[2021] VSC 654 (M Osborne J)

CORPORATIONS - Derivative leave - Proposed proceeding challenging loan facility agreements - Lender enforced securities against company for defaults on agreements - Receivers appointed by lender sold real property to company associated with lender - Claim that no moneys advanced to company under loan facilities - Whether applicants for derivative leave acting in good faith - Inadequately explained delay in seeking leave to bring proposed proceeding - Proposed proceeding used as basis for adjourning related guarantee proceeding - Good faith not established - Whether proceeding in best interests of company - Only tenable claim in proceeding unlikely to yield significant damages because property sold at market value - No evidence applicants capable of funding proceeding - Best interests not established - Leave to appeal refused.

Corporations Act 2001 (Cth) s 237(2).

Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313, discussed; Blakeney v Blakeney [2016] WASCA 76; (2016) 113 ACSR 398, Connective Services Pty Ltd v Slea Pty Ltd [2018] VSCA 229; (2018) 130 ACSR 321, followed.

1. Until its collapse in 2018, Kalimpa Park Pty Ltd ('the company') was involved in a livestock business. It owned a property in Western Australia called Erim Downs ('the property'), on which a related entity Kalimpa Livestock Export Pty Ltd ('the livestock company') conducted a livestock business.
2. The first applicant, Haim Bzezinski, is one of the two directors of the company. He controls the second applicant, Bzezinski Pty Ltd, which owns a one-third share of the company. The third applicant, Danny Ruschin, controls the fourth applicant, Ruschin Pty Ltd, which also owns a one-third share of the company.
3. The second respondent, Michael Stokie, is the other director of the company. The remaining one-third of the company is owned by interests associated with Mr Stokie. He also controls the third respondent, Hilback Pty Ltd ('Hilback'), and the fifth respondent, Erim Downs Pty Ltd ('EDPL').
4. The dispute between the parties concerns actions taken by the Stokie parties after the company encountered financial difficulties. Hilback, as lender, had executed loan agreements with the company, and enforced a related mortgage over the property. It appointed Cameron Hugh Shaw and David Ross as agents in possession and subsequently as receivers and managers of the company, and they ultimately sold the property to EDPL. Mr Shaw and Mr Ross ('the receivers') are the first and fourth respondents. The application for leave to appeal was dismissed as against them, by consent, on 8 April 2022, and so it is generally convenient to refer to the Stokie parties as the respondents.
5. On 28 May 2021, the applicants applied for leave to bring a proceeding on behalf of the company under s 237 of the Corporations Act 2001 (Cth) ('the Act'), substantially in the form of a proposed statement of claim filed with the application. The proposed statement of claim set out claims against the Stokie parties and also against the receivers.
6. Section 237(2) sets out five criteria which an applicant must satisfy in order for a court to grant leave to bring a derivative proceeding.[1]
7. On 8 October 2021, a judge in the Trial Division dismissed the application, finding that two of the necessary criteria for granting leave in s 237(2) of the Act were not satisfied.[2] Specifically, the judge was not satisfied that (a) the applicants were acting in good faith and (b) that it was in the best interests of the company that leave be granted.
8. In relation to a third criterion, that there is a serious question to be tried, the judge found that there was such a question in respect of one of the claims sought to be advanced, but that there was not in respect of any of the others. This sufficed to satisfy that criterion. It was not necessary, given that the applicants had not satisfied all five criteria, to decide what consequence for the scope of the proposed proceeding should follow from these conclusions.
9. The applicants now seek leave to appeal from the judge's decision on two proposed grounds. They first contend that the judge erred in finding that the good faith requirement was not met.[3] Secondly, they contend that he erred in finding that the best interests requirement was not met.[4]
10. If the proposed appeal succeeds, the applicants seek an order granting leave to bring a proceeding on behalf of the company substantially in the form of the original proposed statement of claim, but amended so as to limit its application to the Stokie parties only. In other words, the applicants contend that leave to bring a proceeding should be granted, even in respect of those claims which the judge was not satisfied raised a serious question to be tried. As it transpires, we do not need to decide whether that would be an appropriate basis on which to grant leave.
11. For the reasons that follow, leave to appeal will be refused.

1. On 31 January 2017, the company acquired the property, comprising nearly 2,000 hectares, for $1.4 million. The purchase was partly funded by a loan from the Commonwealth Bank of Australia, secured by a first registered mortgage over the property ('the property loan').[5] The Commonwealth Bank also made loans to the livestock company, with the company as guarantor, to fund the purchase of certain machinery and equipment ('the asset loans').
2. In September 2017, the company entered into two loan facility agreements with Hilback.
3. By the first loan facility agreement, Hilback agreed to provide the company a $3 million loan facility for the purpose of purchasing and developing the property (although the purchase had by then occurred). It was a condition that certain 'collateral securities' be provided, including:

(a) a general security deed, granted by the company in favour of Hilback;

(b) a second mortgage over the property, granted by the company in favour of Hilback ('the Hilback mortgage'); and

(c) a guarantee and indemnity in respect of the company's loan obligations, provided by Mr Bzezinski and Mr Ruschin.

