McGuinness v Workplace Eye Protection Pty Ltd - [2020] FCA 626

FEDERAL COURT OF AUSTRALIA
McGuinness v Workplace Eye Protection Pty Ltd [2020] FCA 626

File number: NSD 47 of 2020

Judge: GLEESON J

Date of judgment: 19 May 2020

Catchwords: CORPORATIONS – application for leave pursuant to s 237 of the Corporations Act 2001 (Cth) to bring proceedings on behalf of a company – where application brought by executor of the estate of a former company shareholder – where certain company dividends alleged to have been paid unlawfully – whether grant of leave is in the best interests of the company – whether there is a serious question to be tried – whether prospective claim is time-barred – leave refused

Legislation: Corporations Act 2001 (Cth) Part 2F.1, ss 180, 181, 236, 237, 254T, 1317H, 1317K

Cases cited: Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 973; (2004) 51 ACSR 245
Drew v Lynch, in the matter of Mirage 3.4D Pty Limited [2019] FCA 632
Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732
Huang v Wang [2016] NSWCA 164; (2016) 114 ACSR 586
Keenan v Bundaberg Port Authority [2016] FCA 134
Lewski v Australian Securities and Investments Commission [2016] FCAFC 96; 246 FCR 200
Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432

Date of hearing: Determined on the papers

Date of last submissions: 3 April 2020 (Defendant)
6 April 2020 (Plaintiff)

Registry: New South Wales

Division: General Division

National Practice Area: Commercial and Corporations

Sub-area: Corporations and Corporate Insolvency

Category: Catchwords

Number of paragraphs: 88

Counsel for the Plaintiff: JM Harris

Solicitor for the Plaintiff: Jemmeson Fisher Lawyers

Counsel for the Defendant: A Harding

Solicitor for the Defendant: Glenn R Walters & Co

ORDERS

NSD 47 of 2020

BETWEEN:
PHILLIP EDWARD MCGUINNESS

Plaintiff

AND:
WORKPLACE EYE PROTECTION PTY LTD (ACN 128 607 607)

Defendant

JUDGE:

GLEESON J

DATE OF ORDER:

19 MAY 2020

THE COURT ORDERS THAT:
1.The application for leave to bring proceedings pursuant to s 237 of the Corporations Act 2001 (Cth) be refused.
2.The plaintiff pay the defendant’s costs of the application.
3.The proceeding be listed for a case management hearing on 28 May 2020 at 9:30 am to make further orders for the continuation or finalisation of the proceeding.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT
GLEESON J:

The plaintiff, Mr McGuinness, seeks leave pursuant to s 237 of the Corporations Act 2001 (Cth) (Act) to begin proceedings on behalf of the defendant (company) against the two directors of the company, Cheryl Dunstan and Susan Hantzi, and a former director, Adam Ayash. Specifically, Mr McGuinness seeks leave to bring the proceedings on behalf of the company for compensation pursuant to s 1317H of the Act for breaches of directors duties and for orders replacing the current directors with himself and Cathie Lynch (derivative action).
Section 237 of the Act provides:
(1)A…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2020] FCA 626
Decision Date: 19 May 2020

CaseChat Overview and Summary

In the Federal Court, Mr McGuinness, as the executor of the estate of a deceased shareholder of Workplace Eye Protection Pty Ltd, sought leave to bring a derivative action against the company for alleged unlawful payments of dividends. The company opposed the application on several grounds, including that the claims were time-barred and not in the company's best interests. The court had to determine whether the application met the statutory criteria under the Corporations Act 2001 (Cth) for granting leave to bring a derivative action, particularly if the action was in the company's best interests, there was a serious question to be tried, and the application was made in good faith.

The court found that while Mr McGuinness was likely acting in good faith as the executor of the estate, he had not provided evidence to support his belief that the company had a good claim with reasonable prospects of success or that the action was in the company's best interests. The court held that the requirement for a serious question to be tried was met at a relatively low threshold, but the application needed to be supported by actual evidence rather than mere indications. The court also concluded that the proposed claims were time-barred under the Act, and thus, there was no serious question to be tried.

