Oates v Consolidated Capital Services Ltd - [2009] NSWCA 183

No judgment structure available for this case.

Reported Decision: 257 ALR 558233 FLR 28372 ACSR 50676 NSWLR 6927 ACLC 1,166

New South Wales

Court of Appeal

CITATION: Oates v Consolidated Capital Services Ltd [2009] NSWCA 183
This decision has been amended. Please see the end of the judgment for a list of the amendments.

HEARING DATE(S): 16 February 2009

JUDGMENT DATE:
3 July 2009

JUDGMENT OF: Spigelman CJ at 1; Allsop P at 2; Campbell JA at 5

DECISION: (1) Appeal dismissed with costs.
(2) Notice of Motion to join Messrs Hawkins and Tyne dismissed with costs.

CATCHWORDS: CORPORATIONS – derivative action – sections 236 and 237 Corporations Act 2001 (Cth) – meaning of “proceedings on behalf of a company” – whether using a statutory derivative action to cause the company to bring a general law derivative action would be considered “proceedings on behalf of a company” – meaning of “proceedings” – meaning of “on behalf of a company” – distinction between the rights of members or shareholders and officers or directors under section 236 – whether a person bringing proceedings on behalf of a company must assert a cause of action for the benefit of the company – CORPORATIONS – derivative action – general law – whether leave is required to commence a derivative action at general law – distinction between leave to commence proceedings and a trial of a preliminary issue – history of the procedure for bringing a derivative action –CORPORATIONS – membership, rights and remedies – reflective loss – whether a shareholder of a holding company can obtain a remedy for loss suffered by a subsidiary company – DAMAGES – general principles – reflective loss – whether a shareholder of a holding company can obtain a remedy for loss suffered by a subsidiary company – whether the losses are to be considered separate – EQUITY – equitable remedies – whether the reflective loss principle applies to equitable remedies – APPEAL AND NEW TRIAL – appeal – general principles – points and objections not taken below – requirement to examine the pleadings and the oral and written admissions – whether argument sought to be raised on appeal was argued at trial – EMPLOYMENT LAW – the relationship of employer and employee – whether property was created in the course of employment – whether property belongs to the employer or employee – STATUTORY INTERPRETATION – sections 236 and 237 Corporations Act 2001 (Cth) – whether section 237 is to be interpreted independently of section 236 – whether upon meeting the requirements of section 237 the court must grant leave – interpretation of legislative provisions in context – WORDS AND PHRASES – “proceedings” – “on behalf of” – “reflective loss”

LEGISLATION CITED: Acts Interpretation Act 1901 (Cth)
Companies Act 1985 (UK)
Companies Act 2006 (UK)
Corporate Law Economic Reform Program Act 1999 (Cth)
Corporations Act 2001 (Cth)
Rules of the Supreme Court 1965 (UK)
Uniform Civil Procedure Rules 2005

CATEGORY: Principal judgment

CASES CITED: Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461; 23 LTOS 315; [1843-60]; All ER Rep 249
Amaca Pty Ltd v Cremer [2006] NSWCA 164; (2006) 66 NSWLR 400
Amaca Pty Ltd v Novek [2009] NSWCA 50
Atwool v Merryweather (1867) LR 5 Eq 464n; 37 LJ Ch 35
Beach Petroleum NL v Kennedy [1999] NSWCA 408; (1999) 48 NSWLR 1
Bhullar v Bhullar [2003] EWCA Civ 424; [2003] BCC 711; [2003] 2 BCLC 241
Braverus Maritime Inc v Port Kembla Coal Terminal Ltd [2005] FCAFC 256; (2005) 148 FCR 68
Bray v Ford [1896] AC 44
Cameron Brae Pty Ltd v Commissioner of Taxation [2007] FCAFC 135; (2007) 161 FCR 468
Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 1007; (2004) 211 ALR 457; 51 ACSR 299
Chahwan v Euphoric Pty Ltd [2008] NSWCA 52; (2008) 245 ALR 780; 65 ACSR 661
Chen v Karandonis [2002] NSWCA 412
Chilcotin Pty Ltd v Cenelage Pty Ltd [1999] NSWCA 11
Coulton v Holcombe (1986) 162 CLR 1
East Pant Du United Lead Mining Company (Limited) v Merryweather (1864) 2 H & M 254; 71 ER 460
Eastland Technology Australia Pty Ltd v Whisson [2005] WASCA 144; (2005) 223 ALR 123
Ehsman v Nutectime International Pty Ltd [2006] NSWSC 887; (2006) 58 ACSR 705
Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732
Foss v Harbottle (1843) 2 Hare 461; 67 ER 189
Friend v Brooker [2009] HCA 21; (2009) 83 ALJR 724; 255 ALR 601
Gould v Vaggelas (1984) 157 CLR 215
Harrison v Melhem [2008] NSWCA 67; [2008] Aust Torts Reports 81-951 (61,661)
Howell v Macquarie University [2008] NSWCA 26
Johnson v Gore Wood & Co [2002] 2 AC 1
Karam v Australia and New Zealand Banking Group Ltd [2000] NSWSC 596; (2000) 34 ASCR 545
Khouri v Government Insurance Office (NSW) (1984) 165 CLR 622
Leaway Pty Ltd v Newcastle City Council (No 2) [2005] NSWSC 826; (2005) 220 ALR 757
Magafas v Carantinos [2006] NSWSC 1459
Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859
Manly Council v Byrne [2004] NSWCA 123
Menier v Hooper’s Telegraph Works (1874) LR 9 Ch App 350
Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414
Multicon Engineering Pty Ltd v Federal Airports Corporation (1997) 47 NSWLR 631
O’Brien v Komesaroff (1982) 150 CLR 310
Oates v Consolidated Capital Services Limited [2008] NSWSC 464; (2008) 218 FLR 73; 66 ACSR 277
Oates v Consolidated Capital Services Pty Ltd [2007] NSWSC 680
O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262
Proust v Blake (1989) 17 NSWLR 267
Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204
Quinn v Leathen [1901] AC 495
Ragless v IPA Holdings Pty Ltd (in liq) [2008] SASC 90; (2008) 65 ACSR 700
Re Doran Constructions Pty Ltd (in liq) [2002] NSWSC 215; (2002) 194 ALR 101; 168 FLR 116
Showtime Management Australia Pty Ltd v Showtime Presents Pty Ltd [2008] NSWSC 618
South Johnstone Mill Ltd v Dennis [2007] FCA 1448; (2007) 163 FCR 343
Suttor v Gundowda Pty Ltd (1950) 81 CLR 418
Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313
Talbot v NRMA Ltd [2000] NSWSC 608; (2000) 50 NSWLR 300
Target Holdings Ltd v Redferns [1996] 1 AC 421
Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638
University of Western Australia v Gray (No 20) [2008] FCA 498; (2008) 246 ALR 603; 76 IPR 222
University of Wollongong v Metwally (No 2) (1985) 59 ALJR 481; 60 ALR 68
Victoria University of Technology v Wilson [2004] VSC 33; (2004) 60 IPR 392
Virgtel Ltd v Zabusky [2006] QSC 66; [2006] 2 Qd R 81
Waddington Ltd v Chan Chun Hoo [2006] HKCA 196; [2006] 2 HKLRD 896
Waddington Ltd v Chan Chun Hoo [2008] HKCFA 63; [2008] HKEC 1498
Wallersteiner v Moir (No 2) [1975] QB 373
Water Board v Moustakas (1988) 180 CLR 491
Whisprun Pty Ltd v Dixon [2003] HCA 48; (2003) 77 ALJR 1598; 200 ALR 447
White v Shortall [2006] NSWSC 1379; (2006) 68 NSWLR 650
Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484

TEXTS CITED: A J Boyle, “The Minority Shareholder in the Nineteenth Century: A Study in Anglo-American History” (1965) 28 Mod L Rev 317
Austin Ford and Ramsay, Company Directors (2005) LexisNexis Butterworths
B S Prunty, “The Shareholders’ Derivative Suit: Notes on its Derivation” (1957) 32 NYU L Rev 980

PARTIES: Tom Michael Oates (Appellant/Applicant in N/M for joinder)
Consolidated Capital Services Pty Limited (First Respondent)
Consolidated Capital Limited (Second Respondent)
Australian Securities and Investments Commission (Third Respondent)
Garrick Michael Hawkins (Respondent to N/M for joinder)
Scott Francis Tyne (Respondent to N/M for joinder)

FILE NUMBER(S): CA 40171/08

COUNSEL: M Leeming SC; J Hewitt (Appellant)
J Gleeson SC; J Hogan-Doran (First & Second Respondents)
Submitting Appearance (Third Respondent)
S Robb QC (Respondents to N/M for joinder)

SOLICITORS: Chang Pistilli & Simmons (Appellant)
Eakin McCaffery Cox (First & Second Respondents & Respondents to N/M for joinder)
Australian Securities & Investment Commission (Third Respondent)

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): 1021/07

LOWER COURT JUDICIAL OFFICER: Barrett J

LOWER COURT DATE OF DECISION: 15 May 2008

LOWER COURT MEDIUM NEUTRAL CITATION: Oates v Consolidated Capital Services Ltd [2008] NSWSC 464

CONTENTS

Para

Nature of the Case 6

Derivative Actions Under the General Law 16

The Statutory Derivative Action 19

The CCL Reorganisation Deed 24

The Claims Sought to be Brought 30

The Proceedings Below 40

PART A – ENFORCING RIGHTS OF CCL UK

54

Section 237 a Freestanding Power? 55

Is Action to Enforce CCL UK’s Rights “Proceedings on Behalf of” CCL Australia 66

Is Leave Possible, or Necessary, to Start a General Law Derivative Action? 71

Would a General Law Leave Application be “Proceedings on

Behalf of” CCL Australia 108

Error in Characterisation as “Double Derivative Action”? 138

PART B – ENFORCING RIGHTS OF CCL AUSTRALIA

“Ownership” of Products and Opportunities 141

Ownership Arising from Employment? 142

What Did “Ownership” Consist Of? 156

Serious Question to be Tried 163

Breach of Duty to CCL Australia? 168

Failure to Deal with Contentions about Transfer Of Shares in CCL UK 183

The Written Submissions Below 188

The Oral Argument 197

Decision 202

Reflective Loss 207

Failure of Mr Hawkins to Give Evidence 231

In Which Entity are Shares in CCL Australia Vested? 236

The Notice of Motion of Joinder 240

Ground of Appeal Number 6 245

Orders 247

CA 40171/08
SC 1021/07

SPIGELMAN CJ
ALLSOP P
CAMPBELL JA
3 JULY 2009

TOM MICHAEL OATES v CONSOLIDATED CAPITAL SERVICES PTY LTD & ORS

Judgment

1 SPIGELMAN CJ: I agree with Campbell JA.

2 ALLSOP P: I have had the advantage of reading the reasons for judgment of Campbell JA. I agree with the orders that he proposes and, subject to the comments below, with his Honour’s reasons.

