Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd

[2001] QSC 324

SUPREME COURT OF QUEENSLAND

CITATION:

Talisman Technologies Inc v. Qld Electronic Switching P/L [2001] QSC 324

PARTIES:

TALISMAN TECHNOLOGIES INC
(plaintiff/applicant)
v
QUEENSLAND ELECTRONIC SWITCHING PTY LIMITED ACN 009 656 740
(first defendant/respondent)
and
BANK OF QUEENSLAND LIMITED ACN 009 656 740
(second defendant/respondent)
and
COMPAQ COMPUTER AUSTRALIA PTY LIMITED ACN 002 955 722
(third defendant/respondent)

CONSOLIDATED WITH

IN THE MATTER OF: AUSTRALIAN COMPANY NUMBER 091 907 433 PTY LTD ACN 091 907 443

QUEENSLAND ELECTRONIC SWITCHING PTY LTD ACN 003 027 503
(applicant)
v
AUSTRALIAN COMPANY NUMBER ACN 091 907 443 PTY LTD ACN 091 907 443
(first respondent)
and
TALISMAN TECHNOLOGIES INC
(second respondent)
and
SARACEN FINANCIAL SERVICES LIMITED ACN 084 940 983
(third respondent)
and
COMPAQ COMPUTER AUSTRALIA PTY LTD ACN 002 955 722
(fourth respondent)

FILE NO/S:

S6194 of 2001
S3575 of 2001

DIVISION:

Trial Division

DELIVERED ON:

7 September 2001

DELIVERED AT:

Brisbane

HEARING DATE:

5 September 2001

JUDGE:

Mullins J

ORDER:

1.  The application filed on 20 August 2001 be dismissed.

CATCHWORDS:

CORPORATIONS – Statutory derivative action – leave sought pursuant to ss 236 and 237 Corporations Act 2001 (Cth) to bring proceedings on behalf of company – whether appropriate to join company as a defendant – satisfaction of conditions in s 237(2)

Corporate Law Economic Reform Program Act 1999
Corporations Act 2001 (Cth), s 236, s 237

Keyrate Pty Ltd v Hamarc Pty Ltd [2001] NSWSC 491 (19 June 2001)

COUNSEL:

JC Sheahan SC for the plaintiff/applicant
PA Keane QC and JD McKenna for the first and second defendants/respondents
A Buchanan (solicitor) for the third defendant/respondent  

SOLICITORS:

McCullough Robertson as town agents for Atanaskovic Hartnell for the plaintiff/applicant
Clayton Utz for the first and second defendants/respondents
Allens Arthur Robertson for the third defendant/respondent

1. MULLINS J: At the same time as hearing this application, the plaintiff Talisman Technologies Inc also applied for joinder of Saracen Financial Services Limited as the second plaintiff in the action.  No party opposed that course and I ordered that Saracen Financial Services Limited be joined as second plaintiff.  I shall therefore refer to Talisman Technologies Inc as the first plaintiff, Saracen Financial Services Limited as the second plaintiff and to the other parties as they are designated in proceeding S6194 of 2001. 

1. By order made by Douglas J on 31 July 2001 proceeding S6194 of 2001 was consolidated with proceeding S3575 of 2001 (“the winding up proceeding”).  By application filed on 20 August 2001 in the consolidated proceeding, the first plaintiff applies to join Australian Company Number 091 907 443 Pty Ltd (“the joint venture company”) as the fourth defendant.  I am using the description “the joint venture company” for convenience and it is not intended as a definitive characterisation of the role of that company.  The application is opposed by the first and second defendants.

1. Although the solicitors for the third defendant appeared, they did not actively participate in the application and the court was informed that the third defendant supported the opposition to joining the joint venture company on the basis that the joint venture is at an end effectively because of the breakdown in the relationship among the parties. 

1. The litigation arises out of an agreement  to which the first and second plaintiffs, the first, second and third defendants and the joint venture company were parties.  The agreement is entitled “Subscription and Shareholders’ Agreement” and was entered into on or about 31 March 2000.

1. In brief, the agreement provides for a project to be undertaken by the joint venture company which was the design, construction and installation of automated teller machines.  Some 300 ATMs were proposed, the first 81 of which were to replace existing ATMs of the second defendant.  The second defendant is the holding company of the first defendant.  The first defendant holds 49.9% of the issued shares in the joint venture company.  Each of the first and second plaintiffs hold 22.55% and the third defendant holds 5% of the issued shares in the joint venture company.  The directors of the joint venture company are the nominees of the shareholders.

