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

HEALTH SOLUTIONS AUSTRALIA PTY LTD (ACN 063 345 077)

Practice and procedure - Discouragement of interlocutory disputes - Pleading issues - General observations about O 59 r 9 - Obligation of meaningful conferral - Risk of practitioners being ordered to pay costs which flow from refusal to confer orally

Practice and procedure - First defendant's application for an extension of time within which to apply to strike out portions of the plaintiff's substituted statement of claim

Practice and procedure - First defendant's application to strike out parts of statement of claim

Practice and procedure - Plaintiff's application for leave to amend statement of claim

Corporations Act 2001 (Cth), s 232, s 233

Rules of the Supreme Court, O 1 r 4A, O 1 r 4B, O 20 r 19(3), O 29 and O 29A, O 59 r 9

First defendant's application for an extension of time refused

First defendant's application to strike out parts of statement of claim dismissed

Leave granted to the plaintiff to amend statement of claim

First defendant pay the plaintiff's costs of application to strike out parts of statement of claim fixed in the sum of $2500

Plaintiff to pay second and third defendants' costs in respect of the application to amend the statement of claim fixed in the sum of $350

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

Wayde v New South Wales Rugby League Ltd [1985] HCA 68; (1985) 180 CLR 459

1 MARTIN CJ: This is an interlocutory application in which the first defendant applies for orders that:

(1) the time for bringing an application to strike out portions of the plaintiff's pleading be extended;

(2) pars 106C to 106G inclusive and 107(jj) of the plaintiff's substituted statement of claim be struck out.

2 Before dealing with this specific application, I would observe that both I and the other members of this Court are firmly of the view that interlocutory disputes of this kind must be actively discouraged. In many cases, interlocutory disputes, particularly disputes relating to pleading issues, consume very substantial amounts of time and expense on the part of both the parties and the Court. In many cases, the time and expense involved in the consideration and resolution of the interlocutory dispute is entirely disproportionate to its significance to the just and effective resolution of the case as a whole by mediation or trial. For this reason, this Court will use the existing powers available under the Rules of the Supreme Court ("the Rules") and if necessary amend the Rules to actively discourage disputes of this kind. In very general terms, interlocutory disputes of this kind will only be entertained by the Court if the time and expense involved in their resolution is proportionate to the significance of the dispute to the just and effective resolution of the case. This principle is, in my view, already inherent in the provisions of the Rules when read as a whole, including in particular O 1 r 4A and r 4B, O 29 and O 29A.

3 Before dealing with this particular case, I would also like to make some general observations about O 59 r 9. As will be abundantly apparent from any sensible reading of its terms, its clear purpose is to reduce interlocutory disputes and avoid adverse consequences of the kind to which I have just referred by requiring the representatives of the parties to confer with a view to resolving the interlocutory dispute before the Court is called upon to entertain and resolve it.

4 In far too many cases, the Rule is complied with in form rather than substance. That is because too often the representatives of the parties consider that the exchange of furious correspondence is an adequate substitute for meaningful conferral in relation to the substance of the interlocutory dispute. This case provides an unfortunate example of that phenomenon.

5 For my part, I favour an approach to the construction of the Rule which would lead to the conclusion that it has not been substantively complied with unless and until legal representatives of the parties, with authority to resolve the particular interlocutory dispute in question, have orally conferred in respect of the substantive issues that arise in relation to that dispute, either by telephone or by meeting face to face. It follows that any legal representative who declines or refuses to participate in such a process of conferral, without good cause, is at risk of being ordered to pay the costs which flow from that refusal personally. There may, of course, be cases in which a departure from this approach to the application of O 59 r 9 is justified, but, in my view, those cases will be exceptional.

6 I will turn now to the particular application before me.

7 The paragraphs of the statement of claim which are attacked in this application were introduced into the pleading in somewhat unusual circumstances. In order to describe those circumstances, it is necessary to refer to the substantive proceedings.

8 At all material times, the plaintiff was a minority shareholder in the first defendant. The majority of the shares in that company have, at all material times, been held by the second defendant. The third defendant is a director of each of the first and second defendants and is executive chairman of the first defendant.

