Ragless v IPA Holdings Pty Ltd (In Liq) - [2008] SASC 90

SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
RAGLESS v IPA HOLDINGS PTY LTD (IN LIQ)
[2008] SASC 90
Judgment of The Full Court
(The Honourable Justice Debelle, The Honourable Justice Sulan and The Honourable Justice Vanstone)
11 April 2008
CORPORATIONS - MEMBERSHIP, RIGHTS AND REMEDIES - MEMBERS' REMEDIES AND INTERNAL DISPUTES - PROCEEDINGS ON BEHALF OF COMPANY BY MEMBER - STATUTORY DERIVATIVE ACTION
Appellant and respondent are directors of defendant company – dispute between appellant and respondent as to management of company and division of assets – order made winding up company – respondent granted leave pursuant to s 237 of Corporations Act 2001 (Cth) to commence proceedings in name of company – whether pre-requisites in s 237(2) have been satisfied – whether ss 236 and 237 apply to company in liquidation – appeal dismissed.
Corporations Act 2001 (Cth) s 236, s 237, s 241, s 477(6), s 511(1), referred to.
Aliprandi v Griffith Vintners Pty Ltd (in liq) (1991) 6 ACSR 250; Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199; Cape Breton Co v Fenn (1881) 17 Ch D 198; Charlton v Barber (2003) 47 ACSR 31; Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732; Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534; Meytor Inc v Queensland Electronic Switching Pty Ltd [2003] 1 Qd R 186; Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313, applied.
American Cyanamid Co v Ethicon Ltd [1975] AC 396; Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57; BL & GY International Co Ltd v Hypec Electronics Pty Ltd (2001) 164 FLR 268; Brightwell v RFB Holdings Pty Ltd (in liq) (2003) 171 FLR 464; Cadima Express Pty Ltd (in liq) v Deputy Commissioner of Taxation (1999) 157 FLR 424; Carpenter v Pioneer Park Pty Ltd (in liq) (2004) 51 ACSR 299; Christianos v Aloridge Pty Ltd (1995) 59 FCR 273; Fargro Ltd v Godfroy [1986] 1 WLR 1134; Ferguson v Wallbridge [1935] 3 DLR 66; Foss v Harbottle (1843) 2 Hare 461; 67 ER 189; HPM Pty Ltd v Fear (2002) 171 FLR 12; Kamper v Applied Soil Technology Pty Ltd (2004) 211 ALR 337; Lloyd-Owen v Bull [1936] 4 DLR 273; Mhanna v Sovereign Capital Ltd [2004] FCA 1040; Promaco Conventions Pty Ltd v Dedline Printing Pty Ltd (2007) 159 FCR 486; re Bank of Gibraltor & Malta (1865) LR 1 Ch 69; re Dominion Portland Cement Co (1919) NZLR 479; re Imperial Bank of China, India and Japan (1866) LR 1 Ch 339; Roach v Winnote Pty Ltd (in liq) [2001] NSWSC 822; Russell v Westpac Banking Corporation (1994) 61 SASR 583; Scarel Pty Ltd v City Loan and Credit Corporation Pty Ltd (1988) 17 FCR 344; Scuteri v Lofthouse (2006) 59 ACSR 327; Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd [2001] QSC 324; Zempilas v JN Taylor Holdings Ltd (in liq) (No 6) (1991) 5 ACSR 28, considered.

RAGLESS v IPA HOLDINGS PTY LTD (IN LIQ)
[2008] SASC 90
Full Court: Debelle, Sulan and Vanstone JJ

DEBELLE J: This is an appeal from a Master of this court granting leave to the plaintiff pursuant to s 237 of the Corporations Act2001 (Cth) to commence proceedings in the name of IPA Holdings Pty Ltd (in liquidation).
IPA Holdings Pty Ltd (“Holdings”) was incorporated on 30 June 1982 under the name Industrial Pyrometers (Aust) Pty Ltd. On 28 February 1991 it changed its name to its present name. It acted as trustee of the Industrial Pyrometers (Aust) Pty Ltd Unit Trust (“the IPA Trust”).
The plaintiff, Clive Lindsay Ragless, has been a director of Holdings since it was incorporated. The only other director of the company was Daron Jon Carnie. He too has been a director of Holdings since it was incorporated. For convenience and intending no disrespect, I will refer to the plaintiff as “Ragless” and to Mr Carnie as “Carnie”. Both Ragless and Carnie are also the secretaries of Holdings.
Holdings has a paid up capital of two dollars represented by two fully paid ordinary shares of one dollar each. One share is held by Ragless and the other by Carnie.
The IPA Trust has issued two units. One is held by IPA Manufacturing Pty Ltd (“Manufacturing”) as trustee of the Ragless Family Trust. Manufacturing is controlled by Ragless. The other is held by Onetemp Pty Ltd (“Onetemp”) as trustee of the Carnie Family Trust (“Onetemp”). Onetemp is controlled by Carnie. Originally it was called Carnie Nominees Pty Ltd and later Industrial Pyrometers (Aust) Pty Ltd.
