Cadima Express Pty Ltd (in liq) v Deputy Commissioner of Taxation

Judgment 1By Originating Process filed on 23 August 2013, the Plaintiff, Dennis G Pamplin Pty Ltd ("DGP") applies for leave under s 237 of the Corporations Act 2001 (Cth) to bring proceedings in the names of Fishinthenet Investments Pty Ltd ("FITN") and Coastal Waters Seafood Pty Ltd ("CWS") against Mr Jeff Hunt, a former director of those companies, in respect of the causes of action pleaded in a draft Statement of Claim which is annexed to an affidavit of Ms Marie Pamplin sworn 19 August 2013. DGP was issued 50 ordinary shares in FITN on 20 November 2009 and owns half of the ordinary shares in FITN. The other half of the ordinary shares in FITN are owned by Mr Hunt and his sister, who does not support the foreshadowed derivative claim. FITN in turn holds all of the shares in CWS. FITN previously owned a property in Tasmania from which it and CWS, or at least CWS, undertook a business of fishing for abalone and lobster and marketing fresh and frozen products domestically and in Asia. 2The nature of the proceedings that DGP seeks to bring in the name of FITN and CWS is set out in the proposed draft Statement of Claim. Broadly, DGP contends that it has claims arising from the fact that an offer was made by it for the purchase of shares in FITN from Mr Hunt and his sister which valued the companies at $2,500,000; the business was sold for an amount less than that amount; Mr Hunt was employed by the purchaser of the business; and Mr Hunt deducted sums for directors' fees and expenses from the proceeds of sale. DGP seeks a declaration that the affairs of FITN are being conducted or that specified acts or omissions were oppressive to, or unfairly prejudicial to, or unfairly discriminatory against, DGP. DGP also seeks that an order that, at its election, Mr Hunt be required to purchase its shares in FITN at their face value, determined on the basis that (1) certain matters (namely Mr Hunt's receipt of remuneration of $104,000, his receipt of consulting fees of $23,400 and his receipt of payment for expenses purportedly incurred in the amount of $80,069) be excluded and (2) the business undertaking of FITN was sold for the highest offer allegedly made for it, being $2.25 million. That relief is plainly sought by DGP and is in the nature of an oppression claim and does not require leave under s 237 of the Corporations Act. 3Alternatively, a declaration is sought that Mr Hunt is liable to account to FITN and CWS for any money or benefit paid to him by reason of an alleged breach of fiduciary duty or as a constructive trustee on the basis of breach of fiduciary duty, and declarations are sought that Mr Hunt acted in contravention of ss 181 and 182 of the Corporations Act 2001 (Cth). These latter claims could only be brought by FITN, and by DGP in its name as a statutory derivative action, and require leave under s 237 of the Corporations Act. 4There was substantial consensus between the parties to the legal principles applicable to the grant of leave under s 237 of the Corporations Act. In order to grant leave under Corporations Act s 237(2), the Court must be satisfied of five matters, and must grant that leave if satisfied of those matters. If any or all of the criteria specified in s 237(2) are not satisfied, then the Court should not grant the leave sought: Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859 at [12]-[13] per Brereton J; Oates v Consolidated Capital Services Pty Ltd [2009] NSWCA 183; (2009) 76 NSWLR 69; (2009) 72 ACSR 506 at [55]-[65] per Campbell JA (with whom Spigelman CJ and Allsop P agreed). Whether FITN and CWS would bring the proceedings 5The first requirement for a grant of leave to bring a derivative action, under s 237(2)(a) of the Corporations Act, is that it is probable that the FITN and CWS will not otherwise bring the proceedings. Mr Hunt did not contend that that requirement was not satisfied. Whether DGP is acting in good faith 6The second requirement for a grant of leave to bring a derivative action, under s 237(2)(b) of the Corporations Act, is that DGP must establish to the Court's satisfaction that it is acting in good faith: Chahwan v Euphoric Pty Ltd t/as Clay & Michel [2008] NSWCA 52; (2008) 245 ALR 780; 65 ACSR 661 at [69]; Showtime Management Australia Pty Ltd v Showtime Presents Pty Ltd [2008] NSWSC 618 at [77]. Factors relevant to the good faith requirement include the applicant's honest belief that a good cause of action exists and has reasonable prospects of success and whether the applicant is seeking to bring the proceedings for a collateral purpose. The authorities indicate that it will be relatively easy to satisfy this requirement if an application is made by a current shareholder who has more than a token shareholding and the proceedings seek recovery of property so that the value of the applicant's shares would be increased: Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 at [38]; Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432 at [58]. The Court does not consider the merits of the claim in determining whether this criterion is satisfied, since they are relevant to the question in s 237(2)(d) of whether there is a serious question to be tried: Fitzpatrick v Cheal [2010] NSWSC 717 at [41]. 