Emerton Pty Ltd v Referral Marketing Services Pty Ltd

1 The plaintiff ("Emerton"), a company owned and controlled by Mr Clifford, seeks, by its interlocutory process filed on 10 October 2008, leave to maintain certain claims in these proceedings on behalf of the first defendant ("RMS"), a company in liquidation. The relevant claims are claims that Emerton considers to be available at the suit of RMS against the second defendant ("Ms Allen"), the sole director of RMS. Ms Allen and Emerton are the shareholders of RMS. 2 Emerton thus wishes to bring derivative claims against Ms Allen on behalf of RMS. 3 In the proceedings, Emerton is pursuing certain claims directly against Ms Allen. It is also pursuing claims against RMS's liquidators. They are the third and fourth defendants. The claims Emerton wishes to have RMS pursue against Ms Allen are additional to these, although based on facts relevant to the claims Emerton makes against Ms Allen. 4 In relation to claims by RMS against Ms Allen, Emerton's basic thesis is that Ms Allen committed breaches of duties she owed as the director of RMS. The statement of claim refers to breaches of fiduciary duties and duties imposed by s 180, s 181 and s 182 of the Corporations Act 2001 (Cth). The particular claim Emerton wishes to pursue on behalf of RMS is expressed as a claim under s 1317H for an order that Ms Allen pay "damages" (presumably "compensation": see s 1317J(2)) to RMS. I am content to proceed on the basis that the claim by RMS against Ms Allen will be for damages, equitable compensation or statutory compensation, as appropriate. 5 There are, on the case Emerton would seek to make, essentially five complaints against Ms Allen as the director of RMS: 1. That she caused or allowed RMS to issue to Emerton a share certificate for A class shares when a certificate for ordinary shares should have been issued and, as a result, a dividend of $120,000 declared on ordinary shares was paid so that it went wholly to Ms Allen as the sole holder of ordinary shares and Emerton received no part of it. 2. That, from about March 2008, Ms Allen diverted work from RMS to Market Share Production Pty Ltd ("MSP"), a company of which she was sole director and shareholder. 3. That, between March 2006 and March 2007, RMS paid certain debts of MSP to a total of $17,261. 4. That before June 2005, RMS lent $199,180.34 to Ms Allen and then, in later financial reports, "falsely recorded" that the loan was to MSP, which company was later put into voluntary administration by Ms Allen so as to create an appearance that the loan by RMS was irrecoverable or worthless. 5. That RMS paid at least $50,000 of Ms Allen's personal expenses related to a holiday. 6 Emerton accepts that, following the decision of the Court of Appeal in Chahwan v Euphoric Pty Ltd [2008] NSWCA 52; (2008) 65 ACSR 661, it is not open to it to obtain leave under s 237 of the Corporations Act to commence and prosecute proceedings on behalf of RMS. The Court of Appeal held that the section does not apply in the case of a company in liquidation, which RMS now is. 7 Emerton says, however, that it should be granted leave to sue on behalf of RMS under that aspect of the court's general equitable jurisdiction recognised by the Court of Appeal in Chahwan v Euphoric Pty Ltd and more recently discussed by me at paragraphs [17] and following of the judgment in Carpenter v Pioneer Park Pty Ltd [2008] NSWSC 551; (2008) 66 ACSR 564. It was accepted before me on the present application that the approach should be as outlined in that judgment. 8 That approach takes as its starting point a principle referred to by Gummow J in Scarel Pty Ltd v City Loan & Credit Corp Pty Ltd (1988) 17 FCR 344 that, in the case of a company in liquidation: "The scheme of the statute is that it is the liquidator who is the appropriate party to decide whether to continue for the company litigation such as this, subject to the control of the Companies Court over the liquidator." 9 Gummow J later said: "The ordinary rule there [ie, when the company is in liquidation] is that the liquidator, in the ordinary case, is the appropriate person in whom is vested the authority to decide whether the company should take or continue action to recover damages or secure some other relief for an injury done to the company."

