Chahwan v Euphoric Pty Ltd [2006] NSWSC 1002 | Case summary

1787/05 ELIE CHAHWAN v EUPHORIC PTY LIMITED trading as CLAY & MICHEL & ANOR JUDGMENT 1 These proceedings were commenced by summons filed in March 2005. Mr Chahwan, Mrs Ayoub and Bycoon Pty Limited ("Bycoon") sued Euphoric Pty Limited ("Euphoric") as first defendant and a firm of solicitors as second defendants. As now constituted, the proceedings are proceedings in which Mr Chahwan sues Euphoric and Bycoon. He claims a declaration that certain property at Unanderra (sufficiently described, for present purposes, as Lot 39 and Lot 40) is held by Bycoon upon trust for him (or that the properties are subject to an equitable charge in his favour for moneys he provided to Bycoon to purchase the property), a declaration that Euphoric, a mortgagee of part of the property (Lot 40), holds its interest in that property upon a constructive trust for Bycoon, and certain other relief. These are pleaded in an amended statement of claim filed on 9 June 2006. Mr Chahwan's claims against Bycoon are in paragraphs 1 and 2. The claims he wishes to see Bycoon pursue against Euphoric are in paragraphs 3 to 11. 2 That amended statement of claim recognises that, although Mr Chahwan is the sole plaintiff, certain of the relief sought is relief that should be sought by Bycoon. I refer, of course, to the claims for declaratory relief in favour of Bycoon and against Euphoric. Those claims are based in part on the proposition that Mrs Ayoub, the sole director of Bycoon (and sister of Mr Chahwan), in causing it to grant a mortgage to Euphoric, acted in breach of duties owed by her to Bycoon and that Euphoric took its interest in the property in knowledge of that breach. Bycoon, I should add, is now in liquidation as a result of a winding up order made by me on 14 November 2005. Mrs Ayoub is no longer a party and no relief is sought against her. 3 It is in this context that I heard a notice of motion filed in these proceedings by which Mr Chahwan seeks two orders: first, an order under s.237 of the Corporations Act 2001 (Cth) that he have leave to bring the proceedings on behalf of Bycoon to the extent that they involve the claims by Bycoon against Euphoric; and, second, an order under s.471B of the Corporations Act that Mr Chahwan have leave to continue the proceedings to the extent that they involve claims by him against Bycoon which, as I have said, is now in liquidation. 4 I was informed that the liquidator of Bycoon did not oppose the making of the orders and did not wish to be heard. 5 Before turning to the merits of the claims in Mr Chahwan's notice of motion, I should refer to the position of the defendant Euphoric in relation to the claim for leave under s.237. Euphoric is, of course, already a party to the proceedings. It has been a party since inception. Both Euphoric and Bycoon, the existing defendants, were served with Mr Chahwan's notice of motion. It identified both of them as persons to be served. When the notice of motion was called on for hearing, Mr Kidd of counsel announced an appearance for Mr Chahwan and Mr Lucarelli of counsel announced an appearance for Euphoric. Mr Kidd then proceeded to open his case and to read affidavits and tender documents. There were some objections on which I ruled. Mr Lucarelli then sought to cross-examine Mr Chahwan, whereupon Mr Kidd said: "Perhaps before I call the witness, I should indicate what your Honour has observed at the outset; we do object to Mr Lucarelli's client being heard in connection with this application. I can't say to your Honour that I have any authority one way or the other on that topic and indeed, I can't say to your Honour that I have searched for such authority. Perhaps a way forward would be to allow Mr Lucarelli to proceed." 6 The references here to "what your Honour has observed at the outset" was a reference to the following interchange at the start of the hearing: "HIS HONOUR: What are you in that proceeding, Mr Lucarelli?

