MATTER : Sections 232, 1317DB, 1317HD, 1317HE, 1324 and 1323 of the Corporations Law

BETWEEN : EASTLAND TECHNOLOGY AUSTRALIA PTY LTD (ACN 059 479 391)

SILVERFERN NOMINEES PTY LTD as Trustee of the Prestidge Family Trust (ACN 070 887 722)

Corporations - Management and administration - Director's duties and powers

Practice and procedure - Application for joinder of parties - Question of standing

Practice and procedure - Whether to order trial of preliminary issue

Practice and procedure - Application for summary judgment pursuant to Rules of the Supreme Court, O16 - Power to order summary judgment - Turns on own facts

Corporations Law, s 232, s 241 s 1317HD, s 1317DB, s 1317HE, s 1324 and s 1323

1 As to the questions ordered by Owen J to be argued at a special appointment, being:

(b) the validity of the arbitration clause in the settlement deed of 5 June 1999; and

(c) whether the parties can contract to avoid their statutory duties under s 232 of the Corporations Law

2 The respondents' applications for summary dismissal and trial of preliminary issue be dismissed

Airpeak Pty Ltd & Ors v Jetstream Aircraft Ltd & Anor (1997) 15 ACLC 715

Akerhielm v De Mare [1959] AC 789

Allen v Atalay (1994) 12 ACLC 7

Broken Hill Pty Ltd v Bell Resources Ltd (1984) 2 ACLC 157

Brooks v Burns Philp Trustee Co Ltd [1969] HCA 4; (1969) 121 CLR 432

Caltex Oil (Australia) Pty Ltd v Best & Anor [1990] HCA 53; (1990) 170 CLR 516

Emlen Pty Ltd & Anor v St Barbara Mines Ltd & Ors (1997) 15 ACLC 715

Eng Nee Yong v Letchumanan [1980] AC 331

Lieberman v Morris [1944] HCA 13; (1944) 69 CLR 69

Papaki Pty Ltd v Scott (1984) 2 ACLC 253

QIW Retailers Ltd v Davids Holdings Pty Ltd & Ors (No 2) (1992) 10 ACLC 1162

Re Price Mitchell Pty Ltd (1984) 2 ACLC 524

Webster v Lampard [1993] HCA 57; (1993) 177 CLR 598

1 WHEELER J: These are brief reasons for refusing, with some reluctance, the respondents' application for a determination of preliminary issue. In addition, I decline to answer certain questions stated by Owen J on an earlier occasion. The history of this matter is briefly as follows.

2 The applicant is the holder of certain patents for devices for administration of drugs and fluids to patients by injection ("the Eastland Devices"). Feezone Pty Ltd ("Feezone") and Intercontinental Corporation Pty Ltd ("Intercontinental") are shareholders in and creditors of Feezone. The first respondent is a former director of Eastland Technology Australia Pty Ltd ("Eastland"). The second respondent, Mr Prestidge, is a design draftsman. The third respondent Silverfern Nominees Pty Ltd ("Silverfern") is a company controlled by Mr Prestidge. Silverfern has provided design drafting services to Eastland.

3 In 1998, Dr Whisson and Mr Prestidge established a partnership "DiMed" and lodged patent applications for certain devices, which, broadly, are devices for injection which are so designed as to minimise the risk of needle-stick injuries ("the DiMed Devices").

4 Mr Sims, a director of Eastland believed that the DiMed Devices were the property of Eastland because they were "directly related to and devolved from" the Eastland Devices, as he put it. As a result, a dispute arose between Eastland on the one hand and Dr Whisson and Mr Prestidge on the other as to the ownership of the DiMed Devices. On the basis of the belief of Mr Sims and another director of Eastland, Eastland commenced action CIV 1333 of 1999 in this Court. By deed dated 5 June 1999 ("the settlement deed") the parties settled that action.

5 On 3 December 1999, Eastland commenced the current action claiming relief under s 232, s 1317HD, s 1317DB, s 1317HE, s 1324 and s 1323 of the Corporations Law.

6 On 21 December 1999, Owen J directed three threshold matters be determined at a special appointment, namely:

"(a) an application to join Feezone and Intercontinental as applicants in the current action;

(b) the validity of an arbitration clause in the settlement deed; and

(c) whether the parties can 'contract to avoid their statutory duties' under s 232 of the Corporations Law."

7 By chamber summons dated 24 February 2000, the respondent sought summary dismissal, alternatively directions and orders for the trial of a preliminary issue. That issue, broadly, is whether or not the settlement deed is of binding effect in the present circumstances so as to preclude the present applicants or Intercontinental or Feezone from bringing an action.

8 On 9 March, I heard lengthy argument directed to these applications. It became plain that the threshold questions were not happily framed, and I deal with them first. I deal with them briefly, for reasons which will shortly become clear.