Consequently, the court refused the application for leave to bring the derivative action. The court ordered that Mr McGuinness pay the company's costs of the application and scheduled a case management hearing for 28 May 2020 to make further orders regarding the proceeding.

Orders

Orders of the court

1. The application for leave to bring proceedings pursuant to s 237 of the Corporations Act 2001 (Cth) be refused.

2. The plaintiff pay the defendant’s costs of the application.

3. The proceeding be listed for a case management hearing on 28 May 2020 at 9:30 am to make further orders for the continuation or finalisation of the proceeding.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

The application was opposed by the company, on the following grounds:(1)there is no serious question to be tried because all of the proposed claims are time barred under s 1317K of the Act and, in any event, they have no prospects of success;(2)the derivative action is not in the company’s best interests; and(3)Mr McGuinness did not give the notice required by s 237(2)(e)(i) of the Act.FACTS The evidence proves, at least to a prima facie level, the following facts. If and when any derivative action is brought, the following facts may be contradicted by other evidence including, for example, by Mr Ayash or Ms Hantzi. The company imports and supplies prescription safety frames for prescription safety glasses for use in industry. It was registered as a company in 2007. The company was established by Mr Moore, who is the brother of Ms Dunstan and Ms Lynch.Ownership of company shares Mr McGuinness did not become the registered owner of the Shares until about 25 October 2013. The Shares were transferred to Mr McGuinness by Mr Ayash. On 15 January 2009, the Shares had been transferred by Mr Moore to Mr Ayash to be held on trust for Mr Moore. Mr McGuinness’s evidence included an email sent on 20 March 2012 in which Ms Dunstan appears to have acknowledged that Mr Ayash held the Shares “non-beneficially … on behalf of John’s estate”. Subsequently, a dispute arose as to whether the estate owned the Shares. In about March 2014, Mr McGuinness was informed that, on 26 February 2014, the directors of the company (that is, Ms Dunstan and Ms Hantzi) had resolved to approve the transfer of the Shares to Mr McGuinness. In her affidavit, Ms Dunstan acknowledges that she understood, when Mr Moore transferred the Shares to Mr Ayash, that the Shares were to be held on trust for Mr Moore although she did not know the precise arrangements between them.Directors of company By s 9 of the Act, “director” of a company is relevantly defined to mean:(a) a person who:(i) is appointed to the position of a director;…(b)unless the contrary intention appears, a person who is not validly appointed as a director if:(i) they act in the position of a director; or(ii)the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes. Mr Ayash was a director of the company from 16 January 2009 to 15 July 2013. According to ASIC’s records, Ms Dunstan has been a director of the company since 12 April 2012, and Ms Hantzi has been a director since 15 July 2013. Ms Dunstan contends that she did not become a director of the company until about 12 June 2012. However, she accepts that, on 7 June 2012, Ms Dunstan (and Ms Hantzi) agreed to the payment of a dividend declared on 7 June 2012 (2012 dividend). The constitution of the company provides for the declaration of dividends by the directors of the company. On those facts, I accept that there is prima facie evidence that, on 7 June 2012, Ms Dunstan and Ms Hanzi were directors of the company within the meaning of s 9 of the Act.2012 dividend

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

In submissions, Mr McGuinness complained that the company has no taken action to recover the $21,800 paid to Mr Ayash. However, no cause of action is pleaded in the draft statement of claim based on that matter and there was no evidence about the prospects of any recovery action against Mr Ayash. CONCLUSION The application for the order in prayer 1 of the originating process must be refused. Costs should following the event. I will list the matter for a case management hearing on 28 May 2020 to make further orders for the continuation or finalisation of the proceeding.