HIS HONOUR: Are you? Well, I'm not sure. Go ahead, Mr Kidd." 7 Later, in the course of ruling on the admissibility of a document, I said: "This is an application for final relief under 237. I hinted earlier that I wasn't sure why Mr Lucarelli was here. I wonder why Mr Lucarelli is here when the question is as to the internal affairs of this company that's in liquidation, Bycoon. You're applying for a final order granting leave under that section which is a matter of domestic concern to Bycoon." 8 In the result, after Mr Kidd eventually made the submission that Mr Lucarelli should not be heard, I allowed the matter to proceed on an inter partes basis, indicating that I would receive written submissions on the matter. Those submissions were in due course received. 9 Mr Kidd submitted, on the basis of the decisions in Carpenter v Pioneer Park Pty Ltd (2004) 186 FLR 104, Roach v Winnote Pty Ltd (2006) 57 ACSR 138 and Peters v Coastace Pty Ltd (2006) 57 ACSR 241, that the question of a grant of leave under s.237 is a matter of domestic concern within the company concerned (here, Bycoon), involving a decision as to whether the company should, under the auspices of the applicant for leave (who must be a member or former member of either the company or a related body corporate, or a present or former officer of the company) be allowed to cause the company to bring proceedings that the normal decision makers within the company are unlikely to cause it to institute. In ordinary circumstances, the persons properly interested in such an application are those I have called "the normal decision makers" being, in addition to the applicant, those who are within the categories qualified to apply for leave under s.237. 10 Mr Lucarelli submitted that this is not (and cannot be) a hard and fast rule. In the context of this particular case, he points out that Euphoric has been a party since inception and that the course the proceedings have taken have involved implicit acceptance of the right of Euphoric to be heard upon the s.237 application made by Mr Chahwan. In that respect, Mr Lucarelli referred to a hearing before McLaughlin AsJ on 8 June 2006 and the lead-up to it. McLaughlin AsJ granted leave for the plaintiff to file an amended statement of claim pleading its case as now formulated. The amended statement of claim filed on 9 June 2006 was filed in exercise of that leave. It was common ground both at the hearing before McLaughlin AsJ and before it that Mr Chahwan would need leave under s.237 (as well as s.471B) in order to propound the amended claims. There was a letter from Mr Chahwan's solicitors to Bycoon's liquidator on 25 May 2006 specifically referring to those matters. 11 The present notice of motion was thereafter filed by Mr Chahwan and served on Euphoric. The plaintiff thus showed a willingness for Euphoric to involve itself in the subject matter of the present application. That application is, in one way, an extension of the already determined application to amend, since the outcome of that application has no real efficacy unless the s.237 and s.471B applications are also granted. 12 As far as the s.237 application is concerned, there was, as I see matters, no need for Mr Chahwan to involve Euphoric. The reasoning is as set out in the cases to which I have referred. But the reality is that Mr Chahwan did involve Euphoric. He did so consciously and deliberately. And the s.237 application is, in a sense, an extension of the amendment application in which Euphoric, as an existing party, was properly and necessarily involved. 13 As I said in Carpenter v Pioneer Park Pty Ltd (above) at [11], a brief review of s.237 applications decided to that point showed that the person I called "the substantive defendant" - in the present context, Euphoric - had played an active part on some occasions on which the question of s.237 leave was argued. That, it was noted, was because of the stage at which the need for leave had been recognised or other factors affecting the existing constitution of the proceedings. 14 It is, I think, going too far to say that the substantive defendant should never be heard on a s.237 application. Cases in which there is an established litigious context engendering a legitimate expectation on the part of the substantive defendant of an opportunity to argue the question of the grant of s.237 leave are distinguishable from those where a person with standing under s.236 makes an application in advance of initiation of any proceedings by the company or before the company has become involved in the defence of proceedings initiated against it. 15 In the present case, the company was an established party before the s.237 application was foreshadowed. Mr Chahwan was at all times willing for Euphoric to be heard on its s.237 application. His belated attempt to capitalise upon the court's question whether Euphoric should properly be heard should not rebound unfairly to his advantage and to Euphoric's disadvantage. To put matters on to a firm footing, I shall make an order nunc pro tunc to the effect that if and to the extent that Euphoric needs leave under rule 2.13 of the Supreme Court (Corporations) Rules 1999 to be heard on the application for leave under s.237. 16 I turn now to the merits of the s.237 application. In doing so and for reasons stated, I have regard to submissions made on behalf of Euphoric. 