CORPORATIONS - members rights and remedies - statutory derivative action - application for leave - relevant considerations - where action potentially barred by limitation statute
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CORPORATIONS - members rights and remedies - statutory derivative action - application for leave - relevant considerations - where action potentially barred by limitation statute
The plaintiff Neil Gary Hargraves applies for leave pursuant to (CTH) Corporations Act 2001 to bring a derivative claim on behalf of the second defendant company Karinya Haulage Pty Limited, in which he is a 50% shareholder, against his sister the first defendant Susan Eveston, who is the other equal shareholder, and has at all material times been a director, secretary and financial controller of Karinya.
Mr Hargraves alleges, and has adduced some evidence which, if accepted, might establish, that between 31 October 2006 and 24 December 2010, Mrs Eveston caused payments totalling $35,389.37 to be made from Karinya's bank account to herself or her nominees, without authority, not in good faith or for the proper purposes, and misrepresented those payments in Karinya's accounts as if they were payments to legitimate creditors. In the draft statement of claim, the claim is framed as one in tort for deceit, but could also be supported as one for breach of director's duties, or conversion.
Carey-Hazell v Getz Bros & Co [2017] NSWSC 888 | Case summary | Zoe
(CTH) Corporations Act 2001, s 236, allows inter alia a member of a company, acting with the leave of the Court granted under s 237, to bring proceedings on behalf of the company, in the name of the company. By s 237(1), such a person may apply to the Court for leave to bring such proceedings, and by s 237(2), the Court must grant the application if it is satisfied that:-
1. 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
2. the applicant is acting in good faith; and
3. it is in the best interests of the company that the applicant be granted leave; and
4. if the applicant is applying for leave to bring proceedings - there is a serious question to be tried; and
5. either (i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or (ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied.
In this case, as in many cases, [1] the requirement of s 237(2)(a) - that the Court be satisfied that it is probable that the company will not itself bring or take responsibility for the proceedings - is plainly satisfied, as Ms Eveston, the defendant in the proposed derivative action, is a 50% shareholder and one of two directors, and has failed or refused to agree to a resolution to consent to the bringing of the proposed claim. The notice requirements of s 237(2)(e) are also satisfied: the requisite notice - including drafts of the originating process and statement of claim - were provided under letter dated 19 April 2017.
The remaining criteria - that the Court be satisfied that the applicant for leave is acting in good faith (s 237(2)(b)), that it is in the best interests of the company that the applicant be granted leave (s 237(2)(c)), and that there is a serious question to be tried (s 237(2)(d)) - are related, because the existence of a reasonably arguable cause of action is relevant to each. The first defendant submitted that the plaintiff failed to satisfy those criteria, because although the evidence adduced by Mr Hargraves otherwise might establish a sufficiently arguable cause of action, on the face of the draft statement of claim and the evidence any such cause of action was plainly barred by (NSW) Limitation Act 1969, s 14, and was therefore not maintainable.
The cause of action pleaded in the draft statement of claim is founded on the tort of deceit. Limitation Act, s 14 relevantly provides:
14 General
(1) An action on any of the following causes of action is not maintainable if brought after the expiration of a limitation period of six years running from the date on which the cause of action first accrues to the plaintiff or to a person through whom the plaintiff claims:
…
(b) a cause of action founded on tort, including a cause of action for damages for breach of statutory duty,
….
As the last misappropriation alleged in the draft statement of claim was in 2010, the plaintiff's cause of action would prima facie be caught by s 14(1)(b). However, Limitation Act, s 55, relevantly provides:
55 Fraud and deceit
(1) Subject to subsection (3) where:
(a) there is a cause of action based on fraud or deceit, or
…
the time which elapses after a limitation period fixed by or under this Act for the cause of action commences to run and before the date on which a person having (either solely or with other persons) the cause of action first discovers, or may with reasonable diligence discover, the fraud deceit or concealment, as the case may be, does not count in the reckoning of the limitation period for an action on the cause of action by the person or by a person claiming through the person against a person answerable for the fraud deceit or concealment.
