Viola & Ors and Latham & Ors
[2015] FamCA 826
•6 October 2015
FAMILY COURT OF AUSTRALIA
| VIOLA AND ORS & LATHAM AND ORS | [2015] FamCA 826 |
FAMILY LAW – PROPERTY – PRACTICE AND PROCEDURE – Wife’s application for leave to commence proceedings under the Corporations Act 2001 (Cth) on behalf of companies in which she and the husband have an interest as against the husband and his company and a third party and the third party’s company – derivative action – where it is found that there is a serious question to be tried and that the wife is acting in good faith but that it is not in the best interests of the companies for leave to be granted – final orders made that the wife’s application for a derivative action be dismissed
FAMILY LAW – PROPERTY – INTERLOCUTORY INJUNCTION – Wife’s application to restrain the husband from accessing his superannuation entitlements and that he account for any previous withdrawals made in breach of previous orders – where the husband admits that he has made withdrawals from his superannuation entitlements but denies a breach of previous orders question as to whether the husband should account for any previous withdrawals at an interlocutory stage – where the superannuation fund has been almost entirely depleted – where the husband has insufficient funds to repay the amounts withdrawn – interim orders made that the husband file and serve an affidavit setting out the details of his withdrawals and the application of those funds – interim orders made that the husband be restrained from winding up the superannuation fund.
| Corporations Act 2001 (Cth) s 237 Family Law Act 1975 (Cth) |
Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57
Chahwan v Euphoric Pty Ltd t/as Clay & Michel (2008) 245 ALR 780; [2008] NSWCA 52
Coeur de Lion Investments Pty Ltd v Kelly [2013] QCA 160; [2014] 1 Qd R 296
Jensen & Ors v RQYS Marina Ltd & Ors [2014] QSC 243
Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859
MGCC v Vinciguerra [2011] FCAFC 31
Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432
Stanford v Stanford (2012) 247 CLR 108
Streeter v Western Areas Exploration Pty Ltd (No 2) (2011) 278 ALR 291
Swansson v R A Pratt Properties Pty Ltd [2002] NSWSC 583
| FIRST APPLICANT: | Ms Viola |
| PROPOSED SECOND APPLICANT: | B Pty Ltd |
| PROPOSED THIRD APPLICANT: | C Pty Ltd |
| FIRST RESPONDENT: | Mr Latham |
| PROPOSED SECOND RESPONDENT: | Mr Baxter |
| PROPOSED THIRD RESPONDENT: | D Pty Ltd |
| PROPOSED FOURTH RESPONDENT: | E Pty Ltd |
| FILE NUMBER: | MLC | 5668 | of | 2012 |
| DATE DELIVERED: | 6 October 2015 |
| PLACE DELIVERED: | Melbourne |
| PLACE HEARD: | Melbourne |
| JUDGMENT OF: | Macmillan J |
| HEARING DATES: | 11 & 31 March 2015 |
REPRESENTATION
| COUNSEL FOR THE FIRST APPLICANT: | Mr R Peters |
| SOLICITOR FOR THE FIRST APPLICANT: | Taussig Cherrie Fildes |
| COUNSEL FOR THE PROPOSED SECOND APPLICANT: | Not applicable |
| SOLICITOR FOR THE PROPOSED SECOND APPLICANT: | Not applicable |
| COUNSEL FOR THE PROPOSED THIRD APPLICANT: | Not applicable |
| SOLICITOR FOR THE PROPOSED THIRD APPLICANT: | Not applicable |
| COUNSEL FOR THE FIRST RESPONDENT AND THE PROPOSED FOURTH RESPONDENT: | Mr S Hay |
| SOLICITOR FOR THE FIRST RESPONDENT AND THE PROPOSED FOURTH RESPONDENT: | Kennedy Partners |
| COUNSEL FOR THE PROPOSED SECOND AND THIRD RESPONDENTS: | Dr E Boros |
| SOLICITOR FOR THE PROPOSED SECOND AND THIRD RESPONDENTS: | Norton Gledhill |
ORDERS
IT IS ORDERED THAT
By 4.00 pm on 28 October 2015, the husband file and serve upon solicitors for the wife an affidavit setting out the details of all withdrawals made by him from his superannuation entitlements since separation, including but not limited to those held in the Latham Superannuation Fund, together with particulars as to the application of those funds.
The husband, his servants and/or agents, be and are hereby restrained from winding up the Latham Superannuation Fund save and except with the wife’s consent in writing or by order of this Court.
On or before 4.00 pm on 27 October 2015 the parties file and serve any written submissions in support of any application for costs arising out of or incidental to the hearing of this matter.
On or before 4.00 pm on 17 November 2015 the parties file and serve any reply to any written submissions in support of any application for costs arising out of or incidental to the hearing of this matter.
The wife’s further amended application in a case filed 13 February 2015, the husband’s response to further amended application in a case filed 5 March 2015 and the proposed second and third respondents’ response to an application in a case filed 11 March 2015 be otherwise dismissed.
The matter be otherwise adjourned for mention before Justice Macmillan at 9.00 am on 9 November 2015.
IT IS NOTED that publication of this judgment by this Court under the pseudonym Viola and Ors & Latham and Ors has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
| FAMILY COURT OF AUSTRALIA AT MELBOURNE |
FILE NUMBER: MLC 5668 of 2012
Ms Viola
First Applicant
And
B Pty Ltd
Proposed Second Applicant
And
C Pty Ltd
Proposed Third Applicant
And
Mr Latham
First Respondent
And
Mr Baxter
Proposed Second Respondent
And
D Pty Ltd
Proposed Third Respondent
And
E Pty Ltd
Proposed Fourth Respondent
REASONS FOR JUDGMENT
This application comes before me for determination of two discrete issues in the context of property proceedings pursuant to the Family Law Act 1975 (Cth) (“the Act”), commenced by the wife in this Court against the husband by initiating application filed 26 June 2012.
The husband, the wife and Mr Baxter, the proposed second named respondent, are each directors of B Pty Ltd (“B”), the proposed second named applicant, and C Pty Ltd (“C”), the proposed third named applicant. The husband and the wife own shares in B as does Mr Baxter and his wife. The husband, the wife, as trustees of the F Trust and G Pty Ltd, of which the husband and the wife are directors and in which they each own 50 per cent of the shares, as well as Mr Baxter and his wife are shareholders of C.
Mr Baxter and his wife are directors and shareholders of D Pty Ltd (“D”), the proposed third named respondent. The husband is a director and owns all of the shares in E Pty Ltd (“E”), the proposed fourth named respondent.
In her further amended application in a case filed 13 February 2015, the wife seeks leave pursuant to s 237 of the Corporations Act 2001 (Cth) (“the Corporations Act”) to bring proceedings on behalf of B and C against each of the husband, Mr Baxter, D and E – what is otherwise known as a ‘derivative action’ (“the proposed derivative action”). The wife alleges that the husband and Mr Baxter, as directors of B and C, have breached both their fiduciary and their statutory duties pursuant to the Corporations Act. The wife’s application is opposed by the husband and Mr Baxter and the other shareholders
The husband, if the wife’s application for leave is granted, seeks payment of $100,000 by the wife to him for the purposes of litigation funding, as well as orders requiring her to meet the costs of C and B.
The wife further seeks orders to restrain the husband from making withdrawals and otherwise from accessing his superannuation entitlements and that within 14 days the husband repay all withdrawals made by him from his superannuation entitlements since separation, being 7 July 2012. The husband opposes the wife’s application.
Documents Relied Upon by the Parties
The wife relied upon the following documents:
·further amended application in a case filed 13 February 2015;
·the wife’s outline of submissions;
·initiating application filed 22 June 2012;
·affidavit of the wife filed 22 June 2012;
·affidavit of the wife filed 19 May 2014;
·affidavit of Mr H filed 7 October 2014;
·affidavit of Mr H filed 10 December 2014;
·affidavit of the wife filed 18 December 2014;
·affidavit of the wife filed 13 February 2015;
·affidavit of the wife filed 4 March 2015; and
·the wife’s financial statement filed 4 March 2015.
The husband relied upon the following documents:
·response to further amended application in a case filed 5 March 2015;
·the husband’s outline of submissions filed 10 March 2015;
·affidavit of the husband filed 19 June 2014;
·affidavit of the husband filed 5 March 2015;
·affidavit of Mr I filed 11 March 2015; and
·the husband’s financial statement filed 20 March 2015.
Mr Baxter and D relied upon the following documents:
·response to application in a case filed 11 March 2015;
·the outline of submissions of the second and third respondents filed 9 March 2015;
·affidavit of Mr Baxter filed 27 February 2015;
·affidavit of Ms J filed 27 February 2015;
·affidavit of Mr K filed 27 February 2015;
·affidavit of Mr L filed 27 February 2015; and
·affidavit of Mr M filed 11 March 2015.
The wife also referred to a number of other affidavits and tendered the director’s insurance policy for B and C and attached schedules.
Mr Baxter and D also tendered one document, being a transcript of B board meeting of 23 July 2013.
The Standard of Proof
The standard of proof in this case is on the balance of probabilities. Section 140 of the Evidence Act 1995 (Cth) provides that, without limiting the matters the Court may take into account in deciding whether it is satisfied that a party has proven his or her case, it must take into account:
(a) the nature of the cause or action or defence;
(b) the nature of the subject-matter of the proceeding; and
(c) the gravity of the matters alleged.
Each of the parties filed and relied upon written submissions and the hearing otherwise proceeded by way of oral submissions.
The Issues
The first of the issues the Court is required to determine is whether or not to grant leave to the wife to bring proceedings on behalf of B and C against the husband and E and Mr Baxter and D. The focus of the parties’ submissions in this case was on whether or not there is a serious question to be tried, whether the Court could be satisfied that the wife was acting in good faith and whether it was in the best interests of both B and C for leave to be granted to the wife to bring proceedings on their behalf. Irrespective of the particular focus of the submissions in this case, the Court must be satisfied that all the criteria in s 237(2) of the Corporations Act are satisfied before granting leave.
The wife has particularised the claim to be brought against the husband, Mr Baxter, D and E if leave is granted pursuant to s 237(2) of the Corporations Act in a draft Statement of Claim (“the Statement of Claim”) attached to the outline of her submissions, an earlier version of that Statement of Claim being annexed to her affidavit filed 13 February 2015.
There are two aspects to the wife’s case that the husband and Mr Baxter have breached their fiduciary and statutory duties to each of B and C. Firstly that the proposed acquisition by B of a 70 per cent interest in N Pty Ltd (“N”) (“the initial proposal”) was in B’s best interests because:
·N was a good business, which could be improved with B’s management;
·there were obvious synergies between N and B;
·it would secure a closer interest between B and O Ltd (“O”); and
·as N was a large customer of B, the benefits of the relationship between N and B might be lost if O were to acquire N to the exclusion of B.
