Aliprandi v Griffith Vintners Pty Ltd

Judgment 1By Interlocutory Process filed on 31 January 2014, the Plaintiffs, HY International (Aust) Pty Ltd ("HY International") and Phoenix Explorer Pty Ltd ("Phoenix") apply for leave, in the Court's inherent jurisdiction, for HY International to continue and prosecute all causes of action pleaded in proceedings brought by the Plaintiffs against Ms Clare Huang and others in the name of the Fifth Defendant, Colorado Products Pty Ltd (in prov liq) ("Colorado"). An application for corresponding leave in respect of certain proceedings in the District Court of New South Wales was not pressed, in circumstances that the other parties to those proceedings had not been given notice of the application. The Plaintiffs sought a further order that, if the claims for relief brought in Colorado's name were successful, Colorado's provisional liquidator would be justified in transferring to HY International all monies recovered by or awarded to Colorado and a direction that the provisional liquidator do so when requested by HY International. Several other orders were initially sought in respect of the appointment of a receiver of the rights of action of Colorado but that application was not pressed. 2It is necessary to say something as to the background of this application, which has a long and convoluted history. A provisional liquidator was appointed to Colorado on 14 October 2011, although that appointment did not take effect until 21 October 2011 when a stay expired. A liquidator has not subsequently been appointed to the Company. These proceedings were initially commenced, inter alia, by Colorado, by its provisional liquidator, as plaintiff. When Colorado was party to the proceedings, the provisional liquidator retained the Plaintiffs' solicitors to act for it but HY International paid the costs of those solicitors. The provisional liquidator subsequently assigned all causes of action available to Colorado to HY International on 8 April 2013 and, by my judgment delivered on 22 May 2013 ([2013] NSWSC 611) I granted leave to the Plaintiffs to file a Further Amended Statement of Claim, as amended to name Colorado as a defendant rather than as a plaintiff in the proceedings. The Defendants at that point contended that the assignment required the Court's approval under s 477(2B) of the Corporations Act 2001 (Cth), which the provisional liquidator had not obtained, and that there was an argument that an agreement entered into without such approval was invalid, but accepted that that matter could properly be raised as a defence to the Further Amended Statement of Claim. From at least the point at which the Defendants filed their Defence to the Further Amended Statement of Claim in August 2013, the efficacy of the assignment of the rights by the provisional liquidator to the Plaintiffs, or at least the Plaintiffs' entitlement to assert the rights once assigned, has been denied by the Defendants. In October 2013, the provisional liquidator sought retrospective approval of the assignment, which I gave by my judgment delivered on 6 November 2013 ([2013] NSWSC 1613). 3The Defendants subsequently sought leave to amend their Defence to the Further Amended Statement of Claim to introduce a new paragraph 11C, which elaborated the grounds of the existing denial of the efficacy of the assignment, and I granted such leave in my judgment delivered on 2 December 2013. In doing so, I noted that the Plaintiffs were not shut out of any application to bring a derivative action in the Court's inherent jurisdiction, since it was open to them to seek leave to conduct the proceedings in that manner, nunc pro tunc, if so advised. I then made orders directing the Plaintiffs to use their best endeavours to serve any further application to bring any such derivative action and any supporting evidence by 5 December 2013. In the event, no application was brought by that date but the Defendants take no point as to that matter. The Plaintiffs, in effect, now bring such an application. The evidence in the application 4The Plaintiffs rely on an affidavit of the provisional liquidator dated 28 January 2014. The provisional liquidator refers to the history of his appointment as provisional liquidator and to the orders made in respect of his assignment of Colorado's causes of action to HY International to which I referred above. The provisional liquidator refers to a request from the Plaintiffs' solicitors for assistance in respect of an application for leave in the Court's inherent jurisdiction for HY International to continue the proceedings in Colorado's name. He indicates that he took independent legal advice, although that advice is not in evidence, and has formed the view that it is in Colorado's best interests (including the interests of its creditors) for HY International to continue to prosecute all of Colorado's claims in the proceeding, using Colorado's name in prosecuting those claims and in enforcing the relief if those claims are successful. 