Bzezinski v Shaw

Relevant Principles

1. The application for leave to bring the proposed derivative suit on behalf of and in the name of the Company is made pursuant to s 237 of the Corporations Act 2001 (Cth) (the Act).
2. Each of Ms Wylie, as a director of the Company, and Wylie's Securities, as a shareholder of the Company, is entitled to make such an application: s 236(a)(i) and (ii).
3. Section 237 of the Act provides that the Court must grant leave to bring a derivative suit if it is satisfied of the matters specified in s 237(2)(a)-(e), namely: (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; 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.
4. It is well established that if these criteria are made out, the court is required to grant leave and conversely, if any one is not made out, the court should refuse leave: Huang v Wang [2016] NSWCA 164 at [57] per Bathurst CJ (McColl JA agreeing) and the cases there cited.
5. Three of these elements can be addressed briefly.
6. As regards s 237(2)(e), the requirement for notice has been satisfied.
7. As regards s 237(2)(a), it is likely that the Company itself will not bring proceedings against Mr Williams and Jada. That is because there is, in effect, a deadlock between management and between shareholders. As outlined above, each of Wylie's Securities and Jada is a 50% shareholder in the Company, and the only directors of the Company are Ms Wylie and Mr Williams.
8. As regards s 237(2)(c), it is, generally, reasonable to expect that pursuit of an action by or on behalf of a company against an officer for the recovery of compensation for any alleged breach of duty to the company is in the company's best interests: Hislop v Paltar Petroleum Ltd (No 3) [2017] FCA 1253 at [20] (Gleeson J) and the cases there cited. In the present case, the proceedings alleging breach of duty by a director of the Company have been resolved by a court order being made, by consent, for a substantial sum of compensation to be paid.
9. In determining if it is in the best interests of the company that leave be granted, relevant matters to consider include the likely recovery if the action is successful, the likely costs, and the nature of any indemnity the applicant has offered to the company if the action is brought and the likelihood that the company will recover under that indemnity: In the matter of Gladstone Pacific Nickel Limited [2011] NSWSC 1235 at [57] (Ball J).
10. In the present case: 1. as regards the issue of recovery, the Plaintiffs have led evidence regarding the assets available to Mr Williams and Jada to meet the Judgment Debt, in the event that it is enforced against them; and 2. as regards the costs of the proposed proceedings, the Plaintiffs proffered an undertaking to pay the Company's costs of pursuing the claims in the proposed derivative suit and to indemnify the Company in respect of any costs orders made against it in pursuing the claims.
11. That left two elements: first, a serious question to be tried; and secondly, good faith.
12. The main area of dispute between the parties concerned the requirement in s 237(2)(d) that there is a serious question to be tried.
13. 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 RA Pratt Properties Pty Ltd [2002] NSWSC 583 at [25] (Palmer J). Consequently, the same relatively low threshold is applicable, and it is not appropriate for the court to attempt to resolve disputed questions of fact: Gladstone Pacific Nickel at [56] (Ball J).
14. There is no dispute that the Judgment Debt was created by the entry of the consent orders on 14 June 2022, or that each of Jada and Mr Williams was liable for this debt. Instead, the issue is whether there is a serious question to be tried regarding whether the Judgment Debt remains outstanding.
15. The Plaintiffs relied on evidence from the Company's accountant and the Company's bookkeeper to the effect that no amount of $1.5m had been received by the Company from either Jada or Mr Williams. The Plaintiffs submitted that this material established that there was a serious question to be tried as to whether the Judgment Debt remained owing.
