Supreme Court New South Wales Medium Neutral Citation: Hackett v Nambucca Valley Quarries Pty Ltd [2012] NSWSC 1189 Hearing dates: 14 September 2012 Decision date: 04 October 2012 Jurisdiction: Equity Division Before: Gzell J Decision: Application dismissed with costs. Hearsay evidence admitted as application interlocutory. Catchwords: CORPORATIONS - Supervision, Regulation and Correction - application for leave under Corporations Act 2001 (Cth), s 236 to commence proceedings in name of corporate trustee - whether best interests criterion in s 237(2)(c) established - action by beneficiary raising same issues - whether undertaking as to costs of value EVIDENCE - Admissibility and Relevance - objection to hearsay - whether application under Corporations Act 2001 (Cth), s 236 final or interlocutory Legislation Cited: Corporations Act 2001 (Cth) Cases Cited: Australian Securities Commission v AS Nominees Ltd [1995] FCA 1460; (1995) 62 FCR 504 Barnes v Addy (1874) LR 9 Ch App 244 Collie v Merlaw Nominees Pty Ltd [1998] VSC 203 Ehsman v Nutectime International Pty Ltd [2006] NSWSC 887; (2006) 58 ACSR 705 Fay v Moramba Services Pty Ltd [2009] NSWSC 1428 Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732 Hall v Nominal Defendant [1966] HCA 36; (1966) 117 CLR 423 Hurley v BGH Nominees Pty Ltd (1984) 2 ACLC 497 Licul v Corney [1976] HCA 6; (1976) 180 CLR 213 Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859 McEwen v Combined Coast Cranes Pty Ltd [2002] NSWSC 1227; (2003) 44 ACSR 244 McLean v Lake Como Venture Pty Ltd [2003] QCA 562; [2004] 2 Qd R 280 Pope v Butcher (1996) 20 ACSR 37 Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd [2011] NSWSC 1235; (2012) 86 ACSR 432 Swansson v R A Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 Talisman Technologies Inc v Qld Electronic Switching P/L [2001] QSC 324 Wood v Links Golf Tasmania Pty Ltd [2010] FCA 570 Young v Murphy [1996] 1 VR 279 Texts Cited: R I Barrett, "Recent Cases", (1985) 59 ALJ 46 Category: Interlocutory applications Parties: Kenneth John Hackett (Plaintiff) Nambucca Valley Quarries Pty Limited (Defendant) Representation: Counsel: S Reuben (Plaintiff) M Ashhurst SC with A Smith (Defendant) Solicitors: CCS Legal Pty Ltd (Plaintiff) Falvey Associates Lawyers (Defendant) File Number(s): SC 2011/349950 Judgment 1The plaintiff, Kenneth John Hackett, holds one ordinary share in the defendant, Nambucca Valley Quarries Pty Ltd (NVQ). Robert Charles Laut holds the other share in NVQ and is currently a director of it. 2NVQ is the corporate trustee of the Worrell Creek Unit Trust (Unit Trust) and operated a gravel quarry at Macksville, New South Wales. 3Mr Hackett resigned as a director of NVQ in November 2003 and was replaced by James Joseph Mainey. 4The beneficiaries of the Unit Trust are Hackett Laboratory Services Pty Ltd (HLS) and Saltwater Developments Pty Ltd, a company controlled by Mr Laut. Each beneficiary holds 10 units in the Unit Trust. 5By his originating process, Mr Hackett seeks leave to commence proceedings in the name of NVQ against Mr Laut and Mr Mainey and their associated interests. 6In substance it is alleged that Mr Laut and Mr Mainey in breach of their duties owed to NVQ caused their own interests to take up benefits that could have been earned by NVQ. The proposed statement of claim also seeks, at the instance of HLS, to hold Mr Laut and Mr Mainey liable as accessories to breaches of trust committed by NVQ to the beneficiaries of the Unit Trust. 7With respect to the alleged accessorial liability the leave of court is not required. But it was submitted that it is desirable if Mr Laut and Mr Mainey may be held liable to account to NVQ or HLS that this be done in the same action. 8In Ehsman v Nutectime International Pty Ltd [2006] NSWSC 887; (2006) 58 ACSR 705 at 718 [56] Austin J expressed the view that it was appropriate for derivative claims to be pursued in proceedings in which personal claims were also asserted provided that great care was taken to distinguish the two categories of claims and the ingredients of the case to prove each category. There was considerable advantage in doing so where there was a substantial common substratum of fact. 9Simon Madison Wilson, the solicitor on the record for Mr Hackett, said that the proposed action against Mr Laut and Mr Mainey is to be combined with an action by HLS, as a beneficiary of the Unit Trust, claiming the same relief against Mr Laut and Mr Mainey and their interests. 