- Browne v Dunn

Whether it is in the best interests of the Company that Mr Hourican be granted leave and whether there is a serious question to be tried

It is often convenient to deal with these two criteria for the grant of leave together. The third requirement for the grant of leave, under s 237(2)(c) of the Corporations Act, is that the grant of such leave is in the Company's best interests. Mr Folino-Gallo referred to the well-known formulation of that requirement in Swansson above as requiring that the Court be satisfied that the proposed action actually is, on the balance of probabilities, in the Company's best interest. He referred to relevant matters identified by Ball J in Re Gladstone Pacific Nickel Ltd above, 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. He also submits that shareholders' attitude to the proceedings is relevant, where shareholders would receive a share of recoveries proportionate to their shareholding. That proposition may well be correct, where a person holding a small minority interest in the Company seeks to bring proceedings, to which a substantial majority of shareholders are opposed. It seems to me to have rather less weight where one of three shareholders seeks to bring proceedings, on the basis that the other two shareholders' conduct, in their capacity as directors of the Company, is contrary to their statutory and equitable duties.
The fourth requirement under s 237(2)(d) of the Corporations Act is whether there is a serious question to be tried in the proceedings. Mr Folino-Gallo points out, and I accept, that 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 above at [25]; Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763; (2010) 79 ACSR 293 at [140], upheld on appeal in MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367. In Re Gladstone Pacific Nickel Ltd above, 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 [2002] NSWSC 583; (2002) 42 ACSR 313 at [25] per Palmer J; Oates v Consolidated Capital Services Ltd [2009] NSWCA 183; (2009) 72 ACSR 506 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."
In his written submissions in chief, Mr Parsons initially submitted that it was in the Company's interests to grant leave because: "Prima facie, if the Company appears to have suffered an actionable wrong at the hands of its current directors, it is in the Company's best interests that a remedy be pursued by proceedings." I do not accept that submission. Plainly, any assessment whether it is in the Company's best interests that Mr Hourican be granted leave to bring the derivate proceedings depends on matters such as the strength of the suggested claims, the costs which will be incurred by the Company in bringing the proceedings and any arrangements which have been made to protect it against those costs, the potential liability to Messrs Mahaffy and Lord if the proceedings are unsuccessful, and the likelihood that substantive damages will be recovered and their quantum. Mr Parsons ultimately addressed those matters in oral submissions.
The question whether the proceedings are in the Company's best interests also needs to be approached, it seems to me, in the context that Mr Hourican can, in his oppression claim, seek relief by way of an order that money paid out by the Company be returned to it: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672 at [528], or alternatively that his shares be bought out on a basis which compensates him for any breach of duty by Mr Mahaffy and Mr Lord. I summarised the relevant authorities as to that issue in Re JGS Investment Holdings Pty Ltd [2014] NSWSC 1532 at [14] as follows: "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. … 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." I raised with Counsel, in the course of submissions, whether that proposition meant that it was not necessary for the Company to bring such a claim, where the relevant matters could be raised by Mr Hourican in an oppression claim. That proposition has two difficulties. The first is that the courts have frequently granted leave to bring derivative proceedings, in conjunction with oppression claims; and the second is that, as Mr Parsons points out, there may be a question whether a remedy in oppression will be available if the relevant conduct said to give rise to oppression had ceased, although an order for recovery of loss suffered by the Company would be available in that situation.
I now turn to the factual matters on which Mr Hourican relied in support of the application. At the Court's invitation, Mr Hourican formulated a set of draft Points of Claim, which were subsequently revised in the course of the hearing, which clarified the matters sought to be relied on in the proposed derivative claim.
