In the matter of Sunny International Hardware Group Pty Ltd

Category: Principal judgment

Parties: Yu Qun Cai (Applicant)
Wen Yuan Hong (First Respondent)
Bi Qing Hong (Second Respondent)

Representation: Counsel:
Mr S Lee (Solicitor) (Applicant)
Ms J Steele SC/Ms S Steinhoff (Respondents)
Solicitors:
Spencer Reyner Law Office Pty Ltd (Applicant)
Diligence Lawyers (Respondents)

File Number(s): 2024/246385

JUDGMENT

1. By Originating Process filed on 4 July 2024, Mr Yu Qun Cai commenced proceedings, in which he also named Sunny International Hardware Group Pty Ltd (“Company”) as a Plaintiff, seeking relief in respect of oppression under s 232-234 of the Corporations Act 2001 (Cth) (“Act”), bringing derivative proceedings under s 236-237 of the Act and also seeking injunctive relief under s 1324 of the Act*.* The Defendants to the proceedings are the two directors and majority shareholders in the Company, Mr Hong and Ms Hong. They are not married or related, though they have the same surname, and Ms Hong is Mr Cai’s former wife. Mr Cai had no authority to commence the proceedings in the name of the Company, unless and until he obtained leave to bring derivative proceedings on the Company’s behalf.

2. By an Amended Interlocutory Process filed on 26 August 2024, which amended the substantive relief sought by Mr Cai, he abandoned his claim to relief in oppression, brought an additional claim for access to documents under s 247A-247B of the Act and pursued his application for leave to bring derivative proceedings and for injunctive relief. The proceedings were initially allocated a hearing date in November 2024 but, unfortunately, that hearing was vacated as a result of his return to China to attend his father’s funeral.

3. When the matter was heard on 19 March 2025, Mr Cai abandoned his claim for access to documents under s 247A-247B of the Act and pursued only his claim for leave to bring derivative proceedings. For completeness, Mr Lee’s submissions also addressed a claim for an interlocutory injunction for the production of documents, but I assume that claim was abandoned together with Mr Cai’s claim for access to documents under s 247A of the Act. In any event, I would not have made an order for the production of documents, by way of interlocutory injunction, unless the requirements for the production of documents under s 247A of the Act were satisfied.

Background, lay affidavit evidence and the nature of the proposed claim

4. By way of background, the Company imports bathroom and kitchen supplies from China and at least some of those products were or are manufactured by an entity associated with Mr Cai and his family members. Mr Cai was previously the sole shareholder and a director of the Company. In August 2008, as part of a financial settlement reached on the end of the marriage between Mr Cai and Ms Hong, Mr Hong and Ms Hong became directors of the Company; Mr Cai then reduced his shareholding in the Company from all of its shares to 15 of its 100 shares; and Mr Hong acquired 50 and Ms Hong acquired 35 of the 100 shares in the Company. Mr Cai ceased to be a director of the Company in September 2014.

5. In late 2023, Mr Cai and Ms Hong exchanged WeChat messages in Chinese which, as translated, suggested that Mr Cai was in urgent need of substantial funds and was facing the threat of bankruptcy and wished Ms Hong to lend him those funds, and also referred to the fact that he had not received dividends from the Company for many years. Mr Cai challenged the accuracy of those messages in his cross-examination, on the basis that he had poor skills in Mandarin and had used an AI based system to compose the messages, and that he had intended to communicate, not that he need money from Ms Hong, but that he could not provide additional funds to Ms Hong or to his and Ms Hong’s children. It also emerged, in cross-examination of the Defendants’ solicitor, Mr Jiang, that the translation put before the Court did not include all of the messages exchanged between Mr Cai and Ms Hong in Chinese. It is not necessary to determine the dispute as to the content of the messages (or, perhaps more precisely, whether Mr Cai had intended to say something quite different from what he said in his message) in order to determine the proceedings.

6. Shortly after that WeChat exchange, in December 2023, the solicitors then acting for Mr Cai first sought access to documents relating to the Company and requested Mr Hong and Ms Hong call a shareholders meeting to authorise access to documents to all shareholders and consider the distribution of dividends. Mr Hong and Ms Hong did not then provide such documents to Mr Cai or call a shareholders meeting. In late May 2024, Mr Cai’s then solicitors foreshadowed the commencement of proceedings. Correspondence relating to the production of documents continued thereafter, although the Company did not produce such documents to Mr Cai. Mr Cai commenced the proceedings on 4 July 2024 as I noted above. Correspondence as to access documents then continued, with offers of access being as late as the week before the hearing, but the parties did not agree the terms of access and the Company did not allow access to such documents to Mr Cai.

7. Turning now to the affidavit evidence, Mr Cai reads his affidavits dated 3 July 2024 and 22 August 2024. He referred, in his first affidavit, to the fact that he had not been provided with minutes or notices or resolutions passed in relation to the Company and had not been paid dividends between 2014 and 2023. He referred to correspondence between solicitors in which he had requested access to documents, without success. He addressed an allegation which was then made, but has since been abandoned, that there were discrepancies between information contained in the Company’s bank statements and its financial statements. He also addressed, largely in evidence admitted with a limiting order under s 136 of the Evidence Act 1995 (NSW) as submission or as his understanding, the matters relevant to the grant of leave to bring derivative proceedings under s 237 of the Act, which I address below.

