Supreme Court New South Wales Medium Neutral Citation: In the matter of Carbon Copies Composites Pty Ltd [2022] NSWSC 1762 Hearing dates: 2 December 2022 Date of orders: 2 December 2022 Decision date: 02 December 2022 Jurisdiction: Equity - Corporations List Before: Black J Decision: Leave to bring derivative proceedings granted; mandatory interlocutory injunctions in respect of certain property made; reserve the costs of the application. Catchwords: CORPORATIONS — Statutory derivative action — Application to bring proceedings on behalf of company — Where leave sought by officer or former officer of company — Where the plaintiff director is not an Australian resident and does not hold significant assets in Australia — Where an entity associated with the plaintiff provides the indemnity for the company's costs of the proceedings and any orders made against the company for costs or damages — Whether the indemnity is adequate and the application is in the company's best interests. EQUITY — Equitable remedies — Injunctions — Whether a mandatory injunction should be ordered on an interlocutory basis in respect of disputed property. Legislation Cited: Corporations Act 2001 (Cth), s 237 Cases Cited: - Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57; [2006] HCA 46 - Cassegrain v Gerard Cassegrain and Co Pty Ltd [2008] NSWSC 1159 - Redenbach v Legal Practice Management Group Pty Ltd (2018) 125 ACSR 513; [2018] NSWSC 527 - Re Imperium Projects Pty Ltd [2015] NSWSC 123 - Re Sunnya Pty Ltd (Supreme Court of New South Wales, Black J, 10 November 2022) Texts Cited: J D Heydon et al, Meagher, Gummow and Lehane's Equity, Doctrines and Remedies (LexisNexis, 5th ed, 2015) Category: Principal judgment Parties: Vaughan Stanley Wellington (in his capacity as director of Carbon Copies Composites Pty Ltd (recs and mgrs apptd) (First Plaintiff) Vaughan Stanley Wellington (Second Plaintiff) Darren John Vardy (in his capacity as receiver and manager of Carbon Copies Composites Pty Ltd (First Defendant) Colin James Hutchison (Second Defendant) Representation: Counsel: A J Bulley/J Brook (Plaintiffs) S Bell (Direct Brief) (Second Defendant) Solicitors: Access Law Group (Plaintiffs) File Number(s): 2022/327499 Judgment – EX TEMPORE (Revised 14 December 2022) Leave to bring derivative proceedings 1. By Originating Process filed on 2 November 2022, the Plaintiff, Mr Wellington, in his capacity as a director of Carbon Copies Composites Pty Ltd ("Company") and in his own right, seeks relief including an order that he be granted leave to bring proceedings as a statutory derivative action under s 237 of the Corporations Act 2001 (Cth) ("Act"). 2. In my earlier judgment delivered on 24 November 2022 ([2022] NSWSC 1638) ("Earlier Judgment"), I dealt with the requirements to grant leave to bring a statutory derivative action under s 237 of the Act. I there noted that a difficulty arose because Mr Wellington undertook to indemnify the Company in respect of the costs of the proceedings, but there was a question as to the adequacy of the undertaking where he was resident outside Australia and did not appear personally to own any property in Australia. I there addressed an offer by an entity associated with Mr Wellington, Trading Consultants Pty Ltd ("Trading Consultants"), to provide such an indemnity and pointed to potential difficulties with that indemnity, as it then stood. Mr Bell, who appears for the Second Defendant, Mr Hutchison, had referred to two such difficulties, namely that there was limited evidence as to the assets of Trading Consultants, beyond evidence as to an unencumbered property that it holds in Bowral, and an absence of an undertaking not to dispose of that property or secure that property to a third party while the indemnity was in place. I pointed to a further difficulty that the indemnity operated in an indirect way, by indemnifying Mr Wellington in respect of any claim by him, rather than being given directly to the Company. 3. I concluded (at [37]) that I was satisfied of most of the matters necessary to grant leave to bring the derivative proceedings under s 237 of the Act, but the difficulties with the form of undertaking offered by Mr Wellington, as it then stood, was such that I could not grant leave on that undertaking. I deferred the matter, in accordance with the practice adopted in other cases, to allow that question to be addressed and noted that, if it was addressed: "… then leave to bring the derivative proceedings would be granted, and I will deal with the remaining question as to a mandatory injunction to which I refer below, on an interlocutory basis, and I will make further directions including that the matter continue on pleadings." I also addressed the course that I was likely to take if that issue was not adequately addressed. 