Plaintiffs v Defendant

Supreme Court of Victoria|2011-12-20|Before: FERGUSON J

CORPORATIONS - Statutory derivative action - Leave required to commence proceedings - Alleged claim by company as beneficiary that entitled to unpaid present entitlements - Prospective plaintiff and defendant related companies controlled by deadlocked directors - Whether applicants acting in good faith - Allegation that proposed proceeding attempt to achieve forced sale or destruction of proposed defendant's business - Whether in best interests of company that leave be granted - Allegation that applicant director would be in position of conflict - Whether there is a serious question to be tried - Corporations Act 2001 (Cth) ss 236, 237.

1 Poseidon Tarama Pty Ltd operates a food dips business. The dips are produced under the well-known brand, Black Swan. The business was originally operated by the defendant, Constantine Saris (who is a director of Poseidon) and his brother, Christos Saristavros. Christos Saristavros was killed in October 2000. Following his death, his wife, who is the second plaintiff, Thomai Saristavros, became a director of Poseidon in his place and she and her two sons became the holders of the share in Poseidon previously held by her late husband. Mr Saris and Ms Saristavros are now in dispute with one another.

2 Poseidon is the trustee of the C&C Sarris Family Trust. Roman Heights Developments Pty Ltd (a company of which both Ms Saristavros and Mr Saris are also directors)("RHD") is a beneficiary of the trust. The shareholders of RHD are Macralink Pty Ltd (the first plaintiff) and Fanouris Pty Ltd. Macralink is controlled by Ms Saristavros and her two sons who are directors and shareholders of that company. Mr Saris owns and controls Fanouris.

3 Macralink and Ms Saristavros have made application to bring proceedings in the name of RHD against Poseidon. They allege that Poseidon is indebted to RHD for an amount in excess of $20 million for unpaid present entitlements owed to RHD as beneficiary of the C&C Sarris Family Trust. If judgment is obtained, then they seek leave to issue a statutory demand against Poseidon and (if the statutory demand is not complied with) to wind up Poseidon in insolvency.

4 The issues are whether there is a serious question to be tried as to the entitlement of RHD to immediate payment of the unpaid present entitlements, whether it is in the best interests of RHD for leave to be granted to Macralink and Ms Saristavros and whether they are acting in good faith.

5 Macralink, as a shareholder, and Ms Saristavros, as an officer of Poseidon are each entitled to bring a proceeding on its behalf if leave is granted under s 237 of the Corporations Act.[1] Section 237(2) provides that the Court must grant the application for leave 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 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 sub-paragraph (i) is not satisfied.

6 If any one of the grounds is not established, then leave will be refused.[2]

7 It was common ground that paragraphs (a) and (e) of s 237(2) were satisfied.

8 When considering whether there is a serious question to be tried for the purposes of s 237(2)(d) of the Corporations Act, the Court's task is not to determine the merits of the proposed derivative action to any great degree. Rather, the task is similar to that which the Court faces in relation to an application for an interlocutory injunction.[3] In this regard, it is for the applicant to put on sufficient evidence to satisfy the relatively low threshold of a serious question to be tried.[4]

9 The proposed claim is for payment of unpaid present entitlements ("UPE") of approximately $20 million set aside by Poseidon in favour of RHD under the terms of the trust deed for the C&C Sarris Family Trust. The UPE are recorded as an unsecured current liability in the financial statements of the C&C Sarris Family Trust and as a current asset in the financial statements of RHD.

10 Ms Saristavros gave evidence that going back approximately 10 years there was an informal agreement or arrangement between her and Mr Saris that they would allow Poseidon to retain the amounts to which RHD was entitled by way of trust distributions in order to assist Poseidon in its business.

