Plaintiff v Defendants

Supreme Court of Victoria|2011-05-13|Before: Davies J

CORPORATIONS -- Statutory derivative action - Requirements of s 237(2) Corporations Act 2001 (Cth) - Criteria for grant of leave satisfied - Corporations Act 2001 (Cth), s 237.

1 This is an application by the plaintiff ("Texxcon") for an order under s 237 of the Corporations Act 2001 (Cth) ("the Act") granting it leave to bring claims in this proceeding on behalf of Nominexx Pty Ltd ("Nominexx"). Texxcon is a 50% shareholder of Nominexx and seeks to bring the Nominexx claims in the alternative to claims that it has made against the defendants under the Trade Practices Act 1974 (Cth) ("the TPA") and the Fair Trading Act 1999 (Vic) ("the FTA")("the misrepresentation claims").

2 The subject matter of Texxcon's misrepresentation claims is a loan of $14m that Nominexx is alleged to have made to the first defendant ("Austexx Corporation") in two instalments in October and November 2008. Texxcon has alleged that Nominexx, in making the loan to Austexx Corporation, acted as agent for the Austexx-Texxcon Joint Venture ("the JV").[1] The parties to the JV were Texxcon and Austexx Constructions No. 2 Pty Ltd ("Austexx"), a wholly owned subsidiary of Austexx Corporation. The JV undertook the design and construction of development projects for Austexx Corporation and its group of companies. Texxcon has alleged that the terms of the JV agreement included, relevantly, that Texxcon and Austexx owned the JV assets as tenants in common in accordance with their respective 50% interests in the JV;[2] that the JV Board would comprise 3 members appointed by Texxcon and 3 members appointed by Austexx;[3] that the JV Board had full and complete power and authority to give all approvals and make all decisions and determinations in respect of the JV assets, except for duties and responsibilities delegated to Nominexx under the management agreement;[4] that all decisions of the JV Board were required to be made by a simple majority;[5] and that Nominexx was appointed as corporate nominee to conduct the JV works.[6]

3 It is pleaded that as at October 2008, there were surplus funds in the JV account[7] and that Texxcon was induced by representations made by the seventh defendant ("Cowan"), the company secretary of Austexx Corporation, and the second and third defendants ("South Wharf Tower" and "South Wharf Retail" respectively), to approve a loan by Nominexx to Austexx Corporation of $14m of the JV surplus funds.[8] The alleged representations included that the loan from Nominexx to Austexx Corporation would be for a maximum of 14 months and that funds were available to Austexx Corporation by way of an Interest Capitalisation facility ("the Mirvac facility") which could be used to repay the loan.[9] Texxcon has alleged that its three representatives on the Nominexx board authorised Nominexx to make the loan, acting in reliance on the representations. The terms of the loan included that the loan amount would be advanced by Austexx Corporation to South Wharf Tower and South Wharf Retail so that those companies could pay progress claims due by them to Nominexx under a building contract that Nominexx had entered into as agent of the JV.[10] Texxcon has claimed that the alleged representations were misleading and deceptive. In particular it is alleged that the Mirvac facility was not available to repay the loan to Nominexx and that Austexx Corporation could not repay the loan within the 14 month period.[11]

4 Texxcom joined the three Austexx directors on the Nominexx board as defendants to the proceeding (as the fourth, fifth and sixth defendants). These directors were also directors of Austexx Corporation, South Wharf Tower and South Wharf Retail. Texxcon has alleged that they aided, abetted, counselled, procured and were knowingly concerned in and a party to the misrepresentations.[12]

5 Texxcon has claimed that it suffered loss and damage by reason of the misrepresentations. The loss and damage is particularised as its half share of the surplus funds of the JV loaned to Austexx Corporation. Texxcon seeks recovery of its loss and damage. [13]

6 The claims that Texxcon seeks leave to bring on behalf of and in the name of Nominexx are a debt claim against Austexx Corporation for recovery of the whole of the loan moneys made by Nominexx, alternatively damages for breach of contract and claims against the second to seventh defendants under the TPA and FTA.[14] The nature and basis of the claims are pleaded out in a proposed further amended statement of claim.