7DGP is a shareholder in FITN which would stand to benefit from any monies recovered by FITN and the Court will more readily draw the inference that that the proceedings were brought in good faith in that situation. There is no suggestion that DGP is acting for any collateral purpose. Mr Hunt submitted that, having regard to the limited prospects of success of the proposed proceedings, no reasonable person could honestly believe that there existed a good cause of action against Mr Hunt that enjoyed reasonable prospects of success and that DGP had therefore failed to establish that its application was brought in good faith. That matter is better addressed by reference to the questions of whether the proceedings give rise to a serious question to be tried and are in the companies' interests which I will address below. I consider that the good faith requirement under s 247(2)(b) of the Corporations Act has been satisfied. Whether the grant of leave is in the companies' interests and there is a serious question to be tried 8It is convenient to deal with the questions of whether the grant of leave is in the companies' interests and whether there is a serious question to be tried together given the extent to which they overlap in this application. 9The third requirement, under s 237(2)(c) of the Corporations Act, is that the grant of leave is in the best interests of the relevant companies. DGP accepts that this test requires more than a prima facie indication that the proceedings may be, or are likely to be, in the company's interests and the Court must be satisfied that the proposed action actually is, on the balance of probabilities, in the companies' best interests: Swansson above at [55]-[56]. Relevant matters include the prospects of success of the proceedings, their likely costs, the likely recovery if the proceedings are successful and the likely consequences if they are not: Maher above at [44]; Re Gladstone Pacific Nickel Ltd above at [57]. 10The fourth requirement under s 237(2)(d) of the Corporations Act is whether there is a serious question to be tried in the proceedings. 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]; Goozee v Graphic World Group Holdings Pty Ltd [2002] NSWSC 640; (2002) 42 ACSR 534 at [32]ff; South Johnstone Mill Ltd v Dennis [2007] FCA 1448; (2007) 163 FLR 343; (2007) 64 ACSR 447 at [78]; 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, 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." 11Whether a serious question to be tried is established and whether the claims would be in the companies' best interests need to be considered by reference to the proposed pleading of the claims and the evidence by which they would be supported. The proposed claim in respect of the sale of the business 12The draft Statement of Claim pleads (paragraphs 9-11) that on or about 1 December 2011, it was resolved that the business of FITN and CWS should be sold; that, on or about 29 August 2012, DGP made an offer to purchase a 50% shareholding of FITN (implicitly, from Mr Hunt and his sister) for the price of $1.125 million; and that, on that date, it was resolved by the shareholders of FITN and CWS that DGP would purchase the shares of both companies for the price of $2.25 million. That allegation seems to be directed to a suggestion that a purchase of a 50% shareholding in CWS for the price of $1.125 million corresponded to a purchase price for all shares of the companies of $2.25 million; that contention cannot be taken literally, since it cannot have been intended that DGP would purchase its shares in FITN from itself and there was no suggestion that the shares in CWS would transferred to DGP. 13The draft Statement of Claim then pleads (paragraph 12) that, on or about 20 December 2012, contrary to the resolution alleged to have been passed on 29 August 2012, Mr Hunt (implicitly, in his capacity as the sole director of FITN) agreed to sell the entire business undertaking of FITN and CWS to a third party, Sun Rising Fisheries Pty Ltd ("Sun Rising") for the sum of $2,150,125.19. It is pleaded (paragraph 13) that there were conditions of that sale that an amount of $150,000 was to be withheld by Sun Rising for a period of 12 months and that Mr Hunt would be employed by Sun Rising for a minimum term of 6 months. 