11 Ms Saristavros says that, over the past three years, there have progressively been more and more difficulties in the working relationship between her and Mr Saris. She says that this tension has increased since she and her sons were joined as parties in Family Court proceedings between Mr Saris and his former wife. Ms Saristavros and her sons wish to separate their financial interests from the financial interests of Mr Saris and his former wife. In furtherance of that goal they wish to cause RHD to require Poseidon to pay to RHD the whole of the UPE owing to it for distributions made under the C&C Sarris Family Trust. Ms Saristavros has not been able to persuade Mr Saris that RHD should take that course. Consequently, Ms Saristavros and Macralink seek leave to bring the action on behalf of RHD. Ms Saristavros says that it is not the preferred course of her and Macralink to bring about the liquidation of Poseidon. Rather, Ms Saristavros and Macralink would prefer that Poseidon sell its business. In the Family Court proceedings, Ms Saristavros and her sons are seeking orders for a sale of the business. RHD is not a party to those proceedings.

12 Mr Saris swore affidavits in opposition to the application. He deposed that it was not until after the 2010/11 financial year had passed that Ms Saristavros suggested that RHD should be paid the UPE. In his view, this was contrary to the policy that they had adopted for many years of permitting Poseidon to retain sufficient cash in its business to allow it to grow and to provide it with working capital. According to Mr Saris, if this policy is to be changed, Poseidon needs time to adapt, otherwise it will become insolvent and its business will be irreparably harmed. His evidence is that it could borrow the funds and then pay down the UPE amount in an orderly way. He believes that the UPE if payable, is only payable on reasonable notice and only after the directors of RHD have passed a valid resolution requiring it to demand Poseidon to pay. According to Ms Saristavros, the arrangement permitting Poseidon to retain the UPE was a year by year decision. She says that she never agreed that RHD would not require payment of the UPE unless both she and Mr Saris agreed to that. Ms Saristavros deposed that the UPE amount is immediately payable in full and that no timeframe for its payment has ever been agreed upon. Because of her difficulties with Mr Saris, she is not prepared to authorise Poseidon to borrow the amount that would be required to pay the UPE immediately. Ms Saristavros accepts that Poseidon does not have available sufficient liquid funds to pay immediately.

13 Mr Saris accepts that if there were no other facts (other than the setting aside of the UPE) Poseidon would have an immediate obligation to pay those entitlements. However, Mr Saris claims that critical to the issue of whether there is a serious question to be tried is an equitable defence based on estoppel which he says is available to Poseidon because of the long standing policy that they adopted for retention of the UPE by Poseidon. In this regard, he relies on what was said by the High Court in Walton Stores (Interstate) Ltd v Maher.[5] In particular, Mr Saris relied on a passage from the judgment of Mason CJ and Wilson J and a passage from the judgment of Brennan J:

One may therefore discern in the cases a common thread which links them together, namely, the principle that equity will come to the relief of a plaintiff who has acted to his detriment on the basis of a basic assumption in relation to which the other party to the transaction has "played such a part in the adoption of the assumption that it would be unfair or unjust if he were left free to ignore it": per Dixon J in Grundt, at 675; see also Thompson, at 547. Equity comes to the relief of such a plaintiff on the footing that it would be unconscionable conduct on the part of the other party to ignore the assumption.[6]

In my opinion, to establish an equitable estoppel, it is necessary for a plaintiff to prove that (1) the plaintiff assumed or expected that a particular legal relationship then existed between the plaintiff and the defendant or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship; (2) the defendant has induced the plaintiff to adopt that assumption or expectation; (3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; (4) the defendant knew or intended him to do so; (5) the plaintiff's action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and (6) the defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise.[7]

14 With those principles in mind, it was submitted by Mr Saris that the evidence in this case clearly demonstrates that:

(a) RHD has, over many years (both actively and by silence) allowed and encouraged the UPE amount owed to it to build up to a point where it is now beyond Poseidon's capacity to pay the entire amount immediately;

(b) by acting in that way, RHD has, over the same period, induced in Poseidon (and Poseidon has proceeded upon) assumptions that:

(i) Poseidon was free to use the UPE in order to fund and grow its business for the benefit of the C & C Sarris Family Trust;

(ii) Poseidon would not be exposed to the risk of insolvency by using the UPE to fund its business in the manner allowed;

