BETWEEN : YOULDEN ENTERPRISES PTY LTD (ACN 063 388 947)

HEALTH SOLUTIONS AUSTRALIA PTY LTD (ACN 063 345 077)

Practice and procedure - Application by third defendant for stay of proceedings pending hearing of criminal charge - Turns on own facts

Practice and procedure - Application to strike out statement of claim - Turns on own facts

Corporations Act 2001 (Cth), s 233

Hospitals and Health Services Act 1927, s 26B(4), s 26F

First Defendant : Mr M G Pendlebury (28 March 2003)

Second Defendant : Mr M G Pendlebury (28 March 2003)

Australian Growth Resources Corp Pty Ltd v Van Reesema & Ors (1986) 6 ACLC 529

Caesar v Sommer [1980] 2 NSWLR 929

Gaston v United Newspapers Ltd & Ors (1915) 32 TLR 143

General Steel Industries Inc v Commissioner for Railways & Ors (NSW) [1964] HCA 69; (1964) 112 CLR 125

Global Finance Group Pty Ltd (In Liq) (Supervisor Appointed) & Anor v Margaria & Ors [2001] WASC 50

Jenkins v Enterprise Gold Mines NOL & Anor (1992) 6 ACSR 539

John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A'asia) Pty Ltd & Ors (1991) 6 ACSR 63

Kimberley Downs Pty Ltd & Ors v Western Australia, unreported; SCt of WA; Library No 6414; 26 August 1986

Kizquari Pty Ltd v Prestoo Pty Ltd (1993) 10 ACSR 606

Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692

Norilya Minerals Pty Ltd v Ireland & Ors (1991) 5 WAR 411

Re Saltergate Insurance Co Ltd (In Liq) (1980) 4 ACLR 733

Reid v Bagot Well Pastoral Co Pty Ltd [1993] SASC 4323; (1993) 61 SASR 165

Ron Hodgson (Trading) Pty Ltd v Belevedere Motors (Hurstville) Pty Ltd [1971] 1 NSWLR 472

Speidel v Plato Films Ltd & Ors [1961] AC 1090

1 MASTER NEWNES: On 15 November 2002, the plaintiffs commenced proceedings by way of originating process against the defendants seeking relief under s 233 of the Corporations Act. The application was supported by an affidavit of Robert William Youlden sworn on 13 November 2002.

2 At an interlocutory hearing on 2 December 2002, it was ordered that a draft statement of claim annexed to Mr Youlden's affidavit stand as the statement of claim in the proceedings and orders were made for the filing of defences and any reply, and for discovery and inspection of documents. In effect, it was ordered that the matter proceed on pleadings rather than on affidavit in the usual way under O 81 G. The defendants' entitlement to apply to strike out the statement of claim was expressly preserved.

3 Subsequently, the first and second defendants applied to strike out a number of paragraphs of the statement of claim on various grounds. The third defendant made a similar application and also applied for an order that the proceedings be stayed, pending the determination of a criminal charge brought against him.

4 I will deal first with the application for a stay.

5 It is common ground that the first defendant ("HSWA") carries on the business of providing hospital services through its operation and management of the Peel Health Campus in Mandurah. It does so under an agreement with the State Government. That agreement, the Peel Health Campus Agreement, was entered into in June 1997. In order to carry out its obligations under the agreement, HSWA is obliged to be, and is, the holder of a licence to conduct a private hospital under the Hospitals and Health Services Act 1927.

6 The shareholders of HSWA are Youlden Enterprises as to 12.5 per cent of the issued ordinary shares, King Holdings Pty Ltd as to 15 per cent and the second defendant ("HSA") as to 72.5 per cent. The shareholders and directors of Youlden Enterprises are Robert and Pauline Youlden. The shareholders and directors of King Holdings are Ian and Keryl Gorton.

7 The structure of HSA is a little more complicated. Healthcare Investments Pty Ltd ("HCI") holds 51 per cent of the issued ordinary shares in HSA and Health Solutions International Pty Ltd ("HSI") holds 49 per cent. HSI in turn is a wholly-owned subsidiary of Provisions Suppliers Corporation Lte ("PSC"), a company based in Singapore. At all relevant times, PSC has been represented on the board of HSWA by two directors.

8 The shareholders of HCI were, between 1 July 1999 and about 23 February 2000, King Holdings and Fopar Nominees Pty Ltd (a company controlled by Mr Fogarty) as to 50 per cent each. From about 23 February 2000, Fopar Nominees Pty Ltd ("Fopar") acquired the shareholding of King Holdings Pty Ltd and has since held all of the issued capital in HCI.

9 The third defendant ("Mr Fogarty") is a director of HSWA and has been its executive chairman since about May 2000. He is also a director of HSA, HCI and is the sole shareholder and director of Fopar.

10 Both Mr Youlden and Mr Gorton were directors of HSWA from 1996 until, in the case of Mr Youlden, about 26 August 1999, and in the case of Mr Gorton, about 7 February 2001. In each case they were removed from the board by a resolution of the shareholders.

11 Mr Fogarty was appointed to the board on 2 August 1999 and replaced Mr Gorton as managing director on 23 May 2000.

12 On 4 July 2002 Mr Fogarty was charged with stealing $430,000, the property of HSWA, contrary to s 378(8) of the Criminal Code. The relevant part of the statement of material facts, which is attached to the summons, is as follows:

"The accused in this matter is currently the managing director of Health Solutions (WA) Pty Ltd and held this position at the time of the offence.

As a result of anomalies within the directorship of Health Solutions (WA) Pty Ltd a shareholder and director identified payments of funds from the accounts of Peel Health Campus to an entity without any association to any shareholders or other directors.

Detectives from Major Fraud Investigation received a complaint and through inquiries identified that the accused stole $430,000 from the account of Health Solutions (WA) Pty Ltd on 21 August 2000, which was processed and credited to the account of Corporate Financial Systems Pty Ltd (CFS) on 22 August 2000.

