Fiduciary v Morningstar Research [2005] NSWSC 442 | Case summary

5308/01 FIDUCIARY LTD & 2 ORS V MORNINGSTAR RESEARCH PTY LTD & 6 ORS JUDGMENT 1 HIS HONOUR: In Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 ("my judgment of July 2004") I decided various interlocutory applications regarding this substantial and complex commercial litigation. One my orders was that the first and third plaintiffs, Fiduciary and Fiduciary Consultants (companies owned and controlled by Graham Rich, the second plaintiff), be required to give security and that, until they did so, their claims in the proceeding be stayed. 2 I found that Mr Rich, Fiduciary and Fiduciary Consultants were impecunious and would be unable to meet from their own resources any adverse costs order, if such an order were to be made against them at the final hearing of the proceeding (judgment of July 2004, at [41], [42], [43], [59] and [70]). However, they have obtained some financial support from a litigation funder, Litigation Lending Services No 3 Partnership ("LLS"), under arrangements briefly referred to in my judgment of July 2004 (at [27], [45], [80], [136]). 3 Security has not been given and therefore the stay of the first and third plaintiffs' claims continues to be operative. It is worth noting that the stay of Fiduciary's claims means that the claims for relief on the ground of oppression under Part 2F.1 of the Corporations Act cannot be pursued, because Fiduciary is the only one of the three plaintiffs who is a shareholder with standing to seek relief under those provisions (judgment of July 2004, at [70]). At a directions hearing on 7 September 2004, the plaintiffs' solicitor informed the court that the corporate plaintiffs would not be meeting the order for security for costs, and his instructions were to proceed with the claims to be made by Mr Rich in his own right. 4 Another of my orders required that the costs awarded against the plaintiffs in a Federal Court proceeding that had been transferred to this court be assessed and paid forthwith. These costs have not been paid. The plaintiffs have also not paid some costs of an unsuccessful interlocutory application, ordered by Barrett J to be assessed and paid forthwith, and subsequently assessed at a figure of over $101,000. 5 An outline of the facts relevant to the dispute and the present application may be found in my reasons for judgment. I gave a summary of the plaintiffs' Amended Statement Claim ("ASC"), a lengthy document, at [29]-[31]. As appears from that summary, the plaintiffs allege wrongdoing of various kinds causing damage to themselves and the first defendant, Morningstar Research Pty Ltd ("MDU"), and plead causes of action for themselves and MDU. 6 MDU was formed by the Rich interests. In 1999, they entered into joint venture arrangement with Morningstar Inc (a Chicago-based company), for Morningstar Inc to license certain products, services and technologies to MDU, and for MDU to develop derivative licensed products. Their contractual documents included a shareholders' agreement, a subscription agreement and a licensing agreement. Under those arrangements Morningstar Inc became a shareholder, and later obtained further shares by making capital contributions as provided for in the agreements. Then it made further advances to MDU, partly under convertible loan agreements, which entitled it to convert the loan amounts into equity. Eventually Morningstar Inc's shareholding in MDU grew to over 90% and the holding of the Rich interests was reduced to 9.35%. The evidence before me now indicates that, while Fiduciary is a shareholder in MDU, some of the shares belonging to "the Rich interests" are in fact vested in other entities ultimately owned and controlled by Mr Rich. 7 The ASC seeks, as "interlocutory relief", an order pursuant to s 237(1) of the Corporations Act 2001 (Cth) that the plaintiffs be given leave to bring, on behalf of and in the name of MDU, all of the claims made in the proceeding in which MDU is the proper claimant. A claim to relief in that form could not be pursued at the present time, because of the stay of proceeding operating against the two corporate plaintiffs. 8 Fiduciary and Mr Rich made an application under s 237, by interlocutory process on 15 April 2004, which I listed for hearing in June 2004 on the condition that Fiduciary and Mr Rich pay, on or before 30 April 2004, the non-GST component of the costs payable under Barrett J's order. When those costs were not paid, the hearing of the interlocutory process was vacated. 9 Subsequently Mr Rich, alone, filed an interlocutory application seeking leave under s 237 to bring a proceeding with respect to the allegations in a number of specified paragraphs of the ASC (some 47 paragraphs are identified in the application), on behalf of and in the name of MDU. As amended on 16 March 2005, the application also seeks an order granting leave to Mr Rich, pursuant to ss 236, 237 and 242, to enter into a funding agreement on behalf of and in the name of MDU. My present judgment determines that application. 