3 As to the question of the use of the extrinsic material discussed at [126]-[134] I would only say that my agreement with his Honour’s reasons should not be taken as acceptance of a proposition that the material is to be viewed differently where it confirms rather than tends against any particular construction: cf Braverus Maritime Inc v Port Kembla Coal Terminal Ltd [2005] FCAFC 256; 148 FCR 68 at 81 [36]; Cameron Brae Pty Ltd v Commissioner of Taxation [2007] FCAFC 135; 161 FCR 468 at 471 [3].

4 As to the question of the transfer of shares point, I would tend to the conclusion that the conduct of the oral argument discussed by Campbell JA at [197] ff entitled the primary judge to approach the matter as he did. Nevertheless, I otherwise agree with Campbell JA’s analysis of the issues thereafter.

:

6 Mr Tom Oates, Mr Garrick Hawkins and Mr Scott Tyne were associated with a business venture that, in the period 2001 to 2004, was involved in the development and marketing of structured finance products in the United Kingdom and elsewhere in Europe. The business venture was carried out using a group of three companies.

7 The holding company in the group was an Irish company, Consolidated Capital Acceptances Limited (“CCL Ireland”). The shares in CCL Ireland were held by a nominee for Mr Oates (as to 20%), by interests associated with Messrs Hawkins and Tyne (35% each), and also by a Mr Tony Mallin (as to 10%). Messrs Oates, Hawkins and Tyne were all directors of CCL Ireland.

8 CCL Ireland held all the shares in Consolidated Capital Services Pty Ltd (“CCL Australia”) a company incorporated and registered in New South Wales. Messrs Oates, Hawkins and Tyne were all directors of CCL Australia.

9 CCL Australia in turn held all the shares in Consolidated Capital Limited (“CCL UK”), a company incorporated and registered in England and Wales. Messrs Oates, Hawkins and Tyne were also directors of CCL UK. CCL Australia, CCL UK and CCL Ireland were referred to collectively as “the Consolidated Capital Group”.

10 On 18 August 2004 Mr Oates resigned as a director of CCL Australia, CCL UK and CCL Ireland. On 24 August 2004 Messrs Hawkins and Tyne executed a deed, called the CCL Reorganisation Deed. It was executed by them both in their own personal capacities, and in their capacities as directors of the various CCL companies. It purported to transfer to Messrs Hawkins and Tyne various rights of CCL Australia, CCL UK and CCL Ireland. I will consider the provisions of that Deed in more detail later.

11 Mr Oates complains that Messrs Hawkins and Tyne have thereby appropriated to themselves, or to companies they controlled, certain commercial advantages that should have accrued to CCL Australia or CCL UK. Those commercial advantages were, broadly, of the nature of intellectual property and business opportunities.

12 Mr Oates wishes to cause CCL Australia to bring proceedings against Messrs Hawkins and Tyne alleging that they had breached fiduciary duties and other directors’ duties owed to CCL Australia, and also to cause CCL Australia, in its capacity as a member of CCL UK, to bring litigation against Messrs Hawkins and Tyne alleging that they had breached fiduciary duties and other directors’ duties owed to CCL UK. To enable those two types of litigation to be brought, Mr Oates commenced proceedings in the Equity Division of the Supreme Court of NSW against CCL Australia and CCL UK, seeking leave under section 237 Corporations Act 2001 (Cth) to enable such litigation to be brought. The parties agreed that no forum non conveniens point would be taken in either the application for leave or any subsequent proceedings.

13 Barrett J dismissed Mr Oates’ application: Oates v Consolidated Capital Services Limited [2008] NSWSC 464; (2008) 218 FLR 73; 66 ACSR 277. Mr Oates seeks to have this Court reverse Barrett J’s decision.

14 After the appeal had been instituted, Mr Oates filed a Notice of Motion in the appeal proceedings, seeking an order that Mr Hawkins and Mr Tyne “be joined as respondents to these proceedings”. That Notice of Motion was heard at the same time as the appeal from Barrett J.

15 CCL Australia and CCL UK were the First and Second Respondents to the appeal, and appeared by the one set of counsel and solicitors. While ASIC was joined to the appeal as Third Respondent, it filed a submitting appearance and took no part in the argument. Messrs Hawkins and Tyne were represented by Mr Robb QC on the hearing of the Notice of Motion, but took no part in the hearing of the appeal. Mr Robb commendably took the view that, even if his clients were ultimately to be joined to the appeal, the representatives of CCL Australia and CCL UK would have already said everything that could have been said by Messrs Hawkins and Tyne.

16 Under the general law there is a usual principle that only a corporation can sue for a wrong done to it, but there were some exceptional circumstances, recognised in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 and cases following it, when a member of the corporation was entitled to sue to enforce a right of the corporation. Cases that were brought by a member within one of those exceptional circumstances were referred to as “derivative actions”. Entitlement to bring a derivative action was restricted, as the practice concerning derivative actions first developed, to members of the corporation.

17 More recently, at least some jurisdictions have responded to the practice of business affairs being run through groups of companies by recognising the possibility of a member of a corporation bringing an action to sue for a wrong done to that corporation’s subsidiary. The possibility of bringing under the general law such a “double derivative action” has been recognised in decisions in litigation entitled Waddington Ltd v Chan Chun Hoo in both the Hong Kong Court of Appeal ([2006] HKCA 196; [2006] 2 HKLRD 896 – “Waddington CA”) and in the Hong Kong Court of Final Appeal ([2008] HKCFA 63; [2008] HKEC 1498 – “Waddington Final Appeal”). Though a statutory derivative action has been introduced in Hong Kong, the Waddington litigation was commenced before that legislation came into operation, and so was decided in accordance with the common law (Waddington Final Appeal [22]). It is not necessary to decide whether that extension of the general law is correct in principle.

18 In Australia the general law position concerning derivative actions has been significantly altered by Part 2F.1A Corporations Act 2001, which runs from sections 236 to 242 inclusive.

19 Sections 236 and 237 Corporations Act 2001 (Cth) provide:

“ 236 Bringing, or intervening in, proceedings on behalf of a company

(1) 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.

(2) Proceedings brought on behalf of a company must be brought in the company’s name.

(3) The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.

237 Applying for and granting leave

(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.

(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.

(4) For the purposes of subsection (3):

(a) a person is a third party if:

(i) the company is a public company and the person is not a related party of the company; or

(ii) the company is not a public company and the person would not be a related party of the company if the company were a public company; and

(b) proceedings by or against the company include any appeal from a decision made in proceedings by or against the company.”

20 It is common ground that Mr Oates falls within section 236(1)(a) by virtue of being a former officer of CCL Australia, and thus has standing under section 237(1) to apply to the court for leave under section 237. He does not have standing to apply for leave under section 237 in any way other than by being a former officer of CCL Australia. When he is not and never has been a member of CCL Australia he would not have had standing under the general law to bring a derivative action that sought to enforce any right of CCL Australia.

21 The proceedings in relation to which leave can be granted under section 236 are ones in which “a company” plays a role. The dictionary contained in section 9 Corporations Act 2001 states that: “company means a company registered under this Act ...”. Section 9 goes on to say that concerning certain identified provisions of the Act “company” has a wider meaning than that, but none of those wider meanings apply to sections 236-242. This Court held in Chahwan v Euphoric Pty Ltd [2008] NSWCA 52; (2008) 245 ALR 780; 65 ACSR 661 at [124]-[125] that a company in liquidation is not a “company” within the meaning of sections 236 and 237, but that restriction on the meaning of “company” in sections 236 and 237 does not impinge on the facts of the present case.

22 CCL Australia was incorporated and registered in New South Wales in April 2001, a date before the Corporations Act 2001 commenced (15 July 2001). However, the transitional provisions in section 1378 Corporations Act 2001 have the effect that the registration of CCL Australia may be dealt with after the commencement of the 2001 Act:

“… as if it were a registration of the company under Part 2A.2 of this Act as a company of whichever of the company types listed in subsection (2) corresponds to its previous class and type.”

23 It follows from this that CCL Australia is a “company” within the meaning of sections 236 and 237 Corporations Act 2001, but CCL UK is not.

24 Mr Hawkins and Mr Tyne executed the CCL Reorganisation Deed in both their individual capacities and in their capacity as directors of the various CCL companies.

25 Under the heading “Background” the Deed made various statements. It referred to Messrs Hawkins, Tyne and Oates having together conducted an investment banking business (referred to as “the Old Business”), from which Mr Oates had resigned. It said that “the Old Business was conducted through the medium of” CCL UK. It said:

“Hawkins, Tyne and Oates were each employees of CCL Australia. Their services were contracted to CCL UK by way of a service agreement between CCL UK and CCL Australia.”

26 It stated that the Old Business was funded by way of various advances made by Messrs Hawkins and Tyne to CCL Ireland, the repayment of which was jointly and severally guaranteed by CCL Australia and CCL UK. It stated that the loans were repayable upon demand, that demand had been made by the Deed, but none of the companies had the means of paying the loans, and hence the agreement had been entered.

27 The operative part of the document contained an acknowledgment:

“… that all:

(a) financial structures and concepts developed in the context of the Old Business; and

(b) all documents and economic models produced in the context of the Old Business,”

“… all its right, title and interest in and to:

(a) its shareholding in CCL Australia; and

(b) the Intellectual Property.”

28 CCL Australia assigned to Messrs Hawkins and Tyne:

“… all its right, title and interest in and to:

(a) its shareholding in CCL UK; and

(b) the Intellectual Property (if any).”

29 CCL UK assigned to Messrs Hawkins and Tyne:

“… all its right, title and interest (if any) in and to the Intellectual Property.”

30 Mr Oates’ counsel put before Barrett J a draft of the Statement of Claim that set out the allegations that Mr Oates wished eventually to have made in proceedings. It alleged that Mr Oates had been a director of the various CCL companies from dates in 2001 until 18 August 2004. It alleged that Mr Hawkins and Mr Tyne had each, at all relevant times, been directors of CCL Australia, CCL UK, and CCL Ireland.

31 One theme in the Statement of Claim was that in the period 2001 to 2004 certain “CCL Products” were “developed by officers of CCL Australia and/or CCL UK”, that they were primarily developed by Mr Oates “in his capacity as an executive director of CCL Australia and/or CCL UK”, and that each of the CCL Products “was the confidential property of CCL Australia and/or CCL UK”. In 2004 “CCL Australia and/or CCL UK” sought to derive fees and income from participating in transactions known as “Acquiring Income Transactions” and “Swap Novation Transactions”. In the period from 2001 to 24 August 2004 Mr Hawkins, Mr Tyne and Mr Oates also developed business opportunities “for the Consolidated Capital Group” directed to deriving income from participating in Acquiring Income Transactions, Swap Novation Transactions, transactions involving the CCL Products and other similar transactions. These transactions were referred to collectively as “the CCL Business Opportunities”.

32 The Statement of Claim alleged that the CCL Business Opportunities were developed by Messrs Hawkins, Tyne and Oates “in their respective capacities as officers and directors of CCL Australia and/or CCL UK”. The Statement of Claim also said that the CCL Business Opportunities “were the business opportunities of CCL Australia and/or CCL UK”.

