Supreme Court New South Wales Medium Neutral Citation: Man v Vitality Funds Pty Ltd [2022] NSWSC 1673 Hearing dates: 2 December 2022 Decision date: 02 December 2022 Jurisdiction: Equity - Corporations List Before: Hammerschlag CJ in Eq Decision: Application dismissed with costs Catchwords: CORPORATIONS – Corporations Act 2001 (NSW) ss 236-237 – derivative action – where a minority shareholder in a company (Vitality) with a minority shareholding in another company (Liby) claims that Vitality is being oppressed in the affairs of Liby and seeks leave to bring proceedings on behalf of Vitality against Liby, primarily for a winding up order or appointment of a receiver with no claim for relief in the form of a buyout – HELD – requirements of s 237(2) not met because the applicant has not satisfied the Court that she is acting in good faith, that the proceedings are in the best interests of Vitality, or that there is a serious issue to be tried Legislation Cited: Corporations Act 2001 (NSW) Category: Principal judgment Parties: Feng Man - Applicant Vitality Funds Pty Ltd - First Respondent ShaoJuan Liang - Second Respondent Representation: Counsel: M Karam with J Raftery - Applicant D Pritchard SC with N Kabilafkas - First and Second Respondent Solicitors: Bloomsbury Legal - Applicant Juris Cor Legal - First and Second Respondent File Number(s): 2022/184190 Ex Tempore JUDGMENT 1. HIS HONOUR: This is an application, made by Originating Process filed 24 June 2022, for an order pursuant to s 237 of the Corporations Act 2001 (Cth) (the Act) granting leave to the applicant, Ms Feng (Skye) Man (Man), to commence and maintain proceedings on behalf of the first respondent company, Vitality Funds Pty Ltd (Vitality) against Liby Property Warriewood Pty Ltd (Liby). 2. Liby is in the process of developing a nine-townhouse project at Macpherson Street, Warriewood on the Northern Beaches of Sydney (the Project). The strata plan was registered in January 2021. I was informed from the bar table that the Project has cost about $12 million and is expected to return in the order of $20 million. Five of the townhouses have been sold. One is on the market. Three are being rectified because, apparently, they have building defects. 3. The shares in Vitality are owned as to 40% by Man and 60% by the second respondent, Ms Shaojuan Liang (Liang). They are Vitality's directors. By all accounts, they have fallen out. 4. Vitality owns 20% of the shares in Liby. The remaining 80% is owned by Liby Capital Pty Ltd (Liby Capital), a company associated with Messrs Zhanxiong Chen (described as an overseas investor) and Haibiao (Ricky) Lin (Lin), who is married to Liang. 5. Man's economic interest in the Project is thus 8% (being 40% of 20%). Man says she has contributed $700,000 of her own money to the Project. 6. Liang's economic interest is 12% (being 60% of 20%). 7. Jealand Group Pty Ltd (Jealand) is a building company owned by Mr Chao (Andrew) Chen (Chen). Jealand is (or was) retained by Liby as the builder on the Project. 8. Man was married to Chen. They were divorced in September 2019. 9. Liby has fallen into dispute with Jealand about alleged building defects in the Project and has commenced proceedings in the Technology and Construction List. Those proceedings have not progressed beyond the pleading stage. Liby has claimed damages and Jealand has brought a cross claim. 10. Man says that Liby has: 1. paid unapproved remuneration to Liang and Lin; 2. entered into a consultancy agreement with and paid moneys to a Hong Kong entity (Ouisa), which is associated with Liby Capital; and 3. paid excessive amounts to a company called Timely Services Pty Ltd, which is related to Liang. 1. Man says that this is conduct in the affairs of Liby which is oppressive, unfairly prejudicial, or unfairly discriminatory to Vitality. She seeks leave to bring proceedings on behalf of Vitality against Liby for relief under Part 2F.1 of the Act (the oppressive conduct provisions being ss 232 and 233 of the Act). 2. From the written submissions by counsel for Liang, the payments complained of total $650,600 and most go back to 2021. 3. Her proposed Originating Process for the foreshadowed proceedings seeksan order that Liby be wound up. In the alternative, she seeks the appointment of a receiver (but does not specify what powers the receiver should have). She seeks, in the further alternative, a final (not interim) order that Liby be restrained from making any further payments to its directors or related entities of the directors. I interpolate that, as framed, this relief would capture payments which are entirely proper. In something of an understatement, counsel for Man accepted that this order would need some "tweaking". As a final alternative, she seeks the "restraining of the implementation of resolution 4 of minutes of a meeting dated 11 August 2017". 