Pesec v Consolidated Builders Limited
[2021] ACTCA 25
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
COURT OF APPEAL
Case Title: | Pesec v Consolidated Builders Limited |
Citation: | [2021] ACTCA 25 |
Hearing Date(s): | 7 September 2021 |
DecisionDate: | 20 September 2021 |
Before: | Crowe AJ |
Decision: | See [114] |
Catchwords: | PRACTICE AND PROCEDURE – APPLICATION – Application for leave to appeal an interlocutory decision of a judge to dismiss a claim for an order granting leave to bring proceedings under s 237 of the Corporations Act 2001 (Cth) – meaning of ‘best interests’ – whether the judge erred in consideration of s 237(2)(c) of the Corporations Act 2001 (Cth) – whether the judge erred in not making an order pursuant to s 136 of the Evidence Act 2011 (ACT) – discretion to limit use of evidence – whether decision was attended with sufficient doubt – it was not – whether substantial injustice would result if leave was refused supposing the judge’s decision to be wrong – it would not due to availability of an alternative right of action. |
Legislation Cited: | Corporations Act 2001 (Cth) ss 180, 181, 182, 233, 237 Court Procedures Rules 2006 (ACT) r 1203 |
Cases Cited: | Australian Securities & Investments Commission v Adler [2002] NSWSC 171; 168 FLR 253 |
Parties: | Anthony Pesec (Applicant) Consolidated Builders Limited ABN 53 008 654 411 (Respondent) |
Representation: | Counsel C Erskine SC (Applicant) M O’Meara SC and I Ahmed (Respondent) |
| Solicitors Adero Law (Applicant) Clayton Utz (Respondent) | |
File Number(s): | AC 18 of 2021 |
Decision under appeal: | Court/Tribunal: Supreme Court Before: McWilliam AsJ Date of Decision: 13 April 2021 Case Title: Pesec v Consolidated Builders Ltd (No 3) Citation: [2021] ACTSC 105 |
CROWE AJ:
Background
This is an application for leave to appeal from the decision of McWilliam AsJ in Pesec v Consolidated Builders Pty Ltd (No 3) [2021] ACTSC 105. I will refer to Mr Pesec, the applicant before me, as ‘the Applicant’, and the respondent as ‘CBL’.
In the decision which the Applicant seeks leave to challenge, McWilliam AsJ dismissed the Applicant’s claim for an order granting him leave to bring proceedings on behalf of CBL pursuant to s 237 of the Corporations Act 2001 (Cth) (the Corporations Act).
Her Honour described the application, and the circumstances under which her judgment and reasons for decision were delivered as follows:
1.Mr Anthony Pesec, the plaintiff, is a shareholder in the defendant, Consolidated Builders Ltd (CBL), a public company formed by a group of Canberra-based builders and property developers. CBL’s business is purchasing, subdividing, developing and managing land assets.
2.By Originating Process filed on 14 May 2020 and amended on 24 July 2020, the plaintiff sought leave to bring a derivative action on behalf of CBL, pursuant to ss 236 and 237 of the Corporations Act 2001 (Cth) (the Corporations Act). The defendant opposed the grant of leave sought.
3.The proposed defendants to the derivative action are the Board of Directors of the company: Mr Josip Zivko (CBL’s Managing Director), Mr Frank Crnkovic, Mr Mirko Skrnjug, Mr Rein Heins and Mr Noel McCann (the Directors). A further proposed defendant is the company that was a nominated purchaser of shares in CBL on behalf of CBL’s Managing Director, XO 1 Pty Ltd (XO 1). They were not parties to the present application.
4.Due to a limitation period set to expire on 14 April 2021 with respect to part of the proposed proceedings, I determined the application on an urgent basis on 13 April 2021. This approach was foreshadowed only on the last day of the hearing, and it arose because the parties wanted time to file detailed closing submissions.
5.I ordered that the application be dismissed. At the time judgment was delivered, I indicated to the parties that I would subsequently provide written reasons for judgment on the plaintiff’s application. These are the reasons.
The reasons for decision were delivered on 28 May 2021.
The application for leave to appeal was filed on 14 April 2021. Subsequently, after the reasons for decision were handed down, the Applicant sought orders including one for leave to file and serve an amended application for leave. That order was made by the Senior Deputy Registrar on 10 June 2021. There was a dispute as to whether that order was properly complied with. That dispute was, in an exercise of practical good sense by the parties, resolved by them agreeing to a procedural order which I made in the course of hearing the application for leave to appeal.
In any event, the amended application was filed and served by the Applicant on 25 June 2021. The amendment merely corrected the date for hearing of the application and substituted a reference to a new supporting affidavit.
Need for leave to appeal
Section 37E(4) of the Supreme Court Act 1933 (ACT) provides:
(4)Also, an appeal may be brought against an interlocutory order of the court constituted by a single judge, or the associate judge, only with leave of the Court of Appeal.
The Applicant accepted that the NSW Court of Appeal in McEvoy v Caplan [2010] NSWCA 115; 78 ACSR 167 at [4] (McEvoy) had determined that a decision dismissing an application for leave under s 237 of the Corporations Act was an interlocutory, rather than final, decision. In coming to that conclusion, MacFarlan JA (Allsop and Beazley JJA agreeing) relied on the High Court decisions of Licul v Corney (1976) 180 CLR 213 and Carr v Finance Corporation of Australia Ltd (1981) 147 CLR 246. These authorities make it clear that the analysis of whether a judgment is interlocutory or final turns on the strict legal effect of the judgment in finally determining the substantive rights of the parties, and not the practical effect of the judgment having regard to the circumstances of the case (including the operation of a limitation law).
Mr Erskine SC, who appeared on behalf of the Applicant, submitted that the practical effect of the expiry of the limitation period on 14 April 2021 meant that in reality the order dismissing the Applicant’s application at first instance was final.
I was not referred to any authority suggesting that the conclusion in McEvoy was incorrect. Indeed, I did not understand Mr Erskine to be suggesting that I should not follow the decision in McEvoy. Rather, I understood his submission to relate to the consideration of whether a substantial injustice might be occasioned to the Applicant should leave to appeal be refused.
In the circumstances, I proceed on the assumption that Order 1 made by McWilliam AsJ on 13 April 2021 was an interlocutory order, and that as a consequence, the Applicant requires leave of the Court of Appeal to appeal from that order.
The evidence
Mr Erskine read the following affidavits:
(1)Mr R Markham dated 25 June 2021 (including the folder of documents exhibited to the affidavit and marked ‘RMM1’);
(2)Mr R Fletcher dated 19 July 2021; and
(3)Mr R Fletcher dated 6 September 2021.
Mr O’Meara SC, who appeared with Mr Ahmed for CBL, read the affidavit of Ms T Mulroy dated 9 August 2021 (including the bundle of documents exhibited to the affidavit and marked ‘TEM1’ to ‘TEM13’).
The principles to be applied to deciding whether leave should be given
The relevant principles to deciding whether leave should be given were recently stated by Murrell CJ in Donohue v Volanne Pty Ltd (No 2) [2021] ACTCA 11 in the following terms:
13.Although there are no rigid and exhaustive criteria which govern the exercise of the discretion to refuse or grant leave to appeal from an interlocutory decision, there are two touchstones:
(a) Is the decision attended with sufficient doubt to warrant its being reconsidered?
(b) Would substantial injustice result if leave was refused, supposing the decision to be wrong?
14.The onus lies upon the party who applies for leave to satisfy the Court of Appeal of those factors.
15.The type of decision that is the subject of the application also informs the exercise of the discretion. As Refshauge J observed in Capital Property at [28]:
[T]he principles in which a Court approaches the decision as to whether to grant leave are:
(a)that leave will be granted sparingly to avoid delaying and fragmenting the hearing of cases;
(b)that a Court will be particularly hesitant to grant leave where the decision is one in respect of practice and procedure or is made in the exercise of a discretion; and
(c)that decisions which, though interlocutory, determine substantive rights more readily be the subject of the grant of leave.
