FEDERAL COURT OF AUSTRALIA Mali, in the matter of Head Quarters (WA) Pty Ltd v Head Quarters (WA) Pty Ltd as trustee for the Three Flights Up Unit Trust [2016] FCA 171 File number: QUD 1150 of 2015 Judge: EDELMAN J Date of judgment: 1 March 2016 Catchwords: CORPORATIONS –leave to bring the proceedings on behalf of a company – alleged breaches of fiduciary duty – alleged knowingly procuring breaches of fiduciary duty – whether criteria in ss 236 and 237 of the Corporations Act are satisfied Legislation: Corporations Act 2001 (Cth) ss 182(1), 183(1), 236, 236(1)(a), 236(1)(b), 237, 237(2)(a), 237(2)(b), 237(2)(c), 237(2)(e), 237(3), 237(3)(b), 237(3)(c)(ii), 240 Cases cited: Alleyne v Darcy (1854) 4 I Ch R 199 Chahwan v Euphoric Pty Ltd t/as Clay & Michel [2008] NSWCA 52; (2008) 245 ALR 780 Eaves v Hickson (1861) 30 Beav 136; (1861) 54 ER 840 Fyler v Fyler (1841) 3 Beav 550; (1841) 49 ER 216 Howard v Commissioner of Taxation [2014] HCA 21; (2014) 253 CLR 83 Keech v Sandford (1726) Sel Cas Ch 61; (1726) 25 ER 223 Midgley v Midgley [1893] 3 Ch 282 Norris v Le Neve Ridgeway (1745) Temp Hardwicke 322; (1745) 27 ER 843 Robash Pty Ltd v Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432 Tang Man Sit v Capacious Investments Ltd [1996] 2 WLR 192; [1996] AC 514 Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544 Getzler, J "Rumford Market and the Genesis of Fiduciary Obligations" in A Burrows and Lord Rodger of Earlsferry (eds), Mapping the Law (Oxford University Press, 2006) Date of hearing: Determined on the papers Date of last submissions: 29 February 2016 (Applicant) Registry: Queensland Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 31 Counsel for the Applicant: No appearance as matter determined on the papers Solicitor for the Applicant: Rouse Lawyers Counsel for the First Respondent: No appearance as matter determined on the papers Counsel for the Second and Third Respondents: No appearance as matter determined on the papers Solicitor for the Second and Third Respondents: Metaxas & Hager ORDERS QUD 1150 of 2015 BETWEEN: DEEPESH MALI Applicant AND: HEAD QUARTERS (WA) PTY LTD ACN 601 116 072 AS TRUSTEE FOR THE THREE FLIGHTS UP UNIT TRUST First Respondent SHAHYAZ YEZDI MUBARAKAI Second Respondent JERESTINE SHAHYAZ MUBARAKAI Third Respondent JUDGE: EDELMAN J DATE OF ORDER: 1 MARCH 2016 Upon the applicant undertaking to the Court that he will pay and bear and indemnify Head Quarters (WA) Pty Ltd as trustee for the Three Flights Up Unit Trust against all costs, charges and expenses of and incidental to the bringing and continuation of the proceedings brought by him pursuant to Order 1 below, except insofar as the Court may in future otherwise direct or allow, THE COURT ORDERS THAT: 1. Pursuant to s 237 of the Corporations Act 2001 (Cth), the applicant has leave to commence proceedings in the name of Head Quarters (WA) Pty Ltd as trustee for the Three Flights Up Unit Trust against the third respondent and Victoria Ventures Pty Ltd as trustee for the Victoria Ventures Unit Trust in respect of the causes of action pleaded in the draft statement of claim, which is marked exhibit 1. 2. The respondents be restrained from: (a) terminating the Three Flights Up Unit Trust; and (b) calling, convening or holding any further meetings of the Three Flights Up Unit Trust; until the proceedings commenced by the applicant in the name of the first respondent have been determined or until leave is granted under s 240 of the Corporations Act 2001 (Cth), whichever occurs sooner. 3. The costs of this application be costs in the proceedings brought on behalf of the first respondent. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT EDELMAN J: Introduction 1 This is an application by Mr Mali for leave to commence proceedings on behalf of the first respondent, Head Quarters (WA) as trustee for the Three Flights Up Unit Trust. Mr Mali relies upon s 237 of the Corporations Act 2001 (Cth). Following various exchanges during directions hearings, the second and third respondents did not oppose this application. I will refer to the second and third respondents formally as Ms Mubarakai and Mr Mubarakai rather than as they are referred to in the evidence and proposed statement of claim by their preferred first names, Jeri and Yaz respectively. 2 The action that Mr Mali seeks to bring on behalf of Head Quarters (WA) is essentially based on allegations of conduct by Mr Mali's co-director in Head Quarters (WA), Ms Mubarakai. Mr Mali says that she diverted a valuable opportunity of which Head Quarters (WA) had the right to take the benefit, to a company called Victoria Ventures (as trustee for the Victoria Ventures Unit Trust). That company, Victoria Ventures, is the proposed second respondent. It has Mr Mubarakai as its sole director and shareholder. Mr Mali estimates that Victoria Ventures is on course to make a net profit of $160,000 in its first year. In contrast, it seems that Head Quarters (WA) is not in a strong financial position. Mr and Mrs Mubarakai are considering making an application to wind up Head Quarters (WA) on the basis that it is insolvent. However, at a directions hearing yesterday, the solicitor for Mr and Mrs Mubarakai properly conceded that it might be very difficult to establish that Head Quarters (WA) is insolvent if the value of this litigation is taken into account. 