(iii) if, for whatever reason, RHD required Poseidon to pay down the UPE, Poseidon would:

be given reasonable and sufficient notice of that requirement;
not be required to sell its business in order to comply with such requirement;

(d) if RHD were allowed to immediately call up the entire amount of UPE:

(ii) Poseidon would suffer significant detriments in that:

1. it will be (at the very least) forced to sell its business;

15 Put another way, Mr Saris contended that there is detriment to Poseidon in that Ms Saristavros has allowed the UPE to build up to a point where it is simply impossible for those entitlements to be paid out of Poseidon's funds on demand or instanter.

16 Mr Saris submitted that in all of the circumstances:

(a) it would be unconscionable for RHD to rely upon any strict legal rights it may have based on a money had and received claim; and

(b) a court will restrain RHD from enforcing any strict legal rights to the extent necessary to do equity between the parties. In this case, that would require the court to restrain RHD for a period equivalent to the reasonable and sufficient notice period described above.

17 In summary, Mr Saris submitted that RHD cannot in good conscience allow such a large debt to accrue and then, with no warning or time to adjust, require payment of the entire amount when in his view it will have such profoundly detrimental consequences for Poseidon.

18 As noted above, it is a relatively low threshold to establish that there is a serious question to be tried. In my opinion, the evidence in the accounts that there is a liability owed by Poseidon to RHD in respect of the UPE together with the evidence of Ms Saristavros that the UPE amount is due immediately is sufficient to rise above the requisite threshold. The evidence in regard to the proposed equitable defence contended for by Mr Saris, that he says prevents RHD from requiring immediate payment, is not of a character that would lead to a conclusion at this stage that the proposed claim by RHD would fail. Rather, such a defence, should it be pursued, would at least require the testing through cross examination at trial of the affidavit evidence that has been given and full argument. I am satisfied that there is a serious question to be tried as to whether Poseidon is liable to RHD for the immediate payment of the UPE amount.

Is the proceeding in the best interests of RHD?

19 What is in the best interests of Poseidon necessitates a consideration of the interests of the shareholders.[8] The fact that Ms Saristavros and Macralink may have a personal interest in the outcome of the action is not significant.[9]

20 Nevertheless, the onus of proof is on Ms Saristavros and Macralink to satisfy the Court that the derivative action is in the best interests of RHD. In this regard, Palmer J in Swansson v RA Pratt Properties Pty Ltd & Anor[10] stated:

[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.[11]

21 Mr Saris submitted in respect of the first three matters identified by Palmer J that:

(a) the position of RHD cannot be separated from that of Poseidon. Throughout its history, both Poseidon and RHD have been tightly held and controlled by the respective families and used in connection with the Black Swan business. It was always envisaged that the business would be held within the families and it was never intended to sell the business;

(b) it may be inferred that, if the proposed claim is allowed to proceed, it would cause harm to Poseidon's business. If Poseidon is liquidated and/or is forced to sell its business, RHD would lose an income stream (as would the respective family members);

(c) there is clearly a disagreement about the way in which the UPE should be paid down. Ms Saristavros has a view. Mr Saris has a view. However, if the Court grants leave, Ms Saristavros will be free to vindicate her position. That weighs against the granting of leave;

(d) the proposed proceeding makes no commercial sense. It cannot be in the best interests of RHD to pursue it. The alternative course (propounded by Mr Saris) would see Poseidon pay down the UPE in an orderly, commercially prudent, way and the income stream of RHD preserved. Mr Saris' proposed course would preserve Poseidon's solvency and would protect and maintain its business. The course proposed by Ms Saristavros would bring about Poseidon's insolvency and cause significant and irreparable harm to its business and it would, in turn, cause harm to RHD. A course engendering such results should not be pursued and cannot be in the "best interests" of RHD for the purposes of s 237(2)(c).

