The plaintiff Gek Sim Tsia holds 25% of the shares in the first defendant company Jimmy's Recipe Pty Limited, which operates a Chinese-Malaysian cuisine restaurant in the Galleries Victoria near Town Hall. She acquired her shareholding on 22 September 2010, when she effectively bought out a previous participant. The second defendant Jimmy's Recipe Gateway Pty Limited was incorporated on 10 June 2016, and since 26 October 2016 has operated a Chinese-Malaysian cuisine restaurant in the Gateway Building near Circular Quay, using substantially the same recipes and livery as the first defendant. The third defendant Alwin Nan Chu Chong is, and at all material times has been, a director of the first defendant, in which he holds 70% of the shares, and is also a director of the second defendant, in which he holds 40% of the shares. The fourth defendant Norannie Chang is his mother, and she is also a director of the first defendant. The proposed fifth defendant Chee Wee Seow is a director of, and shareholder in, the second defendant. There are two other directors of the second defendant in addition to him and the third defendant.
On 3 July 2017, the plaintiff filed an Originating Process commencing these proceedings, joining the first, second and third defendants, and seeking leave pursuant to (CTH) Corporations Act 2001 s 237 to bring proceedings on behalf of the first defendant against the second and third defendants; orders that the second and third defendants pay compensation to the first defendant for the second defendant's breach of director's duties and the third defendant's knowing concern therein (although it seems likely that it was intended to be the other way around); a declaration that the first defendant's affairs had been conducted in a manner that was oppressive of her within the meaning of s 232 and/or s 461(1)(f); and an order pursuant to s 233 for the compulsory purchase of her shareholding in the first defendant; or alternatively that the first defendant be wound up on the just and equitable ground. The Originating Process was amended on 1 August 2017 to correct the transposition of defendants to which I have already referred, and to seek declarations that the third defendant had breached his director's duties and the second defendant had been knowingly concerned therein.
The proceedings continued on pleadings and are now constituted by an Amended Statement of Claim, claim (1) in which seeks an order, pursuant to Corporations Act, s 237, that the plaintiff have leave to bring proceedings on behalf of the first defendant against the second, third, and fourth defendants. By a notice of motion filed on 14 February 2018, the plaintiff seeks leave to further amend the Amended Statement of Claim, the substance of the amendment being to join and seek relief against the proposed fifth defendant. The present hearing is concerned with the claim (1) for relief in the Amended Statement of Claim, for leave pursuant to Corporations Act, s 237 to bring a derivative action, and the Notice of Motion for leave to further amend the Statement of Claim.
The matters of complaint in the proceedings have been helpfully summarised in the submissions of the third and fourth defendants as involving seven main allegations. In summary, the plaintiff complains first and foremost, that the directors of the first defendant, have in causing or permitting the establishment of the Jimmy's Recipe Gateway restaurant using a get-up and style substantially the same as that of the Jimmy's Recipe Galleries Restaurant, used or allowed to be used the intellectual property of the first defendant, and a corporate opportunity which, if they were to exploit it, they were bound to exploit only for the benefit of the first defendant instead of for the benefit of the second defendant, and indirectly the third defendant. In addition, there are complaints that the directors have caused the first defendant to pay invoices addressed to the second defendant; that they have increased the salaries they draw from the first defendant without her approval and without, so it is said, the requisite approval of a general meeting for directors' remuneration; that they have caused or permitted employees of the first defendant to work for the second defendant; that they have terminated the plaintiff's father's appointment as the company's accountant; that they have denied her access to the company's books and records; and that they have drawn down on their loan accounts in the company, including to fund their defence in these proceedings, without repaying the plaintiff's loan accounts.
The case is put first against the third and fourth defendants as breaches of their statutory and fiduciary duties as directors of the first defendant, and secondly against the second defendant as an accessory on the footing that it has knowingly assisted in, or knowingly received the benefits of, those breaches of duty; and, if the amendment be permitted also against the fifth defendant, again on the basis of accessorial liability. In addition, the Amended Statement of Claim reflects the claim in the original Originating Process for relief on the grounds of oppression. Of course the plaintiff, as a member of the company, has standing to bring an oppression suit of that kind without requiring leave under s 237. The matters to which I have referred as being the alleged breaches of duty of the third and fourth defendant are also the matters which are said to have amounted to the oppressive conduct of the affairs of the first defendant such as to ground relief for oppression.
