5189/05 PATRICIA MARY EHSMAN V NUTECTIME INTERNATIONAL PTY LTD & 4 ORS
JUDGMENT
1 HIS HONOUR: Before me is an application by the plaintiff, Mrs Ehsman, for leave under s 237 of the Corporations Act 2001 (Cth) to bring proceedings on behalf of the fifth defendant company, Timentel, by filing and serving a further amended originating process and amended points of claim.
2 The proceedings have had a somewhat chequered history already. In the originating process, filed on 29 September 2005, the plaintiff was identified as Timentel, though the moving party was only one of the four directors of that company, namely Mrs Ehsman. After the defendants made an application that the claim be dismissed as incompetent, an amended originating process was filed, pursuant to consent orders, on 29 November 2005. The plaintiff became Mrs Ehsman. The defendants were (and remain):
· the second, third and fourth defendants, namely Messrs Brady, Frasca and Paix, co-directors of Timentel with Ms Ehsman (I shall refer to them as "the other three directors");
· the fifth defendant, Timentel, which is under the control of the other three directors; and
· the first defendant, Nutectime (which is owned and controlled by the other three directors, Mrs Ehsman being neither a director nor shareholder).
3 The amended originating process sought some orders apparently reflecting rights of Timentel, and an order of a kind that could be obtained by a shareholder such as Mrs Ehsman personally in oppression proceedings, and an order under s 237.
4 On 12 December 2005 Mrs Ehsman filed an interlocutory process, pursuant to consent orders of the court, seeking the order under s 237, and also an order granting her leave to file and serve amended points of claim ("draft APC") and a further amended originating process ("draft FAOP"), in accordance with drafts annexed to Mrs Ehsman's affidavit of 9 December 2005. Mrs Ehsman moved on that interlocutory process at the hearing before me.
5 The hearing of the interlocutory application proceeded on the agreed basis that the parties would read their affidavits and tender their documents, but there would be no cross-examination, and no concession made by either side. Upon the tender of the evidence, the hearing proceeded to submissions. I took the view that it was appropriate to proceed in that fashion, having regard to the consent of the parties who were represented by experienced counsel.
6 Although the determination of an application for leave under s 237 is a final determination, as Palmer J pointed out in Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313, at [24], the matters determined are limited to the matters listed in s 237(2). The court does not normally enter into the merits of the proposed derivative action to any great degree (Swansson at [25]). In particular, under s 237(2)(d), the court does not make factual determinations concerning the case that the plaintiff seeks leave to assert on behalf of the company, but only considers whether there is a serious question to be tried. The limited nature of that question will often enable the court to avoid making determinations on contested questions of fact. In some cases it is appropriate for the court to determine such questions as whether the applicant is acting in good faith (s 237(2)(a)), and whether it is in the best interests of the company that the applicant be granted leave (s 237(2)(c)), after having regard to the pleadings or proposed pleadings, facts that are common ground, and a review of the disputed questions of fact and the contentions of the parties, without resolving disputed questions of fact for the purposes of the leave application. In such circumstances it will be appropriate to proceed without cross-examination.
The plaintiff's case
7 The parties agree that Mr Brady and Mr and Mrs Ehsman came together in a business venture before Timentel was formed. Mrs Ehsman owned some patents for a split face wristwatch display, and she wished to exploit them commercially. Mr Brady had some marketing experience. There are disagreements about the commercial utility of Mrs Ehsman's patents, and as to the precise terms of their arrangements, which need not be resolved for present purposes. It is common ground that they respectively brought to the business of Timentel, when it was formed in 1998, the patents (such as they were) and a measure of marketing/commercial input.
8 When Timentel was formed, Mrs Ehsman granted it a licence over her patents, for no consideration (although she received shares in the licensee entity). There is disputed evidence as to whether, as Mrs Ehsman asserts, she entered into the licence agreement in reliance on the assumption, encouraged by Mr Brady, that the licence would always be held by a company in which she would be a director and shareholder. The licensee's interest in the licence agreement was assignable. Mrs Ehsman claims, and the defendants deny, that it was a term and condition of the licence agreement that the licence would not be assigned by Timentel to a company in which Mrs Ehsman was not a shareholder and director.
9 Initially the only shareholders were the Ehsmans and Mr Brady, and Mr Brady and Mrs Ehsman were the directors. Mr Brady's evidence is that he devoted very considerable time and effort, and expense, to travelling to Europe to negotiate for the commercial exploitation of the split face wristwatch display. According to him, the people he consulted in Europe told him that Mrs Ehsman's patents were just concepts and it would be necessary to work out the most efficacious interior wristwatch mechanisms to support the split face. That is disputed by Mrs Ehsman. But it is clear enough that Mr Brady did do some amount of developmental/marketing work in Europe, the cost of which was shared or partly shared with the Ehsmans.
