Supreme Court New South Wales Medium Neutral Citation: Katrina June Harris v Paul Edward Harris & Ors (No 2) [2013] NSWSC 1620 Hearing dates: 25 October 2013 Decision date: 06 November 2013 Jurisdiction: Equity Division Before: Darke J Decision: 1. Grant leave to the plaintiff to file an Amended Statement of Claim in accordance with paragraphs 41 and 42 of these reasons for judgment. 2. The plaintiff's application for leave to bring proceedings pursuant to s 237 of the Corporations Act is refused. 3. The plaintiff is to pay the first and third defendants' costs of the Notice of Motion Filed on 10 October 2013. Catchwords: CORPORATIONS - section 237 Corporations Act 2001 (Cth) application for leave to bring proceedings on behalf of company - whether grant of leave in best interests of company - lack of evidence - leave refused PROCEDURE - application to amend statement of claim - no issue of principle Legislation Cited: Civil Procedure Act 2005 Corporations Act 2001 (Cth) Cases Cited: Chahwan v Euphoric Pty Ltd [2008] NSWCA 52 Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442 Harris v Harris [2013] NSWSC 1261 Hackett v Nambucca Valley Quarries Pty Ltd [2012] NSWSC 1189 Magafas v Carantinos [2006] NSWSC 1459 McEvoy v Caplan [2010] NSWCA 115 Re Mycorp Pty Ltd [2013] NSWSC 1344 Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583 Category: Procedural and other rulings Parties: Katrina June Harris (Plaintiff) Paul Edwards Harris (First Defendant) Terry Albert Harris (Second Defendant) Tylina Holdings Pty Limited (Third Defendant) Representation: Counsel: N Obrart (Plaintiff) M S Henry SC (Defendant) Solicitors: Shaye Chapman Lawyers (Plaintiff) Polczynski Lawyers (Defendants) File Number(s): SC: 2011/394272 Publication restriction: Nil Judgment 1By Notice of Motion filed on 10 October 2013 the plaintiff seeks the leave of the Court to file an Amended Statement of Claim, and also seeks leave pursuant to s 237 of the Corporations Act 2001 (Cth) to bring certain claims, which are described in a proposed amended pleading, on behalf of Tylina Holdings Pty Ltd ("the Company"), the third defendant in the proceedings. 2The Company is the trustee of a trust known as the R K Harris Family Trust ("the Harris Family Trust") which was established pursuant to a trust deed dated 4 June 1979. The settlor of the Harris Family Trust was Mr Robert Harris. He was a "primary beneficiary" of the trust, along with his wife Dulcie Harris and their three children - the plaintiff, the first defendant and the second defendant. 3Robert Harris and Dulcie Harris were initially the directors of the Company. However, following the death of Robert Harris in 1994, the first and second defendants became directors. The plaintiff alleges that at all material times the first and/or second defendants have had effective control of the Company. Since the death of Dulcie Harris in 2011 the first and second defendants have been the only directors of the Company. 4The plaintiff complains about various aspects of the conduct of the affairs of the Harris Family Trust and in particular payments out of trust funds which are alleged to have occurred in breach of the trust. The plaintiff's claims are dealt with in further detail below. 5An earlier Notice of Motion filed by the plaintiff seeking leave to file an Amended Statement of Claim was heard by Kunc J on 30 August 2013. On that day his Honour dismissed the motion but granted leave to the plaintiff to file and serve a Notice of Motion of the kind which is now before the Court. In the course of his judgment, his Honour stated that the plaintiff should have leave pursuant to s 64 of the Civil Procedure Act 2005 to make amendments to raise the issues set out in the then proposed pleading, but that a number of deficiencies in the form of the proposed pleading rendered it necessary to decline to give leave for the filing of the pleading in that form (see Harris v Harris [2013] NSWSC 1261 at [16]-[18]). 6In the course of dealing with the deficiencies in the proposed pleading (see at [20]-[38]), Kunc J noted that various allegations of breaches by the first and second defendants of duties owed as directors of the Company would need to be the subject of an application for leave under s 237 of the Corporations Act. 7On the hearing of the present motion, Ms Obrart of counsel, who appeared for the plaintiff, read an affidavit sworn by Andrew Chapman on 8 October 2013. Attached to that affidavit was a proposed amended pleading. However, at the commencement of the hearing Ms Obrart provided the Court with a further version of that proposed amended pleading which corrected certain errors which had been found in the earlier version. (The version which was provided to the Court at the hearing will be referred to as "the proposed pleading"). Mr Henry of senior counsel, who appeared for the first to third defendants (but not for the proposed fourth and fifth defendants), tendered a bundle of documents which included correspondence between the parties and an ASIC search in respect of the Company. 