New South Wales Supreme Court CITATION : Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859 HEARING DATE(S) : 15/08/05 JUDGMENT DATE : 25 August 2005 JUDGMENT OF : Brereton J DECISION : See Judgment at Paragraph 62 CATCHWORDS : CORPORATIONS - statutory derivative action - application for leave under Corporations Act 2001 (Cth) s.236, 237 by member of deadlocked company to defend proceedings against company & to bring cross claim against other member and director - whether leave may be granted if applicant fails to satisfy all five criteria in s.237(2) - whether leave may be granted to defend proceedings on behalf of a company - whether leave may be granted nunc pro tunc - whether judgment as to probability of company not itself bringing proceedings to be made on current facts or deferred - whether good faith requirement satisfied in absence of sworn assertion of honest belief in cause of action - whether personal character and qualities of applicant relevant under s.237(2)(c) - whether leave should be on terms that company protected from costs - whether leave to defend on behalf of company should be granted when same issues can and will be raised by other defendant - appropriate costs order when granting leave LEGISLATION CITED : (CTH) Corporations Act 2001 s.236, 237 Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313 Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442 Carpenter v Pioneer Park Pty Ltd (in liq) (2004) 211 ALR 457 Goozee v Graphic World Group Holdings Pty Limited (2002) 42 ACSR 534 Charlton v Baber (2003) 47 ACSR 31 Jeans v Deangrove Pty Ltd [2001] NSWSC 84 Herbert v Redemption Investments Pty Limited [2002] QSC 340 Spokes v Grosvenor Hotel Co Limited [1897] 2 QB 124 CASES CITED : Keyrate Pty Limited v Hamarc Pty Limited [2001] NSWSC 491 [17] RTP Holdings Pty Ltd v Roberts (2000) 36 ACSR 170 Cf Harris v Caladine (1991) 172 CLR 84 Peters' American Delicacy Co Limited v Heath (1939) 61 CLR 457 Russell Kinsella Pty Limited (in liq) v Kinsella [1983] 2 NSWLR 452 Richard Brady Franks Limited v Price (1937) 58 CLR 112 Walker v Wimborne (1976) 137 CLR 1; 3 ACLR 529 Spies v The Queen (2000) 201 CLR 603; 173 ALR 529; 35 ACSR 500 McLean v Lake Como Venture Pty Limited [2003] QSC 562 Devereaux Holdings Pty Limited v Pelsart Resources NL (No 2) BC8500667 David Maher (Plaintiff) PARTIES : Honeysett & Maher Electrical Contractors Pty Ltd (First Defendant) Mark William Honeysett (Second Defendant FILE NUMBER(S) : SC 6055 of 2004 J W Dodd (plaintiff) COUNSEL : G Sirtes (defendants) MCG Lawyers (Plaintiff) SOLICITORS : Morton & Harris (Defendants) LOWER COURT JURISDICTION : - 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BRERETON J 25 August 2005 6055 / 04 Maher v Honeysett & Maher Electrical Contractors P/L JUDGMENT 1 BRERETON J: The plaintiff David John Maher and the first defendant Mark William Honeysett are the only directors of and equal shareholders in the second defendant Honeysett & Maher Electrical Contractors Pty Limited ("HME"). Irreconcilable differences have arisen between them as to the future of HME. Mr Maher has instituted these proceedings to have HME wound up on the just and equitable ground, and to enforce agreements which he contends have been made between him and Mr Honeysett as to the distribution of HME's assets. Mr Honeysett opposes the winding-up of HME and enforcement of the alleged agreements, and by cross-claim asserts that those agreements were procured by the duress or unconscionable conduct of Mr Maher. Mr Honeysett now wishes to be permitted to defend Mr Maher's claim on behalf of HME, and to bring a derivative action in the name and on behalf of HME against Mr Maher and his company Demaher Pty Limited ("Demaher"), for equitable compensation and/or an account of profits by reason of alleged breaches by Mr Maher of his fiduciary obligations as a director of HME, from which Demaher is said to have benefited. 2 With his own cross-claim, filed on 22 February 2005, Mr Maher purported to include a cross-claim by HME against Mr Maher and Demaher, without the leave which he required to do so. By the present application, brought by Notice of Motion filed on 3 June 2005, Mr Honeysett seeks to regularise the position, by seeking leave, nunc pro tunc, pursuant to Corporations Act 2001, s.237, "to act on behalf of, as well as bring or maintain a Notice of Cross Claim in the name of" HME against Mr Maher and Demaher. Mr Maher opposes that application, contending that Mr Honeysett has failed to establish three essential preconditions, namely:- · That it is probable that HME will not itself bring the proposed proceedings, or properly take responsibility for them; · That Mr Honeysett is acting in good faith; and · That it is in the best interests of HME that Mr Honeysett be granted leave. Background 3 The Company was incorporated on 31 March 1994, and acquired the business of the firm Honeysett & Maher Electrical Contractors which had previously been carried on by Mr Maher and Mr Honeysett in partnership. Mr Maher and Mr Honeysett are and have always been its only directors and equal shareholders. The Company was trading profitably until late 2003, when irreconcilable differences emerged. There is no suggestion that it is not solvent. 4 Mr Maher filed his Originating Process on 10 November 2004, claiming: 1. A declaration that there exists two valid and binding agreements as between the Plaintiff and the Second Defendant one dated 15 December 2003 and the other undated agreement made on or about 20 November 2003. 2. An order that the said agreement referred in paragraph 1 above be specifically performed by the Second Defendant and carried into execution. 3. An order pursuant to section 461(e) and (k) of the Corporations Act that the First Defendant be wound up under the - Corporations Act . 4. An order that a liquidator of the First Defendant be appointed. 5 Mr Honeysett filed an appearance on 9 December 2004. The Notice of Appearance stated, as grounds of opposition to the winding up of HME, that HME was not insolvent and ought not be wound up, that HME had a claim against Mr Maher and Demaher for equitable damages and an account of profits for breach of fiduciary obligation, and that the irreconcilable differences relied upon by Mr Maher were caused by him with the result that he was disentitled by his misconduct or unclean hands from relying on the just and equitable ground. 6 On 9 December 2004, the Registrar by consent made directions that the matter proceed by way of pleadings. Mr Maher filed a Statement of Claim on 31 January 2005, by which, in short, he alleges that in about October 2003 disagreement between him and Mr Honeysett as to the future direction of HME led to irreconcilable differences between them, and culminated in an agreement made on or about 20 November 2003 – now said to be between Mr Maher, Mr Honeysett and HME - that HME would cease to trade on 19 December 2003 and for the distribution between them of its assets, which agreement was varied in some respects by a subsequent agreement between the same parties on 15 December 2003. Mr Maher alleges that those agreements have been performed in part but that, with the knowledge and consent of Mr Honeysett, HME has failed to perform some of its obligations. He claims the following relief: - 1. A declaration that there exists two valid and binding agreements as between the Plaintiff and the First and Second Defendants, one dated 15 December 2003 and the other undated agreement made on or about 20 November 2003. 