Re Woodbine Project Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT
CORPORATIONS LIST

S ECI 2021 02997

AO SONG & ORS (according to the Schedule)	Plaintiffs
v
PIN LI	First Defendant
and
WOODBINE PROJECT PTY LTD (ACN 609 722 509)	Second Defendant

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JUDGE:	Button J
WHERE HELD:	Melbourne
DATE OF HEARING:	16 September 2021
DATE OF JUDGMENT:	23 September 2021
CASE MAY BE CITED AS:	Re Woodbine Project Pty Ltd
MEDIUM NEUTRAL CITATION:	[2021] VSC 617

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CORPORATIONS – Derivative leave application – Section 237 Corporations Act 2001 (Cth) – Application to defend an existing proceeding – Allegation that the director of the company has a conflict of interest – Whether it is probable that the company will not properly take responsibility for the proceeding – Whether grant of leave is in the best interests of the company – Whether application is brought in good faith – Whether undertaking to indemnify the company’s costs required – Whether undertaking to indemnify company against adverse costs orders required – Leave granted.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	S Wartski	Q&L Lawyers
For the Defendants	P Bornstein	Oceania Lawyers and Consultants

TABLE OF CONTENTS

Background......................................................................................................................................... 1

Evidence............................................................................................................................................... 3

The companies, the plaintiffs, the funds and Mr Li................................................................... 4

The plaintiffs’ awareness of the County Court Proceeding...................................................... 6

The County Court Proceeding: further detail............................................................................... 8

Legislation and principles.............................................................................................................. 15

Section 237(2)(a): properly taking responsibility for the proceedings, or steps in them.. 16
Section 237(2)(b): acting in good faith...................................................................................... 18
Section 237(2)(c): best interests.................................................................................................. 19
Section 237(2)(d): serious question to be tried........................................................................ 21
Indemnities in respect of costs and adverse costs orders: authorities................................ 22

Consideration.................................................................................................................................... 30

Standing........................................................................................................................................ 30
Whether it is probable that Woodbine will not itself properly take responsibility for the County Court Proceeding or steps in it........................................................................................ 31
Good faith..................................................................................................................................... 33
Best interests................................................................................................................................ 34
The rebuttable presumption in s 237(3)................................................................................... 36
Written notice to Woodbine of intention to apply................................................................. 36
Whether the plaintiffs should be required to give an undertaking to meet Woodbine’s costs in the County Court Proceeding................................................................................................. 37

Access to the books and records of Woodbine........................................................................... 41

Proposed orders................................................................................................................................ 41

HER HONOUR:

Background

By an originating process dated 18 August 2021, the plaintiffs have applied under s 237 of the Corporations Act 2001 (Cth) (the Act) for orders granting them leave to intervene in proceedings in the County Court to which Woodbine Project Pty Ltd (Woodbine) is a defendant, and to take control of the conduct of Woodbine’s defence, including by making any contribution claims or cross‑claims. The proceedings in question were issued in the County Court of Melbourne[1] by Yueyue Xiu against Woodbine and Pin Li (the County Court Proceeding).
[1]County Court Proceeding No CI-20-01192.

Pursuant to leave granted on 27 August 2021, the plaintiffs filed an amended originating process by which they added an application for an order permitting them (or persons appointed by them) to inspect the books of Woodbine under s 247A(3) of the Act.

The originating process was filed on 18 August 2021, but was not served on the defendants until 25 August 2021. Nevertheless, the matter was brought on urgently for hearing on 14 September 2021 as a mediation was required to be conducted by 24 September 2021.[2] The plaintiffs were concerned that their application be determined prior to the mediation, lest the interests of Woodbine be (as the plaintiffs would see it) sacrificed to the interests of Mr Li.
[2]Pursuant to orders of Judge Woodward in the County Court Proceeding made on 1 July 2021.

On 9 September 2021, the parties submitted proposed consent orders which proposed leave be granted to the plaintiffs pursuant to s 237 ‘to intervene in … and to take over the conduct of [the County Court Proceeding] on behalf of Woodbine’, restraining Mr Li from taking steps on behalf of Woodbine in the County Court Proceeding and authorising the plaintiffs and / or other persons on the plaintiffs’ behalf to inspect the books of Woodbine.

However, the proposed consent orders were silent on how the costs of Woodbine in the County Court Proceeding were to be met. The proposed consent orders were also imprecise in their formulation of the ambit of the leave to be granted. At a directions hearing on 10 September 2021, in view of these matters, and the apparent intention of the defendants not to resist the leave sought, the timetable was amended with a revised date set for the plaintiffs to put on submissions addressing the statutory criteria contained in s 237 and setting out the approach they contended should be taken in relation to the costs of the County Court Proceeding. While a date was also fixed for the plaintiffs to put on submissions, should they wish to, the Court was informed that the defendants did not intend to file submissions. The application was heard on 16 September 2021.

At the hearing of the application, the Court was informed that, just two days prior, the County Court had made freezing orders against Woodbine on an ex parte basis, and had also made orders vacating the order requiring mediation by 24 September 2021. The Court was provided with the orders made by the County Count, which also revealed that the freezing order did not include any carve-out for Woodbine’s legal costs of defending the County Court Proceeding. Both the return of the freezing order and the County Court Proceeding more generally, are due to be before a judge of the County Court on 12 October 2021.

The details of the claims made in the County Court Proceeding are set out further below, but the gravamen of the plaintiffs’ concern is that, in circumstances where Ms Xiu makes a claim against Mr Li personally in the County Court Proceeding, Woodbine’s interests are in conflict with those of Mr Li as Woodbine’s defence (and the mediation, whenever held) may be conducted on the basis that Woodbine, and not Mr Li, is the person liable to Ms Xiu. The plaintiffs also pointed to the fact that the defendants have not filed any defence to the most recent version of the statement of claim filed by the plaintiff in the County Court Proceeding.

I am satisfied that Mr Li’s interests conflict with those of Woodbine and that, while Mr Li remains in sole control of Woodbine, it is probable that the company will not properly take responsibility for the County Court Proceeding. I am also satisfied that the plaintiffs are acting in good faith, and that it is in the best interests of Woodbine that persons who do not suffer the same conflict of interest as Mr Li have the conduct of its defence in the County Court Proceeding and take carriage of advancing any claims the company may have against Mr Li. While counsel for the plaintiffs indicated, in oral submissions, that the plaintiffs may wish to advance claims against third parties, no potential claims have been identified. Accordingly, the grant of leave will be confined to the defence of Woodbine and the pursuit of any claims under Order 11 of the County Court Civil Procedure Rules 2018 (the County Court Rules) that Woodbine may have against Mr Li relating to the matters the subject of the County Court Proceeding.

Evidence

The plaintiffs relied on the affidavits of:

(a) Ao Song affirmed 17 August 2021;

(b) Ao Song affirmed 31 August 2021;

(c) Ao Song affirmed 14 September 2021;

(d) Mucen Ma affirmed 17 August 2021;

(e) Mucen Ma affirmed 31 August 2021;

(f) Yibo Liu affirmed 18 August 2021;

(g) Yibo Liu affirmed 31 August 2021; and

(h) the plaintiffs’ solicitor, Grace Xiao, affirmed 17 August 2021.

The defendants did not file any affidavits or submissions. While not opposing the grant of leave under s 237, the defendants did not make any admissions that Mr Li had engaged in any wrongful conduct. Counsel for Mr Li did not make any submissions on the matters underpinning the application, including the plaintiffs’ contention that Mr Li was in a position of conflict.

Given that the Court’s power under s 237 is enlivened only where the statutory criteria are met, it is necessary to address the substance of the application, notwithstanding the absence of active opposition to the relief sought.[3]
[3]See the observations made by Brereton J on the use to be made of concessions in s 237 applications in Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859, [20].

The companies, the plaintiffs, the funds and Mr Li

It is necessary to say something about the corporate structures of the companies involved in the dispute and how the plaintiffs and Mr Li fit into them. Woodbine was registered in December 2015. Mr Li is, at present, its only director and holds 90 of 110 issued shares. However, the relevant ASIC extract records that Mr Li does not hold those shares beneficially. The other 20 Woodbine shares are held by Yibo Liu, who is the third plaintiff. The second plaintiff, Mucen Ma, says that the 90 shares held by Mr Li are held on trust for her.

Woodbine holds 80 of the 116 issued shares in another company, Northern Pro Pty Ltd (Northern Pro). The first plaintiff, Mr Song, holds 29 of the 116 issued shares in Northern Pro. The other seven Northern Pro shares are held by Mr Li. Mr Song and Mr Li are both directors of Northern Pro, although Mr Song deposed that, in practice, the company is controlled by Mr Li and he (Mr Song) does not have access to its books and records.

Mr Song also owns 100% of the shares of Columbia Building Pty Ltd (under external administration) (Columbia Building) and is a director of that company. Mr Song is also a director and the 100% shareholder of Columbia Real Estate Pty Ltd (under external administration) (Columbia Real Estate).

Mr Song is the cousin of Ms Ma. Mr Song deposed in his affidavit of 17 August 2021 that he and Mr Li have been business associates involved in property development for some time. At the time of affirming his affidavit, the only active property development being pursued by the entities in question was a development at 1492 North Road, Clayton in Victoria (the Clayton Development). It appears that, previously, Woodbine developed and held a property in Chelsea, Victoria (the Chelsea Development).

Ms Ma has deposed that she advanced $250,000 by way of investment funds to Woodbine. Ms Liu has deposed that she advanced $200,000 on the same basis. While Ms Liu and Ms Ma originally advanced their funds for the purposes of investment in the Chelsea Development being conducted Woodbine, they both entered into agreements, each dated 10 September 2020, transferring their interests in the Chelsea Development to interests in the Clayton Development being conducted by Northern Pro. While Ms Liu originally invested $200,000, she had been repaid $115,000, leaving a balance of $85,000 owing to her from the initial investment of $200,000, along with any share of profits from the Clayton Development to which she is entitled under the agreement entered into on 10 September 2020.

