Peck v SCHOEN
[2008] WASC 180
•21 AUGUST 2008
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: PECK -v- SCHOEN [2008] WASC 180
CORAM: MASTER SANDERSON
HEARD: 12 AUGUST 2008
DELIVERED : 21 AUGUST 2008
FILE NO/S: COR 55 of 2008
BETWEEN: PETER LEONARD PECK
Plaintiff
AND
ANDRE SCHOEN
First DefendantDATELINE (WA) PTY LTD (ACN 099 950 115)
Second Defendant
FILE NO/S :COR 111 of 2008
BETWEEN :ANDRE SCHOEN
Plaintiff
AND
PETER LEONARD PECK
First DefendantDATELINE (WA) PTY LTD (ACN 099 950 115)
Second Defendant
Catchwords:
Corporations Act 2001 (Cth) - Application to commence proceeding in name of company - Turns on own facts
Legislation:
Nil
Result:
Leave refused
Category: B
Representation:
COR 55 of 2008
Counsel:
Plaintiff: Mr R E Lindsay
First Defendant : Mr P B O'Neal
Second Defendant : No appearance
Solicitors:
Plaintiff: Friedman Lurie Singh & D'Angelo
First Defendant : Karp Steedman Ross-Adjie
Second Defendant : No appearance
COR 111 of 2008
Counsel:
Plaintiff: Mr P B O'Neal
First Defendant : Mr R E Lindsay
Second Defendant : No appearance
Solicitors:
Plaintiff: Karp Steedman Ross-Adjie
First Defendant : Friedman Lurie Singh & D'Angelo
Second Defendant : No appearance
Case(s) referred to in judgment(s):
Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859
Re Westbourne Galleries Ltd [1973] AC 360
Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313
MASTER SANDERSON: This was the return of two applications. The first in time was the plaintiff's application in COR 55 of 2008 for leave to commence proceedings on behalf of the second defendant. The application was brought under s 237(1) of the Corporations Act 2001 (Cth). The second application brought in COR 111 of 2008 was an application to wind up the second defendant under s 461(1)(k) of the Corporations Act. At the conclusion of the hearing, I indicated I would refuse the plaintiff leave in COR 55 of 2008 to commence proceedings in the name of the second defendant. I indicated that I would publish reasons at a later date. I also indicated that I was inclined to wind up the second defendant in COR 111 of 2008. Counsel for Mr Peck asked that any decision on the winding up of the second defendant be held over until reasons were published dealing with the refusal to grant leave to proceed in the name of the company. Accordingly, I did not make any winding up order. These then are my reasons for refusing Mr Peck leave to bring action in the name of the company.
The criteria for leave being given to proceed in the name of a company under s 237(1) are set out in s 237(2). That section reads as follows:
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.
It was common ground between the parties that subparagraphs (a) and (e) were satisfied. There was a contest between the parties in relation to each of the three other grounds mentioned in the section. It was also common ground between the parties that if I was satisfied in relation to all of the grounds, then there was no discretion to either grant or refuse the application.
This application led to the filing of voluminous affidavit material. The plaintiff filed two affidavits, the first sworn 7 May 2008 and the second sworn 14 July 2008. The first defendant filed three affidavits, the first sworn 4 July 2008, the second sworn 1 August 2008 and the third sworn 4 August 2008. In addition, there was filed on behalf of the plaintiff two affidavits of Sukhwant Singh, the first undated but filed 7 May 2008 and the second sworn 18 July 2008. There was also an affidavit of Reece David Crooke sworn 4 July 2008. All of these affidavits were admitted into evidence without objection and I have considered each in reaching my decision.
Given the vast amount of evidentiary material filed in this application, there is remarkably little controversy about the background facts. The plaintiff and the first defendant became friends over 25 years ago. The second defendant (which I will refer to as 'Dateline') was formed by the plaintiff and the first defendant in circumstances where the company was effectively a 'quasi‑partnership', as that phrase is described in cases such as Re Westbourne Galleries Ltd [1973] AC 360. There was no dispute about this between the parties and it is an important feature of the case. Dateline seems to have done little except provide employment of a kind for its two shareholders.