10 The present funding agreement is an instrument dated 10 December 2003 between LLS, Mr Rich, Fiduciary, Fiduciary Consultants and the plaintiffs' solicitors. MDU is not party to it. The agreement makes no provision for funding any proceeding brought by Mr Rich in the name of MDU. However, there is evidence before me that if the present application is successful, LLS will enter into a revised funding agreement to which MDU will be a party, substantially in the same terms as the present agreement. The statutory derivative action under Part 2F.1A 11 Part 2F.1A of the Corporations Act, of which s 237 forms part, was introduced into the Corporations Law, now the Corporations Act, by the Corporate Law Economic Reform Program Act 1999 (Cth). Its enactment followed a chain of law reform recommendations in Australia, after the enactment of similar provisions overseas, especially in Ontario: see Companies and Securities Law Review Committee, Enforcement of the Duties of Directors and Officers of a Company by means of a Statutory Derivative Action (Discussion Paper No 11 and Report No 12, 1990); Report of the House of Representatives Standing Committee on Legal and Constitutional Affairs, Corporate Practices and the Rights of Shareholders (1991); Companies and Securities Advisory Committee, Report on a Statutory Derivative Action (1993); Corporate Law Economic Reform Program Proposals for Reform: Paper No 3, Directors' Duties and Corporate Governance (1997); Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998. 12 According to the Explanatory Memorandum (para 6.1), the criteria prescribed by s 237, based on the recommendations of these various bodies, are aimed at "preventing potentially vexatious or unmeritorious actions that would be detrimental to the company on whose behalf the action was taken", and (para 6.2) the criteria "seek to strike a balance between the need to provide a real avenue for applicants to seek redress on behalf of the company where it fails to do so and the need to prevent actions proceeding which have little likelihood of success". 13 Section 236(1) allows, inter alia, an officer or former officer of a company to bring a proceeding on behalf of the company, if acting with leave granted under s 237. Section 236(2) stipulates that the proceeding must be brought in the company's name. Mr Rich has the standing to make an application for leave under s 237 because he was the managing director of MDU, at least until 24 November 2001. 14 Section 237(2) is in the following terms: "The Court must grant the application if it is satisfied that: (a) it is probable that the company will not itself to bring the proceedings, or properly take responsibility for them, or for the steps in them; and (b) the applicant is acting in good faith; and (c) it is in the best interests of the company that the applicant be granted leave; and (d) if the applicant is applying for leave to bring proceedings - there is a serious question to be tried; and (e) either: (i) at least 14 days before the making of the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or (ii) it is appropriate to grant leave even though sub-paragraph (i) is not satisfied." 15 An application under s 237(2) is an application for final rather than interlocutory relief, as Palmer J observed in Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313, at [24]. On the other hand, the interlocutory standard is imported into s 237(2)(d)), and the court has broad supervisory powers under s 241 which appear to permit it to modify its orders and the conditions upon which they were made. As his Honour remarked (at [24]) an application for leave under s 237 should not be granted lightly. That means that the Court must be satisfied on the balance of probabilities that the five criteria have been met. But the legislation is facultative in nature and is intended to overcome the restrictions of the common law exceptions to the rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189, as the law reform materials make plain, and therefore there is no special standard of proof or any presumption or disposition against the granting of relief. 16 It is apparent from the use of the word "must" in s 237(2) that if all of the five criteria have been satisfied, the court is bound to grant the application: Carpenter v Pioneer Park Pty Ltd (in liq) (2004) 211 ALR 457, at [31]. There are obiter dicta to the effect that, although the section does not expressly say so, if the applicant fails to bring himself or herself wholly within the parameters of s 237(2), the Court must not grant leave: Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534 at [27] (Barrett J); Charlton v Baber (2003) 47 ACSR 31 at [31] (Barrett J); RTP Holdings Pty Ltd v Roberts (2000) 36 ACSR 170 (Lander J); Jeans v Deangrove Pty Ltd [2001] NSWSC 84 (Santow J), Herbert v Redemption Investments Pty Ltd [2002] QSC 340 (Mackenzie J). It is unnecessary for me to decide the point because I am satisfied that the five criteria have been met in the present case, or will be met if certain conditions are satisfied. The grant of leave may be upon terms: Carpenter v Pioneer Park at [31]ff. 17 Sub-paragraph (e) was complied with by virtue of the making of the interlocutory application in October 2004, and the amended application on 15 March 2005, in circumstances where the reasons for doing so were previously embodied in the ASC. At the hearing of the interlocutory application on 4 April 2005 senior counsel for the defendants informed the court (T 42.21-24) that the defendants accept that sub-paragraphs (a) and (d) have been made out. The evidence before me supports those concessions. So the contest relates to whether Mr Rich is acting in good faith within sub-paragraph (b), and whether it is in the best interests of MDU that Mr Rich be granted the leave he seeks, within sub-paragraph (c). 