33 Messrs Hawkins and Tyne, in their respective capacities as a director of CCL Australia, were each alleged to owe duties to CCL Australia of the following types:

“(a) a duty to act in good faith and in the best interests of the company’s shareholders as a whole;

(b) a duty to exercise his powers for proper purposes;

(c) a duty not to place himself into a position in which his personal interests did or might conflict with the interests of the company;

(d) a duty not to misappropriate the company’s property for personal or a third party interest;

(e) a duty not to misuse his position for personal or a third party’s possible advantage;

(f) a duty not to use for his personal benefit any business opportunity belonging to the company.”

34 In their respective capacities as a director of CCL UK, each of Mr Hawkins and Mr Tyne were alleged to owe to CCL UK duties stated in the same terms.

35 Next, the Statement of Claim pleaded the entering into of the CCL Reorganisation Deed. The Statement of Claim made separate mention of the various assignments effected by the CCL Reorganisation Deed, including the assignment by CCL Australia to Messrs Hawkins and Tyne of its right, title and interest to both its shareholding in CCL UK, and the Intellectual Property. It alleged that the assignments in that Deed were not supported by consideration passing from either Mr Hawkins or Mr Tyne to any of the companies in the Consolidated Capital Group, or alternatively were at an undervalue. The entering into of the CCL Reorganisation Deed was alleged to be a breach by Mr Hawkins and Mr Tyne of their duties to CCL Australia and CCL UK earlier set out.

36 Next, the Statement of Claim alleged that the entering into of the various assignments involved a breach of section 320 Companies Act 1985 (UK). Inter alia, that section prohibits a company entering into an arrangement whereby a director of the company or its holding company acquires one or more non-cash assets “of the requisite value” from the company, unless the arrangement is first approved by a resolution of the company in general meeting and (if the director is a director of its holding company) by a resolution in general meeting of the holding company. The Statement of Claim alleged that the assignment effected by the CCL Reorganisation Deed was of assets that exceeded the requisite value of the assets of CCL UK and CCL Australia, that there were no resolutions of CCL UK, CCL Australia or CCL Ireland to approve them, and hence that they breached section 320. The Statement of Claim alleged that section 320 imposed duties on Mr Hawkins and Mr Tyne as directors of both CCL UK and CCL Australia, that Mr Hawkins and Mr Tyne breached each of those statutory duties, and that each of CCL UK and CCL Australia had a cause of action in respect of breaches of section 320. It alleged that “CCL UK and/or CCL Australia” had thereby suffered loss and damage, that the assignments were void pursuant to section 322(1) Companies Act 1985 (UK), and that each of Mr Hawkins and Mr Tyne were liable to account to CCL UK for any gain that they had made directly or indirectly from the use of the CCL Products and the CCL Business Opportunities, pursuant to section 322(3) Companies Act 1985 (UK).

37 The Statement of Claim pleads not only that the entering of the CCL Reorganisation Deed is a breach of duties owed to the two separate companies. As well, under the heading “Diversion of Business Opportunities of the Consolidated Capital Group” it identifies several companies, alleges that they came under the control of Messrs Hawkins and Tyne in October 2004, and that Mr Hawkins, Mr Tyne and some of those companies derived income from the CCL Business Opportunities after 24 August 2004. Those circumstances are also alleged to give rise to breaches on the part of Mr Hawkins and Mr Tyne of their duties “to CCL Australia and/or CCL UK”.

38 The Statement of Claim also contains an allegation of breach of duty owed to Mr Oates personally, that need not be further considered for present purposes.

39 The Orders that Mr Oates Claimed in the Further Amended Originating Process, so far as relevant to this appeal, were that he: “… be given leave pursuant to section 237 of the Corporations Act to bring proceedings under section 236 of the Corporations Act in the name of CCL Australia against”: Mr Hawkins, Mr Tyne, and two companies to which Mr Oates alleged corporate business opportunities of CCL Australia had been wrongly diverted. That order was one designed to remedy the wrongs he alleged had been done to CCL Australia. Another order sought was:

Corporations Act

That order was one designed to remedy the wrongs he alleged had been done to CCL UK.

40 The parties to the proceedings below were Mr Oates as plaintiff, CCL Australia as first defendant, and CCL UK as second defendant. Only CCL Australia presented argument at the hearing. It contended that leave for Mr Oates to bring proceedings on behalf of CCL Australia should be refused, for two reasons. The first was that there was no serious question to be tried (as required by section 237(2)(d)) since any appropriated commercial advantages did not belong to CCL Australia. The second was that, even if there was a serious question to be tried, the expense and complexity of the proceedings would be quite disproportionate to any relief ultimately awarded, so it was not in the best interests of CCL Australia for Mr Oates to be granted leave, and thus section 237(2)(c) was not satisfied.

41 CCL Australia also contended that a grant of leave under section 237 to Mr Oates, in his capacity as a former officer of CCL Australia, could never put him in a position from which he could cause the wrongs that he said had been done to CCL UK to be sued for. It was common ground that any proceedings that sought to vindicate rights of CCL UK would need to be brought as a derivative action under the common law, and that the only person who could bring such an action to vindicate rights of a corporation was a member of the corporation. CCL Australia contended that a grant of leave under section 237 could not put Mr Oates into a position where he could cause CCL Australia to instigate a derivative action of that type.

42 Second, CCL Australia contended that under the general law a derivative action could not be brought by a corporation’s sole shareholder. Barrett J rejected this second contention, and no appeal is brought from that aspect of his decision, so it need not be considered further.

43 Barrett J upheld the contention that a grant of leave under section 237 could never put Mr Oates into a position where he could cause litigation to be brought that sued on breaches of duty owed to CCL UK.

44 Mr Oates’ claim to be granted leave to bring proceedings on behalf of CCL Australia was rejected because Barrett J was not satisfied that Mr Oates had made out a serious question to be tried. The evidence before his Honour included 10 volumes of contemporaneous documentation concerning the structure that was adopted for the CCL Group, and the actual operation of companies in the group. His Honour found (at [57]) that those documents:

“… show, virtually without exception, that it was [CCL UK] that sought legal and taxation advice on matters of structuring and that it was [CCL UK] that was put forward as the potential supplier. There can be no real doubt that all business dealings were, on their face, dealings by [CCL UK].”

45 That finding is not criticised on the appeal.

46 One of the concerns evident from the documentation was that the structure that was adopted should be as tax effective as possible. At the time, of the three countries in which companies in the CCL Group were incorporated, Ireland had the lowest corporate tax rate, and Australia the highest.

47 In an affidavit dated 19 October 2007, Mr Oates explained how the structure operated. In his explanation CCL UK was “the operating entity”:

“It would pay rent and salaries etc of people that worked for it in the UK. It would carry out its operations and services as agent or otherwise for and on behalf of its parent. It would recover these costs back plus a margin of say 10% and would only be taxed on this 10% margin in the UK …”

48 Barrett J recognised (at [57]) that the conclusion that would ordinarily be drawn from the fact that it was CCL UK that was carrying out virtually all of the activities of advancing the business (namely, that CCL UK was acting in its own interests) could be displaced by proof that it was in truth acting as an agent for CCL Australia. His Honour said (at [58]):

“The so-called intellectual property on which the litigation proposed by Mr Oates is based can only be a combination of the personal skills of the three individuals and the knowledge obtained from the external sources to which I have referred. There is little evidence about which company employed the individuals. The document in which Mr Hawkins and Mr Tyne set out the arrangement for the transfer of business to their own companies says that the three were employees of [CCL Australia]. On the other hand, there is evidence that it was [CCL UK] that paid the salaries, being funded by Mr Hawkins and Mr Tyne to do so (as I have said, the venture itself never made any money).”

49 Mr Tyne had deposed to how he understood the companies in the group would act and interrelate. The Judge summarised that understanding (at [55]) as:

‘substantial percentage’

50 Barrett J summarised the difference between the two contentions (at [56]) as:

modus operandi

‘products’

‘representative office’

51 His Honour considered (at [59]) how the objective of minimising tax would fare under the two accounts of the proposed structure. He noted that the proposed structure to which Mr Oates deposed would result in the vast bulk of the profits being derived in Australia, the highest tax jurisdiction, and that no explanation was given of how a large part of those profits would then be transferred to CCL Ireland. He noted that transfer by loan or dividend would not reduce the taxable income of CCL Australia, and continued (at [60]):

vice-versa

52 He took the view (at [61]) that the version for which Mr Tyne contended, “does at least seem to hang together in a coherent, if potentially artificial, way.” On Mr Tyne’s version, the English company would be the source of services created by it in its own right and from its own resources.

53 Barrett J concluded (at [68]-[69]) that the tax implications of the two structures “makes entirely implausible the possibility that the agency model was adopted.” Thus, he concluded that Mr Oates had not succeeded in showing there was any arguable basis for the contention that CCL UK operated as an agent of CCL Australia. That led, in his Honour’s view, to the conclusion that there was no foundation for a finding that CCL Australia, rather than CCL UK “owned” the commercial advantages allegedly wrongfully diverted by Mr Hawkins and Mr Tyne to themselves or their associated interests. For that reason, his Honour concluded that he was not satisfied that there was a serious question to be tried, so far as the alleged wrongs done to CCL Australia were concerned.

PART A – ENFORCING RIGHTS OF CCL UK

54 Sections 260-263 Companies Act 2006 (UK) have replaced the common law derivative action in England with a statutory derivative action with effect from 1 October 2007. On the hearing of the appeal it was common ground that that statute does not apply to causes of action that arose before the commencement of the legislation and that any cause of action that CCL UK had concerning the matters alleged in the draft Statement of Claim arose before that commencement. Hence the bringing by a shareholder of a derivative action to enforce rights of CCL UK is governed by the general law.

55 Barrett J’s consideration of whether to grant leave concerning wrongs allegedly done to CCL UK proceeded on the assumption that, if leave were granted under section 237 to bring proceedings, those proceedings would need to be proceedings “on behalf of a company”. Mr Leeming SC, counsel for Mr Oates on the appeal, submits that the judge was mistaken in making that assumption. Rather, he submits, section 236 sets out who may bring proceedings on behalf of a company, but section 237 does not use the expression “on behalf of a company”. He submits that all that is required, before section 237 is activated, is that the applicant meet one or other of the descriptions set out in section 236(1)(a), the applicant applies to the court “for leave to bring, or to intervene in, proceedings”, and that the applicant satisfies such of the five matters listed in section 237(2)(a)-(e) as are applicable to the particular application being made. (Section 237(2)(d) does not apply to an application for leave to intervene in proceedings, but that qualification does not impact on the present case.)

