O'MEARA v FWV Stanke Holdings Pty Ltd (No 3) - [2007] SASC 305

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
O'MEARA v FWV STANKE HOLDINGS PTY LTD (No 3)
[2007] SASC 305
Judgment of The Honourable Justice Vanstone
17 August 2007
CORPORATIONS - MEMBERSHIP, RIGHTS AND REMEDIES - MEMBERS' REMEDIES AND INTERNAL DISPUTES - PROCEEDINGS ON BEHALF OF COMPANY BY MEMBER - STATUTORY DERIVATIVE ACTION
Plaintiff applies under s 237 Corporations Act to intervene in proceedings to take over defence of a company and to file a contribution notice - whether plaintiff acting in good faith - whether in best interests of company - whether serious question to be tried. Held: criteria in s 237(2) satisfied, application granted.
Corporations Act 2001 (Cth), s 237, referred to.
Carpenter v Pioneer Park Pty Ltd (in liq) (2004) 211 ALR 457; Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313; Chahwan v Euphoric Pty ltd [2006] NSWSC 1002; Williams v Spautz (1992) 174 CLR 509, applied.
Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250; Shelton v National Roads and Motorists Association Ltd (2004) 51 ACSR 278; Jones v Dunkel (1959) 101 CLR 298, considered.

O'MEARA v FWV STANKE HOLDINGS PTY LTD (No 3)
[2007] SASC 305
Civil
VANSTONE J:
Introduction

By originating process filed 3 July 2007 the plaintiff, Mrs Leonie O’Meara, seeks permission under s 237 Corporations Act 2001 (Cth) to intervene in action number 1565 of 2005 for the purpose of taking responsibility on behalf of the defendant (the third defendant in that matter) for its defence of the proceedings. Then, permission is sought to file an amended defence and a contribution notice.
The application is supported by an affidavit of the plaintiff, the annexures to which include the current and the proposed pleadings in action number 1565.
The plaintiff has standing to bring this application as she is the holder of one of the four shares in the defendant company. I note that she is also a beneficiary of the wills of her late parents, each of whom also held one share in the defendant. Her brother, Frederick John Von Stanke, holds the other share and is a director of the defendant, as are also his two children.
The defendant company resists the application. In an earlier hearing I allowed two applications for permission to intervene to put submissions in opposition to the plaintiff’s application. The intervenors are Mr Von Stanke in his capacity as executor for the estates of each of his parents (represented by Ms E F Nelson QC with Mr S D Ower) and Mr Von Stanke in his capacity as a shareholder of the defendant (represented by Mr P N Vickery QC with Mr T P Duggan). The company itself, which, as I mentioned, counts Mr Von Stanke as a director, was represented by Mr T F Bathurst QC and Mr M A Frayne. Mr Von Stanke was, then, to say the least, adequately represented on this application. He filed affidavits in each of his capacities but, ultimately none were tendered. In each of his capacities he sought to cross-examine the plaintiff on her affidavit and that was the only oral evidence before me.
I have had the benefit of extensive submissions, both written and oral, made on behalf of the defendant and for Mr Von Stanke in each of his capacities. Senior Counsel have referred me to the leading authorities on all aspects of the matter. The application was listed before me at short notice because the trial in action number 1565 is scheduled to commence on 15 November next. In view of that timetable I have determined to deliver my decision speedily, possibly at some cost to the extent of detail in these reasons.
Background
I set out something of the background to this application. The defendant, FWV Stanke Holdings Pty Ltd (“FWV”) is one of three companies which I shall call “the family companies”. The other two family companies are RCV Stanke Estates Pty Ltd (“RCV”) and JHV Stanke Properties Pty Ltd (“JHV”). These companies are aligned with three branches of the Von Stanke family, a family whose members, over more than 50 years, have pursued vocations as fishers, based in a location called Carpenter Rocks, not far from Mount Gambier. Each of the family companies owns one share in each of two further companies which I shall call “the fishing companies”. These run the fishing and fish processing businesses conducted at Carpenter Rocks. One or other of the fishing companies is the registered proprietor of large holdings of land in that area and further owns numbers of very valuable fishing licences which are used by various members of the Von Stanke family.
