CORPORATIONS – MEMBERSHIP, RIGHTS AND REMEDIES – MEMBERS'
REMEDIES AND INTERNAL DISPUTES – PROCEEDINGS ON BEHALF
OF COMPANY BY
MEMBERS AND OTHERS - STATUTORY DERIVATIVE ACTION – where the
Source
Original judgment source is linked above.
Catchwords
CORPORATIONS – MEMBERSHIP, RIGHTS AND REMEDIES – MEMBERS'REMEDIES AND INTERNAL DISPUTES – PROCEEDINGS ON BEHALFOF COMPANY BYMEMBERS AND OTHERS - STATUTORY DERIVATIVE ACTION – where theself-represented first and second defendants controlcompanies – where thefirst and second defendants seek leave of the court pursuant to s 237 of theCorporations Act 2001 to pursue a counterclaim on behalf of two companies– where both companies are in liquidation – whether thedefendants’application for leave should be allowedPROCEDURE – CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS –PLEADINGS – GENERALLY – where orders made previously
required the
defendants to provide notice of their proposed amended pleading – where
the defendants filed and served an amended
defence contrary to that order
– where the court has the power to disallow the amendment pursuant to rule
379 of the Uniform Civil Procedure Rules 1999 – whether the
defendants’ amended defence should be disallowed
Corporations Act
2001 (Cth), s 237
Uniform Civil Procedure Rules 1999 (Qld), r 379
Chahwan v
Euphoric Pty Ltd t/as Clay & Michel [2008] NSWCA 52
(2008) 245 ALR 780, followed
Secretary, Department of Health and Aged Care v Prefixx Pty Ltd
[2024] FCA 153, cited
Judgment (20 paragraphs)
[1]
[1] On 19 September 2024, Kelly J heard an application by the plaintiffs to strike out certain paragraphs of the amended defence and counterclaim which had been filed in August 2024 by the defendants, Mr and Mrs McManus.
[2] The plaintiffs attacked paragraphs 62 to 72 of that pleading because they made two broad types of counterclaims:
[2]
(a) damages claims which were, in reality, damages suffered by companies which were controlled and owned by Mr and Mrs McManus, rather than damages suffered by them personally; and
(b) claims for alleged personal injuries suffered by Mr and Mr McManus.
[3]
[3] Kelly J accepted the plaintiffs' claim that the pleading did not disclose any proper basis for Mr and Mrs McManus to personally recover corporate losses suffered by the corporate entities. The claim was also inadequately pleaded.
[4] His Honour accepted that the personal injuries claim did not comply with the Personal Injuries Proceeding Act 2002 (Qld).
[5] His Honour made orders as follows:
Paragraphs 62 - 72 of the Amended Defence and Counterclaim are struck out.
2. By 29 November 2024, the Defendants shall provide to the Plaintiffs' solicitors a proposed Further Amended Defence and Counterclaim.
3. By 10 December 2024, the Plaintiffs' solicitors shall write to the Defendants regarding whether they object to any part of the proposed Further Amended Defence and Counterclaim.
4. The matter be listed for review before Freeburn J at a time after 10 December 2024 to be advised by the Associate to Freeburn J.
5. Paragraph 2 of the Application filed 2 September 2024 be adjourned to a date to be fixed.
6. The Defendants pay the Plaintiffs' costs of and incidental to paragraphs 1 and 3 of the Application filed 2 September 2024, to be assessed on the standard basis.
[6] On 29 November 2024, Mr and Mrs McManus filed and served another version of their defence and counterclaim. This version included similar counterclaims but also pleaded the following:
[4]
(a) they sought the leave of the court to pursue a counterclaim as the "previous majority of shareholders of the private companies in liquidation" being Cadalax Pty Ltd and Freydence Pty Ltd;
(b) Mr and Mrs McManus were dependent on the companies as their main source of income;
(c) the asset value of the companies acted as security for commercial loans;
(d) the "illegal seizure of the companies" by the plaintiffs caused significant financial hardship to the majority shareholders through diminished asset value and diminished income stream;
(e) a liquidator has been appointed to manage Cadalax Pty Ltd and Freydence Pty Ltd;
(f) but the liquidator has taken no action to progress a claim against the plaintiffs; and
(g) it is unlikely that a liquidator in this situation would commence a redress claim.
