Plaintiff v Defendants

1 By summons dated 12 September 2017, Mr Urban applies pursuant to s 237 of the Corporations Act 2001 (Cth) ('the Act'), that he be granted leave to bring a proceeding on behalf of and in the name of Junior Academy ELC Pty Ltd (formerly known as Coco's Early Learning Centre Pty Ltd) ('Junior Academy') as trustee for the Glen Eira Road (249) Unit Trust ('Glen Eira Road Unit Trust) against Mr and Mrs Lahmy, in the form set out in the draft statement of claim.[1]

2 Section 236 of the Act provides for bringing, or intervening in, proceedings on behalf of a company, and states as follows:

(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.

(3) The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.

Note 1: For the right to inspect company books, see subsections 247A(3) to (6).

Note 2: For the requirements to disclose proceedings and leave applications in the annual directors' report, see subsections 300(14) and (15).

Note 3: This section does not prevent a person bringing, or intervening in, proceedings on their own behalf in respect of a personal right.

3 Section 237 of the Act sets out the test for applying for, and granting leave to bring, a proceeding on behalf of a company:

(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.

(3) A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that:

(a) the proceedings are:

(i) by the company against a third party; or

(ii) by a third party against the company; and

(b) the company has decided:

(i) not to bring the proceedings; or

(ii) not to defend the proceedings; or

(iii) to discontinue, settle or compromise the proceedings; and

(c) all of the directors who participated in that decision:

(i) acted in good faith for a proper purpose; and

(ii) did not have a material personal interest in the decision; and

(iii) informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and

(iv) rationally believed that the decision was in the best interests of the company.

The director's belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold.

(a) a person is a third party if:

(i) the company is a public company and the person is not a related party of the company; or

(ii) the company is not a public company and the person would not be a related party of the company if the company were a public company; and

(b) proceedings by or against the company include any appeal from a decision made in proceedings by or against the company.

Note: Related party is defined in section 228.

4 Mr Urban bears the onus of establishing each of the five elements in sub-s (2), on the balance of probabilities.[2] If the elements are established, then the Court must grant leave. The obligation is mandatory. A failure to establish any one of the matters specified is fatal to the application for leave.

5 There are three childcare centres that feature in this application. First is the childcare centre at 249 Glen Eira Road, Caulfield North, which was owned and operated by Mr and Mrs Urban with Mr and Mrs Lahmy through a trust structure ('the 249 Glen Eira Road centre'). Second is the childcare centre owned and operated by Mr and Mrs Lahmy that is across the road (approximately 130 metres away) from 249 Glen Eira Road centre, at 294-296 Glen Eira Road (in Elsternwick, but referred to as also in Caulfield North)[3] ('the 294 Glen Eira Road centre'). Third is the proposed childcare centre at 1036 Glen Huntly Road, Caulfield South ('the 1036 Glen Huntly Road centre').

6 Mr and Mrs Urban, together with the Bambini Group, purchased the property at 1036 Glen Huntly Road with a view to developing a childcare centre. They held planning permits to do so. The proposed 1036 Glen Huntly Road centre was approximately 2.7 kilometres away from the 249 Glen Eira Road centre owned by Mr and Mrs Urban and Mr and Mrs Lahmy.[4] That centre was not ultimately developed.[5]

7 Junior Academy acted as the trustee for the Glen Eira Road Unit Trust, which owned and operated the business at 249 Glen Eira Road. Mr and Mrs Urban, through companies owned by them, owned half the units in the unit trust, and Mr and Mrs Lahmy, through companies owned by them, owned the other half of the units in the unit trust.

8 Mr Urban contends that Mr and Mrs Lahmy breached their duties as directors of Junior Academy when they bought and established the 294 Glen Eira Road centre that Mr Urban alleges competes with the 249 Glen Eira Road centre.

9 In particular, Mr Urban alleges that, faced with the opportunity to purchase the site at 294 Glen Eira Road, Mr and Mrs Lahmy had a duty to Junior Academy to develop it for the benefit of Junior Academy, or alternatively prevent its development as a competitor. Mr Urban alleges that it was a breach of Mr and Mrs Lahmy's duties as directors of Junior Academy to personally pursue the business opportunity to establish a competing business. Mr Urban further alleges that they breached their duties as directors of Junior Academy in failing to inform the Junior Academy board of the proposal to establish a child minding centre on the site. This would have enabled the board to consider whether it wished to acquire the site, or whether it should take some steps to mitigate or reduce or prevent the competition which would be levied against it.