As these arrangements suggest, Holdings was a joint venture on the part of Ragless and Carnie. It is common ground that in 1970 Ragless and Carnie formed a partnership to manufacture and sell pyrometers. Pyrometers are a device for measuring and controlling temperature in an industrial environment. The business manufactured that part of the pyrometer called “the sensor” but did not manufacture the part called “the controller”. The business sold sensors to which controllers had been fixed.
In June and July 1982 Ragless and Carnie restructured the arrangement by which they conducted their business. On 30 June 1982, Ragless and Carnie incorporated Industrial Pyrometers (Aust) Pty Ltd which, as already noted, later changed its name in 1991 to IPA Holdings Pty Ltd. The company then conducted the business of manufacturing and selling pyrometers. On 1 July 1982 the IPA Trust was also established. Although Ragless and Carnie had adopted a corporate trust structure, in essence they continued to carry on the business as a partnership.
Ragless and Carnie expected to retire in 2003 when each had reached the age of 60 years. They intended that in June 2003 the IPA Trust would terminate and the business would be wound up. Effect was given to that intention in the Trust Deed for the IPA Trust. The Trust Deed defined the vesting day to be 1 June 2003. By that date both Ragless and Carnie would have reached 60 years of age. The IPA Trust was to terminate on the vesting day unless earlier terminated pursuant to the Trust Deed: clause 10. There has not been any termination pursuant to the Trust Deed prior to 1 June 2003. Upon termination of the IPA Trust, it was intended that the assets and goodwill of the business be sold and the proceeds distributed to the unit holders: clause 12. Either unit holder was at liberty to purchase from the other the assets and goodwill of the IPA Trust.
Late in 1990, Ragless and Carnie agreed to divide the business into two divisions, its manufacturing division and selling division. Effect was given to that intention early in February 1991. Ragless and his company Manufacturing took over the manufacture of sensors. Carnie and his company then called Industrial Pyrometers (Aust) Pty Ltd (“Industrial Pyrometers”) and now called Onetemp took over the sales of sensors and controllers. The agreement was not then reduced to writing. That did not occur until 25 June 1999 when a deed was executed by Holdings, Manufacturing, Industrial Pyrometers as Onetemp was then called, Ragless, Stephen Ragless, who is the brother of Ragless, Carnie and a company called Ragcar Investments Pty Ltd (“the 1999 Deed”). Ragless and Carnie conducted their business according to the agreement made in 1990.
The 1999 Deed provided in clause 4 for the lease of the manufacturing assets and of the sales assets to Manufacturing and to Industrial Pyrometers respectively and a licence to each respectively to manufacture sensors and to sell sensors and controllers. The consideration for the lease and licence was the payment by each company of $75,000 per annum to Holdings. The goodwill of the business remained in the possession of Holdings. One issue between the parties is whether the fact that the manufacturing assets and sales assets were leased suggests an intention on the vesting date that the assets would return to Holdings which would then sell those assets and the goodwill of the business.
The 1999 Deed provided that the arrangement was to remain on foot for a period of two years from 1 July 1997: clause 2.21. Clause 7 of the deed provided that on the expiry of that term of two years either Holdings, Manufacturing or Industrial Pyrometers could terminate the agreement on three months’ notice in writing. On 8 December 1999, just over five months after the deed had been executed, Industrial Pyrometers and Carnie gave notice terminating the agreement.
Curiously, while the 1999 Deed made provision for the sale of one division from Manufacturing to Industrial Pyrometers or vice versa and provision for the sale of the combined business in certain circumstances, it made no provision for the consequences of termination. It did not make any provision as to the disposition of either the manufacturing or sales assets or of the goodwill retained by Holdings. Similarly, the Trust Deed made no provision for any disposition of the assets should the arrangements as to the conduct of the business be terminated before the vesting day other than on the death of either Ragless or Carnie.
The notice given by Industrial Pyrometers and Carnie expired on 8 March 2000. The options then available to Ragless and Carnie included combining the two separate businesses into one to be operated in partnership or to continue their separate businesses. In the result, both continued to conduct their separate businesses. That has led to disputes between them. Ragless asserts that he and Carnie had agreed that the assets were to be leased to each division and thus, on termination, the two divisions would merge so that the business could be sold as a whole unless the parties agreed otherwise. Carnie says that all assets other than goodwill were transferred to each division.
On 1 June 2003 the trust vested so that it was necessary for the business to be wound up pursuant to the terms of the Trust Deed. That has not occurred and that has led to further disputes.
