[2010] FCA 763
- Vrisakis v Australian Securities Commission (1993) 9 WAR 395
Judgment (17 paragraphs)
[1]
Gladstone Pacific Nickel Ltd (2011) 86 ACSR 432; [2011] NSWSC 1235
- Re Global Advanced Metals Pty Ltd (2019) 141 ACSR 222; [2019] NSWSC 1804
- Re HIH Insurance Ltd and HIH Casualty and General Insurance Ltd; Australian Securities and Investments Commission v Adler (2002) 168 FLR 253; 41 ACSR 72; 20 ACLC 576; [2002] NSWSC 171
- Re Imperium Projects Pty Ltd [2015] NSWSC 16
- Re IW4U Pty Ltd (in liq) (2021) 150 ACSR 146; [2021] NSWSC 40
- Re JGS Investment Holdings Pty Ltd [2014] NSWSC 1532
- Re Legal Practice Management Group Pty Ltd [2018] NSWSC 527
- Re Lotus Property Fund No 8 Pty Ltd [2020] NSWSC 1349
- Re Sirrah Pty Ltd [2018] NSWSC 1802
- Re Sirrah Pty Ltd (in prov liq) (2021) 152 ACSR 212; [2021] NSWSC 413
- Roche v Winnote Pty Ltd (2006) 57 ACSR 138; [2006] NSWSC 231
- South Johnstone Mill Ltd v Dennis (2007) 244 ALR 730; (2007) 64 ACSR 447; [2007] FCA 1448
- Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313; [2002] NSWSC 583
- Twigg v Twigg (No 4) (2016) 147 ACSR 389; [2020] NSWSC 1159
- Twigg v Twigg (2022) 402 ALR 119; [2022] NSWCA 68
- V-Flow Pty Ltd v Holyoake Industries (Vic) Pty Ltd (2013) 296 ALR 418; 93 ACSR 76; [2013] FCAFC 16
- Vinciguerra v MG Corrosion Consultants Pty Ltd (2010) 79 ACSR 293; [2010] FCA 763
- Vrisakis v Australian Securities Commission (1993) 9 WAR 395; 11 ACSR 162
Texts Cited: - J Glister, "Equitable Liability of Corporate Accessories" in PS Davies & J Penner, Equity, Trusts and Commerce, 2017, pp 275-302
- R Teele Langford and I M Ramsay, "Conflicted Directors: What is Required to Avoid a Breach of Duty" (2014) J Eq 108
Category: Principal judgment
Parties: Villefranche Investments Pty Ltd as trustee for the Gates Family Trust and others (Plaintiffs)
ASP Aluminium Holdings Pty Ltd (First Defendant)
Lolita Younes (Second Defendant)
Lolita Investments Pty Ltd (Third Defendant)
Representation: Counsel:
R Yezerski SC/B Hord/S Thomson (Plaintiff)
C H Withers SC/S Puttick/K Dyon (First Defendant)
L F Kelly KC/C Johnstone (Second and Third Defendants)
[2]
Solicitors:
Gilbert & Tobin (Plaintiff)
Thomson Geer (First Defendant)
Russells (Second and Third Defendants)
File Number(s): 2023/333788
[3]
Judgment
By Originating Process dated 20 October 2023, several Plaintiffs bring an oppression claim. The First Plaintiff, Villefranche Investments Pty Ltd ("VIPL") as trustee for a trust also seeks interlocutory relief granting it leave under s 237 of the Corporations Act 2001 (Cth) ("Act") to bring derivative proceedings on behalf of the First Defendant, ASP Aluminium Holdings Pty Ltd ("Holdings") against two existing Defendants in the proceedings, Ms Lolita Younes and Lolita Investments Pty Ltd ("LIPL") and several proposed Defendants, in the form set out in a proposed Statement of Claim ("SOC"), as amended as identified in the course of the hearing. Holdings is the holding company of the Alspec Group, which conducts a business relating to the design, manufacture and distribution of aluminium products for the architectural, residential, industrial and home improvement markets. That business has a substantial revenue and substantial profits although, in recent years, Holdings has paid reduced dividends to shareholders including its minority shareholders.
VIPL's application for leave to bring these derivative proceedings was opposed by Holdings and by Ms Younes and LIPL. Consistent with well established case law, the proposed Defendants other than Ms Younes and LIPL did not need to be, and were not, joined in or heard in the application: Carpenter v Pioneer Park Pty Ltd (in liq) (2004) 1 ACSR 245; [2004] NSWSC 973 at [16]-[17]; Roche v Winnote Pty Ltd (2006) 57 ACSR 138; [2006] NSWSC 231 at [20]-[22]; Cooper v Myrtace Consulting Pty Ltd [2014] FCA 480; Huang v Wang (2016) 114 ACSR 586; [2016] NSWCA 164 ("Huang v Wang") per Barrett AJA at [85]-[87]. This Judgment determines the application for leave to bring the derivative proceedings.
[4]
Affidavit evidence and some matters of chronology
VIPL reads the affidavit dated 20 October 2023 ("Platford 1") of its solicitor, Ms Platford, who identifies the background to the proceedings and notes steps which had previously been taken by several of the Plaintiffs to obtain access to documents in respect of Holdings. Ms Platford also refers to a previous application made by, inter alia, VIPL to the Takeovers Panel, where the Panel did not grant relief on the basis that, inter alia, the claims were more appropriately determined by a Court. Ms Platford also addresses each of the criteria that are applicable to determining whether the Court should grant leave to bring derivative proceedings under s 237 of the Act, to which I will refer below, and to documentary evidence on which VIPL relies in support of the leave application. I will address that documentary and other evidence, to the extent it is necessary to do so, in the chronology of events that I set out below and in dealing with the applicable criteria for the grant of leave.
By a second affidavit dated 2 February 2024 ("Platford 2"), Ms Platford referred to a report obtained from an industrial leasing expert, Mr Kempthorne, to which I refer below and annexed a revised proposed SOC and outlined the amendments made in that document, which is (as I noted above) to be further amended as identified in the course of the hearing. Ms Platford also refers to earlier proceedings between the parties to which reference was made in the Defendants' evidence, and notes that VIPL was not party to a settlement agreement of earlier proceedings or party to other proceedings to which the Defendants referred. I also note that the events which are the subject of the proposed derivative claim largely or entirely postdate the earlier proceedings.
VIPL also read the affidavit dated 14 February 2024 of Mr Justin Reynolds, who is an accountant of many years of experience who has provided accounting services to VIPL and its controllers and holds a power of attorney for VIPL. Mr Reynolds' evidence addresses the assets of VIPL, so far as that is relevant to the value of an indemnity which it offers as to any liability which may be incurred by Holdings in respect of the proposed proceedings. VIPL has now offered a revised undertaking as to that matter which all parties accept sufficiently protects Holdings' interests.
Holdings reads the affidavit dated 15 December 2023 of its solicitor, Ms Fernandez ("Fernandez 1"), who refers to its corporate history, correspondence with solicitors acting for VIPL from September 2020, a previous application brought by VIPL under s 247A of the Act, previous proceedings before the Takeovers Panel, and correspondence between solicitors in respect of the purchase of a "corporate boat" and dealings with the Edgecliff premises which are in issue in the proposed derivative proceedings. Ms Fernandez also refers to previous proceedings between VIPL and Holdings in evidence, which Ms Platford responds in her second affidavit to which I referred above. By her second affidavit dated 22 January 2024 ("Fernandez 2"), Ms Fernandez led evidence relating to claims for confidentiality by Holdings in respect of documents, which were not pressed by Senior Counsel acting for Holdings in the hearing.
[5]
Applicable principles
Counsel referred to the principles applicable to the grant of leave under s 237 of the Act and I have drawn below on Counsels' submissions and my summary of those principles in Re Legal Practice Management Group Pty Ltd [2018] NSWSC 527 at [50]-[54] ("Legal Practice Management Group"); Re Global Advanced Metals Pty Ltd (2019) 141 ACSR 222; [2019] NSWSC 1804 ("Global Advanced Metals") and Mount Gilead Pty Ltd & Hobhouse v L Macarthur-Onslow (2021) 398 ALR 629; [2021] NSWSC 948 ("Mount Gilead"), affirmed by the Court of Appeal in Mount Gilead Pty Ltd v Macarthur-Stanham (as executor of Estate of late Lee Macarthur-Onslow) (2023) 168 ACSR 32; [2023] NSWCA 37. In an application for leave to bring statutory derivative proceedings, VIPL must satisfy the criteria for the grant of leave specified in s 237(2) of the Act. 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 Holdings will not itself bring the proceedings; VIPL is acting in good faith; it is in Holdings' best interests that VIPL be granted leave; there is a serious question to be tried; and at least 14 days before making the application, VIPL gave written notice to Holdings of her intention to apply for leave and of the reasons for applying, or the Court should dispense with that requirement.
VIPL bears the onus of establishing that each of these matters is satisfied on the balance of probabilities: Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313; [2002] NSWSC 583 ("Swansson") at [26]; Huang v Wang. 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]. Whether an application for leave under s 237 of the Act is treated as final or interlocutory, leave to bring a derivative action is not given lightly: Swansson at [24]. No party sought to rely on the statutory presumption in s 237(3) of the Act in this application. It is common ground that VIPL has standing to bring a claim under s 237 of the Act, satisfying the standing requirement in s 236 of the Act where it is a shareholder which holds 46,834 shares in Holdings, comprising about 17% of issued shares in Holdings.
[6]
Whether Holdings will bring the proceedings
Holdings accepts, and the other Defendants do not contest, that the first of the requirements for a grant of leave to bring a derivative action under s 237(2)(a) of the Act, that it is likely that Holdings would not itself bring the proceedings, is satisfied.
[7]
Whether VIPL is acting in good faith
The second requirement for a grant of leave to bring a derivative action, under s 237(2)(b) of the Act, is that VIPL must establish to the Court's satisfaction that she is acting in good faith. Factors relevant to the good faith requirement at least include whether VIPL 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 VIPL is seeking to bring the action for a collateral purpose.
In Swansson, Palmer J (at [36]) observed 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."
Palmer J also there observed (at [42]) that where those in control of a company refuse to take proceedings to redress a wrong which appears to have been done to it, the Court should permit a derivative action to be instituted by those within the categories allowed by s 236(1) of the Act, and that such a person:
"would suffer a real and substantive injury if the action were not permitted. The injury must be necessarily dependent upon or connected with the applicant's status as a current or former shareholder or director and the remedy afforded by the derivative action must be reasonably capable of redressing the injury."
That observation was approved in Chahwan v Euphoric Pty Ltd (2008) 65 ACSR 661; [2008] NSWCA 52 ("Chahwan") at [70] and Tobias JA there noted (at [74]) that:
"… I take his Honour to be saying that an applicant will only be acting in good faith for the purpose of s 237(2)(b) where, as a current or former shareholder or director of the company, he or she would suffer a real and substantive injury if a derivative action were not permitted provided that that injury was dependent upon or connected with the applicant's status as such shareholder or director. It might be a positive indication of the good faith of a shareholder if he or she sought to institute a derivative action which would have the effect, if successful, of restoring value to his or her shares in the company."
[8]
Whether a serious question to be tried is established against the several Defendants
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 Holdings' best interests. I will defer dealing with this question until after I have addressed the question whether a serious question to be tried is established. The fourth requirement for the grant of leave, under s 237(2)(d) of the Act, is that there is a serious question to be tried in the proceedings, which has to be determined in respect of each of the several Defendants and by reference to the three transactions as to which VIPL seeks to bring claims on Holdings' behalf.
In Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534; [2002] NSWSC 640 at [34], Barrett J observed that:
"… a serious question to be tried can be found only by reference to an infringement of some legal or equitable right or the commission of some legal or equitable wrong, with the result that the issue needs to be approached by inquiring whether there exists, in the circumstances and on the evidence, a sufficiently cogent showing of some such infringement or wrong to warrant the imposition of an order to preserve the status quo pending full investigation."
His Honour also observed (at [35]) that the s 237(2)(d) test is imported from equity's approach to the grant of interlocutory injunctions.
Whether there is a serious question to be tried requires the application of the same test as applied by the Court in determining whether to grant an interlocutory injunction: Swansson at [25]; Vinciguerra v MG Corrosion Consultants Pty Ltd (2010) 79 ACSR 293; [2010] FCA 763 ("MG Corrosion") at [140], upheld on appeal in MG Corrosion Consultants Pty Ltd v Vinciguerra (2011) 82 ACSR 367; [2011] FCAFC 31.
In Gladstone Pacific Nickel, Ball J summarised the test as to whether there is a serious question to be tried as follows (at [56]):
"The test of whether there is a serious question to be tried is the same as the test that is applied by the court in determining whether to grant an interlocutory injunction: Swansson v R A Pratt Properties Pty Ltd [above] at [25] per Palmer J; Oates v Consolidated Capital Services Ltd (2009) 76 NSWLR 69; 257 ALR 558; 72 ACSR 506; [2009] NSWSCA 183 at [164] per Campbell JA, with whom Spigelman CJ and Allsop P agreed. Consequently, the same relatively low threshold is applicable. It is not appropriate for the court to attempt to resolve disputed questions of fact. For that reason, cross-examination going to the merits of the case will only be permitted with leave of the court and then only to a limited extent. Whether the court should attempt to resolve a disputed question of law will depend on the particular circumstances of the case, including whether the question is novel or difficult and whether it is susceptible of resolution on the present state of the evidence: Kolback Securities Ltd v Epoch Mining NL [(1987) 8 NSWLR 533] at 535 per McLelland J (as he then was). In answering the question whether there is a serious question to be tried, the court must obviously have regard to the material before it; and the material that is available may affect the result. As the Full Federal Court explained in Aboriginal Development Commission v Ralkon Agricultural Co Pty Ltd (1987) 15 FCR 159 at 163; 74 ALR 505 at 509-10:
"However, applying the "serious question" test, it is clear that the inquiry whether there is a serious question to be tried must be answered with reference to the circumstances of the case. There may be cases in which the facts are so clearly and comprehensively established at the time of the application for the interim order that the court would conclude that the applicant had no arguable case. At the opposite extreme there may be cases in which the applicant has had little opportunity to ascertain the facts and to adduce evidence but there is some material to suggest an entitlement to relief. Upon further investigation that material may turn out to be capable of ready refutation or explanation but, in the meantime, it may be appropriate for the court to intervene. Everything must depend upon the circumstances of the case, including the extent to which the applicant has had an opportunity to present the facts to the court and the consequences of granting or of refusing relief."
