Jensen & Ors v RQYS Marina Ltd & Ors [2015] QCA 153

SUPREME COURT OF QUEENSLAND

CITATION: Jensen & Ors v RQYS Marina Ltd & Ors [2015] QCA 153

PARTIES: LAWRENCE JOHN JENSEN CAROLYN HUNTER ROSS (first appellants) NAIAD AUSTRALIA PTY LTD ACN 010 463 779 (second appellant) PETER ROBERT FREDERICK LEWIS VIRGINIA ELIZABETH LEWIS (third appellants) v RQYS MARINA LIMITED ACN 010 217 991 (first respondent) ROYAL QUEENSLAND YACHT SQUADRON LIMITED ACN 053 989 272 (second respondent) RQYS NOMINEES PTY LTD ACN 130 840 523 (third respondent) KEVIN ANTHONY MILLER (fourth respondent) IAN ROBERT THRELFALL (fifth respondent) MARK GALLAGHER (sixth respondent) GEOFFREY JOHN STANHOPE (seventh respondent) COLIN FRANCIS GIBBONS (eighth respondent) WILLIAM GEORGE KIRBY (ninth respondent) GREGORY CLARKE (tenth respondent) CHARLES RUSSELL McCART (eleventh respondent) PETER JOHN CONDE (twelfth respondent) PAUL CRANSTON HUGHES (thirteenth respondent) DAVID GILMOUR VIRGO (fourteenth respondent)

FILE NO/S: Appeal No 10177 of 2014 / SC No 6086 of 2014

DIVISION: Court of Appeal

PROCEEDING: General Civil Appeal

ORIGINATING COURT: Supreme Court at Brisbane - [2014] QSC 243

DELIVERED ON: 21 August 2015

DELIVERED AT: Brisbane

HEARING DATE: 7 May 2015

JUDGES: Gotterson JA and Boddice and Flanagan JJ / Separate reasons for judgment of each member of the Court, each concurring as to the orders made

ORDERS: **1.**Appeal dismissed. / **2.**Appellants to pay the respondents’ costs of the appeal on the standard basis.

CATCHWORDS: APPEAL AND NEW TRIAL – APPEAL – GENERAL PRINCIPLES – RIGHT OF APPEAL – WHEN APPEAL LIES – ERROR OF LAW – WHAT IS – GENERALLY – where each appellant was a member of the first respondent – where the appellants failed to satisfy the learned primary judge that they be granted leave to bring a proposed proceeding in the Supreme Court of Queensland on behalf of the Marina Company – where the appellants contend by way of appeal that they were denied procedural fairness at the hearing before the learned primary judge – where in oral submissions, senior counsel for the appellants attributed the error to a denial of the opportunity to cross-examine the respondent’s witnesses – where a perusal of the transcript of the hearing before the learned primary judge reveals that there was no occasion on which counsel made a request to cross-examine which was refused – where the decision not to cross-examine was voluntarily made – whether there has been a denial of procedural fairness / CORPORATIONS – MEMBERSHIP, RIGHTS AND REMEDIES – MEMBERS’ REMEDIES AND INTERNAL DISPUTES – PROCEEDINGS ON BEHALF OF COMPANY BY MEMBER – STATUTORY DERIVATIVE ACTION – where in oral submissions, senior counsel for the appellants proposed that it was “a necessary condition” to success on the appeal that the learned primary judge’s view as to the meaning of the Marina Company’s Memorandum of Association be overturned – where the appellants’ written submissions identify the “central error” committed by the learned primary judge as one demonstrated in the observation in paragraph [1] of the reasons that the Marina Company “exists to support the members of the Royal Queensland Yachting (sic) Squadron” – where in further elaboration, the appellants’ written submissions contend that the support envisaged by that object is limited to benefitting the Squadron’s members “as individuals” – whether to interpret the expression “to benefit the members of the Royal Queensland Yacht Squadron” as identifying a class of individuals who might be benefitted personally, and even preferentially as between them to a point of inclusion of some and exclusion of other, misconstrues its purpose and effect / Corporations Act 2001 (Cth), s 237(1), s 237(2) / Browne v Dunn (1894) 6 R 67, considered / Jensen & Ors v RQYS Marina Ltd & Ors [2014] QSC 243, related / Oates v Consolidated Capital Services Pty Ltd (2009) 76 NSWLR 69; [2009] NSWCA 183, cited / Re Gladstone Pacific Nickel Ltd (2011) 86 ACSR 432; [2011] NSWSC 1235, cited / South Johnstone Mill Ltd v Dennis (2007) 163 FCR 143; [2007] FCA 1448, cited

COUNSEL: A J H Morris QC, with L A Jurth, for the appellants / S S Couper QC, with C E Curtis, for the respondents

SOLICITORS: Londy Lawyers for the appellants / HWL Ebsworth Lawyers for the respondents

GOTTERSON JA: There are five appellant parties to this appeal. The first appellants are Mr L J Jensen and Ms C H Ross. The second appellant is Naiad Australia Pty Ltd. The third appellants are Mr P R F Lewis and Mrs V E Lewis. Each of the appellants is a member of the first respondent to the appeal, RQYS Marina Ltd (“the Marina Company”), a company limited by guarantee not having a share capital. They are also berth holders in a marina conducted by the Marina Company.