10 Mr Brady's evidence is that he came up with the idea of having movements in each half of the split face watch case for the forward and return hand movements, all controlled by an electronic integrated circuit, and that Mr Claude Ray, an experienced watchmaker, carried out the necessary design work. The eventual product, which he called a "hinged electronic watch", was based on ideas that were fundamentally different, he said, from Mrs Ehsman's patents. These matters are contested.
11 Mr Brady said he negotiated a development agreement with Mr Ray's company, using a company with which he was associated, Renaissance Management, for that purpose. In turn he caused Renaissance Management to enter into an agreement with another company with which he was associated, DNB Global Corporation (registered in the Philippines), which made advance payments to Mr Ray's company. At a final hearing of this case it will be necessary to explore these corporate relationships and their purpose, and to understand better the nature of Mr Brady's interests. DNB Global appears to bear his initials, but there is some evidence that he is just one of five directors and is indirectly a shareholder. DNB Global is important in this case because, according to Mr Brady, it incurred substantial expenses through payments for development work, for which Timentel reimbursed it out of monies borrowed by Timentel from Mr Brady, Mr Frasca and Mr Paix. But Mrs Ehsman questions whether loans were ever in fact made by those three directors.
12 Mr Brady said the development of the hinged electronic watch was very expensive and under the arrangements between them, Ms Ehsman was to contribute to that development. He alleges that she defaulted in that obligation. He claims that by March 2005 she owed and had not paid about $86,000. That is contested. According to Mr Brady, the development was eventually successful and the hinged electronic watch is protected by patents in various countries, procured at a cost to DNB Global, recoverable from Timentel.
13 In about June 2002 Ms Ehsman and Mr Brady decided to bring in two other parties, namely Mr Frasca and Mr Paix. There is quite a bit of evidence, not all consistent, about the circumstances in which Mr Frasca and Mr Paix were invited into the company. What is clear is that Mr Frasca and Mr Paix joined the board of directors and acquired shares, they provided some capital, and in due course they sided with Mr Brady and against Mrs Ehsman. After they joined the board, the company's issued 100 ordinary shares were divided as follows: Mr Brady 35 shares, Mr and Mrs Ehsman 35 shares, Mr Frasca 15 shares, and Mr and Mrs Paix 15 shares.
14 During 2002, it seems, Mrs Ehsman visited Europe and met with one of Mr Brady's contacts, Manuel Spode of Les Artisans Horlogers. There is conflicting evidence as to what happened at the meeting. Mr Frasca gives evidence in his affidavit that the meeting led to Mrs Ehsman being criticised by the other directors for intervening secretly without the board's authority, and for her suspicious approach. Mr Frasca also says that at a meeting he had with Mr and Mrs Ehsman in 2003, they told him that they were determined to bring Mr Brady down. These matters are also disputed. Nevertheless it appears that, some time after Mr Frasca and Mr Paix arrived on the board, if not earlier, the relationship between Messrs Brady, Frasca and Paix, on the one hand, and the Ehsmans, on the other hand, deteriorated. By now the relationship has completely broken down.
15 There is a considerable amount of correspondence in evidence, and minutes of board meetings. I shall not describe this material in detail here. The correspondence shows that at least since early 2005, Mrs Ehsman has been concerned about verifying payments allegedly due by Timentel to DNB Global, and also about the financial management of Timentel more generally. The evidence is that the only bank account of Timentel has been relatively dormant at times when, the defendants allege, Timentel made payments to DNB Global. Mrs Ehsman's solicitors have written to Timentel's solicitors about these matters.
16 Mr Brady claims that by about May 2005 there was a pressing need for capital for Timentel, to pay invoices to DNB Global of about $216,000 and certain other smaller debts. It appears that at this time Mr Brady, Mr Frasca and Mr Paix developed a proposal to lend Timentel up to $246,000 for a term of 60 days with interest of 17% compounding monthly, secured by a registered charge. Mrs Ehsman asked the copies of the draft loan facility and charge documents but received them only after they had been executed. A board meeting attended by Mr Brady, Mr Frasca and Mr Paix, but not Mrs Ehsman, on 9 May 2005 approved the loan proposal and authorised execution of the documents. Mr Brady, Mr Frasca and Mr Paix, acting as directors of the company, purported to authorise the company to enter into the loan facility and charge agreements in which they were the counterparties, without the consent of the other director/shareholder, Ms Ehsman.
17 The defendants claim that the loan facility was drawn down and the money was used directly for payment of outstanding debts of Timentel, rather than for deposit into Timentel's bank account. Mrs Ehsman, by her solicitor, sought to verify the making of the loan but she says she has not received proper documentation. The evidence includes minutes of the board meeting of DNB Global on 18 August 2005, at which the directors of that company confirmed that the company had been paid for certain invoices, but the evidence is incomplete because, for example, the identity of the paying entity is not given.