[9]
The proposed claim as to the Luddenham Rd property
As I noted above, paragraphs 66-127 of the proposed SOC plead matters relating to the Luddenham Rd property. In opening submissions, Mr Yezerski summarises the claim which VIPL seeks to bring on behalf of Holdings in respect of the Luddenham Rd property as follows:
"[VIPL] seeks to advance claims that certain current and former directors of [Holdings] breached their statutory and fiduciary duties to the company by causing the company to fund the rezoning and development of [the Luddenham Rd property] owned by, [Atilol] - a company that was at all relevant times controlled by, or connected with, Lolita Younes and Paul Nakhle, both of whom were directors of [Holdings]. Ms Younes is currently the indirect majority shareholder of [Holdings] and Mr Nakhle is the company's chief executive officer. In addition to claims against the relevant directors for breaches of their statutory and fiduciary duties, [VIPL] seeks leave to advance claims of accessorial liability against [Atilol]."
Mr Yezerski emphasises that it appears to be common ground that the directors of Holdings caused it to expend in excess of $5 million developing the Luddenham Rd Property without securing any contractual commitment from Atilol in relation to that property, until after the proceedings were commenced and immediately before this hearing.
Mr Withers, for Holdings, in turn provides a detailed narrative of the factual basis of the Luddenham Rd transaction, largely directed to the proposition that it is desirable for Holdings to move from its current Eastern Creek premises to the Luddenham Rd property, implicitly, if a rezoning of the property is ultimately achieved and a suitable facility is ultimately constructed on that property. It does not, of course, follow from the suggested desirability of that outcome that it is desirable for Holdings to achieve that result on any terms. Mr Withers also emphasises Ms Younes' disclosure of her interest and abstention from discussions concerning the transaction and I address the case law concerning that matter below.
I now turn to the chronology of events in respect of the Luddenham Rd property. The owner of that property, Atilol, was incorporated on 27 March 2013 with Ms Younes as its sole shareholder and director (Platford 1 [59]; Ex J1, 3304). In May 2013, Atilol contracted to purchase a first portion of the Luddenham Rd property with a completion date of 31 December 2015. That land was then zoned as RU2 rural landscape land (Platford 1 [72]; Russell 1 [31]; Ex J1, 2268, 2270, 3085). In August 2015, Atilol contracted to purchase the second portion of the Luddenham Rd property with the same zoning (Platford 1 [72]; Russell 1 [34]; Ex J1, 2268, 3086).
[10]
The proposed claim as to the "corporate boat"
As I noted above, paragraphs 128-135 of the proposed SOC deal with the purchase of a "corporate boat" from Youla, a company controlled by Ms Younes, a matter which is also relied on in the oppression case. In opening submissions, Mr Yezerski describes the claim that VIPL seeks to bring for Holdings in respect of the "corporate boat" as follows:
"[VIPL] seeks to advance claims that certain current and former directors of [Holdings] breached their statutory and fiduciary duties to [Holdings] by causing the company to purchase a yacht from a company wholly-owned by Ms Younes, in circumstances where it is alleged that the directors took no adequate steps to ascertain, and could not be satisfied, that the transaction was in the best interests of [Holdings]."
I now set out the chronology of events in respect of the proposed claim as to the purchase of a "corporate boat" from Youla. In late 2019 or early 2020, Mr O'Neill, the Alspec Group's National Marketing Manager and a proposed Defendant in his capacity as a director of Holdings, engaged Indesign Media Asia Pacific (Indesign) to consider marketing strategies and Indesign sent Mr O'Neill a two page report (Fernandez 1, Ex J1, 1096-7) setting out a four-point marketing plan which referred to offering "corporate hospitality", including by reference to:
"Corporate boat - available year-round, boats allow for relationship building and corporate events with a difference. Available through syndication or for outright purchase."
By a marketing report dated 4 February 2020 (Ex J1, 1155; Platford 1, [98]; Fernandez 1, [86]), Mr O'Neill also referred to corporate hospitality conducted by the Alspec business and recorded that:
"Alspec does not currently operate a Corporate Boat, however, if a Corporate Boat was available this would enable Alspec senior management and sales to provide highly memorable customer events on Australia's harbours and waterways to build stronger relationships and business opportunities.
A Corporate Boat is also a point of difference to our competitors, so the customer experience we could offer would not be unique. In addition, if we purchased a Corporate Boat, it could be available all year round, at different locations throughout Australia and could also be branded Alspec, so it was highly recognisable on the water."
An attached "SWOT Analysis" identifies many "strengths" of the purchase of a corporate boat; three suggested "weaknesses", of which one is a suggested benefit, and includes several photographs of large motor yachts; and concludes that:
"Overall, corporate hospitality, specifically a corporate boat, provides the stand out opportunity for Alspec to build its brand, relationships and business opportunities.
Purchasing a corporate boat outright versus a share in boat syndication or hiring a Corporate Boat provides availability 365 days per year and would allow a Corporate Boat to be branded.
The value of a Corporate Boat would to [sic] accommodate up to 30 passengers would be between $1.2m and $2.0m dependant on the age of the vessel."
[11]
The proposed claim as to the Edgecliff premises
As I noted above, paragraphs 136-147 of the proposed SOC deal with the circumstances in which Lopana (as I noted above, a company owned by Mr Nakhle) purchased the Edgecliff premises in which the Alspec Group had a showroom and Holdings paid a substantial amount of rent in advance to assist him to do so. In opening submissions, Mr Yezerski describes the claim that VIPL seeks to bring for Holdings in respect of the Edgecliff premises as follows:
"[VIPL] seeks to advance claims that certain current and former directors of [Holdings] breached their statutory and fiduciary duties to the company by:
(i) diverting a corporate opportunity to acquire land leased or licensed by [Holdings] (or one of its subsidiaries) to a company wholly-owned by Mr Nakhle; and
(ii) causing [Holdings] to advance funds to Mr Nakhle on uncommercial terms to enable him to acquire that land."
I now set out the chronology of events in respect of the proposed claim as to the Edgecliff premises. On 31 January 2022, Lopana acquired the Edgecliff premises, which were then leased by the Alspec Group, from Precious Corporation Pty Ltd for $4 million (Ex J1, 1634, 1995, 3409; Platford 1, [101] - [102]; Fernandez 1, [78]-[82]). On the same date, a lease between ASG as lessee and Lopana as lessor for the Edgecliff premises was executed by Mr O'Neill for ASG and by Mr Nakhle for Lopana (Ex J1, 1634; Platford 1, [101]-[103]; Seymour, [132]; Fernandez 1, [80]-[82]).
On 23 December 2022, the solicitors for VIPL wrote to Holdings' solicitors noting that:
"The FY22 Report [for Holdings] discloses that the group leases premises from a director-related entity for $400,000 a year with $1.8 million pre-paid as at 30 June 2022. There does not appear to be a reasonable basis on which pre-payment of rent for a five year period on a commercial office premises can be considered to be on a arms' length basis." (Ex J1, 1883)
Some two and a half months later, by letter dated 10 March 2023, Holdings' solicitors responded that the lease related to the Edgecliff premises and that:
"The Edgecliff premises were initially owned by an interest associated with Mr Saad and the Lidco entities. As part of the Lidco joint venture, the Company was invited to lease part of the Edgecliff Premises and utilise them as a showroom. We are instructed that, subsequent to the dissolution of the Lidco joint venture and in order to preserve the significant commercial benefits of a sophisticated showroom with a CBD adjacent location as well as prominent street frontage, an entity associated with Mr Nakhle, Lopana Pty Ltd, acquired the Edgecliff premises …
… A portion of the rent payable in respect of the lease was pre-paid in order to facilitate the acquisition of the Edgecliff Premises. As set out above, it was determined that there were commercial premises in the Company retaining the use of those premises." (Ex J1, 1995)
[12]
The proposed accessorial claim against Atilol
In opening submissions, Mr Yezerski identifies the several ways in which VIPL puts Holdings' claim against Atilol. First, Ms Yezerski submits that:
"[Atilol] was the corporate creature, vehicle, or "alter ego" of Ms Younes, or Ms Younes and Mr Nakhle, through which they profited from the breaches of [Primary Duties, as defined]"
It seems to me that the factual basis of this claim is seriously arguable. At the time of the earlier alleged breaches on which VIPL relies, and until March 2022, Ms Younes was Atilol's sole director and sole shareholder. A factual basis for this claim is also seriously arguable after Ms Younes' and Mr Nakhle's daughter became Atilol's shareholder in March 2022, where the letter of intent dated 2 May 2022 and her abstaining from later board decisions both arguably assume her continued control of Atilol.
Mr Withers responds that the claim against Ms Younes as Atilol's alter ego is not seriously arguable as a matter of law. He submits that there is:
"no distinct basis of alter ego liability as against a defaulting fiduciary's corporate creature. That is, a company which is the alter-ego of a fiduciary may be liable as an accessory for the fiduciary's breach without having separately to establish knowledge on the part of the corporate alter ego. But that is simply because the fiduciary's knowledge is attributed to the corporation also - it is not a distinct basis of accessorial liability. Accordingly, here, [VIPL's] separate 'alter ego case' adds nothing. It suffers from the same problems - and it will ultimately fail - for the same reasons as set out above concerning the (proposed) principal claims as to fiduciary breach."
Turning now to the applicable case law, in Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; 287 ALR 22; [2012] FCAFC 6 ("Grimaldi"), the Full Court of the Federal Court observed (at [242]-243]) that:
"It is accepted in this country that Lord Selborne's ex tempore observations in Barnes v Addy did not provide an exhaustive statement of the circumstances in which, and the bases on which, a third party's participation in another's breach of fiduciary duty or breach of trust, could render that person accountable in equity as a "constructive trustee" (to use the commonly adopted but often unhelpful formula): Farah Constructions, at [161].
The fact findings made in this case reveal, potentially, four quite different manifestations of such participation. Each type warrants present note. The first, is where the third party is the corporate creature, vehicle, or alter ego of wrongdoing fiduciaries who use it to secure the profits of, or to inflict the losses by, their breach of fiduciary duty: see eg Cook v Deeks [1916] AC 554 (Cook) at 565; Queensland Mines Ltd v Hudson (1975-1976) ACLC 28,658 at 27,709, revsd on other grounds (1978) 18 ALR 1; Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488 (Timber Engineering) at (11); Green & Clara Pty Ltd v Bestobell Industries Pty Ltd (No 2) [1984] WAR 32 (Green v Bestobell); Gencor ACP Ltd v Dalby [2000] 2 BCLC 734 at [26]; CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704 (CMS Dolphin) at [97]-[105]. In these cases the corporate vehicle is fully liable for the profits made from, and the losses inflicted by, the fiduciary's wrong. The liability itself is explained commonly on the basis that "company had full knowledge of all of the facts": Cook at 565; it is the alter ego of the fiduciary with a "transmitted fiduciary obligation": Timber Engineering, at (11); or that it "jointly participated" in the breach: CMS Dolphin at [103]. Liability does not turn on the need to show "dishonesty", although it often provides the reason for the interposition of the company. Proof of a breach of fiduciary duty will suffice; Green v Bestobell, at 40. And, as was said in CMS Dolphin (at [104]), it is "rather artificial" to use Barnes v Addy to explain this liability."
[13]
Prospects of recovering damages, compensation or an account of profits
I will deal below with the prospect of VIPL, on Holdings' behalf, recovering damages or compensation or an account of profits in the proceedings, which is best addressed in determining whether they are in Holdings' best interests, consistent with the view that I took in Global Advanced Metals and Mount Gilead. If it were necessary for VIPL to establish a serious question to be tried that Holdings could recover substantial damages, compensation or an account of profits, it seems to me that it has done so for the reasons noted below.
[14]
Whether the proposed proceedings are in Holdings' best interests
As I noted above, 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 Holdings' best interests. The relevant principles were summarised in Swansson at [55]-[60], where Palmer J noted that that provision 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 the best interests of the company, an applicant should generally give evidence of the character of the company, in the sense of the nature of the company's operations; the business of the company 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. In Gladstone Pacific Nickel, Ball J identified relevant matters including the prospects of success of the action; the likely costs of the action; the likely recovery if the action is successful; and the likely consequences to the company if the action is unsuccessful. The "best interests" of Holdings involve its separate and independent welfare, predominantly reflecting the interests of its shareholders: Huang v Wang at [59].
Whether it is in the best interests of Holdings to bring a claim depends not only on whether it might succeed as to liability, but whether there would be any practical benefit from its success. In Re Imperium Projects Pty Ltd [2015] NSWSC 16 at [14], I observed that it did not follow that it was in a company's best interests that a remedy be pursued, merely because it appeared to have suffered an actionable wrong, and any assessment of the company's best interests depended on matters including "the strength of the suggested claims". In Re Sirrah Pty Ltd [2018] NSWSC 1802 at [21], I also noted that, where a serious question to be tried exists, and there is a prospect of substantial recovery if the proceedings are successful, it may well be in a company's best interests that it have the opportunity to make that recovery, so long as it is not exposed to an unjustified risk of costs in doing so. In South Johnstone Mill Ltd v Dennis (2007) 244 ALR 730; (2007) 64 ACSR 447; [2007] FCA 1448, in a claim for sale at undervalue brought against receivers and managers, Middleton J found that there was sufficient evidence of damage, without determining whether the applicant's expert evidence was admissible, where an inference supporting a claim for substantial compensation could be drawn from the documentary evidence.
