CATCHWORDS CORPORATIONS - rule in Foss v Harbottle - fourth exception and disputed fifth exception - whether derivative claim should be permitted to be added by amendment to an application after a provisional liquidator had been appointed in the application - whether possibility of provisional liquidator suing negatived fourth exception - whether in such circumstances fifth exception would exist - whether applicability of rule in Foss v Harbottle should be deferred for determination at the hearing - effect of appointment of a liquidator distinguished from that of appointment of a provisional liquidator - joinder under Federal Court Rules of causes of action held in different capacities - whether the applicant should be appointed receiver of the rights of action of the company, with power to sue in its name - joinder of additional claim with winding up application. Federal Court Rules, Order 6, r.1 Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 Garden Mews - St Leonards Pty Ltd v Butler Pollnow Pty Ltd (1984) 9 ACLR 91 Aliprandi v Griffith Vintners Pty Ltd (in liq) (1991) 6 ASCR 250 Dempster v Mallina Holdings Ltd (Pidgeon, Rowland and Seaman JJ., Supreme Court of Western Australia, unreported, 17 March 1994) Biala Pty Ltd v Mallina Holdings Ltd (1993) 11 ACSR 785 Dempster v Biala Pty Ltd and TS Holdings Pty Ltd (1989) 15 ACLR 191 Hurley v BGH Nominees Pty Ltd (1982) 6 ACLR 791 Ferguson v Wallbridge [1935] 3 D.L.R 66 Fargro Ltd v Godfroy [1986] 1 W.L.R 1134 Pollnow v Garden Mews - St Leonards Pty Ltd (1984) 9 ACLR 82 Shirlaw v Taylor (1991) 31 FCR 222 Re Obie Pty Ltd (No 2) (1983) 8 ACLR 574 FAI Insurances Ltd v Pioneer Concrete Services Ltd (1987) 14 ACLR 250 Rymark (Australia) Development Consultants Pty Ltd v Mahoney's Constructions Pty Ltd [1972] V.R. 735 Re National Computer Systems & Services Ltd (1991) 6 ASCR 133. ALORIDGE PTY LIMITED (PROVISIONAL LIQUIDATOR APPOINTED) (ACN 003 954 318) v. WEST AUSTRALIAN GEM EXPLORERS PTY LIMITED NG 3210 of 1993 Burchett J. Sydney 10 January 1995 IN THE FEDERAL COURT OF AUSTRALIA) ) NEW SOUTH WALES DISTRICT REGISTRY) NG 3210 of 1993 ) GENERAL DIVISION ) IN THE MATTER OF WEST AUSTRALIAN GEM EXPLORERS PTY LIMITED (ACN 051 309 605) BETWEEN: ALORIDGE PTY LIMITED (PROVISIONAL LIQUIDATOR APPOINTED) (ACN 003 954 318) Applicant AND: WEST AUSTRALIAN GEM EXPLORERS PTY LIMITED Respondent CORAM: Burchett J. PLACE: Sydney DATE : 10 January 1995 ORDER OF THE COURT THE COURT ORDERS THAT the Applicant bring in, on a date to be fixed, short minutes of orders appropriate to reflect the reasons of the Court. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA) ) NEW SOUTH WALES DISTRICT REGISTRY) NG 3210 of 1993 ) GENERAL DIVISION ) IN THE MATTER OF WEST AUSTRALIAN GEM EXPLORERS PTY LIMITED (ACN 051 309 605) BETWEEN: ALORIDGE PTY LIMITED (PROVISIONAL LIQUIDATOR APPOINTED) (ACN 003 954 318) Applicant AND: WEST AUSTRALIAN GEM EXPLORERS PTY LIMITED Respondent CORAM: Burchett J. PLACE: Sydney DATE : 10 January 1995 REASONS FOR JUDGMENT BURCHETT J.: This is an application for leave to amend made by motion on notice. It is made in an application in which an order is sought for the winding up of the respondent West Australian Gem Explorers Pty Limited. That application is presently based on an amended statement of claim which alleges that the persons acting as directors of the company have invalidly purported to remove a director; that an invalid issue of a large number of shares was made for an improper purpose, namely, to enhance and maintain the position of one of the acting directors, and at a gross undervalue; that the business of the company involving the sale of chrysoprase (miscalled chrysophrase) has been conducted in such a manner as to make it not possible to ascertain with any degree of accuracy its true financial position (in relation to which allegation particulars were filed asserting that the accounts and financial dealings of the company "have been intermeddled and/or merged with the accounts of Victorian Gems and Minerals Pty Limited a company ... controlled by members of the Christianos family" and that gems have been transferred to that company and to other companies in the same group); that the directors have employed one Manuel Calzada to manage the company "knowing full well that the said Manuel Calzada was a person to whom the provisions of section 229(3) of the Corporations Law apply", who had been convicted and sentenced to prison for a large number of stealing offences and released on parole; and that other things have occurred which justify the granting of the relief sought in the application. By paragraphs 25 to 31 inclusive of the current amended statement of claim, further allegations were made, as follows: "25. On 3 July 1992 Metana Minerals NL by written agreement agreed to conditionally surrender exploration licence 31/58 in the Shire of Menzies which was held in its name solely. 