7 The debt claim is based on an alleged formal loan agreement made between Nominexx and Austexx Corporation on or about 18 December 2009, under which the date for repayment of the loan amount and interest owing was extended to 1 January 2011. It is alleged that Austexx Corporation failed to pay the moneys owing, despite a demand having been made.[15] It is further alleged, as alternative claims for relief, that:

(a) Austexx Corporation is indebted to Texxcon and Austexx Constructions No. 2, alternatively to Nominexx, for the Loan Amount plus accrued interest pursuant to the terms of the Formal Loan Agreement; and

(b) by reason of Austexx Corporation's breach of the terms of the Formal Loan Agreement, Texxcon and Austexx Construction[s] No. 2, alternatively Nominexx, have suffered loss and damage, being the Principal Sum and accumulated interest.

8 The claims under the TPA and FTA are based on the alleged misrepresentations and alleged accessorial liability of the three Austexx directors.[16]

Further, Nominexx has failed and refused to bring proceedings against Austexx Corporation in respect of [the Nominexx claims].

PARTICULARS

At a Board Meeting of Nominexx held on 4 February 2011, the Austexx Corporation aligned directors voted against a resolution to bring proceedings against Austexx Corporation and the resolution was not passed.

10 Texxcon as a shareholder of Nominexx is entitled to bring proceedings on behalf of that company subject to a grant of leave under s 237 of the Act.[17] Section 237(2) contains the criteria for granting leave. The sub-section provides as follows:

(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.

11 If all of the five criteria have been satisfied, the Court must grant the application for leave.[18] The prevailing view is that failure to satisfy any one of those criteria means that leave must be refused.[19] Texxcon has the burden of satisfying the Court on the balance of probabilities that each criterion has been satisfied.[20]

12 The application is supported by an affidavit of Joseph John Gianfriddo ("Gianfriddo"), the company secretary of Texxcon and a director of Nominexx. No rebuttal affidavits were filed on behalf of the defendants and Gianfriddo was not cross examined, although notice of intention to cross examine him was given on behalf of the fourth and fifth defendants. Counsel for the first to third, sixth and seventh defendants informed the Court that those defendants neither consented to nor opposed the grant of leave. The fourth and fifth defendants were separately represented and their counsel informed the Court that they did oppose the grant of leave. In short, they contended that the criteria in s 237(2)(b), (c), (d) and (e)(i) were not satisfied.

13 It is convenient to deal with the requirements of s 237(2) in the same order in which counsel for fourth and fifth defendants put his contentions at the hearing.

14 The authorities indicate that the test for a serious question to be tried is the same test that applies on applications for interlocutory injunctions and accordingly, the standard of proof is the same.[21] Thus the Court will ordinarily conclude that there is a serious question to be tried if there is a probability, on the evidence, that the applicant would be entitled to relief on the claims made.[22] The Court does not normally enter into the merits of the proposed derivative action to any great degree, but rather considers whether there is evidence to support the claims.[23] Whilst "an indication of the evidence" without actual evidence is insufficient to demonstrate a serious question to be tried, the Court may draw inferences where those inferences are open on the material before the Court, particularly if the respondents have not led any evidence.[24]

15 Counsel for the fourth and fifth defendants argued that there was no serious question to be tried because the proposed claims did not raise any cause of action, or claim for loss and damage, or act of reliance on alleged misrepresentations separate from Texxcon's case as pleaded. This submission, however, mischaracterises the nature of the claims intended to be brought on behalf of Nominexx. The claims are not a replication of Texxcon's claims. Texxcon has sued for damages quantified as its half share of the loan funds and interest based on allegations that Nominexx, in making the loan, acted on behalf of, and with the authority of, the JV as agent for the JV. Nominexx, on the other hand, would sue for enforcement of its rights and remedies on the loan and contract in the derivative claim as principal, seeking recovery of the full loan amount of $14m plus interest. The submission, nonetheless, highlighted that the form of the proposed pleading is not apt to make this clear, particularly because the statement of claim presently pleads in paragraph 14 that "references to Nominexx in this pleading are as agent of the [JV]". Despite paragraph 14, it is evident from a consideration of the proposed pleadings, as well as of the evidence in support of the application, that the proposed claims on behalf of Nominexx are predicated on Nominexx acting as principal, not as agent, with respect to the loan. These claims would be put in the alternative to Texxcon's claims, which are predicated on Nominexx acting as its agent with respect to the loan. Some change will be needed to the form of the pleadings to make this clear but the proposed claims are actionable by Nominexx.

