Swansson v RA Pratt Properties Pty Ltd

[2002] NSWSC 583

Reported Decision: 42 ACSR 313
(2002) 20 ACLC 1594

New South Wales

Supreme Court

CITATION:	Swansson v Pratt [2002] NSWSC 583
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	SC 1150/02
HEARING DATE(S):	20 June, 2002
JUDGMENT DATE:	3 July 2002
PARTIES :	Ruth Swansson - Plaintiff R.A. Pratt Properties Pty Ltd - First Defendant Peter Highland - Second Defendant
JUDGMENT OF:	Palmer J

COUNSEL :	P.P. Strasser - Plaintiff N.J. Kidd - Second Defendant
SOLICITORS:	Mark Phillip Symonds - Plaintiff No appearance for First Defendant Selby Levitt - Second Defendant
CATCHWORDS:	CORPORATIONS - DERIVATIVE ACTION - LEAVE TO COMMENCE - GOOD FAITH - BEST INTERESTS OF COMPANY - Shareholder applies for leave to bring derivative action against director of company - breaches of statutory duties under s.180, s.181, s.182 Corporations Act and breach of fiduciary duties under general law alleged - closely held family company - majority of shareholders do not wish action to be taken - real grievance between applicant and director arises out of dissolution of marriage and alleged concealment of property - question whether applicant seeking double recovery of property the subject of divorce settlement - whether applicant acting in good faith as required by s.237(2)(b) - principles discussed - whether proposed derivative action in the best interests of the company as required by s.237(2)(c) - principles discussed. HELD: Applicant had not adduced sufficient evidence to discharge onus of satisfying the Court that she was acting in good faith - applicant had not satisfied the Court that the derivative action was in the best interests of the company. DERIVATIVE ACTION - COSTS ORDER - Applicant seeks order under s.242 that company pay costs of derivative action - discussion of evidence required. HELD: No order justified.
LEGISLATION CITED:	- Canada Business Corporations Act, 1985 - Corporate Law Economic Reform Program Act, 1999 (Cth) - Corporations Act 2001 (Cth), s.9, s.180, s.181, s.182, s.185(a), s.236(1), s.236(3), s.237(1), s.237(2), s.242, Pt. 2F.1A, s.1317K - Family Law Act, 1975 (Cth) - s.87, s.87(8)(a), s.87(9)(b) - Limitation Act, 1969 (NSW) - s.23, s.55(1)(b) - New Zealand Companies Act, 1993 - s.165
CASES CITED:	- Advent Investors Pty Ltd v Goldhirsch (2001) 37 ACSR 529 - Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 - Bellman and Western Approaches Ltd, Re (1981) 130 DLR (3d) 193 - Chapman v E-Sports Club Worldwide Ltd (2000) 35 ACSR 462 - Chemaisse and Federal Commissioner of Taxation, In the Marriage of (1988) FLC 91-915 - Dowling v Colonial Mutual Life Assurance Society (1915) 20 CLR 509 - Edwards v Halliwell [1950] 2 All ER 1064 - Foss v Harbottle (1843) 2 Hare 461 - IOC Australia Pty Ltd v Mobil Oil Australia Ltd (1975) 11 ALR 417 - Karam v ANZ Banking Group Ltd (2000) 34 ACSR 545 - Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 - Radwan and Radwan (1986) FLC 91-755 - Ruralcorp Consulting Pty Ltd v Pynery Pty Ltd (1996) 21 ACSR 161 - Suters, In Marriage of (1983) FLC 91-365; 9 Fam LR 340 - Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd [2001] QSC 324 - Techflow (NZ) Ltd v Techflow Pty Ltd (1996) 7 NZCLC 261,138 - Vrij v Boyle (1995) 3 NZLR 763 - Williams v Spautz (1992) 174 CLR 509
DECISION:	Originating Process dismissed with costs.

Introduction

1 The Plaintiff (“Ms Swansson”) is a director and shareholder of the First Defendant (“RAPP”) and the former wife of the Second Defendant (“Mr Highland”). Ms Swansson and Mr Highland were divorced in May 1997. Mr Highland was a director of RAPP between 1992 and December 1997. 2 By her Amended Originating Process Ms Swansson seeks leave, pursuant to s.237(1) of the Corporations Act, 2001 (Cth) (“CA”) to bring proceedings against Mr Highland in the name of RAPP. The proceedings are founded upon alleged contraventions by Mr Highland of his duties to RAPP as a director under CA ss.180, 181 and 182 and under the general law.

