Taxa Australia Pty Ltd v Wang & Anor

Affidavit evidence

1. I should identify briefly the affidavit evidence which is relied upon, and the areas canvassed in submissions, before turning to the relatively narrow matters which seem to me to be determinative of Mr Wang's application for leave to bring his proposed derivative action. Mr Wang relies on his affidavit of 16 September 2016, which is intended to establish that Mr Diao and others established companies which were to compete with the Company. There is some evidence to which Mr Wang has referred which suggests that these companies may, in some respects, compete with the Company. Whether that involves a breach of duty by Messrs Diao and Borghese is less clear. In that respect, Mr Wang has taken me to evidence of scattered individual instances, at the level of sales of particular items, and it is by no means clear the evidence on which Mr Wang would establish, as he claims, that those companies sold products misappropriated from the Company, as distinct from a proposition that they sold similar products to the Company, potentially in competition with the Company.
2. Second, Mr Wang led evidence that sought to establish that the Company had contravened statutory requirements in relation to sponsoring certain persons for what are known as subclass 457 visas. This is, of course, a most serious allegation which is contested by the Plaintiffs. It will ultimately not be necessary to determine the merits of that application because it seems to me that, on any view, it cannot support the claim for leave to bring a derivative action on behalf of the Company that is sought by Mr Wang. The first reason it cannot do so is because, to the extent that there is any suggestion that the public interest requires vindication in this respect, Mr Wang has the opportunity, as he has done, to report the matter to relevant authorities who may take such steps as they consider appropriate in that respect. Any claim by the Company against Mr Diao or others in this regard would not presently be in its interests, because there is no suggestion the Company has suffered loss unless the Minister for Immigration and Border Protection brings a claim against it, and Mr Wang's suggestion that the Minister may bring such a claim is speculative and unsupported by evidence. In particular, it depends upon a speculation as to whether the Minister would, first, find wrongdoing in respect of these matters and second, elect to bring a claim against the Company, rather than individuals associated with it in respect of any such wrongdoing. If the Company presently brought a claim against Mr Diao in this respect, it could not establish any loss or damage.
3. By a second affidavit dated 19 September 2016, Mr Wang leads further evidence intended to establish that the Company provided false information to the Department of Immigration and Border Protection, which appears to be associated with the allegation to which I have referred above. By a third affidavit dated 24 October 2016, Mr Wang leads evidence in response to an affidavit of Mr Diao, which deals, in particular, with the businesses conducted by the Company, JD3 and Taxa International.
4. The Plaintiffs have also relied on voluminous evidence, particularly in order to seek to establish the proposition that they have strong claims against Mr Wang and, by extension, that Mr Wang's application to bring a claim on behalf of the Company is not brought in good faith, because, they submit, he seeks to bring that claim to divert attention from the strong case which they contend they have against him, in respect of his conduct at a point that he was in control of the Company. I express no view as to the question whether Mr Wang's claims are brought in good faith, because it seems to me to be preferable to assume that matter, in favour of Mr Wang, without deciding whether that is the case, and to determine the matter on other grounds.
5. The Plaintiffs rely on, inter alia, an affidavit of Mr Diao dated 12 December 2015 which deals with the business of the Company and matters that have led to the claims by the Company against Mr Wang. The Plaintiffs also rely on affidavits of Mr Luca Borghese dated 14 September 2016 which refer to aspects of his dealings with Mr Wang, and which depose that business of the Company was diverted by Mr Wang to entities associated with Mr Wang, and that payments were diverted from the Company to Mr Wang, and an affidavit of Mr Davidson which appears to address the same matters. The Plaintiffs also rely on two affidavits of Ms Solomon and Ms Warfe. Ms Warfe's affidavit deals, in particular, with an issue which Mr Wang characterises as misconduct (and, indeed, as an attempt to dishonestly influence a public official as noted above). Ms Warfe leads evidence that that matter is simply a typographical error, or possibly a misunderstanding as to instructions as to Mr Diao's address. It seems to me that that matter is immaterial so far as this application is concerned.

