Suh v Cho
[2013] VSC 491
•13 September 2013
| Do Not Send for Reporting | ||
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
S CI 2012 04980
| JUNG WHA SUH AND OTHERS (according to the schedule attached) | Plaintiffs |
| v | |
| JEFF W CHO AND OTHERS (according to the schedule attached) | Defendants |
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JUDGE: | Derham AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 22 February 2013 | |
DATE OF JUDGMENT: | 13 September 2013 | |
CASE MAY BE CITED AS: | Suh & Ors v Cho & Ors | |
MEDIUM NEUTRAL CITATION: | [2013] VSC 491 | |
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CORPORATIONS - Statutory derivative action - Application for leave under Corporations Act 2001 (Cth) ss 236, 237 by member of deadlocked company to bring proceedings on behalf of the company against other member and director - Whether the five criterion in s 237(2) are established - Whether leave may be granted nunc pro tunc – Leave granted.
PRACTICE AND PROCEDURE – Discovery – Order for defendant co-director and public officer of company to authorise release of financial information by the Australian Taxation Office – s 55 Civil Procedure Act 2010 – Application granted.
PRACTICE AND PROCEDURE – Application to join third party – Whether cause of action disclosed – No cause of action disclosed – Leave refused.
PRACTICE AND PROCEDURE – Application by sole director and shareholder of company to appear and represent the company before the court generally– Leave given from time in interlocutory applications – Rules and practice applicable – Whether appropriate to grant leave generally – Leave refused.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr S.S.R. Lee, Solicitor | P & B Law (later Spencer Reyner Law Office Pty Ltd) |
| For the First Defendant | In person | |
| For the Second Defendant | In person | |
| For the Third Defendant | The second Defendant, Ms Christi Ho (pursuant to leave granted) |
HIS HONOUR:
Introduction
By summons dated 14 January 2013, the first named plaintiff (“Mr Suh”) seeks the following orders:
(a)pursuant to s 237 of the Corporations Act 2001 (“the Corporations Act”), leave to bring proceedings on behalf of the second named plaintiff, Jeff the Plumber Pty Ltd (“Company”) against the defendants;
(b)an order that the first named defendant (“Mr Cho”) provide a written authority, addressed to the legal officer of the Australian Taxation Office (“ATO”), granting Mr Suh authority to obtain copies of the Company’s income tax returns and Business Activity Statements, pursuant to ss 55(1) and 55(2)(f) of the Civil Procedure Act 2010;
(c)that the third defendant (“Jeff & Sons Plumbing”) disclose all financial records required to be kept pursuant to s 286 of the CorporationsAct to Mr Suh pursuant to s 55(1) of the Civil Procedure Act 2010;
(d)that the defendants pay Mr Suh’s costs of the application.
The actual formulation of the wording of the orders sought was rather different, but the above is the gist of the orders sought. Moreover, although the applicants do not expressly state so in their application, it seems clear that the application for leave to bring the proceedings under s 237 of the Corporations Act is an application for leave nunc pro tunc from the date proceedings were commenced in the County Court on 11 June 2010.
By order made on 20 February 2013, Ferguson J referred to an Associate Judge the hearing and determination of the summons pursuant to Rule 77.05 of the Supreme Court (General Civil Procedure) Rules2005 (“Rules”).
In addition to the Mr Suh’s application, the defendants, by summons filed 19 December 2012, applied for orders for:
(a)leave allowing the second defendant, Ms Ho, to act on behalf of Jeff & Sons Plumbing;
(b)leave to join Mr Suh’s spouse, Heae Sook Kim, as a third party pursuant to Order 11 of the Supreme Court (General Civil Procedure) Rules2005.
Summary of Conclusions
For the reasons expressed below, I have concluded that I should make the following orders:
(a)Pursuant to ss 236 and 237 of the Corporations Act, but subject to paragraph (b) below, leave is granted nunc pro tunc to the first named plaintiff to bring this proceeding on behalf of the second named plaintiff against the defendants;
(b)The leave given by paragraph (a) of this order is given subject to the condition that the first named plaintiff is responsible for any costs ordered against the second named plaintiff, and undertakes not to seek contribution or indemnity from the company in respect of those costs;
(c)Pursuant to ss 55 of the Civil Procedure Act 2010, the first named defendant shall provide a written authority, addressed to the legal officer of the Australian Taxation Office, granting Mr Suh authority to obtain copies of the Company’s income tax returns and Business Activity Statements for the financial years ending 30 June 2006, 2007, 2008 and 2009;
(d)That the third defendant shall make discovery in accordance with the Rules of all its financial records required to be kept pursuant to s 286 of the Corporations Act, including all income tax returns and business activity statements filed with the Deputy Commissioner of Taxation for the financial years ending 30 June 2010, 2011, 2012 and 2013.
(e)That the defendants summons filed 19 December 2012 is dismissed.
Background facts[1]
[1]See the decision of Anderson J in Suh v Cho [2011] VCC 82 from which some of this history is drawn.
The proceeding has something of a chequered history. It began in the County Court in June 2010. The claims made by Mr Suh both for himself and, purportedly, on behalf of the Company are against Mr Cho, his wife, the second defendant (“Ms Ho”), and Jeff & Sons Plumbing, a company of which Ms Ho is the sole director and shareholder.
The individual parties are members of the Korean community. Mr Cho (also known as Jeff Cho) is a licensed plumber. Mr Cho’s familiar name explains the name of the Company, which was incorporated in September 2005 by Mr Cho and it is through it that he operated a plumbing business. Mr Cho was the sole director of the Company.
In about February 2009, Mr Suh entered into an agreement with Mr Cho to become an equal shareholder in, and director of, the Company. Mr Suh was not a licensed plumber and the “hands on” plumbing work of the company continued to be performed by Mr Cho. The relationship was not successful. In June 2009 Mr Cho left the business, and effectively the relationship between Mr Cho and Mr Suh ceased. In June 2009, Jeff & Sons Plumbing was incorporated with Ms Ho as the sole director and shareholder. Jeff & Sons Plumbing provides plumbing services and Mr Cho works in the business.
Mr Suh claims that between March and June 2009 he advanced sums totalling $150,000 by way of personal loans to Mr Cho, repayable on demand, and $150,000 to the Company. The further claims made by the plaintiffs in the Amended Statement of Claim dated 30 August 2010 are as follows:
(a)A claim by the Company against Mr Cho for repayment of unpaid loans totalling $30,000. This is the first of the claims in respect of which leave is sought under ss 236 and 237 of the Corporations Act for Mr Suh to bring the proceeding on behalf of the Company against Mr Cho;
(b)a claim by Mr Suh against Mr Cho for misleading or deceptive conduct which induced Mr Suh to invest in the Company;
(c)a claim that the defendants had “taken possession of the plumbing business” conducted by the Company and thereby converted it. This is the second claim in respect of which leave under ss 236 and 237 of the Corporations Act is required;
(d)a claim that Mr Cho has breached statutory, equitable and fiduciary duties and obligations owed to the Company by his conduct as an employee of the Company, and in establishing Jeff & Sons Plumbing in direct competition, taking with him certain assets of the Company for that purpose. This is the third claim in respect of which leave is sought under ss 236 and 237 of the Corporations Act for Mr Suh to bring the proceeding on behalf of the Company against Mr Cho;
(e)a claim that Ms Ho and Jeff & Sons Plumbing knowingly assisted Mr Cho in his breaches of statutory, equitable and fiduciary duties and obligations owed to the Company This is another claim (the fourth) that involves the necessity to have leave under ss 236 and 237;
(f)a claim that Mr Cho has breached his obligation pursuant to ss 181, 182 and 183 of the Corporations Act as a director of the Company and that Ms Ho and Jeff & Sons Plumbing were involved in those breaches. This is another claim (the fifth) that involves the necessity to have leave under ss 236 and 237;
(g) a claim that Jeff & Sons Plumbing holds its plumbing business on trust for the Company. This is another claim (the sixth) that involves the necessity to have leave under ss 236 and 237;
(h)a claim that “the plaintiffs” are entitled to damages under s 1324(10) of the Corporations Act in consequence of Mr Cho’s breaches of ss 181, 182 and 183 of the Corporations Act and against Ms Ho and Jeff & Sons Plumbing as persons involved in the contraventions. This is another claim (the seventh) that involves the necessity to have leave under ss 236 and 237.
