- Atlasview Ltd v Brightview Ltd

Judgment 1By Interlocutory Process filed on 13 August 2014, the Plaintiff, Mr Glenn Redman, seeks orders that he be given such leave as is necessary to file an Amended Originating Process and Statement of Claim and to join Mr Danny Arraj as the Fourth Defendant in the proceedings. 2The Originating Process previously filed by Mr Redman had sought orders under s 233(1)(f) and (g) of the Corporations Act 2001 (Cth) authorising Mr Redman to continue proceedings against Messrs Simon Arraj and Joe Arraj (to whom I will refer as "the Messrs Arraj") in the name of JGS Investment Holdings Pty Ltd ("Company"). Sections 233(1)(f) - (g) of the Corporations Act relevantly provide that the Court may make orders in an oppression proceeding that it considers appropriate in relation to a company, including an order for the company to initiate or prosecute proceedings or authorising a member to institute or prosecute specified proceedings in the name and on behalf of the company. 3The proposed Amended Originating Process in turn pleads a claim for breach of contract in respect of a Shareholders Agreement, a claim for breach of fiduciary duty owed by the Messrs Arraj to the Company and a claim that the proposed Fourth Defendant, Mr Danny Arraj, was involved in those breaches. The Amended Originating Process also seeks a declaration that the conduct of the affairs of the Company has been oppressive to, unfairly prejudicial to or unfairly discriminatory against Mr Redman and declaring that the Messrs Arraj breached their directors' duties with respect to the Company and Mr Danny Arraj was knowingly involved in those breaches. The order for leave sought to continue the proceedings presently sought under s 233(1)(f)-(g) of the Corporations Act is presently not sufficiently wide to support the continuance of the proceedings against Mr Danny Arraj, although that may be an inadvertent omission. 4Paragraph 6 of the proposed Statement of Claim in turn pleads that the Messrs Arraj as directors of the Company owed duties, including general law duties to act in good faith, to avoid conflicts of interest and to act for a proper purpose and statutory duties under ss 180-183 and 191 of the Corporations Act. Paragraphs 61-81 of the proposed Statement of Claim relate to the proposed circumstances of the transfer of a unit ("Transfer") to Mr Antoine Arraj and Mrs Renee Arraj, the parents of Messrs Arraj. Paragraphs 82-93 of the proposed Statement of Claim concern the circumstances of a payment made by the Company to a third person ("Payment"). Paragraphs 94 and 95 plead that the Transfer and the Payment were in breach of the duties owed by the Messrs Arraj. Paragraphs 96 and 97 of the proposed Statement of Claim plead that the relevant conduct contravened ss 181(2), 182(2) and 183(2) of the Corporations Act and that Mr Danny Arraj was "involved" in the relevant breaches of duty, presumably within the meaning of s 9 and s 79 of the Corporations Act. Paragraph 98 of the proposed Statement of Claim pleads that Mr Danny Arraj "knew, or had knowledge of all the relevant circumstances to indicate or put him on inquiry that" the Transfer and/or the Payment was made contrary to the Company's best interests. That allegation is particularised by reference to Mr Danny Arraj's retainer as solicitor of the Company, his knowledge of certain matters and certain steps which he took. Paragraphs 99-103 plead that Mr Danny Arraj "knew, or had knowledge of all the relevant circumstances to indicate or put him on inquiry that" the Transfer and/or the Payment involved a conflict of interest or was not made for a proper purpose or was made for less consideration than reflected in the transfer document or was made for less consideration than the market value of the unit or that the Payment was not made to satisfy a debt of the Company. 5Paragraph 113 of the proposed Statement of Claim in turn pleads breach of fiduciary duties owed by the Messrs Arraj to the Company by reason of the matters pleaded in paragraphs 61-93; paragraph 114 pleads that Mr Danny Arraj has been involved in those breaches of fiduciary duty by reason of the matters pleaded in paragraphs 94-103; and paragraph 115 pleads that Mr Redman has suffered loss and damage as a result of the alleged breaches. 6The Messrs Arraj oppose the joinder of Mr Danny Arraj, the proposed amendment to the Originating Process and the filing of the proposed Statement of Claim. Case management issues 7Mr Redman's outline of written submissions in support of the amendments addressed case management issues and issues as to the Court's power to grant leave to file the proposed Amended Originating Process and the Statement of Claim and to join Mr Danny Arraj as party in the proceedings. At that point, Messrs Arraj and Mr Danny Arraj had not identified their basis for opposing the grant of leave. 