On 30 June 2014, the appellants, as applicants, commenced proceedings by way of originating application against the Marina Company and others for an order pursuant to s 237(1) of the Corporations Act 2001 (Cth) granting them leave to bring a proposed proceeding in the Supreme Court of Queensland on behalf of the Marina Company. The proposed proceeding is one that would be pursued by a 93 page statement of claim¹ included within exhibit CGL-1 to an affidavit sworn by their solicitor and filed in support of the application.² Some 13 defendants are named in this document. They, with the Marina Company, were the respondents to the originating application. Those respondents are the respondents to this appeal.

The proceeding commenced by the originating application was heard on 20 August 2014 by a judge of the trial division. His Honour gave judgment on 29 September 2014 ordering that the application be dismissed.³ Reasons for judgment were published that day.⁴ By the terms of the order, it was further ordered that the applicants pay the respondents’ costs of and incidental to the application to be assessed on the standard basis.

On 27 October 2014, the appellants filed a notice of appeal against the judgment.⁵ There are 13 grounds of appeal.

Factual background

The learned primary judge summarised the factual background to the proposed proceeding as follows:

“[2]Before 1991 the Royal Queensland Yachting Squadron was an unincorporated association, and trustees held property for its benefit. In the late 1970s and early 1980s the Squadron obtained approval to construct a marina. By late 1980 the trustees of the Squadron decided that the marina project would be developed by a separate entity. This was done in order to protect the Squadron’s assets and remove the trustees from the possibility of personal liability. Mr Kirby, who has been involved with the Squadron since the early l970s and has held various flag office positions in it, was the Honorary Solicitor of the Squadron between 1972 and 2002. He drafted the Memorandum of Association of RQYS Marina Ltd (“the Marina Company”). Its first object is:

‘To establish and support or to aid in the establishing or support of associations, institutions, trust funds or conveniences calculated to benefit the members of the Royal Queensland Yachting Squadron.’

[3]To ensure that the marina project was managed in a way that could not be adverse to the Squadron in the future, its Articles of Association provided that the Flag Officers of the Squadron would comprise the majority of the directors of the Marina Company.

[4]Development of what later came to be known as “Marina 1” was commenced before the incorporation of the Marina Company on 23 March 1981. The Squadron continued to hold the lease over parts of the Marina 1 areas. A lease was subsequently granted to the Marina Company in 1983 and the Squadron relinquished its leasehold interests. The purpose of arranging to have a head lease granted to the Marina Company in 1983 was to enable it to then grant interests to berth holders.

[5]Marina 1 is operated by the Marina Company in a seabed lease in the Manly boat harbour. It is surrounded by freehold land owned by the Squadron, which is utilised for access and car parking. The Marina Company’s water, sewerage services and electricity is supplied from the Squadron’s infrastructure. The Marina Company shares administration and management with the Squadron, and has done so since its inception.

[6]The Marina Company required each berth holder to be a member of the Marina Company. All members of the Marina Company are required to be financial members of the Squadron. This requirement was introduced to enable the Marina Company to obtain the benefit of ‘mutuality’ principles that apply for taxation purposes to income received from berth holders. In addition, the Port of Brisbane Corporation required as a term of its sub-lease with the Marina Company that berth holders be financial members of the Squadron.

[7]Membership of the Marina Company does not confer any rights, or create any obligations in relation to berths. Berth holders enter into separate, fixed-term lease agreements with the Marina Company, which establish each berth holder’s rights and obligations in relation to berths.

[8]On 14 October 1991 the Royal Queensland Yacht Squadron Ltd (“the Squadron”) was incorporated as a company limited by guarantee, and effectively took over the activities, operations and affairs of the Squadron.

[9]The marina proved to be a success. Between 1984 and 1993 it was expanded to include what was known as “Stage 2”. It now has 464 berths.

[10]From about 2002 onwards, discussions occurred among the directors and members of the Marina Company and the Squadron about the possibility of expanding the existing marina with the development of what is now known as Marina 2. The directors of the Marina Company wished to ensure that potential tax issues were addressed. They sought and obtained from the Australian Tax Office (ATO) a Private Ruling in 2007. Following this ruling the directors of the Squadron and of the Marina Company agreed to proceed with the development of Marina 2, by establishing a corporate trustee holding assets on trust for the Squadron, which is a tax exempt entity. As a result, RQYS Nominees Pty Ltd (“Nominees”) was incorporated on 29 April 2008 and the New Marina Trust was established at about the same time under which Nominees held the relevant lease for Marina 2 on trust for the Squadron.”⁶

On 1 May 2008, the Marina Company transferred to Nominees a business which it conducted at repair and maintenance facilities located on a 30 metre strip of nearby land. Later, on 24 May 2010, the Queensland Government granted a lease for Marina 2 to Nominees for a term of 25 years from 25 February 2010 to 24 February 2035.