18 On 11 July 2005 Messrs Brady, Frasca and Paix as lenders made a formal notice of demand for payment to Timentel of an amount of about $247,000. But they gave the company a limited extension of time to repay. Mrs Ehsman's solicitors alleged in correspondence that any attempt to enforce the charge would render it void under s 267 of the Corporations Act, because the chargees were "relevant persons" for the purposes of that section.
19 The security was not enforced but instead, at some stage it was proposed that the company would enter into an asset sale agreement and a deed of assignment of the licence, in favour of the other three directors or their vehicle, for a price supported by a valuation by Les Artisans Horlogers. In correspondence, Mrs Ehsman's solicitors endeavoured unsuccessfully to obtain information about the valuation - indeed, they approached the valuer directly without success. They alleged that the valuation did not cover all of the assets sold. They strenuously opposed the proposed transaction, on several grounds including that the transaction would be in breach of the contractual arrangements and understandings between Mrs Ehsman and the other three directors.
20 Nutectime was formed in August 2005. The directors are Mr Brady, Mr Frasca and Mr Paix. The company has issued 100 ordinary shares. Mr Brady owns 60 shares, Mr Frasca owns 20 shares in Mr and Mrs Paix own 20 shares. Mr and Mrs Ehsman do not hold any shares.
21 The asset sale agreement and the deed of assignment of licence were entered into by Timentel and Nutectime on 2 September 2005. The transaction was considered at a board meeting not attended by Mrs Ehsman. Messrs Brady, Frasca and Paix went through a procedure of formally disclosing their interest in the purchaser but then they proceeded, purporting to act as directors of the company, to approve the transaction. It appears that the contract was made and completion took place on the same day. The total sale price $277,000. According to Timentel's solicitors, the sale proceeds were used to pay out and discharge the charge over the company's assets. That appears to have meant that the bulk of the sale proceeds were directed to Mr Brady, Mr Frasca and Mr Paix. It is not clear from the evidence whether there was any actual movement of money.
22 Up until May 2005 Mrs Ehsman had been a director and (with her husband) substantial shareholder of Timentel, which was the licensee for no consideration of her patents. On one view, the company owed a substantial amount of money to DNB Global, but it had procured substantial development work for its split face watch design. Any profits from the realisation of that development work would have come to Timentel, and Mr and Mrs Ehsman would have had a 35% interest in those profits. After 2 September 2005, Mrs Ehsman was still a director of Timentel and Mr and Mrs Ehsman remained 35% shareholders. But the company's substantial assets, and any prospect it may have had of earning profits from the development of the split face watch, had gone. Mrs Ehsman was still the licensor of her patents, but she was entitled to receive no consideration for the licence. The new licensee, Nutectime, was a company in which she had no interest, and that company had acquired Timentel's assets and any profit-making opportunity relating to the split face watch. The controllers and shareholders of Nutectime were her fellow directors and shareholders of Timentel.
The draft APC and draft FAOP
23 From this brief account it appears that if Mrs Ehsman could substantiate her allegations, this would be a case of self-dealing by her co-directors to her considerable disadvantage, and unauthorised diversion of a corporate opportunity. Experience shows that in such cases it is important for the plaintiff to identify with particularity the precise duties said to have been breached and the circumstances of the breach. That is important in the interests of clarity of presentation of the plaintiff's case, and to ensure that the defendant is not surprised by having to meet a case at trial different from what she had been led to expect. These considerations strongly suggest that in such a case, the plaintiff should proceed by statement of claim. Where the plaintiff is proceeding in her own right, invoking the oppression remedy, and also seeking to assert the company's rights in a derivative action, the need for clarity of pleading is especially strong.
24 As earlier mentioned, Mrs Ehsman's interlocutory application seeks not only leave under s 237 but leave to file and serve amended points of claim and a further amended originating process in accordance with the drafts annexed to her affidavit of 9 December 2005. Points of claim are sometimes detailed and clear, but those qualities are missing from the draft APC. It is necessary to deal with the defects of the draft APC, and also the draft FAOP, in some detail.
25 I have endeavoured to identify those allegations that relate to some right of Timentel, and distinguish them from allegations relating to some right of Mrs Ehsman personally. In summary, for reasons given below, paras 7, 18-21, 22, 23-26, and 27-29 (and the claims to relief in paras 1-5, perhaps 7, and 8) of the draft APC are claims made on behalf of Timentel, and paras 8-16, 17, 30 and 31 (and claims to relief in para 6 and perhaps 7) are claims made by Mrs Ehsman personally.
26 It is important to maintain the distinction between derivative and personal claims in the interests of clarity. But nothing in Part 2F.1A requires that a derivative action be in a separate proceeding in which no personal claims are made by the person who has carriage of the proceeding. For example, in Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732 the plaintiffs were an individual and corporate plaintiffs, and leave was granted under s 237 so as to permit the individual plaintiff (who was a shareholder and officer of the corporate plaintiffs) to assert the rights of the companies in a proceeding in which he also asserted rights of his own. The combination of corporate and personal claims was not unlike the combination of claims in the present case, though the pleading was by an elaborate statement of claim. In that case, and here, the asserted derivative and personal rights arise to a large degree out of the same alleged facts.
