227 ALR 758
Swansson v R A Pratt Properties Pty Ltd [2002] NSWSC 583
42 ACSR 313
Transmetro Corp Ltd v Kol Tov Pty Ltd [2009] NSWSC 350
71 ACSR 582
Warren v Coombes [1979] HCA 9
Judgment (9 paragraphs)
[1]
Background and the relationship of the parties
Drs Huang and Wang are dentists. Since April 2011 they have carried on practice at the premises situated in a development known as Q Central at Bella Vista.
Up to the time of the events giving rise to these proceedings, the premises were owned by a company, Robin Stuart International Retirement Fund No 1 Pty Limited and leased to Ismile. The lease was for a term of seven years commencing on 1 April 2011 with two options to renew for further terms of five years. As at 1 May 2014, the annual rent payable under the lease (including GST and contribution to outgoings) was $52,490.28.
Ismile is a company whose shares are held equally by DHE, a company controlled by Dr Huang, and WWE, a company controlled by Dr Wang. Its directors are Dr Huang and members of his family and Dr Wang and members of her family.
Ismile is the trustee of the Ismile Dental Trust, a unit trust constituted by deed dated 7 October 2010 (the trust deed). The units of the trust are divided into ordinary, income and equity units. Entities controlled by Drs Huang and Wang hold an equal number of each class of units in the trust.
Income units in the trust do not confer any right to vote or speak at any general meeting of unit holders. By cl 3.1.2 and cl 3.1.3 of the third schedule to the trust deed, the trustee has the right to pay to those unit holders such part of the net income in each accounting year as it determines and in such proportion in respect of each unit holder as it also determines. If no determination is made, the holders of income units have no right to distribution of income. The trust deed provides that on termination of the trust, income unit holders are only entitled to receive the value of each unit specified in the trust deed, namely $1.
Equity units do not confer any right to vote or speak at any meeting of unit holders either. Equity unit holders are entitled from time to time to distributions of capital in such amounts and in such proportion as the trustee determines. Subject to that, they are not entitled to any capital distribution. On termination, holders of equity units are entitled to a return of the issue price of their units in priority to the holders of ordinary units but are not entitled to any further return of capital.
Clause 8 of the trust deed deals generally with distribution of income. It requires the net income to be paid to unit holders or the persons described as the "Unit Holders Class of Discretionary Beneficiaries" in proportion to the number of units held by each unit holder. Effectively, it means that unit holders are entitled to their proportion of income to be distributed either to themselves or to the persons named as their discretionary beneficiaries, generally members of their respective families. It also means, having regard to the specific provisions concerning income and equity units, that in default of any determination under cl 3.1.2 and cl 3.1.3 of the trust deed, the distribution is to be made to ordinary unit holders or their discretionary beneficiaries.
Clause 8.4 permits the trustee, with the consent of a majority of issued voting units, to accumulate income. Voting units are not defined in the trust deed but, by default, must mean ordinary units.
The trustee is empowered by cl 8.6 to pay any income distributed to a beneficiary, either in cash or by cheque, by placing such amount to the credit of the beneficiary in the books of the trust or by the issue of additional units.
The trust deed confers wide powers on the trustee including, relevantly, a power to invest in real property and a power to borrow.
Although there was no formal documentation dealing with their relationship, the primary judge found, and it was not disputed, that each of Drs Huang and Wang practised at the premises three days a week. The primary judge also recorded that it was common ground that the arrangement did not involve a partnership but an association conducted with Ismile, structured in a manner that involved the conduct of separate practices and the sharing of certain expenses. The arrangement was set out in an email of 2 August 2011 from Dr Wang to Dr Huang, which was accepted by the latter. The email was in the following terms:
"We started this practice as associateship, never partnership. The fundamental differences are partnership will share everything equally whereas associateship is pretty much independent of each other, only sharing common interest in certain areas.
If you agree, we have common interest in the following areas;
1. Marketing of the ismile dental as whole unit - so that we can share n/p equally.
2. As practice grows, opportunity to cooperate further as 50/50 associateship to fund further treatment centers [sic] and share further profit.
3. Sharing limited services such as rent/outgoing etc. to reduce overhead.
However, we do not share:
1. Individual stock,
2. Nursing staff.
3. Own patient once built up unless asked to.
etc,"
The primary judge recorded that it was not disputed that "n/p" referred to new patients.
In the operation of their respective practices at the premises, money was paid into a joint account to meet joint expenses. Each of Drs Huang and Wang maintained separate accounts in the name of Ismile into which they deposited their fees for dental services. Each of them drew money out of their separate accounts as they required. Each dentist thus had the benefit of income from the individual patients treated by them. Although the primary judge found that Ismile accounted for and paid tax on income earned by Drs Huang and Wang in operating their respective practices, the draft final accounts suggest the money received from the practices was paid into the company's accounts and paid out by way of trust distribution. It will be necessary to say something further about those accounts later in this judgment. However, it should be noted that in an affidavit affirmed on 31 October 2014, Dr Huang stated that he had not approved the 2014 financial statements.
As I indicated, the premises were leased premises. The primary judge noted that in cross-examination, Dr Huang accepted that, as at 2011, he and Dr Wang did not seek to purchase any property from which to operate the business.
