Smoorenburg and Raan Pty Ltd v Baddeley
[2002] VSC 307
•6 August 2002
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST
No. 2053 of 2002
| RICHARD CASPER THEODORUS SMOORENBURG | First Plaintiff |
| - and - | |
| RAAN PTY LTD (ACN 079 018 518) | Second Plaintiff |
| v | |
| RICHARD HIRAM BADDELEY & ORS | Defendant |
---
JUDGE: | WARREN J. | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 2 August 2002 | |
DATE OF JUDGMENT: | 6 August 2002 | |
CASE MAY BE CITED AS: | Smoorenburg and Raan Pty Ltd v Baddeley & Ors | |
MEDIUM NEUTRAL CITATION: | [2002] VSC 307 | |
---
INJUNCTION – Application to restrain defendants from using alleged partnership assets to fund defence – serious question to be tried – Balance of convenience – Whether damages or other relief a sufficient remedy.
PARTNERSHIP – Injunction to restrain use of alleged partnership assets refused.
---
APPEARANCES: | Counsel | Solicitors |
| For the First and Second Plaintiffs | Mr M.G. Rinaldi | Kliger Partners |
| For the Defendant | Mr D.J. Batt | A and J Macken & Co |
TABLE OF CONTENTS
Background Facts............................................................................................................................... 2
The Plaintiffs’ Allegations................................................................................................................ 3
The Defendants’ Response.............................................................................................................. 4
The Plaintiffs’ Submissions............................................................................................................. 4
HER HONOUR:
The first plaintiff has instituted proceedings in the Commercial List seeking winding up of an alleged partnership between himself and the first to eighth defendants together with consequential relief.
On an interlocutory basis the plaintiffs seek orders that the defendant be restrained from using funds or assets of the alleged partnership for the purposes of the defence of the proceeding.
Background Facts
In the statement of claim the first plaintiff (“Smoorenburg”) alleges that a partnership commenced from 1 July 1993 between himself and the first to eighth defendants with respect to the conduct of a patent and trademark attorney business known as “Watermark”. The first plaintiff alleges, further, that from 28 May 1987 until 27 May 2002 he was employed as a patent attorney by the partnership through the vehicle of the Watermark Unit Trust. The second plaintiff (“Raan”) is a corporation that is the beneficiary of a trust known as the Raan Trust associated with Smoorenburg. Raan is the trustee of the Raan Trust. The partnership is alleged to consist of a management agreement dated 1 July 1991, a further agreement dated 21 June 1993, a document entitled “Leave for Principals”, a document entitled “Policy for Principals in Respect of Unit Holdings” dated 30 March 1999 and a document entitled “Principals’ Remuneration”. It is alleged, further, that the partnership is to be implied.
Raan received the remuneration and benefits arising from the employment of the first plaintiff and his partnership with the defendant.
The statement of claim sets out what might be described as the usual type of allegations made in a partnership action, that is, mutual obligation, fiduciary duty, duty to act in good faith and the duty not to seek to dissolve the partnership or terminate the employment of a partner except on proper and reasonable notice. The plaintiffs allege that on 24 May 2002 the defendants demanded the resignation of Smoorenburg from the partnership without tendering the capital interest of Smoorenburg in the partnership and without reasonable notice. The plaintiffs allege, further, that on 27 May 2002 the defendants wrongfully excluded Smoorenburg from the partnership and unilaterally terminated his employment. As a consequence, the plaintiffs seek orders for the winding up of the partnership and consequential relief including the taking of accounts. There are additional allegations with respect to certain guarantees of loan obligations of the partnership with respect to which declaratory relief is sought.
The proceeding was commenced in the Commercial List on 2 July 2002 and the first directions hearing was returnable on 19 July 2002. An expeditious timetable was imposed upon the parties and that is yet to be completed at the time of the present interlocutory application. The present application arises in the context of that timetable.
