Re Dynamic Industries Pty Ltd
[2014] VSC 101
•20 March 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S CI 5411 of 2013
IN THE MATTER OF
DYNAMIC INDUSTRIES PTY LTD (ACN 056 989 809)
BETWEEN:
| EDWARD BORCZYK SEB NOMINEES PTY LTD (ACN 066 964 449) and WILLIAM VAN ROOY DYNAMIC INDUSTRIES PTY LTD (ACN 056 989 809) | Plaintiffs Defendants |
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JUDGE: | ROBSON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 5 March 2014 | |
DATE OF JUDGMENT: | 20 March 2014 | |
CASE MAY BE CITED AS: | Re Dynamic Industries Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2014] VSC 101 | |
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CORPORATIONS – Derivative action – Leave to commence – Good faith – Best interests of company – Undertaking to meet costs of company – Corporations Act 2011 (Cth) s 237.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr GJ McEwan | Obst Legal |
| For the Defendants | Mr MP Guthrie | Slater & Gordon |
CASES REFERRED TO
Chahwan v Euphoric Pty Ltd (2008) 245 ALR 780
Devereaux Holdings Pty Ltd v Pelsart Resources NL (No 2) Unreported, New South Wales Supreme Court, Young J 24 July 1984
Edelsten v Main and Graywater Recycler International Pty Ltd [2013] VSC 270
Goozee v Graphic World Group Holdings Pty Ltd (2002) 170 FLR 451
Jones v Dunkel (1959) 101 CLR 298
Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859
Re Poly Pacific Pty Ltd [2013] VSC 670
Roach v Winnote Pty Ltd (2006) 227 ALR 758
South Johnstone Mill Ltd v Dennis (2007) 163 FCR 343
Suh v Cho [2013] VSC 491
Swansson v R A Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313
Texxcon Pty Ltd v Austexx Corporation Pty Ltd [2011] VSC 203
True Value Solar Holdings Pty Ltd v Fernandez [2013] VSCA 27
Wood v Links Golf Tasmania Pty Ltd (No 2) [2013] FCA 143
TABLE OF CONTENTS
Introduction............................................................................................................................... 2
The evidence............................................................................................................................... 4
The proposed claim................................................................................................................... 14
Summary of relevant legal principles........................................................................................ 17
Is it probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them?................................................................................................................ 22
Are the plaintiffs acting in good faith?..................................................................................... 23
Is it in the best interests of the company that the plaintiffs be granted leave?........................... 26
Is there is a serious question to be tried?................................................................................... 28
Has appropriate notice been given or is it otherwise appropriate to grant leave?...................... 30
Conclusion............................................................................................................................... 30
HIS HONOUR:
Introduction
Edward Borczyk, the first plaintiff, and SEB Nominees Pty Ltd (SEB), the second plaintiff, seek leave under s 237 of the Corporations Act 2001 (Cth) (the Act) to commence a proceeding in the name of the second defendant Dynamic Industries Pty Ltd (Dynamic) against William Van Rooy, the first defendant, and Guilfoyle Wreckers Pty Ltd (Guilfoyle), in substantially the same form as the proposed statement of claim exhibited to the affidavit of Mr Borczyk affirmed 14 October 2013.
Part 2F.1A of the Act deals with proceedings on behalf of a company by members and others. Section 236 of that Part provides:
(1)A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if:
(a) the person is:
(i) a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or
(ii) an officer or former officer of the company; and
(b) the person is acting with leave granted under section 237.
(2)Proceedings brought on behalf of a company must be brought in the company’s name.
(3)The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.
Section 237 provides:
(1)A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.
(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.
(3)A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that:
(a) the proceedings are:
(i) by the company against a third party; or
(ii) by a third party against the company; and
(b) the company has decided:
(i) not to bring the proceedings; or
(ii) not to defend the proceedings; or
(iii) to discontinue, settle or compromise the proceedings; and
(c) all of the directors who participated in that decision:
(i) acted in good faith for a proper purpose; and
(ii) did not have a material personal interest in the decision; and
(iii) informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and
(iv) rationally believed that the decision was in the best interests of the company.
The director’s belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold.
(4)For the purposes of subsection (3):
(a) a person is a third party if:
(i) the company is a public company and the person is not a related party of the company; or
(ii) the company is not a public company and the person would not be a related party of the company if the company were a public company; and
(b) proceedings by or against the company include any appeal from a decision made in proceedings by or against the company.
The evidence
The plaintiffs rely on the affidavits of Mr Borczyk affirmed 14 October 2013 and Jerzy Henryk Martyniak affirmed 28 September 2013.
By his affidavit, Mr Borczyk deposes as follows. Mr Borczyk is a director and shareholder of SEB. Mr Borczyk annexes to his affidavit a proposed statement of claim in which the plaintiffs will be Dynamic, Mr Borczyk and SEB, and the defendants will be Mr Van Rooy and Guilfoyle.
Mr Borczyk came to Australia from Poland in 1984. After coming to Australia, he worked in several asbestos removal businesses. Mr Borczyk met Mr Van Rooy in 1987 and Andrew Gott in about 1992 while working in the asbestos removal field.
In 1992, Mr Van Rooy set up Dynamic to operate as an asbestos removal business. Mr Van Rooy was appointed a director of Dynamic on the day of its incorporation, namely, 13 July 1992.
In about 2000, Mr Van Rooy said to Mr Gott and Mr Borczyk that they should join Mr Van Rooy in the business. Dynamic commenced trading in about June 2001, when Mr Gott and Mr Borczyk were formally appointed directors of Dynamic and the trustees of their respective trusts became shareholders in Dynamic.
Since 31 July 2001, the shareholders in Dynamic have been:
(a)SEB (25%) – one of a total of four ordinary shares;
(b)Gomak Holding Pty Ltd (Gomak) (25%) – one of a total of four ordinary shares: this is a company associated with Mr Gott; and
(c)Mr Van Rooy and his wife, Patricia, as to one ordinary share each until around 30 June 2006 when those shares were transferred to Van Rooy Investments Pty Ltd (VRI) (50%), which thereafter held two of a total of four ordinary shares: this company is associated with Mr Van Rooy.
From its commencement, Dynamic was conducted as an asbestos removal, demolition and industrial insulation business. Until approximately April 2011, Mr Borczyk worked as a site supervisor. In that capacity, Mr Borczyk spent most of his time out of the office and at the various sites at which the asbestos removal, demolition and/or insulation works were being carried out.
Since about April 2011, Mr Borczyk has been unable to work due to a work-related injury. He is presently in receipt of workers’ compensation payments.
From Dynamic’s commencement, Mr Van Rooy has worked as general manager and estimator. Since about 2007, he has been assisted in some of that work by his brother-in-law, Paul Cini. As general manager and estimator, Mr Van Rooy looked after all of the financial affairs of Dynamic. Mr Van Rooy had access to all of the bank accounts of Dynamic and was responsible for maintaining the books and records of Dynamic. Mr Van Rooy was also responsible for giving quotations for jobs which Dynamic sought to perform.