CFS is a company established on 9 August 2000 with an associate of the accused as the sole director and had no business dealings or services with Peel Health Campus.

The accounts for Peel Health Campus were endorsed to reflect this transfer as management fees for the period May through to July. The accountant at the time was instructed to effect this transfer at the sole instruction of the accused.

Payments totalling $75,000 were then withdrawn from CFS and forwarded for the benefit of the accused into a private company account of the accused. When the accused was challenged by co-directors as to the alleged theft of these moneys the accused arranged for the return of $75,000 to enable the repayment of the $430,000. On 28 August 2000 CFS transferred $430,000 back to the accounts of Health Solutions (WA) Pty Ltd."

13 Those proceedings are at a relatively early stage. No indictment has yet been presented and Mr Fogarty is yet to enter a plea to the charge. He has said in an affidavit in these proceedings that he will plead "not guilty" and the charge will be defended.

14 On 13 November 2000 the plaintiffs commenced these proceedings. In the statement of claim, they rely on a number of grounds which they say entitle them to relief under s 233 of the Corporations Act. There are, broadly speaking, 12 grounds relied upon. Only one of those is relevant to this application. It is as follows:

26. On 9 August 2000 Graeme Kenneth Matcham applied for Corporate Financial Systems Pty Ltd ('CFS') to be registered as a company under the Corporations Law of WA.

27. CFS was registered as a company under the Corporations Law of WA on August 2000 with Antony Solin as a sole shareholder and director.

28. On about 21 August 2000 Fogarty caused HSWA to pay, and HSA acquiesced or failed to prevent HSWA making, a payment of $430,000 to CFS ('the CFS Payment').

29. The CFS payment was caused to be made by Fogarty without the authority of HSWA.

30. CFS had no commercial relationship to HSWA and no consideration was provided by CFS for the CFS Payment and there was otherwise no reason for the CFS payment.

31. By reason of acting in the manner pleaded in par 28 to 30 hereof, Fogarty breached the duties pleaded in par 12(a) hereof in that Fogarty did not act honestly or bona fide in the interests of HSWA.

32. Youlden Enterprises and King Holdings have sought from Fogarty, HSA and HSWA by its board of directors an explanation for the CFS payment.

33. No explanation has been provided by Fogarty, HSA or HSWA by its board of directors to Youlden Enterprises or King Holdings for the CFS payment.

34. In or about July 2002 Fogarty was charged by the Director of Public Prosecutions with the offence of stealing in relation to the CFS payment.

...

39. In or about April to July 2000 Youlden Enterprises and Kings Holdings requested that measures be taken by Fogarty, HSA or HSWA by its board of directors and/or sought advice as to what measures have or were being taken by Fogarty, HSA or HSWA by its board of directors in relation to the Peel Health Campus Agreement, having regard to the CFS Payment and the investigations of the Western Australian Police.

40. No measures are being taken by Fogarty, HSA or HSWA by its board of directors in relation to the Peel Health Campus Agreement, having regard to the CFS Payment and the investigations of the Western Australian Police."

15 It is common ground that the transaction which forms the basis of the criminal charge is the same as that relied upon by the plaintiffs under this head of complaint.

16 In these proceedings, the plaintiffs have sought various heads of relief, including that (a) Mr Fogarty be removed from the board of directors of HSWA; (b) Mr Fogarty be removed from and discontinue all executive functions in relation to the affairs of HSWA; (c) that a nominated and Court approved representative of each of the plaintiffs be appointed to the board of directors of HSWA; (d) the board of directors advertise for and appoint a general manager to manage HSWA; and (e) other relief relating to dividends, dividend policy, shareholder loans and other matters.

17 In the alternative, the plaintiffs seek orders that the board of directors of HSWA be removed and the Court appoint a new board until further order, and further in the alternative, that HSA purchase the plaintiffs' shares in the first defendant at a price to be determined by a valuer appointed by the Court.

18 Mr Fogarty says that he will be unfairly prejudiced in his defence of the criminal charge if these proceedings are not stayed pending the resolution of that charge. The plaintiffs oppose any stay of these proceedings.

19 The relevant legal principles are not in dispute. It is accepted that they are as stated by Wootten J in McMahon v Gould (1982) 7 ACLR 202 at 206:

"(a) Prima facie a plaintiff is entitled to have his action tried in the ordinary course of the procedure and business of the Court (Rochfort v John Fairfax & Sons Ltd (19));

(b) It is a grave matter to interfere with this entitlement by a stay of proceedings which requires justification on proper grounds (supra);

(c) The burden is on the defendant in a similar action to show that it is just and convenient that the plaintiff's ordinary right should be interfered with (Jefferson v Bhetcha (905; 1113));

(d) Neither an accused (supra) nor the Crown (Rochfort v John Fairfax & Sons Ltd (at 21)) are entitled as of right to have a civil proceedings stayed because of a pending or possible criminal proceeding;

(e) The Court's task is one of the 'balancing of justice between the parties' (Jefferson Ltd v Bhetcha (at 904; 1113), taking account of all relevant factors (supra, at 905; 1113);

(f) Each case must be judged on its merits, and it would be wrong and undesirable to attempt to define in the abstract what are the relevant factors (supra, at 904; 1113);

(g) One factor to take into account where there are pending or possible criminal proceedings is what are sometimes referred to as the accused's 'right of silence', and the reasons why that right, under the law as it stands, is a right of a defendant in a criminal proceedings (supra) at 904, 1113). I return to this subject below.