27 Here the sole plaintiff is Mrs Ehsman, and Timentel is a defendant. It is not proposed that Timentel should become a plaintiff if s 237 leave is granted, because Timentel is properly a defendant to some of Mrs Ehsman's claims. Nor is it proposed that the derivative action be constituted as a separate proceeding, because there are substantially overlapping facts concerning the derivative and personal claims, which should therefore be heard together. Section 236(2) says that proceedings brought on behalf of a company must be brought in the company's name. But there is now a substantial line of decisions holding that, despite the literal wording of s 236(2), leave under s 237 can be given where the company is a party to the proceeding as a necessary defendant in respect of other claims, without requiring the company become a plaintiff or insisting that the derivative action be brought in a separate proceeding: see especially Keyrate Pty Ltd v Hamarc Pty Ltd (2001) 38 ACSR 396, per Santow J at [18]-[19]; Metyor Inc v Queensland Electronic Switching Pty Ltd (2002) 42 ACSR 398, per McPherson JA at [14]-[15]; Charlton v Baber (2003) 47 ACSR 31, per Barrett J at [5].
28 I turn now to consider the draft APC, paragraph by paragraph.
29 After preliminary allegations, para 7 of the draft APC asserts that by reason of their appointment as directors of Timentel, Mr Brady, Mr Frasca and Mr Paix owed Timentel various duties. There is a list of the standard duties of directors. The list reflects ss 180, 181, 182 and 183 of the Corporations Act, and also a duty to act honestly in the exercise of their powers and the discharge of their duties as directors (a formulation no longer found in the statute). Particulars of the alleged duties are given by a nonsensical reference to s 232 of the Corporations Act (the "oppression" remedy) and an uninformative reference to "the general law". It is hardly surprising, in light of Mrs Ehsman's factual allegations, that the provisions concerning improper use of position or information (ss 182 and 183) should be invoked, but less easy to see the basis upon which, on those alleged facts, other duties such as the duty of care are said to be relevant.
30 Having made allegations about the defendants' duties as directors of Timentel, the draft APC (paras 8-16) makes allegations about the licence agreement, leading to the assertion that the purported sale by Timentel to Nutectime of its rights under the licence agreement was in breach of the licence agreement. That is a personal claim by Mrs Ehsman against Timentel (and no other defendant) for breach of contract. It is not a claim for breach of any duty owed to Timentel.
31 Para 17 pleads that, by reason of matters pleaded in paras 8-11, the first to fourth defendants are estopped from asserting that Timentel was entitled to sell or assign to the first defendant the rights of Timentel under the licence agreement. This was said to arise because Mrs Ehsman entered into the licence agreement in reliance on the assumption, encouraged by Mr Brady, Mr Frasca and Mr Paix, that the licence would always be held by a company of which she was a director and shareholder. Clearly the allegation of estoppel is made for the benefit of Mrs Ehsman personally rather than to vindicate some right or interest of Timentel. The document does not reveal how the allegation can be made against any defendant other than Mr Brady, given that the assumption is said to have been created and acted upon at the time of the licence agreement, which was made well before Mr Frasca and Mr Paix became involved.
32 Paras 18-21 make allegations about breaches of duties owed by the other three directors to Timentel. They allege that Timentel did not receive any of the proceeds of sale of assets, or received only part of the proceeds, and Messrs Brady, Frasca and Paix received those proceeds or part of them. It is claimed that their conduct in receiving those proceeds constituted a breach of all of the duties pleaded in paragraph 7. I find it impossible to justify that claim, with respect to some of the duties identified in para 7, even taking into account the "particulars" to para 21. Moreover, the mere assertion that Timentel did not receive proceeds of sale and the other three directors did (even when the "particulars" to para 21 are added) cannot, per se, establish a breach of any of the duties identified in para 7. These allegations fall well short of a proper pleading.
33 Para 22 alleges that by reason of the matters alleged in certain other paragraphs, Messrs Brady, Frasca and Paix have been unjustly enriched as a result of breach of the duties referred to in para 7. Presumably this is intended to establish a ground of recovery for Timentel. Again, the precise matters that might constitute unjust enrichment have not been adequately pleaded and, moreover, it is not easy to see why para 22 combines breach of directors' duties with unjust enrichment.
34 Paras 23-26 make allegations against Nutectime, intended to support orders declaring void and setting aside the purported sale of assets or requiring Nutectime to hold the assets in trust for Timentel. These paragraphs seem to assert some entitlement to relief on the part of Timentel rather than Mrs Ehsman, although the remedies would obviously operate for her benefit as well. The precise foundation of the remedies is not clear. The drafter has not invoked the equitable principles concerning accessory liability for breach of trust with any specificity or clarity. To the extent that entitlement to the relief is said to arise out of Nutectime being "knowingly concerned in the breach" there is a suggestion of statutory accessory liability, but the statutory directors' duties do not create any accessory civil reliability for being knowingly concerned in the primary breach. There is "accessory" liability under the statute for de facto and shadow directors, but the allegations in the draft APC do not in terms invoke that liability.