3 The parties consented yesterday to this matter being dealt with on the papers and for reasons and orders to be made from chambers. For the following reasons, Mr Mali should be given leave to commence proceedings on behalf of Head Quarters (WA). The requirements for an application for leave to proceed on behalf of a company 4 The power of a person to proceed on behalf of a company is governed by the Corporations Act. Section 236 of the Corporations Act provides: Bringing, or intervening in, proceedings on behalf of a company (1) A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if: (a) the person is: (i) a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or (ii) an officer or former officer of the company; and (b) the person is acting with leave granted under section 237. (2) Proceedings brought on behalf of a company must be brought in the company's name. (3) The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished. 5 Mr Mali is both a shareholder and a director of Head Quarters (WA). He satisfies the requirement in s 236(1)(a). The only possible issue in this application is whether s 236(1)(b) is satisfied. That directs attention to s 237. 6 Section 237 of the Corporations Act provides in the subsections relevant to this application as follows: Applying for and granting leave (1) A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings. (2) The Court must grant the application if it is satisfied that: (a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and (b) the applicant is acting in good faith; and (c) it is in the best interests of the company that the applicant be granted leave; and (d) if the applicant is applying for leave to bring proceedings--there is a serious question to be tried; and (e) either: (i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or (ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied. … Application of the criteria for leave in s 237 of the Corporations Act 7 The first criterion, contained in s 237(2)(a) of the Corporations Act, is that it is probable that Head Quarters (WA) will not itself bring the proceedings, or properly take responsibility for them, or the steps in them. The evidence in this case is that Mr Mali and Ms Mubarakai are the two directors of the relevant companies. Mr Mali does not have a majority shareholding in the relevant companies and it is extremely unlikely that Ms Mubarakai will authorise the companies to bring proceedings against herself or her husband's company. The relationship between the relevant parties has broken down and the board of Head Quarters (WA) will not take steps to commence or conduct the proposed proceedings without leave being given to Mr Mali to conduct the proceedings on its behalf. 8 The second criterion, contained in s 237(2)(b), is that Mr Mali is acting in good faith. Mr Mali is required to establish this matter to the Court's satisfaction. Relevant considerations to whether Mr Mali is acting in good faith include the following (see Chahwan v Euphoric Pty Ltd t/as Clay & Michel [2008] NSWCA 52; (2008) 245 ALR 780, 797 [75], 798 [81] (Tobias JA); Robash Pty Ltd v Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432 [58] (Ball J)): (1) Mr Mali's honest belief that good cause of action exists and has reasonable prospects of success; and (2) whether Mr Mali is seeking to bring the proceedings for a collateral purpose. 9 There is no suggestion in this case of a collateral purpose such as might exist, for example, where an inference might be drawn because the application is brought by a person with only token shareholding. Mr Mali's good faith in bringing these proceedings is evident from the substantial economic interest in Head Quarters (WA) and because, for the reasons I explain below and with the qualifications I explain, there are reasonable prospects of success in the proceedings. 10 The third criterion, contained in s 237(2)(c), is that it is in the best interests of the company that the applicant be granted leave to proceed. Section 237(3) provides for a rebuttable presumption against the proceedings being in the best interests of the company in the following circumstances: (3) A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that: (a) the proceedings are: (i) by the company against a third party; or (ii) by a third party against the company; and (b) the company has decided: (i) not to bring the proceedings; or (ii) not to defend the proceedings; or (iii) to discontinue, settle or compromise the proceedings; and (c) all of the directors who participated in that decision: (i) acted in good faith for a proper purpose; and (ii) did not have a material personal interest in the decision; and (iii) informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and (iv) rationally believed that the decision was in the best interests of the company. The director's belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold. 11 The rebuttable presumption does not arise in this case. It appears that no decision has been made by Head Quarters (WA) under s 237(3)(b). In any event, one of the two directors of Head Quarters (WA), Ms Mubarakai, is the proposed first respondent and has a material personal interest in the decision under s 237(3)(c)(ii). 12 The critical matters in an assessment of whether an action is in the best interests of the company include the prospects of success of the proceedings, the likely costs, and any likely recovery if the proceedings are successful and the likely consequences if they are not: see Robash Pty Ltd v Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432, 445 [57] (Ball J). 