Cassegrain v Gerard Cassegrain and Co Pty Ltd

The structure of the Plaintiffs' claims

1. It will be convenient to refer first to the structure of the matters relied upon in the Statement of Claim, particularly so far as leave is sought to bring the derivative proceedings, and to some of the evidence which addresses those matters, before returning to the relevant principles and the result of applying them in this case.
2. Paragraphs 1 to 6 of the Statement of Claim plead the parties to the proceedings. Relevantly, as I noted above, Mr Gregory Harris and Ms Brown are the executors of the estate of the late Mrs Aileen Harris, and hold, in that capacity, approximately 47% of shares in the Company. The Company is the First Defendant in the proceedings. The Second Defendant, Mr William Harris, was purportedly appointed a director of the Company on 30 October 2002, although the validity of that appointment is in issue, and the Third Defendant, his daughter, Ms Michelle Harris, was purportedly appointed a director of the Company on 9 November 2017 although the validity of that appointment is also in issue. The Fourth Defendant, Harris Health Care Pty Ltd ("Harris Health Care"), is the holder of the majority of shares in the Company and Mr William Harris and Ms Michelle Harris are its directors. The Plaintiffs seek to bring claims against it, to which I will refer below, broadly in the nature of claims for accessorial liability for the transactions alleged against Mr William Harris in respect of knowing involvement and knowing receipt.
3. As I noted above, certain claims are pleaded that are in the nature of personal claims by the Plaintiffs. It is not necessary to address those claims for the purposes of determining the application for leave to bring derivative proceedings. The result of the transactions that are challenged in those personal claims is that Mr William Harris and Ms Michelle Harris together are the two directors of the Company, and have control of it, and that Harris Health Care, which is also under their control, has a controlling interest in the shares in the Company.
4. Turning now to the matters pleaded by way of derivative claim, the Plaintiffs plead that Mr William Harris owed certain duties to the Company since October 2002, being the duties owed by a director at general law in respect of the no conflict and no profit rules and the statutory duties under ss 180, 181 and 182 of the Corporations Act. That claim does not depend upon any question whether Mr Harris was validly appointed as a director of the Company or is properly characterised as a de facto director of the Company, since it appears to be common ground that he has acted as director of the Company throughout the relevant period. The relevant duties would likely be owed by Mr William Harris to the Company, whether as a director appointed in a legally valid manner or as de facto director.
5. The Plaintiffs rely upon a Services Agreement entered into in 1997 between the Company and Harris Health Care, pursuant to which remuneration was payable to Harris Health Care on a monthly basis at a specified rate. The Plaintiffs contend that the Company has paid an amount exceeding that remuneration, by a significant amount, in the period from 2009 until, relevantly, 1 December 2016 when a new Services Agreement appears to have been entered into. It appears, from the affidavit evidence, that it is at least common ground that a Services Agreement existed and that management fees were paid by the Company to Harris Health Care over that period. I recognise that, as Mr Wells and Mr Anderson, who appeared for the Plaintiffs, fairly accepted, there may be a question as to the application of a limitation period in respect of the earlier part of that claim, so far as it extends to amounts paid in the financial years from 2009 to 2012. I will return to the relevance of that question in addressing the application for leave to bring derivative proceedings below.
6. The Plaintiffs plead that, in causing the Company to make payments exceeding the amounts said to be payable under the 1997 Services Agreement and in the particular circumstances of the Company, Mr William Harris breached his directors' duties involving at least a conflict of interest and alleged breaches of the statutory duties. The relief sought is equitable compensation, statutory compensation under s 1317H of the Corporations Act or alternatively an accounting, which it appears is sought to identify the relevant payments and put Mr William Harris or Harris Health Care to justification of them.
7. A claim is also brought in respect of a Services Agreement entered into on 1 December 2016, which it is alleged provided for payment of excessive service fees in the circumstances of the Company at the relevant time and that conduct is also alleged to amount to a breach of the equitable and statutory duties owed by Mr William Harris.
8. The Plaintiffs also plead the making of loans in substantial amounts by the Company to Mr William Harris and Harris Health Care over the relevant period, and an occasion on which an amount of indebtedness was written off, in what they contend amounted to a waiver of part of that loan. That conduct is also alleged to amount to a breach of fiduciary and statutory duties owed by Mr William Harris to the Company, so far as the transactions benefitted either Mr William Harris or Harris Health Care. The Plaintiffs also plead substantial payments made by the Company to Harris Health Care, by way of reimbursement of amounts which Harris Health Care contends were paid to employees for the benefit of the Company. Again, that conduct is alleged to constitute a breach of directors' fiduciary and statutory duties.
9. The Plaintiffs also seek to advance claims by the Company for accessorial liability, and specifically for knowing involvement or knowing receipt at general law or for knowing involvement for the purposes of s 79 of the Corporations Act, against Harris Health Care, where the Plaintiffs contend that Mr William Harris' knowledge would be attributed to Harris Health Care so far as he was a director of that company.
10. Finally and for completeness, claims are brought in respect of oppression and relief is sought by way of an order to wind up the Company. Those are personal claims for which no leave to bring a derivative action is required.

