Lakshman v Law Image

Supreme Court of NSW|2002-09-18|Before: Windeyer J

CITATION : Lakshman v Law Image [2002] NSWSC 888 CURRENT JURISDICTION: Equity Division Corporations List FILE NUMBER(S) : SC 4027 of 2002 HEARING DATE(S) : 17, 18 September 2002 JUDGMENT DATE : 27 September 2002

Sushil Kumar Lakshman (Plaintiff) Law Image Pty Ltd (First Defendant) Law Image Service (Melb) Pty Ltd (Second Defendant) PARTIES : Shailesh Raj (Third Defendant) Rajiv Tandon (Fourth Defendant) Sarita Raj Tandon (Fifth Defendant) Law Image Service Pty Ltd (Sixth Defendant) JUDGMENT OF : Windeyer J at 1

Mr M B Evans (Plaintiff) COUNSEL : Ms E A Collins (Third Defendant) Mr K Odgers (Fourth and Fifth Defendants) John McEncroe & Company (Plaintiff) SOLICITORS : Phillips Fox (Third Defendant) Edward T Davis & Co (Fourth & Fifth Defendants) CATCHWORDS : CORPORATIONS - whether leave under s237 of the Corporations Act 2001 should be granted to a director of a company to bring proceedings on behalf of that company LEGISLATION CITED : Corporations Act 2001, s182, s236, s237 Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 10 ACSR 230 Breen v Williams (1996) 186 CLR 71 at 113; Foss v Harbottle (1843) 2 Hare 461 CASES CITED : Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534 Keyrate Pty Ltd v Hamarc Pty Ltd (2001) 38 ACSR 396 Metyor Inc v Queensland Electronic Switching Pty Ltd (2002) 42 ACSR 398 Pilmer v The Duke Group Ltd (in liq) (2001) 77 ALJR 1067 Swansson v Pratt (2002) 42 ACSR 313 DECISION : See paragraphs 31 to 35