In their Amended Defence dated 14 September 2010, the defendants alleged that:
(a)In March 2009, Mr Suh and Mr Cho had agreed that Mr Suh would become an equal shareholder and director of the Company;
(b)in April and May 2009, the Company had loaned sums totalling $32,000 to Mr Cho, of which $2,000 had been repaid and the balance was to be repaid without interest after five years;
(c)between March and May 2009, Mr Suh had advanced the sum of $200,000 by way of loan to the Company as working capital;
(d)in May 2009, Mr Suh agreed to lend the further sum of $100,000 to the Company as working capital;
(e)an alleged agreement dated 2 June 2009 acknowledging a debt of $150,000 by Mr Cho to Mr Suh “was executed by the first defendant under economic duress”;
(f)that the decision to bring each of the derivative claims was made by Mr Suh alone without the consent of Mr Cho, and could not be brought without leave under s 236 of the Corporations Act;
(g)the other allegations by the plaintiffs giving rise to the claims for damages against the defendants were denied.
Mr Cho and Ms Ho had originally filed appearances personally and Ms Ho had purported to file an appearance on behalf of Jeff & Sons Plumbing. Subsequently, solicitors filed a notice that they acted on behalf of the defendants. Then, in October 2010, the solicitors sought leave to file a notice of ceasing to act, which was granted. Since then, Mr Cho and Ms Ho have represented themselves and Ms Ho has, at various times, including in this application, been permitted to represent Jeff & Sons Plumbing.
On 17 November 2010, the Registrar of the County Court of Victoria entered default judgment:
(a)for the Company against Mr Cho for the sum of $30,000 (together with statutory interest and costs);
(b)for Mr Suh against Mr Cho, for $150,000 for money lent (together with statutory interest and costs); and
(c)for the plaintiffs against the defendants, interlocutory judgment for damages to be assessed;
for non-compliance with orders made by Kennedy J on 28 October 2010 for the filing and service of an affidavit of documents and the delivery of further and better particulars of the defence.
In January 2011, Anderson J delivered reasons for decision in an application by Mr Cho to set aside the judgment against him for $30,000 in favour of the Company. His Honour determined to set that judgment aside unless it could be shown that leave of the Court for the Company to bring a claim was not required.[2] Anderson J also set aside the interlocutory judgment entered by the Registrar for damages to be assessed. He refused to set aside the judgment for $150,000 against Mr Cho in favour of Mr Suh.
[2][2011] VCC 82 at [46] (25 February 2011).
In the course of his reasons for judgment, Anderson J noted:
In paragraph 14 of the defence, the defendants allege that the claim for repayment of the $30,000 cannot succeed because the decision by Jeff the Plumber Pty Ltd to bring the proceeding was “made solely by the first plaintiff without the consent or agreement of the first defendant” and that accordingly leave was required pursuant to ss 236 and 237 of the Corporations Act 2001 before the proceeding might be brought. Mr Suh and Mr Cho are equal shareholders in, and the only directors of, Jeff the Plumber Pty Ltd. Without further evidence as to the authority by which the proceeding was brought by the second plaintiff there would clearly seem to be some prospect of this defence succeeding. If leave were required under s 237 before the action might properly be brought on behalf of that company, it would not be leave of the County Court but leave of the Supreme Court or Federal Court. Unless such leave is unnecessary, the judgment, insofar as it relates to the second plaintiff’s claim against Mr Cho for the repayment of $30,000, cannot stand.
Orders giving effect to his Honour’s reasons for decision were finally made on 1 April 2011. That Order notes that there were three claims likely to require leave under s 236 and 237 of the Corporations Act. The Order also stayed the enforcement of the judgment for $150,000 pending any application to transfer the proceeding to the Supreme Court and any application by Mr Cho to seek leave to appeal the refusal to set aside judgment for $150,000.
The defendants sought leave to appeal the judgment of Anderson J to the Court of Appeal. Leave was granted on 13 May 2011. Ultimately, on 2 May 2012, orders were made by consent for the default judgment for the debt of $150,000 to be set aside.
On 27 April 2012, Mr Suh made application under the Courts (Case Transfer) Act1991 for the proceeding to be transferred to the Supreme Court. The defendants objected to the transfer. In October 2012, the proceeding was determined to be appropriate for transfer to the Supreme Court, and was so transferred.
Supporting affidavits
In support of Mr Suh’s application, his solicitor, Simon Spencer Reyner Lee, swore an affidavit dated 14 January 2013. In that affidavit Mr Lee notes the pleaded allegations relating to the $30,000 allegedly advanced by the Company to Mr Cho, and Mr Cho’s response. The response is that Mr Cho admitted that the Company lent him the sum of $5,000 on or about 20 April 2009 (of which $2,000 was repaid on about 22 May 2009), and further the sum of $27,000 on or about 27 May 2009, but otherwise denies the allegation and says that the sums lent were to be repaid within five years of being lent with no requirement that interest be paid.
The affidavit, which is in many respects a submission, goes on to advance the following propositions:
(a)that because Mr Cho has objected on numerous occasions to the Company bringing this action against him, it is probable that the Company will not itself bring the proceedings, or take responsibility for them, so that s 237(2)(a) is satisfied;
(b)that Mr Suh is an equal shareholder and co-director with Mr Cho in the Company and has a legitimate interest in the welfare and good management of it, and that this warrants litigation to recover property or ensure that the directors do not act unlawfully to the detriment of the Company as a whole. For these reasons, it was submitted that Mr Suh is acting in good faith in advancing the application for leave, so that s 237(2)(b) is satisfied;
(c)that by reason of searches undertaken as to the properties owned by the first and second defendants, they have the ability to meet at least a substantial part of any judgment in favour of the Company and, therefore, the derivative action would be practical and beneficial for the Company. It is therefore in the best interests of the Company that the application for leave be granted: s 237(2)(c);
(d)that the pleadings disclose that there is a serious question to be tried, so that s 237(2)(d) is satisfied;
(e)that in the circumstances of the proceeding, it is appropriate to grant leave even though sub-paragraph 237(2)(e)(i) has not been satisfied.
The application of Mr Suh also relied on an affidavit of Mr Lee in support of the application, sworn on 8 August 2012, that there be an order that Mr Cho provide a written authority addressed to the Legal Officer of the ATO authorising Mr Suh to obtain copies of the Company’s income tax returns and Business Activity Statements. In that affidavit, Mr Lee deposed to the following facts:
(a)that on 26 November 2010 a subpoena and Form 42A addressed to the ATO was issued seeking income tax returns and Business Activity Statements for the Company for various periods, together with income tax returns and Business Activity Statements for Jeff & Sons Plumbing for different periods;
(b)that the ATO responded by letter dated 15 December 2010, in effect, that the documents of the Company may be released if request were made under the Freedom of Information Act and written authority were provided by the public officer of the Company;
(c)that on 16 July 2012 Mr Lee requested authority from Mr Cho and Ms Ho to gain access to the Company’s taxation account at the ATO, noting that the public officer of the company is Mr Cho;
(d)also on that date, 16 July 2012, Mr Lee wrote to the ATO requesting written confirmation that access to the Company’s taxation account at the ATO would be granted if the public officer of the Company provided an authority;
(e)in response, on 18 July 2012, the ATO advised that written authority was required from the public officer of the Company in order to gain access to and/or obtain copies of income tax returns and Business Activity Statements;
(f)the defendants did not respond to the request for the written authority. On 31 July 2012, Mr Lee wrote to the secretary of Jeff & Sons Plumbing requesting disclosure of all financial records of that company from 2009 to 2012 pursuant to s 26 of the Civil Procedure Act2010. No response was received to that request.
In the letter from the ATO dated 15 December 2010, reference was made to the restrictions on the provision of documents in response to subpoenas. In particular reference was made to s 16(3) of the Income Tax Assessment Act 1936, which provides:
[Disclosure to a Court] An officer shall not be required to produce in Court any return, assessment or notice of assessment, or to divulge or communicate to any Court any matter or thing coming under his notice in the performance of his duties as an officer, except when it is necessary to do so for the purpose of carrying into effect the provisions of this Act or of any previous law of the Commonwealth relating to Income Tax.
In addition reference was made to s 3C(3) of the Taxation Administration Act 1953, which contains a similar, but wider, restriction on the production of documents in court.
