MG Corrosion Consultants Pty Ltd v Vinciguerra

Federal Court of Australia (Full Court)|2011-03-10|Before: Jagot JJ

INTRODUCTION 1 In the decision under appeal, Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763, the primary judge gave leave pursuant to s 237 of the Corporations Act 2001 (Cth) (CA) for the respondent (Mr Vinciguerra), to commence a derivative proceeding on behalf of the appellant (MGCC) against each of Messrs Malcolm Stuart Gilmour and Tony Armenti and Sola-Kleen Pty Ltd (Sola-Kleen). 2 In short, his Honour concluded that there was support for Mr Vinciguerra's claim that large management fees had been paid by MGCC to Sola-Kleen of which Mr Gilmour was the sole director and shareholder at the instance of Mr Gilmour. Mr Gilmour through sole ownership of Sola-Kleen held the controlling interest in MGCC (70%). Mr Vinciguerra held the balance. Mr Armenti was the external accountant to MGCC. 3 In granting approval, his Honour was satisfied that it was probable that MGCC would not bring the proceedings itself or properly take responsibility for them, that Mr Vinciguerra was acting in good faith, that it was in the best interests of MGCC that leave be granted, that there was a serious question to be tried and that notice had been given to the company of the intention to apply for leave. 4 MGCC contends that all but the last of those conclusions were wrong. 5 For reasons that follow we consider the conclusion reached by the primary judge was correct. In large measure, with some difference in emphasis, we agree with the reasoning adopted by his Honour.

THE REASONING AT FIRST INSTANCE 7 The primary judge had the benefit of a substantial number of affidavits and also the opportunity to observe some of the deponents under cross-examination. 8 It is necessary to discuss the reasons for the judgment below in some detail given that the grounds of appeal challenge each of the conclusions reached by the primary judge and the reasoning for those conclusions. 9 The contention raised by Mr Vinciguerra had been that Mr Gilmour had breached various director's duties in causing MGCC to pay unnecessary or inflated expenses for his benefit or for the benefit of Sola-Kleen of which Mr Gilmour is the sole shareholder. The most significant component of those expenses were large management fees paid to SolaKleen each year. Mr Vinciguerra produced a draft statement of claim by which he sought relief against Mr Gilmour and also against Mr Armenti, the external accountant of MGCC together with the recipient of the fees, SolaKleen. 10 Mr Gilmour has been a director of MGCC throughout the relevant period. He is also the sole director of SolaKleen. Mr Vinciguerra was a director of MGCC between July 2000 and April 2004. Mr Gilmour continued as the sole director between 2004 and between January and May 2008, he was joined by Mr Trevor John Harradine as a director. After May 2008, Mr Gilmour and Mr Harradine were joined by Mr Kenneth James Byfield. For much of the time from 1998 to 2006, Mr Vinciguerra was also employed by MGCC. 11 In 2006, Mr Vinciguerra applied to the primary judge for orders pursuant to s 247A CA requiring MGCC to permit him to inspect its books. In April 2007 (in proceedings not under appeal: Vinciguerra v MG Corrosion Consultants Pty Ltd (2007) 61 ACSR 583), orders were made to that effect. The books of MGCC were inspected by Mr Trevor Gorey, a chartered accountant. In late 2007, Mr Gorey provided Mr Vinciguerra with a report as to the outcome of his investigation (the Gorey Report). He considered that MGCC had paid more than $2 million in expenses that should not have been paid. 12 The draft statement of claim prepared by Mr Vinciguerra was provided to MGCC on 31 March 2008. It reflected conclusions reached by Mr Gorey. Mr Vinciguerra requested an assurance that MGCC would commence proceedings to recover the alleged overpayments. By a response on 11 April 2008, the then solicitors for MGCC informed Mr Vinciguerra's solicitors that MGCC wished to ascertain whether there was sufficient substance in the allegations to warrant MGCC to take appropriate action which may include legal action against the proper parties. MGCC informed Mr Vinciguerra that it proposed to investigate the claims by: (a) not making any decision regarding the matters in the draft statement of claim until the appointment of a second independent director (noting that one independent director, Mr Harradine, had already been appointed); (b) [MGCC's] independent directors addressing the matters raised by [Mr Vinciguerra], by conducting its own investigation, including an examination of any report commissioned by [Mr Vinciguerra]; (c) Mr Gilmour abstaining from voting on any directors' resolutions regarding the investigation of the matters in question and, if it were found that there was some substance in the allegations in the draft statement of claim, in any directors' resolutions as to the institution of any proceedings against all or any of the parties named in the draft statement of claim; and (d) [MGCC] acting upon the resolutions passed by the independent directors. 