(h) However, the so-called 'right of silence' does not extend to give such a defendant as a matter of right the same protection in contemporaneous civil proceedings. The plaintiff in the civil action is not debarred from pursuing action in accordance with the normal rules merely because to do so would, or might, result in the defendant, if he wished to defend the action, having to disclose, in resisting an application for summary judgment, in the pleading of his defence, or by way of discovery or otherwise, what his defence is likely to be in the criminal proceeding (supra, at 904-905; 1113);

(i) The Court should consider whether there is a real, and not merely notional, danger of injustice in the criminal proceedings (supra, at 904; 1113);

(j) In this regard factors which may be relevant include:

(i) the possibility of publicity that might reach and influence jurors in the civil proceedings (supra, at 905; 1113);

(ii) the proximity of the criminal hearing (supra, at 905; 1113);

(iii) the possibility of miscarriage of justice, eg by disclosure of a defence enabling the fabrication of evidence by prosecution witnesses, or interference with defence witnesses (supra, at 905; 1113);

(iv) the burden of the defendant of preparing for both sets of proceedings concurrently (BeeCee Group Ltd v Barton (1980) 4 ACLR 733 at 736);

(v) whether the defendant has already disclosed his defence to the allegations (Caeser v Sommer [1980] 2 NSWLR 929 at 932; Re Saltergate Insurance Co Ltd and the Companies Act (1980) 4 ACLR 733 at 736);

(vi) the conduct of the defendant, including his own prior invocation of civil process when it suited him (cf Saltergate Insurance Co Ltd (at 735-737));

(k) The effect on the plaintiff must also be considered and weighed against the effect on the defendant. In this connection I suggest below that it may be relevant to consider the nature of the defendant's obligation to the plaintiff;

(l) In an appropriate case the proceedings may be allowed to a certain stage, eg setting down for trial, and then stayed (BeeCee Group v Barton)."

20 It was acknowledged by both parties that those guidelines were not in any way intended to fetter the Court's discretion and that the discretion is unfettered.

21 Mr Fogarty has put forward a number of reasons why he says a stay should be ordered.

22 In the first place, he contends that his right to silence in the criminal proceedings would be severely eroded if he were required to disclose the factual basis of his defence in the course of these proceedings. Although these proceedings are to continue on pleadings, rather than by affidavit, it was contended that the consequences would be the same. Mr Fogarty says that unless these proceedings are stayed:

(1) there is a possibility that the police may be diverted to a fresh line of enquiry or identify potential witnesses to attempt to build and strengthen the case against him;

(2) the pre-trial processes of discovery and inspection may prejudice his position in the criminal proceedings;

(3) if the civil trial took place ahead of the criminal proceedings any prejudice to him would be exacerbated by the very considerable advantage the police would gain from having access to the examination and cross-examination of the witnesses, including the examination and cross-examination of him, in these proceedings.

23 Counsel for Mr Fogarty did not, however, identify any circumstances which, in the respects referred to in (1) and (3), distinguished this case from any other case where criminal and civil proceedings in relation to the same subject matter were running concurrently. Moreover, the matters referred to in (3) could only arise if it turned out that the trial of these proceedings took place before the criminal trial. It is simply too early to tell whether that will be the case.

24 Without more, at this stage the risk of prejudice to the criminal proceedings by reason of those factors is, in my view, at best hypothetical.

25 It is also clear that the mere fact that having to file a defence or give discovery in these proceedings might result in Mr Fogarty disclosing the nature of his defence in the criminal proceedings is not of itself a sufficient ground to stay these proceedings: Jefferson v Bhetcha [1979] 1 WLR 898 at 904 - 5.

26 Mr Fogarty, however, went further and contended that if, before the criminal trial took place, he were forced to disclose the factual basis of his defence, and to give discovery and inspection of documents, there was a possibility that witnesses would be interfered with or evidence fabricated in the criminal proceedings, leading to a miscarriage of justice.

27 It was submitted that that possibility arose because Mr Gorton and Mr Fogarty were the main protagonists in what was a protracted and complex commercial dispute involving a large amount of money and the future control of HSWA. It was also submitted that Mr Gorton was the instigator of the criminal charges and the principal prosecution witness, and that he had an interest in Mr Fogarty being convicted because it would enhance the plaintiffs' prospects of success in these proceedings.

28 Counsel for Mr Fogarty contended that it would be prejudicial to his client's defence of the criminal charge for Mr Gorton to be "forearmed for the criminal trial with chapter and verse of Mr Fogarty's defence" through these civil proceedings. So forearmed, it was said, there was a possibility Mr Gorton would mould his own evidence, and persuade other witnesses to do the same, to maximise the prospects of Mr Fogarty being convicted.

29 Although in the criminal proceedings Mr Gorton has already given a statement of his evidence to the police (a copy of which has been provided to Mr Fogarty as part of a "hand-up brief"), it was submitted that that statement was in such general, and in some places inadmissible, terms that it would clearly have to be revised before trial and its existence did not therefore preclude subsequent moulding of the evidence Mr Gorton would actually give at the criminal trial, nor did it prevent the tailoring of any evidence he may give in response to the defence that was advanced by Mr Fogarty.

30 Mr Fogarty has sworn an affidavit dated 13 March 2002 in these proceedings, setting out the matters on which he relies for his contention that Mr Gorton may take that course. In it he alleges that Mr Gorton, while managing director of the first defendant, approached him in about May 1999 with a suggestion that they should together seek to acquire a controlling interest in the first defendant. Mr Fogarty alleges that in persuading him to invest Mr Gorton made a number of significant misrepresentations which, he says, "became the source of considerable disharmony between he and I".

31 It is unnecessary for present purposes to canvass the alleged misrepresentations but I should note that Mr Gorton denies he persuaded Mr Fogarty to invest in the first defendant or that he made any misrepresentations to Mr Fogarty.

32 According to Mr Fogarty, Mr Gorton's performance as managing director deteriorated and in May 2000 he resigned as managing director and was replaced by Mr Fogarty. Mr Gorton ceased to be a director of HSWA on 7 February 2002. However, Mr Fogarty claims that Mr Gorton has since sought to recover his position as managing director and made a formal request at a board meeting on 12 October 2000 which was rejected by the board.