[15]
Notice requirement
It is common ground that the notice requirement under s 237 of the Act has been satisfied.
[16]
Determination
For these reasons, I grant the leave to commence the derivative proceedings sought by VIPL under s 237 of the Act and will make further orders as to the conduct of the proceedings.
[17]
Amendments
20 March 2024 - Additional Counsel noted. Misprints corrected.
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Decision last updated: 20 March 2024
Holdings also relies on the affidavit dated 22 December 2023 of one of its directors, Mr Seymour, who refers to aspects of its corporate history and the previous proceedings. Mr Seymour addresses aspects of the directors' decision-making in respect of funding development costs of and a lease of part of a property situated at Luddenham Rd, Orchard Hills ("Luddenham Rd property") owned by Atilol Holdings Pty Ltd ("Atilol"), a company controlled by Ms Younes. I address matters relating to that property in the chronology and in dealing with the applicable criteria for the grant of leave below. Mr Seymour was not cross-examined and it is preferable that I largely do not reach findings as to his substantive evidence, beyond the matters which need to be addressed in order to determine this application, where Holdings may rely on that evidence at a final hearing and it may then need to be addressed by a trial judge. Mr Seymour also briefly addressed the position in respect of the Edgecliff premises. Holdings also read an affidavit dated 15 December 2023 of Mr Spiros Contominas, who is the Specifications Manager of the Alspec business, which addresses issues relating to the Edgecliff premises.
By a third affidavit dated 6 February 2024 ("Fernandez 3"), Ms Fernandez addressed Holdings entry into a Binding Heads of Agreement ("HOA") with Atilol on that date, about a week before the commencement of this hearing. Holdings now places substantial weight on that agreement in order to resist the grant of leave to VIPL to bring derivative proceedings in respect of the Luddenham Rd property. Holdings also tendered its 2023 financial report (Ex D1.1) and evidence of the qualifications of the members of the Orchard Hills Committee (Ex D1.2).
Ms Younes and LIPL read the affidavit dated 15 December 2023 of their solicitor, Ms Russell ("Russell 1"). Ms Russell noted that Ms Younes was one of the five directors of Holdings, Holdings was the holding company of the companies known as the Alspec Group, and the business operations of the Group were conducted by another entity, Aluminium Specialities Group Pty Ltd ("ASG"). Ms Russell noted that Ms Younes had been the domestic partner and later the wife of Mr Miller, a founder of the Alspec Group. It appears that Ms Younes is also the ex-wife of the current chief executive of the Alspec Group, Mr Nakhle, who plays a significant role in the events to which I refer below. Ms Russell identifies Ms Younes' role as a director and shareholder of other companies including LIPL and Youla Holdings Pty Ltd ("Youla") which sold a very substantial motor yacht to Holdings. Ms Russell contends that VIPL's application for leave to bring the proposed derivative proceedings is not brought in good faith, referring to the commencement of earlier proceedings by VIPL and other minority shareholders of Holdings. That proposition has the difficulties that, as I noted above, the events which are the subject of these proposed proceedings largely took place after the other proceedings concluded; second, the Takeovers Panel did not determine the application brought before it, partly because it would be preferable that a Court do so, and that is hardly a reason for a Court not to do so; and, third, that it does not engage with the merits of the claims that VIPL seeks to bring on behalf of Holdings.
Ms Russell also there outlined events relating to Ms Younes' and Atilol's acquisition of the Luddenham Rd property. Although no objection is taken to that evidence, it is not apparent Ms Russell had any personal knowledge of many of those events and her evidence is presumably given on instructions from Ms Younes who did not give evidence. Ms Russell also gives evidence, by way of assertion, as to Ms Younes' lack of involvement in decision-making regarding the acquisition of the "corporate boat" from Youla and as to her lack of involvement in decision-making regarding the purchase of the Edgecliff premises by a company associated with Mr Nakhle. By a second affidavit dated 13 February 2024, Ms Russell referred to correspondence between the parties relating to the question whether the claims brought by VIPL could be raised in the oppression proceedings rather than in derivative proceedings. Ms Younes and LIPL also tendered further correspondence between the parties' solicitors (Ex D2.1) directed to the circumstances in which the Court will grant leave to bring derivative proceedings, where an oppression claim is also under way.
I now set out a brief chronology of some matters of general significance, which I have drawn partly from a helpful chronology prepared by VIPL, partly from the affidavit evidence and partly from the documentation to which I was taken in the course of the proceedings. I will set out the chronology of events relating to particular claims in dealing with whether a serious question to be tried is established in respect of those claims. ASG was incorporated in August 1974 (Platford 1, [40]). Mr Gates, the husband of Ms Gates, whom is the principal of VIPL, worked with the Alspec Group for many years from 1978 on (Platford 1, [41]). Holdings was incorporated in 1981 as the holding company of the Alspec Group (Platford 1, [42]-[43]). From October 1983 on, Holdings issued shares to employees who became minority shareholders in Holdings (Platford 1, [47]). Holdings and other companies in the Alspec Group have operated from premises at Eastern Creek since 2004 (Seymour, [77]-[78]). Until 2010, Ms Younes was married to the current chief executive of the Alspec Group, Mr Nakhle (Platford 1, [37]). Subsequently, in November 2017, she married Mr Millard, the then controlling shareholder of Holdings (Platford 1 [37], Russell 1 [7]).
By about November 2018, Mr Millard had become dissatisfied with the then board of Holdings (Seymour, [31]). Oppression proceedings were commenced by several shareholders in November 2018; Mr Seymour and Ms Younes were appointed as directors of Holdings on 6 December 2018 (Seymour, [48], [53]); and the then oppression proceedings were quickly settled and discontinued on 12 December 2018 (Platford 2, [26]). Messrs Barraket, O'Neill and Nakhle were then also appointed as directors of Holdings in April 2019 (Seymour, [53]; Fernandez 1, [76]) and Mr Nakhle was appointed as chief executive officer of Holdings and Mr Barraket as chair of Holdings (Ex J1, 2245). On 26 March 2021, Ms Younes, through interposed companies, became the indirect majority shareholder of Holdings, then holding 56.62% of its shares (Ex J1, 2061-2062; 2100 - 2102, 2139).
On 5 October 2023, VIPL notified Holdings of its intention to apply for leave to bring a derivative action (Ex J1, 2350; Platford 1, [106]).
It is relatively easy to satisfy this requirement if an application is made by a current shareholder who has more than a token shareholding and the derivative action seeks recovery of property so that the value of the applicant's shares would be increased, and VIPL plainly falls within that category where it has a significant shareholding in Holdings : Swansson at [38]; Re Gladstone Pacific Nickel Ltd (2011) 86 ACSR 432; [2011] NSWSC 1235 ("Gladstone Pacific Nickel") at [58]; Mathews Capital Partners Pty Limited v Coal of Queensland Holdings Limited [2012] NSWSC 462.
In Re Lotus Property Fund No 8 Pty Ltd [2020] NSWSC 1349 at [75]-[76], Stevenson J in turn observed that:
"An enquiry as to whether, in these circumstances, [the plaintiff] is acting in good faith involves consideration of these questions:
(a) Does [the plaintiff] honestly believe that [the company] has a good cause of action against [the defendant] with reasonable prospects of success?;
(b) Does [the plaintiff] honestly believe that it is in the best interests of [the company] to bring the proceedings?;
(c) Is [the plaintiff] seeking to bring these proceedings for a collateral purpose or to obtain "some advantage for which the action is not designed".
It is not necessary that [the plaintiff] actually depose to having the beliefs to which I have referred. These matters can be inferred from the nature and circumstances of the case and from the diligence with which [the plaintiff] has sought to assert a desire to bring the proceedings in question."
I accept that several factors identified by VIPL support a finding that VIPL holds an honest belief in the existence of good causes of action and is acting in good faith in respect of the claims. First, I will find below that there is a serious question to be tried in respect of each of the claims; VIPL has proposed arrangements, which the Defendants now accept are satisfactory, to indemnify Holdings in respect of its potential liability to costs in respect of the proposed proceedings; and it is apparent that VIPL has devoted significant efforts to preparation of its claims and to the identification of the documentary evidence that supports them. Second, a recovery, whether of the amount paid to Atilol to date in respect of the Luddenham Rd transaction and interest, or a portion of the profit made by Atilol on a rezoning of the Luddenham Rd property, would increase Holdings' assets and the corresponding value of VIPL's shares in Holdings.
Mr Yezerski, with whom Mr Hord appears for VIPL, acknowledges that there has been a history of disputes between VIPL and Holdings or its indirect majority shareholders. Mr Withers, with whom Mr Puttick and Ms Dyon appear for Holdings, in turn pointed to the discontinuance of proceedings previously brought by VIPL to seek access to books and records of Holdings, without acknowledging that that occurred after Holdings produced those books and records for VIPL's inspection; and pointed to VIPL's lack of success in proceedings in the Takeover Panel, without recognising the Panel's observation that the relevant matters were best determined by a Court, a result that VIPL now seeks. It seems to me that that history does not deprive VIPL of good faith and, instead, reflects previous issues as to the management of Holdings, and that is more rather than less reason to find that VIPL is acting in good faith in bringing the proceedings.
I have referred above to the authorities which indicate that the test for a serious question to be tried is a "relatively low threshold": Swansson at [25]; Gladstone Pacific Nickel at [56]. An application of this character does not involve a consideration of the underlying merits of the proposed litigation, except to the extent that it is necessary to determine whether there is a serious question to be tried and it will not generally be appropriate for the Court to attempt to resolve disputed questions of fact in such an application: Swansson at [25]; Gladstone Pacific Nickel at [56]; Huang v Wang at [60]: Legal Practice Management Group at [94]. The need for evidence to establish the factual basis of a serious question to be tried was noted in Charlton v Baber (2003) 47 ACSR 31; [2003] NSWSC 745, where Barrett J held that a serious question to be tried in respect of a breach of directors' duties was not established, where an assertion of loans on uncommercial terms and without adequate security was not supported by evidence of the terms of the loans. The need for evidence to support such claims was also recognised by Gilmour J in MG Corrosion at [141], approved in Hannon v Doyle (2011) 82 ACSR 259; [2011] NSWSC 10 at [48].
The parties and particularly Holdings devoted considerable attention to a close review of VIPL's pleaded case and the evidence supporting it. I proceed on the basis that it is not necessary for VIPL to establish that it can presently prove, by admissible evidence, each paragraph to its claims and each particularised matter in order to establish a serious question to be tried in respect of its substantive claims against the Defendants and proposed Defendants. I should only determine what is necessary to determine whether it has established such a question, where other matters will have to be determined by a trial judge at a hearing. I largely do not address the parties' submissions as to whether VIPL, on Holdings' behalf, could or could not establish matters which may provide alternative bases for relief, where I find that it can establish a serious question to be tried as to at least one basis for relief in respect of each of the challenged transactions against the relevant Defendants.
I now turn to the structure of the claim that VIPL seeks to bring on Holdings' behalf. I have here drawn on the proposed SOC that is annexed to Ms Platford's first affidavit and the note of proposed changes to it that was provided in the course of submissions (MFI 1) and a helpful table prepared by VIPL, which identifies those parts of the proposed SOC that relate to the oppression claim and the derivative claim (MFI 2). Prayers 3 - 11 of the proposed SOC set out the relief that VIPL seeks to claim on Holdings' behalf claimed which, importantly, includes a claim for compensation under s 1317H of the Act against Ms Younes, Mr Nakhle and Messrs Seymour, O'Neill and Barraket and a claim for compensation against Atilol under that section. I will refer to the basis on which compensation can be calculated under that section below. VIPL also seeks to bring a claim for Holdings for an account of profits made by Ms Younes and Mr Nakhle from their alleged breaches of fiduciary duty and a claim for an account of profits made by Atilol on the basis that it is Ms Younes' or Mr Nakhle's alter ego or on the basis of knowing receipt or knowing assistance.
Paragraphs 66-127 of the proposed SOC plead matters relating to the Luddenham Rd property, to which I will shortly turn, which are also relied on in respect of the oppression claim. It appears to be common ground that Ms Younes was the sole shareholder of Atilol from 27 March 2013 until late March 2022, and its sole director until 14 March 2022, when Mr Nakhle's and Ms Younes' daughter replaced her in those positions. The proposed SOC pleads that, but it is not necessary to decide whether, Ms Younes remained a director of Atilol within the extended meaning of s 9 of the Act after 14 March 2022. The proposed SOC also pleads (at [78]) that Mr Nakhle was a director of Atilol within that extended meaning, or alternatively was an attorney for Atilol on several occasions and owed fiduciary duties to Atilol arising from that role. The parties drew attention to the factual matters relating to those allegations and to the applicable case law. It is not necessary for me to address those allegations and it is preferable not to do so where they will likely need to be addressed by a trial judge, where those allegations are not necessary to establish a seriously arguable claim by Holdings against Ms Younes or Mr Nakhle.
Paragraphs 128-135 of the proposed SOC deal with the purchase of a "corporate boat" from Youla, a company controlled by Ms Younes, a matter which is also relied on in the oppression claim. Paragraphs 136-147 of the proposed SOC deal with the circumstances in which Lopana Pty Ltd ("Lopana"), a company owned by Mr Nakhle, purchased the Edgecliff premises in which a subsidiary of Holdings had a showroom and Holdings paid a substantial amount of rent in advance to assist him to do so, and is a matter also relied on in the oppression claim. Paragraphs 171-187 of the proposed SOC plead claims for breach of directors' duties and paragraphs 188-205 plead accessorial liability of Atilol to Ms Younes' and Mr Nakhle's alleged breaches of duty.