8In their written outline of submissions, the Messrs Arraj submitted that the proposed amendments involved a substantial expansion of the present case to add claims of breach of duty and a new claim against Mr Danny Arraj. They submitted that no explanation was provided for the expansion of the case, in proceedings that had been on foot for over two and a half years, and in which significant costs would have been incurred in meeting the case as presently framed. I do not accept that submission. First, the uncontested evidence led on behalf of Mr Redman indicates that time had been spent in a lengthy mediation process, which has only recently failed. Second, it does not seem to me that there will be any significant waste of costs, where the case is presently at the pleading stage; the proposed amendment expands the basis of the case rather than abandoning any aspect of the case to which the Messrs Arraj would have already directed attention; and, as Mr Redman points out, the case against Mr Danny Arraj is based on substantially the same factual allegations as the case against the Messrs Arraj. The joinder of the claim against Mr Danny Arraj with the claim against the Messrs Arraj is, as Mr Redman also points out, consistent with the need to avoid a multiplicity of proceedings. The case in favour of that joinder is stronger where, if Mr Redman was to commence separate proceedings against Mr Danny Arraj based on the same factual substratum as the claim against the Messrs Arraj, it is very likely that the Court would order that those separate proceedings, which could be commenced without leave, should be heard together with the present proceedings. 9In any event, in oral submissions, Mr Giles, who appeared for the Messrs Arraj, indicated that they did not oppose the proposed amendments to the Originating Process or the filing of a Statement of Claim on case management grounds and accepted that it was desirable that the matter proceed by pleadings. He also accepted that there was power to make the amendments, subject to the issue as to whether Mr Redman was a proper plaintiff in respect of loss suffered by the Company to which I will refer below, and that the Court could order the amendment if there was a properly formulated claim, and indicated that the Messrs Arraj's real objection to the amendment raised a legal or pleading issue to which I will refer below. The relief sought against the Messrs Arraj and the form of the pleading 10Next, the Messrs Arraj submit that the only relief sought by Mr Redman, in respect to the proposed claim for breach of duties advanced against the Messrs Arraj, is a series of declarations. They submit that Mr Redman has no interest in, and no standing to pursue, a claim for bare declarations of right between the Messrs Arraj and the Company and has no practical interest in the relief sought. The Defendants also submit that it would be inconsistent with s 56 of the Civil Procedure Act 2005 (NSW) to allow an issue that has no utility to be litigated. I do not accept that submission, since the declarations sought and the related pleading potentially support Mr Redman's claim that the Company's affairs have been conducted contrary to the interests of its members or in a manner that was oppressive to, unfairly prejudicial to, or unfairly discriminatory against him, the consequential relief sought under s 233 of the Corporations Act and the order that the Company be wound up on just and equitable grounds on that basis. An order for damages is also claimed, although that pleading raises a further issue that I will address below. 11The Messrs Arraj also point to what they describe as a related difficulty, that the proposed pleading contains a lengthy narrative of pleaded facts and then asserts, in paragraphs 94-95, a breach of duties arising from those facts. They submit that the proposed pleading would not allow them to know the case they have to meet. I do not accept that submission, since the case seems to involve relatively straightforward allegations that the pleaded facts, in respect of the Transfer and the Payment, constituted a breach of the pleaded general law and statutory duties. The focus of the pleading is upon those two transactions and it does not seem to me that the Messrs Arraj would have any real difficulty in identifying the basis of the allegation that those transactions constituted a breach of the pleaded duties. The claim against Mr Danny Arraj and reflexive loss 12The Messrs Arraj also submit that the claim against Mr Danny Arraj discloses no cause of action, and that the Messrs Arraj should not be burdened with the cost and wasted time occasioned by a defective claim against Mr Danny Arraj. This submission turns primarily on a criticism of the claim pleaded against the Messrs Arraj, which in turn founds the accessorial claim against Mr Danny Arraj. Mr Giles focused his submissions particularly on the nature of the loss claimed by Mr Redman, which, he accepted, directly affected only paragraphs 113-115 of the proposed Statement of Claim. Paragraph 115 is, nonetheless, fundamental so far as it pleads the loss sought to be recovered in the proceedings. 