Slea Pty Ltd v Connective Services Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT

CORPORATIONS LIST

S CI 2011 04332

IN THE MATTER OF CONNECTIVE SERVICES PTY LTD

BETWEEN:

SLEA PTY LTD	Plaintiff
v
CONNECTIVE SERVICES PTY LTD & ORS	Defendants

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JUDGE:	ROBSON J
WHERE HELD:	Melbourne
DATE OF HEARING:	14, 16, 17, 18 August, 10 October and 13 November 2017
DATE OF JUDGMENT:	29 November 2017
CASE MAY BE CITED AS:	Re Connective Services Pty Ltd
MEDIUM NEUTRAL CITATION:	[2017] VSC 609	First revision: 11 December 2017

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CORPORATIONS – Derivative leave application – Section 237 Corporations Act 2001 (Cth) – Consideration of delay – Whether grant of leave is in the best interests of the company – Whether application is brought bona fides – Whether serious question to be tried – Relevance of relief sought – Prima facie use of directors’ power for improper purpose.

PRACTICE AND PROCEDURE – Application for adjournment of hearing of summons to re-open hearing of application for derivative leave after judgment has been reserved – Application to adjourn hand-down of judgment sine die – Adjournment granted.

PRACTICE AND PROCEDURE – Application to re-open the hearing on the grounds of ‘fresh evidence’ – Civil Procedure Act 2010 s 49 – Whether there is the possibility of ‘fresh evidence’ being adduced – Whether such evidence is relevantly ‘fresh evidence’ – Whether such evidence is probative and could materially affect the outcome – Whether in the interests of justice to re-open the hearing – Whether evidence of a third party’s interest in the proceeding ‘taints’ the interests of the plaintiff – Application refused.

PRACTICE AND PROCEDURE – Objection to subpoenas – Supreme Court (General Civil Procedure) Rules 2015 – Whether defendants expressly and precisely identify the legitimate forensic purpose for which access to the subpoenaed documents is sought – Whether the subpoenaed documents could assist in the defendants’ application to re-open the hearing of the derivative leave application – Whether the relevant subpoenas should be set aside pursuant to r 42.04 of the Supreme Court (General Civil Procedure) Rules 2015.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M H O’Bryan QC with Mr G D Dalton QC, Ms K E Foley and Mr J Rudd	Arnold Bloch Leibler
For the First, Second, Fourth to Ninth Defendants	Mr A J Myers AC QC with Mr B F Quinn QC, Mr D G Guidolin and Ms A M Folie	Quinn Emanuel Urquhart & Sullivan
For the Third Defendant	Mr S D Hay	HWL Ebsworth

TABLE OF CONTENTS

Introduction.......................................................................................................................... 1
The relevant facts................................................................................................................. 3

Part 1................................................................................................................................................... 12

Derivative leave application............................................................................................ 12
The Murray Lees statement............................................................................................. 21
The restructure documents.............................................................................................. 24
The Connective companies will not bring the action................................................... 27
Good faith........................................................................................................................... 27
Best interests of the company.......................................................................................... 36
Abuse of power.................................................................................................................. 44
Delay.................................................................................................................................... 50
Serious question to be tried............................................................................................. 52
Notice............................................................................................................................................ 55
Conclusion.......................................................................................................................... 56

Part 2................................................................................................................................................... 57

Application to re-open - Introduction............................................................................ 57
Fresh evidence................................................................................................................... 57
Third and tenth defendants’ submissions..................................................................... 60
Slea’s submissions............................................................................................................. 60
13 November hearing........................................................................................................ 61
The funding agreement.................................................................................................... 64
The co-operation deed...................................................................................................... 65
Financial support agreement and the guarantee and the indemnity........................ 66
Second Murray Lees Statement....................................................................................... 69
Materially affect the outcome.......................................................................................... 70
‘Good faith’......................................................................................................................... 71
‘Best interests’..................................................................................................................... 75
Interests of justice.............................................................................................................. 76
Conclusion.......................................................................................................................... 77
Subpoenas........................................................................................................................... 78
Conclusions........................................................................................................................ 78

HIS HONOUR

Introduction

In 2003, Sofianos Tsialtas, Glenn Lees and Murray Lees established a business as a mortgage aggregator. The business involved procuring and aggregating the services of finance companies lending on mortgages. The business would then, for a commission, offer the service of these financiers to mortgage brokers to enable them to offer a wide choice of mortgagees to their clients seeking to borrow moneys secured by mortgage.

The business was conducted by Connective Services Pty Ltd (Connective Services) and Connective Services OSN Pty Ltd (Connective OSN) (the Connective companies). Mr Tsialtas held his one-third shareholding interest through his company, Slea Pty Ltd (Slea). Each of the Connective companies had a pre-emptive rights provision in its constitution that enabled Slea, and each of the original shareholders, to maintain its one-third interest in the companies and thus the business.

In 2008, Mr Tsialtas resigned as a director of the Connective companies at the request of Glenn Lees. Mr Tsialtas thereafter began working for Liberty Financial Pty Ltd (Liberty). In 2012, Macquarie Bank Ltd (Macquarie Bank) offered to buy 25 per cent of the Connective business. Mr Tsialtas was not informed of the offer by the Connective companies or their directors. To avoid Slea obstructing the offer by Macquarie Bank, by Slea exercising its pre-emptive rights, without the knowledge of Slea, in February 2013, the directors of the Connective companies established a subsidiary company and transferred the Connective business to the subsidiary. This enabled shares in the subsidiary to be sold to Macquarie Bank without enlivening the pre-emptive rights of Slea. I shall refer to these steps as the restructure.

Thereupon, on 31 October 2013, the directors of the Connective companies issued 25 per cent of the shares in the subsidiary to Macquarie Bank, thereby reducing Slea’s interest in the business to 25 per cent from 33.33 per cent and giving Macquarie Bank a 25 per cent share in the Connective business. This is referred to as the transaction.

Slea seeks the leave of the Court under s 237 of the Corporations Act 2001 (Cth) (the Act) to bring derivative proceedings on behalf of the Connective companies against Glenn Lees, Macquarie Bank and others, seeking the rescission of the sale of the shares in the subsidiary to Macquarie Bank. Primarily, Slea claims the directors of the Connective companies misused their powers and breached their duties to the Connective companies by exercising their powers to undertake the restructure steps, to give Macquarie Bank a 25 per cent interest in the business and to reduce Slea’s interest from 33.33 per cent to 25 per cent, to avoid and deny the pre-emptive rights of Slea.

The application was heard by me over 14, 16, 17 and 18 August 2017. I reserved my decision and, on Friday 6 October 2017, the parties were given notice that I intended to hand down my decision on Tuesday 10 October 2017.

On 6 October 2017, after receiving notification that my decision would be handed down, the first, second and fourth to ninth defendants (the Connective parties) issued a summons seeking orders that, pursuant to s 49(1) of the Civil Procedure Act 2010 and the inherent jurisdiction of the Court, the hearing of the derivative leave application be re-opened and the Connective parties be granted leave to adduce new evidence; and the delivery of the judgment of the derivative leave application, listed for 10 October 2017, be adjourned sine die.

On 10 October 2017, the Connective parties made an application to adjourn the hearing of their summons. I reserved my decision. On 20 October 2017, the Court made orders adjourning the hearing of the summons of 6 October 2017 to 13 November 2017.

On 8 November 2017, Slea filed a summons seeking subpoenas, that had been issued in relation to the Connective parties’ application to re-open the hearing of the application for derivative leave, be set aside.

On 13 November 2017, I heard the application to set aside the subpoenas and the application to re-open the hearing of the application for derivative leave.

For the reasons given below, the Court dismisses the application to re-open the hearing of the application for derivative leave and sets aside the subpoenas subject to the 8 November 2017 summons. Further, the Court proposes to grant leave, conditionally, to Slea to bring the proposed derivative proceeding.

The relevant facts

Messrs Glenn and Murray Lees each held their one-third interest in the Connective companies through Millsave Pty Ltd (Millsave). Mr Mark Haron also worked in the Connective business. On 5 May 2011, Mr Haron commenced a proceeding against the Connective companies, Millsave and Slea (the Haron proceeding) alleging that they had agreed with him that Slea and Millsave would sell to him, and he would purchase, 25 per cent of the shares in each of the Connective companies. As discussed below, the Haron proceeding was finally settled on 22 October 2013.

On 15 August 2011, prior to the settlement of the Haron proceeding, Slea instituted the main proceeding, in which the application currently before me is made, as an oppression proceeding against the Connective companies, seeking orders, inter alia, under s 233 of the Act that Connective Services recover directors’ fees paid to Mr Haron and Murray Lees; that Connective Services declare and pay a dividend out of declared profits; that Connective Services rectify its books and records; and that Mr Haron and Mr Graham Maloney be removed as directors from the boards of the Connective companies. The oppression proceeding largely lay dormant whilst the Haron proceeding ran its course.

On 16 August 2011, Mr Haron and Millsave settled the Haron proceeding as between themselves, pursuant to a deed of settlement and release dated 16 August 2011, but otherwise the Haron proceeding continued.[1]
[1]Mr Tsialtas witness statement of 26 October 2015 (Tsialtas first statement) [192]; affidavit of Mr Tsialtas dated 2 August 2016, EX ST-1; EX P4.

As mentioned above, on 15 February 2013, unbeknownst to Mr Tsialtas at the time, the Connective companies restructured the Connective business by:

(a) Connective Services selling its shares in Connective Broker to Connective Group in return for Connective Group issuing a further 19,999,964 shares to Connective Services;

(b) Connective OSN selling its shares in Connective Lender and Connective Funder to Connective Group in return for Connective Group issuing 24 shares to Connective OSN;

(c) Connective Services licensing its intellectual property to Connective Broker for an unspecified sum; and

(d) Connective OSN licensing its intellectual property to Connective Lender and Connective Funder for an unspecified sum.

Mr Tsialtas did not see the documents by which these transactions were effected at the time. Mr Tsialtas became aware of them when they were subsequently discovered or disclosed in the oppression proceeding.

On 20 February 2013, in the Haron proceeding, Daly AsJ ordered that Mr Haron and the Connective companies discover any documents relating to the actual or possible sale of the Connective companies after 10 October 2006, and any restructuring of the ownership structure necessary to give effect to the sale. Despite the order of Daly AsJ, Mr Tsialtas did not become aware of the restructure and transaction until after the Haron proceeding finally settled in October 2013, as referred to below.

On 1 October 2013, Slea commenced a pre-emptive rights proceeding against the Connective companies, Millsave and Mr Haron seeking declarations that the pre-emptive rights provision in the constitution of each of the Connective companies applied to the proposed transfer of shares in the Connective companies by Millsave to Mr Haron under the deed of settlement and release dated 16 August 2011 (the pre-emptive rights proceeding). The pre-emptive rights proceeding did not relate to the Macquarie Bank transaction, as Mr Tsialtas did not know about the proposed Macquarie Bank transaction at that stage. Slea also sought mandatory injunctions requiring Millsave to make an offer to immediately transfer to Slea the shares that were the subject of the deed of settlement and release dated 16 August 2011, that were to be transferred to Mr Haron under the settlement and release of 11 August 2011.

