CORPORATIONS - Appeal against order granting leave to commence a derivative action on behalf of a company - Whether probable that the company will not itself bring the proceedings or property take responsibility for them - Whether in best interests of the company to grant leave - Where company proposed to commence an investigation rather than bring proceedings - Corporations Act 2001 (Cth) s 237 - Appeal dismissed.

2 This is an appeal against the decision of Judd J to grant leave to the respondent to bring proceedings on behalf of the first appellant against the second appellant and Robert Gattereder ('the proposed proceeding').

3 The appeal turns upon the provisions of s 237(2) of the Corporations Act 2001 (Cth). Section 237 provides:

237 Applying for and granting leave

(1) A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.

(2) 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

(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 though subparagraph (i) is not satisfied.

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

(a) the proceedings are:

(i) by the company against a third party; or

(ii) by a third party against the company; and

(b) the company has decided:

(i) not to bring the proceedings; or

(ii) not to defend the proceedings; or

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

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

(i) acted in good faith for a proper purpose; and

(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.

(4) For the purposes of subsection (3):

(a) a person is a third party if:

(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.

Note: Related party is defined in section 228.

4 In the present case, the rebuttable presumption in sub-s (3) did not apply because the proposed proceeding involve claims which were not against a third party in the relevant sense.

5 The factual background is summarised in the judgment of the trial judge:

By originating process filed on 21 August 2012, Gavin James Fernandez applied for leave pursuant to s 237 of Corporations Act 2001 to commence a proceeding in the name of True Value Solar Holdings Pty Ltd (the company) against Robert Gattereder and M+W Solar GmbH (M+W Solar), a company incorporated in the Federal Republic of Germany. The application was opposed by the company and M+W Solar. M+W Solar is a subsidiary of M+W Group GmbH, as is M+W High Tech Projects Malaysia SdnBhd (M+W Solar Malaysia). Mr Gattereder was not represented.

M+W Malaysia is the majority shareholder in the company with 62% of the issued capital; Fernandez Corporation Pty Ltd, a company controlled by the applicant, holds 11.9% of the issued capital in the company; and the applicant holds 28,000 fully paid redeemable preference shares in the company with a face value of $1,000 each. He is also a director of the company. The other directors are Mr Gattereder, Devin Raymond Field, Klaus Taraschka and Surendra Chandrajit.

There is a current proceeding in this court in which the applicant and Fernandez Corporation are plaintiffs and M+W Malaysia and the company are defendants. In that proceeding (the oppression proceeding), the applicant seeks, amongst other relief, the redemption by the company of his preference shares. Fernandez Corporation seeks an order for the purchase of its holding at fair value. The oppression proceeding was commenced by writ filed on 22 June 2012.

In the amended statement of claim in the oppression proceeding, the plaintiffs allege that the affairs of the company are being conducted contrary to the interests of the members as a whole. The allegations relate, in part, to what is described as the 'solar panel procurement proposal' under which, so the plaintiffs allege, M+W Malaysia and Mr Gattereder diverted business opportunities from the company, or imposed upon it a prejudicial purchasing regime or one that produced an unauthorised benefit to M+W Solar.

In the proposed proceeding, the subject of this application, the applicant would have the company allege that it suffered loss and damage by reason of the implementation of the 'solar panel procurement proposal'. In the draft statement of claim, the company alleges that Mr Gattereder breached ss 180(1), 181(1) and 182(1) of the Act, and fiduciary duties owed by him to the company, by proposing and procuring the implementation of the proposal. The company also alleges, against M+W Solar, a constructive trust of profits derived from the implementation of the proposal. The company seeks orders for compensation from Mr Gattereder in a sum exceeding Є1,000,000; and an account of profits and equitable compensation from M+W Solar. [1]

6 In granting leave pursuant to s 237(2), the learned trial judge found it was probable that first appellant would not itself bring the proposed proceedings 'or properly take responsibility for them', and that it was in the best interests of the first appellant to grant leave, for reasons I shall come to shortly. As to the other requirements of s 237(2), the appellants do not dispute that there is a serious question to be tried in the proposed proceeding. Nor have they challenged the trial judge's finding that the respondent is acting in good faith.

7 The appellants contend that the trial judge erred in concluding that he was satisfied with respect to the factors set out in s 237(2)(a) and (c). It may be noted that if the judge were properly so satisfied of the cumulative requirements of s 237(2) then sub-s (2) provided that the Court 'must' grant the application. It is convenient to deal with the grounds of appeal by reference to each of the relevant sub-sections in turn.

The probability that the company would not itself bring the proceeding

Ground 5. The learned primary judge ought not to have been satisfied that it was probable that [the company] would not itself bring the proceedings or properly take responsibility for them given the Proposed Investigation and the circumstances set out in ground 4(a) [namely]:

(a) [the company] had sought and obtained an agreement from M+W to repay any overpaid amount or any uncommercial benefit received by it if any such amount was determined to have been received either by the Proposed Investigation or in the Oppression Proceeding;

Ground 6. His Honour erred in law by treating as irrelevant to the construction and application of s 237(2)(a), the Proposed Investigation and the reasons for the board reaching the agreement referred to in paragraph 4(a) and resolving not to pass the Respondent's resolution to issue the proposed proceeding.