13Mr Giles accepted, in oral submissions, that the Court of Appeal's decision in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672 is authority that a shareholder who brings an oppression suit can claim relief for the relevant company, for example by an order that money paid out by that company be returned to it, but contends that it is not authority for the further proposition that the plaintiff can sue for its own loss. Ms Forrester, who appears for Mr Redman, submits, and I did not understand Mr Giles to contest, that ss 232-233 of the Corporations Act, like their predecessor s 260 of the Corporations Law, permit a member of a company to carry on the equivalent of a derivative proceeding, within or concurrently with an oppression claim, and give a remedy for oppression by ordering a sale of shares, and that the Court may take into account the consequences of a breach of fiduciary obligation established in the proceedings in valuing those shares: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd above at [528] per Priestley JA. That principle would permit Mr Redman, in this case, to seek an order that the Company be compensated for loss which it had suffered as a result of breach of duty by the Messrs Arraj or to seek an order (as he does) that his shares be bought out, and on a basis which adjusts for any such loss. It does not follow, however, that, in seeking such an order, he is entitled to seek an order for damage that he personally has suffered, which is reflexive of the loss which the Company has suffered. I will return to that issue below. 14Ms Forrester in turn relied on the decision of White J in Power v Ekstein [2009] NSWSC 130 and the further decision of Austin J in Power v Ekstein [2010] NSWSC 137; (2010) 77 ACSR 302. In Power v Ekstein [2009] NSWSC 130 at [77], White J referred to Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd above as authority that, in an oppression suit, the Court can "short circuit" the making of an order authorising a person to institute and prosecute the proceedings, and held that it was at least seriously arguable that that right survived introduction of Pt 2F.1 of the Corporations Act. His Honour noted that a plaintiff in an oppression action therefore did not need leave to pursue a claim on behalf of the company in respect of the oppression suit, and held that the plaintiff in that case was prima facie entitled to include in her oppression suit her allegations that the directors of the companies had breached duties owed to the company. That proposition does not, however, address the basis on which damages would be calculated, or whether only the company would be entitled to such damages by reference to the loss which it had suffered, rather than the individual shareholder being entitled to recover damages quantified by reference to the company's loss or any corresponding deterioration in the value of its shares. In Power v Ekstein [2010] NSWSC 137; (2010) 77 ACSR 302 at [31], Austin J in turn referred, without disapproval, to the earlier decision of White J and the observation that the plaintiff could "short circuit" the procedure for a derivative action by reliance on s 233(1)(g) of the Corporations Act. His Honour also did not address the basis on which damages could be recovered in such a claim. 15The Messrs Arraj contend the claim against them, or at least paragraphs 113-115 of the proposed Statement of Claim, is defective because Mr Redman is a shareholder in the Company and is not entitled to sue for loss to him said to follow from a breach of their duty owed to the Company. It is clear that the loss sought to be recovered by Mr Redman in paragraphs 113-115 of the proposed Statement of Claim is "reflexive" loss, being a shareholder's loss of value in its shares reflecting loss suffered by the Company. Ms Forrester accepted in oral submissions that the claim made by Mr Redman involved an allegation, inter alia, that a property held by the Company was transferred for less than market value and not for a proper purpose and that gave rise both to loss to the Company and loss to Mr Redman in his capacity as shareholder and she accepted that the loss suffered by the Company and by Mr Redman were the same loss, in that the Company had suffered loss on the sale of the property and Mr Redman claimed to have suffered loss because his shares were worthless, by reason of the Company's loss. She also accepted that Mr Redman did not have any other loss in respect of the transfer of those shares, and that he sought to recover monetary compensation for the loss which he suffered as part of this claim. 16In oral submissions, Mr Giles submitted that the exceptions available in respect of an oppression suit or under s 233 of the Corporations Act do not allow a shareholder to sue for its own loss as distinct from the company's loss. The Messrs Arraj submit that proposition is an incident of the principle that a shareholder cannot sue for loss or damage caused to the relevant company, which is often described as "reflexive" loss. That principle was summarised by Stevenson J in VPlus Holdings Pty Ltd v Bank of Western Australia Ltd [2012] NSWSC 1327; (2012) 91 ACSR 545 at [28] as follows: "The relevant principle is that a shareholder of a company cannot recover damages merely because the company has suffered damage, and cannot recover damages that are merely a reflection of a loss suffered by the company. A shareholder may