Van Aken (as Trustee of the Van Aken Family Trust) v Diver Nominees Pty Ltd (in the matter of Microheat Technologies Pty Ltd)

[2012] FCA 829

FEDERAL COURT OF AUSTRALIA

Van Aken (as Trustee of the Van Aken Family Trust) v Diver Nominees Pty Ltd (in the matter of Microheat Technologies Pty Ltd) [2012] FCA 829

Citation:

Van Aken (as Trustee of the Van Aken Family Trust) v Diver Nominees Pty Ltd (in the matter of Microheat Technologies Pty Ltd) [2012] FCA 829

Parties:

ROBERT VAN AKEN (AS TRUSTEE OF THE VAN AKEN FAMILY TRUST) v DIVER NOMINEES PTY LTD (ACN 069 683 834), CEDRIC ISRAELSOHN, VCAMM LIMITED (ACN 102 661 530), PETRACE PTY LTD (ACN 061 228 591), ALBERT FINANCE SERVICES PTY LTD (ACN 006 691 934), ALBERT SUPERANNUATION NOMINEES PTY LTD (ACN 066 684 679), LONE MOUNTAIN DEVELOPMENTS PTY LTD (ACN 069 125 837), GRIFFIN TECHNOLOGIES PTY LTD (ACN 100 030 144) and BRUSALIE PTY LTD (ACN 122 947 157)

File number:

VID 377 of 2012

Judge:

DODDS-STREETON J

Date of judgment:

27 July 2012

Catchwords:

PRACTICE AND PROCEDURE – Application for leave to amend originating process by adding claim for breach of employment contract and further alternative relief – application to join additional defendants

PRACTICE AND PROCEDURE – Application to strike out originating process under r 16.21 of the Federal Court Rules 2011 or alternatively, under the court’s implied jurisdiction as not disclosing reasonable cause of action and abuse of process – whether r 16.21 applicable – whether originating process and supporting affidavit disclosed no reasonable cause of action

Legislation:

Corporations Act 2001 (Cth), ss 232 and 233
Federal Court of Australia Act 1976 (Cth), s 31A
Federal Court Rules 2011 (Cth), r 16.21
Federal Court (Corporations) Rules 2000 (Cth)

Cases cited:

Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 considered
Polar Aviation Pty Ltd v Civil Aviation Safety Authority [2012] FCAFC 97 discussed
Polar Aviation Pty Ltd v Civil Aviation Safety Authority (No 4) [2011] FCA 1126 cited
Re Alchemea Ltd [1998] BCC 964 distinguished
Re Bellador Silk Ltd [1965] 1 All ER 667 considered
Weatherall v Satellite Receiving Systems (Australia) Pty Ltd (1999) 30 ACSR 698 discussed
Williams v Spautz (1992) 174 CLR 509 considered

Date of hearing:

27 July 2012

Date of publication of reasons:

8 August 2012

Date of last submissions:

27 July 2012

Place:

Melbourne

Division:

GENERAL DIVISION

Category:

Catchwords

Number of paragraphs:

105

Counsel for the Plaintiff:

Mr M Osborne

Solicitor for the Plaintiff:

B2B Lawyers

Counsel for the Defendants:

Mr H Carmichael

Solicitor for the Defendants:

Freehills

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 377 of 2012

BETWEEN:

ROBERT VAN AKEN (AS TRUSTEE OF THE VAN AKEN FAMILY TRUST)
Plaintiff

AND:

DIVER NOMINEES PTY LTD (ACN 069 683 834)
First Defendant

CEDRIC ISRAELSOHN
Second Defendant

VCAMM LIMITED (ACN 102 661 530)
Third Defendant

PETRACE PTY LTD (ACN 061 228 591)
Fourth Defendant

ALBERT FINANCE SERVICES PTY LTD (ACN 006 691 934)
Fifth Defendant

ALBERT SUPERANNUATION NOMINEES PTY LTD (ACN 066 684 679)
Sixth Defendant

LONE MOUNTAIN DEVELOPMENTS PTY LTD (ACN 069 125 837)
Seventh Defendant

GRIFFIN TECHNOLOGIES PTY LTD (ACN 100 030 144)
Eighth Defendant

BRUSALIE PTY LTD (ACN 122 947 157)
Ninth Defendant

JUDGE:	DODDS-STREETON J
DATE OF ORDER:	27 JULY 2012
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.The defendants’ interlocutory application filed on 24 July 2012 be dismissed.

2.Bradley John Dunstan, Venturebiz Pty Ltd, David Ballantyne Murdoch, Pauline Deidre Murdoch, Roselyn Owen, David Kenneth Owen, Jade Elizabeth Hendriks, Geoff Merrill and Microheat Technologies Pty Ltd each be added as defendants to the proceeding and the title to the proceeding be amended accordingly.

3.The plaintiff have leave to amend his originating process in the form of Exhibit MDS‑1 to the affidavit of Matthew David Sweeney sworn 18 July 2012.

4.The requirement to publish notice of the application for winding up be dispensed with.

5.The proceeding continue by way of pleadings.

6.The plaintiff file and serve:

(a)his amended originating process; and

(b)a statement of claim,

on or before 10 August 2012, on the First, Second, Third, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth and Eighteenth Defendants (“the Primary Defendants”).

7.The plaintiff file and serve:

(a)his amended originating process;

(b)the statement of claim; and

(c)a copy of this order,

on the Fourth Defendant, and the Eleventh to Seventeenth Defendants (“the Remaining Defendants”), as soon as possible.