Corporations Act, s 236, provides that a person may bring proceedings on behalf of a company if the person is, inter alia, a member of the company; and is acting with leave granted under s 237. By sub s (2), proceedings brought on behalf of a company must be brought in the company's name. Section 237 makes provision for applying for and granting leave, and provides that a person referred to in paragraph 236(1)(a) relevantly here, a member, as the plaintiff is may apply to the Court for leave to bring proceedings. The criteria for a grant of leave are specified in s 237(2), which provides that the Court must grant the application if it is satisfied that:
(a) It is probable that the company will not itself bring the proceedings, or properly take responsibility for them; and
(b) the applicant is acting in good faith; and
(c) it is in the best interests of the company that the applicant be granted leave; and
(d) if the applicant is applying for leave to bring proceedings - there is a serious question to be tried; and
(e) either
(i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied.
In the present case, the defendants do not dispute that it is probable that the company will not itself bring the proceedings (which is self-evident from the nature of the allegations and the constitution of the company) nor that the requisite notice has been given. The live issues are whether the applicant is acting in good faith, whether it is in the best interests of the company that the applicant be granted leave, and whether there is a serious question to be tried. As is almost always the case in applications under s 237, the existence of a serious question to be tried where leave is sought to bring proceedings is closely related to, though not determinative of, the questions of good faith and best interests, and it is convenient to address it first.
Prior to the incorporation of the first defendant on 5 December 2008, a partnership between the third defendant and his father Jimmy Chong operated a Chinese-Malaysian cuisine restaurant in the Galleries Victoria Building. That partnership held a lease of the premises, which was due to expire on 28 February 2009. The landlord offered a renewal of the lease, but on terms that involved a refurbishment of the premises and which would require a contribution to the refurbishment. Jimmy Chong and the third defendant needed to raise additional funds if they were to make the requisite contribution to the refurbishment, and decided to seek an investor, and for that purpose to incorporate the business. Thus the first defendant was incorporated by them on 5 December 2008, and at the same time, Jimmy's Recipe was registered as a business name.
The first defendant purchased the restaurant business from the Chongs, and the financial statements of the first defendant (and other documentation including income tax returns of each of the Chongs) demonstrate, at least at this stage, to a high level of persuasion, that the business was for that purpose attributed a value of $650,000, which was treated as an enhancement of the assets of the partnership by goodwill to that extent, and in the accounts of the company as an amount due to the Chongs on loan account as a liability which corresponded with an asset of equivalent value in the form of goodwill. In other words, it is at least at this stage, on the present evidence, tolerably clear that the company paid the Chongs $650,000 for the goodwill of the business of Jimmy's Recipe and to reflect that created loan accounts in favour of the Chongs.
Subsequently, the Chongs sold a shareholding in the company to Million Plus Pty Limited, a proprietary company apparently associated with their then accountant, in order to raise funds (so it would seem) for the refurbishment. Relations with the proprietors of Million Plus, however, deteriorated, and instead an investment was sought from the plaintiff's father.
As I have foreshadowed, in late 2010 the plaintiff acquired a 25% shareholding from Million Plus for valuable consideration. Amongst other things, the plaintiff's investment took out the loan account of Million Plus of about $150,000 which was replaced by a loan account in favour of the plaintiff in an equivalent amount. In 2011, relations between the third defendant and his father deteriorated, and their dispute ultimately resulted in Jimmy Chong selling his three and a half thousand shares to the third defendant, who thereafter was the 70% (and therefore majority) shareholder.
The third defendant and Jimmy Chong, and other witnesses for the defendant, give evidence to the effect that it was never the intention of the Chongs to assign the intellectual property or business name to the first defendant, and that they intended to retain the name for their own benefit, and assumed that they had done so. There is some support for this in the context that from time to time, Jimmy Chong was involved in the establishment of other restaurants which used the name Jimmy's Recipe, at the Tank Stream Arcade and at World Square. On the other hand, $650,000 was not paid and did not become a liability of the company for nothing. The loan accounts created by that transaction have been drawn on, including, in particular, by the third defendant. The proposition that the name and the goodwill of a business cannot be separated is well established. [1] In my view, at least on the material as it stands, there is a strongly arguable case that the first defendant acquired the goodwill and business name associated with Jimmy's Recipe when it acquired the restaurant business in 2009.
It appeared initially that it would be sought to justify the establishment of the second defendant and its business in 2016 on the basis of a "marketing agreement", which apparently gives the first defendant the benefit of advertising campaigns conducted by the second defendant, in return for, arguably, permission to use the name Jimmy's Recipe, and to claim an association with Jimmy's Recipe. However, such an arrangement was quite unnecessary if, as the defendants now maintain, they had not assigned the business name or goodwill to the first defendant at all.