13 MGCC then caused a report to be prepared by its independent accounting expert, Mr Graham Ruthven (now deceased) (the Ruthven Report). The Ruthven Report reached conclusions different, at least in part, from those reached by Mr Gorey. The total shortfall was much lower according to Mr Ruthven. 14 The primary judge had no reason to doubt the expertise or independence of Mr Ruthven but doubted the factual basis upon which his views were based. Mr Gorey never met with Mr Ruthven despite invitation to do so. Much was made by MGCC of this. Neither the views of Mr Ruthven nor the views of Mr Gorey have been thoroughly tested as they might be in a trial. Mr Ruthven (who died shortly after the hearing) was not cross-examined, although he was in attendance at the hearing of the application. 15 His Honour considered (at [32]) that MGCC's contentions at first blush had significant weight, namely, that there had been a persistent delay to provide the Gorey Report to MGCC and a persistent refusal to permit Mr Gorey to meet with Mr Ruthven. His Honour, in the end, was unpersuaded by those complaints 'principally' because he did not regard Mr Harradine as being independent of Mr Gilmour. His Honour set out his reasons for the lack of independence (at [33]-[46]). 16 The primary judge noted that Mr Harradine and Mr Gilmour were, in fact, the directors and only shareholders of Power Savers International (Australia) Pty Ltd (PSI). His Honour concluded that it could not be said, as MGCC's former solicitors had contended when Mr Vinciguerra challenged Mr Harradine's independence, that he was not in any way related to Mr Gilmour. The involvement of Mr Gilmour and Mr Harradine in PSI was not disclosed at any time by either Mr Gilmour or Mr Harradine. Rather, an Australian Securities and Investments Commission (ASIC) company search revealing the directorship of Mr Harradine was filed in an affidavit sworn by Mr Vinciguerra's solicitor. Mr Harradine in a supplementary affidavit explained that he did not disclose information pertaining to his directorships or interest in companies other than MGCC and Sola-Kleen because he did not believe that they had any material effect on how he exercised his judgement in his role as a director of MGCC. 17 On the non-disclosure of the PSI directorship, the primary judge reached a conclusion (at [39]) which is strongly challenged by MGCC: In my opinion, an explanation was called for both from Mr Gilmour and Mr Harradine in the circumstances of this application. I infer that any such explanation by Mr Gilmour and Mr Harradine would not have supported the assertion that Mr Harradine is independent of Mr Gilmour. Accordingly, it is not merely the fact of the relationship but the failure of both Mr Gilmour and Mr Harradine to mention it in their affidavits sworn prior to Mr Williams' affidavit of 15 May 2008 or, when exposed to Mr Williams' affidavit, to explain it, which leads me to conclude not only that Mr Harradine is not independent but is, to the contrary, partisan towards the defendant and Mr Gilmour. 18 The primary judge relied on a further factor in relation to questioning the independence of Mr Harradine on the particular issue of investigation of the payments by MGCC. Mr Harradine deposed that he had received financial records of MGCC for the financial years 2003-2007 inclusive. As a result of what he had been told by the external accountant, Mr Armenti, (a prospective defendant in the derivative proceeding) he believed that the management fees paid by MGCC to Sola-Kleen were fees for its use of Sola-Kleen's premises, equipment and staff. His Honour said Mr Harradine proceeded to give an opinion as an accountant as to why he considered those management fees were, in effect, reasonable. His Honour also noted (at [46]) that MGCC made no closing submissions in reply to the criticisms of the lack of independence of Mr Harradine. 19 His Honour noted that in contrast, Mr Ruthven, unlike Mr Harradine, concluded that a number of the impugned expenses including a significant portion of the management fees that were paid were, in fact, over stated. Mr Ruthven concluded that between 2003 and 2007, the management fees paid by MGCC to Sola-Kleen were overstated by an amount of $382,027. The reason why MGCC nevertheless still placed reliance upon the Ruthven Report was that while Mr Ruthven had also concluded that management fees had been overstated, other expenses had been understated in an almost equal amount. The consequence was that the net profit during the relevant period for MGCC was understated by a much smaller sum, $45,013. 20 His Honour expressly noted (at [45]) that Mr Ruthven made clear that he did not perform any separate verification, validation or audit of information and documents produced to him by MGCC, Sola-Kleen, Mr Gilmour and Mr Armenti for the purposes of his report. 