The underlying action, number 1565, is an oppression claim brought by JHV against the fishing companies, certain directors of the fishing companies, including Mr Von Stanke, and the other two family companies, FWV and RCV. JHV alleges that the affairs of the fishing companies have been conducted in a manner which is oppressive to JHV by reason of decisions taken in the course of the business they run, the use of the companies’ assets, their failure to pay dividends and other matters. JHV seeks relief including an order for an account and enquiry of profits and that its shares in the fishing companies be bought by the other family companies.
For the most part the fishing companies and the directors of the fishing companies admit the allegations. However they justify the way in which the business of the fishing companies has been conducted by reason of what is referred to as a “conventional understanding”.
FWV has filed a defence in which it does not plead to a majority of the allegations. If the plaintiff were to take over the conduct of FWV’s defence it would be with a view to FWV supporting JHV’s claim and seeking similar relief on its own behalf by means of a contribution notice. She has offered an undertaking to the effect (broadly) that if FWV is unsuccessful in her hands she will meet any costs incurred by FWV from the point of her intervention.
The s 237(2) criteria
Section 237(2) Corporations Act sets out five criteria, satisfaction of which will result in the court granting the application.
Two of these are not seriously disputed. Under s 237(2)(a) I must be satisfied that the company will not “properly take responsibility for [the proceedings]”. The defendant company contends that in filing the current defence it has indeed properly taken responsibility for the defence of the action. It is submitted that the company has chosen not to respond to allegations which are not directed to it and that such a stance is appropriate. In my mind that really turns on whether FWV should play any part in defending JHV’s suit if a continuation of the current intercompany arrangements do not benefit it. It also turns on the truth of the allegation that the fishing companies and their directors have acted oppressively. Since the plaintiff contends they clearly have, it would be repugnant to her for FWV to decline to say so. The director who, as it appears, has responsibility for the defence, Mr Von Stanke, has a conflict of interest in the matter since he is a director of the fishing companies, a shareholder of RCV and a beneficiary in several ways of the so-called conventional understanding. Little more than these facts is needed to raise a question as to whether the company will properly take responsibility for the proceedings. It is acknowledged that FWV does not propose to take the steps in the action foreshadowed by the plaintiff if she is given permission. Whether what has been done already amounts to “properly” taking responsibility for the proceedings is, in my view, allied to what is in the best interests of the company. As will be seen, I am satisfied as to that issue and by reason of that finding and the matters I have just mentioned, I am satisfied that the plaintiff has established the requirement imposed by s 237(2)(a).
Then, s 237(2)(e) deals with the question of notice to the company of the intention to apply for leave and of the reasons for so applying. That notice was indeed given to the solicitors acting for FWV in action number 1565. The defendant complains that the notice should have been directed to itself, but I think there is nothing in that point.
The remaining three conditions – good faith, the best interests of the company and that there is a serious question to be tried, are the real areas of dispute. As Barrett J observed in Carpenter v Pioneer Park Pty Ltd (in liq) (2004) 211 ALR 457 at [10] there is a “degree of overlap” between these conditions.
The “acting in good faith” criterion
The plaintiff asserts that she believes FWV’s interests will best be served by joining with JHV in claiming relief against the fishing companies. She says she believes that FWV has a good cause of action against the fishing companies and the director defendants. She relies on a legal opinion furnished by her solicitors in that regard. That is annexed to her affidavit. It is a substantial document dealing in detail with the current proceedings and their history, as well as the legal principles guiding decisions relating to s 237 and the oppression remedy. She asserts that it is her wish in taking the action to restore value to FWV’s shareholding in the fishing companies.
In Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313 at [36] Palmer J observed that a consideration of whether good faith was demonstrated involved both whether the applicant honestly believed that a good cause of action existed and also whether the applicant was seeking to bring the derivative suit for a collateral purpose, such as would amount to an abuse of process. As to her honest belief, counsel for the executors pointed to the fact that this application was lodged long after the principal proceedings were instituted and not long before trial. That is so, but it does not cause me to doubt the plaintiff’s good faith.
It was to the second of the factors that the primary attack on Mrs O’Meara was directed. Counsel pointed to answers given by the plaintiff in cross-examination as to the purposes she sought to achieve by her proposed action. At various points in her evidence she expressed a desire that the benefits of the fishing business be distributed more widely in the community and that the community itself be enhanced, both of which are not purposes which benefit FWV. However she also expressed regret that FWV had been, over a period, dealt with unfairly by the fishing companies and said that it should have been growing over the last decade or so, whereas it had not been. It was further argued that in acknowledging that the plaintiff and her husband would like to own the fishing licence of which they now had use, the plaintiff was pointing to a benefit which was unavailable to her through this litigation. The same could be said of her wish to own some further land in the Carpenter Rocks area.
