Re Safetycare Australia Pty Ltd; Disney Davidson Holdings Pty Ltd v Safetycare Australia Pty Ltd [1999] VSC 321

Supreme Court of Victoria|1999-08-12|Before: Byrne J

Re Safetycare Australia Pty Ltd; Disney Davidson Holdings Pty Ltd v Safetycare Australia Pty Ltd

COMPANIES - inspection of books - whether application brought for improper purpose - Corporations Law s.247A. PRACTICE AND PROCEDURE - costs - costs of affidavits filed in abortive Federal Court proceeding - affidavits adopted in this proceeding - costs of preparation included in costs of this proceeding - costs on solicitor/client basis - application opposed for no good purpose - costs against non-parties - directors of respondent - application resisted not for company's benefit - for directors' own purposes.

The applicants, Disney Davidson Holdings Pty Ltd and Carnarvon Nominees Pty Ltd, are two of four shareholders in the respondent, Safetycare Australia Pty Ltd ("the Company"). They seek orders pursuant to section 247A of the Corporations Law for inspection of certain books of the Company. The applicants are controlled by Rodney Disney Davidson and Phillip Maxwell Earle respectively.

The association of Mr Davidson and Mr Earle with the Company dates back to 1987. In July of that year, heads of agreement were signed under which 50 per cent of the business known as Safetycare Productions, conducted by Paul Whately and Robert Claudio Paul Marcuso, was effectively sold to Mr Davidson and Mr Earle. The structure adopted to implement this sale was the transfer of the business to the Company, of which the four men became directors, and their companies, shareholders.

The business prospered mightily and now trades in a number of countries. After a little time, differences and disputes arose between the four co-venturers, as a consequence of which there were, in 1994 and 1995, discussions with a view to Mr Marcuso and Mr Whately buying Mr Davidson's and Mr Earle's interests. These discussions were unsuccessful.

On 13 July 1995, Mr Davidson was removed as a director of the Company and on 21 July 1995, Mr Earle resigned from that office. Between 1996 and 1998 further discussions continued between the two pairs of men, the directors and the former directors, with a view to one buying the interest of the other. Valuations were obtained for this purpose, but no agreement was arrived at.

In 1998 and 1999 allegations were made by the former directors that they were not being provided with financial details of the Company. A formal demand made by them on 26 April 1999 was not complied with. On 6 May 1999, the applicants commenced proceeding VG 3132 of 1999 in the Federal Court of Australia, seeking an order for inspection under section 247A. This application was resisted by the respondent. Before the application could be heard, the decision of the High Court in Re Wakim was given on 17 June 1999, so that the Federal Court had no jurisdiction.

The Federal Court application was, on 20 July 1999, discontinued by consent of the parties on the basis that each bear its own costs. Meantime, on 25 June 1999, the present application was filed in this court. This application too was resisted by the Company.

In accordance with my practice direction, the applicants sought orders that the three affidavits already filed in the Federal Court proceeding stand as evidence in this case. The parties proceeded on the basis that this would be done and affidavits in response were filed. The application was fixed for trial before me on 11 August, with an estimate of three days. I was told that there would be cross-examination of each of the applicants' deponents.

When the application came on for hearing, I invited counsel for the Company to set out its grounds for resisting the application. They responded that the Company contended that the application was brought for an improper purpose. Two such purposes were identified: first, to further the breach of contract and breach of fiduciary duty which caused the applicants to become shareholders in the Company. It was said that in 1987 Mr Davidson and Mr Earle acted as solicitors for Mr Whately and Mr Marcuso and that they were in breach of fiduciary duty by entering into the agreement under which the Company ran the business without advising their clients to seek independent legal advice. I was told that a couple of weeks ago a proceeding had been commenced in this court seeking to set aside the 1987 agreement on this basis and to recover money paid under it. The second improper purpose was to use the application to obtain a better price for the applicants' interests. It was put that these were matters which should bear upon my discretion to grant or refuse the application.

And so the hearing commenced. The three affidavits filed in the Federal Court proceeding, and the numerous exhibits to them, were tendered in evidence and, subject to an objection as to relevance, accepted. A further affidavit of Mr Earle was read, as were three affidavits on behalf of the Company, all filed in this proceeding. There was no affidavit of Mr Marcuso or Mr Whately. Mr Earle was cross-examined.

One of the Company's deponents, Sidney Peter Catlan, was also required to be cross-examined. In the course of his cross-examination, counsel for the Company announced that their client would now make the documents available. The hearing thereupon stopped to enable counsel to work out the terms of a consent order. This they have done. It remains only to consider the question of costs.

It is clear enough that the applicants should have their costs against the Company, and this was not strenuously disputed. Counsel for the applicants, however, sought three exceptional orders: that the costs order go against Mr Marcuso and Mr Whately; that costs should be awarded on an indemnity basis; and that costs should include the costs of the Federal Court proceeding. I shall deal with these submissions in reverse order.

I will not make an order for costs which includes the costs of the Federal Court proceeding. First, I incline to the view, although it is not a concluded view for I heard no argument on it, that the Supreme Court Act 1986 s.24(1) does not confer this power. The Federal Court proceeding is not a matter in the court or incidental to such a matter. Second, I will not make an order which flies in the face of the parties' agreement that each bear its own costs of the Federal Court proceeding.