21 His Honour was satisfied, in any event (at [51]-[53]), for the purpose of s 237(2)(a) CA that there was no probability of MGCC issuing proceedings. Events spoke for themselves. 22 On the good faith requirement, (s 237(2)(b) CA), the view taken by the primary judge (at [55]) was that it was not necessary for Mr Vinciguerra, himself, to depose to his belief that MGCC would have a good cause of action. It was necessary only for the Court to be satisfied that he was acting in good faith: South Johnston Hill Ltd v Dennis (2007) 163 FCR 343 (at [67]-[69]); Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 (at [32]-[37]). As against that, it was not simply a matter of bald assertion: Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313 (at [36]). Despite that, Mr Vinciguerra did depose to his holding the belief and to his purposes. His Honour was satisfied as to Mr Vinciguerra's good faith by assessing the nature of the allegations, the circumstances in which they arose and looking at the objective facts to enable him to draw an inference. It was clear that the basis of Mr Vinciguerra's belief was the content and conclusion reached by Mr Gorey in the Gorey Report. 23 The decision by Mr Gorey not to meet with Mr Ruthven or the decision not to review Mr Ruthven's selection of documents could not, his Honour considered, reflect on Mr Vinciguerra's good faith. Mr Vinciguerra would be expected to leave such matters to his solicitors. He would also be expected to leave such decisions to Mr Gorey as to whether such exercises would be worthwhile. None of those failures, if they be correctly described as failures, could detract from Mr Vinciguerra's good faith (at [61]). 24 His Honour noted that Mr Gorey considered that the information provided by MGCC had been inadequate. Part of his complaint related to the non-production of books and records of Sola-Kleen. His Honour concluded that Mr Gorey's complaint was not unreasonable because Mr Gilmour was the sole director, secretary and shareholder of Sola-Kleen which in turn was 70% shareholder in MGCC. The principal allegations made by Mr Vinciguerra in the draft statement of claim were that management fees were wrongfully paid by MGCC to Sola-Kleen. His Honour noted (at [63]) that if leave to bring an action on behalf of MGCC were to be given, Sola-Kleen would be a defendant in such an action and would provide discovery of documents which would include its relevant books and records. His Honour concluded that '[i]t is, at least, disingenuous of Mr Gilmour, who has control of Sola-Kleen, to adopt this position in relation to its books and records'. 25 The primary judge was satisfied, also, that there was no collateral purpose on the part of Mr Vinciguerra. MGCC relied upon two primary grounds for collateral purpose. The first was that Mr Vinciguerra in truth simply wished to wind up MGCC. On the state of the evidence, the primary judge rejected that, saying that the proper construction of the evidence was only that Mr Vinciguerra was leaving his options open and would not rule out that possibility depending on how matters eventuated. The second ground was a statement Mr Vinciguerra had made in May or June 2006 to the effect that he was looking forward to 'destroying' the company. Other allegations going to bad faith or collateral purpose were advanced at the hearing but not accepted. MGCC also relied on Mr Gorey's decision not to meet with Mr Ruthven. As previously noted, his Honour observed that whatever decision might have been taken by Mr Gorey or by his solicitors, could not be relied upon to sheet home lack of good faith against Mr Vinciguerra. 26 His Honour also concluded for the purposes of s 237(2)(c) CA that it was in the best interests of MGCC that leave be granted. He noted that it was necessary that the Court be satisfied that the proposed derivative action was in the best interests of the company not simply that it 'may' be in the best interests of the company. 27 MGCC relied on the observations of Palmer J in Swansson (at [56]-[60]) as to matters for consideration under this limb of the section. This was summarised by the primary judge (at [112]): (a) the character of the company, for example whether it is a large public company or a small private family company; (b) the impact of the proposed action on the business of the company; (c) whether the substance of the relief sought by the applicant could be obtained by other means which does not require the company to be brought into litigation against its will; and (d) the ability of the respondent to the derivative action to meet at least a substantial part of any judgment in favour of the company, so as to enable the court to determine whether the action would be of real practical benefit to the company. 28 The primary judge's conclusion was that the proposed derivative action was in the best interests of the company noting that if successful, the action would result in funds being recovered by MGCC which would enhance its assets. In such circumstances there is a prima facie presumption that the bringing of a derivative action would be in the best interests of the company: Maher v Honeysett per Brereton J (at [52]). 