Slea Pty Ltd v Connective Services Pty Ltd
[2014] VSC 684
•14 March 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
S CI 2011 4332
| SLEA PTY LTD (ACN 081 276 811) | Plaintiff |
| v | |
| CONNECTIVE SERVICES PTY LTD (ACN 107 366 496) | First Defendant |
| - and - | |
| CONNECTIVE OSN PTY LTD (ACN 106 761 326) | Second Defendant |
---
JUDGE: | Efthim AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 29 January 2014 |
DATE OF JUDGMENT: | 14 March 2014 |
CASE MAY BE CITED AS: | Slea Pty Ltd v Connective Services Pty Ltd & Anor |
MEDIUM NEUTRAL CITATION: | [2014] VSC 684 |
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Moshinsky SC | Arnold Bloch Leibler |
| For the Defendants | Mr AJ Myers QC and Mr DG Guidolin | Maddocks |
| For Millsave Holdings Pty Ltd, Mssrs Haron, Lees and Maloney | Mr CM Scerri QC and Mr S Hay | Macpherson + Kelley Lawyers |
| Macquarie Bank Ltd | Mr JWS Peters SC and Mr H Redd | Henry Davis York |
HIS HONOUR:
The plaintiff Slea Pty Ltd has made application by summons seeking that:
(a) pursuant to rule 9.02(5) of the Supreme Court (General Civil Procedure) Rules 2005, Millsave Holdings Pty Ltd, Macquarie Bank Limited and Messrs Glenn Lees, Mark Haron and Graham Maloney be joined as defendants to this proceeding; and
(b) pursuant to rule 36.04(1)(b) of the Supreme Court (General Civil Procedure) Rules 2005, the plaintiff be granted leave to file and serve an amended statement of claim in the form exhibited to the affidavit of Justin Taede Vaatstra sworn 6 December 2013.
Background
Mr Sofianos Tsialtas, the sole director of the plaintiff, together with Mr Glenn Lees and his brother Mr Murray Lees founded a mortgage aggregation business in Australia by the name Connective. The business, until recently, was carried on by the first and second defendants, Connective Services Pty Ltd and Connective OSN Pty Ltd (the “Connective Companies”).
The current directors of the Connective Companies are Mr Glenn Lees, Mr Mark Haron and Mr Graham Maloney. Mr Tsialtas was previously but is no longer director of the Connective Companies. He says that he was forced to resign by Glenn and Murray Lees in approximately May 2008.
The plaintiff holds a one third interest (being 600 shares) in the share capital of each of the Connective Companies. That interest is held by the plaintiff as trustee of the Tsialtas Family Trust. Until recently, the balance of the shares (being 200 shares) was held entirely by Millsave Holdings Pty Ltd. Mr Glenn Lees is the sole director of Millsave Holdings Pty Ltd and Mr Glenn Lees and his wife are the sole shareholders.
On or about 29 October 2013, Millsave transferred 300 of its shares in each of the Connective Companies to Mr Haron. That transfer took place following settlement of legal proceedings issued by Mr Haron in this court.
Mr Maloney does not hold any shares in either of the Connective Companies. However, he is described as an independent director and chairman on the Connective Companies website.
In 2006, Mr Haron entered the business. He claimed, in the earlier proceedings before this Court, that in October 2006 he, Millsave Holdings Pty Ltd and the plaintiff entered into a final agreement whereby it was agreed that the plaintiff and Millsave Holdings Pty Ltd would sell to him (and he would purchase) 25% of the shares in each of the Connective Companies for $875,000.00. This amount was payable upon the sale of the Connective Companies businesses or earlier at the discretion of Mr Haron. That was denied by the plaintiff.
On 16 August 2011 Mr Haron and Millsave Holdings Pty Ltd settled that proceeding as between themselves pursuant to a Deed of Settlement and Release dated 16 August 2011.
The trial of that proceeding commenced before Judd J on 21 October 2013. On that date, Mr Haron’s counsel informed the Court that the Deed of Settlement had been terminated and that Mr Haron sought leave of the Court to rejoin Millsave Holdings Pty Ltd as a defendant to the Haron proceeding. The Haron proceeding was settled in confidential terms on 22 October 2013 and was dismissed with no order as to costs.
The parties advised the Court that on or about 29 October 2013, following the settlement of that proceeding, the shareholding in the Connective Companies is as follows:
· The plaintiff: 33.33%;
· Millsave Holdings Pty Ltd: 50%;
· Mr Haron 16.66%.
On 17 October 2011, the plaintiff commenced proceedings against each of the Connective Companies. The plaintiff alleges that the conduct of the affairs of each of the Connective Companies had been oppressive, unfairly prejudicial, and/or unfairly discriminatory against the plaintiff. It alleges a failure to pay dividends, inappropriate retention of dividends, inappropriate payment of directors’ fees, inappropriate recording of directors’ fees as loans and inappropriate and unexplained board appointments.
