This is an application for judicial advice pursuant to s 63 of the Trustee Act 1925 (NSW). The plaintiff seeks advice as to: (1) whether it is necessary for the plaintiff to obtain judicial advice as a condition of it having a right of indemnity for any costs orders made against it in proceedings NSD425/2016 in the Federal Court and (2) whether it is appropriate for the plaintiff to continue to conduct the Federal Court proceedings and to indemnify itself out of the property of the superannuation fund in ARF Investments Pty Ltd for all of its legal costs on an indemnity basis.
On 23 March 2013, the plaintiff, Bideena Pty Ltd (Bideena), commenced proceedings in the Federal Court by way of originating process against six defendants.
On 21 April 2016, the defendants in the Federal Court proceedings applied for security for costs on the basis that Bideena is required to obtain judicial advice before commencing the proceeding in order for Bideena to indemnify itself out of the property of the superannuation fund.
Bideena agreed to obtain judicial advice notwithstanding that Bideena's position is that it is not necessary for it to do so in order to have a right of indemnity (Short Minutes of Order of Markovic J, 21 April 2016).
[2]
Background facts
Bideena is the corporate trustee of the Bideena Super Fund. The directors and only shareholders of Bideena are Jennifer and Christopher Bevan.
Bideena's claims in the Federal Court largely relate to allegations of oppressive conduct within the meaning of s 232 of the Corporations Act 2001 (Cth) on the part of ARF Investments Pty Ltd (ARF Investments) and its subsidiary Agricultural and Rural Finance Pty Ltd (ARF).
By way of overview, ARF (the third defendant in the Federal Court proceedings) provided loans to a total of about $10 million to investors in tea tree oil projects between June 1997 and June 1999. ARF's sole business since January 2003 has been litigation seeking to recover the loans and interest. The sole directors of ARF until September 2012 were Anthony and Richard Sark (the Sark brothers).
Mr Bevan has acted as a barrister for ARF in litigation since about 2006. Mr Evangelos Patakas (the fifth defendant in the Federal Court proceedings) has acted as solicitor for ARF under the name "Evangelos Patakas and Associates" (EPA) in its dealings with borrowers and third parties since about July 2006.
In 2012, ARF loaned funds held on trust for the legal costs of Mr Bevan and Mr Patakas to related parties CaTTO, Felicity Cassegrain and OAL. ARF's then directors, the Sark brothers, subsequently considered placing ARF into liquidation.
What instead transpired was that on 15 August 2012, ARF Investments Pty Ltd (ARF Investments), the second defendant in the Federal Court proceedings, was incorporated as a holding company for ARF. The Sark brothers resigned as directors and transferred two $1 shares in ARF Investments to the super funds of each of Mr Bevan and Mr Patakas on 26 September 2012.
Growth Super Fund Pty Ltd (Growth Super) is the trustee of the Patakas Superannuation Fund (the first defendant in the Federal Court proceedings). Mr Patakas is the sole director and shareholder of Growth Super.
Mr Patakas' sister, Anastasia Patakas (the fourth defendant in the Federal Court proceedings) subsequently became sole director of ARF and ARF Investments (after a short interim period in which Mr Bevan's son was also director prior to conversion to sole director companies). Bideena alleges that Mr Patakas is also a de facto director of ARF Investments within the meaning of the definition of "director" in s 9(b) of the Corporations Act 2001 (Cth).
Bideena alleges that the appointment of Ms Patakas as sole director was pursuant to an agreement that Mr Bevan would remain as counsel for ARF (for the sake of continuity and on account of the complexity of the length proceedings) and would therefore have no role in the management of ARF.
On 29 August 2013, Goeke Investments Finance Pty Ltd (Goeke) (the sixth defendant in the Federal Court proceedings) loaned about $500,000 to ARF on 29 August 2013 secured by a registered charge over ARF's property. The sole director and shareholder of Goeke is Nina Freeman, the de facto wife of Mr Patakas. Bideena alleges that Mr Patakas is also a de facto director of Goeke.
The solicitor for Goeke has sworn an affidavit stating that the balance of the loan remaining to be repaid as at 8 April 2016 was $30,685. Bideena alleges that Mr Patakas procured Goeke to not fully repay the loan for the reason of preserving Goeke's right to appoint a receiver to ARF's property in order to control the affairs of ARF if ARF is placed into administration or there is a charge of director/shareholders ordered by the Court.