It is the wife’s case that notwithstanding the benefits to B of the initial proposal, that proposal was restructured (“the restructured proposal”) so as to enable Mr Baxter and ultimately the husband and/or their associated entities to acquire an interest in N to the exclusion of B and the wife by virtue of her interest in B pending the finalisation of the proceedings in this Court (“the property proceedings”). The wife says that significantly, the proposal was restructured without her consent and having failed to keep the wife as both a director and shareholder fully informed.
The wife submits that not only has B lost the opportunity of the investment in N but that the husband and Mr Baxter failed in the face of O’s acquisition of N to secure B’s position as importer and supplier to N in the knowledge that any reduction in revenue would be likely to reduce the profitability of B and hence the value of its shares, shares the husband proposed in the property proceedings that he should retain.
The second aspect of the wife’s claim is that the husband and Mr Baxter have breached their fiduciary and statutory duties to both B and C and/or an order of this Court by voting, in the face of opposition from the wife, for the payment of an International Services, Representation and Facilitator’s Fee (“the ISRF Fee”) to the husband over and above his other entitlements, in the knowledge that any increase in expenses of either B or C would be likely to reduce their profitability, and as previously referred to, the value of their shares. The wife says that that reduction in value is advantageous to the husband in circumstances where he proposes he should retain his shares and the wife should transfer the shares she owns in both B and C to the husband as a consequence of the property proceedings in this Court.
The other matter in relation to which the wife seeks orders is with respect to the husband’s withdrawals from the Latham Superannuation Fund (“the Fund”) which includes consideration of the following issues:
·whether the husband, by making those withdrawals, has breached paragraph 2 of the orders made by this Court on 13 August 2012;
·if so, whether the husband should be made to repay and/or account for the withdrawals at an interim level or whether the depletion of the Fund is a matter to be taken into account at the final hearing; and
·whether any further orders should be made restraining the husband from making any further withdrawals from the Fund.
Background
The wife and the husband married in 2003 and separated on 7 July 2012. Their divorce was finalised in April 2014.
The occupation of both the husband and the wife is that of director, relevantly directors of B and C.
B is company based in Melbourne and provides a variety of management services to the mining sector and allied industry. B was established by the husband and wife in 2006.
C is a workshop based in P Town, Queensland.
The wife is a non-executive director of B and the husband is the managing director. The chairman of B is Mr Baxter. The fourth director of B is Mr K, who has sworn and filed an affidavit in support of Mr Baxter and D. The wife and the husband are the majority shareholders of B, together holding 80 per cent of its shares. Mr Baxter and his wife together hold 10.8 per cent of the shares in B. The remaining shares are held by Ms J, who has also sworn and filed an affidavit in support of Mr Baxter and D.
The husband, the wife and Mr Baxter are the three directors of C; Mr Baxter is also the chairman of C. The wife and the husband together have an 80 per cent shareholding in C. That shareholding is held partly by the husband and the wife as trustees of the F Trust and partly by G Pty Ltd, a company of which the husband and wife are joint directors and in which they hold equal shares. The remainder of the shares in C are held by Mr Baxter and his wife (10.8 per cent) and Ms J and her husband (9.2 per cent).
Background to the Proposed Derivative Action
N
In or about early 2008, the husband and wife began to investigate the potential for B to supply equipment to N, a manufacturing company. This equipment would be sourced from China. The husband and the wife also wanted to assess whether there was an opportunity for N to supply equipment to C that C would then on-sell to companies in Queensland.
In or around 2012, B commenced supplying equipment to N. The equipment was sourced from O, a company based in City Q, China with which B had a commercial relationship.
The wife deposed that on 23 December 2012, Mr L (the sole owner of N at that time) advised the husband that he had a buyer for N but that because of the strong working relationship which N and B had developed, he would prefer to sell the majority interest in N to B. It was the husband’s evidence, supported by the evidence of Mr L and to a more limited extent by the evidence of Mr Baxter, that Mr L told the husband that he believed that a sale to the third party buyer would likely result in the closure of the N factory and that it was his understanding that if O were to purchase the shares in N that would secure the continued operation of the factory. The husband acknowledges, which is consistent with the wife’s evidence, that he did discuss with her his ideas for an arrangement with respect to the acquisition of an interest in N that might be beneficial to B.
The wife also deposed that on 23 December 2012 the husband telephoned Mr Baxter to advise him of the proposed acquisition of N. According to the wife, there were a number of further telephone discussions between the husband and Mr Baxter in relation to the proposed acquisition by B of an interest in N but that she was not invited to participate in those discussions notwithstanding that she and the husband were holidaying interstate together. She further deposes that the husband attended a meeting with Mr L in R Town on 29 December 2012 to review figures and to structure a deal to acquire N which would include B. It was her evidence that she was also not invited to that meeting. The structure and terms of the initial proposal which the wife deposes were outlined to her by the husband at the end of December 2012 were as follows:
(a)[N] was valued at $3 million, with 70% valued at $2.1 million;
(b)[O] was to purchase 50% of [B], and the newly merged entity would then acquire 70% of [N];
(c)payment terms of $1 million at settlement and $550,000 (with interest) on the 1st and 2nd anniversaries, with a ‘put and call’ option for [Mr L] to sell his remaining 30% on the 3rd anniversary;
(d)there was to be a new board structure, which did not include [the wife]; and
(e)a letter of intent in relation to the original proposal was required by 8 January 2013.
The husband described there being “an intense period of negotiation and discussion - involving various scenarios” during this period and it is clear from the evidence that a letter of intent was sent to N by O on 5 January 2013 along the lines of the initial proposal described by the wife. I note that although this letter is dated 5 January 2012 it was not submitted by counsel for either the husband or Mr Baxter that the letter of intent was sent in 2012 rather than 2013. O said in that letter that it was their intention, in conjunction with B, to purchase 70 per cent of N subject to receipt of a satisfactory due diligence report and formation of an alliance with B.
The wife’s evidence is that between 30 December 2012 and 3 January 2013 she sent a number of emails to the husband voicing her concerns about the initial proposal and requesting information. She further deposes that although she is aware that the husband discussed her emails with Mr Baxter, she was not given an opportunity to participate in those discussions and received only some of the emails passing between the husband and the other interested parties. She said that it was not until after the husband had spoken to Mr Baxter on 30 December 2012 that he emailed her documents containing details of the initial proposal.
On 1 January 2013 the wife says she sent an email to the husband:
·outlining her concerns that the initial proposal would, in contravention of the orders of this Court made 13 August 2012, effectively halve her shareholding in B for no compensation and result in her losing her position as a director; and
·reiterating her concerns about being excluded from the discussions and negotiations which would impede her ability to meet her obligations as a director of B.
It is the wife’s evidence, which is not denied by the husband, that thereafter she was virtually excluded from all communications and negotiations concerning the proposed acquisition of N by B despite numerous requests for information made both by the wife and her solicitors on her behalf.
The wife deposes in particular to a letter from her solicitors to the husband’s solicitors dated 3 January 2013 in which they said as follows:
It may very well be that the proposed acquisition of [N] is a commercially worthwhile venture. Our client, however, without being provided with information, is not in any position to make an informed decision as to appropriateness of the proposed acquisition.
In that letter the wife’s solicitors also observed that the proposed acquisition of N was in breach of the orders of August 2012 but that “... our client may consent and agree to vary the Court Orders, if, after being provided with all the appropriate information, she accepts the proposals as being in the best interests of both [B Pty Ltd] and [C Pty Ltd]”.
The wife deposes that her solicitors confirmed her concerns in relation to the inadequacy of the information and supporting documentation provided by the husband and the initial proposal by letter to the husband dated 25 January 2013 (annexure DEV-3 to the wife’s affidavit filed 18 December 2014).
It is the wife’s evidence that the B board meeting, which was scheduled for 24 January 2013, was postponed at Mr Baxter’s request, which the husband told her was due to Mr Baxter’s doctor being on holidays as a result of which Mr Baxter, who at that time lived in Country T, was to arrive in Australia a week later than previously planned. She said that she received an email from Mr Baxter on 29 January advising her that he had been unable to come to Australia the previous week and that the board meetings would now take place on 31 January 2013. Neither the husband nor Mr Baxter advised the wife at that time that they had both attended meetings with O in City Q, China on 24 and 25 January 2013 to discuss the proposed acquisition of N.
The wife’s case, based upon file notes produced by B’s lawyers U Lawyers pursuant to subpoena and in particular a file note recording a conversation between the husband and Mr U on 12 February 2013 (annexure DEV-31 to the wife’s affidavit filed 13 February 2015), is that during the trip to China the husband and Mr Baxter:
·had decided that the deal with O would not “go ahead at this stage”, was “on hold for [a] while yet” but that it might “come back in due course”;
·told O that the N proposal was “not advisable at this stage” because of the “[Ms Viola] issues” and that O understood why the deal was not going ahead and were “ok” with that.
It was noted in that same file note that the husband thought that the value of N would significantly increase in the next few years.
It is the wife’s case that this is particularly significant given the file notes of the solicitor’s conversations with the husband on 16 and 21 January 2013. It was noted inter alia in the file note of 16 January 2013 that:
·N has intellectual property for the equipment;
·Mr L received an offer from overseas to purchase N but wanted to sell to the husband;
·the husband met with Mr L and a “Handshake deal [was] done”;
·the husband would sell 50 per cent to O for $950,000;
·O want 55 per cent for $850,000;
·net profit after tax would be $250,000 in the first six months of this financial year;
·both the husband and Mr Baxter are “both satisfied as to the $ in the deals”; and
·U Lawyers are to prepare the purchase contract.
The file note from 21 January 2013 states inter alia as follows:
·“You [the husband] been planning this for 2-3 years. Actual deal short notice. [Mr L] rang – 5 days and done”;
·“You [the husband] satisfied have a deal with [Mr L]. Do we need a LOI?”; and
·“O has given them an LOI. You [the husband] helped draft. Very short. Non-binding”.
The wife’s evidence is that Mr Baxter telephoned her on the evening of 30 January 2013 and told her that he and the husband had been to R Town that day to inspect N but that he did not tell her that Mr V who was also the accountant for B had also been present. He also told her that he and the husband had visited O in City Q from 24 – 26 January 2013. It was her evidence that this telephone conversation was the first occasion on which she and Mr Baxter had had any direct communication regarding the proposed acquisition by B of an interest in N. During that conversation the wife says that Mr Baxter represented to her that B was no longer involved in the acquisition of N because Chinese Government policy required a minimum of 55 per cent Chinese ownership when Chinese companies invested in overseas companies, such as B. She said that Mr Baxter told her that the N deal was no longer attractive to him because it would involve losing control of B to O.
