MATTER : Section 237 of the Corporations Law of Western Australia

BETWEEN : NESTEGG HOLDINGS PTY LTD (ACN 009 450 159)

Corporations Law - Action by shareholder to enforce rights of company - Fiduciary duty as between directors and shareholders - Security for costs - Turns on own facts

Seventh Defendant : Mr W S Martin QC & Mr M F Gerus

Anderson v Effexsven (1999) 10 ANZ Ins Cas 61-424

Australian Securities Commission v Aust-Home Investments Ltd [1993] FCA 585; (1993) 44 FCR 194

Barings v Coopers & Lybrand [1997] 1 BCLC 427

Beach Petroleum NL v Johnson [1992] FCA 110; (1992) 7 ACSR 203

Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) [1984] FCA 34; (1984) 2 FCR 1

Brunninghausen v Glavanics (1999) 32 ASCR 222

Buckley v Bennell Design and Constructions Pty Ltd (1974) ACLR 301

Chequepoint Securities Ltd v Claremont Petroleum NL (1986) 11 ACLR 94

DCT v Austin (1998) 28 ACSR 565

Engel Pty Ltd (In Liq) v Leeds, unreported; FCt SCt of WA; Library No 940403; 20 July 1994

FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241

Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 10 ACLC 1394

Gerber Garment Technology Inc v Lectra Systems Ltd [1996] RPC 443

Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACLC 895

Glavanics v Brunninghausen (1996) 19 ACSR 204

Gribbles Pathology Pty Ltd v Health Insurance Commission [1997] FCA 1414; (1997) 80 FCR 284

Hospital Products Ltd v United States Surgical Corp [1984] HCA 64; (1984) 156 CLR 41

Hospitals Contribution Fund of Australia v Hunt (1982) 44 ALR 365

HPM Pty Ltd v BPM Pty Ltd, unreported; SCt of WA; Library No 950243; 19 May 1995

Kingstream Steel Ltd v Stemcor UK Ltd [2001] WASCA 138

L Modic Contractors Pty Ltd v Savage, unreported; SCt of WA; Library No 7810; 20 August 1989

Mesenberg v Cord Industrial Recruiters Pty Ltd (Nos 1 & 2) 19 ACSR 483

Morris v A1 Pools Pty Ltd [2000] WASCA 335

Pearson v Naydler [1977] 1 WLR 899

Prudential Assurance Co Ltd v Newman Industries Ltd [1982] 1 Ch 204

RPT Holdings Pty Ltd v Roberts [2000] SASC 386

Sea Culture International Pty Ltd v Scoles [1991] FCA 523; (1991) 32 FCR 275

Sir Lindsay Parkinson v Triplan Ltd [1973] 2 All ER 273

Southern Cross Exploration NL v Fire and Allrisks Insurance Co Ltd (1985) 1 NSWLR 114

Steamship Mutual Association Ltd v Trollope and Colls (City) Ltd (1986) 33 Build LR 77 (CA)

Stein v Blake [1997] EWCA Civ 2474; [1998] 1 All ER 724

Westralian Goldmines Ltd v Westralian Mines & Drilling Pty Ltd (In Liq) (1986) 4 ACLC 167

Yandil Holdings Pty Ltd v Insurance Co of North America (1986) 7 NSWLR 571

Zortec Australia Pty Ltd v R & I Bank, unreported; FCt SCt of WA; Library No 920609; 13 August 1992

1 MASTER SANDERSON: This is the return of three chamber summonses in two separate but interrelated actions. In action CIV 1505 of 2000 the defendant seeks summary judgment or alternatively that the plaintiff's statement of claim be struck out pursuant to O 20 r 19(1). Depending upon the outcome of that application the defendant also seeks security for costs. Clearly if the defendant is successful on its chamber summons seeking judgment the issue of security for costs will not fall for determination. In COR 67 of 2001 the matter for consideration is the plaintiffs' originating summons seeking leave to commence proceedings. It is common ground between the parties that this originating process ought be dismissed. The only outstanding question is as to costs.