Dateline's sole business consisted of the maintenance of a contract for the provision of news services to various television stations. The evidence deals in some detail with the circumstances in which this contract was obtained and what it involved. But none of that evidence is relevant to the determination of this application. It is sufficient if I say that the contract expired in May 2005.
The first defendant took issue with the plaintiff's financial management of Dateline from 2003. In particular, the first defendant was concerned about the plaintiff's use of his company debit card for personal expenses from August 2005. There gradually developed between the parties acrimony and considerable emotional upset on the part of the plaintiff. Eventually, that emotional upset required the plaintiff's hospitalisation.
The first defendant made an offer to sell to the plaintiff the first defendant's shares in Dateline on 2 September 2005. That offer was not accepted. In an email to the first defendant from the plaintiff's wife dated 19 September 2005, Mrs Peck advised the first defendant that the plaintiff was 'happy to shut the company down at a date mutually agreeable': see annexure AS10 to the first defendant's first affidavit. The plaintiff further expanded on his position in an email to the first defendant dated 24 September 2005. That email canvassed the way in which the company's existence might be terminated. Understandably, the plaintiff was looking to take the most cost effective course. A number of options were canvassed without any concluded view being reached. What does appear certain is that as at September 2005, the plaintiff was satisfied that the time had come for the plaintiff and the first defendant to go their separate ways and to bring their relationship as manifested by Dateline to an end.
In September 2005, the first defendant approached a firm of accountants for the purpose of investigating Dateline's finances and moving towards a voluntary winding up. In an email to the first defendant dated 30 September 2005, the plaintiff demanded that the first defendant confirm his 'approval of the Accountants winding up the company' and advised that the first defendant needed 'to move forward in closing the shell company': see first defendant's first affidavit, annexure AS16.
Discussions then took place with a Mr Strickland, a liquidator of SimsPartners. Nothing developed from these discussions. The plaintiff acknowledged that what was appropriate was 'liquidation or deregistration of Dateline' but was concerned at any 'unnecessary and expensive attempt to investigate the financial affairs of the company': see plaintiff's first affidavit, annexure PLP25. No further steps were taken towards terminating Dateline's existence.
Dateline ceased trading on 1 November 2005 and has undertaken no commercial activities thereafter. This was common ground between the parties. As at the date Dateline ceased trading, it had liabilities in excess of $47,000 and assets worth just a small fraction of that. Once again, there was no dispute between the parties on this issue. It is arguable, although it was not conceded by either party, that Dateline is insolvent. I will have more to say on that issue later in these reasons.
On 19 September 2005, the plaintiff formed a new company, Night News Pty Ltd. The first defendant registered a business name News @ Night on 21 November 2005. It was clear that the plaintiff and the first defendant were to be commercial rivals. That was probably inevitable from the moment that their relationship broke down. On 7 October 2005, the plaintiff submitted a proposal to certain TV stations for a contract under his new company name. The first defendant was invited to tender for the same work. This invitation came after the plaintiff's approach to the TV stations. The plaintiff's tender was unsuccessful. The work went to the first defendant.
It has always been acknowledged by the first defendant that he holds certain assets, the property of Dateline, which he has used in his subsequent business activities. He acknowledges that if called upon to do so, he would be liable to account to Dateline for the use of those assets. The first defendant also alleges that certain other assets of Dateline are held by the plaintiff. That does not appear to be disputed by the plaintiff.
After considering all of the evidence and hearing argument, I concluded that it was not in the best interests of the company that leave be given to the plaintiff to bring proceedings in the company's name. The test to be applied in assessing this criterion was set out by Palmer J in Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313. His Honour said:
… the best interests of the company is a far higher threshold for an applicant to cross. It requires the applicant to establish, on the balance of probabilities, a fact which can only be determined by taking into account all of the relevant circumstances [56].
In Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859, the court held it is relevant to consider the character of the company (that is, that it is a small private company with few shareholders) and the effect of the proposed litigation on the purpose for which the company was established. Further, the nature of the business of the company and the effect of proposed litigation on its proper conduct are also to be considered. In addition, matters relevant to whether the substance of redress sought by the applicant is available by means which do not require the company to be brought into litigation against its will must be taken into account.