At a board meeting of Holdings on 30 August 2018, the then board of Holdings discussed relocating from Alspec Group's Eastern Creek premises within about two to three years (Seymour, [83]). Nonetheless, on 20 August 2019, a lease of the Eastern Creek Premises between ASG as lessee and A S Group Properties Limited ("ASGP") as lessor was executed by Mr Nakhle and Mr Seymour for ASG and by Mr Nakhle and Mr Woolcott for ASGP (Ex J1, 2274; Platford 1, [68]).
The minutes of Holdings' board meeting on 24 April 2020 (Ex J1, 1235; Platford 1, [74]-[75]; Seymour, [94]; Fernandez 2, [21]) refer to capacity issues with Alspec Group's Eastern Creek premises and observe that:
"The opportunity to enter into an arrangement in relation to land owned by Lolita Millard [ie Ms Younes] to create an 'Alspec Industrial Park' was outlined. Ms Millard's personal interest in this matter was noted and she agreed to abstain from any discussion on this opportunity.
The benefits and risks of this potential arrangement were noted. Alternative options for the Company were also considered, with general agreement that they were not as favourable as that being proposed."
There appears to be no further evidence as to the benefits and risks which were then discussed, or which alternative options were identified, or how it was concluded that they were not as favourable as the proposed arrangement with Ms Younes' company, Atilol ("Luddenham Rd proposal"). It was then agreed that Mr Nakhle would prepare and circulate financing options for the board to consider at a board meeting to be scheduled in two weeks.
Mr Yezerski submits, with considerable force, that:
"… the 24 April 2020 minutes record that the Board was "generally in favour" of the Luddenham Rd proposal at that meeting, "subject to financing options and the anticipated timeline being presented". That was a remarkable position for the Board to adopt in circumstances where the Board had no detailed information regarding the benefits, costs and risks of relocating from the Eastern Creek Premises, and therefore no material on which it could assess the proposal having regard to the costs and benefits of remaining at Eastern Creek. It is even more remarkable that the Board adopted this position having regard to the fact that there was no material before the Board going to the commercial terms that [Holdings] might be able to negotiate and agree with [Atilol]. There were many matters beyond "financing options" and "the anticipated timeline" that a prudent board would have considered. Nevertheless, it appears that, even before the Board had any sense of what the commercial terms of the deal would be, its primary concern was financing a deal, rather than whether the opportunity was commercially attractive for [Holdings] having regard to all available alternatives."
By a memorandum dated 4 May 2020 from Mr Nakhle (Ex J1, 1238; Seymour, [102]) addressed to Ms Younes (notwithstanding that she had previously abstained from discussion on the matter) and three other board members, Mr Nakhle attached cashflow requirements relating to "rezoning this proposed new land at Orchard Hills owned by Atilol PL, Ms Lolita Younes (Millard)". Mr Nakhle referred to the cost for the Alspec Group to buy land and build a new building and referred to a suggested scarcity of "raw zoned land" in Sydney and the expense of such lands. He also identified the elements of "this proposal", and provided the board with a schedule identifying two options.
Mr Yezerski submits, again with considerable force, that:
"The analysis was limited to two options, both of which involved relocating to Luddenham Rd Property. There was no consideration of the possibility of remaining at Eastern Creek and no consideration of any alternative potential site for relocation. There was no analysis of whether equivalent or preferable deals could be negotiated with other parties, be they owners of already zoned industrial land or owners of rural land looking to rezone. There was no analysis of how relocating from Eastern Creek would impact ASG Properties [the owner of the Eastern Creek premises], notwithstanding [Holdings'] substantial interest in that company."
It seems that Mr Nakhle's analysis of the advantages of a move to the Luddenham Road premises conducted in 2020 (again, subject to rezoning occurring and any construction of those premises) did not take account of costs of the Alspec Group vacating the Eastern Creek premises and other premises which it leased, and any steps that would need to be taken to dispose of the Eastern Creek premises or use them for other purposes, where they were owned by another company in which Holdings had an interest. Mr Nakhle's analysis also did not address the fact that Holdings interest in the company that owned the Eastern Creek premises had the result that a significant part of the economic benefit from the rent paid by ASG for those premises was retained within the Alspec Group, whereas rent paid to Atilol would not benefit the Alspec Group or its shareholders other than Ms Younes and possibly Mr Nakhle. Although Mr Nakhle's spreadsheet analysed the cost of acquiring land, rather than leasing it from Atilol, it also seems to have taken no account of the fact that the land, once acquired, would be an asset of the Alspec Group which would have continuing and possibly increasing capital value. As Mr Yezerski points out, the figures contained in that spreadsheet also do not wholly correspond to those contained in the memorandum provided to directors.
At a further board meeting on 5 May 2020, the Luddenham Rd proposal and funding of $600,000 for it to the end of September 2020 was discussed (Ex J1, 1244; Platford 1, [77]; Seymour, [105]; Fernandez 2 [21]). Ms Younes did not attend that meeting. There was reference to Mr Nakhle's 4 May memorandum; further reference to the capacity issues concerning the Eastern Creek premises and the opportunity as to the Luddenham Rd property owned by Atilol which is again noted as an entity associated with Ms Younes, and the minutes record:
"The benefits of this potential opportunity were outlined.
The financial comparison of the alternative scenarios of either buying or renting the land were discussed, noting that based on the financials presented, renting the land was more financially viable for the Company.
It was RESOLVED to authorise management to spend up to $600K to the end of September 2020 and HB&B [advisers to Atilol or Ms Younes] to present to the Board at the June 2020 board meeting."
The minute does not refer to any recognition of the difficulties in Mr Nakhle's memorandum and spreadsheet, which I noted above, before Holdings' directors reached the conclusion that leasing the land was more "financially viable" for Holdings. Mr Yezerski submits that Holdings' evidence "confirms that the Board did not receive any professional advice in relation to whether to pursue the Luddenham Rd proposal before making that decision; rather, the Board's decision was made on the basis of Mr Nakhle's threadbare analysis alone." As will appear below, Holdings spent much more than $600,000 in order to fund Atilol's rezoning proposal, although there is no evidence that any further authority was given by the board for additional expenditure.
On 24 June 2020, ASG as lessee and Atilol executed a non-binding proposed ground lease for part of the Luddenham Rd property (Ex J1, 1246; Platford 1, [78]; Seymour, [109]). That document recorded a commencing rent, although, presumably in consequence of the fact that agreement was not binding, ASG has recently agreed to pay a substantially higher "current estimate" of the initial rent, by an agreement dated 6 February 2024 which I address below. The 24 June non-binding proposed lease also provided that:
"…[ASG] is to fund the Development Costs associated with acquiring all approvals for the works. A breakdown of these development costs are annexed to this agreement (Annexure B)."
Annexure B refers to development costs of $4.2 million relating to the rezoning of the whole of the Luddenham Rd property, although the Alspec Group would only occupy a part of that property. As I will note below, the Alspec Group has since paid development costs well in excess of that figure. Oddly, that document is signed by Mr Barraket, the chair of Holdings, on behalf of the lessor (Atilol) and by Mr Nakhle, the chief executive officer of Holdings, on behalf of Holdings. If those persons had each signed that document in the wrong place then, equally oddly, that lease was signed on behalf of Atilol by Mr Nakhle, the chief executive officer of Holdings who had prepared costings for the transaction for Holdings' board.
Mr Yezerski submits that the manner in which that document was signed demonstrates that:
"First, by no later than 24 June 2020, Mr Nakhle was purporting to act simultaneously for [Holdings] and [Atilol]. Secondly, that was a matter that must have been apparent to Mr Barraket, the chairman of [Holdings], when he countersigned the Proposed Lease Terms. …
Notwithstanding that Mr Nakhle's conflicted position must have been apparent to [Holdings] by 24 June 2020 at the latest, the Board of [Holdings] took no steps to exclude Mr Nakhle from any decisions or actions in connection with the Luddenham Rd property, or to obtain independent advice so as to ensure that the Luddenham Rd [p]roposal was in the best interests of [Holdings]."
Mr Yezerski also submits that:
"While it was only envisaged that the Alspec companies would occupy part of the Luddenham Rd Property (a lettable area of 69,097 square metres), the $4.213m (excluding GST) in Development Costs referred to the Proposed Lease Terms were the costs associated with achieving the rezoning and other planning approvals for the whole of the Luddenham Rd Property (221-227 and 289-317 Luddenham Road, a total site area of 891,015 square metres). In other words, [ASG] signed a document that would have it paying all of the Atilol Holdings' Development Costs for the whole of the Luddenham Rd Property - an area more than 10 times larger than the property that [Holdings] would actually lease."
A draft memorandum dated 22 February 2021 from Mr Barraket to shareholders in Holdings (Ex J1, 1405) referred to the suggested relocation of the Alspec Group's operations and stated that Holdings "is to fund the Penrith City Council approvals required for the Department of Planning and all relevant authorities", consistent with what was contemplated by the 24 June non-binding lease; that the budget provided for Holdings to spend $4.213 million up to "commencement on site"; and that Holdings had expended $1.015 million on the Luddenham Rd proposal as at that date. There is no evidence that draft memorandum was sent to shareholders and there is evidence it was not sent to VIPL.
On 28 April 2021, Ms Younes executed a Term Sheet for the development of Luddenham Rd property between Atilol as the landowner and HB&B as developer (Ex J1, 1535; Platford 1, [82]).
On 14 March 2022, Ms Younes was replaced, or purportedly replaced, by Ms Michelle Nakhle, Ms Younes' and Mr Nakhle's daughter, as the sole director of Atilol (Ex J1, 3304; Platford 1, 37, [62], [87]) and, on 23 March 2022, Ms Younes transferred all shares in Atilol to Michelle Nakhle (Ex J1, 1675-6; Platford 1, [63], [88]).
On 2 May 2022, ASG (as lessee) and Ms Younes (as lessor) executed a Letter of Intent (Ex J1, 1691; Platford 1, [92]) which recorded that Ms Younes was the owner of the Luddenham Rd property that was available for lease, presumably reflecting the reality of Ms Younes' control of that property; recorded that that letter again did not create a binding agreement and was not enforceable; provided for an estimated rental price of $625,000 payable monthly (or about $7.5 million annually) commencing in July 2024, although it did not indicate whether that was inclusive or exclusive of GST; and provided for ASG to pay Ms Younes a bond deposit of $1.875 million on or before 1 July 2024, although it is not apparent that there was then any realistic prospect that the relevant premises would be available for ASG to occupy by that time. That document was executed by Ms Younes as landlord and provided for execution by Mr Nakhle as chief executive officer of ASG, although the document in evidence is not executed by Mr Nakhle. It appears this document was prepared for submission in respect of the New South Wales Government Jobs Plus Program (Ex J1, 1692) and, in May 2022, Holdings submitted a "Jobs Plus Program Application" to that program (Ex J1, 1705; Platford 1, [90]). In opening, Mr Yezerski submits, again with force, that:
"The "terms" of the Letter of Intent contemplate that [ASG] will pay monthly rent of $625,000, equating to $7.5 million per annum - an approximate increase of either $2.56 million (34%) or $3 million (67%) above that contemplated by the Proposed Lease Terms (depending on whether the figure of $625,000 is inclusive or exclusive of GST).
In short, while still non-binding, the terms contemplated by the Letter of Intent were less favourable to [ASG] than those contemplated by the [earlier non-binding terms]. Nevertheless, [Holdings] took no steps to require [Atilol] to enter into a binding agreement in respect of the Luddenham Rd [p]roperty."
On 28 June 2022, Mr Nakhle executed the transfer of part of the Luddenham Rd property to a third party, under a power of attorney for Atilol in its capacity as trustee of the Atilol Family Trust (Ex J1, 1729: Platford 1, [61]) and that sale appears to have completed on 19 August 2022 for $6,658,740 (Ex J1, 1727; Platford 1, [94]). That sale price suggests that the value of the Luddenham Rd property had significantly increased by that date.
As I noted above, on 5 October 2023, VIPL notified Holdings of its intention to apply for leave to bring a derivative action (Ex J1, 2350; Platford 1, [106]). On 12 October 2023, a non-binding HOA between Atilol and Holdings was prepared but not executed (Ex J1, 2361; Seymour, [118]). VIPL commenced these proceedings and sought leave to bring the derivative proceedings on 20 October 2023.
By circular resolution dated 22 November 2023 signed by Mr Barraket as chair and Messrs Seymour and Bertram as directors, the board of Holdings noted that Holdings had previously expended funds "in respect of a proposed relocation" to the Luddenham Rd property (implicitly, after any rezoning occurred and a building was constructed) and that ASG was contemplating entering an HOA in respect of the property and resolved to engage the solicitors acting for it in these proceedings to commission the "Orchard Hills Committee" which was asked to express a view as to whether the non-binding HOA was reasonable (Ex J1, 2395; Seymour, [120]). That circular resolution noted that Mr Nakhle and Ms Younes had recused themselves from considering and voting on the resolution, but did not identify any interests in the matter that led them to do so. That note raises several questions. First, by this time, Ms Younes had apparently been replaced by her daughter as director and shareholder of Atilol and the nature of any continuing interest in that company that might require that she not participate in this meeting was not identified; and, second, the nature of Mr Nakhle's interest that might require that he not participate and why he could previously promote the transaction as chief executive and participate in previous directors' meetings but could not now participate in this meeting was also not identified. Mr Puttick speculated in closing submissions, without evidence, that Mr Nakhle disqualified himself because he was a proposed defendant in these proceedings, but so were Messrs Barraket and Seymour who did not disclose any interest or withdraw from that meeting and voted on that resolution despite its likely connection with the proceedings.