1. The project contemplated by the agreement did not come to fruition.  It is in issue in this litigation, as to why the project did not come to fruition and whether finance would have been able to be obtained to enable it to do so.  The shareholders fall into two groups – the plaintiffs and the defendants.  The allegations made by each group of parties against the other are numerous and complex, and the affidavits which have been filed to date by both groups in support of the respective cases are extensive.  It is not possible on an application of this nature to express any considered view, as to the likelihood of one group rather than the other having better prospects of success in the proceedings. 

1. The litigation commenced in Queensland on 23 April 2001 with the filing of  application in the winding up proceeding by the first defendant on the just and equitable ground.  The joint venture company is a respondent to that application, in addition to the first and second plaintiffs and the third defendant.  The joint venture company is not playing an active role in the winding up proceeding.  On 24 April 2001 the proceeding which is now S6194 of 2001 was commenced by the first plaintiff in the New South Wales Supreme Court.  Hunter J transferred that proceeding to this Court on 21 June 2001, as a result of a cross vesting application made by the first and second defendants.

1. By order made on 6 June 2001, Holmes J limited the issue to be pursued in the winding up proceeding as follows:

“(a)The main object of the first respondent was to conduct ‘the business’ as defined in the subscription and shareholders agreement dated 31 March 2000; and         

(b)This object is impossible of performance because there is no reasonable prospect of the company achieving funding for the Business in accordance with the subscription and shareholders agreement.”

1. The winding up proceeding was set down for a hearing of 3 days to commence on 31 July 2001.  Because of the content of affidavits filed on behalf of the first plaintiff on the day before the winding up proceeding was due to commence, the parties agreed that the winding up proceeding could not proceed at that time.  The first plaintiff’s material meant that, in practical terms, the winding up proceeding could no longer be kept discrete from the issues relevant to proceeding S6194 of 2001.  As a consequence, the order for consolidation of the two proceedings was made.  The relief sought by the first defendant in the winding up proceeding was ordered to be incorporated in the counterclaim of the first defendant in the consolidated proceedings. 

1. The first plaintiff’s application is not only that the joint venture company be joined as the fourth defendant in the proceeding, but that an order be made pursuant to ss 236 and 237 of the Corporations Act 2001 (Cth) that the first plaintiff has leave to bring the proceeding on behalf of the joint venture company.

1. These provisions were first introduced into the Corporations Law by the Corporate Law Economic Reform Program Act 1999 and abolish the common law rules relating to circumstances in which shareholders may bring proceedings in respect of wrongs done to a company. The intention of the legislation was to overcome the practical and legal difficulties regarding what used to be called derivative actions, while maintaining appropriate checks and balances.

1. On or about 20 August 2001 the first plaintiff provided the other parties with a copy of the proposed claim and amended statement of claim, if the leave to join the joint venture company as fourth defendant were obtained.  The statement of claim had been previously amended to incorporate the claims by the second plaintiff.  The proposed claim and amended statement of claim became Exhibit 2 on the application.  In general terms the proposed claims on behalf of the joint venture company that are incorporated in the proposed amended statement of claim are that the conduct of the first and third defendants that is relied on as establishing claims on behalf of the first and second plaintiffs give rise to claims on behalf of the joint venture company.  The conduct in question is pleaded in paras 43-51, 57, 60-63, 68, 73, 76-78, 81 and 82 of the amended statement of claim.  The conduct is alleged to involve breaches of the agreement and breaches of directors duties, being the directors of the joint venture company who were nominated by the first defendant and were employees of the second defendant.  The damages claimed on behalf of the joint venture company are the same as those claimed on behalf of the first and second plaintiffs, but increased to reflect the fact that 100% of the loss is claimed.

1. A question arose in the course of the hearing of the application as to whether the first and second plaintiffs would seek to sustain the amendments to the statement of claim involving the joint venture company, if this application were unsuccessful. The first and second defendants were not in a position to concede that those paragraphs could be sustained by the first plaintiff in its own right. Mr Sheahan SC on behalf of the first plaintiff considered that some of the allegations would continue to be sustainable without an order under s 237, but some would not. It is not necessary for the purpose of this application for a decision to be made as to whether any of the amendments made in the proposed statement of claim to incorporate claims on behalf of the joint venture company are sustainable without the joinder of the joint venture company.

1. The primary relief being pursued by the first and second plaintiffs is that which will enable them to obtain an order that the first to third defendants specifically perform their obligations under the agreement.  It is apparent from the material filed in connection with the proceeding that the most desirable outcome for the plaintiffs is to obtain the order of specific performance.  The joint venture company is not a necessary party to that relief.  If the defendants are ordered to specifically perform their obligations under the agreement, that will have consequences for the joint venture company.    

1. Whether the leave is given to the first plaintiff under s 237 depends on whether the 5 preconditions that are set out in s 237(2) have been satisfied. 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.”

