FEDERAL COURT OF AUSTRALIA Rafferty v National Australia Bank Limited [2011] FCA 169 Citation: Rafferty v National Australia Bank Limited [2011] FCA 169 Parties: PATRICK CAMPBELL RAFFERTY, TIME 2000 WEST PTY LIMITED (ACN 127 893 270) and KARAVILLE HOLDINGS PTY LIMITED (ACN 009 439 178) v NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937) File number: SAD 206 of 2010 Judge: MANSFIELD J Date of judgment: 28 February 2011 Catchwords: CORPORATIONS – Corporations Act 2001 (Cth) s 240 – matters for consideration – application for leave of the Court to approve compromise of proceedings Date of hearing: 2 March 2011 Place: Adelaide Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 13 Counsel for the First and Third Applicants: J Cudmore Solicitor for the First and Third Applicants: Cudmore Cusoff Knox Counsel for the Respondent: L Calabrese Solicitor for the Respondent: Finlaysons IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION SAD 206 of 2010 BETWEEN: PATRICK CAMPBELL RAFFERTY First Applicant TIME 2000 WEST PTY LIMITED (ACN 127 893 270) Second Applicant KARAVILLE HOLDINGS PTY LIMITED (ACN 009 439 178) Third Applicant AND: NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937) Respondent JUDGE: MANSFIELD J DATE: 2 March 2011 PLACE: ADELAIDE REASONS FOR RULING 1 This proceeding concerns the alleged wrongful application of funds of Time 2000 West Pty Limited (Time 2000) by National Australia Bank Limited (the Bank). Patrick Rafferty is one of the two directors of Time 2000, along with Stephen Gerard Donovan (Donovan). Companies respectively associated with Rafferty and Donovan were the shareholders in Time 2000. It is not necessary to explore in any detail the nature of the activities planned for Time 2000. It was, in general terms, a corporate vehicle for a joint enterprise. 2 There was a falling out between Rafferty and Donovan. It is also not necessary to explore the details. It has been the subject of separate proceedings: Rafferty v Time 2000 West Pty Ltd (No 4) [2010] FCA 725 and Rafferty v Time 2000 West Pty Ltd (No 5) [2010] FCA 873; (2010) 87 IPR 593. An appeal from those two decisions has recently been heard. Judgment has been reserved by the Full Court. 3 In the course of its operations, Time 2000 held significant funds in a bank account with the Bank. It is alleged in this proceeding that Donovan procured the Bank to pay certain of those funds to the account of Time 2000 Systems (Australia) Pty Ltd (Time Systems), an entity controlled by Donovan. It is further alleged that that payment in reduction of the balance of the monies held by the Bank on behalf of Time 2000 was not properly authorised by Time 2000 and took place without the consent of both directors of Time 2000 in circumstances where it had been arranged, and the Bank was on notice that, no further reduction of monies held on deposit on behalf of Time 2000 would be made without confirmation from both its directors. 4 Because of the shareholding in Time 2000 and its joint directorships, Rafferty has brought these proceedings in his own name as well as in the name of Time 2000. Donovan would not have authorised Time 2000 to do so. Rafferty seeks an order under ss 236(1) and 237(2) of the Corporations Act 2001 (Cth) (the Act) for leave to bring the proceedings on behalf of Time 2000, then as now, as well as for the primary relief referred to. In essence, through Time 2000, he seeks to have its bank account restored to the level it was before the contentious transfer. 5 The parties to the proceeding, but in particular Rafferty and the Bank, have agreed upon their resolution. Karaville Pty Ltd is an entity controlled by Rafferty, but is an incidental party for present purposes. Their agreement, as to its detailed terms, is confidential. I am informed that the agreement includes that the Bank will restore the account of Time 2000 to its credit level and status as it existed prior to the contentious transfer of funds to Time Systems. 6 That agreement having been reached, it is necessary for Rafferty formally to obtain an order under s 237(2) of the Act for leave to have brought the proceedings in the name of Time 2000, and then for an order under s 240 of the Act approving the proposed compromise which, once it is implemented, is apparently intended to lead to the discontinuance of this action. Hence, an order is sought under s 240 that leave be granted to the parties to discontinue, compromise or settle the within proceedings. Thereafter, the proposed order provides for a procedure whereby the proceedings will in due course be discontinued, or otherwise brought to an end. S 237(2) CORPORATIONS ACT 7 There is no doubt that the Court has power to make an order under s 237(2) retrospectively. So much was decided by Middleton J in South Johnstone Mill Ltd v Dennis (2007) 163 FCR 343. For the reasons his Honour their discussed at [24]-[63], with which I respectfully agree, I am satisfied that the Court has power to do so. 8 I am also satisfied on the material before me that each of the criteria identified in s 237(2) have been met. Given the structure of ownership and directorship of Time 2000, it is probable that Time 2000 would not otherwise bring proceedings. I am satisfied that Rafferty is acting in good faith, having an honest belief of a good cause of action and with reasonable prospects of success against the Bank, in seeking to do so. I am also satisfied that he has no collateral purpose that would amount to an abuse of process. It is, as I understand the material, simply a case where Rafferty alleges that funds of Time 2000 have been applied improperly to a corporate entity associated with Donovan, and at the expense of Time 2000 and so indirectly of the interests associated