17 Submissions made by Mr Chahwan begin with the proposition that the fact that Bycoon is now in liquidation does not make the statutory derivative action procedure unavailable. Mr Kidd relied, in that respect, on the various cases reviewed in Carpenter v Pioneer Park Pty Ltd (2004) 51 ACSR 299 (and see, most recently, Fresh Start Australia Pty Ltd v Lofthouse [2006] VSC 327 (27 July 2006)). I did not understand Mr Lucarelli to submit otherwise. That point therefore need not detain me. 18 Another matter that need not be canvassed is Mr Chahwan's standing. He is a member of Bycoon and therefore within s.236(1)(a)(i). 19 Regarding the conditions in s.237(2), it can be said at once that the first (s.237(2)(a)) is satisfied. The liquidator has made statements warranting a conclusion that he will not set Bycoon in motion to pursue the claims Mr Chahwan wishes to see it pursue. 20 The next three conditions - ss.237(2)(b), 237(2)(c) and 237(2)(d) - are controversial. Euphoric argues that Mr Chahwan is not acting in good faith, that it is not in the best interests of Bycoon that Mr Chahwan be granted the leave he seeks and that there is no serious question to be tried. In order to deal with those matters, it is necessary to recite some background. 21 The main claim Mr Chahwan wishes to see Bycoon pursue against Euphoric is a claim that Euphoric, as mortgagee from Bycoon, holds its interest in the Unanderra property upon a constructive trust for Bycoon. The mortgage was granted in a context where Euphoric, a supplier of petroleum products, had sold fuel to a company known as Madallah (a company associated with Mr Ayoub, the husband of Mrs Ayoub); Madallah had become indebted to Euphoric for almost $300,000; Madallah asked Euphoric to supply petrol in future to Bycoon instead of Madallah (with Bycoon assuming responsibility of Madallah's pre-existing debt); Mrs Ayoub agreed to guarantee Bycoon's obligations to Euphoric; Mrs Ayoub, in her capacity as sole director and secretary of Bycoon, caused Bycoon to give Euphoric a mortgage apparently affecting Lots 39 and 40; the reference to Lot 39 was, however, inserted into the mortgage after Mrs Ayoub signed it; before registration of the mortgage, the reference to Lot 39 was deleted; Euphoric sued Mrs Ayoub in the District Court relying on her guarantee of Bycoon's indebtedness and claiming $668,000 for debt; Bycoon was joined as a party to those proceedings; Mrs Ayoub contended in the District Court that Bycoon was not indebted to Euphoric (and that, if anyone was indebted, it was Madallah) and that, in any event, she did not know she was signing a guarantee, had not received legal advice, had a limited understanding of English etc; and the District Court made findings which included findings to the following general effect: 1. The real controller of Madallah was Mr Ayoub. 2. Euphoric was prepared to supply fuel to Bycoon on credit provided that Bycoon accepted responsibility for Madallah's past debt, that Mrs Ayoub guaranteed Bycoon's indebtedness and that Bycoon give security over its Unanderra properties. 3. Euphoric supplied fuel to Bycoon which became indebted to Euphoric in a sum of almost $500,000 which, when added to the pre-existing Madallah debt, produced a total indebtedness of some $774,000, of which Bycoon paid part leaving a balance of about $668,000. 4. Bycoon was effectively substituted for Madallah, by novation, as the debtor in respect of Madallah's pre-existing debt to Euphoric. 22 An appeal to the Court of Appeal was dismissed: see Ayoub v Euphoric Pty Ltd [2004] NSWCA 457. An application for special leave to appeal to the High Court was also unsuccessful: see Ayoub v Euphoric Pty Ltd [2005] HCATrans 746. 23 Against this background, it is submitted on behalf of Mr Chahwan that there is a serious question to be tried in relation to the claim that Euphoric holds its interest in Lot 40 on trust for Bycoon, having received that interest in circumstances where it knew or ought reasonably have known that Mrs Ayoub breached her duties as a director of Bycoon by causing it to mortgage Lot 40 to Euphoric. (The same case will be made in relation to Lot 39 if the somewhat clouded picture of the title references in the mortgage documents and the circumstances in which they were changed show that Lot 39 is in truth included in the mortgage.) The case Bycoon will make as to breach of Mrs Ayoub's duties is based on what may, in broad terms, be described as lack of corporate benefit (cf Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] 1 Ch 2), while the claim against Euphoric will be advanced by reference to both limbs of Barnes v Addy (1884) LR 9 Ch App 244. 24 In broad concept, there is substance in these contentions as to serious question - as far as they go. Mr Lucarelli submits, however, that any apparent serious question evaporates when one has regard to the fact that the accessorial liability pleaded is statutory not equitable and the reality that an estoppel has arisen through the District Court judgment. 25 As to the first matter, Mr Lucarelli says that Bycoon does not have standing to seek a declaration of contravention by Mrs Ayoub of the directors' duties provisions of the Corporations Act, that there can accordingly be no conclusion of contravention and therefore no reliance on the accessorial provisions of s.79 which determine when a person is to be regarded as "involved in a contravention". I do not need to come to a view about this. The amended statement of claim clearly pleads breach of general law directors' duties as well as statutory duties. There is also clear reliance on equitable principles of accessorial liability. Should the Corporations Act aspects turn out to suffer from the defects Mr Lucarelli foreshadows, that will not detract from the force of the equitable claims which, as it were, run in parallel with the statutory claims. 26 The second point raised by Mr Lucarelli is that the issue of assumption of the Madallah debt by Bycoon was litigated and determined in the District Court proceedings. He also says that the claims Mr Chahwan now wishes to see Bycoon press against Euphoric could have been brought in those proceedings and, because they were not, they cannot be brought now in the present proceedings (Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 at p.605). The response is twofold: first, that the District Court has no jurisdiction to grant Corporations Act relief; and second, that the District Court has only a very limited equitable jurisdiction. There is sufficient merit in that response to justify the conclusion that there is no estoppel so clear-cut as to forestall altogether the serious question to be tried. 27 On an application such as this, it is not the function of the court to probe in depth the issue of serious question to be tried. The process is essentially a screening process designed to exclude cases with insufficient prospects of success to warrant the proceedings being pursued. I am satisfied that, in that sense, the s.237(2)(d) condition regarding serious question to be tried is satisfied. 28 I turn next to the s.237(2)(c) and the question whether it is in the best interests of Bycoon that the proceedings be brought on its behalf. As Palmer J emphasised in Swansson v R.A. Pratt Properties Pty Ltd (2002) 42 ACSR 313 at [55], this must be shown as an established and concrete matter ("… is in the best interests …"), not as a matter of possibility or potentiality. It must be accepted that, given Bycoon's present position, the interests of Bycoon are, in substance, the interests of its creditors. 29 There is a preliminary question as to whether there has arisen, by force of s.237(3), a rebuttable presumption that the grant of the leave Mr Chahwan seeks is not in the best interests of the company. Under s.237(3), such a presumption arises, in a case such as the present, if the company itself (here, Bycoon) "has decided … not to bring the proceedings" and: "all of the directors who participated in that decision: (i) acted in good faith for a proper purpose; and (ii) did not have a material personal interest in the decision; and (iii) informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and (iv) rationally believed that the decision was in the best interests of the company." 30 It is submitted on behalf of Euphoric that such a presumption has arisen in this case. It is said to have arisen before Bycoon went into liquidation and at the time the District Court proceedings were current. Mr Chahwan became the sole director of Bycoon in May or November 2002 (both dates are available, on the evidence). He was then aware that Bycoon had granted the mortgage to Euphoric. The District Court proceedings were on foot when Mr Chahwah became Bycoon's sole director. He was, from that point, the only person able to give instructions for Bycoon in relation to those proceedings. He did not, in fact, cause Bycoon to raise in the District Court proceedings any of the matters he now wishes to see Bycoon pursue in the derivative action. It follows, according to the submissions, that the sole director of Bycoon can be seen to have made a decision that Bycoon should not bring the action now in contemplation. 31 I do not think that this can be right. In the first place, the fact that a person did not do a particular thing does not establish that the person decided not to do the thing. It may be otherwise if the person can be seen to have been aware of, and declined to take up, a clear opportunity to do the thing. But I am not satisfied that the District Court proceedings themselves represented a clear opportunity for claims based on alleged Corporations Act breaches and alleged entitlements to equitable relief to be positively asserted and pursued by Bycoon. It is by no means clear that it was open to Bycoon to "bring the proceedings", to use the s.237(3) terminology, as part of the prior District Court action instituted by Euphoric, although it was certainly open to it to bring them independently in the Supreme Court and then to have the two brought together in the Supreme Court. That is a matter of significance to another part of the present application. 32 In any event, proof of a decision of the company not to "bring the proceedings" is only part of what must be shown to raise a s.237(3) presumption. The submission made by Euphoric on this point leaves at large all the matters in s.237(3)(c) set out above. 33 Because no presumption arises, the "best interests" question under s.237(3)(c) must be addressed by way of comparison between the position of Bycoon if, by means of actions taken by Mr Chahwan in good faith, it brings the proceedings and the position of Bycoon if it does not bring the proceedings. The purpose of the proceedings plays a part in that assessment. I therefore defer further consideration of it pending examination of the "good faith" question. 