New South Wales Supreme Court CITATION : Braga v Braga Consolidated Pty Ltd [2002] NSWSC 603 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 2678/02 HEARING DATE(S) : 6 and 7 June 2002 JUDGMENT DATE : 7 June 2002 Gina Gordana Braga (P) PARTIES : Braga Consolidated Pty Limited (D1) Divna Vracarevic (D2) JUDGMENT OF : Hamilton J COUNSEL : M B Evans (P) No appearances (D1 & 2) SOLICITORS : John McEncroe & Company (P) No appearances (D1 & 2) CATCHWORDS : CORPORATIONS [20] - Constitution and legal capacity - External litigation - In general - Action by member and officer against third parties - Application for leave to bring - Fulfilment of statutory requirements. LEGISLATION CITED : Corporations Act 2001 (Cth) ss 236 & 237 Cadwallader v Bajko [2001] NSWSC 1193 CASES CITED : Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 Karam v Australia and New Zealand Banking Group Limited (2000) 34 ACSR 545 Shumyip Properties v Chatswood Investment & Development [2002] NSWSC 13 DECISION : Leave to member and officer to bring proceedings against third parties granted. IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION HAMILTON J FRIDAY, 7 JUNE 2002 2678/02 GINA GORDANA BRAGA v BRAGA CONSOLIDATED PTY LIMITED & ANOR JUDGMENT 1 HIS HONOUR: This is an application made on an originating process filed on 14 May 2002 for orders under s 237 of the Corporations Act 2001 (Cth) ("the CA") granting leave to the plaintiff Gina Gordana Braga to bring certain actions in the name of the first defendant Braga Consolidated Pty Limited. One of those actions is against the second defendant, Divna Vracarevic, who is a director and shareholder of the company. The other proceedings sought to be brought are against persons who are not officers or shareholders of the company, but are persons who are said to have obtained moneys from the company by improper means. 2 Section 237(1) of the CA provides that a member or officer of a company may apply to the Court for leave to bring proceedings on behalf of the company. The section goes on to provide: "(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. (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. (4) For the purposes of subsection (3): (a) a person is a third party if: (i) the company is a public company and the person is not a related party of the company; or (ii) the company is not a public company and the person would not be a related party of the company if the company were a public company; and (b) proceedings by or against the company include any appeal from a decision made in proceedings by or against the company." Two things should be said about these provisions. The first is that they are provisions which were inserted into the Corporations Law and took effect on 13 March 2001. They have carried over into the CA. The second is that they replaced the general law as to derivative actions known as the rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189. The better view of these provisions is that they effect a complete replacement of the pre-existing general law: see s 236(3). Where a derivative action is sought to be brought, one refers solely to the CA and acts solely upon the criteria specified in the provisions rather than adverting to that earlier law: Karam v Australia and New Zealand Banking Group Limited (2000) 34 ACSR 545. 3 This is not a case in which complication is caused by the fact that either all or some of the relevant events occurred before the commencement of the new provisions. As to the situation in relation to these transitional provisions, see the decisions of Austin J in Cadwallader v Bajko [2001] NSWSC 1193 and Shumyip Properties v Chatswood Investment & Development [2002] NSWSC 13 at [17] and [18]. 4 I turn then to the question of whether or not the criteria set out in s 237(2) are met on the evidence before me in these proceedings. It seems to me that the relevant matters are, in fact, established on the evidence. If it were necessary in coming to that conclusion, as I do not think it is, I should be able to advert to the fact that the defendants have been served with the originating process in these proceedings and do not appear on the hearing in opposition to the making of the orders. 5 So far as s 237(2)(a) is concerned, it is established as probable that the company will not itself bring the proceedings. This is a "partnership" company in which the only two directors and shareholders are the plaintiff and the second defendant; each is a director and each holds equal numbers of both A class and B class shares. The plaintiff alleges and the second defendant in correspondence from a solicitor denies that she has taken money from the company. By this very fact it is unlikely, and by the attitude taken in the correspondence from the solicitor it is clear, that she will not facilitate the company taking action against her. 6 As to s 237(2)(b) and (c), there is no reason to think that the applicant is not acting in good faith and, if the plaintiff's allegations are true, it is in the best interests of the company that the applicant be granted leave, so that the abstracted moneys can be recovered by and for the benefit of the company. 7 So far as s 237(2)(d) is concerned, it is established that there is a serious question to be tried. One of the central issues squarely arises from the fact that certain cheques were signed by the second defendant and cashed. The second defendant asserts and the plaintiff squarely denies that the moneys arising from the cashing of those cheques were handed by the second defendant to the plaintiff. 8 So far as s 237(2)(e) is concerned, I have already noted that proceedings have been served on the company and, indeed, if the making of the application referred to in s 237(2)(e)(i) is not the application made in Court, but the filing of the originating process, it is clear on the evidence that notice was given before the time of filing. In any event, I should if necessary grant leave under s 237(e)(ii). 9 I have discussed the five considerations in s 237(2) in relation to the claim sought to be brought against the second defendant. Turning to the claims against the outside defendants, the matters are established in the same way. In relation to those claims, it would appear from the correspondence that the plaintiff and the first defendant are ad idem that the company has valid claims for defalcation against these outside parties, but that the present state of disagreement between them cripples the company from taking those proceedings. In the case of the actions against the third parties, there is no question of a presumption arising that it is not in the best interests of the company for leave to be granted arising from the matters set out in s 237(3). It is clear on the evidence that no decision of the sort referred to in that subsection has been made by the company. 10 In those circumstances, I propose to make the orders sought. I make orders in accordance with short minutes initialled by me and placed with the papers. ********** Last Modified: 09/06/2002 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.