2. An order that the said agreements referred in paragraph 1 above be specifically performed by the First and Second Defendants. 2A. Alternatively the First Defendant pay to the Plaintiff the sum of $58,930.53. 3. An order pursuant to section 461(e) and (k) of the Corporations Act that the First Defendant be wound up under the - Corporations Act . 4. An order that a liquidator of the First Defendant be appointed. 7 By his defence filed on 7 March 2005, Mr Honeysett alleges that any such agreements as are asserted by Mr Maher were "vitiated by [Mr Maher's] conduct in procuring any such agreement". He denies the validity of the agreements and any obligation to carry out any of the matters contained in them. 8 The Registrar's directions made on 9 December 2004 included provision for filing of a cross-claim, and on 22 February 2005, a cross-claim was filed, purportedly on behalf of HME as well as Mr Honeysett, which alleges, in substance: - · That Mr Maher owed fiduciary obligations to HME; · That in breach of those fiduciary obligations Mr Maher had sought to disrupt, sabotage and bring about the demise of the business of HME by, inter alia, seeking to withdraw his guarantee facility supporting HME's bank accounts held with Westpac, causing the withdrawal of the guarantee facility and taking no steps to effectuate alternative arrangements with the bank; taking steps to prevent HME's employees from providing services to HME and its clients thereby exposing it to damages and loss of custom; withholding the issue of invoices to customers of HME thereby adversely affecting its cashflow; instigating preparatory steps to establish Demaher with intent to compete with HME or appropriate customers and goodwill of HME; and, from around 19 December 2003, commencing the trading operations of Demaher based upon existing customers of HME; · That each of the two agreements asserted by Mr Maher was procured by duress (the particulars of which include the facts particularised as breaches of fiduciary obligation referred to above); · That each of those agreements was procured by unconscionable conduct (particulars of which again include the facts particularised as instances of breach of the fiduciary obligation referred to above). 9 The cross-claim claims, by way of relief: - · A declaration that Mr Maher has acted in breach of fiduciary duty in relation to HME; · A declaration that the documents executed in November and 15 December 2003 are void and unenforceable. · An order that Mr Maher pay HME "equitable damages". · An account of profits made by Mr Maher and Demeher in consequence of the alleged breach of fiduciary duty. · A declaration that Mr Maher and Demeher hold any profits as constructive trustee for HME. 10 The Company may not be a necessary party to the claim for a declaration that the agreements are void and unenforceable: despite the allegations in the Statement of Claim, it is far from clear that HME is a party to those agreements. However, only HME and not Mr Honeysett has standing to claim the declaration that Mr Maher has acted in breach of his fiduciary duty (as director), equitable compensation and/or an account of profits, or the declaration of a constructive trust. And it is apparent, from the repetition as particulars of duress and unconscionable conduct of the same facts as found the alleged breach of fiduciary duty, that HME's claim for declaratory relief, equitable damages and/or an account of profits for breach of fiduciary duty on the one hand, and the claim by Mr Honeysett to have set aside or declared void the agreements on the other, share a common substratum of fact. Corporations Act , ss.236, 237 11 Corporations Act 2001, s.236, allows inter alia a member of a company, acting with the leave of the Court granted under s.237, to bring proceedings on behalf of the company, in the name of the company. By s.237(1), such a person may apply to the Court for leave to bring, or intervene in, such proceedings, and by s.237(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. 12 An application under s.237(2) is an application for final, not interlocutory relief. Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313, [24]; Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442, [15]. Section 237 identifies five criteria which, if satisfied, require the Court to grant the leave referred to in s.236. The word "must" in s.237(2) makes plain that if all five criteria are satisfied, the Court is bound to grant the application. Carpenter v Pioneer Park Pty Ltd (in liq) (2004) 211 ALR 457, [31]; Fiduciary Limited v Morningstar Research Pty Ltd [2005] NSWSC 442, [16] (Austin J). The prevailing view is that leave must otherwise be refused. Goozee v Graphic World Group Holdings Pty Limited (2002) 42 ACSR 534 [27] (Barrett J); Charlton v Baber (2003) 47 ACSR 31, [31] (Barrett J); Jeans v Deangrove Pty Ltd [2001] NSWSC 84 (Santow J); Herbert v Redemption Investments Pty Limited [2002] QSC 340 (McKenzie J); Fiduciary Limited v Morningstar Research Pty Ltd [2005] NSWSC 442, [16] (Austin J). The submissions of Mr Dodd, for Mr Maher, were premised on that view, and Mr Sirtes, for Mr Honeysett, did not contend otherwise. The structure of s.237 as a whole – including the rebuttable presumption that in certain circumstances granting leave is not in the best interests of the company – supports the view that s.237(2) was intended to prescribe the circumstances which must be satisfied before leave is granted, and not to leave open an additional discretion to grant leave if one or more of them were not. Similarly, the inclusion by s.237(2)(e)(ii) of a discretionary relaxation from strict compliance with (e)(i) suggests that there is not to be found outside s.237(2) some further discretion to dispense with strict compliance with each of the five criteria. Further, the nature of the criteria themselves is such as to tell against there being a residual discretion: it would be highly improbable that it were intended that there be a residual discretion to grant leave, notwithstanding that an applicant failed to establish one or more of the criteria that the company would probably not itself bring the proceedings, or that the applicant was acting in good faith, or that it was in the best interests of the company that leave be granted, or that there was a serious question to be tried. Accordingly, I agree that leave under s.237 may not be granted unless the applicant satisfies each of the five criteria. 13 A consequence of the conclusion that, if all five criteria be satisfied, leave must be granted, and that otherwise leave must be refused, is that the relevant considerations are limited to the five specified criteria. 14 Part 2F.1A is entitled "Proceedings on behalf of a company by members and others". However, included in the relief claimed by Mr Honeysett is a claim for leave "to act on behalf of" HME, as well as to bring the cross claim, in the proceedings; Mr Sirtes made clear that this was intended to include leave to defend the substantive proceedings on behalf of HME. This leave was sought for more abundant caution, lest it might otherwise be said that HME was not defending the proceedings. 