10What is alleged in the proposed statement of claim is that NVQ failed to ensure that the trust assets in the form of leases of the quarry were utilised exclusively for the purposes of the business of the Unit Trust. 11It is alleged that NVQ allowed the quarry site to be used as the principle place of business for businesses of interests of Mr Laut and Mr Mainey that were actually or potentially in competition with the business of the quarry conducted by NVQ from the quarry site. 12It is claimed that NVQ allowed the businesses of the interests of Mr Laut and Mr Mainey to be set up and to use the quarry site as their principal place of business in pursuit of a possible receipt of a benefit, profit or gain that could have been obtained for the benefit of the Unit Trust. 13It is said that NVQ allowed the interests of Mr Laut and Mr Mainey to earn profits from the sale of rock or aggregate from the quarry site that could have been earned by NVQ. 14And it is alleged that NVQ allowed Mr Laut and Mr Mainey to prefer their own interests over the interests of the beneficiaries of the Trust. 15The Corporations Act 2001 (Cth), s 236(1)(a)(i) is in the following terms: "A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if: (a) the person is: (i)a member, former member or person entitled to be registered as a member, of the company or of a related body corporate." Section 237(1) provides that a person referred to in this provision may apply to the court for leave to bring or to intervene in proceedings. 16The Corporations Act (Cth), s 237(2) sets out five criteria which must be satisfied in order that the court may grant leave. It is in the following terms: "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." 17If all five criteria are satisfied, the court must grant leave. Correspondingly, if all of the five criteria are not satisfied the court must refuse leave (Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859 at [12]). 18As to the first criterion (lack of action), it is unlikely that NVQ would bring proceedings against Mr Laut and Mr Mainey or their associated interests as NVQ is controlled by Mr Laut and Mr Mainey as its directors. 19Mr Ashhurst SC who with Mr Andrew Smith appeared for NVQ did not submit to the contrary. 20As to the second criterion (good faith), Mr Hackett swore that he believed, acting upon advice, that a good cause of action existed that had reasonable prospects of success. 21There was no suggestion by NVQ that Mr Hackett was not acting in good faith. 22I will return to the third criterion (best interests). 23As to the fourth criterion (serious question), NVQ had granted licences to Boral Resources NSW Pty Ltd (Boral) and to Bitupave Ltd (Bitupave) to enter and use the quarry for the extraction of asphalt. 24Nambucca Valley Gravel Pty Ltd (NVG) was a company controlled by Mr Laut and Mr Mainey. It is alleged in the proposed statement of claim that NVQ entered into an exclusive supply and licence agreement with NVG granting it a licence to enter and use the balance of the quarry site not being used by Boral or Bitupave for the use of a mobile crushing plant and for an agreement to supply raw feed hard rock extracted from the quarry site exclusively to NVG. 25It is alleged that NVQ sold rock or aggregate from the quarry to NVG at a price less than it would have received by selling to customers. It is also alleged that NVQ sold rock or aggregate to other interests of Mr Laut and Mr Mainey at an under value 26It is further alleged that NVQ allowed Mr Laut and Mr Mainey to prefer their interests to the interests of the beneficiaries of the Unit Trust. 27NVG, Nambucca Valley Concrete Pty Ltd, Saltwater Equipment Hire Pty Ltd and Saltwater Labour Hire Pty Ltd being companies controlled by Mr Laut and Mr Mainey had their principal place of business registered as the quarry site. 28It appears that Nambucca Shire Council has awarded a contract for $367,158.00 to NVG. 29These allegations raise serious questions to be tried. Notwithstanding that NVQ disputes Mr Hackett's claims, it accepts that there are prima facie issues raised by Mr Hackett's evidence. For the purpose of these proceedings the fourth criterion (serious question) is satisfied. 30Notice of the application was given to NVQ. There is no suggestion to the contrary. The fifth criterion (notice) is satisfied. 31Opposition to the application centred upon the third criterion (best interests). 32In Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732 at 743 [51] Austin J pointed out that sometimes satisfaction of the serious question criterion will lead readily to the conclusion that the applicant should be permitted to assert the company's claims on its behalf. 