Re Brighter Directions Pty Ltd
[2010] VSC 287
•23 June 2010
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
LIST E
No. 3256 of 2010
IN THE MATTER of BRIGHTER DIRECTIONS PTY LTD
| SUSAN CHRISTINE FEHRING (IN HER CAPACITY AS A MEMBER OF THE RESPONDENT) | Applicant |
| v | |
| BRIGHTER DIRECTIONS PTY LTD (ACN 069 671 816) & ORS (According to the Schedule attached) | Respondents |
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JUDGE: | DAVIES J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 16 June 2010 | |
DATE OF JUDGMENT: | 23 June 2010 | |
CASE MAY BE CITED AS: | Re Brighter Directions Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2010] VSC 287 | |
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CORPORATIONS – Derivative Action – Application for interim order for leave to bring proceeding on behalf of a company – Relevant criteria in granting leave – Whether applicant acting in good faith – Whether in best interests of company that leave be granted – Whether proposed proceeding involves serious issues to be tried – Whether leave can be granted nunc pro tunc – Corporations Act 2001 (Cth) ss 237, 241
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APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr. D J Williams | Harrick Lawyers |
HER HONOUR:
The applicant seeks leave under s 237 of the Corporations Act 2001 (Cth) (“the Act”) to bring proceedings on behalf of Brighter Directions Pty Ltd (“BD”) against the respondents. The application proceeded ex parte because the respondents were not given reasonable notice of the hearing of the application. It was submitted that there was urgency in the hearing of the application by reason of the possibility, albeit regarded as a remote possibility, that there may be an issue about whether the causes of action will be statute barred. In the circumstance, an interim order of leave was sought subject to various undertakings proffered by the applicant directed to ensuring that the company would not be prejudiced if leave was granted but later revoked on a contested hearing of the application.
The Court has the express power to make an interim order on an application for leave.[1]
[1]Corporations Act 2001 (Cth) ss 237(2)(e), 241(1)(a); South Johnston Mill Ltd (ACN 101 695 575) & Ors v Dennis and Scales (ACN 004 044 987) & Anor (2007) 163 FCR 343 [51] (Middleton J).
The applicant is a person who may apply to the Court to bring proceedings on behalf of a company as she is a shareholder of BD.[2]
[2]Corporations Act 2001 (Cth) s 236(1)(a).
Section 237(2) of the Act contains the criteria for the grant of leave. Section 237(2) 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 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.
If all of the five criteria have been met, the Court is bound to grant the application.[3] The prevailing view is that failure to satisfy any one of those criteria means that leave must be refused.[4] The applicant for leave bears the onus of satisfying the Court on the balance of probabilities that each of the criteria has been satisfied.[5]
[3]Carpenter v Pioneer Park Pty Ltd (in liq) (2004) 211 ALR 457, 466 [31] (Barrett J); Fiduciary Ltd & Ors v Morningstar Research Pty Ltd & Ors (2005) 53 ACSR 732 [16] (Austin J); Goozee & Anor v Graphic World Group Holdings Pty Ltd & Ors (2002) 42 ACSR 534, 540 [27] (Barrett J); Magafas v Carantinos [2006] NSWSC 1459 (Unreported, Brereton J, 27 November 2006) [8].
[4]Jeans v Deangrove Pty Ltd (recs and mgrs apptd) [2001] NSWSC 84, [9] – [10] (Unreported, Santow J, 26 February 2001); Goozee & Anor v Graphic World Group Holdings Pty Ltd & Ors (2002) 42 ACSR 534 [27] (Barrett J); Herbert v Redemption Investments Ltd [2002] QSC 340 [25] (Unreported, Mackenzie J, 18 October 2002); Maher v Honeysett & Mahr Electrical Contractors [2005] NSWSC 859 [12] (Unreported, Brereton J, 25 August 2005).