Mr Cho swore an affidavit on 20 February 2013 in response to Mr Suh’s application. In that affidavit, he deposes:
(a)as to the background of the dispute;
(b)that he admits borrowing $30,000 from the Company but, contrary to the defence, he did not say that the sums lent were to be repaid within five years of being lent with no requirement that interest be paid. That defence had been prepared by previous counsel engaged by the defendants. Instead, he refers to an affidavit that he swore on 17 January 2011 where, at paragraph 53, he deposed:
On or around 27 May 2009, the first plaintiff offered to lend $30,000 to me from the second plaintiff’s bank account to pay off my credit card debt. The first plaintiff agreed to let me pay off this amount with no interest applying once I had surplus. One condition applied which was that I had to repay the debts by using my credit card to pay off the second plaintiff’s bills when the second plaintiff need money. (sic)
(c)Mr Cho goes on to say that he will repay the $30,000 to the Company by instalments which will be negotiated with Mr Suh and refers, in this regard, to a letter he wrote to the Honourable Judge Anderson of the County Court on 24 May 2012;
(d)that Mr Suh is not acting in good faith in making application for leave to bring the claim on behalf of the Company against Mr Cho and that it is not in the best interests of the Company that Mr Suh be granted leave. In support of these submissions, Mr Cho makes the following points:
(i)he will repay the $30,000 loan to the Company by instalments which will be negotiated with Mr Suh;
(ii)it is not in the best interests of the Company for Mr Suh to act on its behalf to bring the proceeding;
(iii)by reference to his affidavit sworn on 17 January 2011, he devoted substantial time and attention to the Company, worked as a plumber for the company until he resigned on 27 June 2009, searched for and located the business premises to be used by the company, purchased equipment for the business premises, set up the shop used as the business premises and arranged contracts with various suppliers. He then gives an account of returning stocks to suppliers, disconnecting utilities and organising for a potential tenant to re-lease the office from which the company operated and communication of matters in relation to the company with the ATO and the Australian Securities and Investment Commission (“ASIC”);
(iv)he then gives an account of attempting to pay bills of the Company in August 2009 which required the signature of both directors of the Company. He wrote several cheques but Mr Suh refused to sign them;
(v)he states that on many occasions he has tried to gain the consent of Mr Suh to liquidate the company, but has failed to get a response from him;
(vi)he deposes that as a result of arrangements between the parties’ solicitors, on or about 25 October 2009 all assets, equipment, documents and financial documents of the Company stored at the business premises were removed and stored at Mr Suh’s residential premises;
(vii)that the bank accounts of the Company are frozen at the request of the plaintiffs’ solicitor;
(viii)that pursuant to the order of Anderson J made 1 April 2011 (paragraph 10), the first and second defendants were permitted to attend at the offices of the plaintiffs at 14 Tullius Avenue, Oakleigh East to inspect various assets, equipment, documents and financial records of the Company. Mr Suh refused to permit Mr Cho and Ms Ho to carry out that inspection on that day as there was no third party present. Another inspection was attempted on 1 May 2011, but the inspection was unsuccessful because Mr Cho refused to sign a document requested by Mr Lee, the solicitor for the plaintiffs, the text of which is set out in his affidavit;
(ix)further attempts were made to have a variation of the order made by Anderson J and his Honour subsequently ordered on 9 May 2011 that the inspection should proceed on 14 May 2011 at 9.30am. An inspection did occur on that date and Mr Cho complains that it was “conducted under poor facility and it was frequently obstructed by the first named plaintiff, his spouse and his son. Mr Simon Lee was present as well. I addressed this matter to Honourable Judge Anderson at the directions hearing on 20 May 2011 … I requested another inspection … but it was objected to by Mr Lee”;
(x)on or about 28 June 2010 he sent a letter to Mr Suh regarding the Company’s taxation matters but never received any response. In substance the letter states that it attaches the Business Activity Statement for the period ending 30 June 2010, the PAYG summary for the year ended 30 June 2010 and advanced the proposition that it was Mr Suh who was required to do the tax return for the period from 9 March 2009 to 30 June 2009;
(xi)that he sent a letter to the ATO on 31 October 2010 requesting that all correspondence and documents relating to the Company should be redirected to Mr Suh;
(xii)he also sent a letter to Mr Lee, on 31 October 2010, consenting “to change the details of the addressee to your clients including Australian Taxation Office and Australian Securities and Investment Commission etc because your client is responsible for all administrative works for the company”;
(xiii)then there was correspondence relating to ASIC’s annual review fee for the company, a penalty for failure to lodge Business Activity Statements from the ATO and payment of the registration fee for a vehicle used in the business of the Company. Mr Suh’s solicitor responded to demands for payment of these sums by letter dated 2 February 2011 saying that Mr Suh would only agree to make the payment of ASIC’s annual review fee and the penalty due to the ATO on the basis that Mr Cho authorise Mr Suh to gain full and complete access to the Company’s tax account at the ATO and, in relation to the registration of the vehicle, on the basis that a roadworthy certificate is obtained by Mr Cho and the registration of the vehicle is transferred from Mr Cho’s name to the Company. There is no indication of what the response was to this letter.
Applicable law
Section 236 of the Corporations Act, allows inter alia a member of a company, acting with the leave of the Court granted under s 237, to bring proceedings on behalf of the company, in the name of the company. By s 237(1), such a person may apply to the Court for leave to bring, or intervene in, such proceedings. Section 237(2) provides:
(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.
Sub-section 237(3) is not presently relevant.
Before turning to the five criteria in s 237(2), I note the following general propositions:
(a)The word “must” in s 237(2) makes plain that if all five criteria are satisfied, the Court is bound to grant the application: Carpenter v Pioneer Park Pty Ltd (in liq);[3] Fiduciary Limited v Morningstar Research Pty Ltd;[4] Maher v Honeysett & Maher Electrical Contractors;[5]
(b)The cumulative structure of s 237(2) (with “and” at the end of each criteria in (a) to (d)), the structure of s 237 as a whole, including the rebuttable presumption in ss 237(3), and the discretion in ss 237(e)(ii), and the nature of the criteria, supports the view that s 237(2) was intended to prescribe the circumstances which must be satisfied before leave is granted, and not to leave open any residual discretion to grant leave if one or more of them were not satisfied: Maher v Harvey Honeyset & Maher Electronical Contractors Pty Ltd[6] per Brereton J;
(c)A consequence of the conclusion that, if all five criteria are satisfied leave must be granted, and that otherwise leave must be refused, is that the relevant considerations are limited to the five specified criteria: Maher v Harvey Honeyset & Maher Electronical Contractors Pty Ltd[7] per Brereton J;
(d)The burden of satisfying the Court, on the balance of probabilities, that each criterion specified in s 237(2) has been satisfied is on the applicant;[8]
(e)In deciding whether or not to grant leave under this section, a pragmatic and practical approach is to be adopted;[9]
(f)leave may be granted nunc pro tunc (now for then), that is after proceedings have been commenced purportedly in the name of the company, so that the leave is taken to have been given as at the date of the commencement of the proceeding: RTP Holdings Pty Ltd v Roberts;[10] Maher v Honeysett & Maher Electrical Contractors;[11] South Johnstone Mill Ltd v Dennis;[12] Re Brighter Directions Pty Ltd;[13]
(g)leave may be granted upon terms: Fiduciary Ltd v Morning Star Research Pty Ltd (2005) 53 ACSR 732; [2005] NSWSC 442 at [16] per Austin J.
[3](2004) 211 ALR 457, [31].
[4][2005] NSWSC 442, [16] (Austin J).
[5][2005] NSWSC 859, [12] per Brereton J.
[6]Ibid.
[7]Ibid.
[8]Swansson v RA Pratt Properties Pty Ltd and anor (2002) 42 ACSR 313, 318 [24]; [2002] NSWSC 583; Cassegrain v Gerard Cassegrain & Co Pty Ltd and anor (2008) 68 ACSR 132, 143 [69]; Fernandez v True Value Solar Holdings Pty Ltd [2012] VSC 430, [12].
[9]Herbert v Redemption Investments Ltd [2002] QSC 340, [32] per MacKenzie J.
[10](2000) 36 ACSR 170, 174-5 ([27]–[29]).
[11][2005] NSWSC 859, [17] per Brereton J.
[12](2007) 163 FCR 343; 25 ACLC 1443; [2007] FCA 1448 per Middleton J.
[13][2010] VSC 287, [28].
Company will not bring the proceeding - Section 237(2)(a)
The requirement for the Court to be satisfied that it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them, can be satisfied where there is some clear cut authoritative refusal by the company to take the specific proceedings. Where there is no such clear cut or authoritative refusal, the applicant bears the onus of establishing that in all of the relevant circumstances actual refusal or the probability of refusal is to be inferred: see Swansson v RA Pratt Properties Pty Ltd (“Swansson”).[14]
[14](2002) 42 ACSR 313, [29] per Palmer J.
The following facts point inescapably to the conclusion, as a matter of inference, that it is probable that the Company will not itself bring the proceedings:
(a)each of Mr Suh and Mr Cho are equal shareholders and the only directors of the Company;
(b)each of Mr Suh and Mr Cho are in dispute about the conduct of the Company, that is, it is in deadlock;
(c)the responses made in the pleadings by Mr Cho to the claims, which are presently identified as requiring leave of the Court; and
(d)Mr Cho’s opposition to the present application for the grant of leave.
These factors show quite graphically that Mr Cho does not consent and will not consent to the company bringing the proceedings against him or against the company which is apparently controlled by his wife, Ms Ho, but is likely to be, in reality, his creature, Jeff & Sons Plumbing.