2 It is convenient to deal first with the defendants' chamber summons seeking summary judgment or alternatively to strike out the plaintiff's statement of claim. The statement of claim was filed on 20 June 2001. Although the document runs to 23 pages and 38 paragraphs, it is relatively straight-forward. The first five paragraphs identify the parties. It is pleaded by par 2 that at all material times Ross Layman Cammilleri ("Ross Cammilleri") and Craig Frederick Cammilleri ("Craig Cammilleri") were directors and shareholders of the plaintiff. They were also at all material times directors of a company styled Auschess Pty Ltd ("Auschess"). It is pleaded by par 4 that at all material times the first defendant ("Smith") and one Peter Eric Bailey ("Bailey") were also directors of Auschess. By par 5 it is pleaded that the issued share capital of Auschess was 100 ordinary fully paid $1 shares. Fifty of these shares were held by The plaintiff, 25 were held by the second defendant and 25 were held by a company known as Chantry Haulage Pty Ltd ("Chantry Haulage"). The second defendant is the alter ego of Smith. Bailey is said to be a director and shareholder of Chantry Haulage. The third defendant ("Paul") is pleaded to have been (but is no longer) a director and shareholder of the fourth defendant. It is worthy of note that neither Paul nor the fourth defendant are said to be shareholders of Auschess. None of the matters I have referred to above are controversial.

3 By par 6 it is pleaded that in or about April 1996 the Cammilleris, together with Smith and Bailey, caused Auschess to be incorporated to develop and carry on the business of coin-operated internet public access kiosks. It is said (by par 7) that the business was carried on under the business name Eureka Technology. It is then pleaded (by par 8) that between April 1996 and May 1997, Smith worked as a full-time salaried director and general manager of Auschess and Paul was employed by Auschess as a full-time sales manager. It is said the day-to-day running of the business of Auschess was left to Smith and Paul with neither of the Cammilleris having "an active role in the day to day running and management of the business". Paragraph 9 through to par 15 plead certain matters in relation to the business. Essentially it is said that Auschess entered into a business arrangement with a company known as Internet Masters Pty Ltd. It is said that two individuals, Robert John McBrier ("McBrier") and Patrick Joseph D'Cruze ("D'Cruze") were consultants to Internet Masters. It is pleaded during the course of the business arrangement Internet Masters gave way to a firm known as P & R Internet Systems which in November 1996 entered into an agreement with Auschess pursuant to which P & R Internet Systems and Auschess were to further develop the concept of kiosk internet access. (The terms of this agreement are pleaded in par 15 of the statement of claim. For the purposes of this application the general summary of the nature of the agreement between P & R Internet Systems and Auschess which I have given above will suffice).

4 In the context of this application par 16 of the statement of claim is of prime importance. It reads as follows:

"16. At all material times from in or about April 1996 onwards:

(a) Ross Cammilleri and Craig Cammilleri were not actively involved in the day to day running and management of the business affairs of Auschess and, as directors of Auschess and as directors of Nestegg (Nestegg being the holder of 50% of the shares in Auschess) were entirely dependent on Smith and Paul for information and advice regarding the affairs of Auschess and the ongoing viability of the business conducted by Auschess ('the Business');

(b) by reason of the matters pleaded in sub-paragraph (a) hereof it was obvious to Smith and Paul that Ross Cammilleri and Craig Cammilleri were reliant upon Smith and Paul for information and advice regarding the affairs of Auschess and the ongoing viability of the Business;

(c) Paul acted in the position of a director of Auschess.

Particulars

During the period between April 1996 and May 1997 Paul attended most of the meetings of the directors of Auschess, participated therein and made decisions on behalf of Auschess as if he was a director of Auschess, and signed minutes of such meetings in the capacity of a director of Auschess. Further and better particulars will be provided after discovery and interrogatories."

5 By par 17 it is said that by reason of matters pleaded in par 4, 6, 8 and 16, Smith, Bailey and Paul owed The plaintiff in its capacity as a shareholder of Auschess fiduciary duties. Paragraph 4 pleads that the two Cammilleris, Smith and Bailey, were directors of Auschess. Paragraph 6 pleads the incorporation of Auschess for the purpose of developing and marketing the operation of internet public access kiosks. Paragraph 8 pleads the positions of Smith and Paul and the fact that they had the day-to-day running of the business and the fact that neither Ross nor Craig Cammilleri had an active role in the day-to-day management of the business. Paragraph 16 I have quoted. These are the material facts which give rise, so it is said, to a fiduciary duty owed to The plaintiff as a shareholder of Auschess.

6 It is convenient at this point to mention the primary objection the defendants take to the plaintiff's claim. It is said, on the pleaded facts, that the fiduciary duty pleaded in par 17 simply cannot arise. The defendants acknowledge that Smith as a director of Auschess owes fiduciary duties to the company. But save in exceptional circumstances a director of a company does not owe fiduciary duties to a shareholder of that company. It is said on the facts as pleaded these exceptional circumstances do not arise and the claim is doomed to fail. Further, and allied with this submission it is submitted that, on the pleaded facts, any right of action against the defendants or any of them lies with Auschess and not with the plaintiff as a shareholder of Auschess: see Percival v Wright (1902) 2 Ch 421.

