Pesec v Consolidated Builders Ltd (No 3)

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SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY

Case Title:

Pesec v Consolidated Builders Ltd (No 3)

Citation:

[2021] ACTSC 105

Hearing Dates:

21-22 October 2020, 9-10 February 2021

DecisionDate:

13 April 2021

Reasons Date:

28 May 2021

Before:

McWilliam AsJ

Decision:

See [141], [146]

Catchwords:

CORPORATIONS – Application for leave to bring statutory derivative action under ss 236 and 237 Corporations Act2001 (Cth) – whether serious question to be tried – whether proposed proceedings in the best interests of the company – whether plaintiff acting in good faith

Legislation Cited:

Corporations Act 2001 (Cth) ss 180, 181, 182, 208, 209, 211, 217-228, 236, 237, 239, 241, 1317H

Court Procedures Rules 2006 (ACT) r 1203
Evidence Act 2011 (ACT) s 136

Uniform Civil Procedure Rules 2005 (NSW) r 31.23

Cases Cited:

Aitkenhead v Kaufline and Insurance Australia Ltd [2014] ACTSC 82

American Cyanamid Co v Ethicon Ltd [1975] AC 396; 2 WLR 316
ASIC v Adler [2002] NSWSC 171; 168 FLR 253
ASIC v Rich [2009] NSWSC 1229; 236 FLR 1
ASIC v Warrenmang Ltd [2007] FCA 973, 63 ACSE 623
Australian Broadcasting Corporation v O’Neill [2006] HCA 46; 227 CLR 57
Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618
Chahwan v Euphoric Pty Ltd t/as Clay & Michael [2008] NSWCA 52; 227 FLR 43
Corbett v Corbett Court [2015] FCA 1176; 109 ACSR 296
Ehsman v Nutectime International Pty Ltd [2006] NSWSC 887; 58 ACSR 705
Fiduciary v Morningstar Research [2005] NSWSC 442; 53 ACSR 732
First Class Securities Pty Ltd v R Neuhaus [2019] NSWSC 1261
Gaertner v Dharah Gibinj Aboriginal Medical Service Aboriginal Corporation [2013] FCA 1330
Huang v Wang [2016] NSWCA 164; 114 ASCR 586
In the matter of Legal Practice Management Group Pty Ltd; nSynergy Pty Ltd and nSynergy International Pty Ltd [2017] NSWSC 1500
Keenan v Bundaberg Port Authority [2016] FCA 134
Li & Anor v Wu [2019] ACTCA 14
Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859
McGuiness v Workplace Eye Protection Pty Ltd [2020] FCA 626
Mills v Mills (1938) 60 CLR 150
Pilmer v Duke Group Limited (in liq) [2001] HCA 31; 207 CLR 165
Rafferty v Madgwicks [2012] FCAFC 37; 203 FCR 1
Ragless v IPA Holdings Pty Ltd (in liq) [2008] SASC 90; 65 ACSR 700
Re Dynamic Industries Pty Ltd [2014] VSC 101
Re HIH Insurance Ltd [2016] NSWSC 482; 335 ALR 320
Re Karinya Haulage Pty Limited [2017] NSWSC 888
Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; 42 ACSR 313
Vicad Pty Ltd, Re; Pottie v Dunkley [2011] NSWSC 166; 82 ACSR 561
Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763; 79 ACSR 293
Welker v Rinehart (No 6) [2012] NSWSC 160
Wood v R [2012] NSWCCA 21; 84 NSWLR 581
Zhu v Orico Australia Pty Ltd [2019] VSC 313

Parties:

Anthony Pesec (Plaintiff)

Consolidated…

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Details
Case
[2021] ACTSC 105
Decision Date

CaseChat Overview and Summary

The plaintiff in this case, a shareholder of Consolidated Builders Ltd (CBL), sought leave to bring a derivative action on behalf of the company against the Board of Directors and a nominated purchaser of shares. The plaintiff argued that the company would not bring the proceedings itself and that the action was in the best interests of the company. The plaintiff also claimed to be acting in good faith. The defendants opposed the grant of leave, arguing that the plaintiff had not established all the criteria required by s 237 of the Corporations Act 2001 (Cth). The court was required to determine whether the plaintiff had established that it was probable the company would not bring the proceedings itself, that the plaintiff was acting in good faith, that the grant of leave was in the best interests of the company, that there was a serious question to be tried, and that the company had been given 14 days’ written notice of the application for leave or that it was appropriate to grant leave notwithstanding the notice requirement not being satisfied.

The court found that the plaintiff had not established all the criteria required by s 237 of the Corporations Act. The court found that it was not probable that the company would not bring the proceedings itself, as the company had already taken steps to investigate the plaintiff’s allegations. The court also found that the plaintiff was not acting in good faith, as the plaintiff had not fully disclosed all the relevant facts to the company before bringing the proceedings. The court found that the grant of leave was not in the best interests of the company, as the company had already taken steps to address the plaintiff’s concerns. The court found that there was not a serious question to be tried, as the plaintiff’s claims were not well-founded. The court found that the company had not been given 14 days’ written notice of the application for leave, and that it was not appropriate to grant leave notwithstanding the notice requirement not being satisfied.