The current Marina 1 seabed lease is to expire on 31 December 2028. On 4 October 2013, the Queensland Government granted a lease to Nominees over the current Marina 1 lease area for a term of 22 years from 1 January 2029 to 31 December 2051. A separate lease to Nominees over the 30 metre strip of land and adjacent areas was also granted for a corresponding period.

Having regard to the transfer of the business and these lease arrangements for the future, it is reasonable to predict, as the appellants submit, that by the end of 2028, the Marina Company will not own or operate a marina; will not hold any leases; will not conduct any business and will have no means of generating any income.

The proposed proceeding

The Marina Company is named as plaintiff in the proposed statement of claim. The Squadron and Nominees are the first and second defendants respectively. Mr Kirby and eight other gentlemen who are current or former directors of the Marina Company and, in most instances, of Nominees also, are the third to eleventh defendants. The twelfth defendant, Mr P C Hughes, is the company secretary and general manager of the Marina Company. The thirteenth defendant is Mr D G Virgo who has acted as honorary treasurer of the Marina Company and, at times, as company secretary of the Squadron and of Nominees.

The learned primary judge identified a number of topics which are the subject of pleading in the statement of claim document but which have no apparent linkage to the relief sought in it. He then accurately observed:

“[16]Leaving aside allegations which seem to go nowhere in terms of loss and damage alleged to have been suffered by the Marina Company, and concentrating upon the matters to which the applicants’ written and oral submissions were directed, the substance of the proposed proceeding seems to be that the directors and some other officers of the Marina Company are alleged to have subordinated the best interests of the Marina Company and the fiduciary duties they owed to it to the interests of the Squadron. They are said to have misused the Marina Company’s assets and funds and failed to take advantage of opportunities which are alleged to have been available to it. Some of the conduct alleged against the directors and officers is said to have been engaged in under various alleged misconceptions. But Senior Counsel for the applicants went so far as to accuse certain officers of dishonesty. In any case, the directors and other officers are alleged to have breached all of the common law, equitable and statutory duties they owed to the Marina Company.

[17]I should mention that there is no allegation in the proposed pleading that any of the directors or officers obtained any personal benefit in any way from the alleged misconduct. They are not alleged to have put themselves in a better position personally than any other member of the Marina Company.

[18]In essence, they are alleged to have benefited the Squadron in making certain decisions and by allowing the Squadron and Nominees to take advantage of opportunities which were open to the Marina Company. The short response of the respondents is that the Marina Company and its directors were doing precisely what the Marina Company was established to do, namely benefit the Squadron. The directors did not breach their duties because the Marina Company was established to benefit the Squadron and its constitution provided for it to apply its income and property towards the promotion of its objects, the first and foremost of which was supporting entities calculated to benefit the members of the Squadron.”⁷

His Honour expanded upon these observations by noting:

“[24]Because of the way in which the proposed statement of claim is pleaded, and because different proposed defendants acted as directors at different times it is invidious to address the proposed proceeding at some abstract level on the basis that all of the defendants could be said to have breached all of their duties in respect of various matters and transactions which occurred over a number of years. It is appropriate to assess the applicant’s proposed case that the relevant directors subordinated the best interests of the Marina Company and breached their duties as directors in respect of particular transactions. The transactions and the alleged failure to take advantage of various opportunities which are said to have been available to the Marina Company, which broadly correspond to different chapters of the draft statement of claim, may be described as follows:

(a)An alleged failure to take advantage of an opportunity for the Marina Company to become the owner of the second marina;

(b)An alleged failure to obtain a future head lease over the Marina 1 seabed area and adjacent areas from 2029 to 2051;

(c)Transactions in relation to a business known as the Yard Business and related facilities;

(d)Alleged financial irregularities in relation to loans made to the Squadron which are said to have been on uncommercial terms and to have benefited the Squadron and Nominees;

(e)The alleged misappropriation of monies known as the dredging fund in relation to the purchase of a dredge.”⁸

The judgment at first instance

The learned primary judge examined each of the impugned transactions and alleged failures to take advantage of various opportunities. He concluded that the Marina Company appears to have poor prospects of establishing claims in respect of them. He was of the opinion that the respondents had advanced persuasive reasons as to why the claims are misconceived or have poor prospects of success at trial.⁹

Section 237(2) of the Corporations Act lists five criteria. It provides that if the Court is satisfied that each of them exists, then it must grant an application made under s 237(1). His Honour identified those matters which were in contest before him. They were:

“(b)the applicant is acting in good faith; and

(c)it is 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;”.¹⁰

The applicants, now appellants, failed to satisfy the learned primary judge that it was in the best interests of the Marina Company that they be granted leave to bring the proposed proceeding.¹¹ His Honour gave detailed reasons for so concluding. It is appropriate that those reasons be set out in full. They are these:

“[117]Leave to bring a derivative action must not be given lightly.¹² The Court must be satisfied by the applicant for leave that the proposed action is in the best interests of the company. Obviously, it is in the best interests of a company to have its property returned to it. If there are no other ways of obtaining that outcome, then it may be necessary for the company to bring the required proceeding to achieve that result. Likewise, it generally follows that pursuit of an action by or on behalf of a company against an officer for recovery of compensation for damage done to the company by the officer’s breach of duty is in “the best interests of the company”.¹³ However, as Mullins J observed, this general proposition is a starting point for the consideration of the issue and the circumstances in a particular case can displace the application of the proposition.¹⁴ The general proposition that it is in the best interests of a company to have its property returned to it is also a starting point. The Court then considers whether in the particular case there are reasonable grounds to conclude that the company’s property has been taken from it, the prospects of success of an action to recover it, the likely costs and the likely recovery if the action is successful and the likely consequences if it is not.

[118]The applicants submit that without the proposed proceedings being brought, the only future for the Marina Company is that it will continue ‘to be stripped of its assets until being wound up’. For the reasons given by me in considering the separate transactions and matters of substance raised by the applicants in their submissions, I am not satisfied that the Marina Company has been stripped of its assets or that the past and present directors of it intend that it should be stripped of its assets until it is a shell. The applicants point to a statement in the 2010 annual report in which Mr Kirby stated that mention had been made of the fact that the rights of berth owners cease as at 30 December 2028 and ‘it is not currently thought there will be any reason for the [Marina] Company to operate beyond that time ...’. This statement about the Marina Company’s long-term future and what business it might have to conduct after 30 December 2028 is an insufficient basis to conclude that Mr Kirby or anyone else is intent of stripping the Marina Company of its assets until it is wound up.

[119]Rather than address generalities and broad assertions to the effect that the directors of the Marina Company, past and present, have engaged in a dishonest course of conduct involving stripping the Marina Company of its assets, I have addressed some of the more substantial proposed claims. In doing so, I have not been satisfied that if the proposed action was brought by or on behalf of the Company that the claims would have a reasonable prospect of success based on the evidence before me. Consistent with the authorities in determining whether it is in the best interests of the Company for the proposed claims to be brought, it is necessary to consider the prospects of success of each claim and the risks posed to the Marina Company in bringing it.

[120]The applicants have not satisfied me that any of the proposed claims have reasonable prospects of success. The uncontested evidence of an independent costs assessor is that, on the basis of a three week trial, the proposed defendants’ assessable costs would be in the order of $885,000. The Marina Company would presumably incur very substantial costs in litigating the proposed proceeding. The applicants have not offered any personal indemnity or undertakings to protect the Marina Company against adverse costs orders in the event that all or part of the proposed proceeding was unsuccessful.

[121]A relevant consideration is whether the company would be prejudiced by being exposed to the costs and expenses of litigation and risk of an adverse costs order. As Davies J stated in Cooper v Myrtrace Consulting Pty Ltd,¹⁵ the grant of leave has often been made conditional upon the applicant for leave indemnifying the Company for its costs of the proceeding and any adverse costs order against it.¹⁶ Her Honour cited authorities which emphasised the importance of such an indemnity as a means of addressing the risk of prejudice to the company from the commencement of proceedings. I respectfully adopt these observations.

[122]In the absence of a personal indemnity or undertaking of substantial value, the Marina Company is exposed to the substantial prejudice of incurring very substantial costs in litigating the proposed proceeding and a very substantial adverse costs order if the proceeding is unsuccessful. In the absence of such a protection, the proposed litigation, with its substantial costs, is likely to have an adverse effect on the proper conduct of the Marina Company’s business. This alone is a reason why I am not satisfied that granting leave is in the best interests of the company.

[123]In addition, much of the declaratory relief that is sought by the applicants in the proceeding is of no practical benefit to the Marina Company. The proposed proceeding seeks other relief in the form of constructive trusts over property held by Nominees and alternatively orders for equitable compensation or compensation pursuant to causes of action under the Corporations Act 2001. As to the claims which seek relief by way of constructive trusts over the property held by Nominees on trust for the Squadron, the applicants have not shown that the Marina Company has good prospects of having a constructive trust declared over the property. As to the alleged diversion of what are said to have been opportunities which should have been made available to the Marina Company, the respondents have advanced a substantial case that these were not opportunities which it was in the best interests of the Marina Company or in the interests of members of the Squadron for the Marina Company to pursue.

[124]In addition, there is a very substantial argument based upon the High Court’s decision in Farah v Say-Dee¹⁷ that the first limb of the rule in Barnes v [Addy] does not extend to a lost opportunity, rather than a transfer of the Marina Company’s property. On this argument, the success of the proposed claim depends upon whether or not a dishonest or fraudulent design can be proved. I am not satisfied that the Marina Company has reasonable prospects of doing so.