The Plaintiff’s claims

3 RAPP was incorporated, it appears, by Ms Swansson’s parents as a family investment company. Ms Swansson’s parents, Mr and Mrs Pratt Snr, were the original directors and they together with Ms Swansson and her brother, Mr Ian Pratt, were equal shareholders. In December 1992 Ms Swansson and Mr Highland, who were then still married, became the sole directors of RAPP. Ms Swansson nevertheless claims that it was not until March or April 1999 that she became aware of the existence of RAPP and that she was a director and shareholder. Her explanation is that during her marriage she was in the habit of signing whatever documents Mr Highland asked her to sign without reading or understanding them. 4 Ms Swansson says that after discovering the existence of RAPP she caused enquiries to be made by her solicitor, Mr Symonds, which revealed that the company had owned a one-third interest in a property at Cronulla and had sold that interest for a sum of $800,000 by a Memorandum of Transfer dated 28 October 1994 which she had signed. She says, and the evidence demonstrates, that of the purchase price payable to RAPP at least $420,580 was paid on settlement of the sale to two companies in which she and Mr Highland were then directors and shareholders, namely PHP Construction Pty Ltd (“Construction”) and Peter Highland Projects Pty Ltd (“Projects”). She says that her signature to the Memorandum of Transfer as a director of RAPP and on a direction to the purchaser of RAPP’s interest to pay part of the settlement monies to Projects must have been procured by Mr Highland without telling her anything about what she was signing. Ms Swansson says that, prior to early 1999, she did not know that Projects or Construction had received any monies from RAPP. 5 Ms Swansson says that, despite her solicitor’s enquiries to RAPP, its accountant and Mr Highland, no explanation has been given which would justify the payment of at least $420,580 of RAPP’s money to Projects and Construction. She claims that the payment in October 1994 was procured by Mr Highland, while a director of RAPP, for his own benefit or for the benefit of Projects and Construction, in breach of his statutory duties as a director of RAPP under then equivalents of CA ss.180, 181 and 182 and in breach of his fiduciary obligations under the general law. Ms Swansson claims that Mr Highland is liable to compensate RAPP for breach of his statutory duties and his fiduciary duties under the general law. 6 The shareholding of RAPP is presently held by Ms Swansson as to 25%, her mother as to 50%, and her brother, Mr Ian Pratt, as to 25%. The current directors of RAPP are Ms Swansson and her brother. Ms Swansson’s mother and Mr Pratt have made it clear that they do not wish RAPP to commence any proceedings against Mr Highland.
7 Accordingly, Ms Swansson seeks an order under CA s.237(1) granting her leave to bring the proceedings against Mr Highland in RAPP’s name.

The Second Defendant’s contentions

8    RAPP itself has not filed an appearance nor sought to be represented separately. Mr Highland has appeared to oppose the application, and affidavit evidence by Mr Ian Pratt has been filed on his behalf. Mr Highland has not filed any affidavit. 9    Mr Pratt is and was at all material times a chartered accountant. He has deposed that the payment of $420,580 to Projects and Construction was made as part of, and pursuant to, a complicated family arrangement which had been made in about 1991 or 1992 between Mr Highland and Ms Swansson while they were still married, and Ms Swansson’s parents. At that time, as I have noted, the shareholders of RAPP were Ms Swansson’s parents, her brother Mr Ian Pratt and Ms Swansson herself. Mr Pratt says that RAPP originally held a one-third interest in the Cronulla land and that a family arrangement was made whereby Mr Highland and Ms Swansson bought out the interest of the other shareholders in RAPP for a sum of $400,000. In order to avoid capital gains tax, only the beneficial ownership of the shares in RAPP was transferred to Mr Highland and Ms Swansson. 10    Mr Pratt says that this family arrangement was made known to Ms Swansson at the time that it was entered into in about 1991 or 1992. This is borne out, to a degree, by the fact that in December 1992 Ms Swansson’s mother resigned as a director of RAPP (Mr Pratt Snr, the other director, had died) and Ms Swansson and Mr Highland were appointed as sole directors of RAPP. 11    Mr Pratt says that because the beneficial ownership of all the shares in RAPP was vested in Mr Highland and Ms Swansson in 1994, that was the reason that the sum of $420,580 which RAPP was to receive from the sale of its interest in the Cronulla land was paid to Projects and Construction, those two companies being then under the sole control of Mr Highland and Ms Swansson.
12 In 1996 Mr Pratt, in his capacity as a chartered accountant, was engaged by Ms Swansson to advise her in relation to her property settlement with Mr Highland as part of their divorce proceedings. Pursuant to s.87 of the Family Law Act, 1975 (Cth), a Deed of Settlement between Mr Highland and Ms Swansson was entered into and was approved by the Family Court on 3 September 1996. Mr Pratt says that he conducted a due diligence investigation into the financial affairs of Mr Highland and his companies in order to advise Ms Swansson as to the proposed property settlement. At the conclusion of that due diligence investigation, says Mr Pratt, he explained in detail to Ms Swansson and her solicitor, Mr Symonds, the transactions which had taken place pursuant to the family arrangement in 1991 and 1992, as well as the transactions whereby the funds from the sale of RAPP’s interest in the Cronulla property were paid by RAPP to Projects and Construction. Mr Pratt says that those payments to Construction and Projects were taken into account in working out the provisions of the Deed of Settlement into which the parties ultimately entered on 3 September 1996. 13    A settlement sheet prepared by Corrs Chambers Westgarth on 7 November 1996 shows that Construction sold its interest in the Cronulla property to a third party for $250,000 and that on settlement a bank cheque for $140,000 was paid to “Mr Symonds Solicitor” . Beside that item in the settlement sheet is a handwritten note: “R [uth] H [ighland] settlement” . There is no evidence as to when and by whom that note was written. 14    Ms Swansson and Mr Symonds simply deny, without elaboration, that any explanation of the transactions was given to them by Mr Pratt as he deposes. They affirm that it was not until 1999 that Ms Swansson discovered the existence of RAPP and it was not until June or July 2001 that they discovered that RAPP had owned an interest in the Cronulla property. What prompted their discovery of RAPP’s existence in 1999 is not explained by them in their evidence. 15    No party has sought leave to cross examine any of the deponents to the affidavits.