After a mediation took place on 22 October 2013, the Haron proceeding and the pre-emptive rights proceeding were finally settled under a settlement deed (the pre-emptive rights proceeding settlement deed).

Under the pre-emptive rights proceeding settlement deed, Slea agreed to waive any pre-emptive rights in respect of shares to be transferred to Mr Haron by Millsave as part of the settlement and release agreement of 11 August 2011.

On about 29 October 2013, pursuant to the settlement deed, Millsave transferred 300 of its shares in each of the Connective companies to Mr Haron. Following this transfer, the shareholders of the Connective companies were (and remain):

(a) Millsave, which holds 900 shares representing 50 per cent;

(b) Slea, which holds 600 shares representing 33.33 per cent; and

(c) Haron, who holds 300 shares representing 16.67 per cent.

Mr Tsialtas says that when the pre-emptive rights proceeding settlement deed was agreed, he understood that the Connective companies still owned and controlled the Connective business.[2] He therefore also understood that Slea would continue to hold a 33.33 per cent interest in the Connective business as it had since the establishment of the Connective companies and that a new investor would need to comply with the pre-emptive rights regime in the Connective companies’ constitutions.
[2]Tsialtas first statement, [247].

Mr Tsialtas had seen ASIC company searches for some of the entities identified in the Connective group structure diagram. He understood from these documents that new subsidiaries of the Connective companies had been incorporated. Mr Tsialtas had not seen any of the discovered documents, due to the confidentiality regime imposed by the Connective companies during the pre-emptive rights proceeding. Due to that confidentiality regime, Mr Tsialtas could not give any instructions to his solicitors about those documents, or what they might mean. At no stage was Mr Tsialtas told of the objectives of the new subsidiaries, or of the purpose behind their incorporation. Mr Tsialtas was not aware that this was part of a corporate restructure that involved the transfer of the Connective business to a new subsidiary and that thereupon shares in that subsidiary were to be sold to Macquarie Bank.

At the time of settlement of the pre-emptive rights proceeding, Mr Tsialtas was entirely unaware that the Connective companies had agreed to sell, or were negotiating to sell, a substantial interest in the Connective business to Macquarie Bank, notwithstanding the order of Daly AsJ on 20 February 2013 that required discovery by Mr Haron and the Connective companies and production by Glenn Lees and Murray Lees and Millsave of documents relating to the actual or possible sale of the Connective companies.[3]
[3]Tsialtas first statement [249].

On 7 November 2013, Mr Tsialtas received a telephone call from Ms Anne Gallagher, the state manager of Liberty. Ms Gallagher informed Mr Tsialtas of the sale of the Connective business to Macquarie Bank. This was the first time Mr Tsialtas had heard of any sale of the Connective business.

In November 2013, Mr Tsialtas read a media release announcing the Macquarie Bank transaction. Later, during the discovery process in the oppression proceeding, Mr Tsialtas became aware of the details of the restructure.[4]
[4]Transcript of hearing, Re Connective Services Pty Ltd (16 August 2017) T160 XXN.

As mentioned, the constitutions of Connective OSN and Connective Services contained pre-emptive rights provisions (set out below at paragraph 52(a)), whereby before shares can be issued or sold, they must first be offered to existing shareholders. On 20 November 2013, Maddocks, the Connective companies’ solicitors, sent a letter to Arnold Bloch Leibler (ABL), Mr Tsialtas’ solicitors, stating, amongst other things, a denial that the transaction breached the pre-emptive rights provisions of the Connective companies’ constitution.

On 11 November 2013, Slea sent a letter to the directors of the Connective companies, being Mr Maloney, Glenn Lees and Mr Haron, stating that Slea, as a substantial shareholder, expected to be kept informed of all significant transactions.[5] On 12 November 2013, Mr Tsialtas received a letter from Mr Maloney, on behalf of the Connective companies in response to his letter of 11 November 2013, that did not mention or disclose anything about the sale of shares in the new subsidiary company to Macquarie Bank.
[5]Tsialtas first statement [256].

On 20 November 2013, Mr Tsialtas received a letter from Mr Maloney confirming the transaction. In the letter, Mr Maloney said that Slea would receive a fully franked dividend of $1,166,666.67. Mr Maloney also called Mr Tsialtas and said that the Connective group had sold a 25 per cent interest in the Connective business to Macquarie Bank and that it was a great deal for shareholders.[6]
[6]Tsialtas first statement [259].

On 20 November 2013, ABL sent a letter to Maddocks stating that Slea would challenge the validity of the restructure and transaction and sought an undertaking not to dispose of any further shares. The letter also stated that as Slea did not accept the validity of the purported transaction, the dividend of $1,166,666.67 would be held on trust pending the resolution of the issues arising out of the purported transaction. Mr Tsialtas says the dividend continues to be held on trust. The Connective companies have not declared and Slea has not received any dividends since this time.

On or about 6 December 2013, in the existing oppression proceeding, Slea applied to join Millsave, Macquarie Bank and Messrs Glenn Lees, Haron and Maloney as defendants; and for leave to file an amended statement of claim, inter alia, complaining about the transaction and the restructure.[7]
[7]CB D117; LFW-4 to the affidavit of Laura Frances Weston dated 13 June 2016.

On 14 March 2014, Efthim AsJ dismissed Slea’s application to amend the statement of claim in the oppression proceeding on the grounds that Slea required leave under s 237 of the Act to allege that the defendant directors had breached their duties to the Connective companies and to allege that Macquarie Bank knowingly assisted or participated in the breaches of duties owed by the directors to the Connective companies.[8]
[8]Affidavit of Laura Frances Weston dated 13 June 2016, EX LFW-4.

Thereafter, on 1 July 2014, Slea delivered an amended statement of claim in the oppression proceeding, pleading the restructure and the transaction as further acts of oppression. Slea claimed that after the settlement of the Haron proceeding, Slea became aware that the directors of the Connective companies had effected a restructure of the ownership of the underlying business of the Connective companies with a result that, amongst other things:

(a) the fourth defendant (Connective Group), a subsidiary of the Connective companies, which, in turn, held various further subsidiaries, was incorporated;

(b) the underlying companies of the Connective companies were transferred to the subsidiaries (the restructure); and

(c) 25 per cent of the shares in the Connective Group were sold to Macquarie Bank (the transaction).

Slea contends that the result of the restructure and transaction was that Slea’s ownership interest in the underlying Connective business was diluted to 25 per cent.

Slea filed a summons, as amended on 27 May 2016, in the oppression proceeding (the 27 May 2016 summons) seeking orders that:

(a) pursuant to s 237 of the Act, Slea be granted leave to bring a proceeding on behalf of and in the name of Connective Services and Connective OSN in the form set out in the draft statement of claim exhibited to the affidavit of Ms Kimberley Chantelle MacKay, dated 17 May 2016 (the first MacKay affidavit), against the parties identified in the schedule.

(b) Slea be granted leave to use the documents listed in exhibit KCM 1 to the first MacKay affidavit for the purpose of the derivative action, should leave to bring the action be granted.

The 27 May 2016 summons is the subject of these reasons and proposed orders.[9] The defendants to the summons are Connective Services, Connective OSN, Millsave, Connective Group, Connective Broker Services, Connective Lender Services, Connective Funder Services, Connective Group IP Holdings (No 1), Connective Group IP Holdings (No 2) (the Connective defendants/parties) and Mr Haron.
[9]Order of Almond J dated 28 March 2017 in proceeding no S CI 2011 4332; Slea Pty Ltd vConnectiveServices Pty Ltd [2017] VSC 232.

Mr Myers, one of Her Majesty’s counsel, appeared for the Connective defendants and Mr Hay appeared for Millsave. There was no appearance for Mr Haron, who relied on written submissions of Mr Marcus Clarke of counsel. Mr O’Bryan, one of Her Majesty’s counsel, appeared for Slea.

In substance, Slea alleges that the directors breached their duties to the company by exercising their powers to restructure not in good faith, not in the best interests of the Connective companies and for an improper purpose, as the purpose of the directors was, or included, the substantial purpose of circumventing the pre-emptive rights provisions in favour of Slea to the detriment of Slea.

On 11 August 2016, Connective Services and Connective OSN issued an originating process (No 1168 of 2016) (the 2016 pre-emptive rights proceeding) against Slea, Minerva Financial Group Pty Ltd (Minerva) (holding company of Liberty), Millsave and Mr Haron as the defendants, seeking orders, inter alia, that Slea offer its shares in Connective Services and Connective OSN to Millsave and Mr Haron in accordance with clause 77.3 of the constitution of Connective Services and Connective OSN.

The 2016 pre-emptive rights proceeding was brought in reliance on an agreement between Slea and Minerva (the 2010 accommodation agreement) that was obtained by Connective through discovery in the Haron proceeding on 15 December 2011.

The 2010 accommodation agreement was entered into on 12 August 2010 between Mr Tsialtas and Minerva, the company that was then the parent company of Liberty. The 2010 accommodation agreement was entered into after the alleged oppressive conduct against Slea began, when no dividends were being paid out by the Connective companies and Mr Tsialtas was in need of financial support. At the time, Mr Tsialtas was working for Liberty.

In return for providing financial accommodation to Mr Tsialtas, the agreement provided that if further Connective shares came to Mr Tsialtas, or were offered to him from Millsave or Haron under the pre-emptive rights provisions, Liberty would consider lending him the money to enable him to buy those further shares. The 2010 accommodation agreement also provided that if Slea were to become the owner of all the shares, thus the sole shareholder, and therefore the shares would not be subject to pre-emptive rights, then, at that time, Liberty had the option of buying those further shares.

The 2010 accommodation agreement was discovered to the Connective companies in the Haron proceeding. Slea alleges that the timing of the discovery by the Connective companies supports Slea’s contention that the restructure was carried out for an improper purpose, as it would have been evident to the Connective companies and their directors that Slea would have the financial means to exercise their pre-emptive rights if any shares were to be offered at the time of negotiating with Macquarie Bank. On the other hand, the Connective companies submit that the 2010 accommodation agreement discloses a nefarious purpose on the part of Slea in bringing the derivative leave action, as it is said to be brought at the behest of Liberty. This is discussed further below.

In the 2016 pre-emptive rights proceeding, the Connective parties alleged that:

(a) on or about 12 August 2010, Slea entered into the 2010 accommodation agreement with Minerva, whereby Slea would, among other things:

(i) refuse to sell, transfer or dispose of any of its shares in the Connective companies to existing shareholders; and

(ii) seek to transfer all of its shares in the Connective companies to Liberty.