Application for leave to bring derivative claim

1. By his submissions dated 27 October 2016, Mr Wang identifies the aspects of the claims which are sought to be brought, consistent with his affidavit evidence and the material to which I have been taken in submissions, which include claims as to the diversion of the Company's business to JD3 and to Taxa International, of which numerous examples are given, which may or may not be explicable by evidence led by the Defendants in response; taxation and superannuation issues, which go to an allegation that superannuation payments were not paid, in particular in respect to the Second Defendant, Ms Yao; to immigration issues, in particular the sponsorship of persons under subclass 457 and other visas; and the suggested provision of incorrect information to the Department of Immigration and Border Protection.
2. In his written submissions, Mr Zahra sets out the lengthy history of the proceedings and of Mr Wang's application to bring this Cross-Claim, and refers to the principles that are applicable to an application for leave under s 237 of the Corporations Act to which I will refer below. Mr Zahra puts the most substantial focus in his written submissions on three issues, namely whether Mr Wang can establish that the claim is brought in good faith; whether it is in the best interests of the Company that Mr Wang be granted leave to bring the claim; and whether there is a serious question to be tried. Mr Zahra also addresses other aspects of the motion brought by Mr Wang, which I will address below, as well as dealing with issues in respect of subpoenas issued by Mr Wang, an issue which the Court is unlikely to reach given the time that has been available for the hearing today. In his written submissions in reply, Mr Zahra again refers to aspects of the claim against the Plaintiffs, which appear to be directed to the question of whether Mr Wang's claim is brought in good faith; responds to documents, on which Mr Wang relies, in respect of the claims brought in respect of particular entities, and, in particular, submits that the materials on which Mr Wang relies do not establish the allegations that are sought to be advanced. Mr Zahra also responds to the issues as to dealings with the Department of Immigration and Border Protection and taxation and superannuation issues on which Mr Wang relies. I should indicate at this point that I did not hear oral submissions from Mr Zahra, who acts for the Plaintiff and the respondents in the motion, other than in respect of one issue to which I will refer below, because I had already concluded that the leave sought under s 237 of the Corporations Act should not be granted on other grounds.
3. The applicable legal principles in an application of this kind are well established, and this particular claim raises no novel issue in respect of them, although it raises issues in respect of the application of those principles in the particular case. In order to obtain leave to bring a claim on behalf of the company under s 237 of the Corporations Act, Mr Wang must establish five matters, and may only obtain such leave if all five of those matters are established, in which case the Court must grant such leave. The first requirement is that it is probable that the Company will not bring the proceedings or take responsibility for them or for the steps in them. Mr Zahra rightly accepts that that is established in the present case.
4. The second requirement under s 237 of the Corporations Act is that Mr Wang is acting in good faith. As I have noted, the Plaintiffs have led a substantial amount of evidence intended to establish the strength of their claims against Mr Wang and the availability of defences to the claims against them, which seeks to displace the proposition that Mr Wang is acting in good faith. Mr Wang in turn draws attention to some documents which may at least give cause for inquiry as to the extent of competition between the Company on the one hand and companies associated with Mr Diao, Mr Borghese and others on the other, and as to the extent of the Company's compliance with statutory obligations in respect of tax and superannuation issues. As I noted above, it seems to me to be preferable to assume, without deciding, that Mr Wang is acting in good faith, where there are matters which may give rise to concern, so far as potential claims by the Company against Mr Diao and others are concerned, but there is also some force in Mr Zahra's submission that those claims may be raised by Mr Wang as a strategic measure, in order to seek to disrupt the claims brought by the Plaintiffs against him. It is not necessary to determine that matter, in order to determine this application, and it is preferable not to do so, particularly where I or another judge may ultimately need to determine those matters on a final basis.