1. Mr Wellington has sought to address those matters by further steps, as set out in his affidavit dated 30 November 2022 and the affidavit dated 1 December 2022 of his solicitor, Mr Welch. By his affidavit dated 30 November 2022, Mr Wellington confirms that Trading Consultants owns the property at Bowral, and annexes a title search which confirms that Trading Consultants is the registered proprietor of that property and also indicates that it is unencumbered by any mortgage or caveat. Mr Wellington's evidence is that the property is a three storey commercial building, which was purchased in April 2017 for $1,600,000, and there is evidence of the front page of the purchase contract to confirm that matter. Mr Wellington's evidence, which is not admissible as expert evidence, is that he estimates the current value of the property, conservatively, to be at least $3 million. Mr Bulley, with whom Mr Brook appears for Mr Wellington, submits that the Court can proceed on the basis that it is at least unlikely that the value of commercial properties in regional areas of New South Wales such as Bowral have declined, since April 2017, and it seems to me that I can readily make that assumption. There is nothing implausible about Mr Wellington's estimate of the current value of the property, recognising that it is not admissible as expert evidence of that value. 2. Mr Wellington also refers to a resolution of the directors of Trading Consultants which addresses a number of the matters to which I had referred in my Earlier Judgment, and to the fact that an amount of $100,000 has been paid by Trading Consultants to him, and deposited by him to the trust account of his solicitors, and as to which he has given an unconditional and irrevocable authority to his solicitors. The form of resolution passed by the directors repeals any earlier constitution of Trading Consultants, in order to bring the replaceable rules into effect, and undertakes to indemnify the Company for its costs of the proceedings and for any amount that it is ordered to pay in relation to an adverse cost order or damages in the proceedings. Trading Consultants also indemnifies Mr Wellington for any amount that he is ordered to pay by way of costs. Trading Consultants also undertakes to make any payment to the Company or as directed by the Court, to satisfy the indemnities given in favour of the Company, and warrants that the Bowral property is not encumbered, consistent with Mr Wellington's earlier evidence to that effect. The earlier criticism raised by Mr Bell is also addressed by another undertaking by Trading Consultants to the Court that it will not encumber or otherwise deal with the Bowral property until further order of the Court in the proceedings. 3. The question which then arises is whether those undertakings and confirmations are sufficient to address the difficulties which I noted at [32] of the Earlier Judgment. I there recognised that a significant matter in determining whether proceedings are in a company's best interests is the adequacy of an indemnity in respect of the costs to which the company would be exposed by the conduct of the proceedings and the event of their failure. I also there noted that, in assessing the value of such an indemnity, the Court will have regard to the financial strength of the party giving the relevant indemnity. 4. Mr Bulley, in submissions, addresses the matters to which I have referred above and submits that the additional steps taken by Mr Wellington sufficiently address the risk of prejudice to the Company from the commencement of the proceedings should leave be granted, and that the undertakings and funds deposited by Mr Wellington are sufficient to support a conclusion that the bringing of the proceedings is in the Company's best interests. 5. Mr Bell in turn submits, correctly, that Trading Consultants has not led evidence, by way of accounts or otherwise, as to its financial position, and that a current balance sheet has not been tendered. However, as I noted above, there is evidence that the Bowral property is unencumbered and, unless Trading Consultants has a large number of undisclosed liabilities to third-party creditors, the existence of that unencumbered property suggests that it is a company of substance, with a significant asset which would be available to support the indemnity given to the Company. Mr Bell also points out that the Court is not told whether the $100,000 lent by Trading Consultants to Mr Wellington is a loan, or some other form of transfer, but the Court does know that that amount has been paid to the solicitor, to be deposited to a controlled moneys account, without creating any encumbrance over the property which is provided in support of the indemnity offered by Trading Consultants to the Company. Mr Bell rightly also submits that the Court does not know if Mr Wellington has personal funds available in Australia, although I noted in the Earlier Judgment that it appears that Mr Wellington may not have other property available in Australia, because he is largely resident overseas. Mr Bell also points to the absence of evidence as to Mr Wellington's personal liabilities, but that seems to me to be of lesser significance, where Mr Wellington now relies on the indemnity offered by Trading Consultants, supported by the property owned by Trading Consultants, to support the Company's position in respect of the proceedings, and the application will stand or fall with the adequacy of that indemnity. 