8. Mr Cai there contended that:

“[The Company] has a bona fide risk of investigation by the [ATO] for potentially reporting inaccurately of the Company’s financial position for at least FY 21 and FY 20”.

9. The basis on which Mr Cai had formed that view is not apparent. Whether or not there are errors or misstatements in the Company’s financial statements, there is no suggestion that Mr Cai or his representatives have reviewed any tax returns lodged by the Company to determine whether they are accurate or inaccurate, or that he has any understanding of the Company’s true financial position that would have allowed him to assess the accuracy of those tax returns if he accessed them.

10. Mr Cai also refers (Cai 3.7.24 [30]) to his belief that Mr Hong and Ms Hong have “misappropriated the Company’s funds especially when cross-referenced with the Company’s bank statements”; however, that claim appears to reflect the allegation which has now been abandoned.

11. Mr Cai also refers to serious questions to be tried that Mr Hong and Ms Hong have:

“Inaccurately reported the Company’s financial position to the ATO for at least FY 21 and FY 20”.

That allegation would also depend upon what information had been provided by the Company to the ATO in those years and whether it was accurate, and, as I noted above, it is not apparent that Mr Cai has a basis to answer either of those questions.

12. Mr Cai then contends that Mr Hong and Ms Hong have:

“Failed to comply with the [Act] insofar as:

(i) disclosing the above referred relevant Company documents;

(ii) calling the meeting despite my numerous requests; and/or

(iii) oppressively refusing me to attend a meeting with my Australian lawyers.”

Each of those matters may support an oppression claim but Mr Cai does not require derivative leave to bring such a claim.

13. By his second affidavit dated 22 August 2024, Mr Cai exhibited an initial proposed Statement of Claim; but that proposed Statement of Claim depended on the allegation of discrepancies between the Company’s bank statements and financial statements, which he no longer presses. Mr Cai also there indicated his undertaking to indemnify the Company in the event of costs orders being made against it in the proceedings. He did not there expressly extend that undertaking to the Company’s costs of conducting the proceedings, as distinct from any adverse costs order made against it, and he also did not address his financial capacity to give such an indemnity.

14. The proposed Statement of Claim referred to in Mr Cai’s second affidavit has now been superseded by a further “Amended Proposed Statement of Claim” (which I have marked “MFI 1”) (“ASC”) although Mr Lee, solicitor, who appears for Mr Cai emphasised in closing submissions that that is not a final version of Mr Cai’s proposed claim. It is, however, the only articulation of the basis on which Mr Cai would put the claim he seeks to bring against the Company that is available to the Court and its content is significant to the findings that I reach below.

15. Mr Cai there pleads (ASC [1]) that he was a director of the Company between 9 December 2005 and 28 September 2014 and that he remains a minority shareholder in the Company, holding 15 of its 100 ordinary shares. He pleads (ASC [3]-[4]) that Mr Hong and Ms Hong (who is, as I noted above, his former wife) are both directors of the Company and are respectively the holders of 50 and 35 of the ordinary shares in the Company and (ASC [5]) that, inter alia, Mr Hong and Ms Hong solely managed the Company’s financial and business since 29 September 2014 and have managed, including making payments from, the Company’s bank account including wages, dividends and other transactions.

16. Mr Cai then pleads that Mr Hong and Ms Hong owed a fiduciary duty, implicitly to the Company, which he partly puts in positive terms (inconsistent with well-established authority including the High Court’s decisions in Breen v Williams (1996) 186 CLR 71; [1996] HCA 57 and Howard v Federal Commissioner of Taxation (2014) 253 CLR 83; [2014] HCA 21) and partly by reference to the no profit rule. He also pleads their statutory duties under ss 180-182 of the Act.

17. Mr Cai then pleads (ASC [9]) an allegation, by reference to review and assessment of the Company’s actual bank statements and executed financial statements, that the Company:

“reported the following inaccurate and/or untenable matters relating to the financial position of the Company in the Financial Statements to the Australian Taxation Office [“ATO”]

(a) Three categories of expenses which are inaccurate and/or untenable:

(i) ‘fees and charges’ which vary from $350,180 in 2020 and $879,447 in 2022, which are unverifiable and bona fide potential element in reducing the Company’s operating profit;

(ii) Further, the AMEX expenses, which are linked to the expenses and utilised for purchase of products, likely constitute personal expenses of the directors; and

(iii) The above would have material implications in the reporting of the results to the Australian Taxation Office [emphasis added].

(b) The anomaly of the movement of balances in Accounts Receivable and Accounts Payable in the Balance Sheet for the years 2019 and 2021 is untenable; and

(c) Further issue arises in 2020 when the Company’s gross profit falls to 24% of sale whereby the margin change amounts to $445,867 in 2021 (noting that this is not the year when the expense ‘fees and charges’) increased by approximately $400,000.”’

18. Mr Cai there particularises an expert accounting report dated 25 November 2024 of Mr Jones, to which I refer below, in support of that allegation.

