Re Lotus Property Fund No 8 Pty Ltd

[2020] NSWSC 1349

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Lotus Property Fund No 8 Pty Ltd atf Lotus Property Fund No 8 [2020] NSWSC 1349

Hearing dates:

28 September 2020; further submissions 1 October 2020

Date of orders:

2 October 2020

Decision date:

02 October 2020

Jurisdiction:

Equity

Before:

Stevenson J

Decision:

Leave to be granted under s 237 of the Corporations Act 2001 (Cth)

Catchwords:

CORPORATIONS – derivative action – application for grant of leave by former director of company to bring proceedings in name of company under s 237 of the Corporations Act 2001 (Cth)

Legislation Cited:

Corporations Act 2001 (Cth)

Cases Cited:

Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57; [2006] HCA 46

Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618; [1968] HCA 1

Chahwan v Euphoric Pty Ltd [2008] NSWCA 52

Hannon v Doyle [2011] NSWSC 10

Huang v Wang [2016] NSWCA 164

In the matter of Gladstone Pacific Nickel Ltd [2011] NSWSC 1235

In the matter of Global Advanced Metals Pty Ltd [2019] NSWSC 1804

In the matter of Mycorp Group Pty Ltd (& Ors) [2013] NSWSC 1344

Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859

Nation Energy (Australia) Pty Ltd v Paltar Petroleum Ltd (Administrators appointed) [2019] FCA 1473

Oates Consolidated Capital Services Ltd [2009] NSWCA 183

Swansson v R A Pratt Properties Pty Ltd [2002] NSWSC 583

Category:

Procedural and other rulings

Parties:

Justin Brown (Plaintiff/Applicant)
Lotus Property Fund No 8 Pty Ltd (Defendant/Respondent)

Representation:

Counsel:
S Balafoutis SC with E Doyle-Markwick (Plaintiff/Applicant)
J Shepard (Defendant/Respondent)

Solicitors:
Andrews & Holm Lawyers (Plaintiff/Applicant)
McCullough Robertson Lawyers (Defendant/Respondent)

File Number(s):

2020/251179

Judgment

1. The plaintiff, Mr Justin Brown, was a director of the defendant, Lotus Property Fund No 8 Pty Ltd (“Lotus”) between 4 June 2019 and 27 August 2020.

2. On 28 August 2020, Black J granted Mr Brown leave under s 237 of the Corporations Act 2001 (Cth) (“the Act”) on an interim basis[1] to bring proceedings in the Commercial List on behalf of Lotus against LEP C9 Ltd (“LEP”).

   1. See s 241(1)(a) of the Act.

3. In the Commercial List proceedings, Black J also made interlocutory orders restraining LEP from making certain payments. Those orders have effect until 5pm on the day these reasons are published.

4. Mr Brown now seeks leave under s 237, on a final basis, to prosecute the Commercial List proceedings against LEP on behalf of Lotus.

Decision

5. I propose to grant Mr Brown the leave he seeks.

6. The result is that the Commercial List proceedings will continue.

Corporate and Trust Structure

7. LEP is the trustee of the LEP C9 Trust (“the LEP Trust”). LEP and the LEP Trust were established as a vehicle for a joint venture between Lotus and EP Australia Holdings Pty Ltd (referred to in the transaction documents as “Euro”) to develop land in Willoughby from which Channel Nine formerly operated (“the Property”).

8. Lotus and Euro each own half of the units in the LEP Trust. The directors of LEP are Mr Michael Jiang, representing the interests of Lotus, and Mr Neo Que Yau, representing the interests of Euro.

9. For its part, Lotus is the trustee of the Lotus Property Fund No 8 (“the Lotus Trust”).

10. Mr Jiang is now the sole director of Lotus. Mr Brown was removed as director of Lotus on 27 August 2020 by shareholders’ resolution; the day before these proceedings were commenced.

11. The sole shareholder and unit holder in the Lotus Trust is Lotus Pacific Pty Ltd (“Lotus Pacific”) which is, itself, trustee for the Lotus Pacific Trust. Mr Jiang is the sole director and shareholder of Lotus Pacific.

12. The unit holders in the Lotus Pacific Trust are various parties who have invested in the project, including parties associated with Mr Jiang.

13. Lotus, and Lotus Pacific, have no function other than as trustees for the Lotus Trust and the Lotus Pacific Trust.

14. Mr Brown does not hold units in either the Lotus Trust or in the Lotus Pacific Trust.

15. However, Mr Brown contends that he has an “investment interest” in the project in that a company which he is a director, and which his wife is the sole shareholder, Mosman Finance No 2 Pty Ltd (“Mosman”), is party to a document called “Lotus Property Fund No 8 Side Deed” dated 15 February 2018 (“the Side Deed”) with Lotus Pacific. By the Side Deed, Lotus Pacific agreed to pay to Mosman 25%, or on the happening of a particular contingency, 50% of the amount it received by way of distributions from Lotus as trustee of the Lotus Trust. How those arrangements sit with Lotus Pacific’s obligations as trustee of the Lotus Pacific Trust is not a matter that either party contended was relevant to whether I should grant Mr Brown the leave he seeks.