35 Paras 27-29 allege that the deed of charge dated 9 May 2005 is void and should be set aside because Timentel did not receive the benefit, or received only part of the benefit, of the money purported to be advanced. This seems to be the assertion of rights of Timentel rather than Mrs Ehsman personally. A deed of charge merely provides security for advances made under some other arrangement such as a loan facility agreement. It is not easy to see why the fact (if it be so) that the chargor did not receive the benefit of loan monies purported to be advanced under a loan facility agreement should, per se, lead to the consequence that the security for the loan is void. If the charge is security for money advanced under a loan facility agreement, and no money is advanced to the chargor, then nothing is secured by the charge but the charging instrument is nevertheless valid.
36 Para 30 contends that the other three directors repeatedly failed or refused to furnish information to Mrs Ehsman relating to the affairs of Timentel. Particulars are given. As expressed, this is an allegation of breach of duty to Mrs Ehsman rather than Timentel. There is no allegation of any particular duty but it seems that the drafter had in mind either or both of the statutory rights of a director to gain access to certain information under ss 198F and 290, or the director's general law right of access to the information needed to discharge her fiduciary duty (eg Edman v Ross (1922) 22 SR(NSW) 351). A director seeking to assert those rights is not required to show that inspection is sought in good faith and for a proper purpose, whereas a shareholder seeking inspection under s 247A must do so. Para 30 is not clear enough.
37 Para 31 asserts that, by reason of the matters asserted, the other three directors have conducted the affairs of Timentel in a manner oppressive to, unfairly prejudicial to or unfairly discriminatory against Mrs Ehsman, or contrary to the interests of the members as a whole, contrary to s 232. Mrs Ehsman has personal standing to complain under that provision. The difficulty with para 31 is that it relies globally on all of the other allegations, some of which do not seem to be pertinent (for example, the pleadings against Timentel itself based on breach of contract and against Mr Brady based on estoppel). It should be re-formulated with more precision.
38 The claims to relief at the end of the draft APC are partly relief for Timentel (paras 1, 2, 3, 4, 5, perhaps 7, and 8) and partly relief for Mrs Ehsman (paras 6, perhaps 7). The claims to relief are partly referable to matters alleged in the body of the draft APC, but some of the allegations, if established, would be likely to lead to relief of other kinds that are not mentioned. For example, the statutory duties of directors are civil penalty provisions leading to the consequences in Part 9.4B, including a compensation order under s 1317H on the application (inter alios) of the company, and yet the draft APC makes no mention of such matters.
39 The draft FAOP contains the same claims for relief as the draft APC, and therefore suffers from the defects just noted. It also contains a prayer for an order under s 237. This is inappropriate, given that the interlocutory application presently under consideration seeks a s 237 order and also leave to file the FAOP, so that the question of s 237 leave will have been addressed before the FAOP is filed. Further, in the draft FAOP the application is said to be made pursuant to ss 232, 236 and 237. Sections 236 and 237 do not need to be mentioned, for the reason just given, and s 232 appears from the draft APC to be only one of the statutory provisions under which relief is sought, the others being the various directors' duties provisions.
40 My conclusion is that the draft APC and the draft FAOP are seriously defective, and therefore I shall not accede to Mrs Ehsman's application for leave to file and serve them in their present form. What is needed is a carefully considered pleading by statement of claim. However, my view is that the draft APC identifies in broad terms, though imprecisely and at times in a confused way, some derivative and personal causes of action that emerge on Mrs Ehsman's account of the evidence. The causes of action are:
(A) a personal claim by Mrs Ehsman against Timentel for breach of contract arising out of Timentel's purported sale and assignment to Nutectime, sounding in damages (paras 8-16);
(B) a personal claim by Mrs Ehsman against Mr Brady based the allegation that at the time of the making of the licence agreement he encouraged her to assume that the licence would always be held by a company of which she was a director and shareholder - though the appropriate remedy, if this ground is established, is debatable (para 17);
(C) claims by Timentel against Messrs Brady, Frasca and Paix for breach of ss 182 and 183 and their general law duty to avoid conflicts of interest, by virtue of their self-dealing in the loan and security transactions and then the sale and assignment transactions, leading an order for an account of profit or an order setting aside the transactions, or a compensation order under s 1317H (paras 18-21 and 22);
(D) a claim by Timentel against Nutectime for accessory liability under equitable principles which apply to a person who assists in a breach of fiduciary duty or receives property transferred in breach of duty, leading to an order requiring Nutectime to hold acquired property on trust or to account as a constructive trustee (paras 23-26);
(E) a personal claim by Mrs Ehsman against the other three directors asserting infringement of her right of access as a director to information of Timentel, under the general law and perhaps under ss 198F and 290, leading to an order for access or to restrain obstruction (para 30);
(F) a personal claim by Mrs Ehsman for relief under the "oppression" remedy in s 232, arising out of specifically pleaded facts and circumstances, leading to a range of possible remedies to address the oppressive or unfair conduct (para 30).