Applicable legal principles

1. The applicable legal principles are well established and I reviewed them at some length in my judgment in Re Legal Practice Management Group Pty Ltd [2018] NSWSC 527. I will not seek to repeat that review in full here. In order to grant leave to bring the relevant derivative proceedings, the Court must be satisfied of five matters specified in s 237(2) of the Corporations Act and must grant that leave if satisfied of those matters. Those matters are that the Company will not itself bring the proceedings; the Plaintiffs are acting in good faith; it is in the best interests of the Company that the Plaintiffs be granted leave; there is a serious question to be tried; and at least fourteen days before the making of the application, the Plaintiffs gave written notice to the Company of their intention to apply for leave and of the reasons for applying or, alternatively, it is appropriate to grant leave although such notice was not given. The Plaintiffs bear the onus of establishing that each of these matters is satisfied on the balance of probabilities: Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 at [26]; Huang v Wang [2016] NSWCA 164.

Whether the Company will bring the proceedings

1. The first question then is whether the Court can be satisfied on the balance of probabilities that the Company will not itself bring the proceedings. Mr Wells submits that the Court may be satisfied of that matter, both because the Second to Fourth Defendants have not contested that proposition in submissions, and because it is apparent that Mr William Harris and Ms Michelle Harris control the Company, both as its directors and because Harris Health Care controls the majority of its shares, and it appears from the evidence that they do not accept the validity of the complaints made as to their conduct. It seems to me that, in circumstances that Mr William Harris and Ms Michelle Harris do not accept the validity of those criticisms, it is highly unlikely that they would cause the Company to bring proceedings against themselves where the Company is under their control. As I noted above, the Second to Fourth Defendants have not contended to the contrary. In those circumstances, I am satisfied that the first requirement for the grant of leave is satisfied.

Whether the Plaintiffs are acting in good faith

1. The second requirement for the grant of leave is that the Plaintiffs are acting in good faith. Factors relevant to that requirement include whether they have an honest belief that a good cause of action exists and has reasonable prospects of success, although that belief will be tested against whether a reasonable person in the circumstances would hold that belief and whether they are seeking to bring the action for a collateral purpose. Mr Wells draws attention to the observation in Swansson v RA Pratt Properties Pty Ltd above at [38] 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 action seeks recovery of property so that the value of the claimant's shares will be increased. That observation has frequently been applied in the case law, including in the authorities to which I referred in Re Legal Management Practice Group Pty Ltd above at [54].
2. It seems to me that the Court should be satisfied on the balance of probabilities that the Plaintiffs are acting in good faith for several reasons. First, as Mr Wells points out, it is apparent that the Plaintiffs hold a substantial shareholding in the Company, the value of which will be increased by any recovery made by the Company in these proceedings. Where the Plaintiffs also seek relief in oppression or a winding up, then any recoveries would also be relevant to the amounts which are available to meet claims of creditors and for distribution to contributories in the winding up, and the Plaintiffs would benefit from recovery of those funds by the Company, if a proper claim exists, so as to be distributed on a winding up.
3. The Court should also have regard to whether the Plaintiffs have an honest belief that a good cause of action exists and has reasonable prospects of success, and I have referred above to the relevance of whether a reasonable person would hold that belief in the circumstances. The affidavit evidence of Mr Gregory Harris and Ms Brown refers to the factual matters which support the belief that such claims exist and those matters reflect, at least in part, the production of documents following their earlier application under s 247A of the Corporations Act. The efforts which the Plaintiffs have taken, both to obtain access to those documents by that application to bring this application and to plead the relevant claims, are also indicative of their good faith in pursuing their relevant claims. I can also more readily draw the inference of good faith where no contention to the contrary was put by the Second to Fourth Defendants. For these reasons, I am satisfied on the balance of probabilities that the Plaintiffs are acting in good faith, so far as the action is sought to be brought to establish recoveries for the Company which will be to the benefit of each shareholder if the action were successful.