1. The required instruments were each executed on 15 September 2017. The general security deed and second mortgage were both executed by Mr Stokie on behalf of the company.[6] The deed of guarantee and indemnity was executed by Mr Bzezinski and Mr Ruschin as guarantors, the company as borrower, and Hilback as lender.
2. By the second loan facility agreement, Hilback agreed to provide the company a further $1,650,000 for the purpose of on-lending funds to a related company ('the live export company') to fund a legal proceeding in which it was engaged.[7] The second loan facility agreement also required the provision of the 'collateral securities' described above. At the same time, the company entered into an agreement with the live export company to on-lend it some of the borrowed funds.
3. The company leased the property to the livestock company. The company and the livestock company commenced works at the property to establish the infrastructure necessary for an intensive cattle feedlot business. Construction of a 12,000 standard cattle unit feedlot on the property was largely complete. There were also silos, cattle yards, dams, a weigh bridge, and fixed and transportable accommodation.
4. On 18 April 2017, the company had purchased an insurance policy for the property, issued by QBE Insurance Australia Ltd. Critically, however, the policy did not cover the feedlot.
5. In 2018, the company began to encounter financial difficulties.
6. On 30 January 2018, the Commonwealth Bank had the property valued by Colliers International for the purpose of assessing whether to increase the amounts available under its various loans to the company and the livestock company, including the property loan. Colliers primarily valued the property on two bases:

(a) an 'in use' value basis, which assumed the property's use as a feedlot and farming enterprise, and reflected the added value of special improvements, plant and equipment; and

(b) an 'as if complete' value basis, which assumed that all works to establish the infrastructure for an intensive cattle feedlot business had been satisfactorily completed in all respects.[8]

1. At the time of the valuation, much (but not all) of the necessary infrastructure had been completed. The feedlot was around 75 per cent complete.
2. Colliers valued the property on an 'in use' basis at $8,500,000, and on an 'as if complete' basis at $15,960,000. On the basis of the valuation, the Commonwealth Bank conditionally approved additional financing to complete the development of the property.
3. On 6 August 2018, Hilback's representatives sent notices of default to the company in respect of the first loan facility agreement and the Hilback mortgage. It was said that the company had defaulted by failing to pay interest due under the first loan facility agreement, and that the poor financial condition of the company constituted a 'material adverse effect' and therefore an 'event of default' for the purposes of that agreement. The outstanding loan amounts were declared to be immediately due and payable.
4. Simultaneously, Hilback's representatives wrote to Mr Bzezinski and Mr Ruschin, calling on the deed of guarantee and indemnity and demanding payments of the amounts said to be owed by the company. Hilback issued like notices and demands in respect of the second loan facility.
5. On 30 August 2018, Hilback's representatives wrote to the company and to Mr Bzezinski and Mr Ruschin, noting that the identified defaults under the first and second loan facility agreements, and the Hilback mortgage, had not been remedied.
6. On 4 September 2018, Hilback took possession of the property as second mortgagee and appointed Mr Shaw and Mr Ross as its agents as mortgagee in possession. In that capacity, they engaged a real estate agency ('CBRE') to conduct a sale of the property.
7. On 6 September 2018, Hilback's representatives requested a copy of the insurance policy from the company, which they received some days later. On 18 September 2018, Hilback's representatives wrote to the company's representatives, asserting that the insurance was deficient, including because it did not cover the feedlot. On 21 September 2018, the company's representatives replied that Mr Bzezinski was in the process of obtaining quotes for additional insurance, which might take up to 21 days to finalise.
8. Shortly afterwards, on or about 29 September 2018, the uninsured feedlot was criminally damaged by unknown actors. The damage was significant, in the order of $2 million. Cattle pens and steel fencing were destroyed, and all but one of the 20 one-tonne concrete water troughs were upended. A claim under the insurance policy was declined on the basis that the feedlot did not fall within the policy.
9. On 1 November 2018, the Commonwealth Bank sent the company notices of demand in respect of its obligations as guarantor of the asset loans, demanding payment of $1,344,295.52.
10. Over January and February 2019, CBRE marketed the property for sale. During the course of its marketing campaign, CBRE received six expressions of interest, four of which contained indicative offers in the amounts of $1 million, $1.4-1.5 million, $1.6 million and $3.6 million respectively.
11. The highest indicative offer was made by DC Capital Advisors Pty Ltd ('DC Capital'). In April 2019, DC Capital submitted a formal offer to purchase the property, as well as chattels located on it, for $3.6 million. Mr Shaw and Mr Ross advised DC Capital that they were authorised to sell the property only, and not assets located on the property. DC Capital then withdrew from the sale process.
12. The next highest indicative offer, of $1.6 million, was made by EDPL. On 30 May 2019, EDPL offered to purchase the property for $1.7 million, with a June 2019 settlement. EDPL later made the offer unconditional. The other parties who had submitted expressions of interest were asked to submit any further offers, but none did so.
13. On 5 June 2019, Mr Shaw and Mr Ross were appointed as receivers and managers of the company.
14. On 11 June 2019, the receivers sold the property to EDPL for $1.7 million. The sale settled on 28 June 2019.
15. The total amount owed by the company to the Commonwealth Bank as borrower under the property loan and as guarantor under the asset loans exceeded the purchase price. To discharge the first mortgage in favour of the Commonwealth Bank, EDPL paid $907,564 to purchase the assets the subject of the asset loans.
16. The property purchase price was then applied by the receivers to discharge the amount owing to the Commonwealth Bank under the property loan. Of the balance, the receivers retained $63,410.16 and Hilback received $311,754.67.