14The Statement of Claim in turn pleads (paragraph 15) that the sale of the business undertaking of FITN and CWS was on terms inferior to alternative offers made to Mr Hunt, although the only such offer pleaded is that of DGP; was on terms that were more onerous to FITN and CWS, presumably because the receipt of part of the sale price was deferred, and was on terms that secured employment for Mr Hunt with the purchaser, and that conduct is alleged to have breached fiduciary duties owed by Mr Hunt to FITN and CWS. 15In its written submissions, DGP summarises its first allegation as being that: "Mr Hunt accepted an inferior offer than that made by [DGP] in circumstances where Mr Hunt also accrued a collateral benefit (namely, gainful employment for a minimum period of 6 months." In particular, DGP contends that Mr Hunt failed to secure a sale price commensurate with that offered by DGP; that he accepted as a condition of the sale that the ultimate purchaser of the business, Sun Rising could pay $150,000 of the purchase price 12 months after settlement; and that he entered into an employment contract with Sun Rising, which is alleged to have been a collateral benefit to Mr Hunt. As Mr Hunt points out, the premise of the first complaint is that there was a higher offer from DGP that was open for acceptance by Mr Hunt on behalf of FITN and CWS, namely, DGP's offer to purchase the 50% interest in FITN's shares held by Mr Hunt and his sister from them for $1.125 million, which is said to have valued the companies as $2.25 million, and that Sun Rising's offer to purchase the business and the property for $2.125 million was inferior to that offer. 16Mr Hunt gives evidence, which is not contested by DGP, as to the shareholders' authority given to him to conduct a marketing campaign to attempt to sell the business and property in the period from December 2011. He refers to a substantial offer received in December 2011, although the amount which that purchaser was prepared to pay was ultimately reduced as negotiations proceeded; to an offer received from the operator of another seafood processing business in Tasmania in August 2012, and to Mr Adrian Pamplin's opposition to a sale to that person; to Mr Adrian Pamplin having indicated DGP's willingness to purchase Mr Hunt's and his sister's shares for a total of $1.125 million, and to Mr Hunt's assessment that: "I considered the offer by Adrian [Pamplin] and Lionel [Pamplin] for [DGP] to purchase [his sister's] and [his] shareholding for $1.125 million to be acceptable. The offer effectively matched the offer received from [the other potential purchaser] since it valued 50% of the shares in FITN at $1.125 million. I considered that Adrian [Pamplin] and Lionel [Pamplin], in making the offer, valued the business and the property at approximately $2.25 million." 17Ms Pamplin's evidence, in her affidavit dated 19 August 2013, is that the shareholders of FITN and CWS resolved, on or about 28 August 2012, that DGP would purchase the shareholding of FITN held by Mr Hunt and his sister. There is no evidence of a formal resolution to that effect, but there is reference to an informal agreement to that effect in an email dated 29 August 2012 from Mr Hunt to Mr Adrian Pamplin and to Ms Hunt, which notes that: "1. It was resolved by all shareholders on the 24th August 2012, via phone contact and SMS messages, that shareholder DGP will purchase the shares of Cheryl Denise Hunt and Jeffrey Scott Hunt. 2. It was resolved on the 24th August 2012, via phone that the combined, agreed sale price for the shares (refer to Item 1 above) is $1,125,000 ... less money owed to creditors. 3. It was resolved on the 24th August 2012, via phone and SMS messages that the resolution made in the last Shareholders Meeting, that being: all outstanding money owed to creditors (Fisherman, Quota Holders, NAB and others) are to be paid in full. The cost after the sale of existing stock is calculated at $670,000 ... this cost is to be shared between all shareholders." 