16. In response, Jada and Mr Williams submitted as follows. 1. The accounts of the Company for the financial year ending 30 June 2022 (FY22 Accounts) disclose that: 1. the Company had non-current assets in the form of unsecured loans due from Jada in the amount of around $2.3m and from Wylie's Securities in the amount of around $2.1m; and 2. the Company had a current liability in the amount of around $5.4m, which was owed to the Crocodile Farm Property Partnership (being a partnership between Jada and Wylie's Securities). 1. The accounts of the Company for the financial year ending 30 June 2023 (FY23 Accounts) disclose that: 1. the loans due from each of Jada and Wylie's Securities were reduced to nil as at the end of FY23; and 2. the Company's current liability to the Crocodile Farm Property Partnership had increased slightly, from $5.4m to $5.47m. 1. Order 1 made on 14 June 2022 requiring payment of $1.5m by Jada to the Company should have been taken into account in the preparation of the FY22 Accounts and FY23 Accounts and, if it had been taken into account, the effect would have been: 1. in the FY22 Accounts, to increase Jada's debit loan account by $750,000, and to decrease Wylie's Securities debit loan account by $750,000; and 2. in the FY23 Accounts, to increase the Company's indebtedness to Wylie's Securities by $750,000, and to decrease the Company's indebtedness to Jada by $750,000. 1. By reason of those matters, "the indebtedness of Jada to the Company under order 1 made on 14 June 2022 has been paid in full".
17. In short, Jada and Mr Williams submitted that there was no serious question to be tried as to whether the Judgment Debt remained outstanding because it was necessarily the case, by the application of principles of set-off, that the full amount has already been paid.
18. There are three main problems with this submission.
19. First, in support of this submission, Jada and Mr Williams relied on the decision of Buckley LJ in Halesowen Presswork & Assemblies Ltd v Westminster Bank Ltd [1970] 3 All ER 473. However, that was a case of banker and customer. As his Lordship noted in the passage at 488 which the Defendants quoted and upon which they relied, the relationship of banker and customer is a "single relationship": it is not "a set-off situation, which postulates mutual but independent obligations between two parties", but is instead "an accounting situation, in which the existence and amount of one party's liability to the other can only be ascertained by discovering the ultimate balance of their mutual dealings".
20. The relationship between the Company, on the one hand, and Mr Williams and Jada, on the other, is not a relationship of banker and customer. Jada and Mr Williams did not explain why the principles in Halesowen regarding a running account would apply to the circumstances of this case.
21. Secondly, Jada and Mr Williams submitted that "the Company and Jada each had the right to set-off their respective indebtedness from time to time". It is important to note the language of "a right to set-off". That raises the question whether there is evidence which clearly establishes that such a right has in fact been exercised, such that there does not remain any serious question to be tried in respect of the alleged indebtedness of Jada and Mr Williams to the Company.
22. Jada and Mr Williams did not point to evidence which conclusively established that any such right had already been exercised. The evidence of the FY22 Accounts and FY23 Accounts upon which they relied appears to indicate that no such set-off has yet been effected by the Company. Further, the Company's external accountant, Mr Ryan, from whom Mr Williams and Jada led evidence, explained in an email dated 12 November 2024, which was sent to the solicitors for each of the parties, that the Company "could" exercise a right of set-off. In particular, he stated that: "The Short Minutes of Order could at anytime be satisfied by instructions to increase the amount owed to Wylie by $750,000 and to decrease the amount owed to Jada by $750,000. … No instructions have ever been received to make such an adjustment to the respective loan accounts. If such instructions are received a journal could be entered to reflect the adjustment to the loan accounts and upon the next payment from the trust account, the Short Minutes of Order could be satisfied by adjusting the amount paid."
23. Jada and Mr Williams did not, in their submissions, identify any evidence to establish that, subsequent to this email, any such journal entry has been made.
24. Thirdly, Mr Williams and Jada relied on the maxim that equity regards as done what ought to be done, and submitted that: "if the company were to sue, Jada would simply plead not indebted as alleged and put … on a counter claim for the balance of the loan owed to it".
25. Equitable set-off is a substantive defence, which may be set up not merely as a means of preventing judgment or enforcement, but also as an immediate answer to a liability to pay: Roadshow Entertainment Pty Ltd v ACN 053 006 269 Pty Ltd (1997) 42 NSWLR 462 at 481. In that case, the Court of Appeal (Gleeson CJ, Handley JA, Brownie AJA) explained that: "an equitable set-off impeaches the title of the other party to the legal demand against which it is asserted. When 'the circumstances which support an equitable set-off exist, it is unconscionable for the creditor to regard the debtor as being indebted'…The debtor can therefore claim that the payment demanded was never due"
26. The question for the Court on the present application is whether to grant leave to the Plaintiffs to bring a derivative suit in the name of the Company to enforce the Judgment Debt. For the purposes of this application, the question is not whether it is open to Jada and Mr Williams to raise a defence of equitable set-off which may, if established, present a complete answer to such a claim. Instead, the question is whether the Court can conclude that the likelihood of any such defence succeeding is so high that there cannot be said to be any serious question to be tried in respect of that claim.