9 The plaintiff alleges that by reason of various acts and omissions, viewed either individually or cumulatively, the conduct of each of the defendants has been contrary to the interests of the members of the first defendant as a whole; or oppressive to, unfairly prejudicial to, or unfairly discriminatory against the plaintiff, within the meaning of s 232 of the Corporations Act 2001 (Cth) ("the Act"). Relief is sought pursuant to s 233 of the Act.

10 On or about 6 August 2003, the first defendant filed a defence which stated, inter alia, that save for the provision of discovery, it did not intend to take an active role in the proceedings and would abide the decision of the Court. On 22 February 2006, the solicitors for the plaintiffs wrote to the solicitors for the first defendant enclosing a copy of a substituted statement of claim dated 23 February 2006, together with a copy of an order purportedly made by consent pursuant to which the statement of claim was amended.

11 The affidavit evidence tendered in these proceedings establishes that no prior notice of the proposal to amend the pleading had been given to the first defendant. From a perusal of the Court file, it does not appear that the first defendant ever executed a memorandum of consent to the order permitting amendment of the pleading.

12 In those circumstances, it is perhaps curious that an order was made purportedly by consent and without proof of service on the first defendant, given that the amended pleading is said with good cause to have affected the rights and interests of the first defendant. Nevertheless, no complaint is made in respect of the regularity or efficacy of the consent order, although the circumstances of its making are relied upon in support of the application for extension of time.

13 Correspondence was then exchanged in respect of the circumstances pertaining to the making of the consent order, including allegations of failure to comply with the processes of conferral required by the Rules to which I have already referred. The time specified by the Rules within which the application had to be made to strike out any portion of the amended pleading, being 21 days, expired while correspondence of this kind was being exchanged.

14 According to my calculation, pursuant to O 20 r 19(3), the application should have been made on or before 17 March 2006 (assuming service of the amended pleading on 23 February 2006). In fact, the application was not made until 1 June 2006, a delay of some 76 days, or more than three times the period specified by the Rules for the making of the application.

15 In the affidavit evidence filed in support of the application for extension of time, the first defendant seeks to justify the delay up until late April 2006 by reference to the need to obtain legal advice in respect of the effect of the amendments upon the position of the first defendant, and the need to give consideration of that advice. The delay between late April 2006 and the date of filing the application in early June 2006 is said to be justified in part by communications between the solicitors for the parties which can, I think, be fairly characterised as an entirely unconstructive attempt to comply with the substance of the requirements of O 59 r 9, followed by further consideration of the legal issues by the solicitors for the first defendant.

16 In the latter regard, I note that slightly more than 21 days elapsed between the last communication between the solicitors for the plaintiff and the solicitors for the first defendant on 9 May 2006 and the initiation of the application during which time the failure to initiate an application is said to be justified by the giving of consideration to legal issues. I note that that period of delay is, in itself, longer than the period specified by the Rules within which an application of this kind is to be brought.

17 After considering this chronological sequence of events, I have come to the conclusion that the first defendant has not adequately justified the delay in the commencement of the application to strike out a portion of the pleading. Although the circumstances giving rise to the amendment are indeed curious, any delay flowing from those circumstances should have been overcome by some time in early to mid March. Of the remaining delay, the period occupied by the abortive attempted conferral to which I have referred was less than 14 days.

18 While some period of time could no doubt be justified by reference to the need to take and consider legal advice, in the context of a rule which requires an expeditious approach to the bringing of applications of this kind, the total period taken was, in my view, unjustifiable.

19 An extension of time for the making of this application could nevertheless be justified if it could be established that the interests of justice required that extension, because of, for example, irreparable prejudice to the first defendant or prejudice to the trial process or the efficient utilisation of the resources of the parties and of the Court. That prejudice might be established, for example, by showing that the disputed pleading would unnecessarily protract either the time to be taken in preparation for trial or the conduct of the trial itself by reason of the inclusion of an allegation which had no reasonable prospect of success.

