New South Wales Supreme Court CITATION : Roach & 1 Ors v Winnote P/L (in Liq) & 3 Ors [2001] NSWSC 822 revised - 19/09/2001 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 3801/01 HEARING DATE(S) : 10/09/01 JUDGMENT DATE : 10 September 2001 Walter Edward Roach (First Plaintiff) Roach Industries Pty Ltd (ACN 001 359 913) (Second Plaintiff) PARTIES : Winnote Pty Ltd (in liquidation) (ACN 003 558 110) (First Defendant) Sydtech Pty Ltd (in liquidation) (ACN 002 896 460) (Second Defendant) Neil Cussen (Third Defendant) Kevin Shirlaw (Fourth Defendant) JUDGMENT OF : Santow J COUNSEL : J Sheahan, SC/ E T Finnane (Plaintiffs) J T Johnson (Defendants) SOLICITORS : McCabe Terrill Lawyers (Plaintiffs) Watson Mangioni (Defendants) CATCHWORDS : CORPORATIONS - Statutory derivative action - Application in a liquidation situation - Scope for the general law assisted by s477(6) and s511 Corporations Act. LEGISLATION CITED : Corporations Act Part 2F.1A (ss236 to 242); s237; s239 Aliprandi Pty Ltd v Griffith Vintners Pty Ltd (1991) 6 ACSR 250 Cadima Express Pty Limited v Deputy Commissioner of Taxation (1999) 33 ACSR 527Fargo Ltd v Godfroy [1986] 3 All ER 279 CASES CITED : Esso Australia Resources Ltd v Commissioner of Taxation of the Commonwealth of Australia (1999) 74 ALJR 339 Foss v Harbottle (1843) 67 ER 189 Scarel Pty Ltd v City Loan & Credit Corp Pty Ltd (1988) 17 FCR 344; 79 ALR 483; 12 ACLR 730; 6 ACLC 219 Walker v Wimborne (1976) 3 ACLR 529 DECISION : Derivative action allowed. IN THE SUPREME COURT OF NEW SOUTH WALES NAME OF DIVISION NAME OF LIST 3801/01 SANTOW J 10 September 2001 (REVISED 19 September 2001) Walter Edward Roach First Plaintiff Roach Industries Pty Ltd (ACN 001 359 913) Second Plaintiff Winnote Pty Ltd (in liquidation) (ACN 003 558 110) First Defendant Sydtech Pty Ltd (in liquidation) (ACN 002 896 460) Second Defendant Neil Cussen Third Defendant Kevin Shirlaw Fourth Defendant Judgment ex tempore 1 The present proceedings invoke Part 2F.1A (ss236 to 242) of what is now the Corporations Act whereby a statutory derivative action is substituted for the general law exceptions to the rule in Foss v Harbottle (1843) 67 ER 189. This was introduced to come into effect from 13 March 2000 as part of the so-called CLERP reforms. 2 A question which has not to date been dealt with explicitly, as far as I am aware, is whether the statutory derivative action is available where the company concerned is in liquidation, here, pursuant to a creditors' resolution. As I am otherwise satisfied that the orders sought may be made in circumstances where the liquidator neither consents nor opposes, the only issue is whether the statutory derivative action is available in the circumstances of a company in liquidation, or if not, whether the general law may operate to similar effect. 3 There is no express reference in ss236 to 242 of the Corporations Act delineating the statutory derivative action whereby it is stated, one way or the other, whether these remedial provisions apply to a company in liquidation. It is true that s237(3) provides for a rebuttable presumption that granting leave is not "in the best interests of the company" in the circumstances there set out. Those circumstances include (subparagraph (c)) that, "all of the directors who participated" in the relevant decision acted in good faith for a proper purpose and otherwise satisfied the requirements there laid down. There is no alternative reference to the liquidator in that context and clearly the directors in those circumstances would have no such determining authority in a liquidation situation. It may be that the assumption was made that a liquidator, as an officer of the Court, would make any such decision in such a way as to conform to those requirements, in any event, though here the interests of creditors substitute for those of shareholders; Walker v Wimborne (1976) 3 ACLR 529. 4 I consider s237(3) is really adjectival to the earlier substantive provisions, so that its omission of any reference to liquidators could not be decisive in determining whether the derivative action could apply in a liquidation. Indeed, one could contemplate a receiver also being in an equivalent position, having effectively displaced the Board. It would be an incongruous result if the statutory derivative action were not then available because the receiver has displaced the Board, as regards its external relations which would embrace litigation. 5 The only other statutory reference that may bear on the matter appears to be s239 of the Corporations Act. However, that simply deals with members of a company ratifying or approving conduct and saves that situation from falling outside the scope for a derivative action. 