Roach v Winnote Pty Ltd

[2006] NSWSC 231

Reported Decision: 57 ACSR 138

New South Wales

Supreme Court

CITATION:	Roach v Winnote Pty Ltd; Leslie & Anor - Applicants [2006] NSWSC 231
HEARING DATE(S):	31/03/06
JUDGMENT DATE :	5 April 2006
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Barrett J
DECISION:	Amended interlocutory process dismissed with costs
CATCHWORDS:	CORPORATIONS - statutory derivative action - leave previously granted for shareholder to represent company in defending certain litigation and pursuing cross claim - certain undertakings given to court by successful applicant and associate upon grant of leave to represent company - undertakings intended to protect company in respect of costs of the other litigation - other parties to the other litigation obtain therein costs order against company - those parties seek to be joined as defendants in the proceeding in which leave to represent company previously given - they foreshadow application as such defendants to enforce the undertakings - whether joinder should be ordered
LEGISLATION CITED:	Corporations Act 2001 (Cth), Part 2F.1A, s.237 Supreme Court (Corporations) Rules 1999, rules 1.3(2), 2.13(2) Uniform Civil Procedure Rules 2005, rules 6.24(1)
CASES CITED:	Australia and New Zealand Banking Group Ltd v Carpenter (unreported, NSWCA, 20 May 2005) Carpenter v Pioneer Park Pty Ltd (2004) 186 FLR 104 27 Carpenter v Pioneer Park Pty Ltd (2004) 211 ALR 457 Charlton v Baber (2003) 47 ACSR 31 Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732 McLean v Lake Como Venture Pty Ltd [2004] 2 Qd R 280 Metyor v Queensland Electronic Switching Pty Ltd [2003] 1 Qd R 186 Roach v Winnote Pty Ltd [2001] NSWSC 822 Smits v Roach (2002) 55 NSWLR 166 Smits v Roach (2004) 60 NSWLR 711 Smits v Roach [2004] NSWCA 463 Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313
PARTIES:	Walter Edward Roach - First Plaintiff Roach Industries pty Ltd - Second Plaintiff Winnote Pty Ltd - First Defendant Sydtech Pty Ltd - Second Defendant Neil Cussen - Third Defendant Kevin Shirlaw - Fourth Defendant John Anthony Leslie and Leonardus Gerardus Smits - Applicants
FILE NUMBER(S):	SC 3801/01
COUNSEL:	Mr T.G.R. Parker SC/Mr N.J. Owens - Plaintiff Mr M. White, Solicitor - Defendants Applicants in Person
SOLICITORS:	Henderson Taylor Workplace Lawyers - Plaintiffs Eakin McCaffery Cox - Defendants Applicants in Person

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

BARRETT J

WEDNESDAY, 5 APRIL 2006

3801/01 WALTER EDWARD ROACH & ANOR v WINNOTE PTY LIMITED & ORS; APPLICANTS: JOHN ANTHONY LESLIE & ANOR

JUDGMENT

1 The originating process in this proceeding (3801/01) was filed as long ago as 31 July 2001. Judgment was given by Santow J (as his Honour then was) on 10 September 2001: see Roach v Winnote Pty Ltd [2001] NSWSC 822. He made an order under s.237(2) of the Corporations Act 2001 (Cth) allowing the first plaintiff (Mr Roach) to “intervene” in certain other proceedings on behalf of and in the name of the first and second defendants (Winnote Pty Ltd and Sydtech Pty Ltd) and, in particular, to defend those other proceedings by filing a defence in a specified form and to prosecute a cross claim in a specified form. Those other proceedings were proceedings 50099/99 then pending in the Commercial List. More will be said about them later.

2 There were two plaintiffs in this proceeding (3801/01), being Mr Roach and Roach Industries Pty Ltd. Although leave under s.237 was granted to Mr Roach alone, both the plaintiffs gave to the court, upon the making of the order under s.237 on 10 September 2001, undertakings as follows:

“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.”

3 Two points of clarification need to be made about these undertakings. First, references to the “proceedings referred to below” and “the Proceedings” are references to proceedings 50099/99. Second, references to “the Sixth and Seventh Defendants” must be understood as references to Winnote and Sydtech: they are named as the first and second defendants (out of a total of four defendants) in this present proceeding (3801/01) but as the sixth and seventh defendants in 50099/99.

4 On 20 March 2002, this present proceeding came before the court constituted by McClellan J (as his Honour then was). Mr Roach was given leave to file an amended cross claim and a further defence in 50099/99. This was, it appears, an adjunct to the original grant of leave under s.237. Both plaintiffs gave certain further undertakings to the court as follows:

“1. To indemnify Winnote Pty Ltd and Sydtech Pty Ltd against any costs liability arising from any Orders of the Court in Proceedings 50099 of 1999.
2. To consent to an order that they be liable along with Winnote Pty Ltd and Sydtech Pty Ltd for any Order for costs in favour of the Plaintiffs in Proceedings 50099 of 1999 as against either Winnote Pty or Sydtech Pty Ltd.
3. To provide security for that indemnity and any liability for costs pursuant to an order made consequent upon that consent by way of bank guarantee in a form satisfactory to the Registrar in the amount of $40,000.00.”