15 In Keyrate Pty Limited v Hamarc Pty Limited [2001] NSWSC 491 (Santow J). the plaintiff sought leave to commence proceedings in the name and on behalf of the first defendant (Hamarc) against other defendants. It was objected that there was an inherent problem in seeking relief both for and against Hamarc. The plaintiff argued that it accorded with the former procedures for derivative actions under one of the exceptions to the rule in Foss v Harbottle (1843) 67 ER 189. that such action be brought by joining the company as a defendant and claiming relief on its behalf, resulting in a judgment binding on and for the benefit of the company. Ford's Principles of Company Law (Butterworths), Ford, Austin and Ramsay, paragraph 11.300; Spokes v Grosvenor Hotel Co Limited [1897] 2 QB 124; Keyrate Pty Limited v Hamarc Pty Limited [2001] NSWSC 491 [17]. Santow J (as His Honour then was) accepted that although the bringing of simple proceedings "in the name of" another usually required that other person to be named as a plaintiff, in more complex cases the (then) Corporations Law should be interpreted to allow the remedy provided by Pt 2F.1A to accommodate the full flexibility of the rules of Court and promote the greatest efficiency of the new remedy and thereby the purpose or object underlying it, and that given that Hamarc was necessarily a defendant in order for the plaintiff to obtain relief in the oppression suit, that was an appropriate course in that case. [2001] NSWSC 491, [18]-[19]. In Talisman Technologies Inc v Queensland Electronic Switching Pty Limited, [2001] QSC 324. Mullins J accepted that a company could be joined as a defendant rather than as a plaintiff in an appropriate case for the purpose of pursuing the relief sought pursuant to a statutory derivative action. [2001] QSC 324 [33]. Neither of those cases, however, concludes whether a person may, under s.237, be granted leave to defend proceedings on behalf of a company. 16 The reference in s.236(1) to intervention in proceedings to which the company is already a party for the purpose of taking responsibility on behalf of the company for those proceedings or for a particular step in them such as compromising or settling them compels the conclusion that the section envisages not just a statutory derivative action on behalf of the company, but the conduct of proceedings generally or in particular respects on behalf of a company, which is apt to include the defence of proceedings. The terms of s.237(2)(d), which refer to the event "if the applicant is applying for leave to bring proceedings", supports the view s.236 authorises actions on behalf of a company in proceedings other than "bringing" the proceedings. That Pt 2F.1A authorises the granting of leave to a person to take responsibility on behalf of HME for the defence of proceedings is put beyond doubt by the terms of s.237(3), which contemplate a grant of leave in proceedings by a third party against the company [s.237(3)(a)(ii)], and a decision by the company not to defend such proceedings [s.237(3)(b)(ii)]. Accordingly, I conclude that leave could be granted under Pt 2F.1A to a person to intervene in proceedings in which a company is a defendant, for the purpose of taking responsibility on behalf of that company for the defence of those proceedings. 17 Proceedings cannot be brought under s.236 at the instigation of the persons described in s.236(1) unless leave to bring them has first been obtained, RTP Holdings Pty Ltd v Roberts (2000) 36 ACSR 170, 172 [13]. and the institution of such proceedings by such persons without leave – as occurred here - is, at best, an irregularity. RTP Holdings Pty Ltd v Roberts (2000) 36 ACSR 170, 172 [15]. However, leave under s.237(1) may be granted nunc pro tunc, RTP Holdings Pty Ltd v Roberts (2000) 36 ACSR 170, 174-5 [27] – [29]. as Mr Dodd accepted, thus rectifying the irregularity. 18 In this case, two of the criteria – (d) which requires that there be a serious question to be tried, and (e) which imposes certain requirements as to notice, are uncontroversial, and I shall address them first. Serious question to be tried 19 On an application of this type, while the Applicant must provide the Court with sufficient material to enable it to determine that there is a serious question to be tried, Charlton v Baber (2003) 47 ACSR 31. the Court will not normally enter into the merits of the proposed derivative action to any great degree, the applicant bearing the same relatively low standard as applies in an application for an interlocutory injunction. Swansson v RA Pratt Pty Limited (2002) 42 ACSR 313, 320. 20 Mr Dodd conceded that there was a serious question to be tried for the purposes of s.237(2)(d). While I take that concession into account, s.237 requires that the Court be satisfied of each criterion and a concession does not entirely relieve the Court from examination of the matter, although it reduces the extent of the Court's inquiry. Cf Harris v Caladine (1991) 172 CLR 84, 96 (Mason and Deane JJ), 103 (Brennan J), 133 (Toohey J). 21 Perhaps unusually in the context of an application of this type, most if not all of the evidence on the plaintiff's substantive (specific performance and winding up) application, and the cross-claimants' evidence on the cross-claim (including the proposed cross-claim by HME) has already been filed, and was read on the hearing of the motion. It is manifest that there is a live factual contest as to the circumstances in which the "agreements" were procured and entered. There is also a live factual issue, with evidence bearing both ways, as to whether Mr Maher embarked upon a course of conduct calculated to damage HME from about October 2003 onwards. It suffices to say that the evidence relied on by Mr Honeysett, if accepted at trial, is at least arguably capable of supporting a defence to the winding up and specific performance application, and an allegation of breach of fiduciary obligation against Mr Maher. Coupled with Mr Dodd's concession, this satisfies me that, both in respect of the defence of the plaintiff's claim, and in respect of HME's proposed cross-claim, there is a serious question to be tried. Notice 22 As to criterion (e), Mr Dodd accepted that notwithstanding non-compliance with s.237(e)(i), there had been sufficient notice, so that satisfaction of paragraph (e)(ii) was not contested. Given that the proposed cross-claim has been pending since 22 February 2005 and that Mr Maher, who is the only person to whom notice might practicably be given in the context of this two-man company, has had ample notice of the intention to make the application, I am satisfied that the absence of formal notice to HME ought not prevent a grant of leave. Probable that HME will not itself bring the proceedings 23 Section 237(2)(a) requires that the Court be satisfied that it is probable that the company will not itself bring or take responsibility for the proceedings. As Palmer J observed in Swansson v RA Pratt Properties Pty Limited, (2002) 42 ACSR 313, 319 [28]. in most cases it will be readily apparent whether this requirement is satisfied, since usually the defendant in the proposed derivative action will be in control of the company or enjoy the support of the majority of shareholders or of the board. 