The reference to ‘Capital Property’ was to Capital Property Projects (ACT) Pty Ltd v Australian Capital Territory Planning and Land Authority [2008] ACTCA 9; 2 ACTLR 44. In that decision, Refshauge J went on to refer to the judgment of the Full Court of the Federal Court of Australia in Décor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 (Décor Corporation). His Honour, at [34], extracted the following passage from the judgment of the Full Court (at pages 399-400) as representing, in general terms, the approach to be taken in determining applications for leave to appeal:
In our opinion, the principles discussed in Niemann and in the other cases to which we have referred provide general guidance which a court should normally accept. However, there will continue to be cases raising special considerations, and the court should not regard its hands as tied in any case beyond this; that by s 24(1A) [of the Federal Court of Australia Act 1976 (Cth)] the legislature has evinced a policy against the bringing of interlocutory appeals except where the court, acting judicially, finds reason to grant leave. When the court comes to exercise its discretion on a particular application, an important distinction to be observed is that between the common interlocutory decision on a point of practice – concerning which the High Court has given (see Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170 at 177) a strong warning that “a tight rein” should be kept on appeals – and an interlocutory decision determining a substantive right – where leave will more readily be granted. Although the judgments of Jordan CJ in Re Will of Gilbert (deceased) (1946) 46 SR (NSW) 318 at 323 and of the majority of the High Court in Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (supra) are not concerned with the question of the granting of leave, they emphasise this distinction, which was applied to the granting of leave in Ex parte Bucknell (1936) 56 CLR 221 and Sharp, (supra)…
It is also important to note the following extract from the Sharp v Deputy Commissioner of Taxation (Cth) (1988) 88 ATC 4148 (per Burchett J at 4186) which was quoted with apparent approval by the Full Court in Décor Corporation:
In my opinion, the sufficiency of the doubt in respect of the decision and the question of substantial injustice should not be isolated in separate compartments. They bear upon each other, so that the degree of doubt which is sufficient in one case may be different from that required in another. Ultimately, a discretion must be exercised on what may be a fine balancing of considerations.
The proposed grounds of appeal
The Applicant relies on a draft notice of appeal in which the grounds are:
5.The grounds of appeal are:
(a)in relation to the BDO Report prepared in 2019, the Court erred in not making an order pursuant to s 136 of the Evidence Act 2011 (ACT) limiting its use to the fact of it having been put before the Extraordinary General Meeting of December 2019;
(b)the Court erred in interpreting s 237(2)(c) of the Corporations Act 2001 (Cth) as permitting consideration of the prospects of success of the claim if leave were granted, when the prospects of success of the claim were only to be considered under s 237(2)(d) in relation to there being a serious question to be tried;
(c)the Court erred in its consideration of s 237(2)(c) of the Corporations Act 2001 (Cth) in not taking into account:
(i)the potential benefits of success of the claim as well as the potential detriments if leave were not granted;
(ii)the part of the claim alleging that the respondent lost the opportunity to receive more capital from Mr Zivko if the options had been properly valued, or to have issued fewer shares for the price paid by Mr Zivko;
(iii)an order requiring the applicant to provide security for the company’s costs if leave were granted.
(d)if the Court erred as alleged in ground (a), then the Court erred in relying on the BDO Report as part of its consideration of s 237(2)(c) of the Corporations Act 2001 (Cth); and
(e)the Court erred in considering s 237(2)(c) of the Corporations Act 2001 (Cth) in making findings that the “likely costs of the proceedings is a significant factor” at [139], and that proceedings would involve “significant costs” at [134] and would be “a costly exercise” at [138], in circumstances where:
(i)there was no evidence from the directors as to what defence if any they would make to the claims against them;
(ii)the only evidence of the possible cost of proceedings was disputed as between Mr Waller and Mr Markham, and no resolution of that dispute was made by the Court;
(iii)the evidence of Mr Waller did not disclose the basis on which he made his estimate of possible costs;
(iv)there was no quantification by the Court of what the costs were likely to be; and
(v)any findings as to the cost and complexity of the proceedings could not safely be made on the basis of the evidence before the Court.
Submissions of the Applicant
The Applicant pointed out that either they were not in dispute, or the Associate Justice had found in his favour, in relation to all of the considerations stated in subsection 237(2) of the Corporations Act, except for one. The subsection provides:
…
(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 the 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.
Her Honour found that (b) and (d) were established. However, at [129]-[139] of her reasons for decision she explained why she was not satisfied that the granting of leave under s 237 would be in the best interests of CBL. The failure of the Applicant to establish (c) resulted in the failure of the application itself.
The Applicant submitted that, in the context of the expiry of the limitation period, the dismissal of his application for leave under s 237 effectively terminated his right to seek a derivative action in relation to the granting of the share option to Mr Zivko. In a practical sense, it was said, the decision was a final one. Reference was made to the distinction drawn in the Décor Corporation case.
Grounds 5(b)
In addressing the question of whether her Honour’s decision was attended with sufficient doubt, Mr Erskine commenced by reference to ground 5(b). He submitted that by reference to the judgment of Bathurst CJ (with whom McColl and Barrett JJA agreed) in Huang v Wang [2016] NSWCA 164; 114 ACSR 586 (Huang), there was a real issue as to whether her Honour had erred in taking into account the prospects of the substantive claim succeeding in relation to the s 237(2)(c) issue, having already determined that there was a serious question to be tried under s 237(2)(d). (Her Honour referred to the benefit for CBL of the proposed proceedings as being ‘uncertain’, at [133] and said that the prospect of recovering compensation from the directors was something which ‘cannot be comfortably predicted’ at [138]).
Mr Erskine in particular relied upon paragraph [60] where Bathurst CJ said:
60.A question of some difficulty is whether, having concluded that there is a serious question to be tried, the court can again consider the question in determining whether it is in the best interests of the company to bring the proceedings. In Re Gladstone, Ball J at [58] indicated it was necessary to consider the prospects of success. It must be remembered that an application under the section does not involve a consideration of the underlying merits of the proposed litigation, except to the extent it is necessary to determine if there is a serious question to be tried. Further, in cases where a court has doubts as to the prospects of success, a court can make an order conditional on the applicant undertaking to indemnify the company from any liability for costs which it may incur in pursuing the action.
(It seems likely that the reference in the above extract to paragraph [58] in the Gladstone decision should have been [57]: see below).
In Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd [2011] NSWSC 1235; 86 ACSR 432 (Gladstone), Ball J in dealing with s 237(2)(c) said at [57]:
[57] … In considering what is in the best interests of the company, it is necessary to consider the prospects of success of the action, the likely costs and likely recovery if the action is successful and likely consequences if it is not. One relevant matter in considering these issues is the nature of any indemnity the applicant has offered to the company if the action is brought and the likelihood that the company will recover under that indemnity. It is also necessary to consider the resources the company will be required to devote to the action and the resources it has available, together with the effect that the action may have on other aspects of its business. Finally, it is necessary to consider whether some other remedy is available to the applicant so as to make the proposed action unnecessary from its point of view: see Swansson [2002] NSWSC 583; (2002) 42 ACSR 313 at [56]ff.
Mr Erskine argued that the Court of Appeal in Huang had cast doubt on the proposition that the prospects of the success of the proposed action should be considered other than under s 237(2)(d). Indeed, by reference to the maxim expressio unius est exclusio alterius, Mr Erskine said that the fact that the issue was specifically dealt with in paragraph (d) suggested, as a matter of statutory interpretation, that it was not to be considered under paragraph (c).