41 I am not persuaded that there is any viable course of action underlying paras 27-29.
42 I think the appropriate course is to dismiss the application for leave to file and serve the amended points of claim, and to direct Mrs Ehsman to file and serve a statement of claim to give effect to her personal and derivative claims having regard to these reasons for judgment.
43 Section 237 authorises the court to grant leave to permit a person to bring proceedings on behalf of a company. Part 2F.1A does not explain the word "proceedings" or give any direct indication of the level of specificity of pleaded allegations and prayers for relief that the applicant for leave must achieve. Typically the applicant will provide the court with a draft statement of claim or (as here) points of claim, or some other document giving particulars of the derivative claims. But in my view it cannot be the case that a full statement of the derivative claims must be presented before the court can consider and determine a leave application. Were that to be required, any subsequent amendments to the pleaded case would need to be treated as a leave application under s 237 to which the criteria in s 237(2) would have to be applied. That, in my view, would be an unnecessary burden for case management.
44 In my opinion the applicant for leave must identify and describe the proposed proceedings with sufficient precision that the court can properly assess the application having regard to the criteria that it is required to consider under s 237(2), and the opponents can respond to the application in terms of those criteria. That may be achieved by presenting the court with a draft pleading, but it may be achieved in other ways such as by outlining the claims in affidavit evidence. It is not hard to envisage an application that falls so far short of identifying the derivative causes of action to be asserted that the court is left unable to assess, for example, whether it is in the best interests of the company that the applicant be granted leave, and whether there is a serious question to be tried. Here, however, Mrs Ehsman has done enough in her draft points of claim (defective though they are) and in the voluminous evidence that has been adduced, to permit me to identify the causes of action broadly described in paragraphs (A)-(F) above, of which paras (C) and (D) are derivative claims. I am able to consider the application for leave under s 237 as an application for leave to bring proceedings on behalf of Timentel by a statement of claim that would assert the causes of action identified in paras (C) and (D) and seek appropriate equitable and statutory relief.
The requirements for leave to bring a derivative action
45 Section 236(1)(a) allows a member or officer, inter alios, to bring proceedings on behalf of the company with the court's leave. Ms Ehsman has standing both as a member and an officer of Timentel.
46 Under s 237(2) the court is required to grant the application for leave if it is satisfied of five matters set out in subparagraphs (a) to (e). Subsection 237(3) and (4) establish a rebuttable presumption that the granting of leave is not in the best interests of the company in certain circumstances, but it is agreed that those circumstances have no application to the present case. There is no suggestion of the members of the company purporting to ratify or approve the conduct of the other three directors, so as to invoke s 239.
47 Of the five matters that the court must address under s 237(2), the parties agree that the notice requirement in subparagraph (e) has been satisfied here. The defendants did not concede, in terms of subparagraph (a), that it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them. However, the evidence before me plainly establishes that this criterion is satisfied, in respect of proceedings to pursue any derivative claims of the kind identified at paras (C) and (D) above. Timentel is under the control of the other three directors, who are acting together in respect of the company's dealings with Mrs Ehsman. The other directors (and spouse, in the case of Mr Paix) are the majority shareholders. They have caused the assets of Timentel to be passed to Nutectime, a company in which they but not Ms Ehsman are the directors and shareholders. They have asserted, in answer to the present application, both on their own behalf and on behalf of Timentel, that there is no foundation for derivative claims to be brought. It is clear from their attitude, revealed in the evidence and upon the application, that they would not authorise the company to bring such proceedings.
48 That leaves for consideration subparagraphs (b), (c) and (d) of s 237(2). In their submissions, the parties referred me to a substantial number of decided cases. It seems to me, however, that the courts' approach to these subparagraphs has become relatively clear in the course of decisions, and it is unnecessary for me to refer to authorities extensively. Additionally, I have reached the conclusion that this is a plain case in which all three criteria have been established, and that extensive exposition is unnecessary.
Good faith
49 In the Swansson case, Palmer J expressed the opinion at least two questions are generally relevant to this issue: namely, whether the applicant honestly believes that a good cause of action exists and has reasonable prospects of success; and whether the applicant is seeking to act in a derivative capacity for such a collateral purpose as will amount to an abuse of process. This approach has been followed frequently in subsequent cases. I was referred, inter alia, to the discussion by Brereton J. in Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859, at [30].
