Wu v Li [2018] ACTSC 224

CORPORATIONS - members rights and remedies - application in the Court's inherent jurisdiction for leave to commence a derivative action - where company in liquidation - where liquidator supports application - where proposed actions potentially barred by limitation statute - whether application made in good faith - where collateral purpose not improper - where company indemnified by applicant - application granted

Corporations Act 2001 (Cth) s 237

Limitation Act 1985 (ACT) ss 11, 33

BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783; [1982] 1 All ER 925

Cadima Express v Deputy Commission of Taxation [1999] NSWSC 1143

Carpenter v Pioneer Park Pty Ltd [2008] NSWSC 551

Central City Pty Ltd v Montevento Holdings Pty Ltd [2011] WASCA 5

Chahwan v Euphoric Pty Ltd t/as Clay & Michael [2008] NSWCA 52

Clark v Esanda Ltd [1984] 3 NSWLR 1

Flower & Hart (a firm) v White Industries (Qld) Pty Ltd [1999] FCA 773; 87 FCR 134

Hall v Poolman [2009] NSWCA 64; 75 NSWLR 99

Harpur v Ariadne Australia Ltd (No 2) [1984] 2 QD R 523

Hu v PS Securities Pty Ltd t/as Trustee of Joseph Family Trust [2011] NSWSC 303

In the matter of Dungowan Pty Ltd (in liq) [2014] NSWSC 1721

Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859

Maples v Hughes [2002] NSWSC 617

Pavey & Matthews Pty Ltd v Paul [1987] HCA 5; (1987) 162 CLR 221

Re Cardinal Group Pty Ltd (in liq) [2015] NSWSC 1761

Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 64

Re DH International Pty Ltd (in liq) (sub nom Challis v Hoffman) [2017] NSWSC 870

Re Karinya Haulage Pty Limited [2017] NSWSC 888

Re Sundara Pty Ltd [2015] NSWSC 1694

Re Three Chimneys Pty Ltd (in liq) [2015] NSWSC 1754

Swansson v RA Pratt Properties Pty Ltd [220] NSWSC 583

Varawa v Howard Smith & Co Ltd [1911] HCA 46; (1911) 13 CLR 35

Victorian WorkCover Authority v Esso Australia Ltd [2001] HCA 53; 207 CLR 520

Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509

Young v Queensland Trustees Ltd [1956] HCA 51; (1959) 99 CLR 560

1. The plaintiff in these proceedings, Mr Tao Wu, is a former director of Golden Constructions Pty Ltd ACN 130 970 106 (in liq) (the Company), in which he holds a 35 per cent share. He seeks leave in the exercise of the Court's inherent jurisdiction to bring derivative actions on behalf of the Company. The first defendant, Mr Yuxin Li, and the second defendant, Ms Hong Chen (his wife), hold the remaining interest in the Company, in shares of 30 and 35 per cent respectively.

2. There is an additional connection between the Company and the defendants. In or around August 2008, the Company and the defendants entered into a building contract, pursuant to which the Company was to construct a residential dwelling on a property alleged to have been owned by the defendants in O'Malley (Building Contract).

3. The application seeking leave to bring derivative actions was filed on 14 November 2017. It is part of a larger dispute between the same parties, by which the plaintiff personally makes a liquidated demand against the defendants for approximately $1.2 million under the Building Contract, and approximately $580,000 in respect of specified loan amounts made to the first defendant.

4. In the event that the claim for breach of contract fails, there is an alternative claim brought on a quantum meruit basis. Historically, where goods were supplied as opposed to services, such claim was on a quantum valebat (or valebant) basis, meaning 'as much as it was worth.' The sum claimed is approximately $2.8 million.

5. The plaintiff seeks to add the Company as a second plaintiff to the substantive proceedings to guard against the event that the Company is ultimately found to be the proper plaintiff in respect of the claims pleaded in contract or quantum meruit against both defendants, or the loans alleged to have been made to the first defendant.

6. In support of the application, the plaintiff relied on affidavit evidence sworn by him, by the liquidator of the Company (Mr Henry Kazar), and by the solicitor with carriage of the matter (Ms Hannah Griffiths). The defendants relied on the affidavit evidence of their solicitor, Mr Stephen Gavagna. No deponent was required for cross-examination.

