In the matter of Mata Sherawali and Guru Nanak Pty Ltd trading as Mata Sherawali and Guru Nanak Trust

Parties: Mata Sherawali and Guru Nanak Pty Ltd ats Mata Sherawali and Guru Nanak Trust (Plaintiff)
Akanksha Sandhu (formerly known as “Akanksha Taneja”) (Defendant)

Representation: Counsel:
D Parish (Plaintiff)
A Rizk (Defendant)
Solicitors:
Brander Smith McKnight (Plaintiff)
Alan & Adams Solicitors (Defendant)

File Number(s): 2024/411255

JUDGMENT – ex tempore (Revised 20 May 2025)

Nature of the application

1. By Originating Process filed on 5 November 2024 (“Originating Process”), Mata Sherawali and Guru Nanak Pty Ltd trading as Mata Sherawali and Guru Nanak Trust ("MSGN") brought proceedings against Ms Sandhu, which sought a declaration that Ms Sandhu had contravened, inter alia, several sections of the Corporations Act 2001 (Cth) (“Act”) relating to her statutory directors’ duties, and that she pay compensation to MSGN pursuant to s 1317H of the Act or, alternatively, pay equitable compensation or provide an account of profits.

2. A claim for breach of the statutory or general law directors’ duties can ordinarily only be brought by the company and not by a shareholder against a director or officer of the company, other than as a derivative proceeding or potentially within an oppression claim. It appears that the commencement of the proceedings by MSGN was not properly authorised by its directors, in circumstances where there is a dispute between them. One of MSGN’s directors, Ms Pabbi, now applies for leave to bring the proceedings on behalf of MSGN in the form contained in the Originating Process and now elaborated by an Amended Points of Claim filed 10 March 2025 (“Amended Points of Claim”). In the course of submissions this morning, Mr Parrish, who appears for Ms Pabbi in the application, indicated that the relief sought in paragraphs 14-15 of the Amended Points of Claim was not pressed in respect of the application for leave to bring the derivative proceedings. That decision was plainly a sensible one, where that relief concerned several transactions, described as "unexplained miscellaneous expenses", giving rise to a claim of $4,193.01, and the costs of pursuing that claim would likely have exceeded the costs of any potential recovery. A claim for "unauthorised transfers" was also not pressed as an aspect of the leave application.

3. The focus, in Ms Pabbi’s application for leave to bring the derivative proceedings, was therefore on a claim for "unaccounted revenue" that she seeks to bring in MSGN’s name. Paragraph 18 of the Amended Points of Claim pleaded that Ms Sandhu had control over the point of sale system and the accounts of the business and was responsible for ensuring that "all revenue" from business sales was deposited to the relevant bank account at the end of each business day. Presumably, that allegation contained at least an implied qualification that that responsibility extended only to the deposit of revenue that would properly be deposited to the relevant account at the end of each business day. Paragraph 19 pleaded that, for nearly all quarters since 2018, the amounts deposited in the accounts fell short of the gross sales recorded by the business ("Shortfall"). Paragraph 20 then quantified the Shortfall, and particularised the documents from which that Shortfall had been identified. The Amended Points of Claim then alleged that, relevantly, the "unaccounted revenue" was incurred without the authority of Ms Pabbi, or alternatively made in breach of duties, on the basis that the conduct involved diverting revenue or incurring liabilities that were not for the benefit of MSGN.

4. An immediate and fundamental difficulty arose from that pleading, which has fairly been recognised by Mr Parish in the course of submissions. Putting aside the infelicity of the language of the pleading, where "unaccounted revenue" is not incurred but is a shortfall in the amount of revenue that is received, the fundamental difficulty is that the pleading in paragraphs 18-20 points to a shortfall between the amount of sales revenue recorded by MSGN and the amount of money deposited to its bank accounts. It leaves open two logical possibilities, namely that the difference between the two was properly deducted from the recorded revenue or that it was improperly deducted from the recorded revenue. The allegation of breach of duty assumes the latter position, but there is no identified factual basis for that assumption.

5. The difference between the two, and that fundamental problem, can be illustrated by a simple example, identified in the evidence on which Ms Sandhu relies. Ms Sandhu contends, and I express no view as to the factual accuracy of that contention, that the shortfall is explained, in whole or in part, because, between the point at which MSGN records its gross sales revenue in its point of sale system and the point at which its net revenue is deposited to the bank account, providers of delivery services to MSGN deduct the commission that is payable to them in respect of those delivery services. That proposition is plainly plausible; it may or may not be true, but the fundamental difficulty with MSGN's claim is that it does not come to grips with the possibility that the shortfall arises by legitimate deductions, such as the deduction of commission payable to delivery services. In that example, the shortfall may well exist, by reference to the amount deducted by the relevant delivery providers by way of commission, and that would be consistent with paragraphs 18-20 as pleaded in the Amended Points of Claim. However, even if it could be established that that shortfall was incurred without Ms Pabbi's authority, in the sense that she had not specifically agreed that delivery providers would deduct their commissions – a matter about which they presumably gave MSGN no choice if it was to use their services – then the transactions would nonetheless be for a proper purpose and would amount to legitimate business expenses. In those circumstances, it is highly unlikely that any breach of the statutory duties or general law duties could be established against Ms Sandhu, and, even if a breach was established by Ms Pabbi’s lack of authorisation for the deductions, there would be little or no prospect of a recovery referable to moneys deducted for legitimate business expenses.