19. It should be noted, first, that Mr Cai no longer relies on a comparison of bank statements and financial statements or any alleged discrepancy between the two, since he did not tender an earlier expert report asserting that such a discrepancy existed and the expert evidence now led by both parties does not support that proposition. Second, the language “potential element” in the first claim and “likely” in the second claim recognise that these claims are allegations of possibilities or probabilities, not of matters that Mr Cai has any current basis to assert are known facts. Third, and importantly, Mr Cai does not identify any material facts underlying the allegations that the treatment of the three specified categories of expenses were either “inaccurate” or “untenable” and does not seek to identify the quantum or component elements of any inaccuracy in those expenses. As will emerge below, that reflects the fact that Mr Cai has suspicions as to the correctness of those expenses, but has not had access to documents (most importantly, the Company’s general ledger) which would allow him to test those suspicions, or quantify their impact, and did not seek the production of those documents on notice to produce in these proceedings or press his application for access to documents in the proceedings. Fourth, Mr Cai does not identify the basis on which he contends that those matters would have material implications in the reporting of the Company’s results to the ATO, where that would presumably depend on the content of the information that the Company in fact provided to the ATO and upon the quantum of any inaccuracy in that information expenses, which Mr Cai does not identify.

20. Mr Cai also does not here identify material facts supporting the claim for, or identify the quantum of, any inaccuracy in accounts receivable and accounts payable in the 2019 and 2021 years or any financial impact of any impropriety connected with a fall in the Company’s gross profit in 2021, or any basis on which that fall results from any improper conduct.

21. Mr Cai proposed to go further to plead (ASC [10]-[12]) that:

“10. The Defendants – by executing and/or lodging the Financial Statements – have falsely or inaccurately reported the Company’s financial affairs to the [ATO] (“False Reporting”).

11. Further – or in the alternative – to False Reporting, the Plaintiffs say that the Defendants have, during each of the financial years between 2019 and 2022, misappropriated the Company’s funds (“Misappropriation”).

12. The Plaintiffs say that Misappropriation were misappropriations by the Defendants from the Company to which they had no legal entitlement.”

22. Each of the proposed allegations of False Reporting (as defined) and Misappropriation (as defined) are plainly allegations of fraud, which are made without any adequate identification of the material facts underpinning them. Second, even if the Company wrongly paid inflated fees and charges that reduced its profits, it is not apparent why financial statements which recorded that position would be inaccurate. Third, Mr Cai has no apparent basis to contend that any tax returns lodged by the Company with the ATO (as distinct from its financial statements) did not accurately record its true financial position. Fourth, so far as the allegation of “Misappropriation” implies the theft of the Company’s property by the Defendants, no factual basis for that allegation is identified or apparent.

23. Mr Cai then proposes to pleads (ASC [14]-[16]), relying on the allegations of False Reporting and Misappropriation, that the Defendants breached their fiduciary and statutory duties owed to the Company. The allegation of breach of statutory duties is also a serious allegation, where the relevant statutory duties are criminal and civil penalty provisions. Mr Cai in turn proposes to claim (ASC [17]), on the Company’s behalf, compensation under s 1317H of the Act (which depends on establishing a breach of a civil penalty provision) and in equity; an indemnity for any liability or penalty levied on the Company by the ATO; and declaratory relief as to the Defendants breach of statutory duties. As will emerge below, the evidence provides no basis for any assessment of any amount of compensation to which the Company would be entitled, or whether that compensation would exceed the costs of conducting proceedings to recover any such compensation, and no basis to determine any liability to the ATO arising from the matters alleged, where the information previously provided to the ATO is not established.

24. For completeness, Mr Cai in turn proposes to plead (ASC [18]ff) that he has not been provided with information concerning the Company’s affairs including disclosure of minutes of meetings or been paid any dividends. Those matters might well give rise to a claim in oppression, but Mr Cai does not require leave to bring that claim in his personal capacity, putting aside the fact that he deleted that claim in his Amended Interlocutory Process.

25. As I noted above, Mr Lee, in closing submissions, understandably retreated from the formulation of Mr Cai’s claim in the ASC. However, the Court has no alternative basis to formulate any claim that Mr Cai might seek to bring on the Company’s behalf, particularly where the evidence does not disclose critical matters relevant to such a claim, including the fact (as distinct from the possibility) of any misstatement or error in the Company’s financial statements and the quantum of any such misstatement or error. I recognise that Mr Lee, in closing submissions, criticised the Defendants’ lack of responsiveness to Mr Cai’s requests for information over an extended period, and there may be significant force in those criticisms. I might well have ordered that the Defendants give access to the documents sought by Mr Cai (or, perhaps more likely, documents such as the Company’s general ledger which would have assisted him to adequately formulate his claim), had he pressed his claim for access to those documents or sought access to the general ledger. However, the fact that the Defendants have not been particularly responsive to Mr Cai’s claim cannot substitute for evidence allowing the Court to conclude that the claim is seriously arguable or that it is in the Company’s best interests to bring it. I return to that matter below.

