[2018] VSCA 229
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89[2007] HCA 22
Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296[2012] FCAFC 6
Hasler v Singtel Optus Pty Ltd (2014) 87 NSWLR 609[2014] NSWCA 266
Huang v Wang (2016) 114 ACSR 586[2016] NSWCA 164
Lewis v Condon (2013) 85 NSWLR 99[2018] NSWSC 527
Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd (2011) 86 ACSR 432[2011] NSWSC 1235
Rosenbaum v Baidarman (No 2) [2021] NSWSC 574
Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313[2002] NSWSC 583
Tomanic v One Australia Pty Ltd (2011) 288 ALR 310(2011) 84 ACSR 121[2011] NSWCA 104
Vadori v AAV Plumbing at (2010) 77 ACSR 616
Judgment (26 paragraphs)
[1]
Tate Lucas Brownlee (Second Plaintiff)
Kristen Merrion (Third Plaintiff)
Wilmen Pty Limited ACN 612 746 899 (First Defendant)
James David Wilmen (Second Defendant)
Wil Brown Management Pty Ltd ACN 618 846 021 as trustee for The Wil Brown Management Trust (Third Defendant)
Wil Brown Pty Ltd trading as Raine & Horne Pottsville Beach & Cabarita Beach ACN 613 356 504 (Fourth Defendant)
Representation: Counsel:
Mr D Rayment with Mr A Schmorchevsky (Plaintiffs)
Ms A Avery-Williams (First and Second Defendants)
[2]
Solicitors:
Jemmeson Fisher (Plaintiffs)
Salerno Law (First and Second Defendants)
[3]
Submitting appearance filed by Third and Fourth Defendants
File Number(s): 2020/94768
Publication restriction: N/A
[4]
Introduction
These reasons for judgment concern the plaintiffs' application made by interlocutory process filed on 28 January 2022 to further amend their amended statement of claim. The proposed further amended statement of claim is the document at pages 38-79 of exhibit TB-3 to the affidavit of the second plaintiff sworn on 15 February 2022 (the proposed FASOC).
For the reasons that follow, I have decided to grant leave to the plaintiffs to amend by filing a document substantially in the form of the proposed FASOC and to grant leave to the first plaintiff under s 237 of the Corporations Act 2001 (Cth) to make the claims pleaded in paragraphs 66A and 66P to 66V (but excluding 66R) of the proposed FASOC on behalf of and in the name of the third defendant and to make the claims pleaded in paragraphs 66A to 66V (but excluding 66R) on behalf of and in the name of the fourth defendant.
I have also decided that, to the extent that a grant of leave is necessary, leave should also be granted to the first plaintiff as a beneficiary of the Wil Brown Management Trust (of which the third defendant is the trustee) to make the claims pleaded in paragraphs 66A and 66P (but excluding 66R) on behalf of and in the name of the third defendant.
[5]
Nature of the proceedings and procedural history
The proceedings arise out of a real estate business conducted by the third defendant, Wil Brown Management Pty Ltd ACN 618 846 021 (WBMPL) as trustee of the Wil Brown Management Trust (the Trust), and the fourth defendant, Wil Brown Pty Ltd ACN 613 356 504 (WBPL).
According to the plaintiffs' existing pleadings, WBMPL and WBPL have been carrying on the business since about mid-2017, trading as Raine & Horne Pottsville/Cabarita Beach (the Business). WBPL is the franchisee under a franchise agreement with Raine & Horne, the lessee of the premises from which the Business is conducted and the holder of the bank accounts with Macquarie Bank used for the purpose of the Business, including a trust account. WBMPL owns the rent roll of the Business and is the borrower under a $550,000 loan from Macquarie Bank which was the subject of a finance agreement between Macquarie Bank and WBMPL in its own capacity and as trustee of the Trust.
The shares in each of WBMPL and WBPL are owned equally by the first plaintiff, Brownlee Enterprises Pty Ltd ACN 613 312 548 (BEPL) and the first defendant, Wilmen Pty Ltd ACN 612 746 899 (WPL).
The Trust is a unit trust in which the units are held by BEPL and WPL in equal shares.
All of WBMPL's assets are held on the terms of the Trust.
The second plaintiff, Mr Tate Brownlee (Tate) is a 50 per cent shareholder and the sole director of BEPL.
The second defendant, Mr James Wilmen (James) is a 50 per cent shareholder and the sole director of WPL.
Tate and James are both real estate agents and they are the two directors of WBMPL and WBPL.
The third plaintiff, Ms Kristen Merrion (Kristen) is the other 50 per cent shareholder in BEPL and is the partner of Tate.
The proposed amendments would join to the proceedings Ms Amanda Wilmen as the fifth defendant (Amanda) and Mr Jesse Wilmen as the sixth defendant (Jesse). Amanda and Jesse are the wife and son of James.
In referring to individual parties by their first names, I have adopted the same convention as in the plaintiffs' pleadings. No disrespect is intended.
The proceedings were commenced in the General List of the Equity Division on 26 March 2020 and transferred to the Corporations List in July 2021.
[6]
The plaintiffs' existing claims
It is convenient to outline the plaintiffs' existing pleaded claims before turning to the substance of the amendments.
[7]
Claims relating to the funding of the purchase of the Business
The plaintiffs seek declaratory relief in relation to a financial contribution allegedly made by BEPL to the purchase price of the Business in excess of the contribution amount said to have been agreed between Tate and James in about May 2017.
[8]
Claims relating to Macquarie Bank loan repayments
The plaintiffs allege that James "failed and refused" to cause WBMPL to make the monthly repayments under the Macquarie Bank loan referred to at [5] above. The plaintiffs allege that Tate and Kirsten made repayments totalling $39,591.59 from their personal funds. They claim an entitlement to be reimbursed by WBMPL for that amount and certain other relief.
[9]
Alleged failure to account for sales commissions
The plaintiffs allege that James has failed to account to WBPL for certain sales commission from 19 September 2017 in the sum of $120,000. In prayer 4 of the existing statement of claim, the plaintiffs seek an order that James repay the third defendant the sum of $120,000.