7. There was no issue as to the standing of the plaintiff, as a shareholder, to make an application of this type. It is well established that creditors and members of a company have standing to seek leave to bring a derivative action in the name of a company in liquidation: Chahwan v Euphoric Pty Ltd t/as Clay & Michael [2008] NSWCA 52; (Chahwan v Euphoric) at [124], cited in the judgment of Re DH International Pty Ltd (in liq) (sub nom Challis v Hoffman) [2017] NSWSC 870 (Challis v Hoffman) at [5] per Gleeson JA.

8. The parties were also agreed as to the applicable principles in such an application. They were summarised by Barrett J in Carpenter v Pioneer Park Pty Ltd [2008] NSWSC 551; 71 NSWLR 577 (Carpenter) at [34], stating that the Court will have regard to "three main matters":

(1) Whether the proceedings proposed to be pursued have some solid foundation, in that they exhibit such a degree of merit as to be neither vexatious nor oppressive and to present reasonable prospects of success (Issue 1).

(2) The liquidator's attitude to the question whether the proceedings should be pursued (Issue 2).

(3) Whether practical considerations support the initiation of the proceedings, with particular reference to financial protection of the liquidator and the estate of the company by means of indemnity and, if indicated, security (Issue 3).

9. Those principles were adopted by Ward J (as her Honour then was) in Hu v PS Securities Pty Ltd t/as Trustee of Joseph Family Trust [2011] NSWSC 303 at [38] and by Black J in cases such as Re Sundara Pty Ltd [2015] NSWSC 1694 (Re Sundara) at [10]; and In the matter of Dungowan Pty Ltd (in liq) [2014] NSWSC 1721 (Dungowan) at [25] (citing an earlier decision of his Honour to the same effect).

10. These matters are not exhaustive, as the Court is here called upon to exercise a general equitable jurisdiction, rather than the jurisdiction under s 237 of the Corporations Act 2001 (Cth) (Act). The Court thus retains a general exercise of discretion, having regard to all the circumstances of the case: Challis v Hoffman at [28]-[29]; Dungowan at [26] per Black J.

11. The parties framed their submissions in terms of the three main matters above, although as will be seen, some of the arguments made in relation to each overlap.

Issue 1 - Whether there is a solid foundation for the proceedings proposed

12. The plaintiff must provide the Court with sufficient material to enable it to determine that there is a serious question to be tried: see Re Karinya Haulage Pty Limited [2017] NSWSC 888 at [12] per Brereton J and the authority there-cited.

13. The requirement that each claim have a 'solid foundation' involves, as a practical matter, that there are reasonable prospects of success and some tangible benefit is genuinely in prospect: Carpenter at [30]; cited in Re Sundara at [10].

The prospects of the claims - whether there is a serious question to be tried

14. The claim as articulated turns primarily on the Building Contract, a copy of which was in evidence. It includes on the front page the Company as the builder and the defendants as the contracting parties, although only the second defendant appears to have signed each page. Further, some of the appendices to the Building Contract were incomplete and not signed by anyone. The Company was contracted to build a residential dwelling at the site in O'Malley for $1.8 million inclusive of GST. The Building Contract names Mr Li as the owner of the site.

15. As outlined above, the first proposed claim in the proceedings is that the Company performed work in constructing the dwelling in which the defendants now live, for which it remains substantially unpaid, and for which it is entitled to be paid, either in contract or on what was described as a quantum meruit basis. Further, the Company made loans to the first defendant, which also remain unpaid.

16. The plaintiff contends the joinder of the Company to the existing proceedings being pursued by him is necessary as there is now a question about the operation of a non-assignment clause in the Building Contract, namely clause 18. The terms of clause 18 prohibit the assignment of "rights or obligations under the [Building Contract] without the written consent of the other [party]."

17. The plaintiff has been proceeding on the basis that he held a valid assignment of the Company's rights to sue for recovery of the unpaid amount, which was entered into by the liquidator pursuant to a Deed of Assignment dated 13 August 2014 (Deed of Assignment), a copy of which was also in evidence.

18. By the Deed of Assignment, the liquidator purported to assign all claims, rights, actions, suits and demands the Company may have against the defendants whether at law, in equity or under statute which arise to any extent out of or in consequence of any act or omission by the defendants in relation to the Company or the Company's construction of the dwelling in O'Malley.

19. The defendants contend that they did not give written consent to such assignment. In the event that the Deed of Assignment is ineffective, the legal claim to pursue the debts said to be owed lies with the Company (although an equitable assignment may arise), and thus, the Company may be the proper plaintiff to pursue recovery.

20. The evidence establishes that this is a claim that is arguable and has reasonable merit on the basis of the documentary evidence before the Court.