If leave were to be granted in this case, it would have to be on the condition that the plaintiff would be responsible for all legal fees and other costs associated with the litigation. Given that Dateline has an excess of assets over liabilities, such a conditional order would be essential. But if leave were to be given and action were to be commenced, there is every likelihood that it would be years before the action was resolved. It is always possible that some resolution of the dispute might be negotiated in the short term. But at the very least, it is to be anticipated that a statement of claim would have to be produced, a defence filed and then other interlocutory steps taken before the battle lines were sufficiently distinct to allow informed mediation to take place. In the meanwhile, creditors of the company would effectively be precluded from stepping forward and taking any action to recover what they are owed. That means that the grant of leave would effectively provide a stay on any creditor taking winding up proceedings.
It also means that a company which is arguably insolvent would be taking proceedings in this court. I am by no means satisfied that would be appropriate. I accept that an order for security for costs might be made which would require the plaintiff to cover any costs awarded to the first defendant should the action be unsuccessful. That would effectively protect the interests of the creditors so that the liabilities of the company would not be increased. But it still means that the company, effectively a shell, would be undertaking potentially expensive litigation.
I was also not satisfied that the cause of action available to Dateline was likely to succeed. In part, this picks up the question of whether there is a serious question to be tried. But it goes further than that. Assuming that there is a serious question to be tried, there is the question of what the likely return to Dateline might be if the action was successful. That is not easy to determine from the papers. The cause of action appears to be that the first defendant used Dateline's assets to earn an income. Given that the first defendant concedes that point, and given his offer to account to Dateline accordingly, there has to be more to warrant leave being given.
As I understand the plaintiff's argument, it is said that in some way the first defendant has breached his fiduciary duties as a director of Dateline in competing with the company. The first point to make about that argument is that given the deadlock between the plaintiff and the first defendant and given the mutual agreement they reached in September 2005 that they needed to go their separate ways, it is difficult to see how Dateline could have tendered for any work. It appears to have been mutually agreed by the plaintiff and the first defendant that they would each tender for work which otherwise might have gone to Dateline. It is difficult then to see that in successfully tendering for the work, the first defendant has in some way breached his fiduciary duties.
In the end, what appears to have happened here is that two former friends and business associates fell out. There is residual bitterness between them and doubtless there are rights and wrongs on both sides. The fact is that there is nothing to be gained by prolonging the dispute between them. In my view, the best course is to wind up Dateline, allow a liquidator, if he or she considers it appropriate, to investigate the affairs of the company with a view to any action thought appropriate against either of the directors. If the plaintiff wishes to maintain the claim against the first defendant, and the liquidator is of the view that there is some merit in pursuing the first defendant, then it is always open to the plaintiff to fund the liquidator's activities. Moreover, the liquidator has the power to call the former directors before the court and question them as to the affairs of the company. He will have access to all of the financial records and is entitled to expect the cooperation of the directors. That, to my mind, is the best course to follow.
It was for these reasons that I dismissed the plaintiff's application. In the light of these reasons, I will hear further argument from the parties as to whether or not a winding up order should be made. I will also deal with the question of costs.
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: PECK -v- SCHOEN [2008] WASC 180 (S)
CORAM: MASTER SANDERSON
HEARD: 12 AUGUST 2008 & 23 OCTOBER 2008
DELIVERED : 21 AUGUST 2008
SUPPLEMENTARY
DECISION :6 NOVEMBER 2008
FILE NO/S: COR 55 of 2008
BETWEEN: PETER LEONARD PECK
Plaintiff
AND
ANDRE SCHOEN
First DefendantDATELINE (WA) PTY LTD (ACN 099 950 115)
Second Defendant
FILE NO/S :COR 111 of 2008
BETWEEN :ANDRE SCHOEN
Plaintiff
AND
PETER LEONARD PECK
First DefendantDATELINE (WA) PTY LTD (ACN 099 950 115)
Second Defendant
Catchwords:
Costs - Turns on own facts
Legislation:
Nil
Result:
Costs order against plaintiff in main action
Order for indemnity costs refused
Category: B
Representation:
COR 55 of 2008
Counsel:
Plaintiff: Mr R E Lindsay
First Defendant : Mr J D Steedman
Second Defendant : No appearance
Solicitors:
Plaintiff: Friedman Lurie Singh & D'Angelo
First Defendant : Karp Steedman Ross-Adjie
Second Defendant : No appearance
COR 111 of 2008
Counsel:
Plaintiff: Mr J D Steedman
First Defendant : Mr R E Lindsay
Second Defendant : No appearance
Solicitors:
Plaintiff: Karp Steedman Ross-Adjie
First Defendant : Friedman Lurie Singh & D'Angelo
Second Defendant : No appearance
Case(s) referred to in judgment(s):
Nil
MASTER SANDERSON: When I published my reasons in this matter, I gave the parties the opportunity to make submissions in relation to costs. In relation to COR 55 of 2008, both parties have now made submissions. In addition, the solicitor for the first defendant filed an affidavit setting out, in some detail, the costs incurred by his client in defending the application.