The division of responsibility between Mr Van Rooy and Mr Borczyk could be summed up by saying that Mr Borczyk was responsible for implementing and supervising the works which Dynamic agreed to perform, and Mr Van Rooy was responsible for everything else. Mr Borczyk left all of the financial affairs of Dynamic and the quoting for jobs to Mr Van Rooy. Mr Borczyk did not have account signing authority in respect of any of the bank accounts operated by Dynamic until about April 2011.
Dynamic ceased to trade in July 2011. Mr Gott has never worked in Dynamic’s business and he is best described as a silent partner.
In or about early 2000, Mr Borczyk was told by Adam Tozer, an employee of Guilfoyle, that Mr Van Rooy had bought into Guilfoyle and had been appointed a director of that company. Mr Borczyk was very concerned about the fact that Mr Van Rooy was a director of both Dynamic and Guilfoyle, particularly because of his deteriorating working relationship with Mr Van Rooy at the time. Mr Borczyk believes that the dual directorship placed Mr Van Rooy in a position of conflict because, at the time, Guilfoyle was Dynamic’s largest client, or nearly so.
Mr Van Rooy was personally responsible for providing quotes to Guilfoyle for all works to be performed by Dynamic. Mr Gott, through related entities, also has a shareholding in Guilfoyle. Mr Borczyk has no such interest himself. Mr Van Rooy and Mr Gott also had an interest in Guilfoyle Australasia Pty Ltd (Guilfoyle Australasia), another company to which Dynamic provided services.
In or about July 2011, Guilfoyle Australasia was placed into administration, with several invoices from Dynamic outstanding. Mr Borczyk believes that these invoices remain outstanding in the sum of approximately $1.1 million.
Mr Borczyk deposes to previous Supreme Court proceedings initiated by him to obtain access to the books and records of Dynamic. The background is as follows. From about 2007 onwards, Mr Borczyk made multiple formal and informal requests to Mr Van Rooy for access to the books and records of Dynamic and Metro (Australasia) Pty Ltd (Metro). Metro was established to act as an asset holding company for Dynamic.
Most of the requests Mr Borczyk made of Mr Van Rooy were ignored or met with responses providing excuses for the delay.
In or about April 2011, Mr Borczyk was provided with some financial records by Dynamic’s accountants, Collins & Co. Mr Borczyk has never had full access to the books and records of Dynamic, although he has been able to access old job files remaining at Dynamic’s Williamstown premises.
In early 2011, these limited documents which Mr Borczyk had managed to obtain were provided to his accountant, Gerzy Martyniak of Pol-Acc Business Solutions, for the purpose of analysis.
In March 2011, Mr Borczyk engaged Obst Legal to act as solicitors on behalf of SEB and himself.
In or about May 2011, Mr Borczyk was informed by his accountant, and believes, that there were some anomalies in the financial documents he had provided, including invoices for high amounts received from competitors such as Zealmore, and withdrawals from the company’s account with no details recorded in cheque books.
By letter of 15 September 2011, Mr Borczyk was informed by Howard Obst of his solicitors, and believes, that his accountant required further information in order to reach more conclusive findings.
On 22 February 2012, in accordance with Mr Borczyk’s instructions, his solicitors filed a proceeding in the Supreme Court of Victoria on behalf of SEB seeking access to the books and records of Dynamic, together with those of Metro. Mr Van Rooy, Mr Gott and Mr Borczyk each held an interest in Metro similar to that in Dynamic.
On 16 March 2012, orders were made by the Supreme Court of Victoria reflecting an agreement reached between the parties to that proceeding, pursuant to which certain categories of documents were to be produced to Mr Borczyk.
Documents were provided to Mr Borczyk’s solicitors in two sets, the first of which was provided to Mr Borczyk on or about 10 April 2012, and the second of which was provided to Mr Borczyk on or about 25 May 2012. The job files listed under part of the orders were not provided by Dynamic at any point, apart from a bundle of documents relating to one of the projects which Mr Borczyk believes was not the complete job file. Mr Van Rooy deposed in an affidavit sworn on 9 July 2012 that the complete job files were unable to be located.
The financial documents provided pursuant to the Court orders were given to the accountant for the purpose of completing a further analysis.
Mr Borczyk refers to the affidavit of his accountant Mr Martyniak affirmed 28 September 2013 in support of the application to commence a proceeding in the name of Dynamic. Mr Borczyk says that his accountant informed him, and he believes, that the accountant’s analysis demonstrates that the true financial performance of Dynamic is understated in the accounts as:
(a)Invoices addressed to Guilfoyle have been raised by Dynamic and have either not been rendered to Guilfoyle, not been paid by Guilfoyle, or payment has been made by Guilfoyle but not recorded in the MYOB files of Dynamic; and
(b)Payments have been recorded as being made to “creditors” such as Guilfoyle and Zealmore, when the actual payments have been made out to cash, or to Mr Van Rooy, and appear not to be in satisfaction of those creditors.
Mr Borczyk says that his accountant informed him and he believes that as a result of that conduct, SEB, as a shareholder of Dynamic, received less in terms of distribution of funds than it was duly entitled to receive.
Mr Borczyk says that, in addition to those matters, he is in possession of several invoices from Western Suburbs Computing Services and Collins & Co. He says that these invoices are addressed to Dynamic and/or were paid by Dynamic, but related to work which he believes was not carried out or not carried out for Dynamic. He produces those invoices.
Mr Borczyk says that having regard to the above, if he had full access to the books and records, there may be discovered further inappropriate payments or conduct.
Under the heading of “Commencement of this proceeding”, Mr Borczyk says that he was informed by his solicitors and believes that in or about 30 October 2012, a meeting took place at the offices of Slater & Gordon between Mr Obst and Mr Robert Auricchio of Slater & Gordon, solicitors for Mr Van Rooy. Mr Borczyk says that at this meeting, Mr Obst provided an example of Mr Van Rooy’s financial conduct to Mr Van Rooy’s solicitors and sought an explanation of such conduct.
Mr Borczyk says that following this meeting, he instructed his solicitors to provide his accountant’s findings to Mr Van Rooy’s solicitors for the purpose of having Dynamic’s accountants, Collins & Co, conduct their own review of Dynamic’s financial affairs. He says that he understood that these were provided on 2 November 2012.
Mr Borczyk says that his solicitors have provided him with copies of correspondence between his solicitors and Mr Van Rooy’s solicitors from November 2012 onwards. Mr Borczyk says that he considers that the responses do not provide any explanation of Mr Van Rooy’s conduct. Accordingly, he says that on or about 14 March 2013, he instructed his solicitors to send a letter to Dynamic providing specific examples of Mr Van Rooy’s financial misconduct, and a notice to Dynamic of his intention to apply for leave to commence a proceeding in the name of Dynamic to recover from the appropriate parties:
(a)funds paid by Dynamic that were not for the benefit of the company; and
(b)funds which Dynamic was entitled to be paid but has not received;
unless Dynamic, by 5 April 2013, passed a resolution to do so itself.