18Mr Hunt accepted, in submissions, that there was no dispute between the parties that, by 28 August 2012, FITN's shareholders had reached an agreement, arrangement or understanding that DGP would purchase Mr Hunt's 30 shares in FITN and his sister's 20 shares in FITN for $1.125 million. I will, with considerable reluctance, proceed on that basis where it was common ground between the parties. The position accepted by both parties seems to me to be inconsistent with the contemporaneous correspondence, since the terms of the email dated 29 August 2012 which is said to confirm the relevant agreement for DGP to purchase Mr Hunt's and his sister's shares in FITN provided for an adjustment against the purchase price of $1.125 million to deduct the amount due to creditors. Mr Hunt's evidence is that, in any event, the proposed offer was withdrawn by Mr Adrian Pamplin on 30 August 2012, in circumstances that it is not necessary to relate for the purposes of this judgment; Mr Lionel Pamplin gives evidence in reply, denying that proposition, and it is not necessary or appropriate to seek to resolve a factual dispute of that character in an application of this kind. DGP leads no further evidence to explain what happened in respect of the suggested offer, if it was still on foot between 28 August 2012 when it was made and late December 2012, when the competing offer was made by Rising Sun. 19Mr Hunt gives evidence of a contact made by representatives of interests associated with Sun Rising in September 2012, and of subsequent communications with Mr Adrian Pamplin concerning that offer and of subsequent negotiations, which resulted in an agreement in a sale price for the business and property of $2.125 million reached with Sun Rising on 12 December 2012. Mr Hunt's evidence is also that: "As a result of the negotiations with Sun Rising since September 2012, as well as the failure of all other potential sale transactions in the previous 13 months of marketing the business and the property for sale, I formed the view that the sale price agreed with Sun Rising was a reasonable price for the business and the property in the market conditions prevailing at the time. Furthermore, I formed the view that it was in the best interests of each company and its shareholders that I accept the offer and proceed to settlement of the sale." 20There are also several factors, to which Mr Lo Surdo and Mr Robertson (who appeared for the respondents) draw attention, which suggest that there was a compelling business case for the sale of the business at that time, including substantial losses incurred in the financial years 2009-2010, 2010-2011 and 2011-2012, in circumstances that DGP had declined to provide short term funding that had previously been provided by shareholders to support the company's business and there had also been adverse changes in the Asian and domestic markets for rock lobster. It is not necessary or appropriate to reach a final decision as to those matters in an application of this kind. 21Mr Hunt's unchallenged evidence is that Sun Rising was only willing to pay a purchase price of $2,125,000 for the property and the business if payment of $150,000 was deferred until 12 months after completion. Mr Hunt's unchallenged evidence is also that a representative of Sun Rising informed him that Sun Rising would not enter into the contracts for the sale of the property and the business unless he agreed to work for the business for 12 months. There is support for that evidence in a contemporaneous note of a conversation dated 11 September 2012, which records Sun Rising's requirement that he "continue to help run the business for a period of time, until [Sun Rising was] satisfied that abalone and lobster supply and management of the existing licence are assured". The Heads of Agreement between FITN and CWS and interests associated with the purchaser in turn imposed a condition that Mr Hunt remain with the business for at least 12 months after the completion of the sale to assist in the transition of the business into the purchaser's name. Mr Hunt subsequently commenced work with Sun Rising on 29 April 2013, but that arrangement was not a success and his employment was terminated on 7 May 2013. 22Mr Lo Sordo and Mr Robertson also point to subsequent correspondence between Mr Hunt and DGP and its representatives which they submit is inconsistent with any continuing offer by DGP at this point. Mr Hunt sent an email to DGP's solicitor informing him of the terms of the proposed sale to Sun Rising, including the sale price, and attaching the contract on 21 December 2012. On the next day, DGP's solicitor responded that DGP was not willing to accept the price as outlined in that email or the attached contract and that: "My clients have instructed me that they do not consent to either of the companies entering into the contract as proposed and they withdraw any implied consent empowering the director to enter into those contracts on behalf of the company. My clients have indicated that they would prefer that a receiver be appointed to both companies." As Mr Lo Sordo and Mr Robertson point out, it is striking that this response does not refer to DGP's offer made in August 2012 on which DGP now relies, still less assert that it was either still open or still capable of acceptance or more favourable than the transaction with Sun Rising, and that the suggestion of receivership of the Company is wholly inconsistent with a purchase of Mr Hunt's and his sister's shares by DGP. The contract for the sale of the business and the property was ultimately signed and exchanged with Sun Rising on 14 January 2013 and settlement took place on 15 April 2013. A further letter by DGP's solicitor dated 16 January 2013 also does not refer to DGP's August offer or suggest that there was any continuing or more favourable open offer by DGP to acquire the shares in FITN, instead stating that: "[M]y clients have instructed me as both shareholders and creditors that it is their belief that an administrator ought to be appointed to both companies." 