The consequence of s 55 is that in the case of an action based on deceit, time does not necessarily run from the accrual of the cause of action; rather, it runs from its discovery. Accordingly, in the context of this case, it does not follow, from the pleading that the misappropriations occurred during a period that expired in 2010, that the case must fail on limitation grounds.
It was argued for the first defendant that while in theory that might be so, it was for the plaintiff to establish that there was a serious question to be tried, and having adduced no evidence as to when it discovered the cause of action, it had failed to show that there was any prospect of surmounting the limitation bar. Faced with this proposition at the hearing, the plaintiff belatedly sought to adduce oral evidence, and then a late-served affidavit, to show when it discovered the alleged fraud. I did not admit this evidence, on account of its lateness and the unavailability of the deponent for cross-examination. Thus the question is whether, in those circumstances, the plaintiff has failed to establish a serious question to be tried. In other words, where a cause of action in fraud is pleaded which is prima facie statute barred, must the plaintiff in a s 237 application adduce some evidence to show that it is at least arguable that the limitation period has not expired?
The answer lies in the nature and effect of the expiry of a limitation period, and in particular that it affords a defence; although failure to commence a proceeding within a limitation period may found a defence, commencement within time is not, generally speaking, a material element of the cause of action, to be pleaded and proved by the plaintiff. The expiry of a relevant limitation period is irrelevant until the defendant pleads it as a bar to the remedy, and a defendant who wishes to invoke a limitation period must specifically plead it. [2] Thus, the pleading of a cause of action which is on its face statute-barred does not of itself amount to an abuse of process, at least where the expiry of the limitation period does not extinguish the cause of action. [3]
Although it has been said that the court is reluctant to deal with limitation defences at interlocutory proceedings except in the clearest cases, preferring to consider them at the final hearing, [4] I incline to the view that courts should not be too reluctant to consider limitation defences at an early stage - as to do so otherwise defeats the very purpose of limitation statutes in avoiding the vexation of defendants with stake actions. The court could and should refuse leave under s 237 in a case where it is apparent that a limitation defence is available, will be invoked and must succeed.
However, this is not such a case. That is because it is a fraud case, and the limitation period will run not from the accrual of the cause of action (which can be ascertained from the draft statement of claim), but from the discovery of the cause of action (which is a matter for the plaintiff to plead in reply to a limitation defence, if one is raised). On an application of this kind, while the plaintiff must provide the Court with sufficient material to enable it to determine that there is a serious question to be tried, [5] the Court will not normally enter into the merits of the proposed derivative action to any great degree, the plaintiff bearing the same relatively low standard as applies in an application for an interlocutory injunction. [6] In my view, the plaintiff having otherwise established a serious question to be tried, the potential limitation defence does not at this stage rise to the level of rendering the plaintiff's otherwise arguable case unarguable. In those circumstances, whether or not the potential limitation defence will be fatal to the proposed claim is not a matter to be resolved on the s 237 application. The criterion in s 237(2)(d) is therefore satisfied.
The "good faith" criterion in s 237(2)(b) involves first, whether the applicant for leave honestly believes that a cause of action exists and has a reasonable prospect of success - although that may be tested against whether a reasonable person in the circumstances would hold that belief - and secondly, whether the applicant is seeking to bring the derivative suit for such a collateral purpose which would amount to an abuse of process. [7] The first element of this is closely connected with whether there is a serious question to be tried. [8] Mr Hargraves is a current 50% shareholder, who proposes an arguable action which if successful will recover property of the company and increase the value of his shares. No "improper" collateral purpose has been suggested. For the purposes of s 237(2)(b), I am satisfied that he is acting in good faith.
