Is the application made in good faith?.
55 Under s.237(2)(b) it must be decided whether the plaintiffs are acting in good faith in seeking to activate the various immediate holding companies to seek, by reference to s.232, orders for the winding up of their respective directly and wholly owned subsidiaries. The defendants invite the court to draw the inference that the true purpose of the plaintiffs is to place pressure on the other shareholders in Graphic, particularly Mr Hoolahan, to buy their shares in Graphic (and presumably Double Pay).
56 The "good faith" concept, as it applies for the purposes of Part 2F.1A, was the subject of discussion by Palmer J in Swansson v Pratt [2002] NSWSC 583 (3 July 2002). His Honour observed that "good faith", in this relatively new statutory context, will acquire a developed meaning as courts have occasion to consider particular cases. He nevertheless identified two interrelated factors which he regarded as the minimum content of "good faith" in this area: first, whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success; and, second, whether the applicant is seeking to bring the derivative action for such a collateral purpose as would amount to an abuse of process.
Reasonable belief in the existence of a good cause of action?
57 The considerations I have identified as contributing to the conclusion that there is no serious question to be tried, at least on the evidence as it stands, make me think also that the plaintiffs cannot reasonably believe that a good cause of action exists on the part of each immediate holding company on behalf of which they wish to sue; or that there are reasonable prospects of success on the part of each such immediate holding company.
58 The plaintiffs therefore seem to me to fail the first of the tests emerging from the observations of Palmer J.
Collateral purpose?
59 The plaintiffs' real complaint, in so far as it is relevant to the several wholly owned subsidiaries, is a complaint against the ultimate holding company, Graphic, in which the plaintiffs hold shares. To the extent that they seek to vindicate what they consider to be unfairness within each wholly owned subsidiary contributing to the absence of dividend payments by Graphic to its shareholders, they are not really asserting conduct within or related to the subsidiaries. They are focussing, rather, on conduct within and related to Graphic.
60 It is axiomatic that the consolidated profits of Graphic and its subsidiaries, as disclosed by group accounts, cannot be the source of dividends paid by Graphic; and that, as it applies to a holding company, the prohibition upon payment of dividends otherwise than out of profits pays attention to the separate profits of that holding company alone, with any species of unrealised profits represented by an unexercised power to obtain dividends from subsidiaries being left out of account. The clear decision to this effect in relation to s.376(1) of the Companies Act 1961 in Industrial Equity Ltd v Blackburn (1977) 137 CLR 564 applies also to the provision now in force, being s.254T of the Corporations Act.
61 The ability of Graphic to enhance its own distributable reserves (and thus its capacity to pay dividends) by causing wholly owned subsidiaries with distributable reserves of their own to pass dividends up the corporate chain is clearly an aspect of the affairs of Graphic as a separate company. It is an aspect of Graphic's direct power to shape the behaviour of its directly and wholly owned subsidiaries and of its indirect power to shape the behaviour of its indirectly but wholly owned subsidiaries. Such power is at Graphic's disposal and may be exercised by it virtually at will, subject only to exigencies referable to the interests of the creditors of any individual subsidiary and related considerations concerning the subsidiary's solvency, given the general law prohibition on the payment of dividends which would result in or compound insolvency: see the discussion by Lockhart J in QBE Insurance Ltd v Australian Securities Commission (1992) 38 FCR 270.
62 It follows that if dividend policies adopted within the group as a whole resulting in non-payment of dividends by Graphic can be shown to entail conduct of the composite s.232 description involving failure by Graphic to exercise its powers over other companies so as to cause them to pay appropriate dividends benefiting it, the plaintiffs may rely upon that as conduct in the affairs of Graphic itself. They have no need to cause each immediate holding company to rely on corresponding conduct in the affairs of each wholly owned subsidiary.
63 The motives of the plaintiffs in seeking to activate the several immediate holding companies to seek orders for the winding up of their directly and wholly owned subsidiaries must be considered in the context just described. Those motives emerge from several letters written by the solicitors for the plaintiffs and dated 9 May 2002. Each letter is addressed to the directors of one of the immediate holding companies on behalf of which the plaintiffs seek leave to sue. The letter outlines the plaintiffs' requirements. The first is that they be given a statement of the dividend policy of Graphic, "its related companies (or any of them individually) and Double Pay or any combination of these companies". The second and third demands are:
"2. A declaration of dividends by [Graphic], its related companies and/or Double Pay in respect to a substantial portion of the retained profits for the financial year ended 30 June 2001.
3. Alternatively, that our clients' shares in Graphic be purchased for their fair market value at a price to be agreed between the parties or, if a price cannot be agreed, that [Graphic], its related companies and Double Pay be wound up so that their wealth can be distributed to the shareholders".
64 The message in each letter is clear. The plaintiffs' primary aim is to receive dividends or to have their shares bought. The threat to move for the winding up of all companies is put forward to enhance the possibility that "the other parties" will accede to the request for dividends or buy out. The desire to bring about the winding up of all group companies does not exist as an independent objective. It is expressed purely as a pressure tactic to enhance the possibility of achieving one or other of the two primarily expressed aims.
65 Winding up of all subsidiaries of Graphic in the way the plaintiffs seek to achieve through their proposed derivative actions is foreign to the attainment of their real purpose in relation to the Graphic group, which is the legitimate purpose of realising value they see to be locked up in their Graphic shares. If, as they contend, the group behaviour with respect to non-payment of dividends is oppressive or unfair or contrary to members' interests, proceedings by the plaintiffs in their own right, based on s.232 and seeking winding up of Graphic alone or an order for purchase of their shares in Graphic is a course properly and logically open to the plaintiffs.
