Plaintiff v Defendants

2 M+W Malaysia is the majority shareholder in the company with 62% of the issued capital; Fernandez Corporation Pty Ltd, a company controlled by the applicant, holds 11.9% of the issued capital in the company; and the applicant holds 28,000 fully paid redeemable preference shares in the company with a face value of $1,000 each. He is also a director of the company. The other directors are Mr Gattereder, Devin Raymond Field, Klaus Taraschka and Surendra Chandrajit.

3 There is a current proceeding in this court in which the applicant and Fernandez Corporation are plaintiffs and M+W Malaysia and the company are defendants. In that proceeding (the oppression proceeding), the applicant seeks, amongst other relief, the redemption by the company of his preference shares. Fernandez Corporation seeks an order for the purchase of its holding at fair value. The oppression proceeding was commenced by writ filed on 22 June 2012.

4 In the amended statement of claim in the oppression proceeding, the plaintiffs allege that the affairs of the company are being conducted contrary to the interests of the members as a whole. The allegations relate, in part, to what is described as the 'solar panel procurement proposal' under which, so the plaintiffs allege, M+W Malaysia and Mr Gattereder diverted business opportunities from the company, or imposed upon it a prejudicial purchasing regime or one that produced an unauthorised benefit to M+W Solar.

5 In the proposed proceeding, the subject of this application, the applicant would have the company allege that it suffered loss and damage by reason of the implementation of the 'solar panel procurement proposal'. In the draft statement of claim, the company alleges that Mr Gattereder breached ss 180(1), 181(1) and 182(1) of the Act, and fiduciary duties owed by him to the company, by proposing and procuring the implementation of the proposal. The company also alleges, against M+W Solar, a constructive trust of profits derived from the implementation of the proposal. The company seeks orders for compensation from Mr Gattereder in a sum exceeding Є1,000,000; and an account of profits and equitable compensation from M+W Solar.

6 There was a substantial overlap between allegations in the oppression proceeding concerning the solar panel procurement proposal and the allegations in the proposed proceeding for which the applicant seeks leave. With one qualification, it is unnecessary to consider the claim in more detail because the respondents concede that the allegations give rise to a serious question to be tried. The qualification involves the contention that if and insofar as there is any obligation upon M+W Solar or Mr Gattereder to compensate the company, the amount of any compensation is insignificant or so much less than that claimed by the plaintiff, to the point where it would not be in the best interests of the company to pursue such a claim through litigation.

7 The respondents also resist the grant of leave on the basis that the applicant had not established, as he was required by s 237(2)(a) of the Act, that the company would not itself bring a proceeding in appropriate circumstances or take responsibility to remedy the alleged wrongdoing. They further contend, for reasons other than quantum, that it was not in the company's best interest to bring the proposed proceeding, and that the application was not made in good faith.

8 On 6 August 2012 the plaintiff called a meeting of directors of the company for 14 August 2012 to consider the following resolution:

That the directors resolve to authorise the company to bring proceedings against Robert Gattereder and M+W Solar GmbH by causing to be issued a writ and statement of claim substantially in the form set out in the Annexure to this notice.

The proposed 'proceeding' is the one the applicant now seeks leave to commence on behalf of the company. It must have been apparent to the members of the board that if the resolution was defeated it was probable that an application by Mr Fernandez for leave would follow. That was apparent from the crafted and rehearsed response by Dr Taraschka.

9 The applicant's resolution was, of course, defeated and Dr Taraschka put forward a counter proposal for an investigation to be initiated by the company into the alleged overpayments to M+W Solar. The proposed investigation and its terms of reference are the centrepiece of the respondents' opposition to this application. They deserves close analysis.

