Pellew (Trustee) v IPSA Holdings Australia Pty Ltd

Outcome 12 For the reasons given below, the application may be disposed of on the basis that it is premature to appoint a referee. The leave application should be determined first. 13 If the leave application is successful, the prospect of assistance from an independent expert or referee may be revisited at an appropriate time.

The Bhasin report 14 In accordance with the pre-action discovery orders, Mr Bhasin conducted an investigation into the affairs of IPSA Holdings, based on the information to which he had access. He also provided a Report to the applicants. Mr Bhasin has provided an affidavit in support of the leave application which attaches the Report. 15 In summary the Report considered payments made by IPSA Holdings from 1 July 2017 to August 2023. According to the Report, the investigation identified categories of transactions that did not appear to be related to the business of IPSA Holdings, but rather appeared to have been made for the purpose of diverting the business or profit of IPSA Holdings to Mr Frankle, or were in the nature of expenses that were incurred in excessive amounts. 16 Mr Bhasin observed in his Report that he had access to a limited volume of source documents in relation to many payments by IPSA Holdings. However, acknowledging that qualification, Mr Bhasin was of the view that significant amounts of money from IPSA Holdings have apparently been misappropriated, and he identified some particular concerns. 17 Mr Frankle denies any such misappropriation. 18 Whether or not there is substance to the allegations is not the subject of these reasons.

The nature of the derivative action sought to be advanced 19 As noted, the applicants have now brought an application for leave to commence a derivative action on behalf of IPSA Holdings. A proposed statement of claim was attached to the originating process. 20 The nature of the claims articulated in the proposed statement of claim have their source in the Report, and relate to alleged conduct during the period 1 July 2017 to 31 August 2023. The conduct is described as follows: (a) IPSA Holdings incurred expenses of a personal nature for the benefit of Mr Frankle or entities associated with Mr Frankle of not less than $1,319,606 (para 9); (b) IPSA Holdings incurred expenses by way of payments made to Mr Frankle and to entities associated with Mr Frankle of not less than $22,995,128 (para 11); (c) IPSA Holdings incurred travel related expenses of not less than $668,794 (para 13); (d) IPSA Holdings incurred legal fee expenses payable to Roe Legal Services of not less than $11,527 (para 15); (e) Mr Frankle caused cash to be withdrawn from bank accounts held in the name of IPSA Holdings of not less than $4,750,151 (para 17); and (f) IPSA Holdings made payments to a third-party contractor of not less than $518,028 (para 19). 21 The applicants plead that by this conduct Mr Frankle contravened the duty prescribed by s 181(1) of the Corporations Act to exercise his powers and discharge his duties as a director of IPSA Holdings in good faith and for a proper purpose. 22 It is alleged that the conduct caused detriment to IPSA Holdings and further, or alternatively, conferred benefit on all or any of Mr Frankle, IPSA Infrastructure or PDS. 23 It is similarly pleaded in the proposed statement of claim that by the conduct: (a) Mr Frankle breached the duty set out in s 182 of the Corporations Act to not improperly use his position to gain an advantage for himself or someone else, or cause detriment to IPSA Holdings; (b) Mr Frankle breached the duty set out in s 183 of the Corporations Act to not use information obtained as a director of IPSA Holdings to gain advantage for himself or someone else or to cause detriment to IPSA Holdings; and (c) Mr Frankle breached his fiduciary duties to not place himself in a position where his duties to IPSA Holdings were in conflict with his personal interests or his duties to other entities. 24 The applicants allege that Mr Frankle in effect used both PDS and IPSA Infrastructure as his 'alter ego' or otherwise in a fraudulent and dishonest design in order to obtain benefits. It is alleged that PDS and IPSA Infrastructure each knew of and participated in the various alleged breaches of duty, were knowingly concerned in or assisted in those breaches, and received payments in those circumstances. 25 The applicants in the proposed statement of claim seek to pursue a claim by IPSA Holdings that it has suffered loss and damage as a result of the conduct. They also rely on the various matters as the foundation for an oppression claim, submitting that the conduct was oppressive to, unfairly prejudicial to, or unfairly discriminatory against them. They seek orders that remove Mr Frankle as a director of IPSA Holdings or alternatively seek an order that Mr Frankle acquire the 50% shares they currently hold as joint trustees of the JHR Investment Trust. 26 As explained by counsel for the applicants during the hearing, legal questions that arise in the proposed derivative proceeding include whether contracts entered into between IPSA Holdings and either PDS or IPSA Infrastructure should have been entered into and on what terms, and whether IPSA Holdings should have undertaken certain work itself and retained profits accordingly. Issues also arise as to the exercise that must be carried out in order for the Court to determine any damages in light of the nature of the claims, having regard to s 1317H of the Corporations Act.