13 Any assessment of prospects of success in relation to this criterion must necessarily be extremely tentative and must be made in the absence of either evidence at trial or even a filed defence. Nevertheless, on the basis only of the matters alleged in the draft statement of claim as well as the affidavit evidence filed by Mr Mali (which the second and third respondents chose not to contradict by filing no evidence in response and not opposing this application), I am satisfied, in these broad and conditional terms, that there are reasonable prospects that the company could succeed in its claim. 14 In very broad summary, the causes of action which Head Quarters (WA) seeks to bring are based on allegations that can be briefly summarised as follows. 15 Mr Mali and Ms Mubarakai were the two directors of Head Quarters (WA). They owned shares in the company in the proportions 49:51. Head Quarters (WA) was the trustee of the Three Flights Up Unit Trust. The units in the Unit Trust were held in proportions of 49:51 for trusts associated with Mr Mali and Mr Mubarakai respectively. 16 In 2014 and 2015, Head Quarters (WA) acquired the rights to operate a Sumo Salad retail franchise store and a retail franchise kiosk at Garden City shopping centre. The rights were acquired from Sumo Salad (Franchising) Pty Ltd (Sumo Salad). 17 In June 2015, following a proposal from Sumo Salad, Head Quarters (WA) acquired the rights to operate a Sumo Salad retail franchise pop-up store at the Lady Cilento Children's Hospital. The proposal from Sumo Salad had been that the pop-up store would be operated for 4-6 months or until a permanent store was built at the Hospital. 18 Clause 2.2 of the pop-up store agreement provided that if Sumo Salad proposed to open a permanent Sumo Salad retail franchise store in the Lady Cilento Children's Hospital, it must offer Head Quarters (WA) a first right to purchase the franchise for that new store on the same commercial and legal terms as the proposed offer to any other party. 19 From June 2015 when the pop up store began operating it was very profitable. In August and September 2015, Ms Mubarakai withdrew $28,000 from the bank account of Head Quarters (WA) in order to pay a bank guarantee for the proposed lease of the permanent store and Mr Mali counter-signed the proposed lease of the permanent store. 20 The rights for Head Quarters (WA) to operate the permanent store were never brought into effect. Mr Mali says that, at some point in time, Ms Mubarakai informed Victoria Ventures (a company of which her husband was the sole director) that Head Quarters (WA) would surrender its right under clause 2.2 of the pop-up agreement. Ms Mubarakai then advised Sumo Salad that the Company surrendered its right under clause 2.2 of the pop-up agreement to purchase the franchise of the permanent store and that Victoria Ventures would purchase the franchise of the permanent store. Ms Mubarakai also advised the lessor of the site of the permanent store that Head Quarters (WA) would not lease that site but that Victoria Ventures would. Victoria Ventures used the $28,000 withdrawn from the bank account of Head Quarters (WA) to pay the bank guarantee under the proposed lease of the permanent store. 21 On 17 September 2015, Ms Mubarakai sent an email to Mr Mali stating that, "Lady Cilento Hospital permanent site is no longer a part of Three Flights Up Unit Trust, and once the open air fridge is wound up Three Flights Up Unit Trust's interests in the existing business will be reduced to nil". 22 On 22 October 2015, Ms Mubarakai sent an email to Sumo Salad stating that, "I consider that the Three Flights Up Unit Trust should not proceed with the Lady Cilento permanent site". Ms Mubarakai subsequently refused Mr Mali's request to allow the Company to purchase the franchise of the permanent store. On or about 23 October 2015, Victoria Ventures commenced operating the permanent store. 23 The claims that Head Quarters (WA) brings against Ms Mubarakai are pleaded as: (1) breach of her fiduciary duty not to divert business opportunities away from Head Quarters (WA); (2) breach of her duty under s 182(1) of the Corporations Act not to improperly use her position in order to gain an advantage for herself or Victoria Ventures; (3) breach of her duty under s 183(1) of the Corporations Act not to improperly use information obtained as a director in order to gain an advantage for herself or Victoria Ventures; and (4) knowingly procuring Head Quarters (WA) to breach its fiduciary duty to act in the best interests of the unitholders and to act impartially towards the unitholders. It seems this is a plea which purports to rely upon the line of authorities commencing with Fyler v Fyler (1841) 3 Beav 550, 561-562, 567-568; (1841) 49 ER 216, 221, 223 224 (Lord Langdale MR); Alleyne v Darcy (1854) 4 I Ch R 199, 209 (Sir Maziere Brady LC); Eaves v Hickson (1861) 30 Beav 136, 141; (1861) 54 ER 840, 842 (Romilly MR); Midgley v Midgley [1893] 3 Ch 282, 301 (Lindley LJ), 304 (Smith LJ). 