8The defendants raised a number of specific objections to the adequacy of the proposed pleading, and they also opposed the grant of leave pursuant to s 237. Before dealing with those matters it is desirable to summarise the various complaints made in the proposed pleading. 9The plaintiff alleges that the Company as trustee of the Harris Family Trust owed fiduciary duties to her including a duty to exercise powers under the trust deed bona fide and not capriciously, and that such duties were breached in connection with the payment out of the trust funds of large sums of money in 2008 and 2009. 10In particular it is alleged that a minute of a purported resolution of the Company to distribute the 2008 year income of the trust to Dulcie Harris was falsely made by the second defendant such that no valid resolution to that effect was made, and certain payments made out of the trust funds were in breach of trust (and also constituted a fraud on the power to apply the income of the trust). The first and second defendants are alleged to have knowingly assisted in that breach of trust. The same conduct is alleged to constitute breaches by the first and second defendants of duties they owed to the Company as its directors. 11The plaintiff asserts a claim in the alternative to the effect that in any event the income of the trust was not distributed to Dulcie Harris or in accordance with any valid direction given by her. 12Similar allegations of breach of trust and knowing assistance are made in relation to a purported resolution of the Company to distribute the 2009 year income to the first and second defendants, and the distribution of income in accordance with such resolution. The plaintiff contends that the trust fund should instead have been distributed on the vesting day (13 January 2009) in accordance with clause 4 of the trust deed. 13The plaintiff further alleges that the conduct of the first and second defendants in relation to the distribution of the income of the trust was a breach of fiduciary duties said to be owed to the plaintiff herself as an object of the Harris Family Trust. 14The various acts of alleged wrongdoing are also alleged to constitute oppressive conduct for the purposes of Part 2F.1 of the Corporations Act. 15Finally, there is a restitutionary claim to the effect that certain funds transferred out of the Harris Family Trust to another trust in 2008 are liable to be restored to the Harris Family Trust. 16It is convenient to deal with the specific objections to the proposed pleading first, and then turn to the question of leave pursuant to s 237. 17Mr Henry identified four specific complaints concerning the pleading. These are: (1)In relation to the proposed joinder of the fourth and fifth defendants (who are trustees of another trust which is associated with the Harris family, which I will refer to as "the New Trust"), it was submitted that no cause of action was pleaded against them, or other facts pleaded in relation to them, which would justify the joinder. In addition it was submitted that paragraph 72 of the proposed pleading suggested that the New Trust had been wound up. (2)In relation to prayer for relief 11B(e), it was submitted that the prayer was defective in that it did not identify the persons to whom it was directed; (3)In relation to the restitution claim contained in paragraphs 88 and 89, it was submitted that there was a lack of clarity as to who was obliged to make restitution, and further that the reference to paragraph 60 appeared to be erroneous; and (4)In relation to paragraph 93, it was submitted that there was a lack of clarity concerning the "interest" which the Harris Family Trust had in certain assets, although it was conceded that this lack of clarity could if necessary be dealt with by way of the provision of further and better particulars. 18As to (1), Ms Obrart confirmed that there was no allegation of wrongdoing on the part of the proposed fourth and fifth defendants, but stated that they are appropriate parties because they are trustees of the New Trust which received substantial funds paid out of the Harris Family Trust allegedly in breach of that trust, and are accordingly obliged to make restitution as alleged in paragraphs 88 and 89. Ms Obrart conceded that a new prayer for relief was needed to make that clear, and she also conceded that paragraph 72 of the proposed pleading (which referred to a resolution for the winding up of the New Trust) was not relevant and should be deleted. 