Bideena's claims in the Federal Court relate to allegations of oppressive conduct within the meaning of s 232 of the Corporations Act 2001 (Cth) on the part of ARF Investments Pty Ltd (ARF Investments) and its subsidiary Agricultural and Rural Finance Pty Ltd (ARF).
Bideena submits that the following omissions on the part of ARF constitute oppressive conduct within the meaning of s 232:
omitting to recover costs under costs orders in favour of ARF from late 2012 to late 2015
failing to re-enliven proceedings against the remaining 20 borrowers whose loans have not been repaid and failing to prosecute claims against related-party borrowers or lodge proof of debt for ARF with OAL's liquidator
omitting to pay moneys received as at December 2014 ($2.1 million) to ARF's creditors
omitting to prepare financial statements since September 2012 for 2010-2015 financial years
failing to take the steps above to enable tax returns to be prepared and lodged and income tax to be paid to enable after tax profits to be calculated as a basis for declaration and payment of dividends
In relation to ARF Investments, the oppressive conduct is said to be constituted by:
omitting to cause ARF Investments to take actions to remedy omissions of Ms Patakas as director of ARF
omitting to prepare financial statements since September 2012 for 2010-2015
failing to take the steps above to enable tax returns to be prepared and lodged and income tax paid by ARF to enable after tax profits to be calculated as a basis for the declaration and payment of dividends to ARF Investments
Other claims in the originating process include a claim against Mr Patakas as a de facto director of ARF and a claim against Goeke.
[3]
Principles
Section 63 of the Trustee Act 1925 (NSW) provides that:
(1) A trustee may apply to the Court for an opinion advice or direction on any question respecting the management or administration of the trust property, or respecting the interpretation of the trust instrument.
(2) If the trustee acts in accordance with the opinion advice or direction, the trustee shall be deemed, so far as regards the trustee's own responsibility, to have discharged the trustee's duty as trustee in the subject matter of the application, provided that the trustee has not been guilty of any fraud or wilful concealment or misrepresentation in obtaining the opinion advice or direction.
…
The plurality of the High Court in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 described s 63 as a discretionary power that is confined only by the "subject matter, scope and purpose" of the Act ([59]-[60]). No implications that are not found in the express words of s 63 should be read into that provision (55). The only "jurisdictional bar" that must be satisfied is that the applicant must point to a "question respecting the management or administration of the trust property or a question respecting the interpretation of the trust instrument" ([56]-[58]).
In its written submissions, Bideena submits that s 63 is enlivened in the present case because Bideena is seeking advice as a trustee with respect to the management and administration of trust property, namely the share held on trust in ARF Investments.
The plurality in Macedonian Orthodox also indicated that the application of s 63 "will tend to vary with the type of trust involved". Their Honours remarked at [67]-[68]:
… Where there is a non-charitable private trust involving a conflict between beneficiaries, or between beneficiaries alleging a breach of trust out of which a trustee has profited and that trustee, and where the defendants in those proceedings have a personal capacity to fund the defence, it might not be correct to give the trustee an opinion, advice or direction. The position is not necessarily the same where the trust is for a charitable purpose, where the public interest is involved since ex hypothesi the trust is beneficial to the public, where none of the contestants in the litigation about the trust is suing or defending in order to augment, defend or seek the restoration of personal assets, and where a crucial question is the precise terms of the purpose for which the trust exists.
Nor is the position necessarily the same where the charitable trust is for religious purposes: since religious controversies do not commonly come before the courts unless they involve disputes about property rights they will often take the form of an allegation of breach of trust and a claim that the trustee be removed. That circumstance may have less weight against the grant of the opinion, advice or direction than it would in disputes about a private trust.
While the present case involves a non-charitable private trust, there is no conflict between the beneficiaries of the trust or between the trustee and the beneficiaries. Undoubtedly, however, the context of the application for advice remains important. As the plurality emphasised in Macedonian Orthodox, every application under s 63 depends on its own facts ([52]).