The disputes between Ragless and Carnie have affected the management of Holdings. Carnie proposed the appointment of an independent third director. Ragless opposed that proposal. On 28 November 2005 an order was made in this court winding up Holdings on the application of Ragless. The order was made on the just and equitable ground. Mr John Hart was appointed liquidator.
The disputes between Ragless and Carnie have affected the winding up of the company. Mr Hart as liquidator has investigated potential claims that the company may have pursuant to the Deed. He believes that Holdings may have claims against both Onetemp and Manufacturing. On 13 June 2006 the solicitor for the liquidator wrote to the solicitor for Carnie with a proposal to resolve the dispute between Carnie and Ragless. In the course of that letter, the solicitor for the liquidator referred to potential claims that Holdings might have. The letter said:
My client considers that there may be a claim against One Temp (sic) and/or IPA Manufacturing. However, he is not in a position to proceed with such a claim as he has no funding.
The liquidator did not receive any reply to that letter. On 4 September the solicitor for the liquidator wrote to the solicitors for both Ragless and Carnie informing him that the liquidator proposed to sell the assets of Holdings and stating that he was prepared to offer both Ragless and Carnie an opportunity to purchase the assets within 14 days of the letter. Neither Ragless nor Carnie accepted the offer. By letter dated 6 September 2006 Ragless replied that it was his intention to seek leave of the court to bring an action on behalf of Holdings for the recovery of earnings made by any party due to the unauthorised use of the assets of Holdings, the interest on those earnings and any other damage caused to the company as a result of the unauthorised use of the assets. On 24 October 2006 the solicitor for the liquidator responded to the effect that he had instructions to accept service of proceedings.
It is against that background that Ragless applied on 3 November 2006 for leave pursuant to s 237 of the Corporations Act to bring proceedings in the name of Holdings. The application was accompanied by a draft statement of claim.
Ragless claims that Holdings has claims against Onetemp in relation to breaches of the Deed made on 25 June 1999 and, in particular, for the failure of Onetemp to return sales division assets to it and the failure of Onetemp to account for profits realised from the sales division assets while it unlawfully retained possession of those assets contrary to the terms of the Deed. The statement of claim alleges that it was an implied term of the agreement made in 1991 that on termination Onetemp was to return the sales assets to Holdings, cease using the logo and to cease using the words “Industrial” or “Pyrometers” or “IPA” in its name and was to cease using the intellectual property referred to in the Deed and to cease selling all sensors manufactured by Holdings. It alleges that, on the termination becoming effective, Onetemp ceased to trade with Manufacturing causing loss to Manufacturing. It further alleges that Onetemp was and continues to act in breach of the agreement as evidenced by the 1999 Deed. It alleges that since June 2000 neither Manufacturing nor Onetemp have paid the lease and fees payable pursuant to clause 10 of the 1999 Deed thereby causing a loss to Holdings. It then recites events allegedly demonstrating how Ragless and Carnie are unable to agree as to the management of Holdings. Manufacturing seeks orders restraining Onetemp from using the sales assets, using the logo and using intellectual property and selling sensors. It further claims damages for breaches of the agreement evidenced by the 1999 Deed and under the Trade Practices Act 1974 (Cth). Ragless acknowledges that Manufacturing has a liability to return manufacturing assets to Holdings and to account for profits realised while it had possession of those assets contrary to the terms of the Deed. These claims raise issues as to the proper interpretation of the Trust Deed and the 1999 Deed.
On 12 December 2006 a Master of this court made an order granting Carnie leave to intervene in these proceedings.
On 2 July 2007 the Master ordered that Ragless have leave pursuant to s 237 to commence proceedings in the name of Holdings against Onetemp in respect of the causes of action described in a draft statement of claim filed on 22 January 2007. Carnie has appealed to this court against that order. Shortly put, the grounds of appeal are that none of the pre-requisites listed in s 237(2) of the Corporations Act have been satisfied.
A Statutory Derivative Action
Section 237 of the Corporations Act provides who may bring proceedings on behalf of a company. Section 237 spells out the procedure for obtaining leave to do so and s 237(2) prescribes the matters to be established for the purpose of obtaining a grant of leave. Section 237(2) provides:
237 (2)The Court must grant the application if it is satisfied that:
(a)it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and
(b)the applicant is acting in good faith; and
(c)it is in the best interests of the company that the applicant be granted leave; and
(d)if the applicant is applying for leave to bring proceedings – there is a serious question to be tried; and
(e)either:
(i)at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(ii)it is appropriate to grant leave even though subparagraph (i) is not satisfied.
The Master found that Ragless had established the matters in paragraphs (a), (b), (c) and (d) of s 237(2). The issues in paragraph (e) were not in dispute. The terms of s 237(2) require that the court must grant the application for leave if all the matters in paragraphs (a) to (e) are established. For that reason, the Master granted Ragless leave to proceed in the name of the company.