This is not, however, the end of this matter. The applicants have, as I have mentioned, used three affidavits prepared for and filed in the Federal Court proceeding. In the practice note of 17 June, I encouraged the parties to abortive Federal Court proceedings to avoid, if possible, the unnecessary cost of duplicating in this court work which had been done in the Federal Court. This the applicants have done. The other side of this coin is that they should not be at a cost disadvantage for having done so. If their Federal Court affidavits had been re-engrossed and resworn, the costs of this would have been borne by the Company. So too should they have the benefit of a costs order for those affidavits properly before the court without this wasteful duplication.

I will, therefore, include in the costs order provision for payment of the costs of preparing these affidavits, which were tendered as exhibits 1, 2 and 4 in this proceeding, as if they had been prepared and filed in this proceeding.

As to indemnity costs, the choice which I address is that between party/party costs and solicitor/client costs. While I accept that I have power to order costs on some other basis: Rule 63.28(c), I will not do so. Even if such a severe order were required, I do not think that the applicants should have costs other than those reasonably incurred and of a reasonable amount: Rule 63.30. Like Einfeld J in Re Sanchez; ex parte Schmidts (1994) 49 FCR 326, I am not minded to issue the successful party with a carte blanche. In my opinion this is a case where costs should be awarded on a solicitor/client basis. I accept that in a case such as this, where a company is a vehicle for a joint venture akin to a partnership and there is a pre-emption provision for the sale of shares to existing shareholders, an order under section 247A will be readily made.

The Company, at least since its solicitor's letter of 28 April 1999 and subsequently, has not agreed to provide the access sought by the applicants. It has refused to change this position, even after receipt of a Calderbank offer late on 10 August 1999. It has required the applicants' deponents to attend for what was threatened to be an extensive cross-examination. The applicants were not deterred by this. It was the Company which has backed down.

Of the two alleged improper purposes, the first was shown to be insubstantial. Mr Earle and Mr Davidson were the two solicitors against whom serious allegations of breach of fiduciary duty were made. Neither of the victims of this impropriety was prepared to swear up to the allegation. Mr Davidson was not cross-examined on the matter. Mr Earle was, but he maintained that he advised Mr Marcuso and Mr Whately to seek independent advice. Nor am I impressed by the fact, now disclosed without explanation, some 12 years after the event, that the directors have decided to seek to set aside an agreement from which they have enjoyed very substantial profit. Finally, even if impropriety were found to be present, the agreement of 1987 has not been set aside. The applicants are, even so, today shareholders and, as such, entitled to seek relief under section 247A. As to the second improper purpose, the Company is a quasi partnership and a retiring member is obliged to offer their shares to the others. In these circumstances I can see nothing improper in the applicants seeking to examine the financial affairs of the Company in order to establish the value of their shares. I should say in fairness to counsel for the Company that they did not press a contrary position.

In these circumstances, this is a case in which I find that the resistance by the Company was made and maintained for no good purpose and that the court should indicate its disapproval of this by an award of solicitor/client costs.

The third order sought is that the directors of the Company personally pay the applicants' costs. Counsel for the Company announced that he appeared also for the directors to resist this application, of which notice had been given. The submission of the applicants may be shortly stated. This application is brought in the furtherance of a dispute between Mr Davidson and Mr Earle on the one part and Mr Whately and Mr Marcuso on the other. These four parties are in dispute about the value of the former directors' interests in the Company, which interests represented, broadly speaking, 50 per cent of the value of the Company. It was submitted that an order against the Company would mean that one half of the costs would ultimately be borne by the successful applicants. Put another way, it was said that such an order would infringe the principle that, "the powers and funds of a company may be used only for the purposes of the company." See Re D.G. Brims and Sons Pty Ltd (1995) 16 ACSR 559 at 592, per Byrne J.

It has been held, upon an application of that principle, that the costs of an application for winding up on the ground of oppression might be ordered against the directors for whose benefit the company opposed the application: Re Polyresins Pty Ltd (1998) 28 ACSR 671 at 686, per Chesterman J; Marks v Roe (unreported, Mandie J, 28 May 1996 BC9602061) at p.39.

I am satisfied, even though the version of events of Mr Marcuso and Mr Whately is not before me, that this application was resisted for no purpose of the Company. I have not overlooked also the fact that the shareholders in this company are not Mr Marcuso or Mr Whately, or indeed Mr Earle or Mr Davidson, but rather their companies. To my mind, the evidence shows that the moving spirits in this litigation are the individual persons whose names I have mentioned.

Accordingly, I will make an order for costs against the directors of the Company. The order for costs which I propose, therefore, is as follows: the applicants' costs of this application, including reserved costs and including the costs of preparing the affidavits mentioned below, be taxed on a solicitor/client basis in default of agreement and that when taxed or agreed, be paid by Robert Claudio Paul Marcuso and Paul Whately.

The affidavits referred to are the following affidavits filed in Federal Court proceeding number VG 3132 of 1999, namely, affidavit of Phillip Maxwell Earle, sworn 6 May 1999; affidavit of Rodney Disney Davidson, sworn 6 May 1999; affidavit of David James Lofthouse, sworn 6 May 1999.

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