26. In consideration of surrendering the exploration licence and thereby allowing the Respondent to apply to take up the licence the Respondent was to pay to Metana Minerals NL the sum of $45,000. The payment was subject to the terms and conditions contained in the agreement. 27. Part of the boundary of Mineral Lease 31/104 is partly adjacent to the boundary of exploration licence 31/58. 28. The Respondent paid $5,000 to Metana Minerals NL by way of deposit or part payment for the surrender of the exploration licence. The Respondent did not pay the balance of the moneys due to secure the surrender of the exploration licence. Prior to 3 July 1992 the Directors having the management and control of the Respondent were George Christianos and Fred Salkanovic. Mr. Fred Salkanovic ceased to be a Director on 3 July 1992 and in his stead Maria Christianos and Nikola Vuckovic were appointed as Directors. 29. As at 7 April 1993 the Directors of the Respondent had failed to complete the agreement. On that date the Respondent entered into a further agreement with Metana Minerals NL and Goddard & Hill Limited whereupon Goddard & Hill Limited would purchase Mineral Lease 31/112, as exploration lease 31/58 had now become, for valuable consideration. The Respondent consented to and acquiesced to this course. 30. At all material times the Directors of both Goddard & Hill Limited and the Respondent included George Christianos and Maria Christianos." The present application is but one of a number of suits involving the parties, and it is proposed that it will be heard together with a proceeding number G 3114 of 1993 in which the same applicant sues West Australian Gem Explorers Pty Limited, George Christianos and Frederick Salkanovic, seeking a declaration that the same issue of shares in West Australian Gem Explorers Pty Limited to George Christianos, to which reference has already been made, is void or voidable at the election of the applicant, a declaration that George Christianos and Frederick Salkanovic have acted in breach of their duties as directors in issuing those shares, and an order that the issue be set aside. By the application to amend with which I am now dealing, if granted, there would be added to the application a number of claims to obtain declarations in respect of matters already pleaded and matters sought to be pleaded, particularly in relation to the company Goddard & Hill Limited, and a second amended statement of claim is sought to be filed, to include the following new paragraphs: "24.AOn or about 15 June 1992 West Australian Gem Explorers Pty Limited entered into a written agreement with Goddard & Hill Limited (hereinafter called "The Consultancy Agreement"). 24.BIn consideration for the services that Goddard & Hill Limited was said to provide to West Australian Gem Explorers Pty Limited that company agreed to pay to Goddard & Hill Limited an amount equal to 50% of the gross value of the minerals mined and sold by West Australian Gem Explorers Pty Limited from Lease 31/104. 24.CThe directors of West Australian Gem Explorers Pty Limited as at 15 June, 1992 were George Christianos and Frederick Salkanovic and as at 3rd July, 1992 were George Christianos, Maria Christianos and Nikola Vuckovic. 24.DThe directors of Goddard & Hill as at 15 June, 1992 were Leila Mossenson, Ian Mossenson and Nissan Mossenson. Ian Mossenson was at all times the Solicitor for the Christianos' interests. 24.EOn 16 June, 1992 the said persons resigned as directors of Goddard & Hill Limited and in their stead George Christianos, Maria Christianos, Tonia Zoi Christianos, the mother and sister respectively of George Christianos were appointed as directors. 