33But here it was pointed out that save for the inclusion of causes of action based on the statutory obligations imposed on the directors under the Corporations Act, s 180, s 181 and s 182, and they, in any event, mirror the fiduciary duties owed by Mr Laut and Mr Mainey to NVQ at common law, the allegation that NVQ was in breach of trust and fiduciary duty to HLS raises exactly the same issues as the allegation that Mr Laut and Mr Mainey were in breach of fiduciary and statutory duties to NVQ in inducing, procuring and participating in its breach of trust and fiduciary duty to HLS. And the relief is the same for each cause of action. No additional benefit is sought. 34There is no allegation in the proposed statement of claim that Mr Laut and Mr Mainey breached a fiduciary duty owed by them to HLS because the stronger view is that a director of a corporate trustee does not owe a fiduciary duty to the beneficiaries of the trust. 35In McEwen v Combined Coast Cranes Pty Ltd [2002] NSWSC 1227; (2003) 44 ACSR 244 at 251 [54] Young CJ in Eq said: "Of course there is the problem as to how far the directors of the trustee or how far Trevor and Terry could be personally liable if there was a liability in this connection. The stronger view appears to be that it is only in very rare circumstances that the directors of a trustee company being agents of the company are personally liable for the defaults: see eg Bath v Standard Land Co Ltd [1911] 1 Ch 618; Hurley v BGH Nominees Pty Ltd (1982) 31 SASR 250...; Re James [1949] SASR 143; [1949] ALR 367, my decision in Glandon Pty Ltd v Strata Consolidated Pty Ltd (No 3) (unreported, SC(NSW), Young J No 4258/1988, 4 June 1990, BC9002364) and the paper by Ford and Hardingham "Trading Trusts: Rights and Liabilities of Beneficiaries" in P D Finn (ed), Equity and Commercial Relationships, Law Book Co, Sydney, 1987, pp 48 at 60ff." 36To similar effect is the observation of Brereton J in Fay v Moramba Services Pty Ltd [2009] NSWSC 1428 at [29]: "There is significant authority against the proposition that directors of a trustee company owe a fiduciary duty to the beneficiaries merely by reason of their position as directors [Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504, 522 (Finn J); Young v Murphy [1996] 1 VR 279, 301-2, (J D Phillips J); Pope v Butcher (1996) 20 ACSR 37; Collie v Merlaw Nominees Pty Ltd [1998] VSC 203, [96] (Byrne J); cf Hurley v BGH Nominees Pty Ltd (1984) 2 ACLC 497, which was to the contrary, but is criticised in R I Barrett, "Recent Cases", (1985) 59 ALJ 46, 47...]" 37Mr Ashhurst submitted that the primary contention of NVQ was that, as in AS Nominees, HLS could commence proceedings against the proposed defendants as entities knowingly involved in the alleged breach of trust by NVQ under the second limb and in some cases under the first limb of Barnes v Addy (1874) LR 9 Ch App 244 without the need to involve NVQ in the litigation. He submitted that granting leave would merely bring about duplication of the causes of action with no additional relief. 38In Swansson v R A Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 at 324 [56] - [60], Palmer J indicated the evidence that would normally be required in considering the third criterion (best interests). First, there should be evidence as to the character of the company; secondly, evidence of the business, if any, of the company; thirdly, evidence as to whether relief is available by other means; fourthly, evidence of the ability of the defendant to meet an adverse decision. 39 Of the third requirement his Honour said at 324 [59]: "Third, there should be evidence enabling the court to form a conclusion whether the substance of the redress which the applicant seeks to achieve is available by a means which does not require the company to be brought into litigation against its will. So, for example, 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. This was the case in Talisman Technologies in which it appeared from the evidence that the most desirable outcome for the applicant was to obtain an order for specific performance of a contract, which it could do in a suit in which the company did not need to be a party." His Honour's reference was to Talisman Technologies Inc v Qld Electronic Switching P/L [2001] QSC 324. 40This observation of Palmer J was cited with approval in Maher at [40] and in Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd [2011] NSWSC 1235; (2012) 86 ACSR 432 at 445 [57]. It is a view that I share. 