22 It was submitted for Mr Saris that the proposed proceeding is not in the best interests of RHD if brought by Ms Saristavros. It was contended that Ms Saristavros would be placed in a position of conflict between her duty to Poseidon and her duties to other entities (such as RHD or Macralink) if the proceeding was brought. Counsel relied on Charterbridge Corporation Ltd v Lloyd's Bank Ltd,[12] which set out the following test for determining whether a particular course of action is in the best interests of a company:

"The proper test ... must be whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company."[13]

23 It was submitted on behalf of Mr Saris that, applying the Charterbridge test to Ms Saristavros' duties as a director of RHD, it is arguable that she can properly act to cause that company to enforce an alleged present entitlement. However, when applying the same test to her duties as a director of Poseidon, it was submitted by Mr Saris that Ms Saristavros must be prevented from creating a situation which would see Poseidon forced into circumstances where it:

(a) (through no fault of its own) cannot meet all of its debts as and when they fall due;

24 In those circumstances, it was submitted that when the substance and implications of the multifarious duties of Ms Saristavros are described, it is clear that she is in a position of conflict and, in those circumstances, it was submitted that it is not "in the best interests" of RHD that she be granted leave.

25 Mr Saris relied on Transmetro Corp Ltd v Kol Tov Pty Ltd.[14] In that case, an application was brought by a Mr McEvoy for leave to bring a cross claim on behalf of two companies (KTO and KT) in proceedings that were already on foot. The existing proceedings were brought by Metro and Transmetro against KT, KTO and a Mr Caplan. The principal claims made by Metro and Transmetro were claims for a declaration that a management agreement in respect of a hotel owned by KT and operated by KTO, remained in full force and effect and that a notice of termination of the management agreement was not valid. KTO had cross claimed for a declaration that it validly terminated the management agreement. Mr McEvoy was a director of Metro and Transmetro, and a member and director of KT. The proposed second cross claim that he wished to bring on behalf of KT and KTO was against Mr Caplan, Mr Leslie and Mr Lesnie (three directors of both KT and KTO). The central allegation in the proposed second cross claim was that those directors sought to have KTO terminate the management agreement in order that another company (Aspen) might become the manager of the hotel.

26 In considering the application before him, Barrett J said that if leave were granted to Mr McEvoy, the proceedings would have a form such that:

(a) Metro and Transmetro sue KT and KTO for alleged wrongful repudiation of the management agreement and for a declaration that the agreement is still in full force and effect;

(b) KTO sues Metro for a declaration that the management agreement was validly terminated by KTO; and

(c) KT and KTO sue Mr Caplan, Mr Leslie and Mr Lesnie, as directors of KT and KTO, for breach of duty for having permitted or procured termination of the management agreement so that benefits could be given to a company (Aspen) in which those directors were interested.[15]

Mr McEvoy is the managing director of Transmetro and Metro. In that capacity, he has a duty to see the principal claims of Transmetro and Metro duly and properly prosecuted. He is, in that capacity, committed to pursue and make good the allegation that the management agreement was not validly terminated by KTO and remains on foot for the benefit of Metro (and, indirectly, Transmetro). He is likewise committed to resist the contention of KTO that there was a valid termination of the management agreement.

As dominus litis of the proposed second cross-claim that he seeks to bring on behalf of KT and KTO, however, Mr McEvoy would be bound to contend that the management agreement was validly terminated (the position that KT and KTO take in the proceedings as presently constituted) and that Mr Caplan, Mr Leslie and Mr Lesnie brought about the termination for the purpose of causing their company Aspen to derive benefits.[16]

28 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."[17] 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.[18] His Honour concluded that in the case before him, Mr McEvoy should not be granted leave and stated:

In the present case, it is an essential element of the cause of action Mr McEvoy seeks to have KT and KTO pursue by means of the proposed second cross-claim that KT and KTO prove that the management agreement was validly terminated. It will be alleged against Mr Caplan, Mr Leslie and Mr Lesnie that they procured the termination for the ulterior purpose of enabling Aspen to obtain the management rights in place of Metro. It will be for Mr McEvoy, on behalf of KT and KTO, to make out this case. In doing so, he will have to prove that Aspen became the manager following effective termination of the management agreement as against Metro.

