White (Trustee) v MWL Financial Group Pty Ltd, in the matter of MWL... [2018] FCA 2018 | Case summary

DAVIES J: 1 The applicants are the majority shareholders of MWL Financial Group Pty Ltd ("MWL") and have applied under s 237(1) of the Corporations Act 2001 (Cth) ("the Act") for leave to bring proceedings on behalf of MWL against Focus Financial Partners LLC ("Focus USA"), Focus Australia Holdings LLC ("Focus Australia"), Rajini Kodialam ("Ms Kodialam") and Molly Bennard ("Ms Bennard"). 2 As shareholders of MWL, the applicants may bring proceedings on behalf of MWL with the leave of the Court under s 237 of the Act: s 236(1) and s 237(1). Section 237(2) contains the criteria for the grant of leave and provides as follows: (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 There is no dispute that the criteria in ss 237(2)(a) and (e) are satisfied. In dispute is whether: (a) the applicants are acting in good faith: s 237(2)(b); (b) it is in the best interests of MWL that the applicants be granted leave: s 237(2)(c); and (c) there is a serious question to be tried: s 237(2)(d). 4 MWL has the onus of establishing each of these matters on the balance of probabilities: Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313; [2002] NSWSC 583 at [24] ("Swansson"). 5 The proposed derivative claim arises out of the acquisition by Focus Australia of the Financial Professionals Group ("Financial Professionals"), an Australian based financial services business, on 1 May 2017. 6 Focus Australia is a subsidiary of Focus USA which, through another subsidiary, Focus MW Lomax Australia LLC ("Focus MWL"), holds all the Class A shares in MWL, giving it a 49.9% shareholding interest. The applicants hold all the Class B shares in MWL with a 50.1% interest. Ms Kodialam is the Chief Operating Officer of Focus USA and a director of MWL. Ms Bennard is a principal of Focus USA and also a director of MWL. Ms Kodialam and Ms Bennard were appointed directors of MWL by Focus MWL which, under the Shareholders' Agreement, has the right to appoint up to two directors. MWL has three other directors, who include the first applicant ("Mr White"), all of whom were appointed by the Class B shareholders. 7 The claims that the applicants wish to pursue by the proposed proceedings in the name of and on behalf of MWL are, in summary: (a) claims of breaches of statutory and fiduciary duty by Ms Kodialam and Ms Bennard as directors of MWL; (b) a claim for a constructive trust of the shares held in Financial Professionals by Focus Australia, applying the principles in United Dominions Corporation Limited v Brian Pty Ltd (1985) 157 CLR 1 ("United Dominions"), Pallant v Morgan [1953] Ch 43 ("Pallant") and Baumgartner v Baumgartner (1987) 164 CLR 137 ("Baumgartner"); (c) accessorial liability of Focus Australia in respect of the alleged breaches of directors' duties by Ms Kodialam and Ms Bennard; (d) accessorial liability of Focus USA in respect of the alleged breaches of directors' duties by Ms Kodialam and Ms Bennard; and (e) a claim of accessorial liability against Ms Kodialam and Ms Bennard. 8 Although a minority shareholder, Focus MWL has veto rights which forbid MWL to "start, conduct or settle any dispute or litigation…above $60,000" without Focus MWL's consent. Focus MWL has refused to give its consent to MWL instituting the proposed proceedings. 9 The applicants supported their application by four affidavits sworn by Mr White, the managing director of MWL, and affidavits sworn by each of the other Class B shareholders. 10 It is not disputed that the directors of MWL appointed by the Class B shareholders knew about, and gave their consent to, Focus Australia acquiring the shares in the three companies comprising Financial Professionals - Financial Professionals Pty Ltd, Superannuation Professionals Pty Ltd and Investment Professionals Pty Ltd. The dispute is over whether there was an agreement that Focus USA would hold any investment in Financial Professionals for the benefit of MWL and Focus USA together (as MWL contends) or whether the acquisition was a direct deal done by Focus USA for its sole benefit and independently of MWL, which it had the right to do under the transactional arrangements between MWL and Focus USA (as Focus MWL contends). 11 The applicants' case is as follows. 12 MWL operates a financial services business offering services in the areas of financial planning, self-managed superannuation funds, accounting, life insurance, equity investment, finance and business and tax advisory. Part of MWL's business plan includes acquiring related financial services businesses and consolidating them into a single firm with a national scope. In the second half of 2015 MWL was looking for a capital partner in order to fund that expansion and entered into negotiations with Focus USA which eventuated in Focus MWL, a subsidiary of Focus USA, acquiring the minority interest in MWL in May 2016. In early June 2016 Ms Kodialam told Mr White there was an issue which Focus USA's accountants had alerted her to, namely that Focus USA could not fund acquisitions effected through MWL unless Focus held a majority of MWL's shares because of covenants imposed by Focus USA's institutional investors in the USA, which meant that the original structure with Focus USA holding a minority interest in MWL through Focus MWL had to be renegotiated. 