Ancient Order of Foresters in Victoria Friendly Society v Lifeplan Australia Friendly Society Ltd

Criteria for the grant of leave

1. In an application for leave to bring these proceedings, Mr Lee needs to satisfy the criteria for the grant of leave specified in s 237(2) of the Corporations Act. As Mr Sykes rightly recognises in submissions, in order to grant leave under that section, the Court must be satisfied of five matters, and it must grant that leave if it is satisfied of those matters. Those matters are first, that it is probable that Yinsanity will not itself bring the proceedings, absent the grant of leave; second, that Mr Lee is acting in good faith; third, that it is in the best interests of Yinsanity that Mr Lee be granted leave to bring the proceedings in its name; fourth, that there is a serious question to be tried; and, fifth, at least 14 days before making the application, Mr Lee gave written notice of his intention to apply for leave and the reasons for applying, or the Court should dispense with that requirement. Mr Lee bears the onus of establishing that each of those matters is satisfied on the balance of probabilities: Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 at [26]; Huang v Wang [2016] NSWCA 164. As I noted above, if all of the requirements for s 237(2) are satisfied, the Court must grant leave to bring the proposed proceedings, and if any of those requirements are not satisfied, it should not do so: Maher v Honeysett and Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 at [12]-[13]; The App Shop Pty Ltd v Jalal Brothers Pty Ltd [2019] NSWSC 490 at [13].

Whether Yinsanity would bring the proceedings

1. It seems to me that the first of the requirements for a grant of leave to bring a derivative action under s 237(2)(a) of the Corporations Act, namely that it is likely that Yinsanity would not itself bring the proceedings, absent Mr Lee doing so on its behalf, is satisfied. An inference is readily drawn to that effect where there are presently two statutory directors of Yinsanity; Mr Lee is one and the First Defendant is the other, and those directors would be deadlocked in respect of any decision whether to bring the proceedings, unless the First Defendant considered that she should authorise Yinsanity to bring the proceedings against herself. It is apparent that, in the year or so that has passed since the relevant events, she has taken no steps towards doing so, and I readily infer that she would not now authorise the bringing of the proceedings by Yinsanity.

Whether Mr Lee is acting in good faith

1. The second question in the relevant circumstances is whether Mr Lee is acting in good faith. Factors relevant to that requirement include whether he has an honest belief that a good cause of action exists and has reasonable prospects of success, although that belief will be tested against whether a reasonable person in the circumstances would hold that belief, and whether he is seeking to bring the action for a collateral purpose: Swansson v RA Pratt Properties Pty Ltd above at [36]. The case law recognises that it is relatively easy to establish this requirement if an application is made by a current shareholder who has more than a token shareholding, as Mr Lee has, and the derivative action seeks recovery of property so that the value of the applicant's shares would be increased: Swansson v RA Pratt Properties Pty Ltd above at [38]; see the other cases cited in The App Shop Pty Ltd v Jalal Brothers Pty Ltd above at [16].
2. It seems to me that the Court can readily infer that Mr Lee is acting in good faith in this application, where he has a shareholding in Yinsanity which was acquired for a significant sum; Yinsanity would benefit from a successful claim, so far as it recovered assets or client information or established an entitlement to an account of profits in respect of the business allegedly now conducted by the Defendants; and, in the circumstances, it appears that Mr Lee's shares in Yinsanity might well have little value unless such action was taken.

Whether the proceedings are in Yinsanity's best interests

1. The third requirement for the grant of leave to bring a derivative action, under s 237(2)(c) of the Act is that the grant of such leave is in Yinsanity's best interests. The relevant principles were summarised in Swansson v RA Pratt Properties Pty Ltd above at [55]-[56], where Palmer J noted that this required that the Court be satisfied that the proposed action actually is, on the balance of probabilities, in the relevant company's best interests. In order to prove that leave is in a company's best interests, an applicant should generally give evidence of its character, in the sense of the nature of its operations; the company's business so that the effects of the proposed litigation on the conduct of its business may be appreciated; whether there are other means of obtaining the same redress so that the company does not have to be brought into litigation against its will; and the proposed defendant's ability to meet at least a substantial part of any judgment in favour of the company so that the Court may ascertain whether the action would be of practical benefit to the company.
2. Here, those matters emerge from the evidence. It appears that Yinsanity is now not conducting business operations, so far as, in the relevant circumstances, the physiotherapy business which it once conducted is allegedly now conducted by the Defendants and, the evidence at least raises the possibility that Yinsanity's former clients are now dealing with that business. Accordingly, there is little risk that the conduct of any ongoing business would be disrupted by the litigation, and, conversely, that litigation may be the only means of restoring value to Yinsanity in respect of that business. It may be that the same redress could be pursued in an oppression action, but it seems to me that, where a company has essentially lost the substantial parts of its assets, an oppression action is likely to be less satisfactory than a claim brought by the company for recovery of those assets or their value.
3. Mr Sykes fairly acknowledges that there is no direct evidence of the Defendants' capacity to meet a judgment in favour of Yinsanity. However, Mr Sykes also rightly points out that an account of profits is sought, and the value of that account of profits will depend upon the value of the new business. It seems to me that I can also draw a common sense inference that an existing physiotherapy business and client base would have had at least some value, and would continue to have some value in the hands of a company that allegedly took it up. An account of profits can, in some circumstances, give rise to a recovery equivalent to the whole of the value of the business: see, for example, Ancient Order of Foresters in Victoria Friendly Society v Lifeplan Australia Friendly Society Ltd [2018] HCA 43. It would, alternatively, potentially be available to Yinsanity to seek a constructive trust, so as to establish a proprietary interest in the business now operated by the Defendants. For these reasons, it seems to me that there is reason to think that the Defendants, or at least the Third Defendant to the extent that it took over the business, should have the capacity to meet a judgment against them. I can properly also have regard to the fact that the Defendants have not appeared to advance any submission that leave should not be granted because their assets were not sufficient to meet any judgment against them.
4. The case law has recognised the relevance of an adequate indemnity to be given by Mr Lee in favour of Yinsanity in respect of the costs to which it would be exposed if the proceedings were unsuccessful, and potentially in respect of any amount that it may be ordered to pay by way of security for costs, as a relevant factor to whether proceedings are in Yinsanity's best interests: Power v Ekstein [2010] NSWSC 137; (2010) 77 ACSR 302 at [108]; see the other cases to which I referred in The App Shop Pty Ltd v Jalal Brothers Pty Ltd above at [19]. Mr Lee fairly offered an undertaking to the Court to indemnify Yinsanity against any adverse costs order. Mr Lee has also confirmed, by his Counsel, that he undertakes to pay the costs incurred by Yinsanity in the conduct of the proceedings, a matter that is likely practically necessary for Yinsanity to have capacity to conduct the proceedings. On that basis, the Defendants have indicated that leave is not opposed, and that implies that there is no suggestion that Mr Lee does not have the capacity to meet that undertaking. I am satisfied that it has been established that the proceedings are in Yinsanity's best interests, subject to the undertakings given by Mr Lee which I will note.