only recover damages for loss suffered personally that is separate and distinct from the loss of the company (citations omitted)." Similarly, in Ekes v Commonwealth Bank of Australia [2014] NSWCA 336, Bathurst CJ observed (at [150]-[151]) that: "When a company suffers loss caused by a breach of duty owed to the company, no action lies at the suit of a shareholder to make good a diminution of the value of the shareholder's shareholding where that loss merely reflects the loss suffered by the company. ... The principle extends to include losses suffered as a result of diminution in the value of a person's shareholding, loss of dividends and other amounts which the shareholder might have obtained from the company had it not been deprived of its funds. ... The principle extends to a case where both the company and the shareholder have a claim for breach of duty which caused the loss. ... However, the principle does not prevent a shareholder suing for loss suffered from a breach of duty owed to him or her where the loss is separate and distinct for the loss suffered by the company." [Citations omitted]) The public policy consideration underlying this principle is to prevent double recovery by ensuring that the company and shareholders do not recover concurrently from the same defendant: Mercedes Holdings Pty Ltd v Waters (No 3) [2011] FCA 236 at [45]; VPlus Holdings Pty Ltd above at [34]. 17Mr Giles also referred to the earlier decision in Atlasview Ltd v Brightview Ltd [2004] BCC 542, to which Philip McMurdo J also referred in LPD Holdings (Aust) Pty Ltd v Phillips [2013] QSC 225; (2013) 281 FLR 227. In that case, a deputy judge of the High Court in England declined to strike out a claim for damages against directors in an oppression claim. That decision was doubted by Lord Scott, sitting in the Court of Final Appeal of Hong Kong in Re Chime Corporation Ltd (2004) 7 HKCFAR 546, although his Lordship accepted that compensation could be ordered in favour of the company in such a claim. In particular, his Lordship recognised (at [46]) the risk that an order for payment or transfer of a part of the company's assets, in the sense of its cause of action, to the petitioning shareholders had the capacity to put the interests of the company's creditors at risk. Lord Scott followed that decision in delivering the judgment of the Privy Council in Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] UKPC 26; [2007] 4 All ER 164 at [27] - [28]. 18Those cases were in turn referred to in the decision of the Court of Appeal in Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95; (2008) 66 ACSR 359, where Basten JA observed (at [199]) that the wide range of orders available under s 233 of the Corporations Act should not subvert established constraints on the availability of derivative actions brought by shareholders on behalf of a company, although the fact that the conduct complained of involved misconduct actionable by the company did not preclude relief under that section. Young CJ in Eq, then sitting in the Court of Appeal, also observed (at [361]) that the reasoning of Lord Scott in Re Chime Corporation should be followed in Australia. Although the decision was reversed in the High Court ([2009] HCA 25; (2009) 238 CLR 304), the Court of Appeal's reasoning in respect of this issue was not affected. 19In LPD Holdings above, Philip McMurdo J accepted (at [53]) that it is open to a shareholder in a company, in proceedings brought under Pt 2F.1 of the Corporations Act, to claim relief which is in the nature of compensation to be paid to the company whose affairs are in question, but accepted the criticism in Re Chime Corporation of the view expressed in Atlasview, with the result that a claim by the shareholder that the directors should pay compensation to it rather than the company would not be permitted unless the loss suffered by the shareholder was distinct from rather than derivative of the company's loss (at [58]). Ms Forrester contended that the decision in LPD Holdings was directed to the exercise of a discretion whether the Court should permit a claim under s 233 of the Corporations Act, where only a small part of the plaintiff's overall case was pleaded as loss to the plaintiff, and distinguished that case on that basis. I do not accept that that decision was limited to the exercise of such a discretion, given Philip McMurdo J's careful consideration of the earlier authorities and their effect. 20Mr Giles submits that I should follow the decision in LPD Holdings above. I consider that I should follow that decision, both because it is a decision in respect of national corporations legislation and because it seems to me that it is correct. In particular, it seems to me that any approach that would allow an individual shareholder, in an oppression claim, to sue for damages quantified as his or her own loss derived from the company's loss has the fundamental difficulty that it raises the risk of multiple claims by individual shareholders and by the company each seeking to recover the same loss, and the further risk (identified by Lord Scott in Re Chime Corporation Ltd above) that a successful claim by a shareholder, in respect of loss suffered by the company, would divert the company's right to recover that loss to the shareholder to the potential prejudice of the company's creditors. 