Knight Frank prepared a valuation report (rental assessment) for the Luddenham Rd property as at 24 November 2023 (Ex J1, 3561). Holdings did not seek to tender that document as an expert report and only tendered it subject to the limitation which I have noted above. The Orchard Hills Committee was briefed on relevant background by a memorandum dated 27 November 2023 from the solicitors acting for Holdings in these proceedings (Ex J1, 2410), which Holdings accepted should only be admitted on the basis that it was proof of the process adopted in respect of the property, rather than evidence of the proof of any fact asserted in it. On 27 November 2023, a further non-binding proposed HOA between Atilol and ASG was prepared but not executed (Ex J1, 3045; Seymour, [119]). On 13 December 2023, the Orchard Hills Committee was provided with an updated version of a Knight Frank valuation report (Ex J1, 3588; Seymour, [122]), which Holdings also tendered not as an expert report and subject to the same limitation as the earlier report. VIPL advances several criticisms of the approach adopted in the Knight Frank reports, which it is not necessary to address where Holdings did not seek to tender those reports as expert evidence or establish the truth of the facts assumed by Knight Frank or of the conclusions that it reached.
On 14 December 2023, the Orchard Hills Committee provided its written opinion to the solicitors acting for Holdings in the proceedings (Ex J1, 3087; Seymour, [123]). Holdings tendered that opinion subject to the limitation that it was proof of the process adopted in respect of the property, rather than as evidence of the proof of any fact asserted in it. The Committee identified relevant questions as:
"1. Is [ASG's] decision to move the business from its existing premises (Eastern Creek and the Interchange) reasonable and favourable to [ASG]?
2. Is the proposed Orchard Hills opportunity and proposed timing of the move reasonable and favourable to [ASG]?
3. Are the commercial terms of the proposed HOA reasonable and favourable to [ASG]?."
The executive summary of the Committee's opinion indicated that:
"The Committee's unanimous opinion (Opinion) is that the proposed HOA between Atilol and [ASG} is reasonable and favourable to [ASG]. If the opinion is subject to assumptions that the committee has implied from the Knight Frank rental assessment report which are detailed below, and the committee recommends that [ASG] seek to have Knight Frank confirm that the assumptions are valid." [emphasis added]
Holdings does not seek to establish the correctness of those assumptions or the correctness of the Knight Frank reports to which I referred above. While VIPL advances several criticisms of the opinion formed by the Orchard Hills Committee, it is not necessary to address where Holdings does not seek to establish the truth of the matters assumed by that Committee or of the conclusions which it reached.
In expressing that view, the Committee also expressly assumed that there were no other currently available premises that would meet ASG's needs, although it noted a matter referred to in a report of a real estate consultant which may be inconsistent with that assumption. It also expressly referred to the "considerable timing, and potential cost, risk associated with proceeding in accordance with the HOA" and assumed that the HOA and final documentation would include appropriate protection for ASG if the project was late or not completed by a specified date, and identified several issues and points for consideration in respect of the HOA. That Committee's opinion is of little or no assistance here, because the assumptions on which it is based are not established. In any event, that Committee, understandably, appears to have addressed the position as it stood in December 2023, rather than the question how Holdings found itself at that time without any right to occupy the Luddenham Rd property, notwithstanding that it had spent nearly $5 million in order to fund development approval for the whole of that property, as to which it was to occupy a smaller part.
On 19 December 2023, a further proposed HOA between Atilol and ASG was prepared and not executed (Ex J1, 3093; Seymour, [124]). That document recorded that, by that date, ASG had spent $4,941,989 (excluding GST) (or $5,436,187.90 including GST), on developing and rezoning the Luddenham Rd property. In opening submissions, Mr Yezerski submits that had occurred notwithstanding that:
"[Holdings] and its subsidiaries had never prepared or obtained any detailed assessment of the Luddenham Rd proposal and the benefits, costs and risks of that proposal relative to the available alternatives;
[Holdings] and its subsidiaries did not have any binding and enforceable agreement with Atilol Holdings in relation to the Luddenham Rd property in the period from 5 May 2020 to 19 December 2023;
[I]it appears to remain the case today that [Holdings] and its subsidiaries have no binding and enforceable agreement with [Atilol] in relation to the Luddenham Rd property; and
[Holdings] and its subsidiaries do not appear to have engaged any independent external advisers to advise it in relation to the Luddenham Rd property transaction prior to spending in excess of $5.4 million."
The third point made by VIPL was partly displaced by a binding HOA executed by ASG and Atilol after VIPL's opening submissions were made and shortly before the hearing commenced, although that document still does not fix the rent to be paid by ASG in respect of the premises, if a rezoning occurs and they are ultimately developed. I address that agreement below.
On 20 December 2023, the board of Holdings noted the report of the Orchard Hills Committee and a proposed HOA between Atilol and ASG and the suggested benefits of relocating to Orchard Hills (implicitly, if a rezoning occurred and the new premises were constructed) and resolved to approve that HOA. The minutes (Ex J1, 3106) recorded that the Chair had requested Mr Nakhle and Ms Younes not attend the meeting "due to their material personal interest in the matter to be discussed." That request raises the same questions that I noted above in respect of the 23 November circulating resolution.
On 6 February 2024, shortly before this hearing commenced, Ms Nakhle for Atilol and Mr Barraket and Mr Seymour for ASG executed a binding HOA between ASG and Atilol relating to the development and lease of the Luddenham Rd property (Fernandez 3, Annexure A). Despite its title, that agreement still does not provide a binding rental for the premises to be occupied by ASG (if they are ultimately developed), but only a "current estimate" of the initial rent at a level that significantly exceeds the rental contemplated by the previous non-binding HOA, and it provides for a rental incentive. That agreement again records that, as at 31 January 2024, ASG had incurred costs in excess of $4.9 million, exclusive of GST, to develop the Luddenham Rd property and contained a somewhat self-serving statement that:
"It was and is the parties' intention that in consideration for incurring the costs of developing the Property, the lessor would grant the Lessee exclusive rights in respect of the Property that would grant the Lessee superior rights to develop, control, access, lease, acquire or otherwise manage or deal with the Property and the underlying land. The parties formally record their agreement which is immediately binding and enforceable that in the event that the re-zoning application is unsuccessful, the lessor agrees to repay the amounts expended by the Lessee (including, for the avoidance of doubt, future expenses) in connection with development works with any such amounts to be repayable on demand."
That binding HOA does not provide for a credit for development costs already paid by Holdings or ASG against future rental payable if the lease proceeds. It provides for termination of the agreement for lease if development is not obtained by a specified Approval Sunset Date, and practical completion does not occur by a specified date, although those dates may be extended, and also does not provide for repayment of the amounts paid out by ASG on termination of the lease for those reasons, but only if a rezoning is not obtained.
VIPL does not presently rely on the terms of this agreement to support the proposed claim by Holdings which is directed to events which precede this document. Holdings places substantial weight on this document in answer to that claim. It does not seem to me that this agreement could deprive that claim of the features necessary to satisfy s 237 of the Act, where it is not capable of extinguishing any breaches which had previously occurred; Holdings does not seek to prove the truth of the assumptions that underly the opinion of the Orchard Hills Committee as to the terms of the agreement or the correctness of that opinion; the agreement does not provide for repayment of the development costs paid by Holdings or ASG if the lease proceeds, or allow a credit for them against future rental, or provide for their repayment if the lease does not proceed other than by reason of a failure to obtain rezoning; and an unsecured contractual right to repayment of a substantial amount in specified circumstances is, obviously enough, not the same as that money in Holdings' bank account.
I should add that VIPL also relies, in respect of the Luddenham Rd property, on a report dated 1 February 2022 of Mr Kempthorne, a certified valuer, which was tendered as an expert report and in order to prove the truth of its content. Mr Kempthorne has extensive experience in the leasing, management and valuation of major commercial and industrial investments and confirmed his compliance with the Expert Witness Code of Conduct. His evidence was that it was not ordinary or reasonable commercial practice for a commercial lessee to fund the rezoning costs for property owned by an unrelated potential lessor without any binding and legally enforceable agreement between those parties. Mr Kempthorne also expressed the view, unsurprisingly, that the view taken by the Orchards Hill Committee provided no assistance in determining whether Holdings or ASG could have negotiated binding and more favourable terms with a potential lessor of the Luddenham Rd property or a similar property in 2020. He noted that the market for industrial land for rent in outer western Sydney in 2020 was favourable for prospective tenants by reason of the large amount of prime industrial space that was available to prospective tenants; that rents for industrial space were increasing in 2020, so that it was imperative in 2020 that prospective tenants secure binding lease arrangements so as to lock in the then favourable terms available; and that prospective tenants were then obtaining incentives for long-term leases in the vicinity of 12-15% of the gross annual rent over the life of the lease. There is no reason to doubt Mr Kempthorne's evidence as to these matters where Holdings, Ms Younes and Atilol do not seek to lead probative evidence to the contrary.
VPIL seeks to bring claims that Holdings' directors (other than Ms Younes) breached their equitable and statutory directors' duties by their conduct in respect of the Luddenham Rd property, including the statutory duty of care and diligence under s 180 of the Act and the similar equitable (although non-fiduciary) duty. The applicable principles are well established and it is sufficient to refer to my summary of them in Re Colorado Products Pty Ltd (in prov liq) (2014) 101 ACSR 233; [2014] NSWSC 789 ("Colorado") at [408] as follows:
"In Australian Securities Commission v Gallagher above at 52-3, Pidgeon J observed that the test whether the statutory duty of care and diligence had been contravened was an objective one, that a director need not exhibit a greater degree of skill in the performance of his or her duties than may reasonably be expected for a person of his or her knowledge and experience, in the relevant circumstances, and that it was relevant to consider the way in which the work of the company was distributed between its directors and other officers, provided that distribution was reasonable. In Australian Securities and Investments Commission v Adler [(2002) 168 FLR 253; 41 ACSR 72; 20 ACLC 576; [2002] NSWSC 171] ["Adler"] at [372] (upheld by the Court of Appeal in Adler v Australian Securities and Investments Commission (2003) 46 ACSR 504; 179 FLR 1; [2003] NSWCA 131 ), Santow J noted that the duties imposed by the section are essentially the same as directors' duties at general law; that, in determining whether a director had exercised reasonable care and diligence, the test was what an ordinary person, with the director's knowledge and experience, might be expected to have done in the circumstances if he or she was acting on his or her own behalf; and that the duty of care and diligence would require special vigilance in a situation of potential conflict, requiring scrupulous concern on the part of those officers who become aware of that transaction to ensure that any necessary corporate approvals are obtained and safeguards put in place. That decision has been cited with approval in recent case law, including Parker v Tucker (2010) 77 ACSR 525; [2010] FCA 263 at [70] per Gordon J and Diamond Hill Mining Pty Ltd v Huang Jim Mining Pty Ltd (2011) 84 ACSR 616; [2011] VSC 288 at [90] per Croft J. [emphasis added]
I also recognise that the question whether this duty is breached requires balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question: Vrisakis v Australian Securities Commission (1993) 9 WAR 395 at 450; 11 ACSR 162 at 209; Re FAL Healthy Beverages Pty Ltd [2017] NSWSC 476 at [55].
In summary, VIPL summarises the case that it seeks to bring on Holdings' behalf in respect of the Luddenham Rd property against Holdings' directors (other than Ms Younes) as follows:
"The totality of the evidence, including [Holdings]' responsive evidence, shows that the directors of [Holdings] did not undertake any careful or diligent assessment of the risks, costs and benefits of [Holdings] pursuing, and funding, the rezoning and development of the Luddenham Rd property. Indeed, the documents suggest that the Board of [Holdings] determined to pursue the proposal based upon only the most cursory analysis and without any detailed assessment of the matters any prudent board would consider before embarking upon a risky, multi-million-dollar venture. The Board also failed to take reasonable steps to address Mr Nakhle's conflict of interest in relation to the venture."
Mr Withers characterises this claim somewhat differently, as follows:
"… the principal case concerns a substantial, ongoing redevelopment of a major industrial site, the "the Alspec Industrial Business Park." That redevelopment, and its associated transactions, are ongoing. And, the evidence is that this redevelopment, and its associated transactions, have brought (and will bring) considerable benefits to [Holdings] and, ultimately, its membership. Conspicuously, it appears that [VIPL] does not seek to enjoin the redevelopment nor any of the associated transactions. Instead, it seeks prematurely (if at all) to complain about them, while all the while seeing the [Holdings] take the benefits from them."
I have addressed the limited basis on which Holdings tendered evidence as to the terms of the transaction above, which has the result that it cannot establish the transaction is on arm's length terms or that its benefits will exceed its costs. Mr Withers also emphasises the steps that Holdings has now taken in respect of establishing the Orchard Hills Committee to assess the transaction, but I have pointed above to the reasons, involving both limits to the Committee's view and the legal character of the relevant claims, that have the consequence that that does not assist Holdings.
Mr Withers also submits that:
"[VIPL] complains that [Holdings] took on the risk of incurring the costs of pursuing the rezoning and development of the Luddenham Rd property without an assurance. The complaint fails to recognise that [Holdings] had not been able to identify anything suitable. It approached Atilol and Atilol was reluctant to develop the property. It is not surprising that the [Holdings] agreed to advance funds for the rezoning and development costs. This was evidently seen as being in [Holdings'] interests because it gave it the opportunity to secure a site that was suitable for its needs and where it would have control over the development and naming rights."
It seems to me that there are two fundamental difficulties with this submission. The first is that the proposition that Holdings had "not been able to identify anything suitable" has, at best, a slender evidentiary foundation, to seek to establish the (perhaps surprising) position that there was one and only one available site in the whole of greater Western Sydney for Holdings' relocation which was, by coincidence, owned by Atilol. The second is that the suggestion that Holdings was justified in advancing funds for rezoning and development costs, if correct, does not have the consequence that it was justified in doing so without obtaining any binding right to occupy the premises or have those funds repaid with interest if it was unable to do so, or documenting the relevant arrangements.
Mr Withers submits that:
"The decisions of the Board in connection with these matters were all reasonable business decisions based on adequate information, and which have ultimately realised a highly beneficial commercial outcome for Alspec. Certain risks (i.e., funding certain redevelopment costs) were taken - inherent in many business judgments of this kind - in return for valuable consideration (i.e. development control and naming rights)."
