BETWEEN : RESOURCE EQUITIES LIMITED (ACN 067 748 109)

STRATEGYSEARCH CONSULTING SERVICES PTY LTD (ACN 053 207 088)

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation Number : [2004] WASC 78

Practice and procedure - Application to amend - Failure to join necessary party - Leave under s 237 of Corporations Act 2001 claimed as relief in oppression application - Turns on own facts

Corporations Act 2001 (Cth), s 175, s 233, s 236, s 237, s 1322

Morgan v 45 Flers Avenue Pty Ltd (1987) 5 ACLC 222

News Ltd v Australian Rugby Football League Ltd [1996] FCA 870; (1996) 64 FCR 410

Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31

JN Taylor Holdings Ltd (In Liquidation) v Bond (1993) 59 SASR 432

Re Multi-Tech Services Pty Ltd (In Liquidation) (1982) 30 SASR 218

Shum Yip Properties Development Ltd v Chatswood Investment and Development Co Pty Ltd [2002] NSWSC 13; (2002) 40 ACSR 619

Western Australia v Bond Corporation Holdings Pty Ltd (1991) 5 WAR 40

1 MCLURE J: The applicant (first defendant) seeks leave to appeal from orders made by Master Sanderson on 4 May 2004 giving leave to amend the application and joining three of the applicant's directors.

2 In its original application, the then sole but now first-named respondent (plaintiff) (Western Ventures Pty Ltd), applied under s 233 of the Corporations Act 2001 (Cth) for the winding up of the applicant or, alternatively, the appointment of a receiver on the ground of the alleged oppressive conduct of the affairs of the applicant ("oppression application"). Other members of the applicant have now been joined as plaintiffs (respondents).

3 By the orders the subject of this leave application, the Master joined three directors of the applicant (Messrs Carr, Thomas and Purves) as second, third and fourth defendants respectively and gave leave to amend the application to make further claims and seek additional relief. The further claims are made in the following terms:

"Section 237 and Sections 1322 and 175 of the Corporations Act

The application pursuant to section 237 of the Corporations Act is an application by the [first-named first respondent] for leave to bring proceedings on behalf of the [applicant] against the Second, Third and Fourth Defendants.

The application pursuant to Section 1322 is to declare invalid the purported allotment of 3,000,000 shares in or about May 2003 to Glamont Pty Ltd and pursuant to Section 175 to rectify the register of shareholders."

4 The additional relief sought by the respondent is contained in pars 2, 3 and 4 as follows:

"2. alternatively to (1) above, orders pursuant to section 237 of the Corporations Act that the [first-named respondent] be authorised to institute and prosecute proceedings on behalf of the [applicant] against ... Carr, ... Thomas and ... Purves, directors of the [applicant], for breach of their common law duties as directors and of sections 180 and 181 of the Corporations Act ... ;

3. a declaration pursuant to Section 1322 that the issue of 3,000,000 shares by the [applicant] in or about May 2003 to Glamont Pty Ltd was invalid and void;

4. rectification of the register of members of the [applicant] pursuant to section 175 whereby the issue of 3,000,000 shares in the [applicant] in or about May 2003 to Glamont Pty Ltd is cancelled."

5 Paragraph 1 claims relief under s 233 for the winding up of the applicant or the appointment of a receiver. At the hearing before the Master, counsel for the applicant contended that the proposed relief in par 2 was inconsistent with order 1, although no such inconsistency was claimed in relation to the relief sought in pars 3 and 4. In effect, the applicant conceded that the relief sought in pars 3 and 4 could be made in the oppression application, although the claim is made and relief sought under s 1322 of the Corporations Act which permits an application by "any interested person": s 1322(4). Thus, for the purposes of this application, I assume the respondents have standing, and can obtain a declaration of invalidity, under s 1322 notwithstanding it appears the purpose of that section is to validate actions following an irregularity in procedure. The respondents' claim is pre-emptive in nature.

6 Based on the concession that the claims for relief in pars 3 and 4 are properly raised in this application, it is clear that the relief sought directly affects Glamont's rights, in which case it is a necessary party to the action: News Ltd v Australian Rugby Football League Ltd [1996] FCA 870; (1996) 64 FCR 410 at 524; Morgan v 45 Flers Avenue Pty Ltd (1987) 5 ACLC 222 at 232.

7 This was conceded by the respondent before the Master and in this Court. However, leave to amend was not conditional on the joinder of Glamont and the respondents have not since applied to join Glamont. The consequence of the failure to join Glamont is that, notwithstanding O 18 r 6(1) of the Supreme Court Rules, the claim to relief will be defeated: News Ltd v Australian Rugby Football League Ltd at 524. Accordingly, the Master erred in granting leave to amend in relation to the s 1322/s 175 matters.