(b) the purpose of the 2010 accommodation agreement was to subvert or avoid the pre-emptive rights; and

(c) that in breach of the pre-emptive rights, Slea failed to offer its shares in Connective to Millsave and Haron.

Connective sought orders compelling Slea to offer its shares in the Connective companies to Millsave and Haron, and an order restraining Slea from transferring or dealing with those shares otherwise than in accordance with the pre-emptive rights.

On 4 October 2016, Slea and Minerva sought orders that the 2016 pre-emptive rights proceeding be dismissed or stayed. Further, or alternatively, Slea and Minerva sought an injunction pursuant to s 1324 of the Act restraining Connective Services and Connective OSN from prosecuting the proceeding. Slea and Minerva contended that by commencing the 2016 pre-emptive rights proceeding in reliance on the 2010 accommodation agreement, Connective breached the implied undertaking not to use the 2010 accommodation agreement for a purpose unconnected with the proceedings in which it was discovered.

The application was heard before Almond J and, on 12 May 2017, his Honour ruled that the proceedings had been commenced in reliance on the contents of the 2010 accommodation agreement, which had been obtained by the Connective companies through discovery in the earlier proceedings, and that accordingly the Connective companies breached the implied undertaking not to use the 2010 accommodation agreement for a purpose unconnected with the proceedings in which they were discovered. Almond J held that this amounted to an abuse of court. His Honour held that in circumstances where the core of the claim turned on the terms of the 2010 accommodation agreement, the appropriate remedy was to stay the proceeding pursuant to r 23.01 of the rules of court. On 2 June 2017, Connective Services and Connective OSN issued a summons in the oppression proceeding for orders that Connective Services and Connective OSN be granted leave to use the 2010 accommodation agreement in the 2016 pre-emptive rights proceeding. This summons is not before me. The summons has been heard by Judd J.[10]
[10]Slea Pty Ltd v Connective Services Pty Ltd [2017] VSC 706.

Part 1
Derivative leave application

The summons before me is Slea’s application, pursuant to s 237 of the Act, that Slea be granted leave to bring a proceeding on behalf of and in the name of Connective Services and Connective OSN in the form set out in the draft statement of claim exhibited to the first MacKay affidavit.[11]
[11]Affidavit of Kimberley MacKay dated 17 May 2016 (the first MacKay affidavit), EX Confidential KCM-5.

Section 236 of the Act provides for bringing, or intervening in, proceedings on behalf of a company, and states as follows:

(1)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.
(2)Proceedings brought on behalf of a company must be brought in the company’s name.
(3)The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.

Note 1: For the right to inspect company books, see subsections 247A(3) to (6).
Note 2: For the requirements to disclose proceedings and leave applications in the annual directors’ report, see subsections 300(14) and (15).
Note 3: This section does not prevent a person bringing, or intervening in, proceedings on their own behalf in respect of a personal right.

Section 237 of the Act sets out the tests for applying for and granting leave, to bring a proceeding on behalf of a company:

(1)A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.
(2)The Court must grant the application if it is satisfied that:
(a)it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and
(b)the applicant is acting in good faith; and
(c)it is in the best interests of the company that the applicant be granted leave; and
(d)if the applicant is applying for leave to bring proceedings—there is a serious question to be tried; and
(e)either:
(i)at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(ii)it is appropriate to grant leave even though subparagraph (i) is not satisfied.

(3)A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that:
(a)       the proceedings are:
(i)        by the company against a third party; or
(ii)       by a third party against the company; and

(b) the company has decided:
(i)not to bring the proceedings; or
(ii)not to defend the proceedings; or
(iii)to discontinue, settle or compromise the proceedings; and

(c) all of the directors who participated in that decision:
(i)acted in good faith for a proper purpose; and
(ii)did not have a material personal interest in the decision; and
(iii)informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and
(iv)rationally believed that the decision was in the best interests of the company.

The director’s belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold.
(4)For the purposes of subsection (3):
(a) a person is a third party if:
(i)the company is a public company and the person is not a related party of the company; or
(ii)the company is not a public company and the person would not be a related party of the company if the company were a public company; and

(b)proceedings by or against the company include any appeal from a decision made in proceedings by or against the company.

Note: Related party is defined in section 228.

Slea bears the onus of establishing each of the five elements in subsection 2, on the balance of probabilities.[12] If it does so, then the Court must grant leave. The obligation is mandatory. A failure to establish any one of the matters specified is fatal to the application for leave.
[12]Swansson v R A Pratt (2002) 42 ACSR 313, 319 [26] (Palmer J) (‘Swansson’).

Before applying each of the tests, it is useful to examine the claim sought to be brought and the evidence that is relied on to support it. At the core of the proposed statement of claim is the constitution of Connective Services and Connective OSN which, at all relevant times, contained pre-emptive rights provisions providing for:[13]
[13]The MacKay affidavit, EX Confidential KCM-5.

(a) Pre-emption on issue of shares:

(iii) before issuing shares of a particular class, the directors must offer them to the existing holders of shares of that class;

(iv) as far as practicable, the number of shares offered to each shareholder pursuant to (i) must be in proportion to the number of shares of that class that they already hold;

(v) to make the offer, the directors must give members a statement setting out the terms of the offer;

(vi) the directors may issue any shares not taken up under the offer as they see fit.

(b) Pre-emption of sale of shares:

(i) before transferring shares of a particular class, a member must offer them to the existing holders of shares of the class;

(ii) as far as practicable, the number of shares offered to each shareholder pursuant to (i) must be in proportion to the number of shares of that class that they already hold;

(iii) to make the offer, the directors must give members a statement setting out the terms of the offer;

(iv) if some of the shares offered have not been fully accepted by the end of the period, the member must re-offer the remaining shares on the same terms to those members (if any) who accepted the offer in proportion to the number of shares of that class that they are deemed to hold by virtue of having already accepted some of the shares on offer; and

(v) the member may transfer any shares not taken up under the offers pursuant to (i) and (iv) as they see fit provided that the terms, including price, are no more commercially attractive or advantageous to a third party than the terms of the original offers.

In the proposed statement of claim, Slea alleges that:[14]
[14]The MacKay affidavit, EX Confidential KCM-5.

(a) From about April 2008, Mr Haron and Glenn Lees desired to remove Slea as a shareholder in Connective Services and Connective OSN.

(b) In or about March 2012, the directors (Glenn Lees, Mark Haron and Graham Maloney) commenced discussions and negotiations with Macquarie Bank about the sale of an interest in the Connective business to Macquarie Bank.

(c) On or about 7 June 2012, Macquarie Bank’s solicitors prepared an options paper that:

(vi) identified the following options to restructure Connective Services and Connective OSN to enable Macquarie Bank to acquire an interest in the Connective business:

· Option 1: Connective Services and Connective OSN establish a wholly owned subsidiary (Group-Co) and transfer the Connective business to the wholly owned subsidiaries of Group-Co; and Macquarie Bank be issued shares in Group-Co;

· Option 2: Connective Services and Connective OSN issue shares to Macquarie Bank;

· Option 3: Millsave transfers its share in Connective Services and Connective OSN to a related body corporate and causes that related body corporate to issue shares to Macquarie Bank;

· Option 4: Millsave buys out all of Slea’s shares in Connective Services and Connective OSN using its own funds and funds from Macquarie Bank;

(vii) advised that Slea may challenge option 1 on the basis that the purpose of the restructure would be to enable Millsave to offer and Macquarie Bank to acquire an interest in the Connective business without complying with the pre-emptive rights provisions;

(viii) advised that options 2 and 3 were subject to the pre-emptive rights provisions, which they assumed constituted an ‘unacceptable risk’; and

(ix) advised that option 4 would require agreement with Slea.

(d) Between 20 December 2012 and 25 October 2013 the directors (Glenn Lees, Mark Haron and Graham Maloney) caused Connective Services and Connective OSN to enter into transactions with the result that the Connective business was transferred from Connective Services and Connective OSN to the subsidiaries of Connective Group (the new subsidiary), consistent with option 1 of the options paper.

(e) On 31 October 2013, without conducting a competitive bidding process, Connective Services, Connective OSN, Glenn Lees, Murray Lees, Haron and Macquarie Bank executed a share purchase deed, pursuant to which Connective Services and Connective OSN transferred shares in Connective Group to Macquarie Bank for $5 million and Connective Group adopted a new constitution.

(f) As a result:

(i) Macquarie Bank became the owner of 25 per cent of the shares in Connective Group;

(ii) Connective Services retained 75 per cent of the shares in Connective Group;

(iii) Connective OSN ceased to hold shares in Connective Group;

(iv) Slea’s interest in the Connective business was diluted from one-third to one-quarter.

(g) Between mid-2012 and 31 October 2013, the directors (Glenn Lees, Mark Haron and Graham Maloney) concealed the restructure and share purchase from Slea.

(h) In breach of their duties to exercise their powers as directors in good faith in the best interests of Connective Services and Connective OSN respectively and for a proper purpose, the transaction and restructure was carried out by the directors for the purpose of, or for the purposes that included as a substantial purpose:

(i) selling a 25 per cent interest in the Connective business in a manner that would:

A. circumvent the pre-emptive rights provisions;

B. circumvent Slea’s rights as a shareholder in Connective Services and Connective OSN under the pre-emptive rights provisions;

C. enable Millsave and Haron to retain effective control over the Connective business;

D. ensure Slea would not acquire effective control over the Connective business through the exercise of the pre-emptive rights provisions afforded to it as a shareholder in Connective Services and Connective OSN;

(ii) further, or alternatively, reducing Slea’s interest in the Connective business.

(i) At all relevant times, Macquarie Bank had knowledge of the relevant matters and was therefore on notice of the breaches by the directors of their duties.

(j) By reason of the breach of directors’ duties, the transactions undertaken pursuant to the share purchase agreement and the transactions comprising the restructure are voidable at the election of Connective Services and Connective OSN.

(k) By reason of the breach of duties, Connective Services and Connective OSN suffered loss and damage.

(l) Slea alleges that the improper purpose of the directors in carrying out the restructure and the transactions, inter alia:

(i) can be inferred from all the circumstances;

(ii) is evident from a preliminary statement from Murray Lees, taken on behalf of Slea,[15] which sets out the concerns the principals of Connective Services and Connective OSN had with Mr Tsialtas and their desire to force him out of the business by, inter alia, getting Mark Haron to issue legal proceedings against Slea, seeking a transfer of a 25 per cent shareholding in Connective Services and Connective OSN, refusing to declare dividends, and restructuring the Connective business to allow for the sale of shares to Macquarie Bank without Slea exercising its pre-emptive rights;
[15]The first MacKay affidavit, EX KM-3.