The primary judge referred to the evidence of Dr Wang that she had an interest in purchasing property in the Bella Vista area. She caused WWE to purchase the premises for the price of $670,000, of which $500,000 was financed by way of loan provided by Medfin Australia Pty Ltd (Medfin) and $170,000 from WWE's own resources. The primary judge also found that Dr Wang and her husband paid the stamp duty and legal fees on the purchase.
The primary judge noted that there was no dispute that Dr Wang did not inform Dr Huang that the premises were offered for sale or that WWE was interested in, or intending to purchase, the premises. Dr Huang claims that this constituted a breach by Dr Wang of her fiduciary and statutory duties as a director of Ismile and, as a consequence, the appellants sought orders under s 237 of the Act enabling Ismile to bring the proceedings.
[2]
The legislation
Section 237 of the Act is in the following terms:
"237 Applying for and granting leave
(1) A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.
(2) The Court must grant the application if it is satisfied that:
(a) it is probable that the company will not itself 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 making 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 subparagraph (i) is not satisfied.
(3) A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that:
(a) the proceedings are:
(i) by the company against a third party; or
(ii) by a third party against the company; and
(b) the company has decided:
(i) not to bring the proceedings; or
(ii) not to defend the proceedings; or
(iii) to discontinue, settle or compromise the proceedings; and
(c) all of the directors who participated in that decision:
(i) acted in good faith for a proper purpose; and
(ii) did not have a material personal interest in the decision; and
(iii) informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and
(iv) rationally believed that the decision was in the best interests of the company.
The director's belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold.
(4) For the purposes of subsection (3):
(a) a person is a third party if:
(i) the company is a public company and the person is not a related party of the company; or
(ii) the company is not a public company and the person would not be a related party of the company if the company were a public company; and
(b) proceedings by or against the company include any appeal from a decision made in proceedings by or against the company.
Note: Related party is defined in section 228."
[3]
The primary judgment
The primary judge stated that if the Court was satisfied of the matters referred to in s 237(2)(a)-(e), then it must grant leave. He further stated that if any of the criteria specified in those subsections were not satisfied, leave should not be granted. He stated the appellants had the onus of establishing, on the balance of probabilities, that each of the criteria was satisfied.
The primary judge found that the criteria in s 237(2)(a), (b) and (e) were satisfied. In relation to there being a serious question to be tried, his Honour accepted the test was the same as that applied by the Court in deciding whether to grant an interlocutory injunction. The primary judge noted that the appellants accepted that a fiduciary duty will be limited by the scope of the relationship which gave rise to the duty. He referred to submissions made on behalf of Dr Wang and WWE that there was no breach of duty because the proposed purchase did not fall within the scope of Dr Wang's statutory or fiduciary duties, that Dr Wang was not under a positive obligation to procure the opportunity for Ismile, that the opportunity did not arise as a result of Dr Wang's role as a director of Ismile and that the opportunity to purchase the premises was outside Ismile's existing and contemplated line of business.
The primary judge, whilst accepting the thrust of these submissions, concluded that those matters which he said supported a narrower view of the scope of the business were not sufficient to displace a finding that there was a serious question to be tried, at least in respect of the liability aspect of Dr Huang and DHE's claim for breach of fiduciary duty at general law and breach of s 182 of the Act.
However, the primary judge found it was not in the best interests of Ismile that leave be granted. The primary judge noted that the submissions made before him did not address the fact that the primary relief sought by Ismile was not an account of profits but a constructive trust and that an account of profits had the obvious difficulty that there was no evidence that WWE had obtained any profit. He also concluded that declarations without substantive relief would not provide any benefit to Ismile to warrant the cost of the proceedings. In these circumstances, he concluded that, in the absence of any agreement as to conditional orders, the Court was left to determine whether it was in the best interests of Ismile to grant leave to bring proceedings seeking a constructive trust "in a manner that is not conditional upon Ismile's ability to finance the acquisition of the Premises".
[4]
The appellants
The appellants submitted that the purchase of the premises by WWE fundamentally altered the basis on which the parties entered into the overall arrangement, which was that Drs Huang and Wang would conduct their practices as tenants at the premises. The appellant submitted that because the imposition of a constructive trust is a discretionary remedy, the principles in House v The King [1936] HCA 40; 55 CLR 499 are relevant to the issue.
The appellants submitted that the benefits to Ismile were: first, that the company's future in the premises would be secured; second, that the goodwill in the dental practice would be protected against divestment because of the real prospect that Dr Wang could acquire the goodwill at the end of the lease, so far as it attached to the premises; third, that the "preferred provider" status attaching to the premises would be preserved for Ismile; fourth, the potential for capital gain; and fifth, the fact that annual rent increases and increased rent payable if the options were exercised would be avoided. In that context, senior counsel for the appellant referred to the evidence of Dr Wang that the business had improved significantly and that preferred provider status had been obtained with Medibank.
The appellants submitted that the primary judge made two errors. They submitted first, that he asked the wrong question in stating that the Court was required to determine whether it was in Ismile's best interest to grant leave to bring the proceedings seeking a constructive trust in a manner not conditional upon Ismile's ability to finance the acquisition. Second, they submitted he erred in requiring affirmative evidence of Ismile's ability to do equity.