29 No director of MGCC had given any evidence as to any adverse impact that the pursuit of a derivative action may have on MGCC's ongoing business. 30 Complaint was raised below that Mr Vinciguerra had not sought to adduce any evidence at the hearing to show that the potential respondents would be able to meet any judgment awarded in the derivative action if leave were granted. The primary judge rejected that argument, making the point that if the putative defendants were not in a position to meet any judgment debt, then such evidence could and should have come from them. Mr Gilmour controlled Sola-Kleen so it would be expected that Sola-Kleen, Mr Gilmour and Mr Armenti would have adduced evidence as to any lack of capacity to meet a judgment debt. His Honour noted that Sola-Kleen made an offer to buy Mr Vinciguerra's shares in the MGCC from which it might reasonably be inferred that, at least at the time of the offer, it had the capacity to honour the offer. 31 Finally, the question of the capacity for Mr Vinciguerra to meet any costs order in an unsuccessful derivative action was raised. Mr Vinciguerra had undertaken to give an indemnity to MGCC for costs if the derivative action failed. Mr Vinciguerra disclosed various assets to cover such costs. His Honour was satisfied they were sufficient to meet the indemnity. 32 In relation to the serious question to be tried issue (s 237(2)(d) CA), MGCC placed reliance upon inconsistencies between various versions of the alleged overpayment of management fees. The approach his Honour took in relation to this (at [147]) was that it was unnecessary for the Court to try the action by entering into the merits to any great degree. His Honour noted that Mr Vinciguerra had the same relatively low threshold to surmount as in the case of an application for an interlocutory injunction: Swansson (at [25]). 33 There was a serious question to be tried as there was no dispute that the expenses of which Mr Vinciguerra complained were incurred. They are recorded in MGCC's accounts and so the question for determination was whether they were incurred in breach of duty by Mr Gilmour with knowing involvement by one means or another of Sola-Kleen and/or Mr Armenti. His Honour concluded that, as the sole director, there could be no challenge to the fact that Mr Gilmour authorised each of the accounts to Sola-Kleen of which he was also the sole director and shareholder. 34 As his Honour noted, both of the forensic accountants engaged by Mr Vinciguerra and MGCC concluded that a number of expenses Mr Gilmour caused MGCC to pay were inflated. (Mr Gorey also concluded that a number of expenses were not properly incurred by MGCC at all).

A. Probable that MGCC will not itself bring the proceedings (s 237(2)(a) CA) (grounds of appeal 1-3) 35 MGCC contends the primary judge erred in finding that it is probable that MGCC will not itself bring proceedings or properly take responsibility for bringing proceedings. It is argued the primary judge failed to give proper weight to the content of the letter of 11 April 2008 from the solicitors for MGCC indicating that it took 'responsibility for investigating the allegations as a first step towards deciding whether there is sufficient substance in the allegations that warrant' it 'taking appropriate action, which may include legal action against proper parties'. 36 Reliance is placed on the fact that MGCC appointed Mr Harradine and Mr Byfield as independent directors, appointed Mr Harradine to act as chairman of all board meetings with Mr Gilmour abstaining from voting on any resolutions concerning the investigation of the matters in question and instructed Mr Ruthven, an experienced and qualified independent accountant to produce a report on the matters the subject of complaint. Further, it requested as early as April 2008 and without success until March 2009 to examine a copy of the Gorey Report so as to assist MGCC in investigating the assertions and to identify disputed transactions. In addition, it repeatedly requested, it says, that Mr Ruthven and Mr Gorey meet in order to refine the issues in dispute and to better understand Mr Vinciguerra's allegation. In this regard, it offered to allow Mr Gorey access to the 21 lever arch files of relevant documents including those of Sola-Kleen held my Mr Ruthven in the process of compiling his Report. 