In response to the reliance by CBL on a number of decisions where the approach taken by Ball J in Gladstone had been followed, Mr Erskine submitted that these were single judge decisions which would not prevent the Court of Appeal here, should leave be granted, from reaching its own view on the issue.
Ground 5(c)
The Applicant argued that it was apparent from her Honour’s reasons for decision that she did not consider, or properly consider, the potential benefits for the company should the proposed litigation succeed. Moreover, her Honour failed to take into account the opportunity for the company to have received more capital from Mr Zivko if the shares had been properly valued (or alternatively, to have issued fewer shares for the sum actually paid by Mr Zivko). Finally, the Applicant argued that her Honour failed to take into account the possibility that any costs risk for the company could be reduced by an order requiring the Applicant to provide security.
Ground 5(e)
Her Honour at a number of points in her reasons for her conclusion in relation to s 237(2)(c) referred to the magnitude of the costs of the proposed proceedings: see [134], [138]-[139]. The Applicant argued that it amounted to an error to do so in circumstances where:
1.There was no evidence as to the defences which the defendants in the proposed proceedings were likely to raise;
2. The only evidence as to the costs consisted of estimates of $600,000 and $1 million made by the solicitor for the Applicant and the solicitor for CBL respectively. There was no resolution of that difference by the Court;
3.The evidence of CBL’s solicitor did not disclose the basis on which the estimate was made;
4.There was no quantification by the Court of the likely costs figure; and
5.No finding could be made as to the cost and complexity of the proceedings on the basis of the evidence before the Court.
Grounds 5(a) and (d)
Mr Erskine submitted that her Honour had failed to deal with submissions made on behalf of the Applicant as to reasons why the report of an accountant (the BDO Report) as to the value of the shares over which Mr Zivko was granted the option in 2015 should not have been admitted into evidence beyond being part of the documents which were placed before an extraordinary general meeting (EGM) of the company. Her Honour had only dealt with the issue of the failure of the BDO Report author to have agreed to be bound by the Expert Witness Code of Conduct (see r 1203 of the Court Procedures Rules 2006 (ACT)): see the reasons at [24]-[34]. Mr Erskine relied on the decision in Wood v R [2012] NSWCCA 21; 84 NSWLR 581 at [719] (per McClellan CJ at CL (Latham and Rothman JJ agreeing). In that paragraph, his Honour set out the obligations of expert witnesses as formulated by Cresswell J in National Justice Cia Naviera SA v Prudential Insurance Co Ltd (The Ikarian Reefer) [1993] 2 Lloyd’s Rep 68 at pages 81-82 (Ikarian Reefer). Mr Erskine relied on two of these in particular. They were:
… An expert witness should state the facts or assumptions upon which his opinion is based. He should not omit to consider the material facts which could detract from his concluded opinion.
… If an expert’s opinion is not properly researched because he considers that insufficient data is available, then this must be stated with an indication that the opinion is no more than a provisional one. In cases where an expert who has prepared a report cannot assert that the report contains the truth, the whole truth and nothing but the truth without some qualification, that qualification should be stated in the report.
Mr Erskine also referred to First Class Securities Pty Limited v R Neuhaus [2019] NSWSC 1261 at [22] per Black J where his Honour emphasised the utility of the code in expressly requiring the expert to turn his or her mind to the issue described in the second of the extracts from the Ikarian Reefer case.
The Applicant argued that these issues had been raised in the Applicant’s written submissions before McWilliam AsJ and that her Honour failed to deal with them. It was put that because there was no evidence as to the fair market value of the real estate assets owned by CBL at the material times, the valuation exercise carried out in the BDO Report was inherently unreliable. This had not been acknowledged by the expert in the BDO Report.
As to the use made of the BDO Report in her Honour’s consideration of the best interests of the company issue, Mr Erskine submitted that the opinion expressed in the BDO Report must have affected her Honour’s consideration of potential compensation based on the profit made by Mr Zivko in receiving the shares at an undervalue at [138] of her reasons.
Submissions of CBL
CBL argued that the application should fail at the outset because the Applicant is unable to demonstrate that any substantial injustice would be suffered should the application be refused. This was because on 13 April 2021 the Applicant had commenced proceedings (filed in court with the leave of McWilliam AsJ) directly against the persons who were to be the defendants in the proposed derivative action. The case pleaded in the subsequently filed statement of claim is for relief pursuant to s 233 of the Corporations Act, on the basis of conduct amounting to oppression of shareholders in CBL other than the directors. That conduct includes the granting of the option to Mr Zivko, and the exercising of that option.
Mr O’Meara submitted that, in substance, the relief sought in the oppression action was the same as that pleaded in the proposed derivative action.
It followed, it was said, that there could be no substantive injustice suffered by Mr Pesec should leave to appeal be refused. He will still be able to pursue his rights in relation to the issues he wished to agitate in the derivative proceedings in the oppression proceedings.
Indeed, it was submitted, should the Applicant ultimately succeed in obtaining leave to commence the derivative proceedings, that would create the potential for CBL to be placed in the impossible position of opposing itself in related litigation.
CBL submitted that the absence of any injustice warranted the dismissal of the application for leave to appeal.
CBL also argued that the Applicant had failed to demonstrate sufficient reason to doubt the judgment of McWilliam AsJ. I will set out the submissions by reference to the grounds contained in the Applicant’s draft notice of appeal, and in the order in which they were addressed by Mr Erskine.
Ground 5(b)
As noted above, Mr O’Meara submitted that her Honour had followed the orthodox approach sanctioned by a number of authorities, including Gleeson J (then sitting as a judge of the Federal Court) in McGuiness v Workplace Eye Protection Pty Ltd [2020] FCA 626 and the Gladstone case.
Moreover, it was said, the Chief Justice in his comments at [60] in Huang was cautioning against a consideration of the merits of the proposed litigation which might lead to inconsistent findings under ss 237(2)(c) and (d). The finding under (d), which required a fairly low threshold, did not preclude an assessment of the strength of the proposed claim in the assessment of the best interests of the company.
There was no logical inconsistency in making such an assessment in the context of a finding that the proposed proceedings raise a serious question to be tried. There was no basis for interpreting s 237(2) as precluding that assessment.
Ground 5(c)
CBL submits that, contrary to the contention of the Applicant, her Honour did address the potential benefit to CBL should the proposed action be successful. He pointed to the submissions of the parties summarised at [125]-[126] of the reasons and her Honour’s observations at [133], and her comments in relation to the difficulties with the claim for recission at [136]-137] and the difficulties with the compensation claim at [138].
In relation to the assertion that her Honour failed to take into account the possibility of conditioning leave on the basis of the Applicant providing security for the costs to be incurred by CBL, it was submitted that the Applicant had not sought such an order. Rather, he had proffered no more than an undertaking to indemnify CBL in relation to its costs, and to maintain his shareholding in CBL (including not dealing with or encumbering the shares) in circumstances where he provided no evidence as to his financial position. This was a matter which her Honour took into account at [140].
Ground 5(e)
CBL argue that the challenge by the Applicant on this issue amounts to a challenge as to the weight which her Honour gave to the evidence in relation to the costs issue. In that sense, it is argued that if the principles in House v The King (1936) 55 CLR 499 (House v The King) apply there can be no appealable error. Reference is made to Macedonian Orthodox Community Church St Petka Inc v Petar [2008] HCA 42; 237 CLR 66 at [138].
In any event, it is submitted, the challenge under this ground does not get to ‘first base’. In relation to subparagraph 5(e)(i), it is pointed out that the prospective defendants were not party to the application before her Honour and there was no occasion for them to give evidence. Indeed, it was unrealistic to expect them to give evidence as to how they proposed to defend a proceeding which might, or might not, be commenced.