[10]
Alleged oppression
BEPL alleges that James has conducted the affairs of WBPL and WBMPL contrary to the interests of BEPL in those two companies and in a manner that is oppressive, unfairly prejudicial to or unfairly discriminatory against BEPL as a member of each of those companies. The alleged conduct on which BEPL relies involves:
1. James' alleged failure or refusal to cause WBMPL to make repayments under the Macquarie Bank loan referred at to [25] above;
2. alleged failure by James to account to WBPL for sales commissions referred to at [26] above;
3. alleged unauthorised withdrawals made by James from the Macquarie Bank accounts of WBPL;
4. James' alleged refusal to provide Tate with financial information concerning WBPL and WBMPL;
5. James' alleged opening of new bank accounts and appointment of new accountants for WBPL and WBMPL, thereby denying Tate access to financial information concerning WBPL and WBMPL;
6. the alleged exclusion of Tate from franchisee systems and information, including servers, software and online listings;
7. James' conduct in allegedly excluding Tate from the premises of the Business; and
8. the alleged unlawful termination of Kristen and Tate's employment with WBPL and/or WBMPL.
BEPL seeks the following relief under s 233 of the Corporations Act:
1. an order for the purchase by WPL of BEPL's 50 per cent shareholding in each of WBPL and WBMPL; or
2. an order for compensation; or
3. an order for the appointment of receivers and managers to all property of WBPL and WBMPL; or
4. an order winding up WBPL and WBMPL under s 233 or alternatively on the just and equitable ground under s 461(1)(k) of the Corporations Act.
[11]
Additional oppression allegations and additional relief sought under s 233
Paragraphs 66A to 66V and 67 of the proposed FASOC introduce the following additional grounds of the existing oppression claim:
1. James causing WBPL to purport to enter into a contract of employment with Amanda and an amended contract of employment with Jesse.
2. James causing WBPL to purport to enter into an employment contract with himself (which the plaintiffs contend is invalid) and procuring or causing WBPL to pay sales commission to him under that purported contract; and
3. James allegedly causing money that should have been paid to WBPL and WBMPL to be paid instead to WPL.
James and WPL do not oppose those amendments insofar as they introduce additional bases of the existing oppression claim.
The plaintiffs' claims for relief in respect of the alleged oppression have also been expanded.
In the existing amended statement of claim, the plaintiffs seek an order for the purchase by WPL of BEPL's shareholding in WBPL and WBMPL or, alternatively:
1. an order under s 233 of the Corporations Act requiring WPL and James to compensate BEPL for the alleged oppressive conduct in such amount as the Court thinks fit;
2. an order under s 233 for the appointment of receivers and managers to the property of WBPL and WBMPL; and/or
3. an order under s 233 or s 461(1)(k) for the winding up of WBPL and WBMPL.
Prayer 4 of the proposed FASOC includes an order that WPL also purchase BEPL's units in the Trust. James and WPL do not oppose that amendment to prayer 4.
However, James and WPL do object to prayer 5 of the proposed FASOC in which the plaintiffs seek the following orders under s 233 of the Corporations Act in the event that "an order cannot be made" under s 233 for the purchase of BEPL's units in the Trust or for the purchase of BEPL's shares in WBMPL "at a value which includes the value of property held by WBMPL on trust":
1. an order requiring James to do all things reasonably necessary to consent to the appointment of Tate as the sole licensee in charge of WBMPL; and
2. an order removing or requiring the removal of James as a director or WBMPL, or appointment or requiring the appointment of an additional director to WBMPL.
James and WPL also object to prayer 6 of the proposed FASOC, which is a claim for similar relief in respect of WBPL to the extent that an order cannot be made under s 233 for the purchase of BEPL's shares in WBPL.
[12]
Proposed derivative claims on behalf of WBPL and WBMPL
In paragraph 66A of the proposed FASOC, the plaintiffs allege that, as a director of each of WBPL and WBMPL, James owed duties to each company at general law and under ss 180-183 of the Corporations Act:
1. to exercise his powers and discharge his duties with the degree of care and diligence that a reasonable person would exercise;
2. to exercise his powers and discharge his duties in good faith in the best interests of WBPL and WBMPL (respectively);
3. not to improperly use his position to gain an advantage for himself or someone else, or to cause detriment to WBPL and WBMPL (respectively); and
4. not to improperly use information which he obtains because he is, or has been, a director to gain an advantage for himself or someone else, or to cause detriment to WBPL and WBMPL (respectively).
By paragraphs 66A to 66V and 73 to 81 of the proposed FASOC, the plaintiffs seek to introduce:
1. a claim on behalf of WBPL against James for alleged breaches of his duties as a director of that company by procuring or causing WBPL to purportedly enter into an employment contract with Amanda, and an amended employment contract with Jesse (which the plaintiffs contend are invalid);
2. a claim on behalf of WBPL against James for alleged breaches of his duties as a director in procuring or causing WBPL to purportedly enter into an employment contract with himself (which the plaintiffs contend is invalid) and procuring or causing WBPL to pay commission to James under that purported contract;
3. claims on behalf of WBPL and WBMPL against James for allegedly breaching his duties as a director of those companies by diverting money away from those companies (and into an account of WPL) and allegedly procuring or participating in a breach of trust by WBMPL by procuring or causing WBMPL not to acquire and hold the diverted money on the terms of the Trust;
4. claims on behalf of WBPL and WBMPL against WPL under the first limb of Barnes v Addy as an alleged knowing recipient of the trust money referred to immediately above; and
5. claims on behalf of WBPL and WBMPL against James under the second limb of Barnes v Addy as a party who allegedly procured or knowingly participated in the alleged breaches of trust referred to immediately above.
It is common ground between the parties that, whilst the alleged conduct that is the subject of these claims has not been pleaded as part of the existing oppression suit, the conduct has been the subject of instructions and assumptions that the plaintiffs have provided to an expert valuer for the purpose of valuing BEPL's shares in WBPL and WBMPL under various scenarios in connection with BEPL's claim for orders requiring those shares to be purchased by WPL. Thus, there is no objection to the oppression suit being expanded to include that conduct now.
[13]
Claims relating to the Trust
In paragraph 72 and prayers 19 and 20 of the proposed further amended statement of claim, BEPL claims that, by reason of all of the matters on which it relies as constituting the oppressive conduct of the affairs of WBPL and WBMPL and the matters on which it relies for the purpose of the proposed derivative claims, it is just and equitable that receivers and managers be appointed to the property of the Trust, the administration of the Trust be brought under the control of the Court and the Trust be brought to an end and the property of the Trust distributed in such manner as the Court considers just and equitable having regard to the extent to which WPL and James have misappropriated Trust property or diverted property away from the Trust.
Alternatively, paragraph 72 and proposed prayer 21 of proposed FASOC seek an order pursuant to s 86A of the Trustee Act 1925 (NSW) varying the terms of the Trust to the extent necessary to permit it to be brought to an end and the Trust property to be distributed as referred to above.
Alternatively, paragraph 72 and prayer 22 of the proposed FASOC seek an order pursuant to ss 70 and 71 of the Trustee Act for the appointment of a new trustee.
