Mahmood v Abdul Wahid and Sons Pty Ltd, in the matter of Abdul Wahid and Sons Pty Ltd

Federal Court of Australia|2021-05-20|Before: Mr P, White J

Subject to these orders, the Plaintiff has leave to bring proceedings on behalf, and in the name, of Abdul Wahid and Sons Pty Ltd (AWS) against Mohammad Arif Rana, Asmat Pty Ltd and Farah Saleem in order to make the claims in the form or substantially in the form or to the same effect as the claims in the document entitled "Proposed Statement of Claim" being Annexure JDR22 to the affidavit of John Douglas Radbone made on 10 March 2021.
Subject to any further order of the Court, the Plaintiff: (a) is to indemnify AWS in respect of the costs it incurs in the proceedings; (b) is to meet any costs ordered against AWS; and (c) may not seek contribution or indemnity from AWS in respect of any costs for which there is a joint liability.
Nothing in Order (2) is to prevent the Plaintiff or AWS seeking an order for costs in respect of the claims.
There be liberty to apply. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

WHITE J: 1 This is a judgment on an application for a grant of leave pursuant to s 237 of the Corporations Act 2001 (Cth) to bring proceedings in the name of Abdul Wahid and Sons Pty Ltd (AWS). 2 The application is made by the plaintiff, Zahid Mahmood in Action SAD122/2020. The defendants to that Action are AWS and Mohammad Arif Rana. Mr Mahmood and Mr Rana are brothers. 3 The dispute between the two brothers arises out of the conduct of service station businesses in New South Wales from 1996. Those businesses were conducted, at least initially, by AWS. Three brothers (Mr Mahmood, Mr Rana and a third brother, Zieb) managed the businesses. At some stage, Zieb ceased active involvement in the businesses. 4 In 2003, Mr Mahmood moved to Malaysia to take up university teaching and thereafter ceased day to day hands on involvement in the conduct of the businesses. Mr Rana continued the day to day conduct of the businesses. With the exception of relatively short periods, Mr Mahmood has had employment in various overseas universities since 2003. He claims, however, that, between 2003 and August 2019, he continued to have involvement (sometimes by remote means and sometimes on his returns to Australia) in the management of AWS. 5 In 2019, a dispute arose between Mr Mahmood and Mr Rana as to whether the former had any continuing entitlement to income from the businesses or an interest in AWS. Mr Mahmood alleges that, since at least September 2019, he has been excluded from participation in the management of AWS. He also alleges that in April 2020, Mr Rana wrongfully lodged a Change of Company Details document with the Australian Securities and Investments Commission (ASIC) by which it was asserted that he had ceased to be a director of AWS as and from 1 January 2009. Mr Mahmood alleges that this document was lodged without reference to him and without any proper authorisation. 6 In relation to the businesses conducted by AWS, the allegations by Mr Mahmood in Action SAD122/2020 include: (a) the first business which AWS acquired was a BP service station at Emu Plains; (b) in about 2000, Mr Rana without Mr Mahmood's knowledge entered into a petroleum franchise agreement with Caltex Australia Petroleum Pty Ltd (Caltex) in respect of a service station at Dural. In about 2010, Mr Rana transferred that franchise to AWS; (c) on 22 September 2006, AWS purchased a property at Parklea which it later developed into a service station. AWS made this purchase using its own funds and funds borrowed from ANZ Banking Group Ltd (ANZ) which were secured by mortgages over the Emu Plains and Parklea properties, a mortgage debenture over the assets of AWS, and directors' guarantees; (d) AWS was both the legal and beneficial owner of the Parklea property. I interpolate here that in the Defence, Mr Rana alleges that AWS purchased the Parklea property as trustee for the Rana Family Trust; (e) on 10 April 2019, Mr Rana transferred the Parklea property to Asmat Pty Ltd for no consideration. Mr Mahmood alleges that this transfer was effected by Mr Rana's use of a forged power of attorney and was made with a view to depriving AWS of beneficial ownership of the Parklea property. Again, I interpolate that, in the Defence, AWS and Mr Rana allege that AWS had retired as trustee of the Rana Family Trust on 5 February 2019, that Asmat had been appointed as trustee in its place and that the legal title to the Parklea property was transferred from AWS to Asmat on or about 10 April 2019 "in order to perfect Asmat's legal title to the assets of the Rana Family Trust"; (f) the Emu Plains property was sold on 18 October 2020 and the sale proceeds of $2.2 million were used to reduce the debt of AWS in respect of the Parklea property; (g) on or about 28 January 2011, Mr Rana, using funds of AWS, purchased in his own name a residential property at Kenthurst and subsequently undertook improvements to that property; (h) on or about 15 September 2014, Mr Rana transferred a 50% interest in the Kenthurst property to his wife, Farah Saleem; and (i) on or about 26 November 2012, AWS had the opportunity to purchase land at South Windsor for the purpose of developing a service centre, petrol station, McDonalds and KFC but it did not take up that opportunity. Instead, Mr Rana arranged for another company, Dallat Pty Ltd, to purchase the South Windsor property, albeit using funds of AWS. 7 Relevantly for the purposes of the application under s 237, Mr Mahmood alleges that Mr Rana has conducted the affairs of AWS in a manner which is contrary to the interests of the members of the company as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, him in his capacity as a member and director of AWS. That allegation is particularised in a number ways which it is not necessary presently to detail. Mr Mahmood also alleges breaches of the duties owed to AWS by Mr Rana pursuant to ss 180, 181, 182 and 183 of the Corporations Act (the Directors' Duties), as well as breaches of fiduciary duty. He particularises these allegations by asserting that Mr Rana: (a) transferred the Parklea property to Asmat for no consideration on 10 April 2019 using a forged power of attorney purportedly given by him (Mr Mahmood) on 8 December 2008; (b) alternatively, applied the money and income of AWS to the purchase and improvement of the Parklea property without retaining an interest in the property for AWS; (c) applied the money and property of AWS to the acquisition of Kenthurst; and (d) failed to take up the opportunity for AWS to purchase the South Windsor property and instead applied the money and property of AWS to facilitate the purchase of that property by Dallat. 8 Mr Mahmood wishes to commence proceedings in the name of AWS against three defendants: Mr Rana, Asmat and Farah Saleem. His proposed Statement of Claim, in summary form, indicates that he intends that AWS will allege in those proceedings that: (a) Mr Rana breached fiduciary duties and the Directors' Duties by causing ownership of the Parklea property to be transferred to Asmat; (b) Asmat had taken the transfer with knowledge of Mr Rana's breaches of duty and was accordingly involved in those breaches; (c) Asmat holds the Parklea property on its own account or as trustee of the Rana Family Trust on either a resulting trust or a constructive trust and is liable to restore the Parklea property to AWS or to pay equitable damages; (d) AWS is beneficially entitled to the Parklea property; (e) prior to 15 September 2014, Mr Rana held the Kenthurst property on a resulting trust or a constructive trust for the benefit of AWS; (f) Farah Saleem (to whom Mr Rana transferred a 50% interest in the Kenthurst property) is liable to account for that interest as either a volunteer or as a knowing recipient of Mr Rana's breach of fiduciary duty to AWS in respect of the Kenthurst property; (g) by reason of Mr Rana's use of the funds of AWS to acquire the South Windsor property, he breached the fiduciary duties he owed to AWS and the Directors' Duties; and (h) Mr Rana holds his interest in Dallat Pty Ltd on a resulting trust or a constructive trust for the benefit of AWS. 9 Mr Mahmood proposes that AWS will claim, as against Mr Rana, the following relief: 1. A declaration that the First Defendant has breached fiduciary duties owed at law to the Company and the Second Plaintiff. 2. A declaration that First Defendant has breached his statutory duties to the Company pursuant to sections 180-183 of the Corporations Act. 3. A declaration that the First Defendant holds his interest in Asmat Pty Ltd and Parklea on trust for the Company and/or the Second Plaintiff. 4. A declaration that the First Defendant holds his interest in Kenthurst on trust for the Company and/or the Second Plaintiff. 5. A declaration that the First Defendant holds his interest in Dallat Pty Ltd and the property at 741 George Street South Windsor NSW (CT 12/1184975) ("South Windsor") on trust for the Company and/or the Second Plaintiff. 6. An order that the First Defendant account to the Company for monies paid by the Company in respect of the purchase of the Kenthurst Property and works constructed on that land. 7. An order that the First Defendant account to the Company for monies paid by the Company in respect of the purchase of the South Windsor and works constructed on that land. 8. Orders to give effect to such declarations. 9. An order for equitable compensation or damages. 10 It is not necessary for the purposes of this judgment to set out in detail the relief which Mr Mahmood proposes that AWS would claim against Asmat and against Farah Saleem. It is sufficient to say that Mr Mahmood proposes seeking relief against them on the basis that they were accessories to Mr Rana's breaches of the Directors' Duties and, or in the alternative, knowing recipients of benefits from his breaches.