Another proceeding before this Court was a pre-emptive rights proceeding, which was commenced on 1 October 2013 by the plaintiff against the Connective Companies and Mr Haron. In that proceeding, the plaintiff sought declarations that the pre-emptive rights provision in the constitution of each of the Connective Companies applied to the transfer of shares in the Connective Companies by Millsave Holdings Pty Ltd to Mr Haron under the Deed of Settlement. It also sought injunctions requiring Millsave Holdings Pty Ltd to make an offer to transfer to the plaintiff the shares that were the subject of the Deed of Settlement immediately. That proceeding has been settled in confidential terms as was the proceeding brought by Mr Haron on 22 October 2013.
In an affidavit filed in support of the current application, Mr Tsialtas deposes that on the morning of 7 November 2013 he received a telephone call from Anne Gallagher, the State Manager at Liberty Financial Pty Ltd. Ms Gallagher advised that she was calling to congratulate Mr Tsialtas on the sale of the Connective Companies to Macquarie Bank Limited. At the time he spoke to Ms Gallagher he had not been informed about any sale of Connective’s business to Macquarie Bank Limited.
On 11 November 2013, Mr Tsialtas sent a letter to the directors of the Connective Companies saying that he expected to be informed by the Board of significant transactions being considered by the Connective Companies including any capital raisings, alterations to the nature of the business or share structure of the Connective Companies, corporate reorganisation of the Connective Companies, any sale proposals or transactions.
On 13 November 2013, he received a letter from Mr Maloney which did not mention or disclose anything about the purported transaction with Macquarie Bank Limited.
On instructions from Mr Tsialtas, two letters were written by the plaintiff’s lawyers Arnold Bloch Leibler. The first letter advised of an intention to amend the statement of claim in the oppression proceeding, to protect Slea’s interest as 33% shareholder in each of those companies. The second letter requested full details of the purported transaction.
On 20 November 2013, Mr Tsialtas received an email from Mr Maloney advising that on 30 October 2013 the Connective Companies had sold 25% of a subsidiary company Connective Group Pty Ltd to Macquarie Bank Limited for $5,000,000.00. As a third shareholder, Mr Tsialtas would be entitled to receive a total fully franked dividend of $1,166,666.67.
The entire business of the Connective Companies had been transferred to a recently incorporated subsidiary Connective Group Pty Ltd in which the 25% stake was sold to Macquarie Bank Limited. The businesses had always been held by the two Connective Companies.
The plaintiff submits that what must have occurred was that at some point in time the two Connective Companies transferred the entire business and the entire Mortgage Broking Business to Connective Group Pty Ltd to avoid the pre-emptive right clause in the constitution of both those companies because both Connective Companies had the same constitution.
Clause 77 of those constitutions contains a pre-emptive clause. Pursuant to this clause, if the majority wanted to sell 25% of the business of the Connective Company shares they will first have to offer it to the plaintiff. The plaintiff has a right for first refusal and could have matched or bettered the offer of Macquarie Bank Limited.
The plaintiff contends that given the plaintiff’s interests in maintaining or enhancing its shareholding in this company there is a very realistic prospect that it would have bettered the offer of $5,000,000.00 for a 25% ownership in that company. The result of that sale is that the plaintiff’s shareholding has been diluted to 25%.
Mr Tsialtas deposes that arising out of the purported transactions, the plaintiff intends to:
· Apply for leave to amend the statement of claim in the oppression proceeding to introduce claims based on what it presently knows about the purported transactions. It also intends to apply for leave to join Macquarie Bank Limited to the proceeding and introduce claims based on the purported transactions against Macquarie Bank Limited. The relief sought is to set aside the purported transactions including the sale of 25% of the shares in the Connective Group Pty Ltd;
· Seek leave to include a claim that entry into the purported transactions constitutes a new ground of oppression by the defendants — that the defendants deliberately withheld information about the purported transactions from the plaintiff and structured the purported transactions in a way designed to circumvent the plaintiff’s pre-emptive rights under the defendant’s constitutions;
· Leave to include a claim that the defendant’s directors breached fiduciary duties owed to the plaintiff as a member;
· Leave to include the claim that the pre-emptive rights provisions in the defendants’ constitutions were triggered by the purported transactions but were breached. It will be alleged that Macquarie Bank Limited had knowledge of the plaintiff’s pre-emptive rights;
· Commence new proceedings on behalf of the Connective Companies pursuant to s 236 of the Corporations Act 2001 (Cth) against the directors of the Connective Companies and Macquarie Bank Limited. The plaintiff will allege that the circumstances of entry into the purported transactions gave rise to various breaches by the directors and the fiduciary duties owed by them to the Connective Companies and statutory directors’ duties.