As to subparagraphs 5(e)(ii)-(iv), the Applicant’s solicitor had given evidence estimating the costs at $600,000, and CBL’s solicitor had provided an estimate of $1 million. Her Honour referred to that evidence at [16], [21] and [123(c)]. On any view, it was said, her Honour was entitled to approach the matter on the basis that the costs to be incurred by CBL were likely to be substantial. No arguable error was demonstrated on that basis.
Finally, in relation to subparagraph 5(e)(v), CBL submits that the proposition advanced by the Applicant is undermined by the evidence tendered from his solicitor before her Honour. Moreover, her Honour was in a position to make an assessment of the cost and complexity of the proposed litigation having regard to the examination of the issues which had been undertaken before her for the purposes of the leave application.
Ground 5(a) and (d)
Mr O’Meara suggests that, having not appeared in the s 237 application, Mr Erskine may have misunderstood the basis for the objection to the BDO Report advanced on behalf of the Applicant before her Honour. Reference was made to the written ‘Plaintiff’s Closing Submission’, a copy of which was contained in the exhibit to Mr Markham’s affidavit. It was pointed out that paragraph 12, on which Mr Erskine had relied, appeared under the heading ‘Ratification – the Whittaker Report’.
The criticisms of the methodology adopted in the BDO Report which appear in the sub-paragraphs under that heading were directed to the reliability of the report for the purpose of providing the ratification meeting with realistic guidance as to the extent to which the grant of options to Mr Zivko were below the fair value of the CBL shares having regard to the fair market value of the company’s underlying assets. The purpose of the submissions under the heading was to challenge the weight to be given to the ratification decision, not to challenge the admissibility of the BDO Report.
The submissions which the Applicant had made as to why the discretion under s 136 of the Evidence Act 2011 (ACT) should have been exercised were those summarised by her Honour at [26] of the reasons. That is, they related to the failure by the expert to have agreed to be bound by the Expert Witness Code. While there was considerable debate before her Honour as to the issue of the market value of CBL’s underlying assets that debate was directed to the weight to be given to the share valuations made by the expert, rather than to their admissibility. In that context, her Honour had not erred as was asserted by the Applicant.
Applicant’s submissions in reply
The Applicant again emphasised the importance of the practical effect of the decision refusing leave. In his written outline, the Applicant relied on the following comment by the High Court in Ex Parte Bucknell (1936) 56 CLR 221 at 225-6:
If the interlocutory order… has the practical effect of finally determining the rights of the parties, though it is interlocutory in form, a prima facie case exists for granting leave to appeal. For example, a judgment for either party on a demurrer might, in effect, be decisive of the whole litigation. Although such a judgement would often be interlocutory, it might be final in determining the issues between the parties, and, in such a case, leave would be granted almost as of course.
(Note that the above emphasis appears in the Applicant’s submissions).
In relation to the distinction between the derivative and oppression actions, the Applicant submitted that the latter afforded potential remedies under s 233 of the Corporations Act ‘to rectify the effect of the oppressive conduct on the shareholder’ (Applicant’s Outline of Submissions in Reply, paragraph 6). Paragraph 7 of those submissions continues:
By contrast, the Derivative Action alleges contraventions of s 180(1), s 181(1) and s 182(1) of the Act by directors of (CBL), which offer a wholly separate form of relief, and one which is targeted towards the discharge of directors’ duties.
Mr Erskine further explained the distinction in the following submission (at page 45 of the transcript):
… The derivative action is based upon the conduct of the directors and Mr Zivko, they being the ones in particular who arranged the option agreement with Mr Zivko. It, therefore, is a fairly direct allegation against them and Mr Zivko of, for example, breach of directors’ duties. Oppression, on the other hand, is set out in section 232 of the Act. While oppression is a fairly wide-ranging concept, it is difficult to straitjacket exactly the circumstances in which conduct might be oppressive to, unfairly prejudicial to, or unfairly discriminatory against.
It is a slightly less direct attack upon the conduct that has occurred and there are - your Honour would be familiar with many situations in which there might be two different causes of action that get you to the same endpoint, and they are pleaded as alternatives for the simple reason that it is not always clear which of the two - or which of the alternatives presents the better pathway to the remedy. So at an early stage of proceedings it is not unreasonable to have options open to a party and it is conversely unreasonable, with respect, and potentially unjust to shut one of those options off before any of the options has been given a fair opportunity to be properly explored and outlined before a court.
In relation to the complications raised by Mr O’Meara, should the Applicant be ultimately granted leave to bring the derivative action, Mr Erskine said that the Applicant would seek to stay the oppression action.
In response to CBL’s submissions on grounds 5(a) and (d), Mr Erskine referred to paragraph 12.18 in the ‘Plaintiff’s Closing Submission’ which stated:
The utility of, or the assistance the Court would desire from the admission of, the Whittaker Report as an “independent expert” report is not apparent.
(Note that the ‘Whittaker Report’ is in reference to the BDO Report).
This paragraph, in context, was said to raise the issues based on the inherent unreliability of the expert’s opinion as to the share values referred to at [30] above.
In relation to ground 5(c) Mr Erskine referred to [138] of the reasons to support the submission that her Honour had not adequately taken into account the potential benefit for the company by way of compensation against the detriment involved in the derivative action. It was put that her Honour had failed to attempt to work out the likely level of compensation, even at a general level.
As to the issue of some security being provided for the company’s costs, Mr Erskine pointed to paragraph 14.13 of the ‘Plaintiff’s Closing Submission’. He also read paragraph 25 of the Applicant’s submissions in reply before her Honour which referred to the undertaking contained in 14.13 and noted that if leave was granted the adequacy of the security required could be revisited from time to time. The issue was raised with her Honour in a way which required her to consider it in coming to a conclusion as to the best interests of the company.
Consideration
I propose to first address the issue of whether her Honour’s decision is attended with sufficient doubt by reference to the proposed grounds of appeal and then to consider whether substantial injustice would be caused to the Applicant by the refusal of leave to appeal, assuming that her Honour’s decision was wrong. In relation to the first issue, I will deal with the grounds of appeal in the order in which they were addressed in submissions.
I should say that it is not necessary for me to determine one way or the other whether each ground of appeal is to be assessed, should leave to appeal be granted, by reference to the principles in House v The King or those discussed in Warren v Coombes (1979) 142 CLR 531. The NSW Court of Appeal in Huang did not see the decision to be made under s 237 as truly discretionary. It thus rejected the argument that the principles in House v The King would be applicable in an appeal from a decision pursuant to the section: see per Bathurst CJ at [61]. Barrett JA after expressing his agreement with the Chief Justice referred to the decision of the Western Australian Court of Appeal in Blakeney v Blakeney [2016] WASCA 76; 113 ACSR 398 as suggesting (at 69) that the principles applicable to appeals from discretionary decisions did apply to an appeal from a s 237(2) decision. At [81], Barrett JA said:
81If, by the second sentence of the passage quoted above (coupled with the reference to the particular paragraphs of the Macedonian Orthodox judgment), Buss JA, Murphy JA and Beech J intended to suggest that House v The King governs an appeal from a decision to grant or refuse leave under s 237, the suggestion is, in my respectful opinion, one that should not be accepted. As the Chief Justice recognises by his reference (at [61]) to Dwyer v Calco Timbers Pty Ltd [2008] HCA 13; 234 CLR 234, the judicial task set by s 237(2) is, as there stated by the plurality (at [45]), to reach “a conclusion drawn from the facts disclosed by the relevant evidence, and after any resolution of disputed facts”. That task requires evaluation against the statutory criteria and by reference to the primary facts as found. It does not involve the exercise of discretion. Appellate review must therefore proceed in accordance with Warren v Coombes [1979] HCA 9; 142 CLR 531 rather than House v The King…
I propose to assess the strength of the proposed grounds of appeal, except 5(a) and (d), by reference to the Warren v Coombes principles rather than the more stringent House v The King approach. It seems to me that this is the approach most favourable to the Applicant. Grounds 5(a) and (d) related to the exercise of the discretion open to her Honour under s 136 of the Evidence Act 2011 (ACT). It seems to me that it would be necessary for the Applicant to demonstrate error in the House v The King sense in order to succeed on these grounds: see per McColl JA in South Western Sydney Area Health Service v Edmonds [2007] NSWCA 16; 4 DDCR 421 at [133], and GBF v The Queen [2010] VSCA 135 at [61]-[62].