On behalf of the plaintiff, it was submitted there should be no order as to costs. It was the plaintiff's submission that the first defendant had been guilty of misconduct and had invited the litigation. It was said that the first defendant failed to account for the assets of the company and had made use of those assets to earn a profit. In the circumstances, the plaintiff says that it was proper and appropriate that he should have brought this action. This point is developed at some length in the submissions, but essentially the plaintiff's position is straightforward.
For his part, the first defendant says that the plaintiff ought pay his costs on a full indemnity basis. As a starting point, the first defendant says that the plaintiff, properly advised, should not have brought this application. Essentially, what is submitted on behalf of the second defendant is that both parties (that is to say, the first and second defendants) had agreed that the second defendant ought cease trading. It was said that this was a classic case where there was an irreconcilable deadlock between the only two directors of the company, the plaintiff and the first defendant, and that the substratum of the company had failed. For these reasons it was said it was apparent that the proper course was that the company be wound up on the just and equitable ground. If, in the course of the winding up the liquidator took the view that there was some misconduct on the part of the first defendant, then the plaintiff could fund an action by the liquidator.
These submissions were developed in some detail. In particular, it was argued that the first defendant was not guilty of misconduct. The submissions pointed out that the first defendant had always acknowledged that he held property of the second defendant and that he was liable to account for the use of the second defendant's assets. There being no dispute on that question, there really was no basis upon which an action by the plaintiff in the name of the company could be authorised.
Furthermore, the first defendant says that he did not invite litigation. It was submitted that he had done everything necessary to properly manage the financial affairs of the second defendant. In particular, he had appointed a registered liquidator to investigate the second defendant's finances with a view towards winding up. Given that the second defendant had no assets and was arguably insolvent, there was no further steps he could reasonably have taken to protect the company's position.
Having considered both sets of submissions, and with reference to the ultimate outcome of the application, I am satisfied that the proper order is that the plaintiff should pay the first defendant's costs of the application to be taxed. I am not satisfied that the costs should be paid on an indemnity basis. Despite the fact that the application was unsuccessful, it was by no means hopeless. The plaintiff was clearly concerned that the first defendant was using the second defendant's assets for his personal benefit. Armed with that fact - a fact which was not denied - it could not be suggested that the plaintiff had no grounds for taking the action that he did. As I have concluded, it would seem to me that there is a better way to deal with the obvious insolvency of the second defendant, but it is by no means the case that I concluded a person in the position of the plaintiff, properly advised, would not have initiated these proceedings.
Nor do I accept that it is appropriate there be no order as to costs. For his part, the first defendant acknowledged his liability to account to the second defendant for the use of its assets to produce income. Once that acknowledgment was made, the plaintiff was always at risk that if an action such as he took was unsuccessful, he would be responsible for the costs. That is why I think it is appropriate that the plaintiff should pay the first defendant's costs.
In proceedings COR 111 of 2008 the first defendant has applied to wind up the second defendant on the just and equitable grounds. The plaintiff has no objection to such an order being made. The question here again is who should pay the costs. In a minute of proposed orders, the first defendant proposes those costs should be paid by the plaintiff. The plaintiff says that the usual order should be made and the costs should be paid out of the assets of the company.
I am satisfied the proper order is that the costs be paid out of the assets of the company. The argument in this matter effectively took place in this action. Once I had determined that leave should not be granted to the plaintiff, then the winding up order was inevitable. I see no reason why these costs should be borne by the plaintiff.
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