Statutory provisions 11 Section 236 of the Corporation Act provides for the bringing of proceedings on behalf of a company (relevantly) by a member or director of a company: 236 Bringing, or intervening in, proceedings on behalf of a company (1) A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if: (a) the person is: (i) a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or (ii) an officer or former officer of the company; and (b) the person is acting with leave granted under section 237. (2) Proceedings brought on behalf of a company must be brought in the company's name. (3) The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished. 12 Section 237 concerns the Court's power to grant leave for the purposes of s 236(1)(b): Applying for and granting leave (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. Note: Related party is defined in section 228. 13 In the present case, it was not in issue that Mr Mahmood has the standing required by s 236(1) and that the criteria contained in s 237(2)(a), (b), (d) and (e) are satisfied. The opposition of the defendants (AWS and Mr Rana) is based on s 237(2)(c) as they contend that Mr Mahmood has not demonstrated that the grant of leave to bring the derivative proceedings would be in the best interests of AWS.

Relevant principles 14 The "best interests of the company" criterion has been discussed in a number of the authorities. It is established that the phrase "best interests" directs attention to the company's separate and independent welfare: Charlton v Baber [2003] NSWSC 745, (2003) 47 ACSR 31 at [52]; Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442, (2005) 53 ACSR 732 at [46]; Huang v Wang [2016] NSWCA 164; (2016) 114 ACSR 586 at [38]. 15 The requirement that the derivative action be in the best interests of the company requires consideration of two aspects: first, whether it is in the best interests of the company that the action be brought and, secondly, whether it is in the best interests of the company that it be brought by the applicant: Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432 at [57]; Hislop v Paltar Petroleum (No 3) [2017] FCA 1253 at [17]-[18]. 16 In Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 at [55], Palmer J described the requirement that the derivative action be in the best interests of the company (as opposed to being possibly, or appearing to be, or even likely to be, in the best interests of the company) as imposing a relatively high threshold. It is for the applicant for leave to establish, on the balance of probability, a fact, namely, that it is in the best interests of the company that leave be granted: Swansson at [56]-[60]; Brightwell v RFB Holdings Pty Ltd (in liq) [2003] NSWSC 7, (2003) 171 FLR 464. This requires consideration of all relevant circumstances, including: the prospects of success of the actions; the likely costs; the likely recovery if the action is successful; the likely consequences for the company if it is not successful; the nature of any indemnity which the applicant has offered to the company if the action is brought and the likelihood that the company will be able to recover under that indemnity; the resources which the company will be required to devote to the action compared with the resources which it has available, together with the effect which the action may have on other aspects of its business; and whether some other remedy is available to the applicant so as to make the proposed action unnecessary from its point of view. See Swansson at [56]; Robash v Gladstone at [57].