When the wife asked Mr Baxter when he had become aware of the Chinese Government’s policy, she said he told her he had known several days before travelling to City Q. It was her evidence that when she asked Mr Baxter why he had in those circumstances met with O, he said it was because he already had his ticket booked and that “the meeting was important to gain assurances from [O] that they would continue to supply to [N] through [B] even if they owned [N] directly”.
Mr Baxter deposed in his affidavit filed 27 February 2015 that the initial proposal (referred to by Mr Baxter as the “combined proposal”) did not proceed because the wife had told him, although he did not say when it was she had done so, that she would oppose the transaction unless it proceeded on the basis that:
i.no new funding would be required from shareholders;
ii.the sum of $750,000 proposed to be invested by [O] in [B] would be distributed to [B’s] shareholders; and
iii.[the wife] was appointed as a director of [N].
Although this is consistent with the letter sent to the husband’s solicitors dated 25 January 2013 insofar as it relates to the wife retaining the same shareholding and holding the same directorships as the husband, the purpose of that being to preserve her rights vis-à-vis the husband in the context of the property proceedings and having regard to the orders made 13 August 2012, Mr Baxter makes no reference to the wife’s indication that she required further information in order to assess the proposal.
The husband deposes at [21] of his affidavit filed 5 March 2015 that the involvement of B in the N opportunity was abandoned because:
21.1[B] did not have, and was not realistically able to generate, funds sufficient to enter into an arrangement with [O] and [N];
21.2The shareholders did not have sufficient funds (in the case of the husband and the wife) or were not prepared (in the case of [Baxter] and [J]) to contribute additional capital to facilitate the transaction;
21.3The participation of [B] in such an arrangement was unrealistic and unachievable.
The managing director’s report for the months of November and December 2012 and January 2013 dated 29 January 2013, prepared by the husband, states at page 3 that:
As a result of [O’s] requirement to own 55% of [B], it is recommended that it is not in the [B] Shareholders [sic] interest to relinquish control of [B] to [O] for the purpose of purchasing 70% of [N].
[O] still wish to purchase a controlling interest in [N] and have requested we ([B]) continued negotiation on their ([O]) behalf with [N].
The wife’s case, which she says is supported by the file note of the conversation between the husband and Mr U on 12 February 2013, is that a restructured N proposal (“the restructured proposal”) was agreed upon with the following terms:
·O would acquire 51 per cent of N, Mr L would retain 30 per cent, and the husband and Mr Baxter would acquire 19 per cent of N between themselves;
·B would become a management company;
·the husband would become a managing director of N;
·B would become an importer and supplier to N and would be paid a 6 per cent commission on sales to N; and
·a contract would need to be prepared by U Lawyers to secure B’s position as an importer and supplier.
The proposed acquisition by the husband and Mr Baxter of a 19 per cent interest in N was not referred to in the managing director’s report dated 29 January 2013.
In the supplementary managing director’s report dated 27 February 2013, the husband advised inter alia at page 2 as follows:
·that he was facilitating negotiations between O and N with a view to O acquiring a controlling interest in N; and
·that as part of those negotiations, B would remain as the importer of O’s products to N.
The husband made no mention of the restructured proposal which provided for Mr Baxter and the husband to acquire a 19 per cent interest either in his supplementary managing director’s report or at the board meeting of B on 28 February 2013.
The wife’s evidence, which is not disputed, is that at the B board meeting on 22 April 2013, Mr Baxter reported, in response to the wife’s request for an additional agenda item, that:
There is no progress report as there is nothing to progress because it is finished as reported in the February board MD report.
Notwithstanding the husband’s report to the board on 28 February 2013 and Mr Baxter’s statement on 22 April 2013, it is the wife’s case that it is clear from documents produced pursuant to subpoena that negotiations with respect to Mr Baxter and the husband acquiring an interest in N had been ongoing. That evidence, as deposed to at [57] of the wife’s affidavit filed 18 December 2014, included:
(a)the file note prepared by Mr U of U Lawyers dated 12 February 2013, based on a telephone call from the husband, which states:
(i)“[O] wld [sic] take 51% of [N]. Owner keeps 30%”: and
(ii)“You [referring to the husband] and … [referring to Mr Baxter] 19% between you”.
(b)the signed Letter of Intent dated 18 April 2013…; and
(c)the file note prepared by Mr U of U Lawyers dated 3 May 2013, based on a meeting with the husband, which states:
(i)“They’ll [referring to O] get 51% of [N]”; and
(ii)“You [referring to the husband] and … [referring to Mr Baxter] get 19% between you”.
(Original emphasis)
The letter of intent dated 18 April 2013 and annexed to the wife’s affidavit filed 18 December 2014 provides that O (as Party A) would purchase a 51 per cent interest in N and that the husband and Mr Baxter through their related entities (as Party B) would purchase a 19 per cent interest in N, with Mr L retaining a 30 per cent interest in N (as Party C). The letter of intent further provides that Party B on behalf of Party A had paid a deposit of $25,000. The wife says that the $25,000 deposit was in fact paid by B. Mr Baxter in his affidavit filed 27 February 2015 deposes that the deposit was paid by B on behalf of O but that an equivalent amount was deducted from an amount payable by B to O.
The wife further deposes at [59] of her affidavit filed 18 December 2014 that the husband travelled to China again between 25 and 31 August 2013 for the purpose of a meeting with O. Upon his return the wife requested a formal update and that a report of the husband’s trip to China be included as an agenda item at the next meeting of the B Board. At that meeting on 5 September 2013 the husband reported that he had travelled to China to negotiate price reductions from O for equipment products. When the wife asked him to provide an update on the status of the N acquisition including the percentage that O was acquiring, she said that Mr Baxter interjected saying words to the effect of “[w]e don’t know how much is being bought. Nothing at this stage”. Mr Baxter did not deny making a statement to this effect.
The wife says that subsequent to the board meeting on 5 September 2013 until 9 May 2014, when in the course of discovery with respect to the property proceedings she says she came upon an email from Mr Baxter to the husband confirming that D had acquired a 19 per cent interest in N, she did not receive any updates in relation to the N acquisition.
A copy of ASIC records with respect to N is annexure DEV6 to the wife’s affidavit filed 18 December 2014. The ASIC records reflect the final agreement reached in relation to N and disclose that on 3 April 2014 there was a change to shareholdings in N as follows:
·L Pty Ltd – 45,000 shares (30 per cent);
·D – 28,500 shares (19 per cent); and
·O – 76,500 shares (51 per cent).
Annexure DEV6 also contains a copy of ASIC Form 484 which discloses that Mr Baxter became a director of N and a shareholder through D on 3 April 2014 and that his shareholding commenced on 11 April 2014.
A subpoenaed copy of the final signed version of the N shareholders’ agreement dated 3 April 2014 (“the shareholders’ agreement”) is annexure DEV-13 to the wife’s affidavit filed 18 December 2014. The wife says this document, and in particular clause 11.2, evidences that the acquisition was intended not only to benefit Mr Baxter personally, but also the husband. Clause 11.2 states that:
Subject to clause 9.1(c), the Company must register a transfer of Shares:
…
(b) from [D] to an entity controlled by [Mr Latham] for up to 2/3rds of its initial Share holding; …
The wife deposes that at the next B board meeting on 17 April 2014, Mr Baxter failed to disclose both his directorship of N or his 19 per cent personal interest in N.
The failure to disclose the 19 per cent acquisition by D in N is not denied by the husband or Mr Baxter. To the contrary both the husband and Mr Baxter assert that confidentiality obligations imposed by the letter of intent dated 18 April 2013 and the share transfer agreement prohibited Mr Baxter from disclosing D’s acquisition at B Board meetings.
The wife also asserts that at the B board meeting on 23 July 2014 Mr Baxter said words to the effect that it had not been possible for the husband to invest in N until the proceedings in this Court were concluded, that N was worth $5 million and acquiring a 19 per cent interest in N for $500,000 was a good deal and that D would be happy to transfer its 19 per cent interest in N to B.
Upon reading the managing director’s report prepared by the husband in advance of the B board meeting on 23 July 2014, the wife deposes that she also became aware that B was being bypassed in relation to sales of O products to N. The new trading arrangement disclosed in that report was that B would receive a monthly management consulting fee of $2,500 from N as well as 5 per cent of direct sales from O to N. Notwithstanding the reference in the file note of the conversation between the husband and Mr U on 12 February 2013 to the need for a contract to protect B’s position there is no evidence of this arrangement being subject of any contract between B and O or N. The wife deposed that as at the date of her 18 December 2014 affidavit, no sales commission had been paid to B by O under this arrangement, whereas the husband deposes in his affidavit filed 5 March 2015 at [26] that:
The end result of the steps undertaken by me is that [B] continues to receive regular and substantial income from both [O] and [N] and at a level greater than it received prior to the new ownership arrangements being implemented.
The ISRF Fee
The second complaint made by the wife as against the husband and Mr Baxter is in relation to the payment of an ISRF Fee of $100,000 per annum to the husband, $20,000 payable by B and $80,000 payable by C. The payment of the ISRF Fee was provided for by a resolution passed at the board meetings of B and C on 27 June 2013. The ISRF Fee is paid in addition to a monthly management fee paid by each of C and B to the husband (as well as to the wife) and other benefits he receives from C and B.
It is the wife’s position that the resolution was passed in breach of the constitutions of each of B and C and in breach of the orders made by consent on 13 August 2012 by Cronin J. The husband denies those allegations.
The constitutions of each of B and C relevantly provide (as summarised at [10] in the Statement of Claim) as follows:
…
(b)its directors shall be paid by way of remuneration for their service as directors such sums and in such manner as the board determines within an approved limit (clause 77(1));
(c)where a director has a material personal interest in a transaction, he is not entitled to vote on any matter pertaining to the transaction (clause 82(3)(a));
(d)if a deadlock in voting occurs at a meeting of its directors, the Chairman will not have a casting vote and the motion being voted upon will not be carried (clause 89).
Paragraph 5 of the 13 August 2012 orders provides:
That the husband, either personally or via his servants or agents be restrained from:
5.1Executing any document or voting at any board meeting or general meeting in such manner which will result in an alteration of any entitlements which he or the wife may currently have in any of the corporate entities or trusts or the superannuation fund as referred to in paragraphs 1 and 2 hereof;
5.2Altering the loan accounts or any entitlements which the parties may have in any of the corporate entities or the trusts as referred to in paragraphs 1 and 2 hereof.
The corporate entities referred to in paragraph 1 of the 13 August 2012 orders include B and C.
Paragraph 3 of the 13 August 2012 orders formalised the arrangement for payment of the monthly management fee (referred to above) by each of C and B to the husband and the wife. Specifically, paragraph 3 provides for each of B and C to pay the management fee to the F Trust and for the fee to be paid to the husband and wife in equal shares.