8.Any of the Remaining Defendants who wish to appear in the proceeding shall file and serve a notice of appearance on the plaintiff within a reasonable time of being served pursuant to paragraph 7 hereof and subject to further order by no later than 24 August 2012.

9.The Primary Defendants shall file and serve a defence (and any cross claim) on or before 24 August 2012.

10.The plaintiff shall file and serve a reply and defence to any cross claim pursuant to paragraph 9 hereof, on or before 7 September 2012.

11.Subject to further order any of the Remaining Defendants who wish to file and serve a defence shall do so on or before 24 August 2012.

12.The proceeding be referred for mediation by a Registrar of the Court, such mediation to be completed by 15 October 2012.

13.Liberty to apply.

14.The costs of the interlocutory application dated 18 July 2012, the interlocutory application dated 24 July 2012 and the directions hearing on 27 July 2012 be reserved until the publication of written reasons.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 377 of 2012

BETWEEN:

ROBERT VAN AKEN (AS TRUSTEE OF THE VAN AKEN FAMILY TRUST)
Plaintiff

AND:

DIVER NOMINEES PTY LTD (ACN 069 683 834)
First Defendant

CEDRIC ISRAELSOHN
Second Defendant

VCAMM LIMITED (ACN 102 661 530)
Third Defendant

PETRACE PTY LTD (ACN 061 228 591)
Fourth Defendant

ALBERT FINANCE SERVICES PTY LTD (ACN 006 691 934)
Fifth Defendant

ALBERT SUPERANNUATION NOMINEES PTY LTD (ACN 066 684 679)
Sixth Defendant

LONE MOUNTAIN DEVELOPMENTS PTY LTD (ACN 069 125 837)
Seventh Defendant

GRIFFIN TECHNOLOGIES PTY LTD (ACN 100 030 144)
Eighth Defendant

BRUSALIE PTY LTD (ACN 122 947 157)
Ninth Defendant

JUDGE:	DODDS-STREETON J
DATE:	27 JULY 2012
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

INTRODUCTION

1. On 27 July 2012, I made the orders set out above, for the reasons that follow.

2. There were two interlocutory applications before the court in the oppression proceeding commenced by the plaintiff, Robert Van Aken, by originating process filed on 21 May 2012.

3. The plaintiff’s interlocutory application sought leave to amend his originating process for oppression by adding a claim for breach of an employment contract, asking for further alternative relief and joining additional defendants.  It also sought orders for pleadings, discovery and the filing and service of affidavits.

4. The defendants’ interlocutory application sought to strike out the originating process under r 16.21 of the Federal Court Rules 2011 (Cth) (“Federal Court Rules”) or alternatively in the “exercise of the Court’s implied jurisdiction to protect the integrity of its processes” for, inter alia, failure to disclose a reasonable cause of action or as an abuse of process.  It also sought that the plaintiff’s interlocutory application be refused.

5. The plaintiff’s interlocutory application was supported by the affidavit of Matthew Sweeney, of the solicitors for the plaintiff, sworn on 18 July 2012 and by written submissions dated 25 July 2012.

6. The defendants’ interlocutory application was supported by the affidavit of Bradley Dunstan sworn on 25 July 2012 and by written submissions filed on 26 July 2012.

   BACKGROUND

7. By the originating process, Robert Van Aken, who is a minority shareholder in Microheat Technologies Pty Ltd (“Microheat”) as trustee of the Van Aken Family Trust (“VAFT”) sought, pursuant to ss 232 and 233 of the Corporations Act 2001 (Cth) (“the Act”) relief against nine defendants (eight companies and one individual, Cedric Israelsohn) for “oppressive, unfairly prejudicial or unfairly discriminatory conduct of the affairs of Microheat and/or acts or omissions of the company which are oppressive to, unfairly prejudicial to or unfairly discriminatory against [him]”, on the facts stated in a supporting affidavit by Mr Van Aken sworn on 18 May 2012.

8. Mr Van Aken deposed, in essence, that he was a founder, director, company secretary and minority shareholder of Microheat who had been employed as its managing director since its inception.  In May 2012, the board terminated his employment, removed him as company secretary, sought that he resign as a director and denied him access to information, the company premises and company staff. 

9. The originating process sought an order that the first to ninth defendants purchase the plaintiff’s shares in Microheat rateably in proportion to their existing shareholdings at a value referable to a valuation of Microheat at $60 million approved at a shareholders’ meeting on 13 February 2012, or alternatively, at a fair value after necessary adjustments for the oppressive conduct.

10. In his affidavit sworn in support of the originating process, Mr Van Aken deposed that he holds 426 shares in Microheat comprising 19.7% of its issued capital in his capacity as trustee of the VAFT.

11. Microheat has 17 shareholders.  The shareholders other than the plaintiff hold the issued capital as follows:

12. Microheat has a Constitution and replaceable rules dated 21 February 2007.

13. Microheat, the plaintiff and other principal shareholders (Bradley Dunstan, VCAMM, Diver, Mr lsraelsohn, Geoff and Vivien Merrill, David Owen, Venturebiz, Ross and Rebecca Robinson and the HotGreenCircus Consortium (“HGC”) are party to a shareholders’ agreement dated 10 March 2009 (“the shareholders’ agreement”).  Not all the shareholders of Microheat are parties to the shareholders’ agreement.

14. Microheat currently has five directors, being Mr Van Aken, Mr Israelsohn, Mr Dunstan (nominee of VCAMM Limited), Jo‑Anne Albert (nominee of HGC (which according to Mr Van Aken’s affidavit comprises Albert Financial Services Pty Ltd, Albert Superannuation Nominees Pty Ltd, Lone Mountain Developments Pty Ltd, Brusalie Pty Ltd, companies associated with Ms Albert, Mr Pryor and Mr Heymanson) and Mr Griffin (the nominee of Diver).  Mr Dunstan is the chairman of the board.