18 Section 237(3) creates a rebuttable presumption that granting leave is not in the best interests of the company, in certain circumstances where the directors of the company have decided that the company should not bring the proceeding. The defendants do not contend that subsection (3) is attracted in the present case (T 42.35-38). 19 Sections 241 and 242 should also be noted. Under s 241(1), the court may make any orders, and give any directions, that it considers appropriate in relation to proceedings brought with leave, including (inter alia) interim orders and directions about the conduct of the proceedings. Section 242 provides as follows: "The Court may at any time make any orders it considers appropriate about the costs of the following persons in relation to proceedings brought or intervened in with leave under section 237 or an application for leave under that section: (a) the person who applied for or was granted leave; (b) the company; (c) any other party to the proceedings or application. An order under this section may require indemnification for costs." Good faith 20 The Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 gives the following explanation of the "good faith" criterion: "6.36 In assessing whether an applicant is acting in good faith, the Court could be expected to have regard to whether: · there was any complicity by the applicant in the matters complained of; and · the application is being made in pursuit of an interest other than that of the company. 6.39 The good faith requirement is designed to prevent proceedings being used to further the purposes of the applicant, rather than the company as a whole." 21 In the present case it cannot be said, in my view, that there was any complicity between Mr Rich and the defendants in respect of the matters complained of. The question is whether his making the application is in pursuit of interests other than those of MDU. In Swansson v RA Pratt Properties Pty Ltd, Palmer J said (at [36]) that there are two interrelated factors to which the court would always have regard in determining whether the good faith requirement has been satisfied: whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success; and whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process. That approach has been followed later cases (for example, Carpenter v Pioneer Park at [22], Charlton v Baber at [40] and Goozee v Graphic World at [56]), and I shall do likewise. 22 In his affidavit made on 18 November 2004, Mr Rich asserted that he holds the honest belief that a reasonable cause of action exists in respect of the claims he seeks to make on behalf of MDU, and that such claims have a reasonable prospect of success. Mere "bald assertion" is not sufficient to establish the applicant's honest belief, as Palmer J observed in Swansson (at [36]). But in the present case, it is relevant to consider the nature of the allegations to be made on behalf of MDU and the circumstances out of which they arise. As explained in my judgment of July 2004, the dispute arises out of commercial dealings in which MDU became a joint-venture vehicle of the parties. The substantive claims made by the plaintiffs in the ASC and summarised at [30] and [31] of my judgment of July 2004 encompass the assertion that the wrongdoing, in some cases, caused damage to MDU and hence, indirectly, the interests of Fiduciary and Mr Rich. This gives rise to an inference, which I make, that Mr Rich wishes to proceed in MDU's name so as to make sure that an available avenue of indirect recovery is not excluded. 23 The defendants submitted that the case made out against them in the ASC is based upon the proposition that Morningstar Inc did not provide the Morningstar Software as required by the Licensing Agreement between Morningstar Inc and MDU. "Morningstar Technology" is defined in the Agreement to include Morningstar Software. "Morningstar Software" is defined to mean the source code and object code versions of certain computer software owned by Morningstar Inc as identified in Exhibit B. Exhibit B identified the "Principia Pro Product Line", and the "Internet Product Line" which included Morningstar.net. Clause 3.3 of the Agreement provided that within 60 days after the Effective Date Morningstar Inc would provide to MDU, "in a manner and format to be agreed upon by the parties", a copy of the Morningstar Software, and would thereafter provide updates via the Internet according to a schedule and in a manner and format to be agreed upon by the parties. 