The amendments to the Statement of Claim
Paragraphs 17A-17D and 18(f) of the amended statement of claim plead the purported transactions as another instance of oppression by the Connective Companies against the plaintiff. These paragraphs have not been objected to.
Paragraphs 19-23 of the amended statement of claim plead breaches of fiduciary duties and statutory duties by the directors of the Connective Companies relying on the same conduct that is referred to in paragraph 17A-17D.
It is alleged that in breach of the directors’ fiduciary duties in contravention of s 181(1) of the Corporations Act 2001(Cth), the purported transactions were not in the interests of the Connective Companies and were not for a proper purpose. It is also alleged that Macquarie Bank Limited knowingly assisted in the directors’ breach of duties, knowingly received Trust property and also contravened s 181(1) of the Corporations Act 2001 (Cth).
These paragraphs have been objected to by the defendant and the proposed defendants. They submit that in those paragraphs, the plaintiff as a shareholder purports to bring an action for a wrong allegedly committed against the defendant companies. To do so offends the rule in Foss v Harbottle.[1] It is submitted that the plaintiff is required to seek leave under s 237 of the Corporations Act 2001 (Cth) to bring a claim of that nature in the name of the companies and that the exception to the rule in Foss v Harbottle has been expressly abolished by s 236(3).
[1](1843) 67 ER 189.
Section 236 and 237 of the Corporations Act 2001 (Cth) provide:
236 Bringing, or intervening in, proceedings on behalf of a company
(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.
237 Applying for and granting leave
(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.
…
The plaintiff submits that paragraphs 19 to 23 plead a cause of action that can be brought in the plaintiff’s own name and rely on the decision in Ngurli Ltd v McCann,[2] in support of that submission.
[2][1953] 90 CLR 425.
In that case, Ngurli Ltd was formed by Clifford Southcott to avoid tax liability. Its only assets were 2,000 shares in another company sold to it by Clifford Southcott. The purchase price of those shares was left outstanding as a secured debt to Clifford Southcott. Ngurli Ltd had a nominal capital of 10,000 shares. Sixty one shares were issued, one to Clifford Southcott, 30 to his daughter and 30 to her daughter. Clifford Southcott’s share was a “Life Governor’s Share” which gave complete control of Ngurli Ltd to him during his life and to his personal representatives as long as the share remained in the name of Clifford Southcott or his personal representative.
During the lifetime of Clifford Southcott, he appointed Horace Southcott as a director of Ngurli Ltd. Horace Southcott then became entitled to the one share and the debt owed by Ngurli Ltd to Clifford Southcott. The debt to Clifford Southcott was paid by the issue of shares in Ngurli Ltd. This was to the benefit of Horace Southcott. The executor of Clifford Southcott’s daughter and her daughter claim that the share allotment to Ngurli Ltd was not in the best interests of Ngurli Ltd but was made by Horace Southcott with the fraudulent intention of benefitting himself to the detriment of the executor of Clifford Southcott’s daughter and his granddaughter.
The High Court held that in such circumstances, the executor and the granddaughter as minority shareholders were entitled to sue in their own names to remedy the breach of trust.
In Ngurli Ltd v McCann, Williams ACJ, Fullagar and Kitto JJ said:
But the powers conferred on shareholders in general meeting and on directors by the articles of association of companies can be exceeded although there is a literal compliance with their terms. These powers must not be used for an ulterior purpose. “The term fraud in connection with frauds on a power does not necessarily denote any conduct on the part of the appointor amounting to fraud in the common law meaning of the term or any conduct which could be properly termed dishonest or immoral. It merely means that the power has been exercised for a purpose, or with an intention, beyond the scope of or not justified by the instrument creating the power”, … Voting powers conferred on shareholders and powers conferred on directors by the articles of association of companies must be used bona fide for the benefit of the company as a whole.[3]
[3]Ibid, 438.
Here the plaintiff alleges that the directors of the Connective Companies failed to exercise their fiduciary duties in the best interests of the company as a whole. They are said to have acted for an improper purpose.
I note that in Ngurli v McCann their Honours also stated that:
…The second thing is that the phrase, ‘the company as a whole,’ does not (at any rate in such a case as the present) mean the company as a commercial entity, distinct from the corporators: it means the corporators as a general body. That is to say, the case may be taken of an individual hypothetical member and it may be asked whether what is proposed is, in the honest opinion of those who voted in its favour, for that person’s benefit.”[4]
[4]Ibid.
The plaintiff submits that on clear reading of the pleadings, the duties are said to be owed to the company “as a whole” and when the duties are owed to the general body, Ngurli v McCann applies and therefore, the shareholders are entitled to sue in their own names.