Again, I do not accept that submission excludes a seriously arguable case against the relevant Defendants, where the matters to which Holdings refer again do not provide an explanation for advancing the substantial funds to Atilol without acquiring a right to occupy the property or documenting the transaction. For completeness, I note that Holdings does not expressly rely on s 237(3) of the Act, in respect of proceedings against a third party. It is unlikely that that section could apply, where it appears that none of the Defendants in this matter are a "third party" for the purposes of s 237(4) of the Act, since each of them would be a related party of the company if it were a public company. If s 237(3) of the Act applied, I would have found that the rebuttable presumption contained in that section was rebutted, having regard to the matters to which I refer in this judgment.
Mr Withers also submits that any contention that Holdings board failed adequately to conduct due diligence is rebutted, albeit after the event:
"…[VIPL] appears also to complain that the Board subsequently failed adequately to conduct due diligence or to consider the opportunity prior to the expenditure of time and resources in connection with the redevelopment.
Yet this contention, and the preceding, is fully met by the fact that [Holdings] has now undertaken further due diligence in obtaining an independent rental assessment report from Knight Frank and commissioning the appointment of an independent committee (Orchard Hills Committee) to consider whether the terms to be entered into with Atilol were (and are) reasonable and favourable to [Holdings].
The claim that VIPL seeks to bring for Holdings is plainly not limited to an attack on the process adopted by Holdings' board and at least extends to its substantive outcome, that Holdings expended in the order of $5 million in development costs without obtaining any legal right to occupy the premises, at least prior to the rights that it obtained under the recent binding HOA, which I noted above do not fix the rent payable or secure repayment of the development costs it has paid in a range of outcomes. I am also not persuaded this proposition displaces or substantially undermines a seriously arguable case against the Defendants, for the reasons that I have noted above in respect of the Knight Frank reports and Orchard Hills Committee conclusion, including the limited basis on which Holdings sought to tender them and the matters that were left unresolved by them.
Mr Withers emphasises Mr Seymour's evidence as to the benefits of relocating the Alspec Group's business to the Orchard Hills property (Seymour [126]-[129]). It seems to me that these matters also do not deprive the claim that VIPL seeks to bring for Holdings of its character as raising a serious question to be tried, where the fact that the transaction, when documented, would be in Holdings' interests has not been established here, by reason of the limited basis on which Holdings tendered the Knight Frank reports and the recommendation of the Orchard Hills Committee; and, in any event, that fact would not answer the seriously arguable breaches of duty which had occurred between 2020 and 2024, in Holdings advancing substantial funds for the benefit of Atilol without obtaining a right to occupy the Luddenham Road property or documenting the basis on which that was done.
In summary, VIPL here contends that each of the relevant directors of Holdings breached duty of care and diligence by endorsing the Luddenham Rd proposal in the circumstances on 24 April 2020; causing or permitting Holdings to spend up to $600,000 by the end of September 2020 on the Luddenham Rd proposal; approving the execution of the proposed lease terms on 24 June 2020; failing to take steps by 24 June 2020 (at the latest) to ensure that Mr Nakhle was excluded from any decisions or actions in connection with the Luddenham Rd proposal in circumstances where his conflict of interest was apparent; and authorising or permitting the funds of Holdings or the Alspec Group to be spent on the rezoning and development of the Luddenham Rd property; and approving the execution of the letter of intent on 2 May 2022. I am comfortably satisfied, for the reasons set out in my account of the facts above, that a serious question to be tried is established in respect of this claim against Holdings' directors other than Ms Younes (who did not participate in the relevant meetings).
VIPL also seeks to bring claims under ss 181 and 182 of the Act and at general law against Ms Younes and Mr Nakhle. In opening submissions, Mr Yezerski submits that:
"while it appears that, on at least one occasion, Ms Younes abstained from voting or discussing the Luddenham Rd Property proposal at a Board meeting, [VIPL] contends that Ms Younes' duty was to do more. In circumstances where there was no basis upon which the Board could properly assess whether the relocation was in the best interests of the company, Ms Younes' duty was positively to "prevent the transaction going ahead" [citing Permanent Building Society (in liq) v McGee (1993) 11 ACSR 260 at 289 (Anderson J); Adler at 735.]
The parties addressed the question whether there is a seriously arguable case that Ms Younes breached those duties despite her not participating in Holdings' board meetings in respect of the development and lease of the Luddenham Rd property. The case law indicates that the duties of a conflicted director will not necessarily be satisfied by that director disclosing his or her interest in a transaction and refraining from voting on the transaction: Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187; 14 ACSR 109; 12 ACLC 674 (on appeal from Permanent Building Society (in liq) v McGee above); Fitzsimmons v R (1997) 23 ACSR 355; 15 ACLC 666; Adler at [735(4)] where Santow J summarised the applicable principle as follows:
"in certain circumstances, such as a director in "a position of power and influence" over the board, mere disclosure of a conflict between interest and duty and abstaining from voting is insufficient to satisfy a director's fiduciary duty. The director may also be under a positive duty to take steps to protect the company's interest such as by using such power and influence as he had to prevent the transaction going ahead: Permanent Building Society (in liq) v McGee (1993) 11 ACSR 260 per Anderson J, at 289 ..."
This issue was also addressed, albeit in respect of s 184 of the Act, in Duncan v Independent Commission Against Corruption [2016] NSWCA 143; see also R Teele Langford and I M Ramsay, "Conflicted Directors: What is Required to Avoid a Breach of Duty" (2014) J Eq 108.
It seems to me that Mr Withers' subtle attempt to distinguish those cases, or restrict them to circumstances where matters were known to one director and not others, is not sufficient to exclude a seriously arguable case that these principles are applicable here.
Mr Withers also submits that:
"There is simply the (bare) assertion that Ms Younes was in a position of "power and influence" whereby [VIPL] alleges that because Ms Younes was married to the majority shareholder of [Holdings] (i.e., Mr Millard), this placed her in a position of power and influence over the Board. It is wholly unclear how this (bare) proposed plea rationally substantiates any allegation (much less finding) of power and influence.
There is no pleading or evidence that Ms Younes in fact used or sought to use any alleged "power and influence" either directly or through Mr Millard. Ms Younes herself at all relevant times held only approximately 3.79% of the shareholding and 2.11% through Youla Holdings Pty Ltd.
Nor is there a pleading or evidence that the Board succumbed to her power and influence in making the decision to proceed with the Luddenham Rd Property opportunity."
Mr Withers then placed significant weight upon these matters in oral submissions, before, at the conclusion of oral submissions, he reversed Holdings' position and accepted that there was a serious question to be tried that Ms Younes was in a position of power and influence over Holdings board, by reason of the matters pleaded in the relevant paragraphs of the draft Statement of Claim, where Ms Younes and associated entities had previously made a submission substantially to that effect before the Takeovers Panel.
In opening submissions, Mr Withers also submitted for Holdings that:
"Meanwhile, the second aspect of the claim is the contention that Ms Younes was subject to a duty, "positively to prevent the transaction going ahead".
As just noted - and particularly now in the circumstances that the [Orchard Hills] committee has expressed the opinion that the transaction offers substantial benefits to [Holdings] - so to prevent the progress of the transaction would have been to deprive [Holdings] of all the substantial, valuable benefits to which it will give rise. And, even apart from that, left unexplained is how (much less even why) Ms Younes could block the transaction when a majority of the Board were in favour of it. A director who has abstained from being involved in the discussion cannot also then be expected later to intermeddle and block it. [VIPL] has pointed to no authority to the contrary. The illogicality in this aspect of the proposed claim is also obvious."
It seems to me that this submission does not answer the fact that, as I have noted above, from 2020 until immediately prior to this hearing, Holdings had paid substantial funds for development costs for the Luddenham Rd property for Atilol's benefit without obtaining either a right to occupy that property or documenting the basis on which those funds were paid for that purpose. The second half of the paragraph is undermined by the concession now made by Holdings as to Ms Younes' power and influence over Holdings' board.
It seems to me that a seriously arguable case for breach of duty is available against Ms Younes on this basis, where it is seriously arguable that she must have known that the entry into an arrangement where Holdings or ASG would spend substantial funds for Atilol's (and, indirectly, her) benefit without then having any right to occupy the Luddenham Rd premises (if a rezoning was obtained and they were then constructed) was manifestly disadvantageous to Holdings, and there is a seriously arguable case that she breached ss 181 or 182 of the Act or the broadly corresponding fiduciary duties by not exercising the influence which it is now accepted she had over Holdings' decision-making to prevent that occurring. I am satisfied that a serious question to be tried is established in respect of the claim against Ms Younes in respect of the Luddenham Rd property for these reasons.
The parties also addressed the question whether Mr Nakhle arguably breached those duties, which partly depends on whether he is a de facto or shadow director of Atilol, or owed duties to Atilol as its agent or attorney that were in conflict with his duties owed to Holdings. Mr Withers, although appearing for Holdings rather than for Mr Nakhle, vigorously contended that claim was not arguable. It is not necessary to address that question, where there is at least a serious question to be tried that Mr Nakhle breached s 180 of the Act and the corresponding general law duty by permitting Holdings to expend substantial funds without acquiring any right to occupy the Luddenham Rd property and that is sufficient to satisfy the requirement for a serious question to be tried for the claim against him in respect of the Luddenham Rd property.
In opening submissions, Mr Yezerski points to the suggested "deficiencies" in that report and points out that:
"… Mr O'Neill did not perform a cost-benefit analysis; he did not compare the costs and benefits of yacht ownership to other forms of marketing or to syndication of a yacht (as proposed by [Holding's] marketing consultant, Indesign). Nor did Mr O'Neil identify with precision, suitable boats to buy. The analysis is manifestly deficient and unserious. It could not support any decision-making of a reasonable and prudent director in respect to a decision to spend over $1.5m of company funds".
Ms Fernandez's evidence is that Holdings' board considered this report at a board meeting on 18 February 2020, although no further steps were taken until 2021. The purchase of a "corporate boat" was again discussed at a board meeting on 23 September 2021, contemplating an expenditure in the range $1.2 million to $1.8 million (Ex J1, 1576); Fernandez 1, [88]-[91]). Mr O'Neill there referred to corporate opportunities including a company boat and the board "supported Mr O'Neill's recommendation to explore the strategic brand opportunities and revert with specific details and costings". A suitable vessel was then identified promptly which was, perhaps by coincidence, available for sale by Youla, a company wholly owned by Ms Younes. Ms Fernandez's evidence is that, after the 23 September 2021 board meeting, Mr O'Neill became aware that Youla owned a yacht which might be "suitable" for the Alspec Group and that, in late October 2021, Mr O'Neill conducted internet searches for listings of vessels similar to that which was proposed to be acquired from Youla to determine the appropriate price for the vessel.
On 22 October 2021, Youla issued an invoice to Holdings in the amount of $1.65 million (inclusive of GST) for a "Princess P58" motor vessel and Mr Nakhle and Mr O'Neill at some point signed that invoice under the words "Okay to pay" (Ex J1, 1592; Fernandez 1, [93]). After the invoice was issued, there is a further reference to Mr O'Neill reporting as to the opportunity of a "company boat" in the minutes of a meeting of the board on 26 October 2021 without reference to that invoice (Ex J1, 1166; the minutes of the same meeting also appear in different terms at 1595; Fernandez 1, [93]; Fernandez 2, [21]). On 1 November 2021, Holdings paid Youla's invoice for the yacht purchase (Fernandez 1, [93]). The purchase of the "corporate boat" was then disclosed in Holdings' 2022 financial report issued on 26 September 2022 (Ex J1, 1827; Fernandez 1, [93]).
Mr Yezerski points out that Holdings has not led evidence that there was any negotiation with Youla as to the price to be paid to purchase the vessel, or that any valuer or adviser was used to value it before purchase, or that the board recognised Ms Younes' conflict as a director of Holdings and as owner of its proposed counterparty to the transaction. Mr Yezerski summarises the claim that VIPL seeks to bring on behalf of Holdings in respect of this transaction as follows:
"[VIPL] seeks leave to claim that the relevant directors breached their statutory and fiduciary duties in connection with the acquisition of the corporate yacht.
[VIPL] claims that a reasonable person in each director's position, exercising due care and diligence, would not have supported purchasing the yacht or ratifying that purchase. It contends that [Holdings] did not perform any detailed, reasonable or sufficient assessment to determine whether equivalent yachts could be obtained from third parties, or the prices at which such yachts could be acquired. It further contends that the transaction was principally in the interests of Ms Younes and Youla, and not in the best interests of [Holdings] or its shareholders.
The alleged breach of duty is particularly acute in the case of Ms Younes given her conflict of interest. There was a conflict between Ms Younes' duties to [Holdings], one the one hand, and her duties to Youla (as its sole shareholder and director), on the other. In the circumstances, as with the Luddenham Rd Issue, [VIPL] alleges that Ms Younes' duty was positively to "prevent the transaction going ahead".
It seems to me plain that there is a seriously arguable case in respect of this claim and I do not understand any of the Defendants to have contended to the contrary. I will address Holdings' contention that it is not in its best interests to grant leave to bring this claim as a derivative action below.
It is, of course, not immediately apparent that it follows from the proposition that it was desirable for Holdings to retain access to those premises that it was also desirable that Mr Nakhle or an entity associated with him, rather than Holdings, should acquire them, and Holdings should pay a substantial amount of rent in advance in order to permit him or it to do so.
Mr Yezerski summarises VIPL's claim in respect of this transaction as follows:
"A reasonable person in the position of the [Holdings] directors would have considered acquiring the Edgecliff Property for [Holdings] (whereas [Holdings'] evidence is that the Board did not even consider this opportunity), and would not have diverted the commercial opportunity to purchase the Edgecliff Property to Mr Nakhle or provided financing to Mr Nakhle's company on uncommercial terms to enable it to pursue that opportunity.