50 The evidence shows that Mrs Ehsman believes that a derivative action exists which has reasonable prospects of success. She has given sworn evidence in para [24] of her affidavit of 9 December 2006 to the effect that the company has a good cause of action with reasonable prospects of success for the claims that she outlines. I can see no proper basis in the evidence for doubting that this belief is honest. The highest the evidence goes is in the affidavit of Mr Frasca, where he deposes to a discussion with Mr and Mrs Ehsman in 2003 in which, on his version of it, they conveyed an implacable desire to destroy Mr Brady. But that evidence is contested and in any event, if accepted, it would not point to any lack of honesty in Mrs Ehsman's belief at the present time of her prospects of success in a derivative action.
51 Mr Frasca's evidence might be taken to point to a collateral purpose on the part of Mrs Ehsman. But the evidence, if accepted, relates to a conversation some years ago, and the assertion of a collateral purpose is inconsistent with Mrs Ehsman's affidavit evidence. It seems to me that if Mrs Ehsman succeeds in making out her factual contentions, there is a plausible derivative action along the lines of paras (C) and (D) above. If such a derivative action is pursued successfully it will have a beneficial effect on the position of Mrs Ehsman in Timentel. Those conclusions, arising out of the evidence as a whole, makes it difficult to maintain that Mrs Ehsman's purpose in pursuing the derivative cause of action is a collateral one. As Brereton J remarked in Maher v Honeysett (at [33]), the objective facts and circumstances speak louder than an applicant's words about her honesty and purpose, and here the objective facts and circumstances, supported by much evidence, are reasonably eloquent.
52 My conclusion is that Ms Ehsman has succeeded in satisfying me that she is acting in good faith for the purposes of s 237(2)(b).
Best interests of the company
53 In Maher v Honeysett, at [44], Brereton J observed that the phrase "best interests" directs attention to the company's separate and independent welfare, a notion that imports the familiar concept of the interests of the company as a whole. Here it is unnecessary to investigate the qualifications to that proposition arising where the company is insolvent or near to insolvency. In the present case Mrs Ehsman's pursuit of derivative claims will, if she is successful, enure to her benefit, as I have explained.
54 As Brereton J pointed out (at [45]), "the existence in an applicant of a personal interest in the outcome of a proposed derivative action, or even of a personal animus against the company or other members of it, cannot be significant, let alone decisive, because they are usual concomitants of the types of disputes which lead to derivative actions, and few if any such actions would be brought but for personal interest on the part of the relevant applicant and in the absence of animus against the company or other shareholders". I respectfully agree. The fact that Mrs Ehsman has a personal interest in the outcome of Timentel's derivative claims, and even the existence of personal animus against Mr Brady (if Mr Frasca's disputed evidence is excepted), are not matters standing in the way of the conclusion that the pursuit of the derivative claims is in the best interests of Timentel.
55 Relief having the effect of returning Timentel's assets or their beneficial ownership to the company cannot be obtained by Mrs Ehsman 's pursuit of personal claims (except perhaps through some creative orders on the "oppression" ground). The most direct and obvious way of recovery of the property is for Timentel to assert claims for recovery orders derivatively through Mrs Ehsman. If those claims are successful the result will be orders for the restoration of Timentel's property, an outcome which will be in the best interests of the company, although obviously not in the best interests of the majority shareholders.
56 In my view it is appropriate for the derivative claims to be pursued in proceedings in which Mrs Ehsman also asserts personal claims, provided that great care is taken to distinguish the two categories of claims and the ingredients of the case to prove each category. I hope that a first step along that path will be taken by the preparation of a statement of claim. Although there is a risk of confusion in allowing a single proceeding that asserts personal and derivative claims, there is considerable advantage in doing so where, as here, there is a substantial common substratum of fact underlying the two categories of claims (see Maher v Honeysett at [53]).
57 In all the circumstances I am satisfied that it is in the best interests of Timentel, for the purposes of s 237(2)(c), that Mrs Ehsman be granted leave under s 237.
Serious question to be tried
58 In my view this case should be treated as a case where the applicant is applying for leave to bring derivative proceedings, rather than to intervene in existing proceedings. The effect of my granting leave to her to file a new initiating pleading will be, if the job is done properly, to overhaul and substantially reconstitute the proceedings, as proceedings in which she pursues clearly articulated derivative and personal claims. Where the applicant is applying for leave to bring proceedings, s 237(2)(d) requires the court to be satisfied that there is a serious question to be tried.
59 As Barrett J explained in Charlton v Baber at [55], the applicant bears the onus of proving sufficient material to enable the court to make this determination. But as I explained above, referring to Palmer J's judgment in Swansson (and see Maher v Honeysett at [19]), the court does not normally enter into the merits of the proposed derivative action to any great degree. The evidence must reach the same standard as applies for an interlocutory injunction, set out in such cases as Castlemaine Tooheys Ltd v State of South Australia (1986) 161 CLR 148 and Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199. The standard has been described as "relatively low" (Maher v Honeysett at [19]).