The defendants' submissions 17 In relation to these matters, the defendants submitted that the evidence before the Court presently permits only an "extremely tentative" assessment of the prospects of success of the proposed action, adopting the term used by Edelman J in Mali, in the matter of Head Quarters (WA) Pty Ltd v Head Quarters (WA) Pty Ltd (as trustee for the Three Flights Up Unit Trust) [2016] FCA 171 at [13]. In support of this submission, the defendants referred to the letter of their solicitor dated 15 March 2021 containing a critique of certain paragraphs in the proposed Statement of Claim. Some of the matters raised by the solicitor concerned, on my understanding, the form of the proposed pleadings rather than matters of underlying principle or substance. That is to say, some of the matters were in the nature of "pleading points". I do not regard those matters as impairing, in any significant way, the Court's ability to make an assessment of the arguability of the proposed claims or as indicating that the proposed claims are not reasonably arguable. 18 A principal focus of the submissions of AWS and Mr Rana was the potential prejudice to AWS arising from the liability for costs it would incur in derivative proceedings. They noted that, ordinarily, the provision of a meaningful indemnity to the company in respect of costs is an important matter bearing upon the assessment of whether it is in the best interests of the company for leave to be granted. 19 AWS and Mr Rana also noted that Mr Mahmood has not made any offer to pay the costs of AWS, any offer to indemnify AWS against any adverse costs order, and has not agreed not to claim contribution from AWS in respect of any adverse costs order made jointly against them: cf Fiduciary Ltd v Morningstar Research at [51]; Mio Art Pty Ltd v Macequest Pty Ltd [2013] QSC 211, (2013) 95 ACSR 583 at [239]. 20 AWS and Mr Rana did not make any particular submissions about the other matters, identified above, as bearing on the best interests of AWS.