The plurality also noted that, where a trustee seeks judicial advice as to the conduct of litigation, the stage that the litigation has reached may be a relevant consideration. Their Honours remarked at [106] that:
[W]hile the time and cost involved in giving judicial advice at an early stage of litigation, when the issues involved in disputes about rights may not be fully sharpened and it may not be possible for the factual position to be as efficiently exposed as in a trial, may be factors relevant to a decision not to grant judicial advice but to let the matter be examined in conventional litigation, they are not factors which either automatically bar judicial advice or are so weighty as generally to compel the court not to grant the advice.
In the present case, while the litigation in the Federal Court is not well advanced, the defendants have sought security for costs. In such circumstances, it is desirable in my view to grapple with the question now lest the proceedings in the Federal Court potentially be stifled.
[4]
Judicial advice as a condition of indemnity
In written submissions, Bideena notes that the defendants in the Federal Court proceedings argue that Macedonian Orthodox is authority for the following:
(a) A trustee's right of indemnity for an unsuccessful court action is to be treated as at risk in the absence of judicial advice as to whether the trustee was justified in pursuing the action.
(b) That degree of risk has a low threshold, which low threshold is satisfied in the absence of judicial advice, and it is thus appropriate to order security for costs.
In Macedonian Orthodox, Gummow ACJ, Kirby, Hayne and Heydon JJ noted that a purpose of s 63 is to enable trustees "to take advice before embarking on any course which might carry a risk of incurring costs that might be outside the indemnity" (at 93). Their Honours continued (at 93-4):
[71] In short, provision is made for a trustee to obtain judicial advice about the prosecution or defence of litigation in recognition of both the fact that the office of trustee is ordinarily a gratuitous office and the fact that a trustee is entitled to an indemnity for all costs and expenses properly incurred in performance of the trustee's duties. Obtaining judicial advice resolves doubt about whether it is proper for a trustee to incur the costs and expenses of prosecuting or defending litigation. No less importantly, however, resolving those doubts means that the interests of the trust will be protected; the interests of the trust will not be subordinated to the trustee's fear of personal liability for costs.
…
[74] A necessary consequence of the provisions of s 63 of the Act is that a trustee who is sued should take no step in defence of the suit without first obtaining judicial advice about whether it is proper to defend the proceedings. In deciding that question a judge must determine whether, on the material then available, it would be proper for the trustee to defend the proceedings. But deciding whether it would be proper for a trustee to defend proceedings instituted about the trust is radically different from deciding the issues that are to be agitated in the principal proceeding. The two steps are not to be elided. In particular, the judicial advice proceedings are not to be treated as a trial of the issues that are to be agitated in the principal proceedings.
In Northey v Juul [2014] NSWSC 464, Slattery J stated at [105]:
[A]lthough the High Court has said in clear terms that "a trustee who is sued should take no step in defence of the suit without first obtaining judicial advice as to whether it is proper to defend the proceedings: Macedonian Orthodox at [74], (2008) 237 CLR 66, at 94 [74], this in my view is not to be read as overturning existing authority that would allow indemnity to successful trustees after the conclusion of litigation.
His Honour referred in particular to Lindley LJ's remarks in In Re Beddoe (1893) 1 Ch D 547 to the effect that "a trustee who without the sanction of the Court … unsuccessfully defends an action, does so at his own risk", that risk being the risk of the trustee's costs of unsuccessfully litigating for which the indemnity is being sought having been "improperly incurred" (557-558).
Similarly, in Perpetual Investment Management Ltd as Responsible Entity for 10 Schemes listed in the Summons [2014] NSWSC 784, Robb J considered Macedonian Orthodox and remarked that:
[54] The plurality also recognised at [106] that there may be factors that justify a decision not to grant judicial advice, but to let the matter be examined in conventional litigation.
[55] If it is true that there are cases when advice under s 63 should not be given to a trustee in respect of the trustee's position in litigation, it must follow that there are cases when a trustee is not required to seek judicial advice before it takes a step in defence of a suit against it
…
[65] I strongly doubt that Perpetual in the present case was obliged by its duties as responsible entity to make the present application for judicial advice, or that anything said in the Macedonian Bank case was intended to have a contrary effect, given the context outlined above.
Thus, the High Court's remarks in Macedonian Orthodox have not been taken to imply that a trustee who embarks upon litigation having not obtained judicial advice loses any right of indemnity.