41Another factor to be taken into account is the financial position of NVQ at the time the application was brought (Swansson at 326 [75]). 42In its financial report for the year ended 30 June 2011 it discloses liabilities of $1,168,946.00 with an indemnity against the Unit Trust fund in an equal amount. The financial report of the Unit Trust for the same period shows an excess of liabilities over assets of $413,137.00 and that after including capitalised quarry development expenses of $681,099.00 as a non-current asset. 43Mr Reuben who appeared for Mr Hackett submitted that there was no inclusion of the quarry leases in the Unit Trust balance sheet. But there was to the extent of the capitalised expenses. 44Mr Reuben tendered a quarrying licence agreement into which NVQ and Boral entered on 18 August 2012. It recited that Boral "stands to be assigned" the leases to the quarry but in the meantime required entry to the land, which was granted by the agreement. It provided for the payment of royalties calculated on the tonnage of material won, the details of which are confidential. 45Mr Reuben submitted that increased income flows would be received by NVQ. But there was no lump sum payment and no evidence of the likely tonnages under the quarrying licence agreement. In cross-examination when asked if he anticipated that the arrangements with Boral would bring in substantial payments to NVQ, Mr Laut said "in time." 46I find that neither NVQ nor the Unit Trust is in a position to bear an order for costs against it. Nor are they in a position to bear the costs of conducting the proposed litigation. 47Reference was made to Wood v Links Golf Tasmania Pty Ltd [2010] FCA 570 where an order was made that the company meet the fair and reasonable costs of running the action as the claim seemed to be one that was worthwhile pursuing. At [11] it was said that if a costs order was made and at any later time it turned out that the claim was unmeritorious, the cost order could be recalled. 48That was a case in which leave to bring a derivative action had already been granted and Finkelstein J was dealing with an application under the Corporations Act (Cth), s 242 which provides that the court may make any order it thinks appropriate as to the costs of proceedings brought under s 237. 49While the company consented to an order, another shareholder opposed it. His Honour considered that the derivative action was worth pursuing and he was not persuaded that the company was short of funds. It had derived income just under $5m providing an operating profit in excess of $1m. His Honour ordered the company to pay the joint applicants' reasonable costs of bringing the proceedings on behalf of the company. 50In this case the Unit Trust is without funds and it is doubtful whether the proposed proceedings are worth pursuing. 51In Fiduciary at 742 [44], Austin J referred to what the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 said about the third criterion (best interests): "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, the loss to the company may only be nominal. In this case, the costs of taking proceedings may outweigh the [sic] 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." 52His Honour went on to say at 743 [51] that there was a balance to be struck between the prejudice that the company would suffer if claims were pressed unsuccessfully on its behalf and there was an adverse costs order, and the advantage that it would gain indirectly for the benefit of shareholders if the claims were successful. His Honour referred to McLean v Lake Como Venture Pty Ltd [2003] QCA 562; [2004] 2 Qd R 280 at 286 [7]. Similar considerations arise with respect to a trust and its beneficiaries. 53Austin J took the view that where the assertion of claims was simply a manifestation of aspects of the overall dispute between the parties it would often be appropriate for the court to address the question of costs in the event that the claims failed. His Honour said that a suitable way of doing so in that case was to grant leave on terms that the applicant was responsible for the costs ordered against the company and undertook not to seek contribution or indemnity from the company. 54In this case, however, Mr Hackett proffers no undertaking. It is HLS that offers to pay the costs of the proceedings in the first instance with an indemnity against NVQ if and when circumstances permit it to refund the costs. 55The financial report of HLS as trustee of the Hackett Family Trust (Family Trust) for the year ended 30 June 2011 shows total equity of $119,564.00. Trade and other receivables as current assets stood at $347,312.00. That included a loan at call of $172,290.00 about which there was no evidence. 