The matters relied upon were, first, that Messrs Mahaffy and Lord caused the Company to pay directors' remuneration monthly in the sum of $16,100 or $18,000 to Messrs Mahaffy and Lord. Mr Mahaffy's evidence is that Mr Hourican agreed to the payment of directors' remuneration in the amount of $16,100 per month to Mr Lord, which was then the amount also paid to Mr Hourican and Mr Mahaffy (Mahaffy 4.8.14 [37]). Mr Mahaffy also gives evidence of a conversation in January 2012 between Mr Hourican and himself where they agreed to payment of directors' fees of $16,100 per month (Mahaffy 4.8.14 [47]) and of a further conversation with Mr Hourican in April 2012 where, Mr Mahaffy claims, Mr Hourican indicated that he did not require his directors' fees at the moment and those funds could stay in the Company's accounts (Mahaffy 4.8.14 [48]). Mr Mahaffy also gives evidence of payment to Mr Hourican on 26 June 2013 of a lump sum constituting payment of directors' fees to June 2013 and repayment of his initial contribution to the Company, less personal expenses treated as loans to him by the Company (Mahaffy 4.8.14 [50]). Mr Lord's evidence in cross-examination was that his director's drawings were initially $16,100 per month and are now that figure, although they increased to $18,000 for a limited period around May 2014 (T39). It is not immediately apparent that these matters provide a strong basis for claims of breach of ss 181 or 182 of the Corporations Act or the corresponding general law duties, since the payment of remuneration to directors is not self-evidently not made in good faith in the Company's best interests or for a proper purpose, or self-evidently improper so far as it conveys an advantage on the recipient. Mr Hourican did not identify any particular evidence that the amounts involved were excessive.
The next matter on which Mr Hourican relies is that each of Messrs Mahaffy and Lord undertook building work on their own properties at the Company's expense. Mr Hourican identified materials, labour and services provided in respect of work undertaken on a property owned by Mr Mahaffy, quantified in the amount of $83,190.85, which included some items recorded in Mr Mahaffy's loan account and other items which were not recorded in that loan account. Mr Hourican also pointed to a substantially lesser amount attributable to materials, labour and services applied to work undertaken at two properties of Mr Lord, qualified as $23,509. Mr Parsons characterises that work as "substantial". That characterisation appears to be correct in respect of Mr Mahaffy, but may not be correct in respect of Mr Lord.
Messrs Mahaffy and Lord respond that the expenditures incurred by the Company in respect of their residences constituted an arms' length transaction that were the subject of directors' loans. Mr Mahaffy's evidence in respect of the payments in respect of his and Mr Lord's property was that (Mahaffy 4.8.14 [207]) each of he and Mr Lord had taken a director's loan from the Company; that loan was fully documented and for a term of 5 years; interest was payable on it, and the loan was for the purposes of Mr Mahaffy and Mr Lord renovating their homes. Mr Mahaffy's evidence in cross-examination was he consulted the Company's accountant to draw up a loan document in January 2014 to record the basis of loans made to directors, at an interest rate of 7% per annum (T119 - 120) and that Mr Mahaffy and Mr Lord signed loan documents in January 2014. Mr Parsons put to Mr Mahaffy, and he accepted, that that occurred after Mr Hourican had commenced the proceedings, although, even if it be assumed that the documentation of the loan arrangements was prompted by these proceedings, it would nonetheless need to be taken into account in determining whether a serious question to be tried has been established. Mr Mahaffy's evidence was that the 5 year term was suggested by the Company's accountant (T121) and the loan arrangements were approved by Mr Mahaffy and Mr Lord in a meeting between the two directors (T121).
Mr Lord gave affidavit evidence (Lord 28.7.14 [73]) in identical terms to Mr Mahaffy's affidavit evidence in respect of the loans to him and Mr Mahaffy. The Courts have repeatedly referred to the difficulties which arise where witnesses, or their solicitors, copy their evidence: see, for example, Seamez v McLaughlin [1999] NSWSC 9 at [40]; Macquarie Developments Pty Ltd v Forrester [2005] NSWSC 674 at [90]; Celermajer Holdings Pty Ltd v Kopas [2011] NSWSC 40 at [186]; Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789; (2014) 101 ACSR 233 at [13]ff. I note, but say nothing further, as to this matter at an interlocutory hearing of this kind. In cross-examination, Mr Lord's evidence was that the loan agreement was prepared by the Company's accountant in February 2014 (T29). Mr Lord's evidence in cross-examination was also that he had repaid the amount due in respect of work at his properties, apparently by deductions from the amount of his director's remuneration, although there was no documentary evidence to support such a repayment. I do not consider that I should place significant weight on that factual contention, the correctness of which cannot readily be determined in an application of this kind.
In oral submissions, Mr Parsons pointed out that only secondary evidence of the existence of the loan agreements have been given. It does not seem to me that that proposition goes very far, where no objection was taken to Mr Mahaffy's affidavit evidence as to that agreement and it was not put to Mr Mahaffy that it did not exist or did not have the terms which he claimed that it had. Mr Parsons also submitted that Messrs Mahaffy and Lord were self-interested in any transaction to authorise the establishment of directors' loan accounts. However, directors' loan accounts are commonplace in proprietary companies, and the directors of proprietary companies will often be self-interested in respect of the creation of those loan accounts; and, in the present case, neither party has tendered the Company's constitution, so it is unclear whether it contains the common provision that authorises directors of a proprietary company to enter transactions in which they have an interest, after disclosing that interest.