The Plaintiffs’ Allegations
In an affidavit sworn by Smoorenburg on 18 July 2002 he deposed as to his concern of the financial position of the partnership business and his belief that it is likely to deteriorate. He expressed, also, his fear that the assets of the business may be dissipated without his consent or control thereby reducing the value of his share in the business. The allegations and fears stated in the affidavit were not substantiated.
In a second affidavit sworn 25 July 2002 Smoorenburg further deposed as to his belief that he was excluded from the partnership because usually his income exceeded the income of the other partners and a redistribution of earnings had been contemplated by the defendants. In the affidavit Smoorenburg re‑stated his fear that the funds and assets of the partnership may be diminished, including the share of the funds and assets to which he says he is entitled. Again the affidavit did not substantiate the allegations.
In a third affidavit sworn 31 July 2002 Smoorenburg exhibited a copy of the Watermark Unit Trust deed and the management agreement.
The Defendants’ Response
An affidavit was sworn in opposition to that of the plaintiffs by Karen Sinclair, the seventh defendant, sworn 24 July 2002. Sinclair deposed that she was employed by the Watermark Unit Trust and that she is a trustee of that trust. Sinclair, on behalf of the other defendants, denied the assertion of a partnership between the first plaintiff and the first to eighth defendants. She asserted that the partnership in so far as it existed ceased to so exist in December 1987 when the then partnership was dissolved and the Watermark Unit Trust acquired ownership of the business. Sinclair deposed, further, that the second plaintiff, Raan, holds 13,000 units in the Watermark Unit Trust but that the first plaintiff, Smoorenburg, holds no units in that trust. Sinclair deposed, also, as to the way in which the unit trust was structured with respect to the plaintiffs and the defendants. At this point it is not necessary to diverge into those matters save that Sinclair alleged that the plaintiffs had no right to a share of the assets of the Watermark business.
The Plaintiffs’ Submissions
It was submitted on behalf of the plaintiffs that an illegitimate and inequitable disadvantage would be imposed upon the plaintiffs if the defendants are allowed to use the assets of the partnership to fund their costs of defending the present proceeding.
It was submitted by Mr M. Rinaldi of Counsel on behalf of the plaintiffs that the present proceeding was analogous to the oppression cases in the corporations jurisdiction. He submitted that it is well established that where a majority controls the affairs of a company that majority cannot use the funds of the company to defend proceedings brought against them by the minority. He relied, in particular, on the judgment in Re: D.G. Brims and Sons Pty Ltd (1995) 16 ACSR 559 at 591-592. Of course, the orders made in D.G. Brims were in the nature of final as distinct from interlocutory orders. It was a case concerned with oppression in relation to a minority shareholder of a company and not a question of a disputed partnership.
Mr Rinaldi relied, also, on the judgment of Marks J in Farrow and Anor v Registrar of Building Societies and Ors (1991) 2 VR 589 as providing a precedent for the nature of relief sought by the plaintiffs in the present application. However, it is to be observed that in the Farrow case the plaintiffs commenced proceedings against the administrator and others seeking removal of the administrator, alleging that he had not been properly appointed and had misconducted the administration. The plaintiffs who were entitled to sue in their own right contended that the action was brought on a derivative basis for the benefit of a subject building society within the exception to the rules in Foss v Harbottle (1843) 2 Hare 461. As a result, the plaintiffs applied to have the building society added as a defendant and for an order that the society indemnify the plaintiffs for their costs. Marks J held that the Court had power to make the order sought if it is satisfied that the proceeding is derivative. The learned judge held, also, that the power to make the order is not dependent on proof that the plaintiffs are without funds. Ultimately, Marks J held that the proceeding was a derivative action brought in the interests of the society and that as such the building society should be added as a defendant and ordered to indemnify the plaintiffs for their costs. Clearly the matters before the court in Farrow were entirely different to the matters in the present application. There is no question of joinder or indemnity or protection of a plaintiff as was the case in Farrow. In so far as it may be relevant to consider the requirement that an applicant such as the plaintiffs in the present proceeding prove they are without funds that issue does not arise in the present case. In any event, there was no suggestion in the three affidavits of Smoorenburg that the plaintiffs were without funds.