24 This case is not quite within that category, in that Mr Maher does not control HME in the sense of having more than 50% of the voting power, either in general meeting or on the board. However, his 50% entitlement ensures that he can prevent the carriage of any resolution to institute proceedings against him or Demaher. It is readily to be inferred that he would not support a proposal that HME bring the proceedings against him and/or Demaher. That inference is all the more readily drawn in the light of Mr Maher's opposition to the present application, and the absence of any suggestion on his part that he would co-operate in bringing the proposed proceedings. Even more compelling is the inference that HME, deadlocked as it is, will not defend the proceedings against it. 25 Mr Dodd accepts that Mr Maher would not co-operate in bringing proceedings against himself or Demaher, but submits that there is no evidence from which it could be concluded that it is probable that HME will not itself bring the proceedings. He points to the consent dated 8 November 2004 of Mr Michael John Morris Smith, an official liquidator, to act as liquidator of HME, and to the absence of any evidence that Mr Smith would not, if appointed liquidator, bring the proposed proceedings. He rightly submits that the applicant for leave bears the onus of proving each of the criteria, including (a). Although he did not cite it, this submission might be supported by In Talisman Technologies Inc v Queensland Electronic Switching Pty Limited, [2001] QSC 324. in which Mullins J said that there was a question of timing in determining whether it was probable that the company would not itself bring proceedings: until the disputes among the shareholders were determined, the company was not in a position itself to endeavour to pursue claims that may accrue to it. [2001] QSC 324, [19]. In refusing leave, Mullins J said that if the proceedings to be pursued on behalf of the company were characterised as those which were the consequence of the determination of the dispute among the shareholders, it could not be concluded that it was probable that the company would not itself bring the proceedings. 26 However, in my opinion criterion (a) requires a judgment to be made of the probabilities based on the presenting circumstances at the time of the hearing of the s.237 application. It does not permit the effective deferral of that judgment on the basis that the state of the company's affairs might change in the future. While a judgment as to whether it is probable (now) that the company will not itself bring (or take responsibility for) proceedings requires some prognostication of what may transpire in the future, those possible future eventualities form part of the factual matrix upon which a judgment of the present probabilities is to be based. It would be contrary to the purpose of s.237 in facilitating the bringing of appropriate derivative actions to construe it as requiring that disputes between shareholders affecting control be first resolved before that judgment is made. The onus which the applicant for leave admittedly bears does not in my opinion require the applicant to show that a hypothetical future liquidator (a fortiori one the appointment of which the applicant opposes in the substantive proceedings) would not bring the proposed proceedings, nor that once a dispute between shareholders is eventually resolved, the victorious faction would not cause the company to bring them. 27 In the present case, whether a future liquidator might bring the proposed proceedings in the event of a winding up is at this stage entirely speculative. In the current circumstances, and having regard to the current state of HME's affairs, including Mr Maher's 50% shareholding and Mr Honeysett's opposition to a winding up, I am satisfied that it is more probable than not that HME will not itself bring the proposed proceedings against Mr Maher and Demaher, and will not take steps for the defence of the proceedings against it. Good faith 28 Section 237(2)(b) requires that the Court be satisfied that the applicant for leave is acting in good faith. In Swansson, Palmer J, while recognising that in the early development of the law on the statutory derivative action created by Pt 2F.1A it would be unwise to state compendiously the considerations which might apply in determining whether applicants in all categories defined by s.236(1) are acting in good faith, and that the law would develop incrementally as different factual circumstances came before the courts, (2002) 42 ACSR 313, 320 [35]. nonetheless identified two inter-related factors to which the courts would always have regard in determining whether the good faith requirement imposed by s.237(2)(b) is satisfied: first, whether the applicant for leave honestly believes that a cause of action exists and has a reasonable prospect of success; and secondly, whether the applicant is seeking to bring the derivative suit for such a collateral purpose which would amount to an abuse of process. (2002) 42 ACSR 313, 320 [36]. As Palmer J pointed out, those two factors will in most though not all cases entirely overlap. (2002) 42 ACSR 313, 320 [37]. 29 Palmer J added that whether the applicant honestly holds such a belief would not simply be a matter of bald assertion: the applicant may be disbelieved, if no reasonable person in the circumstance would hold that belief. (2002) 42 ACSR 313, 320 [36]. And as His Honour pointed out, the onus of proving the good faith criterion might vary, depending upon the standing of the applicant: a current shareholder with more than a token shareholding who proposes an action which will recover property of the company and increase the value of his shares will relatively easily demonstrate good faith, as will a current director or officer who has a legitimate interest in the welfare and good management of the company; but not so easily would a former shareholder or officer with nothing obviously to gain directly by the success of the action establish the requisite satisfaction. 30 The approach of Palmer J in Swansson has since been followed. Carpenter v Pioneer Park Pty Limited (in liq) (2004) 211 ALR 457, [22]; Charlton v Baber (2003) 47 ACSR 31, [40] (Barrett J); Goozee v Graphic World Group Holdings Pty Limited (2002) 42 ACSR 534, [56] (Barrett J); Fiduciary Limited v Morningstar Research Pty Limited [2005] NSWSC 442, [21] (Austin J). In Fiduciary Limited v Morningstar Research Pty Limited [2005] NSWSC 442 (Austin J). Austin J referred to the explanation of the "good faith" criterion given in the Explanatory Memorandum to the Corporate Law Economic Reform Programme Bill 1998 ("the Explanatory Memorandum") as follows: 6.36 In assessing whether an applicant is acting in good faith, the Court could be expected to have regard to whether: · there was any complicity by the applicant in the matters complained of; and · the application is being made in pursuit of an interest other than that of the company. 6.39 The good faith requirement is designed to prevent proceedings being used to further the purposes of the applicant, rather than the company as a whole. 