24.FIn purported performance of the agreement West Australian Gem Explorers Pty Limited paid to Goddard & Hill Limited various sums of money from time to time. 24.GThe said Agreement was entered into by the directors of West Australian Gem Explorers Pty Limited in breach of their fiduciary duties to that Company. Particulars: (i) The Agreement was of no commercial advantage to WAGE and had no commercial purpose for that Company. (ii) The purpose and the effect of the Agreement was to transfer 50% of the proceeds of sale from WAGE to Goddard and Hill Limited a company solely controlled by the Christianos' interests. Such action was to the exclusion of the shareholders of WAGE. (iii) The directors failed to act properly in the business of the Company and in the interests of the Company as a whole. (iv) The said actions and agreement of 7th April 1993 was to promote and protect the interests of the Christianos' to the detriment of the interests of the Loukas family." The amendments sought involve the joining also of additional respondents, George Christianos, Maria Christianos, Nikola Vuckovic and Frederick Salkanovic together with the company Goddard & Hill Limited. Mr Gyles Q.C., who appears as senior counsel for the proposed additional parties other than Goddard & Hill Limited opposes the granting of leave to amend. He contends that additional claims will not, except in very special circumstances, be joined with a winding up application, and further that the claim here sought to be made is barred by the rule in Foss v. Harbottle (1843) 2 Hare 461; 67 ER 189. The former proposition is supported by reference to Rymark (Australia) Development Consultants Pty Ltd v Mahoney's Constructions Pty Ltd [1972] V.R. 735 and Re National Computers Systems & Services Ltd (1991) 6 ASCR 133. But the point in Rymark was simply that the procedure by petition (described by Lush J. as a "peremptory" requirement of the provision there in question) permitted no exception in a case commenced by writ. Nor was the second case any closer to the present. There, McLelland J. (at 135) expressly limited his remarks to "a creditor's application for the winding up of a company ... on the ground of insolvency". It is true his Honour referred to the nature of the order as "in rem", and made a glancing reference to Rymark, but he then detailed the obvious considerations favouring early determination of the question whether a company should be wound up as insolvent. He said that "it is in the public interest that an application to wind up a company on the ground of insolvency, once filed, be determined without avoidable delay". I do not think the reiterated reference to "the ground of insolvency" can be brushed aside; when the same judge was confronted by a case closer to the present, one raising the "just and equitable" ground, he contemplated that the issues common to the winding up proceedings and the separate claim would be "heard together": Garden Mews - St Leonards Pty Ltd v Butler Pollnow Pty Ltd (1984) 9 ACLR 91 at 93, 95. Indeed, his Honour there appointed an interested party receiver in order to facilitate the joint hearing. There were in that case, as there are in this, reasons of justice and convenience favouring the resolution of all issues at the one time. The second objection relies on the well known rule, which really rests on a very simple ground - that a company's claim should be brought by the company itself, and not by someone else. To this proposition there is generally no answer. However, four exceptions are recognized beyond dispute, and a fifth has been suggested. They are set out in Professor Ford's Principles of Company Law 4th ed. (1986) paras. 1729 et seq. The fourth exception relates to conduct amounting to a fraud or a minority of the members of a company who, being a minority, cannot get it to institute proceedings; they are allowed to bring a derivative action on its behalf. The suggested fifth exception would authorize the commencement of such an action whenever the interests of justice require it to be permitted. What is urged against the amendment here is that the claims made depend upon a right of action against the directors, which, if it lies, belongs to the company. If that right of action had been asserted in the original application and statement of claim, it would have fallen within the fourth exception, at the time of the institution of the proceedings. However, a provisional liquidator was soon appointed. Mr