McEvoy v Caplan
[2010] NSWCA 115
•25 May 2010
NEW SOUTH WALES COURT OF APPEAL
CITATION:
McEvoy v Caplan [2010] NSWCA 115
This decision has been amended. Please see the end of the judgment for a list of the amendments.
FILE NUMBER(S):
2009/00298383
HEARING DATE(S):
4 May 2010
JUDGMENT DATE:
25 May 2010
PARTIES:
John Albert Christopher McEvoy (Appellant)
Benjamin Saul Caplan (First Respondent)
Phillip William Leslie (Second Respondent)
Warren Richard Lesnie (Third Respondent)
Metro Hotel Sydney Pty Ltd (Fourth Respondent)
Transmetro Corporation Ltd (Fifth Respondent)
Kol Tov Pty Ltd (Sixth Respondent)
Kol Tov Operations Pty Ltd (Seventh Respondent)
JUDGMENT OF:
Allsop P Beazley JA Macfarlan JA
LOWER COURT JURISDICTION:
Supreme Court
LOWER COURT FILE NUMBER(S):
SC 5576/2007
LOWER COURT JUDICIAL OFFICER:
Barrett J
LOWER COURT DATE OF DECISION:
5 May 2009
LOWER COURT MEDIUM NEUTRAL CITATION:
Transmetro Corp Ltd v Kol Tov Pty Ltd [2009] NSWSC 350
COUNSEL:
J C Kelly SC/G M McGrath (Appellant)
R Beech-Jones SC/J Kay Hoyle (First, Second and Third Respondents)
SOLICITORS:
Staunton & Thompson (Appellant, Fourth and Fifth Respondents)
Somerset Ryckmans (First, Second, Third, Sixth and Seventh Respondents)
CATCHWORDS:
CORPORATIONS - statutory derivative action - application under s 237 Corporations Act 2001 (Cth) for leave to bring proceedings on behalf of two companies by way of cross-claim - grant of application would have given rise to conflict of duties - grant of leave not in the best interests of the companies
APPEAL - whether appeal lies as of right - order dismissing application under s 237 Corporations Act 2001 (Cth) for leave to bring proceedings on behalf of two companies - statutory derivative action - lower court decision interlocutory - leave to appeal required
LEGISLATION CITED:
Corporations Act 2001 (Cth)
Supreme Court Act 1970
CATEGORY:
Principal judgment
CASES CITED:
Carr v Finance Corporation of Australia Ltd [1981] HCA 20; (1981) 147 CLR 246
Licul v Corney [1976] HCA 6; (1976) 180 CLR 213
Malouf v Malouf [1999] FCA 284; (1999) 86 FCR 134
TEXTS CITED:
DECISION:
(1) The appeal is dismissed as incompetent;
(2) Mr McEvoy is refused leave to appeal; and
(3) Order that Mr McEvoy pay the costs of the respondents in relation to the proceedings in this Court.
JUDGMENT:
IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
CA 2009/00298383
ALLSOP P
BEAZLEY JA
MACFARLAN JA25 May 2010
McEVOY v CAPLAN
Judgment
ALLSOP P: I agree with Macfarlan JA.
BEAZLEY JA: I agree with Macfarlan JA.
MACFARLAN JA: Mr McEvoy seeks to appeal as of right from an order of Barrett J dismissing his application for a grant of leave under s 237 of the Corporations Act 2001 (Cth) to bring proceedings on behalf of two companies, Kol Tov Pty Ltd (“KT”) and its parent company Kol Tov Operations Pty Ltd (“KTO”). The parties have proceeded upon the basis that, in the alternative, Mr McEvoy seeks leave to appeal against the making of the primary judge’s order.
The order made by the primary judge was in my view interlocutory as it did not finally determine the rights of the parties (see Licul v Corney [1976] HCA 6; (1976) 180 CLR 213 at 225). The fact that it was and remains open to Mr McEvoy to make another application of the same kind is decisive in this respect (Carr v Finance Corporation of Australia Ltd [1981] HCA 20; (1981) 147 CLR 246 at 256-7; Malouf v Malouf [1999] FCA 284; (1999) 86 FCR 134 at [36]). Accordingly Mr McEvoy requires leave to appeal (see s 101(2)(e) of the Supreme Court Act 1970). For the reasons set out below, I do not consider that leave should be granted.