31 Austin J also observed that the applicant in that case had asserted in his affidavit that he held the honest belief that a reasonable cause of action existed in respect of the claims he sought to make on behalf of the company in question, and that such claims have a reasonable prospect of success. Noting that "mere bald assertion" was not sufficient to establish the honest belief, His Honour thought it relevant to consider the nature of the allegations to be made on behalf of the company and the circumstances out of which they arose. The proposed claims there under consideration encompassed an assertion that the wrong-doing of the proposed defendants had caused damage to the company, and hence indirectly to the interests of the applicant; that circumstance gave rise to an inference that the applicant wished to proceed in the name of the company so as to ensure that an available avenue of indirect recovery was not excluded. [2005] NSWSC 442 (22). Thus His Honour determined the good faith issue by inference from objective facts, rather than upon "bald assertion". On the other hand, in Chapman v E-Sports Club Worldwide Limited, (2000) 35 ACSR 462. Mandie J, in declining to be satisfied that the applicant was acting in good faith, gave significance to the circumstance that he had not gone on affidavit, and had not even sought the opportunity to do so when substantial material had been filed giving a completely version of what took place. 32 Neither Mr Honeysett nor anyone on his behalf has deposed, in terms, to an honest belief that a good cause of action exists and has reasonable prospects of success. Mr Dodd submits that it would have been very easy for Mr Honeysett to make the relevant assertion - all the more so when, the possible difficulties arising from the absence of such an assertion having been pointed out in argument, no application was made then to supplement the evidence – and that it should therefore be inferred that Mr Honeysett did not have the requisite honest belief. But Mr Sirtes submits that satisfaction of the "good faith" criterion does not require an assertion by the applicant on oath or otherwise that he believes that a good cause of action exists and have reasonable prospects of success, and that good faith can be inferred from other material. 33 I do not take Palmer J, in Swansson, to have stipulated that there must be a sworn assertion by the applicant that he believes that a good cause of action exists and has reasonable prospects of success; rather, His Honour identified a state of mind which must be found to exist in the applicant, rather than any particular means by which that state of mind is to be proved. While in some cases the presence or absence of a sworn assertion of the relevant state of mind might be very important, generally speaking such statements – which by necessity will almost always be unqualified opinion founded on hearsay, since a lay applicant will rarely know whether or not a good cause of action exists, nor its prospects of success, and will be dependent upon the advice of lawyers for forming the relevant belief – must be of little weight or utility; and the objective facts and circumstances will speak louder than the applicant's words. Although in the context that there was also a "bald assertion", the approach adopted by Austin J in Morningstar illustrates this. 34 Unlike Chapman v E-Sports Club Worldwide Limited, (2000) 35 ACSR 462. the present is not a case in which the applicant has denied the respondent an opportunity to test his bona fides by not putting on his own affidavit and avoiding exposure to cross-examination; while he may not have deposed in terms to holding the requisite belief, Mr Honeysett has sworn affidavits which were read on the hearing of the application, upon which he could have been required for cross-examination by which his state of mind could have been tested and any suggestion of mala fides put to him. 35 Significantly, Mr Honeysett is not a former but a current shareholder of HME, with much more than a token shareholding, and the derivative action seeks compensation for HME, and if successful will enhance the value of his shares in it. Accordingly, this is the type of case in which relatively little will be required to establish good faith. 36 Moreover, as Mr Sirtes has emphasised, all the evidence on which Mr Honeysett proposes to rely in the substantive proceedings has been filed and served, and that evidence, which includes affidavits of Mr Honeysett and his wife, deposes to facts which, if accepted, might well support an allegation of breach of fiduciary duty against Mr Maher, and a defence to the claims for specific performance of the agreements and winding up of HME. In this respect, my conclusion, in accordance with Mr Dodd's concession, that there is a serious question to be tried, is pertinent. Barrett J referred to the relationship between the existence of a serious question to be tried and the good faith criterion in Goozee v Graphic World Group Holdings Pty Limited. (2002) 42 ACSR 534, 546 [57]. While it is true that in that case it was the absence of a serious question to be tried that led to the conclusion that the applicants could not reasonably believe that they had a good cause of action, and while the presence of a serious question to be tried may not quite so inevitably lead to the conclusion that an applicant honestly believes that there is a good cause of action, nonetheless the conclusion (and concession) that there is a serious question to be tried is a major step towards establishing it: the actual existence of the matter honest belief in which is required is a firm basis for an inference that there is an honest belief in its existence. And while accepting completely Mr Dodd's reminder that it is for the applicant to prove criterion (b), the absence of any alternative hypothesis as to any "improper" collateral purpose of Mr Honeysett, in the context of the matters which I have mentioned, facilitates the drawing of that inference. 37 Accordingly, I am satisfied that Mr Honeysett is acting in good faith. Best interests of HME 38 Section 237(2)(c) requires that the Court be satisfied that the proposed derivative action is in the best interests of the company. 39 Both parties accepted that s.237(3) – which provides that a rebuttable presumption that the proposed derivative action is not in the best interests of the company arises if certain matters are established – was not applicable here – presumably because HME is not a public company, but, if it were, each of Mr Maher (as a director) and Demaher (as an entity controlled by him) would be a related party of HME within the meaning of Corporations Act, s.228, and thus not be a third party for the purposes of s.237(3): see s.237(4)(a)(ii). 40 In Swansson, Palmer J observed that s.237(2)(c) requires the court to be satisfied, not merely that the proposed derivative action may be or is likely in the best interests of the company, but rather that it is in its best interests. (2002) 42 ACSR 313, 324 [55] – [56]. And His Honour identified matters which would ordinarily be relevant to the inquiry, in particular (a) the character of the company, in that different considerations may well apply depending on whether the company is a small private company whose few shareholders are the members of a family, or whether it is a large public listed company - the effect of the proposed litigation on the purpose for which the company was established and on the family members being potentially relevant in the former but not the latter case; or if the company is a joint venture company in which the venturers are deadlocked so that the proposed derivative action is seen as being for the purpose of vindicating one side's position rather than the other's in a way which will not achieve a useful result; (b) the business if any of the company and the effects of the proposed litigation on its proper conduct; (c) matters relevant to whether the substance of the redress sought by the applicant is available by a means which does not require the company to be brought into litigation against its will – so that if the applicant can achieve the desired result in proceedings in his or her own name it is not in the best interests of the company to be involved in litigation at all, as was the case in Talisman Technologies Inc v Queensland Electronic Switching Pty Limited [2001] QSC 324.; and (d) the ability of the proposed defendant to meet at least a substantial part of any judgment in favour of the company in the proposed derivative action, so that the Court may ascertain whether the action would be of any practical benefit to the company. (2002) 42 ACSR 313, 324 [57] – [60]. 