Cooke & Ors v Denovan & Ors [2023] QSC 93

JHK Legal for the first and second plaintiffs/applicants

Woods Prince Lawyers for the first and third defendants/respondents

Sparke Helmore Lawyers for Snap Fire Systems Pty Ltd

[1] Richard Cooke and Loren Cooke (the Cookes) apply under s 237 of the Corporations Act 2001 (Cth) for leave to bring claims in the name of Snap Fire Systems Pty Ltd (Snap). The application is opposed on the basis that it is not in the best interests of Snap for leave to be granted to bring derivative proceedings.

[2] The background to the application was summarised by Mr Shaw in his submissions in the following way:

(a) Snap operates a business of manufacturing and selling fire collars and associated products to the construction industry;

(b) the business is operated through Snap as the operating entity with an intellectual property holding unit trust (the Trust) of which the fifth defendant (IG6) is the trustee;

(c) the Cookes own shares in Snap and IG6 and units in the Trust;

(d) the first and third defendants (Mr Denovan and Mr Vardy) are directors of Snap and IG6 and, through entities or persons related to them, hold shares in Snap and IG6 and units in the Trust;

(e) Mr Cooke is not presently involved in the management or operations of the business; and

(f) the Cookes make complaints about various aspects of the management of the Snap business and seek to resolve these complaints through these proceedings.

[3] In addition to those matters, there are the following relevant items:

(a) the relationship between the Cookes and the other shareholders has been the subject of dispute and disagreement since about July 2014 when Mr Cooke's employment was terminated by Snap; and

(b) soon after Mr Cooke's employment ended, he and his wife expressed a desire to dispose of their shareholding in Snap and IG6.

[4] A claim and statement of claim was filed on the 9th of December 2022. In it, relief is sought by the Cookes against various defendants but the claims which the Cookes wish to bring on behalf of Snap are in two parts.

[5] The first is contained in paragraphs 35-50 of the statement of claim under the heading "Dilution of interests in the Trust and transfer of assets".

[6] This part of the statement of claim relates to the transfer of certain assets from Snap to IG6 (the Asset Transfers). In brief, the Cookes claim that Mr Denovan and Mr Vardy caused IG6 to undertake a capital raising of $1,110,000 which had the result of diluting the Cookes' interest from one-third to less than 1%. It is alleged that the capital raising was based on a significant under-value of the assets of the Trust. It is alleged that Mr Denovan and Mr Vardy used the capital to purchase assets owned by Snap where such sales were for less than their true worth and that the assets were then leased or licenced back to Snap for more than a reasonable rental or licence fee. It is alleged that the transactions were undertaken with the intention of transferring the capital value of the business to the Trust while, at the same time, diluting the holdings of the Cookes in the Trust to a negligible amount.

[7] The second aspect of the statement of claim for which leave is needed is in paragraph 51-57 which concern transactions involving Snap and Devar International Holdings Pty Ltd (Devar). Devar is an entity incorporated by Mr Denovan and Mr Vardy in September 2015 and of which they are both directors and shareholders. It is alleged that:

(a) since 2016 Mr Denovan and Mr Vardy have caused Snap to sell its products to Devar and Devar has then sold them overseas at a profit;

(b) the supply of products from Snap to Devar have been at or below cost in some instances;

(c) Mr Denovan and Mr Vardy also caused Snap and Devar to enter into a service agreement whereby Snap would operate the business of Devar for a fee which was substantially less than the cost to provide those services; and

(d) Mr Denovan and Mr Vardy took those actions with the intention of depriving Snap of the opportunity to make a profit. (the Devar Transactions)

[8] Various forms of relief are sought in the statement of claim, including:

(a) damages for breach of contract by Mr Denovan and an associated company;

(b) various declarations concerning Mr Denovan and Mr Vardy and breaches of director's duties, equitable damages, an account of profits and so on;

(c) as against IG6, declarations as to breach of duties as trustee and other relief;

(d) a declaration that the issue of units in the IG6 IP Trust is void; and

(e) orders under s 233 of the Corporations Act that the shares held by the Cookes in Snap and IG6 and their holdings in the IG6 IP Trust be purchased on terms to be determined by the court or that damages be paid or that Snap and IG6 be wound up.

[9] Section 236 of the Corporations Act provides that a person may bring proceedings on behalf of a company if, amongst other things, the person is:

(a) a member of the company, and

(b) is acting with leave granted under s 237.

[11] Section 237(1) provides that a person may apply to the court for leave to bring proceedings. Section 237(2) provides that the court must grant the application if it is satisfied that:

(a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and

(b) the applicant is acting in good faith; and

(c) it is in the best interests of the company that the applicant be granted leave; and

(d) if the applicant is applying for leave to bring proceedings-there is a serious question to be tried; and

(e) either:

(i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or

(ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied.

[12] The action for which leave is sought has been commenced but leave may be granted nunc pro tunc.[1]

[13] The issue upon which the application was contested was whether or not it was in the best interests of Snap that the Cookes be granted the requisite leave.

