Plaintiff v Defendants

For the First, Second, and Fourth to Ninth Defendants in the First Proceeding, and the Fifth to Tenth Defendants in the Second Proceeding

For the Third Defendant in the First Proceeding, and the Twelfth Defendant in the Second Proceeding

For the First to Third Defendants in the Second Proceeding

1 Slea Pty Ltd (Slea) is the plaintiff in proceeding number SCI 2011 4332, in which Slea seeks relief, among other things, for alleged oppression, breach of pre-emptive rights provisions in the constitutions of Connective Services Pty Ltd (Connective Services) and Connective OSN Pty Ltd (Connective OSN), and misleading or deceptive conduct (Oppression Proceeding).

2 Connective Services and Connective OSN (together, Connective Plaintiffs) are the plaintiffs in proceeding number S ECI 2018 00073, in which they allege, among other things, that the First and Second Defendants, Mr Glenn Lees and Mr Mark Haron, desired to remove Slea as a shareholder in both the Connective Plaintiffs, and caused the Connective Plaintiffs to enter into various transactions for improper purposes in breach of their duties as directors (Derivative Proceeding).[1]

3 By summonses dated 17 July 2018 filed in each proceeding, Slea and the Connective Plaintiffs seek orders pursuant to r 9.12 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (SCR) that the two proceedings be heard and determined together and that evidence and documents that have been and will be produced in one proceeding be evidence and documents produced in the other.

4 The applications are supported by affidavits of Justin Taede Vaatstra, sworn 17 July 2018 and 14 August 2018 respectively. In response, the First, Second and Fourth to Ninth Defendants in the Oppression Proceeding, and the Fifth to Tenth Defendants in the Derivative Proceeding (Connective Defendants) filed and served an affidavit of Maja Cvjetanovic affirmed 16 August 2018 and an affidavit of Elan David Sasson affirmed 24 August 2018. The First, Second and Third Defendants in the Derivative Proceeding filed and served an affidavit of Brian Michael France sworn 16 August 2018. For present purposes, it is unnecessary to summarise the contents of these affidavits which recite and exhibit uncontentious background matter.

5 Rule 9.12(1) of the SCR provides the following:

(1) Where two or more proceedings are pending in the Court, and -

(a) some common question of law or fact arises in both or all of them;

(b) the rights to relief claimed therein are in respect of or arise out of the same transaction or series of transactions; or

(c) for any other reason it is desirable to make an order under this rule

the Court may order the proceedings to be consolidated, or to be tried at the same time or one immediately after the other, or may order any of them to be stayed until after the determination of any other of them.

(2) Any order for the trial together of two or more proceedings or for the trial of one immediately after the other shall be subject to the discretion of the trial Judge.

6 Relevant considerations in applications under rule 9.12 include:[3]

(a) whether the proceedings are broadly of a similar nature;

(b) whether there are common issues of fact and law;

(d) the time savings and efficiencies that might be achieved;

(g) the prospect of multiple appeals with substantial delays if the proceedings are not tried at the same time; and

(h) the effect on the prospects of non-judicial resolution.

7 The Court has a wide discretion, particularly in matters of trial management.

8 In support of the application, Slea submits that:[4]

(a) all parties to the Oppression Proceeding are parties to the Derivative Proceeding;

(b) the factual substratum in the Derivative Proceeding (being the restructure of the Connective Group of companies and sale to Macquarie Bank Ltd (Macquarie)) overlaps with the factual substratum in the Oppression Proceeding;

(c) there is a commonality of witnesses in the proceedings. Four of the witness statements filed in the Oppression Proceeding address the restructure and sale;

(d) significant common questions of fact arise in both proceedings such that if the two proceedings are not heard together, the same witnesses will need to give evidence about the same matters twice, raising a real risk of inconsistent findings;

(e) while the First and Third Defendants in the Derivative Proceeding, Mr Glenn Lees and Mr Graham Maloney, are not parties to the Oppression Proceeding, they are and were at all relevant times directors of the defendant companies in the Oppression Proceeding and have both filed witness statements in the Oppression Proceeding;

(f) neither proceeding has been set down for trial, and discovery is incomplete in both proceedings; and

(g) the orders sought in the summonses will avoid the need to manage the implied undertaking not to use documents discovered in a proceeding for a purpose unconnected with the proceeding.[5]

9 In opposition to the application, the Connective Defendants submit that:[6]

(a) there is a question whether, on the material, there are sufficient connecting matters between the Oppression Proceeding and the Derivative Proceeding to persuade the Court that the two proceedings ought conveniently and sensibly be heard and determined together;

(b) there is a question whether the application is premature;

(c) there is a risk that the directors, in their defence at the trial of the Derivative Proceeding, would rely on a defence of reasonable reliance on the advice of legal advisers in answer to the contention of improper purpose in relation to the restructure and sale transactions; and therefore a risk that at trial privileged information would be disclosed in the Derivative Proceeding for the purpose of advancing such a defence, which might allow that information to be used in the Oppression Proceeding and thereby prejudice substantive rights of the Connective Defendants;

(d) as further procedural directions are made in the Oppression Proceeding, it would become clear whether the identified risk remains in prospect; and

(e) the way in which the hearing of the Derivative Proceeding is to be managed is as yet unexplored and is likely to involve some subtleties, and directing that the proceedings be heard together would sensibly await some further consideration of those matters.