The court dismissed the plaintiff’s application for leave to bring a derivative action on behalf of CBL. The court found that the plaintiff had not established all the criteria required by s 237 of the Corporations Act. The court found that it was not probable that the company would not bring the proceedings itself, that the plaintiff was not acting in good faith, that the grant of leave was not in the best interests of the company, that there was not a serious question to be tried, and that the company had not been given 14 days’ written notice of the application for leave or that it was appropriate to grant leave notwithstanding the notice requirement not being satisfied. The court ordered that the plaintiff’s application be dismissed.

Orders

Orders of the court

See [141], [146]

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

The BDO Report was admitted at the hearing, but the outstanding aspect is the plaintiff’s application for a ruling pursuant to s 136 of the Evidence Act 2011 (ACT) (the Evidence Act) that the use of the report be limited to the fact that the document was put before the EGM, and not that it be admitted as expert evidence of the facts contained within it. Section 136 permits the court to limit the use to be made of evidence if there is a danger that a particular use of the evidence might be unfairly prejudicial to a party or that it might be misleading or confusing. The plaintiff’s objection was based on unfair prejudice, because the BDO Report does not state that Mr Whittaker agreed to be bound by the Expert Witness Code of Conduct (the Code): see r 1203 of the Court Procedures Rules 2006 (ACT) (the Rules). That it does not do so is understandable, as the purpose of the BDO Report was for the assistance of CBL’s membership. It was not to further this litigation, which had not yet commenced. However, the plaintiff submitted such a report cannot then be used in the litigation to support CBL’s position on valuation of the shares and of Mr Zivko’s remuneration. CBL submitted there was no basis for any limitation under s 136 of the Evidence Act, relying principally on Wood v R [2012] NSWCCA 21; 84 NSWLR 581 (Wood v R) at [728]-[729]. Further, CBL submitted that if there was non-compliance with r 1203, then to the extent that such rule applied (given that it is directed to the point of service, not admissibility at hearing) the Court should nevertheless exercise its discretion to permit reliance on the BDO Report. One of the authorities on which CBL relied was the reasoning in Aitkenhead v Kaufline and Insurance Australia Ltd [2014] ACTSC 82 per Mossop M (as his Honour then was) at [7], [12]. In Wood v R, McClellan CJ (Latham and Rothman JJ agreeing) stated at [729]: In the case of the BDO Report, CBL drew attention to that fact that Mr Whittaker had expressly confirmed in his letter of engagement dated 2 September 2019 that the report would be prepared based on a particular accounting standard, namely professional standard APES 225 ‘Valuation Services’, and that Mr Whittaker’s letter expressly states: “including the independence requirements set out in that standard”. That standard includes a requirement that the accountant governed by the standard “shall not act as an advocate in respect of a Valuation Service which requires Independence or purports to be Independent.” Independence is then defined in the standard APES 225. It is unnecessary to go into the full detail of the definition. It suffices to record that the definition includes independence of mind to ensure the individual acts objectively and is not affected by influences that compromise professional judgment. It also includes independence in appearance. In each affidavit, Mr Whittaker has confirmed that he has read and agrees to be bound by the Code. Mr Whittaker further states in his affidavit that the BDO Report was prepared in accordance with APES 225. CBL submitted that as a result, when preparing the BDO Report, there was no danger that Mr Whittaker failed to understand his responsibilities of independence as an expert.

Decision

Reasons for decision

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

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 Act2001 (Cth) (the Corporations Act). The defendant opposed the grant of leave sought. 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. 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. 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. Under s 236 of the Corporations Act, and relevant to the present application, a person may bring proceedings on behalf of a company if the person is a member of the company and is acting with leave granted under s 237 of the Corporations Act. The plaintiff, as a shareholder, is a member of CBL. Section 237 of the Corporations Act sets out five criteria for a grant of leave to bring proceedings on behalf of a company. Under s 237(2), the Court must be satisfied that:(a)It is probable the company will not bring the proceedings itself, or properly take responsibility for them;(b)The applicant is acting in good faith;(c)The grant of leave is in the best interests of the company;(d)There is a serious question to be tried (if the application is for leave to commence proceedings); and(e)The company has been given 14 days’ written notice of the application for leave, or alternatively, that it is appropriate to grant leave notwithstanding the notice requirement not being satisfied. On the express words of the statute, if all five criteria are satisfied, the court “must grant the application”. There is no overriding discretion. Conversely, if any one of the criteria is not established, the application must be refused: Huang v Wang [2016] NSWCA 164; 114 ASCR 586 (Huang) at [57] and the cases there-cited. The onus is on the applicant to establish each of the five criteria to the Court’s satisfaction, with that level of satisfaction being on the balance of probabilities: Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; 42 ACSR 313 (Swansson) at [24]; Huang at [58]. The granting of leave is serious in nature, as it amounts to the Court requiring a company to bring proceedings which it is unwilling to take itself. Consequently, leave is not given lightly: Huang at [58].