Mr Borczyk says that on or about 18 March 2013, he received a telephone call from Mr Gott informing him that Mr Van Rooy was overseas and would not return until after Easter. After further correspondence, Mr Van Rooy’s solicitors informed Mr Borczyk that Mr Van Rooy would not object to calling a board meeting to consider a resolution that Dynamic “take all necessary steps to recover moneys from Guilfoyle Wreckers Pty Ltd”. Mr Borczyk says that the proposed resolution is, however, inadequate; particularly having regard to his accountant’s findings, which indicate many payments went to Mr Van Rooy, or were made for his benefit.
Mr Borczyk says that accordingly, he has instructed his solicitors to make this application to commence proceedings in the name of Dynamic. He says he was informed by Mr Le Huray of his solicitors and believes that his solicitors informed Mr Van Rooy’s solicitors by letter dated 18 April 2013 that the proposal put forward by Mr Van Rooy was inadequate and that the application would proceed.
Mr Borczyk says that he was informed by his solicitors and believes that if Dynamic is ultimately successful in bringing legal proceedings to recover funds on the basis of his accountant’s findings, Dynamic will potentially be awarded a significant amount of compensation. It is his view that if all or part of that compensation is recovered by Dynamic, the value of his shares and that of the other shareholders will increase.
As to costs, Mr Borczyk says that he has instructed his solicitors to seek that Dynamic bear the costs of bringing the proceedings against the appropriate parties. He says, however, that if this Court refuses to order that Dynamic bear the costs of the proceedings, SEB is prepared to fund the proceedings, including any costs orders made against Dynamic.
During the hearing, counsel for the plaintiffs informed the Court that Mr Borczyk and SEB will, if required by the Court as a condition of leave being given, agree to be responsible for costs ordered against Dynamic and undertake not to seek contribution or indemnity from Dynamic.
Mr Martyniak affirmed in his affidavit as follows.
Mr Martyniak is a director of Pol-Acc Business Solutions Pty Ltd, which operates as a public accountant and registered tax agent. Mr Martyniak has been a practising accountant since about 1990. In 1993 he commenced his own business, Pol-Acc Business Services, which was incorporated as the present company in about 1996. Mr Martyniak’s qualifications include a Master Diploma of Accounting from Footscray TAFE and a Bachelor of Business majoring in Accounting from Victoria University.
Mr Martyniak has been the accountant for Mr Borczyk and his company, SEB, since about 1994.
Mr Borczyk has provided Mr Martyniak with financial records and other documents of Dynamic, including but not limited to:
(a)copies of cheques obtained from the National Australia Bank (NAB);
(b)original cheque books of Dynamic;
(c)invoices issued by Dynamic to Guilfoyle;
(d)financial statements of Dynamic for the 2001 and 2002 financial years; and
(e)electronic files of Dynamic consisting of:
(i)MYOB electronic accounting files for the 2009, 2010 and 2011 financial years; and
(ii)SAGE line 50 electronic accounting files for the 2002 to 2008 financial years.
From Mr Martyniak’s analysis of the documents provided by Mr Borczyk, he has identified some irregularities. The electronic accounting records show numerous payments have been made by Dynamic to Guilfoyle, Zealmore, Absolute Safety (a supplier of safety equipment), and Elite (another competitor of Dynamic).
Whilst the corresponding cheque butts contained in the cheque books match the entries made in the electronic accounting files, the NAB cheques obtained show the payments as being made out to “cash”, to “W Van Rooy”, or to “W & P Van Rooy”. The NAB cheques relating to payments between December 2004 and November 2010, total in excess of $3.4 million.
Mr Martyniak produces a table comparing cheque butts and NAB cheques that were obtained from NAB where, for example, the cheque butt records that the cheque was in favour of Zealmore whereas the cheque itself was payable to Mr Van Rooy. There are 77 entries totalling $3,461,626.64. The table also lists four instances where cheques were unable to be obtained from the bank. The amounts listed total $153,951.
Mr Martyniak was informed by Mr Borczyk and believes that the NAB is unable to provide copies of all the cheques issued by Dynamic. Accordingly, while Mr Martyniak considers questionable numerous other payments recorded in the electronic accounting files as being payments made to Guilfoyle, Zealmore and other entities, without copies of the corresponding cheques, or the financial records of those entities, Mr Martyniak is unable to confirm whether the intended recipient corresponded with the actual recipient of the payments.
Amongst the Guilfoyle invoices is a bundle of 11 invoices rendered by Dynamic between February and June 2009, each marked “not to be entered as per B. Van Rooy”. Mr Martyniak exhibits a copy of those invoices so marked.
Only invoice 1518 has been recorded in the electronic accounting files as being paid. There are no records of the remaining ten invoices, totalling in excess of $1.6 million, having been paid.
Amongst the Guilfoyle invoices are 11 invoices totalling in excess of $1.5 million which have been rendered by Dynamic between September 2008 and July 2011, but have not been recorded in electronic accounting files as being paid. Mr Martyniak exhibits a list of invoices not appearing in the electronic files, together with copies of the invoices.
Mr Martyniak says that as a result of these irregularities, he has concluded that the true financial performance of Dynamic is understated in the accounting records as:
(a)invoices have been raised by Dynamic addressed to Guilfoyle, and have either:
(i)not been rendered to Guilfoyle;
(ii)not been paid by Guilfoyle; or
(iii)been paid by Guilfoyle, but have not been recorded in the electronic accounting files; and
(b)payments have been recorded as being made to “creditors” such as Guilfoyle and Zealmore, when the actual payments have been made to cash or to Mr Van Rooy, and appear not to be in satisfaction of creditors.
In paragraph 19, Mr Martyniak deposes that had the conduct that he describes above not occurred, SEB, as a shareholder of Dynamic, would have been entitled to a greater distribution of funds than it has received.
In opposition to the application, Mr Van Rooy, in his affidavit of 17 December 2013, deposes as follows. Mr Van Rooy is a director of Dynamic and a shareholder in Dynamic through his family’s investment entity, VRI. He is also a director of Guilfoyle and a shareholder in Guilfoyle through VRI.
Dynamic has not traded since 2001 and therefore had no turnover in 2002. Mr Van Rooy exhibits a copy of the 2012 financial records of Dynamic. The 2013 financial statements are yet to be completed.
Dynamic ceased to trade because the directors, including Mr Borczyk, agreed that the business was no longer viable due to trading conditions. Dynamic has continued to be incorporated because Mr Van Rooy assumed that it needed to be incorporated in order to have Workcover continue paying Mr Borczyk his workers’ compensation payments, and also because Dynamic has outstanding debts that need to be paid.