10 The elements of the proposed investigation were described by Dominic Matthew Gatto, of the company's solicitors, in his affidavit dated 31 August 2012. Mr Gatto exhibited minutes of the directors' meeting on 14 August 2012, attended by Dr Taraschka, the applicant, Mr Field, Mr Gattereder and Mr Chandrajit. He deposed that the company had already taken action to deal with the allegations made by the applicant in the following ways:

1. the company's board had directed the company to investigate the allegations, and had expressly required that the investigation be conducted transparently;
2. the company's chairman had confirmed that he intends to appoint an independent expert from one of the 'Big Four' accounting firms to conduct the investigation. Partners from each of these firms had been approached and had expressed interest in being appointed (subject to clearing conflict checks);

1. the company's chairman would ask the expert to report to the board within four weeks of being appointed;

1. while M+W Solar denied that there has been an overpayment, it had undertaken to abide by the independent expert's determination, and would repay to the company any amount that the expert found owing; and
2. the company had directed each of its directors - including both Mr Gattereder and the applicant - to cooperate with the investigation and to provide all documents and evidence which are relevant to the investigation. Mr Gattereder has confirmed that he will do so.

11 Section 237 of the Act prescribes the circumstances in which an application for leave may be brought and when an application must be granted by the Court. That section provides:

(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.

12 The applicant accepts that he bears the burden of satisfying the Court, on the balance of probabilities, that each criterion under s 237(2)(a) to (d) has been satisfied.[1] As mentioned above, the respondents did not challenge the proposition that there was a serious question to be tried.

13 The respondents submitted that the court could not be satisfied that the company would not itself take appropriate action. They submitted that only when the investigation had been completed would the board be able to make an informed decision as to whether it was in the best interests of the company to commence a proceeding. Thus, it was premature to require the company to decide whether to commence a proceeding. In the circumstances, its decision not to do so at this time could not be taken as a refusal to do so.

14 The respondents advanced an alternative argument, submitting that the words in s 237(2)(a), 'or properly take responsibility for them', should be construed so as to encompass the decision of the board to commence the investigation. They submitted that the company was taking 'responsibility for' the allegations and the protection of its rights by commencing the investigation.

15 The construction advanced by the respondents is rejected. The provision is concerned with the commencement of a proceeding, or the company taking responsibility for a proceeding or for steps in a proceeding.

16 The company has formally declined to bring the proceeding. I am satisfied that the applicant has established the requirement in s 237(2)(a) of the Act. That is not, of course, the end of the matter.

17 The respondents contended that the applicant lacked good faith in making this application. The factors upon which they relied are as follows:

(a) The applicant used threats and intimidation to obtain $8 million from the company in redemption of shares.

(b) The applicant commenced the oppression proceeding and seeks relief in respect of the same facts pleaded in the proposed proceeding to be brought by the company.

(c) The applicant opposed the investigation by the company to gather evidence which might support the claims in order to enable the board to make an informed decision whether to issue the proposed proceeding.

(d) The applicant ignored the agreement of M+W Solar to pay back any amount that is found by the independent investigator to have been overcharged.

18 In Swansson v RA Pratt Properties Pty Ltd[2] Palmer J said,

At this early stage in the development of the law on the statutory derivative action created by Pt 2F.1A it would be unwise to endeavour to state compendiously the considerations to which the courts will have regard in determining whether applicants in all categories defined by s 236(1) are acting in good faith. The law will develop incrementally as different factual circumstances come before the courts.

Nevertheless, in my opinion, 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. Clearly, whether the applicant honestly holds such a belief would not simply be a matter of bald assertion: the applicant may be disbelieved if no reasonable person in the circumstances could hold that belief. The second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process.

These two factors will, in most but not all, cases entirely overlap: if the court is not satisfied that the applicant actually holds the requisite belief, that fact alone would be sufficient to lead to the conclusion that the application must be made for a collateral purpose, so as to be an abuse of process. The applicant may, however, believe that the company has a good cause of action with a reasonable prospect of success but nevertheless may be intent on bringing the derivative action, not to prosecute it to a conclusion, but to use it as a means for obtaining some advantage for which the action is not designed or for some collateral advantage beyond what the law offers. If that is shown, the application and the derivative suit itself would be an abuse of the court's process: Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509 at 526; [1992] HCA 34; 107 ALR 635 at 648. The applicant would fail the requirement of s 237(2)(b).