[5]Swansson v R A Pratt Properties Pty Ltd & Anor (2002) 42 ACSR 313, 318 [24] (Palmer J); Cassegrain v Gerard Cassegrain & Co Pty Ltd & Anor (2008) 68 ACSR 132, 143 [69] (Sackville AJ); Fiduciary Ltd & Ors v Morningstar Research Pty Ltd & Ors (2005) 53 ACSR 732 [15] – [16]; South Johnston Mill Ltd (ACN 101 695 575) & Ors v Dennis and Scales (ACN 004 044 987) & Anor (2007) 163 FCR 343 [61] (Middleton J).
A. Background to the Proposed Proceeding
BD was established in 1995 by the applicant, the applicant’s husband, Brian Fehring (“Brian”), her husband’s brother Walter Fehring (the second named respondent) (“Walter”) and Walter’s wife Irene Fehring (the third named respondent) (“Irene”). The company has 12 issued shares. Since incorporation, Brian and the applicant have each held two shares and Walter and Irene have each held four shares.
BD was established to operate a business buying and selling cattle for the domestic and international meat markets and trading in stock feed (“the BD business”).
The original directors of the company were Brian and Walter. Since August 2004, the directors have been Irene and Walter.
Walter, Irene, Brian and the applicant were also involved (with other people) in a venture called South Pacific Bio Tech Pty Ltd (“SPB”). SPB’s business failed in about 2004 and the company went into liquidation. Until 2004 BD and SPB both banked with the National Australia Bank Limited (“the NAB”) and personal assets of Brian and the applicant were mortgaged to the NAB as security for loans and overdraft facilities made available by the NAB to both BD and SPB. They also gave personal guarantees. Walter and Irene did not provide security for either BD or SPB’s facilities with the NAB although they too gave guarantees to the NAB in relation to those facilities. In about 2004, the NAB called up all of SPB’s and BD’s facilities as a result of SPB’s business failing. Shortly after that time, SPB was placed into liquidation with substantial monies owed to the NAB.
The applicant deposed that in late 2004 and early 2005 she, Brian, Walter and Irene had numerous conversations about how to deal with the failure of SPB and the sums owed to the NAB. She deposed that the main substance of the discussions was that:
(a) Wally suggested that, since he had not provided any security in relation to BD’s debts, he would take on any existing debt owed by BD and would do whatever was required to keep the business trading; and
(b) My husband and I said that we agreed with that suggestion.[6]
Precisely what Walter’s suggested course of action would entail was not discussed at that time.
[6]Affidavit of Susan Christine Fehring sworn 8 June 2010, 3 [10].
The applicant further deposed that in or about July 2005 Walter telephoned her and said words to the effect that:
(a)he either had transferred, or was about to transfer, BD’s business temporarily to his family company WC Fehring Nominees Pty Ltd [the fifth respondent] (“WCFN”);
(b)he had secured a $20,000 loan from Ascot Meat Products which would enable the BD business to keep trading, however he wanted to transfer the loan money from Ascot Meat from BD’s bank account and no longer deposit any money generated by trading, into BD’s bank account for fear that the NAB would take the money and apply it to debts owed by BD and SPB;
(c)running the BD business through WCFN would avoid this problem; and
(d)the BD business would only be run via WCFN until such time as the issues with the NAB were finalised.[7]
[7]Ibid, 3 [11].
The applicant further deposed that she and Brian did not have an interest in WCFN but that she did not oppose the temporary transfer of the business from BD to WCFN:
… That was because I accepted Wally’s explanation of why he was doing it. I also believed what he said about the transfer being temporary. I trusted him.[8]
[8]Ibid, 3 [12].
According to the applicant, thereafter the BD business, via WCFN, continued to trade from the same address, use the same phone and fax numbers, the same plant and equipment and provided the same services.
In or around March 2007, BD’s indebtedness to the NAB was satisfied. However, according to the applicant, BD did not resume operating the BD business as it had done prior to 2004.