[125]As to claims for compensation, no attempt has been made to particularise, even approximately, the loss which is alleged to have been sustained by the Marina Company, let alone to quantify it. The fact that the Marina 2 venture may turn out to be a profitable venture does not prove the value of the opportunity at the relevant time, with its associated risks. Similar observations apply to the Yard Business and the Dredging Company.

[126]As to the Marina 1 lease, proof of dishonesty would appear to require the Marina Company to establish that its former directors’ interpretations of the Company’s constitution and of the 2007 ATO ruling were not simply wrong, but not genuinely held, or that it was a belief that no director could reasonably hold. The Marina Company has poor prospects of establishing those matters.

[127] The applicants submit that the Squadron and Nominees are able to satisfy any judgment which will be made against them. They point to recent financial statements which disclose that both have significant assets and cash-flow. However, this begs the question of the likely judgment, a matter not adequately addressed in the proposed statement of claim in its pleading of loss or damage or in the applicants’ submissions.

[128]Any eventual monetary judgment may be small and it would not be in the best interests of the Marina Company to bring hazardous litigation when the benefit it would derive from such a monetary judgment would be outweighed by the costs and the risks associated with bringing the proceeding.

[129]The draft pleading sets out extensive allegations of oppressive conduct, but there is no apparent reason why the applicants could not pursue such relief by separate proceedings under Part 2F.1 of the Corporations Act if they had a proper basis.

[130]Any real dispute about the proper interpretation of the Marina Company’s constitution might be sought in simpler and less costly litigation.

[131]The proposed statement of claim raises many allegations which have only marginal relevance to the claims of substance. For the reasons given earlier and for the reasons developed in the respondents’ submissions, many of the allegations do not give rise to claims for loss and damage or at least any loss and damage which the applicants have properly particularised.

[132]The proposed statement of claim is not simply lengthy and one to which it would be very expensive to plead. It rolls up allegations against numerous directors in respect of various transactions, and does not adequately distinguish between alleged breaches by different respondents, and the loss and damage which each breach is alleged to have caused.

[133]Reference was made in the course or oral submissions to the fact that the applicants, taking account of the criticisms made by the respondents to the proposed proceeding, might revise the pleading and that the applicants were ‘in no sense wedded to or locked into the draft statement of claim in its current form’. The applicants said that they were prepared to review it based upon what the respondents had said in their outline of submissions and that the applicants would be unable to resist the imposition of conditions on leave, requiring the applicants to confine their case as the Court thought fit. One difficulty with that suggestion is that I am left to guess about which parts of the draft statement of claim, including which prayers for relief against which proposed defendants, the applicants have any real affection for, let alone are wedded to. I do not consider that it is appropriate, in the circumstances, given the form in which the draft statement of claim appears, to select, as it were, a few chapters and to confine the applicants to this abridged version.

[134]To the extent that it is possible to separate the various claims for relief and the causes of action which are alleged to support them, I am not satisfied that it is in the best interests of the Marina Company for any of the claims to be brought. None of them appear to have sufficient prospects of success, or to be likely to result in the recovery of substantial property or a substantial award of compensation if successful, so as to justify the likely costs of the litigation and the risks to the Marina Company of paying the proposed defendants’ costs if the claims are unsuccessful.

[135]In conclusion, the applicants have not discharged the onus of satisfying me that it is in the best interests of the Company that they be granted leave to bring the proposed proceeding or proceedings.”¹⁸

The learned primary judge considered that, in view of this conclusion, it was not strictly necessary for him to reach conclusions about criteria (b) (applicants’ acting in good faith) and criteria (d) (serious question to be tried).¹⁹ The conclusion that his Honour had reached on criteria (c) (best interests of the company) precluded the operation of the mandatory provision in s 237(2) that leave be granted. In South Johnstone Mill Ltd v Dennis,²⁰ Middleton J observed that the prevailing view is that “failure to satisfy any one of these criteria means that leave must be refused”. Consistently with this view, the application was dismissed.

The appellants’ alleged denial of procedural fairness

The appellants contend by way of appeal, that they were denied procedural fairness at the hearing before the learned primary judge. The contention is made in circumstances where the affidavit material in support of the appellants’ case was contained in five affidavits sworn by Mr G C Londy, their solicitor. The third of these affidavits, sworn on 15 July 2014,²¹ stated by way of information and belief, facts of which Mr Londy had been informed by Dr N S Girdis, Commodore of the Squadron from 1979 to 1981, and then Chairman of the Marina Company from 1981 until 1998. That information concerned the circumstances in which the Marina Company was formed, initially funded by the pre-selling of berths, and its principal asset, Marina 1, was constructed. It did not concern the circumstances of the transactions sought to be impugned in the proposed statement of claim, circumstances of which Mr Londy was not personally aware. By contrast, certain of the respondents, including Messrs Kirby, Miller and Virgo, made affidavits which were read and which concerned those transactions.