Ground 5(b) – Prospects of success
It is true, as submitted by Mr Erskine, that it is possible to read the comment of the Chief Justice in Huang at [60] as creating a doubt as to the line of authority exemplified by Gladstone in which the prospects of success were said to be part of the mix of considerations to be taken into account in making a determination as to whether it is in the best interests of the company for leave to be given under s 237.
However, I find it difficult to accept the proposition that the requirement to take into account the need for there to be a ‘serious question to be tried’ under s 237(2)(d) implies that the assessment of the prospects of success is absolutely excluded from consideration under s 237(2)(c). It seems to me that that proposition is contrary to the logic of the section.
The authorities suggest that s 237(2)(c) requires an applicant to establish on the balance of probabilities that the proposed action is in the best interests of the company by ‘taking into account all relevant circumstances’: see Huang at [57]. The strength of the cause(s) of action to be relied on, the type of relief to be sought and the magnitude of compensation which might be recovered are all clearly relevant matters. In my view, it would require clear language if it was intended to exclude such matters from consideration under s 237(2)(c). I do not see much utility in the expressio unius maxim in circumstances where the logic of the text suggests that such an implication would be perverse.
While there is, as the Chief Justice says, the possibility of some tension between the consideration of the prospects of success and the finding of a serious question to be tried, it is also the case that the concepts are reconcilable.
It is certainly true that a finding under s 237(2)(d) that there was a serious question to be tried could not stand next to a finding under s 237(2)(c) that the proposed claim was hopeless, or had no realistic prospect of succeeding. However, that is not what occurred here.
Indeed, the Applicant does not challenge the way her Honour addressed the issue posed by s 237(2)(d). Her Honour said in that regard between [38]-[39]:
38.… the plaintiff is not required to bring forward all evidence that might be presented at trial, or to seek to address all questions that might conceivably be raised…
39.This is in part because the Court will “will not normally enter into the merits of the proposed derivative action to any great degree, the plaintiff bearing the same relatively low standard as applies in an application for an interlocutory injunction” … the Court is addressing merit at a threshold level. It does not delve into the detail of the evidence and draw inferences to make findings.
In response to a submission by CBL that consideration of whether there was a serious question to be tried required taking into account an assessment of the burden which the proceedings would place upon CBL, her Honour concluded:
44.I accept that the use of the word ‘serious’ in s 237 imports a degree of gravity that means the Court must find the proposed proceedings involve a matter of genuine substance, excluding claims that are barely arguable or have a bare possibility of success. I also accept that the test has flexibility about it, depending on the nature of the rights asserted.
45.However, I do not accept CBL’s submissions that, before a finding that there is a serious issue to be tried can be made, the Court must effectively undertake a balancing exercise which includes consideration of the consequences to CBL in determining whether the proposed claim is ‘strong enough’ that it ‘justifies’ the potential detriment to the company. The words of s 237(2)(d) do not require such an approach as a relevant consideration in determining whether there is a serious question to be tried. Rather, such a submission is more aptly considered as part of whether it is in the best interests of CBL to commence proceedings against the current Directors and XO 1 when considering s 237(2)(c).
In relation to the s 237(2)(d) issue her Honour, after examining the proposed cause of action and the evidence before the Court, relevantly concluded:
96.Drawing these various contests together, one can well understand why the plaintiff has made this application for leave. He is a non-director shareholder watching another shareholder take advantage of an opportunity to increase his shares in a profitable company, in a manner not available to him and as a result of a decision by directors of CBL of which he was not initially a part because the directors chose not to involve the membership in approving the Option Deed. I am satisfied that the plaintiff has sufficiently identified a case that involves matters of substance with a reasonable probability of success. It may be put in the following way:
(a)CBL and the Directors conducted themselves so as to bring about and carry out the Option Deed without member approval.
(b)The Option Deed was a benefit to a related party under the Corporations Act. It was also a benefit to a shareholder in preference to other shareholders.
(c)Whether that conduct was in compliance with the Corporations Act or equitable fiduciary duties will depend upon one or more of the following:
(i)How the Option Deed is characterised (as remuneration or as a separate benefit);
(ii)Whether the benefit was at market value notwithstanding it was to a related party;
(iii)If the Option Deed was remuneration, whether it was reasonable, with reasonableness importing an objective test, requiring consideration of matters such as the financial position of CBL, the role carried out by Mr Zivko and the market value of the shares;
(iv)What steps the Directors took leading up to the execution of the Option Deed; and
(v)What significance attaches to the subsequent ratification of the conduct by the members of CBL, which itself depends upon factual questions of what was disclosed to the members and how adequate that information was to equip them with the information necessary to ratify the conduct.
97.Each of the claims alleged by the plaintiff is fairly arguable and has substance in terms of evidentiary foundation. I am satisfied that there is a serious question to be tried.
It was in that context that her Honour came to consider the ‘best interests’ issue. After summarising the contending submissions of the parties, her Honour referred to the balancing arguments as to the weight to be given to the shareholder ratification of the decision to issue the share options. Her Honour noted (at [132]) that the concerns of the Applicant with, amongst other things, the BDO Report, were openly discussed at the EGM.
It was in that context that McWilliam AsJ then expressed at [133] the conclusion that what CBL stood to gain by the proceedings was ‘uncertain’. Her Honour explained that conclusion by first turning to the alleged breach of s 209 of the Corporations Act. In relation to that she said:
134.It is of course important that corporate entities comply with the requirements of the Corporations Act. However, a finding that CBL contravened s 208 of the Corporations Act will only be capable of being made after significant costs as to what constitutes reasonable remuneration (the expense is separately considered below). In any event, it is far from certain that it is in CBL’s interests to litigate with a view to establishing its own contravention.
Her Honour then examined the remedies to be sought assuming the contravention to be established. In relation to rescission, her Honour concluded:
136.If the Option Deed remains valid despite the contravention, there seem to be two available outcomes. The first is rescission of the resolution that approved the Option Deed. However, it remains a contract between CBL and Mr Zivko. In circumstances where the transactions by which the shares were purchased under the Option Deed have been completed and years have now passed, it is difficult to see what basis would exist for ordering rescission.
137. Assuming in favour of the plaintiff that both a contravention of s 208 was established (or any other equitable breach established such as to found relief by way of rescission) and that the Court considered it appropriate to bring about the rescission of the Option Deed, the consequence would indeed be an immediate reduction in share capital by (at least) $3.15 million, and the raising of a debt to XO 1 in the same amount. The plaintiff gave no satisfactory explanation for why such relief would be in CBL’s interest
In relation to the proposed claim for compensation, her Honour found as follows:
138.The second potential outcome is that CBLD might seek compensation from the Directors for the ‘profit’ made by Mr Zivko in buying the shares at undervalue (if that is established). That would again be a costly exercise, as it would be necessary to prove not only that the decision was not in CBL’s interests, but that the process engaged in by the Directors fell short of the standard of care and diligence expected or was not taken in good faith or for a proper purpose. Recalling the variety of considerations that will be involved in establishing that aspect of the proposed cause of action (discussed in cases such as Warrenmang and Adler, see [89]-[91] above), that factual conclusion cannot be comfortably predicted.