The appellants accepted that a party seeking the imposition of a constructive trust in the circumstances of cases such as the present must do equity and that any declaration of trust must be conditional upon satisfaction of that criterion. Senior counsel for the appellants noted that the appellants had expressed a willingness to do equity. However, it must be remembered that no indication to that effect came from Ismile, the potential beneficiary of the constructive trust. However, senior counsel for the appellants referred, in that context, to the unchallenged evidence of Dr Huang that he was willing to contribute $85,000 to defray half of the $170,000 contributed by WWE to the acquisition. He also submitted, without reference to authority, that in the case of an errant fiduciary, it could be presumed he or she would be prepared to arrange for the company to which the duty was owed to purchase the property.
[5]
The respondents
The respondents contended that the primary judge did not hold that if the parties could not agree on a conditional constructive trust then the Court was precluded from granting conditional relief, nor did he hold that such a trust cannot be imposed unless the claimant proves that he or she can do equity. They submitted that the primary judge was dealing with an anterior question, namely, whether it was in the best interests of the company for leave to be granted. They submitted that the primary judge applied orthodox principles in dealing with s 237(2)(c).
The respondents submitted that in considering the scope of Dr Wang's fiduciary duty, there was an express agreement that Drs Huang and Wang would "stick to leasing premises for the practice" and that, in many respects, they operated businesses which were separate from each other. They submitted that the appellants' claim for breach of fiduciary duty was by no means strong, particularly when contrasted with cases such as Keech v Sandford (1725) 25 ER 23, since in this case, the opportunity to purchase the property was not presented to Dr Wang in her capacity as a director. They submitted that although this Court need not determine the issue, the prospect of failure on a final hearing is relevant to whether it is in the best interests of the company to grant leave.
The respondents submitted that the primary judge did not approach the question solely by asking whether it was in Ismile's best interests to bring proceedings seeking a constructive trust in a manner not conditional upon Ismile's ability to finance the acquisition. They referred to the fact that the primary judge noted that parties could not agree on a conditional order and, in those circumstances, it was appropriate to consider whether it was in the company's best interests to bring the proceedings. Where such relief might be granted subject to conditions, the respondents contended it was relevant to consider whether Ismile was capable of satisfying such conditions as might be imposed and thus, take up any relief which might be granted. They submitted the ability of Ismile to take advantage of any order was relevant to the question of whether the proceedings were in the best interests of that company.
The respondents emphasised the requirement in s 237(c) that leave be in the best interests of the company. It was submitted that although the proceedings are interlocutory, the Court must be satisfied of this matter. They submitted that the question of whether it was in the best interests of the company must be established by evidence.
[6]
Consideration
Because of the nature of some of the submissions made by the parties it is necessary to say something about the approach to be taken by a court in determining whether to grant leave under s 237(2) of the Act to bring proceedings in the name of the company and the approach that should be taken by an appellate court in considering an appeal against the refusal of leave.
Section 237(2) provides for five criteria for the grant of leave. It is well established that if these criteria are made out, the court is required to grant leave and conversely, if any one is not made out, the court should refuse leave: Charlton v Baber [2003] NSWSC 745; 47 ACSR 31 (Charlton) at [31]; Goozee v Graphic World Group Holdings Ltd [2002] NSWSC 640; 42 ACSR 534 (Goozee) at [27]; Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; 53 ACSR 732 (Morningstar) at [16]. In Swansson, Palmer J at [24] stated that leave should not be given lightly. He stated that the requirement of best interests requires the applicant to establish on the balance of probabilities that the action is in the best interests of the company, a fact which can only be determined by taking into account all relevant circumstances. That approach has been followed consistently: Goozee at [72]; Morningstar at [46]; Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 1007; 51 ACSR 299 at [19]; Chahwan at [85].
It is correct that these cases were decided at a time when it was considered that proceedings under s 237 of the Act were final in nature, a view held to be incorrect in McEvoy at [4] per Macfarlan JA, Allsop P and Beazley JA agreeing. In my opinion, that does not alter the requirement that an applicant satisfy the court on the balance of probabilities that the proceedings are in the best interests of the company. That is consistent with the words of s 237(2)(c) and recognises the serious nature of an order requiring a company to bring proceedings which it is unwilling to take itself.
The appellants were correct in submitting that the best interests of the company means best interests in the sense of its separate and independent welfare Chahwan at [88]. Best interests, at least assuming the company concerned is solvent, will predominantly reflect the interests of shareholders in that capacity: Charlton at [52]. The fact that, in the present case, either Dr Huang or Dr Wang may derive some collateral benefit from the bringing or otherwise of the proceedings, in my view, is irrelevant.
[7]
The nature of the appeal
Leave under s 237 must be granted if the court is satisfied as to the five criteria stated in s 237(2). The statute itself says as much in plain words. If the criteria are not satisfied, leave must be refused. It follows, as the Chief Justice notes, that the decision whether to grant or withhold leave is not a discretionary decision in the true sense and that appellate review is not governed by the principles stated in House v The King [1936] HCA 40; 55 CLR 499 at 505.
I mention this matter only because the recent decision of the Court of Appeal of Western Australia in Blakeney v Blakeney [2016] WASCA 76 may be thought to suggest otherwise. Buss and Murphy JJA and Beech J there said (at [69]), under a heading "The nature of the appeal":
"The primary decision to grant leave involved the master making evaluative judgments about whether all of the criteria in s 237(2) were satisfied. As a result, the principles applicable to appeals against discretionary decisions apply: See, for example, Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66, [157]-[158]."