I was referred on behalf of the plaintiffs, further, to the judgment of the English Court of Appeal in Wallersteiner v Moir (No. 2) (1975) 1 All ER 849. In that case the plaintiff was a minority shareholder in a public company and brought proceedings by way of counterclaim seeking certain declarations of misconduct by the defendant majority shareholder as to the conduct of the subject company. There the plaintiff was fearful that if he succeeded in the litigation he may incur costs, including considerable costs in enforcing judgment against a fined defendant and sought, inter alia, an order for indemnity. The Court of Appeal held that it was open to the court in a minority shareholder’s action to order that the company should indemnify the plaintiff against the costs incurred in the action. The Court of Appeal acknowledged that the proceeding was in the nature of a derivative action brought by a minority shareholder and that as a matter of principle such litigants can be entitled to an indemnity for costs. Lord Denning held (at 858):
“Now that the principle is recognised, it has important consequences which have hitherto not been perceived. The first is that the minority shareholder, being an agent acting on behalf of the company, is entitled to be indemnified by the company against all costs and expenses reasonably incurred by him in the course of the agency. This indemnity does not arise out of a contract express or implied, but it arises on the plainest principles of equity. It is analogous to the indemnities to which a trustee is entitled from his cestui que trust sui juris: see Hardoon v Belilios; Re Richardson. Seeing that, if the action succeeds, the whole benefit will go to the company, it is only just that the minority shareholder should be indemnified against the costs he incurs on its behalf.”
Clearly the present proceeding is distinguishable from the circumstances in Wallersteiner because it is not a derivative action. It is a proceeding brought by a party who alleges it was a partner within a partnership and has been excluded or expelled wrongfully from that partnership. It is clearly not a case of a minority shareholder or an equivalent acting in the interests or to the benefit of the company thereby justifying indemnity against costs. Furthermore, the present application is not in the nature of relief by way of indemnity. Rather, it is an order seeking to restrain the defendants from using the funds of the business or if properly construed, the partnership alleged by the plaintiff.
It was refuted on behalf of the plaintiffs that the present application was in the nature of an injunction. However, it is difficult to see how it can be characterised in any way than as an application for a mandatory injunction. This is so because the plaintiffs seek to compel the defendants by way of restraint order of the Court from continuing to utilise assets for purposes those defendants deemed appropriate including the defence of the present proceeding.
When considered in that way the plaintiffs are subject to the usual burden when making an application for an interlocutory injunction. Properly construed the present injunction is in the nature of an interlocutory quia timet injunction. It behoves the plaintiffs to satisfy the Court that there is a serious question to be tried. Having turned my mind to that matter, on the basis of the affidavit evidence I do not consider I can be so satisfied. Mr Smoorenburg asserts that there was a partnership. Nevertheless I was taken to the subject trust deed with respect to the Watermark Unit Trust and it would appear that there is a specific provision that the trust is a trust and not in the nature of a partnership. Be that as it may, even if I was to be satisfied that there was a serious question to be tried and for the stated reasons I have some hesitation, there remains the question of the balance of convenience. There is no evidence on any basis whatsoever before me that could satisfy me that the assets of the alleged partnership are at risk or that that the balance of convenience be weighed in favour of the plaintiffs. In accordance with the usual principles the plaintiffs fail at the hurdle that lies before them with respect to the balance of convenience. It is not made out in any way. It follows that the application should be refused.
Finally, in so far as it would be necessary to do so there is no evidence before me to persuade me that damages are an inadequate remedy. Ultimately, in the present proceeding, if the plaintiffs succeed there would be, in all likelihood, an order by the Court for the taking of accounts. If it transpires that there has been a wrongful payment by the defendants from the assets of the alleged partnership then those matters can be taken into account in the taking of accounts. The matter to be determined immediately is the question of whether there is the partnership and if so whether the plaintiffs were wrongfully excluded from that partnership. It is that primary relief that the plaintiffs will need to establish at trial.
It follows that the application has failed and will be dismissed.
---
0