Other evidence

16 The transaction whereby RAPP disposed of its interest in the Cronulla land in October 1994 does not appear in the accounts of RAPP for the financial years ended 30 June 1995 or in any subsequent year. No accounts for any earlier period are in evidence but it is clear that RAPP was, immediately prior to 28 October 1994, the registered proprietor of an interest in the Cronulla land. There is nothing in the accounts of RAPP which are in evidence which explains what happened to this asset or how the proceeds of sale were treated. No accounts of Projects and Construction have been produced so that it is not possible to determine how the money said to have been paid by RAPP to those companies was treated and what became of it. There is no evidence about the present financial position either of Projects or of Construction. 17 The most recent evidence as to the position of RAPP is a copy of its financial accounts for the period ended 30 June 2000. From those accounts it appears that as at 30 June 2000 and as at 30 June 1999 RAPP’s activity was confined to receiving dividends from shares in listed public companies acquired at a cost of $129,345. As at 30 June 2000, there was cash at bank of almost $43,000. The company had borrowings of almost $20,000 and its net assets were $152,736. The total operating revenue for the year ended 30 June 2000 was $13,033. 18 Ms Swansson seeks an order pursuant to CA s.242 that, if leave be granted under s.237(1), RAPP be ordered to pay her costs of this application and, further, be ordered to indemnify her in respect of the costs of the proceedings against Mr Highland. In support of that application she says that her assets comprise a home unit in Darling Point purchased for $290,000 in 1998, a car, cash on deposit of between $20,000 and $25,000, and other assets of small value. She says that she earns between $2,000 and $3,000 gross per week.

Pt. 2F.1A

19    The acts of which Ms Swansson complains occurred in 1994. Whatever entitlement she had from that time onwards to bring a derivative action in the name of RAPP against Mr Highland under any of the exceptions to the rule in Foss v Harbottle ((1843) 2 Hare 461) has now been superseded by the provisions of CA Pt. 2F.1A: s.236(3); Karam v ANZ Banking Group Ltd (2000) 34 ACSR 545, at 554 (Santow J); Chapman v E-Sports Club Worldwide Ltd (2000) 35 ACSR 462; Advent Investors Pty Ltd v Goldhirsch (2001) 37 ACSR 529. 20 Pt. 2F.1A was introduced into the Corporations Law , now the Corporations Act , by the Corporate Law Economic Reform Program Act, 1999 (Cth) (“CLERP”). Its inspiration was s.165 of the New Zealand Companies Act, 1993 , a section derived, in turn, from the Canada Business Corporations Act 1985 . However, the terms of Pt 2F.1A are so different from the provisions of the New Zealand and Canadian legislation that the case law in those jurisdictions is of little assistance. There has been scant judicial consideration in Australia of the requirements which must be satisfied before leave is granted to bring a derivative action in the name of a company pursuant to Pt. 2F.1A. 21    The relevant provisions of Pt 2F.1A are as follows:

“ 236 (1) [Person may bring proceedings on behalf of company] A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if:

(a) the person is:

(i) a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or

(ii) an officer or former officer of the company; and


(b) the person is acting with leave granted under section 237.

…

237 (1) [Person may apply to Court] A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.