56 He submits that section 237(2) requires the court to grant such an application if it is satisfied of the five matters listed in section 237(2)(a)-(e). Mr Leeming points to statements to that effect in Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 1007; (2004) 211 ALR 457; 51 ACSR 299 at [31] per Barrett J, and Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732 at [16] per Austin J. Particularly clear, he submits, is the statement of Brereton J in Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 at [13] that:

“A consequence of the conclusion that, if all five criteria be satisfied, leave must be granted, and that otherwise leave must be refused, is that the relevant considerations are limited to the five specified criteria.”

Magafas v Carantinos

57 Thus, Mr Leeming submits, Barrett J was in error in adding a criterion to the list, namely, that the proceedings concerned be ones “on behalf of a company” within the meaning of section 236(1).

58 I do not accept this submission. As a matter of statutory construction, sections 236 and 237 are to be read together. When they are read together, the only type of leave that can be granted under section 237 is leave to bring proceedings on behalf of the company, or leave to intervene in any proceedings to which the company is (already) a party for one of the purposes listed in chapeau to section 236(1).

59 The reasons for reaching this conclusion are:

Entries on the list of types of person contained in section 236(1)(a) all operate by reference to the expression “the company” . “The company” in section 236(1)(a) refers back to the chapeau of section 236(1), so that “the company” is the company on behalf of which the person in question may bring proceedings, or the company that is (already) a party to proceedings in which the person in question seeks to intervene for the purpose identified in the chapeau to section 236(1). Thus, Mr Oates is a person referred to section 236(1)(a) because he is a former officer of a company on behalf of which he seeks to bring proceedings, namely CCL Australia. The only type of person who is empowered by section 237(1) to apply for leave is “a person referred to in paragraph 236(1)(a). In this way, when section 237 entitles someone to apply to the Court for leave to bring proceedings, the requirement for proceedings to be brought “on behalf of” a company is incorporated in section 237 itself.

“the company”

60 The cases upon which Mr Leeming relies for this argument do not in my view support the conclusion he draws from them. In Magafas v Carantinos Brereton J began his discussion of the prerequisites for leave by saying, at [7]:

Corporations Act

61 Brereton J in Maher v Honeysett at [12] said:

“Section 237 identifies five criteria which, if satisfied, require the Court to grant the leave referred to in s 236.”

62 Similarly, in Chahwan v Euphoric Pty Ltd at [117] Tobias JA (with whom Beazley JA and Bell JA (as her Honour then was) agreed) accepted that:

“… if the s 237(2) criteria are satisfied, the court must grant leave: there is no residual discretion.”

63 The leave referred to in section 236 is, of course, (relevantly here) leave to bring proceedings on behalf of a company.

64 While Barrett J in Carpenter v Pioneer Park and Austin J in Fiduciary v Morningstar Research made statements to the effect that leave must be granted if all five criteria are satisfied, those remarks were made in a context where the leave that was being sought was in fact leave to bring proceedings on behalf of a company. The general words of Barrett J and Austin J in those cases must be understood by reference to the context in which they were spoken: Quinn v Leathen [1901] AC 495 at 506 per Earl of Halsbury LC; Leaway Pty Ltd v Newcastle City Council (No 2) [2005] NSWSC 826; (2005) 220 ALR 757 at [75]-[84].

65 In reasoning on the basis that the leave granted under section 237 had to be leave to bring proceedings on behalf of the company, Barrett J was not illicitly adding an extra criterion to the list of matters that must be satisfied before leave can be granted. Rather, he was applying the correct construction of this section.

66 Barrett J said (at [27]) that the “crucial question” was:

‘on behalf of’

67 The reason why his Honour viewed that as the crucial question was:

‘bring proceedings on behalf of’

68 Mr Leeming submits that his Honour thereby addressed the wrong question. When CCL UK is not a “company”, the abolition of the right under the general law to bring proceedings “on behalf of a company” by section 236(3) has no application to it, and neither can a grant of leave under section 237 enable proceedings to be brought on behalf of it. Thus, any action brought against Mr Hawkins, Mr Tyne and their associated companies to enforce any rights of CCL UK could only be brought under the general law.

69 Mr Leeming submits that, even accepting that any derivative action to enforce the rights of CCL UK can only be brought under the general law by a member of CCL UK, and that CCL Australia is the only member of CCL UK, there is still scope for Mr Oates to obtain leave under section 236 that is relevant to such an action. One way in which Mr Leeming submits this could happen is if Mr Oates is granted leave under section 236 to bring proceedings on behalf of CCL Australia seeking leave (under the general law) for CCL Australia to bring or continue derivative proceedings for the benefit of CCL UK. Another route is by an application by Mr Oates to take a step in proceedings commenced on behalf of CCL Australia, in the event that the CCL Australia application is successful. The particular relief that Mr Oates had sought from Barrett J was, he says, the first of these types of relief – see para [39] above.

70 That submission gives rise to a question of whether under the general law it is either possible or necessary for a court to grant to a member of a corporation leave to commence or maintain a derivative action. The argument on that topic has proceeded without examining any questions of conflicts of laws, and on the basis that no statutory provisions or rules of court bear upon the question.

71 The famous decision of Sir James Wigram VC in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 was a decision given concerning a demurrer to a bill. As stated at Hare 461; ER 190:

“The bill was filed … by [A and B] on behalf of themselves and all other the shareholders or proprietors of shares in the company called [C], except such of the same shareholders or proprietors of shares as were defendants thereto …”

72 The company in question was incorporated by an Act of Parliament. Counsel seeking the demurrer specifically argued (at Hare 485; ER 200):

“… that the suit complaining of injuries to the corporation was wholly informal in having only some of its individual members, and not the corporation itself, before the Court; that this defect would not be cured by adding the corporation as parties Defendants, for the Plaintiffs were not entitled to represent the corporate body, even as distinguished from the Defendants and for the purpose of impeaching the transactions complained of …”

73 Sir James Wigram stated (at Hare 490-1; ER 202):

prima facie

74 In other words, his approach was to examine the allegations that had been made in the bill already filed, and see whether the facts so alleged were such as justified an individual member bringing proceedings to enforce a right of the company. The proceedings that the Vice-Chancellor was deciding were like any other demurrer proceedings – they started from the recognition that an action had already been commenced by the filing of the bill, and decided whether the facts alleged in the bill would, if true, show a state of affairs concerning which the law would grant a remedy.

75 Sir James Wigram said (at Hare 491-2; ER 202-3):

inter se

Wallworth v Holt

76 That passage involves specific recognition that it is sometimes possible for an action to be brought by a member of a company, on behalf of themselves and all the other shareholders other than the defendants.

77 The balance of the judgment involved detailed consideration of when a member of a corporation could bring an action to enforce a right of the corporation, and whether the allegations in the particular bill in question measured up to those requirements. There is no suggestion in the judgment, however, that there is any requirement for the court to grant leave before the action can commence.

78 In East Pant Du United Lead Mining Company (Limited) v Merryweather (1864) 2 H & M 254; 71 ER 460 Sir William Page Wood VC considered a situation where a company had purchased a lead mine from one of its directors for a consideration paid partly in cash and partly in shares. Proceedings to set aside the sale were begun, at the instigation of a shareholder, in the name of the company. The solicitor who acted for that shareholder in commencing that action had not been authorised by the Board of Directors to do so. An extraordinary general meeting of the company resulted in a motion for adoption of the bill being defeated in circumstances where the majority was attained only by the defendant-director voting the shares with which he had been issued as part consideration for the purchase of the mine.

79 The Vice-Chancellor directed that the bill be taken off the file, saying, at H & M 261; ER 463:

“At a general meeting, therefore, Mr Merryweather’s votes must be held to be good so long as he continues to hold his shares. Further than this the Court cannot be asked now to give an opinion, for to do so would be to decide the very question at issue in the cause.”

80 That case establishes that a shareholder is not entitled to sue in the name of the company to enforce a right of the company, unless duly authorised by the company. Taking the bill off the file was an appropriate remedy, once it was established that the solicitor who had filed the bill did not have authority to act for the company that was the nominal plaintiff. The case says nothing about a derivative action that is framed in the way that the action in Foss v Harbottle was framed.

81 In Atwool v Merryweather (1867) LR 5 Eq 464n; 37 LJ Ch 35 another attempt was made to attack the same transaction that had been the subject of the East Pant Du United case. This time, a bill had been filed by a plaintiff on behalf of himself and all the other shareholders of the company (other than the defendants) seeking to set aside the contract between the company and two of the defendants. One of the defendants submitted (at LR Eq 467 col 1) that, “the proper course would have been for the Plaintiff to have filed a bill for leave to use the name of the company against the parties to the contract”. (See also LJ Ch 37 col 2.) Sir William Page Wood VC, at LR Eq 468 col 2; LJ Ch 39 col 1, rejected that submission, saying: “I do not think that circuitous course is necessary under any circumstances.” That manner of proceeding was in accord with Foss v Harbottle, and was approved by the Court of Appeal in Chancery in Menier v Hooper’s Telegraph Works (1874) LR 9 Ch App 350.

82 In Wallersteiner v Moir (No 2) [1975] QB 373 Lord Denning MR considered the problem that arose if a company was defrauded by directors who hold a majority of shares. He said, at 390C-1B:

Foss v Harbottle

‘in the name of some one whom the law has appointed to be its representative.’

‘by individual corporators in their private characters, and asking in such character the protection of those rights to which in their corporate character they were entitled ...’

Merryweather

East Pant Du United Lead Mining Co Ltd v Merryweather

Menier v Hooper’s Telegraph

Mason v Harris

Burland v Earle

Merryweather

83 The first two paragraphs just quoted are, with respect, capable of misleading. The notion of the law appointing someone to be the representative of a company does not necessarily involve the court granting any leave to use the company’s name. It can be sufficient if an individual shareholder sues on behalf of himself and other shareholders in circumstances where the law recognises that he is entitled to do so. That way of reading the words of Wigram VC is in my view more in accord with the immediate context in which the few words that Lord Denning quotes from Foss v Harbottle appear (that immediate context being set out at para [73] above), and with the flow of thought of the judgment as a whole.

84 Further, when Lord Denning says that in the first of the Merryweather cases “it was accepted there that the minority shareholders might file a bill asking leave to use the name of the company”, the reference that he gives, at 259 of Hemming & Miller’s report (ER 462-3) is to a passage of argument, not to the judgment. In the course of that argument, reported on p 259, Mr Rolt QC, counsel for the company, said:

“The onus of shewing that the bill has been adopted by the company relies on the minority filing it; but the shareholders have by the amendment, which was finally carried, negatived the adoption of the bill, and expressed their wish to refer the whole matter to arbitration… It is not shewn that the Plaintiffs have done their best to get leave to use the name of the company, which is essential. A bill might be framed, although not in the present form, to do justice, if necessary.”

85 The “leave to use the name of the company” that Mr Rolt mentioned may well refer to leave from the company itself. In any event, the notion of a plaintiff obtaining leave to use the name of the company does not appear anywhere in the Vice-Chancellor’s judgment in the first of the Merryweather cases. As well, the second Merryweather case was not an “initial application” – it was as final as litigation can be, for the orders made (at LR Eq 468-9n; LJ Ch 39) included orders for Merryweather to repay the purchase money with interest and deliver up the certificates for the shares with which he had been issued, and that the company be wound up. Sir William Page Wood said nothing about the “circuitous course” not being necessary only if fraud “could be proved on the initial application” – indeed he said nothing about “initial applications” at all.