16. The corporate and trust structures I have outlined are illustrated by these diagrams:

Corporate Structure

Trust Structure

The Project

17. On 18 August 2015, LEP contracted with TCN Channel Nine Pty Ltd to purchase the Property.

18. Also on 18 August 2015, Lotus entered into two Investors Agreements.

19. The first was with LEP and Euro (“the LEP Investors Agreement”). The second was with Lotus Pacific (“the Lotus Investors Agreement”). I will return to these below.

20. LEP has since developed the Property and, by contract dated 7 February 2020, sold the developed property to Mirvac for some $200 million.

21. On 4 August 2020 LEP received from Mirvac $100,475,991 (“the Completion Funds”).

22. In the Commercial List proceedings Mr Brown seeks to have Lotus challenge the manner in which LEP has dealt with the Completion Funds.

The course of events leading to the 26 August 2020 resolution

23. On 10 August 2020 LEP paid from the Completion Funds:

1. $214,446.68 to Lotus Mgt Pty Ltd (a company associated with Mr Jiang) for “project management expenses”;

2. $997,680.20 to Lotus Pacific Consulting Pty Ltd (another company associated with Mr Jiang) for “various fees including transaction project management and transaction costs”.

24. On 11 August 2020 LEP paid from the Completion Funds:

1. $199,803.54 to Euro Asset Management Ltd (a company evidently associated with Euro) for “project management fees that were in arrears”; and

2. $896,982 to Euro Assets Ltd (evidently another company associated with Euro) for “various costs including transaction project management and Euro transaction costs”. [2]

   2. The descriptions of these four payments are from the affidavit of Mr Damien Kiley, the chief property advisor to Mr Jiang, of 15 September 2020.

25. I will refer to these payments as the “10 and 11 August Payments” and to the payees as “the 10 and 11 August Payees”.

26. On or around 11 August 2020 Mr Brown, through his assistant, asked Mr Jiang for information concerning the distribution of the Completion Funds.

27. 11 August 2020, Mr Jiang wrote to Mr Brown’s assistant:

“ … as you can imagine there’s a lot of work to be done, but will definitely provide you with the update in the next few weeks”.

28. On 12 August 2020 Mr Brown convened a board meeting for Lotus for 20 August 2020 . Mr Brown stated, in the notice of meeting:

“It is requested that directors with knowledge of the sale prepare information for the meeting so that all directors can understand the company’s share of the sale proceeds and the timing and quantum of expected distributions.”

29. Also on 12 August 2020 Mr Brown wrote to the directors of LEP complaining that Mr Jiang’s statement that an update will be provided “in the next few weeks” was unacceptable and stating:

“I am concerned to ensure that [Lotus] receives its share of the sale proceeds, and actions the use of those sale proceeds appropriately…

I also want to make sure you are aware of my position and my rights as an investor.”

30. On 13 August 2020 Mr Jiang sent Mr Brown a notice that he had received from Euro convening a meeting of the Project Control Group established under the LEP Investors Agreement to be held on 19 August 2020.

31. The Project Control Group comprised Mr Jiang representing Lotus and Mr Yau representing Euro. The LEP Investors Agreement provided that the Project Control Group was the forum for:

1. discussing and reviewing all matters relating to the Project and the Property;

2. Lotus and Euro approving or consenting to matters in accordance with the LEP Investors Agreement; and

3. the making of decisions pursuant to or in accordance with the LEP Investors Agreement. [3]

   3. Clause 4.2.

32. Euro’s note stated that at the 19 August 2020 meeting, the Project Control Group would consider, and if thought fit, pass resolutions that the Completion Funds received by LEP be paid by LEP as follows:

“(a)    pay $26,614,079.50 to Euro and $26,614,079.50 to [Lotus] in repayment of their respective outstanding equity contributions to the [LEP] Trust within 2 business days of the meeting;

(b)   pay a total of $3,184,954:

(i)   to Euro and Lotus Development Mgt Pty Ltd in reimbursement of their respective project management and transaction management costs incurred in managing the transaction for the sale of the Property on behalf of the [LEP] Trust

(ii)   in respect of other associated transaction costs (including outstanding agent’s commission, legal fees and completion adjustments).

in each case as previously approved;

(c)   retain in the [LEP] Trust account an amount of $14,084,004 (Retention Fund) for the following purposes:

(i)   to seek to ensure that, in accordance with the advice of [LEP]’s lawyers Baker McKenzie, the Trust has adequate funds available to satisfy any warranty claims brought against [LEP] under the sale documents for the Property during the claims period of 18 months from completion of the sale of the Property (Claims Period); and

(ii)   payment of all ongoing obligations of the [LEP] Trust during the Claims Period and up until winding up of the Trust, including:

A.   ongoing statutory payments and tax obligations of the [LEP] Trust;

B.    ongoing legal costs of the [LEP] Trust;

C.   directors’ fees of $600,000 per annum payable to each of Euro and [Lotus], in each case as previously approved; and

(d)   pay on 15 September 2020 the balance of the Completion Funds (following the above payments and subject to the retention of the Retention Fund) as to $14,989,437 to Euro and $14,989,437 to [Lotus] as distribution of profit of the [LEP] Trust.

(e)   in addition,

(i)   have Deutsche Bank Australia and Perpetual Agency & Trustee release and discharge all charges and remove any restrictions for use and transfer all of the money in the Debt Service Reserve Account.