Prima facie, the prosecution of an arguable action by or on behalf of a company against an officer for recovery of compensation for damage done to the company by that officer's breach of duty is in the interests of the company. In the context of the present case, the proposed derivative action if successful will enhance the assets of Karinya available for distribution between the shareholders. While the proposed action, particularly if unsuccessful, might expose Karinya to liability for costs, Mr Hargraves proposes that it be a term of any grant of leave that he pay and indemnify Karinya against all costs, charges and expenses of and incidental to the bringing and continuation of the proceedings, except to such extent if any as the court may in future otherwise order. In those circumstances, for the purposes of s 237(2)(c), it is in the interests of the company that the claim be brought.
[3]
Conclusion
My conclusions may be summarised as follows:
Because this is a fraud case, the limitation period will run not from the accrual of the cause of action (which can be ascertained from the draft statement of claim), but from the discovery of the cause of action (which is a matter for the plaintiff to plead in reply to a limitation defence, if one is raised). The plaintiff having otherwise established a serious question to be tried, the potential limitation defence does not at this stage rise to the level of rendering the plaintiff's otherwise arguable case unarguable.
The Court being satisfied of all five criteria referred to in s 237(2), the plaintiff's application must be granted.
Accordingly, the Court orders that:
1. Pursuant to (CTH) Corporations Act 2001, s 237, the plaintiff have leave to bring proceedings in the name and on behalf of the second defendant company Karinya Haulage Pty Ltd against the first defendant Susan Eveston, in respect of the causes of action pleaded in the draft statement of claim which is annexure 'B' to the affidavit of Neil Gary Hargraves sworn 15 May 2017.
2. Such leave is given upon condition that the plaintiff pay and indemnify the company from and against all costs, charges and expenses of and incidental to the bringing of the said proceedings, except insofar as this court, or any court in which those proceedings are brought, may otherwise order.
[4]
Costs
Following delivery of the above judgment, I heard counsel on the question of costs.
Although the parties suggested, by agreement, that the costs should be reserved, the present judgment otherwise brings these proceedings to an end and it is most unsatisfactory in those circumstances that costs be reserved. As Mr Marshall has pointed out, it is equally unsatisfactory to order that the costs of the proceedings be costs in the derivative claim once brought, because the parties in such a claim are different.
These are proceedings for final relief. The plaintiff has succeeded in obtaining the relief it sought, over the defendant's opposition. In my view there is no good reason for departing from the ordinary position that the unsuccessful first defendant should pay the successful plaintiff's costs.
The Court therefore orders:
(3) That the first defendant pay the plaintiff's costs of the proceedings.
[5]
Endnotes
As Palmer J observed in Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313 at 319 [28].
Wilson v Rigg (2002) 36 MVR 451; [2002] NSWCA 246 at [16] (Giles JA). The rules of court provide that the defendant must specifically plead a limitation defence: (NSW) Uniform Civil Procedure Rules 2005, r 14.14. See also Commonwealth v Mewett (1997) 191 CLR 471; 146 ALR 299; Commonwealth v Verwayen (1990) 170 CLR 394; 95 ALR 321.
Carey-Hazell v Getz Bros & Co (Aust) Pty Ltd (2001) 112 FCR 336; [2001] FCA 703. In New South Wales, Limitation Act, s 63, means that the expiry of the limitation period does extinguish the cause of action, but this does not alter the position that it provides an affirmative defence, which must be raised and pleaded by a defendant.
Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 533 (Mason CJ, Dawson, Gaudron and McHugh JJ); Foodco Group Pty Ltd v Northgan Pty Ltd (1998) 83 FCR 356 at 364 (Marshall J); Carey-Hazell v Getz Bros & Co (Aust) Pty Ltd (2001) 112 FCR 336; [2001] FCA 703.
Charlton v Baber (2003) 47 ACSR 31.
Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313 at 314.
Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313 at 320 [36]; Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 at [28]-[37]; Victory Projects Pty Ltd v AAA Self Storage Pty Ltd [2016] NSWSC 1758 at [144].
Goozee v Graphic World Group Holdings Pty Ltd (2002) 170 FLR 451; 42 ACSR 534 at 546 [57].
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Decision last updated: 07 July 2017