86 The other two judges in the Court of Appeal did not join in Lord Denning’s account of the history of the derivative action. In these circumstances Wallersteiner v Moir(No 2) is not authority for leave to commence a derivative action ever having been part of the procedure under the general law.

87 A procedural device of the plaintiff in a derivative action approaching the court at an early stage to seek the approval of the court to the continuance of the action was suggested in Wallersteiner v Moir (No 2). The English Court of Appeal was there considering a situation in which a shareholder who had brought a derivative action had achieved some success in the action, but the action was not complete, and the shareholder was concerned about his potential future liability for costs. The potential avenues through which he might obtain such protection were listed by Lord Denning MR at 389H as being:

88 All members of the Court of Appeal held that legal aid was not available, Lord Denning MR, at 395, would have allowed a derivative action to be brought on the basis of a contingency fee arrangement with solicitors, but Buckley LJ, at 403, and Scarman LJ, at 407, would not permit contingency fees in those circumstances. However all three members of the Court of Appeal approved a procedure that was adapted from that available to a trustee of seeking directions of the court concerning the conduct of litigation. If a trustee conducted the litigation in accordance with such directions, the trustee was entitled to an indemnity for costs from the trust estate. Lord Denning put it this way, at 392:

In r

Beddoe, Downes v Cottam

89 Buckley LJ, at 404F-5C, was of a similar opinion:

“After issuing his writ a minority shareholder plaintiff could apply by summons in the action for directions as to whether he should proceed in the action and, if so, to what stage without further directions. I think that such an application should in the first instance be made ex parte. In a relatively simple case the court may feel able to deal with the matter without joinder of any other party. When the summons comes before the court, directions could be given as to whether the company or another minority shareholder or the defendants or any of them or anyone else should be made respondents and whether any respondent should be appointed to act in a representative capacity for the purposes of the summons. The court might at this stage think it desirable to require the plaintiff to circularise or convene a meeting of other minority shareholders and to place their views, so far as ascertained, before the court. The summons should be supported by affidavit evidence of any relevant facts, to which instruction to counsel and his opinion thereon should be exhibited. The respondent or respondents to the summons, if any, would also be permitted to file evidence. The evidence of other parties would not be disclosed to the defendants in the action unless the court so directed, and the defendants, if made respondents to the summons, would not be permitted to be present when the merits of the application were discussed. Upon the effective hearing of the summons the court would determine whether the plaintiff should be authorised to proceed with the action and, if so, to what stage he should be authorised to do so without further directions from the court. The plaintiff, acting under the authority of such a direction, would be secure in the knowledge that, when the costs of the action should come to be dealt with, this would be on the basis, as between himself and the company, that he has acted reasonably and ought prima facie to be treated by the trial judge as entitled to an order that the company should pay his costs, which should, I think, normally be taxed on a basis not less favourable than the common fund basis, and should indemnify him against any costs he may be ordered to pay to the defendants. Should the court not think fit to authorise the plaintiff to proceed, he would do so at his own risk as to the costs. A procedure on these lines could, I think, be adopted without any amendment or addition to the rules of court, although it might well be thought desirable that an appropriate rule should be made.”

90 Scarman LJ, at 407D, agreed with the procedural proposed by Buckley LJ, saying it: “… would be suitable and should be adopted until such time as a rule of court is made which covers the situation.”

91 It is to be observed that the procedure thus endorsed by the Court of Appeal was not seeking leave to commence the action, but applying for directions in the action at an early stage after it was commenced. Further, there was no compulsion on a member bringing a derivative action to make any such application. Rather, the making of such an application was envisaged to be an act of self-protection on the part of the member, to provide some assurance that his or her costs would ultimately be paid from the company's assets, and that there was nothing to stop a member from pressing on with the action without such protection if he or she chose to do so.

92 Mr Leeming submits that Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 shows the possibility of obtaining leave to proceed with a derivative action, at general law. Prudential was a decision on an appeal to the English Court of Appeal from orders made at the final hearing of a derivative action. The trial judge had held that two directors had conspired to injure the company, and that the plaintiff-shareholder was entitled to prosecute an action on behalf of the company to obtain a remedy concerning that conspiracy. Before the final hearing, the defendants in the action had applied to have a preliminary issue decided concerning whether the plaintiff was entitled to maintain the claim against them. The trial judge refused that application, and there was no interlocutory appeal from his decision to do so. The trial judge refused the application for a preliminary determination of the question notwithstanding that it was clearly put to him (extracted at 211-2) that, at least by that time, the defendants had neither shareholding nor board control, and an independent board had decided, with the abstention of the one defendant who remained a director, to defend the action.

93 In the course of the appeal from the final orders in the case, the Court of Appeal (Cumming-Bruce, Templeman and Brightman LJJ) made some obiter observations, as follows, at 221:

Foss v Harbottle

94 The course their Lordships were here recommending was the trial of a preliminary issue of the plaintiff’s standing to bring the action, not an application for “leave to proceed”.

95 At the time, Order 33, rule 4 of the English Rules of the Supreme Court 1965 provided:

“(1) In every action begun by writ, an order made on the summons for directions shall determine the place and mode of the trial …

(2) In any such action … one or more questions or issues may be ordered to be tried before the others.”

96 The type of “preliminary issue” that their Lordships contemplated was an unusual one. They said (at 221H-2B):

‘fraud’

‘control’

Foss v Harbottle

97 I say it is procedurally unusual because usually a preliminary issue in a case involves a decision, on a final basis, of one of the issues in the case, and not merely the establishment of a prima facie case. Even accepting this unusual feature of the “preliminary issue” that their Lordships propose, an application for trial of such a preliminary issue presupposes that there is litigation on foot in which that preliminary issue can be determined.

98 Prudential Assurance v Newman provides no support for the notion that under the general law leave was necessary before a representative action could be commenced.

99 Eventually in England Order 15, rule 12A was added to the Rules of the Supreme Court in 1994 (to apply to actions commencing on or after 1 September 1994), which provided, inter alia:

“(1) This rule applies to every action begun by writ by one or more shareholders of a company where the cause of action is vested in the company and relief is accordingly sought on its behalf (referred to in this rule as a “derivative action”).

(2) Where a defendant in a derivative action has given notice of intention to defend, the plaintiff must apply to the Court for leave to continue the action.

…

(9) If the plaintiff does not apply for leave to continue the action as required by paragraph (2) within the time laid down in paragraph (4), any defendant who has given notice of intention to defend may apply for an order to dismiss the action on any claim made in it by way of derivative action.

…

(13) The plaintiff may include in an application under paragraph (2) an application for an indemnity out of the assets of the company in respect of costs incurred or to be incurred in the action and the Court may grant such indemnity upon such terms as may in the circumstances be appropriate.”

100 Even under this new English practice leave was not required to start a derivative action, only to continue it.

101 An application for leave nunc pro tunc to commence and continue a derivative action was considered by de Jersey CJ in Virgtel Ltd v Zabusky [2006] QSC 66; [2006] 2 Qd R 81, but closer examination of the case does not assist Mr Leeming’s contention. In Virtgtel the company whose rights were said to be infringed was a Nigerian corporation. Under Nigerian law a derivative action could only be brought with the leave of the Federal High Court, and no such leave had been obtained (at 88 [43]). De Jersey CJ, at 88 [43], accepted evidence of a Nigerian lawyer that that requirement applied only to proceedings in Nigeria. Further, his Honour held that the question of whether a derivative proceeding had been duly commenced was a procedural question, and thus was determined in accordance with Australian law (at 88-91 [44]-[58]). (That part of his Honour’s decision need not be considered for the purpose of this appeal.) At 93 [67], his Honour said of the application for leave to commence the proceedings:

Prudential Insurance Company Ltd v Newman Industries Ltd

nunc pro tunc

102 The order actually made, at 100 [106] was a declaration that the applicants “were entitled to commence, and may continue this proceeding, as a derivative action on behalf of the [Nigerian company].” As a declaration, it had the status of a final determination of the right of the plaintiff to bring the action – it was not a preliminary granting of leave to bring the action.

103 In discussing the historical development of the derivative action, neither B S Prunty, “The Shareholders’ Derivative Suit: Notes on its Derivation” (1957) 32 NYU L Rev 980 nor A J Boyle, “The Minority Shareholder in the Nineteenth Century: A Study in Anglo-American History” (1965) 28 Mod L Rev 317 make any mention of leave to commence a derivative action ever having been part of the English law concerning derivative actions.

104 To the extent to which the judgment of Lord Millett NPJ in Waddington Final Appeal at [49]-[51] suggests that an application for leave was ever part of the nineteenth century procedure in England it does not, with respect, seem correct.

105 To summarise, a plaintiff who seeks to bring a derivative action under the general law must allege, in the initiating process, facts that show that he or she falls within a recognised exception to the prima facie rule that the proper plaintiff in an action in respect of a wrong alleged to be done to a corporation is the corporation itself. If the initiating process fails to make those allegations, it is liable to be struck out if the defendant chooses to apply to have it struck out. If the initiating process makes allegations which, if true, would suffice to enable the plaintiff to enforce a right owed to the company in which the plaintiff was a shareholder, but the defendant asserts that the allegations are so insubstantial that the matter should not go to trial, the defendant can move to seek summary dismissal of the claim. If trial of the merits of the action would be long and complicated, a defendant might choose to have a question of the plaintiff’s standing to bring a derivative action decided as a preliminary question. But there is no requirement under the general law relating to derivative actions for leave to be obtained before a plaintiff commences such an action.

106 This is a sufficient reason why Barrett J was right in refusing to give the type of relief that Mr Oates sought to enable him to enforce rights of CCL UK, identified in para [39] above.

107 There was lengthy argument about whether, if CCL Australia were to bring proceedings seeking leave to bring action under the general law against CCL UK, those proceedings for leave would be “proceedings on behalf of” CCL Australia, within the meaning of section 236. In accordance with what this judgement has already decided, that question does not arise. However, as it has been argued, I shall state my views concerning it, on the counterfactual hypothesis that such leave proceedings are possible.

108 Mr Leeming submits that a general law leave application that CCL Australia brought to enforce rights of CCL UK would amount to “proceedings on behalf of” CCL Australia, within the meaning of section 236. He submits that section 15AA Acts Interpretation Act 1901 (Cth) requires the court, in construing section 236, to prefer a construction that would promote the purpose or object underlying the Act to one that would not promote that purpose or object. He submits that section 236 is beneficial or remedial nature and thus, if ambiguous, to be construed “so as to give the most complete remedy which is consistent ‘with the actual language employed’ and to which its words ‘are fairly open’”: Khouri v Government Insurance Office (NSW) (1984) 165 CLR 622 at 638; Amaca Pty Ltd v Cremer [2006] NSWCA 164; (2006) 66 NSWLR 400 at 410-11 [48]-[51]. He draws attention to the statement of Santow J in Karam v Australia and New Zealand Banking Group Ltd [2000] NSWSC 596; (2000) 34 ASCR 545, where his Honour stated at 553 [27]:

“The statutory derivative action, as is clear from its antecedents in terms of a number of different reform proposals culminating in CLERPA, was intended to be remedial. That is borne out by the explanatory memorandum introducing these amendments. At para 15 it enumerates a number of difficulties associated with the common law action and clearly indicates that the legislation, with appropriate checks and balances, is seen as ameliorative: paras 16-17.”