The 10 September 2020 agreements were recorded in writing between Ms Ma, Woodbine and Northern Pro and, by a separate agreement, Ms Liu, Colombia Real Estate, Woodbine and Northern Pro. Those agreements relevantly provided that Ms Ma and Ms Liu’s investments made in the Chelsea Development and their entitlements related thereto ‘will be in and be represented by the number of shares that WB [Woodbine] holds in the NP [Northern Pro] of which those shares’ market value is equivalent to the Investment Repayment [as defined]’. Accordingly, Ms Liu and Ms Ma have an interest in the fate of Woodbine as their investments, and potential to see a return of their capital and related profits, are reflected in, and dependent on, Woodbine’s interest in the Clayton Development being pursued by Northern Pro, of which Woodbine is the majority shareholder

Mr Song’s interest is somewhat different. He is a minority shareholder and a director of Northern Pro. Despite being a director of Northern Pro, Mr Song deposed that Mr Li (also a director of Northern Pro) had effective control of that company’s affairs. However, Mr Song also gave a director’s guarantee for funds loaned by the National Australia Bank to Northern Pro. Mr Song deposed that the property the subject of the Clayton Development was purchased for approximately $1.65 million and, since the date of its purchase, the house on the land has been demolished and permits for the construction of six townhouses have been obtained.

Mr Song’s evidence was that the mortgage to the National Australia Bank is for approximately $1.1 million and he estimates the net asset position of Northern Pro is approximately $550,000. On that basis, Mr Song has deposed that there is real value to the shareholding of Woodbine in Northern Pro. That being the case, Mr Song has deposed to his concern that any judgment obtained by the plaintiff in the County Court Proceeding against Woodbine would detrimentally impact the interests that Woodbine holds in the assets of Northern Pro and that if Woodbine were fixed with a liability for $970,000 plus costs, a liquidator might be appointed to that company and might control Northern Pro as a majority shareholder. However, in oral submissions, counsel for the plaintiffs accepted that, even if a liquidator were appointed to Woodbine, the appointment of a liquidator acting properly would not, ipso facto, adversely affect Northern Pro, it being an asset of Woodbine.[4] Counsel submitted that, rather than Mr Song’s motives being related to Northern Pro, his desire to intervene was borne of his sense of responsibility for Ms Ma and Ms Liu, as he introduced them to Mr Li and Woodbine. That submission was supported by Mr Song’s 14 September 2021 affidavit.
[4]Transcript 28.28-29.13.

The plaintiffs’ awareness of the County Court Proceeding

It came to the attention of Mr Song in April 2021 that Mr Li may be the subject of litigation in the County Court. Mr Song instructed solicitors to make the necessary enquiries. Those enquiries revealed that Ms Xiu had brought the County Court Proceeding against Mr Li and Woodbine. While Ms Xiao deposed to observing an application concerning a freezing order sought, but vacated, against the purchaser of the property the subject of the Chelsea Development from Woodbine, nothing presently turns on that aspect of the County Court Proceeding.

The enquiries made by Ms Xiao revealed that:

(a) a statement of claim endorsed on the writ had been filed in the County Court Proceeding on 19 March 2020;

(b) the defendants to the County Court Proceeding had filed a notice of appearance dated 28 May 2020;

(c) the plaintiff in the County Court Proceeding had filed an amended statement of claim dated 31 July 2020; and

(d) the defendants in the County Court Proceeding had put on a defence to the amended statement of claim on 28 August 2020, as well as further and better particulars dated 14 October 2020.

It is of present relevance to note that the enquiries made by Ms Xiao also showed that the plaintiff in the County Court Proceeding had filed a second further amended statement of claim dated 5 July 2021 and that, while orders were made on 1 July 2021 fixing the time for defences to be filed to that second further amended statement of claim on 30 July 2021, the defendants to the County Court Proceeding had not, at least as at 17 August 2021, filed a defence to the second further amended statement of claim.

As outlined above, at a high level, the plaintiffs’ concerns arise from the fact that, while the plaintiff in the County Court Proceeding alleges, as her principal claim, that she loaned funds to Mr Li personally, in the defence filed on 28 August 2020, the defendants to the County Court Proceeding have pleaded that the loan was in fact between the plaintiff in the County Court Proceeding, Ms Xiu, and Woodbine, with Mr Li being merely the agent of Woodbine.

As such, the plaintiffs are concerned that a claim to the effect that Mr Li is indebted or otherwise liable to Ms Xiu in the County Court Proceeding is being met with admissions on behalf of Woodbine, which prejudice it and benefit Mr Li; in short, the plaintiffs perceive a conflict of interest between Mr Li and Woodbine which conflict, they contend, is not being properly or adequately managed so as to protect the interests of Woodbine in the County Court Proceeding. They are concerned that the interests of Woodbine are being sacrificed to the interests of Mr Li in the County Court Proceeding. They are further concerned that the interests of Woodbine in the County Court Proceeding are not being adequately addressed while Woodbine remains under the sole control of Mr Li as no defence has been filed on behalf of Woodbine (or Mr Li for that matter) to the second further amended statement of claim, despite the Court timetable requiring such a defence to be filed by 30 July 2021.

In furtherance of their evidence concerning the genesis of their concern, the plaintiffs have put on evidence which suggests, at least at a prima facie level, that the funds advanced by the plaintiff in the County Court Proceeding, Ms Xiu, found their way to an account in the name of Mr Li. While the full history of these funds, their genesis and history of transfer remains to be tested in the County Court, and it is not appropriate to reach any final views on that matter in the present proceeding, it appears that the funds were transferred by an agent on behalf of Ms Xiu, either directly or indirectly (which is not clear) into an account of Woodbine, then transferred to an account held by Columbia Building, of which Mr Li was also a director, and then transferred from that account into a personal account of Mr Li. The plaintiffs have put on evidence of banking records obtained from the liquidators of Columbia Building which substantiate at least the receipt of funds into the Columbia Building account in the amount of $970,000 on 3 January 2019, and the transfer of those funds to Mr Li. The evidence of the plaintiffs does not go so far as to establish how the funds reached the account of Columbia Building, or that the funds received by Columbia Building were definitely the funds advanced by the plaintiff in the County Court Proceeding.

The County Court Proceeding: further detail

While the plaintiff in the County Court Proceeding has, as noted above, filed a second further amended statement of claim dated 5 July 2021, it is necessary to record the contentions advanced in her amended statement of claim dated 31 July 2020, as it is to that pleading that the defendants have responded.

In her amended statement of claim, the plaintiff in the County Court Proceeding, Ms Xiu, alleged that she advanced CN¥4.9 million[5] to Mr Li on or about 2 January 2019, at his request. The particulars state the request was made in China and recorded in a document in Chinese, the title of which translates to ‘loan note’. She alleges that the funds were remitted via an agent ‘Wealthy Asia’. Ms Xiu claimed the AUD equivalent of the funds advanced (less a small amount repaid in mid-January 2019) as money had and received by Mr Li to the use of Ms Xiu. She also advanced a claim to the same amount against Mr Li in contract.
[5]The AUD equivalent is pleaded to be $970,009.

By her amended statement of claim, Ms Xiu also advanced a money had and received claim against Woodbine. That claim —which was not expressly pleaded to be in the alternative or further to the claim against Mr Li — pleaded that the funds, then being $970,009, were deposited into Woodbine’s Commonwealth Bank of Australia account, at Mr Li’s direction. Ms Xiu claimed that the funds were received by Woodbine, or paid by Ms Xiu, under a mistake of fact in that she intended the funds to be received by Mr Li, she did not intend the funds to be received by Woodbine and believed the ultimate recipient of the funds would be Mr Li.

The defendants filed a defence in the County Court dated 28 August 2020. This remained, as at the date of hearing of the present application, the only defence filed in the County Court Proceeding. By that defence, Mr Li and Woodbine responded to the allegations made by Ms Xiu in a single defence, which did not articulate any distinct positions by Mr Li and Woodbine, despite the allegations in the statement of claim being made distinctly as against Mr Li (money had and received, and the claim in contract) and against Woodbine (money had and received).

In direct response to the allegation in the amended statement of claim that Mr Li had asked Ms Xiu to lend him funds, the defence pleads that:

(a) the request made by Mr Li on 25 December 2018 was made on behalf of Woodbine;

(b) Ms Xiu agreed to lend the funds to Woodbine for a period of one month in connection with the Chelsea Development; and

(c) Mr Li acted solely as the agent for his disclosed principal, being Woodbine.

The plea that the loan was advanced under a disclosed principal-agent relationship was particularised by reference to, inter alia, a loan agreement in writing entered into by Ms Xiu and Woodbine on 17 January 2019, referred to as the ‘loan extension agreement’, extending the period for repayment of the loan, such that it was repayable in 36 months from that date, and to a Wealthy Asia money exchange and remittance agreement dated 2 January 2019, said to evidence the transfer of the funds to Woodbine.

The defence then pleads that the funds were transferred to Woodbine on or about 2 January 2019 at the request of Mr Li, on behalf of Woodbine, and admits that the balance of the funds have not been repaid to Ms Xiu. The defence goes on to deny that either Mr Li or Woodbine was obliged to repay the funds by 25 January 2019 or by 2 February 2019, and pleads that the sum of $970,009 is not due to be repaid until 17 January 2022, pursuant to the ‘loan extension agreement’. The defence admits the allegation concerning the deposit of the funds into Woodbine’s Commonwealth Bank of Australia account, but denies the allegation that Woodbine received, alternatively Ms Xiu paid, the funds to Woodbine under a mistake of fact (as set out above) and denies that the money was had and received by Woodbine to the use of Ms Xiu.