6. Mr Bell also submits that the position should be straightforward, and that it would be open to Trading Consultants to, for example, give a security in favour of the receiver of the Company, in order to support the undertaking which is given. I do not accept the former proposition, because it does not seem to me that there is any statutory basis for limiting the circumstances in which a derivative action can be brought to a person resident in Australia, who has assets available in Australia and who can provide a straightforward indemnity. In some circumstances, a plaintiff who might otherwise satisfy the requirements for leave to bring a derivative action will be resident overseas, and the process of providing an adequate indemnity may inevitably be more complex. I also do not accept that the second proposition is reason, in itself, not to grant the leave sought. No doubt, it would be possible for Trading Consultants to give security in favour of the receiver, but the question is not whether it would be possible to do so, but whether the basis for leave is established, without it doing so, on the basis of the indemnity and undertakings that have been offered. 7. On balance, it seems to me that the indemnities that have been offered, in support of the costs incurred by the Company in conducting the proceedings and in respect of any costs order made against it in the proceedings, and in support of any undertaking as to damages given, are sufficient to support the grant of leave to bring derivative proceedings. They are undertakings of substance, offered by Trading Consultants which has passed a resolution authorising them, in circumstances where it appears to have a substantial unencumbered property and has offered an undertaking not to deal with that property, or secure it in any other manner, pending the resolution of the proceedings. I recognise that, as Mr Bell points out, Trading Consultants may incur debts which would rank equally with any debts that it incurs under the undertakings. However, that would be true of any person who gave an undertaking in support of an application to bring derivative proceedings, including a natural person who gave such an undertaking. 8. On balance, I am therefore satisfied that, having regard to the matters noted in the Earlier Judgment, and the steps which have now been taken to provide an indemnity for the Company in respect of the costs of the proceedings and the undertaking as to damages, leave should be granted to bring the proceedings. 9. I order, consistent with paragraph 6 of the Originating Process filed on 2 November 2022, that: (1) The First Plaintiff be granted leave to bring the proceedings as a statutory derivative action pursuant to s 237 of the Corporations Act 2001 (Cth). (2) The Court notes the undertakings given by Mr Wellington and by Trading Consultants Pty Limited to support the grant of that leave, as recorded in Mr Wellington's affidavit dated 30 November 2022 and a resolution of the directors of Trading Consultants Pty Ltd passed on 30 November 2022. Application for injunctive relief 1. By his Originating Process, Mr Wellington also sought certain orders against, inter alia, the Second Defendant, Mr Hutchison. The Court has now granted leave to Mr Wellington to pursue the relevant proceedings, under s 237 of the Act on behalf of the Company. The orders originally sought included an order that, upon the usual undertaking as to damages given by Mr Wellington, Mr Hutchison deliver to the First Defendant, Mr Vardy, in his capacity as receiver and manager of the Company, all property of the Company by a specified date. That order had a difficulty, to which I referred in my Earlier Judgment, that it would have required an assessment of what was or was not property of the Company, which is a matter which will ultimately be determined in the final proceedings. 2. Mr Wellington has now amended that order to seek alternative relief, that, upon provision by him of the usual undertaking as to damages, Mr Hutchison deliver to the receiver all Property (as defined in the Originating Process filed 28 October 2022) in his possession by a specified date to be held pending further order of the Court. Mr Bulley accepts that that delivery is for the purposes of the property being held in safekeeping, on the basis that such property may not be used by the receiver, but is to be maintained by the receiver pending the dispute which plainly exists as to ownership of the property, or parts of it, between Mr Hutchison on the one hand and the Company on the other. 