But Mr McEvoy will, at the same time, be duty bound as a director of Transmetro and Metro to pursue and make good the proposition that the management agreement is still in full force and effect and that Metro continues as the manager to the exclusion of Aspen.

The inconsistency between the two propositions for which Mr McEvoy will be compelled to contend is so stark that it is simply not feasible for him to play the two roles. The case is not one of a complicating or clouding interest. It is a case of positive duties in direct collision. By mounting the proposed second cross-claim for KT and KTO Mr McEvoy would be acting in a way that was in fundamental conflict with his duties as a director of Transmetro and Metro. The existence of those duties owed to Transmetro and Metro means that he is under equitable constraints forbidding his pursuit on behalf of KT and KTO of the case that must be made out for the proposed second cross-claim to succeed.

To grant the leave Mr McEvoy seeks under s 237 would be to give complete control and decision-making in relation to the second cross-claim of KT and KTO to a person who was, in equity, forbidden to espouse the cause that the cross-claim sought to promote and duty bound to strive for the failure of that cause.

This simply cannot be in the best interests of KT and KTO.[19]

29 Mr Saris submitted that the position is the same in this case. He contended that if leave were granted, it would involve the Court authorising Ms Saristavros to act:

(a) in fundamental conflict with her duty as a director of Poseidon; and

(b) contrary to equitable restraints that forbid her from pursing the claim the subject of the application.

30 Ms Saristavros submitted that if the debt is due and owing to RHD, Poseidon has as much interest in paying it as RHD has in being paid. In those circumstances it was contended by Ms Saristavros that there would be no conflict of duties. Further, Ms Saristavros submitted that if there is a debt owing by Poseidon, then that is the position it is in and nothing she does creates any new situation. Further, Ms Saristavros submitted, the mere fact that in this application she and Macralink are seeking leave to take all the necessary steps[20] towards the logical conclusion of recovery action, does not necessarily mean that any of those steps will necessarily eventuate. In this regard, she says that she and Macralink are seeking to avoid having to make three separate applications in which the same issues would be rehashed time after time.

31 Ms Saristavros contended that even if (which she denied) she would be in a position of conflict, Macralink would not be faced with the same difficulties and it could bring the action on behalf of RHD. As noted above, the three directors and shareholders of Macralink are Ms Saristavros and her two sons. It was submitted on behalf of Mr Saris that there was no evidence that the sons play any part in the administration of Macralink's affairs and that the inference to be drawn from the evidence is that Ms Saristavros is the controller of Macralink. In this regard it was contended that it would be almost a fiction to think that the sons would take any other view than their mother has already taken and the reality is that the sons would just act in accordance with their mother's wishes and directions. Before granting leave to Macralink, Mr Saris contended that the Court would have to be satisfied that Ms Saristavros' sons would give independent consideration to prosecution of the claim and that it was not open to draw an inference to that effect from the facts. Counsel pointed to the fact that Ms Saristavros is an applicant as well as Macralink for leave to bring the proceeding on behalf of RHD, that she had sworn the affidavits in support of the application, that it was her view about whether the UPE should be paid or not.

32 It was contended by Mr Saris that in coming to the conclusion of whether it is in the best interests of RHD for leave to be granted, the Court must look at both sides and must bear in mind that for 10 years the policy has been to allow Poseidon in effect to use the UPE as working capital. It was submitted that the Court should leave the situation as it is until something unreasonable is done by Mr Saris or Poseidon. Mr Saris also submitted that the Court should have regard to the fact that it is only Macralink that wishes proceedings to be commenced by RHD and that the other shareholder, Mr Saris' company Fanouris, is of a different view.