1. The first plaintiff submits that there is no prospect of the joint venture company bringing the claims, because it is common ground that at the present time the joint venture company’s management is effectively deadlocked. The consequence of the dispute amongst the shareholders is that the joint venture company has ceased functioning, at least until these proceedings are resolved.

1. It was submitted on behalf of the first and second defendants that the issue of whether or not the joint venture company would bring the claims which reflect those of the first and second plaintiffs is the wrong question, as if the matter is being considered from the viewpoint of the joint venture company, it must be a question of what claims as a consequence of the dispute among shareholders it is for the benefit the joint venture company to bring.  Theoretically, the proceedings which are available to the joint venture company are those which respectively reflect the position of each group of shareholders.

1. The first plaintiff submitted that the joint venture company stood to obtain a much greater benefit by being regenerated, if the first and second plaintiffs’ claims for specific performance or damages in lieu of specific performance were successful, but that is a consequence of the nature of the claims being pursued by the first and second plaintiffs. 

1. There is a question of timing in determining whether it is probable that the joint venture company will not itself bring proceedings.  Until the disputes among the shareholders are determined, the joint venture company is not in a position itself to endeavour to pursue claims that may accrue to it.

1. The first plaintiff placed particular emphasis on the proposed claim for an order that the second defendant indemnify the joint venture company against any claim, action, damage, loss liability, cost, charge, expense, outgoings or payments suffered, paid or incurred by the joint venture company in connection with any default or delay by the first defendant in the due and punctual performance of its obligations under the agreement.  It was argued that if the joint venture company were not a party to the proceedings, the first and second defendants may seek to claim that the first and second plaintiffs are not entitled to seek the order of indemnity to benefit the joint venture company.  The argument was put that if the specific performance of the agreement were ordered, it would place the joint venture company in significant funds to assist its regeneration, if it were the recipient of an order requiring damages for delay in the commencement of the project to be paid to it by the second defendant.

1. This overlooks that, even if there were some impediment to the indemnity order which is sought in the proposed amended statement of claim being made for the benefit of the joint venture company (without it being a party), if the result of the proceedings is specific performance against the first to third defendants, the joint venture company will be reactivated and the directors of that company will have to fulfil their obligations to conduct the business of the joint venture company as required by law.  That would extend to any proceedings to benefit the joint venture company, in consequence of the determination of the shareholders’ dispute. 

1. If the proceedings to be pursued on behalf of the joint venture company are characterised as those which are the consequence of the determination of the dispute among the shareholders, I am unable to conclude at this stage that it is probable that the joint venture company will not itself bring the proceedings. 

1. The second precondition is that the applicant is acting in good faith.  That must primarily relate to the conduct of the applicant in seeking the leave to bring the proceedings on behalf of the joint venture company. 

1. In connection with this aspect of the application, I gave leave to the first and second defendants to cross-examine Mr Ian Geoffrey Plater, the chief financial officer of the first plaintiff, on the bona fides of the first plaintiff in bringing this application.  One matter which figured in granting that leave was the fact that the first plaintiff’s solicitors had imparted information about the proceedings to The Australian Financial Review which was published in an article in that newspaper on 4 September 2001 under the headline “ATM damages claim to double”.  The article was concerned with the proposal of joining the second plaintiff which would have the result on the basis that the joint venture business was valued at no less than $100m of doubling the claims against the defendants from $22.5m (made by the first plaintiff) to $45m made by the first and second plaintiffs.  The article states:

“But Mr Simmons said he had informed the Bank of Queensland’s lawyers that financial modelling indicated the joint venture could have been worth $600 million to $800 million, although he said the court would require expert evidence to confirm the figure.”

1. Mr Simmons is a partner in the firm of solicitors acting for the first plaintiff.  There is nothing inaccurate in what is quoted above.  That information had been conveyed in a letter from the first plaintiff’s solicitors to the first and second defendants’ solicitors dated 20 August 2001. 

1. Although that information was conveyed by letter, it has not been incorporated in the proposed amended statement of claim.  According to Mr Plater, the report which the first plaintiff anticipates receiving from the expert that indicates that the joint venture could have been worth $600m to $800m is still being prepared and, as far as Mr Plater is aware, has not been received by the first plaintiff. 

1. It is curious that the plaintiff’s solicitor would disclose that information in those circumstances, even if he were responding to the question of a journalist.  Mr Plater presumed that Mr Simmons was acting on instructions in speaking to the press.  Despite that curiosity, after considering all the material including Mr Plater’s evidence, I cannot conclude that the dealings with the press on behalf of the first plaintiff can be used to challenge the good faith of the first plaintiff in bringing the application.  What were the motives of the first plaintiff in having Mr Simmons provide the information about the value of the lost venture which has not been incorporated in the pleading and has not been the subject of a report received by the first plaintiff is a matter of speculation.  Logically, it is not relevant to determining whether the application for joinder of the joint venture company is being brought by the first plaintiff in good faith.  In this context I consider good faith means that the application is being made in good faith having regard to the interests of the joint venture company.