5 By an amended interlocutory process filed on 7 December 2005, two persons now seek to be joined as defendants in this proceeding (3801/01). The existing defendants are Winnote and Sydtech (first and second defendants) and their two liquidators (third and fourth defendants), the two companies having been, at all material times, in liquidation. The persons who now apply to be joined as fifth and sixth defendants are John Anthony Leslie and Leonardus Gerardus Smits.

6 The desire of Mr Leslie and Mr Smits to be defendants in this present proceeding (3801/01) comes from the fact that they are two of the three plaintiffs in proceedings 50099/99, being the proceedings in which Mr Roach became entitled, by virtue of the order made in the present proceeding on 10 September 2001, to represent and act on behalf of Winnote and Sydtech as defendants.

7 It is necessary to say more about proceedings 50099/99. Mr Leslie and Mr Smits were, at relevant times, in practice together as solicitors. Their practice service company was Plantoy Pty Ltd. It is the third plaintiff in 50099/99. By their summons filed in 50099/99 on 11 August 1999, Mr Leslie, Mr Smits and Plantoy sued Mr Roach, Mrs Roach, Winnote and Sydtech (which I shall call “the Roach interests”) as defendants. (There were, at inception, other defendants as well, those I have mentioned being the first, fifth, sixth and seventh; but the second, third and fourth defendants later ceased to be relevant and may be ignored). Mr Leslie, Mr Smits and Plantoy maintained against the Roach interests claims to recover professional fees and damages. They advanced causes of action for breach of contract and statutory misconduct under the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987. Mr Leslie and Mr Smits had acted as solicitors for those defendants in connection with litigation against another firm of solicitors based on allegations of negligent advice. There was a cross claim which was pursued by the two Roach companies (Winnote and Sydtech) under the direction of Mr Roach pursuant to the leave granted in the present proceedings.

8 Proceedings 50099/99 were heard by McClellan J. Judgment was given on 19 June 2002. The claims by Mr Leslie and Mr Smits against the Roach interests were dismissed on 6 August 2002: see Smits v Roach (2002) 55 NSWLR 166.

9 There was an appeal from the decision of McClellan J. The appeal was allowed on 15 July 2004: see Smits v Roach (2004) 60 NSWLR 711. The Court of Appeal made certain orders. Those orders were varied on 17 December 2004: see Smits v Roach [2004] NSWCA 463. The details of the orders do not matter for present purposes. It is sufficient to note that certain costs orders were made against Winnote and Sydtech and in favour of Mr Leslie and Mr Smits.

10 There was subsequently a grant of special leave to appeal by the High Court of Australia. The appeal has been heard but not yet decided.

11 It is in the context just described that Mr Leslie and Mr Smits wish to be joined as defendants in the present proceeding, that is, proceeding 3801/01 in which Mr Roach was granted leave under s.237(2) to represent Winnote and Sydtech in proceeding 50099/99. The reason they wish to be joined may be gathered from the description of the relief they propose seeking in this proceeding if made parties. Claims for that relief are set out in their amended interlocutory process. If and when they achieve standing to do so, Mr Leslie and Mr Smits will, in this proceeding, press for the following orders:

(a) an order that Mr Roach and Roach Industries (the plaintiffs in this proceeding) consent to the making of an order in 50099/99 that Mr Roach and Roach Industries be liable along with Winnote and Sydtech for any order for costs in 50099/99 against either of those companies and in favour of the Leslie/Smits parties who are the plaintiffs in 50099/99;
(b) an order that, in case of non-compliance with (a) above as to the giving of consent, the Registrar sign the consent on behalf of Mr Roach and Roach Industries; and
(c) an order that Mr Roach and Roach Industries provide security for any liability for costs under any order made in 50099/99 consequent upon the giving of the consent, such security to be by way of bank guarantee in favour of Mr Leslie and Mr Smits.

12 As was pointed out by Mr T.G.R. Parker SC who appeared for the Roach interests on the hearing of the amended interlocutory process, the matter of adding defendants to a proceeding such as the present to which the Supreme Court (Corporations) Rules 1999 apply is governed by rule 2.13(2) of those rules:

“(2) If the Court considers that the attendance of a person to whom leave has been granted under subrule (1) has resulted in additional costs for any party, or the corporation, which should be borne by the person to whom leave was granted, the Court may:
(a) direct that the person pay the costs, and
(b) order that the person not be heard further in the proceeding until the costs are paid or secured to the Court’s satisfaction.”