21. The defendants raise a number of issues, which I will deal with in turn. None of them are sufficient to persuade me that there is no serious issue to be tried.

The limitation periods for each of the claims may have expired

22. The defendants submit that each of the three causes of action proposed to be pursued are statute barred. In each case, s 11(1) of the Limitation Act 1985 (ACT) (Limitation Act) provides for a limitation period of six years.

23. As to the first claim is for breach of contract, the defendants say that more than six years have expired since the action first accrued, basing this argument on an assumption that the pleaded cause of action for breach of contract first accrued in June 2011.

24. However, it is by no means clear that any breach of contract accrued at the time assumed by the defendants. In any event, there is evidence before the Court that the defendants denied they had entered into the Building Contract from at least October 2012, through communications of their legal representatives.

25. On 17 March 2016, there appears to have been a change of position, when a defence in the existing proceedings was filed. The defendants now admit that they entered into the Building Contract, but deny that they owned the O'Malley property and plead, among other things, that the liquidator's assignment of rights was prohibited by a clause in the Building Contract (clause 18).

26. The plaintiff contends that the defendants' conduct amounted to a concealment, such that s 33 of the Limitation Act operates to postpone the time from running. This is disputed by the defendants, who submit that 'concealment' does not mean merely communicating a position. They submit it means a conscious or deliberate keeping back of material facts, relying on Clark v Esanda Ltd [1984] 3 NSWLR 1 at 5, a case involving different legislation.

27. The defendants urged the Court to take a course which would determine the limitation point, including whether the facts amounted to 'concealment', so as to find that there was no available cause of action for breach of contract.

28. While I accept that courts should not be too reluctant to consider limitation defences at an early stage, the factual issues such as whether the conduct of the defendants amounted to concealment, or even the date upon which any breach of the Building Contract crystallised the cause of action, mean that this is an inappropriate case in which to take that approach.

29. Whether there is a serious issue to be tried may include a genuine dispute about the expiry of any limitation period. In light of the above, I have concluded that the claim in contract to be pursued against the defendants has reasonable prospects and will deal with the prospect of a 'tangible benefit' separately below.

30. The second claim is pleaded as being based on quantum meruit. The defendants contend that this cause of action accrued at the time the goods are sold and delivered or the services are rendered. They point to the evidence tendered which suggests that the goods and services were either supplied or rendered over the period ending, at the latest, on 3 August 2011, meaning the six year limitation period has already expired.

31. There may be some force to that submission, given that in Victorian WorkCover Authority v Esso Australia Ltd [2001] HCA 53; 207 CLR 520 at [36]- [37], the High Court referred to the fact that a claim in the nature of quantum meruit arises when the services are rendered, though the quantification of the recoverable sum may not be known until the court gives judgment, citing BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783 at 835; [1982] 1 All ER 925 at 966-967.

32. However, Pavey & Matthews Pty Ltd v Paul [1987] HCA 5; (1987) 162 CLR 221 (at 227 per Mason and Wilson JJ, 251-256 per Deane J), confirms that those forms of action have been superseded, and (putting aside any statutory references which continue to use the terminology of quantum merit) the right to recover for such a claim now depends on a claim to restitution based on unjust enrichment, with failure to pay for the supply of goods and services being one of the recognised categories where a person might be said to have been unjustly enriched. Perhaps consistent with that recognition, or perhaps unrelated to it, rule 408 of the Court Procedure Rules 2006 (ACT) (Rules) permits claims for goods sold and delivered, work done and money lent to be pleaded in short form.

33. The availability of such a cause of action may be affected by the Court's findings as to the Building Contract. If the claim is properly based in restitution, it will only arise in circumstances where recovery pursuant to the Building Contract is unavailable. It may be premature to refuse to grant leave to pursue an alternative claim based on a limitation period having expired in circumstances where the facts concerning the alleged breach of contract claim were yet to be determined. Such facts may impact, for example, upon the 'unjust' nature of the enrichment.

34. Adding to the lack of certainty is the evidence relied upon by the defendants to raise the limitation point as a threshold issue. The document relied upon is the equivalent of a statement of account. It contains a series of columns recording dates, amounts paid, the recipients of the payment and a description of the nature of the expense for which the payments were made. However, the point at which 'unjustness' may arise, such as to complete a cause of action, with time commencing to run under a statute of limitation, is not necessarily the date recorded on a statement. The entirety of the facts that would create the level of certainty to make a conclusive finding that a claim was barred by statute are not before the Court.