During argument, the court suggested a course the parties might adopt to resolve their differences. The parties asked to consider the proposal after argument had been completed. In late February 2008, they informed the court that negotiations had broken down and asked the court to decide the issues in the appeal.
It is convenient to consider separately each of the matters in paragraphs (a), (b), (c) and (d).
Will the Company Sue?
Section 237(2)(a) provides that the applicant for leave must satisfy the court that it is probable that the company will not itself bring the proceedings, or properly take responsibility for them or for the steps in them. The Master found that the liquidator had no funds and no assets other than the claims relating to the company’s goodwill. For those reasons, he found that the requirements of paragraph (a) had been satisfied.
Mr Blue QC, who appeared for Carnie, challenged that conclusion contending that Ragless had failed to discharge the onus of proving the facts required to be established by paragraph (a). Mr Blue submitted that in order to discharge that onus, Ragless needed to establish that he had presented the liquidator with full details of his proposal that the company resume the combined business of manufacturing and selling sensors, the costs and benefits of the company so acting, the prospects of success of the proposed action, its likely costs and its likely benefits including counsel’s opinion. He further contended that the liquidator should have had an opportunity to consider whether to fund the action, that Ragless had to prove that he had informed the liquidator that he was not prepared to fund the liquidator to bring the action if leave were refused, and that, after all those steps had been taken, the liquidator was not prepared to institute the action. Mr Blue submitted that, as Ragless had done no more than inform the liquidator that he was going to seek leave under s 237, he had not discharged the onus.
It is convenient to deal first with the contention that Ragless had failed to inform the liquidator that he was not prepared to provide funds to the liquidator to conduct the action if leave was refused. Paragraph (a) requires the applicant to establish only that it is probable that the company will not itself bring proceedings. It requires no more than that. The effect of Mr Blue’s contention is to add to paragraph (a) another matter to be established by an applicant for leave, namely, that the applicant is not willing to provide funds to the liquidator to conduct the proceedings. The court cannot add to the criteria that have been specified by Parliament. It would be especially undesirable to do so given that these criteria have been specified in order to give effect to recommendations of the Companies and Securities Law Reform Committee. Further, if the applicant had to fund the liquidator to conduct proceedings, it might result in the applicant incurring a higher cost than if he retained his own solicitors. The court must give effect to the only criterion specified in paragraph (a).
Mr Blue’s contention as to the other facts that Ragless had to establish fails to have regard to the history of the dispute between Ragless and Carnie. The liquidator had been appointed on 28 November 2005. The evidence establishes that the liquidator is familiar with the dispute between Ragless and Carnie and the respective contentions of each. The letter from the liquidator’s solicitor dated 13 June 2006 demonstrated that the liquidator had investigated the potential claim that Holdings may have pursuant to the agreement embodied in the 1999 Deed and considered that Holdings may have claims against Onetemp as well as against Manufacturing. As already noted, the solicitor for the liquidator had said:
My client considers that there may be a claim against One Temp (sic) and/or IPA Manufacturing. However, he is not in a position to proceed with such a claim as he has no funding.
That view is confirmed in an affidavit sworn on 16 November 2006 by the solicitor for the liquidator. Later in the letter dated 13 June 2006, the solicitor stated that the liquidator is willing to sell any cause of action that may exist. The letter had earlier stated that the liquidator proposed a solution to the issues between Ragless and Carnie but that proposal was not accepted by either. Mr Blue’s contentions fail to give any weight to the fact that a liquidator has been appointed, that the liquidator has gained a knowledge of and a familiarity with the issues to the point of recognising the respective claims and proposing a remedy. The Master had relied on those facts. There was clear evidence that the liquidator did not have any financial resources and certainly not sufficient financial resources to commence legal proceedings. It was proper for the Master to infer from those facts that the liquidator would not institute proceedings. The absence of evidence of a clear cut and authoritative refusal by the liquidator in answer to a request to bring proceedings does not necessarily mean that the requirements of paragraph (a) have not been established. The court is entitled to draw inferences from all relevant facts. Palmer J addressed that issue in Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313 at [29] in these terms:
29Some cases, however, will not be so clear. The applicant may say there is equivocation on the part of a company in deciding whether to initiate proceedings so that refusal or probable refusal should be inferred. Where there is not a clear-cut and authoritative refusal by the company to take specific proceedings after a properly particularised request to do so by or on behalf of the applicant, the applicant bears the onus of establishing that in all of the relevant circumstances actual refusal or the probability of refusal is to be inferred.
In Charlton v Barber (2003) 47 ASCR 31 the conclusion that the company would not sue was drawn by inference from proved facts. In this case, there were clear facts from which the Master could properly infer that the liquidator would not cause Holdings to commence proceedings. There is no basis for interfering with the Master’s decision on this ground.
