Re Junior Academy ELC Pty Ltd

[2018] VSC 685

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL COURT
CORPORATIONS LIST

S ECI 2017 00222 and S CI 2017 04273

PETER URBAN	Plaintiff
v
JUNIOR ACADEMY ELC PTY LTD	First Defendant
BARCOCHVA LAHMY	Second Defendant
ANNA LAHMY	Third Defendant
EARLY CHILDHOOD MANAGEMENT PTY LTD	Fourth Defendant
GOLD GLOW PTY LTD	Fifth Defendant

and

BARCOCHVA LAHMY	First Plaintiff
ANNA LAHMY	Second Plaintiff
ELKINGTON BAY PTY LTD	Third Plaintiff
v
JUNIOR ACADEMY ELC PTY LTD	First Defendant
UNKI PTY LTD	Second Defendant
NABRU NOMINEES PTY LTD	Third Defendant
PETER URBAN	Fourth Defendant

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JUDGE:	ROBSON J
WHERE HELD:	Melbourne
DATE OF HEARING:	8 November 2018
DATE OF JUDGMENT:	12 November 2018
CASE MAY BE CITED AS:	Re Junior Academy ELC Pty Ltd
MEDIUM NEUTRAL CITATION:	[2018] VSC 685

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CORPORATIONS  – Practice and Procedure - Application for leave to bring a derivative action on behalf of a company – Application by another party to wind up the company – Whether application for leave to bring a derivative action should be heard before the winding-up proceeding.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	G Kozminsky	Marsh & Maher Richmond Bennison Lawyers
For the Defendant	O Bigos	Jack Bock Lawyers

HIS HONOUR:

1. Mr Peter Urban and Mr and Mrs Lahmy entered into a joint venture to establish and operate a childcare centre at 249 Glen Eira Road, Caulfield North, known as Coco’s Early Learning Centre Caulfield North (‘Coco’s Early Learning’).  The joint venture was structured through companies and trusts.  The land and building at 249 Glen Eira Road were owned by Nabru Nominees Pty Ltd (‘Nabru Nominees’), a company of Mr Urban’s.  The business of the childcare centre was owned by Junior Academy ELC Pty Ltd (‘Junior Academy’) as trustee for the Glen Eira Road (249) Unit Trust.  The units in the trust are owned equally by a company controlled by Mr and Mrs Lahmy and a company controlled by Mr Urban.  The directors of Junior Academy are Mr and Mrs Lahmy and Mr Peter Urban.

1. Junior Academy, as trustee of the Glen Eira Road (249) Unit Trust, entered into a management agreement with a company of Mr Lahmy’s, Early Childhood Management Pty Ltd (‘Early Childhood’), to manage Coco’s Early Learning.  Unbeknown to Mr Urban, Mr and Mrs Lahmy started construction of another childcare centre some 200 metres down the road from Coco’s Early Learning at 294–6 Glen Eira Road, which, Mr Urban claims, will compete with Coco’s Early Learning.  Mr Urban claims that Mr Lahmy and his wife Mrs Anna Lahmy breached their duties as directors of Junior Academy in doing so.

1. As a consequence, Mr Urban has applied (in proceeding 2017 No 0022 commenced 12 September 2017) for leave to bring a derivative action in the name of Junior Academy (the First Defendant) against its directors (‘SDA leave application’). Mr Urban seeks leave to bring the derivative action against Mr Lahmy (the Second Defendant) and Mrs Anna Lahmy (the Third Defendant) for breaches of ss 180–3 of the Corporations Act 2001 (Cth) (‘the Act’) and of their common law and equitable duties as directors and officers of Junior Academy. Mr Urban has also applied for leave to bring proceedings against Early Childhood (the Fourth Defendant) and Gold Glow Pty Ltd (‘Gold Glow’) (the Fifth Defendant) for being involved in the contraventions of ss 181–3 of the Act.