3. I bear in mind, in dealing with the question whether such relief should be granted on an interlocutory basis, that Mr Hutchison has already provided, without admissions, an undertaking to the Court that he will not, until further order, access, download, transfer, interfere with, disclose, disseminate, alter, remove, delete or deal in some other specified ways with the Property (as defined in the Originating Process). I note, in that respect, that the definition of "Property" in the Originating Process refers, inter alia, to designs and other items "for the aircraft" or for components or parts of the aircraft or that "relate to" or "concern" the aircraft; components for the aircraft, moulds or other components of the aircraft; batteries or other technology for the aircraft, engines or motors for the aircraft; and computer programs used in the design or manufacture of the aircraft. I also note that, while Mr Bell sought to develop a submission that that definition was uncertain, that proposition does not sit comfortably with the fact that Mr Hutchison has already given an undertaking to the Court that is directed to his dealings with the Property, as defined, and his giving that undertaking assumes that he is capable of identifying what is within its scope. 4. The question then arises, first, whether the Court can in principle make an order of an interlocutory mandatory character of the kind sought, although Mr Bell did not contest its ability to do so in principle, and second, whether the Court should do so in the relevant circumstances. Mr Bell made substantive submissions as to the latter question. 5. As to the first of those matters, the Court has recently considered the relevant issues in Re Sunnya Pty Ltd (Supreme Court of New South Wales, Black J, 10 November 2022) ("Sunnya"), in a situation which had some similarities and some differences. A significant difference was that the assets which had been removed in that case were in the nature of intellectual property that was used in an ongoing trading business, and here there is no trading business because the aircraft is in a state of development. In that case, I noted that the Court should approach the question by reference to the principles set out by the High Court of Australia in Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57; [2006] HCA 46 which require that, to obtain interlocutory injunctive relief, a plaintiff must demonstrate a prima facie case or serious question to be tried as to its entitlement to the relief sought at the final hearing, and also that damages would not be an adequate remedy, so as to warrant the grant of injunctive relief, and must establish that the balance of convenience favours the grant of an interlocutory injunction. Those considerations are interrelated and, if the balance of convenience favours one course over another, a less strong case for final relief might be required and vice versa. 6. I accept that, as I noted in Sunnya, mandatory interlocutory injunctions are relatively rare, although a leading text, J D Heydon et al, Meagher, Gummow and Lehane's Equity, Doctrines and Remedies (LexisNexis, 5th ed, 2015) notes (at [21-395]) that is partly because a mandatory injunction is usually more onerous for a defendant to comply with than a prohibitive injunction. That is of less relevance here, where the injunction is in relatively narrow scope, at least where Mr Hutchison does not, it appears, accept that he has any, or any substantial, Property in his possession that would fall within its scope. He certainly does not suggest, by way of any affirmative case, that there is any difficulty with a mandatory injunction is that he holds so much of the Property relating to the aircraft that it would be onerous for him to return it to the Company. The learned authors of that text note that there is nothing to prevent a Court issuing an interlocutory mandatory injunction, as a matter of principle, and give examples where such orders have been made. 7. Here, the initial question is whether Mr Wellington, in his own right, and, more relevantly, in bringing proceedings on behalf of the Company, can establish a serious question to be tried that would support the mandatory interlocutory relief that is sought. It seems to me that he can establish a serious question to be tried in that respect. I noted in my Earlier Judgment that there is evidence which indicates that there is a serious question to be tried as to whether Mr Hutchison has intellectual property relating to the aircraft in his possession, arising from the correspondence to which I referred in paragraphs 21 and 22 of the Earlier Judgment. In particular, when Mr Hutchison was asked to return property relating to the aircraft, he did not deny that he had such property in his possession, but instead asked the question what would be the path forward for the Company if it was returned. 