As may be seen, the defence filed by Mr Li and Woodbine in the County Court Proceeding directly defends the allegations made by Ms Xiu against Mr Li on the basis that the agreement entered into by Ms Xiu was an agreement with Woodbine and not with Mr Li personally, such that it is Woodbine that is indebted to the plaintiff, and not Mr Li. Quite obviously, if this defence were to succeed, such liability as may exist to Ms Xiu in respect of the funds would be the liability of Woodbine and not Mr Li. While the defence filed to the amended statement of claim does, so far as the allegations against Woodbine are concerned, deny the ultimate money had and received plea, the defence nonetheless proceeds on the basis that there was a loan agreement between Woodbine and Ms Xiu (and not a loan agreement between Mr Li and Ms Xiu).

Ms Xiu filed a reply dated 15 January 2021. By that reply, she has pleaded:

(a) that the loan note referred to in the particulars to paragraph 3 of her statement of claim was between herself and Mr Li;

(b) that the ‘loan extension agreement’, while purporting to be between herself and Woodbine:

(i) does not refer to the earlier payment of CN¥4.99 million or its AUD equivalent;

(ii) did not provide for any assignment, transfer or assumption of Mr Li’s liability to Ms Xiu to be assumed by Woodbine; and

(c) that the contested funds were not received by Mr Li pursuant to, nor was the time for repayment extended by, the ‘loan extension agreement’.

As may be seen, Ms Xiu’s response to the defence’s reliance on the ‘loan extension agreement’ in answer to her claims against Mr Li, was to dispute that that note governed or recorded the terms of the contested advance.

However, Ms Xiu’s reply went on to plead that ‘to the extent that the earlier payment … was to [Woodbine]’, the ‘loan extension agreement’:

(a) did not provide for the extension of any period for repayment of the sum advanced; and

(b) made reference to Ms Xiu advancing funds to Woodbine on 17 January 2019, which did not occur, such that the funds in fact loaned by Ms Xiu were neither received pursuant to, nor was the time for repayment extended by, the ‘loan extension agreement’.

Ms Xiu has then pleaded, in the alternative, that the ‘loan extension agreement’ was void for want of consideration on the basis that the loan extension agreement purported to charge certain property said to be owned by Woodbine in favour of Ms Xiu, which property was not in fact owned by Woodbine at that time. She also pleads that the ‘loan extension agreement’ is void for want of certainty. She then says that, to the extent that the funds were advanced and received by Mr Li and/or Woodbine, and such funds were advanced in purported pursuance of the ‘loan extension agreement’, they are moneys had and received by Woodbine for the use of Ms Xiu.

By way of further alternative pleas, Ms Xiu’s reply then contends that:

(a) the ‘loan extension agreement’ was rescinded, disaffirmed or terminated by her;

(b) Woodbine is estopped from relying on the ‘loan extension agreement’ to deny or defer repayment because Mr Li represented to her that:

(iii) the ‘loan extension agreement’ was not a real loan agreement, which she terms ‘the fake agreement representation’;

(iv) would not be enforced; and

(c) the ‘loan extension agreement’ was ‘void and of no effect’ as:

(i) it was procured by undue influence in that Ms Xiu was induced to sign the ‘loan extension agreement’ while acting under the influence of Mr Li, with whom she had been in a romantic relationship in circumstances where Mr Li was, it appears, in the process of separating or divorcing his wife, Mr Li and Ms Xiu had an ‘on again, off again’ relationship and Mr Li had raised the prospect of marriage with Ms Xiu, such that the loan extension agreement is pleaded by Ms Xiu to be void and of no effect on the basis of undue influence;

(ii) by reason of her romantic connections with Mr Li, Ms Xiu was under a special disability, which Mr Li and Woodbine unconscientiously took advantage of.

Despite having put on a reply in January 2021, Ms Xiu proceeded, with leave of the County Court, to file a second further amended statement of claim dated 5 July 2021. No defence has been filed by the defendants in the County Court Proceeding responding to the allegations made in the second further amended statement of claim. The Court was informed by counsel for the defendants in a directions hearing on 27 August 2021 that there was no present intention to file a defence to the second further amended statement of claim; rather, the amended defence would continue to stand as the articulation of the defendants’ position in the County Court Proceeding.

The second further amended statement of claim is, in its initial paragraphs, consistent with the contentions advanced in the amended statement of claim, but adds the following pleas:

(a) an alternative claim relying on the ‘loan extension agreement’ and contending that it gives rise to one or more of an equitable lien, an equitable charge or equitable mortgage over the property the subject of the Chelsea Development such that the proceeds of any sale of that property not exceeding the sum owed are held on trust for Ms Xiu;[6]
[6]The second further amended statement of claim is somewhat ambiguous in that these pleas are relevantly stated in terms of ‘the defendant’ without specifying which defendant is being referred to.

(b) Ms Xiu nevertheless otherwise disaffirms the loan extension agreement and refers to and repeats aspects of her reply;

(c) the moneys advanced by Ms Xiu were advanced for a particular purpose such that they are said by way of a further alternative claim, to be held on trust by Mr Li for the plaintiff, and that to whatever extent and for whatever purpose Woodbine received the loan moneys, it did so in the knowledge of the purpose for which the funds were advanced by Ms Xiu to Mr Li, rendering Woodbine Ms Xiu’s fiduciary;

(d) the transfer of the property the subject of the Chelsea Development to a third party on 30 March 2021 was in breach of trust and/or a breach of fiduciary duty owed by Woodbine to Ms Xiu and was a breach of the trust and/or a breach of fiduciary duty by Mr Li;

(e) Mr Li procured or induced the breaches of duties and behaved dishonestly, alternatively Mr Li participated in Woodbine’s breaches;

(f) Mr Li and Woodbine converted trust property to their own use;

(g) Mr Li is said by Ms Xiu to be liable for his own breaches of trust and fiduciary duty as well as procuring and inducing Woodbine’s alleged breaches of trust and breaches of duty and knowing assistance in Woodbine’s breaches of trust and breaches of duty and conversion of trust property; and

(h) Woodbine is liable for its own breaches of trust, breaches of fiduciary duty and conversion of trust property.

As may be seen, the County Court Proceeding raises a number of critical issues affecting Woodbine. Without seeking to be exhaustive, those issues include:

(a) To whom did Ms Xiu lend the money: Mr Li, or Woodbine? Determination of this issue will involve consideration of interactions between Mr Li and Ms Xiu, and determination of whether Mr Li was acting on his own behalf, or as Woodbine’s disclosed agent.

(b) Whoever was the borrower as a matter of contract law, did Woodbine receive the funds advanced by Ms Xiu?

(c) If they were received by Woodbine in circumstances which give rise to a liability on Woodbine, does it have any defences to Ms Xiu’s claims?

(d) Is the ‘loan extension agreement’ between Woodbine and Ms Xiu voidable due to the circumstances in which it was procured by Mr Li?

(e) Is the property held and being developed by Woodbine subject to an equitable lien, equitable charge or equitable mortgage in favour of Ms Xiu?

(f) Was Woodbine Ms Xiu’s fiduciary, and did it breach fiduciary duties to her by selling trust property, and, if so, was that breach of trust procured by Mr Li behaving dishonestly?

Legislation and principles

Section 236(1), which appears in Pt 2F.1A of the Act, provides that:

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.

As well as being required to be a person within sub-ss 236(a)(i) or (ii), a person must also obtain leave under s 237. Section 237(2) provides as follows:

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.

Section 237(3) provides for a rebuttable presumption that granting leave is not in the best interests of the company where (relevantly) the proceedings are by a third party against the company, and the company has decided not to defend the proceeding, or to discontinue, settle or compromise the proceeding, and all the directors who participated in that decision acted in good faith for a proper purpose and did not have a material personal interest in the decision (amongst other criteria).

It is well established by authority[7] that:

(a) if all of the criteria specified in s 237(2) are made out, the Court must grant the application (in other words, it is not discretionary); and

(b) if any one of the criteria specified in s 237(2) is not made out, the application must be refused.

[7]The governing principles were summarised by Connock J in Pentridge Village Pty Ltd (in liq) v Capital Finance Australia Ltd (2018) 58 VR 1 (Pentridge Village) at [166]-[171].

Relevantly, even where a concession is made, the Court must be positively satisfied that each of the criteria is made out, although the making of concessions may reduce the extent of the Court’s enquiry.[8]
[8]Pentridge Village, [170] (Connock J).

As is apparent, the plaintiffs are not seeking leave to bring a proceeding in the name of Woodbine, but to take responsibility for the conduct of the County Court Proceeding in which Woodbine is a defendant. It is clear that derivative leave may be granted to intervene in order to take carriage of a company’s defence. In Maher v Honeysett & Maher Electrical Contractors (Maher v Honeysett),[9] Brereton J said as follows at [16]:

The reference in s.236(1) to intervention in proceedings to which the company is already a party for the purpose of taking responsibility on behalf of the company for those proceedings or for a particular step in them such as compromising or settling them compels the conclusion that the section envisages not just a statutory derivative action on behalf of the company, but the conduct of proceedings generally or in particular respects on behalf of a company, which is apt to include the defence of proceedings. … That Pt 2F.1A authorises the granting of leave to a person to take responsibility on behalf of HME for the defence of proceedings is put beyond doubt by the terms of s.237(3), which contemplate a grant of leave in proceedings by a third party against the company [s.237(3)(a)(ii)], and a decision by the company not to defend such proceedings [s.237(3)(b)(ii)]. Accordingly, I conclude that leave could be granted under Pt 2F.1A to a person to intervene in proceedings in which a company is a defendant, for the purpose of taking responsibility on behalf of that company for the defence of those proceedings.
[9][2005] NSWSC 859.

Section 237(2)(a): properly taking responsibility for the proceedings, or steps in them

Insofar as it concerns an application for leave to intervene in and take responsibility for the defence of a proceeding brought against a company, as is the case here, s 237(2)(a) requires the Court to be satisfied that it is probable that the company will not itself properly take responsibility for the proceedings, or for the steps in them. In Swansson v RA Pratt Properties Pty Ltd (Swansson), Palmer J made the following observations about the criterion stipulated in s 237(2)(a):[10]

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.
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.

