Aon Risk Services Australia Ltd v Australian National University

The evidence on which the parties relied

1. The parties relied on voluminous evidence in respect of the application, reading what may be much of the evidence that will be led at a final hearing. It is not necessary to summarise the parties' affidavit evidence at any length, although I have had regard to it. It is plain that significant aspects of the evidence will be in dispute, including claims as to, for example, oral representations alleged to have been made by Mr Zong to Ms Lin and Mr Su, and allegations made by Mr Zong in respect of impropriety on the part of Ms Lin, in particular, an allegation that Ms Lin sought to have the Company's financial results misstated in order to assist her with a visa application. It is apparent that the basic issues in dispute involve the establishment of the Company, with a view to purchasing a motor vessel to provide services for a predominantly Chinese market, the circumstances in which a company associated with Mr Zong's wife sold a smaller motor boat to the Company, which proved unsuitable for the proposed business, and was, on the evidence, potentially sold at over-value; the circumstances in which a range of expenditures have been incurred on behalf of the Company, including very substantial payments made to solicitors over a two day period; and claims made, in Ms Lin's personal capacity, as to misleading representations as to the extent to which her investment in the Company would meet visa requirements to assist her to advance her attempt to obtain residence in Australia. There will, as I have noted, be a significant extent of contest within that field, although I also note that at least some of the Company's dealings are documented, in particular by way of records of financial transactions, and payments into and out of the Company's bank account, to which Mr Campbell draws attention in a chronology and a schedule of money transfers (MFI-1 and MFI-2).