19Those concessions were appropriately made. It is necessary that the pleading make clear what facts are alleged in relation to the trust of which the proposed fourth and fifth defendants are trustees, and how those facts give rise to relief directed to those trustees. The allegations made in paragraphs 40(a), 47-49 and 88-89 of the proposed pleading do seem to me to amount to allegations that the sum of $5.275 million was transferred out of the Harris Family Trust in breach of that trust and were received otherwise than as a bona fide purchaser for value without notice by the fourth and fifth defendants as trustees of the New Trust, such that in their capacities as such, the fourth and fifth defendants are obliged to restore those funds to the Harris Family Trust. These allegations assert a personal liability in respect of the proposed fourth and fifth defendants, but do not go so far as to assert that the proposed fourth and fifth defendants are liable as constructive trustees. Subject to the plaintiff attending to the two alterations referred to in the preceding paragraph, I think the plaintiff should be permitted to make allegations of that character. 20As to (2), Ms Obrart agreed that it was necessary for prayer 11B(e), which is a claim for an order pursuant to s 233(1) of the Corporations Act that certain funds be restored to the Company, needed to be amended in order to specify the persons to whom the order is directed. Again, that concession was properly made, and it is appropriate that prayer 11B(e) be so altered. 21As to (3), I think that the criticisms concerning the reference to paragraph 60 in each of those paragraphs is well founded. Contrary to the suggestions made in paragraphs 88 and 89, the content of paragraph 60 is neither a transfer nor a distribution of money, but is rather a resolution for the distribution of certain money. It seems to me that the references to paragraph 60 in proposed paragraphs 88 and 89 should be deleted. In addition, it would be preferable if proposed paragraph 89 made it clear that the alleged obligation to make restitution is an obligation of the proposed fourth and fifth defendants in their capacities as trustees of the New Trust. 22As to (4), it is necessary that the interests which the Harris Family Trust are alleged to have in the assets specified in that paragraph be identified with reasonable clarity. To the extent that such clarity can be achieved without unduly complicating the pleading, it should be done in the body of the pleading itself. Otherwise, it needs to be achieved through the provision of particulars. It will be left up to the plaintiff to chose an appropriate course. 23It is now necessary to turn to the application for leave pursuant to s 237 of the Corporations Act. 24Section 236(1) of the Corporations Act provides: (1) 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; or (ii) an officer or former officer of the company; and (b) the person is acting with leave granted under section 237. 25Section 237 of the Corporations Act relevantly provides: 237 (1) A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings. (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. 26The plaintiff, who is the holder of 1066 Class A shares in the Company, is a member of the Company and thus a person referred to in s 236(1)(a). Accordingly, the plaintiff has standing to apply under s 237 for leave to bring proceedings on behalf of the Company. 27It is clear that unless the Court is satisfied of the matters contained in each of the five paragraphs contained in s 237(2), the Court must not grant the application for leave to appeal (see Hackett v Nambucca Valley Quarries Pty Ltd [2012] NSWSC 1189 at [17]; Re Mycorp Pty Ltd [2013] NSWSC 1344 at [7]). 28Mr Henry submitted that the evidence before the Court would not permit the Court to be satisfied of all the requisite matters, particularly the existence of a serious question to be tried and that the granting of leave is in the best interests of the Company. During the course of the hearing Mr Henry made a concession to the effect that the Court could be satisfied that there is a serious question to be tried within the meaning of s 237(2)(d). However, he maintained the position that the plaintiff had failed to demonstrate that the grant of leave is in the best interests of the Company within the meaning of s 237(2)(c). 29In Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583 Palmer J stated at [55]-[60]: [55] At the outset, it is important to note that s.237(2)(c) requires the court to be satisfied, not that the proposed derivative action may be, appears to be, or is likely to be, in the best interests of the company but, rather, that it is in its best interests. In this respect, s 237(2) differs significantly from its counterpart in the Canadian legislation, which requires the court to be satisfied that the proposed derivative action "appears to be" in the interests of the company, and from s165(3) of the New Zealand Act which requires that the court "have regard to ... the interests of the company"... [56] The requirement of s 237(2)(c) that the applicant satisfy the court that