[10][2002] NSWSC 583, [28]-[29].

Where those holding decision-making power over a company are in a position where their personal interests conflict with those of the company, the prospect that the company will not take certain steps is often obvious. The Full Court of the South Australian Supreme Court referred to the existence of a conflict of interest rendering it unlikely that contribution proceedings would be brought in FWV Stanke Holdings Pty Ltd v O’Meara; von Stanke v O’Meara (FWV Stanke) (emphasis added):[11]

However, if (as I consider the judge correctly held) it is in FWV’s best interests to bring contribution proceedings of the kind proposed by Mrs O’Meara, FWV’s acknowledgement that it did not intend to bring such proceedings makes it inevitable that s 237(2)(a) is established. The defence of FWV and the pursuit of contribution proceedings go hand in hand. It would be impractical for FWV on John’s instructions to defend JHV’s claim and simultaneously, on Mrs O’Meara’s instructions, to bring contribution proceedings. …
The judge referred to John’s conflict of interest. John is a director of the two companies alleged to be oppressing JHV. He is also one of the beneficiaries of the conventional understanding. John has the use of one of the fishing licences of HSS and its associated pot allocations. He has a personal interest in the continuation of the status quo. This is demonstrated by the fact that he is one of the parties to the joint defence to the JHV oppression action. In my opinion, the judge correctly concluded that this conflict alone raised the prospect that FWV, while controlled by John, would not take proper responsibility for the proceedings. …

[11][2007] SASC 413, [42]-[43] (White J, Doyle CJ and Anderson J agreeing).

Taking proper responsibility for the proceedings involves more than preparing and filing a defence which accords with the rules of pleading. It involves the taking of steps which are in the interests of the company, including the proper pursuit of action within the proceedings for the promotion or defence of the company’s interests.[12]
[12]FWV Stanke, [42]-[44] (White J, Doyle CJ and Anderson J agreeing).

Section 237(2)(b): acting in good faith

Section 237(2)(b) requires the Court to be satisfied that the applicant is acting in good faith. In Swansson, Palmer J identified two factors to which courts will have regard in determining whether the good faith criterion is satisfied; first, whether the applicant for leave honestly believes that a cause of action exists and has a reasonable prospect of success; and secondly, whether the applicant is seeking leave to bring the derivative suit for a collateral purpose which would amount to an abuse of process.[13]
[13]Swansson, [36].

The approach set out by Palmer J in Swansson has been widely followed.[14] What is required to establish good faith depends on the circumstances. Those circumstances include the nature of the relationship between the applicant for leave and the company. For example, a current shareholder with more than a token shareholding who proposes an action to recover property of the company which would increase the value of the individual’s shares will relatively easily demonstrate good faith, as will a current director or officer who has an interest in the welfare and good management of the company. By contrast, a former shareholder or officer with nothing obviously to gain by the success of the action would not as easily establish good faith. Relevantly, Palmer J noted that a creditor may also have standing to pursue a derivative action, for example in that person’s capacity as a former shareholder. Palmer J indicated that, where a creditor seeks leave under s 237 to place the company in a financial position to repay the debt:[15]

[t]here 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…, 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.

[14]See, eg, Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 1007, [22] (Barrett J); Charlton v Baber [2003] NSWSC 745, [40] (Barrett J); Goozee v Graphic World Group Holdings Pty Ltd (2002) 170 FLR 451, [56]; Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442, [21] (Austin J).

[15]Swansson, [40].

The ‘good faith’ criterion was discussed in the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998, which stated that, in assessing whether an applicant is acting in good faith, the Court could be expected to have regard to whether there was any complicity by the applicant in the matters complained of and whether the application is being made in pursuit of an interest other than that of the company.[16] That is not to say that, where an applicant is a shareholder in a company and motivated to seek leave to bring the derivative action in order to protect or enhance his or her own shareholding’s value, that the applicant would thereby fail to meet the good faith criterion. On the contrary, it is accepted that an indirect benefit to the interests of an applicant — by virtue of protecting the interests of the company in which that person is a member — constitutes the pursuit of a legitimate interest for the purposes of the good faith criterion.[17]
[16]Explanatory Memorandum, Corporate Law Economic Reform Program Bill 1998 (Cth) 21-2 [6.36].
[17]See, eg, Fiduciary Ltd v Morning Star Research Pty Ltd [2005] NSWSC 859, [35]-[38] (Brereton J).

For example, in Maher v Honeysett, Brereton J found that, as a current shareholder with more than a token shareholding, the derivative action Mr Honeysett sought leave to bring for that company would, if successful, enhance the value of his shares in it and, accordingly, was ‘the type of case in which relatively little will be required to establish good faith’.[18]
[18]Maher v Honeysett, [35].

Section 237(2)(c): best interests

In relation to the best interests criterion, stipulated in s 237(2)(c), the Court must be satisfied that it ‘is’ in the best interests of the company that the applicant be granted leave; not merely that it ‘may be’ or ‘is likely to be’ in the best interests of the company.[19]
[19]Swansson, [55]-[56] (Palmer J); Maher v Honeysett, [40] (Brereton J).

A number of matters are relevant to the assessment of whether leave to intervene or bring a proceeding is in the best interests of the company. Those matters include the characteristics of the company, the business of the company and the effects of the proposed litigation on its proper conduct, matters relevant to whether the substance of the redress sought by the applicant is available by other means which do not bring the company into litigation, and the ability, where leave is sought to bring a proceeding, of the proposed defendant to meet at least a substantial part of any judgment.[20] In Fiduciary Ltd v Morningstar Research Pty Ltd (Morningstar), Austin J also noted, quoting the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998, that the best interests criterion allows the Court to ‘focus on the true nature and purpose of the proceedings’ and ‘would recognise that a company might have sound business reasons for not pursuing a cause of action open to it and that its management might legitimately have decided that the best interests of the company would be served by not taking action’.[21]
[20]Maher v Honeysett, [40] (Brereton J), citing Swansson, [57]-[60] (Palmer J).
[21][2005] NSWSC 859, [44] (Brereton J), citing Explanatory Memorandum, Corporate Law Economic Reform Program Bill 1998 (Cth) 22 [6.38].

Expanding upon the ‘best interests’ criterion in Pentridge Village, Connock J made the following additional observations:[22]
[22]Pentridge Village, [254], [256]-[259].

(a) attention is to be paid to the separate and independent welfare of the company which, in the case of a solvent company, will predominantly reflect the interests of shareholders in that capacity;

(b) the prospects of success, likely costs and likely recovery in proceedings, the consequences if the proceedings are not successful, and the nature of any indemnity the applicant has offered, will also be relevant to the assessment of best interests, as will the effect of the proceedings on the company’s business operations;

(c) the fact that the applicant has a personal interest in the outcome of the action or the applicant has personal animus against other members of the company is not significant or decisive because this is common in the types of disputes that lead to derivative actions;

(d) there is no fixed test to determine where the company’s best interests lie; rather, the court will have regard to whether the benefits of the proceeding are outweighed by the costs and risks involved in bringing them; and

(e) a proceeding to protect the interests of members as members from breaches of duty by the directors is likely to be in the best interests of the company as a whole, although not invariably so.[23]

[23]In support of this observation about best interests where breaches of duty are in prospect, Connock J there cited Connective Services Pty Ltd v Slea Pty Ltd[2018] VSCA 229, [120] (Ferguson CJ, Whelan and McLeish JJA) citing with approval Slea Pty Ltd v Connective Services Pty Ltd[2017] VSC 609, [159] (Robson J).

While some of these factors are more directly applicable in relation to a situation where leave is sought to bring a proceeding (rather than leave to intervene in the defence of a proceeding) nevertheless they bear upon, and are readily adapted to, the proper consideration of the best interests of a company where leave is sought to intervene in the defence of proceedings brought against that company.

Section 237(2)(d): serious question to be tried

Section 237(2)(d) is only relevant where the applicant for leave is seeking to bring proceedings in the name of a company, rather than seeking to intervene in an existing proceeding. Other than taking carriage of Woodbine’s defence, the plaintiffs anticipate seeking leave to file a notice under Order 11 of the County Court Rules against Mr Li. Rule 11.15 is framed in terms of making ‘claims’ ‘against another party to the proceeding’, and is so cast in terms which reflect that the ‘proceeding’ already exists. On this basis, s 237(2)(d) does not apply to the grant of leave sought by the plaintiffs. However, if the provision does apply insofar as the plaintiffs seek leave extending to filing a notice against Mr Li under r 11.15, I am satisfied that there is a serious question to be tried.

Indemnities in respect of costs and adverse costs orders: authorities

The question of how the costs of the company in respect of which leave is being sought are to be met may be approached from a number of angles, which overlap. Who is to bear the costs, and the willingness of those seeking leave to intervene to bear those costs, has been considered relevant both to the assessment of the good faith of the applicants for leave, and to the assessment of the best interests of the company pursuant to s 237(2)(c).

In addition, s 242 of the Act provides:

The Court may at any time make any orders it considers appropriate about the costs of the following persons in relation to proceedings brought or intervened in with leave under section 237 or an application for leave under that section:
(a)       the person who applied for or was granted leave;
(b)       the company;
(c)       any other party to the proceedings or application.
An order under this section may require indemnification for costs.

The authorities illustrate that it is common for persons applying for leave to bring proceedings in the name of a company to be required to undertake to meet the company’s costs of those proceedings. Applicants for leave are also often required to undertake to meet any adverse costs orders made against the company in the litigation which they seek to initiate in the company’s name. Where proceedings are sought to be initiated on behalf of a company in a precarious financial position, such an undertaking will almost invariably be required.[24] As Ward CJ in Eq recently observed in Broadway Plaza Investments v Broadway Plaza Pty Ltd (Broadway):[25]

[T]he case law emphasises the importance of an indemnity as a means of addressing the risk of prejudice to the companies from the commencement of the proceedings, should they ultimately prove to be unsuccessful, and the risk of exposure to costs and expenses of litigation including costs orders.

