Chahwan v Euphoric Pty Ltd t/as Clay & Michel

Judgment - ex tempore 1By Amended Interlocutory Process, the plaintiff, Mr Fred Fajloun, applies for leave under ss 236 and 237 of the Corporations Act 2001 (Cth) and the general law to bring proceedings on behalf of the second defendant, Mycorp Group Pty Limited ("Mycorp") and the fourth defendant, Summer Tides Pty Limited ("Summer Tides") against the first defendant, Mr George Khoury, the fifth defendant, Snowy Falls Pty Limited ("Snowy Falls") and the sixth defendant, Telnac Pty Limited ("Telnac"). 2The application to bring such proceedings was originally filed on 9 November 2012 and is brought in context of allegations made by Mr Fajloun that he and Mr Khoury had conducted a business of the development and operation of service stations at certain sites, allegations of breach of fiduciary duty by Mr Khoury, and an application brought in Mr Fajloun's personal capacity for relief under the oppression provisions in s 233 of the Corporations Act in respect of Mycorp and Summer Tides. A Statement of Claim was filed on 30 November 2012 which sought corresponding relief. The original application for leave to bring derivative proceedings was not pressed in its initial form, because of issues which arose as to the form of the proposed pleading and whether the relevant companies should be indemnified by Mr Fajloun in respect of the costs of the proposed proceedings. 3A draft Amended Statement of Claim and draft Cross-Claim have now been placed before the Court. The draft Amended Statement of Claim maintains claims brought by Mr Fajloun in his own right against Mr Khoury and against Snowy Falls and claims in oppression in respect of Mycorp and Summer Tides, but deletes the claim for leave to bring derivative action which is now the subject of the draft Cross-Claim. The draft Cross-Claim provides for Mycorp to claim damages and/or equitable compensation and, in the alternative, an account of profits against Mr Khoury and Telnac and for Summer Tides to claim damages, equitable compensation and, in the alternative, an account of profits against Mr Khoury and Snowy Falls. 4The draft Cross-Claim in turn pleads that Mr Khoury owed fiduciary and statutory obligations to Mycorp and Summer Tides as a director of those entities and alleges breach of those duties by Mr Khoury's alleged failure to offer the opportunity to secure certain service station sites to those entities and his causing Summer Tides to pay moneys not due to Snowy Falls and to pay expenses properly payable by Snowy Falls and causing Summer Tides to pay greater than market rent to Snowy Falls for a service station site at Merrylands. Somewhat similar allegations are made on behalf of Mycorp in respect of dealings with Telnac in respect of a service station site at Bankstown. I will refer in greater detail to those allegations below. Claims are also advanced against Snowy Falls and Telnac as, allegedly, the corporate alter ego of Mr Khoury or, alternatively, for knowing assistance or knowing receipt. 5The application is supported by an affidavit of Mr Fajloun sworn 9 November 2012 which indicates that he is a director and shareholder of each of Mycorp and Summer Tides and that Mr Khoury is also a director of those companies, and sets out Mr Fajloun's and Mr Khoury's involvement with the relevant service station sites. 6Mr Khoury, Snowy Falls and Telnac neither consent to nor oppose the grant of leave under s 237 of the Corporations Act for Mr Khoury to bring proceedings on behalf of Mycorp and Summer Tides. They rightly submit that such leave could only be granted under ss 236 and 237 of the Corporations Act, on which Mr Fajloun primarily relies, and not under the general law, by reason of s 236(3) of the Corporations Act. They also submit that Mr Fajloun should be required to indemnify the relevant companies in respect of liabilities which may arise from their involvement in the relevant proceedings and Mr Fajloun has indicated his willingness to do so. I will return to that matter below. 7In order to grant leave under s 237(2) of the Corporations Act, the Court must be satisfied of five matters and must grant that leave if it is satisfied of those five matters. 8The first matter, under s 237(2)(a) of the Corporations Act, is that it is probable that the companies will not bring proceedings. It appears that requirement is satisfied where Messrs Fajloun and Khoury are the two directors of the relevant companies; Mr Fajloun does not have a majority shareholding in them; there is no indication that Mr Khoury would authorise the companies to bring proceedings against himself or his associated entities; the relationship between the relevant parties has otherwise broken down and there are claims now brought against Mr Khoury by Mr Fajloun in his personal capacity; and there has been no suggestion, since the commencement of these proceedings, that the companies wish to commence or conduct the proceedings under their own control rather than by way of derivative proceedings. Mr Khoury has not contended that this requirement is not satisfied, by reason of the approach which he has adopted of neither consenting to nor opposing the application. In my view, this requirement is satisfied. 