10 There is a clear analogy with a trustee in bankruptcy. In Fraser v Deputy Commissioner of Taxation (1996) 69 FCR 99, Beaumont J, speaking of litigation designed to produce recoveries for the benefit of the bankrupt estate, said at 114: "[I]f litigation is to be instituted with a view to the recovery of assets, it is the trustee's function, and responsibility, to be the dominus litis and thus entirely in charge of the litigation to the exclusion of individual creditors." 11 It is because of the position the liquidator occupies in relation to litigation proposed to be brought by the company in liquidation that the second of the three main matters seen as relevant to this kind of application in Carpenter v Pioneer Park Pty Ltd (above) at [34] was the attitude of the liquidator to the question whether the particular proceedings should be pursued. Only if the liquidator, after due consideration, is unwilling or unable to institute proceedings for the company might it be appropriate for the court to allow a creditor or contributory to do so. 12 It is important to emphasise that unwillingness or inability of the liquidator to proceed may warrant some quite different course of action - or, indeed, no action at all. Several possibilities available to a member wishing to see the company in liquidation bring proceedings that the liquidator is unwilling or unable to bring were referred to by Beaumont J, Whitlam J and Tamberlin J in their joint judgment in Christianos v Aloridge Pty Ltd (1995) 59 FCR 273 at 281-282: "[T]he member may use the statutory procedure to ask the court to order the liquidator to bring the proceedings: see Ford and Austin's Principles of Corporations Law 7th ed, p 452, referring to ss 477(6) and 511 of the Law; see also s 1321 providing for appeals from acts, decisions or omissions of liquidators and provisional liquidators. There are other possible remedies, for example, removal of the liquidator or, as was done in Garden Mews-St Leonards Pty Ltd v Butler Pollnow Pty Ltd (1984) 9 ACLR 91 the appointment of a receiver of the company's cause of action." 13 The reference here to removal of the liquidator as one of the "possible remedies" has a particular relevance to this case. This is because the principal relief sought by Emerton against the third and fourth defendants (who, as I have said, are the liquidators of RMS) is that they be removed and replaced by another liquidator nominated by Emerton. 14 The complaints articulated in the statement of claim concerning the removal of the third and fourth defendants as liquidators are in essence: (a) that they have refused to recognise Emerton as the holder of the ordinary shares it says it holds (or should hold) in RMS; (b) that they have rejected Emerton's proofs of debt; (c) that they have not adequately investigated the loan of $199,180.34 made by RMS to Ms Allen; (d) that they have refused to recognise that Ms Allen was overpaid the dividend declared on the ordinary shares; (e) that they have not adequately investigated the other wrongs alleged by Emerton to have been perpetrated by Ms Allen upon RMS as outlined earlier in these reasons. 15 Emerton is pursuing two parallel courses: it wishes to see the existing liquidators of RMS replaced and, at the same time, it wishes to obtain the court's sanction to its having charge of proceedings by RMS against Ms Allen which, if brought at all, should in the ordinary course be brought at the instigation of RMS's liquidators. On reflection, I suppose, it is not correct to describe the courses as parallel: Emerton wishes to have a decision favourable to itself on the second matter before proceeding with the first matter. 16 It was submitted on behalf of Ms Allen that this sequence is inappropriate. I agree. The current liquidators are without funds and unable at this stage to come to any properly formulated view about the claims Emerton considers RMS to have against Ms Allen. Emerton has made it plain that it will not fund the existing liquidators but has expressed a willingness to fund the replacement liquidator, if and when appointed. That of itself suggests that the replacement liquidator, if appointed, will be put into a position to do what liquidators are expected to do in cases of this kind, that is, assess the viability of causes of action said to be available to the company and make a decision whether or not the company should institute and pursue proceedings. 17 This indicates strongly that the question of replacement of the existing liquidators should be determined before any application by Emerton for leave to proceed on behalf of RMS is addressed. The new liquidator, if appointed, may decide to pursue the litigation and have funds to do so. If that turns out to be the position, there will be no basis for any order that Emerton have leave to proceed on behalf of RMS. The new liquidator, if appointed, might make an informed and rational decision not to pursue the litigation. In that event, there would be a clear basis on which to address Emerton's application, if Emerton chose to press it. And if the attempt to have the liquidators replaced proved unsuccessful, there would presumably be, at that point, a crystallised position with respect to the present liquidators' intentions uncomplicated by the possibility that they might cease to be liquidators. 18 It was submitted by Mr Harris SC on behalf of Emerton that, because there are common factual issues, the question of removal and replacement of the liquidators should be left to be litigated as part of the overall claims Emerton seeks to pursue against Ms Allen and RMS. For that reason, it is said, the application now before me should be determined first. 19 The question of the liquidators' removal will concentrate on events since commencement of the winding up, while Emerton's claims against Ms Allen and RMS will be concerned predominantly with events preceding the winding up. Questions relevant to the liquidators' attitude to (and conduct in relation to) events preceding the winding up may make it necessary to go into those events to some extent, but it is most unlikely that the court would, in the confined context of the question of removal and replacement, have to come to concluded views about them. 20 I accept the submission made by Mr Ashhurst SC on behalf of Ms Allen (and supported by Ms Kahler, who appeared for the liquidators) that the question of leave for Emerton to bring proceedings on behalf of RMS cannot sensibly be determined until after Emerton's application to have the liquidators of RMS replaced has been determined. 21 Emerton's interlocutory process will be dismissed with costs; but this will be without prejudice to the ability of Emerton to renew its application in the light of the outcome of its claim to have the liquidators of RMS replaced.

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