1 This is effectively an application by the plaintiffs to strike out part of the first and third to sixth defendants' defence and the whole of the first and third defendants' cross claim.
2 This matter was expedited and came before me for hearing on 15 and 16 March 1999. The plaintiffs had filed a Statement of Claim on the Friday before the hearing and I was informed that it was then agreed that the defendants were to do their best to file a defence and any cross claim on the morning of the hearing. The defendants were not in a position to file these documents until the second day of the hearing.
3 Mr White SC leading Mr Parker appeared for the plaintiffs and Mr S Bell appeared for the first and third to sixth defendants (the defendants). The hearing proceeded on 15 March with Mr White SC opening and calling some evidence.
4 On 16 March 1999 Mr Bell sought leave to file the defendants' defence and the first and third defendants cross claim. Mr White SC opposed that leave on the basis that paragraph 29 & 30 of the defence and the whole of the cross claim were embarrassing and would be struck out for failing to disclose proper defences and failing to disclose reasonable causes of action respectively.
Facts alleged
5 In recent years in Australia there has developed a market for dealing in life insurance policies. When policy holders sell their policies in this market they are able to obtain a higher amount than would otherwise be available on surrender of the policy to the insurer. This market has become known as the Traded Policies Market.
6 The purchaser of the policy is able to alter it to generate a better yield at the end of a three to five year period. The apparent reputation of the investment is that the risk to capital is minimal and the yield is sufficient to attract significant investor attention.
7 The Traded Policies Market attracted John Watson (Watson), the first plaintiff, and Bernard John Kelly (Kelly), the second plaintiff, who together incorporated the entity PolicyLink Limited (PolicyLink). The primary activity of PolicyLink was to purchase policies, alter them to generate an attractive yield and sell them to investors including individuals and superannuation funds.
8 PolicyLink operated in this manner throughout 1996 and 1997 selling its purchased and altered policies to various entities including the Australian First Life Pooled Superannuation Trust (AFL PST) through its manager Auton Consulting Pty Ltd (Auton).
9 In mid 1997 the relationship between PolicyLink and Auton broke down. As a result of this breakdown Watson and Kelly approached Brenton James (James), the first defendant, to find a solution to the problem.
10 Agreement was reached that in consideration of a payment of 1 per cent of the retail value of traded policies to one of James' companies, Trojan Securities Pty Ltd (Trojan), it would broker traded policies to AFLPST and would act on behalf of PolicyLink which would be the undisclosed principal on such sales.
11 In 1997 Watson developed a plan to expand the market by the establishment of another pooled superannuation trust (PST) which could purchase the traded policies from PolicyLink using capital raised by issuing units in the PST to investors.
12 Watson, Kelly and James had various discussions, which I understand will be the subject of some contest, and on 21 August 1997 Dominion Funds Management Ltd (DFM), the second defendant, was incorporated. The directors of DFM at this time were Watson, Kelly and James.
13 Shares in DFM were issued to each of Watson (1 share), Kelly (1 share) and James (1 share) and companies controlled by them respectively, the third plaintiff Nostaw Pty Ltd (Nostaw) (32 shares), the fourth plaintiff Combined Associated Promotions Pty Ltd (CAP) (32 shares) and the third defendant Sagacity Partners Limited BVI (Sagacity) (32 shares).
14 Watson and Kelly will claim they informed James that it was their desire to keep their involvement in the day to day management of DFM to a minimum. To that end it was their intention to resign as directors. Messrs Richard Liebmann (Liebmann) and Raymond Willing (Willing) were nominated to replace Watson and Kelly.
15 Watson, Kelly and James also agreed to set up the Dominion Funds Management Pooled Superannuation Trust (DFMPST) which was to be managed by DFM. Commercial Nominees Australia Ltd agreed to act as trustee and Permanent Trustee Co Ltd agreed to act as custodian.
16 DFM was to market the DFM PST to enable sufficient funds to be generated so that PolicyLink could supply the traded policies to DFMPST with an arrangement for commission to be paid by PolicyLink to DFM.