[5]
[7] Mr and Mrs McManus relied on s 237 of the Corporations Act 2001 (C'th), pursuant to which shareholders may apply to the court for permission to continue proceedings on behalf of the company when a liquidator does not pursue the claim.
[8] There are three procedural problems. The first is that the order of Kelly J made clear that Mr and Mrs McManus were to give notice of their proposed amended pleading by 29 November 2024. Contrary to that order they simply filed and served their further pleading.
[9] Mr and Mrs Manus are self-represented. That probably explains the breach. In any event, it is appropriate to deal with the issue practically. If the orders of Kelly J had been complied with, the court could have decided whether or not the pleading could be filed. Now that the pleading has been filed, the court has power to disallow the amendment pursuant to rule 379 of the Uniform Civil Procedure Rules 1999 (Qld). It is appropriate to deal with the filed pleading and to determine whether the pleading ought to be disallowed under rule 379.
[10] The second procedural problem is that Mr and Mrs McManus' pleading seeks leave of the court pursuant to s 237 of the Corporations Act 2001 to pursue a counterclaim on behalf of the companies. However, they have not actually filed an application under s 237.
[6]
"(2) [Where Court may grant application] The Court must grant the application if it is satisfied that:
[7]
(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
(b) the applicant is acting in good faith; 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
(e) either:
(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 through subparagraph (i) is not satisfied."
[8]
[21] It seems to be accepted that the liquidator has no interest in bringing the proposed counterclaim. The court would need to be satisfied that the proposed counterclaim would be in the best interests of the two companies. Here, there is no evidence that would satisfy the court as to:
[9]
(a) the assets and liabilities of the two companies;[6]
(b) how the counterclaim, and the risk of an adverse costs order against the companies, can be reconciled with the liquidator's principal duty of gathering in and distributing the companies' assets, as efficiently as is reasonably possible;
(c) the assessment of the counterclaim by the liquidator, or if an assessment has been made;[7]
(d) the stance and the interests of the creditors of the companies;
(e) the capacity of the companies to meet the costs of the litigation and, potentially, an adverse costs order.
[10]
[22] Point (e) is not simply a formal issue. If the counterclaim were to proceed the companies may well be required to provide security for costs. It is also worth mentioning point (b). The Corporations Act 2001 entrusts to the liquidator the management of a company in liquidation. It would be no small thing for a court to grant leave to the directors to conduct litigation on behalf of the company whilst, in parallel, the liquidator is endeavouring to wind up the affairs of the company.
[23] That makes it impossible to conclude that the proposed counterclaim would be in the best interests of the companies - which is what is required by s 237(2)(c).
[24] Similarly, there is no evidence as to the merits of the proposed counterclaim such that the court could be satisfied that there is a serious question to be tried. That is the requirement of s 237(2)(d). Conventionally, an applicant might tender an advice of a solicitor or a barrister as to the prospects of the proposed counterclaims. Here, though, Mr and Mrs McManus are self-represented.[8] Nevertheless, what is left is a vacuum.[9]
[25] The franchise agreement appears to have been terminated by the plaintiffs on the basis that the McManus companies sold unapproved products. But there is no clear evidence that that is factually wrong or that there was no entitlement under the agreement to terminate on that basis. Mr and Mrs McManus appear to say that there were negotiations for the plaintiffs to buy three of the stores but there was no concluded arrangement. At some point their supplier accounts were closed but the circumstances are not clear. In any event, there is no basis on which the court can be satisfied that there is a serious question to be tried.