(ii)   transfer all money in the cheque account to the call account and/or fixed deposit account to earn higher interest income during withholding before final distribution on return of capital and/or profit sharing.”

33. As I set out below, the Project Control Group passed resolutions in these terms on 26 August 2020.

34. The Commercial List proceedings the subject of Mr Brown’s application for leave are directed to resolutions (b) and (c)(iii)(C). They are not directed to resolutions (a) and (d), nor (e) except to the extent it gives effect to resolutions (b) and (c)(iii)(C).

35. Resolution (b) was evidently directed to the 10 and 11 August 2020 Payments. Although the proposed resolution stated that those payments had been “previously approved” there was no evidence before me that this is so.

36. The payment of directors’ fees in proposed resolution (c)(ii)(C) is currently restrained by the interlocutory order to which I referred at [3] above.

37. On 14 August 2020 Mr Brown sent Mr Jiang an email seeking information in relation to the proposed resolution. The enquiries Mr Brown made, and the response he received on 17 August 2020 from Mr Jiang are set out in the following table:

Particulars sought by Mr Brown	Response from Mr Jiang
Details of the $3.184m fee to be payable to Euro and Lotus – including a copy of each management agreement and the costs each have incurred which are to be reimbursed via this resolution.	Fees and costs agreed prior to February 2019.
Directors’ fees of $600,000 pa – please provide details of these and when these were “previously approved”.	Approved prior to February 2019.
Overall project costs – we note that no allowance has been made for the Platform bonus fee which remains owing. Please confirm that this fee is included in the transaction costs paragraph 1(b).	There is no bonus fee entitlement.

38. Mr Jiang’s response to Mr Brown’s enquiries was hardly fulsome.

39. In his 13 August 2020 email, Mr Jiang asked Mr Brown whether he was in favour of the proposed resolution and whether he requested Mr Jiang, as the appointed representative of Lotus on the Project Control Group, not to attend the meeting.

40. He concluded by saying:

“If I do not receive your response by 5pm Sydney time on Tuesday 18 August 2020, I will confirm to Euro that I will not be attending the meeting.”

41. The significance of this last comment was a provision in the LEP Investors Agreement the effect of which was that if Mr Jiang did not attend, the meeting would be inquorate and would be adjourned for five business days; and that if at the adjourned meeting a quorum was not present within 30 minutes, the quorum would consist of those in attendance. [4]

    4. Clause 4.6.

42. On 20 August 2020, Mr Brown sent Mr Jiang an email asking whether he would be attending the board meeting of Lotus that Mr Brown had convened for that day.

43. Mr Jiang replied:

“I am not able to attend a board meeting today.

I had understood that the purpose of the meeting was essentially a request for responses to specific queries, which have now been provided

44. Mr Brown replied:

“As per my email earlier today, the responses provided do not answer the specific queries and I have asked for the necessary information to understand what has gone on to give you direction at the [LEP] level.

The purpose of the meeting for [Lotus] was to consider the necessary actions needed following the sale of [the Property], including those you have requested of me in connection with the [LEP] notice of the [Project Control Group] meeting from 19 August [sic].

[Lotus] still requires to have a Board Meeting before you can represent it at a [Project Control Group] or board meeting at [LEP] and this meeting should happen at the earliest opportunity. Please advise.

May I remind you in the strongest possible terms that, as a director of [Lotus], you have a strict legal obligation to disclose information that affects [Lotus] and not doing so is in breach of your duties as a director. There is an extremely high probability that without [Lotus] being able to adequately consider its position, it will cause [Mosman] to suffer very significant financial loss. Mosman will vigorously pursue against you all available claims in respect of any such financial loss.”

45. On 21 August 2020 Mr Jiang replied:

“I confirm that I did not attend the [LEP Project Control Group] meeting on 18 August…

In respect to the specified [LEP] matters which were agreed and approved before you became a director of [Lotus] [5] I do not have any additional documentation to hand…

The directors’ fees referred to in the notice of meeting are payable to the individual directors (or their nominees) and are payable for such time as the directors are responsible for the governance and affairs of [LEP]…”

5. That is, before June 2019.

46. On 24 August 2020, Mr Brown wrote a lengthy letter to Mr Jiang. In that letter, Mr Brown asked Mr Jiang to attend the adjourned LEP Project Control Group Meeting to be held on 26 August 2020 and to “vote no to all resolutions in the notice”.

47. Mr Brown made these enquiries concerning the proposed resolutions.

“$3,184,954 proposed to be paid to Euro and Lotus Development Mgt Pty Ltd

1.    When were these fees, costs and agreements with Euro and Lotus Development Mgt Pty Ltd approved? I have been the [Lotus] Management Committee representative of [Mosman] from inception and I have never heard of or authorised these fees.

2.    I am concerned that you may have approved these fees in breach of the [Lotus] Investors Agreement.

3.    The attached Notice of Management Committee meeting asks for various relevant pieces of information about these fees and costs.

4.    It appears that these fees and costs may be motivated to reduce the return otherwise payable to [Mosman].

5.    It is essential that all the requested information about these fees and costs is provided.

$600,000 pa directors fees proposed to be paid to Euro and [Lotus]

6.    When were these directors fees, approved? I have been the [Lotus] Management Committee representative of [Mosman] since February 2018 and I have never heard of or authorised these fees.

