FEDERAL COURT OF AUSTRALIA Chaudhary v Bandicoot Group Pty Ltd [2017] FCA 517 File number: SAD 211 of 2016 Judge: BESANKO J Date of judgment: 16 May 2017 Catchwords: PRACTICE AND PROCEDURE – consideration of an application to strike out paragraphs of the Statement of Claim – whether the allegations were reasonably or fairly arguable – where proceedings not brought on behalf of the company – whether the loss claimed is derivative loss – whether the plaintiff's loss is separate and distinct to that of the company – whether plea is so lacking in particularity that it ought to be struck out – where deficiencies are not so extreme as to warrant an order striking the plea out – where further request for particulars can be made. Legislation: Corporations Act 2001 (Cth) ss 232, 233, 236, 237, 461 Cases cited: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413 LPD Holdings (Aust) Pty Ltd v Phillips and Others (2013) 281 FLR 227 VPlus Holdings Pty Ltd v Bank of Western Australia Ltd and Others (2012) 91 ACSR 545 Date of hearing: 9 December 2016 Registry: South Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 38 Counsel for the Plaintiff: Mr M Douglas Solicitor for the Plaintiff: PGC Legal Pty Ltd Counsel for the Defendants: Mr N Swan Solicitor for the Defendants: Andersons Solicitors ORDERS SAD 211 of 2016 BETWEEN: VISHAL CHAUDHARY Plaintiff AND: BANDICOOT GROUP PTY LTD ACN 134 424 034 First Defendant ASHEESH GOYAL Second Defendant RUCHI GOYAL Third Defendant JUDGE: BESANKO J DATE OF ORDER: 16 may 2017 THE COURT ORDERS THAT: 1. Paragraphs 46.1, 46.2 and 46.3.1 of the Third Statement of Claim are struck out. 2. The defendants' interlocutory application dated 20 October 2016 is otherwise dismissed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT BESANKO J: Introduction 1 This is an application by the defendants to this proceeding to strike out paragraphs 16.2, 16.7, 17, 19A, 19B (inclusive of Schedule 8), 19C, 26B, 45, 46 and 47.1.7.8 of the plaintiff's Third Statement of Claim. The plaintiff is Mr Vishal Chaudhary, and the defendants are Bandicoot Group Pty Ltd (the company), Asheesh Goyal and Ruchi Goyal. 2 The operations of the company are at the centre of the dispute between the parties. The company was incorporated on 1 December 2008 and at all material times it has traded as a vocational training institution under the name "Salford College". The company carries on business in Adelaide and has at least two bank accounts with the Westpac Banking Corporation. The plaintiff is a shareholder in the company and he holds 49 fully paid ordinary shares. He was a director of the company between 28 January 2009 and 26 February 2016, and he was employed by the company in the role of "Director of Student Support Services" between 1 July 2009 and 25 January 2016. The plaintiff alleges that he is a creditor of the company. 3 The second defendant has been a director of the company since 1 December 2008. The third defendant is the second defendant's wife and she has been a director of the company since 24 May 2014. 4 The plaintiff identifies a number of other individuals and corporate entities which he alleges are related to the second and third defendants in one way or another and which he claims have been involved in the activities of the second and third defendants. 5 The plaintiff's case is that on 28 December 2008, he and the second and third defendants entered into a written agreement regarding the company's operations entitled "Memorandum of Understanding" (Contract). The plaintiff alleges that the terms of the Contract included the following: 14.1 Asheesh and Ruchi would make an initial contribution towards the operational funds of the business of $40,800 (clause 2 of the Contract); 14.2 Asheesh would be paid an annual salary of $70,000 plus 5% of the business' net income, which salary would be reviewed after six months and adjusted to an amount consistent with market rates for equivalent positions at other like businesses (clause 7 of the Contract); 14.2A Vishal would be paid an annual salary of $40,000 plus 5% of the business' net income, which salary would be reviewed after six months and adjusted to an amount consistent with market rates for equivalent positions at other like businesses (clause 7 of the Contract); 14.3 All decisions regarding the operations of the business would be approved by all of the parties to the Contract (clause 8 of the Contract); 14.4 No party to the Contract would draw any monies from the business' bank accounts for personal use without specific approval from all of the parties (clause 10 of the Contract). 6 The plaintiff's case is that the second and third defendants have misappropriated or misused the company's funds for their benefit or for the individuals or corporate entities associated with them and with no benefit to the company (paragraph 16). The plaintiff makes a number of allegations in support of this general allegation and of relevance for present purposes are the following: 16.2 Personally retaining cash payments made to Bandicoot for their own use. Particulars Further particulars will be provided following discovery. 