26. Mr Cai also relied on the expert report dated 25 November 2024 of Mr Jones, who expressed the view that three expense categories in the Company’s financial statements “need close scrutiny”. The first of these was the category of fees and charges in substantial amounts and Mr Jones observed that it was not known what those fees and charges represented. In cross-examination, he also pointed to the size of fees and charges and expressed the view that they warranted further inquiry for that reason. I bear in mind that there is, of course, a substantial difference between “inquiry” on the one hand and the commencement of litigation making serious allegations of wrongdoing on the other. Mr Jones also referred to a “potentially” connected issue of rental expense which fell to $182,000 in FY 2021, a fall which was likely connected with COVID 19 rental relief, and he noted a significant increase in fees and charges in FY 2021. He speculated that those charges “could contain an element of personal expenses”, while recognising that could not be confirmed without access to documents which Mr Cai has not obtained and Mr Jones has not seen. Mr Jones also pointed to the significance of wages and salaries and corresponding superannuation, but fairly acknowledged that “owners can vary their own wages/salaries to reduce reported net operating profit” with no adverse taxation implications, where increased wages or salaries are subject to PAYG tax. I recognise that the payment out of all of a company’s earnings by wages or salaries rather than dividends may support an oppression claim in some circumstances. Mr Jones also pointed, in cross-examination, to the potential significance of the Company’s general ledger to an investigation of these issues, but Mr Cai did not seek the production of that in these proceedings and he and Mr Jones have not had access to it.

27. The Defendants in turn read the affidavit dated 14 October 2024 of their solicitor, Mr Jiang, who estimated that the costs incurred by the Company in pursuing the proposed proceedings would be in excess of $500,000. That estimate was challenged by Mr Lee in his cross-examination of Mr Jiang although Mr Cai did not lead evidence, including evidence of Mr Lee, that would provide an alternate costs estimate for the proceedings. I accept that the proceedings could potentially be less costly to run, although that would largely depend on the nature of the evidence that may emerge to support the allegations of wrongdoing which Mr Cai seeks to advance in the Company’s name, which is presently not available to him. No doubt, as Mr Lee suggested, the proceedings may be less costly if that evidence plainly makes good the case that he seeks to bring and the Company obtained summary judgment against Mr Hong and Ms Hong; but, perversely, the proceedings would also be less costly if the evidence is incapable of making good that case and it is summarily dismissed. That proposition highlights the significance for the Company of a proper assessment of the evidence that Mr Cai has not yet obtained.

28. I recognise that the Defendants did not call either Mr Hong or Ms Hong to give evidence, although it appears that they had at one point served an affidavit of Ms Hong. I can infer, on that basis, that the evidence of Ms Hong and Mr Hong would not have assisted the Defendants and I can more readily draw an inference that is properly available in favour of Mr Cai in that situation, but only where the underlying evidence can support that inference.

29. The Defendants in turn read the expert report dated 13 December 2024 of Ms Thompson who largely recognised that the matters identified by Mr Jones might warrant further investigation or inquiry but also, fairly, recognised that there were other possible explanations for those matters. She also expressed the view, which seems to me to have substantial force, that it was not possible to conclude that the matters noted by Mr Jones were the product of “errors, omissions, fraud or misstatement”, as distinct from legitimate factors such as shift in market conditions, operational adjustments, or changes in accounting policies, without making that further inquiry.

The applicable principles and the parties’ submissions

30. It is common ground that Mr Cai has standing to bring the application, as a shareholder in the Company.

31. Mr Lee and Ms Steele, with whom Ms Steinhoff appeared for Mr Hong and Ms Hong, both referred to the principles applicable to the grant of leave under s 237 of the Act and Mr Lee places particular weight on the articulation of those principles in Suh v Cho [2013] VSC 491 (“Suh”), which largely seems to me to be consistent with the articulation of those principles in the earlier and the later cases. I have drawn below on their submissions and my summary of those principles in Re Legal Practice Management Group Pty Ltd (2018) 125 ACSR 513; [2018] NSWSC 527 at [50]-[54] (“Legal Practice Management Group”); Re Global Advanced Metals Pty Ltd (2019) 141 ACSR 222; [2019] NSWSC 1804 (“Global Advanced Metals”); Mount Gilead Pty Ltd & Hobhouse v L Macarthur-Onslow (2021) 398 ALR 629; [2021] NSWSC 948, affirmed on appeal in Mount Gilead Pty Ltd v Macarthur-Stanham (as executor of Estate of late Lee Macarthur-Onslow) (2023) 168 ACSR 32; [2023] NSWCA 37; Re ASP Aluminium Holdings Pty Ltd [2024] NSWSC 183 and Re Gillespies Cranes Nominees Pty Ltd [2024] NSWSC 1136, affirmed on appeal in Gillespie v Gillespie [2025] NSWCA 24.

32. In an application for leave to bring statutory derivative proceedings, Mr Cai must satisfy the criteria for the grant of leave specified in s 237(2) of the Act. In order to grant leave under that section, the Court must be satisfied of five matters and must grant that leave if satisfied of those matters. Those matters are that it is probable that the Company will not itself bring the proceedings; Mr Cai is acting in good faith; it is in the Company’s best interests that Mr Cai be granted leave; there is a serious question to be tried; and at least 14 days before making the application, Mr Cai gave written notice to the Company of his intention to apply for leave and of the reasons for applying, or the Court should dispense with that requirement. Mr Cai bears the onus of establishing that each of these matters is satisfied on the balance of probabilities: Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313; [2002] NSWSC 583 (“Swansson”) at [26]; Huang v Wang (2016) 114 ACSR 586; [2016] NSWCA 164 (“Huang v Wang”). If all the requirements of s 237(2) are satisfied, the Court must grant leave to bring the proposed proceedings. If any or all of the criteria specified in that section are not satisfied, then the Court should not grant that leave: Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 at [12]-[13]. Whether an application for leave under s 237 of the Act is treated as final or interlocutory, leave to bring a derivative action is not given lightly: Swansson at [24].