Gyles Q.C. argues that this appointment prevents the fourth exception applying, since (he says) the provisional liquidator could cause the company to bring the claim. If the argument is valid, and assuming Ipp J. was right when he ruled (in Biala Pty Ltd v Mallina Holdings Ltd (1993) 11 ACSR 785) that the facts establishing the fourth exception must exist at the hearing and not merely at the institution of the action, the applicant would not have been able to rely on its minority status to establish this exception even if the claim now sought to be added had been made initially, A fortiori, the claim cannot be brought by amendment after the appointment of the provisional liquidator. However, Mr Officer Q.C., senior counsel for the applicant, answers this argument by pointing out that, in Biala, Ipp J. (at 844-848) held the fifth exception did exist and did apply in the particular circumstances, including the availability of the fourth exception at the time of the institution of the proceedings and its having become unavailable only during their pendency. On the same kind of basis, the fifth exception was claimed to be available here. Biala was taken on appeal, as Dempster v Mallina Holdings Ltd. In the as yet unreported judgment of the Full Court of the Supreme Court of Western Australia, delivered on 17 March 1994, Pidgeon, Rowland and Seaman JJ. said: "It is generally accepted that standing to commence an action that comes within the rule is a matter of substance rather than procedure: see MacDougall v Gardiner (1875) 1 Ch D 13 at 24 and Australian Coal and Shale Employees Federation v Smith (1937) 38 SR (NSW) 48 at 59. If, however, a plaintiff claims that he comes within one of the exceptions, then it seems to be the practice, in Australia at least, to deal with this at the trial. This need not necessarily be resolved as a preliminary issue but rather resolved at the hearing. Some of the cases are collected and discussed in Dempster v Biala Pty Ltd and TS Holdings Pty Ltd (1989) 15 ACLR 191." They added: "If, in fact, as a matter of the law of Australia, there is a fifth exception, then it would be difficult to resolve the question of standing without resolving that issue at a trial", and they repeated that it "is not generally accepted law in Australia and certainly not in Western Australia" that this question of standing should be resolved as a preliminary matter. Their Honours' view is supported by the case cited, also a full court decision, at 193; it receives too some support from the judgment of KIng C.J. and Mitchell J. in Hurley v BGH Nominees Pty Ltd (1982) 6 ACLR 791, which is cited in Ford (op. cit.) para. 1735. These decisions suggest that the question raised as an objection to the amendment ought not to be determined now; that I should allow the amendment; and that the issue should be decided when all the evidence is in at the hearing. However, I do not think the problem should simply be deferred without some further discussion. The appointment of a liquidator (as distinct from a provisional liquidator) would certainly raise a formidable obstacle to a derivative action. Unless the fifth exception could be applied in some as yet unperceived situation, it would raise an insuperable obstacle. This was held by the Privy Council in the Canadian appeal Ferguson v Wallbridge [1935] 3 D.L.R. 66, which was followed in England by Walton J. in Fargro Ltd v Godfroy [1986] 1 W.L.R. 1134. A similar view was taken by McLelland J., in Pollnow v Garden Mews - St Leonards Pty Ltd (1984) 9 ACLR 82 at 84-85, of a claim sought to be made against a company in respect of which a provisional liquidator had earlier been appointed in other proceedings. His Honour said: "The proceedings were commenced on 22 August 1983. The affairs of the company were at that time and still are under the control of a provisional liquidator appointed by the court on 30 June 1983 in proceedings No 4755 of 1983, being proceedings for the winding up of the company. It could not possibly be successfully agreed [sic - scilicet argued] that justice requires the rule in Foss v Harbottle to be disregarded where control of the affairs of the company (and the power to bring proceedings in its name) is vested in an officer of the court and is indirectly under the control of the court itself in the winding up proceedings. A remedy for