Ratio Decidendi

Legal Principle Established

There is also an allegation that each of Ms Dunstan and Ms Hantzi contravened s 181(1) of the Act by acting recklessly in voting in favour of the second resolution.CONSIDERATION In Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 973; (2004) 51 ACSR 245 (Carpenter (No 1)) at [16], Barrett J explained that the provisions of Part 2F.1 of the Act, which includes s 236 and s 237: ... enable anyone with a particular form of ‘insider’ status described in s 236(1)(a) to seek the court’s assistance in taking over the role of the normal decision makers in relation to a particular proceeding. The court’s function is essentially a screening function. It must assess against specified criteria the litigation proposal the applicant has in mind for the company. If that proposal is found by the court to meet the criteria, it must grant leave enabling the applicant to pursue it for the company. Having regard to the company’s opposition, it is probable that the company itself will not bring the proceedings proposed by Mr McGuinness. Accordingly, s 237(2)(a) is satisfied.Good faith In Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432, Ball J stated (at [58]):The requirement that the applicant be acting in good faith has at least two elements. One is that the applicant must honestly believe that the company has a good claim with reasonable prospects of success. The other is that the claim must not be brought for some collateral purpose as would amount to an abuse of process. In my opinion, the applicant must also honestly believe that it is in the best interests of the company that the action be brought.(citations omitted) There is no suggestion that Mr McGuinness is not is acting in good faith in bringing the application, although there is some issue concerning the identity of the residuary beneficiaries on whose behalf the derivative action would be brought. Mr McGuinness did not verify that he believes that the company has a good claim with reasonable prospects of success based on the draft statement of claim; or that it is in the best interests of the company that the action be brought. Even so, where Mr McGuinness is acting as administrator of the estate, I accept that he is acting in good faith. Accordingly, s 237(2)(b) is satisfied. Serious question to be tried In Keenan v Bundaberg Port Authority [2016] FCA 134 , Reeves J said (at [40]):This criterion has been held to set a “relatively low threshold to surmount” and it has been compared to the standard applicable to the grant of an interlocutory injunction: see Swansson at [25] and Gartner at [46]. It has also been observed that this criterion “does not require the Court to enter into the merits of the proposed derivative action to any great degree”: see Vinciguerra at [147]. Nonetheless, it is clear on the authorities that “the application must be supported by evidence. A mere ‘indication of the evidence’ without actual evidence is insufficient”: see Vinciguerra at [141] and Gaertner at [47].2012 dividend

File number:	NSD 47 of 2020
Judge:	GLEESON J
Date of judgment:	19 May 2020
Catchwords:	CORPORATIONS – application for leave pursuant to s 237 of the Corporations Act 2001 (Cth) to bring proceedings on behalf of a company – where application brought by executor of the estate of a former company shareholder – where certain company dividends alleged to have been paid unlawfully – whether grant of leave is in the best interests of the company – whether there is a serious question to be tried – whether prospective claim is time-barred – leave refused
Legislation:	Corporations Act 2001 (Cth) Part 2F.1, ss 180, 181, 236, 237, 254T, 1317H, 1317K
Cases cited:	Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 973; (2004) 51 ACSR 245 Drew v Lynch, in the matter of Mirage 3.4D Pty Limited [2019] FCA 632 Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732 Huang v Wang [2016] NSWCA 164; (2016) 114 ACSR 586 Keenan v Bundaberg Port Authority [2016] FCA 134 Lewski v Australian Securities and Investments Commission [2016] FCAFC 96; 246 FCR 200 Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432
Date of hearing:	Determined on the papers
Date of last submissions:	3 April 2020 (Defendant) 6 April 2020 (Plaintiff)
Registry:	New South Wales
Division:	General Division
National Practice Area:	Commercial and Corporations
Sub-area:	Corporations and Corporate Insolvency
Category:	Catchwords
Number of paragraphs:	88
Counsel for the Plaintiff:	JM Harris
Solicitor for the Plaintiff:	Jemmeson Fisher Lawyers
Counsel for the Defendant:	A Harding
Solicitor for the Defendant:	Glenn R Walters & Co