[VIPL] contends that the directors breached their duty of care and diligence to [Holdings] by causing, permitting, or failing to object to:
(a) the diversion of the corporate opportunity to acquire the Edgecliff Property to Mr Nakhle; and
(b) the provision by [Holdings] or one of the Alspec Operating Companies of financing to [Mr] Nakhle or Lopana to acquire the Edgecliff Property.
Further, [VIPL] contends that each director breached their duty of care and diligence by failing to consider if it was in the best interests of [Holdings] for it to purchase, or for one of its subsidiaries to purchase, the Edgecliff Property.
[VIPL] also contends that each of the directors breached their Primary Duties [as defined]. In the case of Mr Nakhle, he breached his fiduciary duties by causing Lopana to acquire the Edgecliff Property and causing or permitting [Holdings] or one of the Alspec Operating Companies to provide financing to acquire the Edgecliff Property, in circumstances where he was in a clear position of conflict. In the case of the other directors, they breached their fiduciary duty by causing or permitting [Holdings] to divert the corporate opportunity to acquire the Edgecliff Property to Lopana."
It also seems to me plain that VIPL has established a seriously arguable case in respect of this claim, and I do not understand any of the Defendants to have contended to the contrary.
The Full Court also there observed (at [556]) that:
"where the advantage of a fiduciary's/trustee's wrongdoing accrues to a third party (whether as a knowing recipient or an assistant) and the third party is the alter ego/"nominee" (usually corporate) of the fiduciary, its liabilities will be joint and several with the fiduciary's: Green [& Clara Pty Ltd v Bestobell Industries Pty Ltd (No 2) [1984] WAR 32] at 40; see Gencor ACP [Ltd v Dalby [2000] All ER (D) 1067; [2000] 2 BCLC 734] (where the action was against the fiduciary for commission payments "diverted into his own creature company" and for which both the company and the fiduciary were held accountable)."
The authorities were reviewed by Beech J in EC Dawson Investments Pty Ltd v Crystal Finance Pty Ltd (No 3) [2013] WASC 183 at [406]. In Hasler v Singtel Optus Pty Ltd (2014) 87 NSWLR 609; 311 ALR 494; 101 ACSR 167; [2014] NSWCA 266 at [74], Leeming JA noted that category of liability without expanding upon its scope. In Cornerstone Property & Development Pty Ltd v Suellen Properties Pty Ltd [2014] QSC 265 ("Cornerstone") at [96]ff, Jackson J pointed to examples of this principle, while not deciding whether it applied in that case. His Honour noted that:
"The plaintiff also pleads that the first defendant was the corporate vehicle or alter ego of the second defendant, who used it to secure profits and cause losses by reason of her breach of fiduciary duty.
Apart from Barnes v Addy liability, there are other categories of case where a non-fiduciary may be responsible as a party to a breach of fiduciary obligation. Recently, they were essayed by the Full Court of the Federal Court of Australia in [Grimaldi].
One category identified in Grimaldi is where the third party is the corporate creature, vehicle, or alter ego of the wrongdoing fiduciary, who uses the corporation to secure the profit from or inflict the losses caused by the breach of fiduciary duty. Of the cases relied upon by the Full Court, the highest in authority is Cook v Deeks [[1916] 1 AC 554]. The outcome in that case against the directors was "that they cannot retain the benefit of such contract for themselves, but must be regarded as holding it on behalf of the company". As against the defaulting directors' new company, it was held that "it acquired the rights of [the defaulting directors] with full knowledge of all the facts and the account must be directed in form as an account… against all the other defendants", but there was no discussion in that case as to the basis in principle for that conclusion. Another similar alter ego case, not referred to as such in Grimaldi, is Farah [Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89], where the defaulting fiduciary's company was said to be liable as his "alter ego" without further discussion.
There is some analysis of the basis of this liability in CMS Dolphin Ltd v Simonet [[2001] 2 All ER 294]. The question in that case was whether the defaulting fiduciary could be made personally liable to account for the profits of the new company which he had formed to take the customers and business opportunities of the plaintiff in breach of fiduciary duty. It was held that the defaulting fiduciary was personally liable to account for the profits made by the new company."
In Chickabo Pty Ltd v Zphere Pty Ltd (No 3) [2020] VSC 464 at [40], Sifris JA in turn observed that:
"The liability and remedy against the accessory may depend on whether the accessory is the alter ego or nominee of the primary wrongdoer or whether the recipient acted in concert with the primary wrongdoer. In such a case [ie where a party is the alter ego of the wrongdoer] liability may be joint and several."
His Honour there found (at [58]) that two companies could there "properly be considered (as indeed found) the alter ego of [the wrongdoer] and in effect 'his companies' and proprietary relief is available exclusively against those parties that hold the traceable proceeds of the breach of fiduciary duty" and he referred (at note 55) to Cornerstone and observed that it was unnecessary to identify the precise jurisprudential basis of the liability of the alter ego companies.
The observations in Grimaldi above were also applied by the Court of Appeal in Australian Careers Institute Pty Ltd v Australian Institute of Fitness Pty Ltd (2016) 340 ALR 580; 116 ACSR 566; [2016] NSWCA 347 at [178], where Sackville AJA observed that the Full Court in Grimaldi:
"cited a number of authorities to support the statement of principle. In most, if not all of these cases, the fiduciary's conduct was regarded as fraudulent, as "wrongdoing close to fraud" or could well have been characterised as fraudulent. However, I am prepared to accept for present purposes, that the principle stated in Grimaldi applies to the corporate "alter ego" of a fiduciary, even where the fiduciary's breach of duty does not involve dishonesty or fraud."
The approach in Grimaldi to holding the corporate alter ego of a defaulting fiduciary liable for that fiduciary's breach was also applied by Ball J in Twigg v Twigg (No 4) (2016) 147 ACSR 389; [2020] NSWSC 1159 at [138] (affirmed by the Court of Appeal as Twigg v Twigg (2022) 402 ALR 119; [2022] NSWCA 68) and in my judgments in Mudgee Dolomite & Lime Pty Ltd v Murdoch [2020] NSWSC 1510 at [162] and Re Sirrah Pty Ltd (in prov liq) (2021) 152 ACSR 212; [2021] NSWSC 413. I have here not neglected Leeming JA's reference in Murdoch v Mudgee Dolomite & Lime Pty Ltd (in liq) (2022) 398 ALR 658; [2022] NSWCA 12 at [27]-[28] to:
"difficulties as to the conceptual basis of the analysis, as noted in J Glister, "Diverting Fiduciary Gains to Companies" (2017) 40(1) UNSWLJ 4. Is the liability based on agency, or piercing the corporate veil, or some other means such as a trust or the appreciation that a gain by the company is a gain by its sole shareholder? As Professor Glister observes at 21 and 26, the term "alter ego" is a term which displays both "elasticity" and "general flexibility", but if anything detracts from the analysis."
However, any such difficulties have not prevented the imposition of liability on this basis in several of the cases to which I have referred above.
I am not persuaded that, having regards to the case law that I have noted above, Mr Withers' submissions deprive the claim that VIPL seeks to put for Holdings on this basis of a seriously arguable character. As Professor Glister demonstrated in his chapter, "Equitable Liability of Corporate Accessories" (in PS Davies & J Penner, Equity, Trusts and Commerce, 2017, pp 275-302), cases including Gencor ACP Ltd v Dalby (cited in Grimaldi) and CMS Dolphin Ltd v Simonet (cited in Cornerstone) have treated the alleged wrongdoer and his or her alter ego as relevantly the same actor in imposing accessorial liability, with each made liable for the gains made and losses caused by the other. I accept that a second and narrower approach is potentially available, as also noted by Professor Glister and here pressed by Mr Withers, which relies on the fact that a company is the alleged wrongdoer's alter ego to attribute knowledge to it, as a step in imposing liability upon it. However, the availability of that second approach does not have the consequence that the first approach is not seriously arguable here, by reference to the existing case law, and a trial judge or appellate court might well adopt that first approach.
It therefore seems to me that there is a seriously arguable case that Atilol was, at relevant times, the corporate creature, vehicle or alter ego of Ms Younes and that that would be sufficient to support the claim against Atilol, where I found above that there is a seriously arguable case for breach of duty against Ms Younes in respect of monies that were paid to, or for the benefit of, Atilol.
Mr Yezerski also identifies several other bases on which VIPL would put Holdings' accessorial claim against Atilol, as follows:
"Second, that [Atilol], through Ms Younes, procured the breaches of fiduciary duty by Mr Nakhle and the other directors by, amongst other things, "procuring" [Holdings] or the Alspec Operating Companies to expend their funds on the rezoning and development of [Atilol's] Luddenham Rd Property (the Development Costs).
Thirdly, that [Atilol] has received assets from [Holdings] in breach of Ms Younes and Mr Nakhle's fiduciary duties ("knowing receipt", or the first limb of Barnes v Addy). The alleged receipt is of the Development Costs that [Holdings] or its subsidiaries paid to rezone and develop the Luddenham Rd Property, and [Atilol] had actual knowledge of the relevant breaches of fiduciary duty through Ms Younes and Mr Nakhle. Consistently with authority, where a plaintiff's money is applied, in breach of a fiduciary duty, to improve an accessory's land, a court may treat the land as charged with the payment of a sum representing the amount by which the value of the land has been enhanced by that application.
Fourthly, that Atilol Holdings has been knowingly assisted in Ms Younes and Mr Nakhle's fiduciary duties ("knowing assistance"; or the second limb of Barnes v Addy) by:
(i) executing the Proposed Lease Terms;
(ii) rezoning and developing the Luddenham Rd Property using funds provided by [Holdings] or one of its subsidiaries; and
(iii) executing the Letter of Intent.
In this connection, it is alleged that Ms Younes and Mr Nakhle's breaches were dishonest or fraudulent, or part of a dishonest and fraudulent design, and that [Atilol] had actual knowledge of those breaches by reason of the knowledge of Ms Younes and Mr Nakhle.
Fifthly, that [Atilol] aided, abetted, counselled or procured, or was knowingly concerned in the directors' breaches of their statutory duties, and was thereby "involved" in those breaches for purposes of s 79 of the [Act].
If leave is granted to advance the accessorial liability claims, [VIPL] proposes to seek an account of profits from [Atilol] in respect of that liability. One consequence that would follow from the rezoning and development of the Luddenham Rd Property is that it will significantly appreciate in value. So much is obvious from the fact that it will be converted from rural land to industrial land.
Again, it would be no defence to that account of profits claim that [Holdings] did not suffer loss, or would not itself have been in a position to make the profit that Ms Younes or Atilol Holdings made."
Holdings, Ms Younes and LIPL in turn advance detailed criticisms of the viability of those other accessorial claims against Atilol. For example, Mr Withers submits that there is no seriously arguable claim against Atilol and that allegations of a fraudulent and dishonest design are not properly pleaded against it, so as to support a claim for knowing assistance. It is not necessary to address these submissions where I have found that a seriously arguable case against Atilol is available on the basis that it is Ms Younes' alter-ego and any question of the adequacy of the pleadings as to alternative claims should properly be left to case management in the proceedings rather than addressed in an application for leave to bring derivative proceedings under s 237 of the Act. It is only necessary for Holdings to succeed on one basis of its accessorial claims against Atilol in order to recover compensation or an account of profits; I have found that it has at least one seriously arguable claim available to it; and there is no utility in my then assessing multiple alternative claims which may need to be determined by a trial judge at a final hearing.
In opening written submissions, Mr Yezerski identifies several matters which go to the question whether the proceedings are in Holdings' best interests as follows:
"First, there is a "seriously arguable case" that there has been a "diversion of corporate assets and business opportunities" from [Holdings] to Ms Younes, Mr Nakhle and [Atilol]. At the core of each of the claims for which leave is sought is conduct that involves the capital and resources of the company being used in the best interests of Ms Younes and Mr Nakhle, rather than in the best interests of the shareholders of [Holdings] as a whole. It is in the best interests of the company that such claims be pursued. That is particularly so in circumstances where the capital of the company has been used to pursue a very profitable opportunity for Ms Younes and [Atilol], being the rezoning and redevelopment of Luddenham Rd. As in Legal Practice Management Group, there is "a real potential of significant recoveries, by way of an account of profits or equitable compensation", particularly having regard to the account of profits claim against [Atilol].
Secondly, the indemnity provided by [VIPL] means that [Holdings] is protected should the derivative action ultimately fail. The company will not have to meet any adverse costs risk should that occur.
Thirdly, [Holdings] is likely to receive a substantial recovery should the relevant claims succeed. [Atilol's] ownership of the Luddenham Rd Property indicates that it is an entity of means. Notably, the defendants have adduced no evidence to suggest that the director defendants, collectively, would lack the means to satisfy any judgment. …
Fourthly, [Holdings] is a large enterprise whose operations are unlikely to be substantially affected if leave is granted. … There is no plausible reason to believe that the operations of an enterprise of that size will be meaningfully affected if leave is granted. …"
Mr Yezerski also summarises the basis of Holdings' claim for loss and damage in respect of the Luddenham Rd property in opening submissions as follows:
"The [proposed SOC] foreshadows claims for declaratory relief and orders under 1317H of the [Act] or in equity requiring the relevant directors to compensate [Holdings] for its loss and damage. If also foreshadows a claim for an account of profits against Atilol Holdings, Ms Younes and Mr Nakhle.
He also submits that:
"The claims [VIPL] seeks leave to advance are not limited to claims for compensation or damages. They include claims for an account of profits. The purpose of an account of profits is not to compensate a beneficiary for a loss, but rather to disgorge profit from an accessory that was earned in breach of duty and which it would be unconscionable for the accessory to retain. For this reason, the account of profits claims would be maintainable even if [Holdings] had suffered no loss by the breaches."