7.    I am concerned that you may have approved these fees in breach of the [Lotus] Investors Agreement.

8.    The attached Notice of Management Committee meeting asks for various relevant pieces of information about these fees and costs.

9.    It appears that these fees and costs may be motivated to reduce the return otherwise payable to [Mosman].

10.    It is essential that all the requested information about these fees and costs is provided.”

48. Mr Brown concluded:

“Michael, please be assured I am very aware of my duties as a member of the [Lotus] Management Committee and as a [Lotus] Board member. I have at all times acted in accordance with all my duties.

You have an apparent unwillingness to share information with me as your co-Management Committee member. This is information which is fundamental to the project and the proposed Agreement. It is all information you must have anyway, or have easy access to. You are already in breach of your obligations in making me ask again for information to be provided, and are a party to an Invalid [LEP] Notice of [Project Control Group] meeting. I have significant concerns that you have materially breached your obligations already.

This letter is written and the information is being asked for having taken advice from Senior Counsel. Please treat it with the utmost seriousness.”

49. Mr Brown attached to that letter a notice of a proposed meeting of Lotus’s Management Committee, to be held 27 August 2020.

50. The agenda for the meeting foreshadowed resolutions requiring production by LEP to Lotus of information under cll 3.1, 3.9 and 18.6.13 of the LEP Investors Agreement. Some 15 categories of information were sought.

51. On 25 August 2020 Mr Jiang sent an email to Mr Brown rejecting any assertion that he had been unwilling to provide information or was in breach of any of his obligations.

52. Mr Jiang concluded:

“…you have left me with no option but to not attend the adjourned meeting of the [LEP] [Project Control Group] which was originally convened for 19 August 2020.

I will not be available to attend the meeting you have requested for 27 August 2020, but will nevertheless arrange for further responses in relation to the information you have requested (to the extent available to me and not already provided to you) to be provided to you as soon as reasonably practicable.”

53. On 26 August 2020 the adjourned meeting of the Project Control Group occurred. Only Mr Yau, from Euro, attended. Mr Yau purported to pass the resolutions foreshadowed in Euro’s notice of 13 August 2020.

54. Later, on 26 August 2020, Mr Brown’s solicitor, Mr Andrew Mutton from Messrs Andrews & Holm, wrote to the directors of Lotus foreshadowing these proceedings and seeking Lotus’s consent to their commencement by 4pm on 27 August 2020. Mr Mutton also wrote to the directors of LEP, enclosing a copy of his letter to Lotus and seeking the information referred to at [50] above.

55. On 27 August 2020, Mr Brown wrote to Mr Jiang enclosing a notice of meeting of the Lotus Management Committee proposing a resolution authorising the directors of Lotus to commence proceedings against LEP.

56. Later on 27 August 2020 Mr Jiang wrote to Mr Mutton saying that Mr Brown had been removed as a director of Lotus “by shareholders’ resolution”.

53. Mr Jiang concluded:

“I am informed that all payments authorised by the [LEP] [Project Control Group] were effected yesterday (prior to receiving your correspondence) with the exception of the $6,653,519.88 to be paid to [Mosman] on behalf of [Lotus]…”

58. That amount has since been paid to Mosman.

The claims made in the Commercial List proceedings

59. Mr Brown seeks to claim, in the Commercial List proceedings, that Lotus have a greater share of the Completion Funds than Project Control Group resolved, and obtain information which may allow it to further increase that share, if proposed or past payments to third parties can properly be impugned.

60. The relief that Mr Brown seeks to obtain on behalf of Lotus in the Commercial List proceedings comprises orders that:

1. LEP provide identified information;

2. LEP be restrained from paying from the Retention Fund referred to at resolution 1(c) of the 26 August 2020 resolution, the directors’ fees of $600,000 pa referred to in para 1(c)(ii)(C) of the minutes;

3. LEP pay Lotus damages in respect of the 10 and 11 August 2020 Payments on the basis that those payments were not permitted by the relevant provision in the LEP Investors Agreement [6] ; and

4. LEP pay Lotus’s costs of the proceeding.

6. Cl 2.29 – set out below in my discussion of whether there is a serious question to be tried.

Proceedings on behalf of a company

61. Section 236(1) of the Act provides:

Bringing, or intervening in, proceedings on behalf of a company

(1) A person may bring proceedings on behalf of a company…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.

62. Section 237(2) of the Act 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.

63. Thus Mr Brown must establish that:

1. he has standing under s 236(1) to bring the Commercial List Proceedings on behalf of Lotus against LEP;

2. it is probable that Lotus will not itself take responsibility for those proceedings: s 237(2)(a);

3. he is acting in good faith: s 237(2)(b);

4. it is in the best interests of Lotus that it be granted leave: s 237(2)(c);

5. there is a serious question to be tried in the Commercial List proceedings: s 237(2)(d); and

6. it is appropriate to grant leave notwithstanding the fact that Mr Brown has not given Lotus 14 days’ notice of his intention to make this application: s 237(2)(e).

64. There is no dispute about the matters in [63] (a) and (b). [7]

    7. Although there is a dispute as to whether Mr Brown’s status includes that of a current officer of Lotus.

65. It is also accepted that, if matters in [63] (c), (d) and (e), are established it will follow that it is appropriate to grant Mr Brown leave, notwithstanding the lack of 14 days’ notice to Lotus.