15. Thus, Mr Van Aken, Mr Israelsohn, Diver, VCAMM, Mr Dunstan and the HGC shareholders are, in the plaintiff’s terms “director represented” shareholders.

16. Mr Van Aken, whose background was in civil aviation, was for some years a project manager for developing and implementing an air traffic system. 

17. He deposed that in 2001, he and the second defendant, Mr Israelsohn. explored a concept for an improved water heating service solution.  They engaged various other expert entities to assist with developing prototypes for the invention and took out patents for the technology.

18. In 2007, Microheat was incorporated by Mr Van Aken and Mr Israelsohn, who were the founding shareholders.  The patents were assigned to the company.

19. Mr Van Aken deposed that Microheat required new investors to contribute further capital.  By 2008, Diver, VCAMM and other “Private Investors” became shareholders or had increased their investment.

20. In March 2009, the company and a number of shareholders entered the shareholders’ agreement which provided, in cl 2.1, for a board constituted by two directors representing Mr Van Aken and Mr Israelsohn, and three directors representing Diver, HGC and VCAMM.

21. The shareholders’ agreement refers to a Business Plan which (Mr Van Aken deposed) predated the shareholders’ agreement.  Clause 2.4 of the shareholders’ agreement requires the board’s unanimous prior written consent for, inter alia, pursuing any matter demonstrably outside the scope of the Business Plan (cl 2.4(p)) and amending the Business Plan (cl 2.4(q)).

22. Mr Van Aken deposed that the Business Plan identified him as the managing director of Microheat, a position he occupied from the foundation of the company until May 2012, at which date his annual salary was $240,000.  The plaintiff submitted that in the circumstances he had a legitimate expectation of his continued employment and participation in the management of the company in that position.  The termination of his employment was thus alleged to constitute both a breach of contract and, together with other factors, an exclusion from the expected role in management, which amounted to oppression.

23. Mr Van Aken deposed that when Microheat needed to raise further capital, the board approved an Information Memorandum in March 2012 for that purpose.  In December 2011, it engaged Harrington & Co Pty Ltd and Climate Capital Pty Ltd (“Climate Capital”) to source further investors.

24. On 13 January 2012, the board approved a $60 million valuation of the company based on a significantly higher valuation which had already been prepared by Acuity Technology Management (“Acuity”) at the behest of VCAMM.  The board resolved to raise a further $8 million capital.

25. On 13 February 2012, a shareholders’ meeting of Microheat ratified the $60 million valuation and the $8 million capital raising.

26. Mr Van Aken deposed that on 11 April 2012, he was asked to attend a meeting at VCAMM’s premises with Mr Dunstan, Mr Israelsohn and the chairman of VCAMM.  At the meeting, Mr Dunstan told Mr Van Aken that “a directors’ meeting” had terminated his appointment as managing director and handed him a letter of termination for misconduct dated 11 April 2012, effective immediately.  Mr Dunstan had CDs, DVDs and photographs of Mr Van Aken taken by Victorian Detective Services.  He stated that Mr Van Aken had been under surveillance.  Mr Dunstan also handed Mr Van Aken eight letters asking that Mr Van Aken be replaced as managing director and company secretary and be removed as a director.

27. Following the parties’ engagement of lawyers, the letter of termination was withdrawn and a mediation was proposed.

28. On 30 April 2012, a board meeting was convened for 3 May 2012 with an agenda proposing:

    (a)the removal of Mr Van Aken as managing director and company secretary;

    (b)the appointment of Mr Pryor as CEO;

    (c)a presentation by Mr Pryor in relation to a review of the information memorandum; and

    (d)the proposed sale of Mr Van Aken’s shares.

29. Mr Van Aken’s solicitors unsuccessfully sought an adjournment of the meeting for 14 days to allow him to prepare a response to the allegations.  Prior to 3 May 2012, Mr Van Aken received a notice which had been provided to Climate Capital referring to the termination of his appointment.  Mr Van Aken also complained of the notice to Climate Capital and that amendments which he had not approved, including deletion of references to himself, were made to the Information Memorandum.

30. Mr Van Aken did not attend the board meeting on 3 May 2012, at which the board resolved to remove him as managing director and company secretary.

31. On 14 May 2012, Microheat’s solicitors advised Mr Van Aken that the board requested his resignation as a director and sought that he appoint a nominee in his place.

32. On 15 May 2012, Mr Van Aken declined to resign, offered to sell his shares at the valuation approved on 13 January 2012 and sought access to various documents in order to respond to allegations against him.

33. Mr Van Aken was then removed as company secretary, but despite the earlier request that he resign, was not removed as a director.

    The plaintiff’s interlocutory application dated 18 July 2012

34. The plaintiff’s interlocutory application dated 18 July 2012 sought leave to amend the originating process by adding two further alternative claims for relief (that the company be wound up under s 461(1)(f), (g) and/or (k) of the Act, and that the company purchase the plaintiff’s shares at a fair value and the company’s share capital be reduced accordingly). It also sought to add a claim for damages against the company for breach of the contract of employment and for payment of accrued employee entitlements.

35. The plaintiff also sought to join the following defendants:

    (a)Bradley John Dunstan;

    (b)Venturebiz Pty Ltd;

    (c)David Ballantyne Murdoch;

    (d)Pauline Deidre Murdoch;

    (e)Roselyn Owen;

    (f)David Kenneth Owen;

    (g)Jade Elizabeth Hendriks;

    (h)Geoff Merrill; and

    (i)Microheat Technologies Pty Ltd,

    and that the title to the proceeding be amended accordingly.