(2) [Court must grant application] 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.”
22    Pt 2F.1A is, by its terms, intended to keep a careful balance between facilitating the bringing of derivative actions, where the earlier rule in Foss v Harbottle and its exceptions were seen to create undue difficulty, and protecting a company from too ready and unwarranted interference in its internal management. 23    The ability to bring a derivative action is no longer confined to shareholders who, under the exceptions to the rule in Foss v Harbottle , were formerly regarded as being the only persons who could represent the interests of the company as a whole: see e.g. Edwards v Halliwell [1950] 2 All ER 1064, at 1066; Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, at 210; Ruralcorp Consulting Pty Ltd v Pynery Pty Ltd (1996) 21 ACSR 161. Standing is now conferred on shareholders, former shareholders and those with inchoate rights as shareholders, as well as upon officers and former officers. By operation of the definition of “officer” in CA s.9, current directors, secretaries and other senior executives as well as persons who have formerly held such positions may now seek leave to commence a derivative action even though they may never have been, and might never become, shareholders of the company. The inclusion of such persons in s.236(1) raises difficult questions as to the content of the requirement that the applicant must be acting in good faith. I will return to this issue shortly.
24 It is clearly the intent of Pt 2F.1A that leave to bring a derivative action must not be given lightly. An application under s.237(2) is not interlocutory in character; the relief sought is final and the applicant bears the onus of establishing the requirements of the subsection to the Court’ satisfaction. 25 In order to ascertain whether there is a serious question to be tried for the purposes of s.237(2)(d), the Court will not normally enter into the merits of the proposed derivative action to any great degree. The applicant has the same relatively low threshold to surmount as in the case of an application for an interlocutory injunction: Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618, at 622. Thus, cross examination on the merits of the proposed derivative action will usually be permitted only with leave of the Court and to a limited extent. 26 However, because of the possibly serious consequences to the company if the application is allowed and the company is thereby compelled to engage in litigation as a plaintiff against its will, all facts and circumstances relevant to the consideration of the requirements of s.237(2)(a), (b), (d) and (e) must be considered and the applicant bears the onus of satisfying the Court that, on the balance of probabilities, those requirements have been fulfilled. There is no reason in principle for restricting the parties’ rights of cross examination if any matter relevant to those requirements is in contest. 27 I turn now to the requirements of s.237(2).

The company will not probably take proceedings

28    In most cases, it will be readily apparent whether this requirement is satisfied. Usually the defendant in the proposed derivative action is in control of the company or is supported by the majority of shareholders or of the board. 29    Some cases, however, will not be so clear. The applicant may say there is equivocation on the part of a company in deciding whether to initiate proceedings so that refusal or probable refusal should be inferred. Where there is not a clear-cut and authoritative refusal by the company to take specific proceedings after a properly particularised request to do so by or on behalf of the applicant, 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. 30    There may be other cases where the applicant may say that the company will probably not take the proceedings because, even if it wished to do so, it has insufficient funds. Again, the applicant bears the onus of establishing that proposition. 31    In this case, Mr Pratt has given evidence that he and his mother do not wish RAPP to take proceedings against Mr Highland. They hold 75% of the company’s issued shares and Mr Pratt is the only director of the company besides Ms Swansson. Accordingly, I am satisfied that the requirement of s.237(2)(a) has been met.