The appellants contend, by their notice of appeal, that the learned primary judge erred by proceeding on a footing that Mr Kirby’s account of the decision-making process in relation to the development of Marina 2 was “not contradicted;”²² that his explanation that no part of the Marina Company’s funds (with the exception of a repaid loan) was used to finance the construction of Marina 2, was “not contested;”²³ and that there was “no sound reason not to accept Mr Kirby’s sworn evidence” that the lease beyond 2028 for Marina 1 was granted to Nominees instead of the Marina Company, because of taxation concerns.²⁴

In oral submissions, senior counsel for the appellants attributed the error to a denial of the opportunity to cross-examine the respondent’s witnesses.²⁵ The submission was not illustrated by reference to a body of specific evidence that he had wished to put to any of the respondents’ witnesses but was denied the opportunity to do so.

A perusal of the transcript of the hearing before the learned primary judge reveals that there was no occasion on which counsel made a request to cross-examine which was refused. What occurred was that senior counsel for the respondents intimated that he would not rely upon the rule in Browne v Dunn in the event that his opponent did not cross-examine his witnesses.²⁶ The decision not to cross-examine was voluntarily made. Moreover, notwithstanding the absence of cross-examination, the appellants were able to make submissions on the improprieties which they asserted infected the transactions.

There was no procedural unfairness in his Honour’s acting upon the evidence before him in order to gauge the prospects of success of each of the proposed claims. The evidence was uncontested in that it was not disputed by evidence to the contrary. It was legitimate for this purpose for his Honour to analyse each such claim within a factual context which was supported by evidence and was not challenged. His Honour was not, of course, purporting to make conclusive findings of fact or to determine the claims finally.

I am not persuaded that the appellants were denied procedural fairness as claimed.

The appellants’ “necessary condition to success”

In oral submissions, senior counsel for the appellants proposed that it was “a necessary condition” to success on the appeal that the learned primary judge’s view as to the meaning of the Marina Company’s Memorandum of Association be overturned.²⁷ Later, it was said that if the Court is against the appellants on this question of construction, they “lose the appeal”.²⁸

The Memorandum of Association for the Marina Company deals with nine separate matters, in clauses numbered I to IX. Clause III is headed “Objects”. It sets out the objects for which the Marina Company is established in some 30 paragraphs, the first one of which is:

“1.To establish and support or to aid in the establishment and support of associations institutions trust funds or conveniences calculated to benefit the members of the Royal Queensland Yacht Squadron.”²⁹

The heading for Clause IV is “APPLICATION OF INCOME AND PROPERTY”. It provides:

“The income and property of the company shall be applied solely towards the promotion of the objects of the company as set out herein and no portion thereof shall be paid or transferred directly or indirectly by way of dividend, bonus or otherwise to or amongst the members of the company. Provided that nothing herein contained shall prevent the payment in good faith of interest to any such member in respect of moneys advanced by him to the company or otherwise owing by the company to him or of remuneration to any officers or servants of the company or to any member of the company or other person in return for any services actually rendered to the company or for goods supplied in the ordinary and usual way of business. Provided further that nothing herein contained shall be construed so as to prevent the repayment to any member of out of pocket expenses and interest or money lent or hire of goods or rent for premises demised to the company.³⁰

The learned primary judge noted that the proposed statement of claim alleged that the directors “acted under the misconception that the Marina Company was authorised to apply or to transfer its income or property for no, or alternatively inadequate, consideration to the Squadron, Nominees or another entity related to or associated with the Squadron”³¹ – that is to say, a misconception as to Clause IV; and that they and its officers “acted under the misconception that the first object of Clause III authorised them to act in the best interests of the Squadron or its members, or Nominees or another entity related to or associated with the Squadron”.³²

Consistently with submissions made on behalf of the respondents, his Honour expressed the following view, which the appellants challenge, concerning the interpretation of the provisions to which I have referred:

“[41] The Marina Company’s constitutional arrangements allow a transfer of property to the Squadron as long as the purpose of the transfer is calculated to benefit the members of the Squadron. The Marina Company’s interest may be served by achievement of this objective. The Marina Company’s primary purpose of supporting the members of the Squadron does not prevent it from making a payment or transfer to the Squadron. The relevant issue is whether such a payment or transfer is for the purpose of supporting institutions or conveniences that are calculated to benefit the members of the Squadron.”

That he did not mean to determine the interpretation issue finally is evident from the paragraph which follows where his Honour added:

“[42] I am not required to finally decide the issue of interpretation. It is sufficient to conclude that the respondents’ contentions about the Marina Company’s constitution are persuasive.”³³

On his Honour’s view of the interpretation issue, the pleaded attribution of misconceptions to the directors and other officers is not viable. On that view, there were no misconceptions of the type pleaded.