One factor not addressed by the parties is the prospect of a future liquidator of the Company bringing the proceedings. That may be relevant because Mr Cho has maintained that the Company should be wound up. However, so far as the evidence reveals, he has taken no steps in that direction. This question was not addressed by Mr Suh as the matter was not raised by the defendants. In light of the defendants being self-represented, that is hardly surprising. In these circumstances, I should consider it. It was one of the matters considered by Brereton J in Maher v Harvey Honeyset & Maher Electronical Contractors Pty Ltd,[15] where his Honour remarked:
However, in my opinion criterion (a) requires a judgment to be made of the probabilities based on the presenting circumstances at the time of the hearing of the s.237 application. It does not permit the effective deferral of that judgment on the basis that the state of the company’s affairs might change in the future. While a judgment as to whether it is probable (now) that the company will not itself bring (or take responsibility for) proceedings requires some prognostication of what may transpire in the future, those possible future eventualities form part of the factual matrix upon which a judgment of the present probabilities is to be based. It would be contrary to the purpose of s.237 in facilitating the bringing of appropriate derivative actions to construe it as requiring that disputes between shareholders affecting control be first resolved before that judgment is made. The onus which the applicant for leave admittedly bears does not in my opinion require the applicant to show that a hypothetical future liquidator (a fortiori one the appointment of which the applicant opposes in the substantive proceedings) would not bring the proposed proceedings, nor that once a dispute between shareholders is eventually resolved, the victorious faction would not cause the company to bring them.
[15][2005] NSWSC 859, [25]-[27].
Those observations are applicable in this case. The parties have had available the option of seeking a winding up of the Company, on the just and equitable ground at least, since the relations between Mr Suh and Mr Cho broke down in June 2009. Neither of them has taken the opportunity to seek a winding up. The probabilities based on the present circumstances are that there will be no such application. However, to speculate about the prospect is not productive. It is enough, to repeat Brereton J’s words, that it would be contrary to the purpose of s 237 in facilitating the bringing of appropriate derivative actions to construe it as requiring that disputes between shareholders affecting control be first resolved before that judgment is made.
Good Faith - Section 237(2)(b)
The applicant must satisfy the Court that he or she is acting in good faith. There are two interrelated factors to which the courts have had regard in determining whether the good faith requirement is satisfied:
(a)whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success; and
(b)whether the applicant is seeking to bring the derivative action for some collateral purpose that would amount to an abuse of process: Swansson.[16]
[16](2002) 42 ACSR 313, [37] per Palmer J.
In Swansson,[17] Palmer J noted that -
…these two factors will, in most but not all, cases entirely overlap: if the court is not satisfied that the applicant actually holds the requisite belief, that fact alone would be sufficient to lead to the conclusion that the application must be made for a collateral purpose, so as to be an abuse of process. The applicant may, however, believe that the company has a good cause of action with a reasonable prospect of success but nevertheless may be intent on bringing the derivative action, not to prosecute it to a conclusion, but to use it as a means for obtaining some advantage for which the action is not designed or for some collateral advantage beyond what the law offers. If that is shown, the application and the derivative suit itself would be an abuse of the court's process: Williams v Spautz (1992) 174 CLR 509 at 526; 107 ALR 635 at 648. The applicant would fail the requirement of s 237(2)(b).
[17]Ibid.
Notwithstanding the requirement that the applicant honestly believe that a good cause of action exists and has a reasonable prospect of success—a subjective question—the requirement of good faith must be objectively determined: Fiduciary Limited v Morningstar Research Pty Limited;[18] Maher v Harvey Honeyset & Maher Electronical Contractors Pty Ltd;[19] Fernandez v True Value Solar Holdings Pty Ltd.[20] Thus, the Court may draw inferences as to the applicant’s good faith by assessing the nature of the allegations and the circumstances out of which they arose: Vinciguerra v MG Corrosion Consultants Pty Ltd.[21]
[18][2005] NSWSC 442, [22] (Austin J).
[19][2005] NSWSC 859, [31].
[20][2012] VSC 430, [19].
[21][2010] FCA 763, [56]; Fiduciary Ltd v Morning Star Research Pty Ltd [2005] NSWSC 442, [22].
The existence of personal animosity towards other shareholders, or between the shareholders in dispute, does not necessarily involve a lack of good faith: Pottie v Dunkley.[22]
[22][2011] NSWSC 166, [58].
Mr Suh did not depose as to his belief that a good cause of action exists and has a reasonable prospect of success. His solicitor, Mr Lee, did depose that Mr Suh’s position as an equal shareholder and co-director of the Company gave him a legitimate interest in the welfare and good management of the Company, which warrants litigation to recover property and ensure the directors do not act unlawfully to the detriment of the Company as a whole.[23]
[23]Affidavit of SRR Lee sworn 14 January 2013 at [13].
Mr Cho submits, on the basis of his affidavit material, that Mr Suh is not acting in good faith, is acting in his own personal interest, and is not acting bona fide in the interests of the Company. He also submits that it is not in the best interests of the Company that leave be granted to Mr Suh to commence the proceedings pursuant to ss 236 and 237 of the Corporations Act.
In my view, satisfaction of the “good faith” criterion does not require an assertion by the applicant on oath or otherwise that he believes that a good cause of action exists and has reasonable prospects of success. The requirement of good faith can be inferred from other material. As Brereton J noticed in Maher v Harvey Honeyset & Maher Electronical Contractors Pty Ltd:[24]
I do not take Palmer J, in Swansson, to have stipulated that there must be a sworn assertion by the applicant that he believes that a good cause of action exists and has reasonable prospects of success; rather, His Honour identified a state of mind which must be found to exist in the applicant, rather than any particular means by which that state of mind is to be proved. While in some cases the presence or absence of a sworn assertion of the relevant state of mind might be very important, generally speaking such statements – which by necessity will almost always be unqualified opinion founded on hearsay, since a lay applicant will rarely know whether or not a good cause of action exists, nor its prospects of success, and will be dependent upon the advice of lawyers for forming the relevant belief – must be of little weight or utility; and the objective facts and circumstances will speak louder than the applicant’s words.…
[24][2005] NSWSC 859, [33].
Mr Cho relied primarily upon material he said showed that Mr Suh lacked good faith in bringing the application. In large measure the material relates to disputes of the kind quite common between parties to a jointly operated company where the parties fall out with each other. Given that the requirement of good faith must be objectively determined, then the determination that there is a serious question to be tried is relevant to the objective determination of good faith. The conclusion that there is a serious question to be tried is a major step towards establishing that the applicant is acting in good faith.[25]
[25]Maher v Harvey Honeyset & Maher Electronical Contractors Pty Ltd [2005] NSWSC 859, [36].
Having regard to the circumstances of the breakdown in the relationship between Mr Suh and Mr Cho in June 2009, and the establishment of Jeff & Sons Plumbing immediately thereafter with Mr Cho’s spouse, Ms Ho, as the sole director and secretary of that company, and the conduct of the business of that company by Mr Cho himself as the only licensed plumber, provides an arguable basis for the allegation that there has been an appropriation by the new company, Jeff & Sons Plumbing, of the business previously conducted by the Company. This provides support for the causes of action other than the recovery of the debt due to the Company ($30,000). In relation to that debt, the pleadings, the affidavit of Mr Lee, and the facts deposed to by Mr Cho point to their being a serious question to be tried as to the recovery of this from Mr Cho.
In my view, the material advanced by Mr Cho, to which I have made extensive reference above, does not establish that in making the application Mr Suh is not acting in good faith.
In this case, given that Mr Suh claims that he has advanced funds to the Company, as did Mr Cho (albeit with funds Mr Suh alleges were lent to him by Mr Suh), it is plainly relevant for the Company to recover as much of its assets as possible in order to repay its debts. Thus, Mr Suh has a real interest in the company recovering moneys from Mr Cho, and this also points to the application being made in good faith.
The fact that Mr Suh would suffer a real and substantive injury if a derivative action were not permitted and the fact that that injury is connected with the status of Mr Suh as a shareholder and director of the company, further supports, objectively speaking, the application being made in good faith: Chahwan v Euphoric Pty Ltd t/a Clay & Michel.[26]
[26](2008) 227 FLR 43; 245 ALR 780 per Tobias JA at [74].
I am, accordingly, satisfied that Mr Suh is acting in good faith.
Best Interests - Section 237(2)(c)
The requirement that the Court be satisfied that it is in the best interests of the company that the applicant be granted leave has been interpreted to mean that the company’s “separate and independent welfare” is the touchstone: Charlton v Baber.[27]
[27](2003) 47 ACSR 31; [2003] NSWSC 745, [52].
In Maher v Harvey Honeyset & Maher Electronical Contractors Pty Ltd,[28] Brereton J described this concept as importing the familiar concept of interests of a company as a whole. Whether the best interests of the company as a whole reflect those of the shareholders taken together in light of the corporate object, or those of the creditors which will prevail in the context of insolvency, will be influenced by the status of the company.
