Kandt Stening Group Pty Ltd v Stening [2006] NSWSC 307 | Case summary

4935/05 KANDT STENING GROUP PTY LIMITED (ACN 093 729 821) v PETER EDWARD STENING & ANOR JUDGMENT - Ex Tempore (Revised 18 April 2006) 1 HIS HONOUR: This is a Notice of Motion which is brought in proceedings which relate to a rupture in the affairs of a group of accountants. To be able to follow the allegations, a history needs to be set out. 2 Mr Peter Stening had carried on practice as an accountant through a firm called Peter Stening & Co. From 1997 onwards Mr Stening and Mr Bruce Howle continued to carry on that practice through a company called Peter Stening & Associates Pty Limited (PSA). Another person was for some time involved in that company, but has departed, and for present purposes he can be ignored. Mr Stening and Mr Howle were equal shareholders, and the only directors of PSA. 3 PSA, in 2001, entered into what I will refer to as a merger with another firm which provided similar services. By that term I do not intend to refer to anything more than what, as a matter of commercial function, was achieved between the two firms. I intend to conclude nothing about the legal significance of it. 4 The other firm was one in which two other men were involved, namely, Mr Ian Keith Cousins and a Mr Roderick Glenn Cousins. A new company, Kandt Stening Group Pty Ltd (KSG) was formed. The four men who were the driving force of the two practices which had merged became directors of that company. Relevantly, for present purposes, Mr Stening became an employee of the company. That employment ran from 1 April 2001. 5 In September of 2001, two agreements were entered into, which related to the manner in which the merger of the practices would operate. All I need say about that at the present time is that those agreements are capable of bearing a construction whereby the clients of PSA, and the clients of the practice which the two Mr Cousins' had operated, KMS, were each made available to KSG, so that KSG would provide the services to those clients, in return for an annual fee to be paid to the respective companies that had contributed the clients. The agreements are open to the construction that, when the agreements came to an end, each of the companies which had merged would get their own clients back. By saying that the agreements are open to this construction, I certainly do not intend to do anything like making a determination of what is the correct construction of either agreement. 6 There came to be yet another rearrangement of the manner in which the practice was carried out. Another man who was, in commercial terms, a working partner, Mr Purcell, came into the group. 7 His advent was the occasion for a restructure where a new company, Kandt Stening Group Holdings Pty Limited was formed. It was the trustee of the KSG Holdings Trust. That Trust was established in June 2002 with five unit holders, namely, the family trust companies of the five who were, in effect, the working partners. The shareholdings in KSG became an asset of that Trust. The Trust Deed was one which contained a provision for preemption concerning the transfer of any unit in the Unit Trust. Under that provision, units had first to be offered to existing unit holders at a particular price and, if the persons to whom they were offered did not regard that price as acceptable, they had the option of having someone described in the Deed as "the Accountant" decide what the value of the unit was. 8 By 2005, Mr Stening was considering the possibility of departing from the merged group. In August 2005, on 22 August, he told Mr Howle of his intention to leave. He, in fact, left very soon after. 9 KSG began proceedings against Mr Stening. In broad terms, those proceedings alleged that Mr Stening had breached duties which he owed, both as an employee and as a director, to KSG concerning the way in which Mr Stening evidently intended to set up a rival accounting firm, and to deal with the same clients, or at least some of the same clients, as he had dealt with while working through KSG. The particular causes of action are ones which rely upon a contract of employment, which is alleged to be a variation or replacement of the contract for employment which had originally been entered in April 2001. That variation or replacement contract is alleged to be one under which there is an agreement to serve the company for five years. By comparison, the April 2001 contract allowed for a month's notice. 10 As well, it was alleged there was confidential information of the plaintiff which had been removed by Mr Stening, and used by him. 11 Mr Stening's contention is that he was entitled to continue to deal with the firms, and clients, that he dealt with precisely because of the terms of the 7 September 2001 agreement. 12 It will be recalled that the construction of that agreement, which is open, is one whereby if the agreement terminates the clients contributed respectively by PSA, as by the other merging entity, would be returned to those entities. Thus, that agreement itself did not give a personal right to Mr Stening to get the clients back, but at least it meant that KSG did not have the right to continue to deal with them. 13 The application before me today is a Notice of Motion, brought by Mr Stening. He seeks, first, leave to bring a particular cross-claim. That cross-claim is one in which Mr Stening is one of the cross-claimants. PSA is another cross-claimant. A company referred to as PES, which is the trustee of Mr Stening's Family Trust, is the third cross-claimant. The proposed cross-defendants are KSG, and Kandt Stening Group Holdings Pty Limited. 14 In very broad terms, in one part of that cross-claim Mr Stening seeks from KSG some alleged unpaid employee entitlements. When it is Mr Stening and KSG who are the parties to the original action, no leave is needed to bring the cross-claim in that respect. 