Dynamic currently has the following liabilities: an overdraft with the NAB of $338,000 as at 7 August 2013, and an invoice of $50,000 issued by Collins & Co, Dynamic’s accountants.
At the time of swearing Mr Van Rooy’s affidavit, Dynamic’s tax return for the financial year ended 30 June 2013 had not been finalised. Mr Van Rooy reserved the right to serve a supplementary affidavit containing this tax return, which he did not do.
Dynamic has accrued $12,000 of interest on the NAB overdraft for the period 27 February 2013 to 7 August 2013, and Mr Van Rooy estimates that for the period 3 September 2013 to December 2013 Dynamic has accrued a further $8,000 in interest, being four months at the rate of $2,000 per month.
As Dynamic does not trade and has no funds, Dynamic has no means by which to pay the principal or the interest in respect of the NAB overdraft. Mr Van Rooy has paid interest on the NAB overdraft since, at the latest, January 2012 to the estimated sum of $46,000.
Mr Van Rooy has paid $100,000 out of his own funds to the Australian Taxation Office (ATO) for Dynamic’s tax liability and he has also paid $50,000 out of his own funds to Collins & Co in satisfaction of their invoices for work done for Dynamic. Mr Van Rooy says that without his help, Dynamic would not be able to pay its outstanding liabilities.
Mr Van Rooy refers to Mr Borczyk’s affidavit where Mr Borczyk says that he believes that Dynamic will potentially be awarded a significant amount of compensation from the proposed defendant. Mr Van Rooy says that in the financial year ended 30 June 2013, Guilfoyle made a loss of $885,503.48, and he says that as at 30 June 2013, the total equity in Guilfoyle was $114,390.97. Mr Van Rooy reserved the right to outline his own financial position in a supplementary affidavit. As it happens, he did not do so.
The proposed claim
The proposed statement of claim alleges the incorporation of Dynamic and that it ceased to trade in July 2011. The plaintiffs allege Mr Borczyk is a director of Dynamic. The plaintiffs allege SEB is a shareholder in Dynamic and they also allege the current shareholding in Dynamic. The plaintiffs allege that Mr Van Rooy is a director of Dynamic.
The plaintiffs allege that at all relevant times from 31 July 2001 until Dynamic ceased to trade, the conduct of Dynamic’s business was managed as follows:
(a) Mr Borczyk acted as site supervisor, spending most of his time away from the Dynamic offices;
(b) Mr Van Rooy acted as general manager and estimator and was responsible for giving quotations for jobs and attending to all financial affairs of Dynamic; and
(c) Mr Van Rooy was the only person authorised to sign for Dynamic’s cheque or other bank accounts until Mr Borczyk obtained authority in April 2011.
The plaintiffs allege that at all relevant times Mr Van Rooy, as an officer of Dynamic, owed fiduciary duties to Dynamic at law and under ss 181 to 184 of the Act.
The plaintiffs allege that in breach of his fiduciary duties, Mr Van Rooy made payments totalling $3,615,577.64 from Dynamic’s funds to himself or to third parties to whom he personally owed moneys, which payments were disguised in the accounting records of Dynamic as expenses or purchases of Dynamic when, in fact, they were not. The particulars given are those in the schedule prepared by Mr Martyniak, which totals $3,615,577.64 as discussed above.
The plaintiffs allege that Guilfoyle carries on a business of general demolition. The plaintiffs allege that Guilfoyle was the largest client, alternatively a client, of Dynamic. The plaintiffs allege that at all relevant times from 9 October 2007, Mr Van Rooy was a director of Guilfoyle and did not disclose that directorship to Mr Borczyk.
The plaintiffs allege that at all relevant times entities associated with or controlled by each of Mr Van Rooy and Mr Gott were shareholders of Guilfoyle, namely, VRI, Gott Holdings (No 1) Pty Ltd, Gott Holdings (No 2) Pty Ltd, and Gomak Holdings Pty Ltd; and that neither Mr Van Rooy nor Mr Gott disclosed those shareholdings to Mr Borczyk.
The plaintiffs allege that in or about early 2008, Mr Borczyk discovered that Mr Van Rooy had been appointed a director of Guilfoyle and had, through an entity associated with or controlled by him, acquired shares in Guilfoyle.
The plaintiffs allege that as Mr Van Rooy was responsible for providing quotations for all work performed by Dynamic for Guilfoyle, the twin directorships of Mr Van Rooy in Dynamic and Guilfoyle placed Mr Van Rooy, amongst other things, in a position of conflict between his own interest and his duty to Dynamic, and between his duties to the two companies.
The plaintiffs allege that in breach of Mr Van Rooy ’s fiduciary duties, Mr Van Rooy failed to render Guilfoyle invoices for work performed or completed by Dynamic. Further and alternatively, they allege he under-quoted on various jobs for Guilfoyle. They allege that consequently, Dynamic was deprived of earnings and receipts it should otherwise have obtained, and Guilfoyle (and in turn Mr Van Rooy through his associated entities) benefited.
The plaintiffs say that the particulars are extensive and, pending discovery and interrogation, the plaintiffs’ reply upon the particulars set out in Schedule B. The draft statement of claim annexed to Mr Borczyk’s affidavit, however, does not have a Schedule B. In addition to the table of cheques previously referred to, the particulars do include a table headed ‘Dynamic invoices to Guilfoyle Wreckers marked “not to be entered as per B Van Rooy” and not appearing in the electronic accounting files of Dynamic’. These add up to $1,647,363.22. Further, the statement of claim includes a table headed ‘Dynamic invoices to Guilfoyle Wreckers which are not appearing in the electronic accounting files of Dynamic’. There are 11 of these in total which add up to $1,582,201.50.
The plaintiffs allege that by reason of these matters, Mr Van Rooy breached his fiduciary duties by, for example, failing to act honestly in the exercise of his powers and the discharge of his duties of office.
The plaintiffs further and alternatively allege that at all material times, Guilfoyle has knowingly been party to the alleged breaches of duty by Mr Van Rooy and has knowingly assisted him in not rendering invoices as alleged, and/or under-quoting on Dynamic’s jobs for Guilfoyle.
The plaintiffs allege that in the premises, Guilfoyle is liable as constructive trustee for those breaches of duties.
The plaintiffs allege that by reason of the foregoing matters, the plaintiffs will suffer and have suffered loss and damage and are entitled to equitable compensation. Particulars are to be supplied.
The plaintiffs claim damages against each of Mr Van Rooy and Guilfoyle. Further and alternatively, the plaintiffs seek against Mr Van Rooy and Guilfoyle, equitable compensation, and finally, the plaintiffs claim such further other orders as the Court sees fit, including orders for any necessary accounts or inquiries and interests and costs.
Mr Borczyk and SEB do not appear to have advanced in the pleading, any claims that they have against Mr Van Rooy or Guilfoyle. I will say no further on this issue as I did not hear argument on this matter. Nevertheless, there was no suggestion that Dynamic did not disclose a good cause of action as against Mr Van Rooy and Guilfoyle on the allegations made.