[26] In the circumstances, the application under s 237 is refused.
(b) without leave of the court, the defendants are not to file any further counterclaims or other pleadings which seeks relief for losses alleged to have been suffered by Cadalax Pty Ltd and Freydence Pty Ltd.
[12]
[1] A draft application was supplied to my associate.
[6] One document supplied to the court suggests that the debts of the 'group' were $490,000 as at 23 February 2023.
[18]
[7] The assumption is that the liquidator will not proceed without being put in funds. But, one would expect that, even if the liquidator was put in funds, the liquidator would either require an advice as to prospects or make an assessment of the prospects.
[19]
[8] Mr and Mrs McManus did retain a solicitor, Mr Guthrie of Thomson Geer, in 2023 but he seems not to have continued in the role.
[20]
[9] Mr and Mrs McManus have certainly alleged that the plaintiffs' termination of the franchise was wrongful. They assert that the plaintiffs act in an unconscionable way. But there is no basis on which the court can properly assess the merits of their case.
Parties
Applicant/Plaintiff:
The Coffee Club Franchising Company Pty Ltd & another
[11] Again, it is necessary to be practical and to regard Mr and Mrs McManus as having properly made an application under s 237.
[12] The third procedural problem is that in the hearing before Kelly J, Mr and Mrs McManus agreed to correct or at least deal with the problems with eight paragraphs, namely paragraphs 29(e), 32(b), 34(b), 38, 49, 55(a), 60(a) and 60(d). Mr McManus said explicitly to Kelly J, "we are not objecting to those paragraphs anymore". That was because Mr and Mrs McManus had an incomplete set of the documents when they prepared that version of the counterclaim before Kelly J.
[13] It is surprising that, having said that to Kelly J, Mr and Mrs McManus would then repeat exactly the same paragraphs in their new pleading.
[14] Those repeated paragraphs should be struck out. The first two paragraphs contain questions which should not be in a pleading. Mr and Mrs McManus are entitled to admit, or deny, or not admit the allegation. They are also entitled to 'not admit' the allegation based on an objection, for example, because the paragraphs are vague or embarrassing. But Mr and Mrs McManus have not given any of those proper responses. The remaining six paragraphs deny the existence of aspects of the agreements - which even Mr and Mrs McManus do not now maintain.
[15] It is necessary to turn to s 237 of the Corporations Act 2001 assuming, in Mr and Mrs McManus' favour, that they have made an (informal) application for leave under that section.
[16] The first question is whether s 237 applies at all given that Mr and Mrs McManus seek leave to bring proceedings, that is, to prosecute a counterclaim on behalf of Cadalax Pty Ltd and Freydence Pty Ltd, both of which are in liquidation.
[17] Whilst in the past there has been conflicting authority on whether s 237 applies where a company is in liquidation, the issue has now been resolved. In Chahwan v Euphoric Pty Ltd t/as Clay & Michel,[2] the New South Wales Court of Appeal decided that Part 2F.1A of the Corporations Act 2001, which includes s 237, has no application to a company in liquidation. That is irrespective of whether the company is in voluntary liquidation (shareholders' or creditors') or a court ordered liquidation.[3]
[18] In the case of uniform legislation like the Corporations Act 2001, intermediate appellate courts, and courts below that level, should not depart from an interpretation placed on a provision of such legislation by another intermediate appellate court.[4] I am bound to follow that decision.
[19] As Mr Jiear, the solicitor for the plaintiffs, points out, the decision in Chahwan v Euphoric Pty Ltd t/as Clay & Michel has been recently followed by Perry J in Secretary, Department of Health and Aged Care v Prefixx Pty Ltd.[5]
[20] Even if s 237 did apply, an application under s 237 would have no prospect of success. Section 237(2) provides:
[27] Further, having regard to the other issues with the pleading filed on 29 November 2024 (referred to above), the appropriate orders are those proposed by the plaintiff, namely: