The Court is dealing with a notice of motion filed by the defendants on 9 April 2020 that seeks orders that the amended statement of claim filed by the plaintiff on 13 March 2020 be struck out, and alternatively that a number of identified prayers for relief and paragraphs of the pleading be struck out.
The defendants seek an order that the proceedings against the fourth defendant be dismissed with costs.
The defendants seek an order vacating the orders made in the Online Court on 24 March 2020.
The proceedings relate to the affairs of the first defendant, Trend Designs Pty Ltd (the Company).
The plaintiff, Ms Brooke-Erin Rose and the second defendant, Shannon Anthony Baranski, are sister and brother. They both hold 1000 ordinary shares in the Company. In the plaintiff's case those shares are held in her capacity as executor of her late father's estate.
The third defendant, John Albert Shirlaw, is an accountant by profession. The fourth defendant, Shepherd Management Services Pty Ltd (SMS) is a company controlled by Mr Shirlaw through which, as I understand it, he provides accountancy and consultancy services.
Ms Rose was a director of the company until 14 September 2017 on which date she was removed as a director. Mr Shirlaw was appointed a director of the company on that date and a single ordinary share was issued to him.
By her amended statement of claim, Ms Rose seeks to establish that those transactions were void and seeks declarations to that effect.
Ms Rose also complains about the fact that a dividend has been paid to Mr Baranski but no dividend has been paid to her. She complains that she has been shut out of the management of the Company and not given information concerning its affairs.
Ms Rose seeks relief under s 233 of the Corporations Act 2001 (Cth) for orders that she be paid dividends, that Mr Shirlaw and SMS be restrained from being involved in the operation or affairs of the company, and an order that the Company buy back, or Mr Baranski buy, all of her shares in the company at a price to be determined by the Court.
The defendants do not complain about Ms Rose's prayers for relief or pleadings in relation to this aspect of her claim.
On 25 February 2020, Ward CJ in Eq made an order striking out certain prayers for relief and paragraphs in Ms Rose's statement of claim.
Her Honour also made the following order:
3. Leave to the Plaintiff to file and serve an Amended Statement of Claim on or before 13 March 2020, such leave being limited to causes of actions concerning:
(a) the validity of company resolutions passed on 14 September 2017;
(b) alleged oppressive conduct; and
(c) any claim of the Plaintiff to a distribution of dividends or capital from the Company.
In accordance with that leave, Ms Rose filed her amended statement of claim on 13 March 2020. The defendants responded by filing their notice of motion as referred to above.
These reasons for judgment deal with the notice of motion following a hearing that took place on 26 May 2020.
At the hearing counsel for the defendants informed the Court that they did not pursue their claim in par 1 of the notice of motion for an order that the amended statement of claim in its entirety be struck out. Counsel said that the Court might make that order if it took the view that the amended statement of claim was substantially defective, so that it should be struck out entirely with leave to Ms Rose to replead.
That is not a course that the Court will follow in this case.
The defendants pursued the following claim for relief:
2. Alternatively, an Order that the following parts of the Amended Statement of Claim filed on 13 March 2020 be struck-out:
a. The relief sought in prayers 4; 10A and 10B; and
b. Paragraphs 13, 18 - 29, 35 and 36.
I will deal with this claim for relief before I consider the other relief sought by the defendants in their notice of motion.
I note, firstly, that Ms Rose accepts that the Court should make an order striking out prayer 4. That was a prayer that Ward CJ in Eq ordered be struck out. It was retained in the amended statement of claim inadvertently. Ms Rose's solicitors acknowledged that fact in an email dated 24 March 2020 to the defendants' solicitor, some two weeks before the defendants' notice of motion was filed.
Prayers for relief 10A and 10B are in the following terms:
10A. Pursuant to section 233(1)(j) of the Corporations Act 2001 (Cth), an order that an account be taken of the profits made by the Third and Fourth Defendants from their dealings with the Plaintiff, an order that an inquiry be held to determine the amount of such profits and an order that the Third and Fourth Defendants pay to the Company such profits.
10B. Pursuant to section 233(1)(j) of the Corporations Act 2001 (Cth), an order that the Third and Fourth Defendants pay the Plaintiff damages or equitable compensation.
As prayer 10A seeks an order against Mr Shirlaw and SMS in favour of the Company, it is in the nature of a derivative action. However, it is sought as part of oppression proceedings under s 233 of the Corporations Act. Strangely, the order has been sought under subsection (1)(j), which empowers the Court to make an order requiring a person to do a specified act, rather than under subsection (1)(g), whereby the Court is empowered to authorise a member to institute and prosecute specified proceedings in the name and on behalf of a company.
As prayer 10B seeks an order that Mr Shirlaw and SMS pay damages or equitable compensation to Ms Rose, it can only be a reflexive claim. There is no allegation in the amended statement of claim that either Mr Shirlaw or SMS owed any duties to Ms Rose in her personal capacity. The duties alleged were owed to the Company. This claim can only be a claim in respect of some diminution in the value of Ms Rose's shareholding in the Company, or perhaps in respect of some reduction in the Company's capacity to declare dividends in favour of Ms Rose.