16.7 Using Bandicoot's funds for their own personal benefit or the benefit of entities controlled by them and not for the benefit of Bandicoot and characterising those transactions as loans. Those funds have 16.11.1 Not been repaid to Bandicoot; 16.11.2 Been treated as having been written off by Asheesh and/or Ruchi; 16.11.3 Not been recorded in Bandicoot's financial statements Particulars Particulars of such transactions are set out in Schedule 7A to this pleading and further particulars will be provided following discovery. Schedule 7A identifies five entries relating to loans in the company's balance sheet at different dates. 7 Paragraph 17 is one of the paragraphs which is challenged by the defendants and it is convenient to set it out in full: 17. The conduct of Asheesh and Ruchi as pleaded in paragraph 16 of this pleading is, and was, contrary to the Contract pleaded at paragraphs 14.3 and 14.4 of this pleading in that: 17.1 In relation to the contractual obligations pleaded at paragraph 14.3 of this pleading: 17.1.1 the decision to use Bandicoot's funds as pleaded at paragraph 16 was part of the operation of Bandicoot's business; 17.1.2 Vishal did not approve Asheesh's or Ruchi's use of Bandicoot's funds as pleaded at paragraph 16; 17.2 In relation to the contractual obligations pleaded at paragraph 14.4 of this pleading, Asheesh and Ruchi drew monies from Bandicoot's bank accounts for their personal use, as pleaded at paragraphs 16.1, 16.3, 16.4, 16.5, 16.6 and 16.7, without specific approval from all of the parties to the Contract. 8 The plaintiff alleges that the company has paid an excessive and unauthorised salary to the second defendant as the chief executive officer (paragraphs 18 and 19). 9 The plaintiff alleges that the second and third defendants have caused the company to breach contracts it had with various staff members. Paragraphs 19A, 19B and 19C are challenged and it is convenient to set them out in full: 19A Asheesh and/or Ruchi have caused Bandicoot to breach contracts it was a party to with the individuals named at Schedule 8 of this pleading or otherwise inappropriately deal with those individuals such that the individuals resigned from their employment or engagement. 19B As a consequence of Bandicoot's conduct, which is also particularised at Schedule 8 of this pleading, Bandicoot has suffered loss, by reason of the departure of valuable employees and/or contractors and incurring costs associated with unnecessary personnel turnover. 19C The conduct of Asheesh and/or Ruchi as pleaded at paragraph 19A and Schedule 8 of this pleading: 19C.1 Amounted to decisions regarding the operations of Bandicoot's business; 19D.1 Took place without Vishal's approval, in breach of the contractual obligations pleaded at paragraph 14.3 of this pleading. Schedule 8 identifies six staff members. 10 The plaintiff alleges that when he became aware of what he claims to be the unauthorised and excessive remuneration paid to the second defendant and the misappropriation and misuse of the company's funds, he raised his concerns at meetings and discussions and insisted that money be repaid to the company. The plaintiff alleges that that resulted in the second and third defendants causing the company to issue a further 51 shares which are registered in the name of a party related to the second and third defendants. The plaintiff alleges that that conduct has had the effect of diluting his shareholding in the company and that it was not in the company's best interests. 11 The plaintiff alleges that he has not been paid his annual remuneration in accordance with the Contract or in accordance with an oral variation to the Contract. Paragraph 26B is challenged and it is convenient to set it out in full: 26B Pursuant to the Contract, or, alternatively, by way of oral variation to the Contract, it was agreed by Bandicoot, Vishal, Asheesh and/or Ruchi that Vishal would receive annual remuneration in his role as DSSS of: 26B.1 $110,000 in the financial year ended 30 June 2013; 26B.2 $110,000 in the financial year ended 30 June 2014; 26B.3 $110,000 in the financial year ended 30 June 2015; 26B.4 $121,000 in the financial year ended 30 June 2016. Particulars To the extent that the Contract was orally varied, those variations arose as a consequence of a conversation between Asheesh and Vishal which took place in about mid-2012. 12 The plaintiff alleges that in January 2016 his contract of employment was unlawfully terminated. He alleges that he has been unlawfully removed as a director of the company. He alleges that subsequent meetings of the company have been unlawful and that he has been excluded from the management of the company. 13 The plaintiff alleges that contrary to an obligation to do so, the second and third defendants have failed to pay an amount of $39,444.31 as an initial contribution towards the operational funds of the company. The plaintiff alleges that the company paid a dividend to a party related to the second and third defendants and that that payment was unlawful. He did not receive a dividend. The plaintiff alleges that as directors of the company, the second and third defendants have breached their equitable and statutory duties to the company. 