Whether the Company will bring the proceedings

33. It is common ground that the first of the requirements for a grant of leave to bring a derivative action under s 237(2)(a) of the Act, that it is likely that the Company would not itself bring the proceedings, is satisfied.

Whether Mr Cai is acting in good faith

34. The second requirement for a grant of leave to bring a derivative action, under s 237(2)(b) of the Act, is that Mr Cai must establish to the Court’s satisfaction that he is acting in good faith. Factors relevant to the good faith requirement at least include whether Mr Cai has an honest belief that a good cause of action exists and has reasonable prospects of success, although that belief will be tested against whether a reasonable person in the circumstances would hold that belief, and whether Mr Cai is seeking to bring the action for a collateral purpose.

35. In Swansson, Palmer J (at [36]) observed that:

“… there are at least two interrelated factors to which the Courts will always have regard in determining whether the good faith requirement of s 237(2)(b) is satisfied. The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. Clearly, whether the applicant honestly holds such a belief would not simply be a matter of bald assertion: the applicant may be disbelieved if no reasonable person in the circumstances could hold that belief. The second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process.”

36. Palmer J also there observed (at [42]) that where those in control of a company refuse to take proceedings to redress a wrong which appears to have been done to it, the Court should permit a derivative action to be instituted by those within the categories allowed by s 236(1) of the Act, and that such a person:

“… would suffer a real and substantive injury if the action were not permitted. The injury must be necessarily dependent upon or connected with the applicant’s status as a current or former shareholder or director and the remedy afforded by the derivative action must be reasonably capable of redressing the injury.”

37. That observation was approved in Chahwan v Euphoric Pty Ltd (2008) 65 ACSR 661; [2008] NSWCA 52 at [70] and Tobias JA there noted (at [74]) that:

“… I take his Honour to be saying that an applicant will only be acting in good faith for the purpose of s 237(2)(b) where, as a current or former shareholder or director of the company, he or she would suffer a real and substantive injury if a derivative action were not permitted provided that that injury was dependent upon or connected with the applicant’s status as such shareholder or director. It might be a positive indication of the good faith of a shareholder if he or she sought to institute a derivative action which would have the effect, if successful, of restoring value to his or her shares in the company.”

38. It is relatively easy to satisfy this requirement if an application is made by a current shareholder who has more than a token shareholding and the derivative action seeks recovery of property so that the value of the applicant’s shares would be increased, and Mr Cai falls within that category where he is a minority shareholder in the Company: Swansson at [38]; Re Gladstone Pacific Nickel Ltd (2011) 86 ACSR 432; [2011] NSWSC 1235 (“Gladstone Pacific Nickel”) at [58]; Mathews Capital Partners Pty Limited v Coal of Queensland Holdings Limited [2012] NSWSC 462.

39. In Re Lotus Property Fund No 8 Pty Ltd [2020] NSWSC 1349 at [75]-[76], Stevenson J in turn observed that:

“An enquiry as to whether, in these circumstances, [the plaintiff] is acting in good faith involves consideration of these questions:

(a) Does [the plaintiff] honestly believe that [the company] has a good cause of action against [the defendant] with reasonable prospects of success?;

(b) Does [the plaintiff] honestly believe that it is in the best interests of [the company] to bring the proceedings?;

(c) Is [the plaintiff] seeking to bring these proceedings for a collateral purpose or to obtain “some advantage for which the action is not designed”.

It is not necessary that [the plaintiff] actually depose to having the beliefs to which I have referred. These matters can be inferred from the nature and circumstances of the case and from the diligence with which [the plaintiff] has sought to assert a desire to bring the proceedings in question.”

40. Mr Lee rightly recognises, in order to establish good faith, Mr Cai must show he honestly believes that a good cause of action exists and has a reasonable prospect of success and that he is not bringing the claim for some collateral purpose. Mr Lee also rightly points out that the existence of personal animosity between the shareholders in dispute does not necessarily establish lack of good faith. He also rightly recognises that objective facts and circumstances of the claim are also relevant to whether good faith is established. Mr Lee points, in support of the claim that Mr Cai is acting in good faith, to the difficulties which he has had in obtaining documents from the Company and to the expert evidence which indicates, as I have noted above, that three items contained in the Company’s financial statements warrant or may warrant further inquiry. I accept that Mr Cai’s difficulty in obtaining documents from the Company may support his belief that a good cause of action may exist against Mr Hong and Ms Hong, at least on the basis that they and the Company may more readily have made those documents available for review if they would readily have displaced his concerns. I also accept that both experts’ reports support a view that there are matters which may warrant further inquiry in the Company’s financial statement. Mr Lee also points to the fact that Mr Cai has not, since he ceased to be a director, received dividends from the Company, but Mr Cai does not require leave to pursue an oppression claim as to that issue.

41. In opening submissions, Ms Steele submit that:

“The Court should deduce that the proposed derivative action is merely ancillary to the actual complaint of [Mr Cai]. It is a further forum where Mr Cai will continue to ventilate his complaints as to the payment of dividends by the Company and/or the provision of information (by way of Company minutes) as to how the Company is being run.