7 The defendants make further complaints about the statement of claim which are interrelated to the complaint I have outlined above. Rather than deal with the issues of the fiduciary duty and by the defendants to the plaintiff and who holds any right of action against the defendants separately, it is convenient if I go on to outline the rest of the plaintiff's claim and the further objections the defendants make to it.

8 By par 18 of the statement of claim it is pleaded that between 5 May 1997 and 9 May 1997 Smith represented to Ross Cammilleri that the business conducted by Auschess had no viable future, that funds were so short that there was a danger Auschess was or would become insolvent and that the business should be terminated. By par 19 it is pleaded that acting in reliance upon these representations Ross Cammilleri agreed to Auschess "ceasing to trade" from 5 May 1997. (By way of an aside complaint is made about par 19 of the statement of claim. It is said that in its form it is confusing. Given the conclusion I have reached on this application it is not, strictly speaking, necessary for me to deal with this objection to par 19. However, it does seem to me the objection is well-founded. It is difficult to see how Ross Cammilleri could agree to Auschess ceasing to trade "on behalf of Nestegg". It is one thing to say that Ross Cammilleri made that decision in his capacity as a director of Auschess. To say that he made that decision on behalf of The plaintiff, a shareholder of Auschess is to plead matters which are embarrassing. Furthermore, the use of the expression "ceasing to trade" is, in itself, uncertain. On any view of this pleading, par 19 would be struck out and would require repleading.)

9 By par 20 and par 21 it is pleaded that almost immediately after Ross Cammilleri agreed to Auschess ceasing to trade, Smith, Bailey, Paul, McBrier and D'Cruze set up a company styled Eureka Technology Pty Ltd and now known as pieNetworks Limited which eventually became the fifth defendant. In or about April 2000 the fifth defendant was listed on the Australian Stock Exchange. Smith, Bailey, Paul, McBrier and D'Cruze either themselves or through their various companies held shares in the fifth defendant. The precise shareholding is pleaded in par 22. By way of a document titled "Minute of Proposed Amendment to Particulars of Paragraph 22 and 29 of the Statement of Claim" ("the minute") the plaintiff proposed at the hearing of this application to amend the particulars to par 22(a). This involved a plea that a specified number of shares issued to the second and fourth defendants were "founder" shares for which the respective defendants paid "no capital outlay or minimal capital outlay". By par 23 it is pleaded that the fifth defendant now operates coin operated internet terminals both in Australia and internationally. By par 24 it is pleaded that the fifth defendant has entered into consultancy agreements with Smith and the second defendant on certain terms and conditions.

10 Paragraph 25 through to par 28 plead a case of misleading and deceptive conduct against certain of the defendants. No application is made with respect to this cause of action and I need say nothing more about it.

11 Paragraph 29 pleads what the plaintiff says is its loss and damage. By way of the minute to which I have earlier referred the plaintiff proposes to amend the particulars to par 29. The former par 29 as proposed by the plaintiff is as follows (I have omitted the marking-up and the sections of the former paragraph which have been deleted by the proposed amendment):

"29. Nestegg has suffered loss and damage as a result of the conduct pleaded in paragraphs 26, 27 and 28 hereof.

Particulars

(a) Had Smith and/or had Smith on behalf of Gocom not acted as pleaded, Auschess would have continued to develop and market the concept of internet public access kiosks to a level of success commensurate with the level of success achieved by pieNetworks, in which event Nestegg's shareholding in Auschess would have been of considerable value.

(b) Further or alternatively, had Smith and/or had Smith on behalf of Gocom not acted as pleaded, pursuant to clause 4.1 of the P & R Agreement pleaded in paragraph 14 hereof after 30 June 1997 Auschess together with P & R Internet Systems would have formed a new entity in which Auschess held a 65% interest which entity would have conducted the same business or a similar business to that of pieNetworks, in which event Nestegg's shareholding in Auschess would have been of considerable value.

(c) Further or alternatively, the plaintiff repeats the matters pleaded in sub-paragraph 22(a) hereof and says that had Smith and/or had Smith on behalf of Gocom not acted as pleaded, Auschess would have continued to develop and market the concept of internet public access kiosks to a level of success commensurate with the level of success achieved by pieNetworks, in which event Nestegg would also have been afforded the opportunity to participate in acquiring 'founder' shares for no capital outlay or for minimal capital outlay upon Auschess being floated on the Australian Stock Exchange as a public company.