17 In November 1997 the arrangement between PolicyLink and Trojan in selling policies to AFLPST was varied to replace Trojan with DFM. Trojan's commission was thereby available to DFM.
18 At this time further shares in DFM were issued to facilitate the raising of further capital. Auckland Trust Company Superannuation Fund (Auckland) of which Kelly and Watson claim to be members purchased 60 shares in DFM, 30 each from Nostaw and CAP. The other shares were issued to James, Kelly and Watson's respective companies so that the shareholding was then James (1), Sagacity BVI (132), Watson (1), Nostaw (102), Kelly (1), CAP (102), Auckland (60).
19 On 18 November 1997 Watson, Kelly and James held a directors' meeting of DFM. The terms of the discussions and agreements reached at this meeting will be crucial to the outcome of this litigation. Watson and Kelly claim that agreement was reached that any issue of options for the issue of a further 25 per cent of shares in DFM were to be held in trust by Kelly, Watson and James on behalf of the existing shareholders of the company and that their allocation would occur only at the unanimous discretion of Kelly, Watson and James.
20 On the other hand James claims that it was agreed that such options could be allocated at the discretion and agreement of the directors. He will claim that "directors" means whoever the directors were at the time of the allocation.
21 On 17 December 1997 Watson and Kelly retired as directors and Liebmann and Willing were appointed to the Board of DFM.
22 In February 1998 Mr Andrew de Vries (de Vries), the fourth defendant, was appointed as the marketing manager of DFM to assist with the marketing of DFM and the DFM PST.
23 During the first half of 1998 the relationship between Watson, Kelly and James soured. So too it appears did the relationship between James, Liebmann and Willing which resulted in the resignation of Liebmann and Willing in late June 1998.
24 It is apparent there was a meeting between at least Watson and Roger Auton of Auton on 9 June 1998. On 10 June 1998 Roger Auton forwarded a facsimile to Watson at PolicyLink which referred to the meeting of yesterday regarding the New Traded Policy PST and Dominion Funds Management Ltd. Auton suggested to Watson that the proposed agreement be effective from 1.7.98.
25 Auton stated that it would enter into an exclusive arrangement with PolicyLink for the purchase of policies by AFLPST and that AFLPST would trade directly with PolicyLink. Auton also advised that the current heads of agreement between Commercial Nominees and DFM were to be cancelled and replaced by alternative arrangements which the defendants claim were less advantageous to DFM and the interests of the James and Sagacity. The evidence of the defendants tendered by the plaintiff without objection on this application is that in any event James was informed by Kelly that Auton had been approached and PolicyLink's problems of the previous year had been sorted out. Further that Auton would make contact with James to effectively obtain his approval of the arrangements. (James affidavit 6/11/98 - pars. 64 -67)
26 It is these arrangements that are the source of complaint by James and Sagacity in the proposed cross claim. I shall return to this in more detail in due course.
27 After Liebmann and Willing resigned James purported to appoint two other directors, his brother, Kenneth David James (K James), the fifth defendant and de Vries.
28 The events of July 1998 are the subject of the plaintiffs' claims and can be summarised relevantly as follows:
28.1 On or about 23 July 1998 K James and de Vries resolved at a director's meeting of DFM that DFM enter a Management Services Agreement with Dominion Corporate Finance Pty Ltd (DCF) the sixth defendant, whereby DCF would provide management services to DFM. DCF is a company controlled by James. (the Management Agreement)
28.2 At a director's meeting of DFM on 24 July 1998 (after the issue of 325 shares to each of Nostaw, CAP and Sagacity) James, K James and de Vries, without notice to the plaintiffs, resolved to issue and allot 457 ordinary shares in DFM to Sagacity. On the same day such shares were issued and allotted to Sagacity bringing James' shareholding to 915 shares compared to the shareholding of the Watson/Kelly interests of 916 shares. (the Sagacity Shares Issue)
28.3 On 29 July 1998 at a directors' meeting of DFM attended by James, K James and de Vries, James tabled a document purporting to be a minute of the resolution passed at the meeting of 18 November 1997. This contained the resolution for which James contends and is contrary to the resolution for which the plaintiffs contend. Once again without notice to the plaintiffs, the directors then resolved to issue and allot two ordinary fully paid shares in DFM to James. These were issued and allotted on that day and brought James' shareholding to 917 shares compared to the Watson/Kelly interests of 916 shares. (the James' Shares Issue)
29 On 30 July 1998 Nostaw and CAP requisitioned a meeting of shareholders to be held on 25 August 1998. Nostaw and CAP proposed the appointment of six additional directors being Watson, Kelly, Liebmann, Willing and Messrs Sedgwick and Roberts. At the meeting of 25 August 1998 James claimed that he held the majority shareholding and would vote that shareholding at the meeting.