15 The next aspect of the proposed cross-claim raises a question about who is entitled to the clients which PSA contributed. This aspect of the cross-claim is one which Mr Stening seeks to bring in the name of PSA, in circumstances where he alleges that under the September 2001 agreement, PSA was entitled to get the clients back, and that those clients had not been got back. The relief sought concerning that complaint is, in the first instance, relief of a specific nature seeking orders aimed at compelling the return of the clients to PSA, or, in the alternative, of a pecuniary nature, seeking to have PSA compensated for the loss which Mr Stening seeks to assert PSA has suffered. 16 Another aspect of the proposed cross-claim arises from an attempt which Mr Stening made to sell his unit in the Unit Trust. PES offered its unit in the Unit Trust to the family companies of the other four men involved in the venture, at a value which PES thought appropriate, but none of them agreed with that value, and a valuation by the Accountant was required. That valuation produced a value for the unit of $1. 17 PES seeks to complain that that valuation is one which is not a valuation which falls within the terms of the Trust Deed. The Accountant who was nominated to carry out the valuation was, it seems, KSG. Mr Stening seeks to have PES contend that the valuation was one arrived at in breach of the duty of the trustee to avoid conflict between its interest and the interest of any of the beneficiaries, and, in broad terms, to act evenhandedly between the various beneficiaries. The nub of the compliant which is sought to be made, in this portion of the cross-claim, is that, if KSG is right in saying that it is entitled to the clients who were originally contributed by PSA, those clients must have a value in the hands of KSG, and that value must have been ignored, in arriving at the nominal $1 valuation. That is not the legal frame in which the cross-claim is put, but that is the thinking which appears to lie behind it. 18 Section 22 Civil Procedure Act 2005 provides: "(1) Subject to subsection (2), the court may grant to the defendant in any proceedings ( the first proceedings ) such relief against any person (whether or not a plaintiff in the proceedings) as the court might grant against that person in separate proceedings commenced by the defendant for that purpose. (2) Relief may not be granted under this section against a person who is not a plaintiff in the first proceedings unless the relief relates to, or is connected with, the subject of the first proceedings." 19 To apply section 22(2), one must first identify what is the subject of the first proceedings. The subject of the first proceedings need not be identified by a single phrase. The subject of the first proceedings can be all or any of those matters that the first proceedings are about. 20 The next thing that section 22(2) requires one to do is to consider the relief that is sought in the cross-claim. Finally, one must ask whether that relief "relates to, or is connected with" the subject of the proceedings. That expression "relates to, or is connected with" is an expression which is of great generality. It does not contemplate that any particular sort of relationship, or context, need to be established. When what the section is doing is imposing an outer limit on the exercise of the Court's powers, it is not surprising that it is cast widely, and that it will be a matter for the Court to decide, by reference to the facts of an individual case, whether it is appropriate to actually exercise the power to permit a cross-claim which section 22(2) confers, or to require a separate hearing of any cross-claim which has been commenced without the cross-claimant needing leave to bring it. 21 Rule 9.1 Uniform Civil Procedure Rules 2005 has been referred to in argument. The only relevant provision in it is in subrule 1 which says: "A party ( the cross-claimant ) may make a cross-claim within the time limited for the party to file a defence or within such further time as the court may allow." 22 The question for present purposes, given that the present cross-claim is sought to be filed outside the time for filing a defence, is whether the Court ought allow the further time. 23 When exercising a discretion whether to allow that time, the Court will take into account whether issues raised by a cross-claim can conveniently be tried, or indeed need be tried, along with those raised by the principal claim. 24 In the present case, in my view, the relief which is sought in the cross-claim is all related to, or connected with the subject matter of the first proceedings. The first proceedings has as its core who is entitled to deal with the PSA clients, once the merger has come to an end. I think the various questions which are sought to be agitated by the cross-claim all have that question involved in them. 25 If Mr Stening is to bring the proceedings on behalf of PSA, it would be necessary for leave to be granted under section 237 of the Corporations Act 2001. That section provides: "(1) A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings. (2) The Court must grant the application if it is satisfied that: (a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and (b) the applicant is acting in good faith; and (c) it is in the best interests of the company that the applicant be granted leave; and (d) if the applicant is applying for leave to bring proceedings - there is a serious question to be tried; and (e) either: (i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or (ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied. (3) A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that: (a) the proceedings are: (i) by the company against a third party; or (ii) by a third party against the company; and (b) the company has decided: (i) not to bring the proceedings; or (ii) not to defend the proceedings; or (iii) to discontinue, settle or compromise the proceedings; and (c) all of the directors who participated in that decision: (i) acted in good faith for a proper purpose; and (ii) did not have a material personal interest in the decision; and (iii) informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and (iv) rationally believed that the decision was in the best interests of the company. The director's belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold. (4) For the purposes of subsection (3): (a) a person is a third party if: (i) the company is a public company and the person is not a related party of the company; or (ii) the company is not a public company and the person would not be a related party of the company if the company were a public company; and (b) proceedings by or against the company include any appeal from a decision made in proceedings by or against the company." 