10 In opposition to the application, the First to Third Defendants in the Derivative Proceeding (together, Directors) submit that:[7]

(a) of the thirteen issues in the Oppression Proceeding, only three arise for determination in the Derivative Proceeding, namely:

(i) whether there was conduct designed to remove Slea as a shareholder from at least July 2009;

(ii) whether the 2012 restructure was designed to circumvent or attempt to circumvent Slea's rights; and

(iii) the circumstances of the sale of an interest in the Connective business to Macquarie from about July 2013;

(b) there are other issues arising for determination in the Oppression Proceeding which will require considerable preparation and Court time, and are not the subject of allegations in the Derivative Proceeding, namely:

(i) whether there was a failure to pay dividends from about July 2009;

(ii) whether there was inappropriate retention of dividends from the end of the financial year 2010;

(iii) whether Connective Services made inappropriate payments during and following the financial year ended 30 June 2009;

(iv) whether directors' fees were inappropriately recorded as unsecured loans in the 2009 and 2010 financial years;

(v) whether there was a failure to provide further drafts of a shareholders' agreement or to otherwise finalise the shareholders' agreement in about July 2009;

(vi) conduct relating to the adoption of provisions of the Connective Group Pty Ltd constitution during 2013;

(vii) whether there was a breach of pre-emptive rights provisions and misleading and deceptive conduct during October 2013;

(viii) whether proceeding S ECI 2016 001168 concerning pre-emptive rights provisions was brought and funded for an improper purpose;

(ix) whether the Connective companies should be participating in and funding the derivative action; and

(x) the failure to provide consolidated financial records for the Connective Group of companies;

(c) because the issues in the Derivative Proceeding are substantially narrower than those in the Oppression Proceeding, consolidation would result in the directors unnecessarily expending considerable time and funds; and

(d) as the Oppression Proceeding is considerably more advanced procedurally, it should not be prevented from progressing to trial by the Derivative Proceeding, which commenced just over a year ago.

11 Finally, the Directors join with the Connective Defendants in their opposition to any outcome that would result in Slea being able to access documents that are protected by legal professional privilege.

12 Millsave, the Third Defendant in the Oppression Proceeding and the Twelfth Defendant in the Derivative Proceeding, neither consents to, nor opposes the application.

13 Macquarie, the Fourth Defendant in the Derivative Proceeding, neither consents to, nor opposes the orders sought by the plaintiff and did not seek to be heard on the application.

14 I am satisfied that it is appropriate to make an order in the terms sought by Slea and the Connective Plaintiffs for the following reasons.

15 The factual substratum in the Derivative Proceeding, which essentially concerns the corporate restructure and the sale to Macquarie, is subsumed within the Oppression Proceeding. Compendiously stated, in the Derivative Proceeding it is alleged that the restructure and sale constitute a breach by the Directors of their duties to the Connective Plaintiffs, whereas in the Oppression Proceeding it is alleged that the restructure and sale constitutes oppressive conduct. As a consequence, common questions of fact arise and there will be a commonality of key witnesses. The three directors of the Connective Plaintiffs have each filed witness statements in the Oppression Proceeding that address the restructure and sale, being the same subject matter of the Derivative Proceeding.

16 If the proceedings were heard separately, the same witnesses would need to give evidence about the same matters twice, leading to the risk of inconsistent findings.

17 The parties and the issues are substantially entwined. All eleven parties to the Oppression Proceeding (Slea and the ten defendants) are parties to the Derivative Proceeding. Macquarie is a party to the Derivative Proceeding but not the Oppression Proceeding, however it is alleged in both proceedings that Macquarie was involved in the restructure and sale. Eleven out of the fourteen parties in the Derivative Proceeding are parties in the Oppression Proceeding. There is also a substantial overlap in the relief claimed in each proceeding.

18 The Oppression Proceeding is certainly more advanced in its interlocutory stages than the Derivative Proceeding, but has not yet been listed for trial.

