Matyear v Prismex Technologies Pty Ltd [2008] NSWSC 677 | Case summary

4546/06 JOHN MATYEAR & ANOR V PRISMEX TECHNOLOGIES PTY LTD & ORS JUDGMENT (Ex tempore; revised on 2 July 2008) 1 HIS HONOUR: By an amended notice of motion (interlocutory process) filed in court today, the plaintiffs seek an order under s.237 of the Corporations Act, granting them leave to bring proceedings on behalf of the first defendant (Prismex) against Mr John Ashall (the third defendant), Colin Taggert and X-Position Pty Ltd, by filing a proposed amended statement of claim which is annexed to the notice of motion. The amended notice of motion seeks leave, consequentially, to join Mr Taggert and X-Position as the fifth and sixth defendants, as they are not presently parties to the proceeding. 2 At present the statement of claim seeks the winding up of Prismex on grounds stated in s 461(1) of the Corporations Act (including the just and equitable ground), and relief under the "oppression" provisions of Part 2F.1. The amended statement of claim will add further prayers for relief and pleadings to the existing statement of claim, to assert that Mr Taggert and Mr Ashall, as directors of Prismex, are in breach of their general law fiduciary duties and statutory duties as directors and are accordingly liable to pay equitable compensation to Prismex, and that X-Position has had the benefit of those breaches of duty and should be made accountable accordingly or be declared to be a constructive trustee of those benefits. 3 The first plaintiff, Mr Matyear, and Mr Ashall and Mr Taggert are the directors of Prismex. The second plaintiff, Metage, holds a substantial quantity of shares in Prismex. Metage is a company associated with Mr Matyear. Mr and Mrs Ashall and the second defendant, Mendela Pty Ltd (a company associated with Mr Taggert), also hold substantial quantities of shares in Prismex. There are two other shareholders, who are parties to the proceeding. 4 Prismex was formed in 1995. At the same time a company called Interium was formed. Since December 1995 the shareholdings of Prismex and Interium have been aligned - that is, they have the same shareholders who have the same proportionate interests. Prismex is the owner of Australian letters patent for a double sided illumination display system ("the Prismex Patent"). The only activity of Prismex since its incorporation has been the licensing of the Prismex Patent. Interium held an exclusive licence from Prismex to employ the patent for the lifetime of the patent, and it did so by trading until about May 2006. The licence was apparently granted orally at a time when (as I have said) the shareholdings of Prismex and Interium were aligned. 5 In mid-May 2006 Interium was placed in voluntary administration, after various disputes had emerged amongst its directors. Solicitors purporting to act for Prismex informed the administrator, by letter dated 8 June 2006, that if Interium did not trade on, Prismex would immediately terminate the licence and any purchaser interested in continuing to use the patent would have to seek permission from Prismex. Mr Matyear complains that this letter was written without notice to him although he was at all relevant times a director of Prismex. 6 On 30 June 2006 Prismex was placed into creditors voluntary liquidation. Thereafter the liquidator of Interium conducted an auction for the assets and undertaking of Interium, and Messrs. Taggert and Ashall made an offer. There was also an offer made on behalf of the company then called Eleven Lighting Pty Ltd, subsequently known as Keller Industries Pty Ltd, a company that was in competition with Interium. The offer by Keller Industries was successful. The agreement between the liquidator and Keller Industries purported to authorise the latter to enter into possession of Interium's premises "under licence" on the next business day. Prismex and X-Position brought proceedings in the Federal Court against Keller Industries, alleging successfully that the licence granted by Prismex to Interium was revocable and could not be effectively assigned by the liquidator. 7 There is an allegation on the part of the plaintiffs that after the liquidator's sale, Messrs Taggert and Ashall unlawfully entered the premises occupied by Interium (in liquidation) and removed certain property and destroyed other property. It is unnecessary to pursue that allegation further here. 8 On 5 July 2006 solicitors purporting to act for Messrs Taggert and Ashall and Prismex wrote to the liquidator's solicitors asserting that the licence to Interium terminated immediately when the company went into liquidation. Mr Matyear complains that the letter was written without any notice to him notwithstanding that he was a director of Prismex at all relevant times. Messrs Taggert and Ashall also purported to hold a directors' meeting of Prismex on 5 July 2006, which resolved to licence the Prismex patent exclusively to X-Position. X-Position was a company established by Mr Taggert on the same day, evidently for the purpose of exploiting the Prismex Patent. Mr Matyear complains that notice of that meeting was not given to him and he was not invited to attend. 9 On 14 August 2006 Mr Matyear wrote to Mr Taggert and Mr Ashall about what he called "a number of serious matters", asking a series of questions including questions about when certain meetings of directors of Prismex were held and what notice was given of them. Those questions related to decisions made on behalf of Prismex about such matters as termination of the licence to Interium, the granting of a new licence to X-Position, and the commencement of the Federal Court proceedings against Keller Industries. He asked for an explanation of why he was not being kept "in the loop" with what was happening with Prismex. 