Mr Brown’s standing to bring the Commercial List proceedings on behalf of Lotus

66. Mr Brown was a director of Lotus until the day before these proceedings commenced. He is thus a “former officer” of Lotus.

67. Mr Brown also contends he remains an “officer” of Lotus by reason of the fact that he is a member of the Management Committee established under the Lotus Investors Agreement.

68. The Lotus Investors Agreement provides for the establishment of a Management Committee, the membership of which comprised a representative of Lotus Pacific (Mr Jiang) and an “independent representative”.

69. Mr Brown is that “independent representative”. He was appointed to that role by Mosman pursuant to cl 2.1 of the Side Deed.

70. Under the Lotus Investors Agreement, except in relation to identified matters, Lotus can take no action in relation to the project without unanimous approval of the Management Committee and the board of Lotus must implement any decisions made by the Management Committee [8] . It follows that Mr Brown’s position on the Management Committee give him a role in making decisions concerning Lotus’s possible investment in the project. Mr Brown is therefore an “officer” of Lotus. [9]

    8. Clause 4.14

    9. Section 9 of the Act defines “officer” to include a person “who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the entity…”.

71. Thus, Mr Brown has standing to bring these proceedings both as a former and current officer of Lotus.

Is it probable that Lotus will not itself bring the proceedings?

72. Ms Shepard, who appears for Lotus on this application, did not dispute that Lotus will not “take responsibility” for the Commercial List proceedings or take any steps in them. It is obvious it will not.

Is Mr Brown acting in good faith?

73. Were Mr Brown a current director of Lotus, it would be “relatively easy” for him to demonstrate good faith and to show that he “has a legitimate interest in the welfare and good management of the company”. [10]

    10. Swansson v R A Pratt Properties Pty Ltd [2002] NSWSC 583 at [38] (Palmer J).

74. Here, Mr Brown is a former director, but only just: he was removed as a director on 27 August 2020, the day before he commenced he commenced these proceedings; and immediately after he had proposed a resolution that Lotus commence proceedings against LEP to the effect of the Commercial List proceedings which have now been commenced[11] .

    11. See [54] to [56] above.

75. An enquiry as to whether, in these circumstances, Mr Brown is acting in good faith involves consideration of these questions:

1. Does Mr Brown honestly believe that Lotus has a good cause of action against LEP with reasonable prospects of success?; [12]

2. Does Mr Brown honestly believe that it is in the best interests of Lotus to bring the proceedings?; [13]

3. Is Mr Brown seeking to bring these proceedings for a collateral purpose or to obtain “some advantage for which the action is not designed”. [14]

   12. Swansson at [36].

   13. In the matter of Gladstone Pacific Nickel Ltd [2011] NSWSC 1235 at [57] (Ball J); thus showing the interdependence of the requirements set out in s 237(2)(b) and (c) of the Act.

   14. Swansson at [36]-[37].

76. It is not necessary that Mr Brown actually depose to having the beliefs to which I have referred. These matters can be inferred from the nature and circumstances of the case and from the diligence with which Mr Brown has sought to assert a desire to bring the proceedings in question. [15]

    15. Eg Hannon v Doyle [2011] NSWSC 10 at [107] (Barrett J); citing Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 at [28].

77. I am satisfied that Mr Brown honestly believes Lotus has a good cause of action against LEP and that it is in the best interests of Lotus to bring these proceedings. He has expressed concern in his affidavit evidence as to the transactions now sought to be challenged. In the correspondence with Mr Jiang that I have set out above, [16] Mr Brown has made persistent enquiries in relation to the matters now sought to be investigated in the Commercial List proceedings. I see no reason to doubt that these enquiries reflect Mr Brown’s genuine concern about what has occurred.

    16. Especially at [29], [44], [47] and [48].

78. Mr Brown commenced proceedings immediately after the 26 August 2020 resolutions were passed. He has also offered to fund the proceedings on behalf of Lotus and to indemnify Lotus against any adverse costs order; and to provide a $500,000 bank guarantee by way of security. Those matters bespeak Mr Brown’s honest belief that Lotus has a good cause of action against LEP and that it is in Lotus’s best interests to prosecute the Commercial List proceedings.

79. Ms Shepard’s submissions focussed on what she submitted was Mr Brown’s true motivation, namely to use the Commercial List proceedings to promote the interests of Mosman, as an investor, rather than the interests of Lotus.

80. Mosman invested some $7.9m in the project. The investment has been returned but Mosman may be entitled to the uplift to which I have referred under the Side Deed[17] .

    17. See [15] above.

81. Ms Shepard pointed to a number of references in Mr Brown’s affidavit to Mosman’s position including his statement that:

“I believe the [$600,000] directors’ fees are a mechanism to ensure that [Mosman] does not receive payments to which it is entitled.” [18]

18. At [45(f)].

82. Ms Shepard also drew attention to the references made by Mr Brown to Mosman’s position in his correspondence with Mr Jiang. [19]

    19. At [44] and [47] above.

83. Ms Shepard pointed to authority that:

“…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.”[20]

20. Swansson at [42], cited with approval in Chahwan v Euphoric Pty Ltd [2008] NSWCA 52 at [73]-[74] (Tobias JA, with whom Beazley and Bell JJA agreed).