19 Doubtless there will be some further delay caused by hearing the Oppression Proceeding with the Derivative Proceeding, but this should be substantially ameliorated by the fact that the documents discovered in the Oppression Proceeding will be treated as filed and discovered in the Derivative Proceeding. This should be conducive to the prompt completion of interlocutory steps in the Derivative Proceeding because the parties will be able to focus on finalising any additional discovery that is required in the Derivative Proceeding and any additional evidence that is required in the Derivative Proceeding, rather than starting afresh. This should assist the parties to save costs and to work efficiently to bring the cases to trial. As the Court of Appeal recently observed in the course of the Derivative Proceeding, the extent of any delay will depend upon the parties' willingness to expeditiously advance the matters.[8] Hearing and determining the proceedings together will avoid the duplication which would result from having separate trials; furthermore, the Court will have the benefit of dealing with the two proceedings together in fashioning the most suitable remedy.

20 I am not persuaded that it is premature to make the orders sought. The sooner the parties have certainty about how to organise the evidence and discovery in the Derivative Proceeding, the better.

21 I accept the submission put on behalf of Slea that the Connective Defendants have approbated and reprobated in relation to the issue of whether the proceedings should be heard together. In the written case of the applicants filed in support of the application for leave to appeal against Robson J's grant of leave to commence the Derivative Proceeding, the Connective companies state:

All parties agree the Oppression Proceeding and any derivative proceeding must be run together.[9]

22 Further, less than six weeks ago, the Court of Appeal heard[10] an appeal from the decision of Robson J[11] granting Slea leave to bring the Derivative Proceeding. In support of an argument that it was not in the best interests of the companies for the Court to grant leave to bring the Derivative Proceeding because it would lead to a further delay in the hearing of the Oppression Proceeding, the transcript records that the following exchange took place between Mr Myers QC for the Connective Defendants and the Chief Justice:

MR MYERS: ... and these oppression proceedings were commenced in 2011 and bringing this action in 2016 is, has already and will lead to further construable delay in the hearing of the oppression proceedings. It's not conceivable that these proceedings and the impression [oppression] proceedings won't be heard together. It really isn't.

FERGUSON CJ: I think everybody is in agreement about that.[12]

23 Before me, Senior Counsel for the Connective Defendants sought to argue to the contrary. In my view, the Court should not receive this argument from the Connective Defendants. The argument was originally put in unqualified terms to the Court of Appeal and there has been no change of circumstances which would warrant an about-face on this application and no explanation of the change of attitude. Senior Counsel for Slea submits[13] that the principle of equitable election means that the Court will not allow a party to make an election to advance its position in proceedings (before the Court of Appeal in this case) and then resile from it in a later application in the same proceeding.[14] I accept this submission and therefore rule that the Connective Defendants are not entitled to advance an argument in these applications that the proceedings should be heard separately.

24 Despite this ruling, I am nevertheless required to consider the matters which were advanced by the Connective Defendants through their Senior Counsel in support of the proposition that the two proceedings ought not be heard together because the three directors (who have not themselves made any election) have in essence adopted the argument of the Connective Defendants and thereby make the same submissions through their Counsel.

25 I consider that the submissions made before me in favour of separate hearings, to the extent that they contradict the submissions made on the same issue by Mr Myers QC before the Court of Appeal, are of no significant weight for several reasons.

26 First, I accept the wisdom of the broad proposition previously advanced by the Connective Defendants that it is not conceivable that the two proceedings would not be heard together.

27 Secondly, the submission based on potential access to privileged documents is mere hypothesis. There is no evidence before the Court that there are privileged documents which are relevant to the issues raised in the Derivative Proceeding. As Slea submits, and I accept, the Derivative Proceeding might well have been brought by way of an amendment to the pleadings in the Oppression Proceeding, in which case the discoverable documents would be available in both causes of action.

28 Thirdly, the argument based on loss of the benefit of joint client privilege amounting to a loss of substantive rights is unpersuasive.

29 Section 124 of the Evidence Act provides:

(1) This section only applies to a civil proceeding in connection with which 2 or more parties have, before the commencement of the proceeding, jointly retained a lawyer in relation to the same matter.

(2) This Division does not prevent one of those parties from adducing evidence of:

(a) a communication made by any one of them to the lawyer; or

(b) the contents of a confidential document prepared by or at the direction or request of any one of them;

in connection with that matter.

30 Under the terms of s 124, the Directors have the right to waive joint client privilege and adduce evidence at trial of communications made by any one of them to a jointly retained lawyer or to adduce the contents of confidential documents in connection with the relevant matter.[15] So rather than representing a loss of a substantive right, it seems to me having regard to the statute, it is better characterised as an attribute of the right. A joint privilege holder is always susceptible to loss of privilege where the statute permits the evidence to be adduced.