(d) Further or alternatively, the plaintiff repeats the matters pleaded in paragraph 24 hereof and says that had Smith and/or had Smith on behalf of Gocom not acted as pleaded, Auschess would have continued to develop and market the concept of internet public access kiosks to a level of success commensurate with the level of success achieved by pieNetworks, in which event Nestegg would also have had the benefit of participating in opportunities similar to those enjoyed by Gocom as pleaded in paragraph 24 hereof, upon Auschess being floated on the Australian Stock Exchange as a public company.

(e) As a result of the said conduct, Auschess ceased to trade and has lost the opportunities referred to in sub-paragraphs (a) to (d).

(f) Further and better particulars will be provided by way of expert evidence prior to trial."

12 Paragraph 30 pleads a further breach of fiduciary duty. In the context of the pleading as a whole it is a somewhat curious plea but, to do justice to the plaintiff's case, I should quote it in full. It reads as follows:

(a) at a meeting held in or about May 1997 Smith orally informed Bailey and Paul that the Cammilleris had declined to contribute further funds to Auschess;

(b) for that reason, Smith, Bailey and Paul at that meeting agreed to cause Eureka to become incorporated to conduct the Business but to the exclusion of the plaintiff as a shareholder and the Cammilleris as directors;

(c) at no material time did Smith, Bailey or Paul inform Nestegg and the Cammilleris that they intended to continue or were contemplating continuing the Business through Eureka and to the exclusion of the plaintiff as a shareholder and the Cammilleris as directors;

(d) since 23 May 1997 Eureka (now known as pieNetworks) has conducted the Business."

13 Paragraph 31 through to par 38 plead that the defendants collectively and individually breached their fiduciary duties to the plaintiff. None of these paragraphs adds anything new to the pleading and the allegation of breach of fiduciary duty in each of the paragraphs refers back to one or other of the paragraphs I have already mentioned. The prayer for relief against each of the defendants claims either an account of profits and/or equitable compensation.

14 Dealing first with the pleaded case it is clear that the material facts pleaded in par 4, par 6, par 8 and par 16 cannot give rise to a fiduciary duty as pleaded in par 17 of the statement of claim. To determine whether or not a fiduciary duty arises between parties it is necessary to identify some action or function the doing or performance of which attracts the supposed fiduciary duty: see Breen v Williams (1996) 186 CLR 71 at 82; Wik Peoples v Queensland (1996) 187 CLR 1 per Brennan CJ at 95. There is nothing in the four nominated paragraphs of the plaintiff's statement of claim which could give rise to a fiduciary duty as between director and shareholder. Certainly the mere fact that the Cammilleris decided not to take any part in the management of Auschess could not be said to give rise to such a duty.

15 Leaving the pleaded case to one side the wider question is whether, accepting for the purposes of the application all the material facts as pleaded, a duty of care arises as between Smith and Paul as directors of Auschess and the plaintiff as one of its shareholders. (As noted above, Paul was not appointed as a director of Auschess. The plea is that he was a de facto director and this is challenged by Paul as part of this application. I will have something further to say about this issue below. For the present I will proceed on the basis that the plaintiff is able to establish the pleaded facts and that Paul is properly viewed a director of Auschess).

16 It is certainly the case, as was acknowledged by counsel for the defendants, that in certain circumstances a director of a company can owe fiduciary duties to the company shareholders. Two cases received particular attention from counsel. The first of these was the decision of the House of Lords in Johnson v Gore Wood [2000] UKHL 65; [2001] 2 WLR 72. The facts of the case were rather complex and it is the statements of principle made by various members of the House of Lords which are of importance. Dealing with the question of when a shareholder may recover damages against a party for a breach of a duty owed to a company, Lord Bingham said (at 94 - 95):

"(The) authorities support the following propositions.

(1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. ...

(2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. ...

(3) Where a company suffers loss caused by a breach of duty to it, a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other."

17 All members of the House agreed with these statements of principle although each member put the position in a slightly different way. Lord Millett said (at 120 - 121):

"A company is a legal entity separate and distinct from its shareholders. It has its own assets and liabilities and its own creditors. The company's property belongs to the company and not to its shareholders. If the company has a cause of action, this represents a legal chose in action which represents part of its assets. Accordingly, where a company suffers loss as a result of an actionable wrong done to it, the cause of action is vested in the company and the company alone can sue. No action lies at the suit of a shareholder suing as such, although exceptionally he may be permitted to bring a derivative action in right of the company and recover damages on its behalf. ...

Correspondingly, of course, a company's shares are the property of the shareholder and not of the company, and if he suffers loss as a result of an actionable wrong done to him, then prima facie he alone can sue and the company cannot. On the other hand, although a share is an identifiable piece of property which belongs to the shareholder and has an ascertainable value, it also represents a proportionate part of the company's net assets, and if these are depleted, the diminution in its assets will be reflected in the diminution in the value of shares. The correspondence may not be exact, especially in the case of a company whose shares are publicly traded, since their value depends on market sentiment. But in the case of a small private company like this company, the correspondence is exact."