Good faith – principles

32    There is no elaboration in s.237 as to what matters the Court should take into account in determining whether an applicant is “acting in good faith”. That phrase is one which occurs in very many different contexts in the law: it must take its content in any particular case from the context in which it is used. 33    As I have observed, prior to the commencement of Pt 2F.1A only current shareholders could take advantage of the exceptions to the rule in Foss v Harbottle . Pt 2F.1A now gives a right to initiate proceedings to some persons who, but for those provisions, would have had no such right at all under the general law. Such persons are all those within the categories created by s.236(1)(a) who are not shareholders of the company when the application for leave is made. Further, there is no requirement in s.236 that a person seeking leave must have been a shareholder or officer when the alleged wrong was committed against the company. Accordingly, under Pt 2F.1A a former shareholder or director may seek to sue in the company’s name for a wrong which was committed after he or she had disposed of all shares in the company or had ceased to hold office. 34 The Court is not given power in Pt 2F.1A to grant final relief in a suit instituted in a company’s name to any person other than the company itself. Accordingly, applicants for leave who are not current shareholders of the company cannot gain by increase in the value of their shares if the derivative action succeeds and the company recovers compensation. Likewise, applicants who are former officers of the company cannot obtain orders resolving conflicts in which they themselves are engaged. Yet such persons are entitled to be given leave if they satisfy the requirements of s.237(2). The section, therefore, suggests that it must be possible for persons to satisfy the requirement of good faith even when they have no financial interest in the company and no present involvement in its management. 35 At this early stage in the development of the law on the statutory derivative action created by Pt 2F.1A it would be unwise to endeavour to state compendiously the considerations to which the Courts will have regard in determining whether applicants in all categories defined by s.236(1) are acting in good faith. The law will develop incrementally as different factual circumstances come before the Courts. 36 Nevertheless, in my opinion, there are at least two interrelated factors to which the Courts will always have regard in determining whether the good faith requirement of s.237(2)(b) is satisfied. The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. Clearly, whether the applicant honestly holds such a belief would not simply be a matter of bald assertion: the applicant may be disbelieved if no reasonable person in the circumstances could hold that belief. The second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process. 37 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. The applicant would fail the requirement of s.237(2)(b). 38 Where the application is made by a current shareholder of a company who has more than a token shareholding and the derivative action seeks recovery of property so that the value of the applicant’s shares would be increased, good faith will be relatively easy for the applicant to demonstrate to the Court’s satisfaction. So also where the applicant is a current director or officer: it will generally be easy to show that such an applicant has a legitimate interest in the welfare and good management of the company itself, warranting action to recover property or to ensure that the majority of the shareholders or of the board do not act unlawfully to the detriment of the company as a whole. 39 However, where the applicant is a former shareholder or officer with nothing obvious to gain directly by the success of the derivative action, the Court will scrutinise with particular care the purpose for which the derivative action is said to be brought. 40 For example, a creditor may happen to be a former shareholder of the company and may seek, by the derivative action, to place the company in a financial position to repay the debt. There would be no abuse of process in commencing and maintaining the derivative action itself in that the action is commenced and maintained in order to achieve the purpose for which it is designed, namely, to recover property for the company. However, it may well be said that, in making an application for leave under Pt 2F.1A, the applicant is not acting in good faith because he or she is, in reality, seeking to vindicate his or her interest as a creditor and not whatever interest he or she may have as a former shareholder. 41 To take another example: a derivative action sought to be instituted by a current shareholder for the purpose of restoring value to his or her shares in the company would not be an abuse of process even if the applicant is spurred on by intense personal animosity, even malice, against the defendant: it is not the law that only a plaintiff who feels goodwill towards a defendant is entitled to sue: see e.g. Dowling v Colonial Mutual Life Assurance Society (1915) 20 CLR 509, at 521-522; IOC Australia Pty Ltd v Mobil Oil Australia Ltd (1975) 11 ALR 417, at 426-427. On the other hand, an action sought to be instituted by a former shareholder with a history of grievances against the current majority of shareholders or the current board may be easier to characterise as brought for the purpose of satisfying nothing more than the applicant’s private vendetta. An applicant with such a purpose would not be acting in good faith. 42 If a wrong appears to have been done to a company and those in control refuse to take proceedings to redress it, the Court should permit a derivative action to be instituted only by those within the categories allowed by s.236(1) who would suffer a real and substantive injury if the action were not permitted. The injury must be necessarily dependent upon or connected with the applicant’s status as a current or former shareholder or director and the remedy afforded by the derivative action must be reasonably capable of redressing the injury. 43 Further, if an applicant for leave under s.237 seeks by the derivative action to receive a benefit which, in good conscience, he or she should not receive, then the application will not be made in good faith even though the company itself stands to benefit if the derivative action is successful. Such a benefit would include, for example, a double recovery by the applicant for a wrong suffered or recompense for a wrongful act inflicted upon the company in which the applicant was a direct and knowing participant with the proposed defendant in the derivative action. In such a case the law would not permit the applicant to derive a benefit from his or her own wrongdoing.

Good faith – facts and conclusions

44 In the present case Mr Kidd, who appears for Mr Highland, says that Ms Swansson has already received the benefit of the money paid by RAPP to Projects and Construction because that money was taken into account in making the property adjustments between the parties embodied in the Deed of Settlement executed on 3 September 1996 and approved by the Family Court under s.87 of the Family Law Act. He says that Ms Swansson is seeking to recover the monies again through a derivative action in the name of RAPP so that, in truth, she is seeking a double recovery which she should not, in good conscience, be entitled to receive. 45    Mr Strasser, in his able argument for Ms Swansson, says that there is no evidence upon which I can find Ms Swansson has, in fact, received under the Deed of Settlement the benefit of the monies paid by RAPP to Projects and Construction. That proposition is not entirely correct. Evidence has been adduced by Mr Pratt in some detail which supports the assertion that Ms Swansson has at all relevant times known about the payments from RAPP to Construction and Projects. I cannot simply disregard that evidence just because Ms Swansson and Mr Symonds deny it. 46    As I have observed earlier, the requirement of good faith for the purposes of s.237(2)(b) is determined on a final basis, not on an interlocutory basis, and the parties must contest the issue on that footing. It is highly unsatisfactory for the Court to have to determine the issue of good faith on the basis of equivocal, incomplete documentary evidence and the bare assertions and counter-assertions of witnesses whose credit has not been tested by cross examination. No Judge feels comfortable deciding a contest which depends ultimately on the credit of witnesses without seeing and hearing those witnesses in the witness box. However, that is how the parties in this case have chosen to leave the matter.
47    In those circumstances, I must decide the question on the basis that it is Ms Swansson who bears the onus of proving to the Court’s satisfaction, on the balance of probabilities, that she is acting in good faith. In order to arrive at a conclusion I must have regard primarily to the inherent probabilities which emerge from the rather scant available evidence. 48    That evidence can be summarised thus:


– Ms Swansson was a shareholder in RAPP, her family’s company, prior to 1992; in 1992 she became a director with Mr Highland; she has given no explanation in her evidence as to how she came to be in ignorance of RAPP and her interest in it during such time as her father and mother were its directors;

– RAPP, Mr Highland’s interest in that company, and the extent of its assets were not disclosed by Mr Highland in his financial statement pursuant to Family Law Rules, Order 17 Rule 3;

– $420,580 was paid to Projects and Construction in or about October 1994; at that time Mr Highland and Ms Swansson were the directors and shareholders of those companies; Mr Highland’s financial statement in 1996 pursuant to the Family Law Rules discloses the existence of those companies and his interest in them;

– Ms Swansson’s brother, Mr Ian Pratt, was fully aware of all of the relevant transactions between RAPP, Projects and Construction and conducted an investigation into Mr Highland’s financial position in order to advise Ms Swansson as to the property settlement embodied in the Deed of Settlement;

– the Deed of Settlement acknowledges the interests of Mr Highland and Ms Swansson in Projects, Construction and certain other companies but does not refer to RAPP; it acknowledges that Construction has a one-third interest in the Cronulla property; it acknowledges that Mr Pratt has investigated Mr Highland’s affairs and has inspected numerous financial records including the tax returns and financial accounts of Projects, Construction and the other companies from 1993 to 1996;

– the Deed provides that Mr Highland is to pay to Ms Swansson by way of property settlement a total of $700,000 together with certain additional payments;

– the Deed provides for Ms Swansson to relinquish to Mr Highland all of her interest in Construction, Projects and the other companies referred to;

– in November 1996, upon settlement of the sale of Construction’s interest in the Cronulla property, $140,000 was paid to Ms Swansson through her solicitor, Mr Symonds.

49    Bearing in mind that Ms Swansson was independently advised by her solicitor, Mr Symonds, as to her property settlement with Mr Highland in 1996, I find it inherently improbable that she would have appointed Mr Pratt as her own financial adviser to investigate Mr Highland’s financial affairs if she and Mr Symonds had any misgivings about Mr Pratt’s independence, integrity and capacity to conduct the investigation properly. It is clear that Mr Pratt knew all about the payments from RAPP to Construction and Projects and the antecedent family arrangements which had resulted in Mr Highland and Ms Swansson becoming the sole directors of RAPP. No reason has been advanced, supported by any evidence, as to why Mr Pratt would be motivated to conceal the payments made by RAPP to Projects and Construction from Ms Swansson and Mr Symonds when advising them of the results of his investigations. 50    Further, it is clear that Mr Symonds was involved in some unexplained way and to some unexplained degree in the settlement of the sale of Construction’s interest in the Cronulla property. It is improbable that he knew nothing at all about the facts and circumstances underlying that sale and his client’s right to participate in its proceeds. 51    Next, it is puzzling that no explanation is given as to what prompted the discovery by Ms Swansson and Mr Symonds in March 1999 that RAPP existed and that it had had an interest in the Cronulla property. 52    It is true that I cannot make a positive finding on the evidence that Ms Swansson in fact received the benefit of the payments by RAPP to Construction and Projects in her divorce settlement so that she is seeking a double recovery in these proceedings, against good conscience. By the same token, I cannot make a positive finding that she did not receive any such benefit and is not seeking a double recovery. The circumstances to which I have referred, taken together, cause me to hesitate in accepting at face value the untested assertions of Ms Swansson. The onus is upon her to demonstrate to the Court’s satisfaction that she is acting in good faith in making the application. In my opinion, she has not discharged that onus. I am not able to feel a comfortable degree of satisfaction that sufficient facts have emerged to justify a finding in Ms Swansson’s favour. 53    Accordingly, I am not satisfied that Ms Swansson is acting in good faith in seeking leave to bring the proposed derivative action against RAPP.