(iii) emails discovered by the defendants on 10 August 2017, between Macquarie Bank, Glenn Lees, Graham Maloney and their respective solicitors, sent prior to or at the time of the restructure, discussing the restructure and share sale transaction, the need to deal with ‘the shareholding issues with Sof [Mr Tsialtas]’, and confirming, by their lawyers, that they had not informed Slea of the restructure.[16]
[16]EX P8.

(m) Macquarie Bank’s knowledge can be inferred from:

(i) the content of the options paper which was prepared by its lawyers;

(ii) its knowledge of the pre-emptive rights provisions;

(iii) its concern about ‘structuring issues’, as referred to in emails from James Casey (of Macquarie Bank) to Glenn Lees sent on 20 March 2012 and 21 March 2012.[17]

[17]EX P8.

As indicated above, in the oppression proceeding, the claims sought to be raised in the proposed statement of claim allege the restructure and transaction were carried out with an improper purpose. Slea contends that, initially, it relied on the strong inference that the restructure was done to avoid the pre-emptive provisions. This inference was supported by the fact that Macquarie Bank could not make the investment it sought to make by buying shares from the existing shareholders without triggering the pre-emptive rights, which would have allowed Mr Tsialtas, with the backing of Liberty, to buy shares issued by the Connective companies and thus gain control of the Connective companies. The directors of the Connective companies were aware of this risk, as they had seen the 2010 accommodation agreement that had been discovered in the earlier Haron proceeding.

Mr Moshinsky QC, counsel for Slea in the oppression proceeding, when seeking leave to amend the claims in the oppression proceeding to rely on the breach of duties by the directors to the company and to join Macquarie Bank, informed Efthim AsJ that these were bare allegations without particulars and that Slea did not have the transaction documents, but that the claim was based on the sole inference that they could not see any other purpose for the restructure and transaction than to circumvent Slea’s rights.

The application to amend the claims in the oppression proceeding was rejected on 14 March 2014, for the reason that the amendment required a leave application, such as the present application for derivative leave, to bring claims against the directors.[18]
[18]Affidavit of Laura Frances Weston dated 13 June 2016, EX LFW-4.

The Murray Lees statement

As is discussed above, Murray Lees was a co-founder of the Connective business along with his brother, Glenn Lees, and Mr Tsialtas. He was a principal of the Connective companies until he was purportedly made redundant in November 2015.

Subsequently to the refusal for leave to amend the originating process, in May 2016, Slea received the statement of Murray Lees, made 11 May 2015,[19] that confirmed what Slea had suspected and inferred, being, that in fact the restructure was carried out by the directors to avoid the pre-emptive rights of Slea being enlivened by selling 25 per cent of the shares in the Connective companies to Macquarie Bank (the Murray statement).
[19]The MacKay affidavit, EX KCM-3.

The Connective parties submitted that Slea could not rely on the statement by Murray Lees in this proceeding, as Slea had not proved that the document tendered, bearing the purported signature of Murray Lees, was in fact signed by Murray Lees.

In response, Slea referred to and relied on evidence that the Connective parties admitted that the Murray Lees statement was in fact made by Murray Lees, as when they were made aware of the Murray Lees statement, the Connective companies took proceedings to restrain Murray Lees from disclosing certain matters stated in his statement, on the grounds that he was disclosing information confidential to the Connective companies. On 30 August 2016, the Connective parties commenced proceedings alleging, inter alia, breaches by Murray Lees in relation to disclosing confidential information to Slea and Slea’s lawyers, in making the Murray Lees statement (confidentiality proceedings).

In response to comments made by counsel for Slea in relation to the issuing of the confidentiality proceedings, by letter dated 19 October 2016, Quinn Emanuel Solicitors, solicitors for the Connective companies, identified passages of the Murray Lees statement said to be confidential.[20] Glenn Lees also provided a statement, dated 13 February 2017, identifying paragraphs of the Murray Lees statement that he asserted were subject to Connective’s rights of confidence and privilege.[21]
[20]CB C703–714.
[21]CB C725.

On 7 March 2017, Quinn Emanuel wrote to ABL and informed them that in the interests of having the real issues in dispute resolved, they would no longer object to Slea relying on the Murray Lees statement on the grounds that his obligations of confidence to Connective precluded him from voluntarily giving evidence to Slea,[22] bringing to an end the confidentiality proceedings.
[22]CB C727–9.

On 14 March 2017, ABL sent a reply in which they noted that they now assumed that the Connective parties do not assert that the Murray Lees statement contains any privileged information, unless notified otherwise.[23]
[23]CB C731–3.

Slea submits that the confidentiality proceedings and the evidence in support, which identified the statement as that of Murray Lees, constitutes an admission by the Connective companies that the statement was in fact the statement of Murray Lees. I accept that submission.

I am satisfied that the Murray Lees statement, tendered as the statement of Murray Lees, was his statement and was signed by him.

On behalf of the Connective parties, Mr Quinn of counsel submitted that despite this being, strictly speaking, an interlocutory application, that this evidence, which is said to go to a critical point, is really an attempt to put in a full statement by a witness who was available to be called, could have been called, where the choice was made not to call him.[24] Further, that in the circumstances where the application will have serious consequences, Mr Quinn submitted that the general discretion to exclude evidence, pursuant to s 135 of the Evidence Act 2008, ought be engaged, or if admitted, to limit its use (s 136).[25]
[24]Transcript of hearing, Re Connective Services Pty Ltd (16 August 2017) T165.
[25]Transcript of hearing, Re Connective Services Pty Ltd (16 August 2017) T166, T170.

Section 135 states that:

The court may refuse to admit evidence if its probative value is substantially outweighed by the danger that the evidence might—
(a)       be unfairly prejudicial to a party; or
(b)       be misleading or confusing; or
(c)       cause or result in undue waste of time; or
(d)unnecessarily demean the deceased in a criminal proceeding for a homicide offence.

Connective parties submit that the probative value of the statement is very limited; it is un-testable; it is unclear from Ms MacKay’s affidavit whether she had anything to do with the taking of the Murray Lees statement, or whether there is a belief that it is true; and in the circumstances where the motive of Murray Lees providing the statement is unexplained.[26]
[26]Transcript of hearing, Re Connective Services Pty Ltd (16 August 2017) T168.

Slea submitted that the rules of evidence for an interlocutory type question apply and, in those circumstances, the Court is entitled to receive hearsay evidence to satisfy itself that there is a question to be tried, and ordinarily there would be no cross-examination allowed.[27]
[27]Transcript of hearing, Re Connective Services Pty Ltd (16 August 2017) T177. I was referred to a number of decisions confirming that leave applications of this kind are interlocutory in nature. Macfarlan JA, with Allsop P and Beazley JA agreeing, said such that applications are interlocutory: McEvoy v Caplan (2010) 78 ACSR 167, 168 [4]. Gzell J said of the earlier cases which suggested such an application was final in nature, that those decisions cannot be right, because there is no final determination of issues between the parties: Hackett v Nambucca Valley Quarries [2012] NSWSC 1189 (4 October 2012) [67], [70] (Gzell J).

After hearing submissions on this point, I ruled that the weight of authority favours the view that the proceedings are interlocutory and thus hearsay evidence is admissible under s 75 of the Evidence Act 2008, which provides that in an interlocutory proceeding the hearsay rule does not apply to evidence if the party who adduces it also adduces evidence of its source.[28]
[28]See Transcript of hearing, Re Connective Services Pty Ltd (16 August 2017) T186.

I also noted that in my view, in this sort of proceeding, it would be inappropriate and perhaps prejudicial to the further hearing of the matter to allow Murray Lees to be cross-examined at this stage in the proceeding.

The restructure documents

Notwithstanding the Murray Lees statement, there was substantial evidence presented on the application for derivative leave that the restructure was intended to avoid Slea’s pre-emptive rights.

At the time of the application to amend the oppression proceeding to include the allegation that the directors of the Connective companies had breached their duties to the Connective companies, Slea had not seen the restructure documents, although Slea had requested them. The documents were provided to Slea eventually between November and December 2013.

After the application for leave under s 237 was issued, further evidence has become available to Slea which further supports the proposed claim Slea wishes to pursue in the name of the Connective companies against the Connective parties, Millsave and Mr Haron.

As discussed above, the paper headed ‘Connective options paper’, dated 7 June 2012, on letterhead of Henry Davis York Lawyers, lawyers for Macquarie Bank, explains the existing structure of the Connective Group and then identifies four possible options for Macquarie Bank acquiring an interest in the Connective business. These options are mentioned in the proposed statement of claim. The observations of Macquarie Bank on each of the options follows.

Option 1 is to transfer the Connective business to the new subsidiary and then issue new shares in the new subsidiary, as holder of the Connective business, to Macquarie Bank; this was the option that was ultimately carried out (save that the interest transferred was 25 per cent of the new subsidiary, not 20 per cent as referred to in the options paper).

Option 1 notes ‘we note your instructions that Millsave intends to implement this restructure regardless of MBL’s investment’ and that Slea may challenge this restructure and investment on the basis that the restructure was implemented to enable Millsave to offer and Macquarie Bank to acquire 20 per cent of the Connective business without complying with the pre-emptive rights process for the issue of shares or the pre-emptive rights process for the transfer of shares set out in the constitutions.

Option 2 is simply issuing shares to Macquarie Bank. It is noted that ‘we assume that it’s an unacceptable risk to rely on Slea co-operating in respect of passing a resolution to issue new shares to Macquarie Bank and if such a resolution was proposed, Slea may insist on the pre-emptive process in respect of the issue of new shares to be complied with and Slea may seek to acquire further shares in Connective which we assume would be unacceptable to Millsave and Macquarie.’

Option 3 involves Millsave effectively creating a new special purpose vehicle and Macquarie Bank investing in that vehicle. It is noted that such a structure will only be possible if Slea consents or does not accept the pre-emptive offer, as there is no exception to the pre-emptive rights provisions in respect of a transfer of shares to a related body corporate.

Option 4 was to make an offer to buy Slea’s shares. Millsave might use its own funds and funds from Macquarie Bank to buy all of Slea’s shares and then Millsave would hold all of the shares. This would require an agreement with Slea, including in relation to the purchase price, but may be an option, both in order to effect the transfer to Macquarie Bank and resolve the litigation in respect of the shareholding in the Connective companies. Millsave could then transfer shares to Macquarie Bank, or can issue new shares, because the pre-emptive rights would effectively no longer apply.

The restructure was undertaken, without the knowledge of Slea, taking about 12 months to implement. The restructure documents show it involved a series of complex steps.

On 5 July 2013, Ms Heritage from Macquarie Bank sent an email to various people, including ‘Graham’, whom I infer is Mr Maloney, from which it is evident that the negotiations continued with Macquarie Bank once the restructure was carried out.[29]
[29]EX P8; PCD.001.001.8598.