35. This is not to encourage detailed affidavit evidence on an application such as this. The Court is addressing merit at a threshold level. It does not delve into the detail of the evidence and draw inferences to make findings in a factual matrix that crosses a number of causes of action, which may then have legal consequences regarding whether or not a limitation period for a certain claim has expired.

36. Rather, the position is that the facts of this case as presently pleaded do not lend themselves to a conclusive finding that the claim is barred by statute. The existence of a potential argument about the limitation period does not dissuade me from finding that the claim presently described as being in quantum meruit has reasonable prospects of success.

37. The same may be said for the third claim, being a liquidated claim for recovery of 'loan funds' (defined in the statement of claim). The defendants contend that the cause of action for recovery arises from the date the loan was advanced, relying on Young v Queensland Trustees Ltd [1956] HCA 51; (1959) 99 CLR 560 at 566. The well-established principle is that at common law, a loan made where no time for repayment is specified, or where the loan is stated to be payable 'on demand', creates an immediate debt by which the money is repayable immediately, without the creditor first making a demand for payment: see Central City Pty Ltd v Montevento Holdings Pty Ltd [2011] WASCA 5, where the authorities are helpfully collected at [36].

38. Relying on a schedule in evidence of the amounts asserted to comprise the loan funds, the defendants submit that the last entry on which the loan funds were made was 30 June 2011, and accordingly, the limitation period of six years has long expired.

39. In the alternative, the defendants submit that even if the cause of action arose upon a demand being made by the Company, such demand was made on 20 March 2012, through correspondence of the liquidator's legal representatives, and this is still more than six years ago.

40. I have some doubt about the necessity to join the Company to the proceedings for the purpose of pursuing the separate claim based on 'loan funds'. Whatever the merit of the argument that clause 18 of the Building Contract operates to prohibit the assignment of rights or obligations under that contract, it is irrelevant to the claim based on a loan to the first defendant, because that claim does not arise under the Building Contract.

41. Indeed, the defendants in oral submissions accepted there was no barrier to the assignment of the loan and submitted that on that basis, the claim by the Company does not have a solid foundation because the proper plaintiff is Mr Wu. However, the current defence pleads otherwise. It denies that the Deed of Assignment had any effect to assign any cause of action to the plaintiff. I have therefore proceeded to consider the issue.

42. There are no particulars in the proposed pleading as to the nature of the loan. On the proposed pleading, it is unknown whether the loan was evidenced in writing or what its terms were, and it is difficult to conclusively find a date when a cause of action to recover loaned monies arose. That may be a product of a short form of pleading permitted by the Rules, however, it does create a difficulty. If the facts in the pleading at their highest are accepted, any finding that the limitation period has conclusively expired would be based on assumptions of fact made by the Court that have not been pleaded.

43. A separate difficulty is that the defendants do not accept that there was any loan from the Company to the defendants. Instead, they seek to characterise the 'loan funds' as repayments made by a different company, Golden Enterprise Investment Pty Ltd (GEI). The first defendant pleads that he loaned more than $7 million to GEI for the purposes of constructing his home on the O'Malley site and that the 'loan funds' were partial repayments of that sum to him.

44. This suggests that the defendants accept monies were paid to them for various expenses and that the issue is really whether the monies were a separate loan made by the Company or repayments of a previous loan made by the first defendant to a different company. One of the parties must be mistaken as to how the transactions were to be characterised and the resolution of that question will depend on evidence.

45. I do not see how the Court could conclusively find on this application that the limitation period had expired in respect of 'loan funds' made to the first defendant, in circumstances where there is a clear dispute that there was any loan made by the Company in the first place. That in itself raises a serious question to be tried.

46. All of this persuades me that the facts underlying this dispute are not clear cut so as to permit a summary determination of any question of limitation. Thus, this claim also has arguable merit on the present evidence before the Court.

47. The defendants contend that there is no genuine prospect of a tangible benefit to the Company. They argue the potential monetary benefit (if the proposed claims are ultimately successful) is small, there is uncertainty as to if, and when, any such benefit might be paid, and there is the prospect of failure, with the associated cost exposure.

48. The liquidator has undertaken the cost / benefit analysis and is satisfied that pursuing the litigation will benefit to the Company (discussed in relation to Issue 2 below). The plaintiff is prepared to put himself in a position somewhat similar to that of a litigation funder, except that he is also a person interested in having the same rights vindicated. Nevertheless, as a result of his funding the litigation, the Company has the prospect of recovering more than $200,000. While that is a small percentage of the potential overall sum, it is nevertheless a reasonable sum properly characterised as a tangible benefit to warrant pursuing legal proceedings. I note that a sum of $214,000 was recently described as significant in recovery proceedings, even if spread among a large number of creditors: Re Cardinal Group Pty Ltd (in liq) [2015] NSWSC 1761 at [34].

