Stanisis v Tracc Pty Ltd - [2022] WASC 281

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA
CITATION:   STANISIS -v- TRACC PTY LTD [2022] WASC 281
CORAM:   MASTER SANDERSON
HEARD:   26 MAY 2022
DELIVERED          :   29 AUGUST 2022
PUBLISHED           :   29 AUGUST 2022
FILE NO/S:   COR 30 of 2022
BETWEEN:   NICK STANISIS
Plaintiff
AND
TRACC PTY LTD
STEVEN MITCHELL CARULLI
First Defendants
RAYMOND MARSHALL BECHARD
Second Defendant

FILE NO/S: COR 37 of 2022
BETWEEN: NICK STANISIS
Plaintiff
AND
TRACC PTY LTD
First Defendant
RAYMOND MARSHALL BECHARD
Second Defendant
STEVEN MITCHELL CARULLI
Third Defendant
CIR8 PTY LTD
Fourth Defendant

Catchwords:

Corporations Law - Application for leave to bring derivative action - Turns on own facts

Legislation:

Corporations Act 2001 (Cth)
Limitation Act 2005 (WA)

Result:

Conditional leave to bring action granted

Category: B

Representation:

COR 30 of 2022

Counsel:

Plaintiff	:	M Sims
First Defendants	:	S Standing
Second Defendant	:	S Standing

Solicitors:

Plaintiff	:	DLA Piper
First Defendants	:	WSR Law
Second Defendant	:	WSR Law

COR 37 of 2022

Counsel:

Plaintiff	:	M Sims
First Defendant	:	S Standing
Second Defendant	:	S Standing
Third Defendant	:	S Standing
Fourth Defendant	:	S Standing

Solicitors:

Plaintiff	:	DLA Piper
First Defendant	:	WSR Law
Second Defendant	:	WSR Law
Third Defendant	:	WSR Law
Fourth Defendant	:	WSR Law

Cases referred to in decision:

Blakeney v Blakeney [2016] WASCA 76
Peter Parker v James Auswild [2022] VSCA 8
Taxa Australia v G Wang [2018] NSWSC 1412

MASTER SANDERSON:

On 18 February 2022, the plaintiff filed an originating process seeking, relevantly, the following orders:
1.The plaintiff have leave to bring proceedings on behalf of Tracc Pty Ltd (ACN 096 246 338), in accordance with section 236 of the Act, against Raymond Marshall Bechard, Steven Mitchell Carulli, and CIR8 Pty Ltd (ACN 610 625 173), in the terms set out in the Minute of Proposed Writ of Summons included at Annexure 'NS6' of the Affidavit ("Proposed Writ").
2.Alternatively, the plaintiff have leave to file the Proposed Writ, but may take no further step in the proceedings so instituted without leave of the Court.
The application was supported by the affidavit of the plaintiff sworn 17 February 2022 and another sworn 23 February 2022. For reasons which will become apparent, the matter was dealt with urgently, and on 25 February 2022 I made the following orders:
Interim leave to file Writ of Summons
1.Pending hearing and determination, on a final basis, of the plaintiff's application for leave under s237 of the Corporations Act (Leave Application), the plaintiff have leave, on an interim basis under ss 237 and 241(1)(a) of the Corporations Act, to file a writ of summons in the terms set out in the Minute of Proposed Writ of Summons included at annexure NS6 of the affidavit of the plaintiff filed on 18 February 2022, but may take no further step in the proceedings so instituted without leave of the Court.
Joinder of defendants
2.Steven Mitchell Carulli and Raymond Marshall Bechard be joined as the second defendants in these proceedings ...
It was the plaintiff's position that the cause of action the first defendant had against the second and third defendants (in matter COR 37 of 2022) could become statute‑barred before the application for leave to bring the derivative action could be heard. There is authority which supports the grant of leave to bring the derivative action on what is effectively an interim basis pending determination of the application. Although counsel for the second and third defendants did not consent to this course of action, he raised no objection. The matter was then programmed to a full hearing and these reasons deal with the substantive application.
In relation to the substantive hearing, the second defendant filed a short affidavit sworn 27 April 2022. That affidavit did no more than refer to the fact that the plaintiff in these proceedings had issued an originating process (COR 37 of 2022) seeking relief for alleged shareholder oppression against the second defendants to this action. For his part, the plaintiff relied on a further affidavit sworn 12 May 2022. Prior to the hearing, the plaintiff filed a Minute of Proposed Orders which relevantly read as follows:
1.The plaintiff has leave under ss 237 and 241(1) of the Corporations Act 2001 (Cth) to bring and continue proceedings CIV 1161 of 2022 (Derivative Action) on behalf of and in the name of Tracc Pty Ltd (ACN 096 246 338) (Tracc) against the second defendants and CIR8 Pty Ltd (ACN 610 625 173) on condition that the plaintiff pays and bears (and indemnifies Tracc against) all costs, charges and expenses including costs on a solicitor/client basis of and incidental to the bringing and continuation of the Derivative Action except to such extent, if any, as the Court may in future otherwise direct or allow.
2.The costs of these proceedings be costs in the cause of the Derivative Action.
There was no dispute about the relevant background facts. They can be summarised as follows. The first defendant was incorporated on 19 March 2001. It is in the business of outsourcing trust accounting services to clients in the property management industry. In the course of that business, the first defendant developed software known as TraccOnline Property Trust Accounting Software (Software). This Software was to replace and enhance the functionality of third party software previously used by the first defendant under licence in the course of its business. The Software was used by between 20 and 30 customers of the first defendant at any one time. Customers paid a fee to the first defendant for use of the Software.
At all material times until 24 November 2015, the first defendant had three directors and shareholders – the plaintiff and the two second named defendants. The plaintiff ceased to be a director of the first defendant on 24 November 2015 consequent upon the breakdown of his working relationship with the second defendants. On 8 February 2016, the second defendants caused CIR8 to be incorporated. They are CIR8's only directors and were, until 12 January 2021, its only shareholders. On or about 1 March 2016, by a document titled 'Deed of Assignment of Intellectual Property Rights' (Transfer Agreement), the second defendants caused the first defendant to make an agreement by which the intellectual property rights to the Software were transferred by the first defendant to CIR8 for $91,573.89 (plus GST) (Transfer Price). This amount was said to be 'deemed book value' of those intellectual property rights. The plaintiff says the basis on which this 'deemed' valuation figure was arrived at has not been explained by the defendants.
By the terms of the Transfer Agreement, CIR8 was permitted to pay the Transfer Price in 12 monthly instalments. The plaintiff says no commercial benefit to the first defendant is apparent from the very generous payment terms, nor has any explanation as to why such a benefit is proper been provided by the second defendants. The plaintiff says it may be inferred the second defendants intended to allow CIR8 time to generate cashflow from the Software developed by the first defendant before it would be obliged to pay the first defendant for it. The Transfer Agreement was executed on behalf of the first defendant and CIR8 by the second defendants.
The first defendant shareholders did not provide their informed consent in general meeting (or otherwise) to the making of the Transfer Agreement. Further, the plaintiff says to the best of his knowledge no valuation of the intellectual property rights associated with the Software was obtained before the Transfer Agreement was made.
Since March 2016, when the Transfer Agreement was made and before CIR8 was required to pay any part of the Transfer Price, the first defendant has been paying a licence fee to CIR8 for the use of the Software. The plaintiff says he is unable to say how much has been paid by the first defendant to CIR8 for the use of the Software. The plaintiff also says he is unable to say how many of the first defendant's customers have made use of the Software since it was transferred to CIR8 or what financial arrangements had been put in place between CIR8, the first defendant and the first defendant's customers for the licencing and use of the Software.
The plaintiff says, by the proposed derivative action, the first defendant would seek relief against the second defendants in this action for breaches of their statutory and fiduciary duties to the first defendant in causing the first defendant to make the Transfer Agreement. The first defendant would also seek relief against CIR8 for its knowing involvement in the second defendant's breach of duty and receipt of the proceeds of the second defendants' breaches.
The application was brought under s 237(2) of the Corporations Act 2001 (Cth). That section reads as follows:
(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.