13 Although the revised structure had yet to be agreed, MWL continued to seek out opportunities to expand its business by acquiring compatible financial services firms. In October 2016, Mr White presented to the MWL Board the opportunity to acquire Financial Professionals, which Mr White described as a boutique financial services business based in Broadbeach. In November 2016 Mr White, on behalf of the Board of MWL, made an indicative offer which Financial Professionals accepted in March 2017. In around April 2017 Ross Rickard, the principal of Financial Professionals, told Mr White that settlement had to occur prior to the end of that financial year. In his affidavit sworn 29 May 2018, Mr White deposed at paragraphs [33] and [34]: 33. At about the same time, Kodialam, Maikousis and I had a telephone discussion about the Financial Professionals transactions. At this time, the end of financial year was drawing closer, and no funding or alternative arrangement was in place between MWL and Focus MWL. Kodialam said words to the effect that: (a) Focus (or one of its related entities) could step into the shoes of MWL as purchaser of Financial Professionals business; and (b) Focus would settle the Financial Professionals transaction, on the basis that the business would be acquired as part of, and for the benefit of, the (yet to be agreed) renegotiated arrangements between MWL and Focus. 34. I said that I agreed with that proposal. (errors in original) 14 Mr Maikousis is another of the Class B shareholders. 15 Mr White also deposed to receiving a letter dated 24 April 2017 from Ms Kodialam on behalf of Focus USA which stated: Dear Jon, As you know, a wholly-owned subsidiary of Focus Financial Partners, LLC ("Focus") is in the process of directly acquiring the legal entities related to the Australian wealth management firm, Financial Professionals, which includes Financial Professionals Pty Ltd, Investment Professionals Pty Ltd and Superannuation Professional Pty Ltd (collectively, the "Companies"). I wanted to confirm Focus' interest in entering into a management agreement with a management company owned by the principals of MW Lomax Pty Ltd ("MW Lomax") for the management of the Companies, subject of course to our mutual agreement as to the terms and conditions of such management agreement. We look forward to discussing these items with you further. (errors in original) 16 On 1 May 2017 Focus USA completed the acquisition of Financial Professionals through its subsidiary, Focus Australia, which now holds all the issued shares in those companies. On the same date Ms Bennard was appointed as a director of the three companies in Financial Professionals as the nominee of Focus Australia. 17 Mr White further deposed that once the transaction was completed, MWL and Focus USA "resumed discussions regarding the documentation that could be put into place to reflect the proposal whereby, although Focus Australia was the named purchaser of [Financial Professionals], MWL would ultimately receive the profits from that business". However, no arrangement was reached. Focus Australia remains the 100% owner of Financial Professionals and, Mr White stated, "the profitability that MWL would have derived had it acquired this business as intended, still sits with Focus MWL". 18 The proposed statement of claim includes the following factual allegations: 31. On or around 7 April 2017, Kodialam on behalf of Focus USA stated to White and Maikousis, on behalf of MWL, that, because of the limited time available to complete the Financial Professionals Group transaction: (a) Focus USA or its nominee would step into the shoes of MWL as purchaser, and (b) that Financial Professionals Group would be managed by MWL as part of a yet-to-be agreed management agreement. PARTICULARS The statement was made in a telephone call between White, Maikousis and Kodialam, during which Kodialam said words to the effect that "we [Focus] will complete the purchase and hand it back and sort it out with the management agreement". White responded with words to the effect that MWL would "need something in writing to confirm that arrangement". … 33. On or before 24 April 2017, MWL and Focus USA agreed: (a) that Focus USA would not bid for Financial Professionals Group for its sole benefit, but would hold any investment in Financial Professionals Group for the benefit of MWL and Focus USA together; and (b) accordingly, that MWL would not bid for Financial Professionals Group (together, the Agreement). PARTICULARS The agreement was partly oral and partly in writing. To the extent that it was oral, it was made in a telephone conversation on or about 7 April 2017 between Kodialam on behalf of Focus USA and White and Maikousis on behalf of MWL, the substance of which was to the effect alleged. To the extent that it was in writing, it was evidenced by the letter dated 24 April 2017 from Kodialam on behalf of Focus USA to White on behalf of MWL. A copy of the letter is in the possession of the solicitors for the plaintiff and may be inspected at their offices by appointment. 34. On 1 May 2017: (a) Focus USA caused Focus Australia to buy all the ordinary shares of Financial Professionals Group (the Investment); and (b) Bennard was appointed a director of each of the entities in the Financial Professionals Group (the Appointment). 35. In and after April 2017: (a) MWL and Focus USA attempted to renegotiate the Original Structure; (b) no agreement was reached between [MWL] and Focus USA as to any Revised Structure ; and (c) MWL did not give its informed consent for Focus USA, alternatively Focus Australia, to make the Investment for its sole benefit. … 37. Focus USA and Focus Australia has not accounted to MWL for the Investment. (errors in original) Whether the applicants are acting in good faith 19 It is undoubted that the applicants, as the majority shareholders of MWL, have a legitimate interest in the proposed derivative action and there is evidence from Mr White, in his first affidavit, attesting to his belief, and his reasons for that belief, that it is in the best interests and for the benefit of the company as a whole that the applicants be given leave to commence the proposed proceeding. Mr White also attested to advice received from counsel that the proposed proceedings have a real prospect of success. Mr White was not challenged on his reasons for seeking to commence the proposed proceedings. However senior counsel for Focus MWL urged the Court to conclude that it should not be satisfied that the applicants are acting in good faith in seeking to bring that action. 