any injustice alleged to arise from the appointment of the provisional liquidator is a matter to be pursued in the winding up proceedings (as has in fact occurred). Accordingly the proceedings so far as claims are made on behalf of the company, are not sustainable in the absence of the company as plaintiff." But, with respect, it was able to be argued, and successfully, that the provisional liquidator was not an appropriate person to have the conduct of the proceeding, as appears from his Honour's judgment (delivered the same day) in Garden Mews - St Leonards Pty Ltd v Butler Pollnow Pty Ltd (supra) at 95. The problem was solved by the appointment of Mr Pollnow as receiver of the rights of action of the company with power to enforce them in the name of the company (ibid; and cf. Aliprandi v Griffith Vintners Pty Ltd (in liq) (1991) 6 ASCR 250), but it is not clear to me why, assuming the fifth exception to the rule in Foss v Harbottle does exist, the same reasons which justified his appointment would not, in its absence, have justified his bringing a derivative action. At any rate, the appointment of Mr Pollnow suggests a way out of the impasse here, if impasse there be. It must be remembered that a provisional liquidator is, in a fundamental respect, not in the same position as a liquidator. He is appointed by an interlocutory order to fulfil a function analogous to that of a court-appointed receiver, whose task is "provisional only" and "does not at all affect the right": per Lord Hardwicke L.C. in Skip v Harwood (1747) 3 Atk 564; 26 ER 1125, cited in Shirlaw v Taylor (1991) 31 FCR 222 at 229-230, where the ephemeral nature of the appointment was also emphasized at 224. In Re Obie Pty Ltd (No 2) (1983) 8 ACLR 574 at 577, Thomas J. said a provisional liquidator's "primary function is to maintain the status quo pending determination of the winding up proceedings", and he drew attention to the limitations on the provisional liquidator's powers inherent in his appointment by the Court. See also Re Carapark Industries Pty Ltd (1967) 86 WN(Pt 1)(NSW) 165 at 171 and Ford, op. cit. para. 2206. This being the position of a provisional liquidator, and having regard to the circumstances of this case and the close relationship between the claims put forward on behalf of the company and those which necessarily arise in the application to wind up the company, I would not think it appropriate that the Court should authorize the provisional liquidator, as its servant, to pursue the matter, when the applicant is ready to do so. In my opinion, considerations of justice and convenience favour the applicant. It was not suggested there is in the Federal Court any difficulty of the kind raised by Young J. under the Rules of the Supreme Court of New South Wales in FAI Insurances Ltd v Pioneer Concrete Services Ltd (1987) 14 ACLR 250. Cf. Federal Court Rules, Order 6, rule 1. The decision of the Full Court of the Supreme Court of Western Australia in Dempster v Mallina Holdings Ltd (supra) would, as I have said, support allowing the amendments, and leaving the dispute as to the alleged application of Foss v Harbottle to the hearing. But that might keep the question of standing in undesirable doubt. The interests of justice would be better served if the parties knew that the substantial issues were definitely to be decided. Appropriate certainty is more likely to be assured if an order is made along the lines of that which McLelland J. made when he appointed Mr Pollnow as receiver of the rights of action of the company in whose name he desired to sue, with power to do so. As McLelland J.'s decision was not cited to me, I shall hear anything further that counsel desire to put as to whether and in what terms a similar order should be made. In any case, I shall allow the amendments sought. I direct the applicant to bring in, on a date to be fixed, short minutes of orders appropriate to reflect these reasons. I certify that this and the preceding 11 pages are a true copy of the Reasons for Judgment herein of his Honour Justice Burchett. Associate: Date: 10 January 1995 Counsel for the Applicant: Mr D. Officer Q.C. with Mr D.L. Warren Solicitors for the Applicant: N.G. Cassim & Company Counsel for the Respondent: Mr R.V. Gyles Q.C. with Mr J. Simpkins Solicitors for the Respondent: Phillips Fox Date of hearing: 24 June 1994