30 That meeting was adjourned and these proceedings were commenced. By undertakings given to the court the parties appear to have agreed to adjourn the meeting until these proceedings are completed. There has also been agreement that further shares will not issue without notice.
31 The plaintiffs, Watson, Kelly, Nostaw and CAP seek remedies including:
31.1 Declarations and orders setting aside the management agreement, the Sagacity Shares Issue and the James Shares Issue.
31.2 Declarations that James, de Vries and K James breached their fiduciary duties to DFM in causing it to enter into the Management Agreement.
31.3 Declarations that James has contravened ss 243ZE(2) and (3) of the Corporations Law in participating in the Sagacity Shares Issue Resolution and the James Shares Issue Resolution.
31.4 A declaration that DFC has breached s 243ZE(2) of the Corporations Law in entering into the Management Agreement.
31.5 An order that James be prohibited from managing a corporation for such period as the Court determines pursuant to s 230 of the Corporations Law;
31.6 An order pursuant to s 1317 HD of the Corporations Law that James and DCF account to DFM for an amount equal to that paid to DCF by DFM under the Management Agreement.
31.7 An order pursuant to s 246 AA that DFM be wound up.
32 The defendants deny the plaintiffs are entitled to the relief they seek and raise various defences with reference to the Articles of Association and s 243N(1) of the Corporations Law.
Application opposing leave/strike out
33 The challenged paragraphs of the defence provide as follows:
29 In answer to the whole of the Statement of Claim the proceedings have been brought for improper collateral purposes and are an abuse of process.
30 By reason of the matters alleged in par 29 above the plaintiffs are not entitled to equitable relief as they come to the Court with unclean hands.
34 The defence then particularises the unclean hands by reference to the matters alleged in the cross claim. It is therefore necessary to consider the cross claim.
35 The cross claim is brought by James and Sagacity (the cross claimants) against Watson, Kelly, Nostaw and CAP (the cross-defendants).
36 The cross claimants' complaints can be conveniently summarised as follows:
36.1 That the cross-defendants are in breach of their obligations under the PolicyLink Shareholders Agreement. This breach is said to arise because DFM is in competition with PolicyLink and the PolicyLink Shareholders Agreement purports to prohibit such competition (pars. 7 to 19). This claim is not the subject of any claim for relief - although it seems to be relied upon to establish the motive to cause commercial harm to the defendants.
36.2 That in June 1998 Watson, Kelly and PolicyLink acted in a manner that was oppressive, unfairly prejudicial to and unfairly discriminatory against DFM, James and Sagacity. The conduct claimed to give rise to this allegation is the securing of Auton's agreement to change the terms of DFM's contract with AFLPST to DFM's financial detriment (pars. 12, 21 to 24); and
36.3 that Nostaw and CAPS's proposed resolutions that the six new directors be elected to DFM's Board are oppressive, unfairly prejudicial to and unfairly discriminatory against DFM, James and Sagacity.
The defendants claim that if the plaintiffs have control of DFM they will remove James from the Board and enter into contracts which will be detrimental to DFM's interests. They claim the plaintiff's will either sell or wind up DFM .
36 The cross claimants then seek declarations pursuant to s 246 AA of the Corporations Law in respect of the Auton Agreement and the proposed resolutions together with an order that the cross-defendants transfer their shares to the cross claimants for the consideration of $3000 or alternatively that the shares be valued by a referee.