Mr Mahaffy's evidence is that Mr Hourican had also incurred personal expenses, treated as loans to him from the Company, including payments in respect of landscaping at his home, work completed at his mother-in-law's home and personal dentistry work in November 2012 (Mahaffy 4.8.14 [50]). Mr Mahaffy referred, in cross-examination, to the fact that the Company had also funded expenditures by Mr Hourican on the basis of the loan account, and his evidence was that the directors had an agreement that they would use the loan account when they needed to (T92). That evidence finds some support in the items recorded in Mr Hourican's loan account. An account referable to Mr Hourican which is in evidence (Mahaffy 4.8.14 Annexure "M") records personal expenses incurred by Mr Hourican, in respect of landscaping, skip bins and a dentist payment of $15,000. This matter reduces the force of any complaint as to the fact that personal expenses were charged to the Company, but there remains an issue as to the quantum of those expenses, at least in respect of Mr Mahaffy.
In oral submissions, Mr Folino-Gallo relied, in answer to the criticism of the monies expended to the benefit of Mr Mahaffy, on the existence of the loan agreement, and in respect of Mr Lord on his evidence that he had repaid those loans. Mr Folino-Gallo submitted that the only amount of any claim in respect of the loan account recoverable against Mr Mahaffy would be any difference between the 7% interest said to be payable on that loan account and a commercial rate of interest, or the opportunity cost that might be suffered by the Company being out of that amount of money. Mr Folino-Gallo pointed out, and I accept, that it is possible that different results could be reached as to whether leave to bring a derivative action should be granted in respect of the two directors. That result is plainly open where Mr Lord's loan account is significantly less than that of Mr Mahaffy, although it does not seem to me that his evidence that he has repaid it should be treated as determinative, where it has not been tested at a final hearing.
Mr Hourican also points to the payment of substantial cash amounts to Mr Mahaffy, quantified as nearly $80,000. There was no evidence of formal approval given by the directors for the payment of those amounts, and it is plain that they were not sanctioned by unanimous consent of the shareholders since Mr Hourican did not consent to them. It seems to me to be seriously arguable that the payment of those amounts, a substantial portion of which occurred over 4 months between January 2014 and April 2014, may have amounted to a contravention of ss 181 - 182 of the Corporations Act, so far as monies that were otherwise available to fund the Company's activities were diverted to Mr Mahaffy and the Company necessarily assumed the risk as to Mr Mahaffy's ability to repay those amounts.
On balance, it seems to me that the amount involved in the building expenses paid for Mr Mahaffy and the cash payments made to Mr Mahaffy, and the fact that the Company will be out of those funds for several years under the terms of the loan agreements, and exposed to the credit risk of a substantial amount lent to Mr Mahaffy on an unsecured basis, is sufficient to indicate that a serious question of breach of directors' duties arises in respect of Mr Mahaffy, and that it is in the Company's best interests to bring a claim against Mr Mahaffy in that regard, particularly where Mr Hourican will indemnify it (as noted below) against the cost risks of doing so. I am not satisfied that it would be in the Company's best interests to bring such a claim in respect of Mr Lord, where the amount involved is of a similar order as the personal expenses incurred in respect of Mr Hourican and the costs involved in pursuing a claim against Mr Lord as to that matter, even in the context of an existing oppression claim, are likely to be disproportionate to the amount involved.
Mr Parsons also points out that the Company has undertaken building work for two directors and shareholders of a substantial client of the Company. I will refer to that client, which has not had an opportunity to be heard in the proceedings, as "Client Co" and its directors and shareholders as "A" and "B". Mr Hourican's draft Points of Claim refer to works undertaken at a property owned by A, who was a shareholder and director of Client Co, at two properties, including works recorded in the Company's financial records of approximately $139,500 and additional works identified from other records. Mr Hourican also referred to works undertaken for B, who was also a director and shareholder of Client Co, quantified as approximately $70,000, and one additional item of $7,238 at B's property.