[28][2005] NSWSC 859, [44].
In Swansson[29] Palmer J said that this requirement imposes a far higher threshold than demonstrating that the proceeding “may be, appears to be or is likely to be” in the best interests of the company.
[29](2002) 42 ACSR 313, [55]–[56].
The assessment of the best interests of the Company involves a balancing of the respective interests of the parties. In Fiduciary v Morningstar[30] Austin J held that:
In cases such as this, there is a balance to be struck between the prejudice that the company will suffer if claims are pressed unsuccessfully on its behalf and there is an adverse costs order, and the advantage that it will gain, indirectly for the benefit of its shareholders, if the claims are successful: see McLean v Lake Como Venture Pty Ltd [2004] 2 Qd R 280; [2003] QSC 562 at [7]. Sometimes satisfaction of the “serious question to be tried” criterion will lead readily to the conclusion that the applicant should be permitted to assert the company’s claims on its behalf. But where, as here, the assertion of those claims is simply a manifestation of aspects of the overall dispute between the parties, it will often be appropriate for the court to address the question of costs in the event that the claims fail. A suitable way of doing so, addressed during the hearing of the present application, is to grant leave on terms that the applicant is responsible for the costs ordered against the company, and undertakes not to seek contribution or indemnity from the company. I think such an order is appropriate here. The intention is that Mr Rich will be unable to reduce the quantum of his own liability by asserting a claim to recoupment against the company, bearing in mind that over 90% of any costs payable to the defendants by the company will in substance be paid out of Morningstar Inc’s interest. [31]
[30](2005) 53 ACSR 732.
[31][2005] NSWSC 442; 53 ACSR 732, 743 [51].
One of the consequences of this statement of the law, is that it must be demonstrated that there will be benefit to the company from the action, if the action is successful.[32] Another consequence is that the balance can be adjusted by granting leave on condition, including a condition that the applicant is responsible for the costs ordered against the company, if any.
[32]Re Brighter Directions Pty Ltd [2010] VSC 287, [23].
In True Value Solar Holdings Pty Ltd v Fernandez,[33] Osborne JA (Neave and Priest JJA agreeing) noted that the question of whether a proposed proceeding is in the best interests of a company is to be determined in the particular circumstances of the case. There is no fixed test.[34]
[33][2013] VSCA 27, [13].
[34]Vinciguerra v MG Corrosion Consultants Pty Ltd (2010) 79 ACSR 293, [119] (appeal dismissed: MG Corrosion Consultants Ltd v Vinciguerra (2011) 82 ACSR 367).
Notwithstanding this injunction, there are some obvious factors that can establish the best interests of the company. These include the ‘character’ of the Company,[35] the nature of the Company’s business and operation, whether there are other means of obtaining the same redress so that the Company does not have to be drawn into litigation against its will, and the ability of the defendants to meet at least a substantial part of any judgment in favour of the Company so that the Court may ascertain whether the action would be of practical benefit to the Company: Swansson per Palmer J at [55]-[60]; Ragless v IPA Holdings Pty Ltd (in liq).[36]
[35]For example, whether the company is a small, private company whose few shareholders are the members of a family or whether it is a large public listed company: Per Palmer J in Swansson v Pratt [2002] NSWSC 583 at [57].
[36](2008) 65 ACSR 700; [2008] SASC 90, [35] per Debelle J.
If the Company is insolvent, that will mean that the interests will be directed towards the benefit accruing to the Company’s creditors: Charlton v Baber (2003) NSWSC 745 at [53]. The inquiry is not confined to whether it is in the best interests of the Company that the proceedings be brought on behalf of the Company. An integral question is whether it is in the best interests of the Company that the proceedings be brought by the particular person who seeks leave: Transmetro Corp Ltd v Kol Tov Pty Ltd (2009) 71 ACSR 582; [2009] NSWSC 350 at [15].
In this case the purpose of the Company seems to have wholly failed. It was reconstituted as a result of the agreement between Mr Suh and Mr Cho to conduct business as a plumber. Mr Cho has left the Company and is employed in another company with similar objectives apparently established by his spouse. It is not known whether the Company is insolvent. It is known that the affairs of the Company are deadlocked and this would be sufficient to enable one or other of the shareholders to commence proceedings for its winding up on the just and equitable ground. That has not happened, notwithstanding the passage of considerable time, and much opportunity for one or other of them to do so. There are apparently assets of the Company stored at the premises of Mr Suh and his spouse. Moreover, there are assets of the Company comprising the debt of $30,000 apparently due by Mr Cho, together with claims against Mr Cho for breaches of his duties as a director and his equitable and fiduciary duties, in respect of which there is some prospect of success.[37] It cannot be known whether a liquidator would pursue these claims, and he would not do so unless funds were available either within the Company or provided by Mr Suh. I refer to the observations of Brereton J in Maher v Harvey Honeyset & Maher Electronical Contractors Pty Ltd,[38] and my observations about them in relation to this case at paragraphs 30 and 31 above.
[37]Neither party addressed the principles applicable to these questions, nor any authorities. They turn on the application of equitable fiduciary principles and the duties of directors that are well known: see by way of example only the exposition of the principles by Finn, Stone & Perram JJ in Grimaldi v Chameleon Mining NL (2012) 200 FCR 296. I have not thought it necessary to refer to them in the circumstances.
[38][2005] NSWSC 859, [25]–[27].
Mr Suh has produced evidence that Mr Cho is the joint proprietor with his spouse of their home at 2 Balmain court, Wantirna, Victoria.[39] That property is burdened by a mortgage and by a charge supported by a caveat. There is no evidence as to the equity that Mr Cho and his spouse have in the property. But the fact of ownership provides some evidence of the ability of Mr Cho and Ms Ho, in relation to the claims against her, of an ability to meet a judgment in favour of the Company, and thus offer some practical benefit.
[39]Affidavit of SRR Lee sworn 14 January 2013, at [16] and Exhibit SSRL-4.
Having regard to all these factors, it seems to me that Mr Suh has established that it is in the best interests of the Company that the application be granted. There is a risk, however, that the Company will suffer prejudice if claims made on its behalf are unsuccessful and there is an adverse costs order against it. In order to strike a balance between that prospect, and the advantage that the Company will gain, indirectly for the benefit of its shareholders, if the claims are successful, I consider that it is appropriate to grant leave on terms that Mr Suh is responsible for any costs ordered against the Company, and undertakes not to seek contribution or indemnity from the company in respect of them. I consider it appropriate because the claims made on behalf of the Company are a product of disputes between Mr Suh and Mr Cho, and perhaps their respective spouses, and the risk of failure of those claims should be borne by he who advances them. So, for example, if Mr Cho were to make claims of breach of duty to the Company by Mr Suh, and sought leave to pursue them on behalf of the Company, I consider that he should be responsible for the costs of the Company those claims proved unsuccessful.
Serious question to be tried - Section 237(2)(d)
This requirement may be equated with the test on an application for an interlocutory injunction: Swansson;[40] Ehsman v Nutectime International Pty Ltd.[41] That test will be satisfied if the plaintiff shows a sufficient likelihood of success to justify, in the circumstances, the preservation of the status quo pending the trial: Australian Broadcasting Corporation v O’Neill.[42]
[40](2002) 42 ACSR 313, [25] per Palmer J
[41](2006) 58 ACSR 705, [59] per Austin J
[42](2006) 227 CLR 57 (see especially at [19] per Gleeson CJ and Crennan J, and at [65]-[72] per Gummow and Hayne JJ); See also South Johnstone Mill Ltd v Dennis (2007) 163 FCR 343 at [79] per Middleton J.
In Ragless v IPA Holdings Pty Ltd (in liq),[43] Debelle J stated:
The Court must determine whether the applicant has demonstrated that there is a real question to be tried, that is to say, whether the applicant is able to identify the legal or equitable rights to be determined at trial in respect of which a final relief is sought…
[43](2008) 65 ACSR 700; [2008] SASC 90, [40].
There is, however, no requirement for the Court to make factual determinations about contested issues: Ehsman v Nutectime .[44]
[44](2006) 58 ACSR 705, [6].
Mr Suh has not given evidence as to the basis of the claims. This has been done by his solicitor. For the reasons mentioned above at paragraphs 38 to 43, it seems to me that it is not necessary that Mr Suh do so. His solicitor has referred to the basic facts alleged in the Amended Statement of Claim, and those basic facts are not disputed in the defence, although their characterisation and effects are in dispute. Those basic facts support a serious question to be tried in relation to all the claims.[45]
[45]I repeat, neither party addressed the principles applicable to these questions, nor any authorities. They turn on the application of equitable fiduciary principles and the duties of directors that are well known: see by way of example only the exposition of the principles by Finn, Stone & Perram JJ in Grimaldi v Chameleon Mining NL (2012) 200 FCR 296. I have not thought it necessary to refer to them in the circumstances.