The defendants submitted that the Court should strike out prayer 10A because Ms Rose was seeking to prosecute derivatively a claim of the Company, without having been given leave by the Court to bring the claim under s 237 of the Corporations Act. The defendants submitted that prayer 10B should be struck out because, as a matter of law, Ms Rose is not entitled to maintain an action against Mr Shirlaw and SMS for a reflective loss, even in the context of an oppression suit.
It will be convenient to consider the paragraphs of the pleading which the defendants seek to have struck out in a different order than that in which they are listed in the notice of motion. I will set out first the contentious paragraphs that explain the significance of the other allegations of fact impugned by the defendants.
Paragraph 21 pleads:
In calculating the:
(a) Plaintiff's equitable compensation; or
(B) price at which the Plaintiff's shares ought to be purchased,
the Fees must be added back to the value of the Company.
Paragraph 24 pleads:
In calculating the:
(a) Plaintiff's equitable compensation; or
(b) price at which the Plaintiff's shares in the Company ought to be purchased,
all funds received by the Fourth Defendant from the Company must be added back to the value of the Company.
Then, pars 35 and 36 plead respectively:
The Second to Fourth Defendants ought to account to the Company for:
(a) the Fees;
(b) other funds received from the Company without a proper basis.
The account, so determined, should inform the price at which the Plaintiff's shares are purchased by the relevant Defendant.
In substance, pars 21(a) and 24(a) allege that the moneys defined in par 19 as the "Fees" paid to Mr Shirlaw in the amount of $34,810.00 and to SMS in the amount of $33,775.50 should be added back to the value of the Company for the purpose of calculating Ms Rose's equitable compensation.
Paragraphs 21(b) and 24(b) claim that the Fees must be added back to the value of the Company for calculating the price at which Ms Rose's shares bought to be purchased. Paragraph 35 pleads a claim that all of the defendants ought to account to the Company for the Fees and other funds received from the Company without a proper basis, and the result of the account should inform the price at which Ms Rose's shares are to be purchased.
The purpose in analysing the amended statement of claim in this way is that all of the other impugned paragraphs allege facts that are relevant both to Ms Rose's claim for damages or equitable compensation on the one hand, and her claim that her shares should be bought out at an appropriate value on the other. If the prayer for relief that raises one of these claims is struck out, but not the other, then Ms Rose may continue to be entitled to make the allegations of fact because they support the claim for relief that she is permitted to continue to maintain.
In outline, the further impugned paragraphs are as follows. Paragraph 13 alleges that the Company has paid the Fees to Mr Shirlaw and SMS; par 18 alleges that the payments were contrary to the interests of the members of the Company as a whole and were oppressive to, unfairly prejudicial to, or unfairly discriminatory against Ms Rose; par 19 alleges Mr Shirlaw and SMS charged the Fees; par 20 alleges the Fees were not incurred with the proper authority of the Company, were excessive or related to work that was not in fact undertaken; par 22 alleges that Mr Shirlaw was the sole director and guiding mind of SMS; and par 23 alleges that SMS had actual knowledge or relevant notice of certain matters relevant to the liability of the Company to pay the Fees.
Paragraph 25 alleges duties owed by Mr Baranski to the company as its director; and par 26 alleges breaches of those duties in relation to the removal of Ms Rose as a director, the appointment of Mr Shirlaw, the payment of the dividend, the issue of the single share to Mr Shirlaw, and also the payment of the Fees to SMS, which Ms Rose alleges related to Mr Baranski's personal liabilities.
Paragraph 27 alleges duties owed by Mr Shirlaw to the Company as its director; and par 28 alleges different duties owed by Mr Shirlaw to the Company in his capacity as an accountant and tax agent. Paragraph 29 alleges breach of the duties by Mr Shirlaw in gaining benefits for himself and SMS.
The allegations of fact that I have just outlined are properly relevant to the oppression claim made by Ms Rose against Mr Baranski and Mr Shirlaw.
It appears that the only allegation made against SMS in respect of its receipt of its portion of the Fees is the allegation made in par 23 concerning SMS's actual knowledge or its relevant notice of various matters that constituted alleged breaches by Mr Baranski and Mr Shirlaw.
The allegations of knowledge and notice are apparently made to support Ms Rose's allegation in par 38 that SMS ought to account to the Company for the Fees and other payments received from the Company without a proper basis.
I propose to follow the decision of Black J in In the matter of JGS Investment Holdings Pty Ltd [2014] NSWSC 1532 (JGS Investment Holdings) at [16] to [20], that the principle that prevents a shareholder from maintaining a claim for reflexive loss against a party in respect of damage caused by that party to the company by reason of a breach of duty, also applies in the context of what is commonly still called an oppression suit under Part 2F.1 of the Corporations Act.