Good Faith

Section 237(2)(b) requires the applicant to establish that he is acting in good faith. Generally speaking, a court will have regard to at least two interrelated factors when determining whether the applicant has satisfied the requirement of good faith in s 237(2)(b). Palmer J identified those factors in these terms in Swansson at [36] and [37]:
36Nevertheless, in my opinion, there are at least two interrelated factors to which the courts will always have regard in determining whether the good faith requirement of s 237(2)(b) is satisfied. The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. Clearly, whether the applicant honestly holds such a belief would not simply be a matter of bald assertion: the applicant may be disbelieved if no reasonable person in the circumstances could hold that belief. The second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process.
37These two factors will, in most but not all, cases entirely overlap: if the court is not satisfied that the applicant actually holds the requisite belief, that fact alone would be sufficient to lead to the conclusion that the application must be made for a collateral purpose, so as to be an abuse of process. The applicant may, however, believe that the company has a good cause of action with a reasonable prospect of success but nevertheless may be intent on bringing the derivative action, not to prosecute it to a conclusion, but to use it as a means for obtaining some advantage for which the action is not designed or for some collateral advantage beyond what the law offers. If that is shown, the application and the derivative suit itself would be an abuse of the court's process: Williams v Spautz (1992) 174 CLR 509 at 526; 107 ALR 635 at 648. The applicant would fail the requirement of s 237(2)(b).
Those propositions have been consistently applied: see, for example, Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534 at [56]; Carpenter v Pioneer Park Pty Ltd (in liq) (2004) 51 ACSR 299 at [22]; Charlton v Barber at [40]; Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732 at [21]. When examining the question of good faith, the court will not act on the bald assertion of the applicant for leave: Swansson at [36]. Here, as in other areas of the law, the objective facts and circumstances speak louder than the applicant’s words and the court will have regard to them: Fiduciary at [22].
In Swansson at [38] to [41] Palmer J considered the kinds of conduct that might or might not satisfy the requirement of good faith. One instance of conduct which would satisfy the requirement is where the application is made by a current shareholder of a company who has more than a token shareholding and the derivative action seeks recovery of property so that the value of the applicant’s shares would be increased. At [41] he said:
41To take another example: a derivative action sought to be instituted by a current shareholder for the purpose of restoring value to his or her shares in the company would not be an abuse of process even if the applicant is spurred on by intense personal animosity, even malice, against the defendant: it is not the law that only a plaintiff who feels goodwill towards a defendant is entitled to sue: see eg Dowling v Colonial Mutual Life Assurance Society (1915) 20 CLR 509 at 521-2; 21 ALR 425 at 433; IOC Australia Pty Ltd v Mobil Oil Australia Ltd (1975) 11 ALR 417, at 426-7; 2 ACLR 122 at 131.
In this case, Ragless and Carnie are each in a position to exercise control over one half of the shares in the company. Ragless has a substantial shareholding. On any view, he has more than “a token shareholding”. In this action Ragless seeks to add value to his shares. If successful, he will receive a direct financial benefit.
The Master was aware that, although Ragless and Manufacturing were in a like position to Onetemp and Carnie in that Manufacturing had not complied with its obligations under the agreement, the statement of claim did not seek any order as against Ragless and his company Manufacturing. Ragless had, through his solicitor, stated to the Master in open court that he was ready, willing and able to account to Holdings for the assets of Manufacturing but believed that he should not have to do so until the claim by Holdings against Onetemp and Carnie had been resolved. The Master had noted that Ragless has an insoluble conflict of interest in compromising or settling any claim that Holdings may have against Carnie and Onetemp. The Master concluded:
65The nature of the company structure, the circularity of the benefits of a profitable action on the part of the company to be paid by Carnie and his interests and the plaintiff and his interests for the end benefit of the shareholders who are Carnie and the plaintiff is something that weighs against a finding of good faith. However, it appears to me that the action contemplated by the plaintiff if successful will result in the company being in a position to pursue all of its entitlements to the benefit of the shareholders. While I am of the veiw that the issue of good faith is finely balanced, in the end analysis I find that the plaintiff is acting in good faith and so meets the requirements of Section 237(2)(b) of the CA. The requirement of good faith is met.
Mr Blue attacked this conclusion on a number of grounds which, on examination, are essentially different issues flowing from the conflict of interest confronting Ragless.
The Master has applied correct principle and has carefully noted the issues. His reasons demonstrate that he was alert to the relevant issues and, in particular, to the necessity for a proper accounting also by Ragless and Manufacturing. The evidence clearly establishes that Ragless honestly believes that he had a good cause of action and reasonable prospects of success. It also establishes that he is not seeking to abuse the process of the court but is seeking to bring the action with the legitimate objective of breaking what has become a deadlock between him and Carnie and their respective companies.