41 In Morningstar, Austin J adverted to what the Explanatory Memorandum had to say about the "best interests" criterion, which was as follows:- 6.38 This criterion would allow the court to focus on the true nature and purpose of the proceedings. It would recognise that a company might have sound business reasons for not pursuing a cause of action open to it and that its management might legitimately have decided that the best interests of the company would be served by not taking action. For example, a decision may be taken in a case where, although it may be clear that there has been a breach of duty by a director, a loss to the company may only be nominal. In this case, the costs of taking proceedings may outweigh any benefit to the company. 6.39 The inclusion of this criterion would allow the court to refuse to grant leave in these circumstances because the applicant for leave would not be able to show that to do so would be in the best interests of the company. 42 Mr Dodd advanced three reasons for saying that it was not in the best interests of HME that Mr Honeysett be granted the leave which he seeks, namely:- · Mr Honeysett is the least suitable person to be entrusted with an action on behalf of HME, because of his personal interest in so much of the cross-claim as is brought on his own behalf, as distinct from on behalf of HME; · Mr Honeysett is not a suitable person to be granted such leave, because he is not capable of making rational decisions; and · The best interests of HME were that Mr Honeysett and Mr Maher be left to contest and resolve the issues between them, whereupon HME could then consider its position. 43 Mr Sirtes submits that the first two of these reasons are irrelevant considerations for the purposes of s.237(2), because they are not referred to in the five criteria. Mr Dodd responds that personal characteristics and qualities of the applicant are made relevant by the terms of s.237(2)(c), which is expressed as requiring the Court to be satisfied, not that it is in the best interests of HME that leave be granted, but that it is in the best interests of HME that the applicant be granted leave. 44 The force of this response is, however, much weakened by the form of s.237(3), which creates a rebuttable presumption that granting leave is not in the best interests of the company in certain events. The matters there referred to do not suggest that personal qualities of the applicant are relevant. The phrase "best interests" directs attention to the company's separate and independent welfare. Charlton v Baber (2003) 47 ACSR 31, [52]; Fiduciary Limited v Morningstar Research Pty Limited [2005] NSWSC 442, [46]. This imports the familiar concept of the interests of the company as a whole. As to which, see, for example, Peters' American Delicacy Co Limited v Heath (1939) 61 CLR 457; Russell Kinsella Pty Limited (in liq) v Kinsella [1983] 2 NSWLR 452 (Powell J); Richard Brady Franks Limited v Price (1937) 58 CLR 112; Charlton v Baber (2004) 47 ACSR 31, 44 [50]. Whether the "best interests" of the company as a whole reflect those of the shareholders taken together in light of the corporate objects, or those of the creditors which will prevail in the context of insolvency, will be influenced by the status of the company. Walker v Wimborne (1976) 137 CLR 1; 3 ACLR 529; Spies v The Queen (2000) 201 CLR 603; 173 ALR 529; 35 ACSR 500; Charlton v Baber (2004) 47 ACSR 31, (53]. 45 Moreover, the existence in an applicant of a personal interest in the outcome of a proposed derivative action, or even of a personal animus against the company, or other members of it, cannot be significant, let alone decisive; they are usual concomitants of the types of disputes which lead to derivative actions, and few if any such actions would be brought but for personal interest on the part of the relevant applicant and in the absence of animus against the company or other shareholders. Corporations Act, Pt 2F.1A was intended to facilitate the bringing of derivative actions where appropriate, and not to impose restrictions which did not previously exist. According to the Explanatory Memorandum, the criteria are aimed at "preventing potentially vexatious or unmeritorious actions that would be detrimental to the company on whose behalf the action was taken" and "seek to strike a balance between the need to provide a real avenue for applicants to seek redress on behalf of the company where it fails to do so and the need to prevent actions proceeding which have little likelihood of success". Explanatory Memorandum, paragraphs 6.1, 6.2. That balance would not be served by excluding applicants who have a genuine grievance in respect of which the company is the proper plaintiff, just because they have a personal interest or animus in doing so. 46 Nor do I think that the mental fitness of an applicant is a relevant consideration. If it were established that an applicant satisfied the five criteria but was incapable of managing his or her affairs, the proper conclusion would be to grant leave, but require that a tutor conduct the proceedings. 47 Accordingly, in my opinion the personal qualities or fitness of the applicant are not a relevant consideration under s.237(2)(c). Its terms are to be construed, in the light of its objects and context (including s.237(3)), as requiring only that the Court be satisfied that the granting of leave is in the best interests of the company. 48 In any event, I would not accept that Mr Honeysett is not now able to act rationally. True it is that a psychologist has expressed the view that in December 2003 he was in no fit state to have made rational decisions, and in fact had made some irrational decisions. Affidavit of Lyn Bartlett sworn 15 June 2005, annexure B, p2.6-7. But his general practitioner has reported that on 10 March 2004 he appeared much better and was back at work for himself and seemed more positive, though he was still on Zoloft; he has not seen him since. Affidavit of Michael Berger sworn 15 June 2005, [19]. A psychiatrist has opined that he had been significantly depressed for several months and [as at 24 April 2005] "is still moderately depressed". Affidavit of Rosalie Wilcox sworn 16 June 2005, annexure B, p6.7-8. This is the most up-to-date evidence of his mental state, and does not warrant any conclusion that the moderate depression from which he apparently suffered in April 2005 is incompatible with the ability to make rational decisions. 