[14] The argument for the Cookes was on these lines:

(a) the claims sought to be brought are "strong" and on their face have the potential to result in a substantial monetary award in favour of Snap;

(b) the allegations made are relied upon to support an oppression action (which is contained in paragraphs 95-101 of the statement of claim) and will, therefore, be litigated in any event; and

(c) the claims will be pursued at no cost to Snap as the litigation will be funded by the Cookes and they will indemnify Snap for any adverse costs order.

[15] The only criterion which was the subject of debate was the requirement that the proposed action be in the best interests of the company.

[16] Mr Denovan and Mr Vardy provided evidence which shows that there is a reasonably based debate between the two parties as to the facts underlying the two areas upon which a claim is sought to be made - the asset transfer and the Devar arrangements.

[17] In order to obtain leave an applicant must do more than merely show "a prima facie indication" that the proposed proceeding is in the best interests of the company.[2] Further, the text of s 237(2)(c) requires that the court be satisfied that the proposed action actually is in the company's best interests and not merely that it may be or appears to be or is likely to be in the company's best interests.[3]

[18] Matters which need to be taken into account when considering whether a grant of leave is in the best interests of the company will usually include:

(a) the costs of the proposed proceeding;

(b) the prospects of success of the proceeding;

(c) the likely recovery of the proceeding if successful; and

(d) the likely effect of the proceeding on the company.[4]

[19] Another matter which will ordinarily need to be taken into account is whether or not the party applying for leave has another way of obtaining the same relief. That does not mean identical relief but it does require consideration of whether or not redress which needs to substantially the same kind of circumstances exists. In Swansson v Pratt,[5] Palmer J said:

"[59] ...there should be evidence enabling the Court to form a conclusion whether the substance of the redress which the applicant seeks to achieve is available by a means which does not require the company to be brought into litigation against its will. So, for example, if the applicant can achieve the desired result in proceedings in his or her own name it is not in the best interests of the company to be involved in litigation at all."

[20] If a similar result can be obtained by other means, then that is an important consideration on an application such as this. It is not, though, conclusive as to whether or not the proceeding is in a company's best interests. It is of importance in this case because, on a reasonable reading of the statement of claim and the other material provided, the dispute sought to be advanced is one between shareholders. Another means of obtaining a similar result is through the existing oppression proceeding pleaded in the statement of claim.

[21] Paragraphs 95 to 101 plead the oppression action on behalf of the Cookes. In the pleading, it is alleged that Mr Denovan and Mr Vardy used their position as directors of Snap and IG6 to take action resulting in the exclusion of Mr Cooke from the management of Snap and the dilution of the Cookes holdings in the Trust to be diminished as well as causing the value of Snap to be diminished. The oppression allegations made are based (in large part) upon the pleading which precedes paragraph 95. The allegations which go to make up the Asset Transfers and the Devar Transactions claims are the two areas upon which leave is sought to proceed on behalf of Snap. In other words, in order for the Cookes to maintain their oppression action they will, on the basis of their own pleading, have to agitate the matters pleaded and referred to as the Asset Transfers and the Devar Transactions.

[22] In Hassall v Speedy Gantry Hire Pty Ltd,[6] Moynihan SJA dealt with the situation where, as his Honour described it, "large segments of the proposed statement of claim are lifted from the pleadings in the oppression action". In that case, there already was an oppression action on foot and leave was being sought to commence a new action on behalf of the company. His Honour held that the claims advanced in the proposed derivative action could be litigated in the oppression proceedings. This was so because the claims advanced in the proposed derivative action were based on allegations of breach of fiduciary duties, among other things. He said at paragraph [10]:

"If a buy out order is made in the oppression action the shares can be valued so as to take into account the consequences of the breach of fiduciary duties."

[23] The same applies in this case. It is not in the company's interests to be engaged in litigation in circumstances where the relief which is being sought by the applicants under s 237 can be obtained by other means. It is not in the interests of the company to be engaged in proceedings which are founded essentially on the same complaints as those which will be pursued in the part of the statement of claim alleging oppression. As in Hassall v Speedy Gantry Pty Ltd, it has not been satisfactorily demonstrated that the relief available in the oppression proceeding will not be adequate.

[24] I am not satisfied that it is in the best interests of Snap that leave be granted. The application is dismissed.

[1] McLean v Lake Como Venture Pty Ltd [2003] QCA 562; [2004] 2 Qd R 280.

[2] Re: Wan Ze Property Development (Aust) Pty Ltd [2012] NSWSC 722; (2012) 90 ACSR 593. Part of this decision overturned on appeal (Ke Qin Ren v Hong Jiang; Yi Cheng Jiang v Wan Ze Property Development (Aust) Pty Ltd (in liq) [2014] NSWCA 388), but no challenge was made on appeal with respect to the judgment on derivative proceedings (at para 19).

[3] Fiduciary Ltd & Ors v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732.

[4] Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432.

[5] [2002] NSWSC 583; (2002) 42 ACSR 313.

[6] [2001] QSC 327.