56If the loan was not recoverable, HLS would have had an excess of liabilities over assets. I am not satisfied that Mr Hackett has established that the HLS offer as to costs is valuable. 57The prospects of recovery of any decision in favour of NVQ are poor. Both Mr Laut and Mr Mainey have negligible equity in their assets. Andrew Murray Ross, a chartered accountant, prepared a report. One of his tasks was to identify whether the entities associated with Mr Laut and Mr Mainey had recorded any profits and to summarise their present financial position. 58Each of NVG, Saltwater Equipment Hire Pty Ltd, Saltwater Labour Hire Pty Ltd and Nambucca Valley Concrete Pty Ltd had an excess of liabilities over assets in the year ended 30 June 2011. Only Saltwater Civil Engineering Pty Ltd had any equity and that was only $39,000.00 rounded off. The group had deficiencies of equity of $734,000 rounded off. 59There are a number of reasons that lead me to conclude that the third criterion (best interests) has not been established. First, there is the circumstance that the allegation that NVQ was in breach of trust and fiduciary duty to HLS raises exactly the same issues as the allegation that Mr Laut and Mr Mainey were in breach of fiduciary and statutory duties to NVQ in inducing, procuring and participating in its breach of trust and fiduciary duty to HLS. And the relief is the same for each cause of action and no additional benefit is sought. 60Secondly, HLS could commence proceedings against the proposed defendants as entities knowingly involved in the alleged breach of trust by NVQ under the second limb, and in some cases under the first limb, of Barnes v Addy without the need to involve NVQ in the litigation 61Thirdly, neither NVQ nor the Unit Trust is in a position to bear an order for costs against it. Nor are they in a position to bear the costs of conducting the proposed litigation. 62Fourthly, there is the uncertainty as to the financial position of HLS as trustee of the Family Trust and whether the undertaking proffered by it has value. I am not satisfied that it does. 63Fifthly, there is the negligible prospect of recovery of any judgment in favour of NVQ. 64The third criterion (best interests) in the Corporations Act (Cth), s 237(2) has not been established to the court's satisfaction. 65The originating process is dismissed with costs. The exhibits, subpoenaed material and court books are to be returned forthwith. 66Rulings on the parties' objections to evidence have been provided to them separately. 67There is one aspect of those rulings that should be mentioned. Objection was taken to hearsay evidence on the ground that the application is final and not interlocutory. 68That contention is based upon a statement by Palmer J in Swansson at 318 [24]: "It is clearly the intent of Pt 2F.1A that leave to bring a derivative action must not be given lightly. An application under s 237(2) is not interlocutory in character; the relief sought is final and the applicant bears the onus of establishing the requirements of the subsection to the court'[s] satisfaction." 69This statement was followed by Austin J in Fiduciary at 735 [15] and by Brereton J in Maher at [12]. No authority was cited by Palmer J. No additional authority was cited by Austin and Brereton JJ. 70With the greatest of respect an application under the Corporations Act (Cth), s 236 and s 237 is interlocutory. There is no final determination of issues between the parties. 71If the application is granted, the rights of the parties can be determined by that litigation. If the application is refused, the rights of the parties are unaffected. There is no final determination of them. 72In Hall v Nominal Defendant [1966] HCA 36; (1966) 117 CLR 423 at 444 Windeyer J said that a final order was one that finally disposed, subject only to appeal, of an action or an existing dispute between the parties. 73Gibbs J endorsed this test in Licul v Corney [1976] HCA 6; (1976) 180 CLR 213 at 225: "The other view which, since Hall v Nominal Defendant, should, I think, be regarded as established in Australia, depends on the nature of the order made; the test is: Does the judgment or order, as made, finally dispose of the rights of the parties?" 74In my judgment these authorities establish that an application under s 236 and s 237 of the Corporations Act (Cth) is interlocutory. ********** 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: 04 October 2012