33 Ms Saristavros submitted that it was in the best interests of RHD to commence the proceedings because, if successful, it would gain for RHD and indirectly for its shareholders (Macralink and Fanouris) payment of in excess of $20 million. Her contention is that RHD has a clear interest in recovering the monies owing to it as it will be better off with money in its own hands rather than merely being in the position of a creditor, particularly when the future of Poseidon is uncertain; there is disharmony among its directors; and the debt is unsecured and has never attracted interest. Ms Saristavros submitted that the Court should not speculate about the future profitability of Poseidon or about the decisions it may make in the future in relation to distribution of profits, or about the relative profitability of other investment opportunities available to the stakeholders if the business is sold and the proceeds applied to the stakeholders and RHD.

34 Ms Saristavros also submitted that Mr Saris is really asking the Court to protect Poseidon but, if there is a debt owed to RHD, it is not appropriate for the Court to provide that protection. Further, Ms Saristavros contended that no legally enforceable course has been proposed by Mr Saris for payment of the debt over time.

35 The primary purpose of a derivative action is to enable a shareholder to bring a claim which the company ought to prosecute but does not. When the family context and past history of the dealings between RHD and Poseidon is considered, it is not clear that RHD is refraining from doing something which it should be doing. RHD is a family company. Its two shareholders are also family companies owned by different branches of the broader family. Only one of those shareholders is of the view that RHD should demand payment by another family company (Poseidon) and sue it if it fails to pay. It is not in dispute that for many years, there was, at the least, an arrangement whereby Poseidon retained the amounts to which RHD was entitled by way of trust distributions in order to assist Poseidon in its business. It is also not in dispute that Poseidon does not have available to it liquid funds to pay the UPE amount immediately and that Ms Saristavros will not permit it to borrow funds to pay it. In those circumstances, RHD may very well be acting properly by not requiring that Poseidon immediately make payment to it. In this regard, it matters not whether the earlier arrangement constituted an enforceable agreement or policy or gives rise to an equitable defence. The fact that a company does not seek to enforce its strict legal rights does not mean that its decision to refrain from doing so is flawed. There may be very good reasons why such a course is in its best interests. Here, if one looks at it from the position of RHD, and even taking into account the dispute between the directors of Poseidon and the uncertainty of its future, it is not clear that it is in RHD's interests to pursue payment of the UPE as that would inevitably lead to the cessation of any prospect of future trust distributions from Poseidon. True it may be that there is no certainty that there will be such future distributions even if the UPE is not pursued, but there is a very strong likelihood that there will not be any if RHD pursues a claim for the UPE now. Further, the assumption underlying the contention by Ms Saristavros that RHD will be better off with money in its own hands rather than merely being in the position of a creditor, is that the amount will be paid in a timely manner and sooner than would be the case if proceedings were not instituted. As Poseidon does not have the funds available to make immediate payment and Ms Saristavros will not permit it to borrow, that assumption is questionable.

36 Another consideration is the role that Ms Saristavros has as a director of each of Macralink, RHD and Poseidon and whether it is in RHD's interests that she and Macralink be granted leave. In my view, Ms Saristavros would be in a difficult position. As a director of RHD she would be obliged to cause it to argue that the earlier arrangement as to retention of the UPE amount by Poseidon was no obstacle to demanding immediate payment. However, as a director of Poseidon, she would be duty bound to investigate whether it has a plausible defence to the claim, including the equitable defence contended for by Mr Saris. On the evidence in this application, such a defence does not appear to be completely hopeless, such that it could be dismissed out of hand. Whilst Ms Saristavros contended that Poseidon can have suffered no detriment by the arrangements that were in place because it has had the use of the funds interest free, that does not necessarily lead to the inevitable conclusion that it has suffered no detriment. If it was established that, in reliance on the conduct of RHD, Poseidon has placed itself in a position where it cannot immediately pay the UPE if required to do so, then it seems to me that that would be a real, not fanciful, detriment. In those circumstances, Poseidon would effectively have exposed itself to a situation where it cannot control its own solvency. The claim would be that had it known that immediate payment of the UPE might be demanded, it may well have arranged its affairs differently. Of course, to succeed in litigation against RHD, Poseidon would need to establish all of the elements of the estoppel defence including the basis upon which the payments were retained and its reliance on the conduct of RHD. As I have said above, such a defence would at least require testing at trial of the evidence that has been given in relation to the current application.