The statutory regime 27 Part 2F.1A of the Corporations Act is headed 'Proceedings on behalf of a company by members and others'. In short, the provisions of this part set up a statutory derivative action that permit an applicant to apply to the Court for leave to bring proceedings in the company's name to assert or protect the company's rights. 28 The power to grant leave to a member to bring a derivative claim is found in s 236 and s 237 of the Corporations Act which provide: 236 Bringing, or intervening in, proceedings on behalf of a company (1) A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if: (a) the person is: (i) a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or (ii) an officer or former officer of the company; and (b) the person is acting with leave granted under section 237. (2) Proceedings brought on behalf of a company must be brought in the company's name. … 237 Applying for and granting leave (1) A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings. (2) The Court must grant the application if it is satisfied that: (a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and (b) the applicant is acting in good faith; and (c) it is in the best interests of the company that the applicant be granted leave; and (d) if the applicant is applying for leave to bring proceedings - there is a serious question to be tried; and (e) either: (i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or (ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied. … 29 In due course, when the leave application is heard, it will be necessary to consider each of the five matters in s 237(2)(a) to (e). 30 In Tydeman v Asgard Group Pty Ltd, in the matter of Asgard Group Pty Ltd [2023] FCA 486, Stewart J (at [30]) recognised the decision whether or not to grant leave under s 237(2) is not discretionary. Where all five requirements are satisfied, leave must be granted; conversely, if at least one requirement is not satisfied, leave must be refused, citing Huang v Wang [2016] NSWCA 164 at [57], [61] (Bathurst CJ, McColl JA and Barrett AJA agreeing). 31 Whilst it is necessary to consider the prospects of success, an application under s 237(2) does not involve a consideration of the underlying merits of the proposed litigation beyond the extent necessary to determine if there is a serious question to be tried: De Tocqueville, in the matter of Pacific Current Group Limited v Pacific Current Group Limited [2020] FCA 172 at [59] (Moshinsky J), quoting Bathurst CJ in Huang v Wang at [60]. A history of the nature of the inquiry as to whether there is a serious question to be tried may be found in Li v Dao [2018] VSC 530 at [114]-[122]. 32 However, in the interim Mr Frankle's application must be addressed.