In respect of the work undertaken for A and B, Mr Mahaffy's evidence (Mahaffy 4.8.14 [207(c)]) was as follows: "… as a relationship management exercise we are assisting our major commercial clients with minor consulting advice and financial assistance on their home renovations. These renovations are of a non-structural, non-specialised nature and as such are excluded from home building licensing and warranty requirements. The clients approached us to provide a referral to our network of trusted tradesmen and suppliers, which are then paid for at cost through [the Company]. The client's [sic] then duly reimburse the Company for these costs. We do not make any money on these jobs. This is a transparent system. The [C]ompany is not a project manager, builder or contractor. The lost margin here is viewed as a marketing expense, which enhances goodwill with these major clients."
Mr Lord gave substantially identical evidence (Lord 28.7.14 [73(c)]), as follows: "… as a relationship management exercise we are assisting our major commercial clients with minor consulting advice and financial assistance on their home renovations. These renovations are of a non-structural, non-specialised nature and as such are excluded from home building licensing and warranty requirements. The clients approached us to provide a referral to tradespeople, which are then paid for at cost through the company. This is a transparent system. [The company] is not a project manager, builder or contractor on these jobs. The lost margin here is viewed as a worthwhile marketing expense." I have referred above to the difficulties which arise where affidavit evidence of witnesses is given in identical terms, suggesting that the witnesses or their solicitors have copied each other's evidence. Again, I say nothing further in that regard at this point.
Mr Mahaffy's affidavit evidence initially referred to the recording of charges in respect of A and B's work to Client Co's project as involving human error (Mahaffy 4.8.14 [211]). However, Mr Mahaffy's evidence, in cross-examination, was that the work done at the home of one of the directors and shareholders of Client Co was initially invoiced to that director, and then he requested that it be charged to a project then being undertaken for Client Co, and the invoices were then reissued on that basis (T110). Mr Lord's evidence in cross-examination was that the Company invoiced A and B for the works completed at their houses, although Mr Mahaffy attended to sending the relevant invoices (T30).
Messrs Mahaffy and Lord submitted that the work was undertaken to develop the business relationship between the Company and the client. Mr Parsons responds that the building works were apparently undertaken without formal documentation and were not, at least initially, recorded in the Company's books. He acknowledges, however, the evidence of Messrs Mahaffy and Lord that those costs were recorded on a spreadsheet, prior to their entry into the Company's accounting software. The evidence which emerged in the course of the cross-examination, particularly of Mr Mahaffy, suggested that the relevant works may have been paid for, albeit by Client Co rather than by A and B personally. If that is correct, then any claim for damages by the Company in that regard may be very difficult to establish.
Mr Parsons submitted, in the course of closing submissions, that the Company would still have cause for complaint so far as there is a suggested impropriety in Client Co paying for work undertaken for its directors and shareholders A and B. That proposition is not self-evidently correct, first, because A and B as shareholders of Client Co could, at least absent any prospect of Client Co's insolvency, ratify such an expenditure and, second, because there is no evidence that Client Co, A or B have not properly dealt with those payments for tax purposes. A further difficulty with that proposition is that it is not raised by Mr Hourican's draft Points of Claim, and it is likely to be difficult for the Company to establish any loss referable to that proposition. On balance, I am not satisfied that I should grant leave to bring this claim. Most significantly, there does not seem to me to be sufficient evidence to support the proposition that these works were not paid for to allow the Court to be satisfied that substantive damages would be recovered. On the other hand, significant costs would likely be incurred, where the claim will require scrutiny not only of the accounting of the works for A and B but also for Client Co, which appears to be a significant client of the Company for which it has done ongoing work.
Next, the draft Points of Claim attack purported loan agreements between the Company and Messrs Mahaffy and Lord. As I noted above, Messrs Mahaffy and Lord referred to these agreements in their affidavit evidence, although they did not tender them. It was suggested that the effect of the loan agreements is to defer any obligation of the directors to repay amounts recorded in the loan accounts for several years, on payment of a commercial interest rate. It seems to me seriously arguable that the entry into the loan agreements involved a breach of directors duties, at least so far as it involved the making of an unsecured loan to the directors for an extended period, in a manner which diverted the Company's financial resources to the directors' personal use, and exposed the Company to the risk of their ability to repay it in several years' time. I recognise, however, that the Company may face significant difficulty in quantifying the loss arising from this claim, particularly if the loan agreements are in fact on commercial terms as to interest and there is no significant issue as to Messrs Mahaffy and Lord's ability to repay the amounts in several years' time. On balance, and with some hesitation, I am satisfied that a serious question to be tried is established in respect of these agreements and it is in the Company's interests to pursue the claim, where it is indemnified against the costs of doing so and where the issues will be raised in the oppression case in any event.