Whether it is in the Company's best interests that leave be granted

1. The next question in the leave application is whether it is in the best interests of the Company that the Plaintiffs be granted leave. In Swansson v RA Pratt Properties Pty Ltd above at [55]-[56], Palmer J noted that this element required that the Court be satisfied that the proposed action actually is, on the balance of probabilities, in the relevant company's best interests. Relevant matters were identified by Ball J in Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432 as including the prospects of success of the action; its likely costs; the likely recovery if the action is successful; and the likely consequences for the relevant company if the action is unsuccessful.
2. It will ordinarily be necessary to give evidence of the character of the company in order to allow the Court to determine that question and there is such evidence in this case. As Mr Wells points out, the Company had previously conducted the business of a nursing home provider but has since sold that business and now holds the funds that were realised from that sale, which would likely be distributed to shareholders in a winding up. In these circumstances, there is no suggestion that the conduct of these proceedings would have any adverse impact on any ongoing business of the Company. To the contrary, it seems to me that the conduct of these proceedings is likely to determine matters which would be relevant to the amount of assets available for distribution on the winding up of the Company. So far as a serious question to be tried exists, and where there is a prospect of recoveries if the proceedings are successful and the amounts involved are substantial, then it is likely to be in the best interests of the company that it had the opportunity to make those recoveries, as long as it is not exposed to an unjustified risk of costs in doing so.
3. It will also be relevant, in determining whether the proceedings are in the Company's best interests to have regard to whether the Company will be protected against the costs of an adverse result. The case law has recognised the desirability of an indemnity to be given to the relevant company to protect it from adverse costs exposure, or at least that the Court may more readily conclude that it is in a company's best interests to bring such proceedings where such an indemnity is available: Cassegrain v Gerard Cassegrain and Co Pty Ltd [2008] NSWSC 976; (2008) 68 ACSR 132 at [73]; and see my observations in Re Legal Practice Management Group Pty Ltd above at [68]. Here, the Plaintiffs offer such an indemnity for the costs of the conduct of the proceedings by the Company, and for any order as to costs against it, and the Court may note that offer in granting such leave. I recognise that the question of costs may be less significant where a derivative application is to be brought at the same time as an oppression claim, and there is likely to be overlap of relevant issues. Here, however, I proceed on the basis that the issues raised in the derivative action are potentially wider than those raised by the oppression claim, although there is some overlap between them, and the indemnity offered therefore has real significance.
4. I must also have regard, in determining whether it is in the Company's best interests that leave be granted, to the possibility that redress might be available by other means, including by the proceedings for oppression that the Plaintiffs propose to bring. Mr Wells fairly acknowledged, in submissions, that there is at least some potential that the issues raised in respect of the derivative action could be addressed in aspects of an oppression claim. For example, if it were established that the Company's assets had been dissipated by related party transactions with Mr William Harris or Harris Health Care, then it is at least possible that the Court in an oppression claim could order a buy out of the Plaintiffs' shares, at a value that is adjusted for the effect of those transactions upon the Company's assets.
5. However, the Plaintiffs point out, correctly, in my view, that there are potential limits to the availability of such relief. First, an adjustment of that kind can only be made if a buy-out order is made. If a winding up order were made, then it will be much more difficult to adjust contributories' interests in that way. Second, the Plaintiffs point out that, so far as a personal claim is brought by them, it cannot extend to a loss in the value of their shares which is reflexive of the Company's loss suffered by reason of a breach of the duties owed to it: Re JGS Investment Holdings Pty Ltd [2014] NSWSC 1532 at [21]; Taxa Australia Pty Ltd v Wang [2016] NSWSC 1913 at [23]. The Plaintiffs point out that in those circumstances, their personal claim properly does not seek to recover loss which is the Company's loss, albeit they contend that it would be reflected in a diminution in the value of their shares. The Plaintiffs also point out that here there will be no issue as to multiplication of proceedings where there is an overlap in the issues raised in the oppression claim and the proposed derivative action.
6. I recognise that, in some circumstances, it may not be necessary to seek leave to bring a derivative action, because all relevant issues can be determined in the context of an oppression claim. However, there are many cases in which the availability of oppression proceedings, as an alternative to or in addition to the derivative proceedings, have not been treated as preventing a grant of leave to bring derivative proceedings, see for example, those to which I referred in Re Legal Practice Management Group Pty Ltd above at [61]. In these circumstances, I am not satisfied that the availability of an oppression claim to the Plaintiffs and the possible availability of an adjustment for the value of their shares for the conduct alleged in such a claim, has the result that it is not in the best interests of the Company that leave be granted to bring the relevant proceedings, where I would otherwise be satisfied that that was the case. For these reasons, I am also satisfied on the balance of probabilities that it is in the best interests of the Company that the Plaintiffs be granted leave.