In a letter dated 5 June 2013 (annexure DEV-19 to the wife’s affidavit filed 18 December 2014), the husband’s solicitors set out their advice to him in relation to the (then) proposed ISRF Fee and whether that fee would breach the 13 August 2012 orders. The advice stated in that letter was that:
An additional payment properly reflecting the value to the companies of the work which you are currently undertaking for them does not breach paragraph 5 or any other provision of the August 2012 orders.
In particular, it does not impact upon the monthly management fees paid by B nor, to the best of my understanding, impact on any dividends referred to in paragraph 3.3 of the Orders. Further, and importantly, it does not alter what is currently otherwise paid to and/or entitled to be received by [the wife] pursuant to the Orders and, subject to Board approval, there appears no reason why you should not be adequately remunerated for this work.
A copy of that letter was annexed to the papers provided to the wife in anticipation of the board meetings on 27 June 2013. The wife deposes at [104] of her affidavit filed 18 December 2014 that the advice is premised on the writer’s understanding that the payment of the ISRF Fee to the husband would not impact on the payment of the monthly management fee to the husband and the wife or their other entitlements. The wife says that the history of payments and arrears since that letter was written suggests that the payment of the ISRF Fee has in fact impacted upon the payment of the monthly management fee. The history of payments and arrears deposed to by the wife are set below.
On 20 June 2013, the wife’s then solicitor wrote to the husband’s solicitor stating that the proposed additional payment to the husband would amount to a breach of the August 2012 orders (a copy of that letter being pages 118-120 of annexure DEV-31 to the wife’s affidavit filed 13 February 2015).
A copy of a file note dated 21 June 2013 from U Lawyers is annexed to the wife’s affidavit filed 13 February 2015. It shows that U Lawyers advised the husband, amongst other things, that:
·the question of remuneration of a B executive was a board matter and not a shareholder matter;
·before the husband voted on a matter such as his remuneration in which he had an interest, he needed to check the company constitutions; and
·the husband needed to check the constitution to see whether the Chairman had a casting vote.
The husband initially denied, contrary to the wife’s assertions, that he had voted in relation to the resolution of 27 June 2013. At [92] of the husband’s affidavit filed 19 June 2014, the husband deposed:
At the Board meetings [for B and C], [Mr Baxter] voted in favour of the resolution, although it was opposed by the wife. I did not vote owing to my interest in the outcome of the resolution. The resolution was passed.
The husband ultimately conceded in his affidavit filed 5 March 2015 at [31] that he had in fact voted in favour of the resolution relating to the ISRF Fee, although he said that he had no recollection of doing so. It is now accepted by the parties that both the husband and Mr Baxter voted in favour of the resolution and that the wife objected to it. That resolution was passed at the end of the 2013 financial year during which the husband had continued to receive 50 per cent of the B and C management fees and his other entitlements. On 17 July 2013 C paid the ISRF fees for the financial year ending 30 June 2013 to E and on 1 August 2013 B paid its share of those fees for the same financial year to the husband.
The wife deposes at [110] – [111] in her affidavit filed 18 December 2014 that although the resolution passed on 27 June 2013 provided for the husband to receive ISRF Fee payments in the 2013 and 2014 financial years, Mr Baxter confirmed at the board meetings of B and C on 23 July 2014 that amounts listed as payable to E in the board papers were for the first quarterly ISRF Fee payment for the 2015 financial year. The wife says that when she pointed out that there was no resolution to support the continuation of the ISRF Fee in the 2015 financial year, Mr Baxter advised that he would review the minutes from the board meeting on 27 June 2013. The wife further deposes that on 1 August 2014, in the absence of any resolution, Mr Baxter as Chairman directed that the ISRF Fee would be paid to the husband for the 2015 financial year together with a 2.9 per cent consumer price index increase. It is the evidence of the wife that prior to the board meeting on 23 July 2014, the consumer price index increase had not been raised with respect to the ISRF Fee payment.
The wife’s case, which is not disputed by the husband or Mr Baxter, is that to date the husband has been paid ISRF fees in excess of $300,000, of that amount, approximately $61,000 has been paid by B and approximately $240,000 has been paid by C.
The Derivative Action
Legal Principles
Pursuant to s 1337C(1) of the Corporations Act, jurisdiction is conferred on this Court with respect to civil matters arising under the Corporations Act.
The wife seeks to bring proceedings on behalf of B and C in respect of alleged breaches of fiduciary duties owed by the husband and Mr Baxter, as well as alleged breaches of the statutory duties owed by the husband and Mr Baxter under the Corporations Act. Section 236(1) of the Corporations Act provides that:
A person may bring proceedings on behalf of a company… if:
(a) the person is:
(i) 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
As both a shareholder and director of C and B, the wife has standing to commence proceedings on behalf of those companies pursuant to s 236(1)(a).
Section 237(2) of the Corporations Act provides that a court must grant an application to bring proceedings on behalf of a company 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.
To grant leave for the wife to commence proceedings in the name of B and C, the Court must be satisfied that all five of the criteria in s 237(2) of the Corporations Act have been met. A failure by the wife to satisfy any one of those criteria in s 237(2) means that leave must be refused.
The burden of satisfying the Court on the balance of probabilities that each criterion in s 237(2) of the Corporations Act has been satisfied rests with the wife as the applicant in these proceedings: Swansson v R A Pratt Properties Pty Ltd [2002] NSWSC 583, [24] (“Swansson”).
Palmer J in Swansson stated at [24] 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’ [sic] satisfaction.
I will consider each of the subsections of s 237(2) in turn later in this judgment.
Relief Sought
As against the husband and Mr Baxter, the wife seeks to claim on behalf of C and B:
·a declaration under s 1317E of the Corporations Act;
·equitable compensation or alternatively compensation under s 1317H of the Corporations Act;
·interest; and
·costs.
The wife seeks equitable compensation on behalf of B and C with respect to Mr Baxter and the husband’s breach of their fiduciary duties and compensation pursuant to s 1317H with the respect to the breach of their statutory duties. Section 1317E of the Corporations Act provides that if a court is satisfied that a person has contravened a civil penalty provision it must make a declaration of contravention. The consequences of a declaration of contravention of a civil penalty provision include inter alia, an application by ASIC to disqualify the person the subject of the contravention from managing corporations.
As against D, the wife seeks to claim on behalf of B:
·a declaration that D has held its 19 per cent shareholding in N on constructive trust for B since 3 April 2014;
·an order that D transfer its 19 per cent shareholding in N to B and an order that an account of the profits D has made as a consequence of that shareholding, including giving credit to D for the proper costs of acquiring the shareholding while deducing the expenses which B paid towards or since that acquisition;
·an order pursuant to ss 79, 1317H and 1324 that D transfer its 19 per cent shareholding in N to B and pay compensation to B as a consequence of B being deprived of a 19 per cent shareholding in N, including giving credit to D for the proper costs of acquiring that shareholding;
·equitable compensation or alternatively compensation under s 1317H;
·interest; and
·costs.
Section 1324 allows the Court to grant an injunction on such terms as may be appropriate where a person has or is engaged in conduct that constituted or constitutes a contravention of the Corporations Act. Section 79 defines relevant behaviour involved in a contravention.
As against E, the wife seeks to claim on behalf of B and C:
·equitable compensation or alternatively compensation under s 1317H;
·interest; and
·costs.
I will deal first with the less contentious of the criteria about which the Court must be satisfied.
Section 237(2)(a) of the Corporations Act: Likelihood of the Company Bringing Proceedings
In December 2014, the wife instructed her solicitors to send letters to the husband and the other directors of B, seeking their consent to B commencing proceedings against each of D, Mr Baxter and the husband (no proceedings against E having been proposed at that time) to recoup the misappropriated opportunity to invest in N and to recoup the ISRF Fee payments made to the husband which were, on the wife’s case, contrary to the constitutions of both B and C. Mr K, the fourth director of B who is not a party to these proceedings and who was not a director at the time of the alleged fiduciary breaches, refused to consent to such proceedings being brought.
The husband and Mr Baxter oppose the wife’s application for leave to bring proceedings.
Palmer J in Swansson said as follows with respect to s 237(2)(a):
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
In circumstances where the wife proposes to bring proceedings on behalf of B and C (of which the husband and Mr Baxter are both directors) and where the proposed respondents are the husband, Mr Baxter, E (the husband’s company) and D (Mr Baxter’s company), I am satisfied that there is no likelihood that either C or B will bring the proposed proceedings themselves.
Section 237(2)(e) of the Corporations Act: Notice
In the wife’s outline of submissions, counsel for the wife noted that no point is taken against the wife about any failure to give a 14 day notice requirement. In any event, counsel for the wife relies upon the discretion of the Court pursuant to s 237(2)(e)(ii) to grant leave where it is appropriate to do so even if the notice requirement is not fulfilled.
I am satisfied, in circumstances where the wife’s further amended application in a case was filed on 13 February this year, seeking orders to bring proceedings on behalf of B and C, that leave can be granted pursuant to s 237(2)(e)(ii).
Section 237(2)(d) of the Corporations Act: Serious Question to be Tried
There was significant overlap between the submissions with respect to the other remaining criteria. For convenience I propose to turn first to the question of whether or not there is a serious question to be tried.
In establishing whether there is a serious question to be tried for the purposes of s 237(2)(d) of the Corporations Act, Palmer J in Swansson said the following at [25]:
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.
The test for obtaining an interlocutory injunction was set out by the High Court in Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57. In that decision, the High Court held that the applicant must demonstrate a prima facie case. Gleeson CJ and Crennan J at [65] explained that a prima facie case “[does] not mean that the plaintiff must show that it is more probable than not that at trial the plaintiff will succeed; it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial”.
As submitted by counsel for the wife, both the husband and Mr Baxter as directors of B and C have a fiduciary duty not to:
·promote their own interests, making or pursuing a gain or benefit in circumstances in which there is a conflict or a real or substantial possibility of a conflict between their interest and the company’s interest without the fully informed consent of all shareholders (“the conflict rule”); and
·obtain a profit from their position as directors without the fully informed consent of all shareholders (“the profit rule”).
With respect to the conflict rule, McLure P in Streeter v Western Areas Exploration Pty Ltd (No 2) (2011) 278 ALR 291 (“Streeter”) said that:
[66] … A fiduciary is under an obligation, without informed consent, not to promote the personal interest of a fiduciary by making or pursuing a gain or benefit in circumstances in which there is a conflict or a real or substantial possibility of a conflict between the personal interest of the fiduciary and those whom he is bound to protect…
[67]… A fiduciary has (within the scope of his engagement or undertaking) a duty of undivided loyalty to the person to whom the duty is owed, in this case the company of which he is a director. Thus, ordinarily a director cannot have personal interests that conflict with the interests of the company…
[68] If a director has a positive duty (even if non-fiduciary) to pursue or acquire a particular benefit (which includes an opportunity) or property for the company and seeks that property for his private purposes, there will be a conflict of interest and interest…
“Informed consent” in this context, as submitted by counsel for the wife, refers to the informed consent of all shareholders of the relevant company.