Summary of relevant legal principles
In Swansson v R A Pratt Properties Pty Ltd,[1] Palmer J of the Supreme Court of New South Wales set out the approach to be taken for an application under s 237 of the Act as follows:
[1][2002] NSWSC 583; (2002) 42 ACSR 313 (Swansson).
[24] It is clearly the intent of Pt 2F.1A that leave to bring a derivative action must not be given lightly. An application under s.237(2) is not interlocutory in character; the relief sought is final and the applicant bears the onus of establishing the requirements of the subsection to the Court’ satisfaction.
[25] In order to ascertain whether there is a serious question to be tried for the purposes of s.237(2)(d), the Court will not normally enter into the merits of the proposed derivative action to any great degree. The applicant has the same relatively low threshold to surmount as in the case of an application for an interlocutory injunction: Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618, at 622. Thus, cross examination on the merits of the proposed derivative action will usually be permitted only with leave of the Court and to a limited extent.
[26] However, because of the possibly serious consequences to the company if the application is allowed and the company is thereby compelled to engage in litigation as a plaintiff against its will, all facts and circumstances relevant to the consideration of the requirements of s 237(2)(a), (b), (d) and (e) must be considered and the applicant bears the onus of satisfying the Court that, on the balance of probabilities, those requirements have been fulfilled. There is no reason in principle for restricting the parties’ rights of cross examination if any matter relevant to those requirements is in contest.
[27] I turn now to the requirements of s 237(2).
The company will not probably take proceedings
[28] In most cases, it will be readily apparent whether this requirement is satisfied. Usually the defendant in the proposed derivative action is in control of the company or is supported by the majority of shareholders or of the board.
[29] Some 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.
[30] There may be other cases where the applicant may say that the company will probably not take the proceedings because, even if it wished to do so, it has insufficient funds. Again, the applicant bears the onus of establishing that proposition.
[31] In this case, Mr Pratt has given evidence that he and his mother do not wish RAPP to take proceedings against Mr Highland. They hold 75% of the company’s issued shares and Mr Pratt is the only director of the company besides Ms Swansson. Accordingly, I am satisfied that the requirement of s 237(2)(a) has been met.
Good faith – principles
[32] There is no elaboration in s 237 as to what matters the Court should take into account in determining whether an applicant is “acting in good faith”. That phrase is one which occurs in very many different contexts in the law: it must take its content in any particular case from the context in which it is used.
[33] As I have observed, prior to the commencement of Pt 2F.1A only current shareholders could take advantage of the exceptions to the rule in Foss v Harbottle. Pt 2F.1A now gives a right to initiate proceedings to some persons who, but for those provisions, would have had no such right at all under the general law. Such persons are all those within the categories created by s.236(1)(a) who are not shareholders of the company when the application for leave is made. Further, there is no requirement in s.236 that a person seeking leave must have been a shareholder or officer when the alleged wrong was committed against the company. Accordingly, under Pt 2F.1A a former shareholder or director may seek to sue in the company’s name for a wrong which was committed after he or she had disposed of all shares in the company or had ceased to hold office.
[34] The Court is not given power in Pt 2F.1A to grant final relief in a suit instituted in a company’s name to any person other than the company itself. Accordingly, applicants for leave who are not current shareholders of the company cannot gain by increase in the value of their shares if the derivative action succeeds and the company recovers compensation. Likewise, applicants who are former officers of the company cannot obtain orders resolving conflicts in which they themselves are engaged. Yet such persons are entitled to be given leave if they satisfy the requirements of s 237(2). The section, therefore, suggests that it must be possible for persons to satisfy the requirement of good faith even when they have no financial interest in the company and no present involvement in its management.
[35] At this early stage in the development of the law on the statutory derivative action created by Pt 2F.1A it would be unwise to endeavour to state compendiously the considerations to which the Courts will have regard in determining whether applicants in all categories defined by s 236(1) are acting in good faith. The law will develop incrementally as different factual circumstances come before the Courts.
[36] Nevertheless, 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.
[37] These 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. The applicant would fail the requirement of s 237(2)(b).
[38] 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, good faith will be relatively easy for the applicant to demonstrate to the Court’s satisfaction. So also where the applicant is a current director or officer: it will generally be easy to show that such an applicant has a legitimate interest in the welfare and good management of the company itself, warranting action to recover property or to ensure that the majority of the shareholders or of the board do not act unlawfully to the detriment of the company as a whole.
[39] However, where the applicant is a former shareholder or officer with nothing obvious to gain directly by the success of the derivative action, the Court will scrutinise with particular care the purpose for which the derivative action is said to be brought.
[40] For example, a creditor may happen to be a former shareholder of the company and may seek, by the derivative action, to place the company in a financial position to repay the debt. There would be no abuse of process in commencing and maintaining the derivative action itself in that the action is commenced and maintained in order to achieve the purpose for which it is designed, namely, to recover property for the company. However, it may well be said that, in making an application for leave under Pt 2F.1A, the applicant is not acting in good faith because he or she is, in reality, seeking to vindicate his or her interest as a creditor and not whatever interest he or she may have as a former shareholder.
[41] To 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 e.g. Dowling v Colonial Mutual Life Assurance Society (1915) 20 CLR 509, at 521-522; IOC Australia Pty Ltd v Mobil Oil Australia Ltd (1975) 11 ALR 417, at 426-427. On the other hand, an action sought to be instituted by a former shareholder with a history of grievances against the current majority of shareholders or the current board may be easier to characterise as brought for the purpose of satisfying nothing more than the applicant’s private vendetta. An applicant with such a purpose would not be acting in good faith.
[42] If a wrong appears to have been done to a company and those in control refuse to take proceedings to redress it, the Court should permit a derivative action to be instituted only by those within the categories allowed by s 236(1) who would suffer a real and substantive injury if the action were not permitted. The injury must be necessarily dependent upon or connected with the applicant’s status as a current or former shareholder or director and the remedy afforded by the derivative action must be reasonably capable of redressing the injury.
[43] Further, if an applicant for leave under s 237 seeks by the derivative action to receive a benefit which, in good conscience, he or she should not receive, then the application will not be made in good faith even though the company itself stands to benefit if the derivative action is successful. Such a benefit would include, for example, a double recovery by the applicant for a wrong suffered or recompense for a wrongful act inflicted upon the company in which the applicant was a direct and knowing participant with the proposed defendant in the derivative action. In such a case the law would not permit the applicant to derive a benefit from his or her own wrongdoing.[2]
[2]Ibid, [24]-[43].
