Even in the absence of such an undertaking, s 242 of the Corporations Act would empower the Court hearing the derivative action to make an order requiring Denis to indemnify the Company against any adverse costs order.
74 Denis' evidence establishes that his siblings, John Cassegrain, Patrick Cassegrain and Catherine Dunn, and his nephew, James Dunn, have agreed to assist him financially in pursuing the leave proceedings and, should leave be granted, the derivative proceedings in the Company's name. The siblings are parties (along with Denis) to a costs agreement with Denis' solicitors. The arrangement is that each will contribute equally to the costs of the proceedings, with the intent that costs will be paid as and when they fall due. I accept that, if leave is granted to Denis to maintain the derivative proceedings in the name of the Company, the costs incurred by the Company in conducting the proceedings will be met by Denis with the assistance of his siblings.
75 Denis gave uncontradicted evidence that, although he could not fund both the derivative proceedings entirely on his own, he has unencumbered assets substantially exceeding $1 million in value, including $280,000 on deposit. I find that if Denis is given leave to bring proceedings in the Company's name, the indemnity he has proffered will adequately protect the Company against the risk of an adverse costs order, should the derivative proceedings fail. The form of the indemnity is appropriate to prevent Denis having recourse to the Company's funds to reimburse him for any portion of the costs incurred by him on the Company's behalf.
76 In making this finding, I have taken into account that Denis himself will incur a liability to pay costs under the agreement with his solicitors and that his assets will be reduced to the extent of the liability. I have also taken into account the estimate given by Mr Patakas, the Company's solicitor, that the parties to the derivative proceedings are likely to incur costs amounting, in all, to some $2.5 million. As Mr Patakas recognised in his evidence however, estimating the costs of future proceedings is not a precise exercise and depends to a considerable extent on the issues in dispute and the way in which the parties conduct the litigation. In my view, Mr Patakas' estimate that Claude and Felicity, if successful in the derivative proceedings, would be entitled to recover about $1 million in costs from the Company, is likely to be a significant overestimate. It seems to me that the evidentiary issues in the derivative proceedings, should they proceed, are likely to be more confined than they were in the oppression proceedings. On the evidence before me, Denis' proffered indemnity is likely to be adequate to protect the Company against any adverse costs order made against it in the derivative proceedings.
Best Interests of the Company
77 Section 237(2)(c) of the Corporations Act requires this Court to be satisfied that the proposed derivative action is in the best interests of the Company. As Palmer J pointed out in Swansson v RA Pratt Properties Pty Ltd at [55] this provision imposes a far higher threshold requirement than a test which merely requires that the proposed derivative action appear to be in the interests of the company concerned: see Chahwan v Euphoric Pty Ltd [2008] NSWCA 52 at [85] per Tobias JA, approving Palmer J's comments.
78 The expression 'best interests' is concerned with the Company's 'separate and independent welfare': Charlton v Baber at [52] per Barrett J; Chahwan v Euphoric Pty Ltd at [88] per Tobias JA. In Charlton v Baber, Barrett J interpreted the best interests of a company in liquidation as reflecting the interests of its creditors: at [53].
79 The New South Wales Court of Appeal has now held (albeit by way of dicta) that Pt 2F.1A of the Corporations Act does not apply to a company in liquidation: Chahwan v Euphoric Pty Ltd at [122], [124]. Nonetheless, the expression 'best interests of the company' imports the 'familiar concept of the interests of the company as a whole': Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859 at [44] per Brereton J; Chahwan v Euphoric Pty Ltd at [88]. This concept, in turn, is capable of embracing both the interests of the shareholders and the creditors of the company: Walker v Wimborne (1976) 137 CLR 1 at 6-7 per Mason J (with whom Barwick CJ agreed); Chahwan v Euphoric Pty Ltd at [89]; cf Spies v R (2000) 201 CLR 603 at [93]-[95] per Gaudron, McHugh, Gummow and Hayne JJ.
80 The Company submits that Denis has not demonstrated that if the transactions he wishes to impeach are reversed, the Company will be in a better commercial position than at present. It argues that the evidence has not established that the Company's solvency will be assured, having regard to its liability for CGT, even if the dairy farm is retransferred and Claude is required to repay his drawings from the loan account.
81 The evidence as to the Company's true financial position is incomplete. As I have noted, the latest financial statements prepared for the Company appear to be those incorporated in the Special Purpose Financial Report prepared in respect of the year ended 30 June 2005 for use by directors and members of the Company. The report records that as at 30 June 2005 the Company was not trading (it having come out of receivership on 31 December 2004) and that its principal activity was 'running the appeal against the Commissioner of Taxation in the Federal Court'.
82 Neither party adduced any expert evidence as to the Company's true financial position. Denis gave evidence that he had formed the view that because of the Company's likely CGT liability, and because it had sold shares in a related company (CaTTO) at what he considered to be an undervalue, the Company faced the prospect of being placed in liquidation. However, his oral evidence suggested that he did not have a good grasp of the Company's prospects in relation to its appeal against the CGT assessment and that he had made no detailed enquiries as to the Company's true financial position. No claims relating to the CaTTO sale have been incorporated in the proposed derivative proceedings, although Denis claimed that he was still considering whether to take any action in relation to that sale.
83 In the absence of more detailed evidence, it is difficult to know what to make of the Company's financial accounts. There is a recorded deficiency in the balance sheet of $9,614,268. However, this is largely accounted for by a non-current liability of $9,374,239 to a wholly owned subsidiary, Clos Farming Estates Pty Ltd ('Clos'). The balance sheet values the Company's shares in Clos at only $2, apparently because the accounts were prepared on the basis of historical cost. I was not taken to any evidence as to Clos' financial position, so I am unable to make any finding as to the true value of the Company's investment in Clos.
84 The deficiency recorded in the balance sheet also includes the sum of $2,249,786 said to be due by the Company to Claude under his loan account. If the foreshadowed derivative proceedings are successful, the debt to Claude through his loan account will or may be expunged. On the other hand, the balance sheet does not record the Company's liability to the ATO, which stood at $3.84 million in October 2005.
85 The Company has not been placed in liquidation. It appears that the Company has not traded since it came out of receivership and that its only external creditor is the ATO. The precise amount of the Company's indebtedness to the ATO will depend on the outcome of the appeal against the objection decision that has been remitted to the AAT. Based on the comments of Lindgren J in his judgment on the appeal to the Federal Court from the original decision of the AAT, there may well be a reduction in the Company's liability, but it is likely to be only a relatively small reduction in percentage terms.
86 Clearly enough, if the proposed derivative action does not give rise to a serious question to be tried, it would be difficult to conclude that it is in the best interests of the Company to grant leave to Denis to bring proceedings in the name of the Company. However, it is appropriate to consider the best interests issue on the assumption that the derivative action does give rise to such a question. On this assumption, I am satisfied that it is in the best interests of the Company that Denis be granted leave to institute proceedings in the name of the Company. I reach that conclusion because, although there can never be certainty about the outcome of the derivative action, if the action is successful the Company's assets will increase substantially and its liabilities will decrease substantially.
87 The factors I have taken into account in reaching this conclusion include the following:
· the foreshadowed derivative action, if successful, will recoup some $2 million from Claude, with a realistic possibility that this sum will be augmented by an order that he pay interest and that he or Felicity account to the Company for any increase in the value of the dairy farm since the date of its transfer to them;