With respect to the profit rule, McLure P in Streeter said:
[73]… The conflict and profit rules overlap, but are not co-extensive. The profit rule is usually formulated by reference to the remedy of an account of profits… The Court in Warman said:
A fiduciary must account for a profit or benefit it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position.
…
[75]Thus, where the relief sought is an account of profits, there must be connection between the breach of the conflict or profit rule and the profit derived … it is clear from the terms of the profit rule that there must be a causal connection between the profit and use of the fiduciary office. What is a sufficient connection between a profit and a breach of the conflict rule is not as clear. However, a mere temporal connection would seem to be inadequate.
(Citations omitted).
The statutory duties imposed upon directors by the provisions of the Corporations Act, whilst overlapping with the fiduciary duties, are more extensive than those fiduciary duties. The statutory duties imposed by the Corporations Act which the wife asserts have been breached by Mr Baxter and the husband are as follows:
·Section 180: the duty of directors to exercise his or her powers and discharge his or her duties with the degree of care and diligence that a reasonable person would exercise if he or she were a director of the company;
·Section 181: the duty of directors to exercise his or her powers and discharge his or her duties in good faith in the best interests of the company and for a proper purpose; and
·Section 182: the duty of directors not to improperly use his or her position to gain an advantage for him or herself of some other person or to cause detriment to the corporation.
These sections of the Corporations Act are all what are described for the purposes of s 1317E as civil penalty provisions. S1317E provides that if a court is satisfied that a person has contravened a civil penalty provision then the Court must make a declaration of contravention. That the husband and Mr Baxter were, and continue to be, bound by both their fiduciary and statutory duties in respect of B and C is not disputed. What is disputed is whether the husband and Mr Baxter have breached those duties.
I will consider separately whether there is a “serious question to be tried” with respect to both the misappropriation of the N opportunity and the payment of the ISRF Fee.
Acquisition of N
The wife’s case is that the true purpose of the restructured N proposal was to exclude her from the benefits that might flow to B from the acquisition of a 70 per cent interest in N as per the initial proposal and to provide Mr Baxter and the husband with the benefit of an interest in N, delaying any investment by the husband in N until the conclusion of the property proceedings. Not only did the initial proposal not go ahead, but the husband and Mr Baxter, without having informed the wife (who was the only other director of B at the time the N opportunity arose) either in contemplation of or upon completion, in breach of both their fiduciary and statutory duties, executed a letter of intent which was ultimately recorded in the shareholders’ agreement by which Mr Baxter acquired a 19 per cent interest in N with the opportunity for the husband to acquire two-thirds of that interest at a later date.
The wife would say that a further consequence of the decisions and actions of the husband and Mr Baxter was to exclude B and hence the wife from the benefits of the acquisition of a 70 per cent interest in N, thereby risking the potential profitability of B absent a relationship with N, O being in a position to purchase equipment directly from N without the need for those purchases to be made through B.
Counsel for Mr Baxter and D submitted that D’s acquisition of a 19 per cent interest in N was not a breach of the fiduciary or statutory duties they owed to B because the genesis of the transaction was an approach by Mr L to the husband with respect to O purchasing N and because although the husband sought to involve B in that transaction by proposing that B be used by O as “the vehicle for its investment in N”, that proposal was rejected by B and unacceptable to O. As a result, the transaction was restructured (the restructured proposal) and insofar as the wife complains that as part of the restructured proposal D acquired a 19 per cent interest in N, that was only in circumstances where it was clear that it was not an opportunity that was available to B.
Although I am not required to enter into the merits of the proposed derivative action to any great degree and am not in a position to make findings where evidence is in dispute, in my view the submissions made on behalf of Mr Baxter and D, which were adopted by counsel for the husband, do not always sit comfortably with the available evidence.
For example, Mr Baxter’s evidence deposed to at [18] of his affidavit filed 27 February 2015 that after he advised Mr M and Mr N at the meeting with O in City Q on 25 January 2013 that the proceedings in this Court could result in a reduction in the husband’s interest in B and that Mr M, after discussion with other O personnel, said that O was not prepared to invest in N whilst that uncertainty existed as it wanted to secure the ongoing services of the husband to B. That evidence does not sit well with the tenor of the file note dated 12 February 2013 of the husband’s instructions to U Lawyers upon his return from that meeting, that the husband and Mr Baxter had told O it was not a good time to proceed and that O understood. Although it was submitted by counsel for Mr Baxter and D that these notes are “double hearsay” whereas the Court has the sworn evidence of the husband, Mr Baxter and Mr L, it is also the case that the husband has not denied that he made the statements attributed to him by Mr U.
Mr Baxter acknowledged in his affidavit at [29] that there was no reference in the minutes of the board meeting on 22 April 2013, which records B’s rejection of the first proposal, of any alleged reluctance on O’s part to invest in B because of any uncertainty in relation to the husband’s interest in the company. Mr Baxter’s evidence as to O’s concerns about the husband’s interest in B also does not sit comfortably with the restructured proposal which had O acquiring 51 per cent of N and D acquiring a 19 per cent interest with the opportunity for the husband to acquire two-thirds of the shares acquired by D at a later date.
Mr Baxter deposed that the reason he did not disclose D’s investment in N to the B board, notwithstanding the questions asked by both the wife and her solicitors, was because of the confidentiality obligations imposed by each of the letter of intent dated 18 April 2013 and the share transfer agreement. It was submitted by counsel for the wife that neither the letter of intent nor the shareholders’ agreement prevented disclosure or explained what the wife’s counsel said was the breach of Mr Baxter’s fiduciary and statutory duties as a director of B.
Both the husband and Mr Baxter through related entities were described as parties to the letter of intent. Although section 5.1 of that letter of intent provides that the letter of intent was confidential and not to be disclosed to anyone without the consent of the other parties, section 5.2.3 provides that section 5.1 does not apply to a disclosure required by applicable law.
Clause 9.2 of the share transfer agreement, which was entered into by O, D, L Pty Ltd (the company through which Mr L holds shares in N) and Mr L on 19 February 2014, provides that “[t]he Parties agree that the discussions and negotiations relating to, and the existence and the terms of, this Agreement and the other Transaction Documents and any information relating to any Party and their respective Affiliates shall be kept strictly confidential” unless, inter alia, “the disclosure thereof is required by law”.
Even if Mr Baxter had been correct, which is arguably not the case, and he was bound by both the letter of intent and/or the share transfer agreement not to disclose D’s acquisition of shares in N, that would not explain why the wife as a director and shareholder of B was not kept fully informed prior to the husband and Mr Baxter signing the letter of intent on 18 April 2013.
I am satisfied having regard to the relatively low threshold the wife must satisfy that there is a serious question to be tried as to whether Mr Baxter and the husband have in fact breached their fiduciary and statutory duties.
However, counsel for Mr Baxter and D further submitted that it is not enough to establish that there has been a breach of fiduciary or statutory duties and that there must also be an arguable case for the relief that is sought. She referred me to the decision of Applegarth J in Jensen & Ors v RQYS Marina Ltd & Ors [2014] QSC 243 (“Jensen’s case”) at [116] where his Honour said as follows:
It has been said that the applicant need only demonstrate that there is “a real question to be tried”, and this requires the applicant to identify “the legal or equitable rights to be determined at trial in respect of which the final relief is sought”. Because the inquiry relates to identifying some prospect that the proposed plaintiff will succeed in establishing an entitlement to the relief sought in the proposed proceedings, it is necessary to consider whether there is sufficient basis to conclude that the proposed plaintiff may succeed in establishing an identified cause of action and obtain the relief sought in the relevant prayer for relief. It is therefore necessary to consider the proposed claims separately. (emphasis added)
Counsel for Mr Baxter and D submitted that even assuming that there had been a breach of either fiduciary or statutory duties, which was not conceded, in circumstances where the wife has not demonstrated “a probability of success in obtaining the relief” she seeks, the wife has not established that there is a serious question to be tried. She identified at [16] of the outline of submissions of the second and third respondents filed 9 March 2015 what she said were the three forms of relief sought by the wife in relation to the N transaction:
(a)an order that D transfer its 19 per cent shareholding in N to B;
(b)an order that D account to B for the profits it is alleged to have made as a consequence of its 19 per cent shareholding in N; and
(c)payment of equitable compensation by Baxter to B for loss and damage allegedly suffered by B.
Counsel for Mr Baxter and D referred in some detail in both her outline and during the case, as did counsel for the husband albeit in somewhat less detail, to various examples which she said demonstrated that the relief sought by the wife was bound to fail. For example, with respect to the transfer of D’s 19 per cent shareholding to B counsel for Mr Baxter and D submitted that:
·B had not taken up D’s offer to transfer its 19 per cent interest in N to B;
·B could not afford to fund the acquisition of D’s 19 per cent interest in N; or
·As submitted by counsel for the husband, even if B could afford to fund the acquisition of those shares any proposed transfer of those shares would be subject to the rights of O and Mr L and/or his associated entity as shareholders in N.
Counsel for Mr Baxter and D submitted with respect to the probable failure of the wife’s claim for an account of D’s profits as a consequence of the acquisition of the 19 per cent interest in N that:
·the purchase price of the shares acquired by D was negotiated at arm’s length and was consistent with an independent valuation;
·D had not acquired the shares undervalue and hence had not made any profit;
·D has not sold its shares but even if it were to do so, it would be likely to do so at a similar price as it paid for them because the formula for calculation of the share sale price under the pre-emption provisions is the same as the formula for calculation of the purchase price; and
·it is unconscientious to claim that a benefit or gain has been obtained in breach of a fiduciary duty where there is no possible conflict between the personal interests of, in this case, Mr Baxter and D and his fiduciary duty to B because B has itself obtained rights and benefits as a result of the acquisition by D of the shares in N.
Finally with respect to the wife’s claim for compensation, counsel for Mr Baxter and D’s submitted that:
·B did not lose the opportunity to acquire a 70 per cent interest in N because it never had that opportunity independently of O;
·B did not lose the opportunity to acquire a 19 per cent interest in N because it never had sufficient funds to enable it to do so;
·B is better off as a consequence of D acquiring a 19 per cent interest in N as a result of the implementation of an arrangement by which B is paid an annual fee and a 5 per cent commission of all direct sales from O to N; and
·D’s acquisition of an interest in N permitted B to save face with N as neither B nor Latham were able to co-invest with O.