Mr Frankle's referee application 33 At an earlier case management hearing in the leave application, Mr Frankle sought to be heard as an intervener on the basis that he intended to bring an application for the appointment of an independent referee. It was submitted that such an appointment was in the interests of the efficient use of judicial resources and those of the parties. At that time, and having regard to matters such as the potential for the Court to appoint a referee on its own motion (Division 28.6 and r 1.40 of the Federal Court Rules) and the discretion for a director to be heard on an application concerning a company (as recognised by r 2.13 of the Federal Court (Corporations) Rules 2000 (Cth)), I indicated I would adjourn the case management hearing so that Mr Frankle could intervene solely for the purpose of bringing the application he proposed, whilst noting the applicants' opposition and without indicating whether I considered such an application had any prospect of success. 34 Mr Frankle subsequently filed an application and supporting affidavit. Mr Frankle proposes that an expert accountant be appointed, and has obtained the consent of an experienced insolvency practitioner to act in that regard. The applicants oppose the orders sought by Mr Frankle. They rely on an affidavit of Ms Pellew (also filed in support of the leave application). 35 Mr Frankle's affidavit discloses a number of contextual matters. 36 First, there has clearly been a breakdown in the shareholder relationship between Ms Pellew and Mr Frankle. Second, arrangements between Ms Pellew and Mr Frankle do not appear to have been formally documented until a shareholders agreement was executed in September 2019. Third, Mr Frankle has relied on the same accountant to prepare the books and records of each of IPSA Holdings, PDS and IPSA Infrastructure. The accountant has not at all times understood the nature of the interests of the various parties in the entities, although admitted errors in that regard have apparently been corrected. Fourth, Mr Frankle refers to personal circumstances of Ms Pellew, such as her bankruptcy, the liquidation of other companies which she then controlled, the fact that ASIC had disqualified Ms Pellew from acting as a director of a company, and the fact that the Commonwealth Director of Public Prosecutions had brought certain charges against her (matters of public knowledge). Mr Frankle also sets out in some detail contentions about loans made by IPSA Holdings to Ms Pellew. Mr Frankle appears to contend that these matters affected the financial position and opportunities relating to IPSA Holdings and that they are relevant to the leave application. Fifth, Mr Frankle disputes many of the conclusions reached in the Report. 37 Mr Frankle generally described IPSA Holdings in his affidavit as a company that secured its first contracts in early 2018, it first payments in late 2018 and continued to secure contracts so that by late 2020 it employed 17 staff and consultants, and by August 2021 it operated from leased premises in Fremantle (premises purchased by Mr Frankle as trustee for the Robin Frankle Trust). Contracts successfully tendered for include works offered by the Department of Defence. I have already referred to the hours of work that Mr Frankle said he undertook in relation to IPSA Holdings. 38 As to Mr Frankle's denials or explanation of matters in the proposed statement of claim and Report, it suffices for now to note the following: (a) as to payments made by IPSA Holdings to Mr Frankle and associated entities, Mr Frankle states that all private expenses paid from IPSA Holdings' bank account have been accounted for as part of the repayment of invoices for services provided by PDS or IPSA Infrastructure (discussed further at [42] below), and that all invoices have been provided to the applicants in response to the earlier court orders (referred to at [1] above); (b) as to references to cash withdrawals from various bank accounts, Mr Frankle states that they relate to performance bonds which were deposited to comply with Department of Defence requirements, were released upon performance, and were all accounted for in the general ledger of IPSA Holdings; (c) as to legal fees, Mr Frankle states that they relate to the engagement of Ryan & Co (rather than Roe Legal Services) to undertake work for IPSA Holdings. He states that legal fees relating to his disputes with Ms Pellew have been transacted against IPSA Infrastructure's outstanding invoices and have not been incurred by IPSA Holdings; (d) of the payments identified as 'private' in the Report, Mr Frankle states not all are private. He contends the payments need to be split into 'business expenses' and 'private'. Mr Frankle identified in his affidavit some payments that he says are clearly business expenses. He states that as for private expenses, he has been informed by his accountant that: all transactions that were actually for my private expenses were accounted for in the ledger against outstanding invoices for services provided by either PDS or IPSA Infrastructure, and not as an expense of the respondent and then subsequently as a drawing to me from PDS [or] IPSA Infrastructure. (e) there have been extensive payments to PDS and IPSA Infrastructure, but those entities are subcontractors and all repayments were based on invoices received by them (including invoices relating to Mr Frankle's drawings for salary or wages); and (f) all travel expenses paid by IPSA Holdings were business expenses relating to IPSA Holdings. 39 It should be accepted by the applicants that on the basis of Mr Frankle's affidavit, if further information, records and in-person explanations were provided to Mr Bhasin or a referee by Mr Frankle and his accountant, the scope of the payments in dispute should reduce. A present impediment to the narrowing of the dispute is the imbalance in access to information. 40 However, even if that exchange of information were to occur, there remain disputed areas where, based on the material before me, legal issues will require examination. A factual analysis alone is unlikely to be determinative. For example, Mr Bhasin in the Report included the following statement: Amounts paid to PDS (Formerly RMF) I identified in the books of IPSA Holdings that on 30 June 2021 a bill was recorded in Xero in the total sum $3,300,000, with the description being 'contract work done for 2021'. I also note that this bill was created on 26 August 2021 - nearly two months after the end of the 2021 financial year. I have reproduced the bill below: To: IPSA Holdings Australia Ltd Invoice Date RMF Projects Attention: Robin Frankle 30 June 2021 WA 6163 PO Box 2 ABN: 46 611 571 469 COTTESLOE WA 6011 AUSTRALIA