James and WPL do not oppose the amendments in paragraphs 72 and prayers 19 to 22 of the proposed FASOC.
Prayer 23 of the proposed FASOC seeks an order that WBMPL render accounts in respect of the Trust. James and WPL did not make any submissions in relation to this proposed amendment. As I have mentioned, WBMPL has filed a submitting appearance in these proceedings and did not appear on the hearing of the plaintiffs' amendment application.
It is clear from the proposed prayers for relief that the relief in prayers 19 to 23 is sought only if and to the extent that an order is not made under s 233 of the Corporations Act for the purchase of BEPL's interest in the Trust, or for the purchase of BEPL's shares in WBMPL at a value which includes the value of the Trust property.
[14]
Uncontentious amendments
As I have already mentioned at [30] above, James and WPL do not oppose those amendments that plead additional conduct by James that is alleged to constitute oppression.
The proposed FASOC contains various other amendments that are not opposed by James and WPL, including the insertion of additional particulars of contracts in respect of which James has allegedly failed to account to WBPL for sales commission, the insertion of additional details concerning the allegation that James excluded Tate from the premises of the Business, and the insertion of a claim for an order that WBPL pay to Kristen certain employee benefits allegedly owing to her.
[15]
The plaintiffs' rationale for the contentious amendments
Underlying proposed prayers 5 and 6 and the proposed derivative claims is a concern on the part of the plaintiffs that it is uncertain:
1. whether the Court has power under s 233 of the Corporations Act to order a buy-out of units in the Trust (as opposed to shares in WBMPL);
2. whether or how the value of Trust assets can or should be taken into account in valuing shares in WBMPL;
3. whether a buy-out of shares in WBMPL would be an appropriate remedy for any oppression that is ultimately found if the shares could not be valued in a manner that has regard to the value of the Trust assets; and
4. whether a buy-out of shares in WBPL (absent a buy-out of shares in WBMPL) would be an appropriate remedy for any such oppression in circumstances where WBPL and WBMPL are conducting one business.
I accept that all of those uncertainties exist: see Tomanic v One Australia Pty Ltd (2011) 288 ALR 310; (2011) 84 ACSR 121; [2011] NSWCA 104 at [300]-[306] (Campbell JA, Macfarlan JA agreeing) and the authorities there referred to.
The plaintiffs submit, and I accept, that it is also uncertain whether the Court has power to make the orders sought in prayers 19 and 20 of the proposed FASOC for the winding up of the Trust by appointing a receiver and manager to distribute the Trust assets or under an order for the general administration of the Trust: see Re Gaydon [2001] NSWSC 473 at [29]. Moreover, courts are typically reluctant to make an order for the general administration of a trust, which is a cumbersome process: see McLean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 623 at 633-636; Rosenbaum v Baidarman (No 2) [2021] NSWSC 574 at [90].
It would be inappropriate on an application for leave to amend to express even preliminary views about how those issues might ultimately be resolved at the final hearing.
[16]
Consideration and determination
The question is whether the Court should grant leave to the plaintiffs to amend by pleading the derivative claims on behalf of WBPL and WBMPL.
Leave to amend should be refused if the Court is not satisfied of the matters set out in s 237(2) of the Corporations Act. Insofar as the proposed derivative claims concern WBMPL, the Court must also be satisfied that there are special circumstances justifying BEPL, as a beneficiary of the Trust, bringing those claims against James and WPL on behalf of WBMPL (as trustee). If leave to bring the derivative claims would not be granted, then it would be futile to grant leave to amend.
If leave to bring the proposed derivative claims would be granted, the question whether to grant leave to amend will fall to be determined in accordance with ss 56-58 of the Civil Procedure Act 2005 (NSW). The primary questions for the Court are whether the proposed amendments will "facilitate the just, quick and cheap resolution of the real issues in the proceedings" (s 56(1)) and whether a grant of leave to amend would be consistent with the dictates of justice in all the circumstances of this case.
[17]
Leave to bring proposed derivative claims
As a shareholder of WBPL and WBMPL, BEPL has standing to bring proceedings on behalf of those companies, subject to the Court granting leave under s 237 of the Corporations Act.
Section 237(2) of the Corporations Act provides:
"(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."
If those five criteria are made out, the Court is required to grant leave. The Court should refuse leave if any one of the criteria is not made out. The applicant for leave bears the onus of establishing each of the criteria on the balance of probabilities. This reflects that leave is not given lightly because it is a serious matter to permit proceedings to be brought in the name of a company that the company has not been willing to commence itself: Huang v Wang (2016) 114 ACSR 586; [2016] NSWCA 164 (Huang) at [57]-[61] (Bathurst CJ, McColl JA agreeing and Barrett AJA agreeing at [78]) and the authorities there referred to.
[18]
Section 237(2)(a): Whether probable that WBPL and WMBPL will not bring the claims
As to the criterion in s 237(2)(a), Tate and James are the two directors of WBPL and WBMPL. Their associated entities BEPL and WPL are the equal shareholders in those two companies. Tate and James, and BEPL and WPL, have been in dispute in relation to WBPL and WBMPL since at least the commencement of these proceedings in March 2020. The proposed derivative claims relate to alleged breaches by James of his duties as a director of WBPL and WBMPL. In opposing the derivative claim amendments, James has not adduced any evidence or made any submissions to the effect that he will cooperate with Tate to cause the companies to bring the proposed claims. I am satisfied that the criterion in s 237(2)(a) is established.
[19]
Section 237(2)(b): Whether BEPL is acting in good faith
In Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313; [2002] NSWSC 583 (Swansson) at [36], Palmer J identified two interrelated factors to which the Court will always have regard for the purpose of s 237(2)(b):
1. whether the applicant honestly believes that a good cause of action exists which has reasonable prospects of success (noting that the applicant's claim that they hold such a belief should be assessed objectively against whether a reasonable person in the circumstances would hold such a belief); and
2. whether the applicant is seeking to bring the action for a collateral purpose that would amount to abuse of process.
His Honour emphasised, and subsequent cases have confirmed, that consideration of whether the applicant is acting in good faith is not limited to those two factors: Chahwan v Euphoric Pty Ltd (2008) 65 ACSR 661; [2008] NSWCA 52 (Chahwan) at [81]-[83]; Connective Services Pty Ltd v SLEA Pty Ltd (2018) 130 ACSR 321; [2018] VSCA 229 at [105]-[106].
