Knorr v Radial Timber Australia Pty Ltd

DAVIES J: 1 The applicant has applied for an extension of time and leave to appeal from the order of Moshinsky J dismissing his application for leave under s 237 of the Corporations Act 2001 (Cth) ("the Corporations Act"), ("the s 237 application") to bring proceedings on behalf of Radial Corporation Limited ("the company"). By orders made on 8 December 2017, the application for an extension of time and leave to appeal is dealt with without an oral hearing pursuant to r 35.18(1) of the Federal Court Rules 2011 (Cth) ("the Rules"). Both parties have filed written submissions. 2 Section 237(2) of the Corporations Act contains the criteria for the grant of leave to commence a proceeding in the name of a company and provides as follows: (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 If all five criteria in s 237 have been met, the Court is bound to grant the application: Goozee v Graphic World Group Holdings Pty Ltd [2002] NSWSC 640 at [27]. Correlatively, the failure to satisfy any one of those criteria means that leave must be refused: Goozee at [27]; South Johnstone Mills Ltd v Dennis [2007] FCA 1448 at [60]. The onus is on the applicant for leave to satisfy the Court on the balance of probabilities that each of the criteria has been satisfied: Swansson v Pratt [2002] NSWSC 583 at [24]; South Johnstone at [61]. 4 The applicant is the sole director of the company and, subject to leave being granted under s 237, has standing to bring proceedings on behalf of the company. Moshinsky J dismissed the applicant's s 237 application, holding that the applicant was unable to satisfy the Court that it was in the best interests of the company that the applicant be granted leave (s 237(2)(c) of the Corporations Act) or that it was probable that the company would not itself bring the proceedings (s 237(2)(a) of the Corporations Act). 5 Moshinsky J reasoned as follows: In circumstances where Mr Knorr is acting for himself, and does not have any present plan to engage a lawyer to represent either himself or the company if leave were granted, I am not satisfied that it would be in the best interests of the company for Mr Knorr to be granted leave. The proposed amended statement of claim, although shorter than the original statement of claim, is a complex document which, in many places, is difficult to follow. It would not be in the interests of the company for any claims it may have to be pursued in this way. Further, the proposed amended statement of claim seeks to rely on a number of complex causes of action, such as cartel conduct. This underlines the desirability, in the interests of the company, of there being legal representation if such claims are to be pursued. I note that r 4.01(2) of the Federal Court Rules 2011 states that a corporation must not proceed in the Court other than by a lawyer. Mr Knorr does not presently propose to engage a lawyer to act on behalf of the company and, therefore, would not comply with this requirement. While leave can be granted for an individual to appeal on behalf of a company, this is not readily granted and the rule reflects the normal position, namely, that a corporation must not proceed other than by a lawyer. In addition, in circumstances where the company is not merely the alter ego of Mr Knorr - as there are other shareholders apart from Mr Knorr - there is a real risk that the company may incur a liability for costs if the litigation proves unsuccessful. Mr Knorr has not offered an indemnity for any costs that may be awarded against the company, and even if he had offered such an indemnity, it is not clear whether he would be able to satisfy it. Thus, a grant of leave would expose the company to the risk of an adverse costs order being made against it. Secondly I am not satisfied that it is probable that the company will not itself bring the proceedings as required by s 237(2)(a). Mr Knorr, the sole director, plainly wants to bring the proceedings. If the board of the company were properly constituted, it may well decide to bring the proceedings. The fact that the board is not properly constituted and, for that reason, has not been able to make a decision does not demonstrate that, if properly constituted, the company would be unwilling to do so. 6 Moshinsky J also noted "for completeness" that with many, but not all, of the causes of action pleaded by Mr Knorr, it was very difficult to assess whether there is a serious question to be tried because of the form of the proposed amended statement of claim. 7 The proposed draft notice of appeal contains 29 grounds. The grounds are prolix and in large measure are not properly identifiable as grounds but rather constitute submissions. In substance, the applicant contends that Moshinsky J erred in holding that the matters set out in ss 237(2)(a) and 237(2)(c) of the Corporations Act were not satisfied and erred in not holding that the proposed proceedings by the company raise serious questions to be tried.

preliminary question: is leave to appeal necessary? 8 The respondent properly raised a preliminary question as to whether leave to appeal is necessary. 9 Whether leave to appeal is required depends upon whether the order of Moshinsky J dismissing his application is interlocutory or final. That question is answered by determining whether the legal effect of the judgment is final or not. If the legal effect of the judgment is final, it is a final order; otherwise it is an interlocutory order: Bienstein v Bienstein [2003] HCA 7 at [25]. 10 In McEvoy v Caplan [2010] NSWCA 115, the Court of Appeal held that the dismissal of an application for a grant of leave under s 237 of the Corporations Act was an interlocutory order as it did not finally determine the rights of the parties. The Court stated that the fact that it remained open to the applicant to make another application of the same kind was decisive in this respect. In Huang v Wang [2016] NSWCA 164, Barrett AJA, after referring to McEvoy v Caplan expressed the view in obiter that in some types of cases the order might properly be viewed as a final order. Barrett AJA gave as an example where a person does not bring the s 237 application in an existing proceeding (as was the case in McEvoy v Caplan) but in a standalone application which merely names the company itself as respondent and identifies the case that the person wishes the company to pursue against some unrelated third party. His Honour stated that in such a case the debate is solely on an issue of internal governance and domestic concern: whether the company should sue the third party and whether the applicant, who otherwise lacks the ability to put the company into motion, has established a statutory entitlement to act on the company's behalf in that respect. 11 In the present case, the applicant has brought the derivative application in the proceeding that he had already commenced against the respondents. In the proposed amended statement of claim, the applicant has pleaded a large number of claims on behalf of the company and, in the alternative, as personal claims for oppression under the Act. In my view the present case does not fall within the type of case identified by Barrett AJA in Huang v Wang where the order dismissing the s 237 application may be regarded as final. Further, given the basis on which Moshinsky J dismissed the application for relief under s 237, the applicant is not shut out from making a further application should the relevant considerations under s 237 change. That matter, in my view, is decisive that Moshinsky J's order was interlocutory in nature and therefore leave to appeal is required by the applicant.