The exception to the rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 was intended to assist in the resolution of disputes between those holding a minority interest in the company and those holding a majority and controlling interest. In Meytor Inc v Queensland Electronic Switching Pty Ltd [2003] 1 Qd R 186, McPherson JA, with whom Williams JA and Wilson J agreed, applied that principle when granting leave to enable two minority interests in a joint venture company to bring proceedings on behalf of the company notwithstanding that some of the claims were personal claims of the plaintiff. In granting leave, McPherson JA pointed out at [18] that this was a useful means of resolving a dispute between two groups of warring shareholders and that the joining of the majority shareholders as defendants would ensure that all assets are restored to the company. He said:
It is not always possible to say at once whether a particular asset, advantage or opportunity belongs to the company rather than to one or other of two groups of warring shareholders. If a particular asset is in law corporate property, th company ought to recover it; if it is not, one or other of the shareholders may perhaps be entitled to do so. Resolving such questions is the principal purpose that the proceedings are designed to serve.
In my view, the principle applies with equal force when control of the company is divided between the only two shareholders in the company and those two shareholders are locked in a dispute which has reached a stalemate because neither will agree to any proposal of the other (nor, in this case, will they agree a proposal of the liquidator) to resolve the dispute.
In addition, the wide powers available to the court under s 241 of the Corporations Act enable the court to address the conflict of interest which Ragless clearly has. Section 241(1) invests the court with power to make any orders and give any directions that it considers appropriate in an action in which leave to sue in the name of the company has been granted. Those powers include the power to appoint an independent person to investigate and report to the court on the financial affairs of the company: s 241(1)(d). That is one course which the court could consider. The court has power to add Carnie as a defendant. Carnie will be able to bring a cross-claim against Ragless and Manufacturing. These powers combined with the other wide powers available under s 241 will enable the court to address any issues deriving from the conflict of interest which Ragless has and will enable it to determine the matter fairly between the two warring shareholders in Holdings. Those powers will enable the court to order that Ragless and Manufacturing will account to Holdings in accordance with the undertaking Ragless has given.
For these reasons, the Master’s conclusion in respect of the requirement of good faith should be upheld.
Best Interests of the Company
Paragraph (c) of s 237(2) requires the court to be satisfied that it is in the best interests of the company that the applicant be granted leave. The effect of that requirement is that the court must be satisfied that it is in the best interests of the company that the applicant has leave to proceed on behalf of the company. As Palmer J pointed out in Swansson at [55], s 237(2)(c) requires that the court be satisfied, not that the proposed derivative action may be, appears to be, or is likely to be, in the best interests of the company but, rather, that it is in its best interests. That inquiry would normally require the applicant to adduce evidence on at least the following matters:
·the character of the company, that is to say, the nature of the company’s operations;
·the business of the company so that the effects of the proposed litigation on the conduct of the business may be appreciated;
·whether there are other means of obtaining the same redress so that the company does not have to be brought into litigation against its will; and
·the ability of the defendant to meet at least a substantial part of any judgment in favour of the company so that the court may ascertain whether the action would be of practical benefit to the company.
See Swansson at [52] to [60]. In discussing the first of those matters, Palmer J suggested that the procedure was not suitable in the case of a joint venture company where the controlling interests are deadlocked. He said at [57]:
[T]he company may be a joint venture company in which the venturers are deadlocked so that the proposed derivative action is seen as being for the purpose of vindicating one side’s position rather than the other’s in a way which will not achieve a useful result: see eg Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd [2001] QSC 324.
After Palmer J had delivered judgment, the Court of Appeal of Queensland published its decision in Meytor Inc in which it allowed an appeal against the decision in Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd [2001] QSC 324. As already noted, that decision identified the utility of granting leave to resolve a deadlock between controlling interests in a joint venture company. In Fiduciary at [47], Austin J expressed a like view:
It seems to me that, where the company in question is a joint-venture vehicle and one of the venturers alleges that the other has acted unlawfully causing the company loss, it will usually be appropriate to allow the complaining venturer to bring proceedings in the company’s name against the other venturer and its representatives on the board, even though there are no other shareholding interests than those of the litigants and the effect of success of the litigation will be indirectly to benefit the complaining venturer proportionately to its shareholding.
Joint venture companies in which no one shareholder has a controlling interest have a real potential to become bogged down in a stalemate because the shareholders cannot agree how to conduct the business of the company. The decisions in Meytor Inc and in Fiduciary establish that a grant of leave is a suitable means by which to resolve deadlocks of that kind.