23It seems to me that there are fundamental difficulties with the manner in which DGP puts its first claim in respect of the sale of the business. The first difficulty is that the evidence of an informal shareholders' resolution on 28 August 2012 could not establish that there was an offer by DGP in a form capable of acceptance by FITN at any relevant time, comparable with the offer later received from Sun Rising. The informal resolution on or about 28 August 2012 is not expressed as an offer made by DGP which would be capable of acceptance by Mr Hunt and his sister, still less by FITN, which was the subject of the proposed transaction between its shareholders rather than a party to it. DGP also leads no evidence to explain what happened in respect of the suggested offer between 28 August 2012 when it was made and late December 2012, when the competing offer was made by Rising Sun. The second difficulty is that the structures of the proposed transaction and the later sale to Rising Sun are not comparable, since the resolution referred to a sale of shares in FITN, from which Mr Hunt and Ms Hunt may benefit as selling shareholders rather than a sale of the business by the Company. It does not seem to me that a serious question to be tried is established, in respect of the claim as to the terms of the sale generally, since there is no evidence that would allow a conclusion that a sale of the shares of Mr Hunt and his sister in FITN to DGP was more favourable to FITN or CWS than a sale of the business of the companies to Rising Sun. 24It seems to me that there is a serious question to be tried as to a possible breach of fiduciary duty in respect of the transaction, at least in the limited sense that Mr Hunt may have had a personal interest in respect of the offer of continued employment with FITN in respect of the sale to Rising Sun. The matters to which I referred in paragraph 21 above are not a complete answer to the proposition that the offer of employment to Mr Hunt gave rise to a personal interest in respect of the transaction, which at least arguably might have given rise to a conflict of his duty to FITN and his personal interest in respect of the transaction. However, it is unlikely that compensation could be recovered by FITN where there is no evidence to suggest that Rising Sun would have paid more for the business had it not continued to employ Mr Hunt in the business and the most likely position is that it would not have purchased the business in that situation. Any account of profits available to FITN referable to the fact of Mr Hunt's continued employment by FITN at the same salary, for a relatively short period, would be minimal. It seems to me that the prospects of any significant recovery from this claim are so slight that it could not be in FITN's interests to bring it. The proposed claim in respect of directors' fees 25In written submissions, DGP identifies its second allegation as relating to Mr Hunt having taken a sum of money referable to directors' fees from the proceeds of the sale. The proposed Statement of Claim pleads (paragraphs 21-22) that, in breach of duty, Mr Hunt had received directors' fees from FITN in the amount of $41,600 and directors fees from CWS in the amount of $62,400. An allegation is pleaded, but was not pressed as the basis of this application, that Mr Hunt had also received consulting fees from FITN and CWS. These matters are alleged to give rise to contraventions of ss 180-182 of the Corporations Act, although relief is sought only in respect of the pleaded breach of ss 180-181 and not s 182 of the Corporations Act. 26Mr Hunt acknowledges, in his affidavit evidence, that, prior to distribution of the sale proceeds on the sale of the business and property to Rising Sun, he allocated $104,000 to his unpaid directors' fees for the years 2005-2013. A ledger of directors' fees for FITN and CWS is in evidence and records directors' fees payable in respect of CWS of $10,000 per annum and FITN of $5,000 per annum and interest charged at 7% or 8% in respect of each year. The basis for the interest charge was not addressed by the evidence. 