The paragraphs in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66 to which attention is thus directed refer to the House v The King principles in connection with the undoubtedly discretionary decision whether to give judicial advice to trustees.
If, by the second sentence of the passage quoted above (coupled with the reference to the particular paragraphs of the Macedonian Orthodox judgment), Buss JA, Murphy JA and Beech J intended to suggest that House v The King governs an appeal from a decision to grant or refuse leave under s 237, the suggestion is, in my respectful opinion, one that should not be accepted. As the Chief Justice recognises by his reference (at [61]) to Dwyer v Calco Timbers Pty Ltd [2008] HCA 13; 234 CLR 234, the judicial task set by s 237(2) is, as there stated by the plurality (at [45]), to reach "a conclusion drawn from the facts disclosed by the relevant evidence, and after any resolution of disputed facts". That task requires evaluation against the statutory criteria and by reference to the primary facts as found. It does not involve the exercise of discretion. Appellate review must therefore proceed in accordance with Warren v Coombes [1979] HCA 9; 142 CLR 531 rather than House v The King: see, for example, Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41; 14 BPR 26639 at [100], [107]; Port Stephens Council v Sansom [2007] NSWCA 299; 156 LGERA 125 at [51]; Canty v PaperlinX Australia Pty Ltd [2014] NSWCA 309; 9 BFRA 524 at [124]-[126].
[8]
The nature of a s 237 order
In McEvoy v Caplan [2010] NSWCA 115; 78 ACSR 167, Macfarlan JA expressed the opinion (with which Allsop P and Beazley JA agreed) that, if an order granting leave under s 237 had been made in that case, it would have been an interlocutory order. His Honour referred to the test said by Gibbs J in Licul v Corney [1976] HCA 6; (1994) 180 CLR 213 at 225 to be established by authority in Australia:
"Does the judgment or order, as made, finally dispose of the rights of the parties?"
The way in which the proceedings in McEvoy v Caplan were constituted and the context in which the s 237 application was made may be gathered from the first instance judgment: Transmetro Corp Ltd v Kol Tov Pty Ltd [2009] NSWSC 350; 71 ACSR 582. Before any application was made under s 237, two companies had instituted proceedings against an individual and two other companies; and one of the defendant companies had filed a cross-claim against yet another company. The proposed derivative action was by way of a further cross-claim by the two plaintiff companies against the existing natural person defendant and two other individuals. The applicant for leave under s 237 (McEvoy) pursued his application by way of motion filed in the existing proceedings. The three individuals against whom McEvoy wished to see the plaintiff companies bring a cross-claim were named as the respondents to the motion. The case against the grant of leave was argued by those potential cross-defendants.
In those circumstances, it was no doubt correct to say that an order granting leave under s 237 would not have finally disposed of the rights of the parties and that the order would therefore have been interlocutory. In some other cases, however, the position may be different and the order might properly be viewed as a final order.
A person with standing under s 236(1) may file a s 237 leave application which merely names the company itself as respondent and identifies the case that the person wishes the company to pursue against some unrelated third party. A recent example of such a case is Cooper v Myrtace Consulting Pty Ltd [2014] FCA 480. Because the reason for the application is usually the unwillingness of the company to bring the proceeding in question, the likelihood is that the company will oppose the application. In such a case, the debate is solely on an issue of internal governance and domestic concern: whether the company should sue the third party and whether the applicant, who otherwise lacks the ability to put the company into motion, has established a statutory entitlement to act on the company's behalf in that respect. The only persons legitimately interested in that debate are the applicant and the company.
[9]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 18 July 2016
Solicitors:
Kanjian & Company (Applicants)
Esplins (Respondent)
File Number(s): 2015/162023
Decision under appeal Court or tribunal: Supreme Court of New South Wales
Jurisdiction: Equity
Citation: [2015] NSWSC 510
Date of Decision: 5 May 2015
Before: Black J
File Number(s): 2014/239524
Nature of s 237
(i) If the five criteria in s 237(2) of the Corporations Act 2001 (Cth) are made out, the court is required to grant leave; conversely, if any one criterion is not made out, the court is required to refuse leave. The decision is not discretionary, it requires the applicant to establish on the balance of probabilities that each criterion is made out: [57], [61] (Bathurst CJ); [75] (McColl JA); [78], [81] (Barrett AJA).
Charlton v Baber [2003] NSWSC 745; 47 ACSR 31; Goozee v Graphic World Group Holdings Ltd [2002] NSWSC 640; 42 ACSR 534; Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; 53 ACSR 732; Swansson v R A Pratt Properties Pty Ltd [2002] NSWSC 583; 42 ACSR 313; Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 1007; 51 ACSR 299; Chahwan v Euphoric Pty Ltd [2008] NSWCA 52; 65 ACSR 661; Dwyer v Calco Timbers Pty Ltd [2008] HCA 13; 234 CLR 124 applied.
(ii) Whether the proceedings under s 237 are considered interlocutory or final in nature does not alter the requirement that an applicant must satisfy the court of each criterion on the balance of probabilities: [58], [66] (Bathurst CJ); [75] (McColl JA); [76] (Barrett AJA).
(iii) Obiter: Depending on the circumstances of the case, an order under s 237 may constitute either an interlocutory or a final order: [82]-[87] (Barrett AJA).
