
17 Of these objections to the proposed statement of claim, I am satisfied that some are justified. In relation to par 4, counsel for the defendant submitted, and I accepted, that the description "particulars" heading part of par 4(a) - (d) inclusive was inappropriate because those paragraphs contained material allegations of fact which are essential parts of the pleading and to which the defendant would need, and wished, to respond. That difficulty was easily overcome by deleting the word "particulars" and letting the subpars (a) to (d) stand as parts of the principal paragraph.
18 Other objections were made which I rejected in the course of oral argument and which I need not describe. There was then objection by counsel for the defendant to the pleas in the claims for relief by each of the proposed plaintiffs for exemplary or aggravated damages. The basis of the objection was that no facts or circumstances were alleged in the
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- body of the pleading which would assert, let alone qualify for, an award of aggravated or exemplary damages, and that even if one were to put to one side the question of whether or not aggravated or exemplary damages were available for the kind of breach of duty of which the plaintiff wishes to complain, there is simply nothing in the body of the document which would generate such a plea.
19 I am satisfied that this objection is well made and, after discussing the matter with counsel for the applicant, I have indicated that the words "aggravated" or "exemplary" in par 4 of the first plaintiff's claim for relief and in par 5 of the second plaintiff's claim for relief must come out. I, therefore, treat the proposed amended statement of claim as having been modified in the manner which I have just described.
20 That now brings me to the question of the application for leave for Malacca to sue in the name of Newkey. Section 236(1) of the Corporations Act (2001) (Cth) provides:
"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."
22 The next question is whether the applicant is a person acting with leave granted under s 237 and that, as I have already said, is the
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- application before the court. The criteria for granting the leave is set out in s 237(2):
"(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."
24 I return to the statutory text. Section 237(3) provides:
"(3) A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that:
- (a) the proceedings are:
(i) by the company against a third party; or
(ii) by a third party against the company; and
(b) the company has decided:
(i) not to bring the proceedings; or
(ii) not to defend the proceedings; or
(iii) to discontinue, settle or compromise the proceedings; and
- (c) all of the directors who participated in that decision:
(i) acted in good faith for a proper purpose; and
(ii) did not have a material personal interest in the decision; and
(iii) informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and
(iv) rationally believed that the decision was in the best interests of the company.
- The director's belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold."
25 A person is a third party for the purposes of subs (3) if the company is not a public company and a person would not be a related party of the company if the company were a public company.
26 I am satisfied in this case that the rebuttable presumptions referred to by s 237(3) do not apply in the present case, first of all because the proposed defendant Mr Morrone is not a third party; secondly, because there is no evidence that the party has formally decided not to bring the proceedings or to pursue them. Nor is there any evidence that all of the directors who participated in the decision acted in good faith or otherwise as required by the section.
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27 So, one comes back to the five statutory criteria. At this point I divert to refer to the substantial body of jurisprudence which has developed in discussing and analysing these requirements. There is a very comprehensive discussion of the principles by Barrett J in Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31. The matter is also discussed and the principles tabulated in the decision of Einstein J in Kamper v Applied Soil Technology Pty Ltd [2004] NSWSC 891; (2004) 50 ACSR 734, again by Barrett J in Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 1007; (2004) 51 ACSR 299, by Austin J in Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732, Glavanics v Brunninghausen, already cited, and in the decision of the Court of Appeal of Queensland in Thomas v D'Arcy [2005] QCA 68; [2005] 1 Qd R 666.
28 I turn now to the particular criteria. The first criterion again is whether or not it is probable that a company will bring the proceedings itself or properly take responsibility for them. The agreed position of the parties is that the company, Newkey Investments Pty Ltd, is presently controlled, or at least its board of directors is controlled, by Mr Morrone alone and that there is no prospect of Mr Morrone initiating or pursuing proceedings of this nature against himself. I accept that to be the position and I am satisfied that this first criterion is fulfilled.