5. In making those observations, I have not disregarded the relevance, not only of subjective good faith, but also of the question whether a claim has a reasonable prospect of success. Subjective honesty, or a bare assertion of a belief in the prospects of a claim, may not establish good faith if such a belief could not reasonably be held: Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 at [36]. The Court will, however, ordinarily not consider the merits of the claim in determining this question, since they are relevant to whether a serious question to be tried is established. It is possible, in respect of aspects of his claim, that Mr Wang may have a reasonable basis for a concern that the Company has not complied with statutory obligations, and possibly that there has been competition, although not necessarily diversion of business, by entities associated with Mr Diao from the Company. That may be sufficient to establish good faith in respect of the claim, although I need not express any final view in that regard.
6. The third requirement under s 237 of the Corporations Act is that it is in the best interests of the Company that Mr Wang be granted leave to bring the proposed proceedings. In Swansson above, Palmer J noted that that required that the Court be satisfied that the proposed action actually is, on the balance of probabilities, in the Company's best interests. In Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 1235, Ball J identified relevant matters, including the prospects of success of the action and the benefit to be gained by it, and the likely consequences to the Company if the action is unsuccessful. In Huang v Wang [2016] NSWCA 164; (2016) 114 ACSR 586, Bathurst CJ observed (at [69]) that a company's best interests will have regard to the interests of shareholders in that capacity, but a collateral benefit to a particular shareholder from bringing proceedings is irrelevant.
7. It seems to me that I could not be satisfied in this case that the bringing of the proceedings, as a derivative action, is in the Company's best interests, and I am comfortably satisfied to the contrary. There are several matters which lead to that conclusion. The first is that, as Mr Wang frankly accepted, in the course of an unsuccessful application for a further adjournment, he is presently unable to quantify, and appears to have given little thought to, the extent of the damages which may be recoverable by the Company in the proposed derivative claim. That matter cannot be addressed by taking the approach which Mr Wang adopted in submissions today, by pointing to several individual invoices which may or may not indicate a diversion of an order from the Company to another entity. It requires, instead, a systematic analysis of the entirety of the claim that the Company may bring, so as to determine whether there would be sufficient recovery from such a claim to warrant the costs to which the Company would be exposed in bringing the claim. I have also noted above that any exposure faced by the Company in respect of immigration issues is speculative and the Company could not presently establish loss in that regard.
8. A second reason why, it seems to me, it is not in the Company's best interests to bring such a claim is that, plainly enough, that would expose the Company to the risk of an order for costs in respect of such a claim, if that claim were unsuccessful. Those costs may be substantial, particularly if the matter proceeds slowly, as the matter did today, by reason of difficulties which Mr Wang, as a person without legal qualifications, has in conducting it, if he were permitted to do so. I am reinforced in that view because, as I will note below, it seems to me that many, if not all, of the claims that Mr Wang could properly bring on the Company's behalf (which is a narrower class than the claims he seeks to bring) could be brought within an oppression action by Mr Wang personally, without exposing the Company to the risk of such costs. It is difficult to see that it could be in the Company's best interests for it to be at a risk of costs, where those costs could be borne by Mr Wang personally, in respect of the claims which he wishes to bring, where both their prospects and recoveries from them are uncertain.
9. A third difficulty with the potential claims, so far as the Company's best interests are concerned, is that the courts have frequently emphasised the importance of an adequate indemnity for the risks, including costs, to which a company may be exposed by bringing derivative proceedings. I had drawn that matter to Mr Wang's attention when the matter was listed before me for directions on a previous occasion. Mr Wang today indicated that he was inclined towards, although I do not understand him to have finally committed to, providing such an indemnity, but indicated that he was not in a position to establish his ability to meet it.