In Swansson, Palmer J explored scenarios in which the two factors may or may not be satisfied (at [38]-[42]). In the following passage subsequently referred to with approval in Chahwan at [70]-[71], his Honour observed (at [38]-[39]):
"38. Where the application is made by a current shareholder of a company 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, good faith will be relatively easy for the applicant to demonstrate to the court's satisfaction. So also where the applicant is a current director or officer: it will generally be easy to show that such an applicant has a legitimate interest in the welfare and good management of the company itself, warranting action to recover property or to ensure that the majority of the shareholders or of the board do not act unlawfully to the detriment of the company as a whole.
39. However, where the applicant is a former shareholder or officer with nothing obvious to gain directly by the success of the derivative action, the court will scrutinise with particular care the purpose for which the derivative action is said to be brought."
Palmer J also said (at [42]):
"If a wrong appears to have been done to a company and those in control refuse to redress it, the Court should permit a derivative action to be instituted only by those within the categories allowed by s 236(1) who 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."
[20]
Section 237(2)(c): Whether grant of leave in best interests of WBPL and WMBPL
Section 237(2)(c) directs attention to the company's "separate and independent welfare" and requires the applicant for leave 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": Huang at [59] and the authorities there cited.
Section 237(2)(c) raises the question whether it is in the best interests of the company as a whole that the action be brought at all, and also whether it is in the company's best interests that the action be brought specifically by the applicant: Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd (2011) 86 ACSR 432; [2011] NSWSC 1235 (Gladstone Pacific Nickel) at [57].
To enable all relevant circumstances to be considered, an applicant for leave will ordinarily be required to adduce evidence of at least the following matters:
1. the character of the company;
2. the business of the company (so that the effects of the proposed litigation on the proper conduct of that business may be appreciated);
3. whether there are alternative means of achieving the redress sought that do not require drawing the company into litigation against its will; and
4. whether the prospective defendant will be able to substantially meet any judgment that may be made in favour of the company (so that the Court may ascertain whether the proposed action would be of any practical benefit to the company).
See Swansson at [57]-[60]; Mount Gilead Pty Ltd & Hobhouse v L Macarthur-Onslow [2021] NSWSC 948 (Mount Gilead) at [90]-[91].
A determination of whether a grant of leave is in the bests interests of the company does not involve a consideration of the merits of the proposed claims, except to the extent necessary to determine whether there is a serious question to be tried. The existence of a serious question to be tried is a separate criterion for the grant of leave under s 237(2)(d): Huang at [60].
Section 237(3), which creates a rebuttable presumption that granting leave is not in the best interests of the company in certain circumstances, is not applicable in the present case.
I am satisfied that it is in the best interests of WBPL for BEPL to be granted leave to bring the derivative claims against James for alleged breaches of his duties as a director in procuring or causing WBPL to purportedly enter into employment contracts with Jesse, Amanda and himself and procuring or causing the payment of commissions to himself under that contract or purported contract. Those claims raise serious questions to be tried for the reasons discussed below and are unlikely to be pursued by WBPL if leave is not granted. Alternative means of redress are potentially available to BEPL and are being pursued, but there is uncertainty about their availability for the reasons explained at [56]-[58] above and the relief claimed in respect of the derivative claims is only sought if those alternative means of redress (that is, buy-out orders) are not available. That is an important distinction between the present case and the case of Vadori v AAV Plumbing (2010) ACSR 616; [2010] NSWSC 274 on which James and WPL relied. In that case, Ward J (as her Honour then was) declined to grant leave under s 237 only because her Honour had already upheld the plaintiffs' oppression claims and had determined to make compulsory buy-out orders: at [261]. As Black J noted in Re Legal Practice Management Group Pty Ltd, nSynergy Pty Ltd, nSynergy International Pty Ltd (2018) 125 ACSR 513; [2018] NSWSC 527 at [61], the availability of oppression proceedings as an alternative to or in addition to derivative proceedings has not been treated as precluding a grant of leave under s 237 in other cases.
[21]
Section 237(2)(d): Serious question to be tried?
13. Whether there is a serious question to be tried is determined according to the same test the Court applies when deciding whether to grant an interlocutory junction. That is a relatively low threshold. The applicant for leave under s 237 must establish that, if the evidence remains as it is, there is a sufficient likelihood of success of the proposed derivative claims to warrant a grant of leave. However, the applicant is not required to demonstrate that it is more probable than not that the proposed derivative claims will succeed at trial. Thus, whilst the applicant must adduce evidence to establish the factual basis of the serious question to be tried, it will not generally be appropriate for the Court to attempt to resolve disputed questions of fact in determining the application for leave. Whether the Court should attempt to resolve disputed questions of law will depend on the particular circumstances of the case, whether the question is novel or difficult and whether it is susceptible of resolution on the evidence before the Court at the time of the application for leave: Swansson at [25]; Gladstone Pacific Nickel at [56]; Mount Gilead at [63]-[66]; Mineralogy Pty Ltd v Sino Iron Pty Ltd [2016] WASCA 105 at [87] (Newnes JA, McLure P and Corboy J agreeing).
14. Subject to one qualification, I am satisfied that each of the proposed derivative claims raises a serious question to be tried on the basis of:
1. the evidence referred to at [76]-[77] above concerning the payment of monies into a bank account in the name of WPL;
2. the evidence of James' calculation that WBPL has earned commissions totalling approximately $3,800,000 in the period since August 2017, most of which has been earned in the period since December 2017 when monies of WBPL and WBMPL were paid into the WPL account referred to above;
3. the evidence of written employment contracts signed by James on behalf of, or purportedly on behalf of, WBPL with each of Amanda, Jesse and himself in 2020;
4. Tate's evidence that he was not notified of and did not authorise WBPL's entry into those employment contracts; and
5. the evidence that the 2020 employment contract in respect of James provided for payment of commission, whereas the employment contract that James entered into with WBPL in 2017 expressly provided that he was not entitled to commission.
I acknowledge that James has given evidence of his reasons for causing monies to be paid into the WPL bank account referred to above, and has also given evidence to the effect that Tate was aware of and consented to the substance of the employment arrangements. This evidence establishes that there is a dispute about the allegations that form the basis of the proposed derivative claims, but that does not detract from the conclusion that there is a serious question to be tried in the sense referred to at [100] above.