49 The submission that the best interests of HME were that any determination whether or not HME should bring the proposed proceedings should abide the outcome of the dispute between the shareholders might derive some support from the judgment of Mullins J in Talisman Technologies Inc v Queensland Electronic Switching Pty Limited. [2001] QSC 324. In that case, application was made for the joinder, as an additional defendant, of a "joint venture company", which was opposed on the ground that the joint venture was at an end, effectively because of the breakdown in the relationship between the warring shareholders. The substantive proceedings sought specific performance of obligations under a shareholders' agreement, to which proceedings the joint venture company was not a necessary party. In refusing leave, Mullins J said that the proposed joinder of the joint venture company as a defendant and its slight involvement in the primary objective of the plaintiffs highlighted the lack of utility of the proceedings for it; and that it added very little to the proceedings to have the joint venture company joined as a party, the reality being that if the substantive proceedings resulted in specific performance of the shareholders' agreement, consequences would follow for the joint venture company which did not have to be previously ventilated in the proceedings. Thus Mullins J concluded that it was not in the best interests of the company that leave be granted. 50 The judgment of Mullins J may properly be understood as based on the view that all the proposed derivative action would achieve would be to enable the company to claim from the defendants 100% of what the existing plaintiffs (who were entitled to half of the shareholding) were already claiming 50%, and that its joinder was therefore unnecessary and added nothing in substance to the proceedings: the applicants could achieve the desired result in proceedings in their own name. So understood, the circumstances of the present case are quite different: here, only HME has standing to bring the claims founded on breach of fiduciary duty, and Mr Honeysett cannot personally claim 50% of what HME could claim on that basis. 51 Moreover, the factual substratum of HME's proposed claim is substantially the same as that which underlies the dispute between Mr Maher and Mr Honeysett personally. See [10] above. That factual substratum is to be litigated in any event. That circumstance makes it highly desirable in the interests of a company whose only shareholders and directors will be litigating the issue in any event, that the subject matter be litigated on behalf of HME concurrently. Santow J adverted to the relevance of a common substratum of fact to the grant of leave under s.237 in Keyrate Pty Limited v Hamarc Pty Limited. [2001] NSWSC 491, [24], [26]. 52 Prima facie, the prosecution of an action by or on behalf of a company against an officer for recovery of compensation for damage done to the company by that officer's breach of duty is in the interests of the company. In the context of the present case, the proposed derivative action if successful will enhance the assets of HME available for distribution between the shareholders. As HME has ceased to carry on business, the proposed derivative action will not have a detrimental impact on its business. The only caveat is that the proposed action, particularly if unsuccessful, might expose HME to adverse costs consequences. In this respect, Mr Sirtes drew attention to the observations of Austin J in Morningstar, to the effect that one considerable factor to be weighed against its being in the best interests of a company that leave be granted under s.237 is that, if the derivative action were ultimately to fail, the result would be a substantial costs liability for the company. Austin J referred to the need to strike a balance between the prejudice that the company would suffer if claims were pressed unsuccessfully on its behalf and it was called upon to meet an adverse costs order, and the advantage that it would gain indirectly for the benefit of its shareholders if the claims were successful. McLean v Lake Como Venture Pty Limited [2003] QSC 562 [7]; Fiduciary Limited v Morning Star Research Pty Limited [2005] NSWSC 442, [51]. As Austin J said, where the assertion of claims on behalf of a company is simply a manifestation of aspects of the overall dispute between the parties, it will often be appropriate for the court to address the question of costs in the event that the claims fail, and that a suitable way of doing so is to grant leave on terms that the applicant is responsible for the costs ordered against the company and undertakes not to seek contribution or indemnity from the company. 53 This is at least to some extent a similar case, in that the claims which Mr Honeysett asserts the company has against Mr Maher and Demaher are aspects of the overall dispute between Mr Honeysett and Mr Maher. I conclude that the prosecution of the proposed claim on behalf of HME, which has been conceded and found to be seriously arguable, against a director for recovery of compensation for damage allegedly done to HME by that director's breach of duty, and which if successful will enhance the assets of HME available for distribution between the shareholders, is in the best interests of the company, so long as HME is not exposed to the risk of suffering adverse costs consequences. Mr Sirtes did not oppose the imposition of such a term as was imposed in Morningstar on any grant of leave. 54 Accordingly, I am satisfied:- · That the personal interest or animus of the applicant and his mental health are not relevant considerations for the purposes of s.237(2)(c); · That the relief to be claimed by HME in the proposed claim is not such as can be claimed indirectly by Mr Honeysett in a personal claim; · That the common substratum of fact underlying the proposed derivative action, the defence of Mr Honeysett to Mr Maher's personal claim, and Mr Honeysett's personal cross-claim makes concurrent determination of the proposed cross-claim preferable to deferring HME's claim until after the resolution of the shareholder's dispute, all the more so when there is no interest in HME other than that of Mr Maher and Mr Honeysett; · That subject to HME being protected from exposure to any adverse costs consequences, prosecution of a claim on behalf of HME against Mr Maher and Demaher to recover compensation for loss suffered or profits made as a result of breach of fiduciary obligation by Mr Maher is in the interests of HME; · Therefore, that it is in the best interests of HME that Mr Honeysett be granted the leave which he seeks to bring the proposed cross-claim in the name and on behalf of HME, upon terms as to the protection of HME as to costs. 