Description Quality Unit Price GST Amount AUD Contract work done for 2021 1.00 3,000,000.00 10% 3,000,000.00 Subtotal 3,000,000.00 Total 10% 300,000.00 Total AUD 3,300,000.00 Less Amount Paid 3,300,000.00 AMOUNT DUE 0.00 DUE DATE 26 Aug 2021

This bill was then gradually accounted for in the books of IPSA Holdings as having been paid through IPSA Holdings making payment of expenses that appear to be of a private nature, including, but not limited to: - tuition fees for [school] - private home expenses such as shire rates and tariffs; - golfing equipment purchases and hire; - cricket equipment purchases and hire; - private health insurance fees; - personal traffic and other infringement fines; - leisure expenses such as purchases made at BCF, restaurants, bars and pubs; - accommodation expenses at resorts and luxury hotels; - Goodlife gym subscriptions; and - sporting event and concert tickets. 41 Mr Frankle responded to this in his affidavit as follows: In about August 2021 the books of PDS were being finalised and I caused [his accountant] to create an invoice in the amount of $3,300,000 inclusive of GST for work performed by PDS for the respondent up until 30 June 2021 that had not previously been billed. This includes the work performed in winning the tenders and in servicing the contracts won, I now observe that the invoice in error refers to work done for 2021. 42 This example discloses the evidentiary issues faced by Mr Bhasin when he prepared the Report, and the legitimacy of his questioning. It is not clear how PDS performed work that entitled it to be paid $3 million. The terms of payment, hours worked etc are not apparent, and the invoice is for a significant amount. Generalised assertions would not ordinarily be sufficient to justify payment by a company of an invoice in that sum, absent further content. In due course it may well be that a further explanation is provided. However, at present it is by no means clear that the only issues that arise in this regard are factual rather than legal. 43 Senior counsel for Mr Frankle accepted that the issues between the parties will not all be resolved by an accounting exercise but proposed as part of the reference that the referee have access to an independent lawyer, and that the referee, the applicants and Mr Frankle come to the Court for assistance where required. 44 Therefore, the scenario with which I am concerned is one where a forensic accounting review undertaken at this stage: may provide some assistance; will require an element of cooperation between the applicants, Mr Frankle and the referee; may narrow and resolve some factual issues; may require the referee to seek legal advice; and may require applications to the Court.

The power to appoint a referee 45 Mr Frankle relies on provisions in both the Corporations Act and the FCA Act as the source of power for the orders he seeks. 46 Section 241, also within Part 2F.1A of the Corporations Act, enables the Court to make any orders and give any directions that it considers appropriate in relation to proceedings brought or intervened in with leave. 47 Relevantly, s 241(1)(d) provides: (1) The Court may make any orders, and give any directions, that it considers appropriate in relation to proceedings brought or intervened in with leave, or an application for leave, including: … (d) an order appointing an independent person to investigate, and report to the Court on: (i) the financial affairs of the company; or (ii) the facts or circumstances which gave rise to the cause of action the subject of the proceedings; or (iii) the costs incurred in the proceedings by the parties to the proceedings and the person granted leave. 48 If the Court appoints such an independent person it must make an order stating who is liable for the remuneration and expenses of that person. The persons who may be made liable for that remuneration and expenses are all or any of the parties to the proceedings or the application and the company. 49 There is authority for the proposition that the court may make an order under s 241(1)(d) prior to the hearing of an application for leave to bring a derivative action: Victory Projects Pty Ltd v AAA Self Storage Pty Ltd [2016] NSWSC 1758 at [149]. However, Black J declined in that case to make an order appointing an investigator, noting the exchanges of information that had already been undertaken, including by the use of court processes: at [150]. Mr Frankle was unable to identify a case in which an appointment has been made under s 242(10(d). 50 The applicants also rely on s 54A of the FCA Act which relevantly provides for the referral of one or more questions arising in a proceeding to a referee. The Court may then deal with the report as it thinks fit, including by adopting it in part or in full, varying it or rejecting it. Division 28.6 of the Federal Court Rules provides further parameters for the appointment of a referee.