49. The arguments as to costs exposure overlap with the submissions put in respect of arguments directed to practical considerations, and are discussed below.

The allegation that the application is not made in good faith

50. The defendants contend that the derivate action is being brought for a collateral purpose and therefore is not made in good faith. They submit that the applicant is in reality seeking to vindicate personal interests, rather than the action being in the best interests of the Company.

51. They have raised it as an argument relevant to whether the claims have solid foundation. I have treated the raising of a lack of good faith as being relevant to the Court's inherent jurisdiction in two ways: the first as an argument that the asserted lack of good faith is such as to amount to an abuse of process, so that the Court would not be satisfied the claims have 'solid foundation'; and the second as an argument that, even if the lack of good faith did not amount to an abuse of process, in the Court's overall discretion, the Court would not permit the derivative action to proceed.

52. Such an approach is similar to the observation of Tobias JA in Chawan at [81] that lack of good faith under s 237 of the Act extends beyond conduct that would constitute an abuse of process.

53. Shortly stated, the plaintiff has been found to owe the first defendant a debt through separate proceedings in the Federal Court of Australia. A bankruptcy notice was issued and a sequestration order followed in the Federal Circuit Court. However, that sequestration order was later set aside by the Federal Court, because it was made more than 12 months after the creditor's petition had been issued (the creditor's petition had expired while judgment was reserved).

54. The defendants submit that the true reason the plaintiff is seeking to pursue derivative proceedings on behalf of the Company in this Court is to seek to create a basis (or some other reason) for defending any fresh bankruptcy notice and creditor's petition issued by the first defendant, and any subsequent application for a sequestration order.

55. Attention thus turns to the deal the plaintiff has made with the liquidator through the Deed of Assignment. The plaintiff must pay to the liquidator five per cent of any net proceeds recovered through the derivative actions he seeks leave to pursue. The term "net proceeds" is defined in the Deed of Assignment to mean the gross proceeds paid by the defendants to the plaintiff as a consequence of the investigation, prosecution or enforcement of any of the causes of action assigned (which include the proposed derivative actions), less the plaintiff's legal costs.

56. The defendants contend that such a small percentage of recovery for the Company demonstrates that the true purpose of these causes of action is to benefit the plaintiff directly and personally, rather than the Company.

57. The plaintiff accepts that he is indebted to the first defendant by reason of the outcome of separate proceedings. He maintains that this does not detract from genuinely seeking to pursue claims both on his own behalf and in the name of the Company. The plaintiff proposes to fund the proceedings and indemnify the liquidator.

58. The liquidator for the Company believes it is in the Company's interests, and specifically in the interests of creditors, for the Company to pursue the proposed claims. He has taken into account the potential legal costs for the Company, although if the Company is successful, such legal costs may of course be paid by the defendants. He considers that if successful, and taking account of the plaintiff's share pursuant to the Deed of Assignment, the benefit to the Company may still be approximately $150,000 plus interest. Over many years, the interest component will not be a small sum. Having read the various reports to creditors in evidence, the liquidator's view appears to be that some return to creditors, where the Company and the liquidator are indemnified on costs, would be better than no return at all.

59. The question of good faith has expressly arisen in the context of considerations under s 237 of the Act, where the statute requires the applicant to satisfy the Court that the applicant is acting in good faith: see Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583 at [36]- [43] per Palmer J.

60. On the statutory formulation, the authorities have identified two interrelated factors, although the issue of good faith is not confined to only those two factors. The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. The second is whether the derivative action is for such a collateral purpose as would amount to an abuse of process: Swansson at [35]-[36].

61. In Chahwan v Euphoric, Tobias JA (with whom Beazley and Bell JJA - as their Honours then were - agreed) held (at [124]-[125]) that s 237 of the Act does not apply to companies in liquidation. However, his Honour had earlier separately considered the principles relevant to good faith at [71]-[75] and [82], approving Palmer J's reasoning in Swansson.

62. Tobias JA stated at [83] that if an applicant is in reality seeking to further his or her own personal interests other than as a current or former shareholder of the company, rather than the interests of the company as a whole, then the applicant's onus to satisfy the court he or she is acting in good faith will not have been discharged.