10 On 18 August 2006 Mr Taggert purported to reply to that letter, using the letterhead of Prismex. In his letter Mr Taggert asserted that he and Mr Ashall were two of the three directors of Prismex and held the majority of the issued shares, and then he said "we have effective ownership and control of Prismex Technologies". He proceeded to say that in the circumstances "we" (that is Mr Ashall and himself) had taken steps which they believed to be in the best interests of Prismex. 11 A meeting of directors of Prismex was convened for 31 August 2006, to confirm termination of the licence to Interium, to confirm that Prismex had not agreed to an assignment of the licence, to ratify the decision of Messrs Taggert and Ashall to appoint a new licensee for the Prismex Patent, and to ratify their decision to commence the Federal Court proceedings against Keller Industries and to retain solicitors. Notice of the meeting was given to Mr Matyear. Mr Matyear commenced the present proceeding by originating process filed on 30 August 2006, and on that day he wrote to Mr Taggert and Mr Ashall seeking adjournment of the directors' meeting as he could not personally attend, and alleging that they were acting in breach of their duties as directors. In the end the meeting went ahead and Mr Matyear attended by telephone, while alleging that the meeting had been irregularly convened. There are minutes of that meeting recording that the proposed resolutions were carried by Mr Taggert and Mr Ashall over the objection of Mr Matyear. The minutes say that a formal licence agreement would be entered into between Prismex and X-Position, "for a valuable consideration", and that no other licensees had been considered. 12 Another meeting of the directors of Prismex was convened for 24 November 2006, for the purpose of approving a proposed licence agreement with X-Position, a draft of which was circulated. It provided for a royalty of 2% of net sales revenue and no cash premium. The meeting was postponed and on 24 November 2006 Mr Matyear sent an e-mail to Mr Taggert proposing that the directors consider a proposal for a licence agreement with Interium, apparently at that stage a new company of the same name formed by Keller Industries, for initial payment of $5,000 in cash and a 5% royalty of the net sale price of signs incorporating the Prismex Patent. On 27 November 2006 Keller Industries made a higher offer with the cash premium of $7,000 and a 5% royalty. 13 Eventually the directors met to consider these matters on 7 December 2006. Mr Taggert proposed, in view of the new offers, that the proposed licence agreement with X-Position not be executed at that stage, and that further information be requested, and an independent valuation of the licence be obtained. A motion that an independent valuation of the licence be obtained was carried unanimously. 14 In fact it appears that no such valuation of the licence has been obtained to date. On 19 January 2007 Mr Matyear wrote to Mr Taggert and Mr Ashall commenting on that fact and on 30 January 2007 Mr Taggert wrote to Mr Matyear responding to that letter and saying that Mr Matyear had a copy of the proposed licence agreement with X-Position which had been discussed at the recent directors' meeting and that "no inquiries were made other than with X-Position". 15 Some other matters are identified in an affidavit filed on behalf of the defendants made by Mr Taggert on 22 November 2007, part of which was tendered by the plaintiffs on the present application. Mr Taggert explained the reasoning that led him to form X-Position and to his decision with Mr Ashall to grant it a licence over the Prismex Patent. He said that at the time of setting up X-Position, neither he nor Mr Ashall had any clear idea about what royalty would be appropriate to exploit the licence, given the uncertainty (pending the outcome of the Federal Court case) of the right of Prismex to grant a new licence. He said they would work out an appropriate commercial rate later, and they considered it was imperative that manufacturing begin as soon as possible to preserve the continuity of product and goodwill in the Prismex panels. He and Mr Ashall discussed what would be a reasonable commercial licence fee, and the range discussed was from 2% to 4%. He said he and Mr Ashall did not consult Mr Matyear about their decision to terminate the licence to Interium and to grant a new licence to X-Position, because they believed he would not act in the best interests of Prismex, as he was working with Keller Industries against Prismex and had been instrumental in having Interium wound up. 16 Mr Taggert explained that as at the date of his affidavit he had not yet obtained a valuation of the Prismex Patent. He said he proposed to do so but his solicitor had told him that a candidate to perform the valuation had estimated a fee range between $12,500 and $20,000, and that because of the substantial costs burden of the proceedings in the Federal Court and the present proceedings, it had been necessary to delay the task. 17 Mr Taggert gave evidence that X-Position was continuing to carry on the business of making edge-light signage and digital displays, employing a staff of 16 and he said the company had purchased plant and equipment to the value of between $150,000 and $200,000. He said that up until 30 June 2007, X-Position had made sales of double-sided lighting display panel products manufactured in accordance with the Prismex Patent of approximately $1,521,000, which (he said) resulted in licence fees at 2% payable to Prismex of $30,424.73. However, he said that while X-Position held funds representing those licence fees, the fees had yet to be paid for Prismex Technologies. 