McEvoy v Caplan [2010] NSWCA 115; 78 ACSR 167 considered.
Cooper v Myrtace Consulting Pty Ltd [2014] FCA 480; Carpenter v Pioneer Park Pty Ltd [2004] NSWSC 973; 186 FLR 104; Roach v Winnote Pty Ltd [2006] NSWSC 231; 227 ALR 758; O'Meara v FWV Stanke Holdings Pty Ltd [2007] SASC 286; Chahwan v Euphoric Pty Ltd [2006] NSWSC 1002 cited.
The primary judge found that there was not a sufficient prospect of obtaining relief to warrant the conclusion that the bringing of the proceedings was in the best interests of Ismile. He referred to the statement in J D Heydon, M J Leeming and P G Turner, Meagher Gummow & Lehane's Equity: Doctrines and Remedies (5th ed 2015, Lexis Nexis Butterworths) at [3.060] to the effect that a person who claims an asset bought by a fiduciary on the basis that the asset ought to have been acquired, if at all, for the principal must be willing to do equity by paying the price of the asset so claimed. In the present case, he pointed out that the requirement to do equity requires that Ismile either assume the loan taken out by WWE or indemnify it for future payments and compensate it for payments already made, which Ismile does not have the capacity to make without financial support from its shareholders. He concluded that the evidence did not permit him to draw the inference that Dr Huang and DHE had the capacity to provide that support.
His Honour referred to Dr Huang's reliance on a letter of offer dated 20 October 2014 (the finance offer) from BOQ Specialist Bank to another company associated with him, Perpetual Healthcare Network Pty Ltd, which Dr Huang described as giving "in principle approval for an advance of $570,000 on the security of suitably approved commercial property". He also referred to Dr Huang's statement that he believed that the offer could be transposed to Ismile with supporting guarantees from Drs Wang and Huang. His Honour noted that he rejected the latter evidence whilst leaving open the possibility for Dr Huang to bring further evidence and that Dr Huang did not seek to do so.
So far as the finance offer was concerned, the primary judge noted that it was an indicative approval of a credit facility and that final terms and conditions would depend on the final structure and details. He also noted that it had expired six months previously. He concluded that it provided little evidence of Dr Huang's or DHE's ability to secure finance where the financier's attention was directed to the position of Perpetual Healthcare and Dr Huang, rather than to the position of Ismile and its shareholders.
The primary judge also noted that Dr Huang and DHE did not propose any specific arrangement to indemnify WWE and Dr Wang against their liability for WWE's borrowings or to substitute a new loan arrangement between the lender and Ismile for the existing loan arrangement between WWE and Medfin or to confirm that Medfin was content to enter into the loan arrangement on the basis that Dr Huang and DHE could support it at least to the level of their respective interests in Ismile.
His Honour concluded there was no evidence of any profit made by WWE for which it could be held liable to account, nor was there any evidence that Ismile had suffered loss entitling it to equitable compensation. Neither of these findings was disputed on appeal.
In the circumstances, the primary judge held that it was not in the best interests of the company to bring the litigation. It should be noted that the primary judge made the following remarks at the conclusion of his judgment:
"[62] For these reasons, I am not satisfied that the proposed proceedings are in Ismile's best interests as the evidence stands. I should add that, before reserving judgment, I identified my concern as to this aspect of Dr Huang's and DHE's claim and offered Dr Huang and DHE the opportunity to make further submissions. Those submissions might, for example, have further addressed (and, potentially, sought leave to lead further evidence about) Dr Huang's or DHE's capacity to make a proportionate contribution to the costs of taking out finance over the Premises or indemnifying WWE for its liabilities under the loan to Medfin, if WWE was ordered to transfer the Premises to Ismile, and the manner in which such a transaction could fairly be implemented. After taking further instructions, Mr Sulan confirmed that the Plaintiffs' position was that the relief they proposed was wholly appropriate and they did not seek alternative relief or the opportunity to make further submissions (T112). I have reached the conclusions set out above on that basis."
His Honour also indicated that it may be open to Dr Huang and DHE to bring a further application if they were able to address, by adequate evidence, the matters that caused the failure of the present application.
It was submitted that the primary judge was incorrect in requiring not merely a willingness to do equity but an affirmative demonstration of the capacity of Ismile to do so. The appellants submitted that the primary judge was in error in concluding that, in the absence of agreement between the parties as to the conditions of any constructive trust, the Court was left to decide whether it was in Ismile's best interest to be granted leave to bring proceedings seeking a constructive trust over the premises in a manner that was not conditional upon Ismile's ability to finance the acquisition. They submitted the Court had power to impose such conditions as it sought fit in order to do justice between the parties.
It was submitted that it was this error which led the primary judge to incorrectly focus on the lack of detail of the possible mechanism by which the financial contribution of WWE could be discharged.
The appellants submitted that what they described as the primary judge's inflexible approach to the grant of a constructive trust was not supported by authority. They submitted that all that was required "was a constructive trust over WWE's interest in the Premises for the benefit of Ismile, subject to ensuring reimbursement of WWE for its contributions (other than those secured over the Premises) to the purchase price, and any payments made under the terms of the mortgage secured over the property". They submitted an alternative remedy would be to grant a constructive trust, subject to a charge or lien securing WWE's contribution.