29 I will skip to the last of the criteria, in s 237(2)(e), about the question of timing. There is no evidence of any kind that the applicant has given written notice to the company of intention to apply for leave or of the reasons for applying. However, this application has now been before the court for most of this week; there have been several adjourned applications and Mr Morrone has been represented by counsel. No application has been made by Newkey Investments Pty Ltd to intervene or to be heard and I cannot conceive of the possibility that, through Mr Morrone, Newkey Investments Pty Ltd has not been apprised of this application. As no immediate consequences are likely to follow from an order being made - when I say "immediate", consequences which may redound to the prejudice of Newkey - within a period of 14 days, it seems to me that it is appropriate to consider the grant of leave even though the requisite 14 days' notice has not been satisfied.
30 That leaves the three criteria: (b) whether or not the applicant is acting in good faith, (c) whether or not 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 whether there is a serious question to be tried.
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31 On the question of good faith, I pause simply to make explicit reference again to the discussion of the principles of the elements of the test for good faith in this setting which were addressed and described by Barrett J in Charlton v Baber (supra). That discussion, which I respectfully adopt and apply, is to be found in pars 40 to 43 of that report.
32 So far as the applicant is concerned, I am satisfied that the reason for bringing the application and for pursuing the claim, if leave were to be granted, is an attempt to vindicate the interests of Newkey Investments Pty Ltd and to reclaim for Newkey the benefits of commercial opportunities for which the defendant, if the facts be proved, should have accounted to Newkey. I see nothing discreditable, collateral or improper about that motivation, and the fact that achievement of that purpose will, hopefully, redound to the benefit of Malacca, being a 50 per cent shareholder in Newkey, does not in any way negate the legitimacy of that purpose or demonstrate an absence of good faith. For that reason I am satisfied that the second criterion in s 237(2)(b) is satisfied.
33 The third question is whether or not it is in the best interests of the company that the applicant be granted leave. Again, I refer to the discussion of this criterion by Barrett J in Charlton v Baber (supra), this time at par 45 and following, where his Honour adopted the test pursued by Palmer J in Swansson v R A Pratt (supra) which I have already mentioned. In that case; namely Swansson v Pratt, Palmer J said at par 24:
"It is clearly the intent of Part 2F.1A that leave to bring a derivative action must not be given lightly. An application under s 237(2) is not interlocutory in character; the relief sought is final and the applicant bears the onus of establishing the requirements of the subsection to the court's satisfaction."
- Later in the same judgment at par 71, his Honour said:
"The alleged breaches by Mr Hyland [the potential defendant] of his duties as [director of the company] occurred in 1994. If any breaches of the Corporations Act ss 180, 181 and 182, were committed, proceedings by [the company] for a contravention were barred by operation of Corporations Act s 1317K prior to the filing of Ms Swansson's application for leave in January 2002. There is no serious question to be tried on the statutory causes of action."
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34 I interpose here that the reason was that any potential cause of action was solely statutory in origin and under the time provisions of the legislation had long expired. This has led counsel for Mr Morrone to submit that it cannot be in the best interests of Newkey to pursue this proposed action because Mr Morrone has an unanswerable defence under s 38 of the Limitation Act1935 (WA) which, despite being amended and replaced by a new Limitation Act, is the statute which applies to the present case, or at least there is no suggestion that it does not.
35 Mr Mendelow relies on s 38(1)(c) which provides that there is limitation period which he submits has expired in respect of actions of account, being actions of account other than such accounts as concern the trade of merchandise between merchant and merchant, their factors or servants. There are, in my view, a number of potential answers to that submission. The first is that the limitation defence only arises if specifically pleaded, it being procedural rather than substantive, and that even if it were pleaded, it is by no means certain that it would be available for a breach of a duty which is essentially a breach of a fiduciary duty owed by a director to his corporation.
36 Mr Mendelow for Mr Morrone seeks to maintain that, in the first place, s 38 of the Limitation Act does apply expressly to claims for breach of a duty of an equitable nature or origin, including breach of fiduciary duty, but that even if it does not and the jurisdiction of the court is equitable rather than legal, the principles are that equity follows the law and will adopt, by way of analogy, the same limitation period in applying its discretionary defence of laches as would be applicable if a specific legal period of limitation were to apply. He adds to his submission that where duties of an obligation to account arise either by terms of contract or because of a fiduciary relationship between the parties, there is authority in the United Kingdom for the proposition that the duty is contractual rather than equitable, and that the appropriate legal period of limitation applies.