On 30 July 2013, an email was sent from Mr Smooker at Maddocks, to Mr Mortimer, who is identified as a lawyer at Henry Davis York, which refers to the restructure and the transaction with Macquarie Bank being concealed from Slea.[30]
[30]EX P8; PCD.001.001.2803.

Emails between Macquarie Bank, Glenn Lees, Mr Maloney and their respective solicitors, sent prior to or at the time of the restructure, discuss the restructure and transaction, the need to deal with ‘the shareholding issues with Sof’ [Mr Tsialtas], and confirming, by their lawyers, that they had not informed Slea of the restructure.[31]
[31]EX P8; (see pleas at paragraph 53(e) above).

The Connective companies will not bring the action

As to the first requirement for granting leave under s 237, there is no dispute that it is probable that the Connective companies will not themselves bring the proceedings or properly take responsibility for them.

The allegations underlying the application for derivative leave concern the conduct of Glenn Lees, Mr Haron and Mr Maloney. Each remains a director of the Connective companies, and the directors have effective control over the Connective companies. The directors, as the governing mind of the Connective companies, oppose the derivative leave application and are defending the concurrent oppression proceeding in which related allegations of misconduct are raised.

Good faith

Pursuant to s 237(2)(b), Slea must establish on the balance of probabilities, that it is acting in good faith in bringing the application for derivative leave.

Both parties referred to the observations of Palmer J in Swansson:[32]

At this early stage in the development of the law on the statutory derivative action created by Pt 2F.1A it would be unwise to endeavour to state compendiously the considerations to which the courts will have regard in determining whether applicants in all categories defined by s 236(1) are acting in good faith. The law will develop incrementally as different factual circumstances come before the courts.
Nevertheless, in my opinion, there are at least two interrelated factors to which the courts will always have regard in determining whether the good faith requirement of s 237(2)(b) is satisfied. The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. Clearly, whether the applicant honestly holds such a belief would not simply be a matter of bald assertion: the applicant may be disbelieved if no reasonable person in the circumstances could hold that belief. The second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process.
…
Where the application is made by a current shareholder of a company who has more than a token shareholding and the derivative action seeks recovery of property so that the value of the applicant’s shares would be increased, good faith will be relatively easy for the applicant to demonstrate to the court’s satisfaction. So also where the applicant is a current director or officer: it will generally be easy to show that such an applicant has a legitimate interest in the welfare and good management of the company itself, warranting action to recover property or to ensure that the majority of the shareholders or of the board do not act unlawfully to the detriment of the company as a whole.

[32]Swansson, 320 [35]–[36], [38] (Palmer J).

Thus, Palmer J states that there are at least two interrelated factors:

(a) whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success;

(b) whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process.

It was submitted by the Connective parties that although Palmer J considered what constitutes good faith in Swansson, good faith means an absence of a collateral purpose, being the general understanding of good faith in the law, with reference to the company’s interest.[33]
[33]Transcript of hearing, Re Connective Services Pty Ltd (17 August 2017) T307.

The Connective parties submit that for Slea to be acting in good faith, Slea is required to have a pure intention and is not trying to achieve something other than that which the proceedings are explicitly directed to; that does not include a substantial collateral purpose.

Mr O’Bryan submits that the benefit that the law allows through this proceeding is the protection of shareholder interests[34] and that it cannot amount to an abuse of process for Slea to advance its interests, notwithstanding that there is a third party that has contingent interests or benefits, which are derived from Slea’s interests.[35]
[34]Transcript of hearing, Re Connective Services Pty Ltd (18 August 2017) T394.
[35]Transcript of hearing, Re Connective Services Pty Ltd (18 August 2017) T392.

In his affidavit of 2 August 2016, Mr Tsialtas states, under the heading ‘purpose for bringing the proposed derivative action:’[36]
[36]Affidavit of Mr Tsialtas dated 2 August 2017 [34]–[40]; EX P4; CB C415-6.

A copy of the draft Statement of Claim in the Proposed Derivative Action is exhibited at “Confidential KCM-5” to the First MacKay Affidavit.
I believe there is a good cause of action underlying the Leave Application.
The Leave Application is not bought at the behest of Minerva. Minerva did not instruct or [sic] direct me to issue the Leave Application.
I am making the Leave Application to restore Slea’s 33.33% interest in the Connective business and thereby restore full value to the original shareholders of the Connective Companies. Slea also seeks to prevent the directors from taking further steps that are detrimental to the Connective Companies as a whole, which includes Slea’s interest as a 33.33% shareholder.
Slea also seeks, by the Leave Application, to restore its pre-emptive rights under the Connective Companies’ constitutions, which rights have been subverted by the Restructure and certain provisions of the Connective Group constitution.
In this regard, I note that by virtue of the Restructure and provisions in the Connective Group constitution, Slea’s interest in the Connective Business is at risk of being further and/or wholly eliminated. Examples of how this could occur are by:
(a)the directors of Connective Services resolving to sell some or all of its shares in the Connective Group or not participating in any further share issue in Connective Group; or
(b)the directors of Connective Group resolving to sell some or all of its shares in any of the Connective subsidiaries or not participating in any further share issue in the Connective subsidiaries; or
(c)Connective Services being forced to sell its share in Connective Group by reason of mechanisms built into the Connective Group constitution. The Connective Group constitution provisions which provide for these mechanisms are set out in Annexure B of the draft Statement of Claim exhibited at “Confidential KCM-5” to the First MacKay Affidavit.

Further, the Connective Group constitution includes provisions that may prevent Slea from ever increasing its shareholding in Connective Services. Those provisions are also set out in Annexure B of the draft Statement of Claim exhibited at “Confidential KCM-5” to the First MacKay Affidavit.

As discussed below, the Court does find that there is a serious question to be tried.

Mr Tsialtas was not challenged on his evidence that he believed there was a good cause of action underlying the leave application.

I am satisfied on the balance of probabilities, on the evidence before the Court, that Slea, by its sole director Mr Tsialtas, believes that there is a good action as pleaded in the draft proposed statement of claim.

The Connective parties contend that Slea has a collateral purpose in bringing the proceeding on behalf of the Connective companies in that Slea is bringing the proceedings for the benefit of Liberty or Minerva; ‘that Slea is a stalking horse for Liberty.’[37]
[37]Transcript of hearing, Re Connective Services Pty Ltd (14 August 2017) T67.

The Connective parties relied upon the 2010 accommodation agreement, discussed above. The Connective parties contend that it is apparent under the 2010 accommodation agreement that Liberty has the option of obtaining all of Slea’s shares in the Connective companies and that therefore Slea has nothing obvious to gain directly from the success of the derivative action, that the action is not brought with reference to the company’s interests; but rather it is serving a collateral purpose of giving effect to the objectives of the 2010 accommodation agreement.[38]
[38]Transcript of hearing, Re Connective Services Pty Ltd (17 August 2017) T307.

Secondly, that Liberty is funding the proceedings is pointed to as evidence of a collateral purpose.

The Connective parties submit that all the evidence shows that the proceeding ‘is being promoted and conducted by Liberty in order to get a toehold, or a bigger toehold in the company or ultimately to get control of it’[39] and that the Court is required to ‘scrutinise with particular case the purpose for which the derivative action is said to be brought.’[40]
[39]Transcript of hearing, Re Connective Services Pty Ltd (17 August 2017) T310.
[40]Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732, 740 [34].

Mr O’Bryan submits that what is being put by the Connective parties is that Slea does not have an interest in the proceeding, and that the proceeding is being pursued to advance Liberty’s interests and not Slea’s interest. Mr O’Bryan submits the problem with the submission is that the evidence shows that Liberty’s interest in the proceeding is contingent upon and derivative from Slea’s interest in the proceeding.[41]
[41]Transcript of hearing, Re Connective Services Pty Ltd (18 August 2017) T392.

Secondly, Slea submits that this submission misses the point. Slea says that even if the 2010 accommodation agreement does give Liberty the option as alleged, it is in Slea’s commercial interest to pursue the proposed proceedings under the 2010 accommodation agreement.

This is so because if the proposed proceeding is successful, Slea may, depending on the relief granted, improve its interest in the business, which Mr Tsialtas considers may now be worth something in the area of $100 million. Further, the proceedings will protect Slea’s interest from being further diluted by any further share issue by the Connective Group.

The terms and conditions agreed between Slea and Minerva in consideration of the funding provided by Minerva, both for the litigation and any purchase of Connective shares, are consistent with Slea’s objective to restore full value to its shareholding in the Connective companies.

Slea is bound under the 2010 accommodation agreement to do all that it is necessary to protect and maintain its interest in the Connective business.

The simple point made on behalf of Slea is that even though the proceedings may assist or advance the interests of Liberty, the primary purpose of Slea in pursuing the proceedings is to protect and further its own interests in the Connective business.

It is not denied by Slea that Liberty has an interest in the proceedings, nor that the interests of Liberty and Slea are aligned, however it is submitted that Liberty’s is a contingent, future interest that is entirely respectful of the Connective companies’ constitution. And that such an agreement does not establish an abuse of process or lack of good faith in this proceeding.[42] Further, it is submitted that there is nothing improper about litigation funding.
[42]Transcript of hearing, Re Connective Services Pty Ltd (18 August 2017) T406.

A collateral purpose is that which would amount to an abuse of process within the test laid down in Williams v Spautz.[43] The purpose of a litigant may be to bring the proceedings to a successful conclusion so as to take advantage of an entitlement or benefit which the law gives the litigant in the event.[44]There is no collateral purpose in Slea bringing the application in order to restore full value to its shareholding in the Connective companies, enabling it at some future point in time to realise the value, as well as increasing through dividends, a higher share of the profits.
[43](1992) 174 CLR 509, 526 (Mason CJ, Dawson, Toohey and McHugh JJ) (‘Williams v Spautz’). See also Swansson, 320 [36]–[37] (Palmer J).
[44]Williams v Spautz, 526–7 (Mason CJ, Dawson, Toohey and McHugh JJ).

The test of improper purpose was recently discussed by the Court of Appeal in Melbourne City Investments Pty Ltd v Myer Holdings Ltd,[45] where the court, discussing Williams v Spautz and other cases establishing the tests for collateral purpose, said:[46]
[45][2017] VSCA 187 (20 July 2017) (‘MCI v Myer’).
[46]MCI v Myer, [8]–[13] (citations omitted).