55 However, different considerations inform whether leave is to be granted to defend on behalf of HME the proceedings brought against it, than those which bear on granting leave to bring the proposed cross claim, in particular whether it is in the best interests of HME that the applicant be granted leave to defend on behalf of HME. The proceedings to which HME is a defendant are claims for winding up - essentially although not exclusively on the just and equitable ground - and specific performance of an agreement to which it is alleged (by Mr Maher) that HME as well as Mr Maher and Mr Honeysett are parties. Proceedings between the opposed interests in a deadlocked company have ordinarily been conducted with the company joined as a defendant but unrepresented. There is no need for HME to be represented, because one or other of the parties will advance the arguments which, were it represented, it might. Here, Mr Honeysett, who is already a defendant, can adduce any evidence and advance any argument in his own right which he might have advanced on behalf of HME in answer to the claims made against it. While it might be said that it ordinarily is in the interests of a company to resist its winding up, or to resist an order for specific performance of obligations which it might have under the alleged agreements, that does not necessarily follow in the context of a deadlocked two-member company. In circumstances where the claims against HME can be resisted by Mr Honeysett in his own right as a defendant, it would add nothing to grant him leave to do so on behalf of HME, and I am not satisfied that it is in the best interests of HME that Mr Honeysett be granted leave to intervene in the proceedings for the purpose of taking responsibility on behalf of HME for the defence of the proceedings. Different considerations would arise were Mr Honeysett not himself already a defendant. Costs 56 On the question of the costs of the present application, Mr Dodd submits that it is brought late and retrospectively, to remedy an irregularity. While that is true, the costs of the application would not have differed, nor been avoided, had it been brought earlier. Mr Maher could have, but did not, consent to it. 57 However, it may or may not prove ultimately that there is any valid cause of action against Mr Maher and Demaher. The position is analogous to that upon the grant of an interlocutory injunction, when the usual order is that costs be costs in the cause, or the applicant's costs in the cause. As Young J (as the Chef Judge then was) said in Davison v Public Trustee: (NSWSC, 9 February 1987, Young J). The grant of the injunction is seen as a necessary holding order virtually made without prejudice as to who is right and who is wrong and that when in due course the suit is determined then ordinarily the costs of the interlocutory proceedings follow the result of the cause though always there is some judicial discretion about the matter. 58 In a similar context, Young J also said:- Devereaux Holdings Pty Limited v Pelsart Resources NL (No 2) (NSWSC, Young J, 24 July 1985, BC8500667). My researches as to the local practice as to costs when an interlocutory injunction is granted but then the proceedings are dismissed on final hearing, have not led to any definitive rules being uncovered, but the following seems to be what commonly happens in such cases:-- (a) If the material before the Judge on the interlocutory hearing discloses that there is an arguable or prima facie case and it is more or less conceded in argument that such is the case so that an interlocutory injunction is granted, then costs of the interlocutory injunction are costs in the cause, though sometimes they may be made plaintiff's costs in the cause; (b) If in the situation set out in (a), the defendant does not concede the inevitability of an interlocutory injunction being granted, then the proper order is that the plaintiff's costs be his costs in the cause, or even that the defendant pay the plaintiff's costs in any event; (c) If the main matter argued on the interlocutory application is a question of law which is fully argued, then very often the appropriate order will be that the winner of the argument gets an order for his costs of the interlocutory application in any event, though the order may be that the costs are those of the successful party in the cause; (d) If the motion is treated by the parties as merely being a minor step in the final proceedings, then the appropriate order is that each party's costs being their costs in the cause; (e) If there is an interlocutory motion which is properly brought, and both parties are partially successful, both parties' costs should be costs in the cause; (f) If an interlocutory motion for injunction is properly brought and fails, then either both parties' costs will be costs in the cause, or alternatively the proper order will be that the defendant's costs be costs in the cause. 59 The proceedings for leave are final, not interlocutory in nature. Here, the plaintiff/respondent, far from conceding that a grant of leave was almost inevitable, and notwithstanding the (correct) concession that there was a serious question to be tried, firmly opposed the grant of leave. The defendant/applicant has substantially succeeded, the only point on which it has not having occupied practically no time. Yet it may turn out that the proposed derivative action fails. In my opinion, therefore, having regard to the various considerations mentioned by Young J in Devereaux, the costs of the motion should be the Cross-claimants' costs in the proceedings on HME's cross-claim. Conclusion and Orders 60 The application falls to be determined by reference to criteria (a), (b) and (c). Given Mr Maher's 50% shareholding, HME will probably not bring the proposed claim against Mr Maher and Demaher itself. Mr Honeysett, who is correctly conceded to have a seriously arguable case, is acting in good faith. The prosecution of that proposed claim on behalf of HME, against a director for recovery of compensation for damage allegedly done to HME by that director's breach of duty, and which if successful will enhance the assets of HME available for distribution between the shareholders, is in the best interests of HME, at least so long as HME is not exposed to the risk of suffering adverse costs consequences if it fails. However, in circumstances where the claims against HME can be resisted by Mr Honeysett in his own right as a defendant, it would add nothing to grant him leave to do so on behalf of HME, and I am not satisfied that it is in the best interests of HME that Mr Honeysett be granted leave to intervene in the proceedings for the purpose of taking responsibility on behalf of HME for the defence of the proceedings. 61 For the foregoing reasons, I must grant the leave which Mr Honeysett seeks to bring the cross claim on behalf of HME, but not to intervene for the purpose of taking responsibility on behalf of HME for the defence of Mr Maher's claims against it. That does not prevent Mr Honeysett from raising, in the course of his own defence, any defence upon which HME might have relied. 62 Upon the second defendant Mark William Honeysett undertaking to the Court that he will pay and bear and indemnify Honeysett & Maher Electrical Contractors Pty Limited ACN 064143684 against all costs, charges and expenses of and incidental to the bringing and continuation of the proceedings brought by him pursuant to Order 1 below, except insofar as the Court may in future otherwise direct or allow, I make the following orders:- 1. Grant leave pursuant to Corporations Law s.237, nunc pro tunc to 21 February 2005, to the second defendant Mark William Honeysett to bring proceedings on behalf of Honeysett & Maher Electrical Contractors Pty Limited ACN 064143 684 in the form of the cross-claim filed on 22 February 2005. 2. Order that the motion filed on 7 June 2005 be otherwise dismissed. 3. Order that the costs of the motion be the Cross-claimants' costs in the proceedings on the cross claim brought pursuant to Order 1. ********** 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.