14 The plaintiff alleges that the second and third defendants have acted in breach of the Contract and that this has caused him to suffer loss and damage. Paragraphs 45 and 46 are challenged and it is convenient to set them out in full: 45 The Plaintiff: 45.1. Repeats paragraph 16 of this pleading and says that Asheesh and Ruchi have breached and are in breach of clauses 8 and 10 of the Contract. 45.2. Repeats paragraphs 18 and 19 of this pleading and says that Asheesh and Ruchi have breached and are in breach of clause 7 of the Contract. 45.3. Repeats paragraphs 19A, 19B, 22 to 26, 27 to 29, 38 and 39 of this pleading and says that Asheesh and Ruchi have breached and are in breach of clause 8 of the Contract. 45.3A Repeats paragraphs 26 to 26C of this pleading and says that Asheesh and Ruchi have breached and are in breach of clauses 7 and 8 of the Contract. 45.4. Repeats paragraph 37 of this pleading and says that Asheesh and Ruchi have breached and are in breach of clause 2 of the Contract. 46 By reason of the matters pleaded in paragraph 45 of this pleading, Vishal has suffered, and continues to suffer, damage and loss. Particulars Vishal's loss and damage includes, in relation to the breaches of the Contract pleaded at: 46.1. Paragraphs 17 and 45.1 of this pleading, the decrease in the value of Vishal's shareholding in Bandicoot caused by Asheesh's and Ruchi's misuse and misappropriation of Bandicoot's funds, as pleaded at paragraph 16 of this pleading and particularised at Schedules 1 to 7A of this pleading, and further particulars will be provided following discovery; 46.2 Paragraphs 19.1 and 45.2 of this pleading, the decrease in the value of Vishal's shareholding in Bandicoot caused by the payment of excess salary to Asheesh, and further particulars will be provided following discovery and the production of expert evidence; 46.3 Paragraph 45.3 of this pleading: 46.3.1 the decrease in the value of Vishal's shareholding in Bandicoot caused by the: 46.3.1.1 unnecessary loss of Bandicoot's personnel, as particularised at Schedule 8 to this pleading; 46.3.1.2 dilution of that shareholding caused by the conduct pleaded at paragraphs 22 to 25 of this pleading; 46.3.2 loss and damage incurred as a consequence of the: 46.3.2.1 wrongful termination of Vishal's employment, as pleaded at paragraph 27 of this pleading; 46.3.2.2 improper conduct of Bandicoot's meetings, as pleaded at paragraphs 35 and 36 of this pleading; 46.3.2.3 improper removal of Vishal as director of Bandicoot, as pleaded at paragraph 33 of this pleading; 46.3.3 $36,022.68, being the dividend to which Vishal is entitled, equivalent to that paid to Kush Nominees as pleaded at paragraph 38 of this pleading, and further particulars will be provided following discovery. 46.5 Paragraphs 45.3A of this pleading, unpaid remuneration for the financial years ended 30 June: 45.5.1 2013 in the amount of $25,038.78; 45.5.2 2014 in the amount of $32,000; 45.5.3 2015 in the amount of $15,440; 45.5.4 2016 in the amount of $62,910; 45.5.5 2017 and thereafter, unpaid remuneration subject to the reasonable steps taken by Vishal to mitigate his loss and damage, in addition to all further remedies for the loss and damage which Vishal has suffered as a consequence of the wrongful termination of his employment, as pleaded at paragraph 46.3.2 of this pleading; 46.6 Paragraph 45.4 of this pleading, the loss and damage incurred as a consequence of Asheesh and Ruchi's failure to pay their capital contribution of $39,444.31. 15 The relief which the plaintiff seeks is as follows: first, he seeks a number of declarations of breaches of duty (statutory and equitable) against the second and third defendants (paragraph 47.1); secondly, he seeks an order that the company be wound up under s 233 of the Corporations Act 2001 (Cth) (the Act), or in the alternative, under s 461 of the Act (paragraph 47.2); thirdly, he seeks an order pursuant to s 233 of the Act that the second and third defendants repay to the company the funds that have been misappropriated and misused by them (paragraph 47.3); fourthly, he seeks an order pursuant to s 233 of the Act in the alternative to a winding up order that the second and third defendants be removed as directors of the company, the plaintiff be appointed as a director of the company and that the related party who was issued the shares, make its shares available to the company (paragraph 47.3A); fifthly, he seeks an order, further or in the alternative, that a liquidator be appointed to the company and that the liquidator be directed to institute proceedings to recover the company's monies that have been misappropriated and misused (paragraph 47.4); sixthly, he seeks an order for specific performance of the Contract (paragraph 47.5); finally, he seeks damages for breach of the Contract (paragraph 47.6). Relevant Principles 16 There was no dispute about the relevant principle on a strike out application and it is that an allegation will not be struck out if it is reasonably or fairly arguable. 