37 When one looks beneath the surface, the real dispute is not between RHD and Poseidon but between Mr Saris (through Fanouris) and Ms Saristavros and her sons (through Macralink). If Ms Saristavros or Macralink were permitted to bring the proceedings on behalf of RHD, that would be tantamount to vindicating their position. It is not, as Ms Saristavros contends, a question of protecting Poseidon from a claim. It is about whether RHD should in the circumstances adopt the position of one of its shareholders over the other when it is far from clear that that course is in its best interests.

38 As noted above, the onus is on Ms Saristavros and Macralink to establish on the balance of probabilities that it is (not that it is likely to be) in the best interests of RHD that leave be granted to them to bring the proceeding. They have failed to do so.

Are Ms Saristavros and Macralink acting in good faith?

39 Having determined that the best interests requirement in s 237(2)(c) of the Corporations Act has not been satisfied, it is not necessary for me to consider whether the good faith requirement in s 237(2)(b) has been met. However, in case I am wrong about the best interests requirement, I will briefly consider that issue.

40 When considering whether an applicant is acting in good faith, the Court has regard to at least two interrelated factors:[21]

(a) whether the applicant has an honest belief that the company has a good cause of action with reasonable prospects of success; and

(b) whether the applicant has a collateral purpose in seeking to have the proceedings instituted that would amount to an abuse of process.

41 Although these factors will very often overlap entirely, only the second was in issue in this case.

42 The "best interests" and "good faith" tests overlap to some extent. To the extent that they do, Mr Saris relied upon the submissions that I have dealt with above. He also submitted that Ms Saristavros is, in truth, attempting to achieve a forced sale of Poseidon's business. He noted that she is seeking equivalent relief in the Family Court proceedings. He contended that, in the context of an application to bring a derivative action, acting with such a motivation cannot be acting in 'good faith' within the meaning of s 237(2)(b).

43 Secondly, having regard to the relief sought in the originating process (which, on its face, envisages the service of a statutory demand and, if necessary, a further proceeding to wind up Poseidon) Mr Saris submitted that Ms Saristavros cannot be acting in good faith. Mr Saris contended that Ms Saristavros seeks leave to bring about the destruction of Poseidon in the name of RHD in circumstances where, for many years, Poseidon has provided substantial amounts of money to RHD. Mr Saris contended that the course proposed by Ms Saristavros and Macralink makes no commercial sense for RHD and he says that the fact that Ms Saristavros is pursuing it goes directly to the question of good faith.

44 Ms Saristavros submitted that she and Macralink do not intend to use the proposed proceeding for obtaining some advantage for which the action is not designed and do not intend to use it for some collateral advantage beyond what the law offers. Ms Saristavros contended that they want to bring the proposed proceeding for the purpose of enabling RHD to recover payment of the debt which she claims is owed to it by Poseidon. If it later transpires that a natural consequence of the proposed proceedings is that in order to satisfy Poseidon's debt to RHD, Poseidon takes steps affecting the interests of the stakeholders in Poseidon's business or in the family trust, Ms Saristavros says those are not collateral purposes in any relevant sense. Similarly she says, if a liquidator is eventually appointed who sells Poseidon's business, that would be an outcome for which the proceedings are designed and which is within what the law offers.

45 Ms Saristavros noted that RHD is not a party to the Family Court proceeding and contended that there is no overlap between that proceeding and the proposed proceeding. Counsel submitted on her behalf that the fact that there are two different circumstances that could ultimately lead to the business being sold, does not mean that one taints the other and it does not mean that if Ms Saristavros has two courses open to her at law that she cannot take both of them legitimately or that there is a lack of good faith on her part because she is seeking to pursue rights on behalf of RHD at the same time as she is pursuing a claim in the Family Court.