9 The question of whether it is possible to contract so as to avoid the relevant statutory duties must plainly be answered in the negative. The real question seems to be whether by reason of s 241 of the Corporations Law the settlement deed is inoperative, so that it does not preclude the applicants bringing an action based on breach of s 232.

10 However, s 241 of the Corporations Law is but one of a number of reasons which the applicant puts forward as preventing the application of the deed of settlement in this case so as to preclude proceedings of this type. The principal reason is that it claims that the entry into of the settlement deed was procured by fraud or false representations on the part of the respondents. This claim is the one which the respondents seek to have summarily dismissed, even though I have before me only affidavit material in relation to this claim, with a number of conflicting allegations of facts. I should note also that the question of whether the alleged representation was false is intimately bound up with the question whether the DiMed and Eastland Devices were directly related to each other.

11 The applicant further asserts that the settlement deed does not extend to certain issues raised in this action, but not raised in the previous action, in respect of s 232(2) and s 232(4) of the Corporations Law. It is not sought to have me determine this issue. There is another issue which I will mention shortly.

12 As to the second question, the validity of the arbitration clause is not really in issue at all. The respondents appear to concede that it would not preclude the bringing of the present proceeding, or part of it, while the applicant, as I have noted, asserts that the whole of the deed is void in any event.

13 The question of joinder is subject to a dispute not only as to the merits but also as to what the question involves. An issue, which both parties assert is involved in that question, is whether Feezone and Intercontinental have standing to sue pursuant to s 1324 of the Corporations Law. The respondents appeared to me to concede that the issue at this stage was whether they arguably have standing; that is, they did not seek to have me finally determine that issue. Plainly, having regard to the conflicting observations in Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 14 ACLC 519, and a variety of cases which have since considered that decision, the question is an arguable one.

14 The respondents assert that this does not necessarily mean that the third question should be adversely to them, since they say that the jurisdiction pursant to s 1324 is a discretionary one, and that the court could only exercise its discretion to allow joinder if there was evidence of any impropriety in the decision by Eastland to enter into the settlement deed. It is plain from the voluminous affidavits filed in this matter that a number of factual disputes exist surrounding the entry into of the settlement deed and that not all the relevant factual circumstances are before me. It would, in my view, simply be inappropriate to purport to determine that a discretion could only be exercised in one way upon the incomplete and untested materials presently before me.

15 The questions posed by the respondents as to preliminary issues have the merit of dealing more comprehensively with most of the issues I have mentioned. However, it is suggested that in order to determine them I will need to hear evidence as to the question of whether there was reliance upon the alleged representation, and I will need to assume that there was in fact a false representation made. It may be possible to determine the question of reliance based upon the affidavit material and upon relatively brief cross-examination, but I doubt it. It appears to me that the question of whether there was reliance upon the representation is intimately bound up with the issue of whether the representation was false, and as to the relevant knowledge and understanding of the parties which would assist in indicating whether the applicant would have been likely to rely upon that representation. It seems to me more likely that any cross-examination which attempted to deal with this issue, would inevitably stray into the much more difficult and extensive area of the content of the alleged representation, whether it was in fact made, and its truth or otherwise.

16 On 31 March, after reserving decision in respect of these issues, I was asked to sit again so the parties could inform me of further developments. It appears that the respondents now allege that the applicant has not made certain payments due under the original licence agreement between Eastland and the respondents and that this failure to pay is a repudiation or breach of that agreement which entitles the respondents to terminate that agreement and require delivery up to them of the intellectual property in the Eastland Devices. The applicant takes the view that it is not in default and that the respondents are not entitled to terminate on that basis and further, they take the view that the purported termination has the effect of avoiding the settlement deed, a term of which was that the parties would abide by the licence agreement. It also appears from the correspondence of the parties, which has been placed before me, that they have differing positions in relation to the effect or intended effect upon the rights of the parties of the applications heard by me on 9 March.

17 I then had before me on 11 April, an application for an interlocutory injunction seeking to restrain the respondents from dealing with the intellectual property in the Eastland Devices and seeking leave for the parties to make further submissions in respect of the preliminary question issue. Fortunately, the parties were able to resolve the injunction question, at least in the short term, by offering each other mutual undertakings.

18 On 11 April, I suggested to the parties that there were real difficulties in dealing with the questions stated by Owen J, and that dealing with them would not in any event advance the matter very much further. I directed the parties to confer with a view to agreeing a preliminary question which would enable the best use to be made of the extensive argument already heard by me, and which might finally resolve some issues in a manner which would either advance the trial of the action or would assist the parties in any negotiations that they wish to have with a view to settlement. Unfortunately, they were able to agree neither on the form of an appropriate question, nor on what would be appropriate assumptions of fact for me to make.