It is sufficient for present purposes to refer to ss 237(1) and (2) of the Corporations Act. These provisions 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”.
Mr McEvoy had standing to make his application as he was a member and director of KT, and KT and KTO were related corporations (see s 236(1) of the Corporations Act).
The proceedings which Mr McEvoy sought leave to bring on behalf of KT and KTO were proceedings by way of second cross-claim in an action commenced by Metro Hotel Sydney Pty Ltd (“Metro”) and Transmetro Corporation Ltd (“Transmetro”) against KT, KTO and Mr Benjamin Caplan (“the Principal Proceedings”). The Amended Statement of Claim in the Principal Proceedings alleges that Mr McEvoy and Mr Caplan became associated in relation to the purchase and management of certain Sydney hotels. The association led to the execution of an Hotel Management Agreement (the “HMA”) relating to an hotel which became known as the Metro Hotel Sydney Central. The HMA was entered into between Metro (as hotel manager), Transmetro (as guarantor of the obligations of Metro), KTO (as licensee) and KT (as the owner of the hotel). Mr McEvoy was the managing director of Metro and Transmetro and both Mr McEvoy and Mr Caplan were, with other persons (Mr Warren Lesnie and Mr Philip Leslie), directors of KTO. The allegations in the Amended Statement of Claim are broad ranging. They include allegations that the other directors of KTO wrongly purported to remove Mr McEvoy as a director of KTO and that a purported termination of the HMA by KTO was invalid. Complaints are also made about the conduct of KT.
The cross-claim which Mr McEvoy sought leave to file on behalf of KT and KTO included allegations that Mr Caplan, Mr Lesnie and Mr Leslie breached their duties as directors of these companies by acting for the purpose of obtaining advantages for themselves rather than acting in the best interests of the companies. In particular it was alleged that their actions in seeking to have KTO terminate the HMA constituted such a breach. The primary judge, in my view correctly, treated the draft cross-claim as implicitly complaining, not only that these directors “sought to terminate” the HMA but also, if it were held that the HMA was in fact terminated, that they brought about that termination.
The judge refused Mr McEvoy’s application on the basis that implementation of his proposal would have created a position in which Mr McEvoy would have had two starkly inconsistent roles to play; that is, on behalf of Metro and Transmetro he would have been bound to contend that the HMA had not been validly terminated, whilst on behalf of KT and KTO he would have been bound to contend that it had been validly terminated. His Honour said in this respect:
“25 The inconsistency between the two propositions for which Mr McEvoy will be compelled to contend is so stark that it is simply not feasible for him to play the two roles. The case is not one of a complicating or clouding interest. It is a case of positive duties in direct collision. By mounting the proposed second cross-claim for KT and KTO Mr McEvoy would be acting in a way that was in fundamental conflict with his duties as a director of Transmetro and Metro. The existence of those duties owed to Transmetro and Metro means that he is under equitable constraints forbidding his pursuit on behalf of KT and KTO of the case that must be made out for the proposed second cross-claim to succeed.
26 To grant the leave Mr McEvoy seeks under s 237 would be to give complete control and decision-making in relation to the second cross-claim of KT and KTO to a person who was, in equity, forbidden to espouse the cause that the cross-claim sought to promote and duty bound to strive for the failure of that cause”.
He concluded that the creation of this situation would not be in the best interests of KT and KTO and that he was accordingly not satisfied of the essential pre-requisite to an order being made under s 237 that it be in the best interests of the company that the applicant be granted leave (see s 237(2)(c)).
On the hearing in this Court, the Court raised with the parties the possibility of leave being granted under s 237 upon the basis that:
•Except in relation to the issue arising out of the proposed second cross-claim as to whether the HMA had been terminated, proceedings on that cross-claim be stayed pending determination of the Principal Proceedings;
•The issue as to termination of the HMA arising out of the proposed second cross-claim be determined at the same time as the Principal Proceedings; and
•Mr McEvoy be precluded from playing any role on behalf of KT or KTO in relation to the determination of the issue as to termination of the HMA.