In my opinion, the better view of the authorities importantly Macedonian Orthodox is that it is not obligatory on the part of a trustee to first seek judicial advice before bringing or defending a claim. The High Court in Macedonian Orthodox said no more than that it was desirable that trustees in doubt as to a cause of action seek advice under s 63 rather than rely on s 85 after the event ([36]).
In written submissions, however, Bideena focussed upon what it submits was an "adoption" by the High Court (at [46]-[48]) in Macedonian Orthodox of observations made in In re Beddoe [1893] 1 Ch 547. In Beddoe, Lindley LJ stated that:
[A] trustee who, without the sanction of the Court, commences an action or defends an action unsuccessfully, does so at his own risk as regards the costs, even if he acts on counsel's opinion; and when the trustee seeks to obtain such costs out of his trust estate, he ought not to be allowed to charge them against his cestui que trust unless under very exceptional circumstances …
Bideena submits that the present case is "exceptional" within the meaning of Beddoe and that judicial advice as to whether the trustee is justified in pursing the proceedings is therefore unnecessary. The reasons given by Bideena as to why this case is "exceptional" can be summarised as follows:
the Superannuation Industry (Supervision) Act 1993 (Cth) requires the beneficiaries (Mr Bevan and his wife) to be directors of the trustee company, and both of the director-beneficiaries support the Federal Court proceedings (Mr and Mrs Bevan have both sworn affidavits to the effect that they met as the board of Bideena on 19 February 2016 and resolved to bring the Federal Court proceedings)
Counsel's advice has been obtained
the trust deed (cl A6.1 and 5.2(b)) empowers the trustee to institute and conduct any legal proceedings concerning the Fund, and provides for indemnity of the trustee against any liability incurred in the exercise or performance of its powers and duties
the Superannuation Industry (Supervision) Act provides that a provision that would purport to exclude or limit the trustee's indemnity would be void, and so the indemnity cannot be limited or excluded by failure to obtain judicial advice
I am of the view that the above is a correct analysis.
I should note that I also accept Counsel's submissions that s 56(2A) of the Superannuation Industry (Supervision) Act does not apply in the present case as a self-managed superannuation fund such as Bideena is not a "registrable superannuation entity" within the meaning of s 10 of the Act.
[5]
Entitlement to indemnity
The plurality in Macedonian Orthodox emphasised that s 63 is summary in character; it seeks to provide a cheap and simple means of determining the question at hand ([61]-[63]).
That the facts alleged in an application under s 63 are contested does not mean those alleged facts should be disregarded; instead, s 63(2) provides a safeguard in that the trustee will lose the protection of any opinion, advice or direction if guilty of any fraud or wilful concealment or misrepresentation (Macedonian Orthodox [79]-[80]).
Where the application is supported by an opinion of Counsel that is confidential, it may be difficult for a judge to provide reasons that are as full as would otherwise be given (Macedonian Orthodox [161]). I should note that for the purposes of the present proceedings, Counsel have provided a confidential Opinion and that there has been no waiver of privilege: see Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar, the Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand [2006] NSWCA 160 at [53].
While there is a distinction between the question as to whether, on the one hand, it is in the best interests for the trust estate for litigation to be conducted, and on the other hand, whether the trustee should be entitled to indemnity out of the trust property for its reasonable costs of litigation, the two questions are interrelated. As noted by the plurality in Macedonian Orthodox, where the conduct of litigation is in the best interests of the trust, how those proceedings are to be conducted "as a matter of practicality" must be considered. The financial capacity of the applicant is relevant in determining whether the applicant is entitled to be indemnified out of the trust property with respect to reasonable costs of litigation ([82]-[85]).
The plurality of the High Court in Macedonian Orthodox cited without disapproval the following remarks of Palmer J (Re Application of Macedonian Orthodox Community Church St Petka Inc (No 3) [2006] NSWSC 1247 at [80]):
In a judicial advice application in which the trustee asks whether it is justified in prosecuting or defending litigation, all the Court does is to reach a view as to whether the Opinion of Counsel satisfies it that there are suffıcient prospects of success to warrant the trustee in proceeding with the litigation. Counsel's Opinion must address the facts necessary to support the legal conclusions reached and must demonstrate that the propositions of law relied upon for those conclusions are properly arguable. Whether, in the light of Counsel's Opinion, there are 'suffıcient' prospects of success calls for another judgment, founded upon such considerations as:
- the nature of the case and the issues raised;
- the amounts involved, including likely costs
- whether the likely costs to be incurred by the trustee are proportionate to the issues and [the] significance of the case;
- the consequences of the litigation to the parties concerned;
- in the case of a charitable trust, any relevant public interest factors."