The reference to the ‘Warrenmang’ decision was a reference to ASIC v Warrenmang Ltd [2007] FCA 973; 63 ACSR 623 picking up comments by the Court in that matter to the effect that not every breach of the Corporations Act gives rise to a breach of the directors’ duties provisions. It will in each case be necessary to take into account the particular circumstances of the company: see [89] of the reasons.
At [90]-[91], her Honour referred to the discussion by Santow J of the duties arising under ss 180, 181 and 182 of the Corporations Act in ASIC v Adler [2002] NSWSC 171; 168 FLR 253 at [372], [458] and [735] as providing a useful guide to the assessment of whether there is a serious question to be tried in respect of breach of directors’ statutory and fiduciary duties. A cursory reference to the many considerations discussed by Santow J provides, in my view, ready support for the conclusion expressed by her Honour in the last sentence of [138] of her reasons.
It is not apparent to me that in expressing the conclusions she does at [133]-[138] her Honour was making findings which were logically inconsistent with her finding that there was a serious question to be tried. Rather, having found in favour of the Applicant on that issue, it seems to me that her Honour was attempting to assess the strength of the proposed case in relation to the particular relief which the Applicant intended to seek. Due to the state of the evidence at the very early stage which the claim had reached, the most which her Honour could say was that she was left in a state of uncertainty as to the likelihood of the Applicant obtaining an order for recission which would be of real value to CBL. She was left in a similar state in relation to the outcome of the claim for compensation against the directors.
In the course of submissions, Mr O’Meara postulated a case where, although just barely raising a serious question to be tried, the proposed action would be extremely expensive to run and carry a considerable risk of failing. Mr O’Meara submitted that it would be curious and irrational if the Court was not able to take such factors into account in considering the best interests issue.
I agree with that proposition. Having regard to the width of the concept it seems to me strongly arguable that so long as there is no inconsistency between the finding of a serious question to be tried and the consideration of the risks, uncertainties and cost of the proposed litigation under s 237(2)(c), it is entirely appropriate for those matters to be considered. Indeed, it would probably amount to an error not to consider them.
Overall, I do not regard this ground of appeal as having a reasonable prospect of succeeding.
Ground 5(c) – Failure to take into account relevant considerations
Having regard to the paragraphs of her Honour’s reasons relied upon by CBL, contrary to the submissions of the Applicant based on proposed grounds 5(c)(i) and (ii), it is, in my view, strongly arguable that her Honour did consider the benefits of the proposed proceedings, including the assertion that CBL should recover compensation for the issuing of shares to Mr Zivko at an undervalue. Indeed, it was, in substance, that consideration which the Applicant complains about in ground 5(b). Ultimately, I saw the Applicant’s challenge as one based on the weight which her Honour gave to what she saw as the uncertainty of CBL achieving the propounded benefits. Having regard to the difficulties for CBL in relation to rescission which her Honour discussed at [135]-[137] of her reasons, the lack of reliable evidence on the undervalue issue, and the complexity of the claims against Mr Zivko and the other directors (as to which see [138]) I regard the challenge to her Honour’s decision on these grounds as very weak.
The challenge based on ground 5(c)(iii) appears to have more substance. That is because her Honour expressed the conclusion at paragraph [139] of her reasons that ‘...I was unable to be satisfied that on balance, the proposed proceedings are in CBL’s best interests. Accordingly… I formed the view that I was required to refuse the application’. It was only then, having decided against the Applicant under s 239(2)(c) that her Honour turned to deal with the issue of the costs risk for CBL. At paragraph [140] her Honour said:
140.I did have concerns about an indemnification for CBL’s costs that required CBL to pay money into Court first, as well as the lack of evidence that the plaintiff had the financial means to satisfy an adverse costs order brought by numerous defendants in the event that the proposed action on behalf of CBL did not succeed. However, given the finding that it was not in the best interest of CBL to grant the application, it was unnecessary to address the form of the proposed undertaking.
In the case of McGuinness v Workplace Eye Protection Pty Ltd [2020] FCA 626 (which her Honour expressly relied upon: see [121]-[122] of the reasons), Gleeson J at [79] had included the following in her statement of the principles to be applied in assessing the ‘best interests’ issue under s 237(2)(c):
(5)Relevant considerations are the prospects of success of the action, the likely costs and likely recovery if the action is successful and likely consequences if it is not. One relevant matter in considering these issues is the nature of any indemnity the applicant has offered to the company if the action is brought and the likelihood that the company will recover under that indemnity. It is also necessary to consider the resources the company will be required to devote to the action and the resources it has available, together with the effect that the action may have on other aspects of its business. It is also necessary to consider whether some other remedy is available to the applicant so as to make the proposed action unnecessary from its point of view: Gladstone at [57].
As a matter of logic, the issue of an applicant’s offer to provide security or indemnity for the relevant company’s costs should be considered as one of the factors relevant to the evaluation of whether or not it is in the best interests of the company for the proposed proceedings to be brought. It does appear that her Honour reached her conclusion in advance of considering the undertaking offered by the Applicant. On that basis, he does have an arguable basis for challenging her Honour’s decision on the s 237(2)(c) issue.
However, it is necessary to consider the strength of the Applicant’s case on this issue. The risk to the company of adverse costs orders, and the way in which that risk might be managed, are important considerations under s 237(2)(c). In In the matter of Fishinthenet Investments Pty Ltd and Coastal Waters Seafood Pty Ltd [2014] NSWSC 260 (Fishinthenet), Black J said:
31In this context, the question of an adequate indemnity to be given by DGP and those standing behind it in favour of the companies in respect of the costs which they would incur in conducting the proceedings and the costs to which they would be exposed if the proceedings were unsuccessful, and in respect of any amount which they may be ordered to pay by way of security for costs, is significant. The case law emphasises the importance of such an indemnity as a means of addressing the risk of prejudice to the companies from the commencement of the proceedings, should they ultimately prove to be unsuccessful, and the risk of exposure to costs and expenses of litigation including costs orders. In Power v Ekstein [2010] NSWSC 137; (2010) 77 ACSR 302 at [108], Austin J observed that:
“One of the issues for the court to consider is whether the company would be prejudiced by being exposed to the costs and expenses of litigation and the risk of an adverse costs order. That problem is often addressed by the court making a conditional order, by which the granting of leave is conditional upon the applicant undertaking to the court to pay and bear and indemnify the company against all costs, charges and expenses of and incidental to the bringing and continuation of the derivative claims for which leave is granted: see, for example, Gerard Cassegrain & Co Pty Ltd v Cassegrain [2010] NSWSC 91. In my opinion, such a condition is appropriate here, because the bringing of derivative claims is an aspect of the overall dispute between the plaintiff and Mr Ekstein, and therefore the plaintiff, rather than Companies in which she has only a minority interest, should be required to bear the costs of the litigation, including any adverse costs order that might be made if the claims are unsuccessful”.
The importance of such an indemnity was also recognised in Cassegrain v Gerard Cassegrain & Co Pty Ltd [2008] NSWSC 976; (2008) 68 ACSR 132 at [73]-[76]; MG Corrosion Consultants Pty Ltd above at [64]; Re Mycorp Group Pty Ltd [2013] NSWSC 1344 at [13]; Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 64 at [10].
32Neither DGP nor Ms Pamplin initially led evidence of any willingness to give such an indemnity. In the course of the hearing, Mr Folino-Gallo indicated, on instructions, that such an undertaking could be given by his solicitor on behalf of DGP. Alternatively, he submitted that the Court could impose a condition, on the grant of leave, that such an indemnity be offered by DGP by its directors. However, it seems to me that there is a substantial difficulty with that course. DGP has not led evidence to establish that it or its directors has the capacity to meet such an undertaking, which is a matter as to which I would need to be satisfied before imposing such a condition, particularly where there is a substantial risk that the cost of the proceedings may be disproportionate to the amount which is likely to be recoverable in them.
