The ability to bring the claims as part of the oppression proceedings
66 The major issue which divided the parties at the application's hearing was whether the applicants could, effectively, litigate derivative claims against Mr So and Ultimate in the oppression action. The So interests submitted that they were able to do so, such that there was no purpose in granting leave under ss 236 and 237, which could have the only effect of exposing the operating companies to a liability to an order for costs. The essence of these submissions was that the scope of power in s 233 was sufficiently wide to give the operating companies relief in relation to the alleged breaches of fiduciary duty. It was submitted that the allegations of breach against Mr So and Ultimate could be raised in the oppression action and, if made out, orders could be made requiring them to pay compensation to the operating companies. That would result in an enhancement of their value which would be relevant to the price at which an order for purchase might be made.
67 The submission that such claims could be pursued is founded upon the alleged scope of the Court's power in ss 232 and 233 of the Act. In particular, reliance is placed on the words of the chapeau of the latter section which provide, "The Court can make any order under this section that it considers appropriate in relation to the company …". It was submitted that the authorities support the proposition that those words enable the Court to make orders in relation to claims which the company, the subject of the oppression proceedings, has against third parties. Reliance was also placed on s 233(1)(g) which provides that the Court can make an order authorising a member to, inter alia, institute specified proceedings in the name and on behalf of the company.
68 Sections 232 and 233 operate conjointly. Specifically, the powers under s 233 arise only once the circumstances in s 232 are satisfied. Although the words of a subjective jurisdictional fact are not used, the power to make any order under s 233 is necessarily conditioned upon the establishing of the circumstances specified in s 232: LPD Holdings (Aust) Pty Ltd v Phillips (2013) 281 FLR 227, 236 - 237 [40] (LPD Holdings v Phillips); Campbell v Backoffıce Investments Pty Ltd (2008) 66 ACSR 359, 387 [122]. For present purposes, those circumstances can be referred to as "oppressive conduct" though it is accepted that such a generalisation is, perhaps, technically inaccurate.
69 If the Clancy interests establish that the fourteenth to sixteenth respondents engaged in oppressive conduct, the Court might make any order it considers appropriate in relation to the company including, pursuant to s 233(1)(g) an order permitting the Clancy interests to institute proceedings against Mr So and Ultimate in respect of wrongs done to the operating companies. However, the So interests submitted that the Court can make such an order now, allowing the Clancy interests to commence the third party proceedings in the oppression action or permitting them to make claims which will, if they are successful, provide them with equivalent relief. There is, of course, a temporal inconsistency between that submission and the manner in which the power in s 233 is enlivened. No explanation was given as to the basis on which the Court might utilise the power in s 233(1)(g) prior to the conditions for its exercise being satisfied.
70 The decision of the New South Wales Court of Appeal in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672, 695 [140] (Fexuto) is important in this context. There, Fexuto Pty Ltd brought proceedings claiming that the affairs of Bosnjak Holdings Pty Ltd, in which it was a shareholder, were being conducted oppressively. It alleged, amongst other things, that directors of Bosnjak Holdings had engaged in a breach of fiduciary duty by taking for themselves and a third party company which they controlled, a commercial opportunity which became available to them by virtue of their position as directors. The primary judge held that the claim was made out and ordered an account of profit from the errant directors. Before the Court of Appeal it was submitted that the order for an account of profits should not have been made in the oppression action. That was rejected by the Court, which held that the power to make it was supported by the wide words of s 260(2) which is the progenitor of s 233(1). Although the reasons of the primary judge appeared to rely upon s 260(2)(g) as the foundation for the orders made, the Court of Appeal held that he, in fact, relied upon the broader power in the section's chapeau. At 696 [142] Spigelman CJ observed that the primary judge proceeded "on the basis that an order permitting Fexuto to bring proceedings for account on behalf of the company had been made, with a view to the court granting the order in the same proceedings". In effect, the primary judge utilised the broad power in s 260(2) to make orders based on the fiction that an antecedent order had been made permitting the plaintiffs to bring a derivative action on behalf of the company and that it had been successful.