8. Once it is accepted that there is a serious question to be tried as to the proposition that Mr Hutchison has property relating to the aircraft in his possession, then there is also a serious question to be tried as to the proposition that his retaining that property is in breach of his director's duties, at least so far as they involve a conflict of interest or contravention of the no profit rule, or the corresponding statutory duties. I also recognise that, as Mr Bell has rightly pointed out, Mr Hutchison may ultimately establish that there is no such contravention, because that property was all developed by him, in his personal capacity, prior to his involvement with the Company, and had not passed to the Company and had not passed to the Company in his dealings with the Company. Of course, one difficulty with that proposition is that Mr Hutchison does not now seek to lead any evidence to establish it, although it will be open to him, of course, to do so at a final hearing. On that basis, it seems to me that there is a serious question to be tried, arising from the matters to which I have referred, as to whether Mr Hutchison presently holds Property relating to the aircraft in a manner that would involve a breach of his duties to the Company, whether as an existing or former director of the company. 9. A question then arises as to the balance of convenience. It seems to me that I must, as Mr Bell points out, take into account the fact that Mr Hutchison has given an undertaking, which is relatively wide in its scope, that restricts his ability to use or deal with the Property. I also should not make any assumption that undertakings given to the Court are regularly breached, and I do not make any assumption that Mr Hutchison would either deliberately or inadvertently not comply with such an undertaking. I do, however, also bear in mind that there is a real difficulty, if Mr Hutchison continues to hold Property relating to the aircraft, the extent of which has not been identified, in respect of a lack of visibility of that Property, and a lack of visibility of his dealings with the Property. In particular, Mr Hutchison's compliance or non-compliance with the undertaking in respect of unidentified Property that remains in his possession, would not be apparent to the Company, or the receiver. It seems to me that that is a matter which tends, on the balance of convenience, toward an order that the Property be held by an independent person such as the Company's receiver. I also bear in mind that, as Mr Bell rightly pointed out in submissions, if the receiver was to hold the Property, then he could only do so on the basis of undertakings of a kind that are similar to those given by Mr Hutchison, so that the Property could not be used by the receiver any more than it could be used by Mr Hutchison. However, there is a real difference between Mr Hutchison giving that undertaking, and a receiver doing so, because, with no disrespect to Mr Hutchison, the receiver lacks the economic incentive that Mr Hutchison might have to tempt him towards a breach of the undertaking. Because the receiver is an independent insolvency practitioner, subject to professional obligations, there is less of an issue as to lack of visibility in respect of compliance or non-compliance with the undertaking. 10. There is also a question as to the form of any orders to be made, to which Mr Bell rightly drew attention, although I have pointed above to the fact that a proposition that they are generally uncertain has the difficulty that Mr Hutchison has already given an undertaking that is directed to the concept of "Property" (as defined), without complaint that he does not understand what falls within it. It seems to me that there is no real question of any uncertainty as to paragraphs (a) or (b) of the definition of "Property" in respect of the aircraft, where these items could be readily identified, and where no question of licensing or otherwise arises, and all that is required is that this material be placed in the physical possession of the receiver, which will not be authorised to use it in a way that could give rise to any difficulty with any licenses over relevant materials. I am not satisfied that paragraph (c) is sufficiently certain to support mandatory interlocutory relief, where it would require a judgement as to what "relates to" or "concerns" the aircraft, as distinct from the straightforward question whether the relevant items are for the aircraft or are for a component or part of it. Paragraphs (d), (e), (f) and (g) do not give rise to any uncertainty. It seems to me that paragraph (h) is too wide so far as, as Mr Bell points out, it would extend to computer programs, including programs that may be owned or licensed by Mr Hutchison personally, merely because they had been used in the design of the aircraft. To the extent that a document, including a document in electronic form, is in fact a design for the aircraft, it will in any event fall within the scope of paragraph (a) of the relevant definition. For these reasons, I am satisfied that a modified form of mandatory interlocutory order should be made, omitting paragraphs (c) and (h) of the form of definition of "Property" in the Originating Process. 