18 A practical illustration of these principles is provided by the case of Brunninghausen v Glavanics [1999] NSWCA 199; (1999) 17 ACLC 1247. This is the second of the two cases which occupied counsel's attention. The facts of the case as taken from the headnote were as follows:

"Skima Imports Australia Pty Ltd had 6000 shares. 5000 shares were held by Mr Max Brunninghausen and 1000 by Mr Michael Glavanics. Brunninghausen was the sole effective director and majority shareholder in the company. Glavanics was the other director and shareholder. After an initial period of cooperation, relations between the two men, who were brothers-in-law, soured and there was no longer any trust between them. Glavanics commenced a business which competed with Skima. Glavanics' retention of his directorship of Skima was a formality which brought him no information or insight into the company's affairs.

As a result of family pressure, the two men began negotiations in late 1987 to resolve their differences. At one meeting, Brunninghausen referred to a need to resolve matters so that the problems would not be left to their young sons to sort out in years to come. Glavanics indicated he was willing to sell his shares and resign as a director provided he received a fair price.

While these negotiations were proceeding, Brunninghausen received an unexpected offer from a third party to buy the assets of the company. Brunninghausen had extensive negotiations to this end without informing Glavanics.

Glavanics agreed to sell his shares to Brunninghausen for a price well below the equivalent price paid by the third party for the assets.

The trial judge held that a fiduciary duty was owed by Brunninghausen as a director to Glavanics as a shareholder, and that Brunninghausen's failure to disclose the existence of the other negotiations was a breach of that duty. The trial judge ordered an enquiry to be conducted before himself to determine the amount of compensation to be paid and, in a second judgment, preemptorily awarded $300,000 compensation to Glavanics."

19 One of the issues on appeal was whether or not there existed as between Brunninghausen in his capacity as a director of Skima and Glavanics in his capacity as a shareholder of the company a fiduciary duty. The Court of Appeal confirmed that such a duty existed. Handley JA, with whom other members of the Court agreed, examined in some detail the right of a shareholder to sue for losses sustained by a company and the circumstances when a fiduciary duty arose as between a shareholder of a company and a director. His Honour said (at par 85 and par 86, page 1260):

"In the present case the special knowledge acquired by the defendant in the course of his management of the company was of an opportunity for an advantageous sale of its undertaking. This was an opportunity available only to the company, although the transaction might have been structured as a sale of all its shares.

If the defendant had caused the company to sell its undertaking and had not purchased the plaintiff's shares, the benefit of the sale would have accrued to the shareholders pro rata. Any attempt by the defendant to secure an additional personal profit would have been a fraud on the minority. Any attempt to dilute the plaintiff's shareholding by a substantial fresh issue in favour of the defendant or his friends would have been invalid under Ngurli Ltd v McCann, and any attempt to intercept the gain by altering the rights attached either to his shares or those of the plaintiff would have been invalid. Yet it is said on the authority of Percival v Wright that the defendant is entitled to take advantage of his special knowledge to acquire the plaintiff's shares at gross under-value without disclosing that knowledge. Such a result appears anomalous."

20 It is clear on the facts of this case that the company had no right of action. In fact, Brunninghausen sold all of the shares in the company to the third party after he had acquired Glavanics' shares. But if the arrangement was such that the company's business was sold with the effect that the company was left with cash and Brunninghausen was left with the shares, the company would still not have had any right of action against anyone. It received full value for its assets and undertakings. Glavanics, as the shareholder who had sold out when he did not know of the offer to purchase, was the loser. The loss to Glavanics was the difference between the price at which he sold his shares to Brunninghausen and what the shares would have been worth if he had waited and the company was sold to the third party. But the right of action was Glavanics and the company did not and could not have any independent right of its own.

21 What is clear from Brunninghausen v Glavanics is that it was the particular circumstances of that case which gave rise to the fiduciary duty. Brunninghausen was responsible for the day-to-day running of Skima and Glavanics had little knowledge of the company's affairs. The offer to purchase the company was made to Brunninghausen and he kept the information from Glavanics during the course of the negotiations for the sale of the shares. The nature of the fiduciary duty that arose was a duty on the part of Brunninghausen not to withhold information from Glavanics which could substantially affect the value of the shares, the sale of which was being negotiated.