Leave under s 237 of the Corporations Act

1. With that background, the matters which need to be established in order to obtain leave to bring a derivative action are clear enough. In order to obtain that leave, Ms Lin needs to satisfy the criteria specified in s 237(2) of the Act which requires that the Court be satisfied of five matters, and the Court must grant that leave if it is satisfied of those matters, and must not grant that leave if it is not satisfied of those matters. Those matters are, first, that it is probable that the Company will not bring the proceedings, absent the grant of leave. That is common ground between the parties, and I am satisfied that that is the position, where Ms Lin and Mr Zong are the two directors of the Company, and they are likely deadlocked as to that question. The second question, to which I will return, is whether Ms Lin is acting in good faith. The third is whether it is in the best interests of the Company that Ms Lin be granted leave to bring the proceedings in its name. The fourth is that there is a serious question to be tried, and the fifth, which is also not in contest, is that Ms Lin had given notice of her intention to apply for leave and the reasons for applying, or that the Court should dispense with that requirement. Ms Lin bears the onus of establishing each of those matters on the balance of probabilities: Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313; [2002] NSWSC 583 at [26]; Huang v Wang [2016] NSWCA 164. I have also summarised the relevant principles in Re Yinsanity Pty Ltd [2019] NSWSC 1290 at [5]ff and again in Re TDE Pty Ltd [2020] NSWSC 1436 at [6]ff, and I have drawn on my summary of those principles in those judgments for a number of the observations which follow.
2. The first question in contest in this application is whether Ms Lin is acting in good faith. The case law establishes that relevant factors include whether she 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 she is seeking to bring the proceedings for a collateral purpose. The case law recognises that it is relatively easy to satisfy that requirement if an application is made by a current shareholder who has more than a token shareholding, as Ms Lin plainly does, and the derivative action seeks recovery of property so that the value of her shares would be increased.
3. Here, Mr Campbell points to the fact that Ms Lin is a shareholder in the Company; he draws attention to evidence that at least raises a prospect that the money of the Company has been expended on purchasing a boat from a company owned by Mr Zong's wife, where that boat is not fit for purpose and was acquired at over value; and that a number of other payments out of the Company have been made without authority, so far as they were not approved by directors of the Company acting as a board, including a very substantial payment made to a firm of solicitors to which I referred above.
4. Mr Young, who appears for Mr Zong, puts the issue of good faith in contest and submits, and I accept, that the question of good faith is not determined only by reference to the factors identified in Swansson v Pratt above and the Court may also have regard to other matters which call a plaintiff's good faith into question. Here, Mr Young refers to alternative claims brought by Ms Lin which, on one view of them, seek repayment of the whole of her investment, or claim the repayment of moneys to her as distinct from to the Company, and submits that Ms Lin alternatively seeks to withdraw her entire involvement in the Company or to bring proceedings on the Company's behalf. I accept that, in one sense, that is so, although it should be noted, first, that these are alternatives, and, second, that the relief Ms Lin will obtain would depend on the relief which the Court is prepared to order. Plainly, there is reason for Ms Lin to seek to recover, for the Company, the funds that she contends have wrongly been spent by it, so far as she is unsuccessful in any alternative relief that would extract her from the Company. Mr Campbell emphasises that Ms Lin's primary position is to seek to retain her investment in the Company, having obtained relief in respect of the matters the subject of these claims, so far as she perceives that as a matter that will advance or retrieve her position in respect of her application for Australian residence.
5. Mr Young also advances a more specific allegation, in reliance on Mr Zong's evidence that Ms Lin had sought to have the Company's income misstated to advance her visa application. Plainly, that evidence is contested, and I accept Mr Campbell's submission that Ms Lin denies Mr Zong's evidence about that matter as a whole. In any event, it does not seem to me that that matter impugns Ms Lin's good faith for present purposes. Even if it were assumed that Ms Lin was prepared to misstate the Company's financial return, in order to advance her visa application, a matter which would be significantly adverse to her credit, it does not follow that she would be acting in bad faith in seeking to recover significant amounts paid out by the Company, which were, on the case she seeks to bring, improperly paid out.
6. In these circumstances, I am satisfied that the Court can reasonably find that Ms Lin is acting in good faith, where there appears to me to be at least a basis in the evidence for considering that the boat that was purchased was unsuitable, was acquired at overvalue, and was acquired from persons associated with Mr Zong in a manner that would confer a significant benefit on him or them, and other expenses are arguably open to challenge on the basis at least that they were not authorised by the Company's directors, and were not day-to-day expenses that might fall within Mr Zong's authority under a shareholders' agreement to which Mr Young refers. To the extent that such a challenge succeeds, the Company would benefit so far as it recovered compensation, and Ms Lin would indirectly benefit so far as the value of her shares reflects that recovery.
7. The next question is whether the proceedings are in the Company's best interests. In Swansson v RA Pratt Properties Pty Ltd above, Palmer J noted that this required that the Court be satisfied that the proposed action actually is, on the basis of probabilities, in a company's best interests. There is no real issue as to any adverse impact upon the Company's operations, from the bringing of this litigation, where it appears the Company has not been able to establish its operations, in part because of the issues that are the subject of the relevant claims, and possibly in part because of the breakdown in relations between its shareholders.
8. I was concerned, in hearing the application, about the complexity of the initial form of the pleading, and whether the manner in which the case was pleaded was disproportionate to the amounts in issue, and whether that course would put the Company at risk. The amendments which Mr Campbell has sensibly made, in simplifying the claim, and focusing upon the primary claims, that the relevant transactions were not made for proper purposes, or were made in breach of the rules against conflict of interests or the no profit rule addresses those issues. While Ms Lin's personal case is relatively complex, in terms of alternative representational cases, and alternative relief sought, the Company's case is ultimately a relatively straightforward one, which will stand or fall on the proposition that the relevant transactions were, in the case of the acquisition of the boat, improper or in breach of the rules against conflict of interest and the no profit rule and, in the case of other transactions, not properly authorised under the shareholders' agreement or the Company's constitution or not for proper purposes.
