RTP HOLDINGS PTY LTD & ANOR v ROBERTS & ORS No. SCGRG-00-838 [2000] SASC 386

2 The circumstances of this application are a little unusual. On 6 September 2000 the companies purportedly issued an inter partes summons in Action No. 838 of 2000 against the respondents to this application, Mr and Mrs Roberts and Modern Machinery Systems Pty Ltd. No Statement of Claim was annexed. On the same day the companies issued an interlocutory application in which they sought leave to proceed under s 236 of the Corporations Law. The companies also sought orders in the nature of Mareva injunctions against those defendants.

3 The matter was brought on on short notice before the Chief Justice who directed the plaintiffs to serve the proceedings upon the defendants. Service was effected and there were two subsequent hearings before the Chief Justice when the matter was listed for mention and the parties reported to the Chief Justice that discussions were taking place in relation to the orders sought.

4 The matter came on before me on 6 October 2000 when the matter was adjourned until 20 October 2000 for the same reasons that the Chief Justice had adjourned the previous applications.

5 On 20 October 2000 I gave directions for the filing of affidavits in support of and in opposition to the application for the Mareva injunction. The matter was listed before me early today for the hearing of that application. Mr Jenner, who appeared for the companies in Action No. 838 of 2000, sought an order pursuant to s 237 of the Corporations Law for leave to bring these proceedings. Mr Keen, who appeared for the defendants, indicated that such an order was opposed because Part 2F.1A of the Corporations Law requires that leave be obtained prior to the issue of the proceedings.

6 By way of background information the four applicants and Mr and Mrs Roberts are the six directors and six shareholders of RTP Holdings Pty Ltd and RTP Technologies Pty Ltd. Mr and Mrs Roberts hold a substantially greater interest in both companies than the four applicants.

7 The parties entered into a shareholders' agreement on 24 December 1998 in which they undertook to cooperate and use their best endeavours to ensure that the companies successfully conduct their business and make approvals or decisions that are required of the parties in good faith and in the best interests of the companies and the conduct of their business and be just and faithful in the parties' activities and dealings with the other parties.

8 They further agreed that all decisions by the boards of the two companies had to be made by unanimous vote of the directors. That agreement if binding, a matter upon which I do not pass any opinion, means that the companies are stultified unless all directors agree on a particular course of action.

9 It is clear from the affidavits filed in Action No. 838 of 2000 that the parties have fallen out. The applicants claim in their affidavits filed in those proceedings that Mr and Mrs Roberts and Modern Machinery Systems Pty Ltd, which is a company under the control of Mr and Mrs Roberts, have wrongly dealt with assets of the companies to the detriment of those companies. In particular they claim that Mr and Mrs Roberts and Modern Machinery Systems Pty Ltd have sold a piece of equipment, which is owned by RTP Technologies Pty Ltd, and have failed to account to the companies for the sale of that equipment. It is claimed that the companies have suffered a loss of in excess of $400,000.

10 Mr and Mrs Roberts deny, as does Modern Machinery Systems Pty Ltd, that they have done anything which they are not entitled to do. They claim that Modern Machinery Systems Pty Ltd was entitled to claim ownership of the piece of equipment, entitled to sell it and entitled to retain the proceeds. Mr and Mrs Roberts do not agree that the companies have suffered any loss or that they are entitled to make any claim against them. As they are directors of those companies they are in a position to prevent a unanimous resolution of the board of directors and therefore in a position to prevent, if the shareholders' agreement is binding, the companies otherwise bringing these proceedings with the consent of their board.

11 Section 236 of the Corporations Law allows a member or officer of the company, who is acting with the leave of the court, which has been granted under s 237, to bring proceedings on behalf of the company. Section 237 allows a person to apply to the court for leave to bring proceedings. The criteria for granting leave is contained in s 237(2). If leave is granted, then that person, if that person is a member or officer or otherwise of the class of persons mentioned in s 236, can cause the company to bring proceedings in the company's name; s 236(2).

12 As I have said, objection was taken by Mr Keen on behalf of Mr and Mrs Roberts and Modern Machinery Systems Pty Ltd to the proceedings which have been brought in Action No. 838 of 2000 because leave had not been obtained prior to the institution of those proceedings.

13 In my opinion, that objection to those proceedings at that time was correct. In my opinion, proceedings cannot be brought under s 236 of the Corporations Law at the instigation of those persons described in s 236(1) unless leave to bring those proceedings has been first obtained; s 237(1). That follows from the provisions of s 236(1)(b) of the Corporations Law.

14 There are good reasons why leave should be first obtained. If any member or officer or former member or office was able to cause the company to commence proceedings before leave was granted, a multiplicity of suits might arise. Moreover a member or officer could usurp the proper functions of the company. A company is entitled to decide for itself whether it wishes to bring, defend or intervene in legal proceedings. Where a company will not itself bring, defend or intervene in proceedings it is necessary that there be some filtering system such as the requirement for leave before proceedings are commenced in the name of the company.