In due course, the applicant retained solicitors to make enquiries as to why the business had not been returned to BD. Various correspondence passed between the solicitors for the applicant and the solicitors for the second to fifth respondents. This culminated in a letter dated 15 September 2009 in which written notice was given to Irene and Walter that an application under s 237 of the Act would be made for leave to commence proceedings against them on behalf of BD.
B. Proposed Statement of Claim
The subject matter of the proposed statement of claim is an alleged agreement, termed “the Temporary Diversion Agreement”, made late 2004 or 2005 by which BD, Walter and Irene agreed that:
(a) until BD resolved certain legal and financial issues which it was then facing arising from its indebtedness to NAB (“the NAB issues”), the BD business would be conducted by Walter and Irene, either personally or through an entity controlled by them, on behalf of BD but in such a manner that funds generated by BD’s business were not deposited into any bank account in the name of BD (“the diversion arrangement”);
(b) when the NAB issues were resolved:
(i) this arrangement would come to an end;
(ii) BD would resume conduct of the BD business; and
(iii) Walter and Irene would account, or would ensure that any entity used by them for the purposes of giving effect to the diversion arrangement would account, to BD in respect of all transactions carried out on behalf of BD.[9]
[9]Proposed Statement of Claim, 4-5 [13].
There is a pleading to the effect that the diversion arrangement was implemented. There is a further pleading that in or about 2007 the NAB issues were resolved. It is further alleged that BD’s business and assets have not been restored to it and there has been no accounting to BD for the transactions carried out on behalf of BD pursuant to the temporary diversion agreement.[10]
[10]Proposed Statement of Claim, 5-6 [14-16].
In the proposed writ, BD claims damages, equitable compensation and/or an account of profits for alleged breaches of fiduciary duties against Walter and Irene arising out of their position as directors of BD and having had the effective control, on behalf of BD, of BD’s business and knowing receipt of business opportunities, income and assets in consequence of the improper use of BD’s business and assets.[11]
[11]Barnes v Addy (1873- 1874) L.R. 9 Ch. App. 244.
C. Probable that the Company will not bring proceedings
Having regard to the matters deposed to by the applicant in her affidavit, in particular having regard to the course of correspondence between the solicitors for the applicant and the solicitors for the respondent, I am satisfied that it is probable that the company will not bring the proposed proceedings.
D. Good Faith
Under this criterion, the Court will have regard to at least two interrelated factors, namely:
(a) whether the applicant has an honest belief that the company has a good cause of action with reasonable prospects of success; and
(b) whether the applicant has a collateral purpose in seeking to have the proceedings instituted that would amount to an abuse of process.[12]
[12]Swansson v R A Pratt Properties Pty Ltd & Anor (2002) 42 ACSR 313; Chahwan v Euphoric Pty Ltd t/as Clay & Michael & Anor (2008) 245 ALR 780; Cassegrain v Gerard Cassegrain & Co Pty Ltd & Anor (2008) 68 ACSR 132.
The applicant has not deposed to an honest belief of a good cause of action with reasonable prospects of success, but that belief may be inferred reasonably by the Court, if the Court is satisfied that the applicant is acting in good faith.[13] It is sufficiently apparent from the content of the correspondence passing between the solicitors for the parties that the applicant is acting in good faith. At least, there is no suggestion of any collateral purpose that arises on the material before the Court. I further note that the applicant through her counsel proffered a number of undertakings to the Court directed to ensuring that the company is not at risk of adverse costs orders by reason of an order obtained on an interim basis. In my view, satisfaction of this criterion can be inferred from the presently available material.
[13]South Johnston Mill Ltd (ACN 101 695 575) & Ors v Dennis and Scales (ACN 004 044 987) & Anor (2007) 163 FCR 343.