10 I am satisfied that the requirements of ss 237(2)(a), 237(2)(b), 237(2)(d) and 237(2)(e) of the Act have been met.

11 Mr Peters, one of Her Majesty's Counsel, for the defendant, emphasised that for Mr Urban's application to succeed it was necessary for Mr Urban to satisfy the Court that it was in the best interests of the company that Mr Urban himself be granted leave to bring the proceeding on behalf of the company.

12 In Macralink Pty Ltd v Saris ('Macralink v Saris'),[6] Ferguson J cited with approval the judgment of Barrett J in Transmetro Corp Ltd v Kol Tov Pty Ltd ('Transmetro v Kol Tov'),[7] stating:

His Honour noted that for the purposes of s 237(2)(c) of the Corporations Act, part of the inquiry is whether it is in the best interests of the company for leave to be granted to the particular applicant seeking leave to bring proceedings on behalf of the company and "to the extent that the characteristics of the applicant are relevant to an assessment of where the best interests of the company lie, they must be taken into account." His Honour also observed that the applicant's position in the whole context of the litigation may have a significant bearing on whether it is in the best interests of the company that that applicant be granted leave.[8]

13 Mr Peters submitted that, for several reasons relating to the character of Mr Urban and his position in the whole context of the dispute between him and Mr and Mrs Lahmy, it was not in the best interests of the company that Mr Urban be granted leave.

14 For the following reasons, I am not satisfied that Mr Urban should be granted leave to bring the proceedings against Mr and Mrs Lahmy and the companies named in the draft statement of claim.

15 Mr Urban openly admitted that in his dealings with Mr Lahmy over the sale of the 249 Glen Eira Road centre to Guardian Community Early Learning Centres Pty Ltd ('Guardian'), Mr Urban had told Mr Lahmy an untruth that he had a prospective buyer for the business (when he did not) in order to obtain information from Mr Lahmy, and subsequently told Mr Lahmy another untruth that the prospective buyer had lost interest in the purchase, when there was never in fact a prospective buyer.

16 I find that Mr Urban was quite prepared to tell untruths in his dealings with Mr Lahmy when it suited his own personal interests. I do not therefore consider it appropriate that Mr Urban be given leave to bring a proceeding in Junior Academy's name against Mr and Mrs Lahmy, when Mr Urban would be the major witness for Junior Academy. I consider that Mr Urban could not be trusted to tell the truth about his dealings with Mr and Mrs Lahmy when he has such a personal and financial interest in the outcome of the litigation. On this ground alone, I would not accede to the application.

17 Further, reference was made to Blakeney v Blakeney.[9] In that case, two brothers, William and Tim, were in dispute over the ownership of a crane that had originally been owned by a company they both ran. Tim contended that he and William had agreed on a division of the assets and that William had agreed that Tim should have the crane. There was evidence that William had treated assets of the company as his own or as assets that his sister could have. William sought leave to bring proceedings on behalf of the company against Tim to recover the crane.

Section 237(2)(c) requires the court to be satisfied that it is in the best interests of the company that the applicant be granted leave. That requires more than satisfaction that the grant of leave may be, appears to be or is likely to be in the interest of the company. Rather, the court must be satisfied that it is in the best interests of the company for leave to be granted.[10]

19 The Court said that giving William leave to bring proceedings against Tim could give rise to a conflict of interest on the part of William. If leave were granted, and if, as William contended, there was no asset split agreement, the question would arise as to whether the company should also bring a claim against William, based on William's use of the company's assets.

20 In deciding that leave should not be granted to William, the Court also took into account other proceedings that could have resolved the dispute between the brothers that may have been more appropriate.

21 This ground is also relevant to the proceeding before me. Counsel for Mr Urban made the following submissions in respect of alternative dispute resolution mechanisms:-

(a) the existence of other means for an applicant to pursue their grievance may be relevant, but are not fatal to, an application for leave; and

(b) alternative mechanisms may be relevant where the company could suffer detriment from the proceeding, but where an indemnity is given, the preferable course is a derivative action pursuant to s 237 of the Act.[11]

22 In support of these submissions, counsel referred to my decision in Re Connective Services Pty Ltd ('Connective')[12] and the authorities referred to therein. I interpolate to add that in Connective, leave was granted in circumstances where an oppression action was already on foot and the further relief sought in the derivative action could not be achieved in the existing oppression action.