Whether there is a serious question to be tried

1. The fourth requirement for the grant of leave, under s 237(2)(d) of the Corporations Act, is that there is a serious question to be tried in the proceedings. That requires the application of the same test as applied by the Court in determining whether to grant an interlocutory injunction; Swansson v RA Pratt Properties Pty Ltd above at [25]; Re Gladstone Pacific Nickel Pty Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432 at [56]. It is not necessary for me to address this question at any length, and it is likely to be preferable that I do not do so in circumstances that the matter may well proceed in this List. The facts to which I have referred above raise serious questions to be tried as to whether the assets of Yinsanity, and its customers, were diverted to one or more of the Defendants, and whether that involved breach of directors' duties, breach of fiduciary duty, and whether Yinsanity is entitled to relief by way of compensation or an account of profits.

Notice requirement

1. The final requirement for the grant of leave is that 14 days' written notice of Yinsanity's application for leave was given, or that the Court dispenses of that requirement, as commonly occurs. In this case, that requirement was in fact complied with, so far as such notice was given by the letter dated 29 October 2018, which identified the range of claims which Mr Lee contended Yinsanity had in respect of these events. By further correspondence dated 12 September 2019 between Mr Lee's solicitor and the Defendants' solicitors, agreement has been reached that that letter can be tendered in order to establish that notice.

Determination

1. In these circumstances, I am satisfied, for the purposes of s 237 of the Corporations Act, that it is probable that Yinsanity will not itself bring the proceedings, unless Mr Lee is given leave to do so on its behalf; that he is acting in good faith in seeking to bring the proceedings, where he would potentially benefit financially from a recovery in the proceedings, as a substantial shareholder in Yinsanity; that it is in Yinsanity's best interests that he be granted leave to bring the proceedings, where they would establish a right to compensation or an account of profits if successful, and the undertakings given by Mr Lee should protect it against exposure to adverse costs orders in the proceedings and address the costs of the conduct of the proceedings; there is a serious question to be tried, for the reasons I have set out above; and it is appropriate to grant leave, so far as 14 days' written notice of the intention to seek it has been given. Where each of those matters is satisfied, the Court must grant leave to bring the relevant proceedings.

Costs

1. An order is commonly made, in applications of this kind, that the applicant's costs of the application should be the applicant's costs in the cause of the substantive proceedings: Cassegrain v Gerard Cassegrain and Co Pty Ltd [2008] NSWSC 1159 at [19]; Re Imperium Projects Pty Ltd [2015] NSWSC 123; Re Legal Practice Management Group Pty Ltd [2018] NSWSC 527 at [101]. It seems to me that that is an appropriate order in this situation.

Orders

1. Accordingly, I make the following orders:
2. On the undertaking of the Second Plaintiff, Mr Bon Bon Lee, to pay the First Plaintiff's costs incurred in the conduct of the proceedings, and to indemnify the First Plaintiff against any adverse costs order, grant leave to the Second Plaintiff under s 237 of the Corporations Act 2001 (Cth) to commence proceedings in the name of the First Plaintiff, Yinsanity Pty Ltd, against Ying Xue, Kar How Low and Yingsanity Pty Ltd in respect of the causes of action pleaded in the draft Statement of Claim which is annexed to Exhibit BBCL-1 referred to in the affidavit of Mr Lee sworn 4 July 2019.
3. The Second Plaintiff's costs of this application be his costs in the proceedings brought on behalf of the First Plaintiff pursuant to that leave.
4. Stand the proceedings over for further directions, including directions as to pleadings and as to any mediation, in the Corporations Directions List at 10am on 30 September 2019.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 September 2019