Thus, it seems that [Mr Cai] is bringing the present application in order to further his own interests in respect of payments of dividend, rather than the Company’s (putative) interest in bringing the proposed proceedings.”

42. Ms Steele also contended that Mr Cai was not acting in good faith because the proceedings were brought to place pressure on the Company to pay a dividend or were prompted by hostility on his part toward Ms Hong, and she cross-examined Mr Cai at some length to seek to establish that proposition. I accept Mr Cai plainly does not have a positive view of Ms Hong.

43. In closing submissions, Ms Steele in turn contends the proposed derivative action is merely ancillary to Mr Cai’s “actual complaint” that he has not received dividends from the Company, and that the true purpose of the claim is to further Mr Cai’s own financial interests in that respect. Ms Steele also points to the period that has elapsed since Mr Cai ceased to be a director of the Company, but little turns upon that here where he remains a shareholder of the Company who has standing to bring the proceedings and would benefit from any economic recovery that was made by the Company in the proceedings.

44. I am not persuaded that Mr Cai’s possible wish to receive dividends from the Company or his view of Ms Hong gives rise to a collateral purpose that would amount to an abuse of process or deprive him of good faith in respect of the proceedings, where the evidence establishes matters that warrant further inquiry in the Company’s financial statements, although not yet (as I will find below) that a cause of action against Mr Hong or Ms Hong has reasonable prospects of success. I will assume, without deciding, that Mr Cai honestly believes that a good cause of action against Mr Hong and Ms Hong exists and has reasonable prospect of success. It does not seem to me that he can reasonably hold that view, where a rational assessment of that matter depends upon an understanding of the treatment of the relevant issues in the Company’s financial accounts which would require, as Mr Jones rightly pointed out in cross-examination, at least the review of the Company’s general ledger, which Mr Cai has not obtained and reviewed. At best, it seems to me that Mr Cai could reasonably believe that a good cause of action might exist, and might succeed, depending upon what emerged from that review which he and his advisers have not yet undertaken. For the reasons noted below, even if Mr Cai is acting in good faith, he is unable to satisfy other essential requirements for the grant of leave under s 237 of the Act.

Whether the proposed proceedings are in the Company’s best interests

45. The third requirement for the grant of leave to bring a derivative action, under s 237(2)(c) of the Act, is that the grant of such leave is in the Company’s best interests, generally because bringing the proceedings is in the Company’s best interests.

46. The relevant principles were summarised in Swansson at [55]-[60], where Palmer J noted that that provision required that the Court be satisfied that the proposed action actually is, on the balance of probabilities, in the relevant company’s best interests. Ms Steele rightly emphasises that this criterion requires that it is in the Company’s best interest to grant leave, not that it may be or appears to be or is likely to be, and that question is to be determined on the balance of probabilities by taking into account all of the relevant circumstances.

47. In order to prove that leave is in the best interests of the company, an applicant should generally give evidence of the character of the company, in the sense of the nature of the company’s operations; the business of the company so that the effects of the proposed litigation on the conduct of its business may be appreciated; whether there are other means of obtaining the same redress so that the company does not have to be brought into litigation against its will; and the proposed defendant’s ability to meet at least a substantial part of any judgment in favour of the company so that the Court may ascertain whether the action would be of practical benefit to the company. In Gladstone Pacific Nickel, Ball J identified relevant matters including the prospects of success of the action; the likely costs of the action; the likely recovery if the action is successful; and the likely consequences to the company if the action is unsuccessful. Whether it is in the best interests of the Company to bring the relevant claims depends not only on whether it might succeed as to liability, but whether there would be any practical benefit from its success. In Re Imperium Projects Pty Ltd [2015] NSWSC 16 (“Imperium Projects”) at [14], I observed that it did not follow that it was in a company’s best interests that a remedy be pursued, merely because it appeared to have suffered an actionable wrong, and any assessment of the company’s best interests depended on matters including “the strength of the suggested claims”.

48. Mr Lee submits that:

“If the [Defendants] did, in fact, in breach of their statutory duties under the Act, misreport the Company’s financial position … and/or arbitrarily varied their own wages/salaries to reduce reported net operating profit, then the Company would – potentially together with the shareholders – attain not only an opportunity to voluntarily amend/fix taxation records potentially avoiding an investigation from the [ATO] but also properly address and resolve issue of the Company’s financials such as the issues identified in clauses 3.5 – 3.7 and/or 3.19 of [Mr Jones’] Expert Report.” (Emphasis in original]

49. Mr Lee rightly here recognises (by the word “if”) the open question as to whether the Company could establish that the Defendants acted in breach of their statutory duties. That cannot presently be established, where it depends on the outcome of an inquiry as to the matters warranting inquiry identified in the experts’ reports, and that inquiry has not yet been undertaken. Mr Cai, and those representing him, have also not yet sought to quantify the amount of any recovery that would be available to the Company if it could establish such a breach of duty, so as to allow a view to be formed that it was in the Company’s interests to incur the costs of the proceedings. Indeed, Mr Lee went so far in closing submissions to assert that, irrespective of the prospect of any recovery by the Company, it was in its best interests to bring the proceedings so as to vindicate matters of corporate governance. I do not accept that proposition where, it seems to me, it would only be in the Company’s best interests to pursue potentially expensive litigation if (consistent with the view I expressed in Imperium Projects) it would obtain an economic benefit from that litigation that warrants the costs involved. For these reasons, in the language of the case law, I am not satisfied that it is, rather than merely that it might be, in the Company’s best interests to bring the relevant proceedings, and that is not a sufficient basis to grant the leave sought.