1. On 29 November 2019, Hilback commenced a proceeding in the County Court against Mr Bzezinski and Mr Ruschin, claiming amounts said to be owed under the deed of guarantee and indemnity.
2. On 19 June 2020, the guarantee proceeding was set down for trial, to commence on 23 December 2020.
3. In the guarantee proceeding, Hilback alleges, among other things, that it advanced the company moneys under the loan facility agreements, the company defaulted, and Hilback was entitled to call on the guarantee and indemnity. Mr Bzezinski and Mr Ruschin defend the claim by, among other things, denying that Hilback advanced the company any moneys under the loan facility agreements.
4. On 16 July 2020, Mr Bzezinski and Mr Ruschin foreshadowed bringing (along with Bzezinski Pty Ltd and Ruschin Pty Ltd) an oppression proceeding against, among others, the company, the livestock company, Hilback, Mr Stokie, entities associated with him, and Mr Stokie's son. They provided Hilback's representatives with a draft originating process and supporting affidavit. The draft originating process sought relief including:

(a) setting aside the first and second loan facility agreements, the Hilback mortgage, the general security deed, the deed of guarantee and indemnity, and the appointment of Mr Shaw and Mr Ross as receivers and managers;

(b) compensation from Hilback;

(c) leave for the plaintiffs to bring a derivative proceeding in the name of the company against Mr Stokie seeking compensation for breach of directors' duties;

(d) leave for the plaintiffs to bring a derivative proceeding in the name of the company against the receivers; and

(e) compensation from the receivers for breach of duties owed to the company, including, relevantly, failing to adequately insure the property, and for selling the property at an undervalue.

1. On 19 August 2020, Mr Bzezinski and Mr Ruschin's representatives sent Hilback's representatives a revised version of the proposed originating process, which added the receivers as defendants.
2. On 7 September 2020, the proposed oppression claim was unsuccessfully mediated as part of the guarantee proceeding. No oppression proceeding was commenced.
3. In December 2020, the trial date for the guarantee proceeding was adjourned until 14 July 2021, after Mr Bzezinski and Mr Ruschin parted company with their solicitors.

1. On 28 May 2021, the applicants commenced the proceeding seeking derivative leave, which gives rise to the proposed appeal.
2. On 25 June 2021, the guarantee proceeding was again adjourned, this time until 20 October 2021. The adjournment was sought, and granted, to accommodate the pending application for leave to bring a derivative proceeding. (The guarantee proceeding has since been adjourned again, and is now set down for trial in March 2023.)
3. As mentioned, by the present proceeding, the applicants seek leave to bring a proceeding on behalf of the company under s 237 of the Act, substantially in the form of a proposed statement of claim filed with the application. The proposed statement of claim sets out claims against the Stokie parties and the receivers. In broad terms, it alleges:

(a) Hilback advanced no moneys to the company under either of the loan facility agreements, and as, as a result, the company did not default under the Hilback mortgage, or either of the loan facility agreements;

(b) as a result, the appointments of Mr Shaw and Mr Ross as agents of Hilback as mortgagee in possession, and as receivers and managers of the company, were invalid;

(c) in any event, the receivers breached duties they owed to the company to: (i) adequately insure the property; (ii) adequately secure the property to prevent vandalism and damage; and (iii) sell the property at arm's length and for market value;

(d) further, Mr Stokie breached duties he owed to the company by his involvement in the above matters, including by 'facilitating the sale of the property at an undervalue', and, more generally, by procuring the company to enter into the first and second loan facility agreements against its interests; and

(e) further, EDPL 'aided and abetted' Mr Stokie's breaches of duty in facilitating the sale of the property to it at an undervalue.

1. Section s 237(2) of the Act provides that the Court must grant leave to bring a derivative proceeding on behalf of a company if it is satisfied that each of the following five criteria are met:

(a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them;

(b) the applicant is acting in good faith;

(c) it is in the best interests of the company that the applicant be granted leave;

(d) there is a serious question to be tried; and

(e) the applicant has given the company 14 days' written notice of the intention to apply for leave and the reasons for applying, unless it is appropriate to grant leave even though this has not been done.

