Chapman v E-Sports Club Worldwide Limited [2000] VSC 403

Supreme Court of Victoria|2000-09-22|Before: Mandie J

CORPORATIONS - application for leave to bring proceedings on behalf of a company - ss.236-7 Corporations Law.

A proceeding has been instituted by Geoffrey Robert Chapman against a number of defendants including E-Sports Club Worldwide Limited and E-Sports Club Limited. The substance of the proceeding, although there may be other aspects to it which I need not be concerned with, is that the plaintiff, Mr Chapman, seeks to have E-Sports Club Limited take proceedings in relation to certain intellectual property which has been transferred by that company to the first defendant, E-Sports Club Worldwide Limited, and in substance he seeks to bring a derivative action on behalf of E-Sports Club Limited against E-Sports Club Worldwide Limited.

I would agree with what was said by Santow J in Karam v Australia & New Zealand Banking Group Limited, [2000] NSWSC 596; (2000) 34 A.C.S.R. 545 at 554, that the better view is that the statutory derivative action which has now been created by the Corporations Law, has displaced any potential recourse to any of the exceptions in the rule in Foss v. Harbottle, so that my view is that Mr Chapman has no right to sue in the name of E-Sports Club Limited unless he gets leave of the court. I note that Santow J says that although he considers that to be the better view, that the matter cannot be said to be free from doubt, and I, likewise, agree. Certainly the plaintiff here has proceeded on the basis that leave is required, and the leave which is sought by the plaintiff is either leave to amend the statement of claim in the existing proceeding so as to make it a proceeding brought by leave, or alternatively if that is thought by the court to be inappropriate, to obtain leave to bring a fresh proceeding in the name of E-Sports Club Limited.

I agree that that is a sensible approach because otherwise the court might, on this application, decide that the existing proceeding should not be amended and then the whole process would need to be commenced again with Mr Chapman making a new application by interlocutory process to obtain leave to bring a fresh proceeding but Mr Paterson says that he is content that the court deal with both these aspects together.

Section 236(1) of the Corporations Law provides that a person may bring proceedings on behalf of a company if the person is a member or a director of that company - leaving out irrelevant words - and the person is acting with leave granted under s.237. Section 237 deals with the application for and the granting of leave. The person must apply to the court for leave to bring the proceedings in the name of the company.

Section 237(2) is somewhat oddly worded. It provides that the court "must" grant the application if it is satisfied of various matters. It does not say whether the court has a discretion to grant leave even if not satisfied of those matters. I think it is unnecessary to determine whether the court has some residual discretion because the conclusion I have reached is that even if the court did have such a residual discretion it ought not be exercised in favour of the plaintiff on this current application, but when one looks at the matters of which a court must be satisfied before it is obliged to grant leave, it is hard to imagine how a court would, in most circumstances, grant leave unless those matters were made out, because if a court was not satisfied - for example, that the applicant was acting in good faith, or was not satisfied that the application was in the best interests of the company or was not satisfied that there was a serious question to be tried - it is hard to imagine how the court would have a residual discretion to grant leave.

The court clearly has to look at these criteria, and on the present application, for reasons which I will give, I am not satisfied - indeed I am satisfied to the contrary on the present material - that the applicant is acting in good faith - see s.237(2)(b); or that it is in the best interests of the company that the applicant be granted leave - see s.237(2)(c), or that there are serious questions to be tried - see s.237(2)(d).

The reason why I am not satisfied of those matters has a lot to do with the form in which the material has been placed before the court. In support of the application there is an affidavit by Graeme Howard Chapman who is the brother of the plaintiff and a barrister and solicitor of this court although not a currently practising legal practitioner. There is no affidavit from the plaintiff, himself, and the factual details are somewhat sparse.

Mr Chapman, the plaintiff, through his brother by affidavit, complains that the transfer of the intellectual property of E-Sports Club Limited was made for nominal consideration and without the agreement of his brother representing him at the relevant meeting of directors on 1 October 1999. However paragraph 10 of the brother's affidavit is unsatisfactory to say the least. Rather than providing an account of what happened at the meeting - and I note that he may have only been present by telephone - but he does not say what happened. He does not say what the discussion was. He says that the minutes are inaccurate because they purport to show that he approved the transfers, but he does not say that he voted against any resolution, or that he disagreed with any proposal that was made at the meeting, or that he said anything to convey to the other directors that he objected to what was happening at the meeting. He simply says in his affidavit, "The minutes are inaccurate. I have not signed the minutes as they are inaccurate. I have never consented to the transfers" but does not condescend to tell the court what happened at the meeting or what he actually said.

Then the brother says, perhaps somewhat disingenuously, that he is informed by Geoffrey Robert Chapman that he has never consented to the transfers. There is no direct evidence from Mr Chapman to that effect, and when one looks at the correspondence he seems to have had full knowledge of what was proposed by the directors.

As against that, the directors have put in substantial material supported by a large body of exhibits which appear to show that the transaction was done for good commercial reasons, and not only that, that the plaintiff has not been harmed by the transaction because he is entitled to an equivalent shareholding in the new company which has been offered to him but which he has declined. The material tends to show - if it shows anything at all - that the plaintiff is attempting to use this proceeding as a device to put pressure on the other parties to buy him out.

I do not need to make positive findings about that but what I can say is that I am not satisfied, looking at the material as a whole, that the applicant has any other motive than that which is attributed to him by the defendants - namely to put pressure on them and the relevant companies to extricate him financially from this investment.

I am not satisfied that he is acting in good faith, and I think it is significant that he has not gone on affidavit and has not even sought the opportunity to do so when substantial material has been filed giving a completely different version of what took place.

When it comes to the best interests of the company, I am not satisfied that the material shows that it is in the best interests of the company to bring the proposed proceeding. Very little is said about the company, and Mr Paterson, who appears for the plaintiff, says that is information which is not within his client's knowledge, but his client is a director and, be that as it may, the criterion in the legislation is that the court must or should be satisfied, or ought to at least have regard to, whether it is in the best interests of the company that the applicant be granted leave. There is no material about who is going to pay for this proceeding by the company. There is no material about what position the company would be placed in by being put in the position of a litigating plaintiff.

Finally, I am not satisfied on the material that there is a serious question to be tried. The evidence is fairly heavily one way, and it seems to me that a lot more material would be required and a lot more explanation would be required from the applicant in order to establish that there is a serious question to be tried. Clearly there is oath to some extent against oath in relation to the meeting, but only to some extent as I have indicated, but little else on the whole of the material.

In those circumstances I do not think that the court should give leave when it is not satisfied of any of those matters. I am fortified in that conclusion by considering that the plaintiff has a right to bring oppression proceedings as a shareholder in relation to E-Sports Club Limited, and if he can establish that there has been oppressive or unfair conduct within the meaning of the legislation towards him in his capacity as a shareholder of E-Sports Club Limited, he could no doubt obtain appropriate relief, and although as Mr Paterson pointed out, that may be a fairly indirect or long-winded way of seeking to achieve what he is presently seeking to achieve, it may, in the long run, be a fairer approach because it can then be determined whether the interests of the 10 per cent shareholder should outweigh the interests of the other 90 per cent who do not wish the company to bring this proceeding.

For those reasons, the application for leave to bring this proceeding, either in the existing proceeding or by a fresh proceeding, is dismissed.

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Judgment (18 paragraphs)

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