1. On 24 October 2017, Barcochva (Coco) Lahmy (‘Mr Lahmy’), Anna Lahmy (‘Mrs Lahmy’), and Elkington Bay Pty Ltd (‘Elkington Bay’) applied under s 461 of the Act, for the winding up of Junior Academy. They added as defendants Unki Pty Ltd, Nabru Nominees, and Peter Urban. The application was supported by an affidavit of Mr Lahmy of 24 October 2017. The application relies in part on an allegation by Mr and Mrs Lahmy that Mr Urban has established a competing business known as ‘Bambini,’ which they allege is in the catchment area of Junior Academy’s business at 249 Glen Eira Road.

1. Mr Lahmy deposes that he and his wife have lost all trust in Mr Urban.  Mr Lahmy deposes that relations between Mr Urban on the one hand, and Anna and himself on the other, have broken down irretrievably.  They apply for the winding up of the company on the just and equitable ground.  He deposes that a liquidator appointed to the company will be able to determine what claims to make, and against whom.  He states that the liquidator’s process is a more efficient way of determining the disputes between the parties than a derivative action would be.  He says that in those circumstances, it would not be useful to grant leave for one or both parties to commence proceedings in the name of the company.

1. The two matters were originally listed for hearing together.  Junior Academy subsequently applied for a direction that the SDA leave application be heard and determined before the winding-up application.  Dr Bigos, counsel for what he called the ‘Coco interests’ (ie Mr and Mrs Lahmy and their companies), opposed the SDA leave application.  Dr Bigos submitted that the Court should hear and determine the SDA leave application at the same time as the winding-up application.

Re Innovateq

1. Dr Bigos relied on the decision of Kennedy J in Re Innovateq Pty Ltd.[1] In that matter, Kennedy J was hearing two applications together: one to wind up a company on the grounds the shareholders were deadlocked, and the other an application by one of the shareholders to bring a derivative action in the name of the company against the other shareholder under s 237 of the Act. The parties agreed that the company would inevitably be wound up. Her Honour refused the application to bring a derivative action in the name of the company and ordered the company be wound up. Her Honour held that the liquidator would be able to determine whether it was in the commercial interests of the company to pursue the claim that the applicant for leave sought to pursue.

   [1][2018] VSC 124 (‘Re Innovateq’).

1. Kennedy J addressed the elements that the applicant for leave to bring a derivative action needed to establish:[2]

   [2]Re Innovateq [2018] VSC 124, [67]–[78] (citations omitted).

Turning to the factors identified by Palmer J, it is significant that the character and business of the Company is one reflected in the Deed.  I accept the submission of Mr Barnes that the controlling minds therein decided that the Company would cease trading and cease being in existence (by being deregistered then wound up).

Senior Counsel for the plaintiff also accepted that a winding up would be inevitable; the sole issue between the parties being when a winding up would occur, rather than whether it would occur.  However, as will be seen below, I am satisfied that it is appropriate for a winding up order to be made now in this case on the basis of the suspension of business for over a year as well as on the ‘just and equitable’ ground.

The cessation of trading also immediately distinguishes the case from Cemcon, wherein her Honour observed that the relevant company stood in a position to not only recoup the relevant business but also to ‘continue trading and resume its activities in a relatively prompt fashion’.

The option of liquidation will also not necessarily stymie the litigation.

Thus, first, a liquidator is given power to bring or defend legal proceedings in the name of the company under s 477(2)(a) of the Act. He/she may also apply to the court for directions on any matter arising under the winding up. There is also no reason why any appropriate remedy would be excluded simply because a liquidator was prosecuting the action.

Second, it is true that the trust deed provides that the office of trustee will be determined and vacated on liquidation such that the Company will be a bare trustee.  Further, that the trustee will be generally released from all obligations under the Deed ‘arising after the date of such retirement’.

However, the existing bare trustee will still retain duties which existed by reason of the office of trustee.  Thus, in the decision of CGU Insurance Ltd v One.Tel Ltd (in liq), the High Court stated that one such pre-existing obligation which exists by virtue of the very office (absent negation) is the obligation to ‘get the trust property in, protect it, and vindicate the rights attaching to it’. These duties have even included a right to bring proceedings in order to protect the assets of the trust. In any event, as Counsel for the plaintiff accepted, the liquidator could (at least) still consider whether or not to pursue the litigation. Other steps could then be taken if litigation was to actually proceed. These could include the appointment of a replacement trustee with an appropriate vesting order and/or the making of orders under s 63 of the Trustee Act 1958 (Vic) and/or the appointment of a receiver.