Furthermore, the amended statement of claim does not contain any allegation that any defendant owed any obligation directly to Ms Rose the breach of which entitled her to compensation, rather than that compensation be paid to the Company.
Consequently, I have concluded that prayer 10B and pars 21(a) and 24(a) should be struck out of the amended statement of claim.
In JGS Investment Holdings, Black J referred, at [13] and [14], to authorities that support the view that, in an oppression suit, the Court can "short-circuit" the making of an order authorising a person to institute and prosecute the proceedings on behalf of a company against persons who are relevantly involved in the oppression: see Power v Ekstein [2009] NSWSC 130 per White J (as his Honour then was) at [77]; and also in Power v Ekstein [2010] NSWSC 137; (2010) 77 ACSR 302 per Austin J at [31].
Those authorities establish that it is at least arguable that claims that would otherwise require leave to maintain a derivative action on behalf of a company under s 237 of the Corporations Act can be maintained in an oppression suit.
Consequently, I am not satisfied that it would be appropriate for the Court to strike out on a summary basis prayer 10A, or par 35 of the amended statement of claim in so far as it supports an order that SMS should account to the company.
Ms Rose may be at risk of failing at the hearing on her claim for an order that SMS account to the company, and perhaps even Mr Baranski and Mr Shirlaw, if she does not first obtain leave to maintain a derivative action under s 237 of the Corporations Act. It is not possible at this stage of the proceedings, given the level of detail in the amended statement of claim, to make any sound judgment about whether or not any entitlement of the Company to an accounting from the other defendants will be shown to be sufficiently connected to any oppressive conduct by the defendants against Ms Rose to justify the 'short circuit'. That is not a matter to be determined on this application.
It will not be appropriate for the Court to strike out on a summary basis any of the other allegations of fact impugned by the defendants. They remain relevant in support of prayer 10A, even though prayer 10B will be struck out.
Order 3 sought by the defendants in their notice of motion was an order that the proceedings against SMS be dismissed with costs.
As I understand it, the defendants submitted, and Ms Rose accepted, that if prayer 10B, and the allegations in the pleading concerning the reflective loss claim were struck out of the amended defence, then SMS should be removed as the fourth defendant.
However, in considering these reasons for judgment, I have realised that SMS would remain a necessary party for Ms Rose's claim in prayer 10A that it account to the company along with Mr Shirlaw. If it is the case that on the back of Ms Rose's oppression claim she can 'short-circuit' a derivative claim against Mr Shirlaw, and if - as is alleged by Ms Rose in par 23 - SMS had relevant knowledge or notice of misconduct by Mr Shirlaw, then it would appear necessary that SMS remain as the fourth defendant in the proceedings. Furthermore, SMS is the subject of the injunction sought in prayer 9, and that claim will remain in the amended statement of claim.
When I deliver these reasons for judgment, I will raise this issue with the parties, and give them an opportunity to make further submissions in respect of it.
Finally, the defendants sought, by par 4 of their notice of motion, an order vacated in the orders made in the Online Court on 24 March 2020. Those orders provided dates for the filing of a defence and the parties' evidence, and listed the proceedings for directions on 6 August 2020. Some of the dates have already passed. It is appropriate that the orders be vacated and that alternative case management orders be made.
One matter of concern is that the total amount of the Fees is $68,585.50.
Paragraph 20 of the amended statement of claim contains an allegation that the Fees were not incurred with the proper authority of the Company. The particulars show that this allegation is founded on the claim that the removal of Ms Rose as a director of the Company and the appointment of Mr Shirlaw were void, with the result that decisions made by the Company since 14 September 2017 are without proper authority. That assertion seems straightforward if not given due thought. Complex issues may arise, when measured against the relatively small amount of the Fees, concerning whether the Fees were enforceable against the company notwithstanding any defect in the internal management of the Company.
Paragraph 20 of the amended statement of claim contains alternative allegations that the Fees were excessive or related to work that was not in fact undertaken. The particulars assert baldly that the Fees were excessive having regard to the scope of services allegedly performed, as described in each invoice, and the fact that the company undertakes no trading activity.
Apart from the observation that it is difficult to see what the parties are fighting about if the Company engages in no trading activity, it seems likely that the parties will incur undue costs in litigating the dispute concerning the Fees, unless appropriate case management orders are made that provide for the provision to Ms Rose of appropriate information and require her to be specific in her particulars of the wrongdoing alleged against the defendants in relation to the Fees. The amount of the Fees is too small to justify open-ended litigation on that subject.
I will not make any costs order at this stage and will hear the parties on that subject. I will also give the parties an opportunity to suggest further case management orders and I will then make appropriate orders before relisting the proceedings before the Registrar.
The parties should consult and provide to my associate draft short minutes of order to give effect to these reasons for judgment. If necessary, the parties may relist the matter for a further brief hearing by arrangement with my associate.
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Decision last updated: 02 June 2020