Wood v Links Golf Tasmania Pty Ltd

REASONS FOR JUDGMENT 1 On 19 March 2010, leave was granted to Mr Wood and Mr Hetrel, former officers of Links Golf Tasmania Pty Ltd (LGT), to commence an action in the name of the company against Mr Sattler, a director of LGT, and his company, RG Sattler Nominees Pty Ltd. LGT operates a links golf course in Tasmania. It intended to establish other golf courses. In the action, LGT contends that in breach of his duties, Mr Sattler misappropriated an opportunity to establish a new golf course on land adjoining LGT's existing course by procuring his company to take up the opportunity. The usual relief is sought. 2 Leave to commence the action was required because Part 2F.1A of the Corporations Act 2001 (Cth) abolished the exceptions to the rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189. The exception allowed a member of a company to bring an action (1) to redress a wrong done to the company only when the majority had appropriated for themselves property or advantages which belonged to the company; (2) when the company acted ultra vires; (3) where the act complained of required a special or extraordinary resolution; or (4) where the personal rights of the plaintiff had been infringed. In its place, Part 2F.1A establishes a regime by which certain persons, not limited to shareholders, may apply for leave to bring an action on behalf of the company: s 237. Standing is accorded to a wider class than under the common law. Any person who is a member or former member of the company or a related company or who is an officer or former officer of the company may obtain leave: s 234. 3 Five conditions must be satisfied to obtain leave. They are: (1) the company will probably not bring the action; (2) the applicant is acting in good faith; (3) it is in the best interests of the company that leave be granted; (4) there is a serious question to be tried; and (5) notice of the application has been given to the company: s 237(2). 4 It is clear that leave to bring a so-called derivative action requires a substantial showing: Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313, 318. This follows from the evident purpose of the criteria, which are aimed at "preventing potentially vexatious or unmeritorious actions that would be detrimental to the company on whose behalf the action was taken": Explanatory Memorandum to the Corporate Law Economic Reform Program Bill (1998) p 21 at [6.32], the passage which introduced Part 2F.1A. 5 I can now explain what this application concerns. When leave to bring the action was obtained, Mr Wood and Mr Hetrel also sought an order under s 242 that LGT cover the costs of the action. Section 242 permits the court to make any order it considers appropriate about the costs of proceedings brought with leave under s 237. This power is not entirely new. Prior to the enactment of Part 2F.1A, a minority shareholder action could be commenced by a shareholder on behalf of his/her company. In such an action, the court could order the company to cover the shareholder's costs: Wallersteiner v Moir (No 2) [1975] QB 373. Indeed, under the old law, the position in Victoria was that if the shareholder's action "is bona fide to protect the [company] and the [company] will receive the benefit of success, there is no good reason why the expenses should be met out of the private resources of [the] shareholders": Farrow v Registrar of Building Societies [1991] 2 VR 589, 595 per Marks J. 6 The application for the costs order is not opposed by LGT. To the contrary, it consents to the order. But the order is opposed by Mr Sattler who holds 57% of LGT's issued capital. It is also opposed by another shareholder. In substance, the case against a costs order being made, despite the consent of LGT, is based on the following propositions: (1) more should be known about the merits of the action than is currently known; (2) an independent board of LGT had initially made a decision not to bring the claim against Sattler and his company; (3) if the action fails, LGT will suffer an adverse costs order; (4) if the action succeeds, Sattler or his company will pay the costs; (5) the costs may be run up unnecessarily; (6) LGT has limited resources; (7) Messrs Wood and Hetrel are not impecunious and could themselves fund the action; (8) the action is really about a dispute between, on the one hand, Messrs Wood and Hetrel and, on the other, Sattler and LGT and the action is but a vehicle to resolve that dispute. 7 What is the current practice in relation to making a costs order? The practice was described by Barrett J in Sub Rosa Holdings Pty Ltd v Salsa Sudada Production Pty Ltd [2006] NSWSC 916 at [49] as follows: "It is common place for a person given permission to pursue a claim on behalf of a company to be required, in the first instance, to bear the burden of costs." (citations omitted). Earlier, in Roach v Winnote Pty Ltd (2006) 57 ACSR 138 Barrett J, after considering several Australian cases (but not Farrow v Registrar of Building Societies), said (at [29]): It is thus clear that courts are concerned in some cases to ensure that the person granted leave under s 237 should bear, either wholly or in part, the burden of the company's costs in relation to the proceedings which that person is to represent the company. Measures of that kind are intended to protect the company's financial resources and are merely part of the domestic arrangements within the company as to the basis on which the person concerned will be permitted to act for it. 8 To be quite frank, it is by no means clear why this general approach, if this is the general approach, has been adopted. First of all, the discretion conferred by s 242 is unconfined. Second, the Explanatory Memorandum states (p 26 at [6.19]): "The Court's discretion regarding the allocation of costs is aimed at providing an additional safeguard in respect of use of company funds. In particular, the Court would be able to protect a bona fide shareholder against liability for costs indemnifying them out of company funds while at the same time allowing the Court a further means of discouraging unmeritorious or doubtful action." It might therefore be true, as K L Fletcher writes, that s 242 is "deliberately drafted in a manner that denies the successful applicant the assurance that court recognition will result in the company becoming liable for the reasonable costs of litigating on its behalf": K L Fletcher, CLERP and Minority Shareholder Rights (2001) 13 AJCL 290, 299. But Parliament seems to have had in mind that in appropriate circumstances the company should meet the costs. The only question is: what are those circumstances? 9 The purpose of permitting a person to bring an action in the name of the company is to prevent conduct which involves some element of harm. In most cases the wrongdoer will be in control of the company. That will be the reason the company itself is not bringing the action. The purpose of the exceptions outlined in Foss v Harbottle, as well as the purpose of Part 2F.1A, is to increase the likelihood that someone brings a claim which the company ought to have commenced. In those circumstances, I can think of no good reason why the company should not bear the costs. Put another way, the principle adopted by Marks J should continue to apply under the statute. 10 This is not to suggest that a costs order will be made in all cases. For example, in Fiduciary Limited v Morningstar Research Pty Ltd (2005) 53 ACSR 732, Austin J refused to make a costs order where the company's claim was but one aspect of a much wider dispute between the parties. 11 If a costs order is made and at any later time it turns out the claim is unmeritorious, the costs order can be recalled. That is what happened in Farrow v Registrar of Building Societies. At the time the costs order was made, the plaintiff appeared to have a good claim, although, as Marks J said, he was not able to fully assess the strength of the claim. During the trial, however, things took a turn for the worse. Ultimately the plaintiff was forced to discontinue the suit. As a result, the judge was asked to, and he did, revoke the costs order. 12 I propose to make an order that LGT meet the fair and reasonable costs of running the action. Prima facie, the claim seems to be one which is, from LGT's perspective, worthwhile pursuing. If successful, it will be of considerable benefit to the company and its members. I am not persuaded by the contention that the costs will be unreasonably run up. If there is an attempt to inflate the costs, that can be controlled by the court. Nor am I persuaded by the suggestion that LGT is short of funds. In the 2009 financial year, LGT derived income totalling a shade under $5 million, which provided an operating profit of $1.071 million. While its cash reserves are approximately $210,000, this is the result of paying off shareholder loans, including loans from Mr Sattler. None of the other points raised in opposition are of sufficient substance to require separate discussion. I certify that the preceding twelve (12) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.