36. The plaintiff sought orders that the proceeding continue by way of pleadings, for filing and service of a statement of claim and that the original “primary” defendants (and only those of the newly added defendants who chose to do so) serve defences and cross‑claims.

37. The plaintiff sought a timetable for discovery and the filing and service of evidence by way of affidavit.

38. Mr Sweeney deposed to the need to join the company as a defendant to the proposed claim based on breach of contract of employment and the proposed claim to relief sought by way of share buy‑back.  Mr Sweeney deposed that Mr Dunstan, the chairman of Microheat, had been inadvertently omitted as a defendant to the originating process.  Joinder of the other proposed additional defendants was appropriate, as they might be affected by the buy‑back relief sought, although no other relief was sought against them and their active participation in the litigation would be voluntary.

39. Mr Sweeney deposed to the need to amend the originating process:

    (a)by adding, as alternative relief sought, an order that the company purchase Mr Van Aken’s shares with an appropriate reduction of share capital and an order to wind up the company; and

    (b)by including a proceeding for breach of his employment contract by summary dismissal, based on the same substratum of facts as the oppression claim.

    The defendants’ interlocutory application dated 24 July 2012

40. The defendants’ interlocutory application sought to strike out the originating process filed 21 May 2012 pursuant to r 16.21 of the Federal Court Rules or in exercise of the court’s implied jurisdiction, on the grounds that it failed to disclose a reasonable cause of action or other cause appropriate to the nature of pleading, was likely to cause prejudice, embarrassment or delay and was otherwise an abuse of process of the court. The defendants also sought that the relief sought by the plaintiff’s interlocutory application be refused.

41. Mr Dunstan, the chairman of Microheat and the chief executive officer of the third defendant, VCAMM, deposed to a number of matters on behalf of seven defendants, in opposition to the plaintiff’s interlocutory application and in support of the defendants’ interlocutory application to strike out the originating process.

42. Mr Dunstan deposed that Microheat was a start up technology company holding worldwide patents across a range of fluid heating products.  It had had no cash flow to date from sales and funding had hitherto been provided principally from government grants ($1,068,171) and shareholder funds ($5,673,657).  The funds received totalled $8,419,218.

43. Mr Dunstan asserted that Mr Van Aken was justifiably terminated as managing director of Microheat on 3 May 2012 due to his conduct over the preceding months.  The termination followed receipt of shareholders’ “no confidence” letters alleging Mr Van Aken’s failure to consult or report to the board, failure to conform to reasonable standards of corporate governance, an improper relationship with a staff member, concern about his conduct over financial matters and breaches of the shareholders’ agreement.

1. Mr Dunstan deposed that it was not until Mr Van Aken’s removal as managing director that the remaining board members gained unfettered access to company records.

2. Mr Dunstan deposed to examples of alleged misconduct by Mr Van Aken, including making false representations in emails, falsely confirming various matters, and appointing a person as a personal assistant and business administration co‑ordinator, who in Mr Dunstan’s opinion, “lacked particular competencies” and maintaining an improper personal relationship with her.

3. Mr Dunstan deposed that after the resignation of the personal assistant in March 2012, there were irregularities in Mr Van Aken’s authorisations, including a payment in favour of the personal assistant.

4. Mr Dunstan deposed to staff complaints about Mr Van Aken.  He asserted that although the board had concerns about Mr Van Aken’s conduct for many months prior to his removal, it was necessary to retain him during a critical commercialisation phase.

5. Mr Dunstan deposed that Mr Van Aken increased his remuneration package effective from 1 July 2007 and took a bonus of $3,000 in December 2011 without board authorisation and did not disclose it. 

6. Mr Dunstan deposed that VCAMM retained Acuity to value Microheat in October 2010, to provide the valuation to VCAMM’s auditors.  The valuation was based on forward projections as to sales, costs and cash flow and on profitability assumptions which had not been realised.  The Microheat board did not commission the valuation.  Since October 2010, changes had occurred in Microheat’s business, including increases in manufacturing costs and the bill of manufactured materials, and the execution of an agreement with its Australian distributor, Hills Holdings Limited (“Hills”), requiring a minimum order quantity in the first 12 months.  An assumed agreement with another entity, Septech Holdings Limited, was not yet resolved.

7. Mr Dunstan deposed to the board’s valuation of Microheat at $60 million based on the Futuris Automotive Interiors (Australia) Pty Ltd offer on 13 January 2012 and the reiteration of that value, based on the Acuity valuation at a shareholders’ meeting on 13 February 2012, which also resolved to raise $8 million in capital.

8. Mr Dunstan asserted that the $60 million figure was premised on milestones that were not achieved and was just used as a reference point to value the shares for capital raising.  Only one Microheat product was developed to production stage and no orders had been placed by Hills, without which cash flow would not commence.  Microheat’s contract with the manufacturer, Futuris, imposed obligations and it would need to borrow $1 million to acquire tooling outright, which imposed financial constraints and imperatives.

9. Mr Dunstan deposed that shareholders had not taken up invitations to contribute new capital to Microheat.  He deposed that the defendants would not prevent Mr Van Aken from selling his shares and were willing to assist with the sale.

10. Mr Dunstan deposed that Mr Van Aken could still attend board meetings.  He did not attend the 13 June 2012 board meeting, but attended the 19 June and 5 July 2012 meetings.