71 Spigelman CJ further held that, "it would have been absurd for [the primary judge], after hearing the entirety of the case in this respect, to have ended only with an order authorising Fexuto to bring proceedings in the future". The words emphasised (although not in the original text) demonstrate that the issues of whether some of the directors had breached their fiduciary duty to the company, or whether third parties had been knowingly concerned in that breach, had been fully agitated and that all relevant interests were parties to the oppression action.
72 The Chief Justice continued and added (at 696 [143] - [144]):
[143] His Honour [the primary judge] went on to refer to the introductory words at s 260(2), as quoted above, to the effect that the court is empowered to make "such order or orders as it thinks fit". His Honour said that he agreed with the approach that the amendments to s 260 had been designed to ensure that the court was invested with plenary power to deal with all kinds of oppression with whatever weapons seem just and equitable. I agree with his Honour in this regard and also with the reasons of Priestley JA to similar effect. Once his Honour had formed the opinion for which s 260(2)(a) provides, then an order for an account of profits in the two respects which his Honour identified was both permissible and appropriate.
[144] In my opinion, in the circumstances of this case, the order is supported by the introductory words of s 260(2): "such order . . . as it thinks fit".
73 It is, with respect, difficult to conclude that the Chief Justice did other than accept that the primary judge had utilised the broad power in the chapeau of s 260(2) to make the orders which he did, which were not inappropriate in the circumstances of the case where all relevant parties were before the court and all appropriate issues were raised and ventilated.
74 Priestley JA was prepared to give s 260 a wide interpretation and held that it allowed a shareholder to make a claim for breach of fiduciary duty within the scope of an oppression action. He held (at 763 [528]) that it authorised two things. First, to permit a member to carry on the equivalent of a derivative proceeding either within or concurrently with an oppression case. That was authorised by the opening words of s 260 or by sub-paragraph (2)(g). He then said that sub-paragraph (2)(e) gives the court power to order the purchase of shares and to state the manner in which they are to be valued, including by taking "into account the consequences of the breaches of fiduciary obligation established in the proceedings". Here, his Honour was considering the "equivalent of a derivative proceeding" rather than the prosecution of an actual derivative action which necessarily would have involved the making of an additional claim. However, some inconsistency arises by his reference to carrying it on "either within or concurrently with an oppression case". Mr Dunning KC submitted that those words indicated that his Honour had in mind that a separate action could be undertaken or the proceedings could be pursued within the oppression claim itself. If that is a correct interpretation of Priestley JA's reasoning, it is apparent from the preceding discussion that it was not acquiesced in by Spigelman CJ, even though the Chief Justice reached a similar outcome.
75 There is some doubt as to the precise ratio of Fexuto. As the subsequent authorities make clear, it is unlikely that s 260(2)(g), or now s 233(1)(g), could be used to authorise the commencement of derivative proceedings prior to satisfaction of the conditions of s 232. For a similar reason, the generally expressed power in the chapeau of s 233(1) does not provide the power either. It is axiomatic that none of the powers in s 233 are enlivened until the oppressive conduct is established, with the result that it is difficult to envisage how they might be used to authorise the carrying on of a derivate action concurrently with oppression proceedings. The consequence is that the circumstances which existed in Fexuto would infrequently arise in relation to parties against whom it is alleged were knowingly concerned in a breach of a director's duty.
76 Some much needed clarity on this issue has been provided by the erudite analysis of McMurdo J in LPD Holdings v Phillips. There, the shareholder brought oppression proceedings naming certain of the directors as the first defendants and claiming that their conduct had caused it loss and damage, including a diminution in the value of its shareholding. The allegations of improper conduct were broad, but included alleged oppressive conduct which also amounted to breaches by the directors of their duties owed to the company under the Act as well as breaches of fiduciary duties. The plaintiff sought relief which required the directors to pay to him a portion of the value of the damage caused to the company. The directors sought to strike out those claims on the basis that they were bad in law because the causes of action on which the plaintiff relied were vested in the company. They submitted that s 233 was not sufficiently wide to enable a court to make an order that they, as directors, make a payment of compensation to a shareholder and that, if the claims for breach of duty were available, they should be pursued pursuant to a derivative action under s 237. It was submitted that the requirements of ss 236 and 237 should not be bypassed by allowing derivative actions to be pursued under s 233.