33 Mr Fogarty also says that there are currently separate proceedings in which Mr Gorton challenges the validity of the transfer of the shares in HCI to Fopar, and proceedings by Mr Gorton against HSWA for director's fees of $30,000. In the latter proceedings HSWA has counterclaimed a sum in excess of the amount claimed by Mr Gorton.

34 Mr Fogarty says that a further source of conflict has been his (limited) involvement in the recent Family Court proceedings between Mr Gorton and his wife, who is Mr Fogarty's sister.

35 It was common ground that there is animosity between Mr Fogarty and Mr Gorton. I do not think it possible, on the affidavit material before me, to attempt to decide exactly how that came about, or the rights and wrongs of it, nor is it necessary to do so. I consider it is also unnecessary to determine whether Mr Gorton is, as claimed by Mr Fogarty, the "main protagonist" in the commercial dispute. It is also impossible, and in my view unnecessary, to reach any conclusion as to whether Mr Gorton was the person who made the complaint to the Police.

36 In my view, even if it is the case that Mr Gorton is the "main protagonist" in the commercial dispute or the "instigator" of the prosecution, that would not of itself give rise to any reasonable ground for suspicion that Mr Gorton may take the very serious step of "moulding" his evidence or attempting to interfere with witnesses. Indeed, whether there would even be any real scope for Mr Gorton to "mould his evidence", given that he has already provided a statement of evidence to the police, and given the nature of the charge in question, is by no means clear. Nor do I accept that the antagonism which it is accepted exists between Mr Gorton and Mr Fogarty gives rise to a reasonable suspicion that Mr Gorton would take such steps.

37 The fact that the plaintiffs' claim in these proceedings may be advanced by Mr Fogarty's conviction does not persuade me that there is a serious prospect of evidence being interfered with. It also assumes that the criminal trial would precede the trial of these proceedings. At this stage there is no reason to assume that that will necessarily be the case.

38 I should also say that it was not asserted by counsel for Mr Fogarty that the prosecution turned on issues of credibility between Mr Fogarty and Mr Gorton, or that issues of credibility would be important in the determination of the criminal charge. It is also evident from the "hand up brief" annexed to Mr Fogarty's affidavit that Mr Gorton is by no means the only prosecution witness, nor even necessarily the most important one. Statements have been made to the police not only by Mr Gorton, but also Mr Youlden and Mrs Gorton and other potential witnesses, including an employee of HSWA whose statement of evidence speaks specifically of the implementation of the transaction in question. There is also a deposition of Mr Solin - the sole director of CFS - taken under the Justices Act. Moreover, in relation to discovery and inspection of documents, it is not clear that there are likely to be any relevant documents other than documents belonging to HSWA, or possibly CFS.

39 I am not satisfied that there is a real prospect that, if forewarned as to the basis of Mr Fogarty's defence in the criminal proceedings, Mr Gorton would (or, in the light of his statement to the Police, necessarily even could) tailor his evidence in order to secure a conviction or that he would seek to persuade others to do so.

40 Counsel for Mr Fogarty relied upon the decision of the Ontario Court (General Division) in Bour v Manraj (1995) 24 OR (3d) 279 in which a stay was granted pending completion of a preliminary enquiry on a criminal charge. The facts of that case, however, were quite different and, moreover, the step in the civil proceedings in respect of which the stay was granted involved the cross-examination of the defendant/accused by way of discovery, in a jurisdiction in which the rule against collateral use of material disclosed on discovery did not exist.

41 It was also contended that there was likely to be publicity arising from the civil proceedings which may unfairly affect the jury in the criminal proceedings. Indeed, it was submitted that because there was a long-term government contract for the hospital involved, it was almost certain that publicity would ensue.

42 I do not accept that the grounds for a stay have been made out on this basis. In the first place, there is no reason at the moment to believe there is a serious prospect of such adverse publicity at an interlocutory stage of these proceedings. It is also evident that the criminal trial is still a long way off. If there arises any real prospect of such adverse publicity which could affect the criminal proceedings that is a matter to be addressed at the time, when solutions short of the drastic step of staying these proceedings can also be considered.

43 Whether or not the trial of this proceeding, if it were to occur before the criminal trial, would attract publicity of a sort likely to come to the attention of potential jurors is a matter of speculation at this stage. So is the possible nature and extent of any publicity, including whether and to what extent the transaction in question might figure in it. Moreover, if publicity were likely to occur, the proximity of the criminal trial would be an important consideration in determining whether that publicity was likely to have any influence on potential jurors in the criminal proceedings. If the proximity of the two trials was likely to cause any such difficulty, that is a matter which would properly fall for consideration when it became evident that that prospect was a real one. At the moment it is no more than hypothetical.

44 In considering whether a stay should be granted it is also necessary to have regard to the nature of the claim made by the plaintiffs in these proceedings. The plaintiffs allege that the conduct of the affairs of HSWA by its board of directors, and/or HSA in its capacity as a shareholder and/or Fogarty in his capacity as a director or managing director, is contrary to the interests of members or oppressive to the plaintiffs. They allege that Fogarty has in a number of respects acted contrary to his fiduciary duty as a director. The plaintiffs allege that the oppressive conduct is continuing. It is not a case of seeking compensation for an alleged wrong that is now a matter of history. The fact that the plaintiffs allege the oppressive conduct is continuing is, in my view, a significant factor to be weighed in the balance.

45 I am not satisfied that Mr Fogarty has shown that the interests of justice require, at this stage, that the plaintiffs' rights to have their action determined in the ordinary way should be interfered with. I am not persuaded that there is a real, as opposed to a hypothetical or notional, danger of injustice arising in the criminal proceedings if these proceedings are allowed to continue.

46 It would, of course, be open to Mr Fogarty to make a further application for a stay of these proceedings if circumstances change.