18 This somewhat fragmentary evidence seems to indicate that when Interium moved into a creditors voluntary winding up, steps were taken which had the effect that while its business was sold to Keller Industries, Mr Taggert and Mr Ashall caused a licence agreement to be granted to the company formed by Mr Taggert, X-Position. It is not appropriate to make any final findings of fact at this stage, but the evidence relied upon in the present application provides support for the view that there is a serious question to be tried as to whether the benefit of the licence of the patent was improperly diverted by Mr Ashall and Mr Taggert from Prismex to a company controlled by Mr Taggert alone, namely, X-Position. 19 The evidence to which I have referred also indicates that X-Position has used the patent for manufacturing and sales which are substantial and that it holds royalties that it has not yet paid to Prismex. The evidence further indicates that Mr Matyear caused an alternative offer of a licence to be made to the directors of Prismex at a higher royalty rate and for a lump sum payment, which Mr Ashall and Mr Taggert caused to be rejected by the company in favour of the licence granted to X-Position at a lower royalty rate. Again, it is not appropriate to make final findings about these matters, but they suggest there is a serious question to be tried as to a claim on behalf of Prismex that Mr Ashall and Mr Taggert have acted in breach of fiduciary duties and that X-Position has benefited from those breaches in circumstances which might attract the doctrine in Barnes v Addy (1874) LR 9 Ch App 244. 20 In those circumstances the plaintiffs seek an order for leave to constitute a derivative action under s 237(2). Section 237(2) sets out five criteria to be satisfied. If those criteria are met then the court is required to make an order granting leave. In this case the respondents to the application have put in issue only two of those five criteria, namely: · whether, in terms of s 237(2)(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 · whether, under s 237(2)(c), it is in the best interests of the company for the applicant to be granted leave. 21 As to the first of these matters, it is relevant that, as I have mentioned, on 18 August 2006 Mr Taggert asserted in his letter to Mr Matyear, written on Prismex letterhead, that he and Mr Ashall had effective ownership and control of Prismex. On 12 March 2008 the solicitor for the plaintiffs wrote to the proper officer of Prismex Technologies setting out a proposal to assert the derivative action now before the court. He requested that if it was proposed that Prismex would itself bring such proceedings he be informed immediately, and said that if he did not hear to the contrary by 14 March 2008, the plaintiffs would assume that such proceedings would not be brought by the company. On 14 March 2008, solicitors purporting to act for Prismex responded saying that their client did not consider that the actions of Messrs Taggert and Ashall amounted to breach of their directors' duties, and accordingly it did not propose to bring the proceedings that had been described. 22 Notwithstanding the clear evidence that those in control of the company at the present time appear to have determined, and instructed solicitors to inform their opponents, that the company will not bring the proposed proceedings, counsel for the respondents to the application submitted that the court should be satisfied that it is probable that the company will not itself bring the proceedings. Reliance was placed on a decision of Mullins J in Talisman Technologies Inc v The Queensland Electronic Switching Pty Limited [2001] QSC 324. In that case there were two consolidated proceedings. In one of them, the primary relief being pursued was the winding up of a joint venture company. In the other, the primary relief sought was specific performance of the joint venture agreement. Mullins J noted (at [19]) that there was a question of timing in determining whether it was probable that the joint venture company would not itself bring proceedings. Until the disputes among the shareholders were determined, the joint venture company was not in a position itself to endeavour to pursue claims that may accrue to it. In other words, the court's view in that case was that the resolution of the dispute amongst the shareholders might put the company in the position that it could pursue the proceedings that were sought to be brought by derivative action, but it was premature to make that assessment. 23 In the present case, correspondence on behalf of the plaintiffs and the proposed amended statement of claim both describe the winding up of Prismex as the primary relief the plaintiffs will seek in the proceedings. It appears that the plaintiffs regard the other relief they seek, on the grounds of oppression and by way of pursuing the derivative action, as not the primary forms of relief. Counsel for the respondents submitted that in those circumstances, there is every prospect that a liquidator, if one is appointed, might pursue the action that the plaintiffs wish to have the company pursue derivatively. That being so, counsel submitted, the court is not presently in a position to conclude that it is probable that the company would not itself sue. 24 In my view the present case is factually distinguishable from the Talisman Technologies case. As I have said, that was a case where her Honour formed the view that the company was not in a position to pursue claims until the shareholders' disputes under the joint venture agreement were resolved. There is no similar constraint here. Moreover, in the present case there is, as I have said, clear evidence that those presently in control of the company will not allow the proposed derivative claims to be asserted by the company. What might happen, if at the final hearing the court decides to appoint a liquidator, is really a matter for speculation, given that, though the plaintiff might seek winding up as its primary relief, the court will have a discretion to award relief of other kinds; and given also that the evidence at the hearing may well put a complexion on the appropriate form of relief which cannot at this stage be known. 