21In summary, I accept that Mr Redman can pursue a claim for a breach of general law duty and statutory duties owed to the Company, in a claim under ss 232-233 of the Corporations Act, without necessarily seeking a separate order for leave to bring a statutory derivative action under s 237 of the Corporations Act, although there are several cases (including the second decision in Power v Ekstein) where such leave has in fact been sought in the context of proceedings also brought as an oppression claim. However, consistent with the reasoning in Re Chime Corporation and LPD Holdings above, I do not accept that that claim can extend to a claim by Mr Redman for loss which he has suffered personally, by deterioration in the value of his shares, being, in substance, the same loss as the Company has suffered by reason of a breach of duty owed to it. Ms Forrester's submissions made clear that that was what Mr Redman presently sought to do in the Amended Originating Process and the proposed Statement of Claim. 22It is by no means clear that the Amended Originating Process commits Mr Redman to that impermissible approach, as distinct from a permissible approach. In particular, paragraph 15 of the Amended Originating Process identifies a claim for "damages" and it would be open to Mr Redman to seek damages by reference to the Company's loss and on its behalf, rather than by reference to the corresponding loss of value in his shares in the Company. Paragraph 115 of the proposed Statement of Claim could not be permitted in its present form, so far as Mr Redman seeks to recover his loss and damage that are referable to the Company's loss and damage. However, it seems to me to be consistent with s 56 of the Civil Procedure Act, and the just, quick and cheap resolution of the matters in dispute to hear Mr Redman as to whether he seeks to amend that paragraph to refer to loss and damage suffered by the Company, prior to declining leave for that paragraph in the proposed Statement of Claim, and declining leave to join Mr Danny Arraj on the basis that the pleading against him should not be permitted without a corresponding allegation of loss and damage. 23Mr Ng, who appeared for Mr Danny Arraj, adopted Mr Giles' submissions and identified two further objections to the pleaded claim against Mr Danny Arraj. The first was that prayer 13 in the proposed Amended Originating Process sought leave to continue proceedings against the Second and Third Defendants but not against the proposed Fourth Defendant. As I noted above, that seems to me likely to be an inadvertent omission, which could readily be addressed. Mr Ng also pointed to the paragraphs of the proposed Statement of Claim that pleaded the allegation that Mr Danny Arraj was involved in the requisite sense in the breach of duty and contended that the claim against him could not succeed, because the proposed Statement of Claim did not plead that he knew or ought to have known that Mr Redman had not given his informed consent to the transaction. Mr Ng accepted that that submission was, in effect, that Mr Danny Arraj's knowledge of the absence of informed consent was essential to the allegation of knowing involvement on the part of his client. That submission has the fundamental defect that the Court of Appeal has recently held, in Hasler v Singtel Optus Pty Ltd [2014] NSWCA 266; (2014) 311 ALR 494, that it is not necessary for a party seeking to establish that a third party is knowingly involved in a breach of fiduciary duty to establish his or her knowledge of the absence of informed consent: per Barrett JA at [2]-[3]; per Leeming JA at [130]-[142], with whom Gleeson JA agreed at [6]. That is sufficient to dispose of that objection to the pleading. Mr Giles and Mr Ng did not otherwise raise any issue as to whether the pleading was sufficient to address the knowledge required for a claim to accessorial liability and it is therefore not necessary to address such an issue. Particularisation of loss and causation 24The Messrs Arraj also contend that the structure of the proposed pleading is defective because the loss has yet to be fully particularised, and that breaches of some of the pleaded clauses of the relevant contracts could not lead to the loss claimed. They again submit that that form of pleading does not allow them to know the case they have to meet. I do not accept that submission, since it seems to me that any gap in Mr Redman's ability to establish causation, as between the breaches pleaded and the loss said to result, does not affect the comprehensibility of the claim or their ability to meet it, although it may affect the ultimate prospects of the claim. Result 25The parties should be given an opportunity to consider this judgment and its implications for the proposed pleading. I will list the matter for further directions in the Corporations List on 10 November 2014, or such other date as is agreed between them, and hear the parties as to that matter at that time.