The appellants also submitted that the primary judge erred in concluding that there was insufficient evidence to be satisfied that Ismile could "do equity". The appellants submitted that the approach the primary judge adopted on this issue was based on what was said by Palmer J in Swansson v R A Pratt Properties Pty Ltd [2002] NSWSC 583; 42 ACSR 313 (Swansson), to the effect that an applicant for leave under s 237 is required to establish on the balance of probabilities that the bringing of the proceedings is in the best interests of the company. They submitted that Palmer J made those remarks in the context of the view, held by him, that the proceedings were final not interlocutory, an approach which has subsequently been held to be incorrect: McEvoy v Caplan [2010] NSWCA 115; 78 ACSR 167 (McEvoy) at [4].
The appellants also submitted that the primary judge erred to the extent he concluded that the applicant for an order had to establish a positive case on the matters identified by Ball J in Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; 86 ACSR 432 (Re Gladstone), namely: prospects of success, the likely cost of the action, the likely recovery if the action is successful and the likely consequences if it is unsuccessful. They submitted that that approach conflated subpars (c) and (d) of s 237(2). They submitted the correct approach was set out by Tobias JA in Chahwan v Euphoric Pty Ltd [2008] NSWCA 52; 65 ACSR 661 (Chahwan) at [88]-[89], namely to determine whether, looking at all the circumstances of the case, a positive finding is permitted that granting leave will advance the separate and independent welfare of the company.
The appellants submitted that it was incorrect to conclude that a court would be loath to impose the remedies sought because it would force the parties into an uncontemplated and undesired arrangement. They submitted it was never contemplated that either of Dr Huang or Dr Wang would be the landlord of Ismile and that any change in the relationship was due to the breach by Dr Wang of her fiduciary obligations. They submitted the imposition of a constructive trust would secure Ismile's future in the premises.
The appellants submitted that even if the primary judge identified the correct principles, he incorrectly applied them in failing to recognise the availability and value to Ismile of a constructive trust over WWE's interest in the premises. The appellant pointed to the fact that if WWE remained the landlord, Dr Wang would be in a position of conflict in relation to rent increases, the exercise of any option and in determining whether the landlord and tenant relationship would continue at the expiry of the term.
The appellants also contended there was sufficient evidence to demonstrate that Ismile could do equity. They submitted the rent payable in respect of the premises could be freed up to service a mortgage over them. Senior counsel for the appellants submitted that the rental of $44,000 (excluding outgoings) could secure interest of around 9% on a loan of $500,000.
In their original written submissions and their supplementary submissions, which were filed by the appellants at the conclusion of the hearing, the appellants sought to rely on the 2014 financial statements to support the proposition that Ismile could do equity. There are a number of difficulties with this approach. First, no investigation of this nature was sought to be undertaken in the Court below. Second, and more significantly, in an affidavit affirmed on 31 October 2014, Dr Huang stated he had not approved the 2014 financial statements or tax return on which the submissions were based.
In their original submissions, the appellants referred to a current receivable, disclosed in the 2014 financial statements, of a loan to Dr Wang of $119,039 and submitted that that receivable could be recovered by Ismile. This may be so, but it assumes that Dr Wang would consent to a demand being made. It also assumes that if demand was made, WWE would not make demand for the $263,443 shown in the accounts as a current liability.
In their original submissions, the appellants contended that the tax return for the 2014 financial year showed a profit of $319,635. That ignores the fact that the financial statements stated that the whole of the profit had been distributed, an approach which was consistent with the arrangements between the dentists in respect of their fees.
In their supplementary submissions, the appellants contended that the trustee has a discretion, providing a majority of unit holders consent, to accumulate income. This makes two assumptions: first, that a majority of unit holders would consent to this course, particularly when it involves paying tax on the income at the highest marginal tax rate; and second, that Dr Wang would be prepared to pay her fees for professional services into the trust to enable such accumulation to take place, a course inconsistent with the basis that the dentists had entered into the arrangements between them. In this context, the respondents noted that Dr Huang gave no evidence that he was willing to consent to the accumulation of income.
None of these matters were investigated at the trial.
The respondents submitted that at the trial the appellants "all but accepted" that they had not led adequate evidence of the appellants' ability to finance the purchase of the premises. They pointed to the submissions by counsel for the appellants in the Court below that there did not fall on his clients an evidential burden to satisfy the primary judge that "that sort of finance" could be put in place "because your Honour just needs to give the opportunity to the company". They pointed to the fact that the appellants declined the opportunity to produce further evidence on this issue. The respondents submitted that the primary judge was correct in concluding that the finance offer provided little information concerning Ismile's ability to meet any conditions imposed on the grant of relief.
The respondents submitted that the appellants proposed no specific arrangement to indemnify WWE or Dr Wang against their liability for WWE's borrowings and did not address the question of guarantees by Dr Wang, which might be required if Ismile borrowed funds to acquire the property.
The respondents submitted there was no reliable evidence to show Ismile was in a position to service a mortgage. It submitted there was no evidence to establish that any rent saving would be sufficient to cover mortgage liability. They submitted it was inappropriate to rely on the receivable of $119,039 stated in the 2014 accounts, to be owed by Dr Wang, without any cross-examination on that subject, particularly in light of Dr Huang's evidence he had not approved the financial statements. They submitted that Ismile's income as trustee of the trust was derived from fees for dental services to which I have referred above at [14].