84. I read this to mean that the right of the company that the applicant seeks leave to vindicate must be connected with the applicant’s status as a member or former member, or officer or former officer of the company in the sense that the applicant must be seeking to vindicate the right by reason of that status; and not for some ulterior motive unconnected with the company’s interests. I see this as another way of making the point set out at [75(c)] above.

85. That is, here, Mr Brown must show that the right that he seeks leave to vindicate by prosecuting the Commercial List proceedings against LEP is Lotus’s right to be paid what is due to it under the LEP Investor Deed; rather than Mosman’s right to recoup its investment.

86. The evidence shows that Mr Brown is concerned to have Mosman’s investment recouped.

87. As Mr Balafoutis SC, who appeared with Ms Doyle-Markwick for Mr Brown, submitted “the proper distribution of assets” by LEP would inure to Lotus Pacific and that Mosman’s “interest is dependent or contingent upon a proper conclusion of the proceedings, that is, Lotus being successful in its actions.” [21]

    21. T57.42.

88. However, Mr Balafoutis also submitted: “Mr Brown’s objective is to get the information and get a proper distribution of assets” to Lotus. [22]

    22. T57.40.

89. I accept that submission. I see no reason to doubt the genuineness of the statements made by Mr Brown in his correspondence with Mr Jiang in August, nor to doubt that Mr Brown’s objective, in seeking leave to prosecute the Commercial List proceedings, is to obtain information on Lotus’s behalf, and to obtain what he contends to be Lotus’s proper distribution of the assets from the LEP Trust.

90. I am satisfied that this objective is borne of Mr Brown’s role as a person who was, until the day before these proceedings were commenced, a director of Lotus.

91. I have no doubt that, had Mr Brown remained a director of Lotus after 27 August 2020, he would have brought this application.

92. I am satisfied that Mr Brown is acting in good faith.

Is there a serious question to be tried?

93. The test of whether there is a serious question to be tried is the same as that applied in determining whether to grant an interlocutory injunction. [23]

    23. Eg Swansson at [25]; Oates Consolidated Capital Services Ltd [2009] NSWCA 183 at [164] (Campbell JA; Spigelman CJ and Allsop P agreeing); Re Gladstone Pacific Nickel at [56].

94. This is a relatively low threshold. [24] The question is whether Mr Brown has made out a prima facie case, in the sense that if the evidence remained as it is, there is a probability that, at trial, Lotus will be held entitled to the relief articulated in the Commercial List Statement. [25] It is not necessary that Mr Brown show that it is more probable than not that at trial Lotus will succeed against LEP. It is sufficient for him to show a sufficient likelihood of success to justify him being granted leave under s 237. [26]

    24. Re Gladstone Pacific Nickel at [56].

    25. Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618; [1968] HCA 1 at 622-623; Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57; [2006] HCA 46 at [65].

    26. By analogy, with Beecham v Bristol Laboratories at 620.

95. In relation to the 10 and 11 August 2020 Payments, Mr Brown’s case is that LEP’s power to make payments from the Completion Funds arose only under cl 2.29 of the LEP Investors Agreement.

96. Clause 2.29 of the LEP Investors Agreement provides, relevantly:

“Cashflow Distribution

… unless [Lotus] and Euro determine otherwise, [LEP] agrees to ensure that … the balance of amounts standing to the credit of the Project account are paid … in accordance with the following order of priority:

2.29.1   first, to pay any Project Costs in accordance with the Project Budget;

2.29.2   second, to pay amounts due and payable under the Senior Financing Facility Agreement;

2.29.3   third, to Euro and [Lotus] … to pay any Additional Contributions made by them in accordance with this agreement ….;

2.29.4   fourth, in payment (on a pro rata basis) of the Preferred Equity Return payable on each of [Lotus]’s Equity Contribution and Euro’s Equity Contribution;

2.29.5   fifth, in repayment on a pro rata basis [Lotus]’s Equity Contribution and Euro’s Equity Contribution; and

2.29.6   sixth, to pay on a pro rata basis, the balance of the profit of the Project to each of [Lotus and Euro].”

97. Mr Brown contends that:

1. the 10 and 11 August 2020 Payments could only be justified under cl 2.29 if they were “Project Costs” for the purposes of cl 2.29.1;

2. the 10 and 11 2020 August Payments were not “Project Costs” because:

1. “Project Costs” are defined under the LEP Investors Agreement to mean, relevantly, payments to a “Development Manager” or payments under a “Development Management Agreement”; and

2. none of the 10 and 11 August 2020 Payees were “Development Managers” or parties to a “Development Management Agreement”; and

3. accordingly, to adopt the language in the Commercial List Statement, the 10 and 11 August 2020 Payments “do not fall within the payments permitted to be made” by LEP and “were made in breach of the [LEP Investors Agreement]”. [27]

   27. Clauses C23 and C24.

98. Ms Shepard did not contend that the 10 and 11 August 2020 Payees were “Development Managers” or parties to a “Development Management Agreement”.

99. Rather, Ms Shepard drew attention to the chapeau to cl 2.29 which states that LEP’s obligation to ensure the payments are made in accordance with the sub-cll 2.29.1ff is qualified by the words “unless Lotus and Euro determine otherwise”.

