Siah v Firstland Unlimited Pty Ltd
[2019] WASC 148
•9 MAY 2019
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: SIAH -v- FIRSTLAND UNLIMITED PTY LTD [2019] WASC 148
CORAM: MASTER SANDERSON
HEARD: 21 FEBRUARY 2019
DELIVERED : 9 MAY 2019
FILE NO/S: COR 203 of 2018
BETWEEN: TECK HIN SIAH
Plaintiff
AND
FIRSTLAND UNLIMITED PTY LTD
Defendant
Catchwords:
Corporations law - Leave to commence/continue derivative action - Turns on own facts
Legislation:
Corporations Act 2001 (Cth)
Result:
Plaintiff's application dismissed
Category: B
Representation:
Counsel:
| Plaintiff | : | Mr A P Hershowitz |
| Defendant | : | Ms S K S Ho |
Solicitors:
| Plaintiff | : | Robertson Hayles Lawyers |
| Defendant | : | Susanna Ho Legal Services |
Case(s) referred to in decision(s):
Blakeney v Blakeney [2016] WASCA 76
South Johnstone Mill Ltd v Dennis [2007] FCA 1448
MASTER SANDERSON:
By originating process filed 13 November 2018 the plaintiff seeks leave pursuant to s 237 of the Corporations Act 2001 (Cth) (the Act) for the plaintiff, a shareholder of Firstland Unlimited Pty Ltd (the defendant) (the Company), to bring a derivative action on behalf of the Company against a director of the Company.
The orders seek leave nunc pro tunc. The balance of the authorities suggest such an order can be made: see in particular South Johnstone Mill Ltd v Dennis [2007] FCA 1448 [24] ‑ [56]. The defendant did not argue to the contrary. The question then is whether the requirements of s 237 of the Act are met.
The section itself sets out a number of requirements that must be satisfied. If those requirements are satisfied leave must be granted. It is worthy of note that the grant of leave is mandatory if the requirements of the section are satisfied. There is no room for discretion. The focus of the enquiry then must be whether the requirements of the section are satisfied. Those requirements are five in number. They are:
(1)it is probable the company will not itself bring proceedings or properly take responsibility for them;
(2)the applicant is acting in good faith;
(3)it is in the interests of the company that the applicant be granted leave;
(4)there is a serious question to be tried; and
(5)either at least 14 days before making an application to the court the applicant has given written notice to the company of the intention to apply for leave and of the reasons for applying or it is appropriate for the court to grant leave even though the notice was not given to the company.
In this case the first and fifth requirements were satisfied. Although the second and fourth requirements figured in the parties' submissions it is really the third of the requirements which was of particular focus. It was the defendant's submission that it was not in the interests of the Company that the applicant be granted leave. In considering that submission it is appropriate to consider the nature of other proceedings currently on foot involving the parties.[1]
[1] Supreme Court of Western Australia CIV 1739 of 2018 Teck Hin Siah v Leon Wong (also known as Leon Kew Wong) & Ors.
The plaintiff, in this application, is the plaintiff in CIV 1739 of 2018. The first defendant is Leon Wong, the second defendant is Firstland Investments Pty Ltd, the third defendant is Firstland Pty Ltd and the fourth defendant is the defendant in this application ‑ Firstland Unlimited Pty Ltd. Turning to the statement of claim in that action the plaintiff is the holder of 12% of the issued share capital in the fourth defendant. It is pleaded the first defendant is a director of the fourth defendant, is the beneficial owner of 100% of the issued share capital of the second and third defendants. The third defendant owns 72% of the issued share capital of the fourth defendant. The fourth defendant is a company which carries on construction project management.[2]
[2] Statement of Claim attached to Writ of Summons filed 27 April 2018.
The statement of claim pleads that the first defendant procured the incorporation of the fourth defendant in June 2013 and there were 1,000 issued shares. The plaintiff held 325 shares, a Mr S H Wong (an associate of the first defendant) held 325 shares, the second defendant held 50 shares and the third defendant held 300 shares. At that time the directors of the fourth defendant were the plaintiff, the first defendant and Mr S H Wong. In September 2013 the fourth defendant issued an additional 9,000 shares with the plaintiff, the first defendant, Mr S H Wong and an entity known as Jenas International taking up the new shares. That left the plaintiff with 30% of the issued shares in the fourth defendant.
In May 2014 Mr S H Wong and Jenas International terminated their involvement in the fourth defendant. They transferred their shareholding. As a result the plaintiff held 45% of the issued shares in the fourth defendant, the second defendant held 10% of the issued shares and the third defendant held 45% of the issued shares. The directors of the fourth defendant were the plaintiff and the first defendant. It is pleaded that with the reorganised shareholding the plaintiff and the first defendant agreed to continue the business of the fourth defendant.