27The constitutions of FITN and CWS each provide for the payment of directors' fees upon a resolution of the relevant company. There is no suggestion that the payment of directors' fees to Mr Hunt was authorised by any formal resolution in general meeting. Mr Hunt led oral evidence, by leave, of a conversation in October 2005 before he accepted the position as a director and managing director of FITN and CWS, that, in effect, he would be paid directors' fees of $5,000 in respect of FITN and $10,000 per annum in respect of CWS per annum if there were sufficient profits. Mr Hunt's oral evidence as to the terms of this agreement was unchallenged, since Ms Marie Pamplin's and Mr Lionel Pamplin's affidavit evidence as to those matters was rejected as inadmissible and they did not seek to exercise leave to lead in admissible form. 28I do not consider that the conversation in October 2005 on which Mr Hunt relies deprives his claim in respect of directors' fees of a seriously arguable quality. First, it was said to have taken place between Mr Adrian Pamplin and Mr Hunt, albeit at a meeting where other shareholders were also present, and it is not clear that other shareholders agreed to the position that Mr Hunt contends was agreed with Mr Adrian Pamplin. Second, even if that position had been agreed, the directors' fees ultimately paid by Mr Hunt to himself include fees referable to years where FITN was not profitable; and, third, it is by no means clear that the proceeds of sale of the relevant business should be treated as profits, as distinct from capital, for the purposes of the suggested agreement. 29Mr Folino-Gallo, who appeared for DGP, also contended that FITN's claim also included a claim for expenses purportedly incurred in the amount of $80,869 and reimbursed to Mr Hunt. There were two difficulties with that suggested claim. The first is that there is no reference to that matter in the draft Statement of Claim, other than in one paragraph of the relief claimed, which seeks relief that that amount be excluded in determining the fair value of DGP's shares in FITN for the purposes of the oppression claim, which neither requires nor supports the grant of leave under s 237 of the Corporations Act. The second is that, as Mr Lo Surdo and Mr Robertson pointed out, the constitutions of FITN and CWS each authorised the reimbursement to a director of expenses incurred in connection with the relevant company's business, which makes the absence of any pleading that the expenses were not properly incurred in connection with that business more significant. I do not consider that the claim on that basis for that amount supports a grant of leave to bring a derivative claim. Quantum of the claim and need for indemnity as to costs 30Mr Hunt points out that the proposed claim in respect of the terms of sale of the business and property is in the order of $125,000; the proposed claim in respect of directors' fees are in the amount of $104,000; and the claim in respect of reimbursement of expenses is in the order of $80,000. For the reasons noted above, it seems to me that only the second of those claims, in respect of directors' fees, has sufficient prospect as pleaded that it could potentially be in FITN's and CWS's interests to bring it. As Mr Hunt also points out, an issue then arises as to whether it could be in FITN's and CWS's interests to bring that claim, having regard to the limited potential recovery and the costs which would be involved in seeking it. DGP contended that it was "not conceded" that the quantum of damages was limited to those referred to by Mr Hunt and that the damages sought may increase once the proceedings are commenced and further evidence is gathered. Nonetheless, I must assess whether the proceedings are in the Company's best interests on the basis of the evidence that is presently available, not speculation that something more may turn up. 31In this context, the question of an adequate indemnity to be given by DGP and those standing behind it in favour of the companies in respect of the costs which they would incur in conducting the proceedings and the costs to which they would be exposed if the proceedings were unsuccessful, and in respect of any amount which they may be ordered to pay by way of security for costs, is significant. The case law emphasises the importance of such an indemnity as a means of addressing the risk of prejudice to the companies from the commencement of the proceedings, should they ultimately prove to be unsuccessful, and the risk of exposure to costs and expenses of litigation including costs orders. In Power v Ekstein [2010] NSWSC 137; (2010) 77 ACSR 302 at [108], Austin J observed that: "One of the issues for the court to consider is whether the company would be prejudiced by being exposed to the