9The second criterion specified in s 237(2)(b) of the Corporations Act is that Mr Fajloun is acting in good faith. He must establish this matter to the court's satisfaction: Chahwan v Euphoric Pty Ltd t/as Clay & Michel [2008] NSWCA 52; (2008) 245 ALR 780; 65 ACSR 661; 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 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 320-321; 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) whether there is a serious question to be tried: Fitzpatrick v Cheal [2010] NSWSC 717 at [41]. 10In the present case, Mr Fajloun has a substantial economic interest in the entities on behalf of which he seeks to bring derivative proceedings and success in those claims would recover assets or moneys which he contends were diverted to Snowy Falls and Telnac, with such recovery being to the advantage of Mycorp and Summer Tides and to the indirect advantage of Mr Fajloun as a shareholder in them. Mr Khoury has not contended that the application is not made in good faith or that Mr Fajloun has any collateral purpose in bringing it. In my view, this requirement is also satisfied. 11The third criterion, under s 237(2)(c) of the Corporations Act, is that the grant of leave is in the best interests of the relevant companies. This test requires more than a prima facie indication that the proceedings may be or are likely to be in the interests of those companies and the court must be satisfied that the proposed action is, on the balance of probabilities, in the company's best interest: Swansson v RA Pratt Properties Pty Ltd above. 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 v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 at [44]; Re Gladstone Pacific Nickel Ltd above at [57]. 12I will deal with the question of the prospects of the proceedings, which is relevant to this criterion, in respect of whether there is a serious question to be tried, which I address below. There is no evidence before me as to the likely costs of the conduct of the Cross-Claim, but that matter is addressed by the fact that Mr Fajloun has offered an indemnity as to the costs of the derivative proceedings and Mr Khoury does not contest the adequacy of that indemnity. The amounts likely to be recovered by Mycorp, if successful in the proceedings, are not quantified by evidence, but Mr Khoury has not suggested they are insubstantial or would not warrant the commencement of proceedings. The amounts likely to be recovered by Summer Tides, if successful in the proceedings, are quantified as in excess of $550,000, which is not an immaterial amount, particularly in the context of closely held proprietary companies. There are no obvious adverse consequences if both the companies, or either of them, fail in the proceedings other than an exposure to costs, which is also addressed by the indemnity offered by Mr Fajloun. The conduct of the proceedings by the companies is not likely to have an adverse effect on the conduct of their business, beyond the effect which may already have occurred by reason of the collapse of the relationship between their two shareholders and the commencement of proceedings brought by Mr Fajloun in his personal capacity for the relief to which I have referred above. Again, Mr Khoury does not contend to the contrary. I am therefore satisfied that the grant of leave is in the best interests of Mycorp and Summer Tides, subject to the question of indemnity to which I now turn. 13I noted above that Mr Fajloun had offered an indemnity in respect of the costs, charges and expenses of and incidental to bringing and continuing the derivative claims that are the subject of this application. I will assume, subject to confirming with Mr Fajloun's legal representatives at the conclusion of this judgment, that that indemnity also extends to any liabilities that may be incurred by the relevant companies in that regard. Mr Khoury, Snowy Falls and Telnac each submit that any grant of leave should be accompanied by an appropriate form of undertaking of that character. Such an indemnity is an appropriate means of addressing the risk of prejudice to Mycorp and Summer Tides from the commencement of the proceedings, should they ultimately prove to be unsuccessful, and specifically the risk of exposure to costs and expenses of litigation including costs orders in that regard: Gerard Cassegrain & Co Pty Ltd v Cassegrain [2008] NSWSC 976 at [73]-[76]; Power v Ekstein [2010] NSWSC 137; (2010) 77 ACSR 302 at [108]; MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367. 14The fourth criterion for the grant of leave, under s 237(2)(d) of the Corporations Act, is whether there is a serious question to be tried in the proceedings. That criterion involves the same test 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 above at [56]. The determination of this question requires further reference to the claims that Mr Fajloun seeks to bring on behalf of Mycorp and Summer Tides respectively. 