24 At the hearing of the application, senior counsel for the defendants said his clients contended that Mr Rich never wanted the source code or the object code for the Principia Pro Product Line, because it was not capable of being used on the Internet, that he never asked for it, that there was no attempt to reach an agreement about providing it, and that there was no complaint about not getting it (T 21). He said Mr Rich knew, at the time the joint-venture arrangements were made or shortly thereafter, that Morningstar Inc was developing a refinement or enhancement of the Principia Pro Line Product Line which was to be delivered over the Internet, and that Mr Rich took the view that MDU would only use products to be delivered over the Internet. It was therefore false of the plaintiffs, he said, to propound a case based on the assertion that they suffered damage because MDU never received the Principia Pro Product Line. 25 Those contentions involve some departure from the pleaded Defence filed on 11 November 2002. Paragraph 163 of the Defence alleges that Morningstar Inc's staff provided reasonable assistance to MDU in relation to the product Principia and the staff of MDU failed to adapt it for use in the Australian or New Zealand markets, and that Morningstar Inc provided MDU with access to a number of identified products which were capable of being turned into Derivative Licensed Products suitable for use in MDU's markets, but under Mr Rich's management MDU failed to employ suitable staff and adapt the products to which access had been given. Senior counsel for the defendants said (T 24.46-51; T 25.49-55) the defendants would contend that they provided access to the Principia Pro Product Line when Mr Rich visited Chicago in January 2000, but he did not want it. That contention seems to me to involve, at least, an interpretation of para 163 not evident on the face of it, perhaps involving a slide from "reasonable assistance" and "access" to "offers to provide reasonable assistance" and "offers of access". When asked, senior counsel for the defendants informed the court that his clients intended to amend or supplement the relevant parts of the Defence, in particular para 163 (T 31.18-24). That suggests that the defendants did not regard the matters they were raising as adequately covered by the pleading. 26 Senior counsel for the defendants cross-examined Mr Rich on the question whether the alleged failure by Morningstar Inc to provide the Morningstar Technology was confined to an allegation of failure to supply the Morningstar Software identified in the Licensing Agreement. Senior counsel for the plaintiffs objected to this line of questioning (T 24) on the ground that it was not part of the defendants' pleaded case, and was therefore unfair to the witness, who had formed his view about the viability of the claim (no doubt on advice) on the basis of the defendants' pleaded case rather than this different contention. He also submitted that it would be inappropriate for the court, on the present application, to delve into a central matter of contention between the parties by allowing cross-examination of the kind proposed. 27 The plaintiffs' objection was fully addressed in oral submissions. I eventually ruled (T 35) to reject the question in contest on two grounds: first, given the state of pleadings and the affidavit evidence to which I had been referred (including Ms Desmond's affidavit of 22 December 2004 and Mr Rich's response to it by affidavit of 7 March 2005), there was an element of general unfairness or unfairness in the nature of surprise in raising the issue by way of challenging the good faith of Mr Rich in the context of the s 237 application. Secondly, I expressed the view that further exploration of the issue that counsel had identified as justifying the question under consideration would not assist me to make my decision on that issue in this application. 28 It seems to me, on reflection, that those rulings were correct. It appears from Mr Rich's affidavit of 7 March 2005 that the question whether the source and object codes were in fact delivered was at the forefront of his mind when he responded to Ms Desmond's affidavit. While there is no direct evidence that Mr Rich read and relied upon para 163 of the Defence, it seems to me appropriate to infer, when assessing the question of his good faith under s 237(2)(b), that in a commercial case such as this it is probable that Mr Rich would have formed his belief as to the existence of reasonable causes of action for MDU and its prospects of success after taking legal advice, and that his legal advisers would have based their advice partly on an assessment of the Defence. In expressing his belief, therefore, he was directing his mind to an issue which, having regard to the contents of Ms Desmond's affidavit to which he was replying and the state of the pleadings (which had no doubt been studied by his legal advisers), involved whether access had been given rather than merely offered. It was unfair, in my opinion, for the defendants to pursue a line of cross-examination based on the different contention, not foreshadowed in the Defence, and not specifically foreshadowed in any other way, that access to the codes was offered but not taken up. 29 As to my second ground for this decision, namely that further explanation of the issue would not assist me to make my decision under s 237(2)(b), I explained (T 28) that if, until the hearing of the application, Mr Rich had believed and was led to believe by the pleadings that the defendants' case related to whether they in fact supplied or gave access to the Morningstar Software, then evidence going to the question whether Mr Rich failed to agree on the terms of access would not be capable of assisting me in respect of his good faith. I thought it not relevant to the issue of good faith to hear evidence as to whether Mr Rich would take a different view if different matters had been raised by the defendants (at T 29). This is on the basis that "good faith" for the purposes of s 237(2)(b) is a question of fact as to the applicant's motives in bringing the application, rather than a hypothetical question of what his motives would be if a different issue was placed before him. 30 After I made my rulings, senior counsel for the defendants decided not to ask any more questions in cross-examination of Mr Rich. Having regard to the evidence that I have outlined, the appropriate conclusion is that Mr Rich honestly believes that MDU has reasonable cause of action with reasonable prospects of success. 