27. In that regard, there is not sufficient material before the Court on this application to determine that any such defence of equitable set-off will necessarily be established in the derivative suit, such that leave should be refused. In particular, there is not sufficient material before the Court regarding the debts owed by the Company to the partnership, or regarding how the FY22 and FY23 Accounts were prepared and what debts were or were not taken into account, or regarding any change in the financial position of the Company since the FY23 Accounts, to determine that any such defence would necessarily succeed.
28. After the completion of oral submissions at the hearing, the Court adjourned in order to allow these reasons for judgment to be prepared. During this adjournment, my chambers received an email from the solicitor for Jada and Mr Williams requesting that I take into account the following further submission: "As the applicants are claiming orders for the enforcement of the judgment debt, the court must be satisfied that that the debt remains outstanding (and not that that is merely arguable) notwithstanding the third defendant's right to set off the company's liability to it, which right has been exercised by its presentation of the arguments in this matter."
29. On the present application, I am only determining whether to grant leave to bring the derivative suit and, for that purpose, am required to consider whether there is a serious question to be tried regarding the enforcement of the Judgment Debt.
30. Taking into account the evidence upon which the Plaintiffs relied and the defence of set-off which has been raised by Jada and Mr Williams, I am satisfied that there is a serious question to be tried regarding the enforcement of the Judgment Debt.
31. Whether the Judgment Debt remains outstanding, whether orders should be made for the enforcement of the Judgment Debt, and whether any defence of set-off is a complete answer to such a claim, are all matters to be determined in the derivative suit, and not on this application. For the purposes of this application, I am not required to determine, and have not determined, any of those matters. Further, it is not appropriate to resolve any such disputed questions of fact on this application (Gladstone Pacific Nickel at [56]).
32. Finally, I turn to the requirement in s 237(2)(b) that the applicant is acting in good faith. Matters which will routinely present themselves for consideration as part of the good faith enquiry include whether the applicant honestly believed that a good cause of action existed that had a reasonable prospect of success, and whether the applicant was acting for a collateral purpose that would amount to an abuse of process: Swansson at [36] (Palmer J); Bzezinski v Shaw [2022] VSCA 173 at [64]-[65] (Kyrou, McLeish and Walker JJA).
33. It will be relatively easy for an applicant to demonstrate good faith to the Court's satisfaction where the application is made by a current shareholder of a company who has more than a token shareholding and the derivative action seeks recovery of property so that the value of the applicant's shares would be increased: Swansson at [38]. Where an application is brought for such a purpose, the application would be brought in good faith "even if the applicant is spurred on by intense personal animosity" against the respondent: Swansson at [41].
34. In the present case, the application is made by an entity that owns 50% of the shares in the Company and 50% of the units in the Trust, and seeks the recovery of an amount of $1.5m which, if received, would be for the benefit of the unitholders. There was some suggestion in the written submissions of Jada and Mr Williams that Ms Wylie was motivated by her "unmitigated animosity" to Mr Williams. No such contention was advanced in oral address. In any case, the existence of any such animosity would not, of itself, be a basis for concluding the application was not brought in good faith, for the reasons given in Swansson.
35. Similarly, there was a suggestion in written submissions and in the evidence filed by Jada and Mr Williams that Ms Wylie had acted unreasonably in not providing an indemnity to the Trustees, which would have permitted the Trustees to distribute moneys which they hold for Jada and Wylie's Securities. Again, no such contention was advanced in oral address. In any case, even if Ms Wylie had behaved unreasonably in her commercial dealings with the Trustees (which has not been established), this would not have established a lack of good faith on her part in seeking leave to bring an action to enforce the Judgment Debt.