    Defendants’ submissions on strike out

11. In written submissions, the defendants contended that the originating process did not conform to the Federal Court Rules, as follows:

    The originating “process” is not in conformity with Form 15 and Rule 8.01 of the Rules of Court and is unattended by compliance with Rule 8.02.  The originating “process” is referred to hereafter as “Originating Application” and the Plaintiff is referred to as Applicant, the Defendants are referred to as Respondents.

12. The defendants also contended that:

    2.1The Originating Application does not state as a ground, or evidence as the fact, that the conduct of the company’s affairs which Van Aken impugns, is conduct by act or omission of the company which is “contrary to the interests of the members as a whole”.

    …

    2.3The originating application confines the allegation of oppressive, prejudicial and discriminatory conduct against the Applicant to acts or omissions of the company.  That is, the Applicant does not ground his application or amended application on acts or omissions of any one or all of the Respondent shareholders in their capacity as shareholders.

13. The defendants also submitted that the plaintiff made his oppression claim in a misconceived, erroneous and ambiguous capacity.  There was no substantive basis for the alleged oppression or the relief claimed because the plaintiff (if claiming in his capacity as managing director) was not managing director when commencing the proceeding, but had been dismissed by the directors, supported by the principal shareholders.  Further, the shareholders’ agreement did not oblige the company to employ the plaintiff.

14. The defendants submitted that the plaintiff’s claims (both original and as amended) were self‑interested.  They bespoke breach of cl 2.4(b) and cl 7.1 of the shareholders’ agreement, conflict of interest and breach of the fiduciary duties owed as a director and shareholder.

15. The defendants submitted that the oppression claim was an abuse of process, as the proposed amendment sought, in effect, to run a wrongful dismissal claim in guise of oppression.  Because the plaintiff had treated the company as repudiating the contract of employment, his rights subsisted solely in contract and “he ought not be free to cause commercial unfairness to the [defendants] by commencing in the guise of an oppression claim a wrongful dismissal claim”.

16. The defendants submitted that the company was not in a financial position to purchase the plaintiff’s shares.  Further, the plaintiff was still a director, who was free to sell his shares.  There was thus no oppression and pursuit of the oppression claim was highly prejudicial, a breach of fiduciary duty and an abuse of process, as the plaintiff’s sole substantive complaint was termination of his employment.

17. The defendants also submitted that because the plaintiff held his shares as a trustee but was not employed as managing director in that capacity, he should not be permitted to sue for breach of contract of employment in his capacity as a trustee.

    RELEVANT LEGISLATION AND AUTHORITIES

18. Rule 16.21 of the Federal Court Rules states:

    16.21   Application to strike out pleadings 

    (1)A party may apply to the Court for an order that all or part of a pleading be struck out on the ground that the pleading:

    (a)contains scandalous material; or

    (b)contains frivolous or vexatious material; or

    (c)is evasive or ambiguous; or

    (d)is likely to cause prejudice, embarrassment or delay in the proceeding; or

    (e)fails to disclose a reasonable cause of action or defence or other case appropriate to the nature of the pleading; or

    (f)is otherwise an abuse of the process of the Court.

    (2)A party may apply for an order that the pleading be removed from the Court file if the pleading contains material of a kind mentioned in paragraph (1) (a), (b) or (c) or is otherwise an abuse of the process of the Court.

19. In Polar Aviation Pty Ltd v Civil Aviation Safety Authority [2012] FCAFC 97, the Full Court recently approved Kenny J’s detailed analysis in Polar Aviation Pty Ltd v Civil Aviation Safety Authority(No 4) [2011] FCA 1126 (“Polar (No 4)”) of the authorities governing strike out applications under the relevant rules. For convenience, I set out the relevant parts of the Full Court’s judgment (at [41] to [44]):

    Her Honour also noted that the rule governing strike out essentially related to the sufficiency of pleadings and (at [8]) set out the following extract from the Full Court’s decision in Wride v Schulz [2004] FCAFC 216 at [25]:

    [T]he the pleadings must disclose a reasonable cause of action against the party against whom the cause of action is brought and must state all material facts necessary to establish that cause of action and the relief sought. A “reasonable cause of action” for this purpose means one which has some chance of success if regard is had only to the allegations and the pleadings relied on by the applicant.

    Her Honour discussed authorities, including National Mutual Property Services (Aust) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514 (“National Mutual”) in which Lindgren J (at 529) approved a summary of general principles in Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (Unreported, FCA, Beaumont J, 13 September 1994) (“Allstate”) (at 24, distilled from the editorial note at (1992) 66 ALJ 47 in Lonrho plc v Tebbitt, The Times, 24 September 1991). The authorities indicated that a reasonable cause of action was one with some chance of success having regard to the allegations pleaded, even if weak; and that the strike out power should be exercised only in a plain and obvious case, where it was obvious that no reasonable amendment could cure the alleged defect and there was no reasonable question to be tried.

    In Allstate, Beaumont J (at 24) cited the following principles:

    (1)A “reasonable cause of action” means one with some chance of success if regard be had only to the allegations in the pleadings relied upon by the claimant; in such a case, the claim cannot be struck out: Davey v Bentinck [1893] 1 QB 185.

    (2)The mere fact that the case appears to be a weak one is not of itself sufficient to justify the striking out of the action: cf Wenlock v Moloney [1965] 1 WLR 1238.

    (3)Normally, the power to strike out should be exercised only in plain and obvious cases, where no reasonable amendment could cure the alleged defect: cf Hodson v Pare [1899] 1 QB 455.

    (4)It goes without saying that if a substantial case is involved in the claim, the power to strike out cannot be exercised.