8 The applicant also contends that the Master erred in law or in the exercise of his discretion in granting leave to amend the application to include an application for leave under s 237 of the Corporations Act. The joinder of the second, third and fourth defendants was consequential upon the s 237 related amendments to the application, including the claim for relief in par 2.

9 Section 237, contained in Pt 2F.1A of the Corporations Act, concerns a member's derivative action. The statutory derivative action allows, among other things, the Court to permit a member to bring proceedings on behalf of the company. Where a court is considering whether or not to allow a person to bring proceedings on behalf of a company, it must (under s 237(2)) grant the application if it is satisfied that:

- it is probable the company will not itself bring the proceedings, or properly take responsibility for them;

- it is in the interests of the company that the applicant be granted leave;

- either at least 14 days before making an application to the Court, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying or it is appropriate for the Court to grant leave even though notice was not given to the company.

10 Section 237(3) provides a rebuttable presumption that the grant of leave is not in the best interests of the company if certain matters are established. They are that:

- the proceedings are by the company against a third party;

- the company has decided not to bring the proceedings;

- all of the directors who participated in that decision acted in good faith for a proper purpose; did not have a material personal interest in the decision; informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and rationally believed that the decision was in the best interests of the company.

11 A derivative action under Pt 2F.1A must be brought in the company's name: s 236(2). Thus, leave is a condition precedent to the commencement of a derivative action brought by the members in the company's name under s 237. The respondents have not expressly sought relief in the oppression application under s 233(g) of the Corporations Act which gives the Court the power to authorise a member to institute proceedings in the name and on behalf of the company. It is unnecessary on the facts to address the relationship between the Court's powers in s 233(g) and Pt 2F.1A of the Corporations Act.

12 In this case the first respondent applied to amend the oppression application and join the directors as defendants in order to include an application for leave under s 237 to commence a derivative action, which application for leave is in the alternative and would not arise for determination in the event the Court ordered the company to be wound up or a receiver appointed.

13 It is not apparent from the materials before this Court and was not contended below that the second, third and fourth defendants are otherwise necessary defendants in the oppression application. Such a contention would raise a number of issues, in particular, whether the respondents have standing to seek relief against those defendants and, if not, whether joinder would be permitted if the respondent would achieve indirectly by way of issue estoppel what they could not achieve directly. Similar issues arise from the joinder of the directors for s 237 purposes; that is, whether an issue estoppel would arise from factual findings made in the s 233 and s 1322 claims. There is also the question whether the defendants in a proposed action the subject of a s 237 application have a right to be heard in the leave application. Applications under O 18 r 6 of the Supreme Court Rules are ex parte. These matters were not raised or addressed below and only superficially addressed in the application before this Court.

14 However, it is unnecessary to determine these matters in this application. Assuming, without deciding, that the directors are proper parties to an application under s 237, the determination of that application is to be deferred until the conclusion of the hearing of the oppression claim and is contingent upon the outcome of that claim. Thus, the directors are joined in an application in which they have only a contingent interest, which contingency may never arise. This course may result in uncertainties as to the proper nature and extent of their participation in the application generally and wasted legal costs.

15 Further, there are indications in Pt 2F.1A of the Corporations Act that it is intended that the application for leave be determined in the

factual context prevailing at the time of the commencement of the application. So much is apparent from the requirement that there be written notice to the company of the intention to apply for leave and the procedure and requirements for the establishment of a rebuttable presumption. A company and its directors (or liquidator or receiver) should have the opportunity to consider the company's position in the light of all relevant circumstances as they exist at the time an applicant intends to make and pursue a s 237 application. The low merits threshold (serious question to be tried) and the other preconditions for the grant of leave suggest it is intended to function as a stand-alone application. The relevant Explanatory Memorandum notes that an application for leave under s 237 should not be turned into a trial of the substantive issues. Any action following the grant of leave under s 237 may, in appropriate circumstances, be heard together with related litigation. However, it is unnecessary to decide whether, as a matter of construction, s 237 is confined in the ways suggested. The deferral of a contingent application is also a relevant factor in the exercise of the Court's discretion to allow amendments.

16 I am satisfied that, on the facts in this case, the application for leave under s 237 and the consequential joinder of the second, third and fourth defendants in the oppression action were premature.

17 For these reasons, the Master erred in granting leave to make the s 1322/175 and s 237 amendments and, as emerges from the discussion on the nature and effect of the errors, substantial injustice will result if the decision is not reversed. I would grant leave to appeal and allow the appeal.

18 SIMMONDS J: I have had the advantage of reading the judgment of McLure J. I agree with it and with her conclusions that leave to appeal should be granted and the appeal allowed.