costs and expenses of litigation and the risk of an adverse costs order. That problem is often addressed by the court making a conditional order, by which the granting of leave is conditional upon the applicant undertaking to the court to pay and bear and indemnify the company against all costs, charges and expenses of and incidental to the bringing and continuation of the derivative claims for which leave is granted: see, for example, Gerard Cassegrain & Co Pty Ltd v Cassegrain [2010] NSWSC 91. In my opinion, such a condition is appropriate here, because the bringing of derivative claims is an aspect of the overall dispute between the plaintiff and Mr Ekstein, and therefore the plaintiff, rather than Companies in which she has only a minority interest, should be required to bear the costs of the litigation, including any adverse costs order that might be made if the claims are unsuccessful." The importance of such an indemnity was also recognised in Cassegrain v Gerard Cassegrain & Co Pty Ltd [2008] NSWSC 976; (2008) 68 ACSR 132 at [73]-[76]; MG Corrosion Consultants Pty Ltd above at [64]; Re Mycorp Group Pty Ltd [2013] NSWSC 1344 at [13]; Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 64 at [10]. 32Neither DGP nor Ms Pamplin initially led evidence of any willingness to give such an indemnity. In the course of the hearing, Mr Folino-Gallo indicated, on instructions, that such an undertaking could be given by his solicitor on behalf of DGP. Alternatively, he submitted that the Court could impose a condition, on the grant of leave, that such an indemnity be offered by DGP by its directors. However, it seems to me that there is a substantial difficulty with that course. DGP has not led evidence to establish that it or its directors has the capacity to meet such an undertaking, which is a matter as to which I would need to be satisfied before imposing such a condition, particularly where there is a substantial risk that the cost of the proceedings may be disproportionate to the amount which is likely to be recoverable in them. 33In order to accept an indemnity from DGP, it would be necessary to allow DGP a further opportunity to lead evidence, which it has not presently sought to lead as to its ability to meet such an indemnity, and that would require the allocation of a further hearing date for any dispute as to such evidence to be led and tested by Mr Hunt, if he wishes to do so. I consider that I should only afford DGP that further opportunity if Mr Hunt is compensated for the costs thrown away by the need for an extra hearing date, arising from DGP's failure to lead evidence as to this matter at this hearing, but that in turn raises the difficulty that an order that DGP pay the costs thrown away by the need for an extra hearing day would only protect Mr Hunt's position if DGP had assets sufficient to meet such an order. Notice of the application 34The fifth requirement for the grant of leave is that, at least 14 days before making the application, DGP gave written notice to the companies of its intention to apply for leave and the reasons for applying, or alternatively that it was appropriate to grant leave although that provision was not satisfied. Ms Pamplin's evidence was that she considered that such a notice would be futile, where Mr Hunt was the sole director of the companies, having regard to the causes of action alleged against him. Mr Hunt did not contend that leave should not be granted by reason of the absence of such notice, if it were otherwise warranted. Orders 35I have held that only one of the proposed claims is seriously arguable and could potentially be in the companies' interests, but only if they were indemnified against the costs of that claim which might well exceed the potential recoveries. I consider that the preferable course, where DGP and those standing behind it did not lead evidence to support their capacity to provide an adequate indemnity for FITN's and CWS's costs of the proceedings, is to make an order that the application should be dismissed with costs. 36I will, however, stay this order for 28 days in case DGP wishes to bring further evidence in support of it or its directors ability to given an indemnity for the companies' costs, on terms that they pay Mr Hunt's costs thrown away by the need for any additional hearing as to that matter. DGP may have leave to restore the matter, on 3 days' notice to Mr Hunt and to my associate, if it seeks to pursue that application. 37Accordingly, I make the following orders: 1 The application be dismissed with costs. 2 Stay order 1 for 28 days. 3 The parties have liberty to restore the matter on 3 days notice to the other party and to the Associate to Black J.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 01 April 2014