16 Next, counsel argued that there was no serious question to be tried on the misrepresentation claim because the element of reliance was not made out on the claim as pleaded or as presented on the evidence. I do not accept this submission. In my view the pleading of reliance[25] is supported by the evidence. The evidence was that the alleged misrepresentations were contained in an email that Cowan sent to Gianfriddo and two other members of the Nominexx board "regarding, amongst other things a request that Nominexx lend the amount of $14 million to Austexx Corporation" and that:

Following receipt of Cowan's 29 October 2008 email, the Nominexx directors from Texxcon agreed that Texxcon would authorise the loan to Austexx Corporation.[26]

The inference is capable of being drawn from that evidence, which was unchallenged, that the Texxcon directors on the Nominexx board would not have approved the loan by Nominexx had they known of the falsities in the representations made to them which are alleged.

17 Next, counsel for the fourth and fifth defendants submitted that Nominexx's claim based on misrepresentation must fail by reason of the claim based on accessorial liability against the Austexx directors, who are the fourth, fifth and sixth defendants. This submission was based on a contention that their knowledge constituted knowledge of Nominexx by and under s 84 of the TPA which provides that where the state of mind of a body corporate is to be established for the purposes of the Act it may be established by the state of mind of a director, employee or agent of the company engaged in that conduct. This submission lacks substance. The issue raised by the pleadings is not the state of mind of Nominexx. The issue is whether the conduct of the Nominexx directors from Austexx was misleading and deceptive and, if so, whether Nominexx suffered loss or damage by reason of that conduct. Section 84 of the TPA is not pertinent.

18 It was also argued that the evidence before the Court did not support the accessorial liability claim. I disagree. In view of the uncontradicted evidence contained in Gianfriddo's affidavit about the alleged misrepresentations, the "knowingly concerned" allegations against the fourth, fifth and sixth defendants, involving elements of knowledge and intentional participation in the misleading and deceptive conduct,[27] are capable of inference from the positions that those defendants held as directors of Austexx Corporation and the other companies in that group and, as well, as directors of Nominexx.

19 Finally, it was argued that the debt claim based on the formal loan agreement must fail because the consideration that supported that agreement was past consideration. This submission overlooked the fact that the loan document sued on was executed by the parties as a deed.[28] Therefore the Formal Loan did not need to be supported by consideration to be enforceable. In any event, it is sufficiently arguable that the consideration was constituted by forbearance to sue.

20 I therefore conclude that there is in my view a serious question to be tried on the claims proposed to be brought on behalf of Nominexx.

21 The Court must be satisfied that the proposed action is in the best interests of the company. In Swansson v RA Pratt Properties Pty Ltd[29] Palmer J said that this requirement imposes a far higher threshold than demonstrating that the proceeding "may be, appears to be or is likely to be" in the best interests of the company. In Fiduciary v Morningstar[30] Austin J held that:

... there is a balance to be struck between the prejudice that the company will suffer if claims are pressed unsuccessfully on its behalf and there is an adverse costs order, and the advantage that it will gain, indirectly for the benefit of its shareholders, if the claims are successful ...[31]

Thus some potential benefit for Nominexx must be foreseen from bringing the proposed claims on behalf of Nominexx. The potential benefit for Nominexx includes consideration of the interests of the shareholders.[32]

22 Counsel for the fourth and fifth defendants submitted that this criterion was not met for two reasons. First, that the claims by Nominexx essentially replicate Texxcon's claims. Secondly, that there was no evidence before the Court that the claim will be of any practical benefit to the company.

23 The first submission can be dealt with very shortly. It was premised on the view that Nominexx's proposed claims were made on the basis that Nominexx was the agent of the joint venturers in the making of the loan. For the reasons already given, that is a misunderstanding of the way in which the claim is sought to be put.

24 The second submission was put in two ways. First, it was argued that the applicant did not adduce evidence of the ability of the defendants to meet a substantial part of any judgment in favour of Nominexx. However that kind of evidence is not essential in all cases. In some cases the applicant may need to adduce evidence of a defendant's capacity to meet the judgment in order to show that the proceedings would benefit the company,[33] but here some weight should attach to the fact that there are proceedings on foot already by a 50% shareholder in the company. The inference may be drawn that Texxcon reasonably believes that there would be monetary advantage to Nominexx in bringing its claims. Secondly, counsel for the fourth and fifth defendants sought to put the positive case that Austexx would be unable to meet any judgment debt. He supported that case by tender of the unaudited accounts for Austexx Corporation as at 30 June 2009 which showed a balance sheet deficiency and net loss for that financial year. I am of the view that this evidence carries little weight as the accounts were unaudited and historical. Counsel also relied on the minutes of a board meeting of Nominexx on 4 February 2011 at which the resolution was put that Nominexx bring proceeding to enforce its rights under the loan agreement. The minutes record that Cowan told the meeting that Austexx Corporation, Austexx, South Wharf Retail and South Wharf Tower had a deficiency of assets, that "there is nothing there", that the companies do not trade and that if Nominexx were to take action against the companies, the directors of the companies would need to consider whether they should be placed into voluntary administration. I place no weight on those minutes as they are argumentative statements made by a director in a position of conflict.