Notice - Section 237(2)(e)
The requirement in s 237(2)(e)(i) that 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, is not, it seems to me, relevant in this case where the two shareholders and directors have been parties to this proceeding for three years and where, as I have said, the defence filed by Mr Cho in 2010 clearly raises the requirement for leave to be sought if the proceeding is to be pressed.
In any event, the failure to give a 14 day notice requirement does not disqualify a member from making an application under the section as the Court has the discretion under s 237(2)(e)(ii) to grant leave where it is appropriate to do so. In this case in my view it is appropriate to do so.
Disclosure of financial records
The plaintiffs apply for an order, pursuant to ss 55(1) and 55(2)(f) of the Civil Procedure Act2010, that Mr Cho provide a written authority, addressed to the legal officer of the ATO, granting Mr Suh authority to obtain copies of the Company’s income tax returns and Business Activity Statements for certain periods.
Part 4.3 of the Civil Procedure Act2010 is headed “Disclosure and Discovery”. Section 54 provides that unless a court otherwise orders, discovery of documents in a civil proceeding is to be in accordance with the rules of court. Section 55 then enlarges the powers of the Court by providing in sub-section 55(1) that a “…court may make any order or give any directions in relation to discovery that it considers necessary or appropriate.” Sub-section 55(2) then sets out specific instances of orders and directions that are encompassed in the broad power given by sub-section (1). Paragraph 55(2)(f) provides that without limiting subsection (1), a court may make any order or give any directions expanding a party's obligation to provide discovery.
The most significant of the purposes of the very wide powers given in s 55 was to limit discovery, not enlarge it. Thus in consequence of the enactment of the Civil Procedure Act, the Supreme Court (General Civil Procedure) Rules 2005 (r 29.01.01) were changed to narrow the test of what documents are discoverable, so as to reduce the extent and volume of discovery required in civil proceedings.[46] Nevertheless, the powers are extensive and enlarging, as well as confining, and may be used where the interests of the administration of justice in any particular case call for their exercise, and, in particular, where the exercise of a power is in furtherance of the overarching purpose in relation to the conduct of civil proceedings, namely to facilitate the just, efficient, timely and cost effective resolution of the real issues in dispute.[47]
[46]Williams, Civil Procedure Victoria, C4.54.5.
[47]Civil Procedure Act 2010, s 8.
The application by the plaintiffs seeks to by-pass the rules of court and proceed directly to the exercise of an overriding power. Having regard to the terms of ss 54 and 55 of the Civil Procedure Act, it seems to me to be desirable, perhaps necessary, first to consider whether in accordance with the Rules an order of the kind sought can be made. If not, the question is whether it is appropriate to “otherwise order” under s 54 and make orders of the kind sought under s 55.
Mr Cho has filed a number of affidavits of documents. In one, dated 6 May 2011, he discovers (in Part 1 of Schedule 1) a taxation return of the Company for the year ended 30 June 2008, and in Schedule 2 (documents no longer in his possession) books of account and financial records of the Company between September 2005 and June 2006 (formerly in his possession until June 2007), between July 2006 and June 2007 (formerly in his possession until June until April 2008) and between July 2007 and June 2008 (formerly in his possession until May 2009). He does not say in that affidavit where those documents now are. He does, in a later affidavit in opposition to this application, say that all the financial documents of the Company are stored at Mr Suh’s residence.[48] Because he does not state what those financial documents comprise, I can only assume that they do not include the taxation and BAS returns. I am driven to the conclusion[49] that these books of account and financial records of the Company discovered by Mr Cho included copies of taxation returns of the Company, but they are no longer in his possession or the possession of Mr Suh. There is no discovery made of books of account or financial records of Jeff & Sons Plumbing.
[48]Affidavit of Mr Cho sworn 20 February 2013, paragraph [17].
[49]By the affidavits of documents of the first plaintiff, correspondence between the parties, the inspection of the materials stored at Mr Suh’s premises pursuant to the orders of Anderson J of 1 April and 9 May 2010, and the fact of this application for orders under s 55 of the Civil Procedure Act2010.
In essence, the position is that Mr Cho has declined to authorise Mr Suh to obtain the taxation records of the Company from the ATO. This is the case notwithstanding that Mr Cho has sought to change the address for service of the Company with the ATO from his address to that of Mr Suh.[50]
[50]See the affidavit of Mr Cho sworn 22 August 2012 at [31]-[32].
Applicable law - discovery
Many years ago, in the then Commercial List of this Court, Marks J held that, whatever the limitations on the Court’s power to order the discovery of documents under the Rules relating to discovery of documents, the wide power conferred by the Commercial List Rules (then Ch II, Order 14, Rule 5(3)), namely to
…give such directions with respect to any interlocutory step or proceeding or otherwise as in his opinion are expedient for the just and speedy determination of the matters in issue in the action,
did empower the Court to direct a party to take steps to obtain access to and discover documents which that party has lodged with a public authority where there is a real likelihood that the party will be given access to those documents on request: Palmdale Insurance Ltd (In Liq) v L Grollo and Co Ltd (“Palmdale”).[51]
[51][1987] VR 113, 116-117.
In Psalidis v Norwich Union Life Australia Ltd,[52] (“Psalidis”) Cavanough J pointed out that a significant feature of the decision in Palmdale was that the relevant documents had originally been created by the defendant itself (from whom production and inspection was sought) and had therefore, obviously, been in its power (and, indeed, in its possession and custody) at an earlier time. Accordingly, on ordinary principles, there was no doubt that the defendant was required to disclose the documents in its affidavit of documents. Hence, Palmdale was not a case about discovery but a case about production and inspection.[53]
[52](2009) 29 VR 123, [30].
[53]He also pointed out that the same can be said of the decision of Marks J in C.E. Heath Underwriting & Insurance (Australia) Pty Ltd v Fabric & Apparel Industries (Unreported, Supreme Court of Victoria, Marks J, 28 November 1989.)
In making directions that a party take steps to obtain access to documents in Palmdale, Marks J sparked a controversy, because his reasoning has been construed as suggesting that a party’s discovery obligation extended to making requests for documents no longer in that party’s possession and expressed the view that the full reach of the word “power” in the expression “possession, custody or power” had not been settled by what had been said by Lord Diplock in Lonrho Ltd v Shell Petroleum Co Ltd[54] (“Lonrho”) (namely, that in the absence of a presently enforceable right there was nothing in the court rules for discovery to compel a party to take steps that would enable that party to acquire such a right in the future): see the observations of Ward J in Stern v Sekers; Sekers v Sekers.[55]
[54][1980] 1 WLR 627, 636
[55][2010] NSWSC 59, [247].
In Palmdale Marks J noted that in Lonrho Lord Diplock had expressly declined to consider more generally the law of discovery, confining his comments to the special facts of the case before him.
The issue has arisen in cases where it is suggested that a subsidiary company is obliged to give documents held by its parent company or vice versa. In Taylor v Santos Ltd,[56] Doyle CJ, with whom Prior J agreed, quoted the relevant passage from Lonrho and said that he did not agree that what Lord Diplock had said should be treated as stating exhaustively the content of the expression “power” in the relevant court rule. His Honour said the South Australian Rule imposing an obligation to discover a document, when read as a whole, is limited to a document that the person in question has the legal power or actual and immediate ability to inspect, even though the document is the property of or is held by another person. The obligation to discover hinges upon having a right or actual and immediate ability to examine the document.[57]
[56](1998) 71 SASR 434, 437–8.
[57]See also Psalidis (2009) 29 VR 123 at [31]; Stern v Sekers; Sekers v Sekers [2010] NSWSC 59 at [249].
In Theodore v Australian Postal Commission,[58] Murphy J held that the discovery power did not oblige a litigant to discover documents that are not and never were in his possession custody or power even if he could possibly obtain copies of them on request from a government department, and distinguished the decision of Marks J in Palmdale.
[58][1988] VR 272, 277.
In Sabre Corporation Pty Ltd v Russ Kalvin’s Hair Co,[59] (“Sabre”) Lockhart J held the power of the Federal Court to extend to directing a party to take steps to obtain access to and discover documents which are in the possession, power or control of a third person where there is a real likelihood that the party to the proceeding would be given access to the documents upon request. There are other cases to like effect: C.E. Heath Underwriting & Insurance (Australia) Pty Ltd v Fabric & Apparel Industries[60] and Linfa Pty Ltd v Citibank Ltd.[61]
[59](1993) 124 ALR 400, 404; 46 FCR 428.
[60]Unreported, Supreme Court of Victoria, Marks J, 28 November 1989.
[61][1995] 1 VR 643.