Mr Hourican also contends that Messrs Mahaffy and Lord have paid for items of personal expenditure through the Company, which have not been accurately accounted for in the Company's books. Mr Hourican alleges that Mr Mahaffy procured that the Company's books not accurately represent his dealings with the Company over the period January 2014 to 6 May 2014. Mr Hourican points to several expenditures that were not accurately recorded in the Company's accounts, at least at the date they were produced for his inspection on 6 May 2014, and to other items in the Company's account that had been incorrectly allocated, although only one of those items related to Mr Mahaffy and the others related to allocations of expenditures incurred on behalf of A and B to Client Co, which appear to be consistent with the manner in which A, B and Client Co wished to have those expenditures treated.
So far as one item acquired for Mr Mahaffy's benefit was incorrectly recorded in Mr Hourican's loan account, Mr Mahaffy's evidence, which was by no means implausible, was that a mistake may have been made when allocating the expenditure where directors' loan accounts are adjacent to each other in the accounting system (T94). The proposition that Mr Mahaffy was deliberately omitting items of personal expenditure from his loan account faces the significant difficulty that the relevant expenditures were recorded in withdrawal information in the Company's bank accounts in a manner which plainly identified them as personal expenditures, and it might be questioned why Mr Mahaffy would include that information in the narration in the Company's bank statements, if he was seeking to conceal that the expenditure was undertaken on his personal account. When challenged as to why the relevant expenditures were not included in the loan accounts, Mr Mahaffy noted, in cross-examination, again plausibly, that that was probably because the reconciliation was not completed when the relevant information was printed out to be provided to Mr Hourican and his legal representatives (T100, T106). A further difficulty with that proposition was that, as I raised with Mr Parsons in the course of his cross-examination, the documents to which he was taking Mr Mahaffy indicated that many entries contained in the bank statements, not only those relating to Mr Mahaffy, did not appear to have made their way into the Company's Bizprac accounting records at the time the relevant accounting information was produced to Mr Hourican. The inferences that may be drawn from items not recorded in the Bizprac accounting system are also limited, to the extent that the evidence suggests that the Company maintains excel spreadsheets to record expenditures, at the point prior to their entry into the Bizprac system (T116).
A further difficulty with this allegation is that the omitted expenditures seem to have been incurred in late March, April and early May 2014, immediately prior to the production of the Company's books, and it is by no means implausible that, consistent with Mr Mahaffy's evidence, the relevant entries had not yet been processed in the Company's financial records at the time they were provided to Mr Mahaffy. It is also difficult to see that the Company would suffer any loss as a result of these matters, so as to warrant the cost of pursuit of the matters, if those entries have in fact now been correctly entered in the Company's books. On balance, I am not satisfied that a serious question to be tried has been established in respect of this matter, or that it would be in the Company's interests to pursue this claim, so that leave should be granted in respect of it. It will, of course, still be open to Mr Hourican to pursue this claim on his own behalf in respect of his oppression case.
Mr Hourican also contends that Mr Mahaffy procured that the Company's records reflecting his purported loan account omitted amounts of GST, concealing the true amount of the advantages which he and Mr Lord had obtained from the Company. It does not seem to me that the evidence is sufficient to establish a serious question to be tried as to this matter, which turns on complexities of the GST treatment of particular expenses that were not explored by the evidence.