20 First, a lack of good faith was said to be evidenced by the delay in payment of, and the quantum of, the unpaid minimum dividends for Q1 2018 (January to March), Q2 2018 (April to June) and Q3 2018 (July to September) (totalling $1,155,000) which Focus MWL, under MWL's dividend policy, is entitled to receive. Ms Kodialam gave evidence that under that policy Focus MWL is to receive a minimum quarterly dividend of $385,000. A dividend of $385,000 declared for Q1 on 16 August 2018 has not yet been paid and there have been no interim dividends declared to date for Q2 (April to June) or Q3 (July to September). Mr White filed a responding affidavit in which he deposed to his understanding of the dividend policy that the timing of any payment of declared dividends was subject to the operational and capital requirements of MWL to ensure that MWL was comfortably able to meet its monthly operational requirements such as rent, bank interest, tax, contractors' fees, professional indemnity insurance, wages and superannuation. He deposed that he expected that MWL would be able to pay the Q1 dividend by 30 November 2018. He also deposed that the minimum amount of the final Class A dividend that is required to be declared will depend on whether or not any interim dividends have been paid to Focus MWL and, if only the Q1 dividend has been declared, the minimum final dividend will be $1,115,000. The policy is an exhibit to his first affidavit and it does specify that the ability to pay dividends and the timing of their payment will depend on a number of factors that are there listed which include regulatory cash and solvency requirements for the company and operating and capital requirements of the business. Also in evidence is MWL's constitution. Schedule 1 provides with respect to the time for payment of Class A dividends as follows: 2.2 Time for payment (a) Any part of the Class A Dividend in relation to each Financial Year not paid during that Financial Year is payable on the 5th Business Day after the audit opinion in relation to the financial statements for that Financial Year has been delivered to the Company (Payment Due Date). (b) Without prejudice to paragraph 2.1 above, the Company shall, on a quarterly basis during each Financial Year, make an assessment of free cash flow during the relevant preceding quarter (having allowed, as appropriate and reasonably prudent, for minimum working capital, the regulatory financial requirements of the Company and the availability of retained earnings and franking credits), and shall, if appropriate, pay an interim dividend in partial satisfaction of the Company's obligation to pay the Class A Dividend. 21 Mr White's evidence is also consistent with an email that he sent to Ms Kodialam on 18 September 2018 in which he advised in response to her query as to why the Q1 dividend had not been paid that whilst there was no issue with MWL's operational cash flow, to make sure that MWL's monthly and quarterly cash flows were being managed, payment was "a mere timing issue" and would be made shortly. In view of Mr White's evidence, which was not challenged and which has support both in the policy and MWL's constitution and the advice he gave to Ms Kodialam in September 2018, I am not persuaded that there is anything about the deferral of the payment of the Q1 dividend or the Q2 and Q3 dividend entitlements bearing upon, or of significance to, the question of good faith. 22 Secondly, it was argued, it is also relevant that on 7 December 2017, once it emerged that a management or service agreement could not be agreed between the parties, Mr White made an offer on behalf of the applicants to buy back the Class A shares for $7,865,468, which it was said was approximately half of what Focus USA paid for the shares in May 2016. When the offer was rejected, Mr White engaged lawyers on behalf of MWL, not the Class B shareholders. It was submitted that an inference is open to be drawn that the proposed proceeding is being pursued by the applicants to leverage a favourable buyback of the Class A shares from Focus MWL. 23 The latter contention can be dismissed readily as that offer was pursuant to two options earlier proposed by Focus, one of which was that the MWL Class B shareholders buy out the Class A shareholders. Further I draw no adverse inference from the amount offered by the Class B shareholders. The basis of the figure offered is explained in the offer put to Focus USA. That basis was attacked by senior counsel for Focus MWL on the basis that it did not take account of the value of Financial Professionals which the applicants have alleged in the proposed proceedings is held on constructive trust by Focus Australia for MWL. I find no substance to that criticism given that Focus USA and Focus Australia are in substantial dispute with MWL over the claim that Focus Australia holds the shares in Financial Professionals on constructive trust for MWL. Furthermore, the mere fact that this application was made after settlement discussions fell through does not of itself support an inference of a collateral purpose or lack of good faith in making the application. As the authorities indicate, the Court should not readily infer a lack of good faith merely from the fact that a derivative action application is made after the breakdown of discussions: see, for example, Swansson at [41]; MG Corrosion Consultants Pty Ltd v Vinciguerra (2011) 82 ACSR 367; [2011] FCAFC 31 at [25] ("MG Corrosion Consultants"); Connective Services Pty Ltd v Slea Pty Ltd [2018] VSCA 229 at [111]. 