Consideration 51 I accept that Mr Frankle has suggested the involvement of a third-party expert or referee because he considers that there is some prospect that the applicants will be given comfort as to the operation and finances of IPSA Holdings, which may in turn alleviate the need for legal proceedings or at least narrow their scope. That is an admirable aim, and it can be seen that in this sense Mr Frankle, by his application, has sought to assist in the resolution of the leave application and the resolution of the issues raised by the parties. He does not purport to expand the matters in issue. 52 It is readily apparent from the evidence before me that there is concern on the part of the applicants as to whether a referee would receive all or sufficient information required from IPSA Holdings, particularly having regard to Mr Frankle's position as its sole director and the processes the applicants considered they were obliged to take in order to seek information, including securing court orders to facilitate inspection of books and records of IPSA Holdings. Having said that, I take into account that Mr Frankle has now indicated that he would be prepared to make all records of the three relevant entities available to the proposed referee. 53 However, even assuming that a referee would be provided with all relevant information, there are likely to be legal questions raised as to why certain payments were made by IPSA Holdings, the circumstances in which contracts were entered into between related entities, and why loans have also apparently been made to Ms Pellew. The issues as raised by Ms Pellew and Mr Frankle are not addressed solely to quantum or factual questions, such as which invoice was paid by which entity. If a referee were obliged to seek the assistance of the court in relation to such matters in order to complete a report, there will inevitably be further delay and costs involved. It is possible that the aspiration of reducing time and costs will not be achieved. 54 Experience suggests, having regard to the types of matters raised by the respective parties in the affidavit evidence (including personal information), that even if I were to order such a report at this stage, the use I could make of it on the leave application would remain hotly contested. 55 Further, it must be recalled that as yet the question of leave to bring a derivative action has not been considered. It is true that on that application I will need to consider whether there is a serious question to be tried, but it is not necessary in order to consider that question to have all details or disputes as to the financial position and transactions of the various entities resolved, or even substantially resolved. Although a report in certain circumstances might assist, it is not necessary in order for the Court to resolve the leave application. 56 Having regard to the matters I have addressed and the materials before me, the work that might be undertaken at this point by a referee to address the matters proposed by Mr Frankle is likely to be considerable, but is also likely to leave many questions unanswered. I do not consider it likely that the process, if undertaken at this point in time, will resolve the apparent conflict between the parties. 57 I do not consider the parties to the leave application will be prejudiced by the absence of any such report. I will be assisted on the leave application by the parties providing affidavit material in the usual way that clearly, objectively and concisely address the matters the subject of the proposed derivative proceeding, observing the relief sought in those proceedings. Subject to further order, it is open to the parties to rely on expert evidence on the leave application if they wish to do so. The applicants have accepted as much. 58 I note that experience also suggests that in practice the value of a reference process is enhanced if there is a willingness by all parties to engage cooperatively in it. There is no doubt that a reference or investigation can bring about a significant saving for all parties when utilised appropriately. If the leave application succeeds in this matter, there may well be a time when a reference to an expert accountant, even if only to investigate and assess particular areas of dispute, is appropriate. 59 However, for the above reasons, now is not the time.

Orders 60 There will be an order dismissing Mr Frankle's application. I will hear the parties as to costs in due course. I certify that the preceding sixty (60) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Banks-Smith.