50. Ms Steele in turn points to the likely costs of the proceedings, as quantified by Mr Jiang and submits that the Company’s cash and retained earnings will not be sufficient to meet the costs incurred in conducting the proceedings. I recognise that that issue would be displaced if Mr Cai expressly extended his indemnity to the costs of conducting the proceedings and established that he had the financial capacity to support a wider indemnity. In closing submissions, Ms Steele also questions Mr Cai’s ability to pay the Company’s costs of the proceedings by reference to the WeChat messages to which I referred above, which she contends indicate financial difficulty on his part; however, that depends on the disputed issue as to the content of the relevant message, which I addressed above, and it is not necessary to decide that question in order to determine this application.

51. I am also not satisfied that Mr Cai has established that it is in the Company’s best interests to grant leave to him to bring the proposed proceedings, where his offer of indemnity does not presently extend to the Company’s costs of the conduct of the proceedings and he has not established that he has the capacity to honour the indemnity which he offers against adverse costs orders. If that were the only difficulty with Mr Cai’s application, I would likely have offered him the opportunity to formulate an adequate indemnity that would better protect the Company’s interests in that respect and lead further evidence of his capacity to provide it, but there is no utility in doing so here given the other difficulties which exist with Mr Cai’s application.

Whether a serious question to be tried is established

52. The fourth requirement for the grant of leave under s 237(2)(d) of the Act is that there is a serious question to be tried in the proceedings.

53. In Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534; [2002] NSWSC 640 at [34], Barrett J observed that:

“… a serious question to be tried can be found only by reference to an infringement of some legal or equitable right or the commission of some legal or equitable wrong, with the result that the issue needs to be approached by inquiring whether there exists, in the circumstances and on the evidence, a sufficiently cogent showing of some such infringement or wrong to warrant the imposition of an order to preserve the status quo pending full investigation.”

His Honour also observed (at [35]) that the s 237(2)(d) test is imported from equity's approach to the grant of interlocutory injunctions. Whether there is a serious question to be tried requires the application of the same test as applied by the Court in determining whether to grant an interlocutory injunction: Swansson at [25]; Vinciguerra v MG Corrosion Consultants Pty Ltd (2010) 79 ACSR 293; [2010] FCA 763 (“MG Corrosion”) at [140], upheld on appeal in MG Corrosion Consultants Pty Ltd v Vinciguerra (2011) 82 ACSR 367; [2011] FCAFC 31.

54. In Gladstone Pacific Nickel, Ball J summarised the test as to whether there is a serious question to be tried as follows (at [56]):

“The test of whether there is a serious question to be tried is the same as the test that is applied by the court in determining whether to grant an interlocutory injunction: [Swansson] at [25] per Palmer J; Oates v Consolidated Capital Services Ltd (2009) 76 NSWLR 69; 257 ALR 558; 72 ACSR 506; [2009] NSWSCA 183 at [164] per Campbell JA, with whom Spigelman CJ and Allsop P agreed. Consequently, the same relatively low threshold is applicable. It is not appropriate for the court to attempt to resolve disputed questions of fact. For that reason, cross-examination going to the merits of the case will only be permitted with leave of the court and then only to a limited extent. Whether the court should attempt to resolve a disputed question of law will depend on the particular circumstances of the case, including whether the question is novel or difficult and whether it is susceptible of resolution on the present state of the evidence: Kolback Securities Ltd v Epoch Mining NL [(1987) 8 NSWLR 533] at 535 per McLelland J (as he then was). In answering the question whether there is a serious question to be tried, the court must obviously have regard to the material before it; and the material that is available may affect the result. As the Full Federal Court explained in Aboriginal Development Commission v Ralkon Agricultural Co Pty Ltd (1987) 15 FCR 159 at 163; 74 ALR 505 at 509–10:

“However, applying the “serious question” test, it is clear that the inquiry whether there is a serious question to be tried must be answered with reference to the circumstances of the case. There may be cases in which the facts are so clearly and comprehensively established at the time of the application for the interim order that the court would conclude that the applicant had no arguable case. At the opposite extreme there may be cases in which the applicant has had little opportunity to ascertain the facts and to adduce evidence but there is some material to suggest an entitlement to relief. Upon further investigation that material may turn out to be capable of ready refutation or explanation but, in the meantime, it may be appropriate for the court to intervene. Everything must depend upon the circumstances of the case, including the extent to which the applicant has had an opportunity to present the facts to the court and the consequences of granting or of refusing relief.”