77 McMurdo J initially observed (at 236 - 237 [40]) that the power to make orders under s 233 was conditioned on the demonstration of grounds under s 232, which is, or should be, wholly uncontroversial. He also noted that there will be many occasions on which the alleged conduct, if established, will justify the making of an order under that section and will also constitute a breach of a director's duty. In such cases there was potential for the operation of both ss 233 and 236, and the scope of the former would be unduly restricted were the applicant to be confined to pursuing a derivative action under the latter. Nevertheless, he held (at 237 [43]) that the presence of ss 236 and 237, which specifically provide for a prosecution in the company's name, could be relevant to the exercise of the Court's discretion under s 233 in some cases.
78 His Honour recognised that the directors' conduct in question in Fexuto had the dual character referred to, and that the Court there held that relief in the nature of an account of profits from those directors in respect of their breach of fiduciary duty could be granted under the equivalent of what is now s 233 of the Act which was specifically intended to outflank the rule in Foss v Harbottle. He referred to several authorities supporting the proposition that the Court's wide powers in oppression proceedings permitted the making of orders that directors, who were parties to the proceedings, pay damages directly to the company in respect of any damage caused: Atlasview Ltd v Brightview Ltd [2004] BCC 542. However, he also observed, that no such order should be made unless two matters were satisfied. First, that any such order would correspond with that to which the company would have been entitled had the allegations in question been successfully prosecuted in an action by it (or in a derivative action in its name); and, secondly, that no claim for compensation should be permitted in such cases "unless it is clear at the pleading stage that a determination of the amount, if any, of the director's liability at law to the company can conveniently be dealt with in the hearing of the [oppression claim]": Re Chime Corporation Ltd (2004) 7 HKCFAR 546 at [62]. It was also suggested that the making of such orders should be "rare and exceptional".
79 McMurdo J referred also to the decision of the Privy Council in Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] 4 All ER 164, 172, where it was held that a court's powers in an oppression action (in the form of s 233) were sufficiently broad to allow for the making of orders for a payment of damages to the company by a person who has caused it loss, so long as the persons against whom the order was to be made was a party to the action. The Privy Council's opinion was applied in Campbell v Backoffıce Investments Pty Ltd (2008) 66 ACSR 359, 387 [122] where it was held that the power in s 232 to make any order under s 233 if one of the several alternative requirements were met, indicated a precondition to the exercise of the power and the purpose for which the order was to be made, namely to bring about an end to the oppression. Basten JA (at 403 [199]) expressly identified that the wide powers in s 232 should not be used to subvert the established constraints on the availability of derivative actions, but likewise the fact that the conduct in question is actionable by the company does not preclude relief under s 233. These conclusions in the decision of the New South Wales Court of Appeal were not upset on appeal.
80 McMurdo J concluded (at 240 [51]) that to allow for the possibility in some cases of compensation being paid to the company in the context of an oppression action would not negate the efficacy of ss 236 and 237. The relief under s 233 is only available where the applicant has established the existence of oppressive conduct. Moreover, it is discretionary and the authorities provide that an order for payment of compensation should be refused if the appropriate or more appropriate course is for an action on behalf of the company to be pursued in reliance on s 237. He also held (at 240 - 241 [52]) that the proceedings in s 232 are not proceedings brought on behalf of a company and nor do they become so merely because the nature of the relief granted benefits the company directly. They are proceedings which prosecute a cause of action belonging to the company, but are brought in reliance on the grounds in s 232 and the discretionary relief which might be granted must relate to those demonstrated grounds. Merely because the relief may correspond with that which the company might achieve against its director does not mean that the action is brought on behalf of the company.
81 Importantly, he held (at 241 [53]) that whether relief in the nature of an order that a person pay money to the company will be made in a particular case:
… will depend upon the connection or otherwise between that relief and the ground or grounds for the claim, as well as a wide range of discretionary considerations affected by the circumstances of the particular case, such as the need for or desirability of an extensive litigation of a company's entitlement to compensation within proceedings under Pt 2F.1 where there might be other appropriate relief, including an order under s 233(1)(f).