13 It is, as I understand it, accepted that Mr Leslie and Mr Smits are creditors of Winnote and Sydtech, with the result that they have a status that qualifies them to be joined under rule 2.13(2). The Supreme Court (Corporations) Rules are, however, silent as to the criteria to which regard is to be had upon a joinder application, with the result that, in conformity with rule 1.3(2), the “other rules of the Court” are to be applied. It is therefore necessary to have proceed in accordance with rule 6.24(1) of the Uniform Civil Procedure Rules 2005:

“ Court may join party if joinder proper or necessary

(cf SCR Part 8, rule 8 (1); DCR Part 7, rule 8 (1); LCR Part 6, rule 8 (1))
(1) If the court considers that a person ought to have been joined as a party, or is a person whose joinder as a party is necessary to the determination of all matters in dispute in any proceedings, the court may order that the person be joined as a party.”

14 It is necessary, at this point, to consider the nature of the present proceeding 3801/01 and the effect of the substantive order made by Santow J on 10 September 2001.

15 Part 2F.1A of the Corporations Act enables the court to allow certain persons associated with a company to act on its behalf in bringing or defending litigation. The provisions are, in that way, a means of redressing inaction by which the company is afflicted in relation to the particular litigation. One of the essential pre-conditions to a grant of leave to bring or defend proceedings on a company’s behalf is that the court is satisfied that “it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them” (s.237(2)(a)).

16 In the present case, the Roach interests sought two substantive orders in the alternative. The second (or alternative) was an order under s.237 in favour of both plaintiffs (Mr Roach and Roach Industries). Such an order was made in favour of Mr Roach alone. There was then no longer any claim outstanding under the originating process. An order under s.237 granting leave to represent a company is a final order: see Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313 at p.318. Final relief was thus granted in this proceeding on 10 September 2001.

17 That, in Mr Parker’s submission, means that this proceeding is at an end, so that there is no necessity, in terms of rule 6.24(1) of the Uniform Civil Procedure Rules, for Mr Leslie, Mr Smits or anyone else to be joined as a party in order that “all matters in dispute” may be resolved. In Mr Parker’s submission, there are no longer any “matters in dispute” in this proceeding. There is accordingly no purpose to be served by an order making Mr Leslie and Mr Smits parties and no basis on which such an order could properly be made.

18 Mr Leslie and Mr Smits appeared in person. Both of them made submissions. They say that the approach I have just outlined overlooks the important matter of the undertakings – both those given to the court constituted by Santow J on 10 September 2001 and those given to the court constituted by McClellan J on 20 March 2002. On each occasion, the undertakings were given in this proceeding; and the second of the occasions was several months after final relief had been granted by way of the grant of leave under s.237. The existence of the undertakings means, according to Mr Leslie and Mr Smits, that this proceeding is still extant and alive. Furthermore, they say that there has been non-compliance with the undertakings in two or perhaps three respects. First, while bank guarantees were furnished as contemplated by undertaking 2 of 10 September 2001 and undertaking 3 of 20 March 2002, the form of bank guarantee was never pronounced “satisfactory” by a registrar of the court. Second, Mr Roach and Roach Industries have not given the consent contemplated by undertaking 2 of 20 March 2002. These matters, if established, would point to non-compliance with the undertakings. The third matter of complaint stands in a somewhat different light. Mr Leslie and Mr Smits say that, although the two bank guarantees (regarded by them as non-compliant as to form) were given by Mr Roach and Roach Industries to Winnote and Sydtech as contemplated by the undertakings, the undertakings were later surrendered by the liquidators of the recipient companies or, more accurately, returned by the solicitors acting for those companies (and their liquidators) to the solicitors acting for the Roach interests. This apparently happened after the conclusion of proceeding 50099/99 at first instance before McClellan J. Mr Leslie and Mr Smits see any such surrender or return as inconsistent with the undertakings given to the court by Mr Roach and Roach Industries.

19 It is the contention of Mr Leslie and Mr Smits that they, as parties to 50099/99, were the intended beneficiaries of – or at least have a relevant interest in the due observance of – the undertakings given to the court in the present proceeding 3801/01, with the result that, even though they have hitherto not been parties to this proceeding, they should now become parties so that they may take appropriate action to redress what they regard as the several aspects of non-compliance with the undertakings on the part of Mr Roach and Roach Industries. Their interest arises from the fact that they have the benefit of a costs order against Winnote and Sydtech in 50099/99 (being one of the orders made by the Court of Appeal) and have some expectation that they may come to occupy a better position regarding costs, as against Winnote and Sydtech, as a result of the High Court appeal. They are therefore concerned to see that Winnote and Sydtech, which are in the course of being wound up and are apparently impecunious, obtain what is due to them in conformity with the undertakings given to the court by Mr Roach and Roach Industries.