37 I have been referred to the English authority of Knox v Gye (1872) LR 5 HL 656 and to Coulthard v Disco Mix Club Ltd [2000] 1 WLR 707. I accept that there is a substantial argument to that effect. However, it is not altogether beyond dispute.
38 First of all, the reliance upon Palmer J's decision to refuse leave in Swansson's case (supra), for reasons which included the expiration of a relevant statutory period of limitation, can be put to one side. There is a well-acknowledged doctrine that when it comes to periods of limitation,
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- an absolute period of limitation which has expired for a purely statutory cause of action may prevent the action from being initiated or pursued. The Crown v McNeil (1922) 31 CLR 76 is perhaps the best known and most frequently cited example of that principle, so a species of relief which depends upon a statutory, as distinct from common law or equitable remedy, as was being sought in Swansson's case, will be subject to that more rigorous limitation principle.
39 Another example of the same rigorous approach for an entirely statutory based cause of action is the decision of the Full Court of the Federal Court of Australia in State of Western Australia v Wardley Australia Ltd (1991) 30 FCR 245, the intermediate appeal before that case came to the High Court of Australia. This is a decision of the unanimous court comprised by Spender, Gummow and Lee JJ, and the particular discussion commences at 268 and runs to 270. There, the particular statutory remedy which exclusively applied was the claim for damages conferred by the Trade Practices Act which had no common law or equitable component.
40 What is sought in the present case is damages for an alleged breach of contract, or equitable compensation or damages for breaches of an alleged fiduciary duty, or a simple obligation to account. All of those are non-statutory causes of action and, in my view, are not subject to the same rigorous limitation rule which applies in McNeil's case (supra), in Wardley (supra) or in Swansson (supra).
41 There is a further question which arises and it is whether or not such a defence, the limitation defence, if raised, and if found to be applicable by way of analogy may nevertheless be met on other grounds. In State of Western Australia v Wardley (supra) the court, speaking unanimously at 270, said, of s 82 of the Trade Practices Act 1974 (Cth):
"In our view as we have indicated, section 82 of the Act provides for the three year period as a condition of the remedy, and that condition is something which may be waived by the respondent. Accordingly, whether by equitable estoppel or other sufficient equitable grounds, it may be that the respondent cannot be heard to deny that the condition has been waived. Hence, the notion of unconscientious reliance upon a legal right, referred to by Deane J in Maschinski v Dodds (1985) 160 CLR 583 at 619-20; 62 ALR 429, and in Hawkins v Clayton (CLR at 590), and by Deane and Dawson JJ in Stern v McArthur (1988) 165 CLR 489 at 526-7; 81 ALR 463, may have a role to play.
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- So also may the various strands of the reasoning in the judgments in Commonwealth v Verwayen."
42 Those observations, necessarily dicta in Wardley's case (supra), cite authority at the highest level for suggesting that even to a statutory limitation period which Mr Mendelow stresses is expressed in what Owen J, in Morgan v Banning (1999) 20 WAR 474 at 476, called peremptory terms, may be successfully deflected by defences of waiver and estoppel or unconscientiousness.
43 This combination of features, namely, that the defence is available only if pleaded, if pleaded that it may or may not by way of analogy be applicable to the causes of action which the plaintiff seeks to agitate and, if applicable, may successfully be deflected by discretionary defences which I have identified, shows the merit of the principle described by the High Court in Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 at 533 of leaving the potential effect of limitation defences out of consideration in determining the sufficiency of a pleading or a proposed cause of action unless it can be said that the proposed limitation defence must unquestionably be successful.
44 I am by no means persuaded that a proposed limitation defence in this case must necessarily be effective, and it seems to me that that is not a factor which in this case amounts to any demonstration that it would not be in the best interests of the company that the applicant be granted leave. In formulating the test that way, I am conscious that I may, perhaps unintentionally, have suggested some reversal of the onus of proof. That was not intended. The obligation is on the applicant to demonstrate that it is in the best interests of the company, but the issue having been raised, I am satisfied that the potentiality of a limitation defence does not detract from the plaintiff's case.