1. After setting out the applicable principles, the judge addressed each of the criteria.
2. First, it was common ground that Mr Bzezinski and Mr Ruschin provided the company with the required written notice on 30 April 2021, satisfying s 237(2)(e).[9]
3. Secondly, the judge considered that it was probable that the company would not bring the proceeding, satisfying s 237(2)(a). This was because the company was in receivership and lacked funds. Further, Mr Bzezinski, as one of two directors, could not commence a proceeding on behalf of the company over the objection of the other director, Mr Stokie.[10]
4. Thirdly, the judge considered that there was a serious question to be tried, satisfying s 237(2)(d), albeit only in respect of one claim raised by the proposed statement of claim: that is, that moneys had not been advanced by Hilback to the company pursuant to the loan facility agreements, meaning there had not been a default under the Hilback mortgage. It is convenient to describe this as the 'no advance claim'.[11]
5. The judge noted that establishing a serious question to be tried required meeting a 'low threshold', and involved very little consideration of the merits.[12] He considered that the no advance claim met the test, not because it appeared to be particularly strong, but because the evidence advanced in respect of it was incomplete and inconclusive.[13] For example, no reliable evidence of the company's books and records had been adduced, with the parties instead relying on part of the books and records of the livestock company, a single balance sheet of the company, and bank statements.
6. The judge concluded:

Noting the relatively low threshold, I accept that there is a serious question to be tried as to whether there was a default by the Company under the Hilback Mortgage and the [general security deed]. Unfortunately, the present [state] of the evidence is such that I am unable to positively conclude that there were loans made pursuant to the First Loan Agreement, and as such fall within the rubric of the Hilback Mortgage and the [general security deed]. In circumstances where the plaintiffs have adduced some evidence to the contrary, and noting the low threshold, I accept that there is a serious question to be tried as to whether Hilback was entitled to enforce its securities, but I have some doubt that the proposed claim is a particularly strong one.[14]

1. The judge considered that the other issues presented by the proposed statement of claim did not raise a serious question to be tried. In brief, he found that:

(a) The claim that the receivers breached a duty to obtain further insurance did not raise a serious question because, among other things, it was not clear why the agents of the mortgagee should take out further insurance of the mortgaged property for the benefit of the mortgagor.[15]

(b) The claim that the receivers breached a duty to adequately secure the property did not raise a serious question because any such duty was not breached. This was because it was not apparent what, if any, reasonable steps were available to them to secure a large, non-operating, rural property against 'determined and vindictive steps taken by ... unknown actors'.[16]

(c) The claim that the receivers breached duties to the company to conduct the sale process in a way which achieved market value did not raise a serious question because the sale of the property 'was at market value',[17] and the product of a 'thorough and robust' sale process.[18] The applicants' claim to the contrary rested on the faulty premise that the earlier Colliers valuation was an assessment of market value when it was not. That valuation was primarily concerned with the 'use' value of the developed property, was subject to variability, and, in any event, was conducted before the property was significantly damaged.

1. The judge considered that the finding that the property was sold at market value meant that the proposed derivative proceeding - including the no advance claim - could not establish any 'significant loss or damage' to the company. He explained:

The ultimate consequence of any improper exercise of the security rights by Hilback would be that the Company's asset, the Property, had been sold by Messrs Shaw and Ross when they had no authority to do so.

Even if there was no actionable default under the Hilback securities, the Company and [the livestock company] were in default under the CBA facilities and the sale of the Property was at market value. The relevant counterfactual is that the Property should not have been sold by Hilback as mortgagee in possession (or more specifically, as events transpired, by Messrs Shaw and Ross as receivers and managers appointed by Hilback). If that was the case, then the Company should have retained the Property. If the market value of the Property is the same or consistent with the sale price achieved, which on the evidence before me it is, then all that has happened however is that the Company's real property asset has been transformed into cash. One asset has been substituted for another.[19]

1. Fourthly, and as a result, the judge considered that the grant of leave was not in the company's best interests, as required by s 237(2)(c) of the Act. This was because:

(a) The success of the one tenable claim - the no advance claim - would not yield any significant award in the company's favour because the company suffered no substantial loss. The consequence of any wrongful exercise of Hilback's security rights was only that the property was sold for its market value.[20]

(b) The company was in receivership, was not trading, and lacked the funds to support the proposed proceeding. Further, the applicants appeared to lack the capacity to indemnify the company. They lacked real property, appeared to have experienced difficulties in meeting their own legal costs, and advanced no material which adequately addressed concerns raised as to their impecuniosity.[21]

(c) The applicants had alternative routes by which they could raise the issues which they sought to ventilate in the proceeding, namely the guarantee proceeding, and the proposed oppression proceeding.[22]

1. Finally, the judge did not consider that it had been established that the application had been made in good faith, as required by s 237(2)(b). He explained:

Hilback made demands for repayment on 6 August 2018 and appointed Messrs Shaw and Ross as agents of the mortgagee in possession on 4 September 2018. The claim sought to be advanced in the Company's name (that is, that Hilback had wrongfully taken possession) was not advanced until April 2021. Further, the County Court Proceeding was issued on 29 November 2019, and the defence to that proceeding has included a number of the allegations the subject of the proposed proceeding. The foreshadowed oppression proceeding covers the very same claims now sought to be raised in the proposed pleading and was contemplated in mid-2020. At no stage during that two year period did Messrs Bzezinski and Ruschin either commence any oppression proceeding or apply for the leave for which they now seek. Nor is there any explanation as to why these putative claims have not been advanced at an earlier date. In contrast, the proceeding was issued on 28 May 2021 and then relied upon in June 2021 to vacate (for the second time) the trial of the County Court Proceeding against Messrs Bzezinski and Ruschin.[23]

