Best interests of the company
108 In Swansson, Palmer J was not satisfied that the plaintiff was acting in good faith in seeking leave to bring the proposed derivative action. Even so, his Honour considered whether it was in the best interests of the company that leave be granted. At [55] - [56], Palmer J stated:
[55] At the outset, it is important to note that s 237(2)(c) requires the Court to be satisfied, not that the proposed derivative action may be, appears to be, or is likely to be, in the best interests of the company but, rather, that it is in its best interests. In this respect, s 237(2) differs significantly from its counterpart in the Canadian legislation, which requires the Court to be satisfied that the proposed derivative action "appears to be" in the interests of the company, and from s 165(3) of the New Zealand Act which requires that the Court "have regard to ... the interests of the company". These provisions seem to have led the Courts of those countries to the view that the best interests of a company need be considered only in a prima facie way: see e.g. Re Bellman and Western Approaches Ltd (1981) 130 DLR (3d) 193 at 201; Vrij v Boyle (1995) 3 NZLR 763 at 765; Techflow New Zealand Ltd v Techflow Pty Ltd (1996) 7 NZCLC 261 at 138.
[56] The requirement of s 237(2)(c) that the applicant satisfy the Court that the proposed action is in the best interests of the company is a far higher threshold for an applicant to cross. It requires the applicant to establish, on the balance of probabilities, a fact which can only be determined by taking into account all of the relevant circumstances.
(Original emphasis.)
109 In Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31 (Charlton) at [46], Barrett J said:
The expression "best interests", taken literally, is apt to create a false impression that some absolute or superlative is in contemplation. Its true meaning emerges from a consideration of other contexts in which it is used.
110 At [52], Barrett J concluded:
"Best interests" is thus an expression concerned with a person's separate and independent welfare. Where the concern to which the "best interests" assessment is relevant centres upon possibilities of undue influence and, perhaps, improper purpose, the task is to consider what the putative victim would have done in seeking to protect his or her own position and promote his or her own advantages with such a degree of selfishness as the circumstances will admit.
111 Thus, in this case it is relevant to consider what the company would have done in seeking to protect and its own position and promote its own advantages.
112 In Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732 at [44], Austin J set out the following explanation of the "best interests of the company" criterion in the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 (Cth):
6.38 This criterion would allow the Court to focus on the true nature and purpose of the proceedings. It would recognise that a company might have sound business reasons for not pursuing a cause of action open to it and that its management might legitimately have decided that the best interests of the company would be served by not taking action. For example, a decision may be taken in a case where, although it may be clear that there has been a breach of duty by a director, the loss to the company may only be nominal. In this case, the costs of taking proceedings may outweigh any benefit to the company.
6.39 The inclusion of this criterion would allow the Court to refuse to grant leave in these circumstances because the applicant for leave would not be able to show that to do so would be in the best interests of the company.
113 Counsel for the defendants, Mr Knoll, emphasised the importance of considering the purpose of the proposed derivative action, which he referred to as the "end game".
114 At [47], Austin J said:
It seems to me that, where the company in question is a joint-venture vehicle and one of the venturers alleges that the other has acted unlawfully causing the company loss, it will usually be appropriate to allow the complaining venturer to bring proceedings in the company's name against the other venturer and its representatives on the board, even though there are no other shareholding interests than those of the litigants and the effect of success of the litigation will be indirectly to benefit the complaining venturer proportionately to its shareholding.
115 At [51], Austin J also observed that:
[T]here is a balance to be struck between the prejudice that the company will suffer if claims are pressed unsuccessfully on its behalf and there is an adverse costs order, and the advantage that it will gain, indirectly for the benefit of its shareholders, if the claims are successful.
116 In Chahwan v Euphoric Pty Ltd t/as Clay & Michel [2008] NSWCA 52; (2008) 65 ACSR 661 (Chahwan), Tobias JA with Beazley P and Bell JA agreeing, at [89] implicitly accepted that the existence in an applicant of a personal interest in the outcome of a proposed derivative action cannot be significant let alone decisive as few if any actions would be brought but for the personal interest on the part of the relevant applicant in doing so, citing Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 at [44]. Tobias JA found that the personal interest of the relevant applicant was of a different character. The proposed derivative action sought declarations that the company held properties on trust for the applicant. In that case, it was obvious that the proceeding was designed to secure the interests of the applicant rather than to advance the "separate and independent welfare" of the company.