Holdings was initially a joint venture company established as the means by which Ragless and Carnie could continue their partnership business of manufacturing and selling pyrometers. Although its manufacturing and selling assets were separated in 1990, Holdings retained an interest in them and that is the subject of the current dispute. It is, therefore, appropriate to apply the reasoning in Meytor Inc and in Fiduciary. Ragless and Carnie are in a stalemate in which neither will agree to resolve the issues affecting Holdings or any means by which those issues might be resolved. As the letter from the liquidator’s solicitor of 13 June 2006 demonstrates, the differences between Ragless and Carnie are frustrating his capacity to wind up the company. Those facts coupled with the powers available to the court under s 241 of the Corporations Act demonstrate that the stalemate (or deadlock) can be resolved in the best interests of the company and in a way that will enable the liquidator to proceed with the winding up of the company. There is no other suitable means of remedying the current position.
The Master had regard to the reasons of Austin J in Swansson and to the matters which should be established as listed by Palmer J. The Master quoted paragraph 57 of the reasons of Palmer J which referred to the decision in Talisman Technologies. However, the Master did not note that that decision had been overruled. He found that, while it was difficult for the court to determine whether there was a practical justification for the action, Holdings will not be at risk because it would be a term of a grant of leave that Ragless would have to indemnify the company for the cost of the action. Although the issues were, in his view, finely balanced, he was satisfied that the grant of leave was in the best interests of Holdings. Had the Master been aware of the decision in Meytor Inc, he would have had even more reason to be satisfied on that question.
Where a company is being wound up, the question what is in the best interests of the company will, as a general rule, be answered by having regard to what is in the best interests of the creditors: Charlton v Barber at [53]. Holdings has no creditors. The question in this case is what is in the best interests of the two contributories, that is to say, the two shareholders. Plainly, it is to their advantage to resolve the issues between them and to have the assets of Holdings distributed to them once the liquidator’s costs have been deducted. For all of these reasons, there is no ground for interfering with the Master’s conclusion that it was in the best interests of the company to grant Ragless leave.
Mr Blue QC attacked the Master’s conclusion on a number of grounds. However, none of those grounds addressed the utility of resolving the deadlock between Ragless and Carnie. Nor did they in any respect address the views of the Court of Appeal in Queensland expressed in Meytor Inc. He did not demonstrate any error on the part of the Master. His submissions must be rejected.
A Serious Question
Finally, s 237(2)(d) requires that the court must be satisfied that there is a serious question to be tried. This is a familiar pre-requisite given that it is a factor to be established on an application for an interlocutory injunction. That was one reason for the test being utilised in s 237(2): Goozee at [32] and page 23 of the Explanatory Memorandum which accompanied the Corporate Law Economic Reform Program Bill (“the Bill”). The court must determine whether the applicant has demonstrated that there is a real question to be tried, that is to say, whether the applicant is able to identify the legal or equitable rights to be determined at trial in respect of which the final relief is sought: Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at [91] per Gummow and Hayne JJ with whom Gleeson CJ and Gaudron J agreed. As Gleeson CJ expressed it at [15], the applicant must be able to show a sufficient colour of right of the kind sought to be vindicated by the final relief: see also Goozee at [34]. In Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 at [65] Gummow and Hayne JJ discussed what is meant by a serious question to be tried in the context of granting an interlocutory injunction. They held that the application must show a sufficient likelihood of success to justify the preservation of the status quo pending the trial. It is an interesting question whether s 237(2)(d) requires that the applicants be able to show a sufficient likelihood of success to justify the grant of the leave or merely that there is a real question to be tried that is not frivolous or vexatious: American Cyanamid Co v Ethicon Ltd [1975] AC 396 at 407 per Lord Diplock. Dr Spry has suggested that Gummow and Hayne JJ have misinterpreted Lord Diplock’s analysis: Equitable Remedies (7^th Ed) at (ix) to (x). It is unnecessary to determine this question which was not argued. It is sufficient for this appeal to note that even if the test in O’Neill applies, Ragless has a sufficient likelihood of success to justify a grant of leave.
The Master referred to the test in O’Neill at [65]. Applying that test, he concluded that it had been established that there was a sufficient likelihood of success against both Onetemp and Carnie and eventually against Ragless and Manufacturing so that there was a serious question to be tried. Mr Blue QC contended that there was no opinion or other evidence to assist the court in assessing the prospects of success of Ragless in this action. In consequence, he submitted, the Master could not determine whether there is a serious question to be tried. This contention fails to have regard to the view of the liquidator expressed in his solicitor’s letter dated 13 June 2006 that there may be claims against both Onetemp and Manufacturing. There was sufficient evidence for the Master to form the view there is a serious question to be tried and this contention therefore fails.
For these reasons it has not been demonstrated that the Master erred in his conclusion. It follows that the appeal must be dismissed.