25 I have already concluded that the Nominexx claims raise serious questions to be tried, which include claims against the Austexx directors on the Nominexx board, creating a substantial conflict of interest for them in their consideration as to whether it would be in the interests of Nominexx to bring those claims. The downside to Nominexx in pressing claims that may be unsuccessful is mitigated to some extent by undertakings that Texxcon has agreed to make to the Court in the following terms:

(a) that it will be bear the costs of pursuing any claim on behalf of Nominexx;

(b) that it will indemnify Nominexx for any costs that Nominexx becomes liable to pay; and

26 These undertakings are factors to be taken into the consideration of the best interests requirement, particularly as nothing was put before the Court to indicate that the undertakings would not be of value.

27 Accordingly I am satisfied that the criterion in s 237(2)(c) is met.

28 In Swansson v RA Pratt Properties Pty Ltd,[34] Palmer J stated that there are at least two interrelated factors to which the Courts will always have regard in determining whether the good faith requirement of s 237(2)(b) is satisfied. The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. The second factor is whether the applicant is seeking to bring the derivative suit for a collateral purpose, which would amount to an abuse of process.[35]

29 Gianfriddo has not deposed that he honestly holds such a belief. However, the absence of that evidence does not defeat this criterion. The good faith requirement is a matter which may be objectively determined.[36]

30 It was not suggested that there was any collateral purpose sought to be achieved by Texxcon by the bringing of this application nor in my view could there be on the state of the evidence. The evidence showed that the proposed derivative action is necessary by reason of the stated position of the sixth defendant that Nominexx made the loan as principal, not as agent for the joint venturers. The fact that the applicant is willing, as a condition of leave, to indemnify Nominexx for costs and any adverse costs order, that there is no suggestion of any collateral purpose, and that there is a serious question to be tried on the Nominexx claims is sufficient to demonstrate good faith. Accordingly I am satisfied that this criterion has been met.

31 Finally, it was submitted that notice was not given as required by s 237(e)(i) because notification was not given of the proposed misrepresentation claims, although it was accepted that notice was given of the intention to apply for leave in relation to the proposed contract claim. This submission should be rejected as the requirement is to give notice of the intention to apply for leave and of the reasons for applying. That notice with reasons was given on 12 January 2011.

32 If there were any doubt about whether that letter constituted sufficient compliance, I consider that it would be appropriate to grant leave in accordance with s 237(2)(e)(ii) by reason that a formal resolution was put to the directors of Nominexx on 4 February 2011 that Nominexx should bring proceedings to recover from the debtor companies the amounts due under the loan agreement. That formal resolution was accompanied by an explanatory statement detailing the reasons supporting the resolution. The resolution was voted on but failed by reason that the three Austexx directors voted against the resolution. Without the support of the three Austexx directors any resolution to bring the proceedings could not be passed by the Nominex board. Those three Austexx directors are defendants in the proceeding and are fully cognisant of the claims made against Austexx Corporation and themselves, which include the misrepresentation claims. Accordingly, there is no utility in giving notice of the misrepresentation claims.

The Company will not itself bring the proceedings

33 I am satisfied by reason of the failure of the motion on 4 February 2011 that it is probable that Nominexx will not itself bring the proceedings or properly take responsibility for them or for the steps in them. This criterion is also satisfied.

34 Accordingly I will grant leave to Texxcon to bring the derivative claims of Nominexx in these proceedings. Texxcon sought to have Nominexx joined as a defendant for that purpose. In my view, however, the better course is for Nominexx to be joined as a plaintiff and I will so order.

[1] Amended Statement of Claim filed 25 February 2011, 5 [14].

[10] Ibid, 5-6, 8-10 [14, 15, 22, 23(f), 25].

[13] Proposed Further Amended Statement of Claim dated 2011, 14 [31].