5The provisional liquidator notes several matters that lead him to form the view that the dispute is primarily one between shareholders, consistent with his view previously expressed in respect of the application for approval of the assignment of Colorado's cause of action to HY International. He expresses the view that Colorado's "primary claim" is a claim made against Ms Huang that she had misappropriated Colorado's funds and that the quantum of that claim is in the region of about $70,000 up to $140,000, a claim which, I interpolate, may well not have warranted the length and complexity of the proceedings to date. On the other hand, the Defendants contend that the provisional liquidator has misunderstood the nature of Colorado's claim, which they contend is substantially wider. The provisional liquidator expresses the view that, if the "funded litigation" (which I assume refers to the proposed derivative claim) is successful, the primary beneficiaries would be HY International as a secured creditor and his firm. That view seems to be incorrect, at least so far as any derivative action is concerned, since the Plaintiffs seek an order that the recoveries be paid entirely to HY International so that no benefit would accrue to the provisional liquidator's firm. The provisional liquidator also notes that he has been provided with a draft Deed of Indemnity in favour of himself and Colorado and expresses the view that: "I am satisfied that the draft Deed of Indemnity provides both myself and Colorado with sufficient protection and indemnity in the event that the Court permits HY International to prosecute Colorado's claims in the Proceedings and use the name of Colorado in prosecuting those claims." That view may be correct in respect of the provisional liquidator, who is unlikely to need protection where he is not party to the proceedings and it is highly unlikely that the Court would order costs against him, as I will note below; however, it does not seem to be correct in respect of the terms of the draft Deed of Indemnity so far as Colorado is concerned, for reasons that I will also note below. 6A further issue arose in the course of oral submissions, when Mr Harper, who appears for the Plaintiffs, contended that the Court should deliver judgment in respect of this application but not make any orders until after the delivery of the Court's substantive judgment in the proceedings, in which it determined whether the Defendants were successful in their defence that HY International was not entitled to exercise the assigned rights. I understand, from Mr Harper's oral submissions, that this suggestion was directed to a possibility, which had not been raised by the Defendants, that the Court could not grant leave to bring a derivative action in Colorado's name if, as the Plaintiffs contended as their primary position, the relevant rights have already been assigned to HY International and were able to be enforced by it. It may be that this difficulty is more apparent than real since, as I noted in my judgment delivered on 2 December 2013 (at [13]), even if the rights remain in Colorado, it is clear that the provisional liquidator does not seek to assert them, because he has sought to assign them to the Plaintiffs 7The approach proposed by Mr Harper would have given rise to a significant practical difficulty where the draft Deed of Indemnity proposed by HY International relates only to costs "relating to the period after the date of this Deed" (see definition of "Order for Costs"), and deferring the execution of that Deed until after the delivery of the Court's substantive judgment could well deprive it of any practical efficacy. In the event, it does not seem to me that this difficulty arises, because I do not consider that the Court should grant the leave sought for the reasons set out below. In that situation, no difficulty arises from making an order dismissing the Interlocutory Process that has immediate effect. Matters relevant to the grant of leave to bring a derivative action 8Both parties assumed, and I will also assume without deciding for the purposes of this application, that an application for leave to bring a derivative action, where a company is in provisional liquidation, is to be brought in the Court's inherent jurisdiction rather than under ss 236-237 of the Corporations Act 2001 (Cth). My attention was not drawn to any authority dealing with that matter. It is not necessary to determine that matter, given the other views which I have reached below, which would be equally applicable if the present application had been brought under ss 236-237 of the Corporations Act rather than in the Court's inherent jurisdiction. 9It was common ground between the parties that the Court has an inherent jurisdiction to permit proceedings to be taken in the name of a company in liquidation upon the application of a creditor or contributory and it was also common ground between the parties, and I accept, that relevant factors in such an application include whether the proceedings proposed to be pursued have some solid foundation, in that they exhibit such a degree of merit as to be neither vexatious nor oppressive and to present reasonable prospects of success; the liquidator's attitude to the question whether the proceedings should be pursued; and whether "practical considerations support the initiation of the proceedings", with particular reference to financial protection of the liquidator and the company's estate by means of indemnity and, if indicated, security: Aliprandi v Griffith Vintners Pty Ltd (in liq) (1991) 6 ACSR 250 at 252; Brightwell v RFB Holdings Pty Ltd (in liq) [2003] NSWSC 7; (2003) 44 ACSR 186 at [45]; Carpenter v Pioneer Park Pty Ltd [2008] NSWSC 551; (2008) 66 ACSR 564 at [34]; Hu v PS Securities Pty Ltd as trustee of the Joseph Family Trust [2011] NSWSC 303 at [38]; Staway Pty Ltd (in liq) (recs and mgrs apptd) [2013] NSWSC 819 at [25]. It also appeared to be common ground that these matters are not exhaustive, since the grant of leave in the Court's inherent jurisdiction requires the exercise of the Court's discretion to which other matters might also be relevant. 