26 There is no doubt that Mr Stening is someone who, as both a member, and a director, of PSA has standing to make the application under section 237. 27 The solicitors for Mr Stening notified the solicitors for KSG of their desire to bring this cross-claim. Mr Howle thereupon caused a meeting of directors of PSA to be held. Both he and Mr Stening attended. One of them voted in favour of the proceedings being brought, the other voted in favour of the proceedings not be brought, and in consequence no decision was made. I am satisfied that PSA will probably not undertake the proceedings itself. 28 The next question which arises is whether Mr Stening is acting in good faith in seeking the leave under section 237. From very soon after the time that he departed the company in August of 2005, he has been contending, through his solicitors, that he is entitled to the PSA clients. He has referred to the agreement of September 2001 in that context. If he succeeds in bringing this application on behalf of PSA, it would result in PSA having its value increased. There is no suggestion made that the bringing of the proceedings is an abuse of process. I note that there has been cross-examination of Mr Stening concerning this issue of good faith. Nothing emerged in the course of that cross-examination to cast doubt on the conclusion which emerged prima facie before the cross-examination that the action was brought in good faith. 29 The next question is whether it is in the best interests of the company for the action to be brought. The action is one which, if it were to succeed, would result in the assets of the company being increased. Even though there may be a real prospect that a Court would decline to grant a specific remedy requiring return of the clients to PSA, in circumstances where PSA would not be able to make a corporate decision about how to deal with that while Mr Stening and Mr Howle were both directors, that would not stop PSA from recovering a monetary remedy. Further, the possibility of PSA servicing the clients itself cannot be completely discounted, as there might be a prospect of there being a buy out of one or other of the shareholders. I do not regard that prospect as being of particular weight for present purposes, however. 30 There is, in my view, a serious question to be tried. A fundamental part of KSG's case is that the 7 September 2001 agreement was replaced by an oral agreement made on 17 July 2002. Mr Stening denies that any such agreement was arrived at. It does not seem to be recorded in a minute of the PSA Board, concerning a meeting which occurred apparently soon after 17 July 2002. There does not seem to have ever been any written transfer or assignment of PSA clients to KSG, and the stamp duty obligation that would attract in itself would provide one reason for not effecting it. 31 There is some evidence of there having been at one stage an application to a banker to provide finance on a basis which represented that it was KSG or KSG Holdings which had the effective value attached to the goodwill. While Mr Stening signed a letter of acceptance of the facility which resulted, he did not sign the letter of application, and it is not, at present, established that he was aware of it. There is evidence in cross-examination that he did not remember having seen it. 32 That banking application is one which might be part of a claim by KSG that the 7 September 2001 agreement has been superseded, but the fact there are arguable defences to a proposition does not mean the proposition itself is not one concerning whether there is a serious question to be tried. 33 PSA is a company which has been dormant for some years. It appears, from the evidence before me, to have no particular assets, apart from those aspects of goodwill which are in dispute in the case. That raises a question of how the costs of the derivative action ought be borne. Mr Stening proffers an undertaking that he will finance that action himself and also be responsible for the costs associated with it in the event that it fails. Having that cover against a costs liability concerning the proceedings is a matter which I have taken into account in concluding that it is in the best interests of the company to bring the proceedings. 34 For these reasons I would make an order under section 237 of the Corporations Act 2001 granting leave to bring the cross-claim in the name of PSA, and would grant leave for the cross-claim to be brought out of time. No matter of prejudice arising from the lateness was put to me. 35 There is an aspect of the cross-claim's pleading which requires attention, however. Mr Wells, for KSG, rightly points out that it claims an account of profits, yet says nothing about the facts and circumstances which give rise to any right to an account of profits. If the claim is based solely upon breach of contract, something more than a mere breach of contract needs to be established to entitle a person to an account of profits: Town & Country Property Management Services v Kaltoum [2002[ NSWSC 166 at [78]-[85]; Biscayne Partners Pty Limited v Valance Corp Pty Limited [2003] NSWSC 874 at [228]-[237]. Under those circumstances, I will not grant leave for the draft cross-claim presently before me to be filed. However, it is presumably just a matter of drafting to remedy this deficiency. I direct the parties to bring in Short Minutes of Order at 9.30am on Monday 24 April 2006. **********

Kandt Stening Group Pty Ltd v Stening

At a glance

Court

Decision date

Before

Source

Judgment (11 paragraphs)

Parties

Cases Cited (2)

Cited By (1)