(Emphasis added)
In the instant case the Applicant had proposed an undertaking to indemnify CBL for the costs of the proposed proceedings: see the reasons at [113]. He had also, in the course of the written submissions made on his behalf, offered a further undertaking. The latter was in the following terms:
14.13 Mr Pesec does not oppose the leave of grand condition upon him providing to the Court an undertaking in the following terms:
“I, Anthony Pesec, as
(1)the holder in my capacity as the executor and the sole beneficiary of the estate of Josip Pesec, of 20,000 shares in the Defendant, and
(2)as the holder in my personal capacity of 14,510 ordinary shares in the Defendant
undertake to the Court that I will not, without the consent of the Defendant or alternatively the leave of the Court, directly or indirectly dispose of, deal with or encumber those shareholders in CBL.”
The difficulty for the Applicant here is, as her Honour pointed out, that there is simply no evidence as to his financial position, apart from his ownership of just under 35,000 shares in CBL. The company’s costs of the proposed action should it fail are likely to be substantial (see below at [93]-[94]). The estimate made by the Applicant’s solicitor of $600,000 appears to be a reasonable minimum having regard to the proposed defendants. In that regard, I note from the pleadings in the oppression proceedings that, apart from CBL itself, there are five director defendants. Mr Zivko’s company, which he is said to have nominated to take up some of the shares which he was entitled to pursuant to his exercise of the option, was also joined as a defendant.
I note from the defences which have been filed in the oppression proceedings that Mr Zivko and his company are separately represented from the other directors. It is reasonable to infer that if the derivative action was to proceed, there would be at least two legal teams involved in defending the claims which the Applicant wishes to advance. It is also apparent from the defences that the defendants will be contesting all of the significant elements of the Applicant’s causes of action in the oppression claim. Again, it is reasonable to infer that the same approach would be taken to the same causes of action if they were advanced in the derivative action.
The value of the Applicant’s undertaking not to dispose of or encumber his shares in CBL is difficult to assess. Firstly, for the reasons advanced by the Applicant, the share valuations made by BDO may not be reliable. While it is certainly possible, even probable, as submitted by Mr Erskine, that the underlying value of the real estate assets of CBL might have increased beyond the values recorded in the financial records of the company, the evidence before her Honour (and that before me) does not allow for a realistic assessment of the realisable value of the Applicant’s shares. Secondly, as pointed out by Mr O’Meara, the undertaking provides CBL with no security. Should the proposed litigation fail and the Applicant be required to indemnify CBL against substantial costs ordered in favour of the defendants, it might well result in his bankruptcy if his assets were modest. In such a situation, the CBL shares would be a part of the assets held in the bankruptcy for the benefit of all of the Applicant’s creditors.
As Black J pointed out in the Fishinthenet case, if an applicant for leave under s 237 wishes the Court to give effect to the offer of a costs indemnity, it is necessary for that person to lead evidence from which the Court will be able to conclude that there is a real capacity for the indemnity to be met should it ultimately be called upon.
It thus appears to me that, in the absence of any evidence as to the Applicant’s financial position (apart from his ownership of the CBL shares), the challenge to her Honour’s decision based on her failure to consider the imposition of some form of security for costs condition is unlikely to succeed. Clearly, the Applicant (and those advising him) appreciated the importance of this issue, hence the undertaking in relation to the CBL shares. It might be expected that if the Applicant had the capacity to meet the indemnity, he would have tendered evidence of it, and indeed to have made an offer of security reflecting the costs estimate made by his own solicitor. (Indeed, if the Applicant had that capacity, I would have expected that some evidence of it might have been tendered in the hearing before me).
Ground 5(e)
I see little merit in the attack which the Applicant seeks to make on her Honour’s finding that the likely costs to which CBL would be exposed in the proposed proceedings were ‘significant’. As noted above at [85], the Applicant’s own solicitor had given an estimate of $600,000. On any view, costs at that level might reasonably be seen as being ‘significant’.
Having regard to the history of the response by CBL and its directors to the allegations being made by the Applicant culminating in the EGM in December 2019, and indeed, the response of the company to the s 237 application itself, her Honour was entitled to infer that the proceedings in question would be strongly opposed by the proposed defendants. It is difficult to see what evidence from the directors themselves would have added.
Moreover, having regard to that history, and the detail provided to the Court as to the basis on which the Applicant sought to have CBL proceed, it seems to me that her Honour did have sufficient evidence before her to draw the conclusions which she did as to the complexity of the proposed action.
Also, I do not consider that it was necessary for her Honour to have resolved the different costs estimates made by the respective solicitors for the parties. It is not clear to me that the evidence would have allowed for such a resolution. More fundamentally, for the purposes of performing the necessarily broad-brush cost/benefit analysis required by s 237(2)(c), it was, in my view, sufficient for her Honour to take into account the approximate magnitude of the risk to which the company would be exposed if the action was to proceed. This is what her Honour did in the context of the relevant evidence, and the submissions made to her.
The submission which was made by CBL in that regard was stated in these terms:
[123] …
(c)the costs of the proceedings for CBL is likely to exceed $1 million. Even if the costs are assumed as being between $600,000 and $1 million, that is a matter that weighs significantly against the benefits discussed below.
There was clearly a basis in the evidence for that submission. It is equally clear that, in essence, her Honour accepted the submission.
In that context, the failure of CBL’s solicitor to explain the basis for his estimation appears to me to be a matter of little significance.
Grounds 5(a) and (d)
The threshold issue here is whether it is arguable that her Honour failed to deal with the substance of the submissions made by the Applicant as is now asserted.
There is considerable force in CBL’s submission that, properly understood, the submissions made at paragraph 12 of the ‘Plaintiff’s Closing Submission’ were directed primarily at undermining the weight which should be accorded to the ratification decision of the EGM in December 2019. Mr Erskine pointed to paragraph 12.18 as supporting his argument that the Applicant’s objection to the BDO Report relied on more than the failure to prepare the report pursuant to the obligations stated in the Expert Witness Code. However, I struggle to see how that argument can be made good. The reality is that paragraph 12.18 is something of an aside in a body of submissions which accord with the purpose as described by Mr O’Meara. Rather than suggesting the criticisms of the BDO Report identified in paragraph [28]-[30] above, it seems to me that paragraph 12.18 was more directed to the weight of the report. In context, I read the comment to be suggesting to her Honour that the report was of so little utility that it should be given little or no weight, insofar as CBL sought to rely on it in relation to the valuation of the shares.
Mr Erskine was not able to refer me to a written or oral submission to her Honour in relation to the exercise of the s 136 submission where counsel for the Applicant had expressly raised the considerations which the Applicant relies upon in the proposed challenge to her Honour’s decision in relation to the section. Absent such a submission, I struggle to see how the Applicant can demonstrate the necessary House v The King error.
There is a further problem with these grounds. That problem arises from the use to which the BDO Report valuation was put in her Honour’s analysis of the ‘best interests’ issue. Mr Erskine suggested that it was implicit in her Honour’s consideration of the potential value of the compensation which CBL might recover at [138] that her Honour saw the magnitude of any such award as modest, at best, having regard to the amounts paid by Mr Zivko and the share valuations contained in the BDO Report.
I do not see that submission as carrying much force in the context of how her Honour dealt with the BDO Report opinion as to the value of the shares in the course of her decision. I refer to the following:
a.In assessing whether the Applicant’s claim raised a serious question to be tried, one of the elements of the cause of action to be considered was the issue of whether the granting of the options by deed to Mr Zivko formed part of his reasonable remuneration as Chief Executive Officer of CBL. As to that her Honour said:
71. The plaintiff contends the benefit under the Option Deed did not constitute reasonable remuneration to Mr Zivko in all the circumstances because it was too high or excessive. As part of that submission, the plaintiff drew attention to the financial position of the company. Expert business valuation evidence was led to suggest that the process for how certain assets were classified and then valued was at best inconsistent and at worst wrong. I emphasise that this was what I took to be the import of the plaintiff’s position on the evidence following the cross-examination of the particular accountant, rather than my concluded view. There were also criticisms of the Remuneration Review performed by Mr Leck, an important one being his assumption that BDO’s assessment of the value of the dispute options was correct.
