Peter Urban v Junior Academy ELC Pty Ltd (ACN 136 704 697) (as trustee for the Glen Eira Road (249) Unit Trust (ABN 54 859 835 183))

[2019] VSCA 247

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2019 0028

PETER URBAN	Applicant
v
JUNIOR ACADEMY ELC PTY LTD (ACN 136 704 697) (AS TRUSTEE FOR THE GLEN EIRA ROAD (249) UNIT TRUST (ABN 54 859 835 183)) & ORS	Respondents

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JUDGES:	WHELAN, EMERTON JJA and KENNEDY AJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	11 October 2019
DATE OF JUDGMENT:	1 November 2019
MEDIUM NEUTRAL CITATION:	[2019] VSCA 247
JUDGMENT APPEALED FROM:	[2019] VSC 161 (Robson J)

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CORPORATIONS – Application for leave to appeal against dismissal of application under
s 237 of the Corporations Act 2001 (Cth) (‘Act’) for leave to bring proceeding in the name of the respondent company against fellow directors and others – Allegations of breach of directors’ duties, breach of contract, and knowing assistance – Leave refused by primary judge as not in the best interests of the company to grant leave – Leave under s 237 of the Act not a discretionary judgment but evaluative task – Leave to appeal refused as no error by primary judge – Potential conflict of interest and availability of alternative proceedings – Huang v Wang (2016) 114 ACSR 586 applied.

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APPEARANCES:	Counsel	Solicitors
Applicant	Mr M Borsky QC with Mr G Kozminsky	Marsh & Maher Richmond Bennison
Second to Fifth Respondents	Mr J W S Peters QC with Mr O Bigos	Jack Bock Lawyers

WHELAN JA
EMERTON JA
KENNEDY AJA:

1. The applicant, Mr Urban, seeks leave to appeal from an order of Robson J made 5 March 2019 dismissing an application by Mr Urban for leave pursuant to s 237 of the Corporations Act 2001 (Cth) (‘the Act’) to bring a proceeding in the name of Junior Academy ELC Pty Ltd (‘Junior Academy’) against Barcochva Lahmy, Anna Lahmy, Early Childhood Management Pty Ltd (‘ECM’) and Gold Glow Pty Ltd (‘Gold Glow’).[1]

   [1][2019] VSC 161 (‘Reasons’).

1. Mr Urban and Mr and Mrs Lahmy conducted two childcare businesses together through corporate entities and trusts.  One of those businesses was at 249 Glen Eira Road, Caulfield North.  Junior Academy conducted that business as trustee of the Glen Eira Road (249) Unit Trust.  The two equal unitholders of that trust were companies respectively controlled by Mr Urban and by Mr and Mrs Lahmy.  ECM, a company controlled by Mr and Mrs Lahmy, was the manager of the Glen Eira Road childcare business.  The directors of Junior Academy were, and are, Mr and Mrs Lahmy and Mr Urban.  The business began in early 2015. 

1. During the latter part of 2015, Mr and Mrs Lahmy, through their company, Gold Glow, purchased a property in Glen Eira Road approximately 130 metres away from the Glen Eira Road childcare business and applied for a planning permit to establish a childcare centre.  Mr Lahmy told Mr Urban what they had done in April 2016.  Mr Urban objected.

1. At around the same time, in the latter part of 2015, Mr Urban formed a partnership with a large childcare operator named ‘Bambini’ to purchase land and to develop a childcare centre in Glenhuntly Road approximately 2.7 kilometres or 3.3 kilometres from the Glen Eira Road childcare business, depending upon how it is measured.  Mr Urban did not tell Mr and Mrs Lahmy about this project. 

1. From mid-2016 negotiations were held for the sale of the childcare businesses Junior Academy conducted.  Sales of those businesses were eventually settled in August 2017.  In the course of that process Mr Urban falsely told Mr Lahmy he had a prospective buyer.  He told that falsehood in order to obtain information about the prospective sales. The fact that what he had told Mr Lahmy was false was revealed for the first time in cross-examination before the primary judge.

1. The Glenhuntly Road project did not proceed. Mr and Mrs Lahmy contend that its existence affected the sale process for the Junior Academy businesses.

1. The proceeding Mr Urban seeks leave to bring would allege against Mr and Mrs Lahmy, Gold Glow and ECM, in the name of Junior Academy, that:

—Mr and Mrs Lahmy breached their duties as directors and officers of Junior Academy by, amongst other things, diverting the opportunity to purchase and develop the other Glen Eira Road property from Junior Academy to themselves, misusing confidential information, and failing to disclose their activities.

—ECM is liable for breach of its management agreement with Junior Academy, and ECM and Gold Glow are liable for knowing assistance in the breaches of duty by Mr and Mrs Lahmy.

1. Pursuant to s 236 of the Act, a person may bring proceedings on behalf of a company if the person is a member or officer of the company, and if leave is granted under s 237. Mr Urban meets the first requirement. Section 237 provides, relevantly, that the Court must grant leave where it is satisfied of a number of matters. The primary judge was satisfied of all of those matters save for one, being the requirement in s 237(2)(c) that ‘it is in the best interests of the company that the applicant be granted leave’. Amongst the requirements of which the judge was satisfied were the requirements that the applicant is acting in good faith and that there is a serious question to be tried.