24 Thirdly, it was argued that it was relevant to the question of good faith that Mr White had not been candid with the Court in that he had not given a full account of the parties' dealings by omitting to refer to a material document, namely a letter of intent which was sent by Focus USA to MWL on 23 February 2016 in relation to Focus USA's proposed investment in MWL, and in giving only a generalised and broad account of his conversation with Ms Kodialam in April 2017, contrasted with Ms Kodialam's account. This submission was bound up with the contention that there was no serious question to be tried which, for the reasons later set out, I have rejected. Although Mr White's evidence was not as comprehensive as Ms Kodialam's evidence, which set out in much greater detail the history of the parties' dealings and her account of the telephone conservation on 7 April 2017, I do not accept that Mr White was selective in the presentation of his evidence or that he was not candid in his evidence and do not infer a lack of good faith because his evidence was not as complete as Ms Kodialam's evidence. Further, for the reasons I give later, in so far as the letter of intent has evidentiary value in this application, it lends support for, rather than detracts from, the conclusion that there is a serious question to be tried. 25 I am therefore satisfied that the good faith criterion has been established. Whether it is in the best interests of MWL that the applicants be granted leave 26 This criterion requires an applicant to show that the proposed derivative action is in the best interests of the company, not that it may be, appears to be, is to be, or is likely to be, in its best interests: Swansson at [55]. The applicants argued that this criterion is met for the following reasons: (a) the proposed action is on behalf of a company against officers of the company for recovery of compensation for damage done to the company by their breach of duty: MG Corrosion Consultants at [60]; Vigliaroni v Concrete Precast Systems Pty Ltd [2009] VSC 253 at [29]; (b) MWL is a substantial enterprise; (c) the proposed action would restore to the business of MWL the profits made by Financial Professionals and the synergies and economies of scale that would arise through a combination of the two businesses; (d) Financial Professionals is a substantial enterprise; (e) the substance of the desired relief concerns breaches of directors' duties owed to MWL by Ms Kodialam and Ms Bennard and misuse of the opportunity to acquire Financial Professionals, which belonged in equity to MWL, and those rights can only be vindicated by litigation brought in MWL's name; (f) this is not a situation where the company would be brought into litigation against its will as a majority of shareholders and a majority of directors wish the litigation to proceed; (g) the respondents to the proposed proceeding are officers or subsidiaries of a major US financial enterprise; and (h) MWL is able to fund the proposed proceeding from its own resources. In addition, the applicants collectively hold substantial assets and, if required, have offered an undertaking to indemnify the company and to pay the company's costs of the proceeding. 27 Focus MWL cavilled with the proposition that Financial Professionals is a substantial enterprise, arguing, contrary to the applicants' submission that the Group is very profitable, that it is a "most insignificant asset". Reference was made to the profit and loss statements for the three Financial Professionals companies for the period January 2018 to June 2018 which showed that Financial Professionals Pty Ltd for that period made a net profit of $23,384.17, Investment Professionals Pty Ltd made a net loss of $167,118.43 and Superannuation Professionals Pty Ltd made a net profit of $21,209.14. The balance sheets for each company nonetheless do show a net asset position of some value and while it may be generous to describe Financial Professionals as a "substantial enterprise", the Group does have some worth. 28 Focus MWL also cavilled with the proposition that MWL is in a good financial position. It was submitted that MWL, to the contrary, is in a precarious financial position, that its financial performance deteriorated in the first half of 2018 and that by Mr White's own admission it is suffering from cash flow issues. It was further submitted that $1.115m in dividends in respect of the 2018 financial year is, or will shortly become, owing to Focus MWL and MWL has still not paid the dividend in the sum of $385,000 for Q1 2018, despite it being declared on 16 August 2018. Further, it was said, the applicants propose to fund this proceeding using the proceeds of a Class B dividend declared in respect of the 2017 financial year but the sum remaining from that dividend of $255,558.92 is vastly inadequate given that the applicants' own cost estimate provides that MWL's costs alone will be between $504,350 to $663,850. Reference was also made to a debt of $12 million payable to Westpac that is recorded as a current liability in the management accounts. Accordingly it was submitted that the financial position of MWL is such that it is not in a position to fund the proceeding and the proposed claim will undoubtedly affect its business and financial performance. It was further submitted that because of its financial position, MWL is unable to "do equity" in that it is not in a position to contribute to the purchase price of Financial Professionals so as to obtain relief: Huang v Wang (2016) 114 ACSR 586; NSWCA 164 at [64]. Finally it was submitted that the evidence is that neither MWL nor the applicants are in a position to fund the proceeding, let alone indemnify MWL in respect of any adverse costs order. 