The entire sequence of events by which the second defendant and its business came to be established, from early 2016 (when the third defendant apparently conceived and began to discuss with the other present directors of the second defendant the notion of starting a new restaurant using the name Jimmy's Recipe) through until the consummation of that idea in the latter half of the same year, all without revealing it to the plaintiff, is at least suggestive of embarking on a course of conduct which the third defendant ought to have known, if he did not actually know, would be detrimental to the first defendant's interest in its goodwill.
I am comfortably satisfied that there is a serious question to be tried that, by establishing the second defendant and its business, the third defendant misused, for himself and his associates (including the second defendant), a corporate opportunity which his statutory and fiduciary obligations obliged him to exploit, if at all, only for the benefit of the first defendant. There is evidence, including from the third defendant himself, that the fourth defendant was told of these proposals and was initially resistant to them, but ultimately permitted it to go ahead. At the least, she has not taken steps to prevent it.
That there is a serious question to be tried on the main ground of complaint advanced by the plaintiff does not of course mean that there is necessarily a serious question on every other ground. However, many of them are interrelated.
The defendants have advanced an explanation for the payment by the first defendant of invoices addressed to the second defendant. They say that the invoices were misaddressed, and were in respect of goods and services in fact supplied to the first defendant. That, it seems to me, is a matter for trial, especially given that the misaddressing of invoices in that way may itself be significant evidence of confusion, and potentially damage, occasioned by the establishment of a business under the same name and livery as that of the first defendant. Likewise, the provision of employees of the company to the second defendant is interrelated with the diversion of the first defendant's goodwill, even if there was no employment for them with the first defendant at the relevant time while it was closed for renovations. An application under s 237 is not a vehicle for a detailed examination of each of the particulars of breach of duty which might be alleged. Some of them might ultimately not go to trial, and some of them might fail at trial. The real question is whether the substantial cause of action, which I have said focuses on the diversion of the business opportunity and goodwill of the first defendant, is seriously arguable, and I am satisfied that it is.
It is next necessary to consider whether the applicant for leave is acting in good faith. The argument on this issue was very limited. There was a suggestion that the plaintiff was not really acting herself but that it was her father, who controlled her affairs, who was in reality bringing the proceedings, and that the dispute was an emanation of a personal dispute between him and the Chongs.
On the question of good faith, the essential consideration is whether the proceedings are being brought genuinely for the relief claimed in them, and not for an improper collateral purpose. In this case, the plaintiff is in any event bringing oppression proceedings. There is no identifiable improper collateral purpose. That there is a serious question to be tried is an important element in being satisfied that the plaintiff is acting in good faith. She deposes to her belief that she has a good cause of action. Not only was her evidence not challenged but, on the findings I have so far made, I am satisfied that there is an objective basis for that belief.
It has been observed, in Gerard Cassegrain and Company Pty Limited v Cassegrain [2010] NSWSC 91 at [124], that it is not only possible but appropriate to bring derivative and oppression claims together in the same proceeding if that is the best practical way to resolve the real dispute between the parties. The claims in this case are plainly co-extensive, and it is highly desirable that they be resolved, if they must be, in the one proceeding rather than separately. I am satisfied that the plaintiff was acting in good faith.
However, the main ground on which it was submitted that leave should not be granted was the remaining criterion, namely, whether it was in the best interests of the company that the applicant be granted leave.
In this respect, counsel for the second defendant helpfully analysed the position in terms of the "upside" for the company if the proceedings were to succeed, and the "downside" if they were to fail. It was submitted that even if the proceedings were to succeed, there was no identifiable financial loss to the first defendant company as its revenues and profits had not deteriorated since the opening of the second defendant's business, and there were no identifiable profits which it might recover from the second defendant as on the evidence at this stage, the second defendant had not made a profit. On the other hand if the proceedings were to fail, the company would potentially be visited with liability to pay the other defendants' costs of the proceedings. In this respect, it was emphasised that the plaintiff offered no indemnity of the kind that is often offered on this type of application to indemnify the company in respect of the costs of the proceedings and any adverse costs order unless and until the Court otherwise ordered.
So far as concerns the hypothesis that the proceedings succeed, it is true that the evidence at this stage does not point to a financial loss on the part of the first defendant, nor a profit on the part of the second defendant. But that is far from the whole of the picture. First, these are early days in terms of quantification of loss or quantification of profits. While it is not possible to say, on what is currently known, that the revenues or profits of the first defendant have declined, one does not know whether they would have increased more than they have but for the presence of the second defendant. Similarly, although on the very limited evidence so far available it does not appear that the second defendant has yet been profitable, it has only been in business for a year or so, and is thus in a start-up phase and developing its goodwill and customer connection, and it may well be that, without returning financial profits, those represent a valuable benefit.