22 In the present case what is, in effect, being alleged by the plaintiff is that the defendants stole the business from Auschess. It is said by a series of misrepresentations the Cammilleris were persuaded to close down the business which was immediately reignited by the defendants to their benefit. If the facts necessary to establish those claims are proved, then it is clearly the company Auschess which has suffered the loss. True it is that the value of the plaintiff's shareholding has been diminished by the alleged actions of the defendants but such losses are derivative or, to use the term preferred by the House of Lords in Johnson v Gore Wood, "reflective". If Auschess were to sue and recover the value of the plaintiff's shareholding would be increased and it would effectively recover its position. This stands in stark contrast to the position Glavanics found himself in after he sold he shares to Brunninghausen.

23 It must be acknowledged that there is authority which is at odds with the decision of the House of Lords in Johnson v Gore Wood. In Christensen v Scott (1996) 1 NZLR 273 the New Zealand Court of Appeal held that a shareholder did have a direct right of action for losses occasioned by a diminution in value of the company shares. The facts of the case taken from the headnote were as follows:

"The plaintiffs, the Christensens, were potato farms. They formed a company, Christensen Potato Co Ltd (the company), of which they were the directors, each having an equal shareholding. The company approached the first defendants, Peat Marwick, to organise a lease by the company of a block of land for growing potatoes. There wree three mortgages on the land including one to Registered Securities Ltd (RSL). Peat Marwick arranged for the second defendants McCaw Lewis Chapman to prepare the lease and to attend to other incidental legal matters. The company executed an instrument by way of security in favour of Broadbank Corporation Ltd an dthe company's obligations were guaranteed by the plaintiffs. The lessors defaulted on the mortgage to RSL which entered into possession of the land and the crop and executed its power of sale. RSL claimed it had no knowledge of the lease. The first and second defendants had not obtained the written consent of RSL as mortgagee to the lease nor lodged a caveat against the land to protect the company's interest. Access to the crop was denied to the company and the plaintiffs who were unable to harvest it. The plaintiffs sued RSL and obtained an interlocutory injunction restraining RSL from disposing of the proceeds of the crop. RSL went into liquidation and no damages were recovered. The Christensens claimed against the first and second defendants but that claim was struck out by a Master and an application to review was dismissed by a High Court Judge in August 1991. But in the meantime the company had been placed in receivership. It was wound up on 21 July 1992, the Official Assignee being appointed the liquidator. The present proceedings were commenced in October 1992 and the defendants moved to strike it out April 1993. In December that claim was settled by the company, the receiver, the Official Assignee as liquidator, and the defendants in respect of all claims which the company might have against the defendants arising out of the original proceedings - the defendants entering into the settlement with a denial of liability. The Christensens opposed the settlement claiming that the amounts being paid were totally inadequate. In the present proceedings the Christensens argued that the claim was brought in respect of the duties owed by their professional advisers to them personally and not to the company. An application to strike these proceedings out came on again in the High Court where the Judge accepted that it was arguable that the defendants owed the Christensens a duty of care and assumed that the defendants were in breach of that duty. He held that the damages representing the diminution in the value of the Christensens' shares could not be recovered and that any loss resulting from the negligence of the defendants would be a loss suffered by the company and not by the Christensens.

He held that there was no causal connection between the loss and the defendants' breach of duty and that it was too remote, that the claim for general damages could accordingly not be sustained and that, as the company had claimed the same losses in its earlier proceedings and settled the claim which settlement had been implemented, it would be unjust and oppressive to the defendants to allow the claim to proceed. He therefore struck it out. Mr and Mrs Christensen appealed."

24 The Court of Appeal allowed the appeal and held that it was arguable that the loss the plaintiffs suffered arose not from the breach of duty owed to the company but from the breach of duty owed to them as individuals. Thomas J, delivering the judgment of the Court, said (at 280):

"We consider, therefore, that it is certainly arguable that, where there is an independent duty owed to the plaintiff and a breach of that duty occurs, the resulting loss may be recovered by the plaintiff. The fact that the loss may also be suffered by the company does not mean that it is not also a personal loss to the individual. Indeed, the diminution in value of Mr and Mrs Christensen's shares in the company is by definition a personal loss and not a corporate loss. The loss suffered by the company is the loss of the lease and the profit which would have been obtained from harvesting the potato crop. The loss is reflected in the diminution in the value of Mr and Mrs Christensen's shares. They can no longer realise their shares at the value they enjoyed prior to the alleged default of their accountants and solicitors.