The terms of what is defined in the statement of claim as the 'New Agreement' between the plaintiff and the first defendant are pleaded in some detail in pars 12 and 13 of the statement of claim.
Unhappily the arrangement between the plaintiff and the first defendant did not go according to plan. Without going into details they fell out. In October 2016 two new directors were appointed to the board of the fourth defendant. These persons were associates of the first defendant. It is not suggested these appointments were not made consistent with the fourth defendant's constitution. But it is clear the power within the board thereafter rested with the first defendant.
Events then followed a predictable course. Shares in the fourth defendant were issued to parties other than the plaintiff ‑ those parties being associated with the first defendant. In January 2018 the first defendant was removed as a director of the fourth defendant. The plaintiff says he could not get access to information in relation to the fourth defendant presumably because he was no longer a director. The statement of claim leads a litany of further complaints all of which amount to what the plaintiff claims is oppressive conduct by the first defendant and his associates in relation to the affairs of the fourth defendant. It is unnecessary to detail precisely what the plaintiff says is the discriminatory conduct. But the plaintiff says as a consequence of that conduct he is entitled to certain relief. The prayer for relief is in the following terms:
Against the first defendant
1.An order that the first defendant compensate the fourth defendant in equity or pay damages to the fourth defendant for breach of duties under the Corporations Act 2001 (Cth).
2.An account of profits or sums received by the first defendant by reason of breach of duties under Corporations Act 2001 (Cth), and an order for payment to the fourth defendant of all sums found due on the taking of the account.
3.Further or alternatively, an order that the first defendant repays the fourth defendant the sum of $370,078.78.
4.An order that the first defendant accounts to the plaintiff the sum of $43,636.36.
5.Interest upon any award of compensation or damages or all sums found due on the taking of the account at 6% per annum in accordance with section 32 of the Supreme Court Act 1935 (WA).
6.Costs.
7.Further or alternative relief as this Honourable Court may deem appropriate under section 233(1) of the Corporations Act 2001 (Cth).
Against the second defendant
8.An account of profits or sums received by the second defendant on the construction project management at the property situated at 141 Venturi Drive, Ocean Reef in the State of Western Australia, and an order for payment to the fourth defendant of all sums found due on the taking of the account.
9.Interest upon all sums found due on the taking of the account at 6% per annum in accordance with section 32 of the Supreme Court Act 1935 (WA).
10.Costs.
11.Further or alternative relief as this Honourable Court may deem appropriate under section 233(1) of the Corporations Act 2001 (Cth).
Against the fourth defendant
12.An account of profits or sums received by the fourth defendant on the construction project management at the property situated at 21 Melville Avenue Thornlie in the State of Western Australia, and an order for payment to the plaintiff of all sums found due on the taking of the account;
13.An order that the fourth defendant pays the plaintiff the sum of $105,474.
14.Interest upon all sums found due on the taking of the account and upon the sum of $105,474 at 6% per annum in accordance with section 32 of the Supreme Court Act 1935 (WA).
15.Costs.
16.Further and other relief as this Honourable Court may deem appropriate.
Against the second, third and fourth defendants
17.An order pursuant to section 233 or alternatively, section 461 of the Corporations Act 2001 (Cth) that the fourth Defendant be wound up under the Corporations Act 2001 (Cth).
18.An order that a liquidator of the fourth defendant be appointed.
19.Further or alternatively, an order that the second and third defendants purchase the plaintiff’s shares in the fourth defendant.
20.Costs.
21.Further and other relief as this Honourable Court may deem appropriate.
Presumably, after the statement of claim was filed, the plaintiff realised that a number of the orders he was seeking could only be made on an application by the fourth defendant. Paragraph 1 of the prayer for relief is an example of such an order. It is difficult to see how the plaintiff can seek relief in those terms. Any relief that is granted must be granted to the fourth defendant. That then necessitated this application.
The difficulty with the plaintiff's position is that part of the relief he seeks in CIV 1739 of 2018 is an order winding up the fourth defendant on the just and equitable ground. If he is successful in establishing there has been oppressive conduct then a liquidator will be appointed to the fourth defendant and the liquidator will, in discharge of his duties, investigate any obligations the first, second and third defendants have to the fourth defendant. It is clear that is the most effective forum for consideration of the issues raised by the plaintiff. It is not in the best interests of the fourth defendant to expend time and resources in what would presumably be a cross‑claim by the fourth defendant against the first, second and third defendants. Procedurally the position is awkward. Practically such an action would be pointless.