117 In McEvoy v Caplan [2010] NSWCA 115; (2010) 78 ACSR 167 (McEvoy), the Court of Appeal dismissed as incompetent an appeal and refused leave to appeal from a refusal of leave under s 237. Macfarlan JA (Allsop P and Beazley JA agreeing) concluded that Barrett J was correct in refusing the application on the basis that, if leave had been granted, the plaintiff would have had inconsistent roles to play in the relevant litigation, described by Barrett J as "positive duties in direct collision". Barrett J concluded that the creation of that situation would not be in the best interests of the relevant companies.
118 In Macralink Pty Ltd & Saristavros v Saris [2011] VSC 665 (Macralink), Ferguson J refused an application for leave to proceed, not being satisfied that it was in the best interests of the company (RHD) to bring a claim for unpaid present entitlements. The Court noted that RHD was a family company and that only one of its two shareholders was of the view that the company should demand payment (by another family company, Poseidon) and sue it if it failed to pay. The Court found that RHD "may very well be acting properly by not requiring that [the alleged debtor] immediately make payment to it", and that it was not clear that the proposed claim ought to be brought where there had been a long standing arrangement that Poseidon could retain certain amounts as working capital, Poseidon did not have the funds immediately available to pay and Ms Saristavros (one of the proposed plaintiffs) would not permit it to borrow to do so.
119 In Macralink at [36], Ferguson J applied reasoning similar to that in McEvoy. His Honour noted that Ms Saristavros would be in a difficult position because as a director of RHD, she would be obliged to cause RHD to argue that the earlier arrangement was no obstacle to demanding immediate payment as a director of Poseidon, she should would be duty bound to investigate whether it had a plausible defence to RHD's claim.
120 In Re Gladstone at [57], Ball J stated:
The requirement that the court be satisfied that it is in the best interests of the company that the applicant be granted leave raises two questions. One is whether it is in the best interests of the company that the action be brought. The other is whether it is in the best interests of the company that it be brought by the applicant. The court must consider the interests of the company as a whole. As Brereton J said in Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 at [44]:
The phrase "best interests" directs attention to the company's separate and independent welfare [Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31 at [52]]; [Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732 at [46]]. This imports the familiar concept of the interests of the company as a whole. ... Whether the "best interests" of the company as a whole reflect those of the shareholders taken together in light of the corporate objects, or those of the creditors which will prevail in the context of insolvency, will be influenced by the status of the company [Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1]; [Spies v R [2000] HCA 43; (2000) 201 CLR 603]; [Charlton at [53]].
In considering what is in the best interests of the company, it is necessary to consider the prospects of success of the action, the likely costs and likely recovery if the action is successful and likely consequences if it is not. One relevant matter in considering these issues is the nature of any indemnity the applicant has offered to the company if the action is brought and the likelihood that the company will recover under that indemnity. It is also necessary to consider the resources the company will be required to devote to the action and the resources it has available, together with the effect that the action may have on other aspects of its business. Finally, it is necessary to consider whether some other remedy is available to the applicant so as to make the proposed action unnecessary from its point of view: see Swansson at [56] and following.
121 Ball J's identification of the matters necessary to consider was approved by Bathurst CJ in Huang v Wang [2016] NSWCA 164; (2016) 114 ACSR 586 (Huang) at [38] and [67].
122 In Huang, Bathurst CJ also said (at [57]-[59]):
[57] … In Swansson, Palmer J at [24] stated that leave should not be given lightly. He stated that the requirement of best interests requires the applicant to establish on the balance of probabilities that the action is in the best interests of the company, a fact which can only be determined by taking into account all relevant circumstances. That approach has been followed consistently: [Goozee v Graphic World Group Holdings Ltd [2002] NSWSC 640; 42 ACSR 534 at [72]]; [Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; 53 ACSR 732 at [46]]; [Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 1007; 51 ACSR 299 at [19]]; [Chahwan at [85]].
[58] It is correct that these cases were decided at a time when it was considered that proceedings under s 237 of the Act were final in nature, a view held to be incorrect in McEvoy at [4] per Macfarlan JA, Allsop P and Beazley JA agreeing. In my opinion, that does not alter the requirement that an applicant satisfy the court on the balance of probabilities that the proceedings are in the best interests of the company. That is consistent with the words of s 237(2)(c) and recognises the serious nature of an order requiring a company to bring proceedings which it is unwilling to take itself.
[59] The appellants were correct in submitting that the best interests of the company means best interests in the sense of its separate and independent welfare: Chahwan at [88]. Best interests, at least assuming the company concerned is solvent, will predominantly reflect the interests of shareholders in that capacity: Charlton at [52].