100. Ms Shepard submitted that the resolution of the Project Control Group of 26 August 2020 showed that Lotus and Euro had “determined otherwise” by deciding to make the 10 and 11 August 2020 Payments to the 10 and 11 August 2020 Payees.

101. However, as Mr Balafoutis and Ms Doyle-Markwick point out in their reply submissions, a difficulty with that submission is that:

1. the 26 August 2020 resolution purported to confirm a “previously approved” payment to Euro and Lotus Development Mgt Pty Ltd in circumstances where there is no evidence before me of any such “previous approval”; and

2. three of the four 10 and 11 August 2020 Payments were made to entities other than Euro and Lotus Development Mgt Pty Ltd, which companies were the only ones named in the resolution.

102. Mr Balafoutis and Ms Doyle-Markwick also submitted the 10 and 11 August 2020 Payments were not authorised by the Project Control Group because only Mr Yau was present on 26 August 2020. A difficulty with that submission is that, for the reasons I have set out, it appears that by the operation of cl 4.6 of the LEP Investors Agreement, the 26 August 2020 meeting was quorate. [28]

     28. See [41] above.

103. Following the conclusion of the hearing, I raised with the parties the implications of the following provision which appears in the LEP Trust Deed:

Limitation of Trustee liability

17.1 Subject to the Corporations Act, the Trustee is not liable (in contract, tort or otherwise) for any loss or damage to any person (including any Unit Holder) in any way relating to the Trust if it:

17.1.1   acts in accordance with the terms of this deed; or

17.1.2   has acted in good faith without negligence or fraud.

104. It may be that LEP will rely upon this provision in answer to the claims made in the Commercial List proceedings.

105. However, an answer to such a plea may be that in causing the 10 and 11 August 2020 Payments to be made to parties that appear to be associated with Mr Jiang and Euro, LEP was not acting in good faith. I express no view about that matter, save to say that it appears to be an argument that may be available to Lotus.

106. These are matters to be resolved on a final hearing of the Commercial List proceedings.

107. I am satisfied there is sufficient probability of Lotus establishing the matters at [97] above to conclude that there is a serious question to be tried.

108. So far as concerns the resolution to pay “directors’ fees of $600,000 per annum”, Mr Brown’s case is that:

1. the Project Control Group had no power under cl 2.29 of the LEP Investors Agreement to pay directors’ fees; and

2. LEP was prevented, by cl 18.2.3, of the LEP Investors Agreement, from making any payment to “an Associate”[29] except with prior written consent of Lotus and Euro or as otherwise permitted under cl 2.29.

   29. Defined at cl 22.2.7 of the LEP Investors Agreement to be “an Associate” for the purposes of ss 10-17 of the Act and to thus include a director of LEP.

109. Ms Shepard’s submissions focussed on the question of whether, on its proper construction, the 26 August 2020 resolution of the Project Control Group was directed only to ongoing directors’ fees, rather than directors’ fees for the duration of the project.

110. Ms Shepard’s submissions did not engage directly with the proposition advanced on behalf of Mr Brown that the Project Control Group did not have power to resolve that any part of the Completion Funds be used to pay directors’ fees or to make any payments to “an Associate” of LEP.

111. So far as concerns the claim that Mr Brown wishes to bring on behalf of Lotus for the provision of information, Ms Shepard did not dispute that Lotus was entitled under the LEP Investors Agreement to seek information.

112. Rather, Ms Shepard submitted that some of the information that Mr Brown had sought in the meeting he proposed on 24 August 2020[30] had already been provided. Ms Shepard did not dispute that much of the information that Mr Brown had sought has not been provided, nor that there was a serious question to be tried that Lotus was entitled to seek that further information.

     30. See [49] and [50] above.

113. Overall, I am satisfied that Mr Brown has established that there is a serious question to be tried that Lotus is entitled to relief to the effect of that claimed in the Commercial List Statement. [31]

     31. Mr Brown accepts that paragraph C22 of the current Commercial List Statement will require amendment.

Is it in the best interests of Lotus that leave be given?

114. Mr Brown proposes, in the Commercial List proceedings, to seek to obtain for Lotus a greater share of the Completion Funds than the Project Control Group resolved, and to obtain information which may allow it to further increase that share, if proposed or past payments to third parties can properly be impugned.

114. It would obviously be in Lotus’s interests for such a result to be achieved

115. Lotus is the trustee of the Lotus Trust. Were Lotus to obtain a greater share of the Completion Funds, it would have more funds to distribute to its beneficiary, Lotus Pacific.

116. Lotus does not act in any capacity other than as trustee of the Lotus Trust. There is no suggestion that Lotus would suffer any commercial detriment by reason of Mr Brown causing it to bring proceedings against LEP.