A fair inference to be drawn from the reasons as a whole is that an absence of viability in the alleged misconceptions was a consideration of some influence in his Honour’s conclusion that the appellants had failed to satisfy him that any of the proposed claims have any reasonable prospects of success.³⁴ However, it was not a critical consideration for the conclusion in respect of any of the claims. In each instance, other considerations had significant roles to play.

The appellants’ written submissions identify the “central error”³⁵ committed by the learned primary judge as one demonstrated in the observation in paragraph [1] of the reasons that the Marina Company “exists to support the members of the Royal Queensland Yachting (sic) Squadron”.³⁶ The centrality of the error arises, it is argued, from its role as a catalyst for successive errors which culminated in an ultimate error in finding that the appellants had not discharged their onus with respect to the “best interests of the company” criterion.³⁷

The error, it is submitted, reflects a misconstruction of the object in paragraph 1 in Clause III.³⁸ In oral submissions, senior counsel for the appellants elaborated that it is “of critical importance that the language of (this object) is explicitly in terms of benefitting the members, not the Squadron itself”’.³⁹ In further elaboration, the appellants’ written submissions contend that the support envisaged by that object is limited to benefitting the Squadron’s members “as individuals”.⁴⁰

I mention at this point, that the Memorandum of Association was adopted before the incorporation of the Squadron in 1991 and at a point when the Royal Queensland Yacht Squadron was an unincorporated association. The reference to “Royal Queensland Yacht Squadron” in the object is as apt to apply to the corporation, the “Squadron”, as it was to the predecessor unincorporated association. It is not contended otherwise.

To my mind, the word “calculated” in the first object is apt to qualify the words “establishment and support” which precede it. The establishment or support of associations, institutions, trust funds or conveniences must be calculated to benefit the members of the Squadron in order for it to be within the scope of this object.

I reject the appellants’ construction of the first object as one directed towards benefitting members of the Squadron as individuals. To interpret the expression “to benefit the members of the Royal Queensland Yacht Squadron” as identifying a class of individuals who might be benefitted personally, and even preferentially as between them to a point of inclusion of some and exclusion of other, misconstrues its purpose and effect, in my view. In context, those who are to be benefitted in furtherance of this object are the members of the Squadron collectively. They are to be benefitted in the capacity of members of the Squadron, and not personally. Significantly, it is not those members of the Squadron who are also members of the Marina Company only, who are to be benefitted.

I also reject the implication of mutual exclusivity in the distinction sought to be drawn by the appellants between benefitting the members of the Squadron and the Squadron itself. It is clear, I think, that the provision of support, for example, by way of the transfer of property to the Squadron, is capable of benefitting the members of the Squadron, notwithstanding that the Squadron is recipient. They are benefitted by virtue of an accretion to the assets of the Squadron of which they are members. Some, if not all, of them may benefit further by actually using or enjoying the property as members, depending upon its nature. So also for a transfer of property to an entity associated with the Squadron, such as Nominees, which exists to benefit the members of the Squadron.

I am unpersuaded that his Honour erred in the impugned description he gave of the Marina Company at paragraph [1] of the reasons, or in the view he expressed in paragraph [41] thereof of the ambit of permitted transfers of property. His view accords with the interpretation of the first object which I regard as being correct.

Several other features of the Memorandum of Association were referred to in argument. For completeness, they warrant brief mention.

The appellants challenged his Honour’s characterisation of the first object as the “only true purposive object”.⁴¹ Whereas this object is expressed in general terms, those which follow in Clause III tend to be specific, concerned to authorise definite permissible activity or conduct. His Honour’s view on the interpretation issue is not dependent upon this characterisation. Further, insofar as it might be suggested that to accord equal significance to all 30 objects would require a modified interpretation of the first of them, heed needs to be given to the declaration at the conclusion of Clause III that except where otherwise expressed, the objects specified in one paragraph of the clause do not limit or restrict those in another.

The opening provision in Clause IV both requires, and limits, the application of the income and property of the Marina Company to the promotion of its objects. They, of course, include the object in paragraph 1 in Clause III. An application of the property of the Marina Corporation that furthers that object, properly construed, is authorised by this provision. The provision which follows prohibits payment or transfer to or amongst the members of the Marina Company. It is to be read conformably with, and not in derogation of, the provision which precedes it. Thus a payment or transfer of property to a member of the Marina Company, as Nominees has been, does not contravene the prohibition so long as it is intended to further any of the Marina Company’s objects, including the first object.