A contrast is the decision of the court in Psalidis,[62] a case decided under the Rules and before the passing of the Civil Procedure Act 2010. In that case, Cavanough J had before him an application for particular discovery under r29.08, expanded, on appeal from an Associate Judge who refused to order discovery, to embrace reliance on r 1.14(1), r 34.01[63] and the approach taken by the Federal Court in Sabre.[64]
[62](2009) 29 VR 123, Cavanough J.
[63]Each of which includes a wide directions power.
[64](1993) 124 ALR 400.
In Psalidis, an insured lodged a claim under a critical illness policy issued by the defendant, seeking payment of a benefit because he had been diagnosed with a form of cancer. The insurer refused to pay, alleging that the insured had fraudulently failed to disclose that, in the six months before obtaining the policy, he had been diagnosed with a malignant melanoma which had been removed by a surgeon. In proceedings brought by the insured (and the trustee of a superannuation fund of which he was a member) the insurer applied for orders that the insured make particular discovery of his treating medical practitioners’ notes and all other documents made or received by those practitioners with respect to the melanoma. While the medical records were not in the insured’s possession or custody, the defendant submitted that they were in his power within the meaning of O 29 of the Supreme Court (General Civil Procedure) Rules2005.
Cavanough J held:[65]
(a)The expression “power” in O 29 meant a presently enforceable legal right to obtain, from whoever actually held the document, inspection of it without the need to obtain the consent of anyone else. In the absence of a presently enforceable right, there was nothing in O 29 to compel a party to a proceeding to take steps that would enable him or her to acquire one in the future [27],[28];
(b)Documents which a party would be likely to obtain if it made a request (but which it had not presently an enforceable legal right to obtain) were not within that party's power. [33];
(c)A person’s right of access to his or her medical records under the Health Records Act 2001 was a legal right in a limited sense only. The right could not be directly enforced in the usual way in which legal rights were enforced, namely, in the ordinary courts. In some cases, it would not be able to be enforced at all, much less immediately. Overall, it did not answer the Lonrho description of a presently enforceable legal right of access to medical records. Nor did it provide to Victorians an actual and immediate ability to examine their medical records. [35]-[38], [80], [81];
(d)The restrictions and limitations on access to health records in the Health Records Act 2001 bore two relevant aspects. First, they established a range of exceptions by reference to which an organisation may legitimately refuse access to medical records. Second, they set up a special, exclusive, highly attenuated dispute resolution mechanism outside which the rights created by the Act were not enforceable at all. At least in combination, those aspects led to the court not being satisfied that the documents in question were within the insured's power. [82], [99];
(e)Since there was no real difficulty about using the ordinary processes of party-party discovery, third party discovery or subpoena to produce the relevant information or documents, the court refused to exercise its discretion to order the insured to discover the medical records pursuant to rr 1.14 and 34.01 of the Supreme Court (General Civil Procedure) Rules 2005. [124].
[65](2009) 29 VR 123, headnote.
In reaching these conclusions and particularly the conclusion as to the meaning of ‘power’, his Honour carefully analysed the relevant authorities, including those to which I have referred above.
Psalidis, and the other cases to which I have referred, turn to some extent on there own facts and circumstances. The overall effect of them is, in my estimation, simply this: that notwithstanding the limitations on the discovery process arising from the requirement that the party have possession or custody of, or power over documents in question, the Court has power to direct a party to proceedings to take steps to obtain access to and discover documents which are in the possession, custody or power of a third person where the party has the legal power or actual and immediate ability to obtain the documents or where there is a real likelihood that the party to the proceeding would be given access to the documents upon request.
This is not to say that the Rules, which cover a variety of circumstances and are all premised on the parties having or having had “possession, custody or power” of documents, are thereby set aside. In ordinary circumstances, the Rules will be sufficient for the purposes of the litigation in question. Sometimes, however, they do not go far enough to do justice between the parties, and it is here that the broad ambit of the power of the Court given by s 55 of the Civil Procedure Act is relevant and may be applied.
This then leads to a consideration of the circumstances in which it is appropriate to exercise that broad power. In Psalidis, the conclusion reached by Cavanough J as to whether he should exercise the wide directions powers in rr 1.14 and 34.01 turned on the following matters:[66]
[66]Psalidis, at [122]–[124].
Palmdale and C.E. Heath were cases very different from the present. They were commercial cases. Each plaintiff sued for debts calculable by reference to wages paid. In each case, the defendant had not retained its wages records. In order to have any chance of proving its case, the plaintiff needed the production by the defendant of secondary records, such as tax returns. The defendant said it had not retained copies of these, either. In such circumstances, each plaintiff succeeded in persuading Marks J to require the defendant to take steps to obtain the secondary records or copies from the authorities, by making FOI requests if need be. The secondary records were admittedly discoverable. They had been created by the defendants themselves and despatched by them. So, as already mentioned, the issue was production and inspection, not discovery. The defendants were presumably in a better position than the plaintiffs to help the authorities to identify and locate the secondary records. According to Marks J, the defendants had been unduly unco-operative with the plaintiff, if not obstructive, for a long period. The orders were made, in a real sense, as a last resort.
Sabre was also very different. It was a passing off/misleading and deceptive conduct case in the Federal Court. The respondent sought an order that the applicant be required to take steps to obtain certain relevant documents from a US corporation with which the applicant had a close business relationship. The order sought was not objected to in principle. Lockhart J held that the Federal Court had power to direct a party to take steps to obtain access to and discover documents which are in the possession, power or control of a third party where there is a real likelihood that the party to the proceeding would be given access to the documents upon request.[67] That power was said to arise from s 23 of the Federal Court of Australia Act 1976, which provides:
“The Court has power, in relation to matters in which it has jurisdiction, to make orders of such kinds, including interlocutory orders, and to issue, or direct the issue of, writs of such kinds, as the Court thinks appropriate.”
The Supreme Court Act 1986(Vic) contains no direct equivalent of that provision. However, in various cases decided in other Australian jurisdictions since Sabre, courts have discerned a like power in statutory provisions or rules of court similar to rr 1.14 and 34.01 of the (Victorian) Rules.[68] So far, no Victorian case has expressly referred to Sabre. However, I will assume (without deciding) that an equivalent power resides in this Court.
Nevertheless, it remains a matter for the discretion of the Court whether the power to make a Sabre order should be exercised. In my opinion, no such order would be appropriate in this case, at least at this stage. In Sabre itself, and in most other cases where a Sabre order has been sought, there has been a real difficulty about using the ordinary processes of party-party discovery, third party discovery or subpoena to obtain the relevant information or documents. A typical example is where the documents are overseas and in the possession of some person or entity not readily amenable to the ordinary processes of the jurisdiction.[69] There are no comparable difficulties in the present case.
[67](1993) 124 ALR 440, 404.
[68]See, eg, Absolute Analogue Inc v Sundance Resources Ltd [2008] WASC 259 (Le Miere J), [31]–[32]; Sogelease Australia Ltd v Griffin [2003] NSWSC 178 (Palmer J) at [37]; Bova v Avati [2009] NSWSC 921 (Ward J),[363]–[364], [370]–[373].
[69]That was the situation in Sabre itself. See also Bova v Avati [2009] NSWSC 921, [370]–[374]; cf SPI Spirits (Cyprus) Ltd v Diageo Australia Ltd (No 2) (2006) 155 FCR 150.
The circumstances of the case at hand are significantly different to those faced by the Court in Psalidis. This case is a commercial case, albeit of small compass. It involves the affairs of a closely held private company, the financial affairs of which were apparently managed by or on behalf of Mr Cho (that is by him or his spouse Ms Ho). The financial and taxation position of the Company before and after Mr Suh invested in it are relevant to the claims made by the plaintiffs. Similarly, the financial and taxation position of Jeff & Sons Plumbing after its incorporation in June 2009 are relevant to the claims made. There has been discovery of books of account and financial records of the Company (see paragraph 66 above), but not of Jeff & Sons Plumbing. The discovery made shows that Mr Cho no longer has the financial records, including, as I have inferred, the taxation and BAS returns. The one sure repository of these documents is the ATO.
The provisions of the taxation legislation to which I have referred above at paragraph 21 and 22 place a serious limitation on the ability of the plaintiffs to obtain the tax and BAS returns, even of the Company, let alone those of Jeff & Sons Plumber, from their only known repository.
The last matter that distinguishes this case from that dealt with in Psalidis is the introduction of the Civil Procedure Act2010 and the very wide power in s 55. Where the exercise of that power is in furtherance of the overarching purpose in relation to the conduct of civil proceedings, namely to facilitate the just, efficient, timely and cost effective resolution of the real issues in dispute,[70] then it is justifiable to employ it. In Psalidis, Cavanough J declined at that time to exercise a similar power derived from the directions powers in the Rules, principally because of the existence of other means available to the defendant to obtain the documents in question. He noted that in most cases where a Sabre order has been sought, there has been a real difficulty about using the ordinary processes of party-party discovery, third party discovery or subpoena to obtain the relevant information or documents. This is just such a case. It is in my view appropriate to make orders under s 55 as sought by the plaintiffs in relation to the Company. However, as there has apparently been no discovery of the books and financial records of Jeff& Sons Plumbing, I will make orders for discovery in accordance with the Rules in that regard.