[18] Carpenter v Pioneer Park Pty Ltd (In Liquidation) [2004] NSWSC 1007; (2004) 211 ALR 457, 466 [31] (Barrett J); Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442 (Unreported, Austin J, 9 May 2005) [16]; Goozee & Anor v Graphic World Group Holdings Pty Ltd & Ors [2002] NSWSC 640; (2002) 42 ACSR 534, 540 [27] (Barrett J); Magafas v Carantinos [2006] NSWSC 1459 (Unreported, Brereton J, 27 November 2006) [8]; Vigliaroni v Concrete Precast Systems Pty Ltd [2009] VSC 253 (Unreported, Davies J, 25 June 2009) [3].

[19] Jeans v Deangrove Pty Ltd (recs and mgrs apptd) [2001] NSWSC 84, (Unreported, Santow J, 26 February 2001) [9] - [10]; Goozee & Anor v Graphic World Group Holdings Pty Ltd & Ors [2002] NSWSC 640; (2002) 42 ACSR 534 [27] (Barrett J); Herbert v Redemption Investments Ltd [2002] QSC 340 (Unreported, Mackenzie J, 18 October 2002) [25]; Maher v Honeysett & Mahr Electrical Contractors [2005] NSWSC 859 (Unreported, Brereton J, 25 August 2005) [12].

[20] Swansson v RA Pratt Properties Pty Ltd & Anor [2002] NSWSC 583; (2002) 42 ACSR 313, 318 [24] (Palmer J); Cassegrain v Gerard Cassegrain & Co Pty Ltd & Anor [2008] NSWSC 976; (2008) 68 ACSR 132, 143 [69] (Sackville AJ); Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442 (Unreported, Austin J, 9 May 2009) [15]; Vigliaroni v Concrete Precast Systems Pty Ltd [2009] VSC 253 (Unreported, Davies J, 25 June 2009) [7].

[21] Swansson v RA Pratt Properties Pty Ltd & Anor [2002] NSWSC 583; (2002) 42 ACSR 313, 318 [25] (Palmer J); Goozee & Anor v

Graphic World Group Holdings Pty Ltd & Ors [2002] NSWSC 640; (2002) 42 ACSR 534, 540 [32] - [34] (Barrett J); MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31 (Unreported, North, McKerracher and Jagot JJ, 10 March 2011) [32].

[22] Bradto Pty Ltd v State of Victoria [2006] VSCA 89; (2006) 15 VR 65, 68 [13] (Maxwell P and Charles JA); Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57, 81-2.

[23] Swansson v RA Pratt Properties Pty Ltd & Anor [2002] NSWSC 583; (2002) 42 ACSR 313, 318 [25] (Palmer J); Ehsman v Nutectime International Pty Ltd & Ors [2006] NSWSC 887; (2006) 58 ACSR 705, 707 [6] (Austin J); South Johnston Mill Ltd (ACN 101 695 575) & Ors v Dennis and Scales (ACN 004 044 987) & Anor [2007] FCA 1448; (2007) 163 FCR 343, 357 [80]-[82] (Middleton J).

[24] South Johnston Mill Ltd (ACN 101 695 575) & Ors v Dennis and Scales (ACN 004 044 987) & Anor [2007] FCA 1448; (2007) 163 FCR 343, 357 [82] (Middleton J).

[25] Proposed Further Amended Statement of Claim dated 2011, 14 [32], 8 [22 particulars].

[26] Affidavit of joseph John Gianfriddo sworn 10 March 2011, 4-5 [16-17].

[27] ASIC v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373, 394-5 [90] (Brereton J).

[29] [2002] NSWSC 583; (2002) 42 ACSR 313, 324 [55] - [56] (Palmer J)

[31] Fiduciary v Morningstar [2005] NSWSC 442; (2005) 53 ACSR 732, 743 [51] (Austin J).

[32] Cassegrain v Gerard Cassegrain & Co Pty Ltd & Anor [2008] NSWSC 976; (2008) 68 ACSR 132, 145 [79] (Sackville AJ).

[33] Swansson v RA Pratt Properties Pty Ltd & Anor [2002] NSWSC 583; (2002) 42 ACSR 313, 324 [60].

[35] Swansson v RA Pratt Properties Pty Ltd & Anor [2002] NSWSC 583; (2002) 42 ACSR 313, 320 [36] (Palmer J).

Fair Trading Act 1999(Vic)

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