1. As mentioned, there are two proposed grounds of appeal. They are drafted in discursive terms incorporating much by way of submission rather than the mere statement of grounds, and so it is not fruitful to set them out in full. In short, the applicants contend, first, that the judge erred in finding that the applicants had not established that they were acting in good faith, as required by s 237(2)(b); and secondly, that the judge erred in finding that it had not been established that the proposed derivative proceeding was in the best interests of the company, as required by s 237(2)(c).

Proposed ground 1 - good faith

Submissions

1. The applicants contended that the judge had failed to apply what was said to be the 'test' for good faith in this context found in Swansson v RA Pratt Properties Pty Ltd.[24] Applying that 'test', it was said that the judge ought to have found the good faith requirement established because of the presence of the following indicia:

(a) the applicants honestly believed that a cause of action exists and enjoyed a reasonable prospect of success;

(b) the judge did not find that the derivative leave application was brought for a collateral purpose amounting to an abuse of process;

(c) the applicants had a two-thirds shareholding in the company and one was a current director, meaning that good faith was more readily demonstrated;

(d) the applicants offered to indemnify the company, which was an indicator of good faith irrespective of whether they had the financial capacity to satisfy an indemnity.

1. More generally, the applicants submitted that the judge erred by finding that good faith was not established. In particular, it was said that he wrongly found that the applicants had not previously advanced the claims in the company's name, disregarding the fact that the applicants had raised complaints in June and August 2020 about the appointment of Mr Shaw and Mr Ross as agents in possession and about the subsequent sale of the property. In the years between the relevant events and commencing the present proceeding, the applicants said they had relied on legal advice and been constantly engaged in efforts and incurred great expense seeking to restore the company's assets. The proceeding was commenced only when the applicants' good faith efforts to resolve matters with the respondents failed. It was commenced, not to avoid the forthcoming trial in the County Court, but because in May 2021 the applicants became aware that EDPL had advertised the property for resale. Further, the judge was said to have been wrong to consider that the proposed derivative proceeding was an attempt to 'circumvent' the guarantee proceeding because the guarantee proceeding was confined to a much narrower point.
2. The respondents contended that there was no error. They submitted that the 'indicia' in Swansson did not amount to a compendious and immutable approach to the statutory requirement of good faith. Instead, having regard to the facts of the case, the judge drew a conventional inference as to good faith from the nature and circumstances of the case, and in particular, the delay in asserting the central claim.[25] Rather than overlooking the matters identified, the judge evidently concluded that:

(a) in bringing the claim, the applicants were seeking to vindicate their personal interests as guarantors of the Hilback loan facilities and as defendants in the guarantee proceeding, rather than their interests as shareholders or, in Mr Bzezinski's case, as a director; and

(b) the applicants' offer to indemnify the company was of limited relevance where they evidently lacked the financial capacity to meet it.[26]

1. The applicants also contested the factual assertions set out in [60] above.

1. In our view, this proposed ground is not made out.
2. First, the decision in Swansson does not purport to erect a test requiring application of particular criteria in the evaluation of good faith for the purposes of s 237(2).[27] To the contrary, Palmer J stated that it would 'be unwise to endeavour to state compendiously the considerations' to which the courts will have regard in that context, rather than to allow the law to develop incrementally.[28] The only factors which he considered the courts would always examine were:

(a) whether the applicant honestly believed that a good cause of action existed that had a reasonable prospect of success (noting that an applicant might not necessarily be believed in making such an assertion); and

(b) whether the applicant was acting for a collateral purpose that would amount to an abuse of process.[29]