    (5)Where a point of law has to be decided, and the judge is satisfied that this can be done by him appropriately, thereby avoiding the necessity of, and expense in going to trial, he is entitled to determine the point: cf Williams & Humbert v W & H Trade Marks [1986] AC 368.

    Accepting that the strike out power should be exercised with caution and only in a plain and obvious case, Kenny J stated at [12] of Polar (No 4):

    Notwithstanding the need for caution, where in a strike-out application, a point of law arises, which can appropriately be decided at the interlocutory stage, the judge is entitled to determine the point, thereby avoiding the need for and expense of a lengthy trial. For the reasons set out below, this is a case in which certain points of law should be decided at this stage, since their disposition does not depend on further evidence and findings of fact, and their resolution will limit any future trial.

20. The power to dismiss the proceeding or part thereof under s 31A of the Federal Court of Australia Act 1976 (Cth) (“Federal Court Act”) is distinct.  The court must be satisfied that the relevant party has no reasonable prospect of success, which does not require that it be hopeless or bound to fail.  The Full Court stated at [47] to [48]:

    In Spencer [v The Commonwealth (2010) 241 CLR 118], French CJ and Gummow J, in a joint judgment (on which the appellants particularly relied both before the primary judge and on appeal) stated (at [25]) that the court must make “a practical judgment … as to whether the applicant has more than a ‘fanciful’ prospect of success [which] may be a judgment of law or of fact or of mixed law and fact”.

    French CJ and Gummow J stated at [25]:

    Where there are factual issues capable of being disputed and in dispute, summary dismissal should not be awarded to the respondent simply because the court has formed the view that the applicant is unlikely to succeed on the factual issue.

    DISCUSSION

21. I was not persuaded that the plaintiff’s original or proposed amended application should be struck out because it disclosed no reasonable cause of action, was an abuse of process or otherwise defective.  I considered that the defendants’ interlocutory application should be dismissed and that most of the orders sought in the plaintiff’s interlocutory application should be made.

22. While the nature of the defendants’ many criticisms of the originating process varied, none, in my opinion, was soundly based.

23. Some of the defendants’ complaints, such as the failure to include the company as a defendant or lack of clarity, if otherwise valid, were premature, as they would or may be addressed by the orders for joinder and pleadings sought in the plaintiff’s interlocutory application.

24. The defendants’ contention that the originating process only alleged oppressive conduct by the company mischaracterised the claim, which is for oppressive, unfairly prejudicial or unfairly discriminatory conduct of the affairs of the company and/or acts or omissions of the company, on the facts stated in the supporting affidavit (emphasis added).  The affidavit reveals that the plaintiff alleges oppression constituted by, inter alia, the conduct of the other directors and the controlling shareholders.

25. The defendants’ submission that the originating process did not comply with the Federal Court Rules was, as the plaintiff submitted, a minor complaint and, in any event, based on an apparent misconception of the applicable rules. Pursuant to the Federal Court (Corporations) Rules 2000, the proceeding under ss 232 and 233 may be made by filing an originating process stating each section of the Act under which the proceeding is brought and the relief sought (r 2.2). The originating process is to be supported by an affidavit stating the facts in support of the process (r 2.4). The plaintiff complied with those requirements.

26. More fundamentally, the defendants’ application failed to recognise the stringent criteria applicable to strike out or summary dismissal, discussed above.  It proceeded on the basis that the assertions of Mr Van Aken were refuted and those of Mr Dunstan were established facts, although the evidence of both deponents is untested at this stage.  The strike out application also depended on opaque and unpersuasive arguments which restricted the ambit of the oppression provisions, and failed clearly to identify the plaintiff’s alleged ulterior purpose or its basis.

27. The precise nature of and basis for the relief sought in the defendants’ interlocutory process were unclear. Relief was sought pursuant to r 16.21 of the Federal Court Rules, which is directed at pleadings, but as stated above, the proceeding in this case was commenced in accordance with the Federal Court (Corporations) Rules by an originating process supported by an affidavit.

28. Rule 16.21 permits striking out of pleadings on the grounds of, inter alia, failure to disclose a reasonable cause of action and abuse of process. The striking out of pleadings under r 16.21 does not, however, preclude leave to replead. It is distinct from summary dismissal of a proceeding under s 31A of the Federal Court Act, which the defendants did not seek.

    Whether no reasonable cause of action

29. Assuming that the originating process and affidavit (although without pleadings) could properly, by parity with r 16.21, be struck out on the ground of failure to disclose a cause of action, it would be necessary, consistently with the authorities on strike out, to assume the truth of the plaintiff’s allegations. Only if there were, on that basis, no reasonable prospect of success would it be appropriate to order strike out.

30. The defendants’ strike out application was, however, predicated on counter assertions in the affidavit of Mr Dunstan, many of which were inadmissible because they were conclusory or constituted submission. While contrary arguments and evidence may prevail at trial, they may not suffice to establish that the plaintiff has no reasonable cause of action. While Mr Van Aken’s affidavit also contained assertion and inadmissible material, the matters to which he deposed, in my view, raised reasonable causes of action based on oppression and breach of a contract of employment. It was appropriate that relief for those claims, which arose from the same substratum of facts and circumstances, should be sought in the same proceeding in accordance with rr 9.01 and 9.02 of the Federal Court Rules, and the originating process amended to include the claim for breach of contract.

31. The defendants’ criticisms of the originating process based on the plaintiff’s status as a trustee, the fact that he was no longer managing director at the date of commencing the proceeding and sought relief to which he allegedly had no existing legal right or for conduct that was not itself unlawful, were based on a restrictive view of the oppression provisions, which does not accord with authority. 