The leading authority on abuse of process of the improper purpose kind is Williams v Spautz. In that case, Dr Spautz was dismissed from his position as a senior lecturer at the University of Newcastle. Dr Spautz then instituted more than 30 different proceedings. In some of the proceedings, Dr Spautz alleged criminal defamation and conspiracy against persons who occupied positions of authority at the University. Some of them sought a stay on the basis that the proceeding was an abuse of the process of the court. By majority, the High Court held that the proceedings should be stayed, on the basis that the predominant purpose of Dr Spautz in bringing the proceedings was improper. He sought to use the threat of proceedings and maintenance of them as a means of securing his reinstatement as a lecturer at the University. Mason CJ, Dawson, Toohey and McHugh JJ endorsed the articulation of the relevant principle by Lord Evershed MR in Re Majory:
that court proceedings may not be used or threatened for the purpose of obtaining for the person so using or threatening them some collateral advantage to himself, and not for the purpose for which such proceedings are properly designed and exist; and a party so using or threatening proceedings will be liable to be held guilty of abusing the process of the court and therefore disqualified from invoking the powers of the court by proceedings he has abused.

Their Honours went on to state that the criterion for abuse of process is whether the predominant purpose of bringing the proceedings is improper. They cautioned that the concept of abuse of process must be kept within reasonable bounds:
To say that a purpose of a litigant in bringing proceedings which is not within the scope of the proceedings constitutes, without more, an abuse of process might unduly expand the concept. The purpose of a litigant may be to bring the proceedings to a successful conclusion so as to take advantage of an entitlement or benefit which the law gives the litigant in that event.
Thus, to take an example mentioned in argument, an alderman prosecutes another alderman who is a political opponent for failure to disclose a relevant pecuniary interest when voting to approve a contract, intending to secure the opponent’s conviction so that he or she will then be disqualified from office as an alderman by reason of that conviction, pursuant to local government legislation regulating the holding of such offices. The ultimate purpose of bringing about disqualification is not within the scope of the criminal process instituted by the prosecutor. But the immediate purpose of the prosecutor is within that scope. And the existence of the ultimate purpose cannot constitute an abuse of process when that purpose is to bring about a result for which the law provides in the event that the proceedings terminate in the prosecutor’s favour.
It is otherwise when the purpose of bringing the proceedings is not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed or some collateral advantage beyond what the law offers.

The plurality also drew on the observations of Bridge LJ in Goldsmith v Sperrings Ltd:
Bridge LJ identified one difficulty when he said:
What if a litigant with a genuine cause of action, which he would wish to pursue in any event, can be shown also to have an ulterior purpose in view as a desired byproduct of the litigation? Can he on that ground be debarred from proceeding? I very much doubt it. (Emphasis added.) So would we. But his Lordship, by implication, evidently sees no difficulty with the case in which the plaintiff does not wish to pursue his or her cause of action to a conclusion because he or she intends to use the proceedings for a collateral and improper purpose.

Their Honours held that the commencement and maintenance of the proceedings was predominantly undertaken for an improper purpose and were properly stayed by the trial judge.
Brennan J delivered a separate judgment. He too focused on the proper purpose of legal proceedings and stated:
The purposes which legal proceedings are designed to serve are the protection or vindication of particular legal rights or immunities, the maintenance or affection of particular legal relationships, and the imposition or enforcement of particular legal penalties, liabilities and obligations. The means by which these purposes are achieved in a proceeding consist in the verdict which might be returned or the order which might be made in the proceeding, in the consequences that flow naturally from a verdict that might be returned or from an order that might be made (for example, the vindication of a plaintiff’s reputation flowing from a verdict in a civil action for defamation) and in compromise of the claims made in the proceeding. The achievement of any of the purposes mentioned by any of the means mentioned is within the scope of the remedy for which a proceeding is designed. But a proceeding may be intended to produce and may be capable of producing results that are not within the scope of the remedy.

Brennan J phrased the test as one based on whether there was a substantial legitimate purpose in bringing or maintaining the proceeding. Having referred to Goldsmith v Sperrings Ltd and the passage set out at above he continued:
I respectfully adopt the phrase ‘reasonable relationship’ to formulate a test similar to (though it may not be identical with) the test propounded by Bridge LJ in this passage. I would formulate the test in this way: if there be a reasonable relationship between the result intended by the plaintiff and the scope of the remedy available in the proceeding, there is no abuse of process. If there be mixed purposes - some legitimate, some collateral - I would restate his Lordship’s test that ‘but for his ulterior purpose, [the plaintiff] would not have commenced proceedings at all.’ So expressed, the test casts on the other party an onus of proving what the plaintiff would not have done if he had not formed the intention of obtaining a collateral advantage. That onus may be impossible to discharge. If that onus were discharged, the other party would establish that the plaintiff had not commenced or maintained the proceeding for any substantial legitimate purpose. The gravamen of the test, I apprehend, is that the plaintiff did not commence or maintain the proceeding for any substantial legitimate purpose. I would state the test in that way. Substantiality is a matter of degree, ascertained by reference to the intention attributed to the plaintiff in all the circumstances of the case. At the end of the day, the court must determine, by reference to the intention attributed to the plaintiff, not merely whether the collateral purpose of the proceeding outweighs any legitimate purpose but whether the plaintiff entertained any substantial intention that the proceeding should achieve a legitimate purpose.
For these reasons, I would hold that an abuse of process occurs when the only substantial intention of a plaintiff is to obtain an advantage or other benefit, to impose a burden or to create a situation that is not reasonably related to a verdict that might be returned or an order that might be made in the proceeding.

The Court of Appeal went on to discuss the decision in Dowling v Colonial Mutual Life Assurance Society Ltd,[47] which was also considered by the members of the High Court in Williams v Spautz as an example of a case where the plaintiff intends to obtain relief within the scope of the remedy available in the proceeding such that there is no abuse of process.[48]
[47](1915) 20 CLR 509 (‘Dowling’).
[48]Williams v Spautz (1992) 174 CLR 509, 535 (Brennan J), considered in MCI v Myer, [15].

The Court of Appeal said of Dowling that:[49]

… Colonial Mutual had taken an assignment of a debt owed by Dowling. Based on non-payment of the debt giving rise to an act of insolvency, Colonial Mutual petitioned for the sequestration of Dowling. Colonial Mutual proceeded this way because it wanted Dowling to be publicly examined as to who had caused him to publish defamatory material about it. Isaacs J held that notwithstanding the ultimate object of Colonial Mutual, it had a legal right to the immediate relief it sought (that being the sequestration order). Colonial Mutual wished to use the proceeding for the very object for which it was designed by law; that is sequestration. Its subsequent purpose (discovery of the identity of those causing Dowling to publish the defamatory statements) could only be achieved by the court compelling Dowling to give an answer in a public examination. Isaacs J contrasted the situation with one where it was shown that Colonial Mutual had threatened Dowling that unless he gave up the names of his supporters, it would bring bankruptcy proceedings. In his Honour’s opinion, those circumstances would have constituted an abuse of process. Powers J held that the proceedings were based on a lawful debt and Colonial Mutual intended in good faith to proceed with the petition for bankruptcy. Consequently, in his Honour’s opinion, there was no abuse of process. Griffiths CJ dissented taking the view that the proceeding was an abuse of process. In the Chief Justice’s opinion, the sole purpose of Colonial Mutual in seeking sequestration (to discover by means of an inquisitorial bankruptcy examination those who had encouraged or funded Dowling to publish) was an illegitimate use of the proceeding and constituted an abuse of process.

[49]MCI v Myer, [14] (citations omitted).

It is difficult to categorise the rights and obligations under the 2010 accommodation agreement as a collateral purpose as defined by the cases discussed. Nonetheless, the Connective parties also rely on the fact that litigation funding is being provided by Liberty under a further funding agreement. The fact that Liberty believes it is in its own interests to fund Slea to pursue the proposed claim does not mean that Slea does not have legitimate grounds for pursuing the claim. The critical issue is whether Slea is genuinely seeking relief to its own advantage within what the law allows.

The submissions of the Connective parties on this issue failed to meet the fact that Slea has legitimate claims that may be properly pursued through a derivative proceeding. Liberty’s interest in Slea pursuing those grounds does not convert what is otherwise a legitimate claim by Slea into an improper claim for a collateral purpose. The issue is to characterise Slea’s purpose and objective.

Slea has satisfied me on the balance of probabilities that, on the evidence before the Court, it is acting in good faith in seeking leave to bring the derivative proceedings. Insofar as it is relevant, I am also not satisfied that the predominant purpose of Slea bringing the proceedings is improper or constitutes an abuse of process.

Best interests of the company

The Connective parties contest that it is in the best interests of the Connective companies for leave to be granted. The Connective parties submit that the Court must be positively satisfied that a trial of the proposed claim seeking to unravel a transaction now almost four years old, which has been a commercial success, in all of the circumstances, serves the best interests of the Connective companies.[50]
[50]Carpenter v Pioneer Part Pty Ltd (2004) 211 ALR 457, 464 [19]; Swansson 324 [55]–[56]; Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd (2011) 86 ACSR 432, 445 [57].

The Connective parties acknowledge that the relevant best interests are those of the Connective companies, but nonetheless submit that the Court must also consider the interests of the broader Connective group, which will be affected by the claimed relief.[51]
[51]Goozee v Graphic World Group Holdings Pty Ltd (200) 170 FLR 451, 467 [74], citing Maronis Holding Ltd v Nippon Credit Australia Pty Ltd (2001) ACSR 404; Nicholas v Soundcraft Electronics Ltd [1993] BCLC 360.

Further, at the time of the trial, Slea says that the only relevant co-operation was for Murray Lees to give evidence, and that fact was already known by the Connective parties, as Ms MacKay’s affidavit states that Murray Lees had agreed to provide evidence. Further, Slea submits that the Connective parties were on notice of the existence of an agreement between Murray Lees and an unspecified party to give evidence. Slea submits that the Connective parties elected not to seek to subpoena the production of the co-operation deed.

The Connective parties submit that a vague reference to an agreement in an affidavit cannot be sufficient to put them on notice that a written agreement existed and that I cannot infer, from their failure to call for the agreement, that a forensic decision was made. Nonetheless, it appears from the earlier correspondence that the possibility of such an agreement existing had entered the minds of the Connective parties, as they had sought to obtain it.

Accordingly, I am not satisfied that with reasonable diligence the co-operation deed could not have been uncovered by the Connective parties prior to the hearing of the derivative leave application concluding.

I do not, therefore, consider the evidence to be relevantly fresh.

Financial support agreement and the guarantee and the indemnity

Slea submits that soon after the Connective parties learned that Murray Lees had agreed to give evidence for Slea, the solicitors for the Connective parties wrote to Murray Lees requesting that he ‘identify any financial or other benefit provided (or agreed to be provided) in relation to [his] agreement to give evidence…’[140] No call was made for any such documents.
[140]Affidavit of Justin Taede Vaatstra dated 8 November 2017 [18] and JTV-7.

Mr Dalton said that the fact that Liberty (or Minerva) was funding Murray Lees ‘at about the time that he spoke to ABL and … became the turncoat, the fact that he was in financial difficulty, and the fact that he may have been receiving funding from Liberty was well known’, to the Connective parties.[141]
[141]Transcript of hearing, Re Connective Services Pty Ltd (10 October 2017) T27.