There was no dispute the plaintiff had standing to make the application as a member of the first defendant: see Corporations Act ss 236(1) and 237(1). At the hearing of the application, counsel for the second defendants conceded the plaintiff satisfied the requirements of subsection (a), (c) and (d). Accordingly, the application was opposed on the basis the plaintiff was not acting in good faith and that it was not in the best interests of the company the applicant be granted leave. During the course of his submissions, counsel for the second defendants, although he did not concede the plaintiff was acting in good faith, did not develop his argument on that question to any extent. In effect, the sole issue to be determined in this application is whether or not it was in the best interests of the company that the applicant be granted leave.
Both counsel agreed the relevant principles on when it is in the best interests of a company that leave be granted were examined in detail by the Court of Appeal in Blakeney v Blakeney [2016] WASCA 76 at [52] to [68]. Their Honours noted the expression 'best interests of the company' imports the familiar concept of the interests of the company as a whole. The concept of the best interests of a company is concerned with the company's separate and independent welfare.[1] The enquiry is not whether the proposed action would benefit the directors, the shareholders or even the wider community. The focus is on the company. At paragraph 34 of his written submissions, counsel for the plaintiff provided a summary of what he drew from the Blakeney decision. That paragraph reads as follows:
[1] Blakeney v Blakeney [2016] WASCA 76 [53].
[34]The enquiry as to whether granting leave is in the best interests of the company, will invite attention to at least the following matters (Blakeney [54] - [55]):
(a)the character and scale of the company;
(b)the nature of the company's business, so that the effects of the proposed litigation on that business may be considered;
(c)whether the substance of what the applicant seeks to achieve can be achieved by other means and without the involvement of the company in any litigation;
(d)the evidence as to the ability of the defendant to meet any judgment or at least a substantial part of it;
(e)the prospects of success of the proposed action;
(f)the likely costs and likely consequences if the proposed action is not successful;
(g)the nature of any indemnity the applicant has offered to the company; and
(h)the likelihood of the company recovering under an indemnity.
With respect, I would not cavil with counsel's summary, but it does appear the Court of Appeal placed particular emphasis on the matters referred to in subparagraphs (f) and (g). During the course of his submissions, I put it to counsel that, based on the Blakeney decision, no determination it was in the best interests of the company to allow the derivative action could be made, unless the company was fully indemnified by the party seeking the order and that party had established it had the financial capacity to make good on that indemnity. Counsel, in a carefully considered reply, made two points. First, the section does not specifically refer to the company being fully protected financially if leave was granted. That must mean the financial risk to the company was one factor to be weighed in the balance. Second, and following on from the first point, the weight to be given to the financial risks to the company would be dependent upon the facts of each case. It was counsel's position that in this case, the financial risk to the company was minimal and certainly did not mean no order should be made.
Dealing with each of the issues raised by Blakeney, the plaintiff submitted there was nothing in the character or scale of the first defendant or its business that would suggest it was not in the first defendant's best interests to recover for its own benefit the intellectual property rights in the Software which it itself developed for the purposes of that business. The first defendant's financial statements for the year ended 30 June 2020 indicated its business was then turning over in excess of $1 million. The plaintiff made the point that just how the need for the first defendant to licence back its own Software from CIR8 in order to operate the business has impacted on its profitability was not presently known despite enquiry. Further, the substance of what the plaintiff sought to achieve is the return to the first defendant of its property and compensation for loss suffered while it was deprived of that property. That outcome could only be achieved by litigation.
The plaintiff submitted that on the material presently available, the prospects for success of the proposed derivative action were good. The plaintiff says the second defendants' conflicts were obvious and any commercial rationale or legal justification for their actions had not been provided. In that regard, the plaintiff drew attention to the fact that the second defendants, although being provided with the opportunity to do so, had not engaged with the plaintiff in providing any evidence as to why they had transferred the intellectual property rights to CIR8.
The plaintiff says, should the court think it necessary, he will undertake to pay all of the first defendant's costs of bringing the derivative action and he will meet any adverse costs order made against the first defendant if the action is unsuccessful. The plaintiff has led some evidence which supports his claim that he has the financial capacity to support the indemnity: see the plaintiff's second affidavit paras 21 ‑ 29 and annexures NS22 ‑ 23. There is, I think, some question as to whether or not the plaintiff could actually meet all of the costs involved in the derivative action but, for reasons which I will explain, in this case that is not a factor which is decisive. It was the plaintiff's position that the grant of leave ought not be conditional upon the plaintiff providing a costs indemnity for the benefit of the first defendant. However, if a conditional order was made the plaintiff would provide such an indemnity.
The plaintiff says the evidence he has led as to the capacity of the second defendants to meet any judgment is sufficient. Further, the defendants have not led any evidence they lack capacity despite the fact they were given the opportunity to do so. As to CIR8's capacity to meet a money judgment, that was not a matter which was in the knowledge of the plaintiff. However, the second defendants control CIR8 and they could have, had they wished to do so, provided evidence of CIR8's financial position. Furthermore, it was the plaintiff's position that the financial capacity of CIR8 was largely irrelevant. If the first defendant's claims in a derivative action were successful, the plaintiff says the likely relief the first defendant would obtain was an order that the intellectual property rights to the Software were held on constructive trust for the first defendant. The utility of such an order was not dependant on CIR8 having any other assets to meet a judgment for damages or compensation. In summary, the plaintiff relied upon what was said by the Court of Appeal in Blakeney at [57].
It has been said that generally it is reasonable to expect that the pursuit of an action by or on behalf of a company against an officer for recovery of compensation for damage done to the company by the officer's breach of duty is in the best interests of the company. That will ordinarily be so at least as long as there are reasonable prospects of success, appropriate arrangements have been made in relation to costs and it is expected that a judgment can be successfully executed in whole or in substantial part.
There was one further reason why it was in the first defendant's interests for leave to be granted. It was the plaintiff's position that if leave was refused the first defendant's claims against CIR8 and the second defendant would be statute‑barred. More than six years would have elapsed from the date on which the Transfer Agreement was made. Reference was made to the Corporations Act s 1317K and the Limitation Act2005 (WA) s 13.
That is why the derivative action was commenced on 25 February 2022. If leave was not granted, the action which has been commenced would fall away and the first defendant would be denied the opportunity to vindicate any rights it might have had against CIR8 and the second defendants.
On behalf of the second defendants, it was submitted it was not open to find proceedings were in the company's best interests where the dispute involved waring parties. Rather, it was preferable if those waring parties pursued other proceedings in which the company could be essentially a passive party. The second defendants made the point that was essentially what had happened here. The plaintiff had issued separate proceedings in which he sought an order the second defendants buy his shares in the first defendant. It was the second defendants' position that action would resolve the differences between the plaintiff and the second defendants and that therefore any action by the first defendant against the second defendants was unnecessary. It was the plaintiff's position if leave was not granted there was a risk any valuation of the shares in the first defendant would not take account of any right the first defendant might have to recover damages or compensation and the intellectual property transferred to CIR8.
In response, counsel for the second defendant referred to the decision of the Victorian Court of Appeal in Peter Parker v James Auswild [2022] VSCA 8. The court cited with approval the following propositions:
(a) the court was invested with plenary power to deal with oppression with whatever weapons seemed just and equitable[2];
(b)the oppression provisions were intended to be, and are sufficiently flexible to allow claimed breaches of fiduciary duty to be addressed; and[3]
(c)the general discretionary power of the court under s 233 and, in particular, the power under s 233(1)(j) should be given a liberal construction and authorise orders requiring a person to pay expenses or losses incurred by a company.[4]
[2] Peter Parker v James Auswild [2022] VSCA 8 [131].
[3] Peter Parker v James Auswild [2022] VSCA 8 [132].
[4] Peter Parker v James Auswild [2022] VSCA 8 [138], [143].