[24]See, eg, Carpenter v Pioneer Park Pty Ltd [2004] NSWSC 1007, [39] (Barrett J). See also Roach v Winnote Pty Ltd [2006] NSWSC 231, discussed at paragraphs 67to 68 below.

[25][2019] NSWSC 1082, [37], citing Re Fishinthenet Investments Pty Ltd and Coastal Waters Seafood Pty Ltd [2014] NSWSC 260, [31] (Black J).

Likewise, and as discussed by Austin J in Morningstar, in the (not uncommon) circumstance in which the assertion of claims on behalf of a company is simply the manifestation of aspects of a wider dispute between the parties, it is often appropriate for the Court to address the question of costs in the event that the claim advanced on behalf of the company fails and to do so by granting leave on terms that the applicant is responsible for the costs ordered against the company and undertakes not to seek contribution or indemnity from the company.[26]
[26]Morningstar, [51].

On occasion, applicants for leave to initiate proceedings are also required to provide security for the company’s costs.

Such undertakings need not cement a final position on costs. For example, in Carpenter v Pioneer Park Pty Ltd (Carpenter),[27] the liquidator of the company on whose behalf leave was sought by its director and shareholder to bring proceedings against the ANZ Bank opposed the grant of leave on grounds which included the possibility that the company would itself be required to pay costs in the event that the litigation against the ANZ Bank was unsuccessful. There Barrett J said:[28]

In bringing the present application, Mr Carpenter obviously intends that he should finance the litigation in which he wishes the Company to engage. With the Company’s financial position as it is, he can have no other expectation. As a corollary, Mr Carpenter should be required to indemnify the Company against not only costs and expenses he causes to be incurred through suing on the Company’s behalf but also any liability for costs incurred by the Company otherwise than at his behest by reason of the derivative action, but with the proviso that if the Company succeeds in recovering damages or other moneys through the derivative action (including by compromise or settlement), he may apply to the court for reimbursement of expenses he has borne.

[27][2004] NSWSC 1007.

[28]Carpenter, [39].

Other cases recognise that it may be preferable to consider who is finally to bear the costs of the litigation once more is known about the outcome of the litigation — in particular, whether it has proven fruitful for the company — or more is known about the financial position and activities of the company.[29] Similarly, undertakings may be given not to seek to recover the costs of the litigation other than from the fruits of the litigation.[30]
[29]See, eg, Re Wan Jia (Aust) International Development Pty Ltd [2012] NSWSC 1007, [31] (Black J).
[30]See, eg, Re 22 Park Street Pty Ltd (rec & mgr apptd) [2021] VSC 247 (Connock J) where the application of such undertakings was revisited in the context of approval being sought under s 240 of the Act to settle a County Court proceeding (brought with leave to intervene) against one defendant.

The majority of cases addressing the question of costs address the question in the context of leave being sought to cause the company to adopt an offensive position by initiating litigation; there is little authority addressing the costs issue where leave is sought to intervene and take carriage of a company’s defence. One case that does address the question of costs in an application to intervene in a company’s defence is the decision of Santow J (as his Honour then was) in Roach v Winnote Pty Ltd (Roach).[31] In that case, orders were made under s 237 permitting Mr Roach to intervene in, and defend other proceedings against Winnote Pty Ltd, and to prosecute a cross-claim, upon Mr Roach giving undertakings as follows:[32]

1.To indemnify the Defendants against any liability for costs arising from the conduct of proceedings referred to below.
2.To provide security for that indemnity by way of bank guarantee in a form satisfactory to the Registrar in the amount of $30,000.00.
3.To give the Sixth and Seventh Defendants such information as they may reasonably require from time to time as to the conduct of the Proceedings.
4.To retain in a separate account any moneys received in satisfaction of the Cross-Claim referred to below (otherwise than in respect of costs) and not to disburse these moneys other than with the consent of the Sixth and Seventh Defendants or leave of the Court.

[31][2006] NSWSC 231.

[32]The form of the undertakings is recorded in the reasons of Barrett J in a subsequent application: Roach v Winnote Pty Ltd [2006] NSWSC 231, [2]. See also Roach v Winnote Pty Ltd (in liq) [2001] NSWSC 822, which reasons make clear that Winnote Pty Ltd was in liquidation.

In reasons addressing a subsequent application (Roach II),[33] Barrett J expanded upon the purpose of the undertakings required by Santow J in Roach, and the requirement that similar undertakings be given in other cases (emphasis added):
[33]Roach v Winnote Pty Ltd [2006] NSWSC 231.

[23] The purpose of the undertakings that Santow J saw fit to make the price of the grant of leave under s.237 in this case are explained by the nature of Part 2F.1A proceedings and the function of such leave as just described. His Honour’s judgment makes no reference to the matter but the purpose of the undertakings is, in my opinion, made very clear by the circumstances. Winnote and Sydtech had no assets. They were financially unable to pursue the course that the grant of leave under s.237 enabled Mr Roach to undertake on their behalf. Santow J was obviously concerned to ensure that the two companies were afforded some measure of protection against the financial consequences of the participation in proceedings 50099/99 that he was prepared to allow Mr Roach to cause them to undertake.
[24] Such concerns have been expressly referred to in a number of cases under Part 2F.1A. The content of the next four paragraphs of these reasons draws on analysis, in that respect, found in a recently published research report, “Litigation by Shareholders and Directors: An Empirical Study of the Statutory Derivative Action” by Professor Ian Ramsay and Mr Benjamin Saunders of the University of Melbourne.
[25] In Metyor v Queensland Electronic Switching Pty Ltd [2003] 1 Qd R 186, the Queensland Court of Appeal granted leave under s.237 in such a way that, as is made clear at paragraph [19] of the judgment, the party granted leave would, in the event of its failure in the derivative action, have to “bear … the not inconsiderable costs of the proceedings”. The position in Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732 was similar. The court again took the view that the “best interests of the company” criterion (one of the criteria by reference to which an application for leave under s.237 is assessed) would be satisfied only if the party granted leave gave the company appropriate protection in respect of costs. … [quotation omitted]
[26] In McLean v Lake Como Venture Pty Ltd [2004] 2 Qd R 280, leave under s.237 was granted but was (at p.297):
“conditioned on an undertaking that in the absence of consent by all directors to payment, the funds of the company would not be utilised to pay solicitors’ fees and outlays without leave of the court.”

[27] Charlton v Baber (2003) 47 ACSR 31 was another case in which leave was granted under s.237 on terms designed to ensure that the person granted leave should protect the company in respect of costs. I quote from paragraph [74] of the judgment (at p.49):
“… [W]hile Mr Charton [sic] may now pursue the possibility of augmenting the resources of NAA by pursuit of the claims in respect of which he has succeeded in showing an entitlement to leave under s 237, he should have no expectation of doing so in such a way that those resources are called upon to fund the litigation, unless the result is clearly seen to involve some distinct benefit to the general body of creditors going demonstrably beyond the kind of pointless recycling of money to which I have referred. Much less, of course, should he expect to see corporate resources expended on the litigation if his claims fail.”

[28] In Carpenter v Pioneer Park Pty Ltd (2004) 211 ALR 457, I said (at pp.470-1):
“[45]The court will also make Order 2 in that amended originating process, being an order that Mr Carpenter be granted leave to bring proceedings on behalf of the Company as described in that order. The order will be made both under Part 2F.1A and in exercise of the court’s inherent power and will be made upon terms to the following effect:
(a)that Mr Carpenter pay and bear (and indemnify the Company against) all costs, charges and expenses of and incidental to the bringing and continuation of the proceedings brought by him on behalf of the Company except to such extent, if any, as the court may in future otherwise direct or allow; and
(b)that, insofar as it may not apply of its own force, s.240 of the Corporations Act 2001 (Cth) shall apply to and be observed in relation to the proceedings brought by Mr Carpenter on behalf of the Company.

[46]There will be an order that Mr Carpenter pay the Company’s costs of the proceedings.
[47]There should also be a grant of liberty to apply to both Mr Carpenter and the Company. This will accommodate any need for further directions and the possibility that Mr Carpenter may wish to seek some dispensation from the indemnity in respect of the costs and expenses of the derivative action.”

[29] It is thus clear that courts are concerned in some cases to ensure that the person granted leave under s.237 should bear, either wholly or in part, the burden of the company’s costs in relation to the proceedings in which that person is to represent the company. Measures of that kind are intended to protect the company’s financial resources and are merely part of the domestic arrangements within the company as to the basis on which the person concerned will be permitted to act for it.

A similar approach was taken by the Full Court of the South Australian Supreme Court in FWV Stanke. There, the applicant for leave, Mrs O’Meara, sought to intervene and take control of FWV Stanke Holdings Pty Ltd’s (FWV’s) defence to an oppression proceeding, and to bring contribution proceedings in the name of FWV. In addressing whether the applicant for leave in that case should be responsible for the costs of the derivative proceeding, White J (with whom Doyle CJ and Anderson J agreed) cited and applied the relevant passage of Barrett J’s judgment in Carpenter.[34] White J noted that the applicant for leave accepted that, if leave were granted to Mrs O’Meara to intervene in the conduct of FWV’s defence and to institute contribution proceedings, she would, from the point of taking over the conduct of the defence, be responsible for FWV’s costs.[35]
[34]FWV Stanke, [112], citing Carpenter, [39].
[35]FWV Stanke, [112].