The submissions made by counsel for both Mr Baxter and D and the husband are, at least in part, premised upon statements of fact which are themselves the subject of dispute. For example counsel for Mr Baxter and D submitted in relation to the claim for compensation that B had not suffered any loss as a result of D acquiring an interest in N because the opportunity to acquire a 70 per cent interest in N had not been available to B independently of O and in any event had been rejected by both B and O. It is of course the wife’s case that there was an opportunity for B, in conjunction with O, to acquire a 70 per cent interest in N which B lost because of the actions of both the husband and Mr Baxter and for which it should be compensated. It is also the wife’s case that it was the husband and Mr Baxter who rejected the proposal and not O because of what the file notes refer to as the “[Ms Viola] issue”. Whether that is in fact the case lies at the very heart of the proposed derivative action and is not, as counsel’s submission might suggest, uncontested or established fact. Although the Court might ultimately make findings in favour of the husband and Mr Baxter and their respective entities, on the current state of the evidence in circumstances where that evidence has not been tested, there is a dispute.
As submitted by counsel for the wife the submissions made with respect to the rights of third parties appear to ignore the wife’s case that the acquisition of the shares by D and the terms of the shareholders’ agreement from which the rights of the third parties originate were entered into in breach of the fiduciary and statutory duties of both the husband and Mr Baxter. This would apply equally to the application of the formula used to calculate the purchase price. These submissions are also made in circumstances where Mr Baxter has not produced and neither the wife or B appear to have access to information in relation to N’s current financial position. Although arguably the rights of third parties might be a reason why the wife might not obtain all of the relief she seeks, if the Court were to find that either Mr Baxter or the husband or both had breached their fiduciary or statutory duties, it might also be a reason why another form of the relief sought by the wife might be successful.
I do not intend, nor in my view in circumstances where the threshold test is relatively low, do I consider that it is necessary to address individually each and every example relied upon by either counsel for Mr Baxter and D or counsel for the husband in support of their submissions that the wife has not demonstrated the probability of success of the relief she seeks. I am reminded as observed by Applegarth J in Jensen’s case that it is whether “… there is sufficient basis to conclude that the proposed plaintiff may succeed in establishing an identified cause of action” not, as submitted by counsel for Mr Baxter and D, that success is probable, which in my view would raise the test to a whole different level. Not only is the threshold low, the enquiry is of limited ambit and is not one that requires or permits a detailed analysis.
Whilst some parts of the relief the wife seeks may have better prospects of success than others, that does not lead me to conclude that the wife has not met the test she is required to meet having regard in particular to the relatively low threshold she is required to satisfy. Although I am not in a position to make findings in relation to disputed facts I am satisfied that there is a prima facie case that both the husband and Mr Baxter may have breached their fiduciary and statutory duties and that there is a sufficient likelihood that B may obtain some part of the relief the wife proposes to seek on its behalf and that in those circumstances there is a serious question to be tried.
Payment of the ISRF Fee
It is submitted on behalf of both the husband and E and Mr Baxter that:
·the ISRF Fee represented a salary increase in line with the market rate for the husband’s position;
·they acted in accordance with the advice of the husband’s solicitors that the approval of the ISRF Fee would not involve a breach by the husband of the Family Court orders made 13 August 2012;
·there was no breach of s 191 of the Corporations Act, which requires directors to give notice of a material personal interest if it relates to the affairs of the company;
·the constitutions of B and C are confusingly drafted and a literal interpretation of clause 82(3) of those constitutions would lead to the conclusion that no director could vote in favour of their own remuneration;
·the resolution which was passed is effective unless an application it made to invalidate it under s 1322 of the Corporations Act and a court is of the opinion that an irregularity has caused or may cause a substantial injustice that cannot be remedied by an order of the court; and
·in the alternative it is open to the court to validate an irregular transaction if the persons concerned in or party to the contravention or failure acted honestly or it is just and equitable to do so.
It was submitted on behalf of both the husband and Mr Baxter that in those circumstances the wife has not demonstrated that there is a serious issue to be tried in relation to the ISRF fees paid to the husband.
There is a significant dispute between the parties as to the interpretation of the orders made by this Court in relation to the parties’ entitlements, in particular whether the additional payment reflected the value of the work being done by the husband for the companies and what impact that additional payment might have or has had on the other entitlements of the husband and the wife. In my view it is not necessary, even if possible, for me to determine that dispute for the purposes of this application in circumstances where I am satisfied that there is a prima facie case that the payments were voted on and made in breach of the constitutions of both B and C.
In my view, as counsel for the wife submitted, the fact that it might have been an appropriate level of remuneration for someone in an equivalent role does not address the issue. There are many circumstances in which employees are paid less than the market rate of remuneration and many reasons why that may be the case.
I accept, as counsel for Mr Baxter and D submitted, that a person who incorrectly interprets legal requirements can still be found by a court to have acted honestly. In this case it is submitted that Mr Baxter and the husband misinterpreted the orders of 13 August 2012 or did not understand the relevant provisions of the constitutions. However, although that might address the issue in relation to the alleged breach of the order of this Court, it does not necessarily address the fact that there is a prima facie case that both the husband and Mr Baxter to have acted contrary to the constitutions of both B and C in circumstances where the evidence suggests that the husband was advised to check those constitutions to see if they had the power to do what they proposed to do, where Mr Baxter was aware of that advice to the husband and where Mr Baxter was also aware that he had no casting vote.
In all of the circumstances I am satisfied that there is a prima facie case that the husband and Mr Baxter have breached their fiduciary and statutory duties with respect to the ISRF fees and that there is a sufficient likelihood that B and C may obtain the relief the wife seeks. In those circumstances I am satisfied that there is a serious question to be tried.
Section 237(2)(c) of the Corporations Act: Best Interests of the Company
I will turn next to the question of whether the proposed actions would be in the best interests of the companies.
Palmer J in Swansson at [55] said 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 the best interests” (original emphasis). This is a higher threshold for the applicant to meet than is required to establish that there is a serious question to be tried.
As Applegarth J said in Jensen’s case at [113]: “[best interests] is concerned with the company’s separate and independent welfare”.
Counsel for the wife referred me to the decision of MGCC v Vinciguerra [2011] FCAFC 31 where the Full Court of the Federal Court said at [60]:
… it is reasonable to expect that an action taken by a company for recovery of payments made, must necessarily be, if successful, in the best interests of the company. It generally follows that pursuit of an action by or on behalf of a company against an office for recovery of compensation for damage done to the company by the officer’s breach of duty is in “the best … interests of the company”.
(Citations omitted).
On that basis, the action proposed by the wife in the proposed Statement of Claim with respect to both the recovery of the ISRF Fees paid to E on behalf of the husband and any compensation by the husband and Mr Baxter for the alleged breaches of their fiduciary and statutory duties is arguably in “the best interests of the company”.
However, at [57] in Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432, Ball J, identifying what he said were relevant matters in determining the best interests of the company, said:
…
In considering what is in the best interests of the company, it is necessary to consider the prospects of success of the action, the likely costs and likely recovery if the action is successful and likely consequences if it is not. One relevant matter in considering these issues is the nature of any indemnity the applicant has offered to the company if the action is brought and the likelihood that the company will recover under that indemnity. It is also necessary to consider the resources the company will be required to devote to the action and the resources it has available, together with the effect that the action may have on other aspects of its business. Finally, it is necessary to consider whether some other remedy is available to the applicant so as to make the proposed action unnecessary from its point of view...
(Citations omitted).
The likely costs of the action and the likely recovery if the action is successful, the likely consequences if it is not and the resources of the companies that are required to devote to the action having regard to the nature of the indemnity offered by the wife are in my view a significant issue in this case.
I granted leave to Mr Baxter and D to file and rely upon the affidavit of Mr M, who is a principal of the firm instructed to act on their behalf in these proceedings, that evidence being subject to questions as to the weight it should be afforded, having regard to the nature of the evidence and the fact that it was only filed on the day of the hearing. In that affidavit, Mr M estimates at [6] that the likely costs of the wife, C and B in bringing the proposed derivative action would be approximately $318,000 including GST. There is no distinction drawn between the costs attributable to those parts of the actions which relate to B and those which relate to C. Mr M estimated the cost of Mr Baxter and D to be approximately $330,000 and the costs of the husband and E at approximately $177,439, being a total of $508,000. Mr M further deposed that, based on the likely total costs of Mr Baxter, D, the husband and E, B and C would be exposed to costs in the range of $355,600 to $406,400 in the event that the proposed derivative action did not succeed and that he would expect any order for security for costs to be in the range of $214,000 to $244,000.
Counsel for the husband also submitted that insofar as the proposed relief adversely impacted upon the interests of either L Pty Ltd or O, they would be necessary and/or proper parties to the proceedings. I accept that the involvement of any third parties would be likely to increase the likelihood of the Court making an order for security for costs and increase C and B’s potential exposure to an adverse costs order in the event that the action did not succeed.
Although it seems to me to be uncontroversial that the derivative action proposed by the wife is likely to be expensive, as counsel for Mr Baxter and D acknowledged, Mr M’s evidence is speculative and it is not possible to say how much an action is likely to cost until it is commenced. However it is a guide and I am satisfied, particularly in circumstances where the wife has not sought to adduce any evidence as to the likely cost of the proposed proceedings, notwithstanding that she bears to onus of establishing that the proposed derivative action is in the best interests of B and C, that the cost of those proceedings is likely to be significant, and possibly in the range estimated by Mr M.
Ms J, who is both a director and shareholder of both B and C, and Mr K, who is a director of B, both deposed that B would find it exceedingly difficult, and probably impossible, to fund the B proceedings as it is not currently profitable, has low cash reserves and no ability to borrow. Although Mr Baxter annexed the management accounts for both B and C to his affidavit, that does not really assist me in determining how, if at all, either of the companies would be able to fund the proceedings and what impact if would have on their operations if they were required to do so. Nor did the wife adduce any evidence or direct me to evidence which would lead me to conclude that either B, in particular or C have the capacity to fund the proceedings.
That leads to the conclusion that there is a very real possibility that the wife might have to fund the proceedings and thereafter to the question of whether she has the capacity to do so. The Court must also consider whether the indemnity offered by the wife is in all of the circumstances sufficient, in particular having regard to the possibility of adverse costs orders.
It was not until her affidavit of 4 March 2015 that the wife offered any indemnity in support of her application. She deposed at [16] of that affidavit as follows:
If required to do so by this Honourable Court, I will undertake to pay the costs of [B] and [C] in bringing the proceeding contemplated by my Further Amended Application in a Case filed 13 February 2015, and any costs which either of them is ordered to pay in that proceeding.
The management accounts for B for 1 July 2014 to 21 December 2014 annexed to Mr Baxter’s affidavit filed 27 February 2014 (annexure RAB-1) show that B made a net loss of $41,230.20 for the first six months of the 2014-2015 financial year and that as at the December 2014 had net assets of $80,403.52.