45 Turning to other considerations which are pertinent to whether or not it is in the best interests of the company that the applicant be granted leave, there has been little said on those subjects in the course of submissions. There may, of course, be many circumstances which may tell against the grant of leave because of the interests of the company. There may be trading affiliations, there may be commercial opportunities, there may be new investments, there may be lending arrangements which are conditioned on certain terms which would be embarrassed or which would be precipitated into default if such leave were to be granted. No suggestions of that kind have been made in the present case, nor is it suggested that the pursuit of the proposed action in the company's name
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- would embarrass or prejudice any present or proposed actions of the company or its administration. That being the case, I am satisfied that the third criterion has been successfully demonstrated by the plaintiff.
46 That leads to the question of whether or not there is a serious question to be tried. It is at this point that it is necessary to turn to evidence, admissions or other material from which it can be discerned whether or not there is a question which can be identified which is likely to be determinative and whether or not it is a serious question to be tried.
47 The course of submissions has identified two potential areas in this situation. I will take them in reverse order of importance. The question which I have just been discussing of whether or not there is a good limitation defence available to Mr Morrone in the proposed proceedings is, I am satisfied, a serious question, but for the same reasons which have caused me to reject the submission that it was not in the best interests of the company for leave to be granted because of the availability of a limitation defence, I am satisfied that there is a serious question to be determined over whether or not such a defence, if it were to be raised, would be successful and that it would be inappropriate to reject the proceedings at this stage or to reject leave at this stage without leaving that issue to be tried.
48 Coming now to questions of evidence. Yesterday when counsel for the applicant, Mr Robinson, was developing this application I asked him to identify the materials upon which he relied to support the application insofar as they dealt with matters of fact.
49 After hearing from him, I marked as A, B, C, D, E and F the following documents: A, the affidavit of Mr Ross of 2 February 2004; B, the affidavit of Mr Ross of 8 September 2006; C, certain documents in the trial bundle being pages 765 - 836, a statement of Mr Morrone and signed by him prepared for other proceedings and in particular the passages at 781 - 784, at 766, at 806 - 814 which indicated that Mr Morrone directly or indirectly received, or was entitled to receive, a sum of $225,000 for his role in advising upon what had been called "the Saffron transactions", dealing with the property at Victoria Avenue, Claremont.
50 The next document marked D was pages in the trial bundle at 366 - 373 and in particular at 369 - 370. That is a document, being a pleading filed by Mr Morrone as a defence in a District Court action in which counsel on Mr Morrone's behalf signed a pleading which acknowledged that benefits totalling $207,048.64 had been received by
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- Mr Morrone or an entity associated with him in relation to a particular transaction and that as a sequel there were another series of transactions which resulted in an aggregate benefit of $277,270 going to Mr Morrone or an entity associated with him, showing a total benefit of $484,318.64.
51 The next document, E, is an amended defence dated August 2003 in the trial bundle at 428 - 430. This is an amended defence in the present action put in by Mr Morrone which, in par 4, contained the allegation that express terms of the oral agreement, meaning the oral agreement of which Malacca was then describing and which constituted the genesis and content of the commercial relationship between those parties, Ross and Newkey Investments Pty Ltd, were that Newkey would engage in the following real estate activities: (a) acting as an agent for the sale of real property; (b) the leasing of commercial and residential real property for commissions and fees; (c) the valuations of real property and (d) real property management ("the Newkey activities"), and that the income derived from the Newkey activities would first be applied to expenses and the profit, if any, equally split between the plaintiff and the defendant.
52 That statement, so counsel for the applicant submits, should be treated as a recognition by Mr Morrone that the so-called distinction between "real estate activities" and "real estate development activities" which he seeks to draw and maintain, as I described earlier, is not a distinction which was recognised before and that in fact benefits coming from both species of commercial activity were to be to the advantage of Newkey and rendered him accountable.
