Michalakas v POWELL - [2014] SASCFC 132

SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
MICHALAKAS v POWELL
[2014] SASCFC 132
Judgment of The Full Court
(The Honourable Chief Justice Kourakis, The Honourable Justice Vanstone and The Honourable Justice Parker)
28 November 2014
CORPORATIONS - MEMBERSHIP, RIGHTS AND REMEDIES - MEMBERS' REMEDIES AND INTERNAL DISPUTES - PROCEEDINGS ON BEHALF OF COMPANY BY MEMBER
Appeal against decision of a master refusing application for leave to institute proceedings in the name of a company pursuant to s 237 of the Corporations Act 2001 (Cth) - whether appellant satisfied criteria under s 237(2) of the Corporations Act - whether serious question to be tried - whether in best interests of the company.
Held: appeal dismissed - evidentiary deficits undermine the appellant's contention that the proposed case is viable - the appellant failed to satisfy the Court that the proceedings would be in the best interest of the company - not demonstrated that master erred.
Corporations Act 2001 (Cth) Part 2F, 1A, s 236, s 237; Retirement Villages Act 1987 (SA), referred to.
Charlton v Baber (2003) 47 ACSR 31, applied.
Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199, considered.

MICHALAKAS v POWELL
[2014] SASCFC 132
Full Court: Kourakis CJ, Vanstone and Parker JJ