48 I therefore turn to the application to strike out parts of the statement of claim.

49 The third defendant first attacks par 9(c) of the statement of claim and all of the defendants attack par 9(d) of the statement of claim.

"At all material times, HCI was a company incorporated in Western Australia:

(a) whose shareholders from 1 July 1999 until in or about 23 February 2000 were King Holdings and Fopar Nominees Pty Ltd ACN 009 472 084 ('Fopar') as to 50,000 shares each;

(b) whose sole shareholder and ultimate holding company from in or about 23 February 2000 has been Fopar;

(c) was and is represented on the board of HSWA by Fogarty who also represented HSA; and

(d) whose ownership is currently the subject of separate Supreme Court proceedings."

51 The third defendant says that par 9(c) is defective in failing to plead any material facts in support of the allegation that the third defendant represented two companies on the board of HSWA. I do not consider the plea should be struck out on that ground. The basis upon which it is pleaded that Fogarty represented HCI and HSA is a matter that can be adequately dealt with by way of a request for further and better particulars. It is also said the plea should be struck out on the ground it is irrelevant as it appears only to be directed in some way to motive. I do not accept that. I accept the plaintiffs' contention that it is properly pleaded by way of background or context to the specific matters alleged to constitute oppression.

52 All of the defendants attack par 9(d) on the basis that it is irrelevant to the matters in issue. I accept that objection and would strike out that subparagraph.

53 The first and second defendants attack pars 13 to 18, 21 and 22 of the statement of claim. Those pleas are as follows:

"13. Youlden and Gorton together with Donald Stuart Kay and Neil Alexander Henderson incorporated HSWA in or about June 1994 to carry on the business of providing consultancy services in the field of health management.

14. Youlden and Gorton have health management backgrounds and were two of the founding directors of HSWA.

15. Healthcare Directions (WA) Pty Ltd ACN 065 296 273, a company jointly owned by Youlden Enterprises and King Holdings, together with Donald Stuart Kay, N & J Henderson Pty Ltd and Health Solutions Pty Ltd were the original shareholders of HSWA.

16. In or about 1996 PSC invested in the Health Solutions group of companies and the shareholders of HSWA became Youlden Enterprises (as to 12.5%), King Holdings (as to 15%) and HSA (as to 72.5%).

17. Donald Stuart Kay, Neil Alexander Henderson and N & J Henderson Pty Ltd were the original shareholders of HSA.

18. In or about 1996 Donald Stuart Kay, Neil Alexander Henderson and N & J Henderson Pty Ltd sold 97% of their shareholding interest in HSA to HSI.

...

21. In or about December 1998 Donald Stuart Kay, Neil Alexander Henderson and N & J Henderson Pty Ltd sold their remaining shareholding interest in HSA to PSC through its wholly owned subsidiary HSI.

22. In or about July 1999 PSC, through its wholly owned subsidiary HSI, sold 51% of its shareholding interest in HSA to HCI."

54 The first and second defendants says that those paragraphs do not plead any material facts relevant to the cause of action. They say, for instance, who incorporated HSWA, when that occurred and the fact that the purpose of incorporation was to carry on certain businesses are not relevant to the oppression claim and contend that the matters pleaded are, at best, in the nature of evidence rather than material facts. The plaintiffs, on the other hand, say that they are in the nature of preliminary averments which show how the parties are connected and the surrounding circumstances leading up to the dispute, and they are relevant to the context in which the question of "commercial unfairness" is to be judged.

55 I consider that the pleas are maintainable on the basis relied upon by the plaintiffs and would not strike them out.

56 Paragraph 24 of the statement of claim is attacked by all of the defendants. It is as follows:

"24. In or about February 2000 a transfer form was lodged with ASIC by or on behalf of Fogarty that transferred King Holdings' 50,000 shares in HCI to Fopar in consideration for payment of $1.00. The validity of this transfer is the subject of related Supreme Court and Family Court proceedings."

57 The first and second defendants contend that the plea is scandalous being for the mere purpose of abusing or prejudicing Mr Fogarty, and by way of implication HSWA and HSA. I do not accept that contention. The paragraph is also, however, attacked by all of the defendants on the basis that it is embarrassing because it is not clear why the other proceedings are said to be "related" and on the basis that the matters pleaded are irrelevant to the plaintiffs' cause of action.

58 I accept the plaintiffs' contention that, at least so far as the first sentence is concerned, it is relevant background or context to the specific matters relied upon for the cause of action. The last sentence, however, is, in my view, irrelevant and embarrassing and should be struck out.

59 The defendants next attack pars 34 to 40 of the statement of claim. However, to put the complaints into context, it is necessary to refer to pars 26 to 40. They are as follows:

"26. On 9 August 2000 Graeme Kenneth Matcham applied for Corporate Financial Systems Pty Ltd ('CFS') to be registered as a company under the Corporations Law of WA.

27. CFS was registered as a company under the Corporations Law of WA on August 2000 with Antony Solin as the sole shareholder and director.

28. On or about 21 August 2000 Fogarty caused HSWA to pay, and HSA acquiesced or failed to prevent HSWA making a payment of $430,000 to CFS ('the CFS Payment').

29. The CFS Payment was caused to be made by Fogarty without the authority of HSWA.

30. CFS had no commercial relationship to HSWA and no consideration was provided by CFS for the CFS Payment and there was otherwise no reason for the CFS Payment.

31. By reason of acting in the manner pleaded in paragraphs 28 to 30 hereof, Fogarty breached the duties pleaded in paragraph 12(a) hereof in that Fogarty did not act honestly or bona fide in the interests of HSWA.

32. Youlden Enterprises and King Holdings have sought from Fogarty, HSA and HSWA by its board of directors an explanation for the CFS Payment.

33. No explanation has been provided by Fogarty, HSA or HSWA by its board of directors to Youlden Enterprises or King Holdings for the CFS Payment.

34. In or about July 2002 Fogarty was charged by the Director of Public Prosecutions with the offence of stealing in relation to the CFS Payment.