[22]
Section 237(2)(e): Notice requirements
WBPL and WBMPL have been on notice (through their directors, Tate and James) of BEPL's intention to apply for leave under s 237 and the reasons for the application since the filing of the plaintiffs' interlocutory process on 28 January 2022 and the subsequent service of the plaintiffs' evidence and submissions in support of the application for leave to amend. The formulation of the derivative claims and the reasons for the application for leave under s 237 have evolved to some extent during the weeks since the filing of the interlocutory process, but both directors were on notice of all of the material in sufficient time for the hearing on 22 February 2022. To the extent that s 237(2)(e)(i) of the Corporations Act has not been strictly complied with, I am satisfied that, if leave to amend is granted, it is nevertheless appropriate to grant leave under s 237 in respect of all of the derivative claims save for paragraph 66R of the proposed FASOC.
[23]
Conclusion in relation to leave under s 237
For all of the foregoing reasons, I am satisfied that, if leave to amend is granted, then leave must be granted to BEPL under s 237 of the Corporations Act to bring the derivative claims in the proposed FASOC with the exception of paragraph 66R.
[24]
Leave to amend
Having regard to the nature of the parties' disputes, the uncertainties referred to at [56] - [58] above and the consequences referred to at [74] above if BEPL establishes oppression yet fails to obtain the buy-out order sought, I am satisfied that a grant of leave to amend is consistent with ss 56 - 58 of the Civil Procedure Act 2005 (NSW).
It is regrettable that the plaintiffs did not apply for leave to amend earlier. But it does not follow that it would be consistent within the overriding purpose and the dictates of justice to refuse leave to amend in respect of the derivative claims, forcing the parties to continue the proceedings in circumstances where the existing claims for relief may be inadequate to quell the substance of their dispute and may leave them in a relationship that may be found to be tainted by oppression and unfair prejudice.
Contrary to the submissions made by James and WPL, the derivative claim amendments do not lack utility for the reasons explained at [90] - [92] above.
Contrary to the submissions made by James and WPL, it seems to me to be most unlikely that the derivative claim amendments or the joinder of Amanda and Jesse will result in any material delay in the proceedings being listed for hearing. As referred to at [38] above the amendments do not raise new factual issues over and above the issues that the parties have already been addressing in preparing the expert evidence. Any evidence to be given by Amanda and Jesse in relation to their employment contracts would be expected to be relatively narrow in scope.
James and WPL asserted that they would be disadvantaged by the derivative claim amendments because if they had known that the breaches of director's duties would be alleged they may have "made different forensic choices" about whether to serve evidence or to put the plaintiffs to proof about certain allegations. I explored this assertion with counsel during the hearing and it became apparent that it related principally to James' evidence of his reasons for causing funds of WBPL and WBMPL to be paid into an account of WPL. Counsel candidly acknowledged that whether or not James had served such evidence would not alter the objective facts relied on by the plaintiffs that the money was paid into the account in the name of WPL. As the plaintiffs submitted, there are bank records and other documents that establish this. Counsel for James and WPL did not identify how they were said to be forensically disadvantaged by the evidence they had served concerning James' reasons. In those circumstances, I cannot be satisfied that any such forensic disadvantage would be occasioned by granting leave to amend in respective of the derivative claims.
[25]
Conclusion and orders
I make the following orders and notations:
1. Grant leave to the plaintiffs to amend by filing a further amended statement of claim substantially in the form at pages 38-79 of exhibit TB-3 to the affidavit of Tate Brownlee Sworn on 15 February 2022, subject to:
1. the deletion of the chapeau to prayers 9 to 10 and prayer 11 and the insertion of the substance thereof as a chapeau to prayers 12 to 17; and
2. the deletion of paragraph 66R.
1. Grant leave to the first plaintiff pursuant to Corporations Act 2001 (Cth) s 237 to bring the claims:
1. in paragraphs 66A, 66P, 66Q and 66S to 66V of the further amended statement of claim referred to in order 1 above, and the corresponding claims for relief in prayers 12 to 18, on behalf of and in the name of the third defendant; and
2. in paragraphs 66A to 66Q and 66S to 66V of the further amended statement of claim referred to in order 1 above and the corresponding claims for relief in prayers 12 to 18 on behalf of and in the name of the fourth defendant.
1. To the extent the leave is necessary, grant leave to the first plaintiff as a unit holder of the Wil Brown Management Trust to bring the claims referred to in order 2(a) above.
2. The Court notes:
1. the undertakings of each of:
1. the first plaintiff
2. the second plaintiff; and
3. the third plaintiff
to indemnify each of the third and fourth defendants against any costs orders that may be made against them in relation to the claims made by the first plaintiff on behalf of and in the name of the third defendant and/or the fourth defendant in those proceedings, up to a maximum of $250,000; and
1. the undertakings of:
1. the second plaintiff; and
2. the third plaintiff
to ensure that the amount standing to the credit of their joint bank account held with Suncorp with account number ending in 4024 is not reduced below $250,000 until further order.
1. Order the plaintiffs to pay the costs thrown away by the defendants as a result of the amendments.
2. All costs of and incidental to the plaintiffs' interlocutory process filed on 28 January 2022 are reserved.
[26]
Endnote
With the concurrence of Beazley JA (as Her Excellency then was) and Bell JA (as her Honour then was).
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Decision last updated: 04 March 2022
Parties
Applicant/Plaintiff:
In the matter of Wil Brown Management Pty Ltd and Wil Brown Pty Ltd - Brownlee Enterprises Pty Ltd
The plaintiffs amended their statement of claim with the leave of the Court in May 2020.
A further amendment application was dismissed in July 2021.
The parties served lay evidence and expert evidence during the period from August to November 2021. But for the amendments now proposed by the plaintiffs, the matter would now be ready to be listed for hearing.
The plaintiffs briefed new counsel in August 2021. An application for leave to amend was foreshadowed at a directions hearing mid-December 2021 and the application was made by interlocutory process filed on 24 January 2022. A revised version of the proposed further amended statement of claim was subsequently emailed to the chambers of Black J on 28 January 2022 in advance of a hearing on 31 January 2022.
The hearing of the plaintiffs' amendment application did not proceed on 31 January 2022 because the proposed amendments include derivative claims on behalf of WBPL and WBMPL in respect of which the plaintiffs require leave under s 237 of the Corporations Act 2001 (Cth). All parties accepted that the Court could not sensibly determine the plaintiffs' application for leave to amend without determining whether it would be appropriate to grant leave to the plaintiffs to prosecute those claims on behalf of the two companies.
The hearing of the amendment application proceeded on 22 February 2022 after the plaintiffs had served their evidence in relation to the question of leave and James and WPL had had an opportunity to serve evidence in response. The plaintiffs' evidence included yet another iteration of the proposed amendments in the form of the proposed FASOC that I have identified above.
James and WPL are the only active defendants in the proceedings. WBPL and WBMPL have filed a submitting appearance.