117. Thus Lotus will not be prejudiced if the proposed action is unsuccessful.

118. As there is a serious question to be tried as to the case Mr Brown wishes to bring on behalf of Lotus, and as there appears to be much for Lotus to gain and nothing for Lotus to lose by prosecuting the Commercial List proceedings, it appears on the face of things to be in Lotus’s best interests that Mr Brown be given the leave he seeks,

119. There is authority for the proposition that, in considering what is in the best interests of the company, it is necessary to consider the prospects of success of the action. [32]

     32. In the matter of Gladstone Pacific Nickel Ltd [2011] NSWSC 1235 at [57] (‘Re Gladstone Pacific’).

120. However, in Huang v Wang,[33] Bathurst CJ, with whom McColl JA and Barrett AJA agreed, said:

“A question of some difficulty is whether, having concluded that there is a serious question to be tried, the court can again consider the question in determining whether it is in the best interests of the company to bring the proceedings. In Re Gladstone, Ball J at [58] indicated it was necessary to consider the prospects of success. It must be remembered that an application under the section does not involve a consideration of the underlying merits of the proposed litigation, except to the extent it is necessary to determine if there is a serious question to be tried. Further, in cases where a court has doubts as to the prospects of success, a court can make an order conditional on the applicant undertaking to indemnify the company from any liability for costs which it may incur in pursuing the action.”[34]

33. [2016] NSWCA 164.

34. Ibid at [60] and see at [69] the Chief Justice’s implicit warning about “conflating” s237(c) and (d) ; see also In the matter of Global Advanced Metals Pty Ltd [2019] NSWSC 1804 at [108] (Black J); cf at [123].

122. As I have mentioned, Mr Brown has undertaken that, were he granted leave under s 237 he will pay Lotus’s costs of prosecuting the proceedings, indemnify Lotus in relation to any adverse costs order, and provide security for that indemnity by a $500,000 bank guarantee.

123. Accordingly, I do not propose to consider further the merits of the Commercial List proceedings.

124. The likely recovery from LEP is also a factor relevant to whether it is in Lotus’s best interests to prosecute the Commercial List proceedings. [35]

     35. Re Gladstone Pacific at [57]; Nation Energy (Australia) Pty Ltd v Paltar Petroleum Ltd (Administrators appointed) [2019] FCA 1473 at [15] (Stewart J); In the matter of Mycorp Group Pty Ltd (& Ors) [2013] NSWSC 1344 at [11] (Black J).

125. LEP is a company with $2 of paid up share capital. As I have said, it was incorporated as a special purposes vehicle for the project. It has no business or assets other than the business the subject of the LEP Trust.

126. The means apparently available to LEP to satisfy any claims against it are:

1. the assets it currently holds on trust for the LEP Trust; and

2. its right of indemnity under the Trust Assets under the LEP Investors’ Agreement. [36]

   36. Clause 17.7-17.8

127. LEP may also call on Lotus and Euro to provide additional contributions: [37] such calls only appear to apply to “Cost Overruns” or “Project Costs”.

     37. Note LEP Investors Agreement cl 2.16-2.18.

128. On the other hand, LEP currently holds on trust some $14 million in a “Control Account” being the quantum of the Retention Fund referred to in cl (c) of the 26 August 2020 resolution. [38] Although that fund is primarily to meet any warranty claims under the contract between LEP and Mirvac, it may well be available to meet any damages claim that Lotus obtains in the Commercial List proceedings.

     38. See [32] above.

129. There are, thus, some uncertainties as to LEP’s capacity to meet any verdicts obtained by Lotus against it. However, I do not see these uncertainties as compelling the conclusion that it is not in Lotus’s best interests to bring these proceedings.

130. Overall, I am satisfied that it is Lotus’s best interests that the Commercial List proceedings be prosecuted.

Is it in the best interests of Lotus that leave be given to Mr Brown?

131. Ms Shepard submitted that it would not be in the interests of Lotus for proceedings to be brought on its behalf by Mr Brown because Mr Brown’s interests conflicted with those of Lotus.

132. I do not accept that submission.

133. The first alleged conflict is said to arise because of Mr Brown’s interest in Mosman and the consequent possibility that Mosman will be entitled to a part of any distribution made by Lotus as trustee of the Lotus Trust to Lotus Pacific. I do not accept that this places Mr Brown’s interests at odds with those of Lotus. To the contrary, as Mr Balafoutis and Ms Doyle-Markwick submitted, both Mr Brown and Lotus have an interest in Lotus maximising the proportion of the Completion Proceeds it receives.

134. The second conflict is said to arise because a company associated with Mr Brown, Platform Project Services, is seeking to recover a “bonus fee” from LEP by reason of its former role as Development Manager of the Project. It is true that, were Platform to succeed in making out this claim against LEP, it would reduce the funds available to be distributed to Lotus under clause 2.29 of the LEP Investors Agreement. However, Mr Brown’s interest in Platform does not, in my opinion, create any conflict of interest with respect to its prosecution of proceedings on behalf of Lotus against LEP because any claim that Platform might have against LEP is in priority to that of Lotus (or Euro).

Is it appropriate to grant leave although Mr Brown has given less than 14 days’ notice of his intention to apply for leave?

135. It follows from these conclusions that it is appropriate that Mr Brown be granted leave, notwithstanding the fact that he did not give lotus 14 days’ notice.

Conclusion

136. The parties should bring in short minutes to give effect to these reasons. Those short minutes should include an undertaking to the Court by Mr Brown concerning the costs of the Commercial List proceedings and the provision of security for that undertaking.

137. The parties should also confer and agree as to the directions now to be made in the Commercial List proceedings.

138. I am inclined to order that the costs of this application abide the outcome of the Commercial List proceedings, but will invite submissions of that question. I suggest that question be dealt with on the papers.

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Endnotes

Decision last updated: 06 October 2020