6 One possibly significant line of enquiry would be directed at the position prior to the CLERP statutory derivative action. That is, to ascertain whether the previous general law exceptions to the rule in Foss v Harbottle then operated in a liquidation context. In Aliprandi Pty Ltd v Griffith Vintners Pty Ltd (1991) 6 ACSR 250, McLelland J applied the general law exception to the rule in Foss v Harbottle to a company in liquidation permitting the relevant proceedings. It would indeed be incongruous, were the statutory derivative action to have a narrower ambit than the general law exceptions. That is, given its remedial character as a procedural reform, and its retroactive application to causes of action arising prior to its date of commencement (13 March 2000), which have not been earlier resolved. 7 In Cadima Express Pty Limited v Deputy Commissioner of Taxation (1999) 33 ACSR 527, Austin J, at paragraphs 38 to 58, reviews in some depth the position in relation to the appointment of a receiver to pursue a cause of action on behalf of another. At paragraph 42 he says as to winding up: "42. However, in addition to its statutory powers, the Court possesses an inherent power in the course of the winding up of a company to permit proceedings to be taken in the company's name at the instigation of a creditor or contributory, including a prospective creditor: Russell v Westpac Banking Corporation (1994) 13 ACSR 5. In Aliprandi McLelland J (at 252) confirms that the Court has a power 'of respectable antiquity and … sanctioned by high authority' to authorise a procedure based on 'the same principle on which a man could always have filed a bill in the old Court of Chancery against his trustee to be allowed to use his name to recover the trust property' (citing Cape Bretton Co v Fenn (1881) 17 Ch D 198, 207)." 8 "Ford's Principles of Corporations Law", at paragraph 11.270, points out that the new Part 2F does not address the effect of liquidation and reminds the reader that, under Corporations Law principles, it is for the liquidator to decide whether the company should begin or continue proceedings. The directors and members ordinarily lose their respective powers to have the company conduct litigation other than proceedings to have the winding up orders stayed: Fargo Ltd v Godfroy [1986] 3 All ER 279; Scarel Pty Ltd v City Loan & Credit Corp Pty Ltd (1988) 17 FCR 344; 79 ALR 483; 12 ACLR 730; 6 ACLC 219. The learned authors, without further citation of authority, go on to say: Prior to the commencement of Pt 2F.1A, a member who was dissatisfied with a liquidator's reluctance to sue or continue proceedings could not rely on exceptions to Foss v Harbottle but could use the statutory procedure to ask the court to order the liquidator to begin proceedings: ss477(6), 511. ….. Whether a statutory exception operates when the company is in liquidation would seem to depend on interpretation of the relevant statute. If standing to sue is given by statute to protect the public interest, it would not seem to matter that the company is in liquidation. Because Pt 2F.1A deals with private rights, it is submitted that a member of a company in liquidation cannot utilise Pt 2F.1A but may use ss477(6) or 511." 9 From this it follows that there is no lacuna which would otherwise operate were the statutory derivative action unavailable, on the assumption that the statutory derivative action covered the whole field. If it does not cover the whole field, as Ford contends, then recourse may still be had to s477(6) (control of liquidator's powers by the Court, or application by a creditor) or s511 (application by liquidator to the Court to determine a question arising in the winding up). 10 The general common law could operate if the statutory derivative action did not apply and did not seek to cover the whole field including liquidation. However, I do not need to decide that question since, on balance, I am satisfied that the statutory derivative action would still be available in the context of a liquidation. This is so, even if it be the case that there is here overlap with the inherent power of the liquidator to decide whether the company should begin or continue proceedings assisted as needed by s477(6) and s511 of the Corporations Act. It may also be the case that, as with the dominant purpose test in legal professional privilege (Esso Australia Resources Ltd v Commissioner of Taxation of the Commonwealth of Australia (1999) 74 ALJR 339), the general law should now be applied so it more closely conforms to the statutory derivative action, even if the latter did not itself apply in a liquidator situation, contrary to the view I take. 11 Accordingly, I conclude that there is no impediment to the orders sought which are, in any event, framed in terms that draw upon "all powers thereunto enabling", so as to invoke the general law and s477(6) with s511. 12 There is nothing in the explanatory memorandum introducing the CLERP reforms which throws any light one way or the other upon this question, though I note that paragraph 6.17 makes no mention of any preclusion of the statutory derivative action in the context of a liquidation. Clearly enough, leave will also need to be given pursuant to s500(2)) to the bringing of the relevant action, by reason of the express provisions in that behalf requiring it. 13 I make the orders and note the undertakings given. ********** Last Modified: 01/03/2002 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.