As is apparent from Barrett J’s survey of the authorities in Roach II (extracted above), and the approach of the Full Court of the South Australian Supreme Court in FWV Stanke, no separate or discrete set of principles apply where leave is sought to intervene in a company’s defence, at least where (as was the case in Roach and FWV Stanke) leave to intervene was not limited to taking carriage of the defence, but included bringing cross-claims or even more limited ‘offensive’ action, such as bringing contribution proceedings. The lack of any clear distinction in the approach to be adopted in cases where the company adopts a defensive stance, or acts as the ‘moving party’ is also illustrated by the decision of Ward CJ in Broadway where her Honour, having observed that the authorities make clear that it is appropriate to take into account the potential exposure to adverse costs in the proceedings, noted that the costs exposure of the company to adverse costs ‘must be the case irrespective of whether various of the cross-defendants might be said properly to be characterised as plaintiffs not defendants’.[36]
[36]Broadway, [170]-[171] (Ward CJ in Eq), citing Cooper v Mytace Consulting Pty Ltd [2014] FCA 480, [29] (Davies J). See also Broadway, [152] (Ward CJ in Eq) as to the submission that one of the plaintiffs, Sayour Holdings, was not the ‘aggressor’ in a cross-claim.

A somewhat different perspective was brought to bear on the question of costs in applications to bring proceedings, by Finkelstein J in Wood v Links Golf Tasmania Pty Ltd (Links Golf).[37] There Finkelstein J granted an application, made under s 242 of the Act, for the applicant for leave to have the costs of those proceedings met by the company. His Honour referred to the position prior to the enactment of Pt 2F.1A as follows at [5]:

… Prior to the enactment of Part 2F.1A, a minority shareholder action could be commenced by a shareholder on behalf of his/her company. In such an action, the court could order the company to cover the shareholder’s costs: Wallersteiner v Moir (No 2) [1975] QB 373. Indeed, under the old law, the position in Victoria was that if the shareholder’s action “is bona fide to protect the [company] and the [company] will receive the benefit of success, there is no good reason why the expenses should be met out of the private resources of [the] shareholders”: Farrow v Registrar of Building Societies [1991] 2 VR 589, 595 per Marks J.

[37][2010] FCA 570.

Finkelstein J went on to question the rationale for the apparent practice of generally requiring those seeking leave to pursue a claim to bear, in the first instance, the costs of the company, observing that:

[8] To be quite frank, it is by no means clear why this general approach, if this is the general approach, has been adopted. First of all, the discretion conferred by s 242 is unconfined. Second, the Explanatory Memorandum states (p 26 at [6.19]): “The Court’s discretion regarding the allocation of costs is aimed at providing an additional safeguard in respect of use of company funds. In particular, the Court would be able to protect a bona fide shareholder against liability for costs indemnifying them out of company funds while at the same time allowing the Court a further means of discouraging unmeritorious or doubtful action.” It might therefore be true, as K L Fletcher writes, that s 242 is “deliberately drafted in a manner that denies the successful applicant the assurance that court recognition will result in the company becoming liable for the reasonable costs of litigating on its behalf”: K L Fletcher, CLERP and Minority Shareholder Rights (2001) 13 AJCL 290, 299. But Parliament seems to have had in mind that in appropriate circumstances the company should meet the costs. The only question is: what are those circumstances?
[9] The purpose of permitting a person to bring an action in the name of the company is to prevent conduct which involves some element of harm. In most cases the wrongdoer will be in control of the company. That will be the reason the company itself is not bringing the action. The purpose of the exceptions outlined in Foss v Harbottle, as well as the purpose of Part 2F.1A, is to increase the likelihood that someone brings a claim which the company ought to have commenced. In those circumstances, I can think of no good reason why the company should not bear the costs. Put another way, the principle adopted by Marks J should continue to apply under the statute.
[10] This is not to suggest that a costs order will be made in all cases. For example, in Fiduciary Limited v Morningstar Research Pty Ltd (2005) 53 ACSR 732, Austin J refused to make a costs order where the company’s claim was but one aspect of a much wider dispute between the parties.
[11] If a costs order is made and at any later time it turns out the claim is unmeritorious, the costs order can be recalled. That is what happened in Farrow v Registrar of Building Societies. At the time the costs order was made, the plaintiff appeared to have a good claim, although, as Marks J said, he was not able to fully assess the strength of the claim. During the trial, however, things took a turn for the worse. Ultimately the plaintiff was forced to discontinue the suit. As a result, the judge was asked to, and he did, revoke the costs order.

It should be noted that the company in question in Links Golf had substantial revenues and operating profits.[38]
[38]Links Golf, [12]. See also Steinier v Sunlea Enterprises Pty Ltd [2016] WASC 81, a case which cites Links Golf, and in which Martino J determined that the costs of litigation to be brought in the name of the company should be borne by it, considering that to be an ‘appropriate domestic arrangement’ in that case: at [92].

Links Golf was cited by Black J in Re Wan Jia (Aust) International Development Pty Ltd,[39] but his Honour declined to make an order for the company to bear the costs of the defence of the relevant proceedings, and bring a cross-claim, noting that the issues involving the company arose in what was, in substance, a dispute between its shareholders. Black J, however, left the path open for the position on costs to be revisited later, noting at that:[40]

In my view, the court will be in a significantly better position to exercise its discretion as whether JSC or the Company should bear those costs when the Commercial List Proceedings have been resolved, and the prudent course is to defer making a ruling as to the costs of those proceedings until that point. That position may also be affected by any order as to costs made in those proceedings.

[39][2012] NSWSC 1007.

[40]Re Wan Jia (Aust) International Development Pty Ltd [2012] NSWSC 1007, [31].

This disposition was reflected in the orders made, which included provision for an avenue to revisit costs in the following terms:[41]

The court notes the Plaintiff’s undertaking to the court to pay and bear, and indemnify, the Third Defendant against all costs (including legal costs on a solicitor and own client basis), charges and expenses of and incidental to the bringing and continuation of the derivative defences and claims for which leave is granted, on and from the date such leave is granted. This undertaking does not prevent the Plaintiff from approaching the court at an appropriate time for further orders that the Third Defendant or the First Defendant bear those costs, charges and expenses.

[41]Re Wan Jia (Aust) International Development Pty Ltd [2012] NSWSC 1007, [32(2)] (Black J).

An example of a case in which a later application was made to recover the costs of running litigation pursuant to a grant of leave is Argus Group Pty Ltd v Litigation Lending Services Ltd (No 2).[42] There, Gray J determined an application, brought under s 242 after the conclusion of the litigation in respect of which leave was previously obtained under s 237. Having referred to Links Golf, and the earlier decision of Marks J in Farrow v Registrar of Building Societies[43] (to which Finkelstein J also referred in Links Golf), Gray J determined that the plaintiffs should be indemnified by the company for the shortfall between their actual costs and the amounts recovered from the unsuccessful defendants in the underlying litigation.[44]
[42][2015] SASC 20.
[43][1991] 2 VR 589.
[44]Argus Group Pty Ltd v Litigation Lending Services Ltd (No 2) [2015] SASC 20, [8]-[13].

Any contention that the company should bear the costs of the litigation, particularly if made in conjunction with the application for leave, may also falter if there is no evidence capable of satisfying the Court that the company has the financial capacity to fund the litigation and that funding the litigation will not adversely affect the conduct of the company’s business operations or its asset base. In Swansson, Palmer J considered, in obiter, whether (had leave been granted) the costs of the derivative action should be borne by the company. Palmer J cautioned that:[45]

Before the court can make such an order there must be evidence as to the company’s ability to pay the costs of the proposed derivative action as at the time that leave is sought.
[45]Swansson, [75].

Consideration
Standing

I am satisfied that each of the plaintiffs is a person referred to in s 236(1)(a) of the Act, and therefore each able to apply for leave under s 237 to intervene in the County Court Proceeding for the following reasons:

(a) the first plaintiff, Mr Song, is a member of Northern Pro, which is a related body corporate[46] of Woodbine, and thus a person falling within s 236(1)(a)(i);

(b) the second plaintiff, Ms Ma, is both a former member of Woodbine and a former officer of Woodbine (having been a director between 8 December 2015 and 18 January 2016), and thus a person referred to in s 236(1)(a)(i) and (ii); and

(c) the third plaintiff, Ms Liu, has standing as a current member of Woodbine, and thus a person covered by s 236(1)(a)(i).[47]

[46]Section 50 of the Act provides that a holding company of another body corporate and that body corporate are related to each other, as is a subsidiary of another body corporate and that body corporate. Pursuant to s 46 of the Act, one body corporate is the subsidiary of another body corporate if that other body corporate, inter alia, controls the composition of the first body corporate. Woodbine is the majority shareholder of Northern Pro and Mr Song is a member of Northern Pro.

[47]As noted by Ms Liu in her affidavit of 18 August 2021, she is recorded on the ASIC extract as having been a director of Woodbine between 3 February 2016 to 30 April 2018, however she deposes to not having been aware of that appointment or having consented to it.

The plaintiffs contended that Ms Ma also has standing pursuant to s 236(1)(a)(i) of the Act on the basis that she is entitled to be registered as a member of Woodbine. This submission arises from her contention — not contested by Mr Li, but also untested in the context of Mr Li’s decision not to contest the grant of leave — that Mr Li holds the 90 shares in Woodbine on trust for her. Given that Ms Ma has standing on other bases, it is not necessary to determine whether she has standing as a beneficiary, assuming the trust she asserts exists. Nevertheless, Ms Ma’s belief that she holds the majority of the shares in Woodbine through a trust is relevant to the good faith analysis.

Whether it is probable that Woodbine will not itself properly take responsibility for the County Court Proceeding or steps in it

The plaintiffs submit that Woodbine has not, and will not (absent the grant of leave sought) itself properly take responsibility for the conduct of the County Court Proceeding. In support of this submission, they highlight that:

(a) Whereas Ms Xiu claims that she entered into a loan agreement with Mr Li personally, the jointly filed defence ‘shows that Mr Li is diverting liability on to Woodbine and Woodbine is accepting all liability’.

(b) No defence has been filed to the second further amended statement of claim of Ms Xiu despite it expanding upon the allegations made, including by the introduction of claims made against Mr Li in his capacity as a director of Woodbine.

(c) Ms Xiu’s claims in the County Court Proceeding include that she intended the funds for Mr Li (such that their payment to Woodbine was a mistake). The plaintiffs contend that the apparent actual receipt of the funds by Mr Li into his bank account provides Woodbine with a complete defence to the County Court Proceeding; a defence which is not being advanced by the company under Mr Li’s control.