Paragraph 30 unclean hands
37 The bases for the plaintiffs claims for the setting aside of the various transactions relevantly include the following:
The Management Agreement
The plaintiffs claim that de Vries and K James did not act bona fide in the interests of DFM and were in breach of their fiduciary duties to DFM because;
· the terms of the management agreement were less favourable to DFM than an arms length commercial arrangement; and
· they were motivated by an improper collateral purpose namely to increase James' control over DFM and to divert revenue from DFM to DCF and away from the shareholders.
38 The defendants claim that the plaintiffs' hands are unclean because they were diverting funds away from DFM by inducing Auton to cancel DFM's contract with AFLPST.
The Sagacity Shares Issue
39 The plaintiffs claim James, de Vries and K James were not acting bona fide in respect of this transaction and were in breach of their fiduciary duty to DFM. It is claimed they were motivated by an improper collateral purpose to increase James' shareholding in DFM and thereby increase his influence over the affairs of DFM. Additionally they claim that the share issue was not approved by the shareholders.
40 The defendants claim that the plaintiffs' hands are unclean in respect of this transaction because they improperly induced Auton to change the contract between DFM and ALFPST to DFM's detriment.
James Shares Issue
41 The plaintiffs claim that James created a false document purporting to be a resolution passed at the 18 November 1997 meeting to induce de Vries and K James to pass the James Shares Issue resolution. The plaintiffs claim that James was in breach of his fiduciary duty, and motivated by an improper collateral purpose namely to obtain the majority shareholding and voting control of DFM.
42 The defendants claim that the plaintiffs' hands are unclean once again because of their conduct in dealing with Auton in respect of the DFM contract.
43 In respect of each transaction the defendants also allege the plaintiffs have unclean hands because of their breach of the PolicyLink shareholders agreement and their intention to remove James from the Board and either sell or wind up DFM.
44 The plaintiffs submit that no proper defence is disclosed because there is no connection between the alleged wrongdoing and the equity sued for by the plaintiffs. FAI Insurance Ltd v Pioneer Concrete Services (1987) 15 NSWLR 552 at 561
45 In responding to these submissions Mr Bell for the defendants conceded that there was no immediate or direct link between the conduct alleged against the plaintiffs and the equity for which they were suing. However Mr Bell submitted that it was an around the corner link. It is not clear from the submissions as to how far round that corner the link is suggested to be but it has all the hallmarks of an allegation of general depravity which is not a proper basis for such a defence. Dering v Earl of Winchelsea (1787) 1 Cox Eq.Cas.318 per Eyre CB at 319))
46 In applying the principle that there must be an immediate and necessary relation to the equity sued for Meyers v Casey (1913) 17 CLR 90 it is my opinion that the defence as pleaded does not have such a relation and therefore I refuse leave to file it.
Par 29 of the defence - abuse of process
47 This paragraph purports to be in answer to the whole of the statement of claim. The defendants claim that the proceedings have been brought for improper collateral purposes and are an abuse of process.
48 In support of their application the plaintiffs point immediately to the defendants' failure to bring any application to strike out any portion of the plaintiff's statement of claim or any application for a stay.
49 The defendants claim the improper collateral purpose is the plaintiffs' desire to crush DFM so as to remove it from the market place as a competitor of PolicyLink. Mr Bell submitted that any orders to be made in the plaintiffs' favour in the proceedings would be the "means" for the plaintiffs to achieve this allegedly improper collateral purpose.
50 It is important not to confuse a reprehensible motive with what is required in a collateral abuse action - i.e. a purpose sought to be effected by a litigant in bringing a proceeding when such a purpose is not within its scope and is improper.
51 Mr White SC submits that the propositions for which the defendants contend in support of this paragraph of the defence are fatally flawed. He relies analogously in this regard on Williams v Spautz (1991-1992) 174 CLR 509 at 526;;
"Thus, to take an example mentioned in argument, an alderman prosecutes another alderman who is a political opponent for failure to disclose a relevant pecuniary interest when voting to approve a contract, intending to secure the opponent's conviction so that he or she will then be disqualified from office as an alderman by reason of that conviction, pursuant to local government legislation regulating the holding of such offices. The ultimate purpose of bringing about disqualification is not within the scope of the criminal process instituted by the prosecutor. But the immediate purpose of the prosecutor is within that scope. And the existence of the ultimate purpose cannot constitute an abuse of process when that purpose is to bring about a result for which the law provides in the event that the proceedings terminate in the prosecutor's favour.