35. Sub-section 2611(4) of the Hospitals and Health Services Act 1927 (WA) requires that a body corporate that desires to obtain a licence to conduct a private hospital shall satisfy the Commissioner of Health for the State of Western Australia, inter alia, that all the natural persons concerned in the management or conduct of the applicant are persons of good character and repute and are persons fit to be concerned in the management or control of a private hospital.

36. Pursuant to section 26F of the Hospitals and Health Services Act 1927 (WA) where the Commissioner of Health for the State of Western Australia is satisfied that if the holder of a licence is a body corporate, any person concerned in the management or conduct of the body corporate is not fit to be concerned in or able to conduct a private hospital, the Commissioner may cancel or refuse to renew the licence granted in respect of that licence holder.

37. For the purposes of performing its obligations under the Peel Health Campus Agreement HSWA is the holder of a licence to conduct a private hospital under the provisions of the Hospitals and Health Services Act 1927 (WA).

38. In or about May and June 2002 Youlden Enterprises and King Holdings were informed that the Health Department had contingency plans in place to assume management of the Peel Health Campus in the event the private hospital licence is cancelled.

39. In or about April to July 2002, Youlden Enterprises and King Holdings requested that measures be taken by Fogarty, HSA or HSWA by its board of directors and/or sought advice as to what measures have or were being taken by Fogarty, HSA or HSWA by its board of directors in relation to the Peel Health Campus Agreement having regard to the CFS Payment and the investigations of the Western Australian police.

40. No measures are being taken by Fogarty, HSA or HSWA by its board of directors in relation to the Peel Health Campus Agreement having regard to the CFS Payment and the investigations of the Western Australian police."

60 The defendants complain, first, that par 34 appears to be advanced in support of both the allegations which precede it in pars 26 to 33 and also in relation to the paragraphs which follow it in pars 35 to 40. They say that the fact that Mr Fogarty has been charged is irrelevant to the matters pleaded in pars 26 to 33 and is embarrassing. In my view, that is plainly the case. Counsel for the plaintiffs conceded in the course of argument that par 34 went only to the matters pleaded in pars 35 to 40. I consider that the plea in par 34 should be amended to make it clear that it is directed only to those pleas and not to the pleas in pars 26 to 33. I would strike out par 34 as it stands.

61 The defendants also submitted that the fact Mr Fogarty had been charged is irrelevant to the pleas in pars 35 to 40 because, in essence, it did not enable the Commissioner of Health to invoke s 26B(4) or s 26F of the Hospitals and Health Services Act 1927, and, of itself, could not put the licence for the hospital at risk. They say the allegations 34 to 40 are therefore simply irrelevant. The plaintiffs, however, say that the gravamen of this part of the case is that the defendants failed to take measures and/or failed to inform shareholders of what measures had been taken in response to the CFS payment and the fact that the executive director of the company had been charged with stealing in relation to it. The oppressive conduct is said to lie in the failure to take any steps in connection with those matters and to inform the shareholders, when requested to do so, as to what steps were being taken, or what measures were being implemented.

62 The defendants also specifically complain about par 38 of the statement of claim. The first and second defendants contend that it is ambiguous and unintelligible and, therefore, embarrassing. They say it is not clear whether the alleged contingency plans were in place specifically for the Peel Health Campus (in the event of its licence being cancelled) or health campuses generally. The third defendant complains that par 38 does not plead material facts or proper particulars in support of the allegation and that it is irrelevant.

63 I do not accept the complaint by the first and second defendants. To the extent that the third defendant's complaint relates to a lack of particularity it can be overcome by a request for particulars. The plea is otherwise permissible, in my view, as setting out the basis for the subsequent request that the plaintiffs made and to which they complain there has been no response.

64 Specific complaint is also made about par 40. The defendants say that it does not identify the measures that each of Fogarty, HSA or HSWA could and should have taken; or in other words, what it is alleged they omitted to do. The first and second defendants also complain that the expression "having regard to the CFS payment" is vague and, therefore, embarrassing. I do not accept the latter complaint. I also do not consider that the plea should be struck out on the former grounds. To the extent they are entitled to them, the defendants can seek particulars of it.

65 I would allow pars 35 to 40, subject to par 34 being clarified as mentioned above. The latter plea is required to make explicable the references to the police investigations in pars 39 and 40.

66 The next complaints by the defendants are in respect of pars 48 to 50 of the statement of claim. Those pleas are as follows:

"48. HSWA are paying Fogarty and Fogarty has caused HSWA to make, and/or Fogarty, and/or HSA acquiesced or failed to prevent HSWA making, the following remuneration payments to Fogarty in his capacity as Executive Chairman:

(a) $30,000 per month; and

(b) lease payments on a motor vehicle.

49. The remuneration paid to Fogarty by HSWA is excessive.

Particulars

Res ipsa loquitur. Further particulars may be provided after provision of Discovery and Particulars.

50. By reason of acting in the manner pleaded in paragraph 48 hereof, Fogarty breached the duties pleaded in paragraph 12 hereof in that:

(a) Fogarty did not act honestly or bona fide in the interests of HSWA;

(b) Fogarty failed to avoid a conflict by acting in his own interests at the expense of HSWA;

(c) Fogarty misused his position in that he acted in his own interests to profit or to seek to profit."

67 A number of complaints are made about these paragraphs. The defendants say that par 48 refers to conduct and/or acquiescence not only by Fogarty, but also HSA. In par 50 the plaintiffs then rely upon all of those matters to allege that Fogarty breached his fiduciary duties to HSWA. They also contend that the particulars to par 49 are deficient in that the doctrine of res ipsa loquitur could have no application and no other basis is put forward to support the plea. Further particulars are merely averted to as a possibility. The defendants also say that there is simply no basis pleaded for the allegation in par 50(a) that Fogarty did not act honestly. It is further said that, because of the deficiencies in the pleading in pars 48 and 49, the plea in par 50 is embarrassing.