10The Defendants conceded, for the purposes of this application, that the proceedings satisfied the first of those requirements. The provisional liquidator's affidavit made clear that he supported the grant of leave, although I have noted above that there seemed to me to be significant difficulties with the reasoning which led him to that view. The substantial issue in dispute in this application was whether practical considerations supported the initiation of the proceedings and, in particular, the nature of any indemnity which was required to protect Colorado's estate. The importance of an adequate indemnity to protect the assets of a company in liquidation, where leave to bring a derivative action is sought, has frequently been emphasised in the cases: Scarel Pty Ltd v City Loan & Credit Corporation Pty Ltd (Supreme Court (NSW), Bryson J, 10 December 1987, unrep), where Bryson J treated the absence of an adequate indemnity in respect of the Company's exposure as to costs as the most significant matter relevant to the exercise of his Honour's discretion whether to grant such leave; Cadima Express Pty Ltd (in liq) v Deputy Commissioner of Taxation [1999] NSWSC 1143; (1999) 33 ACSR 527 at [49]; Carpenter above at [57]. 11The Defendants relied, in opposition to the application, on a letter dated 30 January 2014 from their solicitors to the Plaintiffs' solicitors. That letter advanced several criticisms of the proposed indemnity to be provided by HY International, namely that the indemnity was offered by HY International, which did not have assets which would give the indemnity any substance, and not by those standing behind HY International; that any costs order against Colorado, if it were joined as plaintiff to the proceedings, would be effectively worthless where it was in provisional liquidation; that the existing security for costs ordered in the proceedings would not provide the level of protection which would be provided by an indemnity in respect of Colorado's liability for costs in the proceedings; and that the form of Deed of Indemnity proposed by HY International is not adequate because it only extended to future costs, did not operate prior to the assessment of taxation of costs in the proceedings, was liable to termination by HY International at its discretion and was subject to specified exclusions. 12I accept the Defendants' submissions as to the inadequacy of the proposed form of indemnity. First, that proposed indemnity relates only to costs from the date of the Deed. Clause 3.1 provides an indemnity from and against any "Order for Costs" as defined made "from the date of this Deed up to the date of termination or conclusion of this Deed"; and the term "Order for Costs" is in turn restricted to "costs in the proceedings relating to the period after the date of this Deed". The proposed Deed of Indemnity has not yet been executed and, if the approach proposed by Mr Harper were adopted, would not be executed until the point of final judgment in the proceedings; indeed, it might well not be executed at all if judgment at that point is unfavourable to HY International and its willingness to execute such an indemnity then abates. Quite apart from that fundamental difficulty, an indemnity for future costs falls short of the liability to which Colorado would be exposed by bringing the proceedings, which may extend to the costs of the proceedings as a whole, not only the costs after the date in which it has been joined as an additional plaintiff. 13Second, the indemnity does not continue beyond the termination of the Deed (cl 3.1) and HY International is entitled to terminate the Deed as its discretion, subject to giving 14 days notice, which need not be given to the Defendants (cl 5.2). The right to an indemnity for costs incurred prior to termination of the Deed is not preserved after termination of the Deed. The indemnity in favour of Colorado is therefore fragile, since it subsists only so long as HY International wishes it to subsist and could be removed by termination of the Deed between the point of a judgment unfavourable to Colorado and the making of an order for costs against it. Third, the indemnity is only available after Colorado and the provisional liquidator have first had recourse to any insurance cover or any other indemnity available to them (cl 3.2). Fourth, the indemnity does not extend to fraudulent, unreasonable or negligent conduct of Colorado (cl 3.5), a provision that seems to me to have uncertain operation where any such exclusion could potentially arise from steps taken by HY International in conducting the litigation in Colorado's name. Fifth, the indemnity terminates if the provisional liquidator ceases to be provisional liquidator or Colorado is wound up (cl 5.3), where there seems to me no good reason to deprive Colorado (and indirectly the Defendants) of the benefit of that indemnity in that situation. 14In answer to the Defendants' criticisms of the nature of the indemnity, HY International responds that it will provide an indemnity in favour of the provisional liquidator and Colorado which, when executed, will be valid and enforceable. With respect, that proposition seems to me to provide no answer to the difficulties with the present form of the indemnity to which I have referred above. HY International also responds that the provisional liquidator has deposed that he is satisfied that the draft Deed of Indemnity provides himself and Colorado with sufficient protection and indemnity as I have noted above. As I have also noted above, it seems to me that the provisional liquidator was incorrect in forming that view. HY International also submits that the requirement for an indemnity in respect of a derivative action is for the protection of the liquidator and Colorado and not for the protection of the Defendants. That proposition is not supported by the case law. In Cadima above at [49], Austin J noted that: "The Court will wish to be satisfied that the assets of the company in liquidation are not put at risk by the proceedings and that the liquidator is not exposed to personal liability without proper protection, and may also properly have regard to the risks which the litigation poses for the other party, given that the plaintiff is a company in liquidation, the assets of which are to be protected." (emphasis added) An adequate indemnity in favour of the liquidator and Colorado may well operate to the indirect benefit of the Defendants, by allowing a resource from which their costs may be met. In any event, in the present case, the proposed indemnity is not adequate for the protection of Colorado, for the reasons that I have noted above. 