1. We doubt that Palmer J was intending to say, as the applicants would have it, that a failure to approach the good faith question by reference to these two specific criteria would amount to an error of law. Rather, they are features of the good faith inquiry in this context that may be expected to routinely present themselves for consideration.
2. In the present case, the judge did not make an affirmative finding that the applicants lacked an honest belief that a good cause of action existed which had a reasonable prospect of success. Nor did he find that they were acting with a collateral purpose. Instead, he concluded that the applicants had not established that they were acting in good faith.[30]
3. That approach properly reflected the fact that the onus of proof lay on the applicants. As such, the judge was not required, as a precondition to finding against the applicants on this issue, to find either (a) that they lacked an honest belief as to the prospects of success, or (b) that they were acting for a collateral purpose. If the judge had made either finding, it would have followed that he could not be satisfied as to the applicants' good faith, but the inverse was not true: the fact that he did not make either of those findings did not mean that he must have been satisfied as to the applicants' good faith.
4. Indeed, even reading Swansson most favourably to the applicants, the judge was not required to make findings on these matters at all, but only to consider them. It sufficed to explore the matters by reference to the circumstances of the case, on the way to determining whether the applicants had discharged the onus that lay upon them.
5. It is plain from his reasons that the judge considered whether the applicants honestly believed that the case had reasonable prospects and whether they were acting for a collateral purpose. He set out the relevant passage of the judgment in Swansson stating that he should do so.[31] After considering these matters in the context of the relevant facts and circumstances, he concluded that good faith had not been established.
6. It will be evident from what is said above that we reject the submission that the judge erred in law by not giving consideration to the other matter said to comprise the 'test' in Swansson, namely the two-thirds shareholding of the applicants and Mr Bzezinski's status as a director. The judge was, in any event, plainly cognisant of those facts, as his reference to the proposed oppression proceeding confirms.[32]
7. When we then turn to the applicants' specific complaints (set out in [60] above), the judge's conclusion is not shown to be in error.
8. The solicitors' correspondence of June and August 2020 challenged the decision of the receivers to appoint a receiver to the live export company. This is not evidence that the claims sought to be advanced in the derivative proceeding were made before notice of the application for leave to bring that proceeding was given on 30 April 2021. If anything, the letters are to the contrary effect. They assume the validity of the receivers' appointment as receivers and managers of the company, referring without qualification to acts done by them in that capacity and their attendant duties.
9. Next, the applicants gave no evidence as to the legal advice on which they had relied. Nor is any reference made to advice received about potential claims that might be made on behalf of the company, or as to the timing of the application for derivative leave. Most of the evidence in question describes events leading to the unsuccessful mediation on 7 September 2020. After that point, the only evidence relied on is that Mr Bzezinski had been advised that 'immediate legal action' (unspecified) was required to protect the company's interests 'given the forthcoming sale' of the property by EDPL. None of this evidence goes any way to explaining the delay in seeking derivative leave which evidently, and properly, concerned the judge.
10. To the extent that the applicants point to 'numerous efforts' involving the expenditure of 'numerous resources' to recover the company's assets and resolve the parties' differences, again, this does not explain why there was such delay in seeking derivative leave. The applicants point to letters dated 28 March and 11 April 2019 asserting that the company was not indebted to Hilback and that the receivers were therefore not properly appointed as agents in possession. But this rather raises the question why action was not taken to challenge the appointment of the receivers, either in their capacity as agents of the mortgagee in possession or, later, as receivers and managers, despite the ongoing campaign to sell the property. The applicants placed some general reliance on evidence of Mr Ruschin about steps taken to try to resolve matters, but this all preceded the sale of the property to EDPL. Moreover, Mr Ruschin makes it clear that he was made aware of Hilback's intention to sell the property on 1 September 2018, three days before it appointed the receivers as agents in possession.
11. Nor is error shown by the applicants' reliance on the asserted need to take action when it became apparent that EDPL proposed to resell the property. The seeking of derivative leave would be a strange way of seeking to prevent that sale, especially given the need for 14 days' written notice of the application. It has not been explained why an injunction or a freezing order were not more suitable remedies, or why neither was sought. In any event, Mr Bzezinski deposed to seeing the advertisement of the property for resale upon doing a website search on 9 May 2021. By that date, notice of the application for derivative leave had already been given (on 30 April 2021).
12. Next, the applicants' allegation that the judge mistakenly held that the leave application was an attempt to circumvent the guarantee proceeding is baseless. The judge made no such finding. Rather, in circumstances where the leave application was relied upon, shortly after it was made, as a basis for further adjourning the trial of the guarantee proceeding, he was unconvinced that the applicants were acting in good faith. In the absence of any other satisfactory explanation for the timing of the leave application, that is hardly surprising.
13. Finally, the applicants' offer to indemnify the company was not supported by any evidence of their financial means. In the circumstances, the offer said little about their good faith.
14. In our opinion, there were features of this case, on which the judge relied, that raise questions about the good faith of the applicants which they failed to answer. The claim for derivative leave was made nearly two years after the impugned sale, which itself occurred some nine months after Hilback had made its intentions clear and acted to assert its rights. In the meantime, the applicants had foreshadowed bringing an oppression claim covering much the same ground, and were also exposed to potential personal liability in the guarantee proceeding. Their defence in that proceeding covered the same ground as the only claim in the proposed derivative proceeding which raised a serious question to be tried. The fact that the applicants belatedly sought to pursue the same argument in the name of the company, and then relied on that decision as a basis for further adjourning the trial in the proceeding in which they were the defendants, raised an obvious question about their good faith which the evidence did not dispel.
15. The first proposed ground is therefore rejected.
16. While this conclusion means that the judge's refusal to grant derivative leave must be upheld, we will also address the second proposed ground of appeal.