1"> 19 The applicant submitted, correctly, that the requirement of good faith must be objectively determined. He relied on the respondents' concession that there was a serious question to be tried and submitted that there was no evidence of a collateral purpose motivating him. He also relied upon his preparedness to give the following undertakings to the court as a condition of leave. They are to the following effect:

(1) He will bear the costs of pursuing the claim on behalf of the company;

(2) He will indemnify the company for any costs for which it might become liable in the proceeding; and

(3) He will not claim contribution from the company in respect of any adverse costs order made against him in the proceeding.

20 In my opinion, the factors advanced by the company to challenge the applicant's good faith in making the application to bring the proceeding do not evidence an absence of good faith. I accept that the applicant honestly believes that the company has a good cause of action that has a reasonable prospect of success. The respondents' concession that there is a serious question to be tried supports the validity of the applicant's belief. There is no evidence of a collateral purpose.

21 The alleged threats and intimidation relate to the applicant's asserted claim for redemption of shares in the oppression proceeding. Those applicant allegations were disputed. But even if established, they would not of themselves demonstrate an absence of good faith. The applicant contended that he was entitled to call on the company to redeem the shares, and has been improperly denied payment.

22 Contrary to the respondents' submission, the existence of the oppression proceeding, in which the applicant makes the same or similar allegations as it is proposed the company should make in the new proceeding, is a factor that weighs in favour of the grant of leave, not against. To have those allegations litigated in the oppression proceeding, in which the company is a party, but in the absence of any claim by the company for relief, may have the result that it is later precluded from making any claim.

23 The applicant's rejection of the company's proposal for an independent investigator is, in my view, beside the point. The proposal was advanced by those whose interests are plainly associated with an intended defendant in the proposed proceeding, M+W Solar. The investigation proposal was, quite obviously, carefully crafted and presented as part of a plan by the company to avoid litigation of the claims. Having said that, I do not suggest that the company does not genuinely intend to undertake the proposed investigation. But the respondents' reliance on the applicant's failure to embrace the proposal lacks substance. The company remains free to pursue the investigation. The fact that the applicant is not persuaded by the investigation as a substitute for the proposed proceeding is not evidence of his bad faith, when the company has formally rejected his proposal to bring the proceedings.

24 I am satisfied that the application is made in good faith.

25 The assessment of the best interests of the company, on an application such as this, involves a balancing of interests. As Austin J said in Fiduciary Ltd v Morningstar Research Pty Ltd,[3]

In cases such as this, 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: see McLean v Lake Como Venture Pty Ltd [2004] 2 Qd R 280; [2003] QSC 562 at [7]. Sometimes satisfaction of the "serious question to be tried" criterion will lead readily to the conclusion that the applicant should be permitted to assert the company's claims on its behalf. But where, as here, the assertion of those claims is simply a manifestation of aspects of the overall dispute between the parties, it will often be appropriate for the court to address the question of costs in the event that the claims fail. A suitable way of doing so, addressed during the hearing of the present application, is to grant leave on terms that the applicant is responsible for the costs ordered against the company, and undertakes not to seek contribution or indemnity from the company. I think such an order is appropriate here. The intention is that Mr Rich will be unable to reduce the quantum of his own liability by asserting a claim to recoupment against the company, bearing in mind that over 90% of any costs payable to the defendants by the company will in substance be paid out of Morningstar Inc's interest.

26 Putting the best complexion on the respondents' contention that it would not be in the company's best interests to bring the proposed proceeding, their position may be summarised as follows. The company proposes to commence its own investigation through the appointment of a reputable firm of chartered accountants to undertake a thorough investigation into the pricing of products, and any prejudice the company may have suffered as a consequence of the involvement of M+W Solar in its acquisitions. Elaborate terms of reference have been prepared by the company, dated 29 August 2012 identifying the dispute, requesting expert opinions in response to a number of questions and providing a framework for the investigation.