Prayers 9 to 11 of the proposed FASOC seek an order pursuant to s 233(1)(g) and/or ss 236 and 237 of the Corporations Act granting leave to BEPL (as a member of WBPL and WBMPL) to bring these proceedings in the name of and on behalf of WBPL and WBMPL. It is only the proposed derivative claims above that require leave.
The plaintiffs accept that, if leave to amend is to be granted in respect of the proposed derivative claims, the plaintiffs must obtain leave at this stage to bring those claims under s 237 of the Corporations Act. The application for leave under s 233(1)(g) has been included in case leave to amend is refused and the plaintiffs ultimately succeed in establishing oppression. In that event, the plaintiffs may wish to apply to make a fresh application for leave under s 233(1)(g) to bring the derivative claims.
In the case of the proposed derivative claims on behalf of WBMPL, BEPL's application for leave also relies on BEPL's status as a beneficiary under the Trust and the principles governing the circumstances in which a beneficiary may bring a claim in respect of a cause of action of the trustee against a third party.
The chapeau to prayers 9 to 10 of the proposed FASOC states that a grant of leave for BEPL to bring the proposed derivative claims on behalf of WBMPL is sought:
"To the extent a buy-out order cannot be made under section 233 of the Corporations Act 2001 for the purchase of the first plaintiff's interest in the 'Wil Brown Management Unit Trust' or its shares in the third defendant at a value which includes the value of property held or to be held by the third defendant…"
Similarly, the chapeau to prayer 11 of the proposed FASOC states that a grant of leave for BEPL to bring the proposed derivative claims on behalf of WBPL is sought:
"To the extent that a buy-out order cannot be made under section 233 of the Corporations Act 2001 for the purchase of the first plaintiff's shares in the fourth defendant…"
At the hearing of the plaintiffs' application for leave to amend, counsel for the plaintiff clarified that each chapeau is intended to apply to the claims for relief in respect of the derivative claims in prayers 12 to 17 of the proposed FASOC and not to the claims for leave to bring the derivative claims.
The substantive relief set out in prayers 12 to 17 of the proposed FASOC in respect of the derivative claims is:
1. a declaration that WPL and James hold any property that has been misappropriated or diverted from WBMPL or WBPL on constructive trust for the benefit of WBMPL or WBPL and an order requiring WPL and James to transfer any such property to WBMPL or WBPL (prayers 12 and 13);
2. an order requiring WPL and James to give an account of profits and/or pay compensation to WBPL and WBMPL at general law or pursuant to s 1317H of the Corporations Act (prayer 14);
3. a declaration that any contracts of employment entered into during 2018 or later by WBPL with James, Jesse or Amanda are void, or a declaration that those contracts have been voided (prayer 15);
4. an order that James repay the sum of $120,000 to WBMPL (prayer 16); and
5. an order that James account for all monies transferred from any bank accounts held in the name of WBPL or WBMPL to any bank account held in the name of WPL.
James and WPL oppose the amendments that would introduce the proposed derivative claims.
James and WPL also oppose the joinder of Amanda and Jesse as the fifth and sixth defendants. No relief is sought against Amanda and Jesse, but they would be affected by any declaration that their employment contracts are void.
In Chahwan, Tobias JA referred to the passage from Palmer J's judgment in Swansson immediately above and stated (at 74]): [1]
"… 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 dependant 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."
If an applicant is in truth seeking to further their own personal interests (other than as a current or former shareholder of the company), rather than the interests of the company as a whole, the onus of establishing good faith will not have been discharged: Chahwan at [83].
In the present case, the proposed derivative claims raise serious questions to be tried for the reasons explained at [100]-[114] below (subject to one qualification which arises from a pleading deficiency in the proposed FASOC and does not indicate any lack of good faith on the part of BEPL).
BEPL is a 50 per cent shareholder in WBPL and WBMPL. I am satisfied that BEPL seeks leave to bring the derivative claims in order to recover money and assets alleged to have been misappropriated or diverted from WBPL and WBMPL and money paid under the allegedly unauthorised employment contracts, in the event that orders are not made for WPL to buy out BEPL's shares in the two companies and its units in the Trust. Although the plaintiffs on the one hand and James and WPL on the other hand wish for buy-out orders to be made if the plaintiffs establish oppression at final hearing, the uncertainties referred to at [56]-[58] give rise to a risk that buy-out orders may not be made in the circumstances of this case. If that risk were to eventuate, and the derivative claims were not on foot, BEPL would be left as a shareholder in WBPL and WBMPL without the allegedly misappropriated or diverted monies having been recovered and, on the plaintiffs' case, with Tate continuing to be locked out of the Business by James.
It was submitted on behalf of James and WPL that BEPL is not acting in good faith in seeking to pursue the derivative claims because:
1. in February 2020, Tate declined to consent to WBPL and/or WBMPL opening a second trust account;
2. in June 2020, Tate caused WBPL's general and trust bank accounts held with Macquarie Bank to require two signatures for transactions and declined to authorise payments out of the account;
3. in May 2021, Tate refused to consent to renew WBPL's franchise agreement with Raine & Horne, which expired in August 2021; and
4. Tate operates a real estate business that James alleges is in competition with the Business, and this is said to have put WBPL in breach of its franchise agreement with Raine & Horne.
The first two matters must be understood in context. Tate has given evidence that, since December 2017, James has caused all rent roll income to which WBMPL and/or WBPL are entitled and all sales commissions earned by WBPL to paid into an account of WPL. James has given evidence that he established a separate account in the name of WPL for the purpose of operating the Business in December 2017 due to withdrawals from the WBPL bank accounts by Tate that James considered were unauthorised and impacted the ability of the Business to trade. James has given evidence that Tate was aware of the existence of this account from December 2017. However, he does not dispute that Tate was not provided with any bank statements for the account or access to the account until July 2020, after the commencement of these proceedings. Tate's access to the account is "read-only". James' evidence concerning Tate's refusal to authorise transactions out of the Macquarie Bank trust account and general account in June 2020 when two signatures were required reveals that Tate was given very little information about those transactions. Tate has given evidence that he declined to approve transactions about which he considered that he had insufficient information. On the evidence presently before the Court, it appears that this stalemate was overcome by James (or his solicitors) persuading Macquarie Bank to remove the requirement for two signatures.
Thus, James' own evidence establishes that, in response to disputed transactions in December 2017, he took unilateral action to cause funds of WBMPL and WBPL to be paid into an account in the name of WPL to which Tate was given no access and about which he was given no information until July 2020. Tate's refusal to consent to opening an additional bank account, his conduct in declining to approve payments out of the Macquarie Bank accounts and the steps that he took to require two signatures for transactions on WBPL's bank accounts in the context of the dispute described above reflect that both parties are entrenched in their positions in that dispute but do not indicate that BEPL is acting otherwise than in good faith in seeking to pursue the derivative claims.