(d) To the extent that the claims made against Woodbine for breaches of fiduciary duty and breaches of trust are made out, they were occasioned by the conduct of Mr Li, and ‘notices of indemnity or contribution or claims seeking compensation by Woodbine against Mr Li will need to be commenced’; but such actions clearly will not be taken while Mr Li remains in control of giving instructions on behalf of Woodbine.

(e) Orders concerning discovery (both the making and giving thereof) have not been complied with.[48]

(f) Woodbine ought, in the circumstances, to be obtaining discovery from Mr Li.

[48]At the hearing, the Court was informed that the discovery orders had since been vacated by the orders made by the County Court on 14 September 2021. The parties expect the discovery orders to be revisited when the matter is next before the County Court, on 12 October 2021.

I am satisfied that, having regard to the issues in the County Court Proceeding, the conflict between the interest of Mr Li and the company, and the conduct of the County Court Proceeding to date, it is probable that, absent a grant of leave, Woodbine will not properly take responsibility for the proceedings or the steps in them.

Properly taking responsibility for proceedings against a company involves consideration of the defences available to it, and consideration of whether the company has any cross-claims or contribution claims that should be advanced. As matters stand, given Mr Li is the sole director of Woodbine, is also a defendant in the County Court Proceeding in his personal capacity and his conduct (alleged in some respects by Ms Xiu to have been dishonest) is said to have resulted in Woodbine’s alleged liability to Ms Xiu, there is no-one capable of giving instructions on behalf of Woodbine that address its interests independently of those of Mr Li. There is also no‑one capable of giving instructions independent from Mr Li, for Woodbine’s lawyers to give proper consideration to claims that Woodbine may have against Mr Li. While the defence filed to the amended statement of claim does not indicate total capitulation on Woodbine’s part (at least to the extent that a contention is advanced that repayment is not yet due), it made significant admissions that are contrary to Woodbine’s interests, and favourable to the interests of Mr Li.[49] Moreover, no claims have been advanced (nor is there any evidence of consideration having been given to claims that might be advanced) by Woodbine against Mr Li, whether for contribution or to recoup any loss or damage that might be suffered by Woodbine if it is liable to Ms Xiu and that position has arisen through an actionable breach of Mr Li’s duties to the company.
[49]That is not to say the admissions made were improperly made; that is a matter for the County Court to consider should any attempt be made to withdraw them.

Good faith

Having regard to the principles to be applied in assessing the good faith of applicants for derivative leave, as set out Swansson and the cases referred to above, I am satisfied that each of the plaintiffs is acting in good faith. Each of them has an interest in the financial health, assets and liabilities of Woodbine; none of them is officiously seeking to intervene to advance a personal interest disconnected with ensuring that the interests of Woodbine are properly protected so as to ensure, to the maximum extent possible, that its assets will be maximised, and its liabilities minimised (within the bounds of the proper conduct of litigation).

In Mr Song’s case, his motivations to intervene include a sense of responsibility for having introduced Ms Ma and Ms Liu to Mr Li. The plaintiffs contend that this sense of responsibility is consistent with him acting in good faith, much as the sense of responsibility held by a former director may be consistent with acting in good faith.[50] It is not necessary to embrace the analogy to accept that Mr Song is acting in good faith. While Ms Ma and Ms Liu are also creditors of Woodbine, I am satisfied that their desire to take carriage of Woodbine’s defence is not an abuse of process of the kind identified by Palmer J in Swansson. They have identified serious risks to Woodbine in its interests not being properly advanced in the County Court Proceeding and, if successful in the strategy they wish to advance on Woodbine’s behalf, the company’s position will be enhanced. Moreover, they both have an interest (or in Ms Ma’s case, she believes she has an interest as a holder of the beneficial interest) in the shares in Woodbine.
[50]Charlton v Baber [2003] NSWSC 745, [43] (Barrett J).

The plaintiffs have also identified what they believe to be a good defence that ought to be advanced on Woodbine’s behalf; namely the receipt of the funds by Mr Li, consistent with the contention of Ms Xiu in the County Court Proceeding that she intended to advance funds to Mr Li, and their receipt by Woodbine was mistaken. They have also identified claims that they, reasonably, consider ought to be advanced by Woodbine against Mr Li. While these claims have only been identified at a relatively high level,[51] that is explicable by the plaintiffs’ present lack of access to Woodbine’s books and records. In any event, the current status of the pleadings in the County Court Proceeding raises the obvious potential for Woodbine to advance claims against Mr Li.
[51]Eg, no draft pleading has been put on.

Further, each of the plaintiffs has offered to indemnify the costs of Woodbine, which supports a finding of good faith.[52] After the Court raised with counsel whether it was proposed to put on evidence that the plaintiffs have the financial capacity to make good on the proffered undertakings, Mr Song put on a further affidavit deposing to his asset position, and offering to undertake to secure the indemnities proffered by Ms Ma and Ms Liu. While it may be inferred from this state of affairs that Ms Ma and Ms Liu lack the assets necessary to support the full financial value of the undertakings they proffer, their willingness to expose themselves financially — whatever their assets may be — supports the finding that their application is made in good faith. The utility of their undertaking is of more direct relevance to the consideration of best interests and s 242. I return to the form of undertaking that will be required below.
[52]South Johnstone Mill Ltd v Dennis (2007) 163 FCR 343, [69] (Middleton J). See also Re Dynamic Industries Pty Ltd [2014] VSC 101, [95] (Robson J).

Best interests

In support of their submission that it is in the best interests of Woodbine that leave be granted, the plaintiffs submit that:

(a) the evidence is that there is real value in Woodbine’s shareholding in Northern Pro (ie, Woodbine is ‘worth saving’), although they do not know what other assets Woodbine has;

(b) Woodbine is already an involuntary party to the County Court Proceeding, which also involves personal claims made against Mr Li;

(c) there is evidence suggesting that the funds at issue in the County Court Proceeding found their way to Mr Li’s bank account, but this matter has not been advanced in support of Woodbine’s defence in the County Court Proceeding;

(d) unless leave is granted, Woodbine’s defence in the County Court Proceeding will not be properly conducted, and steps will not be taken to claim contribution or indemnity from Mr Li, or claim compensation from him; and

(e) they are willing to indemnify Woodbine for the costs of the County Court Proceeding.

I am satisfied that, in view of the issues arising in the County Court Proceeding, and the position of conflict in which Mr Li finds himself, it is in the best interests of Woodbine that persons who are not personally involved in the litigation ought to have carriage of its defence. I am also of the view that, having regard to the evidence which, on the material available to me, appears to show (subject to further explanation or evidence) that the funds advanced by Ms Xiu found their way to an account in Mr Li’s name, that it is in the best interests of Woodbine that consideration be given to advancing claims against Mr Li to defray any exposure Woodbine may have to Ms Xiu or otherwise recoup from Mr Li such loss as Woodbine may be exposed to in the County Court Proceeding. Those matters simply cannot be attended to while Mr Li remains in sole control of the conduct of the County Court Proceeding on Woodbine’s behalf.

I am also of the view that serious attention should be given to whether a defence ought to be filed on behalf of Woodbine to the second further amended statement of claim in the County Court Proceeding. In discussion with counsel for the defendants on 27 August 2021, the Court was informed that, so far as counsel was aware, there had been no defence to the second further amended statement of claim prepared, he had no instructions do so and, so counsel said, that would mean that whatever the existing defence is would stand. While the existing defence may stand, so far as it goes, the failure to plead to the latest amendments by Ms Xiu may give rise to admissions on Woodbine’s part or (unless rectified) prejudice Woodbine’s ability to raise matters at trial which it has not properly pleaded.[53] In any event, the existing defence does not grapple with the additional issues raised by Ms Xiu’s latest claim. Those issues extend beyond the issues raised by the earlier formulations of Ms Xiu’s claim.
[53]Consideration will need to be given to the operation of rr 13.12 and 13.13 of the County Court Rules.

The rebuttable presumption in s 237(3)

Section 237(3) of the Act provides for a rebuttable presumption that granting leave is not in the best interests of the company in certain circumstances. Those circumstances include where the proceedings in question are ‘by a third party against the company’ and the company has, relevantly, decided not to defend the proceedings or to discontinue, settle or compromise the proceedings, and all of the directors who participated in that decision acted in good faith and for a proper purpose, did not have a material personal interest in the decision and informed themselves about the subject matter of the decision to the extent they reasonably believed appropriate and rationally believed the decision was in the best interests of the company.

In the present case the rebuttable presumption does not arise because no decision has been made not to defend the County Court Proceeding. Moreover, even if such a decision had been taken, it would not have been one in which Mr Li did not have a material personal interest (given that Mr Li’s potential liability to the plaintiff in the County Court Proceeding would be reduced to the extent that Woodbine bears the liability and not Mr Li personally).

Written notice to Woodbine of intention to apply

I am satisfied that the notice requirement contained in s 237(2)(e)(i) is met as the requisite 14 days’ notice was given by the plaintiffs. The evidence of Ms Grace Xiao, solicitor for the plaintiffs, establishes that a letter notifying Woodbine of the plaintiffs’ intention to apply for leave, and the reasons for applying, was sent to Woodbine on 4 May 2021. Although the letter to Woodbine was returned to the plaintiffs’ solicitors in an envelope marked ‘return to sender’, it was sent to Woodbine at its registered office. In any event, it is clear from subsequent email correspondence that the letter of 4 May 2021 did come to the attention of the solicitors acting for Woodbine and Mr Li in the County Court Proceeding by no later than 25 May 2021 when they sent a holding response. For that reason, even if notice was not given, I would grant the leave sought in any event pursuant to s 237(2)(e)(ii).