The best interests of the company

54    In case I am wrong in my finding as to good faith and for the sake of completeness, I should set out my findings as to whether Ms Swansson has satisfied me that it is in the best interests of the company that the application be granted. 55    At the outset, it is important to note that s.237(2)(c) requires the Court to be satisfied, not that the proposed derivative action may be , appears to be , or is likely to be , in the best interests of the company but, rather, that it is in its best interests. In this respect, s.237(2) differs significantly from its counterpart in the Canadian legislation, which requires the Court to be satisfied that the proposed derivative action “appears to be” in the interests of the company, and from s.165(3) of the New Zealand Act which requires that the Court “have regard to … the interests of the company”. These provisions seem to have led the Courts of those countries to the view that the best interests of a company need be considered only in a prima facie way: see e.g. Re Bellman and Western Approaches Ltd (1981) 130 DLR (3d) 193, at 201; Vrij v Boyle (1995) 3 NZLR 763, at 765; Techflow (NZ) Ltd v Techflow Pty Ltd (1996) 7 NZCLC 261,138. 56    The requirement of s.237(2)(c) that the applicant satisfy the Court that the proposed action is in the best interests of the company is a far higher threshold for an applicant to cross. It requires the applicant to establish, on the balance of probabilities, a fact which can only be determined by taking into account all of the relevant circumstances. Accordingly, the enquiry will normally require the applicant to adduce evidence at least as to the following matters. 57    First, there should be evidence as to the character of the company: different considerations may well apply depending on 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. If the company is a closely held family company, it may be relevant to take into account the effect of the proposed litigation on the purpose for which the company was established and on the family members who are the shareholders. If the company is a public listed company, such considerations will be irrelevant. Again, the company may be a joint venture company in which the venturers are deadlocked so that the proposed derivative action is seen as being for the purpose of vindicating one side’s position rather than the other’s in a way which will not achieve a useful result: see e.g. Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd [2001] QSC 324. 58 Second, there should be evidence of the business, if any, of the company so that the effects of the proposed litigation on its proper conduct may be appreciated. 59 Third, there should be evidence enabling the Court to form a conclusion whether the substance of the redress which the applicant seeks to achieve is available by a means which does not require the company to be brought into litigation against its will. So, for example, if the applicant can achieve the desired result in proceedings in his or her own name it is not in the best interests of the company to be involved in litigation at all. This was the case in Talisman Technologies in which it appeared from the evidence that the most desirable outcome for the applicant was to obtain an order for specific performance of a contract, which it could do in a suit in which the company did not need to be a party. 60 Fourth, there should be evidence as to the ability of the defendant to meet at least a substantial part of any judgment in favour of the company in the proposed derivative action so that the Court may ascertain whether the action would be of any practical benefit to the company. 61 In the present case, the evidence shows that RAPP is a company of which Ms Swansson, her mother and her brother are the only shareholders. Her mother and her brother, who hold 75% of the issued share capital, do not wish the company to take proceedings against Mr Highland. The reasons for that attitude are not revealed by the evidence, although Mr Pratt says that he has spoken to his mother about the application, the transaction with the Cronulla land and the events surrounding it. This very sparse evidence would not justify a conclusion that there has been a ratification of Mr Highland’s conduct as a director of RAPP (if such conduct requires ratification) for the purposes of CA s.239. However, in my opinion, it is proper to take this evidence into account when assessing whether the proposed derivative action would be in the interests of the company as a whole, for the following reason. 62 So far as RAPP’s financial accounts for 30 June 2000 reveal, the company is not a trading company; it derives a very modest income from a share investment portfolio. If any substantial sum may be recovered from Mr Highland by the proposed derivative action, 75% of the benefit will go to shareholders who do not want it. Only Ms Swansson desires to pursue Mr Highland through the derivative action but, as Mr Kidd rightly submits, she has a far more direct means of seeking satisfaction than through the derivative action. 63 On the facts alleged by Ms Swansson, Ms Swansson would be entitled to apply to the Family Court for an order under s.87(8)(a) of the Family Law Act revoking the Court’s approval of the Deed of Settlement dated 3 September 1996 on the ground that approval of the Deed had been obtained by fraud. If the Deed of Settlement is revoked, Ms Swansson could simultaneously seek such order under s.87(9)(b) of the Family Law Act as the Court considers just and equitable for the purpose of adjusting the rights between herself and Mr Highland. 64 If Ms Swansson’s account of the facts is accepted so that the benefit of $420,580 has been secretly retained by Mr Highland rather than being taken into account in the adjustment of rights between the parties effected under the Deed of Settlement, then there would clearly be a fraud for the purposes of s.87(8)(a). Failure by a party to a Deed of Settlement to make full disclosure of material facts relating to the business or financial affairs of that party prior to entry into the Deed by the other party has been held to be fraud for the purposes of s.87(8)(a): see e.g. Suters and Suters (1983) FLC 91-365; Radwan and Radwan (1986) FLC 91-755. 65 Further, fraud for the purposes of s.87(8)(a) is not confined to fraud between the parties to a marriage who are parties to a settlement deed: Chemaisse and Federal Commissioner of Taxation, In the Marriage of (1988) FLC 91-915. Mr Pratt knew all about RAPP and the payments to Projects and Construction. If Ms Swansson’s evidence is accepted, Mr Pratt must deliberately and dishonestly have refrained from revealing to her and Mr Symonds what Mr Pratt was bound to disclose about Mr Highland’s affairs for the purpose of the Deed of Settlement negotiations. That dishonesty would, clearly, be fraud for the purposes of s.87(8)(a). 66 If Ms Swansson were able to prove to the satisfaction of the Family Law Court that approval to the Deed of Settlement should be revoked, she would be entitled to a readjustment of property rights as between herself and Mr Highland, having regard to the parties’ present positions. She alone would receive the benefit of those proceedings and Mr Highland would not be required to pay a sum larger than was required to satisfy her claim. In particular, he would not have to pay $420,580 to a company the majority of whose shareholders do not want it. The Family Court would be far better able to do substantial justice between Mr Highland and Ms Swansson in relation to the payments from RAPP to Construction and Projects than would this Court in a derivative action. Why it is that Ms Swansson has chosen not to pursue her remedy in the Family Court is not explained by the evidence. 67 Mr Strasser says that the wrong which Mr Highland has committed against Ms Swansson in relation to their divorce settlement is a completely separate and distinct wrong from that which he has committed against RAPP. That, of course, is perfectly correct but it does not conclude the question whether, in all the circumstances, it is in the best interests of RAPP to pursue a remedy for the wrong said to have been done to it. The core of Ms Swansson’s grievance is that she has not received the benefit of the money paid by RAPP to Construction and Projects. That grievance is, in my opinion, far better addressed by the Family Court as an issue between Mr Highland and Ms Swansson than by an action in this Court which involves RAPP and its shareholders other than Ms Swansson. 68 Finally, no evidence has been adduced as to Mr Highland’s ability to meet any part of a judgment which may be obtained against him if the derivative action is successful. The Court simply does not know whether or not the derivative action would be a fruitless exercise as far as RAPP is concerned. 69 For these reasons, I am not satisfied that it is in the best interests of RAPP that Ms Swansson’s application for leave be granted.