31 Finally, I note and adopt the observations made by Robson J in his reasons for granting leave to Slea to bring the Derivative Proceeding:

It is in the best interests of the Connective companies to pursue the claims for breach of directors' duties arising out [of] the same transactions at the same time. It is desirable that if the Court finds a wrong arising out of those transactions, it can determine the appropriate relief for Slea in the oppression proceeding and/or the Connective companies in the derivative proceeding.[16]

32 Whilst accepting that there may be some inconvenience caused to the Directors in terms of the time and expense of being involved in having the proceedings heard together, the inconvenience should be able to be minimised by trial management (for example, the Directors would not need to attend trial on days where the issues do not concern them) and by appropriate orders for costs if the Directors are successful in their respective defences.

33 Accordingly, I shall make orders that the Oppression Proceeding and the Derivative Proceeding be heard and determined together, and that the evidence and documents that have been and will be produced in one proceeding be evidence and documents produced in the other.

34 The costs disposition in procedural matters of this kind would commonly be costs in the proceeding. In these two applications, Millsave Holdings Pty Ltd (Millsave) and Macquarie each took a neutral position, neither consenting to, nor opposing the applications. The Connective Defendants and the directors resisted the application unsuccessfully on flimsy grounds. In my view, they should not have their costs, even if they ultimately succeed in their defence of either proceeding. In the circumstances, the just order is an order that Millsave, Macquarie and Slea's costs of and incidental to each application should be costs in the proceeding.

CONNECTIVE BROKER SERVICES PTY LTD (ACN 161 731 111)

CONNECTIVE LENDER SERVICES PTY LTD (ACN 161 731 460)

CONNECTIVE FUNDER SERVICES PTY LTD (ACN 161 732 645)

CONNECTIVE GROUP IP HOLDINGS (NO 1) PTY LTD (ACN 165 282 084)

CONNECTIVE GROUP IP HOLDINGS (NO 2) PTY LTD (ACN 165 281 925)

CONNECTIVE BROKER SERVICES PTY LTD (ACN 161 731 111)

CONNECTIVE LENDER SERVICES PTY LTD (ACN 161 731 460)

CONNECTIVE FUNDER SERVICES PTY LTD (ACN 161 732 645)

CONNECTIVE GROUP IP HOLDINGS (NO 1) PTY LTD (ACN 165 282 084)

CONNECTIVE GROUP IP HOLDINGS (NO 2) PTY LTD (ACN 165 281 925)

[1] Slea was granted leave to commence the Derivative Proceeding against the company's directors, shareholders and other parties, including Macquarie Bank Ltd by Robson J (Slea Pty Ltd v Connective Services Pty Ltd [2017] VSC 609). The Court of Appeal granted leave to appeal and dismissed the appeal (Connective Services Pty Ltd v Slea Pty Ltd [2018] VSCA 229 (Ferguson CJ, Whelan and McLeish JJA)). For an elaboration of the background, refer to [4]-[30] of the reasons of the Court of Appeal.

[2] These considerations are uncontroversial and are substantially derived from the Written Outline of Submissions of Slea dated 14 August 2018.

[3] See Humpries v Newport Quays Stage 2A Pty Ltd [2009] FCA 699, [11] (Besanko J); Traditional Values Management Ltd (in Liq) v Taylor [2012] VSC 299, [10]-[11] (Ferguson J).

[4] Written Outline of Submissions of Slea dated 14 August 2018, [13].

[5] Harman v Secretary of State for the Home Department [1983] 1 AC 280.

[6] Written Outline of Submissions of the Connective Defendants dated 11 September 2018, [6]-[25].

[7] Written Outline of Submissions of the Directors dated 15 August 2018.

[8] Connective Services Pty Ltd v Slea Pty Ltd [2018] VSCA 229, [119] (Ferguson CJ, Whelan and McLeish JJA).

[9] Vaatstra Affidavit sworn 14 August 2018, Exhibit "JTV 24", Written Case for the Applicants filed in the Derivative Leave Appeal dated 15 January 2018, [34].

[10] Connective Services Pty Ltd v Slea Pty Ltd [2018] VSCA 229 (Ferguson CJ, Whelan and McLeish JJA).

[11] Re Connective Services Pty Ltd [2017] VSC 609 (Robson J).

[12] Transcript of Proceeding, Connective Services Pty Ltd v Slea Pty Ltd (Victorian Court of Appeal, S APCI 2018 0007, Ferguson CJ, Whelan and McLeish JJA, 3 August 2018) T65:5-11.

[13] Transcript of Proceeding, Slea Pty Ltd v Connective Services Pty Ltd (Supreme Court of Victoria, S CI 2011 04332 and S ECI 2018 00073, Almond J, 12 September 2018) T21:1-15.

[14] Express Newspapers Plc v News (UK) Ltd [1990] 1 WLR 1320, 1329.

[15] See generally Tabcorp Holdings Ltd v Victoria [2013] VSC 302, [121]-[128] (Sifris J).

[16] Slea Pty Ltd v Connective Services Pty Ltd [2017] VSC 609, [161] (Robson J) (emphasis added).