63. This passage was relied upon by the defendants, but it is perhaps important to remember that it was made in the context of s 237 of the Act. The reference to the applicant's onus is a product of the statutory language of that section.

64. Further, what is in the 'best interests' of the company as a whole will be influenced by the status of the company. The best interests may reflect the interests of shareholders taken together in light of the corporate objects, or in the context of insolvency, the interests may reflect those of creditors: see Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 (Maher v Honeysett) at [44] per Brereton J and the cases there-cited, which was referred to by Tobias JA in Chahwan v Euphoric at [88].

65. The same caution must be applied to extracts of authority relied upon by the plaintiff. In particular, the plaintiff referred to the statement that it will be relatively easy to satisfy the requirement of good faith if an application is made by a shareholder who has more than a token shareholding and the derivative action seeks recovery of property so that the value of the applicant's shares would be increased: see Swansson at [38]; Re Sundara at [122] and the cases there-cited.

66. Once a company is in liquidation however, while shareholder value might still be a purpose relevant to the question of good faith, the mere fact that a substantial shareholder seeks to recover property for the Company may require more careful scrutiny than has been suggested in applications made under s 237 of the Act.

67. Personal interest may also be relevant to the question of good faith, but I do not consider that the mere fact an applicant holds a personal interest necessarily means that the derivative proceedings lack good faith, or even that the proceedings are against a company's interests. In Maher v Honeysett, in the context of discussing the 'best interests' of the company for the purposes of a proposed derivative action under s 237 of the Act (and noting that good faith receives separate statutory consideration), Brereton J stated at [45]:

...the existence in an applicant of a personal interest in the outcome of a proposed derivative action, or even of a personal animus against the company, or other members of it, cannot be significant, let alone decisive; they are usual concomitants of the types of disputes which lead to derivative actions, and few if any such actions would be brought but for personal interest on the part of the relevant applicant and in the absence of animus against the company or other shareholders.

Whether proceedings that achieve a collateral purpose are an abuse of process

68. The test for whether proceedings are being used for an improper purpose so as to amount to an abuse of process, focuses on whether the particular claims are genuinely intended to be determined. Proceedings will be an abuse of process if they are brought not to vindicate a legal right, but to effect some other purpose outside the ambit of the legal claim upon which the Court is asked to adjudicate: Varawa v Howard Smith & Co Ltd [1911] HCA 46; (1911) 13 CLR 35 at 91; Flower & Hart (a firm) v White Industries (Qld) Pty Ltd [1999] FCA 773; 87 FCR 134 at [64]; Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509 at 524.

69. The mere fact that a plaintiff might receive a personal benefit from pursuing derivative proceedings beyond the potential benefit received by the Company is insufficient to establish that the proceedings would amount to an abuse of process. A collateral purpose is not necessarily an improper purpose. In Williams v Spautz at 526, the High Court rejected the notion that there was an abuse of process simply because a litigant had a purpose in bringing the proceedings which was not within the scope of those proceedings, observing "the purpose of a litigant may be to bring the proceedings to a successful conclusion so as to take advantage of an entitlement or benefit which the law gives the litigant in that event." In such a case, there would be no abuse: see also Ariff v Ian Kim Send Fong [2007] NSWCA 183 (Ariff) at [14].

70. The court looks to the predominant purpose in bringing the proceedings. The onus of satisfying the court that there is an abuse lies on the party alleging it. The onus is "a heavy one": see Ariff at [16], Goldsmith v Sperrings Ltd [1977] 1 WLR 478 at 498; Williams v Spautz at 529.

71. The same principle as to onus applies to the discretionary considerations here, in that it lies on the defendants who allege the lack of good faith to satisfy the Court of that matter. In that regard, the Court's consideration differs from s 237 of the Corporations Act 2001, where the applicant must satisfy the Court of the matters set out in that section.

72. Here, the only shareholders in the Company are the parties in these proceedings. If the plaintiff is permitted to pursue the proposed causes of action, and is successful, there will undoubtedly be a personal benefit to him separate to the Company. However, assuming reasonableness, which is dealt with next, any such benefit would be a consequence of a lawful assignment of the causes of action by the liquidator. The personal interest of the plaintiff falls into the category of an entitlement which the law permits. The proceedings do not constitute an abuse of process.

73. Similarly, that the liquidator has seen fit to allow the plaintiff who funds the litigation to retain the majority of the fruits of that endeavour does not result in the proceedings being unreasonable so as to constitute a lack of good faith, provided the necessary approval of creditors has been obtained and that the arrangements in fact made are consistent with the liquidator's statutory and other duties: see Hall v Poolman [2009] NSWCA 64; 75 NSWLR 99 at [147]. The case was in a slightly different context, but the propriety of such arrangements was confirmed.