In circumstances of this kind the possibility that the company and the member may seek to hold the same party liable for the same loss may pose a difficulty. Double recovery, of course, cannot be permitted. The problem does not arise in this case, however, as the company has chosen to settle its claim. Peat Marwick and McCraw Lewis accepted a compromise in the knowledge that Mr and Mrs Christensen's claim was outstanding. It may well be, as was acknowledged by Mr Pidgeon in the course of argument, that an allowance will need to be made for the amount already paid to the liquidator in settlement of the company's claim."

25 The decision in Christensen v Scott has been subjected to almost unremitting criticism: see, for example, Harris: "Christensen v Scott - Undermining the Fundamentals of Company Law" 15 Company and Securities Law Journal 67. The House of Lords in Johnson v Gore Wood declined to follow the decision, although Lord Cooke of Thorndon, who sat as President of the Court of Appeal which decided Christensen v Scott, was able to distinguish it. Not least of the problems the decision raises is the question of double recovery. In this case, for instance, there is no doubt that Auschess has a right of action. It has now issued proceedings to enforce that right. There is an irreconcilable tension between the action of the plaintiff on the one hand and the action of Auschess on the other. In my view in such a situation the proper plaintiff is Auschess and it is the company who ought bring the action.

26 During the course of his submissions counsel for the plaintiff pointed out that there is no decision in this jurisdiction which resolves the apparent conflict between the decisions in Christensen v Scott and Johnson v Gore Wood. In the circumstances, counsel submitted it was inappropriate to grant the defendant's application - the position on the law was at least arguable. In my view, the decision in Johnson v Gore Wood is persuasive and in conformity with established principles of company law. In my view it ought be followed in this jurisdiction.

27 The proposed amendment to the particulars in par 29 represents an effort by the plaintiff to overcome the obvious difficulties. Subparagraphs (a) and (b) clearly refer to reflective losses for which the company has an action. Subparagraph (c) refers to the founder shares. But these so-called "founder" shares must have been issued for some consideration - they could not simply be plucked from thin air. A copy of the prospectus issued by the fifth defendant prior to its listing as a public company appears as annexure "RC 12" to the affidavit of Ross Cammilleri sworn 2 March 2001. The shareholding of Smith and the fifth defendant post-float is shown at page 94 of the affidavit and the basis upon which shares were issued to the directors is detailed in par 3.2 of the prospectus (on pages 115 - 116). It is clear that the issue of the shares was dependent upon the relationship between Smith, the second defendant and the fifth defendant. It may well be the case that had the business been owned by Auschess and folded into the fifth defendant prior to float, Auschess may have been entitled to "founder" shares. But it is very difficult to see how any such entitlement could have passed to the plaintiff by virtue just of its shareholding.

28 Subparagraph (d) refers to par 24 of the statement of claim and pleads, in effect, that had the business remained with Auschess the plaintiff would have been engaged as a consultant to the fifth defendant upon the fifth defendant being publicly listed. Apart from anything else there are no material facts pleaded which could support that proposition. The evidence clearly establishes that the plaintiff is the trustee of a trust which runs a commercial fishing operation. There is no reason why an internet technology company should seek consultancy services from a company which runs a commercial fishing operation. In my view the proposed amended pleading does not benefit the plaintiff's position in any way.

29 In all the circumstances I am satisfied that this is a case where the proper plaintiff is Auschess. I am not satisfied that the plaintiff has any right of action independent of Auschess. Any damage suffered by the plaintiff is reflective only. Further, I am not satisfied that based on the material facts contained in the statement of claim and to be found in the evidence of the parties, that there was any action or function the doing or performance of which attracted a fiduciary duty as between the directors of Auschess and the plaintiff as one of its shareholders. The pleaded facts may well disclose a breach of fiduciary duty as between Auschess and its directors. But that is a different matter. There ought be judgment for the defendants in relation to the claim by the plaintiff based on a breach of fiduciary duty.

30 As I have mentioned above, Paul says that apart from any other difficulties with the plaintiff's case, he was not a director of Auschess and on any view of the claim, he cannot be liable to the plaintiff as alleged. I do not propose to examine the evidence on this question. It is enough if I say that it is clear Paul was closely involved with the day-to-day operations of Auschess prior to May 1997. Minutes of directors meetings show that he attended such meetings and that he signed the minutes as a true and correct record. The minutes also show that he was invited to join the board of Auschess as a director. There is no evidence that he ever committed himself to a directorship. The evidence is somewhat confused and I could not conclude on the basis of the material presently available whether or not Paul was, in law, a director of Auschess. I would not have been prepared to enter judgment in favour of Paul on this issue alone.

31 Because of the conclusion that I have reached on the summary judgment application it is unnecessary for me to deal in any detail with the application for security for costs. However, as the matter was fully argued I should, in fairness to the parties, indicate the conclusion I have reached on this issue.