109 Mr Leeming submits that there is no suggestion that the words “on behalf of a company” were intended to erect “a new technical barrier” to the bringing of derivative actions.

110 Considering the provisions just as a piece of text, first, the language of section 236(1) draws the distinction between a “company” and a “corporation”. Section 236 confers entitlement on a person only to bring proceedings on behalf of a “company” (not on behalf of a “corporation” that is not a “company”). Under the Corporations Act the definition of “corporation” is considerably wider than the definition of the term “company”. Under section 57A(1)(b) of that Act, “corporation” is defined to include “any body corporate (whether incorporated in this jurisdiction or elsewhere)”. The term “company”, on the other hand, is limited to companies registered under the Corporations Act (see para [21] above).

111 Second, the scope of the entitlement to bring proceedings that is conferred by section 236(1)(a) on “a member, former member, or person entitled to be a member” (any one of which I will call a “MEMBER”) is different to the scope of the entitlement that is conferred by section 236(1)(b) on “an officer or former officer” (either of which I will call an “OFFICER”). Section 236(1)(a) confers an entitlement to bring proceedings on not only a MEMBER of the “company”, but also on a person who is a MEMBER of “a related body corporate”. While there is a definition of “body corporate” in section 9 Corporations Act it is only an inclusive definition, and so does not detract from the width of the expression “body corporate” under the general law, as meaning any body whatsoever that has corporate personality. The definition of “related body corporate” is found in section 50 Corporations Act, which provides:

200 There was no other mention in oral submissions about a separate claim that Messrs Hawkins and Tyne had acted in breach of their duty to CCL Australia by assigning the shares it held in CCL UK. The address of counsel for Mr Oates used the written submissions as a framework, but did not expressly draw attention to the portions in the written submissions that related to the transfer of shares case. But there was no abandonment by counsel for Mr Oates of the transfer of shares claim.

201 In these circumstances, in my view the issue was before the judge, and should have been dealt with, even though senior counsel for CCL Australia made no submissions on the issue.

Decision

202 I do not accept that this Court should decline to permit the transfer of shares point to be agitated here. The point was made in advance of the trial in the written submissions of Mr Oates that the legal representatives of CCL Australia were served with, and CCL Australia had the opportunity to put whatever evidence or submissions it wished concerning it.

203 Nor do I accept that the only way in which Mr Oates could succeed in showing that there was a serious question to be tried on that point would be by giving detailed evidence about the nature and quantum of the damage alleged to be suffered by CCL Australia through the assignment of the shares. Subject to one matter that I discuss below, it would suffice, in my view, for the evidence before the judge to point to there being a factual foundation for concluding that the shares in CCL UK had value in CCL Australia’s hands before they were transferred.

204 There was no serious question to be tried that there was any view other than that it was CCL UK that would have the benefit of exploitation of the CCL Products and the CCL Business Opportunities. There is evidence from Mr Oates of having discussions with Merrill Lynch concerning the use of some of the CCL Products, that there was agreement in principle that Merrill Lynch would split fees it derived from entering such transactions 50:50 with a Consolidated Capital entity, and of Consolidated Capital Holdings (a company controlled by Messrs Hawkins and Tyne) having concluded in late 2004 various transactions with Merrill Lynch. An email from a Merrill Lynch officer to Mr Hawkins and Mr Tyne dated 16 October 2004 states:

“Subject to docs and the usual stuff, we have won the Abbey swaps – around £120 m of gain, £36 m of tax – split 42% to the good guys.

A good way to end the week – and a busy few weeks ahead to make it all work.”

205 There is affidavit evidence from Mr Tyne that on or before 4 October 2004 he and Mr Hawkins had no knowledge that Merrill Lynch had won or was about to win Swap Novation Transactions with the Royal Bank of Scotland and Abbey National. Even if it were correct that any income-producing contracts were not entered until October 2004 or later, that would not be sufficient to show that there was no serious question to be tried about whether profits arising from any such transaction were the product of the CCL Products or the CCL Business Opportunities, as those items existed before the CCL Reorganisation Deed was entered.

206 In my view, the evidence before the trial judge showed that there is a serious question to be tried, in both of the senses adverted to by Debelle J in Ragless, that the shares in CCL UK had a value before they were transferred, and that they were transferred for less than that value.

Reflective Loss

207 The “one matter” that I referred to earlier is this. Mr Gleeson submitted that any action that CCL Australia might bring against Messrs Hawkins and Tyne for breach of directors’ duties in transferring the shares it held in CCL UK for an undervalue would fail because of the reflective loss principle. I now turn to consider that principle.

208 In Prudential Assurance v Newman Industries (No 2) at 222-3 the English Court of Appeal considered a situation where a shareholder sued directors alleging that the directors had conspired to injure the company, and indirectly, the shareholders. The directors were alleged to have carried out their conspiracy by issuing a fraudulent circular inducing shareholders to vote in favour of the company purchasing certain assets at what proved to be an overvalue. For the shareholder to suffer loss in consequence of the conspiracy was an essential part of its cause of action. Their Lordships held, at 222G-3E, that the shareholders’ claim for personal loss was misconceived:

“… if directors convene a meeting on the basis of a fraudulent circular, a shareholder will have a right of action to recover any loss which he has been personally caused in consequence of the fraudulent circular; this might include the expense of attending the meeting. But what he cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a ‘loss’ is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only ‘loss’ is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent shareholding. The plaintiff’s shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participation, are not directly affected by the wrongdoing. The plaintiff still holds all the shares as his own absolutely unencumbered property. The deceit practised upon the plaintiff does not affect the shares; it merely enables the defendant to rob the company. A simple illustration will prove the logic of this approach. Suppose that the sole asset of a company is a cash box containing £100,000. The company has an issued share capital of 100 shares, 99 of which are held by the plaintiff. The plaintiff holds the key of the cash box. The defendant by a fraudulent misrepresentation persuades the plaintiff to part with the key. The defendant then robs the company of all of its money. The effect of the fraud and the subsequent robbery, assuming that the defendant successfully flees with his plunder, is (i) to denude the company of all its assets; and (ii) to reduce the sale value of the plaintiff’s shares from a figure approaching £100,000 to nil. There are two wrongs, the deceit practised on the plaintiff and the robbery of the company. But the deceit on the plaintiff causes the plaintiff no loss which is separate and distinct from the loss to the company. The deceit was merely a step in the robbery. The plaintiff obviously cannot recover personally some £100,000 damages in addition to the £100,000 damages recoverable by the company.”

209 In Gould v Vaggelas (1984) 157 CLR 215, a misrepresentation had caused Mr and Mrs Gould to enter a contract to purchase, on behalf of a company yet to be incorporated, certain business assets. The company was then incorporated, as a two dollar company, and on settlement of the contract took title to the assets. The Goulds personally succeeded in recovering damages for deceit, consisting of (i) the value of property they transferred to the vendor in partial payment of the purchase price, (ii) the value of property the Goulds mortgaged to banks to secure guarantees given to the banks for loans to the company, and that the banks sold, (iii) the amount of a residual obligation of the Goulds under the guarantees, plus (iv) an amount of interest.

210 Gibbs CJ stated the principle for assessing damages at 219-20:

Prudential Assurance v Newman Industries (No 2)

211 In Johnson v Gore Wood & Co [2002] 2 AC 1 at 35E-36A Lord Bingham of Cornhill (with whom Lord Goff of Chieveley agreed on this point) said, at 35-36:

Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)

Heron International

Ltd v Lord Grade

George Fischer

(Great Britain) Ltd v Multi Construction Ltd

Gerber

Garment Technology Inc v Lectra Systems Ltd

Stein v Blake

Lee v Sheard

George Fischer

Gerber

212 Lord Cooke of Thorndon, at 43B, accepted Lord Bingham’s three propositions, but regarded them as not exhaustive.

213 Lord Hutton, at 55G, followed the principle laid down in Prudential Assurance, but said:

“… it is important to emphasise that the principle does not apply where the loss suffered by the shareholder is separate and distinct from the loss suffered by the company.”

214 Lord Millett, at 62, considered the situation where a company suffers loss caused by the breach of a duty owed both to the company and the shareholder:

“If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company’s creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder.”

215 At 63, his Lordship rejected a proposition that the principle stated in Prudential Assurance v Newman is confined to the case where the defendant is not in breach of any duty owed to the shareholder personally. He points out that the example of the loss of the key in the “cashbox” example given in Prudential Assurance v Newman demonstrates “that the principle applies even where the loss is caused by a wrong actionable at the suit of the shareholder personally.”

216 As the various judgments in Johnson v Gore Wood show, application of these principles requires close attention to be paid to each head of damage that is claimed in an action to see whether that particular head of damage is one that, if awarded, would result in a shareholder receiving compensation for a loss which is nothing more than a reflection of a loss that has been suffered by the company.

217 These principles have been accepted in this Court: Chen v Karandonis [2002] NSWCA 412 at [35]-[44] per Beazley JA, with whom Heydon JA and Hodgson JA agreed.

218 The remedies that Mr Oates seeks to obtain for CCL Australia concerning the transfer of the shares in CCL UK, as articulated in the Statement of Claim, seems to be a declaration that the assignment of the shares is void ab initio, an order for compensation pursuant to section 1317H(1) Corporations Act 2001 (Cth), and “damages and/or equitable compensation”. Section 1317H relevantly provides:

“(1) A Court may order a person to compensate a corporation … for damage suffered by the corporation … if:

(a) the person has contravened a corporation … civil penalty provision in relation to the corporation … ; and

(b) the damage resulted from the contravention.

The order must specify the amount of the compensation.

Note: An order may be made under this subsection whether or not a declaration of contravention has been made under section 1317E.

Damage includes profits

(2) In determining the damage suffered by the corporation or scheme for the purposes of making a compensation order, include profits made by any person resulting from the contravention or the offence.”

219 Any loss that CCL Australia might have suffered in consequence of being deprived of its shares is the value of those shares. It will be no part of its case to assert that it has suffered a loss in consequence of a duty that Messrs Hawkins and Tyne owed to CCL UK having been breached. Similarly, it will be no part of its case to assert that any profit of which it has been deprived, in consequence of the transfer of the shares, is a profit it did not derive because of a duty that Messrs Hawkins and Tyne owed to CCL UK was breached. Thus, it would not breach the reflective loss principle by the positive assertions it needed to make in seeking a remedy.

