App Shop Pty Ltd v Jalal Brothers Pty Ltd

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)

Solicitors: Gilbert & Tobin (Plaintiff) Thomson Geer (First Defendant) Russells (Second and Third Defendants) File Number(s): 2023/333788

Judgment

1. 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.
2. 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.

Affidavit evidence and some matters of chronology

1. 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.
2. 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.
3. 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.
4. 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.

Applicable principles

1. 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.
2. 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.

Whether Holdings will bring the proceedings

1. 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.

Whether VIPL is acting in good faith

1. 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.
2. 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."
3. 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."
4. 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."

Whether a serious question to be tried is established against the several Defendants

1. The third requirement for the grant of leave to bring a derivative action, under s 237(2)(c) of the Act, is that the grant of such leave is in 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.
2. 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.
3. 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.
4. 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."

The proposed claim as to the Luddenham Rd property

1. 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]."
2. 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.
3. 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.
4. 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).

The proposed claim as to the "corporate boat"

1. 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]."
2. 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."
3. 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."
4. 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."

The proposed claim as to the Edgecliff premises

1. 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."
2. 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]).
3. 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)
4. 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)

The proposed accessorial claim against Atilol

1. 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]"
2. 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.
3. 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."
4. 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."

Prospects of recovering damages, compensation or an account of profits

1. 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.

Whether the proposed proceedings are in Holdings' best interests

1. 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].
2. 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.

Notice requirement

1. It is common ground that the notice requirement under s 237 of the Act has been satisfied.

Determination

1. 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.

Amendments 20 March 2024 - Additional Counsel noted. Misprints corrected. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 20 March 2024