15 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

4027/02 SUSHIL KUMAR LAKSHMAN V LAW IMAGE PTY LTD & ORS JUDGMENT 1 The question the subject of this judgment is whether or not the plaintiff, Sushil Lakshman (Lakshman) should be given leave pursuant to s237 of the Corporations Act 2001 to bring proceedings against the third, fourth and fifth defendants in the names of the three corporate defendants. Parties, companies, people and relationships 2 Lakshman is the uncle of Shailesh Raj (Raj) the third defendant. Raj is the brother of Sarita Tandon (Sarita) the fourth defendant, Sarita is the wife of Rajiv Tandon (Rajiv), the third defendant. Rajiv was an employee and director of the second defendant, but resigned on 25 February 2002. 3 Law Image Pty Ltd (Law Image), the first defendant, is a company incorporated in 1997, Lakshman and Raj are its two directors and each of them holds one of the two issued shares in that company. Law Image was formed as an incorporated body to take over a partnership between Lakshman and Raj the business of which was to provide copying services for solicitors. Law Image Service (Melb) Pty Ltd (Law Image Melbourne), the second defendant, is a company registered in July 2001. Lakshman through a company owned by him holds twenty-five percent of the issued shares, his brother Jainendra Lakshman holds another twenty-five percent, Raj holds twenty-five percent and Rajiv the final twenty-five percent. The directors of Law Image Melbourne at the present time are, Lakshman, and his brother Jainendra Lakshman. Raj was a director but he resigned on 10 April 2002 and Rajiv was a director but resigned on 25 February 2002. Rajiv was also an employee of that company up to the date he resigned as a director. Law Image Service Pty Ltd (Law Image Service) was formed on 16 March 1998. It has only two issued shares both of which are held by Law Image. Its directors are Lakshman and Raj. It is the operating company for Law Image in New South Wales and Law Image Melbourne is really the operating company in Melbourne, but the Melbourne company is not a subsidiary of Law Image. 4 Prior to the incorporation of the Melbourne company Lakshman and Raj had acquired another company Law Image (Melb) Pty Ltd, which was registered on 3 March 1999. Raj and Lakshman were the two directors and the whole of the 100 issued shares were held by Law Image. This company, Law Image (Melb) Pty Ltd changed its name to Office-Mation Pty Ltd on 11 July 2001. Its business was not successful and it ceased business after Law Image Service (Melb) Pty Ltd commenced operations. 5 Law Image Service was formed as a result of some accounting advice as was the Melbourne company. The operating companies were very profitable and the business was a successful business. Unfortunately there was a falling out between Lakshman and Raj some time around December 2001. 6 Confidential Copy Pty Ltd is a company previously called Law Imaging Solutions Pty Ltd formed in New South Wales on 6 November 2001. The name change occurred on 1 March 2002. The sole director is Vimlesh Rattan who was at the time of incorporation an employee of Law Image Service, but who resigned on 1 March 2002. He appears to be the sole shareholder in that company. The evidence is not clear but he may be a son-in-law of Sarita. Confidential Copy Pty Ltd seems to have ceased business in March 2002. Confidential Imaging Pty Ltd (Confidential Imaging) was formed in Victoria on 15 March 2002. Its sole director is Sarita. Sarita holds thirty percent of the shares in the company and according to one affidavit of Lakshman her brother, Mr Akhilesh Raj holds seventy percent of the shares. Mr Akhilesh Raj lives in Fiji. 7 The claim which Lakshman wishes to bring was set out in the first instance in the originating process filed on 13 August 2002 and further defined by a draft statement of claim which Lakshman wishes to file which is Exhibit C in these proceedings. 8 Both the originating process and the proposed statement of claim appear to attempt to combine material appropriate to separate claims, first an oppression suit by Lakshman against Raj in respect of the conduct of the affairs of Law Image, Law Image Melbourne and Law Image Service in which part of the claim the plaintiff seeks a buy out order under which he would buy out the shares of Raj, and secondly a claim sought to be brought on behalf of those three companies against Raj, Rajiv and Sarita as against Raj for breach of fiduciary duty and breach of s181 of the Corporations Act 2001 as a director of each of those companies, together with claims against Rajiv and Sarita for their claimed knowing participation in those breaches. 