Application for an extension 12 As Mr Knorr did not file his application for leave to appeal within the 14 day time limit prescribed by r 35.13 of the Rules, he requires an extension of time to seek leave to appeal. In compliance with r 35.14(3) of the Rules, Mr Knorr filed an affidavit in support of his application. He explained that he thought he had 21 days in which to file his notice of appeal which, had the order been final, was correct: r 36.03 of the Rules. As the filing of the application was not significantly out of time, and Mr Knorr has provided a satisfactory explanation for the delay, the real issue as to whether an extension of time should be granted concerns the merits of the substantive appeal. The respondents submitted that leave should be refused because the proposed appeal lacks merit and, it was submitted, a hearing would be futile.

Merits of the proposed appeal 13 Leave to appeal will only be granted if an applicant can demonstrate that the orders in question are attended by sufficient doubt that reconsideration by an appellate court is warranted, and that substantial injustice would result to the applicant if the orders were left uncorrected: Décor Corporation Pty Ltd v Dart Industries Inc [1991] FCA 655. 14 Mr Knorr contended that Moshinsky J should have been satisfied that it is probable that the company will not itself bring proceedings or properly take responsibility for bringing proceedings. Mr Knorr argued that His Honour erred in failing to take into account the evidence which explained why the required number of directors had not been appointed to the company. Moshinsky J did not advert to that evidence in his decision, apart from noting that Mr Knorr explained the difficulties that he faced in persuading other people to become directors of the company. However, it was not Mr Knorr's evidence that no-one else was willing to take up the position as director. Rather Mr Knorr explained in his affidavit why he thought "it was not proper" to have other directors appointed. Whether or not Mr Knorr's reasons were soundly based, his evidence did not establish that a properly constituted board could not be convened. To the contrary, there was evidence from Mr Knorr that three shareholders he approached about becoming directors have generally supported the steps taken by him. Moshinsky J was correct to hold that the impediment to the company bringing the claim had nothing to do with the attitude of the board, but rather was due to the irregular state of affairs of the company with the consequence that the company has not considered for itself whether to become a party. His Honour also correctly identified that the fact that the board is not presently properly constituted and, for that reason, has not been able to make a decision on whether to bring the proceedings which Mr Knorr wishes to bring on the company's behalf, does not demonstrate that, if properly constituted, the company would be unwilling to do so. 15 Mr Knorr also argued that Moshinsky J fell into error in failing to take into account that the company does not have the financial resources to bring the proceedings. Whilst His Honour did not take the company's financial resources into account in holding that the s 237(2)(a) criterion was not met, he did, however, take the financial incapacity of Mr Knorr into account in considering whether the s 237(2)(c) criterion was satisfied. The phrase "best interests" is concerned with the company's separate and independent welfare: Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; Huang v Wang at [59]. 16 In the present case, Mr Knorr proposes to act for himself and the company without legal representation, suing on a number of complex causes of action, which include a claim of fraud. As His Honour stated "this underlies the desirability, in the interests of the company, of there being legal representation if such claims are to be pursued". As His Honour also correctly noted, it is very difficult to assess whether there is a serious question to be tried because of the form of the proposed statement of claim, which is also prolix and in large measure the causes of action sued on are not properly pleaded. In the circumstances where Mr Knorr seeks to embark on ill-defined litigation without legal representation it was open to hold, as His Honour did, that he was not satisfied that such litigation is in the best interests of the company, particularly given that there are other shareholders apart from Mr Knorr and Mr Knorr has not offered an indemnity for any adverse costs order against the company should it not be successful. In the circumstances, the risk of failure of the proceeding would be borne by the company, rather than by Mr Knorr. I am not satisfied that His Honour's conclusion on s 237(2)(c) of the Corporations Act is attended by sufficient doubt to warrant reconsideration by the Full Court. 17 Nor do I consider that substantial injustice would result to Mr Knorr if the orders were left uncorrected, assuming that the decision was wrong, given, as earlier mentioned, that Mr Knorr is not precluded from making another s 237 application. 18 Accordingly, as there is no merit in the application for leave to appeal, there is no utility in granting an extension of time in which to seek leave to appeal. The application for an extension of time to seek leave to appeal the decision of Moshinsky J should be dismissed. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.