In considering the issue of whether the proposed action is in the best interests of the company, Palmer J said:
[55] At the outset, it is important to note that s 237(2)(c) requires the Court to 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. In this respect, s 237(2) differs significantly from its counterpart in the Canadian legislation, which requires the Court to be satisfied that the proposed derivative action “appears to be” in the interests of the company, and from s 165(3) of the New Zealand Act which requires that the Court “have regard to … the interests of the company”. These provisions seem to have led the Courts of those countries to the view that the best interests of a company need be considered only in a prima facie way: see e.g. Re Bellman and Western Approaches Ltd (1981) 130 DLR (3d) 193, at 201; Vrij v Boyle (1995) 3 NZLR 763, at 765; Techflow (NZ) Ltd v Techflow Pty Ltd (1996) 7 NZCLC 261,138.
The requirement of s 237(2)(c) that the applicant satisfy the Court that the proposed action is in the best interests of the company is a far higher threshold for an applicant to cross. It requires the applicant to establish, on the balance of probabilities, a fact which can only be determined by taking into account all of the relevant circumstances. Accordingly, the enquiry will normally require the applicant to adduce evidence at least as to the following matters.
[57] First, there should be evidence as to the character of the company: different considerations may well apply depending on whether the company is a small, private company whose few shareholders are the members of a family or whether it is a large public listed company. If the company is a closely held family company, it may be relevant to take into account the effect of the proposed litigation on the purpose for which the company was established and on the family members who are the shareholders. If the company is a public listed company, such considerations will be irrelevant. Again, the 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 e.g. Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd [2001] QSC 324.
[58] Second, there should be evidence of the business, if any, of the company so that the effects of the proposed litigation on its proper conduct may be appreciated.
[59] Third, there should be evidence enabling the Court to form a conclusion whether the substance of the redress which the applicant seeks to achieve is available by a means which does not require the company to be brought into litigation against its will. So, for example, if the applicant can achieve the desired result in proceedings in his or her own name it is not in the best interests of the company to be involved in litigation at all. This was the case in Talisman Technologies in which it appeared from the evidence that the most desirable outcome for the applicant was to obtain an order for specific performance of a contract, which it could do in a suit in which the company did not need to be a party.
[60] Fourth, there should be evidence as to the ability of the defendant to meet at least a substantial part of any judgment in favour of the company in the proposed derivative action so that the Court may ascertain whether the action would be of any practical benefit to the company.[3]
[3]Ibid, [55]-[60].
There have been several subsequent decisions elaborating on and clarifying these principles, to which the submissions referred: Maher v Honeysett & Maher Electrical Contractors Pty Ltd,[4] Roach v Winnote Pty Ltd,[5] South Johnstone Mill Ltd v Dennis,[6] Chahwan v Euphoric Pty Ltd,[7] Texxcon Pty Ltd v Austexx Corporation Pty Ltd,[8] True Value Solar Holdings Pty Ltd v Fernandez,[9] Wood v Links Golf Tasmania Pty Ltd (No 2),[10] Edelsten v Main and Graywater Recycler International Pty Ltd,[11] Suh v Cho[12] and Re Poly Pacific Pty Ltd.[13]
[4][2005] NSWSC 859 (Maher).
[5](2006) 227 ALR 758.
[6](2007) 163 FCR 343 (South Johnstone).
[7](2008) 245 ALR 780 (Chahwan).
[8][2011] VSC 203 (Texxcon).
[9][2013] VSCA 27.
[10][2013] FCA 143 (Wood).
[11][2013] VSC 270 (Edelsten).
[12][2013] VSC 491.
[13][2013] VSC 670.
I now turn to each of the five criteria that the plaintiffs must establish under s 237.
Is it probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them?
The plaintiffs rely on the evidence of Mr Borczyk in his affidavit of 19 October 2003 which I have summarised above. The plaintiffs also rely upon the fact that Mr Van Rooy, in his affidavit of 17 December 2013, is silent as to whether any resolution was passed authorising the bringing of the proceedings.
The defendants to the application contend that the plaintiffs bear the onus of proving to the Court that each of the five criteria has been satisfied, and that failure to satisfy any one of the five criteria means that leave must be refused.[14] The defendants do not suggest that the plaintiffs have failed to establish the first of the five criteria.
[14]Edelsten [2013] VSC 270, [8]; Texxcon [2011] VSC 203, [11].
I am satisfied on the balance of probabilities that the company will not itself bring the proposed proceedings.
Are the plaintiffs acting in good faith?
The plaintiffs refer to the evidence of the extensive steps taken by them to obtain the relevant company documents which were then provided to their accountant, Mr Martyniak. The plaintiffs also rely on the steps they have taken to ascertain from Mr Van Rooy information about his conduct of the affairs of Dynamic. They refer to the evidence of the misconduct of Mr Van Rooy in managing Dynamic.
The plaintiffs submit that the evidence establishes that they have an honest belief of a good cause of action with reasonable prospects of success. The plaintiffs also refer to their willingness to pay Dynamic’s costs. Mr Borczyk says in his affidavit:
I have instructed my solicitor to seek that Dynamic bear the costs of bringing proceedings against the appropriate parties. However, if this honourable court should so determine, SEB is prepared to fund Dynamic’s costs of bringing those proceedings, including any costs order against Dynamic.
In South Johnstone, Middleton J cited with approval the observations of Palmer J in Swansson that in addressing the issue of good faith there are two interrelated factors to which the Court ought have regard, namely:
• Whether the plaintiffs have an honest belief of a good cause of action with reasonable prospects of success; and
• Whether the applicants have a collateral purpose that would amount to an abuse of process.[15]
[15]South Johnstone (2007) 163 FCR 343, [64].
Middleton J went on to say on the issue of good faith:
[65] The applicants submitted that they satisfied this criterion, and relied upon the fact that they have joined themselves as parties and that they form a substantial number of the shareholders. The applicants also pointed to the absence of any suggestion that any of them was acting otherwise than in good faith. The applicants indicated that they will indemnify the Company for its costs of the proceeding and any adverse costs order against the Company arising out of the proceeding. It was also submitted by the applicants that, whether or not the expert evidence of the valuation of the Company’s milling assets sought to be adduced in this application is admitted into evidence (there being objection to its admissibility), the mere fact that the valuation has been received by the applicants and indicated on its face that the sale of the milling assets was at a substantial undervalue supported the argument that the applicants were acting in good faith.
[66] It must be noted, however, if leave be granted, it could only be granted in relation to 31 of the applicants given the status of the evidence on standing. However, I do not consider that this aspect necessarily diminishes the applicants’ argument that they have brought these proceedings in good faith.
[67] I accept that more than “bald assertion” is required in order to establish an applicant’s honest belief: Swansson 42 ACSR at [36] per Palmer J; Fiduciary Ltd 53 ACSR at [22] per Austin J. In fact, in the present case no applicant has deposed that he or she honestly believes that a good cause of action exists and has a reasonable prospect of success. The applicants’ solicitor, Mr Maitland, has not sought to give hearsay evidence as to the existence of such an honest belief.