53 Whether or not that is the final word on the subject of course remains to be seen, but I accept that the material referred to and relied upon by counsel for the applicant does present an arguable case to support the plaintiff's contentions.
54 Before parting with this aspect of the matter, I must record that a number of objections were made by counsel for Mr Morrone to reliance upon materials contained in the affidavit of Mr Ross of 18 September 2006. The objections are set out in the written submissions which I have received from counsel for the second defendant and are very helpfully identified and explained.
55 The substance of the objections is that the affidavit contains statements of information and belief concerning the evidence available to support the plaintiff's claim in the intended action. Examples, by no means comprehensive, but, nevertheless, illustrative are statements by
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- Mr Ross that he believes that certain named individuals could and, if compelled under subpoena, would give evidence that they paid money in quantified amounts to Mr Morrone in relation to transactions in respect of which the plaintiff alleges Morrone was accountable to Newkey. The basis of the objection is that this is hearsay evidence and that only evidence from a witness or deponent who has first-hand knowledge of these matters is admissible on the present application which is final and not interlocutory in character.
56 I reserved my decision on those objections at the time but it is necessary that I attend to them at this point. I have considerable reservations as to whether or not it is essential on such an application for the plaintiff to do more than demonstrate to the satisfaction of the court that he believes on reasonable grounds that there is credible evidence available to support the case which he desires to advance.
57 It does not seem to me to be essential that on an application such as this the applicant should bring forward evidence in admissible form as if it were at a hearing of the case which he wishes to advance. It seems to me that as a matter of principle it is sufficient if the applicant can bring forward evidence which shows that there does exist or is likely to exist evidence which will support the case which he wishes to pursue, and accordingly, Mr Ross's affidavit as to his belief of the existence, nature and source of such evidence would be primary evidence and not hearsay for this limited purpose.
58 However, I do not rest my decision on the basis that the content of Mr Ross's affidavit to which objection has been taken.
59 This is because it has become common ground in the course of all the hearings on these applications since this trial was to begin last Friday that Mr Morrone's position is not that he, or entities associated with him, were not engaged in real estate development transactions from which substantial pecuniary benefits were derived and which were not paid to Newkey. As far as it is possible for me to ascertain Mr Morrone, his solicitors and counsel, accept that Mr Morrone was involved in the various transactions which are itemised in par 9 of the statement of claim, and derived remuneration from them, but rather he says that this was entirely legitimate because they were an authorised sphere of activity which had been expressly agreed upon when the original commercial arrangements involving Mr Ross, Malacca, Newkey and Mr Morrone were agreed upon and hence that he was never in an accounting position in respect of those benefits to Newkey.
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60 That being the case, it does not seem to be material for present purposes to scrutinise further the question of whether Mr Ross's affidavit containing passages referring to the existence of evidence supporting his allegations that Mr Morrone derived benefit from the transactions the subject of par 9 need be pursued and, consequently, I base my decision not upon the material to which objection has been taken but rather upon the established position that the real issue here is whether or not this activity has been approved or, put another way, that because of the terms of the agreements and disclosures which occurred at the commencement of commercial relationships Mr Morrone was never in an accounting position.
61 The situation therefore is that this question of whether or not Mr Morrone was in an accounting position or whether the proposed plaintiff can prove that there was no authorisation, express or implied, given to Mr Morrone to turn these various commercial opportunities to his own advantage is the main question in the case. It seems to me that it is a serious one and consequently the two principal issues, limitation and authorisation, satisfy the criteria under s 237(2) for the grant of leave.
62 There were some other objections to the proposed grant of leave having regard to the design of the proposed amended statement of claim. As I have already explained, the proposed amended statement of claim retains, but in a varied fashion, the allegation that there was a "shareholders' agreement" - perhaps not the most appropriate term but nevertheless a convenient abbreviation - between Malacca and Mr Morrone that Mr Morrone would discharge the duties of his office so as to bring the advantage of commercial opportunities to Newkey and that as a consequence of that Malacca has a private right of action to complain of the loss, if any, of which he complains.