[70]Civil Procedure Act 2010, s 8.
Application to join Ms Kim as a third party
In support of the application to join Ms Kim, Mr Suh’s spouse, as a third party to the proceeding was affidavits of Ms Ho, sworn 19 December 2012, and Mr Cho, sworn 18 December 2012. In her affidavit, Ms Ho refers to the affidavit of her husband, Mr Cho, as providing evidence that Ms Kim had been involved in the business of the Company from the beginning and, in particular, in the decision to close down the business. She states that after the decision was taken to close down the Company by Mr Suh and Ms Kim in late June 2009, her husband, Mr Cho, has continued to work as a licensed plumber to earn a living to support his family of five. For this reason, she decided to incorporate Jeff & Sons Plumbing on 29 June 2009. She is the sole director and sole shareholder of the company. The company provides plumbing services and Mr Cho works as a plumber in the business. She states that Jeff & Sons Plumbing is not a rival plumbing business of the Company.
She then says that for these reasons she is going to claim an indemnity or contribution, and damages, against Ms Kim. She encloses a proposed statement of claim. That statement of claim pleads:
(a)the amended statement of claim and denials in the defendants’ defence;
(b)that Ms Kim is the wife of Mr Suh and a creditor of the Company;
(c)that Mr Suh and Ms Kim have lent $100,000 to the Company as at 21 May 2009 and that two payments of interest and a principal repayment have been made;
(d)that by an oral agreement made between February and June 2009 between Mr Suh and Mr Cho, Mr Suh promised he would not let his wife get involved in any way with the business of the Company, but this he failed to do;
(e)that Mr Cho received a letter from Mr Suh’s lawyers dated 25 June 2009 indicating he was inclined to agree to cease the business;
(f)that letters have been written by the solicitors for the plaintiffs indicating that they act for both Mr Suh and Ms Kim as if Ms Kim was a party to the proceedings;
(g)Ms Kim is a creditor of the Company and was directly or indirectly involved in the decision of the Company to cease carrying on business;
(h)by reason of the above the defendants have suffered loss and damage.
There is then a claim against the prospective third party, Ms Kim, for an indemnity in respect of the plaintiffs’ claims to the extent that they are successful against the defendants, damages, interest and costs.
I cannot discern a cause of action arising out of the proposed third party’s statement of claim. No submissions were made that explained what cause of action was intended to be raised by this proposal. In the absence of a viable third party cause of action by the defendants against Ms Kim it is not appropriate to grant the leave sought.
Application to represent Jeff & Sons Plumbing
The defendants’ summons seeks leave for Ms Ho to act on behalf of Jeff & Sons Plumbing generally in the proceeding.
By Rule 1.17(1) of the Rules it is provided that,
Except where otherwise provided by or under any Act or these Rules, a corporation, whether or not a party, shall not take any step in a proceeding save by a solicitor.
Rule 2.04 provides that the Court may dispense with compliance with any of the requirements of the Rules, either before or after the occasion for compliance arises.
Rule 8.03 provides that a corporation may file an appearance by any person duly authorised by it to so act.
The result of these rules is that the filing of an appearance is the only step which a corporation may take in a proceeding without a solicitor. The Rules say nothing directly about attending before the Court to address argument. It is clear that any court can, in the control of its own proceedings, allow itself to be addressed in a proper case by any person it considers is a proper person to be allowed an audience: HubbardAssociation of Scientologists International v Anderson.[71]
[71][1972] VR 340, 342.
The effect of Rule 1.17 is that a corporation does not have the same unconditional right of access to the courts as does a natural person, and that a corporation may be put in the position that at trial it is not represented by an advocate: Molnar Engineering Pty Ltd v Byrnes;[72] Clout (as trustee in bankruptcy of the estate of Dexter) v Anscor Pty Ltd.[73]
[72](1984) 3 FCR 68, 75.
[73][2001] FCA 6004.
The rule of practice limiting appearances for a corporation to persons admitted to practise is not based on technicalities. It has long been regarded as based on considerations central to the proper administration of justice and the protection of the parties in the litigation: Scotts Head Developments Pty Ltd v Pallisar Pty Ltd.[74] There are sound policy reasons why a corporation ought be represented by a lawyer.[75] The reasons include:[76]
[74]Unreported, New South Wales Court of Appeal, 6 September 1994; J Forrest J in Worldwide Enterprises Pty Ltd v Silberman & Anor [2009] VSC 165, [16].
[75]Lettieri v Strangio & Ors [2008] VSCA 205, [18].
[76]See Williams, Supreme Court Practice, at I 1.17.0.
(a)difficulties posed when a lay individual endeavours to conduct a complex piece of litigation: Knorr v CSIRO (No 2);[77]
(b)the Court is deprived of the assistance it would receive if the corporation were legally represented when a lay individual appears;
(c)a lay representative is not subject to the ethical precepts that bind lawyers;
(d)the need to have regard to the possible wastage of court time;
(e)the incurring of unnecessary costs, such as by prolixity and lack of focus in the presentation of the case: Worldwide Enterprises Pty Ltd v Silberman;[78] and
(f)the unavailability of disciplinary measures and a duty to the Court by lay advocates.
[77][2012] VSC 268.
[78](2010) 26 VR 595; [2010] VSCA 17.
In Worldwide Enterprises Pty Ltd v Silberman,[79] J Forrest J summarised the matters relevant to determining circumstances that warrant a company being permitted to “take a step” without being represented by a legally qualified person, as follows:
[79][2009] VSC 165, [20].
(a)the manner in which the case has progressed at the time that the application is made;
(b)the manner in which the case can proceed in the future without a solicitor;
(c)the complexity of the issues involved in the case;
(d)whether the lack of disciplinary measures in relation to the person seeking to represent the company will affect the administration of justice;
(e)whether the case can be conducted in an orderly and responsible fashion without a solicitor;
(f)whether there are financial considerations which would inhibit a company from obtaining legal representation;
(g)the stage which the case has reached;
(h)whether the other party is likely to expend more funds in opposing the company’s claim absent a solicitor acting for the company; and
(i)what effect, if any, permitting a company to appear without a solicitor will have on Court resources and, particularly, the effect upon other litigants in the Court List.
These considerations were endorsed on Appeal in Worldwide Enterprises Pty Ltd v Silberman& Anor.[80]
[80](2010) 26 VR 595, [41].
The complexity of the issues that are and will be involved in the case point strongly against the grant of any leave of a general kind, assuming for present purposes that it were appropriate for an Associate judge to grant such leave generally, which it is not (as I refer below).
There is only limited evidence, and that mainly is in relation to other interlocutory steps, that inform the Court as to the financial considerations which might inhibit Jeff & Sons Plumbing from obtaining legal representation. That evidence has to do with the health of the main earner for that company, Mr Cho, and his responsibilities to his family. The manner in which the case has progressed so far, and can proceed in the future, without a solicitor is of serious concern. The Court was not been assisted by the submissions made by Ms Ho on behalf of Jeff & Sons Plumbing. In the main, the affidavits filed in the interlocutory applications to date have missed the point of the particular application. A great deal of Court time has been wasted, not to mention the time of the practitioner acting for the plaintiffs. All of these matters are also in prospect. There is nothing, in short, that commends any grant of leave for Ms Ho to represent Jeff & Sons Plumbing.
It has been the case, however, in all of the applications that have been made in court so far—since the defendants’ solicitors ceased to act in 2010—that Ms Ho has spoken, and been given leave to speak, on behalf of Jeff & Sons Plumbing. For the reasons just stated, it is clearly inappropriate as a general proposition that Jeff & Sons Plumbing be represented otherwise than by a solicitor. Moreover, even if I were persuaded that the grant of leave generally were appropriate, and I am not, it would be inappropriate to give general leave of the kind sought in the defendants’ summons. It would not be binding on another judge of the Court. It is a matter in each case for the Judge before whom an application is made to consider whether it is appropriate for the Company to be represented by one of its directors and not by a solicitor or counsel engaged for the purpose.
For these reasons, the defendants’ summons filed 19 December 2012 will be dismissed. I will hear the parties as to the costs of that summons.
SCHEDULE OF PARTIES
| JUNG WAH SUH | Firstnamed Plaintiff |
| JEFF THE PLUMBER PTY LTD (ACN 116 228 472) | Second named Plaintiff |
| - and - | |
| JEFF W CHO | Firstnamed Defendant |
| CHRISTI HO | Second named Defendant |
| JEFF & SONS PLUMBING PTY LTD (ACN 137 967 545) | Third named Defendant |
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