A loan agreement between Liberty and Murray Lees, and Murray Lees’ financial situation, was raised during cross-examination of Ms MacKay in the following exchange:[142]
[142]T205, L11 – T207.

Mr Myers:Thank you, now do you know about a loan agreement between the Liberty group and Mr Murray Lees?

Ms MacKay: I believe there could be one, I’m not sure.
Mr Myers: What’s the basis of your belief?
Ms MacKay:I understood that Murray had said at some point that he was in financial trouble and had approached Liberty.

Mr Myers:      And do you also believe that Liberty lent him $2.m?
Ms MacKay:   I’m not aware of that.
Mr Myers:      How much do you believe Liberty lent to him?
Ms MacKay:   I don’t have any idea about that.
Mr Myers:      But do you believe there may be a loan agreement?
Ms MacKay:   I believe there may be.
Mr Myers:And that loan agreement was entered into before Mr Murray Lees offered to give evidence on behalf of the Liberty interests?
Ms MacKay:I, I don’t know about that. I don’t know any details about the loan agreement or.

…

Mr Myers:What’s the source of your knowledge about the loan agreement?
Ms MacKay:Ah in terms of the circumstances in which Murray approached - - -

Mr Myers:      Liberty?
Ms MacKay:   Yes.
Mr Myers:      And who told you about those circumstances?
Ms MacKay:I can’t recall. I can’t recall whether it came directly from Liberty or whether I was told internally by someone else from ABL.

…
Mr Myers:Well I put it to you that that’s a really serious omission because you’ve put forward Mr Lees’ statement, that’s something that the court would rely upon, when you believed, maybe I should say no, that he had entered into a loan agreement and taken money from Liberty before giving that statement?
Ms MacKay:Um, well I think the difference was that you said that they would lend the money on condition that he give a statement. And I’m not aware of that occurring.
Mr Myers:But you are aware that they did lend money and he gave the statement?

Ms MacKay: Yes.
Mr Myers:Yes. And you’re aware that he approached Liberty because he said he was short of money and needed some money?

Ms MacKay: Yes.
Mr Myers:And then Liberty lent some money and then he made a statement?

Ms MacKay: Um, I haven’t had any involvement or knowledge of the loan.
Mr Myers:Well is there someone who’s going to give evidence in this proceeding about the loan? Is someone going to tell us about the loan agreement with Mr Murray Lees?

Ms MacKay:   No.
Mr Myers:      You want to keep that from the court do you?
Ms MacKay:   Um, no.
Mr Myers:      Well that’s the effect of what’s happened, isn’t it?
Ms MacKay:I haven’t seen a loan agreement to make some sort of decision about whether it’s relevant on this application or not.

…
Mr Myers:You said that a source of your information about a loan agreement was within the firm of Arnold Bloch Leibler?

Ms MacKay:   Yes.
Mr Myers:      Who was that person?
Ms MacKay:   Um, it would have been Justin Vaastra.

Mr Dalton submitted that from the above exchange it is obvious that there was some knowledge on the part of the Connective companies about a loan agreement between Murray Lees and Liberty, sufficient for the questions to be put,[143] and sufficient information to cross-examine Mr Vaastra at that time, who had given affidavit evidence for the proceeding. Mr Vaastra was not cross-examined about the loan agreement, despite Slea having the information that it put to Ms MacKay.
[143]Transcript of hearing, Re Connective Services Pty Ltd (10 October 2017) T28.

Despite raising the issue, the Connective parties did not seek to call for the loan agreement and instead chose to make something of the fact that Slea had not proffered this material.[144] Mr Dalton submitted that the Court must assume that the Connective parties considered in their interest not to call for the agreement. Mr Myers asked who was going to produce the agreement, but elected not to call for its production or to subpoena the document.
[144]Transcript of hearing, Re Connective Services Pty Ltd (16 August 2017) T205, L5 – T208, L10 XXN; (17 August 2017) T310, L3–26.

I am not satisfied that the Connective parties could not, by reasonable diligence, have obtained this evidence of the loan agreement at the time of the hearing of the derivative leave application.

Second Murray Lees Statement

The further statement of Murray Lees, dated 8 November 2017, is relied upon to point to Liberty’s intentions in relation to the Connective business.

I note that the most recent statement of Murray Lees does not involve him withdrawing anything he said in his previous statement.

Slea submits that it was open to the Connective parties to have subpoenaed Murray Lees prior to the hearing of the leave application; instead of doing so, the Connective parties sought to impugn Slea’s decision not to call Murray Lees and the circumstances attending the provision of his statement. Slea points to the ‘remarkable feature’ that the Connective parties seek to re-open for the purpose of calling the very witness whose absence they sought to exploit, and for the purpose of having the witness give evidence on events that predate the hearing.[145]
[145]Plaintiff’s Outline of Argument (in opposition to Connective’s application to re-open) dated 10 November 2017.

Slea submitted that the allegations raised in the later statement by Murray Lees do not contradict or otherwise bear on the contractual arrangements between Slea and Liberty, and all matters relevant to the re-opening application were traversed at the hearing.[146]
[146]Plaintiff’s Outline of Argument (in opposition to Connective’s application to re-open) dated 10 November 2017.

In my opinion, the statement of Murray Lees does not raise any new issues not otherwise already raised during the derivative leave application.

Materially affect the outcome

Slea submitted that the evidence does not contradict or otherwise bear on the contractual arrangement between Slea and Liberty, evidence of which was presented at the trial, and that all of the relevant matters that the Connective parties now wish to agitate by way of re-opening were already raised by them at the hearing. Slea submitted that, therefore, there is no prospect that the material, the subject of the re-opening application, could materially affect the outcome of the leave application.

Slea submitted that the co-operation deed is contingent upon Murray Lees obtaining a shareholding in the Connective business, which requires Murray Lees to bring proceedings, succeed with the relief claimed, and receive a transfer of shares from Millsave.

Mortgage Results commenced proceedings seeking a transfer of 25 per cent of shares from Millsave (referred to at paragraph 14 of the statement of claim), by which means Mortgage Results attempted to have its legal rights to a 25 per cent shareholding in the Connective companies recognised. At the time that the derivative leave application was heard the proceedings remained on foot. The proceeding is now stayed, pending the Court’s determination in the fresh proceeding commenced by Murray Lees against Liberty.[147]
[147]Transcript of hearing, Re Connective Services Pty Ltd (13 November 2017) T47.

Mr Dalton submitted that, in any event, Murray Lees has now changed camps and the proceeding seeking shareholding rights for Mortgage Results has been stayed. As Murray Lees has no intention of prosecuting his claim to obtain a shareholding in the Connective companies, the ‘nefarious scheme’ that is relied upon as increasing the size of the Liberty stalking horse, simply does not exist anymore.[148] The case put is that the fresh evidence shows that unbeknownst to the Connective parties that at the date of the hearing Liberty had exerted influence over Murray Lees as part of its attempts to exercise influence over the Connective companies, however, by the date of hearing the application to re-open, that was no longer the case. Even if the co-operation deed and financial support agreement can be said to be relevant, the alleged scheme cannot be enforced.
[148]Transcript of hearing, Re Connective Services Pty Ltd (13 November 2017) T76.

‘Good faith’

The Connective parties submitted that the relevant ‘fresh’ evidence is centrally relevant to the statutory requirement that the application is brought in good faith.[149]
[149]The Act s 237(2)(b).

The Connective parties submitted that in assessing this criterion, the Court is to consider whether ‘the application is being made in pursuit of an interest other than that of the company’,[150] namely, for a collateral purpose.[151]
[150]Explanatory Memorandum, Corporate Law Economic Reform Program Bill 1998 (Cth) [6.36].
[151]Swansson v Pratt (2002) 42 ACSR 313, 320 [36]; Chahwan v Euphoric (2008) 227 FLR 43, 61 [78], 62 [83] (‘Chahwan’).

The Connective parties submitted that it is not necessary to find that a collateral purpose amounts to an improper purpose, rather, that the presence of any collateral purpose means that there is an absence of good faith.[152] Mr Quinn referred to Chahwan v Euphoric Pty Ltd, where Tobias J (with Justices Bell and Beazley agreeing) said that:[153]

I would therefore reject the appellant’s submissions on the question of good faith when assessed against the two grounds identified by Palmer J in Swansson: namely, whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success and whether the applicant is seeking to bring the derivative action for a collateral purpose that would amount to an abuse of process. In any event, the expression “acting in good faith” in s 237(2)(b) of the Act need not be confined, as the appellant submitted it should, to those two grounds. In particular, it extends beyond conduct that would constitute an abuse of process.
As Palmer J made clear in Swansson, in my respectful view correctly, although those two factors are required to be considered when a court is determining whether the good faith requirement of s 237(2)(b) is satisfied, the issue of good faith is not confined to those factors. His Honour noted (at 320 [35]), “the law will develop incrementally as different factual circumstances come before the courts”.

[152]Transcript of hearing, Re Connective Services Pty Ltd (13 November 2017) T61.

[153]Chahwan, 62 [81]–[82]; Transcript of hearing, Re Connective Services Pty Ltd (13 November 2017) T72, at T73 Mr Quinn submits that ‘Chahwan has been approved by several cases and it’s not been disapproved.’

Mr Quinn submitted that there can be an absence of good faith on grounds that would fall short of the leave application being an abuse of process.

Mr Dalton submitted that this submission was an attempt at putting further legal arguments than those dealt with at the trial, and serves to highlight the difficulty with any re-opening, and particularly this re-opening application, which is really just seeking to have another go.

In any event, Mr Dalton submitted that the present case fits perfectly with the principle of Chahwan, stated as:[154]

In other words, I take his Honour to be saying that an applicant will only be acting in good faith for the purpose of s 237(2)(b) where, as a current or former shareholder or director of the company, he or she would suffer a real and substantive injury if a derivative action were not permitted provided that that injury was dependent upon or connected with the applicant’s status as such shareholder or director. It might be a positive indication of the good faith of a shareholder if he or she sought to institute a derivative action which would have the effect, if successful, of restoring value to his or her shares in the company.

[154]Chahwan, 60 [74].

The Connective parties submitted that the good faith requirement cannot be met by Slea, as it is clear that the dominant purpose of the co-operation deed between Slea and Murray Lees is to advance the interests of Liberty.[155] That there may, incidentally, be a financial benefit conferred on Slea is beside the point, because the Connective parties now have evidence that these arrangements are to enable Liberty to get control of the business without acquiring all, or any, of the shares and to advance the commercial and financial interests of Liberty.[156] The existence of the co-operation deed and the plan to benefit Liberty exposes the purposes and motivations of the parties to this suite of agreements.[157]
[155]Transcript of hearing, Re Connective Services Pty Ltd (10 October 2017) T12; T21.
[156]Transcript of hearing, Re Connective Services Pty Ltd (10 October 2017) T22.
[157]Transcript of hearing, Re Connective Services Pty Ltd (10 October 2017) T40.