Application to a Company in Liquidation
There has been some debate whether ss 236 and 237 apply to a company in liquidation. The view that they do not has been expressed in BL & GY International Co Ltd v Hypec Electronics Pty Ltd (2001) 164 FLR 268; HPM Pty Ltd v Fear (2002) 171 FLR 12 and in Promaco Conventions Pty Ltd v Dedline Printing Pty Ltd (2007) 159 FCR 486. The view that they do has been expressed in Roach v Winnote Pty Ltd (in liq) [2001] NSWSC 822; Brightwell v RFB Holdings Pty Ltd (in liq) (2003) 171 FLR 464; Charlton v Barber (supra); Kamper v Applied Soil Technology Pty Ltd (2004) 211 ALR 337; Carpenter v Pioneer Park Pty Ltd (in liq) (supra); Mhanna v Sovereign Capital Ltd [2004] FCA 1040; Scuteri v Lofthouse (2006) 59 ACSR 327. In Mhanna, Hely J said that the weight of authority favours the view that leave may be granted where the company is in liquidation. However, it is unnecessary for this court to enter into that debate since there is another route to the conclusion that Ragless should have leave to bring these proceedings.
When a company is in liquidation, the liquidator is, as a general rule, the person in whom is vested the authority to bring legal proceedings on behalf of the company: Scarel Pty Ltd v City Loan and Credit Corporation Pty Ltd (1988) 17 FCR 344; Zempilas v JN Taylor Holdings Ltd (in liq) (No 6) (1991) 5 ACSR 28; Christianos v Aloridge Pty Ltd (1995) 59 FCR 273; Russell v Westpac Banking Corporation (1994) 61 SASR 583 at 585 and 586. However, the court has an inherent power to authorise a creditor or contributor to sue in the name of the company. As McLelland J noted in Aliprandi v Griffith Vintners Pty Ltd (in liq) (1991) 6 ACSR 250 at 252 the procedure is of respectful antiquity and is sanctioned by high authority: re Bank of Gibraltor & Malta (1865) LR 1 Ch 69; re Imperial Bank of China, India and Japan (1866) LR 1 Ch 339; re Dominion Portland Cement Co (1919) NZLR 479 and Lloyd-Owen v Bull [1936] 4 DLR 273. The legitimacy of the procedure was examined in Cape Breton Co v Fenn (1881) 17 Ch D 198 at 207-208 by Sir George Jessel MR:
The only parties to the proceedings in a winding-up are the liquidators, the contributories, and the creditors. Of course applications may be made by other parties pro interesse suo, as in administration suits, for the purpose of removing the difficulties which the proceedings put in the way of their establishing their rights or recovering their property. But beyond that there is no person who has a right to intervene in the winding-up proceedings except the creditors and the contributories. Why should we allow the solicitor of a creditor or contributor to come in? As I have already said, it appears to me it would be very mischievous to do so. Then on what principle is it that a creditor or contributory has been allowed to sue in the name of the company? On the same principle on which a man could always have filed a bill in the old Court of Chancery against his trustee to be allowed to use his name to recover the trust property. That is the principle.
See also Ferguson v Wallbridge [1935] 3 DLR 66 at 83; Fargro Ltd v Godfroy [1986] 1 WLR 1134 at 1136-1138. Decisions in Australian courts include Aliprandi (supra), Russell v Westpac Banking Corporation (supra) and Cadima Express Pty Ltd (in liq) v Deputy Commissioner of Taxation (1999) 157 FLR 424. Section 236(3) abolishes only the right to bring derivative proceedings. Nothing in the Explanatory Memorandum to the Bill suggests an intention to remove or qualify the court’s inherent jurisdiction: Brightwell v RFB Holdings Pty Ltd (in liq) (supra) at 475. See also BL & GY International Co Ltd v Hypec Electronics Pty Ltd (supra) at 286-288; Carpenter v Pioneer Park Pty Ltd (in liq) (supra) at [34]-[36].

That inherent jurisdiction is entirely consistent with s 477(6) and s 511(1) of the Corporations Act. Section 477(6) which is one of the provisions regulating the powers of a liquidator is in these terms:
The exercise by the liquidator of the powers conferred by this section is subject to the control of the Court, and any creditor or contributory, or ASIC, may apply to the Court with respect to any exercise or proposed exercise of any of those powers.
Section 511(1) enables an application to the court to determine any question arising in a voluntary winding up. It provides:
511(1) The liquidator, or any contributory or creditor, may apply to the Court:
(a)to determine any question arising in the winding up of a company; or
(b) to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court.
It will have been noticed that any contributory or creditor may apply in each case. These statutory powers are unaffected by the enactment of ss 236 and 237. The court, therefore, has power to grant leave to Ragless as a contributor to prosecute this action in the name of Holdings.
An Application to Amend
Ragless had applied for leave to amend these proceedings to plead a claim against Carnie as a fellow beneficiary under the IPA Trust. Given the conclusions above, it is unnecessary to consider that application.
Conclusion
For all of these reasons I would dismiss the appeal.
SULAN J: I agree that the appeal should be dismissed. I agree with the reasons of Debelle J.
VANSTONE J: For the reasons given by Debelle J, I agree that the appeal should be dismissed.