25 In addition to that degree of speculation, there is uncertainty as to whether, if a liquidator is appointed, the liquidator would choose to decline to pursue the proposed proceedings, a question that would presumably depend, in part, upon whether funds were available to the liquidator for that purpose. In my view it cannot have been the intention of the drafters of Part 2F.1A to require the court to speculate about what might happen in future, dependent upon the outcome of the litigation, in circumstances where there is clear evidence of present refusal of those controlling the company to allow it to sue. In my view the evidence establishes that s 237(2)(a) is satisfied. 26 As to the best interests of the company under s 237(2)(c), the argument was put that there had been considerable delay on the part of the plaintiffs in formulating derivative claims. A chronology was provided which shows that the statement of claim was filed on 30 August 2006 and the intention to bring derivative claims was foreshadowed only on 14 March 2008. There is evidence by the plaintiff's solicitor to the effect that the intention to make derivative claims was pursued after advice was taken from senior counsel that such claim should be made. 27 The contention made on behalf of the respondents was that this degree of delay had the consequence that it was in the best interests of the company to deny the application for leave, because the shareholder dispute which was at the heart of the proceedings was otherwise ready to be heard and the grant of leave would substantially delay the resolution of that dispute. In my view that submission should not be accepted. While I accept that the grant of leave to bring derivative claims will have the consequence that Mr Ashall, Mr Taggert and X-Position will need to consider their positions and perhaps seek to file additional evidence, nevertheless, the basic factual substratum of the case is unchanged by granting the plaintiffs' permission to make derivative claims on behalf of the company in addition to claims for winding up on the just and equitable ground and for oppression. Hassall v Speedy Gantry Hire Pty Ltd [2001] QSC 327, relied upon by the respondents, is distinguishable on the facts because in that case the proposal before the court was to institute a separate proceeding based on essentially the same facts as were the foundation of the existing proceeding between the shareholders and directors, to which all relevant parties had already been joined. 28 The only substantial additional factual component that will be let in by granting leave, in my view, is that it will be necessary for evidence to be adduced as to the nature of the benefits conferred upon X-Position, and whether they extend to X-Position's whole profits or whether the claim can be asserted in relation to any of those profits. That will be a significant evidentiary matter, but not so significant as to change the nature of the case or produce such delay as to demonstrate that the best interests of the company will not be served by allowing the claims to be made. On the contrary, I am satisfied that in the present circumstances it will be in the best interests of the company to permit claims to be made which relate to the protection of the company's intellectual property and recovery or potential recovery of assets for the benefit of the company as a whole. 29 I note that the court has been invited by the plaintiffs to make an order that they indemnify the company in respect of its costs of making the derivative claims, and that there is no suggestion that any delay that will be caused by the making of derivative claims will affect the protection of the company's intellectual property. 30 The respondents submit that the question whether to pursue the claims which the plaintiffs wish to pursue on behalf of the company is a matter that should be left for the determination of the liquidator, if a winding up order is made. That would produce even greater delay than granting leave to bring derivative claims, since derivative claims will be considered at the final hearing inter parties. 31 It is not true to say that the issues that will be raised by the derivative claims can all be satisfactorily determined in the context of claims based on the oppression provisions of the Corporations Act. This is because the claims extend to relief against persons who are not currently parties to the proceedings, namely Mr Taggert and X-Position, and the claims make an assertion that the company is entitled to an account of profits or an order that X-Position hold certain assets as constructive trustee for it. 32 I am therefore satisfied that is in the best interests of the company that the derivative claims be permitted, and that the other ingredients of s 237(2) have been established. I shall grant leave accordingly. **********

Matyear v Prismex Technologies Pty Ltd

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Judgment (12 paragraphs)

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