15 For those reasons, the proceedings issued in Action No. 838 of 2000 were irregular in that the persons who caused the companies to instigate the proceedings did not first obtain leave to do so. However I adjourned those proceedings so that the four applicants could bring these proceedings to obtain leave.

16 Section 237(2) provides the criteria which must be considered by a court before leave is granted. The criteria there provided is designed to protect corporations from inappropriate action by its members or officers. Section 237(2) provides:

"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

(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

(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."

17 In this application the proposed defendants did not argue that leave should not be granted and did not argue that the applicants were not able to satisfy the criteria in s 237(2) except in one particular. It was argued on behalf of the proposed defendants that the companies ought to be restricted, in the leave which they sought, to bringing proceedings against Mr Roberts and Modern Machinery Systems Pty Ltd. It was argued by Mr Keen that there was no evidence before this Court either on this application or in the proceedings in Action No. 838 of 2000 which would indicate that Mrs Roberts was liable to the companies in any respect. I will return to that matter.

18 I think with respect the proposed defendants were right to object to the procedure which had been adopted in Action No. 838 of 2000 and they were right, in my opinion, when I allowed the applicant to bring these proceedings this afternoon, not to object to the grant of leave except in accordance with the objection to which I have referred.

19 Even though leave is not opposed, it is necessary, in my opinion, that this Court must be satisfied that all of the criteria in s 237(2) of the Corporations Law has been satisfied. It is clear from the affidavits which have been filed in Action No. 838 of 2000 which have been adopted on this application by a further affidavit of Ms Helen Wilhemina Turner sworn this day, that it is probable that the companies would not themselves bring these proceedings. Indeed, in my opinion, it is not only probable but inevitable, because Mr and Mrs Roberts would not sanction the bringing of these proceedings, that these proceedings would not be brought unless the applicants were to adopt the procedure which has been adopted.

20 I am satisfied that these applicants are acting in good faith.

21 Subsection (3) and (4) of s 237 are relevant to the matter to be considered under s 237(2)(c). Those subsections provide:

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

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

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

(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.

(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."

22 Section 327(3) provides for a rebuttable presumption where granting leave is not in the best interests of the company if it is established that the proceedings are by the company against a third party or that the company has decided not to bring the proceedings.

23 In this case, two of the three proposed defendants are not third parties within the meaning of s 237(3) of the Corporations Law but in fact are related parties. Moreover the company has not decided not to bring proceedings. In those circumstances s 237(3) has no application.

24 I am satisfied from the affidavits which have been filed that it is in the best interests of the company that the applicants be granted leave, particularly because in my opinion there is a serious question to be tried. I reject the submission made by Mr Keen that there is insufficient evidence pointing to a liability on the part of Mrs Roberts to the companies and I reject the submission that the applicants have not made out a serious question to be tried in respect of her. In my opinion, on the evidence which is presently available to me, and I say no more about it, because I will when leave is granted on this application, have to consider the question of a serious question to be tried in respect of the Mareva application which will inevitably follow. In those circumstances I should say no more about the question of serious question at this stage.

25 The applicants have not satisfied the final matter which was required to be satisfied in s 237(2)(e) in that they have not at least 14 days before making this application given written notice to the companies of the intention to apply for leave and of the reasons for applying. However, notwithstanding that default, I am prepared to exercise the power given to me in s 237(2)(e)(ii) because it is appropriate to grant leave even though such notice as not been given.

26 For all of those reasons I am prepared to grant the applicants leave pursuant to s 237(1) of the Corporations Law. That would allow the applicants to bring proceedings on behalf of the companies pursuant to s 236(1) and in the name of the companies pursuant to s 236(2).

27 However, as I have already mentioned, those proceedings have already been brought. Indeed all parties have addressed those proceedings as though they were regular prior to today. Mr Keen indicated this morning that if the applicants regularised the procedure by making a successful application under s 237(1) his clients would not object to the validity of the proceedings in Action No. 838 of 2000. In other words, he was prepared to accept that if leave was given, those earlier commenced proceedings could be treated as proceedings brought pursuant to s 236.

28 I think, with respect, that was a sensible attitude to take, because otherwise it would have only put the companies to the added cost of bringing the same proceedings relying upon the same evidence.

29 I can regularise the procedure, in view of the absence of any opposition, by giving the applicants leave to proceed under s 237(1) nunc pro tunc to the day before the proceedings in Action No. 838 of 2000 were issued. I make the following orders:

1. That the applicants have leave to refer to documents produced by the respondents in Supreme Court Action No. 838 of 2000.

2. That the applicants be granted leave to bring proceedings in the name of RTP Holdings Pty Ltd and RTP Technologies Pty Ltd under s 236 of the Corporations Law, against Mr and Mrs Roberts and Modern Machine Systems Pty Ltd.

3 The grant of leave is granted nunc pro tunc to 5 September 2000.

4 The costs of this application be costs in the cause.