I bear in mind that the compensation available to a plaintiff under s 1317H of the Act extends, in a proper case, to profits made by a third party: Grimaldi at [630]-[631]; V-Flow Pty Ltd v Holyoake Industries (Vic) Pty Ltd (2013) 296 ALR 418; 93 ACSR 76; [2013] FCAFC 16 at [54], [58], [82]; Re IW4U Pty Ltd (in liq) (2021) 150 ACSR 146; [2021] NSWSC 40 at [46]ff.
Mr Withers contends that VIPL has not led sufficient evidence to establish the loss that it seeks to recover for Holdings in this claim and that VIPL has not advanced a coherent case of loss on Holdings' behalf. I do not accept that submission, where Holdings is now out of funds for the monies which it has paid out for Atilol's benefit in respect of the Luddenham Rd property, although it is possible that those funds may be repaid in the future or that the development may proceed in the future; and, if a rezoning occurs and the development proceeds, Holdings would then have a seriously arguable case for an account of profits against Atilol for the reasons noted below. Mr Withers also submits that Holdings will suffer "irreparable harm" by bringing proceedings against Atilol in respect of the rezoning and development of the Luddenham Rd property. It seems to me that the limited evidence supporting that proposition is speculative in character. Holdings also points out that the Defendants are involved in running the Alspec businesses, with Mr Nakhle as the current chief executive officer, and I recognise that other Defendants (other than Atilol) are some of the directors of Holdings. I accept that that is a relevant matter and I have had regard to it, but it needs to be balanced against the strength of Atilol's claims against those persons, the benefits of recovery and the risk to a company of it remaining under the control of persons who have arguably breached their statutory and general law duties to it.
In reply (T164-165), Mr Yezerski summarises the potential recovery for Holdings from the claim to brought by VIPL as follows:
"From the material before the Court, the Court knows the damages case is already substantial. It's more than $5 million in loss, even before one comes to interest or to an account of profits and we say that is a sufficient basis upon which the Court can be satisfied that granting leave is in the best interests of the company into relation to the Luddenham Road breaches. Mr Withers' submission was that the binding heads of agreement has broken the chain of causation and wiped away the loss. Again, that is not right. The causal chain was complete before we commenced these proceedings in October last year. The breach had occurred. The money had left the Group and the loss had been sustained. The chain of breach, causation and loss was complete.
As to the proposition that the binding heads of agreement wipes away the loss, again that is not correct. As I said in chief, if the rezoning occurs the 5 million that Alspec has already lost remains lost. It is never repaid so the loss is in no way reduced. Moreover the 5 million in rezoning costs will have resulted in a substantial profit to Atilol in that circumstance, for which we say Atilol is liable to account to [Holdings]. So if the rezoning goes ahead, the ultimate result is that there remains a loss and there would be a substantial profit to Atilol and the heads of agreement does not break the causal chain or result in either nil loss or nil profit. …
If the rezoning does not proceed then, by reason of the binding heads of agreement, the $5 million spent in rezoning costs may have to be repaid but, first of all, only if there is a demand from the company and even then if it is repaid it would be repaid without accounting for Alspec being out of its money in the intervening five years and that's because the binding heads of agreement simply provides for the money to be repaid but without reflecting the cost of that capital over time. So, again, in that circumstance the binding heads of agreement does not completely or necessarily abate any loss."
Holdings also relies on the entry into the binding HOA with Atilol, following assessment by the Orchard Hills Committee in answer to these claims. It seems to me that the matters raised by Holdings in response to VIPL's formulation of Holdings' claim for loss and damage do not have the result that the claim is not in Holdings' best interests, and the basis of that conclusion is straightforward. Where there is a seriously arguable case for breach of directors' duties in respect of the steps taken by the directors, including Ms Younes, Mr Nakhle and non-executive directors in respect of the Luddenham Rd property from 2020 onwards, then the entry into the binding agreement shortly before this hearing commenced does not extinguish any previous breach of directors' duties. Second, it is not established that the binding agreement is on arms' length terms, where Holdings did not seek to establish the factual basis of the Knight Frank opinions, the accuracy of those opinions, the assumptions which underlay the report of the Orchard Hills Committee or the accuracy of the view it had formed. Third, Holdings, at the date of this hearing, had suffered a loss in excess of $5 million from funding development costs for the Luddenham Rd property and it has, at best, an unsecured contractual right to recover those costs in some but not all circumstances under that binding agreement. Fourth, if the rezoning of the Luddenham Rd property is approved, then the available evidence, including the recent sale of part of the Luddenham Rd property at a higher price to which I referred above, is sufficient to support an inference that there has been or will be a significant uplift in the value of that property reflecting the prospect or fact of rezoning. In those circumstances, s 1317H of the Act would potentially extend to the profit made by Ms Younes or Atilol as a result of a breach of ss 180-182 of the Act. It was not suggested the fact that that profit might then be unrealised by Atilol prevents an order under that section. Notwithstanding the possibly narrower approach taken by Ball J in Gladstone Pacific Nickel, I also leave open the possibility that, in a sufficiently strong case, it may be in a company's best interests to bring proceedings in order to vindicate its rights and the rights of its shareholders, and the public interest in the proper governance of companies where it has the financial capacity to do so, rather than to take no steps to enforce its rights against wrongdoers who remain in control of it, even if that could not bring about substantial recoveries, but that is not this case..
Mr Withers submitted that it is not in Holdings' best interests to bring those derivative claims that could be (and are) brought as oppression claims, although he accepted that the claim against Atilol could not be brought as an oppression claim and would require such leave, referring to my observations in Legal Practice Management Group at [62]-[63]. Mr Kelly with whom Mr Johnstone appears for Ms Younes and LIPL also submits that leave to bring derivative proceedings is unnecessary, because the relevant claims can be advanced in oppression proceedings and advances criticisms as to the pleading of the claims against Ms Younes and LIPL, which it is not necessary or appropriate to address in this application, rather than the case management of the proceedings of this kind. Mr Kelly draws attention to the fact that only VIPL, and not all the Plaintiffs who bring the oppression proceedings, seeks leave to pursue the derivative proceedings. I have regard to that matter, although it seems to me to have no consequence, where the proceedings brought by VIPL on Holdings' behalf would, if successful, benefit Holdings by recovery of compensation or an account of profits and would benefit all of its shareholders, including the other Plaintiffs in the oppression proceedings who do not seek to bring them, by increasing the value of their shares.
Both Mr Withers and Mr Kelly submit, and I accept, that several cases have recognised the possibility that a shareholder can pursue a claim for breach of a general law duty or statutory duties owed to a company, in a claim under ss 232-233 of the Act, without necessarily seeking leave to bring a statutory derivative action under s 237 of the Act: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 at [142]-[143], [526]-[528]; LPD Holdings (Aust) Pty Ltd v Phillips (2013) 281 FLR 227 at 236-237; [2013] QSC 225; Re JGS Investment Holdings Pty Ltd [2014] NSWSC 1532 at [13], [21]; Parker v Auswild; Bermuller v Auswild [2022] VSCA 8 at [131]-[138].
In Legal Practice Management Group at [61]ff, to which Counsel referred, I observed that:
"[Counsel for the respondents in that application] submits that it is not in the Respondent Companies' best interests that the Applicants be granted leave and that redress is available by other means, including by proceedings for oppression or breach of fiduciary duty that would avoid the Respondent Companies being brought into litigation against their will. I am not persuaded by that submission. First, the availability of oppression proceedings, as an alternative to or in addition to derivate proceedings, has not been treated as preventing the grant of leave to bring derivative proceedings in other cases: see, for example, Hannon v Doyle above; Ehsman v Nutectime International Pty Ltd [2006] NSWSC 887; (2006) 58 ACSR 705; Power v Ekstein [2010] NSWSC 137; Fitzpatrick v Cheal [2012] NSWSC 261; and Re Imperium Projects Pty Limited [2015] NSWSC 16. The Applicants submit, and I accept, that the decision of Ward J in Vadori v AAV Plumbing (2010) 77 ACSR 616 is distinguishable, since leave to bring a derivative claim was superfluous in that case, because the Court had already found that it would grant the primary relief sought by the plaintiffs in their oppression claim. [Counsel] fairly accepted in oral submissions that she could not identify any case in which leave to grant derivate proceedings has been declined on the basis that oppression proceedings might have been brought, or might be brought in parallel to the derivative proceedings.
Second, as [Counsel for the applicants] points out, oppression proceedings at least arguably could not extend to claims against [several proposed defendants], which could only be held liable in an accessorial capacity in respect of breaches of duties by [the directors], and that matter may be of real practical significance if, for example, [the directors] do not hold assets in their personal capacity, but only through trusts or by way of interests in other corporate entities. The Applicants point out, and I accept, that the efficacy of a buy-out order or other order … in oppression proceedings would depend upon the extent of their personal assets. … These matters together are sufficient to answer the proposition that oppression proceedings would be an inadequate alternative to the grant of leave to bring derivative proceedings.
In submissions in rejoinder, [Counsel for the respondents] raised the possibility that the proposed [accessories] could be joined as defendants in a claim for oppression, where the alleged oppressive conduct consists of breaches of statutory and general law directors' duties, and refers to the decision in Patterson and Ors v Humphrey and Ors (2014) 291 FLR 246 in that respect. That course does not seem to me to be either so certain or so uncontroversial that it could be said that the Applicants should be required to follow it, rather than to pursue the derivative claims which they seek to bring in the Respondent Companies' names."
These issues were also addressed at some length by Derrington J in CIP Group Pty Ltd v So [2022] FCA 1490 ("CIP") at [78], [83]-84], [86], [88]), although Mr Withers and Mr Kelly challenge the reasoning in this decision. It is not necessary to address that reasoning in order to determine this application on the pragmatic grounds noted below. In any event, I understood Mr Kelly fairly to concede that the availability of oppression proceedings as an alternative to, or in addition to, derivative proceedings does not, or does not necessarily, prevent the grant of leave to bring derivative proceedings for the reasons noted in Legal Practice Management Group.
I am satisfied that the fact that Plaintiffs could and do bring an oppression claim in respect of the Luddenham Rd property does not have the consequence that it is not in Holdings' best interests to bring an overlapping claim as a derivative claim. First, the availability of relief by way of compensation orders in favour of Holdings in oppression proceedings may be controversial, as I recognised in Legal Practice Management Group and as the debate here as to the reasoning in CIP in submissions amply demonstrates, and it would not be in Holdings' interests that its claim should be exposed to the risk of failure on that basis. Second, Mr Withers accepts that a claim against Atilol could only be brought as a derivative action. Third, an oppression claim would not allow any recovery for the benefit of the significant number of shareholders in Holdings who are neither Plaintiffs nor associated with the Defendants, who would benefit from a recovery by Holdings in a derivative action. Fourth, there is no disadvantage of substance to Holdings or the Defendants in granting leave to bring a derivative action seeking relief which the Defendants themselves contend could be granted against them in an oppression claim, and the additional costs of bringing the claim as a derivative claim will be marginal, where the same issues would arise in respect of the same parties in the Plaintiffs' oppression claim.
Mr Withers also submits that it is not in Holdings' best interests to bring the claim in respect of the "corporate boat" because that claim can be (and is) brought by VIPL in its oppression suit. He also submits that, where the "corporate boat" was acquired for about $1.5 million, any loss to Holdings would be "relatively unsubstantial" compared to the costs of a derivative suit. I do not accept those submissions. First, while I accept that the claim could be (and is) brought by VIPL in an oppression suit, it seems to me that it is not in Holdings' best interests that it should be left to the uncertainty as to the form of the relief that would be granted in that claim, which would not necessarily include either a buy out order for VIPL's benefit or compensation for Holdings' benefit. Conversely, there is no disadvantage of substance to Holdings in granting leave to bring a derivative action in respect of relief which Holdings itself contends could be granted against it in an oppression suit. The amount of $1.5 million involved in this transaction is not de minimus, although I recognise that the "corporate boat" would have a resale value which neither party seeks to establish. Here, the costs of bringing the claim as a derivative claim will also be marginal where leave will already be granted to Holdings to bring a derivative action in respect of the Luddenham Road transaction, and Holdings accepts that the same issues would arise, likely in respect of the same parties, in respect of this issue as in the Plaintiffs' oppression claim.
Holdings' response to the oppression claim in respect of the Edgecliff property is also primarily that it is not in its best interests to grant leave to bring that claim, for the same reasons that it is not in Holdings' best interests to grant leave to bring the claim in respect of the "corporate boat". Mr Withers also submits that VIPL has not here articulated a claim for loss or profit in respect of the Edgecliff property. I do not accept the former submission, for the same reasons I do not accept it in respect of the claim as to the "corporate boat". I do not accept the latter submission where it is apparent that a substantial payment was made to Lopana as an advance of rent, without any adjustment to take account of the early payment of that amount, and Holdings is at least out-of-pocket for its costs of funding that amount. It seems to me that, here, the potential recovery does not need to be large to have the consequence that the claim is in Holdings' best interests, where the costs of bringing the claim as a derivative claim will be marginal, since leave will already be granted to Holdings to bring a derivative action in respect of the Luddenham Road transaction and the "corporate boat", and Holdings accepts that the same issues would arise, likely in respect of the same parties, in respect of this issue as in the Plaintiffs' oppression claim.
The question whether VIPL offers an adequate indemnity in favour of Holdings in respect of the costs to which it would be exposed if the proceedings were unsuccessful is also relevant to whether the proceedings are in Holdings' best interests. The case law has recognised that a relevant and significant matter in determining whether the proceedings are in a company's best interests is the adequacy of an indemnity in respect of the costs to which the company would be exposed by the conduct of proceedings and in the event of their failure: Power v Ekstein (2010) 77 ACSR 302; [2010] NSWSC 137; App Shop Pty Ltd v Jalal Brothers Pty Ltd [2019] NSWSC 490 at [19]. VIPL offers a deed poll by which it undertakes to meet Holdings' costs of and any order for costs against it in the proceedings and offers a representation and undertaking to the Court (MFI 7) as to the level of its unencumbered net assets and the maintenance of those assets, in a form which the Defendants accept is sufficient for that purpose.