9. Mr Campbell in turn submits that it is in the Company's best interest that Ms Lin be granted leave as, if the Company is successful, there will be a return of value to the Company, to the benefit of all shareholders. Mr Campbell emphasises that, at least on Ms Lin's case, the only amounts provided to the Company were paid by Ms Lin, and that the transfer of other amounts out of the Company by Mr Zong have been to the Company's disadvantage. Mr Campbell also points to evidence which assists in establishing that the proceedings are in the Company's best interests, that at least Mr Zong's wife, who is joined as a Defendant in respect of a knowing involvement and knowing receipt claim, has property in Australia which would potentially fund a recovery by the Company.
10. Mr Young responds that it is not in the best interests of the Company for Ms Lin to be granted leave, due to a suggested conflict between her own interests and that of the Company, and also repeats the proposition that Ms Lin seeks to have the moneys paid to herself, and points to the possibility that proceedings could instead be brought by a liquidator appointed to the Company. Mr Young also submits that it is not in the Company's interest to bring actions that are very likely to fail. As to the first of those propositions, it seems it is not apparent to me that there is here a significant conflict between Ms Lin's interests and the Company's interests; it is in both their interests to recover any amounts claimed in these proceedings, if there is a proper case to do so, so as to restore the Company's financial fortunes; and it will ultimately be a matter for the Court to deal with any question as to whether those funds are retained in the Company, or paid to Ms Lin if she succeeds, in her personal claims or her oppression claims, and there is no risk of double recovery in that respect. I give little weight to the proposition that a liquidator could bring proceedings, where that would require that the Company first be wound up, losing any continuing value in its business, and would expose the Company to the cost of the liquidator's fees. The proposition that it is not in the Company's interest to bring actions that are likely to fail overlaps with the question whether there is a genuinely arguable or seriously arguable case, to which I will return.
11. Mr Young also submits that, although Ms Lin has offered an undertaking to indemnify the Company against any adverse costs order, she has not expressly offered to indemnify the Company against the costs of the continuing proceedings. That is likely explained by the fact that, in practice, the proceedings are being conducted by Ms Lin's solicitors and she has presumably had to pay their costs as they continue. I bear in mind that the authorities in New South Wales make clear that the existence of an adequate indemnity given by Ms Lin in favour of the Company in respect of the costs to which it would be exposed in the conduct of the proceedings, and if the proceedings are unsuccessful, is a relevant and generally a significant factor as to whether the proceedings are in the Company's best interests: Power v Ekstein (2010) 77 ACSR 302; [2010] NSWSC 137; The App Shop Pty Ltd v Jalal Brothers Pty Ltd [2019] NSWSC 490 at [19]; Re TDE Pty Ltd above at [14]. Here, Ms Lin's evidence is that she is prepared to give an indemnity, in respect to any adverse costs order, and I infer, from her conduct to date, that she also intends to pay the costs of conduct of the proceedings; Mr Campbell has confirmed the offer of such an undertaking, on instructions; and the Court can make an order which contemplates that the form of that undertaking will be agreed between the parties, or otherwise determined by the Court, where there are precedents in previous cases as to how such an undertaking should be formulated. I am satisfied that, with such an undertaking being provided, it will be in the Company's best interests to pursue the proceedings, where they have significant prospects of recovery, on the basis that a serious question to be tried is established, to which I will return.
12. I note, for completeness, that I have borne in mind the possibility that the claims brought by Ms Lin could have been brought, possibly without leave to bring a derivative action, in an oppression case. I have reviewed the relevant case law in Taxa Australia Pty Ltd v Wang [2016] NSWSC 1913 at [23]. While that possibility was open, there are many cases of this kind where derivative actions have been brought, in parallel to personal claims and in parallel to oppression claims, and Mr Campbell refers, for example, to the decision in Gerard Cassegrain & Co v Cassegrain [2010] NSWSC 91 at [124]. Had Ms Lin not taken steps to simplify the pleadings, so that the case could likely be run by the Company in a cost-effective manner, I might well have left her to pursue claims by way of oppression, at her direct cost, rather than by way of a derivative action. Where those simplifying steps have been taken, it does not seem to me that the alternative of an oppression case excludes a finding that it is in the best interests of the Company to bring the claim, where that has the potential to recover compensation as I have noted above.
13. The fourth question which was in dispute was whether there was a serious question to be tried. That requires the application of the same test as applied by the Court in determining whether to grant an interlocutory injunction. It is not necessary for me to address that question at length, and it is preferable that I do not do so for all the reasons that such questions are normally dealt with briefly in applications for interlocutory injunctions, where a judge may ultimately have to hear a final hearing. It seems to me that the matters to which I have referred raise serious questions to be tried, at least as to the purchase of the motor vessel, and that was ultimately not contested by Mr Young. It seems to me that the questions raised as to other expenditures also raise a serious question to be tried, at least on the basis that there is an arguable case that they are outside the authority of any individual director, under the Company's constitution, and are not expenses which Mr Lin was authorised to incur under the shareholders' agreement. In any event, it is not necessary to address that question, in respect of expenses individually, because it is sufficient that there is a serious question to be tried in respect of the derivative claim, and that arises at least in respect of the purchase of the motor vessel from the company associated with Ms Zong's wife, and the substantial payments made to the solicitors' firm over a two day period. For these reasons, I am satisfied that the matters to which I have referred raise a serious question to be tried, and that element of the requirement for leave to bring a derivative action is satisfied. There was, as I noted above, no contest as to the notice requirement under s 237 of the Act.
14. In these circumstances, but only on the basis of the amendments to the Originating Process and the Amended Statement of Claim which Mr Campbell indicated would be made in the course of the application, and only on the basis that an adequate indemnity as to the costs of the proceedings and any cost to which the Company may be exposed by way of adverse costs orders is given, I am satisfied, for the purposes of s 237 of the Act, of the matters required to grant leave under that section and I will grant that leave.