220 However, there is another sense in which the reflective loss principle shows that any action by CCL Australia for wrongful transfer of its shares in CCL UK will not yield a remedy worth having. All that CCL Australia can complain about, in any action it brings against CCL UK, is the transfer of the shares. The same document that effected the transfer of the shares also stripped out of CCL UK those assets that had previously given the shares in CCL UK a value. The right to sue concerning the stripping of those assets out of CCL UK can be asserted by CCL UK alone. It would be an infringement of the reflective loss principle if the damages or other remedy recoverable by CCL Australia were assessed on the basis that that stripping had not occurred. Thus, even if a court were ultimately to decide that there had been a legal wrong done to CCL Australia by Messrs Hawkins and Tyne when they caused the transfer of the shares in CCL UK to occur, the damages or other remedy that could be claimed for that wrong would not be substantial.

221 To put it another way, if the view of the facts that is most favourable to Mr Oates were to be adopted, the principle on which any loss caused by transfer of the shares would be assessed is to notionally put CCL Australia into the position it would have been in if that transfer had not occurred. That position would be that it was the owner of shares that had become, through a wrong done by Messrs Tyne and Hawkins to CCL UK, of no value. It would be restoring CCL Australia to the position of the shareholder who had been tricked into handing over the key to the company’s cashbox considered in Prudential Assurance v Newman. Indeed, the position of CCL Australia is somewhat less favourable than that of the key-owner, in that it was not even a necessary step for Messrs Hawkins and Tyne to obtain a single CCL Australia share to be able to appropriate to themselves the CCL Products and the CCL Business Opportunities.

222 Mr Leeming submitted that, even if the reflective loss principle applied to any claim for common law damages, it would not be applicable to equitable remedies. I do not agree. The reflective loss principle applies to remedies in all areas of the law. When the law takes the step of conferring legal personality on a corporation, the artificiality of so doing brings with it a need to alter the way in which all remedies operate as between natural persons to take account of that artificiality. When the item of property concerning which a legal wrong has been done is a share in a corporation, the remedies available for that wrong must recognise the reality that the value of that share is derived from the assets of the corporation. The considerations of principle to which Lord Millet referred in Johnson v Gore Wood, in the passage quoted at para [214] above, are general ones that apply to all types of remedy.

223 The High Court’s decision in Friend v Brooker [2009] HCA 21; (2009) 83 ALJR 724; 255 ALR 601, delivered since the argument in this appeal, illustrates that the reflective loss principle applies to equitable obligations and remedies. The High Court held that no equity of contribution existed between the two shareholders of a company when one of them borrowed money that he made available to the company. French CJ, Gummow, Hayne and Bell JJ reached that conclusion partly because the two shareholders were not under a co-ordinate liability to repay the debt, but also because, as they put it at [86]:

“… equity does not impose fiduciary duties between the parties to a deliberate commercial decision to adopt a corporate structure in which they would owe duties, but to the corporation and as directors. Why … should equity intervene in such a fashion when the company, by which Mr Brooker and Mr Friend carried on the business, failed and, in the result, their personal losses will not be in equal amounts?”

224 Had the two men chosen to carry on the business by means of a partnership, the right of one to have the other reimburse him (through the medium of the taking of the partnership accounts) for half the amount of the borrowing would have been undoubted, but their having chosen to conduct the business using a corporate structure made an essential difference.

225 So far as a remedy of account of profits is concerned, the remedy would also not be substantial. The extension provided by section 1317H(2) to the notion of “damage” concerns “profits made by any person resulting from the contravention or the offence” (emphasis added). Similarly, under the general law, a remedy of account of profits for breach of fiduciary duty extends to profits made in consequence of the breach of fiduciary duty. Spigelman CJ stated the relevant principles in O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 272-3:

Nocton v Lord Ashburton

“Compensation for Breach of Fiduciary Duty”

Equity Fiduciaries and Trusts

Equity: Doctrines and Remedies

Equity Fiduciaries and Trusts

The Principles of Equity

Target Holdings Ltd v Redferns

Livingston v Rawyards Coal Co

His Lordship's ultimate conclusion (at 439) was:

‘Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests. To make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach.’

Canson Enterprises Ltd v Boughton & Co

‘In summary, compensation is an equitable monetary remedy which is available when the equitable remedies of restitution and account are not appropriate. By analogy with restitution, it attempts to restore to the plaintiff what has been lost as a result of the breach, ie the plaintiff's lost opportunity. The plaintiff's actual loss as a consequence of the breach is to be assessed with the full benefit of hindsight. Foreseeability is not a concern in assessing compensation, but it is essential that the losses made good are only those which on a common sense view of causation, were caused by the breach.’

Breen v Williams

226 In O'Halloran, at 277, Spigelman CJ approved the application of the “strict standard applicable to a trustee of a traditional trust with respect to improper application of trust property” to “the case of a director of a company, such as managing director, (or a group of directors) who has (or have) the power to dispose of company property and who does (or do) dispose of such property for an improper purpose.” In O'Halloran, at 275, Spigelman CJ had stated the test applicable to trustees who misapply trust property as being that adopted by Lord Browne-Wilkinson in TargetHoldingsLtdvRedferns [1996] 1 AC 421 at 434D-G:

“If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed. … Even if the immediate cause of the loss is the dishonesty or failure of a third party, the trustee is liable to make good that loss to the trust estate if, but for the breach, such loss would not have occurred. … Thus the common law rules of remoteness of damage and causation do not apply. However, there does have to be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable viz the fact that the loss would not have occurred but for the breach.”

Beach Petroleum NL v Kennedy

Youyang Pty Ltd v Minter Ellison Morris Fletcher

White v Shortall

227 Application of that test of causation means that it is often of no avail to a company director who has disposed of company property in breach of fiduciary duty to establish that the property was likely to be lost to the company in any event without any breach of fiduciary duty, or that the property could have been taken from the company, by some means other than that actually employed, without any breach of fiduciary duty. The reason why it is often of no avail to a company director who has disposed of company property in breach of fiduciary duty to establish these matters is because the enquiry of the court is whether, in the facts as they actually existed, the company would not have lost the property but for the breach of fiduciary duty. (I say “often of no avail” because this Court in Beach Petroleum v Kennedy at 93 [444] did not approve a general proposition that “in no case involving breach of fiduciary duty, may a court consider what would have happened if the duty had been performed.”)

228 But on the facts of the present case, when the CCL Reorganisation Deed actually was entered, and transferred to Messrs Hawkins and Tyne the assets by reason of which the CCL Australia shares had value, and when the shares in CCL UK would thus have become valueless even if the CCL Reorganisation Deed had not transferred them away from CCL Australia, there is no serious question to be tried that any profit has been made in consequence of any breach of fiduciary duty that might have been involved in effecting the transfer of the shares.

229 No attention was paid in argument on the appeal to the manner in which the alleged breach of section 320 Companies Act 1985 (UK) might result in a remedy, but even if the transfer of the shares was held to be void, and the shares in CCL UK were revested in CCL Australia, that would involve the revesting of an asset of no substantial worth.

230 If the only remedy that CCL Australia could obtain, consistently with the reflective loss principle, concerning the transfer of the shares in CCL UK is a remedy of no substantial value, it follows that it is not in the best interests of the company that Mr Oates be granted leave to pursue such an action on its behalf, and in addition there is no serious question to be tried. Thus, in deciding for myself the question that the trial judge did not decide, I would decline to grant Mr Oates leave to bring proceedings on behalf of CCL Australia concerning the transfer of CCL Australia’s shares in CCL UK.

231 There is a separate ground of appeal (that both parties agree is a subsidiary one) alleging error in that the judge did not take into consideration the absence of any evidence from Mr Hawkins. Mr Leeming submits that the judge should have drawn inferences adverse to Mr Hawkins from his failure to give evidence.

232 In my view the judge was not in error in this respect, for two reasons. First, Mr Tyne gave evidence concerning Mr Hawkins’ state of mind at relevant times. No objection was taken to that evidence being read. The only submission that was made to the judge concerning absence of evidence from Mr Hawkins, was on an extremely narrow point, namely that it was only on or after 4 October 2004 that they knew “that Merrill Lynch had won or was about to win swap novation transactions”. The submission was that there was no evidence from Mr Hawkins as to his knowledge (inferentially, on that topic). However, the evidence from Mr Tyne that was read without objection said: “On or before 4 October 2004 Mr Hawkins and I had no knowledge that Merrill Lynch had won or was about to win swap novation transactions”. When evidence in that form has been allowed to be read unchallenged, a submission that Mr Hawkins gave no evidence on that topic lacks cogency.

233 Second, any failure of Mr Hawkins to give evidence would do nothing more than license (but not compel) the judge to infer that the evidence of that absent witness, if called, would not have assisted the party who failed to call the witness, and also to draw with greater confidence any inference unfavourable to the party who failed to call the witness, if that witness seems to be in a position to cast light on whether that inference should properly be drawn: Manly Council v Byrne [2004] NSWCA 123 at [51]-[52]; Howell v Macquarie University [2008] NSWCA 26 at [97]-[98].

234 Concerning the first type of inference, CCL Australia was in no need of help concerning when Mr Hawkins first knew about the entering of the transactions, because evidence on that precise topic was read. Concerning the second type of inference open, Barrett J did not draw any inference that was unfavourable to CCL Australia, and so no occasion arose for him to draw any inference more strongly.

235 I would not uphold this ground of appeal.

236 CCL Australia was at one time deregistered, but White J restored it to the register to enable it to be served with the present application: Oates v Consolidated Capital Services Pty Ltd [2007] NSWSC 680. CCL Ireland has been dissolved under the laws of Ireland. Barrett J said, at [2], that while the shares in CCL Australia may continue to be registered in the name of CCL Ireland:

State Property Act

Oates v Consolidated Capital Services Pty Ltd

237 There was no issue before Barrett J concerning in whom those shares were vested. At the start of the second day of the hearing the judge specifically enquired whether it was common ground that the shares in the Australian company were vested in CCL Ireland. Counsel for CCL Australia confirmed that that was so, and counsel for Mr Oates did not demur. Thus, the passage I have just quoted from the judgment records a common assumption, but does not make a decision. Further, it is a common assumption concerning a matter that did not bear upon the questions the judge was called on to decide. Mr Leeming submits that the judge was in error in holding that the shares in CCL Australia were vested in the Irish state, and submits that the judge should have held that the shares are vested in ASIC by operation of section 588 Corporations Act.

238 In these circumstances, I see no reason why this ground of appeal should be entertained.

239 In the result, in my view, all grounds of appeal have failed. In that circumstance, it is not necessary to consider an issue raised on a Notice of Contention: that the trial judge should have refused leave on the ground that it was not in the best interests of the company to do so, or alternatively should have granted leave only on a condition that Mr Oates undertake personally to indemnify the proposed plaintiff for all costs. Another matter raised by Notice of Contention, that the judge should have found there was no serious question to be tried because there was no opportunity lost, was abandoned in argument.