82 The above observations of McMurdo J appear to have been accepted by Parker J in Blong Ume Nominees Pty Ltd v Semweb Nominees Pty Ltd (2017) 123 ACSR 19, 28 [56]; by Black J in Re JGS Investment Holdings Pty Ltd (2014) 32 ACLC 14-063 809 - 810 [18] - [20] and Taxa Australia Pty Ltd v Wang [2016] NSWSC 1913 [23]; and by K Martin J in Trafalgar West Investments Pty Ltd v Superior Lawns Australia Pty Ltd (No 7) (2015) 107 ACSR 575.
83 Fexuto cannot be taken to stand for the proposition that ss 232 and 233 permits any claim against a third party which is in some way connected to the allegations in an oppression action, to be pursued as part of that action. Such a proposition was said to be derived from the judgment of Priestley JA although his Honour's reasons (at [526] - [528]) should not be understood as being so wide. In Fexuto the relief, which was essentially the same as might be obtained in a derivative action, was sought from entities who were already parties to the action and, as Spigelman CJ observed, all of the issues relevant to the claim had been ventilated at the trial. There is, with respect, nothing in Priestley JA's reasons which suggests that the then s 260 could provide relief against entities which were not proper parties. Even if Priestley JA's reasons could be given the wider construction, there is nothing in the judgments of Spigelman CJ or Fitzgerald JA which indicates any concurrence with them.
84 In this context it is not irrelevant to return to the undeniable proposition that the powers in s 233 are exercisable only after one of the matters in s 232 has been established. Prior to then and the favourable exercise of the Court's discretion under s 233(1)(g), there is no claim against a third party who is not otherwise a proper party to the oppression proceeding. Whatever be the width of s 233, it does not extend to making an entity a party to a proceeding in which there is no existing cause of action against them where all that is said is that, if oppressive conduct is established, an order might be made requiring them to make a payment to the company in respect of which the oppression claim is brought.
85 This is consistent with the observations of Parker J in McMillan v Coolah Home Base Pty Ltd (No 4) [2022] NSWSC 584 [458] where his Honour observed:
[458] Examples of orders addressed to a single oppressive transaction are orders under s 233(1)(f) and (g) for the company, or a member of the company in its name and on its behalf, to bring specified proceedings. The power to make orders of this type in cases of oppression pre-dates the statutory derivative action regime (CA ss 236-242), and must now be exercised with an eye to the restrictions on the court's power to authorise such derivative actions: Campbell v BackOffice Investments Pty Ltd [2008] NSWCA 95 at [199] per Basten JA. But orders for the bringing of proceedings by or on behalf of the company can still be made in proper cases. Also, if satisfied that a party to the proceedings is liable to the company, the court can make a direct order for an account or compensation in the company's favour: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97 at [138], [527]-[528], [698]; LPD Holdings (Aust) Pty Ltd v Phillips (2013) 281 FLR 227 at [44]-[53].
(Emphasis added).
86 The observation in the last sentence accurately reflects McMurdo J's conclusions. There is nothing to suggest that s 233 has any wider operation. It is directed at the conduct of the affairs of the company, actual or proposed acts or omissions by the company, or resolutions or proposed resolutions of members or a class thereof. A third party who is not involved in the affairs of the company or the shareholders and who commits an actionable wrong against the company obviously does not fall within the scope of s 233.
87 A similar conclusion can be inferentially drawn from the decision of Rees J in Re Ter Wisscha Holdings Pty Ltd [2021] NSWSC 1447 [44], where, on an application under s 237, her Honour noted that all of the claims sought to be pursued against entities who were otherwise parties to the oppression action could be brought within the scope of that action with the result that the application was refused.
88 It must necessarily be recognised that what was, in fact, decided in Fexuto was relatively narrow; being that those directors who engaged in oppressive conduct who simultaneously breached their fiduciary duty could be held liable to the company for the profits they gained or for the loss they caused. In that case the issues relevant to the breach of fiduciary duty were intertwined in the oppression claims and all relevant persons were parties to the action. The wide power in s 260(2) (now 233(1)) was sufficient (once the oppressive conduct had been established) to provide appropriate relief in the circumstances. Fexuto does not suggest, contrary to the So interests' submission, that prior to any finding of oppression, an order may be made under s 233(1) permitting a claim to be advanced against a third party who is not a proper party to a claim that one of the circumstances in s 232 are satisfied. The Court was not taken to any order made in the Fexuto litigation which suggested to the contrary.