20 However, in my view, this is not such a case. I accept the submission of the plaintiff to the effect that the allegations raised by the paragraphs which are attacked are of the same substantial character as the other allegations made in the statement of claim in the sense that they allege conduct which viewed either in isolation or in combination with the other conduct complained of is said to constitute contravention of s 232 and to justify relief sought under s 233 of the Act.

21 I do not accept the submission of the first defendant to the effect that the allegations made in the paragraphs under attack are different in character or kind from those made in the rest of the pleading because they focus upon the conduct of the first defendant as compared to the conduct of the other two defendants.

22 Although I do not, of course, have at this stage any idea of the evidence which is likely to be led in support of those allegations, given that the second defendant was at all material times the majority shareholder of the first defendant and that the third defendant was the executive chairman of the first defendant, it seems to me to be a distinct possibility that the evidence will link the conduct complained of on the part of the first defendant to acts or omissions of the second and/or third defendants in the same way as has been asserted in relation to the various other allegations made in the statement of claim.

23 Nor do I accept the submission of the first defendant that the allegations complained of are different in character to the allegations made elsewhere in the pleading because they do not involve an allegation of breach of duty. It is clearly established by authority to which I will later refer that it is not necessary to establish a breach of duty to enliven s 232 of the Act.

24 Further, it seems to me that the area of factual controversy in relation to the allegations made in the paragraphs of the pleading under attack is not likely to be substantial in the context of the issues in the case as a whole. It seems likely from the nature of the allegations themselves that the substantive facts which give rise to the complaint will be established without difficulty and the area of controversy will then lie in the characterisation of that conduct and in particular, the determination of whether the conduct, either viewed in isolation or in combination with other aspects of the conduct of the affairs of the first defendant, gives rise to the conclusion that conduct falling within the scope of s 232 of the Act has occurred.

25 For these reasons, in my opinion, the first defendant has not justified its failure to bring its application within the time specified by the Rules within which an application to strike out the pleading had to be brought, nor do the interests of justice require an extension of time for the bringing of that application in the circumstances of the present case.

26 That conclusion is sufficient to dispose of this application, but in case a different view is taken in another place, I will nevertheless consider the substantive application to strike out the paragraphs complained of and identify the view to which I would have come had time for the bringing of that application been extended. I take that course because both written and oral submissions addressed the substantive application and it is therefore convenient for me to determine those issues in case they are ventilated elsewhere.

27 In the pleading dated 23 February 2006 and to which I have referred, the paragraphs complained of allege that during the years ended 30 June 2004 and 30 June 2005, the first defendant traded in listed entities and thereby departed from the core business of the first defendant without informing or consulting the first-named plaintiff or convening a general meeting of shareholders to consider its decision to depart from the core business of the first defendant.

28 By a minute of proposed substituted statement of claim dated 25 July 2006, the plaintiff seeks to expand those allegations by including a further paragraph, 106DA, which contains an allegation to the effect that on or about 7 January 2003 the plaintiff sought an undertaking from the first defendant and its directors to the effect that there would be no changes in the core business of the first defendant without reference to the shareholders. If permitted, the allegations made in the paragraphs complained of would add another item of conduct to some ten or more items of alleged misconduct particularised elsewhere in the pleading.

29 The plaintiff seeks to make out its case at trial by reference to both the individual items of conduct complained of, and the cumulative effect of the conduct complained of as a whole. It is clear that this is a legitimate course (see John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A'asia) Pty Ltd and Others (1991) 6 ACSR 63, 67).

30 It is also clear that conduct can be properly characterised as falling within the scope of s 232 of the Act without that conduct constituting an actual irregularity, or an invasion of legal rights, or a lack of probity or want of good faith (see Wayde v New South Wales Rugby League Ltd [1985] HCA 68; (1985) 180 CLR 459). Thus, the question of whether particular conduct can be characterised as being conduct which is contrary to the interests of the members as a whole; or oppressive to, or unfairly prejudicial to, or unfairly discriminatory against a minority shareholder, is necessarily a process of characterisation undertaken in the context of the evidence as a whole and against the particular findings of fact that are made from that evidence so that the quality and character of the conduct complained of can be evaluated in that factual context.