The plurality noted ([162]-[164]) that Palmer J's remarks should not be interpreted as drawing a distinction between mere "sufficiency" and "strength" and emphasised that Palmer J had considered the "merits and strengths of the claim" as a relevant factor.
In Re Rosewood Research Pty Ltd (No 2) [2014] NSWSC 1226, Darke J remarked that:
[17] There was no hint of disapproval of any aspect of Palmer J's statement, but I do not think that the High Court, by its reference to the passage, was intending to state that in all cases where a trustee seeks advice as to whether it should defend proceedings, it is essential that the opinion of counsel must satisfy the requirements suggested by Palmer J, and the Court reach a view, based upon the considerations identified by Palmer J, that there are sufficient prospects of success to warrant the Trustee proceeding to defend.
[18] Undoubtedly, the matters referred to by Palmer J are relevant matters to consider in such a case. Nonetheless, it would be a mistake to read his statement as if it prescribed the manner in which the power to give advice under s 63 of the Trustee Act 1925 (NSW) is to be exercised in all such cases. As was stated in the joint judgment in the Macedonian Church case at [59] (and see also Kiefel J at [196]) the discretion to give advice under s 63 is confined only by the subject matter, scope and purpose of the legislation. It is clear, however, that the interests of the trust estate is always of cardinal significance (see the Macedonian Church case at [104], [105], [107], [125], [196] and [197]).
In Re: Application of the Anglican Property Trust Diocese of Bathurst [2016] NSWSC 13, Slattery J also appeared to cite the remarks of Palmer J without any disapproval (at [10]-[13]). In that case, his Honour found that the trustee would be justified in defending the proceedings and using the resources of the trust to do so on the basis that (1) in Counsel's opinion, the defence had "reasonable prospects of success", (2) the Court concludes that the trustee's case is "not unarguable" and "seems reasonably maintainable" and (3) the trustee is the proper contradictor to the plaintiffs' claims ([16]-[19]).
The remarks of Palmer J were similarly cited by Davies J in Jax Quickfit Franchising Systems Pty Ltd as Trustee for the Jax Quickfit Franchising Systems Unit Trust [2012] NSWSC 1114 seemingly without disapproval (at [26]).
[6]
Federal Court proceedings
Counsel for Bideena submit that the claims of oppression and claims against Mr Patakas and Goeke have reasonable prospects of success. For reasons which follow, I have formed a prima facie view that is correct, on the materials before the court.
[7]
Oppression claim
As Bideena is a member of ARF Investments rather than the subsidiary ARF, the oppression claim in the Federal Court proceedings has been pleaded as a failure on the part of ARF Investments to take action to prevent ARF's conduct.
I am of the view that that approach is arguable on the basis of Derrington J's observations in Re Norvabron Pty Ltd No 2 (1986) 11 ACLR 279 at 292 that:
It has been argued that this conduct upon which the application relies is limited to the affairs of Transfield (Qld), whereas the application is necessarily directed at Norvabron, and the suggestion is that the directors of Norvabron have not been shown to be at fault in the affairs of that company in the same way as they were in respect of Transfield (Qld). However, such an approach is artificial in the extreme. The technical answer is that the directors of Norvabron knew very well what was happening in respect of Transfield (Qld) because they were the persons involved. By their omission to take action as directors of Norvabron to prevent their own conduct as directors of Transfield (Qld), which of course was open to them and was their duty, they were guilty of an omission to remedy the situation.
See also IceTV Pty Ltd v Ross [2008] NSWSC 1321 at [13] (Slattery J) and Re Dernacourt Investments Pty Ltd (1990) 20 NSWLR 588 at 616 (Powell J).
Counsel submit that the present involves a case of "sit on their hands oppression" (T2) within the meaning of s 232 of the Corporations Act 2001 (Cth).