29 I reject the submission that the evidence shows that MWL's financial position is precarious, and its financial position is such that it is not in a position to fund the proceeding. First, the most recent management accounts for the MWL Group for the period ended 30 September 2018 which are exhibited to Mr White's fourth affidavit record a positive net profit and positive net asset position for the year to date. Secondly, as stated, Mr White gave an explanation for the delay in the payment of the dividend, namely to ensure that MWL was able to meet its monthly operational commitments. On the available material, there is no reason to doubt the reliability either of his evidence that the company does not have an issue with its operational cash flow or his evidence that he expects that the Q1 2018 Class A dividend will be paid by 30 November 2018. Thirdly, whilst the accounts as at 31 July 2018 recorded a current debt of $12 million payable to Westpac, that debt was recorded as a non-current liability in the audited accounts of the MWL Group as at 31 December 2017, the financial accounts for the period ended 31 March 2018 and in the latest financial statements for the period ended 30 September 2018. Whilst the discrepancy is unexplained, it is shown as a non-current liability in the latest available accounts which I take as the best evidence. Fourthly, it is relevant to take into account that the Class B shareholders propose to use the 2017 Class B dividend of $467,498 to fund MWL's costs of the proceeding and will not seek to recover those costs from MWL unless MWL recovers costs from the proposed defendants. Although it would appear that the dividend will not cover the whole of the costs on the current estimation, the use of the dividend for that purpose will nonetheless be a substantial contribution and is a relevant consideration in assessing the best interests of the company. Fifthly, the contention that MWL is unable to "do equity" in that it is not in a position to contribute to the purchase price of Financial Professionals so as to obtain relief does not have an identifiable evidentiary basis and whilst Focus MWL does not have an onus to disprove that the proposed proceedings are in the best interests of MWL, such a contention, if it is to have any bearing upon consideration of this criterion, must amount to something more than mere unsupported assertion. In the same way, the contention that the proposed claim will "undoubtedly" affect its business and financial performance has no persuasive merit. The evidence does not suggest any impact on the business or financial performance of the company apart from costs and, in that regard, at least part of those costs will be borne by the Class B shareholders using their dividend entitlement. 30 It is also relevant to take into account that the Class B shareholders have offered undertakings to indemnify MWL in respect of any adverse costs order, thereby minimising MWL's risk of exposure to a substantial liability for costs if its claims are unsuccessful. Each of the Class B shareholders has also filed an affidavit setting out their financial capacity to satisfy their indemnity contribution to such costs. The adequacy of that evidence was questioned by senior counsel for Focus MWL, who submitted that if the Court was satisfied that the criteria for the grant of leave are established, it should be made a condition of leave that the applicants, in addition to their undertakings, provide security. I consider that submission later in these reasons under the heading "Costs". It is sufficient to state at this juncture that I am satisfied that the Class B shareholders have the financial capacity to satisfy the indemnity offered. 31 An aligned argument was that it is relevant to take into account that the Class B shareholders have other means to seek redress than through the statutory derivative action, namely through oppression proceedings. However, as the Full Court in MG Corrosion Consultants stated at [60], it is not a requirement under s 237(2) that oppression proceedings be unavailable to a shareholder (see also Blakeney v Blakeney (2016) 113 ACSR 398; [2016] WASCA 76 at [62]). The Full Court in MG Corrosion Consultants also noted that there was no basis to conclude in that case that an oppression proceeding would have less impact on the company's affairs than a statutory derivative action and it was no more in the interests of the company as a whole that an oppression action be brought rather than a derivative action be pursued. I agree with and adopt that reasoning in this matter. Additionally, as stated, the alleged wrongs are wrongs against the company. The company is the proper plaintiff and the proposed proceeding will be of direct benefit to the company if the action succeeds. 32 I am accordingly satisfied that it is in the best interests of the company that the applicants be granted leave to bring the proposed derivative action. Whether there is a serious question to be tried 33 The threshold for showing that there is a serious question to be tried is the same as that for the grant of an interlocutory injunction - that is, the applicant must demonstrate a prima facie case, which "[does] not mean that the [applicant] must show that it is more probable than not that at trial the [applicant] will succeed; it is sufficient that the [applicant] show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial": Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57 at [19] and [65]; South Johnstone Mill Ltd v Dennis (2007) 163 FCR 343 at [78]-[79]; Swansson at [25]. 34 As against Focus USA and Focus Australia the claim is made that Focus Australia holds shares in Financial Professionals on constructive trust for MWL. The relevant factual allegations are extracted above at [18]. 35 Paragraphs [40]-[42] of the proposed statement of claim plead as follows: 40. By reason of the Agreement, Focus USA could not in good conscience: (a) make the Investment; further or alternatively (b) cause Focus Australia to make the Investment, for the sole benefit of Focus USA, alternatively Focus Australia. 41. Focus Australia knew of the Agreement. PARTICULARS Focus Australia is to be attributed with the knowledge of Kodialam as its directing mind and will. 42. By reason of the facts and matters set out in paragraphs 18 to 41 above, Focus Australia holds the Investment on constructive trust for MWL. 36 Focus MWL argued that there is no serious question to be tried because the alleged agreement in [33] of the proposed statement of claim (extracted above at [18] in its latest iteration) on which the causes of action are based "does not withstand scrutiny" and there is no prospect of that agreement being proved at trial. 