52 Mr White SC submits that this argument is applicable to the matter before me. I agree. These proceedings are not a "stalking horse to coerce the defendants in some way entirely outside the ambit of the legal claims" the plaintiffs make. Varawa v Howard Smith Co Ltd (1911) 13 CLR 35 per Isaacs J at 91).
53 It seems to me that the remedies the plaintiffs seek are not a means of obtaining some advantage for which the proceedings are not designed or for some collateral purpose beyond what the law offers. They are proceedings properly available to be pursued by the plaintiffs.
54 Paragraph 29 does not disclose a proper defence and I therefore refuse leave to file it.
Cross claim
55 James and Sagacity seek declarations and orders pursuant to section 246AA of the Corporations Law Before any order can be made the Court must be of the opinion
(a) that affairs of a company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members (in this section called the oppressed member or members) or in a manner that is contrary to the interest of the members as a whole; or
(b) that an act or omission, or a proposed act or omission, by or on behalf of a company, or a resolution, or a proposed resolution, of a class of members of a company, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members (in this section also called the oppressed member or members) or was or would be contrary to the interests of the members as a whole. s 246AA(2)that;
(a) the act of the cross defendants pleaded in paragraph 20:and
(b) the proposed resolutions for the appointment of further directors;
are oppressive, unfairly prejudicial to and unfairly discriminatory against James and Sagacity and are contrary to the interests of the members of DFM as a whole.
56 Paragraph 20 of the cross claim pleads;
On or about 10 June 1998,Kelly, Watson and PolicyLink entered into an agreement or arrangement or understanding with Auton Consulting Pty Limited. Auton Consulting Pty Limited is the manager of AFL PST.
57 Mr White SC relies upon Re Polyresins Pty Ltd (1998) 16 ACLC 1,674 to submit that the cross claimants lack standing because s 246AA does not accommodate majority shareholders with voting control.
58 Mr Bell submits that S 246AA does not preclude the cross claimants from bringing an action and submits further that I should not follow Re Polyresins in so far as it may support Mr White SC's submission.
59 As to this last matter it seems to me that Re Polyresins clearly supports such a proposition. His Honour said;
It is not possible for the company or its directors to act so as to oppress or unfairly prejudice or discriminate against those who can command a majority of votes. If they should so act and take the majority shareholder by surprise their conduct will still lack the requisite characteristic because the majority shareholder can act to eradicate that which would give rise to unfairness.
and
A court will not be able to form the opinion that the affairs of a company are being conducted unfairly in the relevant sense, or that acts or omissions of the company or resolutions of the company are unfair in the relevant sense vis a vis a member who holds a controlling interest in the voting shares of the company. At page 1,682-1,683.
60 His Honour also reviewed the cases cited in argument Thomas v HW Thomas Ltd (1984) 2 ACLC 610;Re Associated Tool Industries Ltd (1963) 5 FLR 55;Benjamin v Elysium Investments (Pty) Ltd & Anor 1960 (3) SA 467;Re HR Harmer Ltd (1958) 3 All ER 689;Wayde v New South Wales Rugby League Limited 180 CLR 459; on this topic and concluded, inter alia, that it is necessary that the applicant not be the controlling shareholder. at page 1,683. His Honour focused on the controlling shareholder. The distinction between a majority shareholder per se and one with control of the company is an important one.