72. CBL, on the other hand, contended that assessing the market value of shares in a company by reference to the net asset value of the company was a flawed approach. CBL contended that valuation of the shares under the Option Deed required consideration of factors such as the rate of volatility, the appropriate discount rate and dividend yield.
73. Again, the above discussion of the competing arguments reveals complex valuation questions relevant to an objective standard of reasonableness. They raise arguable questions about a matter of substance which in turn means that whether the exemption from members’ approval provided by s 211 of the Corporations Act applies is also a serious question to be tried.
It is clear that her Honour was conscious of the reliability issues raised by the Applicant in relation to the BDO Report. Her Honour, quite properly, did not make concluded findings on these issues. However, she accepted that there was a legitimate argument as to the correct way to value the shares. She certainly did not accept the BDO Report at face value.
b.Another of the elements of the Applicant’s proposed claim was the distinct issue of the value of the shares over which Mr Zivko was granted the option. Again, her Honour’s consideration of that issue at [75]-[78] demonstrates that she was well aware of the issues raised by the Applicant in relation to the BDO Report, and that she took account of those matters in concluding that the Applicant’s concern as to the real value of the shares was ‘fairly arguable’.
c.One of the issues raised before her Honour was the effect of the decision of the December 2019 EGM to ratify the granting of the option to Mr Zivko by the directors in 2015. As noted above, the Applicant argued that the decision of the EGM was undermined by the unreliability of the BDO Report. Her Honour dealt with this at [84] of her reasons where she said:
84. It is not necessary to make a finding either way as to how well-informed the shareholders were when they subsequently ratified the Option Deed. This would require the Court to assess the quality of the BDO Report and the quality of the legal advice received by the shareholders which relied on the BDO Report. It would also possibly require the Court to assess the conduct of the Committee. What the evidence relied upon by the plaintiff demonstrates is that there is some foundation for the plaintiff’s concerns about what was disclosed to the members before ratification at the EGM. That in turn means that the dispute fact is a reasonably arguable one.
d.In her final assessment of the s 237(2)(d) issue, her Honour specifically identified the issue of whether the granting of the share options reflected the market value of the shares as being a live question of substance as to which the Applicant had a fairly arguable case: see [96] and [97].
Having accepted the potential problems with the BDO Report in relation to the issues raised under s 237(2)(d), it would make little sense for her Honour to have then ignored the shortcomings of the report in carrying out the balancing exercise required under s 237(2)(c). I see little evidence that she did that. At [138] of the reasons, her Honour expands upon the uncertainties involved in establishing the liability of the directors. At no point does she refer to the valuation opinion in the BDO Report so as to suggest acceptance of that opinion. It is difficult, in my view, to find any basis for the submission that her Honour ‘must’ have taken the opinion in some way adverse to the Applicant.
The most which can be said, it seems to me, about the comment in paragraph [139] about the Applicant’s case seeking to revisit ‘...what might turn out to be reasonable historical remuneration’ for Mr Zivko is that her Honour was left in a state of uncertainty on the share valuation issue. That is a far cry from an implicit acceptance of the validity of the opinion expressed in the BDO Report.
It follows from my analysis of the way in which her Honour considered the BDO Report that, even if she fell into error in rejecting the s 136 limitation sought by the Applicant, that error did not, in my view, cause her to rely on the BDO Report in a way which undermined her evaluation of the ‘best interests’ issue.
Overall, I see the Applicant as having only a poor prospect of succeeding on these grounds.
I conclude overall that the Applicant’s challenge to her Honour’s decision is, at best, weak. It is, however, necessary to consider that conclusion against the risk that an injustice might be done to the applicant should leave to appeal be refused, assuming her Honour’s decision was wrong.
Substantial Injustice
It seems to me that the crucial issue in that regard is the interrelationship between the proposed derivative action and the oppression action which is already under way. As to the latter, the evidence disclosed that the statement of claim was filed on 23 July 2021 and the defences of the defendants were all filed by 23 August 2021. The plaintiff filed a reply to the three defences on 6 September 2021.
As submitted by CBL the relief sought by the Applicant in the oppression action is virtually identical to that which would be sought in the derivative action. While it may be that there could be some possible forensic advantage for the Applicant in being able to pursue the derivative action compared with the oppression action, Mr Erskine was not able to articulate that advantage beyond the submission that it is just and reasonable for a party such as the Applicant to have all options available when at an early stage of proceedings. That position would preserve the possibility that one of the potential pathways to relief might turn out to be better than the other.
While it is true that the expiry of the limitation period has the practical effect that refusal of the application for leave to appeal would bring to an end the Applicant’s right to seek leave to bring a derivative action, that outcome must be seen in the overall context. The reality is that the Applicant is already advancing through the procedural steps necessary to progress the oppression claim towards a hearing. It appears that the pleadings have reached closure in that action.
The situation with the derivative claim is that if leave to appeal were granted, the notice of appeal would have to be filed and the procedures necessary to progress the appeal towards hearing would have to be taken. That would include the settlement of the index to the appeal papers, and the preparation, filing and service of the folders containing those papers. It is very difficult to see the matter coming on before the Court of Appeal prior to next year. Even assuming a quick favourable decision for the Applicant, it is unlikely that he would be in a position to commence the derivative action before well into 2022. While the Applicant proposes to seek a stay of the oppression proceeding should he ultimately succeed in obtaining leave to commence the derivative action, it is apparent that there will have been by mid-2022 considerable cost incurred in advancing the oppression action towards hearing.
The practical reality is that the Applicant will be able to seek redress for his concerns about the grant of options to Mr Zivko in the oppression action. The relief which the Applicant could obtain under s 233 of the Corporations Act is very broad. It may well include the possibility of compensation to CBL for breaches of duty by directors (if established): see per Black J in Taxa Australia Pty Ltd v Wang [2016] NSWSC 1913 at [23], although Gilmour J had expressed some doubt about that remedy in Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763; 79 ACSR 293 at [123]. Notwithstanding that uncertainty, it seems to me that the availability of the remedies in the oppression action significantly mitigate the force of the contention that the refusal of leave to appeal will finally determine substantive rights available to the Applicant.
It seems to me that while there is a somewhat nebulous possibility that the pathway to relief in the oppression action might encounter some difficulties which could be avoided by pursuing the derivative action, those difficulties are not such as to require the conclusion that the Applicant would suffer a substantial injustice if leave to appeal is refused, assuming that her Honour’s decision was wrong.
Conclusion
Applying the principles set out at [14]-[16] above, I have concluded that her Honour’s decision is not attended with sufficient doubt to warrant reconsideration of the s 237 application. Moreover, having regard to all of the circumstances of the case, including the progress of the oppression action, I am not persuaded that a substantial injustice would result by the refusal of leave to appeal, assuming her Honour’s decision to be wrong. It follows that leave to appeal must be refused.
Orders
The orders of the Court are:
1.The application for leave to appeal is dismissed.
2.Either party may, by 4:00 pm on 27 September 2021, apply to have the matter relisted for submissions on costs. If no such application is made, the applicant is to pay the respondent’s costs of the application.
| I certify that the preceding one-hundred-and-fourteen [114] numbered paragraphs are a true copy of the Reasons for Judgment of his Honour Acting Justice Crowe Associate: Jake Hester Date: 20 September 2021 |
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