In short, what the first defendant has lost is the opportunity to exploit a corporate opportunity which may prove profitable. At the same time, its goodwill has been effectively appropriated by the second defendant for the second defendant's benefit. It is in the first defendant's interests to recover its name, trademarks and the like, and to preserve its goodwill and prevent misuses without authority of its intellectual property. Even if the second defendant has not made a profit, it may be that the first defendant would be entitled to recover compensation on the basis of a notional licence fee, for the use of its name and brand. The absence of any profits on the part of the second defendant would of course be no answer to the injunctive relief sought in the statement of claim, effectively to prevent the continuing use of the first defendant's name and brand, and to recover its business name and trademark.
So far as concerns the hypothesis that the proceedings fail, it simply does not follow that there would be any detriment to the first defendant company. Corporations Act, s 242, provides that the Court may at any time make any orders it considers appropriate about the costs of persons in relation to proceedings brought with leave under s 237, including the person who applied for or was granted leave, the company, or any other party to the proceedings or application. The section also provides that an order may require indemnification for costs.
It is true that is has become conventional for applicants for leave to offer an indemnity, see, for example, Fiduciary v Morningstar Research [2005] NSWSC 442, where this practice appears to have originated. It may often be prudent for an applicant for leave to offer an indemnity because by doing so, at least where the applicant is of financial substance, the argument that there is no downside or detriment to the company for a grant of leave is made all the stronger. But it by no means follow that the offer of an indemnity ought to be regarded as a necessary or usual incident of an order granting leave, particularly where the Court has ample power under s 242 to make such order as is just in all the circumstances as to costs, including against the person who is granted leave.
Although derivative proceedings brought with leave under s 237 are brought in form, in the name of, and on behalf of, the company, it is in substance the derivative claimant who brings those proceedings. Leave to bring proceedings on behalf of and in the name of the company does not amount to leave to resort to the company's assets to fund those proceedings. Unless and until an order to that effect is made, the present plaintiff will have to fund the proceedings herself. As things stand, the company will not incur any costs from her prosecution on its behalf of the proceedings. If the proceedings fail, it is entirely open to the Court, under s 242(a), to make any adverse costs order against the present plaintiff, as the person who was granted leave to bring the proceedings. Although one cannot exclude the possibility that there is a case in which the company would be ordered to pay the defendant's costs of unsuccessful derivative proceedings, one might anticipate that ordinarily, it would be the derivative plaintiff who would be the person required to bear those costs. Counsel was not able to point to any case in which the company rather than the derivative plaintiff, had been ordered to bear the costs of unsuccessful derivative proceedings, although as I say there might be a case in which it would be appropriate. As it seems to me, the worst that can be said is that the possibility that if the proceedings fail, the company might be ordered to pay the second defendant's costs and those of the fifth defendant (if the fifth is joined) cannot be excluded. But it seems much more likely that in that event, it would be the derivative plaintiff against whom any adverse costs order would be made. Accordingly, I do not think that the "downside" should the proceedings fail, is nearly so significant as the defendants would suggest. There may be no downside if the proceedings fail; although there is a possibility that the company might incur an adverse costs order, it seems an unlikely one.
I have considered whether, in accordance with what appears to have become a conventional approach, a grant of leave should be made conditional on the plaintiff offering an indemnity. As it seems to me, it is really a matter for a plaintiff as to whether it offers an indemnity or not, and such an offer is a matter which the Court can take into account. The offer of an indemnity might well make a plaintiff's case easier; but the absence of one does not require by any means a conclusion that bringing the proceedings are not in the interests of the company.
Ultimately, it seems to me that the first defendant company has a good arguable case that its goodwill and intellectual property and corporate opportunities have been misappropriated for the benefit of the second defendant, and it is plainly in the interests of a company whose goodwill, intellectual property and corporate opportunities have been misappropriated that steps be taken to recover them and preserve them for its own benefit and future exploitation.
On that basis, I am satisfied that it is in the best interests of the company that the plaintiff be granted leave. If anything, that is fortified by the consideration mentioned in the Cassegrain [2] case that, where issues that parallel those in an oppression suit arise, it is permissible and appropriate for them to be litigated in the one suit.
For those reasons there will be a grant of leave under s 267.