24 Mr Mali submits that the benefit obtained by Victoria Ventures was not merely an "opportunity". Head Quarters (WA) had a contractual first right of refusal to operate the Lady Cilento Children's Hospital permanent store. He will submit that, based upon evidence contained in an affidavit which he has filed, Ms Mubarakai caused that right to be surrendered by Head Quarters (WA) and acquired by Victoria Ventures and that she deceived Head Quarters (WA) in doing so. 25 On the basis of the evidence and proposed statement of claim I consider that Head Quarters (WA) has reasonable prospects of success, with the qualifications I have described above at [13]. In particular, the principle in Keech v Sanford (1726) Sel Cas Ch 61; (1726) 25 ER 223 still has its full inherited vitality in Australian law. It has been described as the "leading case" in the line of authority which it generated: Howard v Commissioner of Taxation [2014] HCA 21; (2014) 253 CLR 83, 102 [37] (French CJ and Keane J). In Keech, the principal, however honestly he acted, was the only person in the world who was not entitled to take the benefit of the lease formerly held by the fiduciary infant. The Lord Chancellor said (at 62, 223): I must consider this as a trust for the infant; for I very well see, if a trustee, on the refusal to renew, might have a lease to himself, few trust estates would be renewed to cestui que use; though I do not say there is a fraud in this case, yet he should rather have let it run out, than to have had the lease to himself. This may seem hard, that the trustee is the only person of all mankind who might not have the lease: but it is very proper that rule should be strictly pursued, and not in the least relaxed; for it is very obvious what would be the consequence of letting trustees have the lease, on refusal to renew to cestui que use. 26 In Norris v Le Neve Ridgeway (1745) Temp Hardwicke 322; (1745) 27 ER 843, 846, Hardwicke LC said of the cases following Keech that "the equity of those cases is grounded on the supposed tenant's right or expectation, and the known usage of renewal: For though the tenants have properly no right, yet he is always preferred, and the ground is, that the person who settles the term in trust has a view to the courtesy in the renewal, the renewal enuring to the benefit of all the trusts". As Professor Getzler has explained, the decision in Keech "has been received as embodying a policy of prophylaxis, or preventative sanction through profit-stripping that takes away all incentive for a fiduciary to consider how he might gain from his position": Getzler, J "Rumford Market and the Genesis of Fiduciary Obligations" in A Burrows and Lord Rodger of Earlsferry (eds), Mapping the Law (Oxford University Press, 2006) 577, 586. 27 If Head Quarters (WA) is successful in establishing liability, it seeks orders including compensation or disgorgement of the profits, or a constructive trust over profits, made by operating the permanent store. It would be required to elect between those remedies after quantification: Tang Man Sit v Capacious Investments Ltd [1996] 2 WLR 192; [1996] AC 514. 28 There may be difficulties in a remedy of a constructive trust for the reasons described by the High Court of Australia in Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544. However, if an account and disgorgement of profits were ordered then there is a prospect for an award of disgorgement of the profits for a number of the years of operation. In Warman, for example, the account of profits was given for the first two years of operation of the business. In this case, the best particulars that Mr Mali says can be given in the proposed statement of claim are that "Victoria Ventures is on course to make a net profit of $160,000 in its first year of operation at the permanent store". That would suggest a prospective recovery of at least $320,000 and potentially far more if the account of profits extends to more than two years. Against this, Mr Mali has undertaken to indemnify Head Quarters (WA) against all costs, charges and expenses in relation to the proceedings. I am satisfied that it is in the best interests of Head Quarters (WA) for the action to be commenced. 29 The fourth criterion for the grant of leave, provided in s 237(2)(d), is whether there is a serious question to be tried in the proceedings. For the reasons I have already explained, and on the limited evidence before me, I am satisfied that this is the case. 30 The fifth criterion for leave under s 237(2)(e) is also satisfied. Although Mr Mali did not give written notice to Head Quarters (WA) of his intention to apply for leave at least fourteen days before making the application, it is appropriate to grant leave in circumstances in which there is no prejudice to any of the other shareholders. In particular, Ms Mubarakai has had notice of this application and its grounds since 16 December 2015. Further, neither Ms Mubarakai nor Mr Mubarakai opposes this application. Conclusion 31 Upon the giving of the appropriate undertakings, Mr Mali should have leave to proceed on behalf of the company. The second and third respondents should be restrained from terminating the Three Flights Up Unit Trust or calling, convening or holding any further meetings of the Three Flights Up Unit Trust until either (i) the proceedings have been determined or (ii) leave is granted to discontinued, compromise or settle the proceedings under s 240 of the Corporations Act 2001 (Cth). I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edelman. Associate: Dated: 1 March 2016