I found the plaintiff to be an honest witness. She is not a sophisticated woman. I gather she has lived most, if not all, of her life in Carpenter Rocks and its environs. The complexities of the litigation do not, understandably, come easily to her. But I am satisfied she understands the interrelationship of the various companies and the nature of the claims which are made by JHV. She has a clear understanding of the position she considers FWV should be taking in response to JHV’s claim and I am satisfied that in pursuing the derivative action her motives are genuine and she plans to see the litigation through to its conclusion. I do not consider that it can properly be said that her purposes are collateral. Even if the ultimate result is that the fishing companies are wound up, that does not undermine the purity of the plaintiff’s motives. But I do not think it is necessary to look so far. The immediate result of Mrs O’Meara’s application, if successful, will be that FWV will enjoy some of the profits of the fishing companies, of which it currently sees no part. I think the plaintiff has a legitimate interest in taking steps to achieve that end. That is not a collateral purpose as that concept is explained in Williams v Spautz (1992) 174 CLR 509.
It was submitted that since the plaintiff and her husband have enjoyed the use of a fishing licence (upon payment of a lease fee to the fishing companies of $20,000 per annum and a sum of $14,000 per annum to the Fisheries Department in the nature of a licence fee) together with some other benefits flowing to them from the fishing companies, it is unconscionable for her to allege oppression. Those other suggested benefits include training given to her husband, provision of a fishing boat for his use, a ready market for his catch and accommodation. In support of this argument I was referred to Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732, particularly at [31]. However, it is not at all clear that all these benefits flowed from the fishing companies anyway. Nor is there evidence before me to suggest that, to the extent they did, any of the arrangements were other than commercial. If they were, then there would be no inconsistency or undue discrimination in the O’Mearas not having to account for profits made by use of the licence and boat. There is no proof before me of the terms upon which other family members used other fishing licences. There is nothing before me to show that the plaintiff has been complicit in the way in which the fishing companies have misused their assets, nor that she seeks to advantage FWV or herself beyond its or her just deserts.
I am satisfied of the plaintiff’s good faith in this matter.
The “best interests of the company” criterion
I turn then to the question whether it is in the best interests of the company that the plaintiff be granted leave. There is no attempt by the company to invoke the presumption in s 237(3). Before being satisfied as to this matter I must find that the pursuit of the particular legal action will positively serve the best interests of the company. This has been said to require more than an inquiry into possibility or potential: Carpenter at [19]; Swansson at [55]-[56]. That statement is particularly apt if considering permission to bring, as opposed to assuming responsibility for, proceedings. I must look at all the relevant circumstances of the current and proposed litigation. Those include the strength of the case.
The plaintiff contends that the defence of the fishing companies and director defendants is likely to fail because the “conventional understanding” invoked by the defendants offends fundamental principles of company law and fails to justify the discriminatory way in which the affairs of the fishing companies have been run. She puts that if there were anything in the nature of such an understanding at the time when the corporate relationships were established, then it cannot bind successive generations of the family who have never acquiesced in it.
It is relevant to consider what might be the consequences to FWV if it maintains its current defence of the action, as against the situation if Mrs O’Meara takes responsibility for the defence and is able to proceed as she foreshadows.
On my analysis, if JHV succeeds then it seems likely that the director defendants would be obliged to account to the family companies for their use of the fishing companies’ assets and the profits made from them. In that eventuality, FWV should find its net assets are substantially increased. However, if JHV were successful in obtaining an order that its shares in the fishing companies be acquired by FWV and RCV then it is likely that only JHV would be better off. Additionally, all the defendants would be affected by an adverse costs order against them. On the other hand, if JHV were to lose the action the status quo would likely continue with FWV deriving no income or benefit from its shareholding in the fishing companies. Additionally, FWV might have some liability for costs not recovered.