the proposed action is in the best interests of the company is a far higher threshold for an applicant to cross. It requires the applicant to establish, on the balance of probabilities, a fact which can only be determined by taking into account all of the relevant circumstances. Accordingly, the enquiry will normally require the applicant to adduce evidence at least as to the following matters. [57] First, there should be evidence as to the character of the company: 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... [58] Second, there should be evidence of the business, if any, of the company so that the effects of the proposed litigation on its proper conduct may be appreciated. [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... [60] Fourth, there should be evidence as to the ability of the 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. 30The passages set out above from [55]-[56] of Palmer J's judgment in Swansson (supra) were (save for the last sentence [56]) cited with apparent approval by Tobias JA (with whom Beazley and Bell JJA agreed), in Chahwan v Euphoric Pty Ltd [2008] NSWCA 52 at [85]. 31Mr Henry submitted that there was no evidence before the Court of the type which Palmer J stated would normally be required on an application such as this. He also submitted that the proposed pleading did not, relevantly, seek any relief that would benefit the Company. He pointed out that the only relief apparently sought in connection with the proposed derivative claims was a declaration that the first and second defendants had breached their duties to the third defendant (see prayer for relief 9). He further submitted that, having regard to the existence of the other claims made by the plaintiff which are based upon the same factual matrix (including the knowing assistance claims), there was no utility for the Company in permitting the derivative actions to be added to the proceedings. 32Ms Obrart, in response, submitted in effect that in circumstances where the derivative claims do not add any new parties and do not introduce any new facts it must be concluded that it is in the best interests of the Company to grant leave to add the derivative claims to the other claims which are to be advanced. Ms Obrart referred to prayer for relief 11B as relief which, if granted, would provide a significant benefit to the Company. However, when it was pointed out that prayer for relief 11B concerned the oppression case rather than the derivative claims, Ms Obrart conceded that an additional prayer for relief would be required. Finally, Ms Obrart referred the Court to two decisions, namely, the decision of Brereton J in Magafas v Carantinos [2006] NSWSC 1459 at [25] - [27], and the decision of Sackville AJ in Cassegrain v Gerard Cassegrain and Co Pty Ltd [2008] NSWSC 976 at [91]. 33In Magafas v Carantinos at [27], Brereton J stated: This is a case in which the factual substratum of Pac-Com's proposed claim is substantially the same as that which underlines the dispute between Mr Magafas and Mr Carantinos personally. That factual substratum is to be litigated in any event. That circumstance makes it highly desirable, in the interests of the company whose only shareholders and directors will be litigating the issue in any event, that the subject matter be litigated on behalf of Pac-Com concurrently. The prosecution of the proposed derivative action here is in the interests of Pac-Com. No submission was made to the contrary. 34In that case, not only was there no submission to the contrary that the grant of leave would be in the best interests of the company, there was also no submission made against the proposition that there was a seriously arguable case (see at [13]). It is not clear from the judgment whether any evidence was adduced concerning the financial position of Pac-Com or the extent of any such evidence. 35In Cassegrain v Gerard Cassegrain (supra) there was evidence adduced as to the relevant company's financial position, although Sackville AJ noted that it was incomplete (see at [81]). Nevertheless, it appears there was at least evidence adduced that showed the company had significant liabilities which could be reduced in the event that the proposed derivative action was successful (see at [86]). 36In the present case, it is now conceded in relation to the proposed derivative claims that there is a serious question to be tried. As Austin J pointed out in Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442 at [51] in some circumstances satisfaction of the "serious question to be tired" criterion will lead readily to the conclusion that the applicant should be permitted to assert the company's claims on its behalf (see also Gzell J in Hackett v Nambucca Valley Quarries Pty Ltd (supra) at [32]). Moreover, there is some force in the contention that where pursuit of the derivative claims would occur at the same time as other claims which are to be litigated in any event, it is a factor which supports the conclusion that the grant of leave to pursue the derivative claims is in the best interests of the Company. 