Section 232 provides that:
The Court may make an order under section 233 if:
(a) the conduct of a company's affairs; or
(b) an actual or proposed act or omission by or on behalf of a company; or
(c) a resolution, or a proposed resolution, of members or a class of members of a company;
is either:
(d) contrary to the interests of the members as a whole; or
(e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.
For the purposes of this Part, a person to whom a share in the company has been transmitted by will or by operation of law is taken to be a member of the company.
The concept of "contrary to the interests of the members as a whole" is independent of the "oppressive, unfairly prejudicial or unfairly discriminatory" ground: Turnbull v National Roads and Motorists' Association Ltd (2004) 50 ACSR 44 at [32] per Campbell J.
Whether conduct is contrary to the interests of the members as a whole is determined by reference to whether the conduct adheres to accepted standards of corporate behaviour or is in accordance with how reasonable directors would act in attending to the affairs of the company: Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534 at [42]-[44]. Attention is to be directed not to the interests of the persons who are in fact members but rather the interests of an individual hypothetical member: Goozee at [42].
In Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459, Brennan J described the phrase "oppressive to, unfairly prejudicial to, or unfairly discriminatory against" as concerned with:
… whether reasonable directors, possessing any special skill, knowledge or acumen possessed by the directors and having in mind the importance of furthering the corporate object on the one hand and the disadvantage, disability or burden which their decision will impose on a member on the other, would have decided that it was unfair to make that decision.
It has been said that the "history and structure of the particular company and the reasonable expectations of the members" are to be taken into account in determining whether the detriment to the complaining member's interests is "justifiable": Thomas v HW Thomas Ltd [1984] 1 NZLR 686 at 694 (Richardson J); Re Ledir Enterprises Pty Ltd (2013) 96 ACSR 1 at [179] (Black J).
Oppression will not be found merely on the basis that the company has been mismanaged or managed poorly: Donaldson v Natural Springs Australia Limited [2015] FCA 498 at [250]; Ananda Marga Pracaraka Samgha Ltd v Tomar (No 6) (2013) 300 ALR 492 at [417].
Counsel for Bideena submits that there is a "prima facie" case of oppression. Counsel has identified with reference to the documents filed the evidentiary materials which it is submitted establish a prima facie case.
Bideena relies upon Mr Bevan's affidavit sworn 23 March 2016. Mr Bevan's evidence is to the effect that:
ARF's most recent financial accounts and tax returns were for the year ended 30 June 2009;
In late 2014, Mr Patakas refused to ask questions proposed by Mr Bevan to Northcorp Accountants;
Mr Patakas refuses to report discussions with the ATO or provide correspondence between Mr Patakas and the ATO about ARF to Mr Bevan;
Mr Patakas has "taken no steps since mid-2008 to recover loans against the remaining 20 borrowers whose loans remain unpaid, in the case of all but two of those 20 borrowers, and since March 2011 in the case of two of those borrowers" with respect to the loans originally made by ARF in 1997-2000;
Mr Patakas has failed to provide particulars to the lawyers of CaTTO and Ms Cassegrain;
Mr Patakas has failed to lodge proof of debt for ARF with OAL's liquidator;
Mr Patakas has refused to commence proceedings against the Sark brothers on behalf of ARF;
Mr Patakas has failed to have assessed and paid ARF's costs in litigation where costs orders were made in favour of ARF;
Mr Patakas has left a small amount of ARF's debt to Goeke outstanding in order to keep alive Goeke's charge over ARF's property
Bideena also relies on the following materials annexed to that affidavit:
ARF's financial statements for the year ended 30 June 2009;
ARF's ATO itemised account;
Draft schedules of loans and draft profit and loss statements from 2009-2013 allegedly prepared by Mr Patakas;
Correspondence between ARF and Northcorp Accountants about professional fees;
A letter from Mr Patakas to Mr Bevan dated 24 November 2014 noting that ARF needs to prepare tax returns for 2010-2013 and enclosing accounting records received from Northcorp and summary schedules/drafts;
A "Memorandum of questions to Northcorp Accountants"
A letter from Mr Bevan to Mr Patakas dated 21 May 2015 enclosing a draft bill of costs for costs orders made in favour of ARF;
An "Agenda for meeting of 22 June 2015" between Mr Bevan and Mr Patakas
Correspondence from Mr Bevan to Ms Patakas dated 21 July 2015 requesting a controlled money statement showing receipts and disbursements of money into and out of the ledger account for ARF in the EPA controlled money account from 1 January 2008 to date;
Correspondence from Mr Bevan to Mr Patakas dated 21 July 2015 requesting all outstanding costs and Counsel's fees be paid;
A list of litigation in which ARF has been involved from AustLII;
Bills of costs between Mr Bevan and EPA;
Correspondence between Kanjian & Company (acting for Bideena) and WKA Legal Pty Ltd (acting for EPA) from January to March 2016.