68 I consider that those objections are made out and counsel for the plaintiffs acknowledged that par 50 could not stand as it is. He accepted that par 48 did not properly distinguish between the alleged conduct of Fogarty and that of HSA and accepted that the basis had not been pleaded for the allegation in par 50(a) that Fogarty did not act honestly. In my view, par 49 is also deficient for the reasons advanced by the defendants. I would strike out pars 48, 49 and 50.

69 The defendants object to pars 51 to 55 of the statement of claim. Those pleas are as follows:

"51. In or about 1999 to 2001 Fogarty caused HSWA to make, and/or Fogarty, and/or HSA acquiesced or failed to prevent HSWA making loans to HSA ('the HSA Loans').

Particulars

Further particulars of the loans and the material terms of the loans may be provided after provision of Discovery and Particulars.

52. The HSA Loans were unsecured, interest free and no repayment time had been stipulated.

53. Pursuant to the HSA Loans, Fogarty caused HSWA to advance money, and/or Fogarty, and/or HSA acquiesced or failed to prevent HSWA advancing money to HSA.

Particulars

Further particulars of the advances may be provided after provision of Discovery and Particulars.

54. By reason that the HSA Loans were unsecured, interest free and that no repayment time had been stipulated, the HSA Loans were un-commercial transactions.

55. By reason of acting in the manner pleaded in paragraphs 51 to 53 hereof, Fogarty breached the duties pleaded in paragraph 12 hereof in that:

(a) Fogarty did not act honestly or bona fide in the interests of HSWA;

(b) Fogarty failed to avoid a conflict by acting in his own interests and in the interests of HSA, HCI and HSI at the expense of HSWA;

(c) Fogarty misused his position in that he acted in his own interests and the interests of HSA, HCI and HSI to profit or to seek to profit. "

70 The defendants say that pars 51 to 54 fail to plead any relevant material facts to support the plea in par 55. Paragraph 55, it is said, contains a plea of dishonesty that is not capable of arising on the matters relied upon. Once again, the pleas in pars 51 and 53 refer not only to the conduct of Fogarty, but also to the alleged conduct of HSA. In my view, pars 51 to 55, as they stand, are embarrassing for those reasons and I would strike them out.

71 The defendants attack pars 72, 84 and 86 on the basis that the allegation that Fogarty did not act honestly is not supported by the matters relied upon. That point was conceded by counsel for the plaintiffs and, in my view, it was rightly conceded. I would strike out those paragraphs.

72 The third defendant also attack pars 73 to 84 of the statement of claim. Paragraphs 73 to 81 plead the failure of HSWA to pay interest on loans made by the plaintiffs to HSWA. The plaintiffs plead that interest to 30 June 2002 has not been paid. Paragraphs 82 to 84 are as follows:

"82. As at the date of this application HSWA remains in default of Youlden Enterprises' Loan and King Holdings' Loan.

83. Fogarty and/or HSA and/or HSWA by its board of directors have failed to take any steps to cause HSWA to remedy its default under the terms of Youlden Enterprises' Loan and King Holdings' Loan.

84. By reason of acting in the manner pleaded in paragraph 83 hereof and by reason of the matters pleaded in paragraphs 56 to 71 hereof, Fogarty breached the duties pleaded in paragraph 12(a) hereof in that Fogarty did not act honestly or bona fide in the interests of HSWA."

73 I have already indicated that I would strike out the plea in par 84 that Fogarty did not act honestly and counsel for the plaintiff conceded that pars 83 and 84, as they stand, are embarrassing, in any event. Once again, par 83 pleads not only the alleged conduct of Fogarty, but also of HSA and HSWA by its board of directors. All of that conduct is then relied upon in part in par 84 for the allegation that Fogarty breached duties owed to HSWA. Counsel for the plaintiff conceded (rightly in my view) that those pleas could not stand. I would strike out pars 83 and 84. Paragraphs 73 to 82 would fall with them.

74 The defendants attack pars 89 to 92 of the statement of claim. Those paragraphs are as follows:

"89. On or about September 2000 the accounting firm KPMG, provided to HSWA an independent report reviewing the operations and management of HSWA ('the KPMG Report').

90. The KPMG Report made recommendations as to the on-going corporate governance of HSWA. The material recommendations in the KPMG Report were:

(a) That Management fees, expense reimbursements and payments on behalf of directors and/or their related companies be formally agreed and minuted at Board meetings;

(b) That a delegations of authority policy be approved by the board to enable an appropriate level of staff to transact on behalf of HSWA and that staff be provided with the Board approved payment schedules to enable them to process these payments; and

(c) That a formal corporate governance structure be developed to facilitate the Directors meeting their responsibilities to maximise both the performance and conformance requirements of the organisation which recommendation was made in part to address the lack of regular board meetings and processes to ensure adherence to regulatory requirements.

91. Youlden Enterprises and King Holdings have sought from Fogarty, HSA and HSWA by its board of directors explanation of what steps have been taken to implement the recommendations of the KPMG Report.

92. No explanation has been provided by Fogarty, HSA or HSWA by its board of directors to Youlden Enterprises or King Holdings as to what steps have been taken and no steps have been taken to implement the recommendations of the KPMG Report."

75 The defendants complain that these paragraphs simply assert that HSWA has allegedly not implemented recommendations said to be contained in a report prepared by KPMG following a review of the operations and management of the company. It is said that, even if made out, that is not something which could warrant a finding under s 232 of the Corporations Act. The plaintiffs must particularise the specific measures that it is said the defendants should have implemented and the reason why the failure to do so gives rise to oppression.

76 The plaintiffs say in response that the measures which they contend should have been implemented are those set out in par 90. They say that the conduct in failing to implement the recommendations is commercially unfair by reason of the other matters that have occurred, such as improper payments.