55. Mr Lee also refers to the formulation of the requirement that there be a serious question to be tried in Suh at [56]-[58] as follows:

“This requirement may be equated with the test on an application for an interlocutory injunction: Swansson; Ehsman v Nutectime International Pty Ltd [(2006) 58 ACSR 705, [59] per Austin J]. That test will be satisfied if the plaintiff shows a sufficient likelihood of success to justify, in the circumstances, the preservation of the status quo pending the trial: Australian Broadcasting Corporation v O’Neill [(2006) 227 CLR 57 (see especially at [19] per Gleeson CJ and Crennan J, and at [65]–[72] per Gummow and Hayne JJ)]

In Ragless v IPA Holdings Pty Ltd (in liq) [(2008) 65 ACSR 700; [2008] SASC 90, [40]], Debelle J stated:

“The Court must determine whether the applicant has demonstrated that there is a real question to be tried, that is to say, whether the applicant is able to identify the legal or equitable rights to be determined at trial in respect of which a final relief is sought…”

There is, however, no requirement for the court to make factual determinations about contested issues: Ehsman v Nutectime.”

56. I have referred above to the authorities which indicate that the test for a serious question to be tried is a “relatively low threshold”: Swansson at [25]; Gladstone Pacific Nickel at [56]. An application of this character does not involve a consideration of the underlying merits of the proposed litigation, except to the extent that it is necessary to determine whether there is a serious question to be tried and it will not generally be appropriate for the Court to attempt to resolve disputed questions of fact in such an application: Swansson at [25]; Gladstone Pacific Nickel at [56]; Huang v Wang at [60]: Legal Practice Management Group at [94]. The need for evidence to establish the factual basis of a serious question to be tried was noted in Charlton v Baber (2003) 47 ACSR 31; [2003] NSWSC 745, where Barrett J held that a serious question to be tried in respect of a breach of directors’ duties was not established, where an assertion of loans on uncommercial terms and without adequate security was not supported by evidence of the terms of the loans. The need for evidence to support such claims was also recognised by Gilmour J in MG Corrosion (at [141]), approved in Hannon v Doyle (2011) 82 ACSR 259; [2011] NSWSC 10 at [48]. Ms Steele rightly acknowledges that it is not necessary for Mr Cai to establish that it is more probable than not that the action would succeed: Cemcon; Re Hall Concrete Constructions (Vic) Pty Ltd [2009] FCA 696.

57. Mr Lee submits that this requirement is satisfied by reference to oppressive conduct on the part of the Defendants, their failure to call a member meeting at Mr Cai’s request and the alleged breach of statutory duties and:

“pending review of the documents sought for further review by an expert, potentially misappropriate[ing] the Company’s funds as referred to in clauses 3.3 to 3.7 of [Mr Jones] Expert Report.” [emphasis added]

58. The claim for oppression and the claim that the Company or its directors failed to convene a meeting requested by Mr Cai do not establish a serious question to be tried in respect of the proposed derivative proceedings, because both claims may be brought as personal claims by Mr Cai. I am not satisfied that Mr Cai has established a serious question to be tried for the alleged breach of statutory duties, where Mr Lee’s formulation of that claim itself recognises the further inquiries that are required, before a serious question to be tried would be established; and Mr Cai is presently unable to identify the basis on which the possible errors in the Company’s financial statements amount to a breach of duty, and still less to identify the amount at issue in any available claim of fraud or misappropriation on the part of the Defendants.

59. Ms Steele responds that the matters referred to in Mr Jones’ report do not demonstrate a serious question to be tried and that:

“The matters raised by Mr Jones amount to no more than speculation in circumstances where Mr Jones was asked specifically to attempt to identify possible false reporting [and] does not conclude that the [Defendants] have prepared false reports to the ATO or misappropriated funds. He cannot because there no evidence to suggest that such serious allegations can be made out.”

60. Ms Steele also elaborates on the lack of information available to Mr Jones in respect of each of the claims relating to fees and charges; movements in accounts receivable and accounts payable; and the position as to the fall in gross profit in 2020, and points to Ms Thompson’s view that there are several possible explanations of these matters, although I recognise that Ms Thompson acknowledges that they warrant further inquiry. Ms Steele also points to, and I have noted above, the serious nature of the claims made by Mr Cai in the ASC, including the allegations of false reporting of the Company’s financial affairs to the ATO and of misappropriation, and rightly points out that these are “serious allegations” and that the claims of fraud or wilful misconduct are not properly pleaded (and, I would add, arguably not properly made) in their present form

Notice of the application

61. Mr Lee submits that the Court should dispense with the need for notice of the application, under s 473(2)(e)(ii) of the Act. That question does not arise where Mr Cai has not established the other matters necessary under s 237(2)(c)(d) of the Act to the grant of derivative leave.

Determination and orders

62. For these reasons, I am not persuaded that I can grant leave to Mr Cai to commence or continue the proceedings on behalf of the Company under s 237 of the Act. The Defendants foreshadowed that they would be potentially seeking indemnity costs as to wasted costs of the proceedings, including their costs in responding to expert evidence served by Mr Cai but not relied on in the proceedings.

63. I make the following orders and directions to give effect to this judgment and allow the parties an opportunity to make submissions as to costs.

64. The Originating Process, the Amended Interlocutory Process and the proceedings be dismissed, reserving the question of costs.

65. Each party serve, and send to the Associate to Black J, their submissions in chief as to costs not exceeding five pages in Arial Font 12, one and a half spacing, by 4pm on 28 March 2025.

3 Each party serve, and send to the Associate to Black J, their submissions in response as to costs, not exceeding five pages in Arial Font 12, one and a half spacing, by 4pm on 4 April 2025.

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