1. The principal argument advanced by the applicants in respect of the 'best interests' requirement concerned the judge's finding that the only claim that had a reasonable prospect of success, the no advance claim, would not result in significant damages even if it were to succeed. (While the written case also relied on the claims that the receivers had failed properly to insure and secure the property, those arguments were not pressed after the applicants discontinued the proposed appeal against the receivers.)
2. The applicants submitted that the judge's finding that the proposed derivative proceeding would not result in a significant award of damages rested on two flawed premises: (a) that the property was not sold at an undervalue, and (b) that, irrespective of Hilback's exercise of its security, the Commonwealth Bank would have exercised its own security and the property would have been sold anyway.
3. The applicants submitted that the first premise was flawed because there was evidence showing that the property was sold for less than it was worth; namely, (a) the DC Capital offer, which exceeded the sale price of the property even after deducting the price EDPL paid for the assets (b) the Colliers valuation, and (c) the evidence of the amounts expended by the company in purchasing the property and in developing it.
4. It was submitted that the second premise was flawed because it was not inevitable that the Commonwealth Bank would have sold the property. Instead, the applicants pointed to the bank's earlier offer of further finance to complete the nearly finished development, and the possibility of an arrangement for the company to trade out of its debts.
5. The applicants also submitted that the judge had erred in finding that, in any event, the no advance claim (which he had accepted raised a serious question to be tried) could be raised by the applicants in the guarantee proceeding.
6. Finally, in oral argument, the applicants said that the appointment of the receivers and the subsequent sale to EDPL, a company associated with Hilback and Mr Stokie, amounted to an improper 'design' or 'scheme' to deprive the company of the property.
7. The respondents contended that the judge was correct to conclude that the proposed proceeding was not in the best interests of the company.
8. First, the evidence said to show that the judge erred in concluding that the property was sold at market value was not to the point. The DC Capital offer encompassed chattels which could not be sold by the receivers and, in any event, was withdrawn. As the judge appreciated, the Colliers valuation did not assess market value and was conducted before the substantial criminal damage was done to the property. For the same reasons, the evidence of the company's past expenditure on the property did not establish anything about its current market value. The best evidence of market value was the outcome of the marketing campaign which saw several offers made, of which EDPL's was ultimately the highest.
9. Secondly, the suggestion that the Commonwealth Bank would not have called on its own security was said to be unsupported by the evidence. The bank's conditional offer of further finance predated its later demands for repayment, and the criminal damage which considerably set back the development of the property.
10. Thirdly, the respondents said that the judge correctly took account of the facts that:

(a) the company was in receivership and lacked apparent assets;

(b) the applicants were apparently impecunious and probably unable to fund the indemnity they offered; and

(c) the applicants had alternative routes available to ventilate their claims, including in the guarantee proceeding.

1. Finally, the respondents said that, while reference had been made at first instance to the association between Hilback and EDPL, it had never been suggested that there was any improper scheme on the part of Mr Stokie, and the applicants should not be permitted to raise such a claim for the first time by way of appeal.

1. Section 237(2)(c) requires a consideration of the company's separate and independent welfare. The applicant for derivative leave must persuade the Court that the proposed proceeding 'is' in the best interests of the company, not that it merely may be, appears to be or is likely to be in its best interests.[33]
2. The impugned findings of the judge under this proposed ground would each suffice to require a negative answer to that inquiry. If the applicants could not show at least a reasonable prospect that the proposed proceeding would yield significant damages, because the property was sold at an undervalue, and also that the Commonwealth Bank would not necessarily have enforced its mortgage if Hilback had not been entitled to enforce its own mortgage, then they could not establish that bringing the proceeding was in the best interests of the company.
3. The judge did not rely only on the findings he made adverse to the applicants on these two matters. He referred also to the financial position of the company and the indemnity the applicants had offered, and the availability to the applicants of other remedies. It is convenient to leave these matters to one side, given the critical importance of the two findings to which we have referred.
4. In our opinion, the judge was correct to hold that it had not been shown that the proposed proceedings would result in any significant award of damages for the company. The DC Capital offer was incapable of acceptance because the receivers were not entitled to sell the assets. It is artificial to seek to attribute a market value for the property by deducting from the DC Capital offer the amount that EDPL ultimately paid for the assets. Apart from the irony in relying on the actual sale value of the assets as evidence of their market value, while contesting that approach in respect of the property, the argument is speculative because, as events transpired, DC declined to make an offer on that basis. The much more telling evidence of market value is the outcome of the extensive and professionally conducted sales campaign which preceded the sale of the property to EDPL.
5. The Colliers valuation made it very clear that it was not an assessment of market value of the property alone. The 'in use' valuation took account of the added value of improvements, plant and equipment, including feedlot approvals and water licences. The 'as if complete' valuation further assumed satisfactory completion of ongoing construction works and was premised on the need for further review once that had actually happened. In any event, the valuation was dated 30 January 2018, well before the ultimate sale which itself took place after the extensive damage to the feedlot. The valuation warned that its authors were unaware of local comparable sales with a feedlot, cautioning that this meant that the valuation was attended by a heightened degree of subjectivity and that 'inherent value volatility exists'. The Colliers valuation falls well short of showing that the property had been sold at an undervalue in June 2019.[34]
6. Similarly, reference to the amounts expended by the company on the property have nothing to do with its market value. Even if some notional amount were to be deducted from the amount spent to account for the loss of the vandalised improvements, calculations along the lines put forward by the applicants were not supported by any expert evidence. In the end, the evidence of the sales campaign itself is plainly the best evidence of the value of the property at the time it was sold, and the applicants fall well short of establishing that it would be in the best interests of the company to pursue litigation seeking to prove otherwise.
7. That suffices to dispose of the second proposed ground of appeal. But we also reject the applicants' argument that the judge erred in finding that there cannot have been any significant loss to the company, even if Hilback wrongfully exercised its purported security rights, because the company and the livestock company were in default to the Commonwealth Bank and there was no basis for remedying that default without the bank exercising its own security rights. The applicants relied on an offer of further finance the bank made in April 2018, but it is far more significant that the bank instead demanded repayment in November 2018, by which time the feedlot had been destroyed and the business was in a much weakened position. No means of remedying the default to the bank was identified. Everything therefore pointed to the likelihood of a forced sale of the property in any event.
8. Finally, in our view the remaining arguments advanced by the applicants are without substance. It was not explained why Mr Bzezinski and Mr Ruschin could not raise the argument that no loan was advanced by Hilback in the guarantee proceeding (and their defence in that proceeding does so). Nor were the best interests of the company further advanced by seeking to characterise the events as the result of a design or scheme. No pleaded cause of action or claim in damages on behalf of the company was said to follow from that characterisation, even if it could have been permitted to be advanced by way of appeal.[35]
9. In relation to the company's financial position, it was highly relevant that no evidence was led of the applicants' ability to fund the proposed derivative proceeding.[36] If there had been such evidence, it may be that an order would have been appropriate that the company not be responsible for costs ordered against it.[37] But in light of the other obstacles to making good the best interests criterion, this by itself would not have made any difference to the judge's conclusion. That conclusion has not been shown to be in error.