The husband in his affidavit filed 5 March 2015 states at [58] that the balance statement and profit and loss statement for C at 31 January 2015 discloses:
58.1A net loss of $413,284.23 for the period 1 July 2014 to 31 January 2015 as against a budgeted profit of $186,320.00 (a difference of $599,604.34 or 321.8%).
58.2Net equity at 31 January 2015 of $1,872,714.20.
The wife in her financial statement filed 4 March 2015 deposes to having an income of $2,156 per week of which she receives $1,232 from B and $924 from C. She has an excess of income over expenditure of $312 per week, however that would vary based upon the income she receives in circumstances where both B and C appear to have posted a loss for the first six months of the financial year ending 30 June 2015. Significantly the wife deposes that she has assets of $6,415,621 and liabilities of $477,415. The value of the property listed as owned by the wife is largely attributed to her shares in B and C.
Leaving aside the question of whether the valuations of B and C prepared by Mr H upon which the wife relies are ultimately accepted, and although the wife has identified the interest she holds, it appears as counsel for the husband submitted that she incorrectly included the total value of the two companies rather than her interest in those entities. The wife’s interest in B and C based upon the valuations prepared by Mr H, are $216,000 and $1,946,500 respectively, a total of $2,162,500. This would leave the wife on the basis of the other figures in her financial statement with net assets of $2,694,456 not $6,014,751 as per her financial statement.
Even allowing for the error in the wife’s financial statement and assuming the values she attributes to the companies are accurate, she has significant assets. However counsel for Mr Baxter and D and counsel for the husband and E made what I consider to be a number of significant points for the purposes of the assessment I must make of the wife’s capacity to pay B and C’s costs and the indemnity offered by the wife with respect to any order for costs they might be required to pay:
·the wife’s offer does not refer to any order that might be made for security of costs;
·the wife’s income is not sufficient to fund the litigation;
·as pointed out by counsel for the husband, the wife’s indebtedness has increased by $213,000 in the space of just over nine months by way of increased borrowings over the property in which the wife lives which is the only other significant asset but which now has an equity of a little under $500,000; and
·the shares the wife owns are illiquid - they are subject to pre-emptive rights and, as submitted by counsel for the husband, are held jointly with the husband and are the subject of the property proceedings. In those circumstances, as submitted by counsel for the husband, “one might ask rhetorically: how would the wife sell those shares, how would she pledge them in order to secure funding, and even if those two things could be surmounted who would buy them or accept them as security?”.
In all of the circumstances I am not satisfied on the balance of probabilities that the wife has the capacity to either fund the proposed proceedings, satisfy any order for security for costs if one were to be made or stand behind any indemnity. The effectiveness of her offer of an indemnity is in those circumstances questionable.
Prospects of Success
Counsel for Mr Baxter and D submitted that it could not be in the companies best interests if they were to recover little or no money which she submitted was the likely outcome because:
·the relief proposed by the wife was unlikely to be granted; and
·even if that were not the case, the facts raise a strong case that even if the involvement of D in the N acquisition involved a breach of duty, the respondents should be relieved from liability pursuant to ss 1317S and 1318 of the Corporations Act on the basis that they have acted honestly.
I have already addressed the question of the likelihood of success of the remedies the wife proposes, albeit the test the wife is required to meet in determining best interests is somewhat more rigorous than the threshold test applied in determining whether there is a serious question to be tried. The second aspect to counsel for Mr Baxter and D’s submission that Mr Baxter and the husband acted honestly is not an established fact and it is this issue that in fact lies at the very heart of this case. The Court is not in a position in those circumstances, when the evidence has not been tested, to conclude that there is a strong case that respondents are likely to be relieved of any liability because they acted honestly.
Likely Recovery if the Action is Successful
The wife deposes in her affidavit filed 13 February 2015 at [22] that a successful action brought on behalf of B and C will see the value of the shareholding in N which B should have had restored to B as well as the restoration to B and C of the amounts paid by them to the husband as ISRF Fees (approximately $300,000 in total). That of course assumes that the companies are able to recover those amounts the wife says are likely to be paid or give effect to the orders she otherwise seeks on behalf of the companies.
There is in my view some uncertainty, based upon his financial statement, and ultimately the value of his interest in both B and C, about the husband’s capacity to meet any orders that might be made against him. This is notwithstanding counsel for the wife’s submission that the husband’s proposal in the property proceedings, that he should acquire the wife’s interest in B and C, tends to suggest that he must have the capacity to do so. However the amount the husband is required to pay the wife, if any, will depend upon the value that is ascribed to the various entities, in circumstances where that value is the subject of ongoing dispute
Although there may be some uncertainty about the husband’s capacity to meet any orders that might be made it is not submitted by Mr Baxter that either he or D could not comply with any orders that might be made.
Likely Consequences if the Action is Unsuccessful
The consequences of the failure of the proposed derivative action would be significant for both B and C, particularly if it were the case that the wife was unable to satisfy her indemnity, and in circumstances where it is asserted on behalf of both the husband and Mr Baxter and their associated entities that B’s financial position is finely balanced.
Effects of the Litigation on the Running of the Company
Counsel for the wife submitted that apart from access to computers, telephone records and other documents necessary for discovery, it would not be necessary for the wife to utilise any other company resources. Whilst that might be the case in my view that is not the only effect the proposed derivative action is likely to have upon the running of the companies.
Counsel for Mr Baxter and D relied upon the affidavits of Ms J, who is a shareholder of both B and C, and Mr K, who is a director of B, in support of her submission that the proposed action would be detrimental to B’s interests. It was their evidence that the husband has been distracted by the property proceedings and that:
(a) the Husband is critical to the success of the B business;
(b)the proposed derivative action would be a major distraction to the Husband and divert a considerable amount of his time and energy away from the B business to its detriment; and
(c)B’s financial position is finely balanced and it cannot afford to have the Husband’s time and energy diverted by the proceedings.
I do not agree insofar as it is submitted that the impact of the property proceedings upon the husband is not relevant as in my view the proceedings cannot be viewed in isolation. I am satisfied on the balance of probabilities that the proposed derivative action by the wife would at the very least be a further distraction to the husband and that in those circumstances it could impact upon the operations of B and C. However, it is also the case that even if the proposed derivative action is an added or further distraction to the husband, the effects of that litigation upon the running of the companies need to be weighed up against the benefits to B and C of the proposed proceedings.
Counsel for Mr Baxter and D further submitted that the proposed derivative action will necessarily require the involvement of O employees as witnesses which could jeopardise the relationship established between B and O. In my view counsel’s submissions with respect to this issue ignore the fact that if the wife seeks relief against the husband in relation to these issues in the property proceedings, as it is submitted she can and should do, this is likely to require similar evidence, including either the husband or the wife adducing evidence from the owners or employees of O. Whether those witnesses are called for the purposes of the property proceedings or for the purposes of the derivative action proposed by the wife, the result is likely to be the same.
Alternative Remedies
Counsel for both Mr Baxter and D and the husband and E submitted that the remedies the wife seeks are available by other means. In Swansson, Palmer J at [59] said in relation to the issue of best interests, as follows:
… 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…
At [66] Palmer J went on to say :
If [the plaintiff] 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 [the second defendant], having regard to the parties’ present positions. She alone would receive the benefit of those proceedings and [the second defendant] 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 [the second defendant] and [the plaintiff] in relation to the payments from [the first defendant] to Construction and Projects than would this Court in a derivative action. Why it is that [the plaintiff] has chosen not to pursue her remedy in the Family Court is not explained by the evidence.
Counsel for Mr Baxter and D submitted that if the wife were able to demonstrate that an amount should be treated as notional property for the purposes of calculating how the remaining property should be divided pursuant to s 79 of the Act, the Court’s discretion is sufficiently wide to take that amount into account when making orders altering property interests. The High Court in Stanford v Stanford (2012) 247 CLR 108 has expressed its views about the concept of notional property and altering parties’ interests in property based upon notional property interests; however there are circumstances in which this Court might take into account the asserted breach by the husband of his fiduciary and statutory duties and the consequences of his breach of those duties upon the financial position of the parties in determining what if any alteration it should make to the parties property interests. However that is not the case with respect to any breach by Mr Baxter of his fiduciary and statutory duties.
There is in my view some merit to the submissions made by counsel for Mr Baxter and D particularly with respect to the ISRF Fees in circumstances where the payment in question was made to the husband and where the other shareholders are not seeking repayment. However, there is less force in that submission insofar as it relates to the acquisition of N and the impact, the wife submits, the actions of not only the husband but also Mr Baxter have had on the value of the shares in B. Albeit that the wife is ultimately disadvantaged by any reduction in value of the shares she and the husband hold in the companies, the damage was caused to B and C not to the husband and the wife.
Although arguably even if the damage to B and C might be part of the wife’s case in the property proceedings, it is also the case that if the husband’s evidence as to value is ultimately accepted his net assets, which include his shares in both B and C, are less than $750,000 which gives rise to questions as to whether there would be sufficient assets from which an adjustment might be made as between the husband and the wife to compensate the wife for what she asserts was a breach of both fiduciary and statutory duties by both the husband and Mr Baxter. The converse of that is that if the wife’s evidence as to value is accepted, there is a greater prospect of her obtaining some redress for the conduct of the husband.
As Palmer J said in Swansson “… leave to bring a derivative action must not be given lightly” and on balance, although there are some factors which favour the proposed derivative action, weighing up all of the matters I must consider, I am not satisfied on the balance of probabilities that the proposed action by the wife is in the best interests of B and/or C. Accordingly, the wife’s application to bring proceedings on behalf of B and C must fail.
However for completeness, in case I am wrong, I will address the remaining consideration of good faith.
Section 237(2)(b) of the Corporations Act: Good Faith
Counsel for the wife submitted that the Court should give leave to institute a derivative action where those in control of a company, in particular in this case the husband and Mr Baxter, refuse to take proceedings in order to redress a wrong done to the company.
Palmer J in Swansson identified and discussed two interrelated factors in determining “good faith”:
36.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 … the applicant would fail the requirement of s 237(2)(b).
Palmer J further said at [38] as follows:
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.
(Citations omitted).
However as submitted by counsel for Mr Baxter and D, the expression “acting in good faith” is not confined to the two factors identified by Palmer J and his Honour himself prefaced the discussion of those two factors at [35] of his judgment acknowledging that “[t]he law will develop incrementally as different factual circumstances come before the Courts”. She referred me to the decision of Muir JA in Coeur de Lion Investments Pty Ltd v Kelly [2013] QCA 160; [2014] 1 Qd R 296 where at [57] his Honour said “[o]ne would think it likely that an applicant under s 237, acting in good faith, would turn its mind to the question whether the amount likely to be recovered in the litigation merited the expenditure of time, resources and money which litigation would necessitate...”.