The respondents also submitted that little weight should be placed on Dr Huang's evidence that he was willing to put Ismile in funds to defray part of the $170,000 deposit absent evidence of his capacity to do so. Further, they submitted no consideration was given to whether Dr Wang could be forced to provide such assistance.
In answer to the submissions concerning the benefit that Ismile would derive from ownership of the property, the respondents pointed out there was no evidence of particular goodwill attached to the premises or that the provider benefit was site specific. They also submitted the relief claimed would force Drs Huang and Wang into a materially different arrangement to that which currently exists between them and that any question of conflict arising out of the ownership of the premises by WWE was speculative.
A question of some difficulty is whether, having concluded that there is a serious question to be tried, the court can again consider the question in determining whether it is in the best interests of the company to bring the proceedings. In Re Gladstone, Ball J at [58] indicated it was necessary to consider the prospects of success. It must be remembered that an application under the section does not involve a consideration of the underlying merits of the proposed litigation, except to the extent it is necessary to determine if there is a serious question to be tried. Further, in cases where a court has doubts as to the prospects of success, a court can make an order conditional on the applicant undertaking to indemnify the company from any liability for costs which it may incur in pursuing the action.
The appellant suggested that this was an appeal from a discretionary decision to which the principles in House v The King applied. I do not think this is correct. The determination of whether leave should be granted is dependent upon the judge hearing the application being satisfied as to the matters in s 237(2) of the Act. That is not a discretionary decision in the House v The King sense: Dwyer v Calco Timbers Pty Ltd [2008] HCA 13; 234 CLR 124 at [38]-[45].
In the present case, the first error asserted to have been made by the primary judge was that he asked the wrong question, namely, whether it was in Ismile's best interests to bring proceedings seeking constructive a trust in a manner not conditional upon its ability to finance the acquisition: see above at [22].
I do not think that that submission fully sets out the approach taken by the primary judge. His Honour, during the course of the hearing, raised the question of how the company would fund the acquisition of the property. Subsequently, the following exchange took place between the trial judge, Mr Emmett for the respondents and Mr Sulan, who was then appearing for the appellants:
"EMMETT: Your Honour, thank you for that pause. This time we have reached agreement, which is that the joint suggestion I think, I'm hoping Mr Sulan will correct me, is that the Court only make any declaration of constructive trust conditional on the company being able to finance the purchase. So that takes a financial capacity out of the equation, that leaves in play the point that I've already made written submissions about, that is thrusting these two individuals into a property owning enterprise together as a separate discretionary matter, but the question of financial capacity is addressed by making the order conditional.
HIS HONOUR: Yes.
SULAN: I should just state my position. I'm not in a position to consent to a conditionality of the order, partly because I can't get instructions while my witness is under cross-examination.
HIS HONOUR: Yes.
SULAN: But it may be that that issue can be in effect agreed, but at the moment I couldn't in effect get instructions to that effect. It may be that the Court doesn't need the parties to agree because the Court would say as a matter of the relief being sought, that's what would be required.
HIS HONOUR: Yes. The only implication of that however, Mr Sulan, is that may affect, to the extent for example that your client may be seeking more than some form of conditional relief, what evidence needs to be in issue.
SULAN: Yes. It may be that one practical course is I could be given leave to seek instructions even when my witness is under cross-examination about that issue.
HIS HONOUR: Is it convenient that I simply park this issue at the moment, in the sense that it may well be that a practical working compromise is for Mr Emmett to proceed on that basis for the moment, if it emerges that that basis is incorrect, then in any event you in that situation might need to lead evidence tomorrow morning which you might not need to lead if that basis is ultimately accepted?"
Thereafter, the following exchange occurred:
"SULAN: I think an accurate statement of my client's position is that in theory there is no real issue with the concept of conditionality, but it has the potential problem for my client that things might not be done which would enable in effect a re-finance of the property to ensure iSmile Dental became in effect the registered proprietor. So for example if a new financier required a personal guarantee from each of the directions, in effect an agreement, the conditionality would require my learned friends to in effect undertake to give that guarantee which is a guarantee in effect which has already been given to the present mortgagee, being Medfin.
So it may be that if my learned friends can give some forms of assurances that in effect what we're trying to achieve by order 5 and 6 would occur, all things being equal, then such conditionality can be agreed. If my learned friends aren't prepared to do that, then it may be that the type of remedy that the Court will need to consider is simply the declaration of trust in order 5, because the Court wouldn't on the hypothesis that it has found a breach of fiduciary duty, then permit in effect the director to thwart the order by not taking the steps that are being anticipated in order 6.
If your Honour was against me on that then we would seek to look at other alternative remedies, including for example a trust over the shares in WW Enterprises, at least insofar as the value of the property is held through those shares.
HIS HONOUR: Yes. I should simply let counsel take their own course.
SULAN: You should, except for it does raise the issue in terms of whether or not my client needs to go further into evidence on this issue of capacity to pay.
HIS HONOUR: Indeed it does, Mr Sulan, but having said that, either there's agreement between counsel of there isn't.
SULAN: Yes.
HIS HONOUR: If there is not agreement then each counsel will need to take their course, having regard to the fact that there is no such agreement."