6. I will address the evidence led by the parties below, but that fundamental conceptual difficulty with MSGN's claim is sufficient basis not to grant the leave which is sought. As Mr Parish rightly accepts, this case is factually and legally indistinguishable from the position which I addressed in Sunny International Hardware Group Pty Ltd [2025] NSWSC 254 (“Sunny”), where a plaintiff sought to bring a derivative claim in respect of conduct which might or might not be wrongful, in a manner that might or might not lead to recovery, but would lead to the company incurring the costs of the proceedings, or at least the potential liability for the costs of the proceedings if they were not successful. For the reasons noted in Sunny, to which I will return, this is not a case for which leave should be granted under ss 236-237 of the Act. In order to obtain leave to bring derivative proceedings, a plaintiff in that situation will likely need to investigate the relevant matters, including by pre-action discovery or exercising a shareholder's rights of access to information, to reach the point that it can advance an allegation that wrongdoing exists in fact rather than as a mere possibility. When, but only when, that allegation can properly be put, then a claim for leave to bring derivative proceedings may properly be available.

Affidavit evidence

7. Returning to the affidavit evidence, Ms Pabbi reads several affidavits. In her first affidavit dated 16 January 2025, she refers to the business of MSGN, although I have been told that it may be that its operative business may have ceased or may shortly cease, by reason of the termination of the franchise under which it has operated. She also refers to the likelihood that Ms Sandhu would be able to satisfy a judgment against her, but that depends upon MSGN's ability to obtain such a judgment.

8. By a second affidavit dated 3 March 2025, Ms Pabbi offers an undertaking to indemnify MSGN as to costs. It will not be necessary to address a disputed question as to the adequacy of that indemnity, given the conclusions I reach on other grounds. She identifies the serious questions to be tried, by referring to the documents which, inter alia, record the deductions of the unaccounted revenue. As I noted above, the difficulty with that proposition is that the proof of the deductions is not sufficient to establish MSGN's case, because it must go further to show, not only that amounts were deducted, but that they were wrongfully deducted. The material facts on which it relies, and the evidence available to support them, does not presently establish a basis for that further step. By a third affidavit, in reply, dated 2 May 2025, Ms Pabbi responds, in evidence partly admitted as submission, to evidence led by Ms Sandhu in respect of the proceedings.

9. Ms Sandhu in turn read her affidavit dated 14 April 2025, where she referred to the background to MSGN’s incorporation, the claims made in the proceedings and, in particular, the allegation as to unaccounted revenue. She referred to the operation of MSGN's point of sale system, which consolidates and stores all sales data, and indicates the manner in which sales income was derived. She in turn refers to the process by which online orders were collected by a delivery intermediary used by the franchisor, and her evidence was that MSGN did not receive into its bank account the gross sales from the sales platform, but that intermediary deposited a net amount after deducting its commission and any applicable customer refunds. That would, as I note above, explain at least part of the relevant “unaccounted revenue”, if true. Ms Sandhu also refers to commissions payable to other third-party aggregators providing delivery services, including UberEats and other similar providers. I recognise that Ms Sandhu's affidavit evidence as to those matters has not been tested; but the fundamental difficulty facing Ms Pabbi, at present, is that she has no evidentiary basis on which to seek to falsify that account of events which, as I noted above, is hardly implausible.

The applicable principles and determination

10. Turning now to the applicable principles, Mr Parish rightly recognised that, on the case law, Ms Pabbi must satisfy the five criteria for the grant of leave specified in s 237(2) of the Act in order to obtain leave to bring derivative proceedings on MSGN’s behalf, namely that it is probable that MSGN will not itself bring the proceedings; she is acting in good faith; it is in MSGN's best interests that she be granted leave; there is a serious question to be tried; and she had given at least 14 days' notice to MSGN of her intention to seek the relevant relief, or the Court dispenses with that requirement. The Court must grant leave to bring the proceedings, if all of the specified criteria are satisfied, and must not grant leave if any of those criteria are not satisfied: Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859.