60 In this case Mrs Ehsman has filed quite extensive evidence, which she relies on for the purposes of the application, and I also have before me substantial evidence on behalf of the defendants. I infer that the evidence before me is substantially the evidentiary cases of the parties for final relief. This is certainly not a case of affidavits hurriedly cobbled together to meet the exigencies of an interlocutory occasion. Having considered the evidence my view is that, although there are many disputed questions of fact, which I am not in a position to resolve, Mrs Ehsman's allegations are sufficiently substantial to cross the "serious question to be tried" hurdle. I am therefore satisfied that s 237(2)(d) has been met.
The court's powers
61 The court is empowered by s 241 to make any orders, and give any directions, that it considers appropriate in relation to proceedings brought with leave, or an application for leave. That section affirms the court's power under the Civil Procedure Act 2005 (NSW) to make an order requiring that the proceedings be brought by statement of claim, a step that I shall take for the reasons I have explained. It also expressly permits the court to make orders requiring mediation, a step that the court is also empowered to take by s 26 of the Civil Procedure Act. During the course of the hearing, I floated with the parties the question whether it would be appropriate to make an order for compulsory mediation. The suggestion was not opposed and I formed the view that if the parties did not voluntarily agree to mediate I should make an order. Unless the parties have, in the meantime, organised for mediation to take place, I shall include a mediation order in the orders that I make pursuant to these reasons for judgment.
62 Section 242 permits the court to make any orders it considers appropriate about the costs of various persons, including the company, in relation to proceedings brought with leave under s 237 (see Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732, at [56]). In such a case as the present, where the company is essentially a vehicle to pursue the commercial interests of four parties, one of whom is at odds with the other three, who oppose the bringing of derivative claims, and the plaintiff wishes to combine derivative claims with personal claims largely arising out of the same facts, it seems to me appropriate to require the plaintiff to indemnify the company in respect of costs it may incur, either directly or by virtue of a court order against it, with respect to the pursuit of the derivative claims. If the indemnity were not given, the other three directors would as a practical matter be required to bear the burden of 65% of the company's costs of pursuing derivative claims which they do not want it to pursue. Obviously, to the extent that the plaintiff makes a personal claim against the company, she should not be required to give such an indemnity. Further, the indemnity needs to be qualified so that it does not apply to any cost order made by the court with the intention of overriding the effect of the undertaking. The main purpose of that qualification is to enable the trial judge to make such order as to costs as he or she thinks appropriate after the final hearing, untrammelled by an undertaking that may cause an order for costs against the company to rebound against the plaintiff; but the qualification may also be useful to allow the court to override the undertaking in circumstances not presently foreseeable.
63 Mrs Ehsman has succeeded in establishing that leave should be granted to her to bring derivative proceedings on behalf of Timentel, and to file and appropriate pleading to initiate those proceedings (and also to clarify her personal claims). That suggests that she should have her costs of the interlocutory application of 12 December 2005, against the defendants other than Timentel. In my view the fact that she will be required to give an undertaking as to the company's future costs is immaterial to the question of the costs of the application. Although I have found that the draft amended points of claim are seriously defective, they nevertheless convey plainly enough the nature of the derivative claims that Mrs Ehsman wishes to pursue. The defects in the pleaded case did not, in my view, provided a justification for the attitude of complete opposition to the application that the defendants presented to the court.
Conclusions
64 For the reasons I have given, I propose to make orders along the following lines:
(1) Subject to the condition identified in order (2), grant leave to the plaintiff, under s 237 of the Corporations Act 2001 (Cth), to bring proceedings on behalf of the fifth defendant against the first, second, third and fourth defendants, asserting the causes of action generally identified in these reasons for judgment and seeking all or any appropriate remedies;
(2) Order (1) is subject to the condition that, before any such proceedings are brought, the plaintiff must indemnify the fifth defendant for and in respect of all costs that the fifth defendant may incur (either on its own account or under an order of the court) by reason of the bringing, maintenance and conduct of the derivative proceedings, provided however that the indemnity is not required to extend to costs that the fifth defendant may incur in the proceedings as a defendant in respect of any personal claim made by the plaintiff, and shall not apply with respect to any final order for costs in the proceedings;
(3) Direct the plaintiff to file and serve a statement of claim to give effect to her personal and derivative claims, having regard to these reasons for judgment, by no later than a date to be specified;
(4) Order the first, second, third and fourth defendants to pay the plaintiff's costs of her interlocutory process filed on 12 December 2005, as agreed or assessed;
(5) Subject to orders (1), (2) (3) and (4), the plaintiff's interlocutory process filed on 12 December 2005 is dismissed;
(6) Order that the proceedings be referred for mediation by a mediator agreed to by the parties, such mediation to take place by no later than a date to be specified;
(7) Liberty to apply to Austin J on 2 days notice.
65 However, I shall give the parties the opportunity to draw my attention to any particular matters that might affect the question of costs, by (for example) causing me to award costs on a different measure or to limit the order for costs in some way. I shall also give them the chance to consider my proposed orders. I shall stand the matter over for the purpose of hearing any such submissions and making orders.
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