32. In Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, French CJ observed that the language and history of ss 232 and 233 indicated that they “are to be read broadly. The imposition of judge‑made limitations on their scope is to be approached with caution” (at [72]).

    Whether abuse of process

33. The defendants also sought strike out on the ground of abuse of process based on r 16.21 (which is directed at pleadings) and the implied jurisdiction of the court. It is well established that bringing or maintaining litigation without the genuine objective of obtaining the relief claimed, but predominately in order to achieve a collateral purpose, will amount to abuse of process.

34. In Williams v Spautz (1992) 174 CLR 509 (“Spautz”), the High Court held, by a majority (Mason CJ, Brennan, Dawson, Toohey and McHugh JJ) that prosecutions laid by a former university lecturer alleging criminal offences by various university officers were properly stayed as an abuse of process, because the predominant purpose for the litigation was to pressure the university to reinstate the lecturer or to reach a favourable settlement on his wrongful dismissal claim.

35. The majority stated that “[i]t is well established that Australian superior courts have inherent jurisdiction to stay proceedings which are an abuse of process” (at 518).  The power extended to the prevention of an abuse of process resulting in oppression even if the moving party had or must be assumed to have a prima facie case (at 522).

36. The majority recognised that “when the purpose of bringing the proceedings is not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed or some collateral advantage beyond what the law offers” there may be an abuse of process.  An improper act is not, however, an essential ingredient of the concept (at 526-527).  Further, it is not necessary that the improper purpose be the sole purpose.  As the majority stated “in more recent times it has been said, in our view correctly, that the predominant purpose is the criterion.” (at 529).

37. In Re Bellador Silk Ltd [1965] 1 All ER 667, Plowman J considered abuse of process in the context of an oppression proceeding. He held that the plaintiff’s petition alleging oppression by the other directors and shareholders of the company was presented not to obtain the relief of winding up sought therein, but for the collateral purpose of securing some repayment of an outstanding loan the company owed to his own group of companies. It had become clear in cross‑examination that the petitioner “did not really want the relief for which he was asking in the petition” (at 671). Plowman J stated (at 672):

    A petition which is launched not with the genuine object of obtaining the relief claimed, but with the object of exerting pressure in order to achieve a collateral purpose is, in my judgment, an abuse of the process of the court…

38. In the present case, the defendants relied on Mr Dunstan’s affidavit to establish that the plaintiff had a collateral purpose in bringing the oppression proceeding.  As stated above, while Mr Dunstan’s assertions and submissions dispute the plaintiff’s claims, in so far as his evidence is admissible, it is necessarily untested at this preliminary stage.

1. Further, some of the defendants’ substantive complaints appeared misconceived and based on a mischaracterisation of the plaintiff’s case.  The defendants contended that the plaintiff had, in essence, no complaint other than his dismissal as managing director, as he was still permitted to attend directors’ meetings, and that there was therefore no nexus between the oppression claim and the plaintiff’s status as a member.

2. The assumption that the plaintiff’s sole complaint was the termination of employment was unfounded, as Mr Van Aken’s affidavit puts a case that his membership to the company involved the expectation of a continuing role as managing director (from which he has been removed), that he has been denied access to information and that his access to the company premises and company employees has been restricted.  As the defendants acknowledged, the plaintiff could not obtain an order for purchase of his shares in an action for breach of contract of employment.

3. Further, if and in so far as the defendants’ contention depended on an assumption that the oppression provisions afford a member relief only for oppression in the capacity as a member, which was lacking in this case, it was not soundly based.

4. While historically, the oppression provisions (for example, s 186 of the Companies Code) imposed such a restriction, it no longer applies. Section 232(e) makes clear that members can seek relief for oppression in relation to prejudice affecting them in a capacity other than as a member, which may include, depending on the particular circumstances, their capacity as a director or an employee.

5. The defendants relied particularly in this context on Weatherall v Satellite Receiving Systems (Australia) Pty Ltd (1999) 30 ACSR 698 (“Weatherall”) where Whitlam J ordered summary dismissal of an oppression proceeding in which the plaintiff relied on a statement of claim which was “plainly and unarguably embarrassing” with “glaring defects” (at [17]).

6. His Honour found that (assuming that the facts alleged in the statement of claim were true, (and allowing for the plaintiff’s entitlement to prove further facts open on the pleadings at trial that would constitute a cause of action), the plaintiff’s case was bound to fail.

7. His Honour so found because the plaintiff in Weatherall, who was a director and shareholder in S Co, based his claim of oppression in the conduct of S Co’s affairs on the failure of Wang (another director and shareholder in S Co) to pay an amount due to a company, Universal Space Technology Ltd (“UST”), under a complex series of transactions, including a share agreement, to none of which S Co was a party.  The plaintiff alleged that UST did not account to S Co for the amount which was due to UST from Wang.

8. Whitlam J acknowledged that breach of the share agreement to which the plaintiff and Wang were parties would entitle the plaintiff to claim damages from Wang and that unfair conduct inconsistent with arrangements and understandings between shareholders could amount to oppression.

9. His Honour observed, however, that the oppression was alleged to be in the conduct of the affairs of a company and despite the extended statutory definition of “affairs”, none of the alleged breaches, including Wang’s breach of the deed with UST, was sufficiently “corporation‑related” to bring it within the purview of the oppression provision (at [13]) (emphasis added).  In particular, Whitlam J held that Wang’s failure to pay UST had nothing to do with his position as a director or member of S Co, did not constitute its “affairs” and was thus not corporation‑related.