27 The respondents' case is that it is only after such an investigation has been completed that the company will be sufficiently informed to make a decision as to whether litigation is required or whether it is reasonable to rely upon the undertaking given by M+W Solar to make good any improper detriment. In other words, it is premature to make such a decision about litigation in the absence of the facts discovered in the course of the investigation.

28 As a template for an investigation, the terms of reference prepared by the company leaves no stone unturned. The instructions anticipate a lengthy process of investigation. No date for a report was prescribed, although that is understandable in circumstances where an appointment was yet to be made. The proposed investigation appears, at least superficially, as a reasonable attempt by the company to thoroughly investigate an alleged wrongdoing before making a decision to embark on litigation.

29 What is arresting, however, about the terms of reference, and informs the purpose of the proposal presented to the meeting of 14 August 2012, is the magnitude of the contemplated investigation. The applicant's complaint about the conduct of M+W Solar and Mr Gattereder is straightforward. The allegations may or may not be made good, but they are relatively uncomplicated. The corresponding allegations made in the oppression proceeding, and in the proposed proceeding, should be capable of a response by way of explanation and clarification, from M+W Group and its subsidiaries, within a very sort space of time, and without much elaboration. The calculation of any benefit or compensation may be more complex, but the substance of the complaint is that trading arrangements were imposed on the company that gave improper benefits to M+W Solar to the detriment of the company. There does not seem to be any need for the elaborate investigation proposed by the company, if its objective is to ascertain the facts about the trading arrangements that were put in place. Those facts ought to be readily available through the company's major shareholder and nominated directors.

30 The respondents also submitted that to commence a new proceeding containing similar allegations to those already made in the oppression proceeding, would give rise to significant complexity. The complexity was said to arise because the company was already a party in the oppression proceeding. I fail to see any such complexity.

31 Had this application been made before the oppression proceeding were commenced, in the face of a reasonably scoped investigation by the company into the magnitude of any alleged benefit to M+W Solar, or corresponding prejudice to the company, there may have been a basis for the company to contend that it should be permitted to complete that investigation before being obliged to decide whether to embark on litigation. That is because it might legitimately contend, if it be the case, that the breach was relatively inconsequential, or that the diversion of resources necessary to commence and maintain a proceeding outweighed any benefit to the company.

32 While the company placed a great deal of weight on the fact that the same or similar allegations are already made in the oppression proceeding, it is the very existence of that proceeding which, in my view, compels the conclusion that it is in the best interests of the company to grant leave to the applicant. In the absence of a claim by the company in the oppression proceeding, for damages or compensation, a determination of the oppression proceeding may preclude the company from later making any such claim.[4]

33 At one point the respondents submitted that the applicant could seek the relevant relief in the oppression proceeding. That would only be possible if the company became a plaintiff and M+W Solar and Mr Gattereder were made defendants. Such a course would be possible, although the applicant would still require leave to make the claim on behalf of the company unless it willingly participated.

34 In my opinion, the existence of the oppression proceeding, with the overlapping factual allegations, required that the company give serious consideration to its position as a claimant. It has conceded that there is a serious question to be tried. In the circumstances, I find that it is in the best interests of the company that leave be granted to the applicant to bring the proposed proceeding on its behalf in substantially the same form as that proposed.

35 Accordingly, being satisfied that each of the criterion under s 237(2)(a) to (d) of the Act have been established by the applicant, the court must grant leave, and I do so.

[1] Swansson v RA Pratt Properties Pty Ltd & Anor [2002] NSWSC 583; (2002) 42 ACSR 313, 318 [24]; Cassegrain v Gerard Cassegrain & Co Pty Ltd & Anor [2008] NSWSC 976; (2008) 68 ACSR 132, 143 [69].

[2] [2002] NSWSC 583; 42 ACSR 313 [35]-[37].

[3] [2005] NSWSC 442; 53 ACSR 732, 743 [51].

[4] Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45; (1981) 147 CLR 589.