61 His Honour's analysis is compelling particularly in the following passages;
It is unrealistic to suppose that a company's affairs may be conducted in a manner that is oppressive or which unfairly prejudices or discriminates against a member who controls a majority of votes that may be cast at a general meeting and who can thereby remove directors and appoint others in their stead.
and
It is possible to imagine circumstances in which those charged with the management of a company might act in such a way as to hurt or prejudice or discriminate against a member of a company but it is not, I think, possible to imagine circumstances in which the hurt or prejudice or discrimination can amount to oppression or unfair prejudice or discrimination when the victim is the controlling shareholder. In other words the conduct will lack the requisite character because the person or persons affected by it can act to prevent it having the character of unfairness. At p 1,677 and 1, 678
62 Mr Bell submits that unlike the older English section with which the Court was dealing in Re HR Harmer Ltd Cited in argument in Re Polyresins; see note 11,a case relied upon before Chesterman J, the current Australian section and its immediate predecessor make no mention of minorities. Section 210 of the Companies Act 1948 (UK) had the heading "Minorities" but made no express reference to the term within the body of the section. He submits further that the legislature could have restricted the category of applicants within s 246AA(1) and (5) but did not do so.
63 Mr Bell compared the heading to s 246AA Remedies in cases of oppression or injustice with the heading s 210 of the Companies Act 1948 (UK) Minorities and submitted that nowhere within Part 2F.1 -Oppression is there any reference to minorities nor any expression that could justify an interpretation that a 'member' means a minority shareholder or one who does not have voting control.
64 A glimmer of support is available in the judgment of Brennan J (as he then was) in Wayde v New South Wales Rugby League Limited 1980 CLR 459. where in dealing with the predecessor of s.246AA His Honour said;
Clearly the legislature intends to provide a greater measure of curial protection to members of a company, especially if they be in the minority, than the protection afforded under earlier Companies Acts. At 471 - emphasis added.
65 Chesterman J referred to this passage in his judgment in Re Polyresins At p 1,681 and emphasised that the standing point was not an issue in Wayde. After noting that there was no elucidation by Brennan J of the circumstances in which the applicant for relief may not be a minority shareholder his honour observed that judicial opinion..seems to favour the view that the section operates for the protection of minority interests. at 1,681
66 Chesterman J understood that no authority had considered the question whether the relevant section could be invoked by a majority shareholder. at 1,679
67 However, the learned authors of Ford's Principles of Corporations Law Professor H A J Ford AM; The Hon. R.P. Austin & I M Ramsay had referred to Canadian authority which dealt with that question. Their conclusion was;
A majority shareholder is not excluded from applying but normally has a remedy in the general meeting. If a majority shareholder were to apply, the court would need to consider whether the application is made unjustly to secure concessions from the minority. Par. 11,440
68 The authors then refer to Mr Michael Rice's 1989 article The Availability of the Oppression Remedy to Majority Shareholders in Ontario. (1989) 16 Can Bus LJ 58 in which he reported upon the then growing trend in the Ontario courts to allow 50% shareholders and even majority shareholders the benefit of an oppression remedy under s 247 of the Business Corporations Act,1982,S.O. 1982c.4. A section not materially different from s 246AA
69 Mr Rice helpfully summarises a number of cases which are in clear support of the authors proposition. In relation to s 244 of the Ontario Business Corporations Act, Gillespie v Overs (Aug. 14 1987 Ont. H.C.J.) (1987 O.J.No 747); Yok Wing Hui v Yamato Steakhouse Inc. (Jan 6 1988 Ont. H.C.J.) (1988 O.J. No 9); Lake Muskoka Investments (Northern and Eastern Ltd) v Lake Muskoka Marine Ltd and Neal Newman (March 31 1989 Ont H.C.J.) In relation to s 238 of Canada Business Corporations Act Jabaco Inc v Real Corporate Group Ltd (Jan 20 1989 Ont H.C.J) (1989 O.J. No 68); In relation to s 224 British Colombia Company Act, Cairney v Golden Key Holdings Ltd (1987) BLR 263. In Jabaco Inc v Real Corporate Group Ltd (Jan 20,1989,Ont.H.C.J.) (1989) O.J. No 68.Doherty J was considering a similar section under the Canada Business Corporation Act R.S.C. 1985 c. C 44. in which the standing issue raised here and in Re Polyresins was argued Doherty J concluded;
The applicant qualifies as a complainant regardless of the size of his share position, or the degree of authority which the constitution of the company permits him to exercise over the affairs of the company.