37 The independence of Mr Harradine assumed great emphasis in the arguments of the parties primarily on the first issue of whether it was probable that the company would issue proceedings or prosecute them. In reality the independence point was no more than a subset of the legislative 'probability' requirement. The requirement however was clearly established for the reasons simply stated by the primary judge (at [51]-[52]). It was quite clear that the company was not going to issue proceedings. While it was clear that MGCC arranged for the Report from Mr Ruthven to be prepared, there was no other evidence of any 'investigation' having been conducted or being planned. Nearly two years elapsed between an 'investigation' being first foreshadowed and the hearing at first instance. Over a year had elapsed between the provision of Mr Ruthven's Report and the hearing at first instance. In this time, although there had been mediation, MGCC continued to oppose the application by Mr Vinciguerra. It had not at the time of the hearing before the primary judge commenced any proceeding. This alone was sufficient a basis to be satisfied as to the probability requirement. 38 The finding as to the lack of independence is to be understood within the context only of the particular circumstances under consideration and there are a collection of factors which would support the conclusion reached by the primary judge. First, Mr Harradine was the designer of the scheme which has given rise to part of the scrutiny. He has defended the scheme and defended various payments including the entitlements Mr Gilmour has received. He has expressed the view, that at least some of the payments were reasonable. He may be entirely right in that view but the question is not whether he is right or wrong but rather whether in the context of a dispute of this nature, he can be seen to be totally impartial. In addition, in affidavit material which we have admitted pursuant to O 52 r 36 of the Federal Court Rules (FCR) on the application of Mr Vinciguerra and without opposition from MGCC, it is apparent that Mr Harradine advised Mr Gilmour and Mr Vinciguerra that MGCC should pay management fees to Sola-Kleen when it had the cash to do so and how to calculate the management fees. This appears to be the very topic under investigation. 39 Mr Harradine also deposed that when Mr Armenti replaced Mr Harradine as the external accountant for MGCC, Mr Harradine provided advice to Mr Armenti as to how the management fees should be calculated. These factors were confirmed also by Mr Gilmour in another affidavit (also sworn in support of a successful application that the primary judge recuse himself from hearing the actual derivative action in light of his findings in the application now under appeal). 40 There is, therefore, some force in the submission for Mr Vinciguerra that, in effect, Mr Harradine was to independently 'investigate' the propriety of conduct which, on his own evidence, was undertaken in accordance with his advice. These matters, however, were not disclosed at the hearing before the primary judge. (They were disclosed in affidavits admitted in the appeal as fresh evidence on application by Mr Vinciguerra and without objection by MGCC). There was no suggestion in the material before his Honour that Mr Harradine had advised in relation to the management fees or that Mr Armenti had received advice from Mr Harradine concerning the management fees which in turn were to be the subject of investigation. The evidence admitted on the appeal confirms the conclusion of the primary judge that Mr Harradine was not relevantly independent. 41 Mr Harradine is no doubt an experienced accountant and his unchallenged affidavit evidence makes clear that he understands the duties that he has as a director and as chairman of the board of MGCC. Nevertheless, in light of the particular dispute, the primary judge's conclusion on independence was open to his Honour. The explanation given by Mr Harradine as to non-disclosure of the PSI directorship was that he did not consider his directorship to be relevant. If he was right about the view that it was not relevant, then it did not need to be mentioned in the correspondence which made clear that he did not have any relationship at all to Mr Gilmour. However, within the context of the particular dispute and the particular inquiry directed to his independence, a more forthcoming response and explanation as to the activities of PSI may well have been expected. It may or may not have been operational. No explanation was given to suggest that it had ceased operating. While perhaps too much turned on this debate, nevertheless, Mr Vinciguerra's submission that Mr Harradine was not relevantly independent was open to be accepted by his Honour. 42 MGCC submitted that Mr Vinciguerra did not cross-examine its directors about their intentions to commence proceedings. Beyond stating that it was in the interests of MGCC to undertake an assessment of the claims made in the draft statement of claim, Mr Harradine did not give any evidence about his intentions. Mr Gilmour gave no evidence about his intentions and Mr Byfield gave no evidence at all. In these circumstances, nothing turns on the decision not to cross-examine any of the MGCC's directors. 43 All those factors allowed the inference to be properly drawn that it was probable that MGCC would not commence or properly take responsibility for proceedings. That inference was plainly correct on the evidence before the primary judge.