9 I pointed out during the hearing that it did not seem to me to be appropriate for these separate claims to be brought in one action. The simple reason for this was that s236(2) of the Corporations Act provides that derivative actions brought on behalf of a company must be brought in the name of the company:- intervention in proceedings is not subject to such requirement. Thus I said that the proceedings would have to be separated as the companies were necessary defendants in the oppression proceedings. There was no objection raised to this. I had thought, without doing any research, that if the law required proceedings on behalf of a company to be brought in the company's name, then the only way that could be done was for the company to be plaintiff. However, since reserving my decision I have found that Santow J reached a different conclusion in Keyrate Pty Ltd v Hamarc Pty Ltd (2001) 38 ACSR 396, which decision was approved and followed by the Court of Appeal of the Queensland Supreme Court in Metyor Inc v Queensland Electronic Switching Pty Ltd (2002) 42 ACSR 398. I should add those two decisions were on a list of authorities handed up by counsel, but they were not referred to in argument when I brought the matter up. 10 As a matter of comity and obligation I should follow these decisions; Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 10 ACSR 230. I must say however with due deference that as a matter of logic and statutory interpretation I am unable to understand how proceedings are brought in the company's name if they are not brought in the name of the company as plaintiff. Proceedings are brought by a plaintiff and defended by a defendant. Sections 236 and 237 of the Corporations Act have replaced the procedure for bringing actions on behalf of a company within the exceptions to the rule in Foss v Harbottle (1843) 2 Hare 461, so that reliance upon previous procedure for derivative actions is unnecessary and I would have thought irrelevant. For the same reason there is no purpose in relying upon some analogy with proceedings brought by a beneficiary of a trust in the name of a beneficiary when the trustee refuses to take such proceedings and is joined as a defendant. In both cases the joinder as defendant was or is necessary to bind the company or the trustee. Section 236 prescribes a different procedure. It is difficult to see how proceedings not brought in a company's name are proceedings brought in the company's name. I add, although it is difficult to believe that he overlooked it, that McPherson JA in Metyor made no reference to s236(2). In any event as a trial judge in a matter concerning national law I will follow the Queensland decision although the plaintiff may consider bringing separate proceedings but seek to have both actions heard together. Claims proposed to be brought against Raj, Sarita and Rajiv Tandon 11 The gravamen of this claim is that Raj provided financial assistance to his sister for the establishment of businesses which compete and were known to be intended to compete directly with the businesses conducted by Law Image Melbourne and Law Image Service, that assistance culminating in the establishment of Confidential Imaging. 12 The gravamen of the claim proposed to be brought against Sarita and Rajiv, is based on knowing participation in and profiting from breach of fiduciary duty of Raj. 13 There is an additional claim in respect of Rajiv, namely that in breach of his duty as a director at the time of Law Image Melbourne he ordered in the name of that company certain equipment from a company called Lanier which was not ordered for the benefit of the company of which he was a director, but intended for the benefit of the company to be operated in competition by his wife. There are additional claims against Raj that he acted contrary to the interests of Law Image Service and Law Image in refusing to agree to a transfer of the business to premises owned by Law Image, that he dismissed certain key employees and that he failed to take steps available to try to recover work from firms whose work had gone to Confidential Imaging. Facts 14 Tensions between Lakshman and Raj seem to have come to a head in December 2001. The reasons are not altogether clear and probably do not matter. From that time on there have been negotiations for an agreement under which one or the other would buy out the other's interest in the various companies. Those discussions continued to at least 12 August 2002, and of course the general experience of the Judges of this Court is that in disputes between directors and shareholders of small partnership type companies the real question is how much will be paid by one of the partner/director to the other for the interest of that other. One of the main arguments of counsel for Raj is that the derivative action Lakshman wishes to bring would be brought for the collateral purpose of assisting him in his buy out negotiations. Evidence going to breach of Corporations Act or of fiduciary duty by Raj 15 There is evidence which if left uncontested at a trial could establish:

(a) That Raj gave or lent at least $13,000 to his sister Sarita, which found its way into Law Image Solutions. There is evidence that a further sum of $40,000 was paid into the bank account of Sarita, but the association of this with Raj is more a question of guesswork than any reasonable inference. (b) That a bank account for Law Imaging Solutions Pty Ltd was opened at the Commonwealth Bank, Kingsford with a mailing addressed "The Directors, 88 Lasseter Avenue, Chifley", which is the home address of Raj. (c) That two mobile telephone accounts were opened by Raj in the name of Confidential Imaging with the address given being that of Sarita in Victoria. There is no explanation whatsoever why that should have been done. There is however, evidence that the accounts for those telephone services were paid by Confidential Imaging.

(d) That Confidential Imaging has its office at 26 O'Connell Street, Sydney and that Law Image owns what is presumably a strata title business office at 23 O'Connell Street and that Raj has refused to agree to Law Image moving into the O'Connell Street premises, although its lease of premises in Pitt Street is about to come to an end.

(e) That Raj has dismissed certain valuable employees of Law Image.

(f) That Raj has an association with Mr Hitchons, the production manager of Messrs Phillips Fox and has assisted Confidential Imaging in obtaining work from that firm at the expense of Law Image Service. So far as this relationship between Raj and Mr Hitchons is concerned, the evidence is as follows: in April this year, Raj and Mr Hitchons went to Fiji together, Mr Hitchons going on a holiday and Raj presumably going to visit relatives there. The cost of the air ticket for Mr Hitchons and at least of some of his accommodation was paid for by Raj. Hitchons said in oral evidence that prior to going on the trip he paid for his expenses by giving Raj cash, namely $850. He said that this was money which he had around the house as his wife was in the habit of having sums of money of that amount around the house. As against this there is evidence that a hotel account, which Hitchons said that he paid, was paid for by Raj. There was some difficulty as Mr Hitchons was called by the plaintiff and the evidence he gave was not really challenged, except by way of astonishment: nor were documents which contradicted his evidence put to him. In spite of that it is I think necessary for me to make some finding and that finding is that I am unable to accept the evidence of Mr Hitchons as to payment. It follows from this that as he was in charge of work of considerable value to Law Image and as that work has now gone to Confidential Imaging there is a further inference that Raj has acted contrary to the interests of the Law Image companies through his association with Messrs Phillips Fox, who are the solicitors acting for him in these proceedings. Evidence against Sarita Tandon 16 So far as knowing participation and breach of fiduciary duty is concerned the same facts as relate to Raj bear upon this. If such breaches can be sheeted home to Raj it is likely that knowing participation can be sheeted home to Sarita Tandon. 17 It might be possible to draw an inference that Sarita would not have set up her company unless it were with the willing acquiescence of her brother. The evidence clearly shows that the copying business can be very profitable and it shows that a considerable part of the business of previous clients of Law Image Service is now going to Confidential Imaging. Evidence against Rajiv Tandon 18 The evidence against Rajiv is not so strong. However, he was a director of Law Image Melbourne and about the time he left that company Law Image Solutions was set up. There is at least an inference that the order of copying equipment from Lanier was intended for the new company. It is likely, if established, that his actions would have amounted to a breach of his contract of employment and as he was a director a breach of fiduciary duty, but it is unlikely that any damage flowed to the Law Image companies as a result of this order. 19 None of the individual defendants against whom it is proposed proceedings should be brought gave evidence. Legislation 20 It is conceded that Mr Lakshman has standing pursuant to s236 of the Corporations Act to bring the proceedings proposed if leave to bring them is granted pursuant to s237(1). It is also not seriously contended that the court should not give the leave under s237(1)(e)(ii) which is required because fourteen days' notice of the application had not been given at the time it was filed. It should not be made too difficult to obtain such leave in the case of a company with few shareholders in circumstances where it is apparent that the directors would not be able to agree to take the proceedings. The question is whether the requirements of s237(2)(a)(b)(c)&(d) have been made out and I will deal with each of these in turn. 21 I have been assisted by clear submissions of all three counsel. I have not overlooked the submissions of counsel for Raj that if his shares are to be sold it is not in his interests to engage in conduct which reduces their value. Is it probable the company will not itself bring the proceedings? 22 So far as Law Image and Law Image Service are concerned it is clear that neither company will bring the proceedings. So far as those two companies are concerned the requirements of s237(2)(a) are met. So far as Law Image Melbourne is concerned the position is otherwise. At the present moment the directors of that company are Mr Lakshman and his brother. There is no evidence that the company will not itself bring the proceedings. The directors have responsibility for the general management of the company and could instruct that proceedings be brought by the company. So far as the second defendant is concerned this concludes the matter and the application by the plaintiff to bring proceedings in the name of the second defendant should be dismissed. Is the plaintiff acting in good faith? 23 This sub-section means what it says and I am not certain it helps to explain it and thereby perhaps restrict it. Nevertheless the decision of this Court in Swansson v Pratt (2002) 42 ACSR 313 and Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534 determine that to fulfil this requirement the plaintiff should hold a genuine and honest belief that the proceedings are justified and have a reasonable prospect of success and that there is a basis for such belief. It needs also to be shown that the proposed proceedings are not sought to be brought for a collateral purpose. So far as the question of genuine belief is concerned, at the time the proceedings were commenced, the plaintiff quite honestly stated in cross-examination that he had no evidence on which to ground his complaints of breaches of fiduciary duty and statutory obligation, and said that he had only a suspicion, although he spoke of "hearsay" and some information from a former employee called David which he regarded as now supported by material which had come to light as a result of documents produced under subpoena. As no application was made to set aside any subpoena on the basis that it was no more than a fishing expedition I am of the view that the matter must be dealt with on the basis of the material available to the court and for that matter to the plaintiff at the time of the hearing before the court seeking leave. 24 The defendants say that the application cannot be made in good faith because the real purpose, at least so far as the third defendant is concerned, is to put pressure on that third defendant to sell his shares to the plaintiff. It is clear that there have been negotiations from December 2001 up to June and perhaps August 2002 as to a purchase of all the shares in Law Image and Law Image Service and I assume Law Image Melbourne. At one stage there were suggestions that Raj purchase the plaintiff's shares and at another stage there were negotiations for purchase of the shares held by Raj by the plaintiff. These negotiations did not result in any agreement. On 12 August 2002, the solicitors for Raj informed the Plaintiff that in view of the failure to come to some agreement on purchase and for other matters it was the intention of Raj to put the company into liquidation and if the plaintiff would not agree to this to apply to the court for an order for winding up. Lakshman says that it was a result of the threat contained in that letter and his view that it would not be in the interests of any party that the company be placed into liquidation, that he commenced these proceedings. Thus it is argued on his behalf that the action which has been taken is for the protection of the company and not for a collateral purpose. The point made is that if the company is being disadvantaged by actions of a director in breach of obligations to the company then in a case where it is clear the company will not bring those proceedings it is proper for a shareholder to do so. 25 There is one additional matter which I think is of significance here. That is that Lakshman does not seem to have any proper understanding of what is sought. He said he does not understand the difference between his having a cause of action against Raj and the companies having a cause of action against Raj. The following passage appears in cross-examination of Raj on page 28 of the transcript. Q. What's your understanding of what will happen in the event that today's application succeeds? A. That I will be representing the company and, of course, Shailesh Raj will still be there. However, all the major decisions of the company, for the betterment of the companies, will be undertaken by me and in regard to the day to day running management and moving to new premises. So I will be making all those decisions, if it is successful.

Q. That is why I asked you about today's application, did you understand I was asking about the application for leave to bring proceedings on behalf of the company? A. No. This is what it meant.

Q. Did you understand my question? A. You previously asked the same question.

Q. I asked what you understood would happen if today's application succeeded? A. Yes.

Q. You have given me an answer, but I want to make sure that when I asked you that question you understood that I was asking you about the application for leave to commence proceedings on behalf the company which is heard today? A. To represent the company.