17 The main submission made by the defendants in relation to the paragraphs they challenged was that the plaintiff was seeking to recover a loss (assuming it was loss) sustained by the company and that he is not able to do that. He cannot avoid that bar by pleading a cause of action which he claims to have if the loss claimed is a reflection of loss sustained by the company. The relevant principles may be briefly summarised as follows. 18 Section 236 of the Act sets out the circumstances in which a member may bring proceedings on behalf of a company. The leave of the Court is required under s 237 of the Act. Leave has not been sought by the plaintiff under s 237 of the Act and, in any event, this proceeding has been brought in the plaintiff's name and not that of the company. 19 Absent leave under s 237 of the Act, a shareholder of a company cannot bring an action for loss sustained by a company and he or she cannot bring an action for loss that is no more than a reflection of the loss sustained by the company. This rule has been explained as a rule which protects the interests of the creditors of the company and it cannot be overcome by the shareholder framing his or her claim as a personal cause of action where the loss is, in fact, a reflective loss. A reflective loss includes a diminution in the value of a shareholder's shares, the company's inability to pay dividends and the company's inability to repay a loan. To avoid the operation of the rule, the shareholder's loss must be separate and distinct, and whether it is separate and distinct is a question of substance and not form. The rule will apply if the loss reflects the company's loss even though the duties owed to the shareholder are different from those owed to the company. The significant matter is the nature of the loss suffered and not the nature of the duties breached. Authority for these propositions is VPlus Holdings Pty Ltd v Bank of Western Australia Ltd and Others (2012) 91 ACSR 545 at [28]-[32] per Stevenson J. 20 In this case, the plaintiff has brought an oppression claim (i.e., the claim under ss 232 and 233 of the Act) and, in a case such as the present, this expands the Court's powers in terms of the orders it may make. If a Court finds oppression it has the power to make an order that a party compensate the company for loss sustained by the company. Furthermore, the Court may make an order under s 233 of the Act that a party compensate another party for loss suffered by the first party providing that it is not a loss that is derivative of a loss sustained by the company. Authority for these propositions is LPD Holdings (Aust) Pty Ltd v Phillips and Others (2013) 281 FLR 227. 21 I turn now to the specific paragraphs under challenge. The Paragraphs under Challenge Paragraph 16.2 22 The plea in this paragraph is of conduct which results in loss to the company. The plea is able to be sustained by reference to the fact that the Court has the power under s 233 of the Act to make the order sought in paragraph 47.3 that the second and third respondents repay monies to the company. 23 In the alternative to its main submission, the defendants submit that the plea in paragraph 16.2 is so lacking in particularity that it ought to be struck out. On the face of it, there is considerable force in this submission. The plea raises the dilemma that, on the one hand, the plaintiff is not entitled to "fish" for a case and thereby impose what might be substantial discovery or disclosure obligations on a defendant, and on the other, that the plaintiff might have a proper basis for an allegation, but because of the particular circumstances be unable to provide proper particulars until after discovery or disclosure. In such cases, it is necessary to consider all of the circumstances. 24 An important circumstance in this case is that the plaintiff relies on an affidavit he swore on 20 July 2016. One of the matters he alleges in that affidavit is that he was concerned that cash payments made to the company by students were not deposited in any of the company's bank accounts and were retained by the second or third defendants and, in some cases, treated as bad debts. In Exhibit VC11 to his affidavit, he produces a number of documents in support of those concerns. Those documents include profit and loss statements and balance sheets for the company for the period from 2009 to 2015. There are substantial amounts for bad debts written off as part of expenses in the profit and loss statements. 