Mr Hourican submitted that there was evidence that Messrs Mahaffy and Lord had "recast" transactions in the Company's books, during the period in which his application for access to those books was pending. In particular, Mr Parsons drew attention to several entries in respect of Client Co and A and B in the Company's Bizprac accounting system, which record invoices which appear to be out of sequential number and date sequence, contrary to the general structure of entries in that system (CB 594, invoices 187, 189 - 190) which Mr Parsons contends were issued after 19 February but before 20 March 2014, in the course of other disputes between the parties in these proceedings. Mr Mahaffy was cross-examined as to the process for entry, which he noted should be recorded when an item was entered into the Bizprac system from a creditor's invoice, although he did not know whether it would wait until a bank reconciliation was done, where a member of the Company's accounting staff sometimes did the entries (T91). Mr Parsons also put to Mr Mahaffy in cross-examination that, having regard to other information recorded in the Company's Bizprac accounting system, invoices 187, 189 and 190 could not have existed prior to 7 March 2014; it was unclear whether Mr Mahaffy entirely accepted that proposition, although he indicated that those invoices were changed so that they were directed to Client Co rather than A and B (T133). Mr Parsons in turn sought to draw an inference that those invoices were issued in order to conceal conduct otherwise in breach of s 181 - 182 of the Corporations Act involving the provision of work and services to A and B without recording them in the Company's accounts. One difficulty with that proposition is that, even if it were correct at a point prior to the issue of invoices in March 2014, which so far as the evidence goes have subsequently been paid, it is not correct now, and it is difficult to see how the Company could suffer loss by the non-recording of items, for a period of time, that were subsequently invoiced to a third party and paid. Messrs Mahaffy and Lord respond that the evidence does not establish that allegation on the balance of probabilities, particularly having regard to the seriousness of the allegation. I am not satisfied that it is in the Company's interests to bring a claim in respect of this matter, since it has not been established that there is any real prospect of a recovery of damages likely to exceed the costs involved. Again, it will be open to Mr Hourican to pursue this claim on his own behalf in respect of his oppression case.
In his submissions in support of the application for leave to bring the derivative proceedings, Mr Hourican also pointed to difficulties that he contended he had suffered in obtaining access to information concerning the Company. That issue can be addressed by an application for access to information under s 247A of the Corporations Act and, at best, provides background to this application.
The existence of an indemnity given by a shareholder who seeks leave to bring the derivative proceedings in favour of the relevant company in respect of costs is likely to be relevant to whether it is in the company's interests to bring the proceedings, and I reviewed the relevant authorities in that regard in Re Fishinthenet Investments Pty Ltd and Coastal Waters Seafood Pty Ltd above at [31]ff. Mr Hourican did not offer such an indemnity at the commencement of proceedings, and Mr Parsons pointed to the Court's ability to make orders as to the costs of the proceedings. However, in closing submissions, Mr Hourican did offer such an indemnity as follows: "I Michael Hourican provide an indemnity to the Company, Imperium Projects Pty Limited in respect of costs arising out of any leave of the Court given in respect of the statutory derivate action, given pursuant to s 237 of the Corporations Act." (MFI 3) Mr Folino-Gallo pointed out that there is no evidence as to the capacity of Mr Hourican to meet the relevant undertaking, but fairly recognises that the position, in respect of a natural person who offers such an undertaking, may well be different from that of a corporate entity with only nominal assets; contrast Re Fishinthenet Investments Pty Ltd and Coastal Waters Seafood Pty Ltd above.
Messrs Mahaffy and Lord submit that it is not in the Company's best interests that Mr Hourican be granted leave to bring the proceedings. Mr Folino-Gallo contends that the claims are relatively modest in size, and the two defendant directors would be entitled to two-thirds of any judgment recovered although neither has any interest in causing the Company to pursue the claim. It seems to me that submission gives insufficient weight to the distinction between the corporate entity and its shareholders, since the Company may benefit from the recovery of any loss that it has suffered, even if its individual shareholders do not particularly wish to have that loss recovered from them. Mr Folino-Gallo submits that Mr Hourican has not provided evidence of likely costs incurred in the proposed litigation and, making allowances for the exigencies of litigation, the costs will be significant and disproportionate to any amount claim. However, the additional costs incurred in the derivative action may be limited, where an oppression claim is proceeding in any event, and the Company's interest in that regard is substantially protected by the indemnity now offered by Mr Hourican. Mr Folino-Gallo also submits that there is no serious question to be tried, and points out that a number of Mr Hourican's complaints relate to the incorrect application of relatively small sums to particular projects.
I have addressed the particular claims sought to be brought by Mr Hourican, their factual basis, whether there is a serious question to be tried in respect of them and whether they are in the Company's best interests above. For the reasons set out above, I am satisfied that Mr Hourican has established that it is in the Company's best interests to bring proceedings in respect of some, but not all, of the matters for which he sought leave to bring derivative claims, namely, the expenditures for building works and personal loans in respect of Mr Mahaffy, but not Mr Lord; and the entry into the directors' loan agreements. I am not satisfied that it is in the Company's best interests to bring a claim in respect of the accounting for dealings with Client Co, A or B or the various errors in the Company's accounts to which Mr Hourican referred. Leave for a derivative claim should therefore not be granted in respect of those matters, although it will be open to Mr Hourican to rely on them in his oppression claim.

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Cases Cited (27)

Cited By (9)