31 The question of collateral purposes was considered in Swansson at [36], and in other cases: Goozee v Graphic World at [55]-[56]; Charlton v Baber at [40]; Carpenter v Pioneer Park at [22]; Lakshman v Law Image Pty Ltd [2002] NSWSC 888 at [23]. It appears from the cases that the courts apply the principles of abuse of process discussed in such cases as Williams v Spautz (1992) 174 CLR 509. According to Swansson (at [43]), the court will also import notions of equity into the good faith requirement, so that if the applicant seeks to receive a benefit which, in good conscience, he or she should not receive, then the application will not have been made in good faith even though the company itself also stands to benefit. Such a benefit would include double recovery, in a case where the applicant has benefited from knowingly assisting the wrongdoer and now seeks to benefit indirectly from the company's success in the litigation. 32 Mr Rich swore an affidavit on 1 April 2005 saying that he was bringing the application under s 237 for the purpose of obtaining an order for payment of substantial damages in favour of MDU, so as to redress the damage caused to MDU as a result of the conduct complained of in the ASC, including alleged breaches by Morningstar Inc of the Licensing Agreement, and thereby increase the value of his indirect shareholding in MDU. Mere assertion does not establish such matters, but here Mr Rich's statements are supported by other matters. 33 In my opinion the nature of MDU's causes of action, as alleged by Mr Rich, and the circumstances in which they are alleged, as outlined in my judgment of July 2004 and the affidavits before me now, reinforce Mr Rich's evidence on this point. Clearly enough part of his purpose is to obtain financial compensation, ultimately for his own benefit, but he seeks to do so by proceeding on behalf of the company, to the extent that the company in which he has an indirect interest has suffered loss. This is not a case where the company has any independent purpose or external interests, as it is a joint-venture vehicle for the parties to litigation. The company's causes of action arise out of the same facts and circumstances as are said to give causes of action to the plaintiffs. I see nothing improper or tending to abuse the processes of the court in Mr Rich seeking to invoke the company's rights in such a case as this. 34 I agree with Palmer J in Swansson (at [39]) that where the applicant under s 237 is a former officer of the company with nothing obvious to gain directly by the success of the derivative action, the court will scrutinise with particular care the purpose for which the derivative action is said to be brought. Here, however, where the company is a joint-venture vehicle and the former officer is one of the venturers, and the application under s 237 will allow him to assert those parts of the overall pleaded case in which it is contended that the company rather than the plaintiffs have suffered loss, and there is an obvious potential indirect gain to him in doing so, the question of collateral purposes has a different complexion. 35 As to the question of double recovery, this is not the case of an applicant having benefited from the defendants' wrongdoing and then seeking to recover damages from them on behalf of the company, for his or her indirect benefit. The defendants contended that there was a "double recovery" problem of another kind. They drew attention to the fact that Mr Rich was at the same time seeking (he said) to restore value to Fiduciary's shareholding in MDU indirectly for his own benefit, and at the same time he was suing for damages for breach of promises allegedly made to himself personally, the promises being to the effect that Morningstar Inc would act in a way which would increase the value of Fiduciary's shareholding in the company. The defendants submitted that maintaining two claims designed to achieve the same purpose, when both claims could not result in substantial damages in the absence of double counting, indicated lack of good faith. 36 I disagree with this submission. There is no direct equivalence between, on the one hand, the amount of damages recoverable on behalf of MDU in any derivative action, based upon the causes of action identified in the amended application, and any increase, by virtue of successfully pursuing those claims, in the value of Mr Rich's indirect holding in MDU, and on the other hand, any damages which he might obtain from his personal claims, assessed by reference to his own loss. The plaintiffs seek relief on various grounds, some on the basis of causes of action independent of MDU, for example under the Shareholders' Agreement and the Subscription Agreement. Although Mr Rich was a party to various agreements to which MDU was also a party, the allegation to be made on behalf of MDU is that the company directly suffered losses from the breach of those agreements of a kind not suffered by Mr Rich. Additionally, Mr Rich was not party to the Licensing Agreement, a matter of some significance because, according to the ASC, a significant cause of MDU's financial failure was Morningstar Inc's breach of the Licensing Agreement, which in turn is said to have led to the making of the various convertible loan agreements and to other events which had the effect, it is alleged, both of diluting Mr Rich's indirect shareholding in MDU and of damaging the company's financial position. 37 In these circumstances, any real prospect of double recovery should be addressed at the final hearing. One can expect the trial court to be vigilant to avoid the plaintiffs obtaining double compensation: Baltic Shipping Co v Dillon (The Ship Mikhail Lermontov) (1993) 176 CLR 344 at 382-3; R v Mountford (2001) 79 SASR 38 at [23]. It may be, depending upon the findings at the trial, that Mr Rich's claims will attract the principle, emerging from Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, at 222-3 (Court of Appeal), Johnson v Gore Wood & Co [2002] 2 AC 1, at 35-36 per Lord Bingham of Cornhill, and Gould v Vaggelas (1985) 157 CLR 215, esp at 245-6 per Wilson J, that an individual shareholder cannot recover for a diminution in share value which merely reflects a loss suffered by the company as a result of the same conduct. In a case such as this, where multiple causes of action are said to arise, vested in various claimants, out of the same complex commercial facts, it will normally be inappropriate to make a determination prior to the final hearing that double recovery is sufficiently in prospect to raise question about the applicant's good faith: Harris v Milfull (2002) 43 ACSR 542 at [40]. 38 In these circumstances my view is that the "double recovery" problem does not exist as a practical issue and the claims asserted by Mr Rich do not, in that respect, signify any lack of good faith. 39 The defendants submitted that Mr Rich has nothing to gain from the granting of leave, because the granting of leave will not confer on him any advantage, or remedy, he does not already have. They submitted that, on the other hand, recovery of damages by MDU would provide Mr Rich with only the indirect benefit of an increase in the value of the Fiduciary shareholding. This submission was developed extensively by reference to the ASC, and the defendants handed up a "Schedule of Claims for Damages in Amended Statement of Claim Comparing Claims by Rich with Claims by MDU". The defendants also referred to observations by Palmer J in Swansson (at [59]) to the effect that there should be evidence enabling the court to form a conclusion as to whether the substance of the redress which the applicant seeks to achieve is available by a means which does not require the company to be brought into litigation against its will: see also Hassall v Speedy Gantry Hire Pty Ltd [2001] QSC 327 at [10]-[14]. These considerations, they said, go to the question of good faith and also to the question whether the granting of leave is in the best interests of the company. 40 It is difficult to assess these submissions in the context of a limited application directed to the specific criteria identified by s 237(2), without the benefit of full presentation of the evidence at the final hearing. Doing the best I can, my opinion is that there is a prospect that the eventual remedial outcome will depend, if the plaintiffs are successful, upon whether the action is framed, in part, as a derivative action or simply an action to assert the plaintiffs' individual rights. In the first place, it is important that MDU has a cause of action on the Licensing Agreement as a party to it, not available to the plaintiffs in that capacity. Secondly, it is possible, as I have said, that at the final hearing Gould v Vaggelas and the other cases I have cited will be an obstacle to Mr Rich recovering personally. Thirdly, in the complex circumstances of this case, it is very difficult, even impossible in practical terms, to be sure about whether the presence or absence of MDU as a claimant will affect the ultimate measure of damages after the facts have been established at the final hearing. I have reached the conclusion, therefore, that the degree of overlapping between MDU's proposed claims and the claims of the plaintiffs is not so complete that the court should conclude, on that basis, that the application is not made in good faith or is not in the best interests of MDU. 41 Noting the breadth of the relief sought in the ASC, and especially in the Industrial Relations Commission proceeding that has been transferred to this court, the defendants contended that if Mr Rich were to succeed in the proceeding as presently constituted, the company would be returned to the position it was in before the alleged misconduct, and (being then under Mr Rich's control) it would be able to pursue the actions that it wishes to pursue without relying on any derivative proceeding. Consequently, said the defendants, a derivative proceeding is otiose. I disagree. The final resolution of the proceeding is likely to take a substantial time, and the prospect that after final orders Mr Rich might be able to commence a fresh proceeding to assert MDU's claims is no substitute for leave to commence such a proceeding now. 42 The defendants submitted that it was relevant to the question of good faith that Mr Rich, despite having the benefit of litigation funding, continues to "defy" the orders made by Barrett J that the plaintiffs pay forthwith the costs of the unsuccessful application for interlocutory relief in November 2001. Although I would not say that this consideration is irrelevant, it seems to me have negligible weight on the issue of good faith, in view of the impecuniosity of the plaintiffs. That fact makes it incorrect to describe non-payment of assessed costs as "defiance" of the court's order. Of course, there is a different issue to be considered, namely whether leave should be granted on terms requiring payment of the assessed costs. 43 My conclusion is that s 237(2)(b) is satisfied in the present case. Best interests of the company 44 The Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 says this about the "best interests of the company" criterion: "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 the 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." 45 The present case bears no resemblance to the hypothetical situation described in the Explanatory Memorandum, where there has been a breach of duty but only a nominal loss and it is not worth the company's while to pursue it. But it appears that s 237(2)(c), as enacted, leads to a broader inquiry. 46 It has been said that the phrase "best interests" is concerned with the company's separate and independent welfare: Charlton v Baber at [52]. In Swansson (at [55]ff) Palmer J drew attention to the wording of s 237(2)(c), which requires the court to be satisfied that the proposed derivative action is in the company's best interests, not merely that it may be or appears to be or is likely to be: see also Goozee v Graphic World at [72]; Charlton v Baber at [45].. He contrasted the Australian wording with the wording of comparable statutory provisions in Canada and New Zealand which, he said, has led the courts in those countries to the view that the best interests of the company need be considered only in a prima facie way. In Australia, he said, the applicant must establish the best interests of the company on the balance of probabilities, a fact which can only be determined by taking into account all the relevant circumstances, some of which he enumerated. 47 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. 48 In the present case Mr Ellis has given evidence that, on certain particular assumptions, MDU is not in a position to finance any legal action against Morningstar Inc and its current and former nominee directors, as the company has barely sufficient working capital to operate its business and expects to record a small loss for the year ended 31 December 2004. Given, however, the availability of litigation funding and the potential for recovery, to the "serious question to be tried" level, the difficult financial circumstances of the company are not sufficient, per se, to warrant the conclusion that a proceeding should not be brought in its name. 49 Subject to one consideration, the evidence before me as to the nature and circumstances of the proposed course of action of the company, its financial circumstances, and the potential utility of the company's presence as a plaintiff in view of potential limitations on Mr Rich's claims to recovery, is sufficient to satisfy me that it is in the best interests of MDU that leave be granted. The consideration that works against this conclusion is that MDU is at risk of exposure to substantial liability for costs if its claims are unsuccessful. 50 The defendants contended that if an order is made under s 237 and MDU's claims fail at the final hearing, the result will be a substantial costs liability for the company, measured in millions of dollars, for no benefit to it. It cannot be in the best interests of the company, they submitted, to expose it to that risk. If MDU's claims fail at the final hearing, it will remain a company in which Morningstar Inc holds more than 90% of the shares, and the Rich interests have only a very small percentage of the shareholding. Therefore (according to the defendants) an order that MDU pay the defendants' costs would be tantamount, in large measure, to an order that they pay their own costs, notwithstanding their success in the litigation. 51 In cases such as this, there 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: see McLean v Lake Como Venture Pty Ltd [2003] QSC 562 at [7]. Sometimes satisfaction of the "serious question to be tried" criterion will lead readily to the conclusion that the applicant should be permitted to assert the company's claims on its behalf. But where, as here, the assertion of those claims is simply a manifestation of aspects of the overall dispute between the parties, it will often be appropriate for the court to address the question of costs in the event that the claims fail. A suitable way of doing so, addressed during the hearing of the present application, is to grant leave on terms that the applicant is responsible for the costs ordered against the company, and undertakes not to seek contribution or indemnity from the company. I think such an order is appropriate here. The intention is that Mr Rich will be unable to reduce the quantum of his own liability by asserting a claim to recoupment against the company, bearing in mind that over 90% of any costs payable to the defendants by the company will in substance be paid out of Morningstar Inc's interest. Further orders 52 The defendants submitted that