15The Plaintiffs submit that the Defendants have the benefit of "sufficient security" in that the Court has ordered security for costs in the amount of $600,000, following several applications for security for costs which were contested at least in part, and that there is "no substantive change in the proceedings" and "all that will happen is that the proceedings will be technically reconstituted as a mere formality" and this does not justify a further award of security. I do not accept this submission. First, the addition of Colorado as a plaintiff in the proceedings seems to me to be a substantive change, in that it will expose Colorado to potential liability for the costs of the entirety of the proceedings, and will also potentially provide an answer to the defence presently raised by the Defendants in paragraph 11C of the Defence. There seems to me to be no reason to treat the grant of leave to bring derivative proceedings by Colorado in this application as any less substantive as any other application for such leave, and the principle that Colorado should be indemnified against the resulting costs exposure has been consistently accepted in the authorities as I noted above. Second, so far as HY International seeks to improve its position, and particularly its ability to respond to the challenge of the efficacy of the assignment raised by the Defence, there seems to me to be no less reason to require that it protect Colorado against the resulting exposure to costs, albeit that such protection will indirectly also protect the position of the Defendants. 16The Plaintiffs also contend that any indemnity is unlikely to be called upon because, if HY International is unsuccessful, it will be liable to pay any costs of the proceedings. With respect, that submission ignores the obvious practical consequence of the facts that (1) as is common ground, HY International does not have sufficient assets to meet the costs of the proceedings; (2) as is also common ground, the Defendants' costs of the proceedings will substantially exceed the amount of security for costs which has been ordered, as is commonly the case; (3) as also appears to be common ground, an order for costs against a liquidator who is not a party would not be made where the use of Colorado's name in the proceedings was authorised by the Court, for the reasons noted in Aliprandi above at 253; (4) as the necessary consequence of those matters, HY International will in fact be unable to meet the entirety of the Defendants' costs if it is unsuccessful in the proceedings; and (5) in that situation, there would be every reason for the Defendants to seek to recover costs against Colorado, to the extent that the security for costs and HY International's assets are unable to meet those costs. 17In the course of oral submissions, Mr Harper also submitted that the Court could impose a condition on the grant of leave requiring HY International to meet any costs order against Colorado. I am not inclined to grant leave subject to such a condition, where it was open to HY International itself to offer an undertaking to that effect if it wished to do so and where, in any event, such an undertaking would not adequately protect the Company's position where HY International does not have sufficient assets to satisfy an order for costs against it. I do not consider that it is necessary or appropriate for the Court to specify what would be necessary to provide an adequate indemnity in respect of the costs exposure to which Colorado would be subjected by the grant of leave to bring derivative proceedings in its name. It is sufficient for present purposes to note that the Deed of Indemnity presently proposed by HY International or the alternative that HY International (a company without assets sufficient to meet a judgment for costs) would accept liability for costs ordered against Colorado, both fall well short of providing an adequate indemnity. 18Given the conclusion that I have reached above, it is not necessary to determine another question that I raised with Mr Harper in the course of oral submissions, whether it would have been appropriate to grant leave to bring a derivative action to only one of the two shareholder interests in conflict, in a contested shareholder dispute where allegations were made of wrongful conduct on the part of both parties. Since I am not satisfied that I should grant the leave sought, no question arises of giving a direction to the liquidator that he would be justified in paying any monetary recovery by Colorado to HY International, still less making any mandatory order requiring him to do so. 19For these reasons, the interlocutory application should be dismissed and the Plaintiffs should pay the Defendants' costs of the application, which seems to me to have raised a discrete issue. There is no reason why that order should not be made now, rather than deferred to the date of final judgment in the proceedings. Accordingly, I make the following orders: 1 The Plaintiffs' Interlocutory Process filed on 31 January 2014 be dismissed. 2 The Plaintiffs pay the costs of the application as agreed or as assessed.