The Court raised this possibility for the purpose of ascertaining whether there was any reasonable means by which it could be ensured that the issue as to termination of the HMA would only be litigated once and that the conflict of duties to which the primary judge referred would be avoided. Without some such orders, the possibility exists that in the Principal Proceedings a court might determine that the HMA was validly terminated and that in separate proceedings that KT or KTO might subsequently bring against the directors, these directors might contend, and a court might find, that the HMA had not been validly terminated. Two of the directors are not parties to the Principal Proceedings and they at least would not, in the absence of special circumstances, be bound by findings made in those proceedings. In these circumstances, it seemed to this Court that if there were a way in which this possibility of duplication of litigation and inconsistent results could reasonably be avoided, then it should be considered.
Senior Counsel for Mr Caplan, Mr Beech-Jones SC however effectively responded to the suggestion that it might be appropriate to make orders upon the basis referred to in [11] above by pointing out that the issue as to whether the HMA was validly terminated is not an issue which was separate and distinct from the issues arising out of the proposed second cross-claim as to breaches of directors’ duties. This is so because the Amended Statement of Claim in the Principal Proceedings goes beyond alleging that the termination of the HMA was not valid on the basis that there was no subsisting breach of the HMA that would justify such termination, to allege that the termination was invalid because it was “undertaken for an improper purpose, namely for Mr Caplan to take the benefit of rights of management” of the hotel for an associate of his. The latter allegations are similar to those contained in the proposed second cross-claim. Allegations to similar effect are made in the Amended Statement of Claim in relation to certain breach notices alleged to have been issued.
The making of allegations (as to the substance and relevance of which I make no comment) in the Principal Proceedings concerning the propriety of the directors’ actions in my view renders it impracticable to adopt a scheme of the nature referred to in [11] above. If the leave sought were granted Mr McEvoy’s challenges to the propriety of the directors’ actions would need to be allowed to be made both in the Principal Proceedings and on the hearing of the second cross-claim because Mr McEvoy would not, through Metro and Transmetro, have the same ability to pursue those challenges in the Principal Proceedings as he would have if he were pursuing them on behalf of KT and KTO on the proposed second cross-claim. For example, in the latter circumstance Mr McEvoy would have access to any privileged advice obtained by KT and KTO in connection with termination of the HMA whereas in pursuing the Principal Proceedings Metro and Transmetro would almost certainly not. There is thus no discrete issue in relation to the termination of the HMA that is suitable for determination separately from determination of the remaining issues arising out of the proposed second cross-claim.
In these circumstances one is left with the situation that confronted the primary judge, and with the attendant difficulties that he identified. In the absence of Mr McEvoy having proffered to his Honour or to this Court any acceptable means of overcoming the conflict that the judge identified, the view taken by the primary judge must be regarded as correct. As the appeal would not succeed if leave to appeal were granted, leave to appeal should be refused.
In conclusion I reiterate the following observation that the primary judge made after he expressed his conclusion that to grant Mr McEvoy the leave he sought would not be in the best interests of the companies:
“28 This is not to say that it may not be, at some point, in the best interests of KT and KTO for Mr Caplan, Mr Leslie and Mr Lesnie to be sued by those companies in the way Mr McEvoy envisages. But this will logically happen, if at all, once it is seen that the management agreement was validly terminated and Aspen in reality derived the benefit of becoming the manager of the hotel in place of Metro”.
I propose the following orders:
(1) The appeal is dismissed as incompetent;
(2) Mr McEvoy is refused leave to appeal; and
(3)Order that Mr McEvoy pay the costs of the respondents in relation to the proceedings in this Court.
**********
AMENDMENTS:
27/05/2010 - Correction to name of firm of solicitors - Paragraph(s) Coversheet
LAST UPDATED:
27 May 2010
18
5
2