Tate's solicitors explained his refusal to consent opening an additional trust account to James' solicitors in the following terms:
"… this week we wrote to NSW Fair Trading and provided a full explanation as to why our client could not in good faith co-sign the opening of another trust account for Raine & Horne Pottsville. We have provided information as to the practice of emptying the business accounts, the failure to provided [sic] financial records of Raine & Horne Pottsville, the unilateral decision to moving of the business accountant for Raine & Horne Pottsville without authorisation, the failure to provide a copy of the trust account audits to our client. In circumstances of such deliberate withholding of information by the defendants, our client cannot allow another trust account to be opened and controlled by James Wilmen. … you may take this letter as a formal request by the Plaintiffs to the defendants to provide the full financial records, including filed taxation returns of the defendant companies, all internal business accounts, franchise returns, including payroll records, including all payments to James Wilmen from the business accounts and trust account. Furthermore, all of the trust accounting records and statutory audit for each relevant year of Raine & Horne Pottsville. Our client will then review their position. It may be the case that our client can be satisfied that there has not been, nor currently is, a fraud or misappropriation of trust funds in the Raine & Horne Pottsville Trust account."
Nor is a lack of good faith on the part of BEPL (as a shareholder seeking leaving in respect of the derivative claims) indicated by Tate (as a director of WBPL and WBMPL) declining to seek a renewal of the Raine & Horne franchise agreement in the context of these proceedings and in circumstances where James' evidence presently before the Court indicates that Tate had been excluded from information about and access to funds of the Business from December 2017 until July 2020. Solicitors' correspondence tendered by James indicates a concern on the part of Tate about obligations of the franchisee that he, as a director of WBPL, would be required to guarantee.
As to James' allegation that Tate is operating a competing real estate business, Tate has given evidence to the effect that he has been operating this business since before the establishment of WBPL and WBMPL and that this was disclosed to James and to Raine & Horne before WBPL and WBMPL acquired the Business. Irrespective of the merits of each party's position in this dispute concerning Tate's other business, the dispute about whether that business is in competition with the Business and whether this constitutes a breach of the franchise agreement is not indicative of lack of good faith on the part of BEPL having regard to the matters referred to at [73]-[74] above.
Counsel for James and WPL sought to draw an analogy between the present case and Re BCK Holdings Group Pty Ltd [2021] NSWSC 1400 (BCK Holdings). In that case, the applicant for leave had made express threats to cause damage to the company and its business activities and had refused to cooperate in aspects of the business unless unrelated disputes were resolved to the applicant's satisfaction. The present case turns on its own facts, which are very different.
Another significant difference between the present case and BCK Holdings, is that BEPL has offered to undertake to the Court that it will indemnify each of WBPL and WBMPL against any costs orders that may be made against those companies in relation to the proposed derivative claims, up to a maximum of $250,000. The defendants did not suggest that $250,000 would not be adequate to cover any such potential costs order.
Tate and Kristen, the two equal shareholders of BEPL, have offered undertakings in the same terms and have given evidence about their assets and financial position. That evidence reveals that their undertakings are not without substance, although there was only limited evidence of the value of their properties and they included in their asset position funds available to be drawn down under various existing loans. However, their assets include a joint bank account with a significant credit balance. Tate and Kristen have offered a further undertaking to the Court not to reduce the balance of that account to less than $250,000.
For all of those reasons, I am satisfied that BEPL is acting in good faith in seeking to pursue the derivative claims.
Counsel for James and WPL emphasised that the alternative means of redress includes the relief sought in the existing amended statement of claim for an order under s 233 requiring James and WPL to pay compensation to BEPL in such amount as the Court considers appropriate to remedy the alleged oppression. However, if buy-out orders were not available for any of the reasons identified at [56]-[58] above so that BEPL and WPL were to continue as shareholders in WBPL, any order for compensation in respect of past misappropriation of funds (if proved) would not necessarily provide the same relief in substance as the relief sought in respect of the derivative claims, which includes an order requiring the funds to be transferred back to WBPL and an order requiring WPL and James to give an account of profits.
Counsel for James and WPL also referred to the orders sought by the plaintiffs for the winding up of WBPL under s 233 and/or s 461(1)(k) of the Corporations Act as an alternative means of redress for the derivative claims. However, for the reasons explained at [56]-[58] above, the particular circumstances of this case give rise to uncertainty about whether winding up orders would be made if oppression were established. This turns on whether the Court has power to wind up the Trust and, if not, whether it would be appropriate to wind up the trustee (WMBPL). If it would not be appropriate to wind up the trustee, questions would arise about whether WBPL should be wound up in circumstances where the Business was conducted jointly by WBPL and WBMPL.
There is no evidence to suggest that WPL and James will not be able to substantially meet any judgment that may be made in favour of WBPL.
I am also satisfied that it is in the best interests of WBPL and WBMPL for BEPL to be granted leave to bring the derivative claims concerning the alleged breaches of directors' duties by James in allegedly diverting or misappropriating moneys from those companies to an account in the name of WPL. Those claims raise serious questions to be tried for the reasons discussed below and my observations above apply equally to those derivative claims.
In relation to the proposed derivative claims concerning James' alleged procurement of and/or knowing participation in alleged breaches of trust by WBMPL in failing to acquire and hold on the terms of the Trust the funds that James caused to be paid into the account in the name of WPL, I am not satisfied that a grant of leave is in the best interests of WMBPL because the plaintiffs have failed to demonstrate a serious question to be tried by reason of the deficiency in the pleading of the cause of action explained at [105]-[114] below.
Counsel for James and WPL submitted that alternative means of redress were available, in the form of redemption of units by the process stipulated in the trust deed and the plaintiffs' claims for orders for the winding up of the Trust referred to at [48]-[53] above.
The redemption process under clause 3.1 of the trust deed requires the fair value of the units to be determined by the auditor of the Trust (or an accountant nominated by the trustee). Once the value has been determined, the trustee is required to act by paying the redemption sum out of the Trust assets. This is not a meaningful alternative means of redress for a claim that the whole of the income from the Trust's assets has been misappropriated by a director of the trustee in breach of his duties and knowingly received by WPL, particularly in circumstances where the two directors of the trustee are in deadlock so that the prospects of the trustee acting to appoint a valuer and raising funds to pay to the redeeming unit holder the amount determined by the valuer are remote.