Reference was also made in submissions to the provisions of Clause VII headed “winding up”. Any surplus on a winding up is to be paid or transferred to the Squadron, or some similar institution with similar objects provided its income and property cannot be distributed to its members, or some other institution meeting the requirements of s 78(1)(a) of the Income Tax Assessment Act, such institution or institutions to be determined by the members of the Marina Company, and failing that, by a judicial officer. Insofar as this provision contemplates payment or transfer of the surplus to the Squadron itself, it lends support to an interpretation of the first object that permits a payment or transfer of property to the Squadron (or Nominees) directly provided that it is calculated to benefit the members of the Squadron. The appellants, however, point to the role given to the members of the Marina Company to decide whether the surplus is to go to the Squadron or to any of the other eligible institutions. This, they argue, accords primacy to the interests of the members of the Marina Company, a primacy that should be observed in furthering the objects of that company. On this argument, the first object is to be furthered in ways calculated to benefit, or primarily benefit, the members of the Marina Company who are members of the Squadron. I am unable to accept this argument. It seeks impermissibly to place a qualification upon the clear words of the first object. Had it been intended that the members of the Marina Company, and not all members of the Squadron, be benefitted, that objective could have readily been achieved by wording the object in paragraph 1 accordingly.

Finally, the appellants propose that, as a matter of principle, it can never be in the best interests of a company to put it in a position where it cannot continue to fulfil its objects. Consequently, a company’s objects cannot be construed in a way which would authorise such an outcome. No authority was cited for such a rule of construction. I accept the respondents’ submission that such a rule would be incompatible with the basic principle that the interests of the company reflect those of its members in light of its corporate objects.⁴² Those interests may foreseeably require the company to restructure or transfer its business or operations in order to advance such interests. Indeed, that very circumstance is anticipated in paragraph 21 of Clause III which authorises the promotion of any company for the purpose of acquiring the property rights and liabilities of the Marina Company or “for any other purpose which may seem directly or indirectly calculated to benefit” the Marina Company. Furtherance of any of the objects of the Marina Company is apt to be characterised as being for its benefit.

Disposition and other matters

On the appellants’ own analysis of their appeal, failure on their part on the “necessary condition to success” dooms their appeal to failure. The necessary condition has not been fulfilled. The appeal must therefore be dismissed.

I would add that the appellants’ appeal does not challenge reliance by the learned primary judge on both the observations of Ball J in Re Gladstone Pacific Nickel Ltd⁴³ that in a consideration of the best interests of the company, it is necessary to consider not only prospects of success of the proposed proceeding, but also its likely costs, the likely prospects of recovery if successful, and the likely consequences if it is not; and the statement of principle by the Court of Appeal of New South Wales in Oates v Consolidated Capital Services Pty Ltd⁴⁴ which proposes that the best interests of a company are served when the benefit that it would derive from the bringing of the proceeding outweighs the cost and risk it would suffer in bringing it.

Nor does the appeal challenge the relevance accorded by the learned primary judge to the costs burden likely to be borne by the Marina Company in the event that the proposed proceeding were to fail. These costs are assessed at not less than $885,000. It was appropriate for his Honour to have had regard to this costs burden as it was also to the related circumstances, firstly, that the Marina Company does not have the funds to meet such a costs order and, secondly, that none of the appellants have offered an indemnity to meet an adverse costs order.

The appellants do challenge his Honour’s assessment of prospects of the proposed claims. However, as they concede and I have noted, the challenge is dependent upon fulfilment of the “necessary condition to success”. Apart from contending that he erred in respect of that interpretation issue, the appellants have not advanced a telling criticism of the reasoning of the learned primary judge which led him to conclude that the prospects of success for each of those claims is poor. As noted, the appellants’ approach was to criticise his Honour, erroneously in my view, for assessing the claims in the context of uncontested factual settings to which a number of the respondents had deposed. It was not to seek to demonstrate illogicality or incoherence in the reasoning within that factual context to conclusions about the prospects of success.

In these circumstances, it is unnecessary to consider each of the proposed claims individually. It is also unnecessary to address several issues debated in oral submissions concerning pleading aspects of the proposed statement of claim. They are overtaken by the appellants’ failure on the “necessary condition to success”.

Orders

For these reasons, I would propose the following orders:Appeal dismissed.Appellants to pay the respondents’ costs of the appeal on the standard basis.

BODDICE J: I have read the reasons for judgment of Gotterson JA. I agree with those reasons and the proposed orders.

FLANAGAN J: I agree with the orders proposed by Gotterson JA and with the reasons given by his Honour.

Footnotes

1. AB71-163. ↩

2. Affidavit of C G Londy sworn 30 June 2014: AB61-64. ↩

3. AB1909-1910. ↩

4. AB1911-1941. ↩

5. AB1942-1962. ↩

6. AB1913-1914. ↩

7. AB1915-1916. ↩

8. AB1917. ↩

9. At [109]. ↩

10. At [110]. ↩

11. At [141]. ↩

12. Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313; [2002] NSWSC 583 at 318 [24]. ↩

13. MG Corrosion Consultants Pty Ltd v Vinciguerra (2011) 82 ACSR 367 at 379 [60]. ↩

14. Re The Presidents Club Ltd; Coeur De Lion Investments Pty Ltd v Kelly [2012] QSC 364 at [59]. ↩