Whether a serious question to be tried is established

1. Next, it is necessary to determine whether there is a serious question to be tried. This is to be determined by applying the same tests as is applied by the Court in determining whether to grant an interlocutory injunction: Swansson v RA Pratt Properties Pty Ltd above at [25]; Re Gladstone Pacific Nickel Ltd above at [56]. Here, it seems to me that that question is relatively straightforward. There is a degree of common ground in the evidence, as I noted above, as to the fact of particular transactions, including at least the payments made of management fees under the Services Agreements and the loans made by the Company to Mr William Harris and Harris Health Care. There is, as I noted above, potentially a significant factual dispute as to the legitimacy of those transactions. However, it seems to me that a seriously arguable case for breach of the rule against conflict of interest or for breach of the no profit rule in equity, or for breach of the statutory analogues in ss 181 and 182 of the Corporations Act, is here established where significant financial transactions have occurred between the Company on the one hand and its director or a related party on the other, given the amounts involved, and the contention that those amounts exceeded the amounts payable on the terms of the relevant agreements or were excessive in the relevant circumstances.
2. It also seems to me at least seriously arguable in the relevant circumstances that one or other form of accessorial liability could be established against Harris Health Care, including liability for knowing involvement under s 79 of the Corporations Act in the breach of the statutory duties. For that reason, it seems to me that a serious question to be tried is established in respect of the claims both against Mr William Harris and Harris Health Care so far as they are sought to be pursued as derivative claims.
3. I should address one other matter, before leaving the question whether a serious question to be tried is established. I have referred above to the possibility that at least some of the claims brought, particularly in respect of the earlier period, may raise limitation issues. The authorities establish that the Court would ordinarily follow the statutory limitation period under s 1317K of the Corporations Act in respect of analogous claims for breach of equitable fiduciary duties, although that limitation period will not necessarily be applicable in a claim for accessorial liability: Lewis Securities Ltd (in liq) v Carter [2018] NSWCA 118; (2018) 355 ALR 703. In Re Legal Practice Management Group Pty Ltd above, I noted that limitation issues were ultimately matters of defence, rather than matters relevant to establishing whether a plaintiff had a serious question to be tried, and may well depend on a detailed examination of facts, including the extent of a plaintiff's knowledge of the relevant conduct at the relevant time and any concealment that may exist in respect of that conduct. I do not see any reason to take a different view in this case. Accordingly, the limitation issues to which I have referred do not seem to me to deprive the Plaintiffs of the serious question to be tried which I have held would otherwise be established.

Notice of the application

1. The final issue is whether the Plaintiffs have either given fourteen days written notice to the Company of the intention to apply for leave or it is appropriate to grant leave although such notice was not given. Here, it seems at least arguable that notice was given, so far as the possibility of the derivative action was raised in the earlier proceedings seeking access to documents under s 247A of the Corporations Act. In any event, where I have held above that it is unlikely that the Company would bring the proceedings itself and given the other findings I have reached above in respect of the other elements necessary for leave under s 237(2) of the Corporations Act, then the Court could readily conclude that it was appropriate to grant leave even though such notice had not been given.

Conclusion

1. In these circumstances, I am satisfied that the statutory requirements for the grant of leave under s 237(2) of the Corporations Act are satisfied. Where those requirements are satisfied, the Court has no residual discretion, and must grant leave for the relevant action to be brought. Accordingly I will grant such leave.

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