11. Mr Bell, in submissions, submitted that Mr Hutchison should be allowed until late December 2022 to return the Property. That was, with respect, an ambitious submission, particularly where made in circumstances that Mr Hutchison does not concede that he has any such Property, still less that is of such a volume that it would take a significant time to return it. It seems to me that the preferable course, particularly given the time of year, and recognising Mr Bell's submission that Mr Hutchison has other commitments in respect of other matters, is to make an order requiring compliance within seven days, but reserving liberty to Mr Hutchison to apply, supported by an affidavit which indicates the steps which have been taken to comply with the relevant undertaking. 12. I order that: (1) On the usual undertaking as to damages given by the First Plaintiff by his Counsel, the Second Defendant deliver to the First Defendant all Property as defined in the Originating Process filed 2 November 2022 (excluding items falling within paragraphs (c) and (h) of that definition) in his possession by 4pm on 9 December 2022 to be held pending further order of the Court, provided that: (a) This order will only have effect if, by 4pm on 6 December 2022, the First Defendant has delivered to the Court and the solicitors for both parties an undertaking to the Court and to both parties that (subject to paragraph 2 below) he will not, and the company will not, until further order, download, transfer, interfere with, disclose, disseminate, alter, remove, delete, copy, use, or commercially exploit in any manner the Property that is delivered to him pursuant to this order; and (b) The Second Defendant is not required to deliver any item of property, the costs of delivery of which would exceed $100, unless if he has first given notice to Mr Wellington identifying that property and the costs of delivery, and Mr Wellington or his solicitors have not placed him in funds for the costs of that delivery. (2) The undertaking by the receiver in paragraph 1(a) above will not prevent the receiver downloading or accessing any material for the purpose of cataloguing or identifying the material in his possession. (3) Reserve liberty to the Second Defendant to apply, on 1 business days' notice, supported by an affidavit indicating the steps that have been taken to comply with this order, if he seeks an extension of time to comply with this order. Costs 1. The Plaintiffs made written submissions as to the costs of this application and submitted that, if leave is granted, they should have their costs of the orders sought to date in the Originating Process. They recognised that it was necessary for Mr Wellington to obtain leave, but point out the application was opposed. They submit, obviously enough, that the costs of the application were increased by the opposition. 2. Having said that, the common practice in respect of costs of an application for leave to bring derivative proceedings, is not to order that the plaintiff has the costs of that application unconditionally, not least because it is not apparent why the plaintiff should have the costs of an application for leave to bring proceedings which ultimately fails. An order is often made that the costs of the application, or some part of them, should be the applicant's costs in the cause of the substantive proceedings: Cassegrain v Gerard Cassegrain and Co Pty Ltd [2008] NSWSC 1159 at [19]; Re Imperium Projects Pty Ltd [2015] NSWSC 123; Redenbach v Legal Practice Management Group Pty Ltd (2018) 125 ACSR 513; [2018] NSWSC 527 at [101]. It does not seem to me to be necessary or desirable to reach an ultimate conclusion as to that matter now, where the parties and the Court will be better informed as to the relevant issues at the conclusion of the proceedings, when they are substantively determined, or, possibly, resolved between the parties. In these circumstances, I will not accede to the Plaintiffs' application that he have his costs of the application unconditionally, and I will, as Mr Bell accepted could properly be done, reserve the costs of the application. 3. Accordingly, I order that the costs of this application be reserved. ********** 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: 23 December 2022