10. I also note that the Uniform Civil Procedure Rules restrict the ability of an individual person to act on a company's behalf in proceedings in this Court, unless that person is also a plaintiff in the proceedings. It may be that Mr Wang could satisfy that requirement, so far as he is a plaintiff in the proceedings. However, as I noted above, there is room for a real concern as to whether the complexity of the claims that Mr Wang seeks to bring is likely to exceed his ability to conduct them, as to some extent occurred in the course of today's application. That in turn raises concern as to whether it is in the Company's best interests that Mr Wang be granted leave to bring the claim where he seeks himself to conduct that claim on the Company's behalf.
11. The next question is whether there is a serious question to be tried. That requires the Court to apply the same test as would be applied in determining whether to grant an interlocutory injunction: Swansson above at [25]; Re Gladstone Pacific Nickel Ltd above at [56]. It seems to me that I should go no further than in dealing with this question than is necessary to determine the application today, again because these issues may need to be addressed in a later hearing on a final basis. It seems to me that Mr Wang may be able to establish claims in respect of competition with the Company and potentially diversion of business at least to the standard applicable to the grant of an interlocutory injunction, although he does not presently have sufficient evidence to establish that those claims are of any substantial scale. It seems to me that Mr Wang could not establish a serious question to be tried for the order that he seeks disqualifying the Second and Third Cross-Defendants from managing a corporation in equity or under ss 206A and 206B of the Corporations Act, not least because those provisions limit standing to seek such an order to the Australian Securities and Investments Commission.
12. It also seems to me that no serious question to be tried is available in respect of Mr Wang's proposed claim for an order for an investigation into whether the Second Cross-Defendant, Mr Diao, gained personal benefits from immigration matters. That is a question for the exercise of the enforcement discretion of the Department of Immigration and Border Protection, and it is appropriately raised, as Mr Wang has done, by drawing that matter to the attention of that Department. It also seems to me that no serious question to be tried is raised in respect of the matters pleaded in paragraphs 58-62 of the proposed Cross-Claim, so far as they again seek to establish a basis for Mr Diao's disqualification on the basis that Mr Diao is subject to sanctions in China, which is a matter for the Chinese authorities and does not give rise, it seems to me, to any civil claim by the Company against him.
13. The final question in an application for leave, I note for completeness, relates to the giving of notice of the application. Mr Zahra sensibly proceeded on the basis that such notice should be treated as given, at least as a practical matter, in the circumstances.
14. I am comfortably satisfied, as I have noted, that it is not in the Company's best interests to grant leave to bring a derivative action, at least of the kind that is foreshadowed by Mr Wang as pleaded in the proposed Second Cross-Claim, and for that reason such leave should be refused.
15. I should add, for completeness, that this does not necessarily prevent Mr Wang pursuing at least those aspects of his claims that are properly arguable, in his own right, as an aspect of his oppression claim. In Atlasview Ltd v Brightview Ltd [2004] BCC 452, a Deputy Judge of the High Court in England declined to strike out a claim for damages against directors brought in an oppression claim. That decision was in turn doubted in the Court of Final Appeal of Hong Kong in Re Chime Corporation Ltd (2004) 7 HKCFAR 546. In LPD Holdings (Aust) Pty Ltd Re Phillips [2013] QSC 225; (2013) 281 FLR 227, Philip McMurdo J accepted (at [53]) that it is open to a shareholder in a company, in oppression proceedings under Pt 2F.1 of the Corporations Act, to claim relief which is in the nature of compensation to be paid to the company whose affairs are in question, although likely not to claim compensation payable to the shareholder personally. I followed that approach in Re JGS Investment Holdings Pty Ltd [2014] NSWSC 1532, in holding that a shareholder bringing an oppression claim can bring a claim for breach of general law duty and statutory duties owed to a company, without necessarily seeking a separate order for leave to bring a statutory derivative action under s 237 of the Corporations Act, although such a claim could only extend to loss which the company had suffered, and not loss which the shareholder had suffered personally.
16. It seems to me that, consistent with the result I have reached, those claims brought by Mr Wang that are properly arguable (and I have noted above that some of the claims he has raised are not) could be brought in that manner, such that the Company is not exposed to a cost risk in respect of them, and those claims are brought (if at all) by Mr Wang at his own expense, and defended by those against whom they are brought at their own expense, with the Company benefitting from any recovery that is made from them.