Finally, although there may be funding issues, there are options available to manage this taking into account the commercial interests of the Company.

I am therefore not satisfied that the substance of redress sought will be unavailable absent the grant of leave.  Indeed, not only is the option available, but the appointment of a liquidator will ensure that a person independent of the two warring factions will be able to exercise professional judgment as to whether a claim ought be pursued in the commercial interests of the Company. This may be compared to the scenario where leave was to be given in circumstances where the litigation would be handed over to one of the competing parties.  Senior Counsel for Mr Hadjiantonakis suggested that the solicitor could conduct the action.  However, this was unsatisfactory and did not offer the independent professional judgment which could be provided by a liquidator.

I am therefore not satisfied that the Company should be brought into litigation against its will in circumstances where a liquidation offers scope for appropriate redress, taking into account the best interests of the Company and in circumstances where liquidation is inevitable in any event.

It is unnecessary to go further, save to observe that, although Mr Phillips appears to be a registered proprietor of property, there otherwise appeared to be no evidence cited about the ability of the Certeq entity which is resident in New Zealand to meet a judgment.

I am not satisfied that it is in the best interests of the company that the applicant be granted leave.

1. Kennedy J was not satisfied that it was in the best interests of the company for the Court to give leave to bring a claim in the name of the company as the inevitable liquidation of the company offered scope for redress.  Her Honour also took into account that, if leave were given, then the company would ‘be brought into litigation against its will.’[3] 

   [3]Re Innovateq [2018] VSC 124, [76].

1. As mentioned above, in Re Innovateq, both parties agreed that the company would inevitably be wound up.  That is not the case here.  Further, the application before me is different from those in Re Innovateq.  The application before me is to hear the application for leave to bring a derivative proceeding before the winding-up application.  In Re Innovateq both the winding-up proceeding and the application for leave to bring a derivative proceeding were being heard together.

1. Dr Bigos submits that Re Innovateq provides useful guidance in the application before me.  According to Dr Bigos, the case supports his submission that the application to wind up should be heard together with the application for leave to bring a derivative action on behalf of Junior Academy.

1. In my opinion, the Court should hear the SDA leave application before the winding-up application.  There are several factors which have led me to this decision.  As discussed, the application before me is fundamentally different to that in Re Innovateq.  Accordingly, I find that the factors mentioned in Re Innovateq are not determinative of the application before me.  

1. If the application to bring a derivative proceeding is successful, then it may or may not be appropriate to hear the derivative proceeding along with the application to wind up the company.  If the application to bring a derivative proceeding is unsuccessful, then the winding-up application may proceed by itself, in any event.

1. The application to wind up the company is not bound to succeed merely because Mr and Mrs Lahmy and Mr Urban have fallen out.  It may be the case that, in the winding-up proceeding, Mr Urban may establish that Mr and Mrs Lahmy acted in breach of their duties as directors to profit themselves at the company’s expense.  It is possible that the Court may, therefore, refuse the winding up because of damage that the winding up may cause Mr Urban and leave open some other course of action or remedy to resolve the stalemate between Mr Urban, Mr Lahmy, and Mrs Lahmy.

1. In my opinion, the Court may more readily resolve the issues arising in the winding-up application if it first disposes of the SDA leave application.  The costs of a liquidator’s litigation may be far greater than the costs that Mr Urban might incur.  Further, it is only just and fair that Mr Urban, who has more at stake than a liquidator in pursuing the claim, should be permitted to pursue his rights, if the law allows, rather than that he should have to rely on a liquidator to do so.  The order in which the Court hears the proceedings is a matter for the Court’s discretion.  There is no order mandated by law in which the Court must hear them.

1. Accordingly, for the above reasons, I propose, in my discretion, to direct that the SDA leave application be heard before the winding-up application.