E. Best Interests
The Court must be satisfied that the proposed action is in the best interests of the company. The expression “best interests of the company” imports the “familiar concept of the interests of the company as a whole”[14] – that is to say, including the interests of the shareholders.[15]
[14]Maher v Honeysett & Mahr Electrical Contractors [2005] NSWSC 859 (Unreported, Brereton J, 25 August 2009) [44].
[15]Cassegrain v Gerard Cassegrain & Co Pty Ltd & Anor (2008) 68 ACSR 132, 145 [79] (Sackville AJ).
In Swansson[16] Palmer J said that this requirement imposes a far higher threshold than demonstrating that the proceeding “may be, appears to be or is likely to be” in the best interests of the company. In Fiduciary v Morningstar[17] Austin J held that:
… there is a balance to be struck between the prejudice that the company will suffer if claims are pressed unsuccessfully on its behalf and there is an adverse costs order, and the advantage that it will gain, indirectly for the benefit of its shareholders, if the claims are successful …[18]
In other words, there must be demonstrated that there will be benefit to the company from the action, if the action is successful.
[16](2002) 42 ACSR 313 [55] – [56].
[17](2005) 53 ACSR 732.
[18]Ibid [21].
The applicant has supported her application with evidence on the merits of the proceeding which, if successful would entitle the company to monetary compensation. If successful, the relief would be of benefit to the company. In the circumstance, I am satisfied on the basis of the presently available material that the proposed action would be in the best interests of the company, if there is a serious question to be tried.
F. Serious Question to be tried
This requirement is not whether there is a cause of action as pleaded but whether there is a sufficient evidentiary basis for the material facts alleged. The standard of proof is the standard that applies on an application for an interlocutory injunction.[19]
[19]Swansson v R A Pratt Properties Pty Ltd & Anor (2002) 42 ACSR 313, 318 [25] (Palmer J); Goozee & Anor v Graphic World Group Holdings Pty Ltd & Ors (2002) 42 ACSR 534, 541 – 542 [32] – [34] (Barrett J).
The presently available material shows, in my view, that there is a serious question to be tried against the proposed defendants for breach of fiduciary duty and knowing receipt of property by reason of the breach of fiduciary duty. Irene and Walter were both directors of BD and appear on the evidence to have facilitated the transfer of BD’s business to companies associated with them without accounting to BD in relation to that transfer. Each of the proposed defendant companies appear, on the evidence, to have conducted and continue to conduct aspects of BD’s business without accounting to BD. It may be imputed from the common directorship that those companies were aware of circumstances that would indicate that Irene and Walter were acting in breach of their duties to BD.[20]
[20]Farrow Finance Company Ltd (in liquidation) v Farrow Properties Pty Ltd (in liq) (1999) 1 VR 584, 620; Australian Securities Commission v AS Nominees Ltd & Ors (1995) 62 FCR 504.
G. Conclusion
Accordingly I am satisfied that an order for leave should be made on the interim basis proposed by the applicant subject to the undertakings she has proffered.
I also comment that the applicant sought the order on an interim basis out of an abundance of caution, rather than filing the statement of claim and seeking leave nunc pro tunc. The express concern was that there was no appellate decision confirming that the Court had the power to give leave nunc pro tunc. The question was considered at first instance by Middleton J in South Johnston Mill Ltd v Dennis & Scales.[21] In carefully considered reasons His Honour concluded that the Court does have such power. I agree with His Honour’s conclusions for the reasons he expressed.
[21](2007) 163 FCR 343.
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SCHEDULE OF PARTIES
BETWEEN
| SUSAN CHRISTINE FEHRING (IN HER CAPACITY AS A MEMBER OF THE RESPONDENT) | Applicant |
| AND | |
| BRIGHTER DIRECTIONS PTY LTD (ACN 069 671 816) | First Respondent |
| WALTER FEHRING | Second Respondent |
| IRENE FEHRING | Third Respondent |
| FEHRING LIVESTOCK PTY LTD | Fourth Respondent |
| W.C. FEHRING NOMINEES PTY LTD | Fifth Respondent |
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10
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