B. Good faith (s 237(2)(b) CA) - (grounds 4 and 5) 44 MGCC contends that the primary judge erred in concluding that Mr Vinciguerra was not using the derivative proceedings as a means of obtaining some advantage for which those proceedings were not designed or some collateral advantage beyond what the law offers. In support of this submission it is argued that the primary judge failed to give proper weight to seven factors. They are: (a) an affidavit of M/s Dalton in which it was deposed that Mr Vinciguerra said words to the effect that 'I'm really looking forward to destroying this company'; (b) Mr Vinciguerra attempting prior to his resignation from MGCC to sell the customer list and business of MGCC to Mintech without board approval; (c) Mr Vinciguerra establishing a business in direct competition with the 'core business' of MGCC; (d) Mr Vinciguerra stating his intention to seek to wind up MGCC, something not discovered even after receiving an offer to purchase his shares; (e) Mr Vinciguerra appearing to have little knowledge of the conduct of the proceedings; (f) Mr Vinciguerra, while still a key employee of MGCC, assisting Mintech in taking over a significant part of MGCC's business in breach of his fiduciary duty; (g) Mr Vinciguerra assisting a competitor in a tender process against MGCC. 45 Heavy reliance is also placed on the fact that Mr Vinciguerra refused to provide a copy of Mr Gorey's Report to MGCC until after he was provided with a copy of the Ruthven Report; failed to instruct Mr Gorey to meet with Mr Ruthven to discuss the findings of their respective reports; and pursued a position as to the content of 'the 21 lever arch files collated by Mr Ruthven in support of his report' without inspecting those files or having Mr Gorey inspect the files. 46 The primary judge is said to have erred in failing to give proper weight to the fact that Mr Vinciguerra was involved in a competing business with MGCC in circumstances where he had 'intimate knowledge' of MGCC's formulae tender processes and other confidential information. 47 The approach that MGCC takes in relation to this issue is that it was inappropriate to infer good faith simply on the basis that Mr Vinciguerra relied upon the Gorey Report. The attack made by MGCC on this process of reasoning is that the conclusions reached by Mr Gorey were contradicted by Mr Ruthven. Each was an experienced independent accountant. An honest belief in the Gorey Report could not be 'reasonably' held without a resolution of the differences between the two reports. 48 We disagree with this approach. It was not for Mr Vinciguerra, as a lay person, to either determine the respective merits of the two expert reports or to direct Mr Gorey as to how to go about his business of advising as an independent expert. Indeed, to do so would have been inappropriate. Further, in key areas of overpayment, Mr Ruthven did not disagree with Mr Gorey. 49 It is certainly true, as MGCC argues, that Mr Vinciguerra gave evidence that he was not in a position to decide the issues. Mr Vinciguerra said in cross-examination that he could not say why the Gorey Report was not provided to the company prior to receipt of the Ruthven Report; he did not discuss with Mr Gorey Mr Ruthven's offer to meet with Mr Gorey; was unaware that Mr Ruthven had offered to provide Mr Gorey the documentation on which his report was based; was unaware of the existence of the 21 lever arch files of documents; was unaware that Mr Gilmour had agreed to take no part in any decision by the directors as to whether or not to commence proceedings; was unaware that the company had not decided whether to commence proceedings in accordance with the draft statement of claim; was unaware that the directors had determined the decision as to whether to commence proceedings would not be made unless and until there had been a bona fide attempt to resolve the significant differences between the two investigating accountants. 50 None of these points, in our view, reflects adversely on the bona fides of Mr Vinciguerra. Quite reasonably, he left his affairs in the hands of experienced solicitors and an experienced accountant to advise him and to proceed as they considered appropriate. 51 In relation to collateral purpose (grounds 4, 5 and 7), MGCC relies upon various factors listed above (at [44]). 52 Dealing first with the words spoken to M/s Dalton, the question is whether any significance should be given to these words. Mr Vinciguerra could not recall saying them but accepted that he may have done so if she recalled the words being spoken. This incident is to be seen in the light of a hostile environment where there was serious animosity between Mr Vinciguerra and Mr Gilmour. In those circumstances, words spoken by either party in the heat of the moment are of significantly less weight than MGCC would place upon them. To infer, however, from those words that at the time of the hearing the true collateral purpose of Mr Vinciguerra was to destroy the company rather than to pursue the derivative action in respect of which he would stand to benefit as a shareholder, invites an unusual leap of logic. It is difficult, in any event, to see how Mr Vinciguerra could destroy the company by being permitted to pursue, on behalf of the company, a derivative action. 53 As to the customer lists, Mr Vinciguerra denied the account which was asserted against him. His evidence was not rejected. There was no basis upon which this Court could conclude that it should have been rejected. 54 In relation to competing with MGCC's core business, it is correct to say that his Honour placed little weight on this issue. That is understandable. Mr Vinciguerra's interests would be served by success in the derivative action, not by diminishing the value of his 30% shareholding by competing with MGCC. It is difficult to see how this could be a collateral purpose. 55 As to Mr Vinciguerra's indication of an intention to apply to wind up MGCC and the rejection of the offer to sell his shares, the state of the evidence was that he was reserving his position in relation to a winding up proceeding until a later time. In any event, there is no reason in principle why a proposal to wind up a company by a party seeking leave to pursue a statutory derivative action in the name of that company would be demonstrative of a collateral purpose or bad faith. Equally, rejecting the share sale offer was explained. Mr Vinciguerra did not reject outright the possibility of selling his shares for a fair value but simply did not agree with the process proposed by Sola-Kleen for the determination of the value of the shares. SolaKleen's proposal contemplated an accountant acting as an expert rather than as an arbitrator. It would be open for Mr Vinciguerra to form the view that in light of the complaints of breach of fiduciary duties, an accountant acting as an expert would not be as well equipped as a court to get to the bottom of his complaints. A reasonable view on advice would be that the best process to get to the bottom of those issues was the adversarial process or by mediation through the proposed derivative action. 56 As to the fact that Mr Vinciguerra had little knowledge of factors on which MGCC relies in relation to the conduct of the proceedings, none of this shows lack of good faith. 57 Mr Vinciguerra's notice of contention raises an additional ground upon which an argument as to good faith is advanced. In light of our conclusion on the primary judge's approach to the question of good faith, it is unnecessary to determine the notice of contention.