That then is sufficient to deal with this application. I am not satisfied it would be in the best interests of the defendant in this proceeding to grant the leave sought. There is an additional factor which I should mention. The leading authority in this jurisdiction on the grant of leave in derivative actions is the decision of the Court of Appeal in Blakeney v Blakeney [2016] WASCA 76. One of the issues which concerned the court in determining whether it was in the best interests of the company to grant leave was the question of whether or not a party seeking leave was able effectively to hold the company harmless with respect to costs. Their Honours put the position in this way:
It has been said that, at least in some cases, in order to demonstrate that the grant of leave would be in the best interests of the company, it may be necessary for the applicant to demonstrate that, if the proceedings are unsuccessful, the company would be in no worse a financial position.
If the applicant offers an indemnity, but does not have the financial capacity to provide it, the court may find it difficult to conclude that the grant of leave is in the best interests of the company [67] ‑ [68].
Having set out that statement of general principle the court then continued:
73.While we agree with the observations outlined in (d) and (e), in our respectful view some of the other observations reveal errors of principle. The master's observation that it is preferable that questions as to security for costs be resolved on an application under s 1335 rather than on an application for leave to bring a derivative action seems to us to overlook the different framework in which questions of costs arise in the context of those two types of application. Questions of costs in the context of an application for leave under s 236 and an application under s 1335 for security for costs arise at different stages in different proceedings, requiring attention to different interests. When a person applies for leave to bring a derivative action, costs questions direct attention to the interests of the company that will in substance be the plaintiff in the proposed action. One facet of the interests of the company is the potential exposure of the company to an adverse costs order. In an application for security for costs under s 1335, the focus of attention is on the position of the defendant in the action, and the risk that, in the event that the defendant succeeds, its costs will not be paid.
74Moreover, we do not think it can be safely assumed that the likelihood of an order for security for costs being sought and made removes the potential detriment to the company, arising from its exposure to an adverse costs order, in the grant of leave to a person to bring a derivative action on its behalf. For example, it is unlikely to be in the interests of a company for proceedings to be commenced if the likelihood is that, subsequently, an application for security for costs would be successfully made, and no security provided. In those circumstances, the company would (almost certainly) be liable for the defendant's costs incurred in the proceedings up to that point, and the proceedings would be stayed.
75In our view, similar criticisms can be made of the master's statement that the availability of an order under s 37 of the Supreme Court Act that a non‑party pay the defendant's costs provides further protection to Geraldton Builders and Fabricators. Whether such an order for costs may be made is a discretionary decision that would be made after the conclusion of the proceedings instituted by William on behalf of the company. In determining whether to make such an order, the focus is on the interests of the defendant to the proceedings, not on the interests of the plaintiff company.
…
77.The master said there was no evidence that William had the financial means to provide an indemnity, nor that he intended to do so beyond a limited amount. The master concluded that, notwithstanding that, it was preferable for any requirement for a bank guarantee or other security from William to be dealt with on an application for security for costs. In our view, for the reasons that we have already given, that approach reveals an error of principle.
78.The master said that it is difficult to see how leave could be given conditionally in circumstances where s 237 is in mandatory terms. Under s 241(1) the court has a broad power to make any orders and give any directions that it considers appropriate in relation (among other things) to an application for leave. In our view, when s 237 and s 241 are read together, the court has power to grant leave on conditions, including a condition that the applicant undertake to indemnify the company in respect of its costs and any liability for costs. As we have said, there are many cases in which leave has been granted on such a condition; see [66] above.
At the conclusion of his submissions, counsel for the plaintiff acknowledged that nowhere in the affidavit evidence was there any detail as to the plaintiff's financial position which could lead to an assessment of his capacity to fund any litigation and meet any adverse costs order that might be made against the defendant. Counsel submitted that, consistent with Blakeney, a conditional order could be made. With respect, that seems to me not to be sufficient. Based upon what was said by the court in Blakeney the plaintiff should have provided full details of his financial capacity both to run any action on behalf of the fourth defendant and to meet any adverse costs order made against the fourth defendant. The evidence produced would necessarily have to assume an application being made by a prospective defendant under s 1335 of the Act and an order being made for security. Some effort would have to be made to anticipate the costs incurred by the Company as plaintiff in the derivative action ‑ even to the extent of producing a costs agreement between the Company as prospective plaintiff and the solicitors together with a detailed assessment of the costs. If all of this information is provided then no doubt a conditional order can be made. But based upon Blakeney it is difficult to see how, in the absence of such information, the grant of leave can be said to be in the best interests of the Company.
The plaintiff's application ought be dismissed. Subject to hearing from the parties the plaintiff ought pay the defendant's costs of the application, including reserved costs.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
DG
Associate to Master Sanderson9 MAY 2019
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