So far as concerns the application for leave to further amend the statement of claim that was opposed by the second defendant and by the third and fourth defendants principally on the ground that it had been propounded only very recently, and that it was desired that they have an opportunity to obtain instructions about it. However, as it seems to me, insofar as the proposed further Amended Statement of Claim pleads a case against the second defendant, all it does in substance is to add additional particulars of how the second defendant is said to have acquired the knowledge alleged against it of the third defendant's alleged breaches of duty. The allegation that the second defendant had the requisite knowledge is already in the pleading. All the amendment does is to assert additional ways by which it is said to have acquired that knowledge. In those circumstances, the likelihood of the application for leave to amend being refused prima facie seems slight. In those circumstances, given that the case has not yet been set down for hearing, it seems to me that the just, quick and cheap way to approach this is to grant leave to amend, but to reserve to the defendants leave to apply within a limited time to have the amendments disallowed.
There was some speculation that the amendments may require the fifth defendant to be or to become separately represented. If so, that may affect the progress of the proceedings towards trial, but it does not seem to me, at least at this stage, a reason to refuse leave to amend.
I have, on previous occasions, rejected the proposition that costs of applications under s 237 should be left to the Judge determining the derivative proceedings brought pursuant to leave. That is because, in principle, an application under s 237 is a proceeding for final relief, and the proceedings brought with leave are not necessarily brought in the same file or proceedings, the same division or, for that matter, even the same court as the application for leave under s 237. For that reason, it is normally desirable that the costs of the s 237 proceedings be finalised by the judge who hears those proceedings. That is important for a second reason, namely that parties not be encouraged to think that a proceeding under s 237 is an opportunity for those who oppose it to have a "free kick", for want of a better term, at the plaintiff's case.
I am satisfied that the plaintiff, having succeeded on the application over opposition, is entitled to her costs against the defendants who opposed it, although my mind has wandered to some extent between whether that should be contingent on the successful outcome of the ultimate proceedings or not. However, because in substance these proceedings are not an interlocutory application in the derivative proceedings but a separate final proceeding, in my view, a final costs order should be made now.
It is not really to the point that the plaintiff would have had to seek leave anyway. Had leave not been opposed, it would have been dealt with as a short matter in the Corporations List one Monday, without requiring a two-day hearing at substantially greater expense. The fact is that when parties elect to oppose applications though they would have had to be made in any event, they thereby elect to expose themselves to the applicant's costs of making the application.
The second, third and fourth defendants must pay the plaintiff's costs of the application under Corporations Act, s 237.
For the reasons already indicated, the s 237 application is not merely a distinct phase in the derivative proceedings, but in substance a distinct proceeding, in which ordinarily a final order for costs would be made. On that basis, it is appropriate that the costs of that application be assessable and payable forthwith.
The Court orders that:
1. Pursuant to Corporations Act, s 237, the plaintiff have leave to bring proceedings on behalf of the first defendant against the second, third, fourth and fifth defendants substantially as pleaded in the document entitled Further Amended Statement of Claim, a draft of which is annexure A to the affidavit of Melissa Anne Crowley sworn 14 February 2018 herein.
2. The plaintiff have leave to further amend the statement of claim by filing a further amended statement of claim in the form of the said draft, including thereby to join Chee Wee Chow as fifth defendant.
3. The second, third and fourth defendants pay the plaintiff's costs of the application under Corporations Act, s 237.
4. The costs payable pursuant to the costs order in respect of the s 237 proceedings be assessable and payable forthwith.
5. In respect of the application for leave to amend, to the extent that it involved any further costs, to the intent that each party bear its own costs, and that the plaintiff must pay any costs thrown away by the amendment (not that I anticipate that there are any).
6. Leave be reserved to the second, third and fourth defendants to apply by motion filed by 7 March 2018 to vary or set aside the leave to amend.
7. The proceedings are otherwise adjourned to 12 March 2018 at 10am, in the Corporations Judge's directions list for further directions, upon which date any motion as contemplated by the above order concerning the leave to amend, and any motion for disclosure, may be made returnable.
[3]
Endnotes
See Cadbury Schweppes Pty Limited v Pub Squash Company Pty Limited [1980] 2 NSWLR 851 at 858; Baccus Marsh Concentrated Milk Company Limited v Joseph Nathan and Company [1919] HCA 18; (1919) 26 CLR 410; and Commissioner of Taxation v Just Jeans Pty Limited (1987) 16 FCR 110, particularly at [121]-[124].
Gerard Cassegrain and Company Pty Limited v Cassegrain [2010] NSWSC 91.
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Decision last updated: 29 August 2018