Amendment application

1. I now turn to the question of amendment of the Amended Originating Process and Amended Statement of Claim. Mr Young fairly accepted that amendments should be permitted, in respect of the claims by the Company, if leave to bring a derivative action was granted, as it will be, subject to the matters that I have noted above. The remaining question relates to other aspects of the amendments. The applicable principles are, again, well established. I am required to exercise my discretion whether to allow the amendment having regard to the provisions of ss 56-58 and 64 of the Civil Procedure Act 2005 (NSW). Section 58 requires the Court to have regard to the dictates of justice when considering an order for the amendment of a document and requires the Court to have regard to the provisions of ss 56 and 57. Section 56 identifies the overriding purpose of the just, quick and cheap resolution of the real issues in dispute in the proceeding and s 57 requires the proceedings to be managed having regard, inter alia, to the just determination of the proceedings. Section 64 of the Civil Procedure Act in turn provides that, at any stage of the proceedings, the Court may order that leave be granted to a party to amend any document in the proceedings and that, subject to s 58 of the Civil Procedure Act, all necessary amendments are to be made for the purpose of determining the real questions raised by the proceedings and in avoiding multiplicity of proceedings. Section 65(2)(c) of the Civil Procedure Act in turn permits a plaintiff, with leave, to amend the Originating Process to add a new cause of action, together with a claim for relief on it, which, in the Court's opinion, arises from the same or substantially the same facts as those giving rise to an existing cause of action and claim for relief set out in the Originating Process.
2. I also have regard to the relevant case law, including Aon Risk Services Australia Ltd v Australian National University (2003) 239 CLR 175. The question has also been considered by the Court of Appeal in several cases, including, for example, Hans Pet Constructions Pty Ltd v Cassar [2009] NSWCA 230 to which I also have regard.
3. There is substantial force in Mr Young's submission that these amendments are significantly delayed, where Ms Lin had indicated that her evidence was complete some time ago. I also bear in mind that Ms Lin has recently filed a further affidavit, in circumstances as to which Mr Young makes complaint. Mr Young points to the fact that the original Statement of Claim was filed in July 2019 and that Ms Lin's evidence ought to have been complete by December 2019 and that this application was made when the matter was otherwise ready to be set down for hearing. Mr Young also advances criticisms of the prospects of success of aspects of the claim, and contends that aspects of the claim are difficult to follow. It seems to me that the proposed claim by Mr Su, which is the subject of such a criticism, is clear enough in its form, and is likely to add little to the factual matters already in issue at a hearing, although there may ultimately be a real contest, as a matter of law, whether he would be entitled to recover the loss that he claims to have suffered, by way of interest on a loan.
4. Mr Young also submits that the oppression claim is not properly articulated, and it is certainly a short form of pleading. However, it seems to me that, given the factual narrative pleaded in the Amended Statement of Claim, the matters which are said to give rise to oppression are clear enough, and that ultimately Mr Zong will not have the slightest difficulty in identifying the matters which he has to meet in respect of the oppression claim. The oppression claim is, at a factual level, substantially, if not wholly, identical with the matters raised in the derivative action, although the relief that is sought is somewhat different. So far as complaint is made of the claim to set aside certain agreements on the basis that they are void for a total failure of consideration, it seems to me that the difficulties with that claim have been significantly addressed by the amendment foreshadowed by Mr Campbell, which limits those claims to later agreements for which Ms Lin contends that Mr Zong has not provided the consideration required under those agreements.
5. I also have regard to an important matter in an application of this kind, namely, that proposed the amendments will not, in fact, delay a hearing, and that is the significant answer to Mr Young's criticism that the amendment is made when the matter is otherwise ready for hearing. Mr Campbell has confirmed that Ms Lin has filed all evidence on which she relies, and she may be held to that statement; he indicates that it will be necessary to file a short affidavit of Mr Su, although the large part of the case on which he relies is documentary and is already in evidence, and that can be done within a week; and Mr Young has fairly accepted that further evidence led by Mr Zong would respond to Ms Lin's latest affidavit, and therefore, I infer, would likely need to be filed in any case, even if the amendment were not made. There is nothing in these matters that will prevent the Court allocating a hearing date in the first quarter of 2021, and I propose to do so on making further directions following the completion of this judgment.
6. In these circumstances, it seems to me that the interests of justice, and ss 56-58 of the Civil Procedure Act, will be promoted by permitting the amendment, and that there is no substantial disadvantage to Mr Zong of allowing the amendment. For these reasons, I will permit the amendment, both in respect of the claims by Ms Lin on the Company's behalf which were not in contest and those remaining amendments which were in contest.