Other issues in the motion

1. I should now return to some other aspects of the notice of motion brought by Mr Wang, which I will address briefly, before returning to what now ought to be done by way of directions for the future conduct of the proceedings.
2. Mr Wang sought, as the second order in his notice of motion, an order that Messrs Diao and Borghese be joined as parties to the proceedings to be brought against them on the Company's behalf. Such an order cannot be made, since I have not granted leave to bring a derivative claim. Such an order may be available if Mr Wang ultimately brings such claims within an oppression claim. Mr Wang also sought an order that he be granted leave to bring such separate claims or any derivative actions in separate proceedings. That order was apparently directed to the possibility that the Court might consider that separate proceedings should be brought, rather than these matters being raised in these proceedings. It seems to me that, on any view, the interests of justice would not be served by two parallel proceedings, raising the same matters, involving the risk of inconsistent findings between them. To the extent that matters were properly raised, they should therefore be raised in these proceedings, rather than in other proceedings. However, I have held above that the case for leave to bring a derivative claim is not established.
3. Mr Wang sought an order that the Court request an inspector from the Department of Immigration and Border Protection to inspect the Company in respect of sponsorship obligations and other immigration matters. As I have noted above, that order should not be made, particularly at this early stage of the proceedings, where the Court has made no findings on the merits. The relevant issues may be brought to the attention of the Department of Immigration and Border Protection by Mr Wang, as he has done.
4. Next, Mr Wang sought a variation of freezing orders previously made by the Court, with the effect that they should not prohibit the Defendants paying what are described as "emergenc[y] expenses" without the written agreement of the Plaintiff. As Mr Zahra points out, freezing orders previously made by the Court were in a common form, which allow reasonable expenses to be paid by the Defendants, subject to certain limits. It does not seem to me that I should vary those orders, notwithstanding the particular difficulties to which Mr Wang drew attention at some length, by inserting an uncertain exclusion for "emergenc[y] expenses", where the risk of a misunderstanding as to what may fall in that category is substantial. It seems to me that, if there is a question as to the level of reasonable expenses that is presently permitted to the Defendants, or their ability to live on and meet their ordinary obligations within that level, then that is properly addressed by bringing an application to vary the existing form of undertaking. That matter has also been raised in respect of the level of legal expenses that is permitted to Mr Wang. Such an application should, however, be brought in a formal way, on notice of motion supported by evidence, so that the Defendants have a proper opportunity to respond to it.
5. Next, Mr Wang sought an order that the Court appoint a legal assistant free of charge for him. The Court has, in certain circumstances, the ability to refer proceedings to, for example, the Law Society of New South Wales and the Bar Association for the appointment of legal representatives. I am not satisfied, on the evidence as it stands, that it would be a proper use of the limited resources of those organisations to refer this matter to them, where Mr Wang seeks to advance relatively complex claims, within a commercial setting, for uncertain recoveries. It seems to me that the Court would require much better evidence than it has at present, both as to the merit of Mr Wang's claims, and as to the financial resources of Mr Wang and other persons associated with him, before it could contemplate making such a referral. I have, however, drawn Mr Wang's attention to his ability to approach those organisations to seek assistance from them.

Costs

1. My preliminary view is that, in the circumstances, an order should be made that Mr Wang pay the costs of the motion, since he has been substantially unsuccessful in that motion. It does not seem to me, as a preliminary matter, that those circumstances rise to the level that any special order as to costs or any order that costs be paid forthwith should be made. Mr Wang should be allowed an opportunity to bring in a further draft Cross-Claim, having regard to the matters which have been addressed in this judgment, to the extent that he seeks leave to bring such a Cross-Claim.
2. After I had expressed the preliminary view set out above, the Plaintiffs pressed an application for an order that costs be paid forthwith. Mr Zahra fairly acknowledges that the only matter that could be put in support of that order is that this application had a discrete character. The courts have been reluctant to make orders that costs be paid forthwith, for good reason, namely that such orders have the capacity to stultify what may ultimately turn out to be meritorious claims. Such orders are exceptional in character, and are ordinarily likely to be made only where a matter is not only discrete in character, but there is also a likelihood that the matter will run for a long period, such that costs in the ordinary course are not appropriate, and where other factors are present to support such an order. I am not satisfied that such an order is appropriate in this application.

Orders

1. Accordingly, I make the following orders:
2. Mr Wang serve any revised Second Cross-Claim, Statement of Cross-Claim on the Plaintiff, and each other proposed cross-defendant to the second cross-claim, by 4pm 30 January 2017.
3. The proceedings be listed for further directions in the Corporations List at 10am on 6 February 2017.
4. Mr Wang pay the plaintiffs' costs of and incidental to the motion, as agreed or as assessed.

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