Counsel submitted that there had been no attempt by the wife to quantify the amount that might be recovered if the proceeding were successful, the costs of prosecuting the action or the company’s ability to meet an order for costs in the event that the action was not successful. Whilst it is true that the only evidence as to the likely costs of the proceedings was evidence adduced by Mr Baxter, it is not true that the wife has not tried to quantify what might be recovered if the proceedings were successful. The ISRF Fees are readily identifiable and it is the wife’s case that the husband and Mr Baxter should pay compensation to B and C for those fees. The wife also attempted to place a value on N based upon the financial statements for the financial years ending June 2009 to 2012 prior to both the initial and restructured proposal in order to value D’s 19 per cent interest. In my view it is difficult for Mr Baxter to make this complaint in circumstances where he has the information that might permit the wife to quantify her claim, with greater accuracy, but chooses not to produce it.
Counsel for Mr Baxter and D also submitted that the wife’s claim that she is acting in good faith must also be viewed in the context of the following matters:
·the relief the wife seeks for the transfer of D’s 19 per cent interest to B in circumstances where there was not a realistic prospect of B being able to fund that acquisition and her failure to follow up on D’s offer to work with B and the other N shareholders to achieve that end would militate against the Court being satisfied that she was acting in good faith;
·the wife’s “11th hour assertion” without any evidence to support that assertion that she could obtain the necessary funds was not credible in light of B’s previous unsuccessful attempts to obtain funds and its general financial position would also tell against her claim to acting in good faith; and
·the wife’s claim for the loss of a 70 per cent interest in N in circumstances where the initial proposal was rejected by both B and O.
I have already dealt with most of these issues earlier in my reasons and am satisfied on the balance of probabilities that they do not demonstrate in all of the circumstances of this case that the wife is not acting in good faith.
Good faith must be objectively determined and as Brereton J said in Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859 (“Maher”) at [33]:
I do not take Palmer J, in Swansson, to have stipulated that there must be a sworn assertion by the applicant that he believes that a good cause of action exists and has reasonable prospects of success; rather, His Honour identified a state of mind which must be found to exist in the applicant, rather than any particular means by which that state of mind is to be proved. While in some cases the presence or absence of a sworn assertion of the relevant state of mind might be very important, generally speaking such statements – which by necessity will almost always be unqualified opinion founded on hearsay, since a lay applicant will rarely know whether or not a good cause of action exists, nor its prospects of success, and will be dependent upon the advice of lawyers for forming the relevant belief – must be of little weight or utility; and the objective facts and circumstance will speak louder that the applicant’s words...
As Brereton J went on to say at [36] of that decision: “… the conclusion … that there is a serious question to be tried is a major step towards establishing [that the applicant is acting in good faith]”. It is open for the Court to draw inferences as to the wife’s good faith by assessing the nature of the allegations and circumstances out of which they arose.
It is clear from the authorities to which I have been referred that although it may be necessary for an applicant acting in good faith to turn his or her mind to “… the question of whether the amount likely to be recovered in the litigation merited the expenditure of time, resources and money which litigation would necessitate”,[1] a detailed analysis of whether the amounts likely to be recovered merits the expenditure of time and resources is not required to demonstrate that the applicant is acting in good faith. That would not be consistent with the observations of Brereton J in Maher that a lay person will rarely know whether a good cause of action exists or its prospect of success. One might also ask how a lay person might make that assessment in the absence of financial information as in this case. Nor is it consistent with the observations of Tobias JA (Beazley and Bell JJA agreeing) at [74] in Chahwan v Euphoric Pty Ltd t/as Clay & Michel (2008) 245 ALR 780; [2008] NSWCA 52 that the fact that the institution of a derivative action would have the effect, if successful, of increasing the value of the applicant’s shares and, as observed by Brereton J in Maher, the fact that there is a serious issue to be tried are positive indications that the applicant is acting in good faith.
[1] Coeur de Lion Investments Pty Ltd v Kelly [2013] QCA 160; [2014] 1 Qd R 296, [57].
The wife in this case seeks relief which she says, if successful will increase the value of her shares and those of the other shareholders. That and the fact that I have already found that there is a serious issue to be tried lead me to conclude that the wife is acting in good faith.
Superannuation
Paragraph 2 of the orders made on 13 August 2012 provides:
That the husband, either personally or via his servants or agents, be restrained from altering in any way, any superannuation fund, business or trust or trusts in which the parties have an interest including, but not limited to the following:
2.1 The [Latham] Superannuation Fund;
2.2 The [Latham] Family Trust;
2.3 The F Trust; and
2.4 [C Pty Ltd] (business name).
Counsel for the wife, in the wife’s outline of submissions filed 10 March 2015, notes that the wife has consistently complained about the husband making withdrawals from the Latham Superannuation Fund (the Fund) in breach of the August 2012 orders since April 2014, with such complaints having been conveyed to the husband’s solicitors. He further says at [73] that:
… in view of the Husband’s solicitors’ existing or potential conflict of interest between their duty to the Court, their duty to the Husband and their own interest in getting paid, the appropriate course was for the Husband to seek this Court’s directions once debate arose about what Order 2 meant.
In those circumstances, the wife in her further amended application in a case filed 13 February 2015 seeks:
(7)That the Husband be and is hereby restrained from making withdrawals from and otherwise from accessing his superannuation entitlements, including those held in the [Latham] Superannuation Fund.
(8)That within seven (7) days of these orders, the Husband account to the Wife for all withdrawals made by him from his superannuation entitlements since separation and provide documentary verification in respect of withdrawals and current balances of all superannuation accounts.
In the wife’s outline of submissions, counsel for the wife submitted that the orders sought could further be refined as follows:
Within 14 days of the making of this Order, the Husband pay into a bank account jointly controlled by the solicitors for the Husband and the solicitors for the Wife the amount of each withdrawal which has been made from the [Latham] Superannuation Fund since 13 August 2012, such moneys not to be dispersed except by the written agreement of the Husband and Wife or pursuant to an order of this Court.
Counsel for the husband objected to the wife seeking repayment of the withdrawn moneys when an order to that effect was only raised in the wife’s outline of submissions and not included in her further amended application in a case. He further submitted that the husband did not have the funds to repay the withdrawn funds within 14 days.
The husband seeks that the wife’s further amended application in a case be dismissed. His evidence is that he has drawn on the Fund in order to meet legal and other costs incurred in the Court proceedings. In his affidavit filed 19 June 2014, the husband deposes at [103] that “I am obliged to withdraw from the fund each financial year”. The husband denies that his withdrawals from the Fund were in breach of the August 2012 orders in that the restraint contained in the orders is limited in scope, and only precludes him from altering the nature or structure of his superannuation fund, rather than from making withdrawals.
He further says in his affidavit filed 5 March 2015 at [42] that the remaining balance in the Fund is negligible and, as of 5 March 2015, comprises approximately $339.00. According to the husband, that fund will be wound up as per the advice of the husband and wife’s accountant. The husband deposes at [44] of that same affidavit that the wife “at all material times had read access to the bank accounts of the Fund and has at all times been aware of the transactions in relation to it”. Given that the Fund has no remaining assets, the husband asserts that any injunctive restraint to prevent him making withdrawals from that Fund would be futile.
Counsel for the husband submitted that in circumstances where the Fund has almost been entirely depleted, there would be no further utility in restraining him from making withdrawals. He further submitted that the wife is already aware of the withdrawals by the husband by reason of her read-only access to the relevant accounts and it is therefore useless to require the husband to account to the wife as per paragraph 8 of the orders sought by her.
At the hearing on 11 March 2015, I asked counsel for the wife why the husband’s withdrawals could not be taken into account and dealt with at the final hearing of the property proceedings. Counsel for the wife submitted that this would require the wife to take a solvency risk in circumstances where the husband’s finances were unknown and where he had not provided a current financial statement. Whilst his evidence remains to be tested the husband has now filed a financial statement.
Although it may be that the husband’s evidence as to the value of B and C, upon which he has based the evidence contained in his financial statement filed 20 March 2015, is accepted, it is equally the case that the evidence as to value upon which the wife relies may be accepted and in those circumstances there would be little or significantly less risk of the husband being unable to satisfy any payment he may be required to make to the wife on account of his withdrawals from the Fund.
The difficulty that I have is that based upon the husband’s financial statement, even if the Court were to determine that the withdrawal of the sum of $197,480 from the Fund was in breach of the order made 13 August 2012, the husband does not have the capacity to repay those amounts he has withdrawn within 14 days as the wife seeks.
In circumstances where I cannot identify any capacity on the husband’s part to repay those amounts he has withdrawn from the Fund in the short term, I do not propose to accede to the wife’s proposal that he should do so now. As there are no further funds that he could withdraw, I am also satisfied that no purpose will be served in restraining him from making any further withdrawals.
In these circumstances I do not consider it necessary at least on an interim basis to determine the dispute as to the interpretation of the order in question or to determine at this stage whether the husband has in fact breached that order.
Notwithstanding that the husband says that the wife has access to the accounts of the Fund and was on that basis aware of the withdrawals, being aware that there have been withdrawals and knowing how those funds have been applied is a very different matter. In those circumstances I propose to require the husband to file an affidavit setting out the details of the various withdrawals and how the funds that were withdrawn have been applied.
The husband remains bound by the orders of 13 August 2012, however so as to avoid any doubt I propose to restrain the husband from winding up the Fund absent the wife’s consent in writing or order of this Court. Ultimately, if the Court were to determine that the husband had made the withdrawals in question from the Fund in breach of the orders, it would be open to the Court to order repayment by him to the Fund. In the absence of further evidence as to why the Fund should be wound up or as to the positives or negatives of requiring repayment to the Fund over other options, I am satisfied that I should leave that option open for the Court at the final hearing.
The Husband’s Response
The husband in his response to the wife’s further amended application in a case sought orders with respect to the payment of his costs in the event of leave being granted to the wife to institute proceedings on behalf of B and C. As I do not propose to grant the wife leave to institute those proceedings it is not necessary to deal with this aspect of the husband’s case.
The husband also sought orders requiring the wife to provide a full accounting together with verifying documentation for all costs expended by her in relation to the proceedings between the husband and the wife in this Court. It is my usual practice to make orders requiring the parties to provide to the Court a statement of costs incurred and I did so in this case on 14 January 2014 and when the matter is again listed for trial a further order will be made in those terms if necessary. If the husband seeks more detailed orders this can be addressed when the matter is listed for mention in order to make the necessary orders and directions in anticipation of a final hearing.
I certify that the preceding one hundred and ninety-eight (198) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Macmillan delivered 6 October 2015
Associate:
Date: 6 October 2015
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