Bideena further relies upon its Statement of Claim filed in the Federal Court dated 19 April 2016.
Bideena then relies upon the affidavits of Mr Bevan sworn 11 and 12 April 2016. In the affidavit dated 12 April 2016, Mr Bevan states that he believes that a "life-threatening bout of viral meningitis" suffered by Mr Patakas about six years ago has led to a "serious psychological deficit", the effect of which has, so it seems, profoundly affected Mr Patakas' productivity.
Bideena also relies upon the affidavit of Mr Bevan's son James Bevan sworn 17 April 2016. In his affidavit, James Bevan recalls being asked to act as a director of ARF and ARF Investments temporarily in 2012. His evidence is that he was subsequently employed by Mr Patakas part-time from 2013 to 2015. He states that in mid-August 2014, he observed Mr Patakas referring to a 2012 calendar. His evidence is that Mr Patakas said words to the effect that "when you backdate ASIC documents you have to make sure the dates match up with whatever is happening and that the dates don't clash". James Bevan alleges that Mr Patakas asked him to sign documents dated 2012 which he did not read. It is alleged that the document signed by James Bevan was a share certificate of ARF Investments dated 15 August 2012.
Bideena further relies upon an affidavit sworn by Mr Bevan on 20 April 2016. In this document, Mr Bevan responds to affidavits filed in the Federal Court by the defendants relating to the interlocutory application seeking security as to costs.
It appears from Mr Bevan's affidavit that the defendants allege that the share in ARF Investments is held by Bideena in its own right rather than as trustee of the Bideena Super Fund such that Bideena would have no recourse to the assets of the super fund to pay any costs orders that might be made against it. The defendants appear to further allege that there is a risk that Mr Bevan and his wife might transfer their beneficial interests in the super fund to another super fund or remove Bideena as trustee and appoint a new trustee.
Mr Bevan's evidence is that the ASIC register inaccurately records that Bideena holds the share in ARF Investments in a non-beneficial capacity. Mr Bevan alleges that the error was either a mistake by Mr Patakas or else it was done "contrary to my clear instructions to him on behalf of Bideena".
Mr Bevan in his affidavit gives undertakings not to transfer his interest to another superannuation fund or remove Bideena as trustee.
Prima facie, this evidence exposes irreconcilable differences between Mr Bevan and Mr Patakas and, if accepted, Mr Patakas' inability or unwillingness to proceed with various recovery actions, and the materials before the Court supports in my view allegations of oppression in the relevant sense.
[8]
Case against Mr Patakas
Bideena submits that the claim against Mr Patakas has "reasonable prospects of success".
Section 9 of the Corporations Act 2001 (Cth) defines a director to include:
(b) unless the contrary intention appears, a person who is not validly appointed as a director if:
(i) they act in the position of a director; or
(ii) the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes.
As to the first limb, the Full Court of the Federal Court in Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 indicated that the phrase "acts in the position of a director" contemplates that the person "has been acting in a role (or roles) within the company and performing functions one would reasonably expect to have been performed by a director of that company given its circumstances" (at [65]). With respect to the second limb, the Full Court expressed the view that "a rigid distinction between a de facto and a shadow director cannot be maintained" (at [69]).
Bideena relies upon Mr Bevan's affidavit evidence sworn 23 March 2016 to the effect that Mr Patakas's firm EPA has:
"taken no steps since mid-2008 to recover loans against the remaining 20 borrowers whose loans remain unpaid, in the case of all but two of those 20 borrowers, and since March 2011 in the case of two of those borrowers" with respect to the loans originally made by ARF in 1997-2000;
failed to provide particulars to the lawyers of CaTTO and Ms Cassegrain;
failed to lodge proof of debt for ARF with OAL's liquidator;
refused to commence proceedings against the Sark brothers on behalf of ARF
Bideena also relies upon Mr Bevan's affidavit evidence that on 28 July 2015, Mr Patakas told Mr Bevan over the telephone that his sister has "nothing to do with ARF" and "signs whatever I want her to sign" and that he left part of the Goeke debt outstanding:
so I can keep alive Goeke's registered charge over ARF. That way I can put in one of my mates as a receiver if anyone tries to wind-up ARF or take control of it away from me.