C. It is in the best interests of MGCC that Mr Vinciguerra be granted leave - (s 237(2)(c) CA) - (grounds 8 and 9) 58 In relation to this ground, MGCC argues that the question is not simply whether the company would benefit if the action were to succeed, but must also extend to the probability of the action succeeding. That question in turn, it argues, depends on the reliability of the Gorey Report. 59 Nevertheless, accepting that the applicant must show more than a mere possibility of success, a Court should not permit an application to seek leave to commence a derivative action to be a trial in itself. 60 If it can be assumed that the conclusions in the Gorey Report were at least in part sound, then it is reasonable to expect that an action taken by a company for recovery of payments made, must necessarily be, if successful, in the best interests of the company. It generally follows that pursuit of an action by or on behalf of a company against an officer for recovery of compensation for damage done to the company by the officer's breach of duty is in 'the best in the interests of the company': Vigliaroni v Concrete Precast Systems Pty Ltd [2009] VSC 253 (at [29]) per Davies J. It is not a requirement under s 237(2) CA that oppression proceedings be unavailable to a shareholder. There would be no basis to conclude that an oppression action (as an alternative approach) would have less impact on MGCC's affairs than a statutory derivative action. It is no more in the interests of the company as a whole that an oppression action be brought rather than a derivative action be pursued. 61 MGCC also developed an argument based on s 237(3) CA which provides: 237 Applying for and granting leave … (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. (emphasis added) 62 MGCC argued that although the directors of MGCC have not yet decided not to issue proceedings, the existence of the presumption emphasises the weight to be given to the views of the directors on this issue. The flaw in this argument is that s 237(3) CA does not apply to a decision not to issue proceedings against a director. A director is not a third party. The presumption is not available. 63 His Honour was entitled to be satisfied that in the absence of any evidence from the proposed defendants to the derivative action as to their inability to meet any award in damages, pursuing the action would be in the best interests of the company. 64 Added to this, Mr Vinciguerra gave evidence that if he was granted leave to bring proceedings in the name of MGCC he would undertake to indemnify MGCC against any liability it may incur as a result of any adverse costs order made in those proceedings. There was evidence on which it was entirely open for his Honour to be satisfied that Mr Vinciguerra had the capacity to satisfy any such indemnity.

D. Serious question to be tried (s 237(2)(d) CA) (grounds 10 and 11) 65 As observed in Swannson (at [25]), the respondent has the same relatively low threshold to surmount as in the case of an application for an interlocutory injunction. 66 To determine whether there is a serious question to be tried, the Court will not decide upon the merits of the action to the degree which the submissions for MGCC suggest. 67 Statutory derivative actions are not a particularly common form of procedure. Approval to commence one will not be granted lightly. For one reason, such an action may impose a substantial burden on a corporation. In the case of a claim against a third party this is all the more significant by reason of the presumption in s 237(3) CA. That said, there would be little point in the amendments to the legislation which gave rise to the introduction of s 237 CA if there were to be a complete trial of the issues before granting leave. This is obvious as there would be no point in conducting the derivative action if all the facts needed to be established in the derivative action had already been proven in the leave application. It would turn the leave application into a trial. There is no basis for thinking that this was the legislative intention when the amendments were introduced in 2000. 68 For the purposes of these grounds, MGCC repeats its argument as to the inappropriateness of relying upon the Gorey Report in preference to the Ruthven Report in circumstances where the experts had not met; the 'independence' of Mr Harradine; and the failure to give proper weight to Mr Vinciguerra's inability to confirm how the amounts in the Gorey Report were calculated. 69 In addition to these grounds which raised arguments dealt with under the previous grounds of appeal, reliance was also placed on an affidavit of Mr Philip Reed. MGCC argues that the uncertainty as to the reliability of the Gorey Report is heightened by the fact that the draft statement of claim pleads that the company paid consultant fees to Mr Reed during a period of 1 July 2002 to 30 June 2007 of not less than $124,800. Different figures appeared in Mr Reed's affidavit where he deposed that the total cost of services rendered by him to MGCC was only $4,451.50 plus GST. This topic raises more questions than it answers. If indeed it was the case that Mr Reed was only paid $4,451.50 plus GST during the relevant period, the question arises as to why the records of MGCC show payments for significantly greater amounts. That was not an issue for the primary judge to reconcile in an application of this nature. 