The availability of the alternative of winding up the Trust, whether through a court-appointed receiver and manager with power to distribute the Trust assets or in the working out of an order for general administration, is uncertain as referred to at [56]-[58] above.
I note that a grant of leave under s 237 in respect of the proposed derivative claims against WBMPL would not be inconsistent with the principles that apply when a trustee (in this case, WBMPL) fails to commence proceedings against third parties (in this case, James and WPL) on a cause of action available to the trustee to protect the beneficial interests of the beneficiaries in trust property. That is one example of "special circumstances" in which the beneficiaries may institute such proceedings if they are "meritorious" in the sense that there is a serious question to be tried : see Alexander v Perpetual Trustees WA Ltd (2004) 216 CLR 109; [2004] HCA 7 at [55]; In the matter of Canberra Babbington [2021] NSWSC 552 at [27]-[29]; Colin R Price & Associates Pty Ltd v Four Oaks Pty Ltd [2017] FCAFC 75 at [102]-[105]; Lewis v Condon (2013) 85 NSWLR 99; [2013] NSWCA 204 at [107]-[108]. BEPL's submissions assumed that beneficiaries require leave to commence such proceedings but that requirement is not clear from the authorities just cited. The better view may be that leave is not required, albeit that these principles should be taken into account in deciding whether to grant leave to amend that would introduce a claim by a beneficiary on a cause of action of the trustee.
Counsel for James and WPL submitted that the Court could not be satisfied that there is a serious question to be tried because paragraphs 66E, 66L and 66Q of the proposed FASOC do not specify which of the pleaded director's duties James is alleged to have breached by causing or purporting to cause WBPL to enter into employment contracts with Amanda, Jesse and himself, by allegedly causing WBPL to make payments to himself for sales commission and by causing monies to be paid into a bank account in the name of WPL from December 2017.
I reject that submission. I accept the plaintiffs' submission that it is clear from the proposed FASOC itself (including the use of the defined term "James' Director's Duties" in paragraph 66A) and from the substance of the conduct pleaded that the conduct is alleged to have breached each of the duties pleaded in paragraph 66A.
Counsel for James and WPL also submitted that the Court could not be satisfied that there was a serious question to be tried because paragraph 66R of the proposed FASOC was not pleaded in the level of detail required by the Court in Farah Constructions Pty Ltd v Say Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [170], where Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ emphasised the need for pleading and particularisation of the "knowledge" element and the "dishonest and fraudulent design" element of a claim under the second limb of Barnes v Addy.
Paragraph 66P of the proposed FASOC pleads that, since about 15 December 2017, James has diverted money away from WBPL and WBMPL into WPL and "procured or otherwise caused [WBMPL] not to acquire and hold such money subject to the terms of [the Trust]".
Paragraph 66Q alleges that this constituted a breach of "James' Director's Duties" (as defined in paragraph 66A).
Paragraph 66R pleads:
"By procuring or otherwise causing WBM not to acquire and hold such money subject to [the Trust], James knowingly procured or participated in a breach of trust by WB."
I assume that the reference to "WB" (which is defined as meaning WBPL) is intended to be a reference to WBMPL.
To the extent that paragraph 66R refers to knowing participation in a breach of trust, it does appear to invoke the second limb of Barnes v Addy. Counsel for the plaintiffs did not suggest otherwise. Liability under that second limb requires knowing participation or assistance in a breach of fiduciary duty that is a dishonest and fraudulent design. A dishonest and fraudulent design involves a breach of fiduciary duty (that is, fraud in equity) that is dishonest in the sense that it transgresses ordinary standards of honest behaviour: Hasler v Singtel Optus Pty Ltd (2014) 87 NSWLR 609; [2014] NSWCA 266 at [105]-[125]. Knowing participation or assistance requires that the participant or assistant has actual knowledge of the essential matters that make up the breaches of fiduciary duty (even if they did not know that those matters amounted to a breach of fiduciary duty), wilfully shut their eyes to the obvious, wilfully and recklessly failed to make inquiries that an honest and reasonable person would make, or had knowledge of circumstances that would indicate the facts to an honest and reasonable person: Baden v Société Générale pour Favoriser le Développement du Commerce et de l'Industrie en France SA [1993] 1 WLR 509 (at 575-576, 582); Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [177]-[178]; Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 at [259]-[262]; Pittmore Pty Ltd v Chan (2020) 104 NSWLR 62; [2020] NSWCA 344 at [191].
I accept the plaintiffs' submission that, in circumstances where James is alleged to have engaged in the relevant conduct and was a director of WBMPL, no further details are required to be pleaded or particularised concerning James' alleged knowledge of WBMPL's obligations as trustee and the payments to WPL relied on as constituting a breach of those obligations.
However, I accept the submission made by James and WPL that, if the plaintiffs rely on the second limb of Barnes v Addy, they must expressly plead that the alleged breaches of trust were a dishonest and fraudulent design and the matters relied on in support of that characterisation of the alleged breaches must also be pleaded.
To the extent that paragraph 66R alleges that James knowingly participated in a breach of trust, it may be intended to plead a separate cause of action for inducing or procuring a breach of trust: see Pittmore Pty Ltd v Chan (2020) 104 NSWLR 62; [2020] NSWCA 344 at [152]-[196]. If so, each element of that cause of action must be separately pleaded. Two different causes of action should not be conflated together in paragraph 66R of the proposed FASOC.
For the reasons at [105] - [114] above, I cannot be satisfied that the claims in paragraph 66R of the proposed FASOC raise a serious question to be tried. That is the qualification to which I referred at [101] above. That does not affect my conclusion that there is a serious question to be tried on the derivative cause of action for breach of James' duties as a director of and WBPL and WBMPL in allegedly diverting or misappropriating funds of those companies into the WPL account.
James and WPL also submitted that they will be prejudiced by joinder of Amanda and Jesse as defendants because they may no longer be willing to give evidence in support of the existing defendants. In my opinion, that is unlikely to occur in circumstances where the plaintiffs claim no relief against Amanda and Jesse and they presumably remain interested in assisting James to defend the claims against himself and WPL. Even if the asserted prejudice did eventuate, that would not outweigh the interests of justice that favour granting leave to the plaintiffs to pursue the derivative claims in the alternative to their oppression suit. Amanda and Jesse are to be joined as defendants as a matter of procedural fairness because they are entitled to be heard about the relief sought by the plaintiffs against WBPL in relation to their employment contracts.
For the reasons already explained above, the grant of leave to amend will not extend to paragraph 66R of the proposed FASOC.