Q. Yes? A. That is my understanding, yes. 26 I am satisfied that the plaintiff has an honest belief that Raj has not acted in the best interests of the company and has in fact acted contrary to its interests and that there is some basis for that belief. I am also satisfied that it is not sought to bring these proceedings for a collateral purpose, namely to assist any buy out claim. The passage of evidence I have set out supports this. It is easy to understand how a lay person would have difficulty in understanding the technicalities of a derivative action. The fact that Lakshman honestly thinks Raj and I think Sarita and Rajiv, have acted in ways which disadvantage the companies he seeks to represent, is, I think, sufficient justification taken with the other matters discussed to find good faith.

Is it in the best interests of the company that the proceedings be brought? 27 The evidence establishes that Law Image Service has lost about fifty percent of its business in the last few months. It is business generated from Messrs Phillips Fox, Messrs Blake Dawson Waldron, Messrs Clayton Utz and the GIO. Some of this business has gone to Confidential Imaging. The Phillips Fox work, according to Mr Hitchons, was moved because there was dissatisfaction with the work performed by Law Image Service. I think it possible to draw an inference that it is at least just as likely that the work went from Phillips Fox to Confidential Imaging because of the association of Raj with Mr Hitchons, particularly as there is some evidence that Raj appears to have been responsible for the dismissal of employees who were most experienced in copying work. It does not seem to me that the proceedings envisaged would harm the company or cause it to lose more work. In those circumstances if there is a reasonable chance of obtaining reasonable compensation for breach of fiduciary duty, then it would be in the interest of the companies to allow the proceedings to be brought. Is there a serious question to be tried? 28 So far as the fourth and fifth defendants are concerned I do not think that the plaintiff has established this as a question between them and Law Image or Law Image Service. It might have been a question between Law Image Melbourne as it is at least likely that it will be found that Raj contributed $13,000 to his sister for the purpose of the setting up of the competing Melbourne operation. The operations of Confidential Imaging in New South Wales were not commenced in Sydney until around about 15 May 2002, and I do not think the plaintiff has established some serious question to be tried on the basis of those funds or the help with the telephones being put towards the establishment of the business in Sydney. The evidence which goes to the Lanier purchase orders, while as I have said it might give rise to some claim in damages for breach of contract between Law Image Melbourne and Rajiv, does not connect Rajiv to any breach of duty by Raj as is claimed in the draft statement of claim. In any event it seems to me that the claims against the fourth and fifth defendant are so weak that they should not be allowed to go forward as it would not be in the interests of the companies to bring them. In some ways it would seem that if there were any possible claim for assistance, then the party participating in the assistance was one of the Confidential companies rather than the individuals and the benefit obtained from Raj went to those companies which are not defendants. 29 As against Raj I consider the position different. I accept that he did not have to give evidence. That was his right. The court is, however, bound to note the fact that Raj was present in court throughout the hearing. He was aware of the allegations being made about assistance to his sister's companies by way of funding, opening of telephone accounts and bank accounts and dealings with Mr Hitchons and he chose to give no evidence. In the absence of denial I consider it is easier for the court to draw an inference of a serious question to be tried as against him. There can be no doubt that he was in a position of conflict if he has assisted his sister and Confidential Imaging in establishing and operating businesses which compete with the Law Image business. If he received profits as a result of a position of conflict, he is liable to account for them and if the companies suffered loss as a result of the breach of duty he is liable for such loss: Breen v Williams (1996) 186 CLR 71 at 113; Pilmer v The Duke Group Ltd (in liq) (2001) 77 ALJR 1067 at 1083. The evidence referred to in paragraph 15 of this judgment establishes I think that there is a serious question to be tried as against Raj.

Result 30 No oppression claim is made against the fourth and fifth defendants. It follows that the application for leave to bring proceedings in the names of the first, second and sixth defendants against them should be refused and the proceedings against them dismissed. As I have said the application of Lakshman to bring proceedings on behalf of the second defendant will be refused and dismissed. Leave will be granted to bring proceedings on behalf of Law Image and Law Image Service against Raj. As oppression proceedings are brought in the same action it will be sufficient if those companies remain named as defendants in accordance with the position determined by the cases to which I have referred. As the proposed statement of claim will require amendment as a result of this judgment the plaintiff should be given leave to and directed to file a statement of claim within fourteen days. Proposed Orders 31 Proceedings against the fourth and fifth defendants be dismissed with costs. 32 Give leave to the plaintiff to bring proceedings on behalf of the first and sixth defendants against the third defendant. 33 Application for leave for the plaintiff to bring proceedings on behalf of the second defendant against the third defendant be dismissed. 34 Direct that the action proceed on pleadings. 35 Direct the plaintiff to file and serve a statement of claim within fourteen days.

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