70 The complaint that Mr Gorey was not available for cross-examination was quite properly rejected by the primary judge and not strenuously pressed by senior counsel in oral argument. The approach taken by his Honour in relation to this aspect of the matter (at [49]-[50]) was as follows: 49 However, the defendant's complaints concerning Mr Gorey are not warranted. Mr Gorey's unavailability was fully explained. Mr Gorey's affidavit was filed and served in March 2009, some nine months before the hearing. The application was initially listed for hearing in July 2009 but it was adjourned to December 2009. However, it was not until 24 November 2009 that the defendant gave notice that it required Mr Gorey to attend for cross-examination. By that time, Mr Gorey had a conflicting commitment to be called as a witness in proceedings before the State Administrative Tribunal. 50 The defendant agreed to the tender of Mr Gorey's affidavit without Mr Gorey being required for cross-examination, rather than necessitate the hearing being adjourned. That was its forensic decision to make and it should not now be heard to complain on this topic. 71 A major difficulty for MGCC in its argument on this topic is that even the Ruthven Report concluded that the amounts which Mr Gilmour had caused MGCC to pay by way of management fees were inflated. He reached the same conclusions as Mr Gorey but also concluded that the inflated expenses were offset by other expenses incurred by MGCC in an understated amount. Once again, this simply raises more questions than it answers as to the books and records of MGCC. The answer to those questions could certainly not be determined on the application before his Honour. The fact that both expenses and payments were significantly inconsistent with the records of the company only supports the conclusion that there was a serious question to be tried. There was debate at the hearing below about whether some or all of these amounts may be statute barred but it was sufficient for his Honour to conclude that having regard to the reservations held concerning the independence of the supporting materials for the Ruthven Report, that the conclusion of the Gorey Report supporting the existence of a serious question to be tried should be accepted. 72 Indeed, on this topic, Mr Ruthven observed that management fees were not paid in financial years ended on 30 June 2001 and 2002. It appears that the source of information as to the actual liability to pay management fees for those years was Mr Harradine corroborated by Mr Gilmour. This arises from the new affidavit evidence but gives a further illustration of Mr Harradine's proximity to the events. It appears that MGCC is dependent on Mr Harradine to prove the liability to pay the fees in those years. From the perspective of Mr Vinciguerra at least, this presents a further challenge to the notion of Mr Harradine's independence in relation to MGCC's proposed investigation. 73 Further, and although the primary judge placed little weight on the Ruthven Report, his observation (at [155]) was undoubtedly correct where he noted that even if the Ruthven Report is correct, the fact that Sola-Kleen would have been entitled to charge management fees totalling that amount for those years is irrelevant. The fact that Mr Gilmour did not cause MGCC to pay management fees to Sola-Kleen for the years ended 30 June 2001 and 2002 provides no defence to a claim that Mr Gilmour breached statutory and fiduciary duties owed to MGCC by causing it to pay inflated management fees (and other inflated expenses) to or for the benefit of himself or Sola-Kleen for the years ended 30 June 2003 to 2007. 74 MGCC's own expert accepts overpayment in the relevant years. In the face of that conclusion, it is difficult to argue that s 237(2)(d) could not be satisfied.

F. Form of undertaking by Mr Vinciguerra (ground 13) 75 This ground relates to the quality of the examination of the net assets of Mr Vinciguerra. He gave evidence by affidavit and additional evidence was given in chief and in cross-examination as to his financial position. The evidence was uncontradicted. The argument that there may be a mortgage over the property could have been examined and tested below. There was no evidence to suggest that Mr Vinciguerra lacked the capacity. Moreover, there is ample opportunity for the docket judge in the derivative action to explore this aspect should it be raised (see for example, s 242). This ground is without foundation.

CONCLUSION 76 As none of the grounds of appeal succeeds, the appeal will be dismissed with costs. I certify that the preceding seventy-six (76) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices North, McKerracher and Jagot.

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