23 I accept that the existence of alternative mechanisms is not fatal to an application for derivative leave. However, I consider that the appropriate weight to be given to this factor depends on the circumstances of the particular case.[13]

24 Unki Pty Ltd ('Unki') is a company in which the shareholders, Mr and Mrs Urban, each hold one share. Unki holds two of the four issued shares in Junior Academy. Further, Unki (as trustee for the Urban Family Trust) holds 120 of the 240 units in the Glen Eira Road Unit Trust of which Junior Academy is the trustee. Mr and Mrs Lahmy hold one share each in Junior Academy. The other 120 units in the Glen Eira Road Unit Trust are held by Elkington Bay Pty Ltd (as trustee of the Lahmy Investment Trust).

25 Without the benefit of argument, it appears that Unki (as a shareholder in Junior Academy) could have brought an oppression proceeding under s 233 of the Act against Mr and Mrs Lahmy as directors of Junior Academy, alleging breach of their duties as directors, as is currently alleged in the proposed statement of claim. Without the benefit of argument, it appears that appropriate relief could have been obtained, if Unki was successful.[14] Importantly, however, Mr Urban did not seek to satisfy me that alternative proceedings to resolve his issues with Mr and Mrs Lahmy were not available,[15] and I am not satisfied that it is in Junior Academy's best interests for it to be the 'primary moving party, with its interests being represented by one of the protagonists'[16] of an underlying dispute, where there may be an alternative mechanism.

26 A further factor is the potential conflict of interest that Mr Urban may be faced with if he was granted leave to bring the proceedings on behalf of Junior Academy. In this case, if leave is granted, and if Mr Urban contends (as alleged in the draft statement of claim) that Mr and Mrs Lahmy used information of Junior Academy relating to 'the names and contact details of clients and potential clients, fees charged for childcare services, information in relation to running costs of the childcare centre and the names, addresses, contact details and salary information of employees', then the question would arise whether Mr and Mrs Lahmy should also seek leave to bring a cross-claim on behalf of Junior Academy against Mr Urban for similar conduct in relation to the 1036 Glen Huntly Road centre. Even if the 1036 Glen Huntly Road centre did not go ahead, a planning permit was obtained and it is likely that Mr Urban disclosed some or all of these matters to the Bambini Group, a competitor of Junior Academy, which may have caused Junior Academy loss and damage.

27 I am not able to find these matters as fact, but the possibility remains and is relevant to whether or not the Court is satisfied that it is in the best interests of the company for Mr Urban to be granted leave.

28 Similarly, Justice Ferguson, in Macralink v Saris, found that the potential conflict of interest of a director of the company seeking to bring a derivative action in the company's name was a factor in her refusal to grant leave to an application under s 237 of the Act.

29 Her Honour cited with approval the following statement of relevant principles by Palmer J in Swansson v RA Pratt Properties Pty Ltd:[17]

[55] At the outset, it is important to note that s237(2)(c) requires the Court to be satisfied, not that the proposed derivative action may be, appears to be, or is likely to be, in the best interests of the company but, rather, that it is in its best interests. ...

[56] The requirement of s237(2)(c) that the applicant satisfy the Court that the proposed action is in the best interests of the company is a far higher threshold for an applicant to cross. It requires the applicant to establish, on the balance of probabilities, a fact which can only be determined by taking into account all of the relevant circumstances. Accordingly, the enquiry will normally require the applicant to adduce evidence at least as to the following matters.

[57] First, there should be evidence as to the character of the company: different considerations may well apply depending on whether the company is a small, private company whose few shareholders are the members of a family or whether it is a large public listed company. If the company is a closely held family company, it may be relevant to take into account the effect of the proposed litigation on the purpose for which the company was established and on the family members who are the shareholders. If the company is a public listed company, such considerations will be irrelevant. Again, the company may be a joint venture company in which the venturers are deadlocked so that the proposed derivative action is seen as being for the purpose of vindicating one side's position rather than the other's in a way which will not achieve a useful result: see eg Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd [2001] QSC 324.

[58] Second, there should be evidence of the business, if any, of the company so that the effects of the proposed litigation on its proper conduct may be appreciated.

[59] Third, there should be evidence enabling the court to form a conclusion whether the substance of the redress which the applicant seeks to achieve is available by a means which does not require the company to be brought into litigation against its will. So, for example, if the applicant can achieve the desired result in proceedings in his or her own name it is not in the best interests of the company to be involved in litigation at all. This was the case in Talisman Technologies in which it appeared from the evidence that the most desirable outcome for the applicant was to obtain an order for specific performance of a contract, which it could do in a suit in which the company did not need to be a party.

[60] Fourth, there should be evidence as to the ability of the defendant to meet at least a substantial part of any judgment in favour of the company in the proposed derivative action so that the Court may ascertain whether the action would be of any practical benefit to the company.[18]

30 In refusing the application, her Honour took into account that the company was part of a family business and the presence of an underlying dispute between the family members involved.