the there is no difference between the position of the company and the positions of Fiduciary and Fiduciary Consultants with respect to security for costs, drawing attention to para [83] of my judgment July 2004 and the observations of Young CJ in Eq in Chartspike Pty Ltd (in liq) v Chahoud [2001] NSWSC 585, at [5]. In my opinion there is substance in this submission. As I explained in my judgment of July 2004, the law draws a distinction between the position of an individual as litigant, and the position of a corporation. In the case of an individual, poverty is no bar to litigation: Cowell v Taylor (1885) 31 Ch D 34, at 38 per Bowen LJ. In the case of a corporation, it is appropriate to make an order for security having regard to s 1335 of the Corporations Act and the policy underlying it: see, especially, my judgment of July 2004, at [57]ff. 53 The effect of the orders for security for costs that I have made is that the claims of the two corporate plaintiffs, including Fiduciary's claims on the ground of statutory oppression, are stayed pending the provision of security. I see no reason why, consistently with the law and policy to which I have referred, the claims by MDU should be in any different position. The fact that MDU's claims are to be asserted by Mr Rich, as an impecunious litigant with the benefit of litigation funding, does not convert those claims into claims of an individual plaintiff within the Cowell v Taylor principle. They remain the claims of a corporation: see ss 236(2), 240; cf Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd [2001] QSC 324. In my view, therefore, the existing orders for security for costs should be extended to the claims proposed to be asserted by Mr Rich on behalf of MDU. I shall make an order to that effect as a term of the granting of leave. It appears to me that the court has the power to make such an order under s 242, as well as by application of its general power to make orders on terms. 54 The defendants also submitted that the granting of leave should be subject to a term that the outstanding costs assessed in respect of the unsuccessful interlocutory hearing before Barrett J also be paid. It would be inappropriate to impose such a condition on the pursuit by Mr Rich of his individual claims, in light of the Cowell v Taylor principle. However, in circumstances where · the company's claims arise out of the same facts and circumstances as the claims asserted by the corporate plaintiffs; · a judge of this court has ordered that costs be assessed and paid forthwith; and · I have vacated a previous hearing of a s 237 after setting that application down for hearing in terms requiring those costs to be paid; it seems to me appropriate to require that those costs be attended to as a term of the granting of leave to pursue claims on behalf of the company. 55 The fact that Mr Rich may have an entitlement to recover a greater amount according to a provision in MDU's accounts is not an adequate basis for deferring payment of these costs, in circumstances where Mr Rich seeks an indulgence while not complying with an order of the court. Conclusions 56 In my opinion, Mr Rich has made out the grounds for bringing a derivative action under s 237 to assert MDU's claims, provided that the best interests of the company are properly protected. That will be so, and the principles regarding provision of security for costs and compliance with the court's orders will be properly reflected, if the granting of leave is made subject to terms in the nature of conditions precedent to leave, requiring: (1) Mr Rich to undertake to bear the costs of the pursuit of MDU's claims, indemnify MDU and not claim contribution from it in respect of any adverse costs order; (2) the company or Mr Rich on its behalf to join in the provision of security for costs that I have ordered to be provided by Fiduciary and Fiduciary Consultants, and for pursuit of the company's claims to be stayed pending compliance; and (3) the plaintiffs to pay the outstanding costs assessed in respect of the interlocutory application heard by Barrett J. 57 As to (1), my view is that the form of words proposed by the defendants in their written submission is appropriate, namely that leave be on condition that Mr Rich pay and bear (and indemnity the company against) all costs, charges and expenses of and incidental to the bringing and continuation of the proceeding brought by him on behalf of the company except to such extent, if any, as the court may in future otherwise direct or allow. 58 In his application Mr Rich seeks leave under ss 236, 237 and 242 to enter into a funding agreement on behalf of and in the name of MDU. It appears to me that the power to do so is conferred by s 242, and subject to the conditions I have outlined, that order should be made. 59 I shall fix the matter for a further short hearing, for the purpose of making orders and hearing argument as to costs of the application. I shall direct the defendants to bring in draft short minutes of orders. I note that I am inclined, subject to submissions, to reserve costs of the application, in circumstances where there has been a measure of success on each side. **********

Fiduciary v Morningstar Research

At a glance

Court

Decision date

Before

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Judgment (12 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (14)

Cited By (35)