66 If Graphic were wound up, its liquidator would have the task of deciding what ought prudently be done with the shares in its subsidiaries. If, as the evidence indicates, the group as a whole is profitable and financially sound, it is very likely that the liquidator would realise greater value by selling the assets of Graphic (including shares in subsidiaries) on a going concern basis, than he or she would by dismantling the profit making structure by liquidation of all the subsidiaries and realisation of their assets in a piecemeal and break-up way. Nothing would then be realised for goodwill, while tangible assets such as machinery would likely realise scrap value only.
67 The plaintiffs' threat to seek to have all group companies put into liquidation with the aid of the several derivative proceedings they wish to launch must therefore be regarded as tantamount to saying that, if the other shareholders in Graphic do not co-operate in achieving the plaintiffs' primary objectives (release of retained earnings at the Graphic level or buy-out of Graphic shares), the plaintiffs will seek to embark upon a course which diminishes or destroys value for all Graphic shareholders.
68 In these circumstances, I am satisfied that the plaintiffs propose to initiate the derivative action on behalf of each immediate holding company not to prosecute that action to its conclusion (being the making of a winding up order in respect of the subsidiary concerned) but as a means of seeking to persuade the other shareholders of Graphic either to concur in and procure the payment of dividends by Graphic or to buy the plaintiffs' shares in Graphic, that being a collateral purpose beyond that offered by any of the proposed derivative actions. There are thus good grounds for regarding each such derivative action as an abuse of process in the sense described by members of the High Court in Williams v Spautz (1992) 174 CLR 509.
69 The plaintiffs' application accordingly fails the s.237(2)(b) test by reference to the two interrelated factors to which Palmer J referred in Swansson v Pratt (above).
The best interests of the putative plaintiff company
70 Turning to s.237(2)(c), the question is whether it is in the best interests of each immediate holding company that the plaintiffs be entitled to assert on its behalf the particular causes of action involving conduct related to its wholly owned subsidiary (or subsidiaries) and, on that basis, to initiate proceedings seeking on the immediate holding company's behalf an order for the winding up of its directly and wholly owned subsidiary.
71 Section 237(3) defines circumstances in which there arises a rebuttable presumption that granting leave is not in the best interests of the company. However, no submissions were addressed to me by reference to that section and the evidence does not allow me to make findings on the matters to which it directs attention. I therefore proceed to consider the matter without reference to the presumption.
72 As Palmer J observed in Swansson v Pratt (above), the question here is specific:
"At the outset, it is important to note that s.237(2)(c) requires the Court to be satisfied, not that the proposed derivative action may be, appears to be , or is likely to be , in the best interests of the company but, rather, that it is in its best interests."
73 This question cannot be answered favourably to the plaintiffs in this case. For reasons I have stated, it cannot be concluded that the statutory remedy under s.232 is of its nature unavailable to a single shareholder. But why should it, in this case, be regarded as in the best interests of each immediate holding company that its directly and wholly owned subsidiary be wound up? That is the sole remedy the holding company would seek in the derivative proceedings. No argument justifying, from the perspective of the interests of its immediate holding company, the winding up of each wholly owned subsidiary has been advanced. Such a winding up might suit the plaintiffs as a means of causing cash to flow through to the ultimate holding company (Graphic) in which they hold shares. But the several liquidations the immediate holding companies sought would effectively put an end to the business of the group which, on the evidence, is trading profitably and is in a sound financial state. There is no basis on which that result can be seen as conducive to the separate interests of any of the immediate holding companies on whose behalf the plaintiffs wish to seek the winding up of each wholly owned subsidiary.
74 Implicit in what I have just said is the proposition that, in the context of a group of companies such as the present, the "best interests" to which s.237(2)(c) directs attention are those of the particular putative plaintiff company, not those of the group. That, in my view, is the clear meaning and intent of the provision. It may be that the separate interests of a particular group company will be coloured or shaped by the wider interests of the group: Maronis Holding Ltd v Nippon Credit Australia Ltd (2001) 38 ACSR 404. It may also be that something which, in isolation, would appear harmful to the interests of the particular group company will be seen in a different light when its interests are viewed in the totality of the group context: Nicholas v Soundcraft Electronics Ltd [1993] BCLC 360. But it is to the particular company's separate interests alone, whether or not so coloured, shaped or modified, that attention must be directed. Such an approach is consistent with the definition of directors' duties by reference to the interests of the company as a whole which emerges from the decision of the High Court in Walker v Wimborne (1976) 137 CLR 1.
75 It is not possible, on the evidence, to conclude that any of the proposed derivative actions would be in the best interests of the company on behalf of which it is proposed that the action be brought.
The s.237(2)(e) criterion
76 Section 237(2)(e) imposes a procedural requirement as to which no issue arises in this case.
Conclusion
77 In relation to each of the proposed proceedings in respect of which the plaintiffs seek leave under s.237(2), I am satisfied as to the matters in ss.237(2)(a) and 237(2)(e). I am not, for the reasons I have stated, satisfied as to the matters in ss.237(2)(b), 237(2)(c) and 237(2)(d).
78 The interlocutory process by which the plaintiffs advance their several claims for leave to institute derivative actions under Part 2F.1A is therefore dismissed.