240 Mr Oates seeks the joinder of Messrs Hawkins and Tyne to the appeal pursuant to one or both of two rules of court. The first is Uniform Civil Procedure Rules 2005 (“UCPR”) rule 6.24(1). It provides:

“If the court considers that a person ought to have been joined as a party, or is a person whose joinder as a party is necessary to the determination of all matters in dispute in any proceedings, the court may order that the person be joined as a party.”

241 The second is UCPR 51.4(1). It provides:

“Each person who:

(a) is directly affected by the relief sought, or

(b) is interested in maintaining the decision of the court below,

must be joined as a respondent.”

242 Mr Leeming has made clear that the order he seeks is for joinder in these Court of Appeal proceedings, not an order that operates retrospectively to join Messrs Hawkins and Tyne to the proceedings below.

243 The forensic point of seeking the joinder of Messrs Hawkins and Tyne was so that submissions could be made on behalf of Mr Oates that various costs orders should be made against them in the event that Mr Oates had any measure of success on the appeal. Senior Counsel briefed for Messrs Hawkins and Tyne attended on the argument of the Notice of Motion, but took no part in the argument of the substantive appeal.

244 When the failure of the appeal shows that there is no forensic point to be achieved by making the order sought in the Notice of Motion, in my view it should be dismissed with costs.

245 By a late amendment, the Notice of Appeal was amended to seek an order that if Mr Hawkins and Mr Tyne were not joined as respondents to the proceedings, they pay the Appellant’s costs below and of the appeal. Argument concerning that ground of appeal was deferred, in the interests of obtaining more time to argue about the principal issues in the appeal.

246 Mr Leeming made clear in argument that this ground of appeal was designed to protect his client’s position about who should pay his costs, in the event that he obtained a cost order. As in my view his client should not obtain a costs order, there is no occasion for any relief under Ground 6.

247 I propose the following orders:

(1) Appeal dismissed with costs.

**********

15/07/2010 - Typographical error corrected. - Paragraph(s) 63

Citations

Oates v Consolidated Capital Services Limited [2009] NSWCA 183

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Cases Citing This Decision

152

Jaworski v Chartered Accountants Australia and New Zealand [2025] NSWCA 177

Cases Cited

51

Statutory Material Cited

7

Braverus Maritime Inc v Port Kembla Coal Terminal Ltd [2005] FCAFC 256

Oates v Consolidated Capital Services Ltd [2008] NSWSC 464

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CITATION:	Oates v Consolidated Capital Services Ltd [2009] NSWCA 183 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	16 February 2009
JUDGMENT DATE:	3 July 2009
JUDGMENT OF:	Spigelman CJ at 1; Allsop P at 2; Campbell JA at 5
DECISION:	(1) Appeal dismissed with costs. (2) Notice of Motion to join Messrs Hawkins and Tyne dismissed with costs.
CATCHWORDS:	CORPORATIONS – derivative action – sections 236 and 237 Corporations Act 2001 (Cth) – meaning of “proceedings on behalf of a company” – whether using a statutory derivative action to cause the company to bring a general law derivative action would be considered “proceedings on behalf of a company” – meaning of “proceedings” – meaning of “on behalf of a company” – distinction between the rights of members or shareholders and officers or directors under section 236 – whether a person bringing proceedings on behalf of a company must assert a cause of action for the benefit of the company – CORPORATIONS – derivative action – general law – whether leave is required to commence a derivative action at general law – distinction between leave to commence proceedings and a trial of a preliminary issue – history of the procedure for bringing a derivative action –CORPORATIONS – membership, rights and remedies – reflective loss – whether a shareholder of a holding company can obtain a remedy for loss suffered by a subsidiary company – DAMAGES – general principles – reflective loss – whether a shareholder of a holding company can obtain a remedy for loss suffered by a subsidiary company – whether the losses are to be considered separate – EQUITY – equitable remedies – whether the reflective loss principle applies to equitable remedies – APPEAL AND NEW TRIAL – appeal – general principles – points and objections not taken below – requirement to examine the pleadings and the oral and written admissions – whether argument sought to be raised on appeal was argued at trial – EMPLOYMENT LAW – the relationship of employer and employee – whether property was created in the course of employment – whether property belongs to the employer or employee – STATUTORY INTERPRETATION – sections 236 and 237 Corporations Act 2001 (Cth) – whether section 237 is to be interpreted independently of section 236 – whether upon meeting the requirements of section 237 the court must grant leave – interpretation of legislative provisions in context – WORDS AND PHRASES – “proceedings” – “on behalf of” – “reflective loss”
LEGISLATION CITED:	Acts Interpretation Act 1901 (Cth) Companies Act 1985 (UK) Companies Act 2006 (UK) Corporate Law Economic Reform Program Act 1999 (Cth) Corporations Act 2001 (Cth) Rules of the Supreme Court 1965 (UK) Uniform Civil Procedure Rules 2005
CATEGORY:	Principal judgment
CASES CITED:	Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461; 23 LTOS 315; [1843-60]; All ER Rep 249 Amaca Pty Ltd v Cremer [2006] NSWCA 164; (2006) 66 NSWLR 400 Amaca Pty Ltd v Novek [2009] NSWCA 50 Atwool v Merryweather (1867) LR 5 Eq 464n; 37 LJ Ch 35 Beach Petroleum NL v Kennedy [1999] NSWCA 408; (1999) 48 NSWLR 1 Bhullar v Bhullar [2003] EWCA Civ 424; [2003] BCC 711; [2003] 2 BCLC 241 Braverus Maritime Inc v Port Kembla Coal Terminal Ltd [2005] FCAFC 256; (2005) 148 FCR 68 Bray v Ford [1896] AC 44 Cameron Brae Pty Ltd v Commissioner of Taxation [2007] FCAFC 135; (2007) 161 FCR 468 Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 1007; (2004) 211 ALR 457; 51 ACSR 299 Chahwan v Euphoric Pty Ltd [2008] NSWCA 52; (2008) 245 ALR 780; 65 ACSR 661 Chen v Karandonis [2002] NSWCA 412 Chilcotin Pty Ltd v Cenelage Pty Ltd [1999] NSWCA 11 Coulton v Holcombe (1986) 162 CLR 1 East Pant Du United Lead Mining Company (Limited) v Merryweather (1864) 2 H & M 254; 71 ER 460 Eastland Technology Australia Pty Ltd v Whisson [2005] WASCA 144; (2005) 223 ALR 123 Ehsman v Nutectime International Pty Ltd [2006] NSWSC 887; (2006) 58 ACSR 705 Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732 Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 Friend v Brooker [2009] HCA 21; (2009) 83 ALJR 724; 255 ALR 601 Gould v Vaggelas (1984) 157 CLR 215 Harrison v Melhem [2008] NSWCA 67; [2008] Aust Torts Reports 81-951 (61,661) Howell v Macquarie University [2008] NSWCA 26 Johnson v Gore Wood & Co [2002] 2 AC 1 Karam v Australia and New Zealand Banking Group Ltd [2000] NSWSC 596; (2000) 34 ASCR 545 Khouri v Government Insurance Office (NSW) (1984) 165 CLR 622 Leaway Pty Ltd v Newcastle City Council (No 2) [2005] NSWSC 826; (2005) 220 ALR 757 Magafas v Carantinos [2006] NSWSC 1459 Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 Manly Council v Byrne [2004] NSWCA 123 Menier v Hooper’s Telegraph Works (1874) LR 9 Ch App 350 Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414 Multicon Engineering Pty Ltd v Federal Airports Corporation (1997) 47 NSWLR 631 O’Brien v Komesaroff (1982) 150 CLR 310 Oates v Consolidated Capital Services Limited [2008] NSWSC 464; (2008) 218 FLR 73; 66 ACSR 277 Oates v Consolidated Capital Services Pty Ltd [2007] NSWSC 680 O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 Proust v Blake (1989) 17 NSWLR 267 Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 Quinn v Leathen [1901] AC 495 Ragless v IPA Holdings Pty Ltd (in liq) [2008] SASC 90; (2008) 65 ACSR 700 Re Doran Constructions Pty Ltd (in liq) [2002] NSWSC 215; (2002) 194 ALR 101; 168 FLR 116 Showtime Management Australia Pty Ltd v Showtime Presents Pty Ltd [2008] NSWSC 618 South Johnstone Mill Ltd v Dennis [2007] FCA 1448; (2007) 163 FCR 343 Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 Talbot v NRMA Ltd [2000] NSWSC 608; (2000) 50 NSWLR 300 Target Holdings Ltd v Redferns [1996] 1 AC 421 Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 University of Western Australia v Gray (No 20) [2008] FCA 498; (2008) 246 ALR 603; 76 IPR 222 University of Wollongong v Metwally (No 2) (1985) 59 ALJR 481; 60 ALR 68 Victoria University of Technology v Wilson [2004] VSC 33; (2004) 60 IPR 392 Virgtel Ltd v Zabusky [2006] QSC 66; [2006] 2 Qd R 81 Waddington Ltd v Chan Chun Hoo [2006] HKCA 196; [2006] 2 HKLRD 896 Waddington Ltd v Chan Chun Hoo [2008] HKCFA 63; [2008] HKEC 1498 Wallersteiner v Moir (No 2) [1975] QB 373 Water Board v Moustakas (1988) 180 CLR 491 Whisprun Pty Ltd v Dixon [2003] HCA 48; (2003) 77 ALJR 1598; 200 ALR 447 White v Shortall [2006] NSWSC 1379; (2006) 68 NSWLR 650 Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484
TEXTS CITED:	A J Boyle, “The Minority Shareholder in the Nineteenth Century: A Study in Anglo-American History” (1965) 28 Mod L Rev 317 Austin Ford and Ramsay, Company Directors (2005) LexisNexis Butterworths B S Prunty, “The Shareholders’ Derivative Suit: Notes on its Derivation” (1957) 32 NYU L Rev 980
PARTIES:	Tom Michael Oates (Appellant/Applicant in N/M for joinder) Consolidated Capital Services Pty Limited (First Respondent) Consolidated Capital Limited (Second Respondent) Australian Securities and Investments Commission (Third Respondent) Garrick Michael Hawkins (Respondent to N/M for joinder) Scott Francis Tyne (Respondent to N/M for joinder)
FILE NUMBER(S):	CA 40171/08
COUNSEL:	M Leeming SC; J Hewitt (Appellant) J Gleeson SC; J Hogan-Doran (First & Second Respondents) Submitting Appearance (Third Respondent) S Robb QC (Respondents to N/M for joinder)
SOLICITORS:	Chang Pistilli & Simmons (Appellant) Eakin McCaffery Cox (First & Second Respondents & Respondents to N/M for joinder) Australian Securities & Investment Commission (Third Respondent)
LOWER COURT JURISDICTION:	Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S):	1021/07
LOWER COURT JUDICIAL OFFICER:	Barrett J
LOWER COURT DATE OF DECISION:	15 May 2008
LOWER COURT MEDIUM NEUTRAL CITATION:	Oates v Consolidated Capital Services Ltd [2008] NSWSC 464