9 It was argued before his Honour that the words 'or properly take responsibility for them' contained in s 237(2)(a) should be construed so as to encompass the decision of the Board to commence the proposed investigation, which was to be conducted by an accounting firm. It was submitted the company was taking 'responsibility for' the allegations made by the respondent and the protection of its rights by commencing the investigation.

10 His Honour was correct to reject this contention. The provision is concerned with the commencement of a proceeding or the company taking responsibility for a proceeding or for steps in a proceeding. The second and third possibilities are concerned with an actual proceeding and not merely with the management of a potential cause of action. Section 237(2)(a) raises threshold requirements with regards respectively to applications under s 237(1) to bring or alternatively to intervene in proceedings.

11 His Honour was also correct to conclude as a matter of fact that, at the date of the application before him, the company would not bring the proceeding. (The fact that it is possible that it may have done so at some further date was not in point.)[2] The Board had elected to take another course, namely that of an investigation by accountants. As ground 4 (b) of the notice of appeal asserts, the Board's position was that the proposed proceeding was unnecessary and not in the interests of the company at all rather than 'premature'.

12 The real issue between the parties was whether, in these circumstances, the requirement of s 237(2)(c) was satisfied.

13 I accept the respondent's submission that the expression 'best interests of the company' imports the 'familiar concept of the interests of the company as a whole'. The question of whether a proposed proceeding is in the best interests of a company is to be determined in the particular circumstances of the case. There is no fixed test.[3]

14 The appellants make a series of related submissions with respect to this issue. They must confront a situation in which the Court's judgment as to the best interests of the company fell to be resolved where:

(c) the applicant was prepared to give comprehensive undertakings as to the company's costs;[4] and

(d) the proceeding was readily manageable by the trial judge in conjunction with the existing oppression proceeding in the Commercial Court.

15 On the other hand, I accept that it was relevant for the Court to form a conclusion as to whether the substance of the redress which the respondent sought to achieve was available by means which did not require the company to be brought into litigation against its will.[5]

16 His Honour the trial judge carefully considered the terms of reference prepared for the investigation. He anticipated a lengthy process of investigation.

17 On the other hand he concluded the proposed claim was relatively simple.

The applicant's complaint about the conduct of M+W Solar and Mr Gattereder is straightforward. The allegations may or may not be made good, but they are relatively uncomplicated. The corresponding allegations made in the oppression proceeding, and in the proposed proceeding, should be capable of a response by way of explanation and clarification, from M+W Group and its subsidiaries, within a very short space of time, and without much elaboration. The calculation of any benefit or compensation may be more complex, but the substance of the complaint is that trading arrangements were imposed on the company that gave improper benefits to M+W Solar to the detriment of the company. There does not seem to be any need for the elaborate investigation proposed by the company, if its objective is to ascertain the facts about the trading arrangements that were put in place. Those facts ought to be readily available through the company's major shareholder and nominated directors.[6]

18 Having read the relevant documentation, I am not persuaded that this characterisation of either the proposed investigation or the proposed claim respectively was wrong.

19 In turn, his Honour was correct in the conclusions he reached that the relationship between the oppression proceeding and the proposed claim supported the grant of leave.

20 First, in a fundamental sense, the resolution of a seriously arguable substantial claim against the appellants raised the possibility the respondent might succeed in the oppression proceeding and obtain consequential relief reflecting in part the value of the company's assets, including any choses in action against the appellants.[7] Nevertheless the obligations of the appellants and Mr Gattereder to the company would not be the subject of judgment in the oppression proceeding. Whether or not and to what extent this situation might give rise to Anshun estoppel, this situation could not on its face be in the company's interests.[8]

21 More particularly I accept Mr Collinson's submissions that:

(a) the claim for breach of director's duties against Mr Gattereder is not raised in the oppression proceeding;

(b) such a claim must be brought by the company and not a shareholder;

(c) the undertakings proffered on behalf of the second appellant were not given by Mr Gattereder;

(d) the relief claimed in the oppression proceeding by way of an order for the ascertainment of the fair value of ordinary shares by a special referee does not on its face provide a satisfactory mechanism for the resolution of the underlying issues raised in the derivative proceeding;

(e) it may be doubted s 233 contemplates an order for the payment of damages by a director to the company for breach of statutory or fiduciary duties;[9]

(f) the investigation is directed to ascertaining whether the company was charged an uncommercial price and suffered a consequential loss. On the other hand the equitable damages claimed in the derivative proceeding may extend to an accounting for profits;

(g) the statement of claim in the derivative proceeding includes a claim against the second appellant for breach of constructive trust and accounting of profits arising out of Mr Gattereder's alleged breach of fiduciary duties. If such profits are properly recoverable they will not necessarily be ascertained by the proposed investigation into the question whether the second appellant received 'an uncommercial benefit' from the procurement arrangements in issue;[10]

(h) the dispute between the parties may involve contested issues of fact such as the quality of product available from alternative sources of supply, which are better resolved by a Court rather than investigating accountants;

(i) the dispute may also raise legal issues such as equitable defences of laches, acquiescence and delay;

(j) the timing of the investigation could not be the subject of definite timetabling or direct control by the trial judge whereas the timetabling of the derivative proceeding could be.