34 Section 237(2)(b) poses the question whether Mr Chahwan "is acting in good faith". In that connection, there are really two questions: whether the applicant honestly believes that a good cause of action exists; and whether the applicant is seeking to bring the derivative action for a proper purpose (as distinct from a collateral purpose that would amount to an abuse of process). 35 Mr Lucarelli submitted that a finding of good faith on Mr Chahwan's part should not be made and, in doing so, concentrated on the latter aspect. He points in particular to what he calls "the four year silence". Mr Chahwan first became aware in February 2001 that Bycoon had granted a mortgage over the property. He became the sole director of Bycoon in May or November 2002. The District Court proceedings had been commenced by Euphoric against Mrs Ayoub. Bycoon was joined later. Mr Chahwan was, from May or November 2002, the sole decision-maker for Bycoon in relation to those proceedings and all matters to do with the Euphoric relationship. Yet at no point did Mr Chahwan assert any interest on his part in the property - or, more significantly for present purposes, any interest of Bycoon in the interest held by Euphoric as mortgagee. It may well be, as I have said, that those matters could not appropriately have been pursued in the District Court proceedings themselves. But they formed part of the overall matrix of alleged rights and liabilities as among the relevant persons in relation to the property. Yet they were never asserted. Of particular significance is Mr Chahwan's statement in evidence that he decided that it would not be in the company's interests to proceed against his sister, Mrs Ayoub. 36 Mrs Ayoub, against whom lies the principal claim of Bycoon in respect of which it is sought to sheet home accessorial liability to Euphoric, became a bankrupt after the District Court proceedings concluded. It was not until after that event that Mr Chahwan sought to mount the accessorial claim - by then, of course, a claim from which his sister was, in practical terms, insulated. 37 These points are significant. I have already said that the District Court proceedings themselves may not have been an appropriate vehicle for the ventilation of the claims now proposed. But, with those proceedings on foot at the instigation of Euphoric, it would have been logical for Bycoon, under the auspices of Mr Chahwan, to have sought to pursue the claim against Euphoric by initiating Supreme Court proceedings and making moves to have the District Court proceedings removed into the Supreme Court and consolidated with them. That he did not do that and has now come forward belatedly - and at a time when his sister is effectively insulated - is strongly indicative of improper motive and purpose. 38 I am not satisfied as to Mr Chahwan's bona fides. It is for him to show affirmatively that he is acting in good faith in what he proposes to have the company do now. The evidence suggests to me that he is seeking to have the company run a case now that it could - and should logically - have run several years ago in the context of the litigation brought by Euphoric, that he desisted from doing so for reasons which may well have been improper from the point of view of his duties as a director of Bycoon (i.e, unwillingness to expose his sister to the allegation of direct liability) and that he would never have bothered to resurrect the matter had Bycoon not failed in its attempt to defend the action brought by Euphoric in the District Court. His motive, briefly stated, is to attempt, after the event, to have Bycoon mount now a cross-claim that it should have mounted years ago - and to do so, moreover, by way of collateral attack on the District Court judgment. That he did not see fit to have Bycoon do this at the time but professes to consider it appropriate now at a point when he can arguably bring it without harm to his sister calls in question the motivation to such an extent to preclude the necessary finding of good faith in terms of s.237(2)(b). 39 Returning to the s.237(2)(c) criterion, the finding that Mr Chahwan is not acting in good faith means that it is not in the interests of Bycoon that he should be allowed to pursue the claim for it. 40 It remains to consider the question of leave under s.471B. This relates to the claims that Mr Chahwan wishes to bring against Bycoon alleging that it holds the property in trust for him. Bycoon's liquidator does not oppose the grant of leave. The claim is proprietary and cannot be accommodated within the proof of debt regime. Leave should therefore be granted. 41 The orders of the court are as follows: 1. Grant leave under s.471B of the Corporations Act for the plaintiff to bring and proceed with the claims in paragraphs 1 and 2 of the amended statement of claim filed on 9 June 2006 against the second defendant (Bycoon Pty Ltd). 2. Grant leave nunc pro tunc for the defendant to be heard upon the plaintiff's motion for leave under s.237 of the Corporations Act to bring on behalf of the second defendant (Bycoon Pty Ltd) the claims in paragraphs 3 to 11 of the amended statement of claim. 3. Order that the plaintiff's motion for leave under s.237 of the Corporations Act be dismissed. 4. Order that the plaintiff pay the first defendant's costs of the motion. **********

Chahwan v Euphoric Pty Ltd

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Judgment (19 paragraphs)

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