Whether the plaintiffs should be required to give an undertaking to meet Woodbine’s costs in the County Court Proceeding

As noted above, the ex parte freezing order made by the County Court two days before the hearing of this matter, did not include any exception for Woodbine’s legal costs of the County Court Proceeding. While the plaintiffs’ position, prior to that occurring, was that they ought not be required to bear the costs of the County Court Proceeding, the freezing order having been made, counsel for the plaintiffs rightly acknowledged there would be no other way for the costs to be met, at least in the short term. In other words, the making of the freezing order in the terms in which it was made, made it inevitable that the plaintiffs would have to bear Woodbine’s legal costs, at least until the freezing order is returned to the County Court on 12 October 2021, at which time it may be varied or vacated (or remain, unaltered).

Nevertheless, because the question of how Woodbine’s costs ought to be met will need to be addressed even if the freezing order is vacated or varied, and also because the question extends to such liabilities as Woodbine may incur to other parties, it is appropriate that I address the question of Woodbine’s costs and liabilities. I set out below my reasons for determining that the plaintiffs ought, as a condition of leave being granted, to bear Woodbine’s costs of the County Court Proceeding in the first instance, and also to indemnify it against liabilities it may incur to other parties in the County Court Proceeding, while preserving their ability to apply for the costs and liabilities to be borne otherwise, when more is known either about Woodbine’s financial position, or the outcome of the litigation, or both.

The plaintiffs rely on the decision of Finkelstein J in Links Golf and submit that the present case is ‘conceptually similar’ in that the leave is sought to prevent conduct that has some element of harm and where the alleged wrongdoer is in control of the company. While willing to give an undertaking to indemnify Woodbine, if required, they submit that it should not apply ‘with respect to any final order for costs in the proceeding’, relying on the carve-out to the undertakings given in Ehsman v Nutetime International (Ehsman) whereby Austin J excluded from the indemnity the costs the company may incur in the proceedings as a defendant to the personal claims made by the plaintiff, and also excluded any final order for costs made in the proceedings.[54]
[54](2006) 58 ACSR 705; [2006] NSWSC 887, [64(2)] (Austin J).

The first carve-out in Ehsman was required because, in that case, leave was granted to the plaintiff, Ms Ehsman, to bring derivative proceedings on behalf of the company as part of existing proceedings in which the company was already a defendant to personal claims made by Ms Ehsman against the company.[55] In this case, the plaintiffs do not otherwise make claims against Woodbine in the proceeding for which derivative leave is sought. As such, the rationale for the first carve-out provided in Ehsman does not apply.
[55]Ehsman, [27] (Austin J).

In explaining the rationale behind the second carve-out, Austin J said:[56]

Further, the indemnity needs to be qualified so that it does not apply to any cost order made by the court with the intention of overriding the effect of the undertaking. The main purpose of that qualification is to enable the trial judge to make such order as to costs as he or she thinks appropriate after the final hearing, untrammelled by an undertaking that may cause an order for costs against the company to rebound against the plaintiff; but the qualification may also be useful to allow the court to override the undertaking in circumstances not presently foreseeable.

[56]Ehsman, [62] (Austin J).

The County Court will, of course, retain its discretion to determine which party to the litigation is to bear the costs and what costs orders it will make. However, I do not consider there is any reason why final costs orders should be carved out of the indemnity to enable the County Court to (as Austin J put it) ‘override’ the undertaking.[57] As noted, the orders I propose below preserve the potential for the burden of costs and liabilities to be revisited by other means, namely pursuant to s 242.
[57]Even if that were possible as a matter of jurisdiction, having regard to the proposed orders I set out below, which make the indemnity a condition of leave.

As the foregoing discussion of the authorities shows:

(a) the question of how the company’s costs, and exposure to costs orders, are to be met, falls for consideration under the good faith and best interests criteria, and is also within the Court’s power to control pursuant to s 242; and

(b) undertakings to meet the costs of the company, including adverse costs orders, are usually required, at least in the first instance and subject to further orders of the Court.

While undertakings are commonly required, most of those cases in which such undertakings are given concern applications to bring proceedings in the name of the company. In such cases, by the grant of leave, the company will be incurring expenses it would not otherwise incur, and taking on the exposure to adverse costs orders if the proceeding fails, being exposure it would not otherwise have. Ought the position be any different where leave is sought to intervene in a company’s defence? After all, the company is already embroiled in litigation, is incurring expenses and will be exposed to adverse costs orders if the company is found liable to the plaintiff(s).

Whatever the merits of such an argument in a ‘bare defence’ scenario, the present plaintiffs’ application goes further. The leave they seek is not only to defend the proceeding, but to make claims under r 11.15 of the County Court Rules, as well as to seek discovery from Ms Xiu and Mr Li. As such, by taking action against Mr Li in particular, the plaintiffs’ proposed course of action will inevitably increase Woodbine’s costs of running the litigation. Their intended course of action will also increase the number of persons to whom Woodbine may be liable pursuant to any future adverse costs orders, and will expose Woodbine to a liability to Mr Li if the company’s claims against him fail. While each case turns on its facts, requiring the undertakings is in keeping with the approach taken in Roach and FWV Stanke where leave to intervene to take carriage of a defence was coupled with leave to intervene to mount cross-claims or contribution claims and costs undertakings were required.[58]
[58]See the discussion at paragraphs 67 to 70 above.

In addition, the actions the plaintiffs anticipate pursuing on Woodbine’s behalf are likely to require applications to be made in the County Court to withdraw admissions, seek leave to file late notices under r 11.15 of the County Court Rules and, quite possibly, apply to vacate the trial date,[59] all of which may result in cost consequences for Woodbine, even if successful.
[59]Presently scheduled for 10 November 2021.

For these reasons, in my view the giving of undertakings to meet Woodbine’s costs, and to indemnify it against any adverse costs orders, should be required as a term upon which the leave sought is granted. Those undertakings will be subject to the plaintiffs’ ability to seek a further order from this Court pursuant to s 242 of the Act at a later date (which may, but need not be, following the conclusion of the County Court Proceeding).

There are additional reasons for requiring the undertakings. First, as the plaintiffs concede, there is no evidence about the assets of Woodbine, other than its shareholding in Northern Pro. As such, I cannot be satisfied that Woodbine can fund the anticipated course of action in the County Court, or to fund it without compromising its property development activities (about which little is known).

Secondly, there is no evidence before me about the likely quantum of Woodbine’s expenses.

Thirdly, while I am satisfied that it is in the best interests of Woodbine for the plaintiffs to have carriage of its defence and related actions in the County Court Proceeding (in place of Mr Li, who is conflicted), I am not in a position to assess (nor would it be appropriate to engage in any detailed consideration of) its prospects of success, particularly in relation to the claims foreshadowed against Mr Li. While Mr Li has elected not to defend the present application — and so has not advanced any alternate explanation for his apparent receipt into a personal account of the funds advanced by Ms Xiu — the factual narrative surrounding those funds and the use to which they were put, remains to play out in the County Court.

Fourthly, it is appropriate, and reflective of the authorities referred to in paragraph 66 above, for the question of who should ultimately bear the costs of the County Court Proceeding (the plaintiffs, or the company) to be determined once the outcome of the proceeding is clear, or, at the very least, more is known about the financial position of Woodbine and the costs expended, or likely to be expended, on the litigation.

As noted above, the asset position of Ms Ma and Ms Liu is unknown. Depending on the extent of Woodbine’s costs and liabilities, they may not have the assets to make good on their undertakings. However, it is clear that Mr Song does have the necessary means, and he has offered to undertake to stand behind the undertakings given by Ms Ma and Ms Liu. This additional undertaking on Mr Song’s part will be required as a condition of the grant of leave.

Access to the books and records of Woodbine

The final matter to deal with is the application for access to Woodbine’s books and records pursuant to s 247A of the Act. The plaintiffs seek an order that both they, and a representative of their legal and accounting advisors, be authorised to inspect the books and records of Woodbine. They submit that they will require access to the books and records of Woodbine in order to conduct the County Court Proceeding. I accept that submission, and note that the inspection of books and records under s 247A was not opposed by the defendants. I further note that the plaintiffs are persons applying for leave under s 237 and, following the grant of leave, will be persons granted leave under s 237. As such, they are persons in whose favour such an order may be made pursuant to s 247A(3).

Proposed orders

Subject to hearing from the parties on the form of orders and receiving the undertaking referred to in paragraph 3 below, I propose to make orders in the following form:

1. The plaintiffs have leave under s 237 of the Corporations Act 2001 (Cth) to intervene in County Court proceeding CI-20-01192 (the County Court Proceeding) to:

(a) take responsibility for the conduct of Woodbine’s defence of the County Court Proceeding; and

(b) bring claims in the name of Woodbine against Pin Li in the County Court Proceeding pursuant to Order 11 of the County Court Rules relating to the matters the subject of the County Court Proceeding.

2. The plaintiffs pay and bear (and indemnify Woodbine against) all costs, charges and expenses of and incidental to the County Court Proceeding (including any adverse costs orders) on and from the date leave is granted under s 237 of the Corporations Act 2001 (Cth). This order does not prevent the plaintiffs from approaching the Court at an appropriate time for further orders concerning those costs, charges and expenses.

3. The Court notes the first plaintiff’s undertaking to indemnify, be primarily liable, and make good any and all liabilities which the second plaintiff and the third plaintiff may incur as a result of order 2.

4. The first defendant is restrained from taking any steps on behalf of Woodbine in the conduct of the County Court Proceeding.

5. Pursuant to s 247A of the Corporations Act 2001 (Cth), the plaintiffs and one representative of each of the plaintiffs’ legal and accounting advisors are authorised to inspect the books of the Company (as the term ‘books’ is defined in s 9 of the Act).

6. There be no order as to the costs of this proceeding.

SCHEDULE OF PARTIES

S ECI 2021 02997
BETWEEN:
AO SONG	First Plaintiff
MUCEN MA	Second Plaintiff
YIBO LIU	Third Plaintiff
- and -
PIN LI	First Defendant
WOODBINE PROJECT PTY LTD (ACN 609 722 509)	Second Defendant

[2021] VSC 617

23 September 2021