Mr Dalton submitted that the co-operation deed would not add anything to the existing evidence and it does not answer Mr O’Bryan’s earlier submission that there is a discrete benefit to Slea in the proceeding, not the least of which is ensuring that its shareholding is not diminished’ and its interest in the Connective business is not reduced from a third to a quarter.

Mr Dalton said that the funding agreement would have no further probative value, as it was common ground that Liberty was funding Slea in the litigation and thus would have no effect on the outcome of the application.[158] The agreement may establish that Liberty had a commercial interest, but this is not relevant to whether or not Slea is acting in good faith. Slea clearly has a genuine commercial interest in establishing that it has a third interest in the Connective business and that interest is enhanced by reason of its commercial dealings with Liberty. If the materiality of the funding agreement is that Liberty’s solicitors and Liberty were giving instructions, this would not have made material difference to the evidence before the Court.
[158]Transcript of hearing, Re Connective Services Pty Ltd (10 October 2017) T26.

Mr Quinn submitted that Slea’s legitimate commercial purpose has been tainted by the joint venture arrangement with Liberty.

The premise of this argument, that the objectives of a joint venture between Slea and Liberty diminishes or somehow taints the legitimate interest of Slea, is false. The argument ignores the fact that by assisting the joint venture, Slea advances its own commercial interests, both in the joint venture and in its shareholding in the Connective companies. Slea’s commercial interest in making sure the constitution of the Connective companies is observed, is not only to protect the value of its investment in the Connective companies, but also the value of the joint venture Slea has with Liberty.

If I am wrong, and the purpose of Liberty is seen as in some way undermining or devaluing the commercial interests of Slea, in my view it still does not derogate from the fact that Slea has a bona fide and predominate reason for bringing the proceeding: to cause the Connective companies to uphold the constitution and undo the damage caused by the directors’ breach by misusing their powers, which led to Slea’s interest in the business being diminished to 25 per cent.

The agreement with Liberty does not interfere with Slea’s rights to dividends on its shares in the Connective companies and thus the earnings of the Connective companies. Slea has a significant commercial interest in ensuring that the directors of the Connective companies properly exercise their powers that is not in any way tarnished or diminished because it also has a joint venture arrangement with Liberty.

‘Best interests’

The Connective companies submitted that the relevant evidence is materially relevant to the consideration of ‘best interests of the company’, and that the whole arrangement with Liberty and Minerva is not directed to the best interests of the Connective companies, it is directed to the commercial interests of a corporation who is not even a shareholder.[159]
[159]Transcript of hearing, Re Connective Services Pty Ltd (10 October 2017) T12, L21–28.

Mr Dalton submits that the question is not whether or not any of the co-operation that is referred to in the materials is in the Connective companies’ interests, but whether or not the application to bring the proceeding on behalf of the Connective companies is in the companies’ best interest. Mr Dalton submits that it is in the best interests of the Connective companies, as a whole, that the directors observe the protections provided to the shareholders in the constitutions of the companies and that contrary to the submissions of the Connective parties, the issue of best interests cannot be determined by the financial advantages to the majority shareholder garnered at the expense of the minority interests of Slea.

Slea submitted that the fact that there is an agreement between Slea and Murray Lees as to how Murray Lees might act as a shareholder, in the contingent event that he becomes one, and that the agreement considers affecting ‘changes that would benefit Liberty’ bears no relationship to the question of whether or not it is in the interests of the Connective companies that the proceeding be brought to ensure that its internal governance is conducted correctly and, if it was not, that appropriate remedies be granted in respect of it.[160]
[160]Transcript of hearing, Re Connective Services Pty Ltd (10 October 2017) T36; T38.

Mr Myers submitted that the Court must feel the gravest apprehension that Murray Lees, someone who was put forward as an important witness, unbeknownst to the other party and to the Court, has been promised $2.8 million for co-operating, including providing evidence.[161]
[161]Transcript of hearing, Re Connective Services Pty Ltd (10 October 2017) T22.

Mr Dalton submits that if Murray Lees’ statement was influenced by the circumstance that he had obtained an agreement for the provision of $2.8 million, his evidence should accordingly be treated with less weight, or should not be believed at all.[162] Nonetheless, Mr Dalton says that there was other evidence presented at the hearing, sufficient to cross the hurdle of a serious question to be tried, in particular the documentary evidence showing Macquarie’s advice to the directors how to get around the pre-emptive provisions.[163]
[162]Transcript of hearing, Re Connective Services Pty Ltd (10 October 2017) T29.
[163]Transcript of hearing, Re Connective Services Pty Ltd (10 October 2017) T29.

Mr Dalton said that it cannot be determinative that there may now be direct evidence that Murray Lees had entered into an agreement with Liberty, as opposed to the state of affairs at the trial: that Murray Lees had given a statement to ABL in circumstances where it was believed that there was a loan agreement with Liberty.[164]
[164]Transcript of hearing, Re Connective Services Pty Ltd (10 October 2017) T30.

Interests of justice

Slea submits that the Connective parties seek to re-open the leave application in order to inquire into the circumstances surrounding its litigation funder’s dealings with a third party, which Slea says is of, at best, marginal relevance, while its possible scope is indeterminate.

The principles of finality in litigation and the efficient administration of justice dictate that the circumstances must be exceptional before a party will be permitted to re-open its case.

As to the question of prejudice, it is submitted on behalf of the Connective parties that inevitably there will always be delay and expense as an inevitable incident of extending the hearing, and in order for prejudice to be a bar to an application to re-open, the prejudice must be something over and above this, otherwise, there would always be prejudice and that hurdle could never be overcome.

Conclusion

It is put that Liberty’s ultimate commercial objective was to enable its joint venture parties, being Slea and Murray Lees (beholden to Liberty), to get control of 58 per cent of shares in the Connective business, to take over control of the board and get Liberty back on the panel of lenders. There is no evidence that shows the commercial purpose of Liberty involves getting rid of Macquarie Bank, or stripping it of its shares; there is no binding agreement to get 58 per cent of the shares; the agreements are contingent; and as things presently stand, Liberty is not receiving the dividend stream of the shares.

The prospect of Liberty seeking to control the Connective companies is irrelevant to the good faith of Slea and whether the proceedings are in the best interests of the Connective companies.

In substance, the new evidence referred to seeks to further the argument maintained during the derivative leave application that the derivative proceedings are being conducted by Slea for a collateral purpose of advancing the interests of Liberty. That was the main contention of the Connective companies in the hearing before me. That case misconceives and ignores the genuine and bona fide interest that Slea has in seeking to protect its interest in the Connective companies from being damaged and diminished by the directors exercising their powers for the improper purpose of circumventing Slea’s pre-emptive rights.

None of the evidence can establish that Slea is bringing the proceedings on behalf of Liberty as opposed to Slea bringing the proceedings in its own interest, which includes advancing the arrangements Slea has with Liberty. The fresh evidence does not contradict the existing evidence before the Court, that the derivative proceedings constitute a discreet benefit to Slea. In any event, I am not satisfied that it is in the interests of justice to allow the hearing to be re-opened on grounds of fresh evidence.

Subpoenas

My view is that I should dismiss the application to re-open the hearing. Mr Quinn submitted that if I was minded to dismiss the application, I should consider whether the objected subpoenas, issued after the hearing of the application to adjourn the summons for re-opening the hearing, could be capable of affecting the outcome. That is, whether there is legitimate forensic purpose for subpoenas.

The relevant subpoenas seek further documents that relate to the alleged fresh evidence outlined above. As Mr Quinn put it, the Connective parties have fresh evidence and, for the purposes of the re-opening application, wish to know whether there is any additional undisclosed fresh evidence, not at large, but directly related to the fresh evidence already discovered.

Mr Dalton submits that insofar as the subpoenaed documents may be said to be relevant to the re-opening application, in which they have to establish freshness and sufficient materiality, the subpoenas are a fishing expedition.

Mr Quinn submits that the purpose of the subpoenas is to ensure that we have all of that evidence of a fresh nature relating to the topic raised by the documents outlined above, and that the substantial overlap of the subpoenaed documents and those already discovered, means the subpoenas fall well short of a fishing expedition.

As I have found that the evidence relied on for the re-opening application is not relevantly ‘fresh,’ is not capable of materially affecting the outcome and it is otherwise not in the interest of justice to re-open the case, I am not satisfied that any further evidence of the same category would have any legitimate forensic purpose.

Conclusions

For the foregone reasons, in the exercise of my discretion, I dismiss the summons for re-opening the hearing and for adjourning the delivery of judgment.

I have not found that there would be any utility in allowing the subpoenas. I allow the objections to the subpoenas.

I have found on the evidence before the Court, that the criteria in s 237 have been met. Accordingly, I am required by the Act to grant leave to Slea to bring the proposed derivative proceeding.

I do so on the condition that Slea undertakes to the Court to pay and bear, and indemnify the company against, all costs, charges and expenses of and incidental to the bringing and continuation of the derivative claims for which leave is granted.

The orders of the Court are as follows:

(a) Pursuant to s 49(1) of the Civil Procedure Act 2010 and the inherent jurisdiction of the Court, the application made on behalf of the first, second and fourth to ninth defendants to re-open the hearing of the derivative leave application be dismissed;

(b) The application made on behalf of the first, second and fourth to ninth defendants, to adjourn the delivery of judgment in the derivative leave application sine die, be dismissed;

(c) Pursuant to r 42.04(1) of the Supreme Court (General Civil Procedure) Rules 2015, the following subpoenas issued at the request of the first, second and fourth to ninth defendants be wholly set aside:

(iv) The subpoena addressed to Liberty Financial Pty Limited dated 27 October 2017;

(v) The subpoena addressed to Liberty Financial Group Pty Limited dated 27 October 2017;

(vi) The subpoena addressed to Murray Lees dated 31 October 2017;

(d) On the condition of Slea undertaking to the Court to pay and bear, and indemnify the company against, all costs, charges and expenses of and incidental to the bringing and continuation of the derivative claims, pursuant to s 237 of the Corporations Act 2001 (Cth), Slea be granted leave to bring a proceeding on behalf of, and in the name of, Connective Services Pty Ltd and Connective Services OSN Pty Ltd, in the form set out in the draft statement of claim exhibited to the affidavit of Kimberley Chantelle MacKay sworn 17 May 2016, at “KCM-5”, against the parties identified in the schedule of parties in the proposed statement of claim.

The Court proposes to adjourn to a date to be fixed, paragraph (b) of the 27 May 2016 summons on the question of whether Slea be granted leave to use the documents listed in exhibit KCM 1 to the first MacKay affidavit for the purpose of the derivative action.

I will hear any submissions on costs.

[2017] VSC 609

29 November 2017