The defendant also urged that the pleading be read carefully. It was submitted that the pleading in paragraphs 19 to 23 refers to breach of duties owed by the company and therefore, is an attempt to bring an action on behalf of the companies.
The main difference between Ngurli v McCann and present circumstances is that in Ngurli v McCann the interests of shareholders was to obtain damages because the sold shares were undervalued. Here, there is no allegation that the shares have been undervalued.
I also note that in Ngurli v McCann their Honours said that:[5]
Although Horace had pre-emptive rights over the new issue he was bound, in deciding to issue the new shares and the terms upon which they were to be issued, to take the interests of the McCanns into account and in failing to do so he committed a breach of his fiduciary duty to consider the interests of the companies as a whole.
In these circumstances the plaintiffs have a clear right to sue in their own names to remedy the breach of trust. They are entitled to a declaration that the allotment of the 4,199 shares was invalid and should be set aside and to an order for the rectification of the register. They have individual statutory rights to have the register rectified under s.124 of the Companies Act 1934-1952 (S.A.)(Grant v John Grant & Sons Pty Ltd (1)). Apart from statute the case is one which falls squarely within the words of Lord Davey in Burland v Earle (2), that where the acts complained of are of a fraudulent character the minority can sue where the persons against whom the relief is sought hold and control the majority of shares in the company and will not permit an action to be brought in the name of the company.
[5]Ibid, at 447.
The situation described by their Honours is one of the exceptions to the rule in Foss v Harbottle, which has been abolished by s 236 of the Corporations Act 2001 (Cth).
In Advent Investors Pty Ltd v Goldhirsch,[6] Warren J (as her Honour then was) said that:
[18]Prior to the amendments, as the Law stood, aggrieved shareholders could not bring a derivative action on behalf of a company unless it fell within one of the exceptions to the rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189. The rule, it is to be recalled, was that the company itself was the proper plaintiff in respect of any wrong done to it. The exceptions to the rule, it is to be further recalled, were articulated in Russell v Wakefield Waterworks Co (1875) 20 LR Eq 474 at 482 and conveniently restated in Edwards v Halliwell [1950] 2 All ER 1064 at 1066-9.
[19]The gravamen of the exceptions was that the general meeting of a company cannot condone a wrong to that company by ordinary resolution. Hence, where actions were beyond power or unconstitutional, or where an individual right of a member was infringed and condonation of the infringement by a general meeting would constitute a fraud on the company (H A J Ford, R P Austin, I M Ramsay, Ford’s Principles of Corporations Law, 9th ed, Butterworths, Sydney, pp 516-17) such circumstances constitute the exception.
[20]Section 236 of the Corporations Law as inserted by CLERP abolished the common law right to bring proceedings on behalf of a company.
[6][2001] VSC 59, at [18]-[20].
In that case the plaintiffs, who were investors in two mining companies, claimed that the directors conducted the mining companies such as to breach their fiduciary duties owed at common law and under the Corporations Law by misappropriating the assets of these companies. The plaintiff sought relief including equitable compensation, damages and restoration of assets and property. Her Honour made it clear that a new statutory regime was to be followed. The principle set out in Ngurli v McCann appears to have been abrogated by statute.
I also note that paragraphs 24 to 26 in the proposed amended statement of claim plead breach of fiduciary duties owed by the directors to the plaintiff.
The plaintiff submits that on a clear reading the of the pleading, duties are said to be owed to the company as a whole general body and that Ngurli v McCann would apply and shareholders can sue in their own name. The pleading does, however, refer to a breach of s 181 of the Corporations Act2001 (Cth), which is a breach of duty owed to the corporation.[7]
[7]Paragraph 23 of the amended pleading.
The defendant submits that there was no such duty owed at the time Ngurli v McCann was decided and I have also not been able to find one. There is a different duty to that in Ngurli v McCann which in my view does not apply to this case.
Paragraphs 19 to 23 are clearly duties owed by the directors to the company and leave is required to bring such a pleading under s 237 of the Corporations Act 2001 (Cth).
Macquarie Bank Limited supported the submissions made by the defendant but also submitted that paragraphs 22, 23, 26 and 29 are not properly pleaded and that they should not be allowed in the current form. By these paragraphs the plaintiff pleads accessorial liability against Macquarie Bank Limited. The flaw in the pleading is that knowledge is not properly pleaded. The pleading should contain proper particulars, but it does not do so. It should not be a matter which will be difficult to achieve as the plaintiff has already provided particulars in a letter to Macquarie Bank Limited.
In the prayer for relief, damages are claimed yet there is no pleading relating to the claim for damages. The plaintiff has agreed to remove that claim from the prayer for relief. That should be done.
A new pleading will be required before the question of whether other parties should be joined as defendants can be considered.
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