74. It is significant that as the price of the assignment, the plaintiff has signed a deed of indemnity, the effect of which is that the plaintiff indemnifies both the liquidator and the Company against any adverse legal costs orders in the derivative proceedings. This adds weight to the genuineness of the plaintiff's purpose in commencing the proceedings.

75. It also means that the current (poor) financial position of the Company in liquidation is unaffected by the proceedings and if the plaintiff is successful, may be improved. It may be that the improvement will not be sufficient to restore the Company to solvency (on the figures in the report to creditors), but it will nevertheless be tangible.

76. I accept that the plaintiff may attempt to rely on any benefit he obtains through funding derivative proceedings that are ultimately successful as a set-off or a counter argument in subsequent separate litigation with the defendants. Again, if that situation arises, it will be the legal consequence of a lawful pursuit, and the merit of any subsequent argument in a different jurisdiction will be a matter for that court. The facts here are very different from those in Chahwan v Euphoric, where there was no tangible benefit to the company in question at all. The applicant was there seeking to institute proceedings in the name of the company which, if successful, would only have benefited himself.

77. It is also significant to the genuineness of the plaintiff's motives that the claims are already being prosecuted by him. The purpose to be served in joining the Company to the existing proceedings is to take account of the possibility that the Court may construe clause 18 of the Building Contract in the defendants' favour.

78. Having taken account of all these matters, I am not satisfied that there is any lack of good faith in the plaintiff seeking leave to pursue the derivative actions. In particular, the possibility of a future argument by the plaintiff in hypothetical bankruptcy proceedings is insufficient to establish that the plaintiff lacks good faith in seeking to commence derivative proceedings in this Court, or, assuming issues 2 and 3 below are resolved in favour of the plaintiff, to warrant a refusal to grant leave in the overall exercise of the Court's discretion.

79. The attitude of the liquidator to the proposed proceedings involves consideration of the liquidator's inability or willingness to enforce a company's rights: see Challis v Hoffman at [27] and the authority there-cited_._

80. Here, the liquidator's evidence was that he supports the application. He has filed a number of reports to creditors with the Australian Securities and Investments Commission in which he confirms his view that the claims now sought to be brought on behalf of the Company have merit. The liquidator holds the view that the defendants were shadow directors, or de facto directors, of the Company.

81. To that end, the liquidator made the demand in the letter to the defendants' legal representatives of 20 March 2012, referred to at [39] above. The terms of the demand covered all three causes of action the plaintiff now proposes to pursue.

82. However, the liquidator deposes to an inability to fund the pursuit of such claims and that is why he has not commenced proceedings directly. As part of giving his consent to the proposed derivative actions, the liquidator has required a Deed of Indemnity to be signed by the plaintiff, the effect of which is not just to indemnify the liquidator, but to indemnify the Company from any adverse costs orders.

83. The defendants argued that the consent should be given little weight because the company has no assets to protect and the liquidator has no personal costs exposure. On the contrary, I do accord weight to the attitude of an independent liquidator in the context of ongoing disputes between the three parties. In Cadima Express v Deputy Commission of Taxation [1999] NSWSC 1143 (Cadima Express) at [80], Austin J observed that the court should normally give weight to the liquidator's decision.

84. The liquidator deposes to having obtained independent legal advice (that is, advice from solicitors unrelated to the plaintiff) on the Deed of Assignment and the indemnity, and in particular the adequacy of the indemnity and the basis upon which the figures have been calculated.

85. I accept that the liquidator's supportive attitude operates in favour of the grant of leave.

Issue 3 - Whether practical considerations support the initiation of the proceedings

86. In terms of satisfying the Court that practical considerations support the initiation of proceedings, these include whether an indemnity is offered in respect of the company in liquidation and the liquidator. The Court will wish to be satisfied that the assets of the company in liquidation are not put at risk by the proceedings and that the liquidator is not exposed to personal liability without proper protection. The Court may have regard to the risks which the litigation poses for the other party, given the plaintiff is a company in liquidation: Cadima Express at [49]; cited in Re Three Chimneys Pty Ltd (in liq) [2015] NSWSC 1754 (Three Chimneys) at [15].