37 First, it was argued that it was plain from the 24 April 2017 letter that MWL gave fully informed consent to Focus USA pursuing the Financial Professionals acquisition on its own behalf, subject to the parties agreeing the terms of a management or services agreement by which MWL or a management company would manage Financial Professionals. Reliance was placed on the following statements in that letter: As you know a wholly owned subsidiary of [Focus USA] is in the process of directly acquiring the [Financial Professionals]. [Focus USA's] interest in entering into a management agreement with a management company owned by the principals of [MWL] for the management of the [Financial Professionals], subject of course to our mutual agreement as to the terms and conditions of such management company. (errors and underlining in original) 38 It was submitted that it was telling that despite the fact that Mr White requested that Focus USA confirm the arrangement in writing following his conversation with Ms Kodialam on 7 April 2017, Mr White did not query or question the terms of the 24 April letter. 39 Secondly, it was argued that the agreement alleged in the proposed statement of claim is inconsistent with the contemporaneous documents and the history of the parties' dealings. It was submitted that the contemporaneous documentary evidence, consistently with the terms of the 24 April letter, revealed that MWL knew that Focus USA had acquired Financial Professionals for its own benefit, subject to the terms of a management or service agreement being reached. It was submitted that this was unsurprising given that the evidence showed that: (a) MWL knew that Focus USA would continue to pursue acquisition opportunities independently of MWL; (b) the negotiations between the parties following the 24 April letter focused on a model whereby MWL (or a nominee) would receive a management or service fee for managing the business of Financial Professionals; and (c) in an email dated 9 November 2017, Mr White confirmed that the 24 April letter had, at least until that point in time, governed the parties' relationship. 40 Thirdly, it was submitted that neither Mr White nor Ms Kodialam gave an account of their conversation on 7 April 2017 which was consistent with the agreement as pleaded in the proposed statement of claim. 41 Fourthly, it was argued that Mr White's account also differed in material respects from the conversation pleaded in [31] of the proposed statement of claim. 42 It was submitted that when regard is had to the contemporaneous documents, including the 24 April letter and subsequent correspondence, it is plain that MWL consented to Focus USA pursuing the Financial Professionals acquisition on its own behalf subject to the parties agreeing the terms of a management or services agreement by which MWL or a management company would manage Financial Professionals. It followed, it was argued, that there is no serious question to be tried as to whether: (a) Focus Australia holds its investment in Financial Professionals on constructive trust for MWL; (b) Ms Kodialam and Ms Bennard breached statutory and fiduciary duties owed to MWL as directors in connection with the acquisition of Financial Professionals; or (c) Focus USA, Focus Australia, Ms Kodialam and/or Ms Bennard are liable as accessories. 43 I disagree that there is not a serious question to be tried on the agreement alleged in the proposed statement of claim. In my view, not only is there a factual basis for that agreement contained in the evidence of Mr White, it also finds support in Ms Kodialam's affidavit which was filed in opposition to the application. 44 The relevant parts of Mr White's affidavit are extracted above at [13]. 45 In her affidavit, Ms Kodialam gave the following account of the 7 April 2017 conversation: 74. On or around 7 April 2017, Molly and I had a telephone discussion with Jon during which we said words to the following effect: Me: "We are still discussing options but Focus' preference is that we adopt the management company structure. We think we can address the issues that you are concerned about including the valuation issue. Either way we think that we should be able to reach agreement on the terms of a deal. Given we have progressed the Financial Professionals deal and it is a good deal, we suggest that Focus or its subsidiary acquires Financial Professionals and then we can continue to explore the management company structure and work out the terms of the management agreement. That way, the principals of MWL can establish a separate entity and manage Financial Professionals in exchange for a fee. We can work out the economics so that the fee reflects the performance of the business. MWL will benefit from the management agreement structure because it will secure a stable source of income and address some of MWL's cash flow issues." Jon: "Alright I understand. I agree that Financial Professionals should be acquired by Focus or a subsidiary of Focus since we have not worked out how to get funding to MWL. I agree that there are benefits to the management agreement but we will need to think about the terms of that agreement. I will need some comfort from you about the management agreement given Focus will now be acquiring Financial Professionals." Me: "What exactly do you want Jon?" Jon: "I want a letter from you setting out Focus' interest in entering into the management agreement. I need to be able to give the other shareholders some reassurance. We understand why Focus should acquire Financial Professionals at this stage but we want something from you setting out what will happen after Focus acquires Financial Professionals and what we will get out of it." Me: "Ok I will talk to Rusty (Russell McGrahanan, Focus' General Counsel) and Jim and get something to you." 46 Earlier