1. In our opinion, leave to appeal must be refused.

AS RECEIVER AND MANAGER OF KALIMPA PARK PTY LTD (ACN 615 703 547) (RECEIVERS AND MANAGERS APPOINTED)

[1] The criteria are those which, if met, require the Court to grant leave. It has been held that, because the Act confers no other power to grant leave, the Court must refuse leave if any of the criteria are not met: MG Corrosion Consultants Pty Ltd v Gilmour [2012] FCA 461 [30]-[32] (Barker J).

[2] Re Kalimpa Park Pty Ltd; Bzezinski v Shaw [2021] VSC 654 ('Reasons').

[3] Corporations Act 2001 (Cth) s 237(2)(b).

[4] Ibid s 237(2)(c).

[5] The loan amount was initially $840,000, but later increased to $1,360,000.

[6] In each of these instruments, Mr Stokie was incorrectly described as the company's sole director.

[7] See AHRKalimpa Pty Ltd v Schmidt [2017] VSC 701 and Schmidt v AHRKalimpa Pty Ltd [2020] VSCA 193.

[8] Colliers also valued the property on an 'alternative' or 'next best' use basis, as a dryland farming property. The applicants did not seek to place reliance on this valuation.

[11] See [46](a) and (b) above.

[24] (2002) 42 ACSR 313; [2002] NSWSC 583 ('Swansson').

[25] See, eg, Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 [28] (Brereton J); Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732, 737 [22] (Austin J); [2005] NSWSC 442 ('Fiduciary'); Re Lotus Property Fund No 8 Pty Ltd atf Lotus Property Fund No 8 [2020] NSWSC 1349 [76] (Stevenson J).

[26] See, eg, Blakeney v Blakeney (2016) 113 ACSR 398; [2016] WASCA 76 ('Blakeney').

[27] Connective Services Pty Ltd v Slea Pty Ltd [2018] VSCA 229; (2018) 130 ACSR 321, 340 [105] (Ferguson CJ, Whelan and McLeish JJA); [2018] VSCA 229; Chahwan v Euphoric Pty Ltd [2008] NSWCA 52; (2008) 245 ALR 780, 798 [81]-[82] (Tobias JA, Beazley JA agreeing at 781 [1], Bell JA agreeing at 818 [128]); [2008] NSWCA 52.

[28] Swansson [2002] NSWSC 583; (2002) 42 ACSR 313, 320 [35].

[32] Ibid [156]. The fourth matter, the indemnity, is addressed at [77] below.

[33] Blakeney [2016] WASCA 76; (2016) 113 ACSR 398, 409 [52]-[53] (Buss and Murphy JJA and Beech J).

[34] Similar observations could be made about the 'alternative' or 'next best' use valuation. It included the feedlot approvals and water licences and was, of course, also dated 30 January 2018 and attended by the same subjectivity and volatility.

[35] No challenge was made to the judge's conclusion that the proposed claims against Mr Stokie for breach of directors' duties were belied by the signature of Mr Bzezinski on key documents, and were not arguable: Reasons [154] n 68.

[36] Blakeney [2016] WASCA 76; (2016) 113 ACSR 398, 411 [68] (Buss and Murphy JJA and Beech J).

[37] Fiduciary [2005] NSWSC 442; (2005) 53 ACSR 732, 743-4 [51] (Austin J).