87. As to the prospect of failure and associated costs exposure, the plaintiff's indemnification of the Company and the liquidator is a practical consideration that supports the initiation of the proceedings. The liquidator deposes to having been provided with $70,000 in a solicitor's trust account to support the indemnity. If he forms the view that further monies are required, he will make a demand for such sums as he considers appropriate, pursuant to the terms of the Deed of Assignment.

88. The defendants argue the indemnity is worthless, given the personal financial position of the plaintiff. However, the evidence establishes that the plaintiff's wife is assisting with the funding of the litigation and, given the arrangements made with the liquidator are satisfactory to him, in my view, the practical considerations have been met.

89. The defendants argued that the sum retained by the liquidator should be increased to provide adequate protection for the defendants' legal costs. I do not consider this to be appropriate on this application for four reasons. First, this is not a case where complex proceedings are about to commence against the defendants. The litigation between the three individuals has been on foot since 9 October 2015 without orders for security for costs being made. It has not been established that joining the Company will cause significant separate costs from those being incurred to address the same claims the plaintiff is arguing as an individual.

90. Second, an indemnity does not mean funding the entirety of the litigation in a lump sum. Provision for legal costs can occur in tranches. Noting the importance of an adequate indemnity in respect of the Company's exposure as to costs (Three Chimneys at [16]; Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 64 at [10]) the amount of $70,000 appears to me to be presently adequate given the limited nature of the amendments to include the Company as an alternative plaintiff. Implicit in that finding is a rejection of the defendants' evidence as to the potential further costs to be incurred in the proceedings, referable to the Company's claims, which I consider to have been vastly overstated, particularly if the defendants no longer contest that the plaintiff as individual is the proper plaintiff on the claim for 'loan funds'.

91. Third, I have had regard to the principle that where the co-plaintiffs are a mixture of individuals and corporations suing on the same claims, and the personal plaintiff is, in substance, the moving party who is likely to suffer an order for the whole of the costs if the proceedings fail, an order ought not be made against the corporation: Harpur v Ariadne Australia Ltd (No 2) [1984] 2 QD R 523; Maples v Hughes [2002] NSWSC 617 at [15].

92. Fourth, the exposure of the defendants can be protected by a different means. It can be expected that both the liquidator and the defendants will monitor the legal costs of the proceeding. To guard against the possibility that the plaintiff might fail to provide further security when reasonably requested by the liquidators, I will impose a condition of the grant of leave to bring a derivative action that the defendants have liberty to apply to revoke the grant of leave if the plaintiff fails to provide additional security to the Company upon request by the liquidator, acting reasonably. Such an approach was taken by Gleeson JA in Challis v Hoffman at [138]-[139].

93. For the above reasons, I am satisfied that the Court should grant leave to the plaintiff to commence derivative proceedings. However, it should be made clear that the defendants retain the right to raise any defences by way of pleading the operation of a statute of limitation.

94. Further, as the amended statement of claim that is filed by the plaintiff should take account of these reasons, I will allow 14 days for a pleading giving effect to these reasons to be filed, as the precise wording of the causes of action may change from the iteration of the proposed pleading attached to the plaintiff's affidavit.

1. Pursuant to the inherent jurisdiction of the Court, and subject to the conditions in order 2 below, leave is granted to the plaintiff to commence and continue a derivative proceeding in the name of Golden Constructions Pty Ltd ACN 130 970 106 (in liq) (Golden Constructions) against the defendants in relation to the facts and circumstances referred to in the draft amended originating claim annexed to the affidavit of Tao Wu sworn 24 August 2017.

2. The conditions of the grant of leave referred to in order 1 above are that:

a. Within 28 days of any request by the liquidator of the Company to provide further security for the plaintiff's obligation to indemnify the Company, the plaintiff shall provide such security as may be requested by the liquidator (acting reasonably) in such form as is acceptable to the liquidator, and in the event of default by the plaintiff in complying with this condition, the defendants shall have liberty to apply to revoke the grant of leave the subject of order 1; and

b. The defendants' right to raise the operation of a statute of limitation by way of defence to any claim pleaded by the Company is preserved.

3. Pursuant to r 220 of the Court Procedures Rules 2006 (ACT) (Rules), Golden Constructions is joined as the second plaintiff to proceedings SC 379 of 2015.

4. Pursuant to r 502 of the Rules, the plaintiff is directed to file an amended statement of claim giving effect to these reasons within 14 days.

5. The defendants are to pay the plaintiff's costs of the application, such costs not to be recoverable until the conclusion of the proceedings.

I certify that the preceding ninety-five [95] numbered paragraphs are a true copy of the Reasons for Judgment of her Honour Associate Justice McWilliam.