15Mr Fajloun's primary claim, so far as Mycorp is concerned, is that Mr Khoury breached fiduciary and statutory duties owed as a director of Mycorp, by causing it to pay greater than market rent to Telnac; caused it to enter a disadvantageous lease with Telnac, which he contends was too short in the context of the parties' commercial interests; and caused Snowy Falls to acquire the Merrylands service station site rather than offering the opportunity to do so to Mycorp. Mr Condon, who appeared for Mr Fajloun, fairly accepted that the first proposition, that Mycorp had paid above market rent to Telnac, was not presently addressed by Mr Fajloun's evidence. However, that allegation is also advanced by Mr Fajloun in his verified Statement of Claim in respect of the proceedings brought in his own right; it is a matter that is capable of being addressed by expert evidence; and the fact that it is not yet addressed by evidence would not lead me to decline leave if the other allegations sought to be advanced on behalf of Mycorp give rise to a serious question to be tried. The allegation that the term of the lease of the premises is too short is supported by Mr Fajloun's evidence that the lease is for a term of four years (with an option to renew for a further term of four years) whereas service station leases are usually for a term of ten years with a further term of ten years by way of option. The acquisition of the head lease by Snowy Falls, with a lease to Mycorp, raises a serious question to be tried as to whether a corporate opportunity within the scope of Mycorp's business, namely the opportunity to lease the property itself so as to operate the business from it, was diverted to Snowy Falls: compare Streeter v Western Areas Exploration Pty Ltd (No 2) [2011] WASCA 17; (2011) 82 ACSR 1. Again, Mr Khoury does not contend to the contrary. 16Mr Fajloun's primary claim, so far as Summer Tides is concerned, is that Mr Khoury breached fiduciary and statutory duties owed as a director of Summer Tides by causing it to pay a greater than market rent to Snowy Falls; causing it to pay rent to Snowy Falls in excess of the amount due under the lease and causing it to pay moneys to Snowy Falls which were not due to Snowy Falls. Mr Fajloun's evidence that, if accepted at a final hearing, would tend to support those claims, addressing Snowy Falls' acquisition of that site, the payment of mortgage expenses in excess of the rent due by Summer Tides, and indicating Mr Fajloun's assessment, based on his experience in the service station business, that the rent paid was in excess of a market rental. These matters may or may not be established at a final hearing; however the evidence presently before the court is sufficient to establish a serious question to be tried, at an interlocutory stage, and Mr Khoury does not contend to the contrary. 17The final requirement for the grant of leave is that, at least fourteen days before making the application, the applicant gave written notice to the company of its intention to apply for leave and the reasons for applying, or alternatively it is appropriate to grant leave although that provision is not satisfied. Mr Fajloun accepts that he did not give such notice prior to the commencement of the proceedings. However, as Mr Fajloun points out, Mr Khoury has since had adequate notice of the application and its grounds, where leave to bring the proceedings was sought on the commencement of these proceedings and the basis for the application is identified in Mr Fajloun's evidence. I am satisfied that it is appropriate to grant leave although such notice was not given prior to the commencement of the proceedings. 18In these circumstances, I am satisfied that each of the five requirements for the grant of leave to bring proceedings on behalf of Mycorp and Summer Tides under s 237 of the Corporations Act are satisfied, and I am therefore required to grant that leave, once again subject to the question as to the form of indemnity. As I have noted, Mr Khoury did not either consent to nor oppose the grant of leave and reserved his ability to seek to strike out the Cross-Claim or Statement of Claim or parts of them if so advised. Nonetheless, the parties agreed the form of orders that should be made, if leave was granted, and I have addressed the matters above which lead me to form the view that such leave must be granted, subject to the question as to the form of the indemnity. 19I note that Mr Fajloun, by his legal representatives, has now confirmed that the intent of the indemnity offered is to extend not only to costs, charges and expenses but also to liabilities of and incidental to the bringing and continuance of the derivative claims. On that basis, I am satisfied that the proposed indemnity is sufficient and that each of the requirements necessary to the grant of leave are satisfied. I therefore make orders in accordance with the short minutes of order initialled by me and placed on the file. I note that those orders provide for directions for the further conduct of the proceedings and that the matter will be listed for further directions, after those further steps have been taken, before the Corporations Judge on 27 May 2013.