[68] Whether or not good faith may be open ‘relatively easy’ to demonstrate (see Swansson at [38]), there must be some positive evidence before the Court to show the applicants are acting in good faith. … I do not think it is sufficient answer for the applicants to say that there has not been any suggestion that any of them is acting otherwise than in good faith. The onus is upon the applicants to satisfy the Court that the applicants are acting in good faith.
[69] However, in my view, the onus has been discharged. It is not a requirement that the applicants depose to their belief; all that is required is that the Court be satisfied that the applicants are acting in good faith. The fact that the applicants are willing, as a condition of leave, to indemnify the company for costs in any adverse costs order, that there is no suggestion of any collateral purpose, that the 31 applicants properly identified as shareholders constitute more than a token shareholding, in any event if they are successful that the value of the shares of each appellant (and other shareholders) would increase, is sufficient to demonstrate good faith. I do not rely on the mere evidence of the expert reports sought to be adduced into evidence relating to undervalue for the purposes of my conclusions on this aspect.[16]
[16]Ibid, [65]-[69].
The plaintiffs submitted that the onus which they bear does not require them to show that a hypothetical future liquidator would not bring the proposed proceedings.[17]
[17]Maher [2005] NSWSC 859, [26].
The defendants contend that the two factors referred to in Swansson and cited in South Johnstone are not the only factors to consider.[18] The defendants say that Mr Borczyk has not deposed that he honestly believes that there is a good cause of action that has reasonable prospects of success. Rather, Mr Borczyk says that he is informed by his solicitors and believes that if Dynamic is ultimately successful in bringing the legal proceedings to recover funds, on the basis of his accountant’s findings, Dynamic will potentially be awarded a significant amount of compensation. The defendants say that Mr Borczyk does not, in that passage, depose to any belief that there is a good cause of action. Further, the defendants say that neither Mr Borczyk nor SEB has agreed to indemnify the company for any losses incurred as a result of the proposed litigation.
[18]Chahwan (2008) 245 ALR 780, [81] (Tobias J).
In Wood, Gordon J cited the two factors referred to in Swansson. After referring to the observations of Middleton J in South Johnstone at [65] and [69], quoted above, her Honour added that it is also relevant to consider the applicant’s offer to indemnify the company for its costs of the derivative action.[19]
[19]Wood [2013] FCA 143, [55].
Although, initially, there was an offer from SEB, the second plaintiff, to fund Dynamic’s costs of bringing the proceedings including any costs order against Dynamic, there was no such offer at all made by the first plaintiff, Mr Borczyk. As mentioned above, Mr Borczyk and SEB subsequently indicated during the hearing that they are now prepared to undertake to fund the costs of the litigation and indemnify Dynamic for any adverse costs order it may incur.
As mentioned earlier, the defendants contend that the plaintiffs have not established that they are acting in good faith as Mr Borczyk has not deposed that he honestly believes that there is a good cause action that has reasonable prospects of success.
In my view, the observations by Middleton J in South Johnstone support the plaintiffs’ contention that they are acing in ‘good faith’. There is no statutory obligation imposed on the plaintiffs to depose as to their belief. That they are acting in good faith may be established by other evidence such as the undertaking to indemnify the company and to meet the costs of the proceeding. In addition, the evidence establishes that the plaintiffs have already gone to a great deal of expense in obtaining access to the books and records of the company. In my view, their actions add support to the finding that the proposed proceeding is being brought in good faith.
Is it in the best interests of the company that the plaintiffs be granted leave?
As indicted above in the observations of Palmer J in Swansson, this question sets a high threshold. That is whether it is, as a practical, matter in the best interests of the company that the plaintiffs be granted leave, rather than whether it may be or is likely to be in the best interests of the company.
In Swansson, Palmer J said that in order to demonstrate that the proposed action is in the best interests of the company, “there should be evidence as to the ability of the defendant to meet at least a substantial part of any judgment in favour of the company in the proposed derivative action so that the court may ascertain whether the action would be of any practical benefit to the company.”[20]
[20]Swansson (2002) 42 ACSR 313, [60].
The defendants submit that the plaintiffs bear the onus of establishing that it is in the best interests of the company to sue the defendants and that they have failed to do as they have not established that the defendants would be able to meet any judgment or a substantial part of any judgment as referred to by Palmer J in Swansson.
In this case, however, the plaintiffs allege that it is the defendants who have profited at the expense of Dynamic. The plaintiffs allege that some $5 million of moneys belonging or due to Dynamic has been misappropriated by the defendants. In those circumstances, Dynamic will only succeed in the proposed proceedings if the plaintiffs establish that the defendants have profited at the company’s expense. As the allegation is that the defendants have improperly enriched themselves at Dynamic’s expense, an inference may be drawn that the defendants would be able to meet at least a substantial part of any judgment from the fruits of the misappropriation.
Mr Van Rooy gave evidence but did not seek to dissuade the Court from drawing the inference that neither he nor Guilfoyle has the funds to meet a judgment in favour of the plaintiffs. Although, the onus remains on the plaintiffs to satisfy me that the proposed proceedings are in the best interests of the Dynamic, under the principles of Jones v Dunkel[21], it is open for me to more readily draw the inference from the evidence led by the plaintiffs that Mr Van Rooy and Guilfoyle may be able to meet a judgment in favour of the plaintiffs or a substantial part of that judgment. I also take into account that Mr Van Rooy has been able to pay approximately $46,000 to the NAB, $100,000 to the Australian Taxation Office and $50,000 to Collins & Co as referred to in his affidavit. These payments suggest that Mr Van Rooy would have the means to meet a substantial part of any judgment in favour of Dynamic. Mr Van Rooy deposed that Guilfoyle had shareholders’ funds of over $100,000 as at 30 June 2013.
[21](1959) 101 CLR 298.
The defendants also submit that the proposed proceedings are not in the best interests of Dynamic as they may have a detrimental effect on Dynamic’s ability to pay its creditors. The defendants rely on the fact that Dynamic has ceased to trade because the directors agreed that the business was no longer viable due to trading conditions. The balance sheet shows that as at 30 June 2012, Dynamic had net liabilities of $777,817.
The defendants submit that the two most important external creditors of Dynamic are the NAB and the ATO. The defendants say that Mr Van Rooy has paid, and is paying, Dynamic’s debts to these creditors. They say that should Dynamic commence proceedings against Mr Van Rooy there is a distinct possibility that he will not keep paying debts on behalf of Dynamic with the result that the company will go into liquidation or be wound up voluntarily.
The onus is on the plaintiffs to establish that it is in the company’s best interests that leave be granted. The evidence is that creditors are being paid. Mr Van Rooy has not said that he will cease to pay creditors. Had he made such a threat, it may have been necessary to examine the basis on which Mr Van Rooy is currently paying the creditors. It may be that he is liable under a personal guarantee not conditional on the company’s initial default, in which case the threat would be of less consequence. Further, in the context of proposed proceedings challenging Mr Van Rooy’s honesty as a director, it may be that such a threat would have militated in favour of granting leave.