36. The only basis on which a submission was made, in oral address, that there was a lack of good faith on Ms Wylie's part was that she had failed to give instructions to the Company's accountants to effect a set-off between the Company's debt to Jada and Jada's debt to the Company. Jada and Mr Williams contended that the unitholders in the Trust "owe to one another a fiduciary duty" to "act in the interests of the trust", and the failure to give such instructions "could, of itself, amount to bad faith". There was no articulation of the basis of this fiduciary duty or why a failure to give instructions in relation to an accounting matter might, of itself, constitute bad faith on the part of a unitholder. Further, Ms Wylie, who gave evidence in support of her application, was not cross-examined on this or any other issue, and was not provided with any opportunity to respond to any such allegation of breach of fiduciary duty or of bad faith (noting that no such allegation was articulated in the written submissions filed in advance of the hearing). In those circumstances, I do not consider that there is a basis for concluding that Ms Wylie has acted or is acting in breach of any fiduciary duty, or otherwise acting in bad faith.
37. For the reasons given above, I am satisfied that the good faith requirement has been satisfied.

Conclusion and Orders

1. It follows, for the reasons given above, that each of the requirements of s 237 has been met. In those circumstances, the Court must grant leave to the Plaintiffs to bring the proposed derivative suit in the name of and on behalf of the Company.
2. The common practice in respect of costs of an application for leave to bring derivative proceedings, is not to order that the plaintiff has the costs of that application unconditionally, not least because it is not apparent why the plaintiff should have the costs of an application for leave to bring proceedings which ultimately fails. An order is often made that the costs of the application should be the applicant's costs in the cause of the substantive proceedings: see In the matter of Carbon Copies Composites Pty Ltd [2022] NSWSC 1762 at [26] per Black J. I will make an order to that effect.
3. On the afternoon following delivery of these reasons, the First and Third Defendants sought a relisting of this matter in order to apply for a stay of the orders set out below, pending any appeal. The basis for this application was put as follows: "Essentially we are concerned that the effect of his honour's orders is to create an issue estoppel which will prohibit our client from arguing that the debt has been paid. This arises because of the terms of the defence we have filed in this matter and the terms of the orders made by Justice Black which referred this matter to his honour."
4. I relisted the matter later the same day. I refused a stay, for the following reasons. 1. By orders made by Black J on 18 November 2024, this matter was listed today "for the hearing of the Plaintiffs' application for leave to bring derivative action in respect of enforcement issues, and if appropriate, the enforcement issues" (emphasis added). In submissions filed in advance of the hearing, the Plaintiffs addressed only the leave application; and the First and Third Defendants did not raise any issue with the Plaintiffs having taken that course, instead responding on the question of leave. Similarly, the Plaintiffs at the hearing moved only on the leave application, and directed submissions only to the leave issue. In those circumstances, I determined only the leave issue. The question of the relief sought in the derivative suit (and therefore any issue raised in the defence to that suit) remains to be determined in another hearing. 2. I do not consider that any "issue estoppel which will prohibit [Jada and Mr Williams] from arguing that the debt has been paid" has been or could be created by the determination of the leave application. As indicated in the reasons set out above, I have not, in determining the leave application, determined any disputed question of fact, including whether or not the debt has been paid. For the purposes of determining the leave application, I have found that there is a serious question to be tried as to whether the Judgment Debt remains outstanding. However, I have not determined any such question. 3. In any case, there is no need to stay any of the orders which I made today, pending the filing of any application for leave to appeal. The orders do not require any step to be taken by the First and Third Defendants prior to the next directions hearing on 10 February 2024, which is a date after the expiry of the period in which any such application must be brought.
5. For the reasons given above, I made the following orders: 1. The Court notes the Plaintiff's undertaking to pay the costs of the Second Defendant in pursuing the claims in the proposed derivative suit and to indemnify the company in respect of any orders made against it in pursuing these claims. 2. Order, pursuant to s 237 of the Corporations Act 2001 (Cth) that the Plaintiffs be granted leave to bring and prosecute on behalf of and in the name of the Company the claim which is set out in the Further Points of Claim which were annexed to the Amended Interlocutory Process. 3. The costs of the Amended Interlocutory Process be the Plaintiffs' costs in the cause of the claim referred to in order 2 above. 4. The matter be listed in the Corporations List on Monday, 10 February 2024, for directions in relation to the hearing of the derivative claim.

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