The plaintiff suggests that if she is granted leave then, whatever happens, FWV will be no worse off. She puts that this is so even if FWV is unsuccessful. In that instance she would be obliged by her undertaking to pay FWV’s costs from the time of her involvement onward. If FWV were, on the other hand, successful then, along with JHV, significant funds should accrue to it and it would recover its costs.
As to the plaintiff’s capacity to pay costs there is some evidence before me. Mrs O’Meara is not a woman of straw. She has substantial assets and a 50 per cent entitlement under her parents’ estates, as yet undistributed by the executor, Mr Von Stanke. She has said in evidence that she has spoken with her bank as to taking a loan of up to $1m to cover her potential liability if the principal action is lost. I see no reason to think that she could not meet such a costs order, and there is no reason to think or indeed any evidence establishing that this amount would be insufficient.
To some extent the evaluation of this criterion involves my own assessment of the likely outcome of the litigation and I think it inappropriate to say too much about that. It is sufficient to observe that in my view to allow Mrs O’Meara to proceed as she wishes presents real prospects of benefits to the company and that those transcend the risks involved of FWV losing. I consider that the likelihood of a better outcome for FWV accompanies the plaintiff’s proposed intervention. I have sympathy for the plaintiff’s viewpoint that the worst thing that could befall the company is for it to succeed in its current defence. The plaintiff’s proposed intervention is in my view in FWV’s best interests.
The “serious question to be tried” criterion
In considering whether there is a serious question to be tried the plaintiff has “the same relatively low threshold to surmount as in the case of an application for an interlocutory injunction”: Swansson at [25]; Carpenter at [17]. Barrett J put it slightly differently in Chahwan v Euphoric Pty Ltd [2006] NSWSC 1002 at [27]:
On an application such as this, it is not the function of the court to probe in depth the issue of serious question to be tried. The process is essentially a screening process designed to exclude cases with insufficient prospects of success to warrant the proceedings being pursued.
It is put by the defendant that there is no serious question to be tried since FWV, through its representation on the board of the fishing companies, has acquiesced in and consented to the conduct of which the plaintiff would have it complain. It is suggested that in this respect the position of JHV is clearly different from that of FWV because JHV had no representation on the boards of the fishing companies.
There is no evidence before me as to whether Mr Von Stanke, as a director of FWV, consented to any decisions which were taken by the fishing companies to distribute benefits outside its shareholders in the rather ad hoc way in which the plaintiff alleges. (Certainly the plaintiff did not.) Perhaps that is an argument which will be made in due course against FWV. But it is not clear to me at all that its availability is such as to foreclose the issue. If Mr Von Stanke indeed acquiesced in these decisions, then the question arises as to whether his actions would be attributed to FWV in any event, being so clearly adverse to FWV’s interests. (See Gluckstein v Barnes (Official Receiver & Official Liquidator of Olympia Ltd) [1900] AC 240; Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250.)
It is suggested that Mrs O’Meara’s oppression action is doomed to fail as the allegations have not been adequately spelt out in the proposed pleadings: Shelton v National Roads and Motorists Association Ltd (2004) 51 ACSR 278. In the draft contribution notice FWV seeks various orders “[o]n the basis of the allegations made by the plaintiff in the within proceedings and the defence filed herein …”. Effectively, the particulars of the oppressive conduct alleged by JHV are adopted. I do not understand why the allegations are said to be inadequate. To suggest that various benefits were handed out to all family members over a long period – which is not established on the evidence before me anyway – is not to deny that by such actions FWV was treated oppressively.

Having regard to all these matters and to the findings I have made in relation to the issues of good faith and best interests of the company, I consider the plaintiff has sufficiently answered this criterion.
Conclusion
I mentioned that although Mr Von Stanke filed affidavits in support of the position he takes in each capacity they were not tendered. I have not read them. Counsel for the plaintiff suggested that I should draw adverse inferences against Mr Von Stanke by reason of his failure to give evidence on various issues raised by s 237 and by Mrs O’Meara’s evidence. He suggested that those inferences could be drawn by reference to Jones v Dunkel (1959) 101 CLR 298. In the event I have not needed to consider that issue. I have reached my conclusions on the basis of the evidence before me which is uncontradicted and which I have accepted, and without reference to any inference that Mr Von Stanke’s evidence would not have helped him.
The plaintiff has met the requirements imposed by s 237(2). I must therefore grant the application.
I shall hear the parties as to the form of the orders.