1. It is apparent from the form which the proposed amended statement of claim takes that the purpose of the first plaintiff in seeking to join the joint venture company is to facilitate the relief sought to be pursued by the first and second plaintiffs.  It may be that that itself is not an impediment to the bringing of the application, if the application can also be shown to be in the interests of the joint venture company.

1. The first and second defendants seek to rely on a number of other aspects of the first plaintiff’s conduct in the proceedings generally to submit that the first plaintiff is not making the application in good faith.  These matters are described by the first and second defendants as the first plaintiff’s evasiveness concerning its own asset position, evasiveness about the joint venture company’s potential exposure to costs if joined as a party, persistence in advancing a case which is described as being unarguable in parts, opposition to the appointment of a liquidator including the delivery of the affidavits in the winding up proceeding on 30 July 2001 and the tactical approach to the issue of security for costs. 

1. I will be dealing with the issue of security of costs in my reasons for judgment disposing of that application.  The approach taken by the first plaintiff to the issue of security for costs may be able to be described as “tactical”, but it is also explicable, having regard to the course of correspondence between the parties’ solicitors.  I do not consider that the stand taken by the first plaintiff in the winding up proceeding and its advancing a case which it needs to advance to have any prospect of obtaining the order for specific performance in respect of the agreement can be used against the first plaintiff on this application.  I have reviewed the correspondence regarding the first and second defendants’ inquiries about the first plaintiff’s asset position and the position in relation to indemnity for costs, if leave were given to join the joint venture company, and do not consider that these matters are relevant in determining the issue of good faith on this application.

1. It was submitted on behalf of the first and second defendants that the requirement of good faith is about the subjective motivation of the applicant for leave, whereas the requirement of s 237(2)(c) that it is in the best interests of the joint venture company that the applicant be granted leave is an objective test. I accept this proposition. The outcome of the objective test may assist, however, in determining whether or not the applicant is acting in good faith in bringing the application. I will therefore proceed to consider the third precondition.

1. When the nature of the proceedings as presently constituted is clearly a dispute among the existing shareholders of the joint venture company, the utility in joining the joint venture company as a party must be in question, as its position will be clarified by the determination of the dispute among the shareholders.  This is particularly so, when the outcome of the proceedings will determine whether the joint venture company continues in existence.               

1. There was debate during the hearing of the application as to whether s 237(1) permits the company to be joined as a defendant, rather than as a plaintiff, in the proceedings. The focus of the Explanatory Memorandum for the relevant provisions was the introduction of a statutory derivative action to enable an individual shareholder to bring an action on behalf of a company for a wrong done against the company, where the company is unwilling or unable to do so. That is reflected in s 236(1) and s 237(1). As the decision in Keyrate Pty Ltd v Hamarc Pty Ltd [2001] NSWSC 491 (19 June 2001) shows in an appropriate case the relevant company can be made a defendant for the purpose of pursuing the relief sought pursuant to a statutory derivative action. In that case the relevant companies were necessarily defendants in the proceedings, in order for the plaintiffs to obtain the relief claimed by them in the oppression action.

1. In this matter, however, the way in which the joint venture company is proposed to be incorporated as a defendant and the little involvement which it has in the primary objective of the plaintiffs in the proceedings highlights the lack of utility that these proceedings have for the joint venture company. 

1. The concept of “best interests” requires the matter to be considered, having regard to all claims being made in the proceedings and not just those which are for the benefit of the first and the second plaintiffs.

1. An issue which I raised during the course of the hearing was what did it add to the proceedings to have the joint venture company joined as a party.  The conclusion which I have reached after analysing the proposed amended statement of claim is that it adds very little.  The reality is that if the outcome of the proceedings results in specific performance of the agreement, consequences will follow for the joint venture company which do not need to have been previously ventilated in the proceedings.  In those circumstances I am not satisfied that it is in the best interests of the company that the first plaintiff be granted leave to join the joint venture company to the proceedings. 

1. It is therefore strictly not necessary to consider further whether the first plaintiff was acting in good faith in bringing the application.  Because of the conclusion which I have reached about the best interests of the company, in the circumstances of the nature of the proceedings, I consider that the first plaintiff was acting for its benefit and not the joint venture company in bringing the application and therefore not acting in good faith.  It is not necessary to consider the fourth and fifth preconditions, as all preconditions must be satisfied for leave to be granted.

1. I therefore order that the application filed on 20 August 2001 seeking the joinder of the joint venture company in these proceedings and leave pursuant to ss 236 and 237 of the Corporations Act 2001 be dismissed.