46 Ms Saristavros submitted that if leave is not granted to her and Macralink, then they are left with nowhere to go because RHD is in deadlock and if Ms Saristavros cannot persuade Mr Saris to take steps to join with her in taking steps to recover the debt owed by Poseidon, then it will never be recovered.

47 In circumstances where Poseidon does not have the immediately available funds to pay and Ms Saristavros will not permit it to borrow, the options available to Poseidon are few if it is required to pay the UPE amount immediately. Ms Saristavros and Macralink are effectively seeking to obtain the same relief that Ms Saristavros and her sons seek in the Family Court proceedings, that is, the sale of the business. The proposed proceeding may not be being used as a means for some advantage for which it is not designed or for some collateral advantage beyond what the law offers and therefore it may not amount to an abuse of process in the strict sense.[22] Nevertheless, I am not satisfied that the good faith requirement has been established. There are a number of reasons for this. First, for the reasons given above, I am not satisfied that the grant of leave is in the best interests of RHD. Second, stripped bare, the real dispute does not concern RHD and Poseidon but rather concerns Ms Saristavros, her sons and Mr Saris. Third, in my view, it is somewhat artificial to view the current application as one driven by the interests of RHD in recovering a debt owed to it and that the sale of Poseidon's business by a liquidator may simply be the product of pursuing that debt. Finally, I do not accept the submission that if leave is not granted to Ms Saristavros and Macralink that they have no remedy. Ms Saristavros is of the view that there is a deadlock in RHD. If that is so, then it may be possible for Macralink to pursue alternative avenues in relation to RHD to achieve the same ends that she and her sons desire. That would be the appropriate forum for ventilating the dispute.

48 There is a serious question to be tried as to whether RHD may require Poseidon to immediately pay the UPE amount. The evidence in the accounts is that there is such a liability and Ms Saristavros has deposed that the amount is due and payable. Any equitable defence of estoppel is one that would need to be tested at trial (at least on the evidence as it stands at present) and with full argument.

49 However, I am not satisfied that it is in the best interests of RHD that leave to bring a proceeding ought be granted to Ms Saristavros and Macralink. It is not clear that such a claim ought to be brought in circumstances where there has been a long standing arrangement that Poseidon may retain the UPE amount for use in its business, Poseidon does not have the funds immediately available to pay and Ms Saristavros will not permit it to borrow to do so. Only one of RHD's shareholders favours the action. Ms Saristavros is most likely to be placed in a position of conflicting duties. Whilst Macralink may not be faced with the same legal difficulties, this does not overcome the other reasons why it is not in the best interests of RHD that it be granted leave to pursue the claim against Poseidon.

[2] Re Brighter Directions Pty Ltd [2010] VSC 287 at [5].

[3] Swansson v RA Pratt Properties Pty Ltd & Anor [2002] NSWSC 583; (2002) 42 ACSR 313 at 318.

[4] Re Brighter Directions Pty Ltd [2010] VSC 287 at [5].

[6] Ibid at 404 per Mason CJ and Wilson J.

[8] Cassegrain v Jarrod Cassegrain & Co Pty Ltd & Anor [2008] NSWSC 976; (2008) 68 ACSR 132 at 145.

[9] Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859 at [45].

[12] [1970] 1 Ch 62. See also, Mernda Developments Pty Ltd (in liq) & Anor v Alamanda Property Investments No 2 Pty Ltd & Anor [2011] VSCA 392 confirming that an objective test is now generally accepted as the proper test.

[13] Charterbridge Corporation Ltd v Lloyd's Bank Ltd [1970] 1 Ch 62 at 74.

[20] That is, to bring proceedings for recovery of the debt, if judgment is obtained, to serve a statutory demand on Poseidon and in the event of non-compliance with the demand, to take proceedings for the winding up of Poseidon in insolvency.

[21] Swansson v RA Pratt Properties Pty Ltd & Anor [2002] NSWSC 583; (2002) 42 ACSR 313 at 320.

At a glance

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Judgment (99 paragraphs)

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Cases Cited (2)