31 In this case, the underlying dispute is between two effective owners of a business carried on through corporate structures. For similar reasons to those identified by her Honour in Macralink v Saris, in my opinion, it is not appropriate that one of the two protagonists in the dispute be given leave under s 237 of the Act to use the company vehicle, that carries out the common venture, to litigate a dispute between the two parties, particularly where an alternative proceeding may have been available.

32 As indicated, there seems to have been an accepted practice between Mr and Mrs Urban and Mr and Mrs Lahmy that each of the parties could conduct their own childcare businesses in addition to conducting those by Junior Academy. This was referred to in some of the written agreements between the parties.

33 In McEvoy v Caplan ('McEvoy v Caplan'),[19] the New South Wales Court of Appeal upheld the decision of Justice Barrett in Transmetro v Kol Tov, refusing leave to Mr McEvoy to bring derivative proceedings by way of a cross-claim, on the basis that he would have starkly inconsistent roles to play. As a director of the plaintiff company, he would be obliged to uphold the validity of a hotel management agreement held by the plaintiff. On the proposed cross-claim, as a director of the defendant company and proposed cross-claimant (who was also party to the hotel management agreement), he would be obliged to contend that the hotel management agreement had been validly terminated. Barrett J held that the inconsistency between these two duties meant that it would not be in the best interests of the proposed cross-claimant company for Mr McEvoy to be given leave to bring the cross-claim.

34 Counsel for Mr Urban submitted that McEvoy v Caplan offered no support to the suggestion that there was any such conflict of interest in Mr Urban bringing the proposed proceeding on behalf of Junior Academy. Mr Kozminsky submitted that if Mr and Mrs Lahmy brought a derivative leave application in relation to Mr Urban seeking to establish a competing childcare centre, Mr Urban would not make an inconsistent case to that which he seeks to make in the proposed proceeding by Junior Academy against Mr and Mrs Lahmy. In each case, Mr Urban would contend that each party could establish a childcare centre so long as they were not competing.

35 I do not accept that submission. The complaint that Mr Urban seeks to bring on behalf of Junior Academy includes allegations that because of Mr and Mrs Lahmy's position as directors of Junior Academy, they had access to information relevant to the financial and business affairs of Junior Academy and the 249 Glen Eira Road centre which included 'names and contact details of clients and potential clients, fees charged for childcare services, information in relation to running costs of the childcare centre and the names and addresses, contact details and salary information of employees'.

36 In the draft statement of claim, Mr Urban proposes to allege that Mr and Mrs Lahmy have entered into an arrangement with Guardian to permit that company to operate the 294 Glen Eira Road centre ('Guardian Transaction').

37 Mr Urban proposes to allege that, so far as Junior Academy is aware, no steps were taken by Mr and Mrs Lahmy to prevent that information from being misused in connection with the purchase of 294-296 Glen Eira Road, or in connection with the negotiations to enter into the Guardian Transaction, or to sell other childcare centres in which Mr and Mrs Lahmy had an interest to Guardian.[20]

38 Mr Urban also had access to this same information when he entered into his dealings with the Bambini Group to purchase the site at 1036 Glen Huntly Road.

39 Accordingly, if, as Mr Kozminsky suggested, Mr and Mrs Lahmy obtained leave to bring a derivative proceeding on behalf of Junior Academy against Mr Urban in respect of his secret dealings with the Bambini Group, then if Mr Urban wished to defend the claim, he would be forced to argue that the disclosure to Guardian of the information pleaded would cause damage to Junior Academy, but the disclosure of the same or similar information to the Bambini Group would not.

40 Although not on all fours with McEvoy v Caplan, I do not consider that it would be in the best interests of Junior Academy for Mr Urban to bring the proposed proceedings on behalf of Junior Academy in view of the distinct possibility that Mr and Mrs Lahmy would seek to bring a cross-claim on behalf of Junior Academy against Mr Urban. In bringing this proceeding, Mr Urban, in purportedly fulfilling his duty to Junior Academy, would be conflicted as mentioned above.

41 In the witness box Mr Urban sought to downplay the impact that the 1036 Glen Huntly Road centre may have had on the 249 Glen Eira Road centre, whilst complaining of the actions of Mr and Mrs Lahmy in establishing the 294 Glen Eira Road centre that impacted on 249 Glen Eira Road centre. As for the two businesses, Mr Urban conceded there may be some potential overlap of parents wanting childcare services.