In that context, the remarks made by the primary judge do not seem to me to be open to the criticism made by the appellants. His Honour proceeded on the basis suggested as appropriate by both parties and then considered whether the bringing of the proceedings was in the best interests of Ismile. Effectively, the conclusion of the primary judge was that the evidence before him did not persuade him that Ismile had the capacity to take advantage of any relief that might be given. That this was his approach can be seen by his comment that the requirement to do equity involved Ismile either assuming liability under the loan taken out by WWE or indemnifying it for future payments in respect of the loan and compensating it for payments it had already made. His ultimate conclusion was that he was not satisfied that it was in the best interests of Ismile to bring the proceedings where the evidence did not support its ability to do equity to obtain such relief. There does not seem to me to be any error in this approach.
Nor do I think the primary judge erred in requiring the appellants to affirmatively demonstrate the capacity of Ismile to do equity. Whilst it is true that relief could be moulded to impose a trust subject to a charge or lien in favour of WWE to secure its expenditure and liability under the mortgage, to ultimately obtain the benefit of any relief it would be necessary for Ismile to discharge the charge or release the property from the lien. It seems to me that any consideration of what was in the best interests of the company must include consideration of the capacity of the company to discharge any such charge or lien or, as the primary judge put it, to provide funds to do equity.
Nor do I think the primary judge erred in concluding that the appellant was required to prove on the balance of probabilities that the bringing of the proceedings was in the best interests of the company. As I indicated above at [58], irrespective of whether the proceedings are classified as final or interlocutory, that approach is consistent with authority and the clear words in the section.
Nor does it seem to me that the appellants were correct in submitting that the primary judge erred in concluding that the appellants were required to establish a positive case on each of the matters identified by Ball J in Re Gladstone: see above at [38].
The primary judge did not seem to me to conflate s 237(c) and (d) in reaching his conclusion. He found there was a serious question to be tried and did not otherwise comment on the strength of the case other than describing it as seriously arguable. The basis on which he declined relief was that he was not satisfied that Ismile could do equity so as to obtain any benefit from the proposed proceedings. This is clear from his judgment at [62], to which I have referred above at [28].
It follows that there was no error of principle in the approach adopted by the primary judge. There remains the question of whether the primary judge should have been satisfied on the evidence before him that Ismile had the capacity to do equity and thereby obtain the benefit of any relief. As the respondents submitted this was hardly at the forefront of the appellants' case below: see above at [51].
In my view, the primary judge was correct in placing little weight on an unsupported assertion by Dr Huang that he could contribute $85,000 to defray part of the expenditure incurred by WWE or on the finance offer which had expired six months previously and related to a different company. Whilst it is correct that Dr Huang was not cross-examined on the statement he made concerning his willingness to make the payment, he did not identify the source of any such funds from which payment could be made.
It may be correct that the interest payments on a mortgage of $500,000 would be less than the amount of rent currently paid by Ismile. However, there was no evidence to show that any mortgage arranged by that company to pay off the Medfin finance loan could be serviced after payment of outgoings from the rent that Ismile would save as a result of acquiring the property. The question of whether Ismile would have sufficient funds to service such a mortgage is a matter of speculation.
No reliance was placed on the 2014 financial statements in the Court below. This was hardly surprising as Dr Huang disputed their accuracy. In dealing with the appellants' submissions on this issue, I have sought to demonstrate why the submissions were based on assumptions, none of which were supported by evidence: see above at [42]-[45]. In these circumstances, the 2014 financial statements do not provide support for the proposition that Ismile had the ability to do equity in the sense of reimbursing WWE for the money it had spent in connection with the acquisition of the property and indemnifying it for liability under the mortgage it obtained to finance such acquisition.
In these circumstances, in my opinion, the primary judge was correct in concluding that, on the evidence before him, it was not in the best interests of Ismile to bring the proceedings.
The appeal should be dismissed with costs.
MCCOLL JA: I have had the advantage of reading in draft the reasons of the Chief Justice. I agree with his reasons and the orders his Honour proposes.
BARRETT AJA: I am of the opinion that, for the reasons stated by Bathurst CJ, this appeal should be dismissed with costs.
I wish, however, to make a few brief observations of my own on two matters referred to by the Chief Justice: first, the nature of an appeal such as the present (see [61] of his Honour's reasons); and, second, whether an order granting leave under s 237 is final or interlocutory (see [37] and [58]).
When a s 237 application is framed and advanced in the way just described, the only parties to the controversy before the court are the applicant and the company. It follows that an order granting leave under s 237 in such a case is an order that finally disposes of the rights of those parties regarding the relevant subject matter, being the question whether the applicant should be permitted to bring the particular action on the company's behalf.
Generally speaking, the unrelated third party that the s 237 applicant wishes to see the company sue is not a necessary party to the s 237 application: see Carpenter v Pioneer Park Pty Ltd [2004] NSWSC 973; 186 FLR 104 (leave to appeal refused by this Court on 20 May 2005); Roach v Winnote Pty Ltd [2006] NSWSC 231; 227 ALR 758; O'Meara v FWV Stanke Holdings Pty Ltd [2007] SASC 286. But if, as in McEvoy v Caplan, the application for leave is brought in existing proceedings and the applicant actively involves the third party in the application, that issue is preempted or sidestepped by the applicant's own decision to proceed in that particular way: see, for example Chahwan v Euphoric Pty Ltd [2006] NSWSC 1002 at [9]-[15].