25 In my opinion, that information, coupled with the fact that the plaintiff has been excluded from the management of the company, means that the plea should stand. I reject the challenge to paragraph 16.2. Paragraph 16.7 26 In correspondence from his solicitors, the plaintiff suggested that he would modify his plea in paragraph 16.7 so that it read as follows: 16.7 Using Bandicoot's funds for their own personal benefit or the benefit of entities controlled by them and not for the benefit of Bandicoot and characterising those transactions as loans. Those funds have: 16.7.1 Not been repaid to Bandicoot; 16.7.2 Been treated as having been written off by Asheesh and/or Ruchi; 16.7.3 Not been accounted for appropriately in Bandicoot's records, including pursuant to Division 7A of the Income Tax Assessment Act 1936 (Cth). Particulars Particulars of such transactions are set out at Schedule 7A to this pleading and further particulars will be provided following discovery. Division 7A of the Income Tax Assessment Act 1936 (Cth) deals with distributions to entities connected with a private company and the circumstances in which, among other things, private company payments, loan and debt forgiveness are treated as dividends. 27 The defendants' main submission with respect to this paragraph fails for the same reasons it failed with respect to paragraph 16.2. 28 As to the alleged lack of particularity, Exhibit VC11 includes, as I have said, the balance sheets of the company for the period from 2009 to 2015. These balance sheets show unsecured loans. The plaintiff has also produced an invoice from a business called IBS Integral Bookkeeping Solutions dated 19 March 2015 which refers to the following: … Discussions regarding DIV7A and write off at 1/7/15. 29 I think that this plea should stand for the same reasons I have decided the plea in paragraph 16.2 should stand. I reject the challenge to paragraph 16.7. Paragraph 17 30 The plea in this paragraph alleges a breach of the Contract between the plaintiff and the second and third defendants. It being a claim for a breach of contract in respect of which nominal damages may be awarded, the plaintiff is, on the face of it, entitled to advance it. The breaches suggest loss to the company or derivative loss to the plaintiff which is not recoverable by the plaintiff, but the fact of the breaches may have additional significance as incidences or evidence of oppressive conduct (Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413). I reject the challenge to paragraph 17. Paragraphs 19A, 19B (inclusive of Schedule 8) and 19C 31 These paragraphs contain mixed pleas. Paragraphs 19A and 19B raise duties owed to the company and loss to the company. As with paragraphs 16.2 and 16.7, the pleas can be sustained by reference to the claim for relief in paragraph 47.3 Paragraph 19C raises duties owed to the plaintiff by the second and third defendants. I allow the plea to stand for the same reasons I have allowed the plea in paragraph 17 to stand. I reject the challenge to paragraphs 19A, 19B and 19C. Paragraph 26B 32 This plea raises an obligation owed by the second and third defendants to the plaintiff and for loss suffered by the plaintiff. The loss claimed is not derivative loss and it can be pursued against the second and third defendants under paragraph 47.6. 33 There is also a complaint by the defendants about a lack of particularity in this paragraph concerning the alleged oral variations. I do not think any deficiency in this respect is so extreme as to warrant an order striking the plea out. A further request for particulars can be made. On the face of it, it seems to me that the plaintiff should identify with precision the variation which was agreed during the alleged conversation. 34 I should add that if, in fact, this is intended to be a claim against the company, then it would need to be supported by a claim for damages against the company. Paragraphs 45 and 46 35 These paragraphs raise breaches of the Contract by the second and third defendants and allegations of the loss and damage suffered by the plaintiff as a result. The duties breached have a dual aspect in that they are duties owed to the plaintiff and to the company. The plaintiff may pursue these claims except where the claims are derivative. I have examined paragraphs 46.1 to 46.6 carefully and I think that paragraphs 46.1, 46.2 and 46.3.1 which refer to a decrease in the value of the plaintiff's shareholding are derivative claims and should be struck out. Paragraph 46.6 is arguable and I will allow it to stand. 36 I uphold the challenge to paragraphs 46.1, 46.2 and 46.3.1. I reject the challenge to the balance of the paragraphs. Paragraph 47.1.7.8 37 The reference in this paragraph to the second and third defendants improperly treating certain of the company's personnel is presumably a reference to the conduct identified in paragraphs 19A to 19C inclusive. That could be made clear with a minor amendment. Otherwise, it seems to me that the plea is a permissible plea of oppressive conduct or linked to the claim for relief in paragraph 47.3 or both. I reject the challenge to paragraph 47.1.7.8. Conclusion 38 Paragraphs 46.1, 46.2 and 46.3.1 of the Third Statement of Claim will be struck out. The defendants' application is otherwise dismissed. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko. Associate: Dated: 16 May 2017