in her evidence Ms Kodialam had explained that Focus USA's typical mode of investment was: (a) to establish a new, indirect wholly-owned subsidiary which acquires all the assets of the target firm; (b) the principals of the target firm establish a management company; and (c) the new management company then enters into a management agreement with the new operating company subsidiary in exchange for a fee. 47 She also deposed that on 11 April 2017 she received an email from Mr White in which he stated that "we will need a bit of time to compare the pros and cons of a management agreement vs the original taking of 51% of MWL and we will need to get legal advice". On 12 April 2017 a draft management agreement template was sent to MWL which, it would appear, was unacceptable to the MWL directors. On 20 April 2017 Ms Kodialam had a further discussion with Mr White following which she reported to her colleagues that "[MWL] are still debating on both options, management agreement and increased shareholding in MWL". On 24 April 2017 she sent the letter of comfort to Mr White that he had requested in the 7 April conversation. 48 The differences between the conversation as pleaded in [31] and the accounts given by Mr White and Ms Kodialam in their affidavit evidence do not lead to the conclusion that there is no serious question to be tried. The account of both witnesses concerning the substance of their conversation on 7 April 2017 was not diametrically different, although Ms Kodialam disputes that she said the words attributed to her by Mr White (see [75] of her affidavit). In any event, exactly what was said is a factual issue which does not have to be resolved in order to be satisfied that there is a serious question to be tried. It is sufficient that the pleaded agreement has factual support in the evidence and, viewing the evidence in its entirety, which includes the 24 April 2017 letter and subsequent correspondence, I do not agree that the pleaded agreement is not supported by the evidence. To the contrary, Ms Kodialam's evidence was that she did tell Mr White that "MWL can establish a separate entity and manage Financial Professionals in exchange for a fee" and "[w]e can work out the economics so that the fee reflects the performance of the business". Even on her account, Focus USA's acquisition of Financial Professionals was not an investment opportunity that it pursued as a "direct deal" done for its sole benefit independently of MWL and she sent the 24 April 2017 letter to Mr White as a measure of comfort that MWL would benefit from the acquisition through a yet to be negotiated management agreement. 49 Furthermore, whilst it can be accepted on the evidence that MWL knew and understood that Focus USA would not be making investments in MWL exclusively and was free to acquire other financial services businesses in Australia independently of MWL, the evidence was that a finder's fee was payable in respect of acquisitions which Focus made which had been introduced to it by a Class B shareholder. The contemporaneous documents include the counter-signed letter of intent dated 23 February 2016 that Focus USA sent to MWL in relation to its proposed investment in MWL. That letter contained the following paragraph: Additional Acquisitions Focus provides incentives to its partners to identify and cause additional independent financial advisers to join its network. If a class B shareholder introduces Focus to another financial advisory firm and Focus then acquires such firm upon terms similar to those set forth in this proposal, Focus would pay to the class B shareholder a finder's fee, in cash, equal to 3% of the acquired NPAT ("Net Profit After Tax) of such firm, payable within 30 days following the consummation of the applicable transaction. This fee would not be paid with respect to any direct or indirect acquisitions by the Company. (errors in original) 50 Ms Kodialam also deposed at [20] of her affidavit that: Paragraph 4 of the MWL [letter of intent], headed 'Additional Acquisitions', states that Focus will pay a 'finder's fee' to any MWL director who introduces another financial advisory firm to Focus and which Focus subsequently acquires on similar terms to those terms set out in the MWL [letter of intent]. That finder's fee would not be paid with respect to any direct or indirect acquisitions by MWL. 51 There was no dispute on the evidence that the opportunity to acquire Financial Professionals was brought to the attention of Focus USA by Mr White at a board meeting of MWL but, significantly, there was no suggestion in the evidence that Focus USA has, or will pay, a finder's fee to MWL regarding Financial Professionals. This fact lends further evidentiary support for the agreement as pleaded. Nor is the pleaded agreement contradicted or gainsaid by the subsequent attempts to negotiate a suitable management agreement structure. 52 There is, in my view, a triable issue in respect of whether Focus USA acquired Financial Professionals on the basis pleaded, as distinct from acquiring it for its sole benefit. For the reasons given, none of the arguments advanced by Focus MWL persuaded me that I should not reach that conclusion. 