KOURAKIS CJ: I would dismiss the appeal for the reasons given by Vanstone J.
VANSTONE J: This appeal is against the decision of a Master of this Court refusing an application for leave to institute proceedings in the name of a company.
The appellant’s application proceeded pursuant to Part 2F.1A Corporations Act 2001. Section 236 relevantly provides that a person acting with leave granted under s 237 may bring proceedings on behalf of a company. Section 237 sets out the criteria to be applied where a person seeks such leave. The applicant must persuade the court that each criterion is satisfied.
The Master found that it was “reasonable to infer” that the receiver and manager appointed to the company would not bring the contemplated action: s 237(2)(a). However, he was not satisfied that the applicant was acting in good faith: s 237(2)(b); not satisfied that it was in the best interests of the company for leave to be granted: s 237(2)(c); and not satisfied that the appellant had demonstrated that there was a serious question to be tried: s 237(2)(d). The Master noted at [26] that there appeared to be “no quarrel” that notice to the receiver of the intention to seek the court’s leave had been given (s 237(2)(e)), but at the same time observed that there was a question about the appellant’s standing to bring the application in the first place: [21]. The Master did not find it necessary to reach a view on that issue: [23]. This appeal focuses on the failure to find there was a serious question to be tried (grounds 1 and 3) and the failure to find that it was in the best interests of the company that leave be granted having regard to the costs risk (ground 2).
Background
On 22 January 2010 Garden Estate Hackham Pty Ltd (Garden E) entered a loan agreement with Angas Securities Limited pursuant to which Angas Securities would advance $2.6m to Garden E for 12 months. The agreement contained an “entire agreement” clause. The primary security given was a mortgage over two land titles, being Volume 5956 Folios 704 and 705 (the land titles). Settlement on the agreement took place later in that month, or early in February 2010. The loan coincided with the purchase by Garden E, a company then controlled by James Michalakas, of land on which stood an independent living facility at Hackham (the facility). That facility was on those land titles. At that time the facility was being operated on a rental model, as opposed to a residence contract model as described in the Retirement Villages Act 1987 (SA) (the Act). Garden E did not comply with the repayment schedule and, on 22 May 2012, at the instance of Angas Securities, receivers were appointed to manage Garden E.
On 21 December 2012 James Michalakas was declared bankrupt.
On 15 December 2013 James Michalakas purported to convene a meeting of Garden E and to appoint his wife, the plaintiff and appellant in these proceedings, as a director. (The validity of that appointment is a matter of dispute.)
The proceedings which Mrs Michalakas sought leave to institute were against Angas Securities, alleging that it was in breach of the loan agreement with Garden E. Materials filed in support of the application allege that it was known by Angas Securities all along that James Michalakas planned to sell the retirement units by way of residence contracts to the prospective occupiers on a deferred management model, and that it was from the proceeds of the sales that the loan would be repaid. Further, it is alleged that Angas Securities knew that for this purpose the land titles would need to be produced to the Registrar-General for endorsement pursuant to the Act. Importantly, it is alleged that these matters were not only known to Angas Securities, but were express terms of the loan agreement, or, at least to be implied, or, at very least were oral terms of the loan agreement. Alternatively the claim is put as one of misleading and deceptive conduct.
It is further alleged that Angas Securities’ failure to produce the land titles prevented the relevant endorsement being made and so prevented sale of the units, leading to Garden E’s inability to make payments on the loan.
The loan agreement made no reference to the purpose of the loan or any plans in relation to the facility. The requirement for repayment is not made conditional upon any contingency or event. A Deed of Priority was entered on 2 February 2010. It set out the priorities as between Angas Securities and the second chargee, as well as Garden E’s consent thereto. In recital E under the heading of “Background” it is recorded that the mortgagor (Garden E):
… intends to establish a Retirement Village on the Mortgaged Property in accordance with the provisions of [the Act] and, as and when the Residential Tenancy Agreements expire, to enter into a Residence Contract under which a person will enter into occupation of a Residence in the Retirement Village and pursuant to which the Mortgagor or the Administrating Authority will require the payment from such Resident of a Premium in consideration for the person who pays the Premium to become a Resident of the Retirement Village.
Clause 8 of the Deed deals with the application of premiums paid by residents. There is no indication of any time frame within which it is expected the residential tenancy agreements will expire.
Serious question to be tried
The appellant must show at least a probability that she will succeed in establishing entitlement to the relief to be sought in the claim: Charlton v Baber (2003) 47 ACSR 31 at [55] per Barrett J. As Gleeson CJ expressed it in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at [15] – in the context of an application for an interlocutory injunction – the applicant must be able to show “a sufficient colour of right of the kind sought to be vindicated by the final relief”.
The essence of the appellant’s argument in support of the proposed claim, as outlined in the draft statement of claim, appears to be that the agreement between Garden E and Angas Securities was partly in writing and partly oral and that it was agreed that the loan would be repaid from premiums paid in relation to residence contracts.
There are profound difficulties with this contention, not least of which are first, that such an agreement would contradict the written loan agreement and second, that such of the written communications called in aid to support the contention as were provided by affidavit evidence, did not support it. In addition, no evidence was given of any oral terms. Such evidence should have been furnished.
On the basis of the partly written/partly oral agreement referred to, it was further put that a term should be implied to the effect that Angas Securities was bound to produce the titles so that the Registrar-General could endorse them. Apart from the observations just made in respect of the first contention, an additional answer is that there is no evidence that the titles were not produced and some evidence that they were. The further result of this last matter is that there is no evidence of breach of the suggested terms, or loss.
Finally, the elliptical form in which loss is pleaded denies the claim of any prospect of success. The draft statement of claim pleads that the residence contracts model was abandoned and that the facility was instead divided into community titles. There is no pleading as to the capital gains or income stream which Garden E would have derived from its residence contracts scheme. The draft statement of claim pleads that, even on the community title model, the land so subdivided could have been sold at a great profit over the purchase price of the facility, but fails to plead how the conduct of Angas Securities caused the failure of that model. In any event, no supportive evidential material is identified by Mrs Michalakas.
These evidentiary deficits entirely undermine the contention that the proposed case is viable.
Best interests of the company
The next contention is that the Master erred in finding that the proposed action would not be in the interests of the company. This question is to be considered having regard to the “separate and independent welfare” of the company: Charlton v Baber at [52]. Where the company is insolvent the interests to be considered are predominantly, if not entirely, those of the creditors: Charlton v Baber at [53].
Before the Master the appellant attested that she understood that if leave to proceed were granted she “must bear the costs of those proceedings”. However, neither evidence of means, nor any security, was provided. In this Court senior counsel for the appellant orally offered the appellant’s undertaking to indemnify the company for any costs, including adverse costs, secured by a second mortgage over a property belonging to a family member, the equity in which was said to be $700,000. It is suggested that if the Court is otherwise minded to allow the appeal and grant leave, that it could condition the grant with a requirement that security in a satisfactory form be given.
In my view that position is unsatisfactory. In the first place, it is clear that this issue was a matter of keen debate before the Master. If some sort of indemnity with security were to be offered, it should have occurred there. Second, s 237(2)(c) requires the appellant to satisfy the Court that the grant of leave is in the best interests of the company. The Court cannot reach that state of satisfaction as things stand and so cannot find that the best interests requirement is met.
Conclusion
From the above it appears clear that not only did the Master not fall into error in refusing leave, he was clearly correct so to do. In those circumstances it is unnecessary to address the remaining criterion in s 237, the question of good faith; upon which the appellant also failed before the Master, but which was not the subject of a ground of appeal.
The appeal should be dismissed.
PARKER J: I agree with the reasons of Vanstone J and would dismiss the appeal.