32 The application is brought under the provisions of s 1335 of the Corporations Law. The first question then is whether or not I can be satisfied that if called upon to do so the plaintiff would be unable to meet any costs order against it. It is at least arguable that as the plaintiff is a trustee company it would, by definition, not be able to meet any costs order from its own assets. It would, of course, have a right of indemnity from the trust assets, but that is a different thing. On that basis the jurisdiction to make an order would be enlivened. The plaintiff's trustee status aside, the evidence establishes that the assets of the trust amount to something in the region of $130,000. This comprises the value of a fishing trawler and the associated long-line fishing licence. Counsel for the defendant made the point that even if the value ascribed to these assets was reliable, there is no guarantee that they would be available when the defendants called upon the plaintiff to meet an order for costs. Both assets are easily transferable and could be put out of the reach of the defendants at any time. In response, counsel for the plaintiff offered an undertaking that neither of the two assets would be transferred from the trust without giving the defendants adequate notice. The defendants saw that undertaking as of little value because on notice being given, it would be necessary for them to approach the court and they may not be in a position to do so prior to the transfer taking place.

33 In the circumstances of this case I think it would be proper to order security for costs. In the exercise of my discretion I am particularly mindful of the difficulties with the plaintiff's case. Furthermore, those standing behind the plaintiff who would benefit from any successful litigation have not been prepared to offer undertakings in their own right. While I regard this as a matter of secondary importance it is nonetheless a factor in favour of the grant of security. Furthermore, the femoral nature of the assets held by the trust and the difficulty that may be occasioned in realising those assets should execution become necessary is a factor in favour of granting of security.

34 What the defendants are seeking by way of security is an amount of just over $117,000. This is the estimated full cost of the action. In my view it would be appropriate if security was to be ordered for the amount of the security to be $50,000. I would give leave to the defendants to apply for further top-up security if and when the matter was entered for hearing. The security should be provided by way of bank guarantee or by deposit with the court. However, I would give liberty to apply with respect to the form of security so that if the directors of the plaintiff were prepared to offer personal undertakings, the matter could be further argued.

35 Finally, there is the application under s 237 of the Corporations Law. As I have mentioned above, the only issue in this matter is the question of costs. By agreement the application itself is to be discontinued.

36 The arguments by the parties on this issue can be shortly stated. The defendants make two points. First, they say that no notice was given under s 237(2)(e)(i) so that it was not certain leave to bring the application would be given. Furthermore, it is said that the circumstances of the case were not such that it was likely leave would be given to bring the proceedings, despite notice not being given, under the provisions of s 237(2)(e)(ii). It was pointed out that the requirement for notice had been drawn to the attention of the plaintiff's solicitors and had been ignored for no good reason. Second, it was said by the plaintiff that prior to the issue of the application no resolution had been put before the directors seeking approval for the company to take action. When subsequent to the issue of this application such a resolution was put to the board it was passed. In the circumstances it was said that the court could not have been satisfied that it was probable that the company would not take proceedings, under the provisions of s 237(2)(a).

37 On the part of the plaintiff it was said that this was a case where there was no determination of the merits of the action and it was now inappropriate to determine the question of costs on an analysis of the merits of the plaintiffs' claim. The question was whether in all the circumstances the plaintiffs had acted reasonably. The plaintiffs say that they did act reasonably even though no notice was given to the company and no resolution to commence proceedings was put before the board, prior to the application being made by the plaintiffs. It is said by the plaintiffs that there were four directors, two of whom were likely to be defendants in any action. In the circumstances the plaintiffs had a reasonable apprehension that the board would not authorise the company to proceed.

38 It is difficult to see why in the circumstances of this case notice was not given by the plaintiffs to the company as is envisaged by s 237(2). Nonetheless it is also clear from the correspondence that the company was aware that proceedings were pending. It is difficult to know what difference notice would have made to the company's position. It also seems to me that the first plaintiff, through its directors, the Cammilleris were reasonably concerned that any board resolution to commence proceedings was likely to be voted down. In the circumstances it may have been better had the motion been put and lost before the application was made, but I do not see the failure to put the motion as decisive on the question of costs.

39 It is clear that the defendants were put to considerable cost and expense in responding to the plaintiffs' application. However, much of the work done will not be wasted. Auschess has now initiated proceedings in its own right. Much of the work down by the defendants in response to this application was designed to demonstrate that Auschess did not have a claim. The evidence gathered will no doubt be used by the defendants in the Auschess proceedings. On that basis alone it seems to me that the costs on the originating process should be costs in the cause of the Auschess proceedings.

40 I will hear the parties as to the precise form of the orders.