53 Having accepted that there is a serious question to be tried that Focus USA acquired Financial Professionals on the basis pleaded, as distinct from acquiring it for its sole benefit, I also accept that there is a serious question to be tried as to whether Focus USA stands in a fiduciary relationship with MWL as alleged. Paragraphs [43]-[46] of the proposed statement of claim pleads as follows: Fiduciary duties of Focus USA 43. By reason of: (a) the joint venture between Focus USA and MWL constituted by the Original Structure; (b) Focus USA's desire to renegotiate the Original Structure; (c) the uncertain form of the Revised Structure; (d) the Agreement; (e) Focus USA's knowledge of: (i) the Opportunity; and (ii) Financial Professionals' exclusivity undertaking to MWL; (f) the vulnerability of MWL to the actions of Focus USA because of: (i) Focus USA's knowledge of the Opportunity through Kodialam and Bennard's directorship of MWL; (ii) Bennard's simultaneous directorship of MWL and Financial Professionals; and (iii) the substantial powers and discretions reposed in Focus USA intrinsic to the Proposed Management Agreement, which Focus USA would not be entitled to exercise for its own sole benefit; in all the circumstances, Focus USA: (g) was a person who undertook or agreed to act for or on behalf of or in the interests of MWL in the exercise of a power or discretion which affects the interests of MWL in a legal or practical sense; or (h) stood in a relationship of mutual trust and confidence with MWL. PARTICULARS The matters set out in paragraphs 6 to 39 above. 44. In the premises, Focus USA stands in a fiduciary relationship with MWL. 45. By reason of the matters set out in paragraphs 43 and 44 above, Focus USA owed a fiduciary duty to MWL: (a) to exercise its powers and discharge its duties: (i) in good faith; (ii) for a proper purposes; and (iii) in the joint interests of Focus USA and MWL; (b) not to place itself in a position where its interests conflicted with the interests of MWL and, if a conflict did arise, not to prefer its own interests to those of MWL; and (c) not to make a profit out of its position without the informed consent of MWL. PARTICULARS The duties arise as a matter of law. Breach of fiduciary duty by Focus USA 46. By: (a) failing to cause the Opportunity to be taken up solely for the benefit of MWL; (b) causing Focus Australia to make the Investment; (c) failing to account, alternatively failing to cause Focus Australia to account, to MWL for the Investment; and (d) permitting Bennard to accept the Appointment, Focus USA breached its fiduciary duties to MWL, in that it: (e) failed to act in the interests of MWL: Particulars Focus USA acted in its own interests, alternatively in the interests of Focus Australia, and/or Financial Professionals. (f) placed itself in a positon where its interests conflicted with the interest of MWL; Particulars The conflict was between its private financial interest, and the interests of MWL; between its interest as ultimate holding company of Focus Australia, and the interests of MWL; alternatively, between its interest as ultimate holding company of Financial Professionals, and the interests of MWL. (g) preferred its own interests to those of MWL; (h) profited, or allowed another to profit, from its fiduciary position without the informed consent of MWL; Particulars As ultimate holding company of Focus Australia, Focus USA profited from the making by Focus Australia of the Investment; Focus Australia profited from making the Investment; alternatively, Financial Professionals from the making of the Investment. (errors in original) 54 MWL relies on the principles in United Dominions for the proposition that the relationship between Focus USA and MWL was fiduciary pending the finalisation of the arrangements between the parties. In United Dominions, Mason, Brennan and Deane JJ held at [12] that: A fiduciary relationship can arise and fiduciary duties can exist between parties who have not reached, and who may never reach, agreement upon the consensual terms which are to govern the arrangement between them… in such circumstances, the mutual confidence and trust which underlie most consensual fiduciary relationships are likely to be more readily apparent than in the case where mutual rights and obligations have been expressly defined in some formal agreement. As I have found that there is a serious question to be tried on the factual matters underpinning the alleged agreement, I accept that it is arguable that the principle in United Dominions is applicable and there is a legal argument that Focus USA owed fiduciary duties to MWL pending the finalisation of the arrangements and whether there has been a breach of fiduciary duty by Focus USA as pleaded. Senior counsel for Focus MWL did not contend that the claim of breach of fiduciary duties by Focus USA was not a claim recognisable in law but submitted that in this case there was no prospect of fiduciary obligations arising out of the parties' relationship in circumstances where there was no dispute that the letter of intent permitted Focus USA to pursue and make acquisitions independently of MWL. As I have already found that there is a serious question to be tried on that issue, it is a matter for trial as to whether MWL will ultimately establish the existence and breach of the fiduciary relationship. 55 The relief sought by MWL in the proposed proceedings includes a declaration that Focus Australia holds the shares in Financial Professionals and any part of the traceable proceeds thereof on constructive trust for MWL. If MWL is successful in establishing the existence and breach of fiduciary duties, there is a serious question to be tried as to whether such declaratory relief is available: see Pallant, discussed in J D Heydon, M Leeming and P G Turner, Meagher, Gummow and Lehane's Equity Doctrines and Remedies (5th ed, 2015) at [12-055]; Baumgartner (or at the least whether Focus Australia can now in good conscience retain the shares in Financial Professionals for Focus' sole benefit, upon the supervening failure of the substratum of the relationship). 56 In the circumstances I am also satisfied that there is a serious question to be tried on whether, as directors of MWL, Ms Kodialam and Ms Bennard breached their statutory and fiduciary duties owed to MWL. Likewise, there is a serious question to be tried on the claims of accessorial liability of Focus USA, Ms Kodialam and Ms Bennard.

White (Trustee) v MWL Financial Group Pty Ltd, in the matter of MWL Financial Group Pty Ltd

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Judgment (14 paragraphs)

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Legislation Cited (1)

Cases Cited (10)

Cited By (3)