Whether serious question to be tried

70 In view of the conclusions to which I have come on the requirements of good faith and the best interests of the company, I may state my views on the remaining issues very briefly. 71 The alleged breaches by Mr Highland of his duties as a director of RAPP occurred in 1994. If any breaches of CA s.180, s.181 and s.182 were committed, proceedings by RAPP for a contravention were barred by operation of CA s.1317K prior to the filing of Ms Swansson’s application for leave in January 2002. There is no serious question to be tried on the statutory causes of action. 72 Ms Swansson also alleges breach by Mr Highland of a fiduciary duty as a director under the general law. The statutory duties of a director are in addition to, not in derogation of, a director’s duties under the general law: CA s.185(a). 73 If Ms Swansson’s evidence is accepted, there would be an argument that there is no relevant limitation period for the causes of action founded on alleged breach of fiduciary duty ( Limitation Act, 1969 (NSW), s.23) or else that any limitation period did not commence to run until March or April 1999 because the causes of action had been fraudulently concealed until then: Limitation Act s.55(1)(b). 74 If I had concluded that leave should otherwise have been granted, I would have held that there was a serious issue to be tried only in respect of the causes of action founded upon alleged breach of fiduciary duty under the general law.

Costs of the derivative action

75 Ms Swansson sought an order under CA s.242 that the costs of the derivative action, if allowed, be paid by RAPP. Before the Court can make such an order there must be evidence as to the company’s ability to pay the costs of the proposed derivative action as at the time that leave is sought. 76 There was no such evidence in the present case. The only evidence as to RAPP’s financial position was its balance sheet as at 30 June 2000. I simply do not know whether its position now is worse, better, or the same. If leave had been granted to Ms Swansson under s.237, I would not have been satisfied that it was proper to make the costs order which she seeks under s.242. 77 I should add, if it be relevant, that if RAPP’s present financial position had been shown to be no stronger than it was on 30 June 2000, I would have declined to make an order under s.242 as to the costs of the derivative action, for the reason that it appears that Ms Swansson’s means, although not very substantial, are better able to bear the costs of the derivative action than those of RAPP. An order under s.242 that RAPP bear the costs of the litigation would have required the company to sell a substantial part of its assets in order to fund what can only be described as a litigation with questionable prospects of success.

Orders

78    Ms Swansson claimed relief in the Originating Process which was ancillary to and dependent upon the granting of leave under s.237. It is not necessary to deal separately with that additional relief. 79    The order of the Court is that the Originating Process be dismissed with costs.
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Last Modified: 07/03/2002