with Rafferty. If the claim is successful, that situation will be reversed and the funds held by Time 2000 will then be applied appropriately on behalf of the shareholders of Time 2000. The particular payment in issue was not specifically the subject of a claim for relief in the proceedings referred to in [2], so if the proceeding is successful (as the proposed compromise now contemplates that it will be), it will simply restore the shareholders of Time 2000 and its shareholders to their proper position. Moreover, it is clearly in the best interests of Time 2000 that its assets not be improperly dissipated by transfers of monies to an interest associated with only one of the shareholders. There is clearly a serious question to be tried. The affidavit evidence discloses that. That is, to a degree, confirmed by the apparent arrangement now entered into between Rafferty apparently on behalf of Time 2000 and the Bank. Nor can there be any improper disadvantage to Donovan or his interests by granting the relief sought because, if the payment to Time Systems was properly made, it can subsequently be justified. There will only be a temporal disadvantage. The payment was made in circumstances at a time when both Rafferty and Donovan were in dispute. They had agreed (on the material before me) that the assets of Time 2000, including its bank assets, would not be applied except by their joint agreement. There is a serious question to be tried that the contentious payment was made contrary to that arrangement. S 240 Corporations Act 9 The other matter to consider is whether an order should be made under s 240. It provides that: Proceedings brought or intervened in with leave of the Court must not be discontinued, compromised or settled without the leave of the Court. 10 Clearly such a provision is intended to ensure that the Court have the opportunity to prevent any collusion between the plaintiff and the defendant in the particular circumstances, and perhaps more widely to oversee the question whether the proposed resolution is in the best interests of the company. The Court may permit others whose interests may be affected to be heard before deciding whether to grant leave to compromise a proceeding brought with leave under s 237(2): Carpenter v Pioneer Park Pty Ltd (in liq) (2004) 211 ALR 457 per Barrett J at [41]. 11 In the absence of full submissions as to the scope and effect of s 240, it is not appropriate to consider those matters in detail. In this instance, it is clear that Time 2000 and the Bank are at arms length. There is no risk of them colluding. That may be a sufficient protection to ensure that the resolution of the claim is an appropriate one. The proposed agreement simply includes restoration of the status quo before the contentious payment was made. If the funds in issue were properly paid to Time Systems by the Bank notwithstanding any arrangement between the directors at the time, and notwithstanding that (as evidence before me suggests) that the Bank was aware of that arrangement, Time Systems (and the Donovan interests) will in due course be able to justify that payment. 12 However, as Time Systems and Donovan have not had an opportunity to be heard and are not parties to this proceeding, in my view it is appropriate to act a little cautiously under s 240 of the Act. Accordingly, I propose to make orders broadly in the terms requested. They are made on the basis that the status of the account will be restored to that which was in place before the contentious payment. Once that occurs, the proceeding is apparently proposed to be discontinued. There are apparently other terms to the proposed compromise, but the critical issue to my mind is the interests of Time 2000. I will direct pursuant to s 240 of the Act that leave be granted to the parties to discontinue, compromise or settle the within proceedings. As the terms of settlement are in part confidential, I am not fully informed as to them. As I have indicated, there is no reason to think that they have not been reached on an arms length and proper basis. There will be circumstances in which it is appropriate for the Court to be informed of the full terms of the proposed compromise of proceedings, so that the Court may be satisfied that all interests potentially adversely affected by any such compromise have an opportunity to participate and be heard. In this case, as I have indicated, to the extent that there may be an adverse effect upon Donovan or Time Systems, presumably by the Bank seeking reimbursement of the funds which have been re-credited to the account of Time 2000, they will have the opportunity to be heard at that time. In the meantime, in case there is some other step which might be taken by those interests to oppose the compromise being permitted, I propose to grant the leave referred to, subject to that leave being stayed by a period of, in effect, 14 days. During that 14 days, the orders to be made are to be served upon Time Systems, and Time Systems is then given a period of seven days within which to file in the Registry, and serve upon the parties, notice that it objects to the leave granted. In the event that it files such a document, the stay of that order will operate until further order. The parties will have an opportunity to be heard as to whether the order should be sealed, or some other or no order should be made. In that event, the matter will be called on for further directions, with a view to resolving any ongoing dispute. 13 In that way, in my view, the interests of both the parties to this proceeding and the interests of Donovan, in particular Time Systems, are properly protected. I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield. Associate: Dated: 2 March 2011