11. There appears to be no contest as to the first criteria, that MSGN will not itself bring the proceedings. I will assume, without deciding, that Ms Pabbi is acting in good faith, at least in the sense that she has a belief in the basis of the claim and that any recovery obtained by MSGN would be to her benefit through a shareholding in MSGN or a unit holding in the trust. I note, however, that Ms Pabbi's good faith may be undermined by the possibility that the belief which she holds is unreasonable, so far as a rational analysis would indicate that there is merely a prospect that, once proper investigations were undertaken, it would emerge that, contrary to the only available evidence at present, the deductions were improperly rather than properly made.

12. The real problem for Ms Pabbi's application relates to the associated questions of whether the proposed proceedings are in MSGN's best interests and whether there is a serious question to be tried in them. The relevant principles were summarised in Swansson v R.A. Pratt Properties Pty Ltd [2002] 42 ACSR 313; [2002] NSWSC 583, in respect of whether the proceedings are in the company's best interests, and I recently addressed them in Sunny at [45]ff. In order for this criterion to be satisfied, the Court must be satisfied that the proposed action actually is, on the balance of probabilities, in MSGN’s best interests. It is not sufficient that it may be, or even that is likely to be, in MSGN’s interests to bring the relevant proceedings. It seems to me that Ms Pabbi cannot satisfy this requirement, because it would only be in the best interests of MSGN to bring the proceedings if there was a reasonable prospect that it could establish wrongdoing on the part of Ms Sandhu, which would result in a recovery of material loss by MSGN. I have expressed the view, in previous cases, including Re Imperium Projects Pty Ltd [2015] NSWSC 16, and again in Sunny at [47], that it is not sufficient to show that proceedings are in a company's best interests to establish that it suffered an actionable wrong, where that assessment also requires analysis of the prospects of a financial recovery by the company in the proceedings.

13. The difficulty here is that Ms Pabbi cannot establish either that there is a reasonable prospect of showing an actionable wrong at a hearing or any reasonable prospect of a recovery of damages consequent upon such a wrong. She cannot establish that because her analysis to date only shows that there is revenue unaccounted for, and not that it is wrongly lost, for example, by misappropriation, rather than rightly deducted, for example, by way of deductions of commissions by delivery providers to MSGN. Without a basis to establish that the conduct was wrongful, she cannot establish either an actionable wrong or a reasonable prospect of recovery by MSGN in the proceedings. That difficulty is highlighted by the Amended Points of Claim, which moves directly from the identification of the shortfall to the allegation of wrongdoing, where the existence of that the shortfall will not establish wrongdoing unless funds have been improperly deducted. For the same reasons, Ms Pabbi cannot presently establish a serious question to be tried, because the allegation of breach of duties assumes wrongdoing, and she does not presently have an evidentiary basis available to establish that wrongdoing. In these circumstances, it is not necessary to address questions, for example, of the adequacy of her offer of an indemnity to MSGN in support of the conduct of the proceedings.

14. In the course of submissions, I had raised the possibility that Ms Pabbi may wish to adjourn the application, for example, to make further inquiries or seek to obtain access to documents which might make available a proper basis to plead identifiable wrongdoing and demonstrate, for better or worse, how the relevant shortfall had arisen. Ms Pabbi did not take up the option of adjourning the application and wished to proceed to its conclusion. Mr Parish, rightly, recognised that little was to be gained by lengthy oral submissions, and relied only on his written submissions. I did not call upon Mr Rizk, who appeared for Ms Sandhu in the proceedings in response. Had I been asked to do so, I would have adjourned the application to allow Ms Pabbi to make further inquiries. Where I was not asked to do so, the application must be dismissed with costs.

Balance of the proceedings

15. Ms Pabbi has rightly accepted that, as a result of the dismissal of her application for leave to bring the derivative proceedings, the proceedings brought by MSGN should be dismissed, because she did not have authority to commence them. Plainly, it remains open to Ms Pabbi to bring any proceedings in respect of any personal claim, that has a proper basis, or oppression proceedings that have a proper basis, neither of which would require leave to bring derivative proceedings. If those proceedings are brought, it is also open to Ms Pabbi to seek, from the Registry, a waiver of the filing fee. There may be some merit in such an application, where those proceedings will likely deal with matters which at least have some overlap with those that were sought to be agitated in these proceedings. Ms Pabbi also rightly accepts that, in these circumstances, an order for costs must be made against her personally, because an order for costs could not fairly be made against MSGN in respect of proceedings which were commenced in its name, but without authority, by Ms Pabbi.

Orders

16. Accordingly, I make the following orders:

17. Interlocutory Process filed 17 January 2025 be dismissed with costs.

18. Proceedings dismissed.

19. Ms Pabbi to pay the Defendant’s costs of the proceedings, as agreed or as assessed.

20. Exhibits be returned.

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