19 The position has now been reached (I was advised on 9 May) where the respondents seek a preliminary issue, assuming the making of a false representation as to the similarity or otherwise of the Eastland and DiMed Devices, but seeking cross-examination with respect to the question of reliance. They also note that it may be necessary for them to ensure that evidence is placed before the court on the trial of preliminary issue in relation to the relationship, if any, between Feezone, Intercontinental and the directors of Eastland, who were party to the settlement deed on Eastland's behalf. The reason for that is that there may be lurking underneath some of the issues raised before me, an issue as to the authority of directors to compromise a claim where the claim is one for breach of directors' duties, and the value of shares is likely to be affected, quite independently of s 241 of the Corporations Law. The applicant, however, would now, as its counsel advised me, be quite happy for neither questions stated by Owen J nor for any preliminary question to be dealt with, but would seek an early trial of the matter, arguing that the relevant issues are so interrelated that this is the most expeditious course.

20 As to the questions stated by Owen J, it seems to me to be unlikely that Owen J, when ordering that they be determined, anticipated the disputes as to the scope and relevance of those questions, which have in fact arisen, or anticipated the application for preliminary issue later made by the respondent, or the further disputes which have arisen and which are interrelated with the preceding applications. In my view, it is therefore inappropriate now to answer those questions.

21 So far as the application for preliminary issue is concerned, that is, in my view, a more difficult question. I have considerable sympathy for the respondents, who seek to assert that a deed entered into between them and the applicant effectively settled all of the issues now arising in this action (save perhaps for any which have arisen with respect to the purported termination). They argue, with some force, that it would be unfair to require them to prepare for and undergo a full trial of factual issues which must necessarily include technical and difficult questions of the similarity or otherwise of the DiMed and Eastland Devices, and which will involve rehearsing the history of dealings between the parties, so as to establish whether they were in fact acting as directors of Eastland at relevant times.

22 However, ordering the trial of a preliminary issue of fact would generally only be appropriate when its outcome will put an end to the action, or where there is a clear line of demarcation between the issues and the determination of one issue in isolation from the others is likely to save inconvenience and expense. It has also been held that the separate trial of issues is only appropriate in "clear and simple cases". The relevant principles are clear enough, and are to be found set out conveniently in Smith v Maloney (1998) 19 WAR 209 at 223 per Malcolm CJ, with whom Kennedy and Ipp JJ agreed. His Honour the Chief Justice noted in that case that there were further considerations which would be relevant to such an action since the advent of case management, and that one such consideration was a question of whether there was "a significant possibility" that the determination of one or more issues tried separately may lead to a settlement. However, I do not understand the advent of case management rule to have superseded all previously learning in relation to this difficult question of when preliminary questions may be appropriate; rather, it has led to what may on occasion be a more generous approach, and has broadened the scope of relevant considerations to include possibility of settlement.

23 In my view, any preliminary issues of law, which could be determined by me, would be relatively minor pure issues of law which would be unlikely to have a significant impact on the future course of proceedings. Questions of fact identified by the respondents are very likely to become intertwined with issues as to the similarity or otherwise of the DiMed and Eastland Devices, and perhaps with the issue of the way in which those directors who entered into the settlement deed negotiated with the respondents, and what representations may have been made on each side at the relevant time. Questions of whether Feezone and Intercontinental can be joined may well be inseparable from the ultimate question of whether it would be appropriate to grant them relief, which in turn may turn on discretionary issues which can only be appreciated after an examination of the role, if any, which those corporations or the directors who may "represent" their interests on the Eastland board (I am here led into speculation because the factual materials are inadequate) played leading up to the entry into of the settlement deed.

24 I note also in this case that the parties have displayed an almost limitless capacity to misunderstand each other and to disagree even about very simple issues. This seems to me to be due, at least in part, to some shifting of ground from time to time by the applicants. It is likely that, whatever questions are raised by way of preliminary issue, the parties will take differing views as to what facts are relevant and that one or the other of them will consider themselves disadvantaged by a failure to explore at the determination of the preliminary issue what they regard as facts bearing on the question.

25 In my view, although it is unfortunate, the only logical way for this matter now to proceed is by way of a trial or trials. It appears that there will need to be a fresh application by someone, or at least a significant amendment to the present application, in relation to the recent purported determination of the licence agreement. It would also appear to be possible for Feezone and Intercontinental to bring their own applications, although I should not like that to be taken to suggest any concluded view on the likelihood of their success on the standing issue. I would at this stage, if the parties thought it convenient to do so, be prepared to order the joinder of Feezone and Intercontinental to the present application, but without prejudice to the rights of the respondents to argue the question of their standing to seek relief.

26 I would otherwise dismiss the respondents' chamber summons dated 28 February 2000.