Proposed orders

1. The orders which I propose to make, subject to hearing counsel, are as follows:
2. Subject to order 2 below, grant leave under s 237 of the Corporations Act 2001 (Cth) for Ms Lin to bring a derivative claim in the name of Australian International Yacht Club Pty Ltd, substantially in the form of the proposed Amended Originating Process which I have marked MFI 3 and the proposed Amended Statement of Claim which I have marked MFI 4, with the further amendments indicated in the course of the hearing today.
3. Direct the parties to submit an agreed form of indemnity to be given by Ms Lin by 4pm on 15 December 2020 to the Associate to Black J or, if there is no agreement, their respective drafts of that indemnity and short submissions as to the difference between them, with any dispute as to that indemnity to be heard by Black J at 3pm on 17 December 2020, or such alternative time as may be agreed between the parties and the Associate to Black J.
4. Note that, on making an order recording the form of indemnity granted by Ms Lin, leave to file and serve the Further Amended Originating Process and Amended Statement of Claim in the form referred to in paragraph 1 above will take effect.
5. Note that the Plaintiffs have filed and served all evidence on which they rely, other than an affidavit of Mr Su, and direct the Plaintiffs to file and serve any affidavit of Mr Su by 4pm on Friday 18 December 2020, no further affidavit evidence to be relied on other than the affidavit of Mr Su, and no affidavit of Mr Su to be relied on if not filed and served by that date, without leave.
6. Direct the Defendants to file and serve all further affidavit evidence by 4pm on 29 January 2021, no further affidavit evidence to be relied on if not filed and served by that date without leave.
7. Direct the Plaintiffs to file and serve all evidence in reply, dealing only with matters properly addressed in reply, by 4pm on 12 February 2021, no reply evidence to be relied on if not filed and served by that date without leave.
8. Direct the parties to deliver a court book containing all pleadings, affidavits, documents relied on, objections to evidence and submissions to the Associate to Black J by 4pm on 15 April 2021.
9. List the matter for hearing with an estimate of four days before Black J on 20 - 23 April 2021.
10. The Plaintiffs must pay the costs thrown away by the amendments.
11. Direct the Defendant to serve and send to the Associate to Black J its submissions, of no more than five pages in one and a half spacing, as to the costs of the s 237 application, by 4pm on 15 December 2020, and direct the Plaintiff to serve and send to the Associate to Black J its submissions in response with the same page limit by 4pm on 18 December 2020, judgment as to costs of the section 237 application to be delivered in chambers.
12. I note that these proposed orders were further amended in several respects following further submissions of the parties.

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