After considering all these matters, I am satisfied on the balance of probabilities that it is in the best interests of Dynamic that leave be granted.
Is there is a serious question to be tried?
In South Johnstone, Middleton J dealt with the fourth criteria as follows:
Serious question to be tried
[77] The fourth criterion – that there is a serious question to be tried – requires a consideration of the evidence.
[78] This requirement may be equated with that which applies on an application for an interlocutory injunction: Swansson 42 ACSR at [25] per Palmer J; Goozee 42 ACSR at [32]-[32] per Barrett J; Ehsman v Nutectime International Pty Ltd (2006) 58 ACSR 705 at [59] per Austin J.
[79] The High Court of Australia recently revisited the question of applications for interlocutory injunctions in Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 (see especially at [19] per Gleeson CJ and Crennan J, and at [65]-[72] per Gummow and Hayne JJ). Justices Gummow and Hayne at [65] stated:
The relevant principles in Australia are those explained in Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618. This Court (Kitto, Taylor, Menzies and Owen JJ) said that on such applications the court addresses itself to two main inquiries and continued [at 622-623]:
“The first is whether the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief … The second inquiry is … whether the inconvenience or injury which the plaintiff would be likely to suffer if an injunction were refused outweighs or is outweighed by the injury which the defendant would suffer if an injunction were granted.”
By using the phrase “prima facie case”, their Honours did not mean that the plaintiff must show that is more probable than not that at trial the plaintiff will succeed; it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial. (Emphasis added).
[80] There is no requirement for the Court to make factual determinations about contested issues, as stated in Ehsman v Nutectime 58 ACSR 705 at [6]:
….In particular, under s 237(2)(d), the court does not make factual determinations concerning the case that the plaintiff seeks leave to assert on behalf of the company, but only considers whether there is a serious question to be tried. The limited nature of that question will often enable the court to avoid making determinations on contested questions of fact.
[81] Three further matters must be observed. First, the application must be supported by evidence. I do not accept, with respect, that an “indication of the evidence” without actual evidence is sufficient (cf Re Varsity Queensland Ltd (2006) 60 ACSR 366 at [10] per Mullins J).
[82] Secondly, the respondents have chosen not to rely upon any evidence as to the merits of the application. Whilst I may draw certain inferences from the failure of the respondents to provide evidence, the applicants must nevertheless satisfy each of the criteria on the balance of probabilities. The failure of the respondents to provide evidence cannot fill gaps in any necessary evidence of the applicants. However, where certain inferences are open, and the respondents have not led any evidence to rebut such inferences, I may be more confident that the inference should be made.[22]
[22](2007) 163 FCR 343, [77]-[82].
The plaintiffs rely on the evidence of Mr Martyniak to establish that they have a prima facie case. The defendants, however, contend that the evidence of Mr Martyniak is not admissible in that it is either hearsay or opinion evidence.
I accept that the evidence may not be admissible if the issue at hand were whether or not the plaintiffs had made out the allegations they propose to make against the defendants, unless Mr Martyniak’s evidence was admissible as expert evidence. As it is, even though Mr Martyniak may be an expert accountant, on this application the rules of Court were not complied with to lead his evidence as expert evidence.
That, however, is not the issue that I have to address. The issue is whether the evidence of Mr Martyniak is admissible on the issue of whether there is a serious question to be tried.
In this case, the defendants were compelled by Court order to deliver up the books and records of Dynamic to Mr Borczyk. Mr Martyniak has examined these books and given evidence of what his examination has disclosed. He is giving direct evidence of what he observed in the books and record of Dynamic. That evidence is not hearsay evidence of what he observed or of the tables he drew based on his observations. That evidence may be hearsay evidence of the ultimate facts alleged in the proposed statement of claim. His examination, however, discloses a serious question to be tried concerning the matters alleged in the proposed statement of claim.
In Goozee v Graphic World Group Holdings Pty Ltd[23] Barrett J said:
… that a serious question to be tried can be found only by reference to an infringement of some legal or equitable right or the commission of some legal or equitable wrong, with the result that the issue needs to be approached by inquiring whether there exists, in the circumstances and on the evidence, a sufficiently cogent showing of some such infringement or wrong to warrant the imposition of an order to preserve the status quo pending full investigation.[24]
[23](2002) 170 FLR 451.
[24]Ibid, [34].
In my opinion, the evidence presented does establish that there is a serious question to be tried.
Has appropriate notice been given or is it otherwise appropriate to grant leave?
No issue was raised by the defendants under this criterion.
The proposed action is to be against Guilfoyle as well. Guilfoyle was not joined as a party to the application although Mr Van Rooy, a director of Guilfoyle, did give evidence on its behalf as to its financial position. No issue was taken over it not being joined as a party to this application.
Conclusion
In my opinion, the plaintiffs have satisfied me on each of the five criteria set out in s 237(2). My satisfaction was premised in part on the undertakings proffered by the plaintiffs on the costs of Dynamic.
Accordingly, subject to the appropriate undertakings being given by the plaintiffs, I must grant the application.
As for costs, the defendants have firmly opposed the grant of leave. The plaintiffs have succeeded but eventually the derivative action may fail. In Devereaux Holdings Pty Ltd v Pelsart Resources NL (No 2)[25], Young J indicated that where on a successful application for an interlocutory injunction the injunction is granted and the application is firmly opposed the appropriate order as to costs is that the successful party’s costs should be costs in the cause. In Maher, Brereton J held that the same approach was appropriate where an application under s 237 succeeded and where it was firmly opposed.[26] I propose to follow the same course in this case.
[25]Unreported, New South Wales Supreme Court, Young J 24 July 1984. Referred to with approval to in Maher [56]-[59].
[26]Maher [56]-[59].
I therefore order as follows. Upon the plaintiffs and each of them undertaking to the Court that they and each of them will pay and bear and indemnify Dynamic Industries Pty Ltd (ACN 056 989 809) against all costs, charges and expenses of and incidental to the bringing of the proceedings in the name of the second defendant Dynamic Industries Pty Ltd (ACN 056 989 809) against William Van Rooy and Guilfoyle Wreckers Pty Ltd in substantially the same form as the proposed statement of claim exhibited to the affidavit of Mr Borczyk affirmed 14 October 2013 and filed herein pursuant to order 1 below, except insofar as the Court may in the future otherwise direct or allow, I order that;
1 Leave is granted pursuant to s 237 of the Corporations Act 2001 to the plaintiffs to bring proceedings on behalf of Dynamic Industries Pty Ltd (ACN 056 989 809) in substantially the same form as the proposed statement of claim exhibited to the affidavit of Mr Borczyk affirmed 14 October 2013 and filed herein.
2 The plaintiffs’ costs of the originating process herein be costs of Dynamic Industries Pty Ltd (ACN 056 989 809) in the proceedings brought pursuant to order 1.
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