22 Ground 1 of the notice of appeal asserts that the judge acted upon wrong principle by concluding that the existence of the oppression proceeding was a factor that 'compels the conclusion' that it was in the best interest of the company to grant leave. The conclusion was one of fact made with respect to a matter which was plainly relevant to the Court's consideration. It was not one of principle.

23 Moreover, for the reasons I have explained, the view taken by the Court was both open and correct. It was buttressed by the inherent limitations of the oppression proceeding and the limitations of the proposed investigation.

24 Ground 2 takes issue with the judge's finding that the proposed investigation was part of a plan to avoid litigation of the claim. I would, with respect, have thought that this finding was plainly correct. The proposed investigation was, as the judge found, a 'crafted and rehearsed response', at least in the sense that it was plainly a carefully considered and formulated proposal. The inference drawn by the judge was compelling.

25 Ground 3 asserts that the judge erred in law in considering that in the absence of a claim by the company for damages in the oppression proceeding there was a risk that determination of that proceeding may estop the company from later making such a claim. As I have sought to explain, even without the risk of future arguments concerning Anshun estoppel, the fact of the oppression proceeding raised a strong argument that the company should seek to finalise its potential claims against the second appellant and Mr Gattereder simultaneously with the oppression proceeding. This said, I do not accept that in the circumstances of this case there was no risk of arguments of estoppel hereafter, at least in respect of Mr Gattereder who had given no undertaking to abide by the outcome of the oppression proceeding.[11] The trial judge was entitled to take account of this risk.

26 The appellants submit that if this view be taken then any aggrieved shareholder must always obtain leave pursuant to s 237 to bring court proceedings in the name of the company in respect of the same conduct giving rise to an oppression case. I do not accept that this is so. Each case must of course turn on its facts and, amongst other things, the applicant must be able to demonstrate good faith. Moreover, s 237(3) provides a rebuttable presumption which will confront a shareholder in a material number of cases.

27 Ground 4 asserts that, because the company sought and obtained agreement from the second appellant to repay any overpaid amount or any uncommercial benefit received by it if any such amount was determined to have been received either by the proposed investigation or in the oppression proceeding:

(b) it would give rise to significant complexity in conjunction with the oppression proceeding,

28 These propositions must fail if, as I have already noted, his Honour was correct in his characterisation of the complexity and length of the investigation on the one hand and the relative simplicity of the initial claim on the other. Moreover, both the oppression proceeding and the investigation suffered from the further limitations which I have identified.

29 His Honour was able to form his judgment as to procedural complexity on the basis that both the oppression proceeding and the proposed claim would be judicially managed, heard and determined together.

30 I am not persuaded that the cases of Cassegrain[12] and Metyor Inc,[13] to which the appellants refer, compel a different view. These cases turn upon their own facts. It was open to his Honour to conclude that the proposed claim was in the best interests of the company. The essence of that judgment ultimately involved essentially procedural considerations as to the appropriate vehicle for the resolution of the dispute before him. No proper basis has been shown for overturning his conclusions. I would dismiss the appeal.

[1] Fernandez v True Value Solar Holdings Pty Ltd [2012] VSC 430, [1]-[5].

[2] Matyear v Prismex Technologies Pty Ltd [2008] NSWSC 677.

[3] Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763; (2010) 79 ACSR 293, [119] (appeal dismissed: MG Corrosion Consultants Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367).

(1) He will bear the costs of pursuing the claim on behalf of the company;

(2) He will indemnify the company for any costs for which it might become liable in the proceeding; and

(3) He will not claim contribution from the company in respect of any adverse costs order made against him in the proceeding.

[5] Swansson v Pratt (2002) ACSR 313, 324 [59]; Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763; (2010) 79 ACSR 293, [121] (appeal dismissed: MG Corrosion Consultants Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367).

[7] In the oppression proceeding Fernandez Corporation Pty Ltd seeks an order inter alia that the second appellant purchase its ordinary shares in the company at their fair value and a further order that the fair value of such shares be determined by a special referee.

[8] FWV Stanke Holdings Pty Ltd v O'Meara; Von Stanke v O'Meara [2007] SASC 413, [100]-[102].

[9] Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763; (2010) 79 ACSR 293, [123] (appeal dismissed: MG Corrosion Consultants Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367).

[11] Solak v Registrar of Titles [2011] VSCA 279.

[12] Gerard Cassegrain & Co Pty Ltd v Cassegrain [2010] NSWSC 91; (2010) 28 ACLC 10-020.

[13] Metyor Inc v Queensland Electronic Switching Pty Ltd [2003] 1 Qd R 186, 192.