Freshstart Australia Pty Ltd v Lofthouse [2006] VSC 317

Foss v. Harbottle [1843] EngR 478; (1843) 2 Hare 461; 67 ER 189

Carpenter v. Pioneer Park [2004] NSWSC 1007

Mr I. G. Waller, of Counsel, with Mr H. L. Redd of Counsel

For the Directors and Officers of Fresh Start Australia Pty Ltd

1 This application began as an application under section 477(6) and section 536 of the Corporations Act 2001 (Cth). By leave granted on 21 July 2006 the application was amended to one under section 237 of the Act. I directed that the amended application and the affidavits in support of the original application be served on Michael Scibilia and Yan Po and that they be notified of the adjourned date, which is today. Mr Minahan of counsel has appeared today on behalf of Mr Scibilia and Mr Po and on behalf of Mr Bradley Senn. Those persons are not respondents to the application and they have not sought to be made respondents. Mr Minahan has nevertheless put some matters to me on the basis that the Court ought to take them into account.

2 The applicant, Anthony Scuteri, is a shareholder in Fresh Start Australia Pty Ltd (in liquidation) ("Fresh Start"). He was a director until 17 August 2005. Mr Scibilia, Mr Po and Mr Scuteri established Fresh Start together, and all of them were originally directors and equal shareholders. Fresh Start's business involved the export of fruit.

3 In 2005 Mr Scuteri fell out with Mr Scibilia and Mr Po. There were court proceedings. Mr Scuteri was purportedly removed as a director. On 16 January 2006 a mediation between the parties failed, in that no settlement was reached.

4 According to the administrators' report, which is exhibit AS-5 to Mr Scuteri's affidavit in support of this application, on 17 January 2006 the directors of Fresh Start, Mr Scibilia and Mr Po, resolved to appoint the defendants as administrators. On 13 February 2006 a creditors' meeting resolved that the company should go into liquidation and the defendants thereafter were the liquidators.

5 According to Mr Scuteri's affidavit, shortly after 13 February 2006 he discovered that a company named Global Fresh International Pty Ltd had been incorporated on 18 October 2005. At that time, according to the ASIC current and historical company extract which is exhibit AS-6 to Mr Scuteri's affidavit, Mr Bradley Senn, who was then Fresh Start's chief financial officer, was its only office holder. On 17 February 2006 Mr Senn ceased to be a director and ceased to be the secretary. On that same day Mr Po and Mr Scibilia were appointed as directors. Global Fresh International Pty Ltd's shareholders are Scibilia Investments Pty Ltd, Yan Po Investment Pty Ltd and Mr Senn.

6 Mr Scuteri's solicitors raised this matter and a number of other matters with the liquidators. In substance, the liquidators advised in relation to this particular matter that they had accepted an explanation which had been given to them for the sequence of events which I have set out by Mr Po and Mr Scibilia. The liquidators indicated that they did not propose to issue proceedings about the matter.

7 It is important in this context to record that the liquidators have been able to realise sufficient assets to pay all creditors in full. I was told by the liquidators' counsel on 21 July 2006 that they now hold a sum of approximately $50,000 which, subject to the outcome of this application, they intend to return to members after deducting any outstanding remuneration and expenses.

8 Mr Scuteri now wishes to pursue the matter of the establishment of Global Fresh International Pty Ltd himself by instituting a proceeding in Fresh Start's name against Mr Scibilia, Mr Po and Mr Senn. He applies for leave to do so under section 237 of the Companies Act.

9 There was at one time some uncertainty as to whether section 237 applied to companies in liquidation.

10 In Scarel Pty Ltd v. City Loan & Credit Pty Ltd[1] Gummow J dealt with a motion by a contributory of a company in liquidation for leave to continue a proceeding which the liquidator had determined to discontinue. His judgment was delivered in February 1988 and addressed the rule in Foss v. Harbottle[2] and the exceptions to that rule, not the statutory derivative action now provided for in Part 2F.1A of the Corporations Act.

11 In that context Gummow J said (at 36):

"The cases dealing with Foss v. Harbottle and the exceptions to it involved going concerns where, by reason of particular circumstances, the orderly exercise of the respective powers of the directors and shareholders did not produce a result whereby the company was taking action to enforce its rights, whether against directors, shareholders or third parties.

The situation is very different where the company is in liquidation. The ordinary rule there 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 other relief for an injury done to the company. In my view, this follows from the operation of the provisions of the Code to which I have referred. A special case arises where the directors institute proceedings to have the winding up order set aside...But the general proposition is that with the liquidation, both the directors and shareholders in general meeting cease to have authority to institute or continue litigation by the company...

A decision by the liquidator may be called into question by a contributory pursuant to the statutory provisions in that behalf. That has been attempted, without success. What is now sought in the present proceedings is, in substance, by way of collateral attack to reagitate the question by treating as applicable the rule in Foss v. Harbottle and relying upon an exception to that rule in the terms asserted by the applicant."

12 Gummow J was not prepared to take that course.

13 These observations were interpreted by some (for example, the authors of the commentary in the CCH Australian Corporations and Securities Law Reporter) as supporting a conclusion that Part 2F.1A did not apply to a company in liquidation. In my view, that was a misconception of what his Honour had said. What he said was that the ordinary rule is that in an ordinary case the court should not entertain a derivative action where a company is in liquidation. That does not mean that in extraordinary cases leave might not properly be given under section 237.

14 The issue has been the subject of a number of first instance decisions, almost all of which have held that Part 2F.1A does apply to a company in liquidation. These decisions are referred to in Barrett J's recent judgment in Carpenter v. Pioneer Park[3]. At paragraph 8 of that judgment Barrett J observes that the question should now be regarded as settled. I agree. Part 2F.1A does apply to a company in liquidation.