31 To take the present issue, it seems to me to be relatively obvious that in some corporate contexts, a departure from core business without prior consultation with shareholders might, at least arguably, constitute conduct which, when viewed either in isolation or in combination with other established items of misconduct, could properly be characterised as bringing the conduct of the affairs of the company in question within the scope of s 232 of the Act. In another particular corporate context, the same conclusion might not be drawn.

32 The precise characterisation to be given to a particular departure from core business may well turn upon a raft of facts and circumstances including the nature of the pre-existing business, the time for which it had been carried on, the nature of the alleged departure from core business, the risks associated with that business, the extent of prior consultation with shareholders, the nature of any pre-existing representations to, or arrangements between, shareholders and so on. I do not think it could be said that it is necessary for there to have been an agreement, arrangement or understanding between the shareholders before it could ever be concluded that a departure from core business could be relevant to and perhaps assist a conclusion, that a course of conduct came within the scope of s 232 of the Act.

33 No allegation is made by the first defendant to the effect that the allegations made in the paragraphs complained of arose so late in the course of proceedings, that it cannot adequately prepare for and meet these allegations at trial, which is listed to occur in November of 2006.

34 Accordingly, I would only be justified in striking out the paragraphs complained of, whether in the form which they took in the pleading served in February 2006 or in the proposed amended form, if I were satisfied that on no view of the evidence which could be led in support of those allegations could the conduct alleged in those paragraphs, either viewed in isolation or in combination with other items of alleged misconduct, lead to the conclusion that the conduct of the affairs of the company could be characterised as falling within the scope of s 232 of the Act. For the reasons I have given, I could not come to that conclusion whether the pleading remained in the form in which it was served in February 2006 or in the form in which it is proposed to be amended.

35 As it is not alleged that the additional paragraph 106DA which is sought to be introduced by the amended pleading dated 25 July 2006 will, of itself, substantially prejudice the trial of these proceedings, I will allow the further amendment necessary to introduce that paragraph.

36 Turning to the plaintiff's application to make additional amendments in terms of the minute dated 25 July 2006, the second and third defendants have only one objection to the amendments proposed in that minute and that objection relates to par 88A of the minute. The first objection is taken to subparagraph (a) of that proposed paragraph and the objection is to the effect that inadequate particulars are given in the pleading because it is not clear, so it is said, just how it is that Youlden Enterprises has been excluded from participation in the management of the first defendant.

37 In my view, the factual basis for that assertion is relatively clear from the pleading itself and it is, on the basis of the allegations made in pars 23, 87 and 88, to the effect that Mr Youlden, the principal of Youlden Enterprises, was voted off the board of the first defendant in August 1999 and thereafter the company was, to all intents and purposes, under the control of the second and third defendants.

38 The second complaint made by the second and third defendants concerned subparagraph (b) of par 88A, which it was said contained negative assertions pregnant with positive assertions to the effect that offers for the purchase of shares may have been made that were unreasonable or incapable of acceptance. In the face of that criticism counsel for the plaintiff moves to amend the terms of the proposed amendment to delete the words which could have given rise to those inferences and I am advised by counsel for the second and third defendants that after those further amendments the terms of par (b) as proposed would be acceptable to the second and third defendants.

1. The plaintiff have leave to amend the statement of claim in terms of the minute dated 25 July 2006 with amendment to the nomenclature including removal of King Holdings Pty Ltd as a plaintiff and with the deletion of the words "or no reasonable" and "capable of acceptance" in par 88A(b).

2. The first defendant's interlocutory application dated 1 June 2006 is dismissed.

3. The first defendant pay the plaintiff's costs of the application to strike out the pleading fixed by me in an amount of $2500 to be paid forthwith.

4. The plaintiff pay the second and third defendants' costs of the appearance today in respect of the application to amend the pleading fixed by me in an amount of $350 to be paid forthwith.