20 The nature and purpose of proceedings in which leave is sought under Part 2F.1A were discussed by me in Carpenter v Pioneer Park Pty Ltd (2004) 186 FLR 104. In that case, a person with standing under s.237(1) sought leave to commence a proceeding on behalf of the relevant company against a bank. That potential defendant sought to be joined as a party to the s.237 application. Joinder was refused on the basis that participation by the potential defendant was not necessary to ensure that all matters relevant to the s.237 application itself were determined and adjudicated. I described the purpose and scope of Part 2F.1A as follows (at p.109):

“Part 2F.1A is concerned with the domestic process by which a company makes decisions relevant to initiation and continuation of legal proceedings. The statutory provisions aim to counter the effects of inaction on the part of those who would normally decide such matters internally. In most cases, those persons will be directors whose inaction may be a product of self-interest. Here, the inaction upon which Mr Carpenter seems likely to rely is the inaction of an unfunded liquidator. The provisions do not, in my opinion, have in view the welfare or interests of persons who are, from the company’s perspective, ‘outsiders’. They enable anyone with a particular form of ‘insider’ status described in s.236(1)(a) to seek the court’s assistance in taking over the role of the normal decision makers in relation to a particular proceeding. The court’s function is essentially a screening function. It must assess against specified criteria the litigation proposal the applicant has in mind for the company. If that proposal is found by the court to meet the criteria, it must grant leave enabling the applicant to pursue it for the company.”

21 The basis on which joinder was refused was stated as follows (also at p.109):

“The intended defendant in the proposed proceeding no doubt has an interest of a general kind in the question whether leave should be granted under Part 2F.1A. If leave is granted, that person will be sued (or is likely to be sued). If it is not granted, the person will not be sued, at least at the instigation of the person who has failed to obtain leave under Part 2F.1A. But this cannot, in my view, form a basis for intervention under Part 8 rule 8. I accept, in this respect, the submissions made by Mr Garnsey. The question whether leave should be granted under Part 2F.1A can be decided perfectly well in the absence of the intended defendant. No legal liability or other legal consequence will accrue to that person by any grant of leave. The presence and involvement of the person when the leave question is argued is in no sense ‘necessary’ to an effectual and complete determination of the matters with which Part 2F.1A is concerned.

22 The Court of Appeal subsequently refused leave to appeal from this decision: Australia and New Zealand Banking Group Ltd v Carpenter (unreported, NSWCA, 20 May 2005).

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. I quote from the judgment of Austin J at p.745:

“In my opinion, Mr Rich has made out the grounds for bringing a derivative action under s 237 to assert MDU's claims, provided that the best interests of the company are properly protected. That will be so, and the principles regarding provision of security for costs and compliance with the court’s orders will be properly reflected, if the granting of leave is made subject to terms in the nature of conditions precedent to leave, requiring:
(1) Mr Rich to undertake to bear the costs of the pursuit of MDU’s claims, indemnify MDU and not claim contribution from it in respect of any adverse costs order;
(2) the company or Mr Rich on its behalf to join in the provision of security for costs that I have ordered to be provided by Fiduciary and Fiduciary Consultants, and for pursuit of the company’s claims to be stayed pending compliance; and
(3) the plaintiffs to pay the outstanding costs assessed in respect of the interlocutory application heard by Barrett J.”

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 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.

30 In the present case, the undertakings given by Mr Roach and Roach Industries on 10 September 2001 and 20 March 2002 represent no more than part of the protection for Winnote and Sydtech that the court saw fit to require of Mr Roach and Roach Industries. The plaintiffs in proceedings 50099/99 were not – and were not intended to be – the beneficiaries of the undertakings. The court’s concern was to prevent the full burden of the costs of pursuing the defence and cross claim in 50099/99 from falling upon Winnote and Sydtech. The matter was a domestic one within each of those companies.

31 It cannot be denied that Mr Leslie and Mr Smits, who have costs orders against Winnote and Sydtech in proceeding 50099/99, have an interest in seeing those companies receive the full financial benefits intended to be secured to them by the undertakings given to the court by Mr Roach and Roach Industries in this proceeding 3801/01. But their interest is the interest that any creditor has in seeing the liquidators pursue corporate benefits to the advantage of the body of creditors. Creditors who believe that a liquidator has been derelict or inattentive may resort to various means in an attempt to remedy the perceived shortcoming. If Mr Leslie and Mr Smits wish to pursue their present concerns, they may consider avenues of these kinds.

32 It is not appropriate that those concerns be pursued in this concluded proceeding 3801/01. Nothing remains to be done in this proceeding. It is in no sense necessary that Mr Leslie and Mr Smits be parties to it.

33 The amended interlocutory process of John Anthony Leslie and Leonardus Gerardus Smits filed on 7 December 2005 is dismissed with costs.

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