15 This conclusion does not, in my view, detract from the cogency of Gummow J's observations as to what should be the ordinary rule. It ought to be only in an extraordinary case where the court will consider permitting the liquidator's role to be supplanted in the pursuit of litigation on behalf of the company.

16 The circumstances here are an instance of such extraordinary circumstances. The liquidators here have completed their principal commercial function. They have realised sufficient assets to pay all creditors in full. The issue to be litigated is, in substance, one between the members. It is a further development in a series of disputes between the members which began before the liquidation commenced. It seems to me that, provided the criteria in section 237 are satisfied, it is far more satisfactory if the member concerned, Mr Scuteri, pursues the matter at his expense rather than that the liquidators pursue it using the modest surplus of funds which they currently hold.

17 The liquidators did not appear at the hearing today but indicated on 21 July 2006 through their counsel that they did not oppose leave being granted.

18 Turning then to the criteria in section 237(2), it seems to me that the position is as follows.

19 It is probable that the company will not bring the proceeding itself. The liquidators have made that clear.

20 In my view, the applicant, Mr Scuteri, is acting in good faith. It seems to me that the material establishes that he has an honest belief that there is a good cause of action. There is no material indicating that he has a collateral purpose.

21 The question of whether the proposed action is in the best interests of the company is one to which Mr Minahan directed some observations. He referred to the fact that the liquidation is almost complete and suggested that there are other courses of action available to Mr Scuteri in order to pursue the matter. It seems to me that such other courses would not be appropriate. If a wrong has been done here, the likelihood is that it is a wrong done to the company and the remedy ought to result in a return to the company rather than some other outcome.

22 Mr Minahan also submitted that the proposed claim remains unarticulated. He also submitted that leave should not be granted unless it appears that the proposed action is in the best interests of the company, rather than that it may be or is likely to be. I accept that. It seems to me that the circumstances here are such that, provided provision is made to address any costs risk, it is in the best interests of the company that the matter that Mr Scuteri has raised is pursued. I take this view because it seems to me that, provided the company is protected from any costs liability, the detriment of the claim failing should fall solely on Mr Scuteri, whereas the benefit of it succeeding should enhance the company's position and increase the company's assets to the benefit of all of the members. The costs risk can be addressed by appropriate orders or an undertaking.

23 It seems to me that the applicant's material does establish that there is a serious question to be tried. There is not only the coincidence in timing which raises concerns, there is also the circumstance that for some reason it was thought appropriate that Mr Senn should be the only office bearer during the period between 18 October 2005 and 17 February 2006, but then, Fresh Start having gone into liquidation, Mr Po and Mr Scibilia emerge as the two directors. I, of course, express no view as to the likely outcome of the proposed action but it does seem to me that a serious question to be tried has been demonstrated.

24 Given the circumstances of the application and the matters that transpired on 21 July 2006, it is appropriate, in my view, to grant leave notwithstanding the fact that section 237(2)(e)(i) has not been satisfied.

25 Subject to two matters, I conclude that leave ought to be granted in this case.

26 The further matters are these. Fresh Start and the defendant liquidators need to be protected in relation to costs liability; and the liquidators need to be able to monitor the progress of the proceeding so as to ensure that the liquidation does not become unduly protracted. Accordingly, I propose to grant leave only if Mr Scuteri is prepared to undertake:

(i) to indemnify Fresh Start and the liquidators against any liability for costs arising from the conduct of the proceeding; and

(ii) to give the liquidators such information as they may reasonably require from time to time as to the conduct of the proceeding.

27 The liquidators did not seek security in relation to the potential costs exposure. They did foreshadow the possibility of returning to court to deal with issues of their remuneration and to enable them to take steps should the proceeding not be dealt with expeditiously. I will reserve liberty to apply generally. This will enable the liquidators to return to court if they consider that the proceeding is not being properly conducted or if they wish to seek security for the undertaking which I have suggested Mr Scuteri ought to give.

28 [The matter was stood down while draft orders and undertakings were considered. The matters noted and the orders made were as follows:

Other Matters:

The Applicant, through his Counsel, undertook:

A. To indemnify Fresh Start Australia Pty Ltd (in liquidation) ("Fresh Start") and the Defendants ("the liquidators") against any liability for costs arising from the conduct of the proceeding referred to in paragraph 1 of these orders;

B. To give the liquidators such information as they may reasonably require from time to time as to the conduct of that proceeding.

Orders:

1. The Plaintiff is granted leave under s.237 of the Corporations Act 2001 (Cth) ("the Act") to bring proceedings on behalf of, and in the name of, Fresh Start by issuing an originating process against Michael Scibilia, Yan Po and Bradley Senn alleging:

breach of their fiduciary duties to the company; and

breach of ss.181, 182 and/or 183 of the Act,

arising out of their involvement with Global Fresh International Pty Ltd as deposed to in the affidavit of Anthony Scuteri sworn on 3 July 2006 and Gary Robert Herz affirmed on 3 July 2006.

2. The Plaintiff file the originating process for the proceeding referred to in order 1 by 4.00pm on 4 August 2006.

3. Subject to any further order, the costs of Fresh Start in the proceedings to be issued pursuant to order 1, are to be met by the Plaintiff.

4. Liberty to apply is reserved.

5. The costs of this application are reserved.]

[1] (1988) 17 FCR 344.

[2] [1843] EngR 478; (1843) 2 Hare 461; 67 ER 189.

[3] [2004] NSWSC 1007.