42 As mentioned, in this case Mr Urban also contends that Mr and Mrs Lahmy were in breach of their duties in failing to inform the Junior Academy board of their intention to open a competing business. At the same time, Mr Urban seeks to defend his own actions in failing to tell the board that he was investing in a competing business at 1036 Glen Huntly Road with the Bambini Group, a major competitor in the industry.

43 Mr Urban failed to tell Mr and Mrs Lahmy that he intended to or did invest in 1036 Glen Huntly Road at the same time as he complains about Mr and Mrs Lahmy buying and establishing the business at 294 Glen Eira Road. I would have thought that it may have been incumbent on Mr Urban to have informed Mr and Mrs Lahmy of what he was proposing to do, just as it appears that it may have been incumbent on Mr and Mrs Lahmy to have told Mr Urban what they proposed to do with 294 Glen Eira Road. As it is, I do not have to decide these issues.

44 I do not consider it appropriate for Mr Urban to conduct proceedings where his own conduct, relating to the same sort of complaint, may also be in issue. Whether it is strictly in issue, I do not need to find; I find that it may become an issue.

45 Thus, on these several grounds, I am not satisfied on the balance of probabilities that it is in the best interests of Junior Academy that Mr Urban be granted leave to bring the proposed proceedings.

46 As for the winding-up petition in respect of Junior Academy, I propose to adjourn the winding-up petition to a date to be fixed, to permit the parties to negotiate an agreement for the dissolution of the company's affairs. Unless the parties can reach an agreement, then, regrettably, a liquidator may have to be appointed, with all the cost and trouble that entails. I am sure that counsel will advise their clients of the undesirable consequences that would rebound on both of them, if they were unable to resolve this dispute, and a liquidator was appointed.

JUNIOR ACADEMY ELC PTY LTD (ACN 136 704 697) (AS TRUSTEE FOR THE GLEN EIRA ROAD (249) UNIT TRUST (ABN 54 859 835 183))

EARLY CHILDHOOD MANAGEMENT PTY LTD (ACN 161 123 459)

[1] Exhibit ADSW 10 to the affidavit of Amy Dawn sworn 14 November 2017.

[2] [2002] NSWSC 583; (2002) 42 ACSR 313, 319 [26] (Palmer J) ('Swansson v Pratt').

[3] Affidavit of Barcochva (Coco) Lahmy dated 22 February 2018 [25].

[4] Affidavit of Barcochva (Coco) Lahmy dated 22 February 2018 [42].

[5] Transcript of Proceedings (4 March 2019) 24.1-3.

[6] [2011] VSC 665 ('Macralink v Saris').

[7] [2009] NSWSC 350; (2009) 71 ACSR 582 ('Transmetro v Kol Tov') affd by McEvoy v Caplan [2010] NSWSC 115; (2010) 78 ACSR 167.

[8] Macralink v Saris (n 6) [28] quoting Transmetro (n 7) [14]-[15] (citations omitted).

[9] [2016] WASCA 76 ('Blakeney v Blakeney').

[10] Ibid [52] (emphasis in original).

[11] Transcript of Proceedings (5 March 2019) 88.10-18, 89.4-9.

[12] [2017] VSC 309.

[13] See Blakeney v Blakeney (n 9) [83]-[85] (Buss and Murphy JJA and Beech J).

[14] Wain v Drapac [2012] 156 (Ferguson J). On 17 October 2013, the Court of Appeal dismissed an appeal from the decision of Ferguson J without an adjudication on the merits. In Re Wyndham Park Estate Pty Ltd [2019] VSC 92, Sifris J observed 'Consistent with authority in the State of Victoria, relief under s 233 may extend to making orders in relation to the affairs of a corporate trustee, as well as orders compelling one party to buy out the units of an underlying unit trust held by the other. See Vigliaroni v CPS Investment Holdings Pty Ltd [2009] VSC 428; (2009) 74 ACSR 282 (Davies J); Wain v Drapac [2012] VSC 156 (Ferguson J); Arhanghelschi v Ussher [2013] VSC 253; (2013) 94 ACSR 86 (Ferguson J)'.

[15] Counsel for Mr Urban made submissions only in response to the alternative mechanism of a solvent winding up of Junior Academy. See Transcript of Proceedings (5 March 2019) 90.17-94.9 where reference was made to Re Wyndham Park Estate Pty Ltd [2019] VSC 92.

[16] Blakeney v Blakeney (n 9) [84].

[17] Swansson v Pratt (n 2).

[18] Macralink v Saris (n 6) [20] quoting Swansson v Pratt (n 2) 324 (emphasis in Macralink v Saris).

[19] [2010] NSWCA 115.

[20] Exhibit ADSW 10 [31(b)] to the affidavit of Amy Dawn sworn 14 November 2017.