37On the other hand, there is a complete absence of evidence concerning the financial position of the Company, and the proposed pleading does not indicate that there is any additional benefit to be derived by the Company by the pursuit of the derivative claims on top of the other claims made in the proceedings (compare Hackett v Nambucca Valley Quarries Pty Ltd (supra) at [33]). The plaintiff has not, at least at this stage, identified any such additional benefit. The absence of any evidence concerning the financial position of the Company also makes it difficult to conduct any assessment concerning the position of the Company in the event that the derivative claims are not successful, and as to whether it may be appropriate for the plaintiff to offer some undertaking in relation to any additional costs which might be incurred by the Company if the derivative claims are pursued. 38Having considered the matters referred to above, I am not satisfied that it is in the best interests of the Company that the plaintiff be granted leave to pursue the derivative claims. The lack of evidence mentioned above, and the inability to identify any additional benefit which would accrue to the Company by the pursuit of the derivative claims, leaves the Court in a position where it is not able to be satisfied that it actually is (as opposed to may be, appears to be, or is likely to be) in the best interests of the Company for leave to be granted. More is required than merely "a prima facie indication that the proceedings may be or are likely to be" in the best interests of the Company (see Re Mycorp Pty Ltd (supra) at [11] per Black J). It follows that the application for leave under s 237 must be refused. 39In case that conclusion is not correct, it is appropriate to indicate that I would otherwise have been satisfied of the matters set out in s 237(2). As to paragraph (a) there is little doubt that in circumstances where the first and second defendants are the only directors of the Company it is probable that the Company itself would not bring the proceedings. As to paragraph (b), in circumstances where it is conceded that there is a serious question to be tried, and in the absence of any suggestion of a lack of good faith on the part of the plaintiff, I am satisfied that the plaintiff is acting in good faith. In view of the concession made as referred to above, I would also be satisfied that there is a serious question to be tried for the purposes of paragraph (d). As to paragraph (e), whilst the notice provision has not been complied with I would (had I been satisfied that is in the best interests of the Company for leave to be granted) have been satisfied that it is appropriate to grant leave despite the non-compliance with the notice provision. There is no doubt that the Company has had adequate notice of the proposed derivative claims and of the plaintiff's intention to seek leave to bring them. 40The refusal of the plaintiff's application for leave under s 237 does not of course prevent the plaintiff from making another such application in the future if she is so advised (see McEvoy v Caplan [2010] NSWCA 115 at [4] per Macfarlan JA). 41As a result of my conclusions, both as to the particular matters complained of in the proposed pleading and as to s 237, it will be necessary for the plaintiff to make further changes to the proposed pleading. In summary, these are: (1)the addition of a prayer for relief as referred to in [18] above; (2)the deletion of paragraph 72 (see [18] above); (3)the alterations to prayer for relief 11B(e) as referred to in [20] above; (4)the alterations to paragraphs 88 and 89 as referred to in [21] above; (5)the clarification of paragraph 93 and/or the provision of further particulars as referred to in [22] above; and (6)the deletion of the parts of the proposed pleading which concern the derivative claims based on alleged breaches of duties owed by the first and second defendants to the Company, viz, prayer for relief 9 and paragraphs 24, 25, 51, 55, 71 and 99. 42I propose to grant leave to file an Amended Statement of Claim which accords with that which is described in the preceding paragraph. The document should be titled Amended Statement of Claim, not First Amended Statement of Claim. Also, given that the defendants have not yet filed any defences, the Amended Statement of Claim should be re-numbered to avoid numerical gaps. The plaintiff's Notice of Motion will otherwise be dismissed. In the light of the result, which is favourable to the first to third defendants, I will order that the plaintiff pay the first to third defendants' costs of the Notice of Motion. 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: 06 November 2013