Consideration 21 In contending that the Court should assess that AWS has arguable prospects of success, counsel for Mr Mahmood relied upon the substantial affidavit by Mr Mahmood filed with the Originating Application on 25 August 2020. In that affidavit, Mr Mahmood deposed, in some detail, to the chronology of events on which he relies for his claim in Action SAD122/2020. In particular, he deposed to circumstances which suggest that Mr Rana or others have made use of a power of attorney purportedly granted by Mr Mahmood. However, Mr Mahmood denies ever executing the power of attorney and notes that it is shown to have been executed on a date when he was not in Australia. Mr Mahmood also deposed to the purchase of the Parklea property and says that, at the time of its purchase, he had no knowledge of anything called the "Rana Family Trust" or any other trust concerning the businesses conducted by AWS; deposed that there was no reference by Mr Rana to the Rana Family Trust over the ensuing years; deposed that he has never seen, nor been provided with, documents showing that AWS purchased the Parklea property as trustee; annexed various documents concerning the ownership and use of the Parklea property which do not contain any reference to AWS acting as trustee of a trust; deposed to other businesses conducted by AWS without there being any reference to it doing so as trustee of a trust; and deposed to a number of other transactions in which Mr Rana engaged and which, at least prima facie, raise questions about the use of the funds of AWS. 22 It is appropriate in assessing the prospects of success to take into account that, although Mr Rana has not been required to file any answering affidavits, or to explain the circumstances to which Mr Mahmood has deposed, he has not yet sought to respond to these matters in affidavit form. Mr Rana's account of the various transactions impugned by Mr Mahmood can be discerned only from the respondents' filed Defence. Apart from denials of the allegations of Mr Mahmood, their principal defence seems to be in the assertion that AWS acted in relation to the impugned transactions as trustee of the Rana Family Trust. 23 In my view, the matters to which Mr Mahmood has deposed indicate an arguable basis for a claim that AWS was not acting as trustee of the Rana Family Trust, that there has been diversion of funds and assets away from AWS, and that Mr Rana may have been the instigator of, or involved in, those activities. They indicate that the claims which Mr Mahmood wishes to bring have an apparent reasonable basis. 24 In the circumstances, I consider that Mr Mahmood has demonstrated adequately that AWS has prospects of success in the litigation sufficient to indicate that it would be in the best interests of AWS for him to be granted leave to commence the derivative action. 25 However, the defendants focus on the lack of a costs indemnity was appropriate. The authorities bear out their submission that ordinarily a meaningful indemnity should be provided - see Cooper v Myrtace Consulting Pty Ltd [2014] FCA 480 at [29]; Redenbach v Legal Practice Management Group Pty Ltd [2018] NSWSC 527, (2018) 125 ACSR 513 at [68]; Dinomyte Pty Ltd v Australian Securities and Investment Commission [2019] FCA 1989 at [29]. The position was summarised by Davies J in Cooper v Myrtace Consulting at [29]: Another of the issues for the Court to consider in determining whether the proposed action is in the best interests of the company is whether the company would be prejudiced by being exposed to the costs and expenses of litigation and the risk of an adverse costs order. 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 the company arising out of the proceeding. The case law emphasises the importance of such an indemnity as a means of addressing the risk of prejudice to the company from the commencement of the proceedings … (Citations omitted) 26 Neither Mr Mahmood's affidavits nor his written submissions addressed the provision of an indemnity to AWS in respect of its costs. The oral submissions of counsel for Mr Mahmood had a dismissive tone on this issue. Counsel seemed reluctant to meet the issue head on, implying that the issue does not arise because AWS is "a shell [and] no longer trading". He also noted that the only assets of AWS are the debts said to be owed to it by each of Mr Mahmood and Mr Rana (or in the case of the latter, an entity controlled by him). Counsel also submitted that the reason for the derivative action is to enable appropriate orders to be made against Asmat and Farah Saleem in the light of the transfer of assets of AWS to them or the acquisition by them of assets derived from the funds of AWS. The implication in the submissions seemed to be that AWS will not risk any assets in the proceeding and so that the absence of an indemnity is not material. 27 The failure of Mr Mahmood to offer an indemnity with respect to AWS's costs is not decisive against the grant of leave. As was noted by Austin J in Fiduciary Ltd v Morningstar Research at [51], "there is a balance to be struck between the prejudice that the company will suffer if claims are pressed unsuccessfully on its behalf and there is an adverse costs orders, and the advantage that it will gain, indirectly for the benefit of its shareholders, if the claims are successful". In striking that balance in the present case, the Court can itself make orders to the effect that, subject to further order of the Court when the success or otherwise of AWS in the proceedings is known, Mr Mahmood is to indemnify AWS in respect of the costs it incurs in the pursuit of the proceedings, is to be responsible for meeting any costs ordered against AWS and may not seek contribution or indemnity from AWS in respect of any costs for which there is a joint liability. Alternatively, the Court could make the grant of leave conditional upon Mr Mahmood's acceptance of those conditions and direct that his commencement of proceedings in the name of AWS will be taken to evidence that acceptance. 28 Of these alternatives, I consider that the former alternative is preferable. 29 As already noted, AWS and Mr Rana did not raise any other particular matters bearing on the "best interests" criterion. I am satisfied in any event that Mr Mahmood is an appropriate person to bring the action on behalf of AWS.

Conclusion 30 In summary, for the reasons given above and subject to the conditions concerning the costs of AWS, I am satisfied that it is in the interests of AWS for leave to be granted to Mr Mahmood to commence proceedings in its name. I make the following orders: (a) Subject to these orders, the plaintiff has leave to bring proceedings on behalf, and in the name, of Abdul Wahid and Sons Pty Ltd against Mohammad Arif Rana, Asmat Pty Ltd and Farah Saleem in order to make the claims in the form or substantially in the form or to the same effect as the claims in the document entitled "Proposed Statement of Claim" being Annexure JDR22 to the affidavit of John Douglas Radbone made on 10 March 2021. (b) Subject to any further order of the Court, the plaintiff: (i) is to indemnify AWS in respect of the costs it incurs in the proceedings; (ii) is to meet any costs ordered against AWS; and (iii) may not seek contribution or indemnity from AWS in respect of any costs for which there is a joint liability. (c) Nothing in Order (b) is to prevent the plaintiff or AWS seeking an order for costs in respect of the claims. (d) There be liberty to apply. 31 I will hear from the parties with respect to the costs of the application for leave to bring a derivative action. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice White.

Corporations Act 2001(Cth)ss 180-183, 236, 237

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