Bideena further relies upon letter dated 16 March 2016 from WKA Legal Pty Ltd (that is, Mr Patakas' personal solicitors) to Bideena that was sent in response to enquiries made by Bideena about ARF.
In essence, Bideena's case is that Mr Patakas has been conducting the affairs of ARF independently of his sister Ms Patakas.
Again, prima facie, this evidence, if accepted, exposes Mr Patakas' control or at least influence over the affairs of ARF and/or Goeke, and hence his potential liability.
[9]
Claim against Goeke
Bideena also submits that the claim against Goeke has "reasonable prospects of success".
By way of Originating Process dated 23 March 2016, Bideena seeks leave under s 237 of the Corporations Act 2001 (Cth) to bring proceedings against Goeke concurrently with its oppression claim. While there may be different theoretical views as to the process to be adopted where leave is sought under s 237 on the basis of an oppression claim, I am of the view that the proposed course appears efficient and therefore there are reasonable prospects that such a course will be permitted.
A succinct summary of the criteria to be satisfied for a grant of leave under s 237 is provided by Black J in Re Akierman Holdings Pty Limited [2015] NSWSC 1395 at [13]. His Honour stated that:
In order to grant leave under that section, the Court must be satisfied of five matters, and must grant that leave if satisfied of those matters. Those matters are that it is probable that the Company will not itself bring the proceedings; [the applicant] is acting in good faith; it is in the best interests of the Company that [the applicant]be granted leave; there is a serious question to be tried; and at least 14 days before making the application, [the applicant]gave written notice to the Company of her intention to apply for leave and of the reasons for applying. [The applicant]bears the onus of establishing that each of the matters specified in s 237(2) of the Corporations Act are satisfied on the balance of probabilities: Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 at [26]. If all the requirements of s 237(2) are satisfied, the court must grant leave to bring the proposed proceedings. If any or all of the criteria specified in that section are not satisfied, then the Court should not grant that leave: Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 at [12]-[13]; Oates v Consolidated Capital Services Pty Ltd [2009] NSWCA 183; (2009) 76 NSWLR 69 at [55]-[65].
As to the requirement of good faith, Palmer J stated in Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583 at [36] that:
There are at least two interrelated factors to which the courts will always have regard in determining whether the good faith requirement of s 237(2)(b) is satisfied. The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. Clearly, whether the applicant honestly holds such a belief would not simply be a matter of bald assertion: the applicant may be disbelieved if no reasonable person in the circumstances could hold that belief. The second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process.
As to whether the proceedings would be in the best interests of the company, Ball J remarked in In the matter of Gladstone Pacific Nickel Limited [2011] NSWSC 1235 at [57] that:
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: see Swansson [2002] NSWSC 583; (2002) 42 ACSR 313 at [56]ff.
In support of this claim against Goeke, Bideena relies upon the materials relating to the Goeke loan referred to above in relation to its claims against Mr Patakas and its oppression claim.
As above, the evidence, if accepted, prima facie indicates that Mr Patakas exercises a degree of control over both Goeke and ARF, and in such capacities arguably has procured the continuance of Goeke's charge over ARF's property for the purpose of preserving Goeke's right to appoint a receiver to ARF's property. Again prima facie this exposes Goeke to liability.
[10]
Conclusion
For the reasons above, I am of the opinion that it is not necessary for Bideena to obtain judicial advice as a condition of it having a right of indemnity for any costs order made in the Federal Court proceedings.
I am also satisfied that in the circumstances, it is appropriate to give judicial advice to Bideena at this stage in the Federal Court proceedings. I am of the view that, on the materials before the Court, it is in the best interests of the Bideena Super Fund to continue the Federal Court proceedings and that it is appropriate for Bideena as trustee to indemnify itself out of the property of the Bideena Super Fund.
[11]
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Decision last updated: 08 June 2016