63 In the proposed amended statement of claim this aspect of the case is advanced by par 4, as now amended, which alleges that on or about 22 March 1994 the first plaintiff, that is, Malacca, and the defendant, that is, Morrone, entered into an oral agreement, the shareholders' agreement to jointly carry on real estate business by the second plaintiff, namely, Newkey Investments, and the basis for that allegation are set out.
64 In par 5 certain express terms are alleged and in par 6 there are said to be a series of implied terms which, although they are not asserted to be fiduciary obligations, resemble the conventional fiduciary obligations for any agent such as causing all money or other benefits to be paid to the benefit of the second plaintiff and disclosure of other benefits and so on.
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65 The submission by counsel for the defendant is that this is in effect, if not in substance, a plea of the existence of the same fiduciary obligations as are relied upon or are sought to be relied upon by Newkey and which exist simultaneously for the benefit of Malacca.
66 Counsel then draws to attention observations of Barrett J in Charlton v Baber (supra) in support of the proposition that an applicant in these circumstances cannot pursue a case where the same fiduciary obligations are said to be owed by the director to the company and to the shareholder, at least in the absence of special facts and circumstances of power, ascendancy or control which would extend the usual rule that the obligation of a director is to the company rather than to the shareholder.
67 There has been no attempt to plead additional facts or circumstances which would result, or which might result, in an extension of such a fiduciary obligation. Were I to be satisfied that that is what par 6 of the proposed statement of claim sought to advance, I would have accepted the submissions of counsel for the defendant and regarded this as impermissible. However, in my view s 6 does not advance an allegation that there are simultaneous fiduciary duties arising from the relationship of the parties by Mr Morrone to Malacca and to Newkey. It distinctly asserts that there was a special contract between Malacca and Morrone as pleaded in par 4, implied terms of which included the obligations asserted in par 6.
68 A special contract, if it existed, with such implied terms would be something quite different from the kind of fiduciary obligations owed by the company. It may be similar in extent but it will be different in origin and it can be enforced by Malacca, notwithstanding there is simultaneously a pursuit in the same action by Newkey of obligations which have their foundation in fiduciary relationships. That is expressly accepted and contemplated by note 3 to to s 236 of the Corporations Act. Accordingly, that objection to the grant of leave cannot be sustained.
69 For those reasons, I am satisfied that this is an occasion when leave should be granted to Malacca Nominees Pty Ltd to sue derivatively in the name of Newkey Investments Pty Ltd for the relief and in the manner proposed by the draft statement of claim and I will give leave for that to be done.
70 This conclusion now allows me to turn directly to the sequential application for leave to amend the statement of claim and the belated application to amend the writ accordingly. For the reasons which I have
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- given, subject to the amendments which in the course of argument I have directed are necessary, I will give leave for the writ of summons to be amended and for the statement of claim to be amended. That can be done and treated as being effected by these proceedings. I will nevertheless direct that a formal amended writ and an amended statement of claim be filed and served not later than the close of business on Monday.
71 That brings me to the question of how this action should progress. It is most unfortunate that matters of this importance and consequence were not addressed before the trial commenced, but however one may disapprove of that and whatever consequences may eventually flow as a result of that on issues of costs, they are important questions which needed to be addressed. But the impetus which has brought this action to trial should not be lost. Accordingly, it seems to me that a very strict and short programme for progression of this matter needs to be proposed. Counsel for the plaintiff has made some submissions about this. Counsel for Mr Morrone has asked that it be deferred until after my decision has been given. I will, therefore, call upon him in a moment but my provisional views on this matter are that a defence to the amended statement of claim should be filed not later than Thursday of next week and that any reply should be filed not later than the Monday.
72 I will be in a position to deal with a directions hearing next Friday afternoon at 2.15 pm and I would propose issuing directions which ensure that, as far as possible, the essential question of whether or not Mr Morrone had authority to engage in this "real estate development activity" or not becomes the focus of the trial, and in an attempt to ensure that it is the main purpose of the trial, I would propose measures to ensure that the nature and extent of remuneration derived from the activities complained of in par 9 are placed before the court by agreement within the time limit between now and the case management conference for next Friday and, failing agreement on those subjects, there be leave to interrogate limited to that issue, but I will hear from the parties as to this.
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