It was the second defendants' position the court's plenary powers to make just and equitable orders in oppression proceedings allowed the making of an order for an account of profits owed to the company or for payment of compensation and that such an order could be made notwithstanding the availability of a derivative action. A number of cases were cited in support of this proposition, in particular Taxa Australia v G Wang [2018] NSWSC 1412. In that decision, extensive authority was cited for the proposition that a shareholder bringing an oppression claim can bring a claim for breach of general law duty and statutory duties owed to a company for losses which the company has suffered without necessarily seeking a separate order for leave to bring a statutory derivative action.[5]
[5] Taxa Australia v G Wang [2018] NSWSC 1412 [97].
Really, the second defendants' position can be summarised in this way. In an oppression action it is open to the court to consider whether or not the first defendant may have had a cause of action for compensation against CIR8 and/or the second defendant and, if it is satisfied such a cause of action existed, then that can be factored in to the purchase price the second defendants would be ordered to pay the plaintiff for the transfer of the shares in the first defendant. On the second defendants' case it mattered not whether the cause of action under consideration was statute‑barred. In other words, the fact the cause of action might have been statute‑barred was not a relevant consideration in determining the price of the shares.
The plaintiff submitted there was no decided authority on the question of whether or not a court, in an oppression action, could take into account what might be the first defendant's rights under a statute‑barred action. Counsel did not go so far as to suggest the broad powers referred to by the second defendants would not be available to the court. Rather, the first defendant's position should be protected by the grant of leave with an order the proceedings be stayed. If such an order were made, it would be in the best interests of the company and would remove one potential area of conflict in any oppression action.
At one level, it might be said the plaintiff's submission was to the effect it was in the best interests of the plaintiff to make such an order rather than being in the best interests of the company. On balance, I am satisfied that is too narrow a view. The grant of leave to bring the derivative action preserves any cause of action the first defendant may have against the second defendants. If a stay of that action is granted the first defendant will be at no financial risk and, incidentally, one issue which might otherwise arise in the oppression action will be put to rest.
Accordingly, I am satisfied it is in the best interests of the first defendant to make the orders sought. Subject to hearing from counsel, I will make an order in terms of paragraph 1 of the plaintiff's Minute of Proposed Orders filed 25 May 2022 (in COR 30 of 2022). I will also make an order the derivative action be stayed pending further order of the court. As to costs, I am satisfied the costs of these proceedings should be costs in the cause of the derivative action.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
AH
Associate to Master Sanderson
29 AUGUST 2022