1. The primary judge was not satisfied that it was in the best interests of the company that Mr Urban be granted leave for three reasons.  They were:

(1)Mr Urban had told an untruth to Mr Lahmy when it had suited his personal interests.  The judge considered that he could not be trusted to tell the truth about his dealings with Mr and Mrs Lahmy.  On this ground alone, the judge said, he would not accede to the application.[2]

(2)Without having had the benefit of argument, the judge considered that there appeared to be an alternative mechanism by which relief might be obtained, being an oppression proceeding under s 233 of the Act.[3]

(3)There was the potential for a conflict of interest.  This was because Mr Urban’s allegations against Mr and Mrs Lahmy would give rise to an issue as to whether Mr and Mrs Lahmy should seek leave to bring a ‘cross claim’ on behalf of Junior Academy against Mr Urban for similar conduct in relation to the Glenhuntly Road project.  The judge considered that this factor was particularly significant where an alternative proceeding (oppression) may be available.[4]

[2]Reasons [16].

[3]Reasons [25].

[4]Reasons [26], [31], [40]–[44].

1. Before us, senior counsel for Mr Urban accepted that if any of these three bases for the primary judge’s refusal of leave was found to be justified the application for leave to appeal must fail.

1. In our opinion the application for leave to appeal should be refused because we consider it to be clear that the third reason why the primary judge refused leave was justified.

1. The decision whether or not to grant leave under s 237 of the Act is not a discretionary judgment governed by the principles in House v The King;  rather, it is an ‘evaluative task’ involving questions upon which reasonable minds can differ.[5]  On an appeal in relation to a decision of that kind it is not enough that the appellate court might have a preference for a different view;  there must be an error in the primary judge’s approach or findings.[6]

   [5]Huang v Wang (2016) 114 ACSR 586, [61] per Bathurst CJ (with whom McColl JA agreed), [78]–[81] per Barrett AJA.

   [6]Chief Commissioner of State Revenue v Metricon Qld Pty Ltd (2017) 224 LGERA 236; [2017] NSWCA 11, [77] per Barrett AJA (with whom Macfarlan and Ward JJA agreed) and Perera v GetSwift Ltd (2018) 363 ALR 394; [2018] FCAFC 202, [241] per Middleton, Murphy and Beach JJ.

1. Senior counsel for Mr Urban contested the primary judge’s reliance upon the potential for a conflict of interest should there be concurrent claims by the contending parties, each advancing a claim on behalf of the Junior Academy.  He submitted that Mr Urban would adopt a consistent position.  He would submit that while Mr and Mrs Lahmy’s new Glen Eira Road centre was in competition with Junior Academy’s centre, Mr Urban and Bambini’s new Glenhuntly Road project was not.  Thus, Mr Urban would not be put in a position of maintaining inconsistent positions when claiming in the name of Junior Academy, and when defending the postulated claim against him.

1. There are two problems with that submission.

1. The first is that the issue is not that Mr Urban would maintain inconsistent positions, it is that Junior Academy would do so.  If leave were granted to Mr Urban to pursue his complaint in the name of Junior Academy, the company in that proceeding would seek to contend that the relevant directors’ duties were breached by Mr and Mrs Lahmy in relation to their new Glen Eira Road centre whereas they were not breached by Mr Urban in relation to his new Glenhuntly Road project.  If Mr and Mrs Lahmy then sought and obtained leave to bring a proceeding in the name of Junior Academy against Mr Urban,[7] Junior Academy would inevitably argue in that proceeding that Mr Urban had breached his duties, and possibly also that Mr and Mrs Lahmy had not.  Junior Academy would, in all probability, maintain inconsistent positions in two concurrent proceedings.

   [7]As senior counsel for the respondents before us confirmed that they would.

1. The second problem is that the conflict cannot be eliminated by confining the area of contention to the issue of whether the respective centres were potential competitors.  Mr Urban also seeks to allege that Mr and Mrs Lahmy diverted an opportunity from Junior Academy and misused confidential information.  The same claim could, and, we were told, would, be sought to be advanced against Mr Urban in the name of Junior Academy should leave be granted.

1. The significance of the inconsistency in the context of the application for leave is increased by the existence of an alternative means of litigating the dispute, being an oppression proceeding, as the judge observed.  There is also a further alternative, to which the judge referred.[8]  Mr and Mrs Lahmy have applied to wind up Junior Academy.  If the company were wound up, a liquidator would be in a position to investigate and pursue claims on behalf of Junior Academy.  As the judge observed, that would entail costs.  A further option would be replacing Junior Academy as trustee with an independent person.

   [8]Reasons [46].

1. Before concluding this issue it is necessary to observe that the parties treated Junior Academy’s position as if it were a company trading in its own right rather than as a trustee of a trading trust.  We have dealt with the matter on the same basis, there being no contention put to the contrary.

1. The primary judge’s third reason for not being satisfied that leave was in the best interests of the company was well justified.  No error in relation to it has been shown.  It is unnecessary for us to consider the other two reasons relied upon by the primary judge.

1. The application for leave to appeal is refused.

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