77 In my view, however, it is not apparent from the pleading why the alleged failure to implement the recommendations referred to is said, whether alone or in conjunction with other matters, to constitute oppressive conduct. I accept the complaints of the defendants and would strike out pars 89 to 92.

78 The defendants also attack pars 93 to 96 of the statement of claim. They are as follows:

"93. Pursuant to the terms of the Peel Health Campus Agreement, HSWA is required to maintain accreditation with the Australian Council of Healthcare Standards.

94. Youlden Enterprises and King Holdings have been informed that the Australian Council of Healthcare Standards has reported inadequacies in the corporate governance of HSWA that affect the accreditation of HSWA.

95. Youlden Enterprises and King Holdings have sought from Fogarty, HSA and HSWA by its board of directors explanation of what inadequacies in the corporate governance of the company have been reported by the Australian Council of Healthcare Standards in respect of HSWA and what steps have or are being taken by Fogarty, HSA and HSWA by its board of directors to address any inadequacies that have been raised by the Australian Council of Healthcare Standards.

96. No explanation has been provided by Fogarty, HSA or HSWA by its board of directors to Youlden Enterprises or King Holdings as to what inadequacies in corporate governance have been reported by the Australian Council of Healthcare Standards in respect of HSWA and what steps have or are being taken by Fogarty, HSA and HSWA by its board of directors to address any inadequacies that have been raised by the Australian Council of Healthcare Standards."

79 The defendants complain that the matters pleaded are purely speculative, based upon what appears to be second-hand information from the Australian Council of Healthcare Standards. It is not pleaded that HSWA's accreditation is actually at risk. The plaintiffs, on other hand, say that the plea is that there has been a request for information which has been directed by the shareholders to the company in respect of statements which have come to the shareholders' attention and that no explanation in connection with the matter has been provided by the defendants. It is the failure to provide any explanation in the particular circumstances that is relied upon. I consider that, on that basis, the plea should be allowed to stand.

80 Finally, the defendants attack pars 104 to 106 of the statement of claim. Those paragraphs are as follows:

"104. At all material times Healthcare Directions Pty Ltd ACN 065 296 273 ('HCD):

(a) was a company incorporated in Western Australia; and

(b) its shareholders were King Holdings and Youlden Enterprises.

105. On 9 September 2002 HSWA improperly instituted proceedings No 2487 of 2002 in the District Court of Western Australia against Gorton, Youlden and HCD and on 27 September 2002 HSWA instituted proceedings CIV 2353 of 2001 in the Supreme Court of Western Australia against Gorton, Youlden and HCD (collectively 'the HCD Proceedings'). On 26 September 2002 the District Court action was discontinued.

106. The HCD Proceedings were commenced for the improper purpose of exerting pressure on Gorton, Keryl Gorton, Youlden, Youlden Enterprises and King Holdings and otherwise are an abuse of process.

Particulars

Particulars of the improper purpose are to be inferred from the following facts:

(a) In or about February 1998 HSWA, with the authority and fully informed consent of the directors, executed an agreement between itself and HCD, pursuant to which HCD was, for reward, to provide a television hire service to the Peel Health Campus for a 10 year term (Hire Service Agreement).

(b) The Hire Service Agreement came into operation in or about February 1998 and was varied in or about January 1999.

(c) In or about July 1999 Fogarty and Gorton formed a partnership, which operated through HCL Pursuant to the terms of the partnership the business and operations of HCD in respect of matters relating to the Peel Health Campus were deemed also to be part of the partnership.

(d) On 22 September 1999 Fogarty informed HCI and Gorton that the business and operations of HCD in respect of matters relating to the Peel Health Campus were deemed also to be part of the partnership.

(e) In or about 1 November 1999 all the obligations and benefits of the Hire Service Agreement were assigned by HCD to King Holdings with the authority and approval of HSWA and the directors of HSWA.

(f) In or about 2000 HSWA terminated the Hire Service Agreement.

(g) At all material times HSWA, with approval of the directors, performed and observed the Hire Service Agreement and the Hire Service Agreement was ratified by the directors of HSWA.

(h) At all material times the directors of HSWA were aware and fully informed of the Hire Service Agreement.

(i) From in or about August 2000 Youlden Enterprises and King Holdings have been raising and agitating matters relating to improper payments by HSWA, non-payment of dividends by HSWA, non-payment of interest on loans to shareholders by HSWA, corporate governance such as the provision of financial and other information to shareholders, improper calls on shareholders and exclusion from management of Gorton and Youlden.

(j) On or about 25 February 2002 and thereafter on various occasions, Youlden Enterprises and King Holdings informed HSWA, HSA and Fogarty that an application under sections 232, 233 and 234 of the Corporations Law is proposed by Youlden Enterprises and King Holdings.

(k) The HCD Proceedings were instituted in September 2002."

81 The defendants say that whether or not the HCD proceedings were commenced for improper purposes and are an abuse of process of the Court is a matter that should, and can, only properly be determined in the HCD proceedings. It is entirely inappropriate for that to be pleaded and sought to be proved in these proceedings. The plaintiffs contend that it is proper to plead these matters, because the conduct complained of constituted conduct which was commercially unfair.

82 I accept the defendants' contentions. The question of whether or not the HCD proceedings are an abuse of process can only be determined in those proceedings. If the plaintiffs consider that the HCD proceedings are an abuse of process, the proper course is to make the appropriate application in those proceedings. It is not an issue to be determined in these proceedings. I would strike out pars 104 to 106 of the statement of claim.

83 I would therefore strike out par 9(d), the last sentence of par 24, pars 34, 48 to 50, 51 to 55, 72, 73 to 84, 86, 89 to 92 and 104 to 106.

84 It was accepted by the defendants' counsel that the plaintiff should be given leave to replead the statement of claim in the event that the defendants' objections, or any of them, were upheld. That is plainly the appropriate course. I will hear the parties on the programming of that and on costs.