4. The proposed Originating Process is accompanied by a draft Statement of Claim which refers to resolutions passed at that meeting but does not identify resolution 4. The resolutions which it does identify are to the effect (amongst others) that Lin and Liang were appointed managers of Liby and were entitled to remuneration at an hourly sum. The allegation is that Man is recorded as being present but was not there. Little, if anything, was said about this claim in argument. 5. Section 236(1) of the Act provides: (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. 1. Subsections 237(1) and (2) of the Act provide: (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. 1. The onus is on Man to meet the requirements of s 237(2). 2. She has met two of those requirements. I am satisfied that Vitality itself will not bring proceedings and no issue was raised that the required notice under subsection (e) was not given. 3. However, for the reasons which follow, I find that Man has failed to meet any of the other criteria necessary for the grant of leave. 4. Man has not persuaded the Court that: 1. she is acting in good faith; 2. it is in the best interests of Vitality that she should be granted leave; or 3. there is a serious question to be tried in relation to the primary relief she seeks (or for that matter, the subsidiary relief). 1. To the contrary, I am satisfied that she is not acting in good faith, and that it would be against Vitality's interest for leave to be given. 2. The various considerations which have driven to that conclusion overlap in their application to the unmet criteria. 3. It is put on behalf of Liang that the true purpose of the proposed proceedings is to destabilise Liby's litigated claim against her former husband by taking them out of Liby's control. If this is her end, it would be served equally by a receivership in which the receiver took control of Liby's choses of action. It is not necessary for the Court to find positively that this is her motivation. However, it is stark that the proposed Originating Process makes no claim for any buy out order of Vitality's shares in Liby (or for that matter her minority shares in Vitality). This lacuna was pointed out by Liang at an early stage of the proceedings, but Man desisted from adjusting the proposed Originating Process. At the hearing, counsel for Man telegraphed that she might seek such an order. But relevant for present purposes, the Originating Process, the subject of the leave sought, seeks the winding up of the entity, which is currently engaged in a significant building project, without any buyout order. 4. I consider it to be inexplicable that, if Man is acting in good faith, she would not seek a buyout, which at this time appears to me to be the only realistic relief that would be available at her instance (having an 8% interest), on the basis of the oppression she seeks to assert. The inference that Man's motivation is as Liang suggests, is open. 5. The mere bringing of winding up proceedings will destabilise Liby, which is mid-project, let alone if a liquidator (or receiver) were to be appointed. It will imperil the value of the enterprise in which Vitality, through Liby, has a material stake. Apart from anything else, buyers of the remaining units would be buying from a company in liquidation or under receivership, which will undoubtedly disadvantage Liby. A winding up (or receivership) lacks any evident, sensible, commercial justification. To bring such proceedings now would be entirely inimical to Vitality's interests and not in its interests at all, let alone its best interests. 6. Additionally, if the directors of Liby have procured it to make the illicit payments complained of, Liby will have claims against them. Plainly, Vitality will not seek leave to bring proceedings on behalf of Liby against the directors. Not doing so could undoubtedly form the basis for a claim of oppression in Vitality, in which Man is a minority shareholder. Yet, she has also not sought relief which would require Vitality to bring proceedings against the directors of Liby. 7. Finally, I do not think there is a realistic possibility that a Court would make a winding up order at this time, on the basis of Man's alleged oppression, even if it were established. 8. As earlier mentioned, on the figures in the written submissions provided by Man's counsel, the alleged illicit payments total $650,600. Man's economic interest of 8% in repayment of these amounts therefore totals $52,048. It is close to inconceivable that the Court would wind Liby up at the instance of Vitality, where the true protagonist is a minority shareholder in Vitality, who seeks to wind Liby up because of a complaint with an economic value of this order of magnitude. 9. The Originating Process filed 24 June 2022 is dismissed with costs. ************ Amendments 08 December 2022 - Para 19 - filed changed to "failed" DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 December 2022