10. Thus, Weatherall recognised that oppression in the conduct of the company’s affairs necessarily required a connection therewith.  As the conduct of the alleged oppressor in issue in that case was entirely unconnected with his position as a director or member of the company, S Co, a remedy for oppression was not available.  Weatherall does not stand for the proposition that a plaintiff in oppression cannot rely on prejudice alleged in his or her status as a director or an employee.

11. The allegedly ulterior or collateral object for which the plaintiff sought the relief in this proceeding was not, despite my repeated inquiries, cogently articulated.  The defendants’ submissions on that question lacked clarity and were based on other contentions which, as discussed above, appeared misdirected or unpersuasive.

12. As I understood their submissions, the defendants argued that it was an abuse of process to seek orders that the company buy‑back the plaintiff’s shares or for winding up, when, on the basis of the matters to which Mr Dunstan deposed, the plaintiff knew that the company could not afford to purchase his shares and would be pressured unfairly at a critical time.  Further, the defendants submitted that it was contrary to the plaintiff’s obligations under the shareholders’ agreement (on which he based his alleged entitlement to continued employment) and a breach of his fiduciary obligations to seek those orders.

13. The relief of which the defendants complained, however, was the subject of the application for leave to amend, and was merely sought as alternative to other relief.  The potentially deleterious impact on a defendant of relief sought in litigation, or the fact that other relief may be available for the alleged wrong, does not render the proceeding an abuse of process.

14. The defendants also alleged an abuse of process because the plaintiff, by making the claims, breached the shareholders’ agreement and his fiduciary duty. The plaintiff was not, however, prohibited by cl 2.4(b) of the shareholders’ agreement from bringing an action for oppression or seeking winding up. Further, while cl 7.1 requires the written consent of all shareholders to the transfer of shares (save for particular categories of transfer), the court’s power to make the orders specified in s 233 of the Act in an oppression proceeding, including for purchase of the plaintiff’s shares, override any restrictions on the disposal of equities in the shareholders’ agreement.

15. While Mr Dunstan deposed that the defendants would not prevent the sale of the plaintiff’s shares, this would not, in the absence of a market for the shares, address the complaint of a minority shareholder alleging that his expectation of employment and participation as managing director has been denied. 

16. To the extent to which the allegation of abuse of process depended on the assertion that the plaintiff complained only of his termination as managing director, for which an action in breach of contract was a sufficient remedy (so that the oppression claim was both prejudicial to the company and gratuitous), it was based on a mischaracterisation of the plaintiff’s claims.  As stated above, the plaintiff asserted exclusion from management in a particular role contrary to his expectations, denial of information and denial of access to company premises and staff.

17. In Re Alchemea Ltd [1998] BCC 964 (“Re Alchemea”), a case (to which I was not referred) decided under the oppression provisions of the Companies Act 1985 (UK), Rimer J struck out, as an abuse of process, an oppression claim alleging conduct “unfairly prejudicial to the petitioner’s interests as a member” based on termination of the petitioner’s employment and directorship.  The company limited by guarantee was a co‑operative.  It necessarily had no shares and the members’ only expectation of return was through wages and related bonuses.  The petitioner’s directorship was dependent on membership, which was in turn dependent on being an employee.  Rimer J accepted that, in such circumstances, the petitioner’s “dismissal as an employee cannot be characterised as conduct unfairly prejudicial to the petitioner in his capacity as a member of the company.  He had no material interests as a member rather than as an employee which were capable of being so prejudiced.” (at 970).  Further, the sole relief sought was the petitioner’s reinstatement as an employee of the co-operative.

18. While Re Alchemea is an example of a case in which an employee’s claim of oppression based solely on wrongful dismissal was held to be an abuse of process, it is very far from the circumstances of the present case.  In Re Alchemea, the relevant legislative provision required conduct unfairly prejudicial to the petitioner in his capacity as a member of the company.  The company was not a company limited by shares, but a company limited by guarantee that paid no dividends.  The sole benefit of membership was employment.  Membership could not exist independently of employment by the company.  The petitioner’s sole complaint was dismissal which affected him only as an employee.  A remedy for unfair or wrongful dismissal was thus sufficient.

19. In the present case, the legislation does not require that the impugned conduct affected the plaintiff in his capacity as a member, the company is a company limited by shares, there is no coincidence of membership with employment and the plaintiff’s complaints are not limited to dismissal from employment.

20. There was no evidence to establish that the oppression proceedings in this case were commenced or maintained for the predominant purpose of obtaining some collateral advantage to the plaintiff, rather than for the purpose for which oppression proceedings are properly designed and exist (see Spautz, at 528).

21. In my opinion, an abuse of process was not established and no cogent basis for the allegation was apparent.

22. At a late stage of the hearing, the defendants abandoned their opposition to the filing and service of a statement of claim, and instead sought a direction to that effect and adjournment of the interlocutory applications.  For the reasons stated above, in my view, the defendants had not established any ground for striking out the originating motion and the principal orders sought by the plaintiff were appropriate.  There was no basis on which to adjourn the applications so that the defendants’ strike out application could be renewed in relation to a statement of claim which was not yet in existence.  I dismissed the application for adjournment.

    CONCLUSION

23. The defendants’ application, which was not, in my view, soundly based, was dismissed. 

24. The plaintiff’s application was in substance granted, save that I referred the proceeding for mediation and did not, at this stage, order discovery and the filing and service of affidavits.

I certify that the preceding one hundred and five (105) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dodds-Streeton.

Associate:

Dated:       8 August 2012