Supreme Court New South Wales Medium Neutral Citation: Smith v Steingold [2019] NSWSC 476 Hearing dates: 20 and 22 March 2019 Date of orders: 26 March 2019 Decision date: 30 April 2019 Jurisdiction: Equity - Commercial List Before: Parker J Decision: See [51] Catchwords: EQUITY – injunctions – interlocutory injunctions – prima facie case – claim of undue influence and oppressive conduct under Corporations Act 2001 (Cth) s 232 – where company advanced funds to its shareholders to fund legal proceedings – propriety of use of company resources to fund proceedings EQUITY – injunctions – interlocutory injunctions – balance of convenience – whether restraint on company from advancing funds to shareholders would stultify the shareholders' conduct of legal proceedings – relief granted on limited terms Cases Cited: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413; 28 ACSR 688 Power v Ekstein [2010] NSWSC 137; 77 ACSR 302 Re a company (No 1126 of 1992) [1994] 2 BCLC 146 Re DG Brims & Sons Pty Ltd [1995] QSC 053; 16 ACSR 559 Re Therma Truck Pty Ltd [2016] NSWSC 266 Sandalciyan v International Development & Construction Pty Ltd [2010] FCA 1145; 80 ACSR 31 Sellar v Lasotav Pty Ltd [2008] FCA 1766 Trojan Equity Ltd v CMI Ltd [2011] QSC 346; 87 ACSR 144 Category: Procedural and other rulings Parties: Colin Steingold (First Applicant) Shadean Pty Ltd (Second Applicant) Gordana Smith (First Respondent) Paul Smith (Second Respondent) CG Partnership Pty Ltd (Third Respondent) Citrus Group Pty Ltd (Fourth Respondent) Representation: Counsel: R Glasson (First and Second Applicants) A McGrath SC (First and Second Respondents) D Pritchard SC/ A McCaulay (Third and Fourth Respondents) Solicitors: Gillis Delaney Lawyers (First and Second Applicants) Peterson Haines (First and Second Respondents) ESY Lawyers (Third and Fourth Respondents) File Number(s): 2018/175708 Publication restriction: Nil Judgment 1. On 20 March I heard an interlocutory injunction application in these proceedings. On 22 March I announced my conclusions in summary form. The application was partly successful. Subsequently the parties brought in short minutes of order giving effect to my decision. Owing to pressure of time, it was not possible to deliver a full ex tempore judgment on 22 March. I have now been asked to set out my decision formally for the benefit of the parties. 2. The proceedings concern the ownership, and affairs, of Citrus Group Pty Limited ("Citrus"). Citrus conducts a recruitment business, providing permanent and temporary staff for the call and contact centre industry. 3. Paul Smith and Gordana Smith are a married couple who are the joint managing directors of Citrus. The business is said to have been founded by them in 2013. 4. These proceedings arise out of transactions effected in September 2017 whereby the ownership of Citrus was restructured. Before the restructure the shares in Citrus were owned as to fifty per cent by Mr Smith and as to fifty per cent by Hunter Capital Pty Limited and FT Holdings Group Pty Limited. These companies were associated with a Mr Myers who in turn was associated with a group of companies known as the Halkin Group. The Halkin Group apparently provided payroll and invoicing services to Citrus. 5. The restructure involved incorporation of a new company called CG Partnership Pty Limited ("CGP"). Citrus became a wholly owned subsidiary of CGP. The shares in CGP were owned as to fifty per cent by Mrs Smith and as to fifty per cent by Shadean Pty Ltd ("Shadean") a company controlled by Colin Steingold. Mr Steingold is, or was, a solicitor. Although his precise role is disputed, he was involved in the negotiations which led to the restructuring transaction. I will refer to Mr Steingold and Shadean collectively as the "Steingold interests" and to CGP and Citrus collectively as "the Companies". 6. Mr Steingold has never been a director of Citrus. Nor, it seems, was he formally appointed as a director of CGP. But following the restructure he acted as chairman of CGP and worked as an executive in the Citrus' business. 7. The Smiths commenced these proceedings as plaintiffs in June 2018. Mr Steingold and Shadean are the first and second defendants. CGP and Citrus are the third and fourth defendants. 8. The Smiths put their claim against Mr Steingold and Shadean on two bases. First, they allege that the restructure transaction which resulted in Shadean receiving a fifty per cent share of CGP was procured by undue influence. Second, they allege that the conduct of Mr Steingold and Shadean has been oppressive. The Smiths seek orders that Shadean's shares in CGP be transferred to them for nil consideration, or alternatively, for a just and equitable sum to be fixed by the Court. 9. When they commenced the proceedings, the Smiths sought interim injunctions against Mr Steingold. They claimed that Mr Steingold was threatening to interfere with the financing of Citrus' business and was treating the Smiths and Citrus' other staff in an offensive and disruptive manner. 10. On 5 June 2018 the Smiths obtained ex parte orders from McDougall J preventing Mr Steingold from representing he had authority to act on behalf of CGP and from alleging that CGP was insolvent. The Smiths also obtained orders requiring Mr Steingold to deliver up passwords and access keys to bank accounts and accounting records, which he had held to their exclusion. On 8 June, without opposition from the Steingold interests, those orders were continued until further order in the proceedings. It appears that Mr Steingold has taken no part in the management of the Companies' affairs since. 11. The interlocutory application which is the subject of this judgment concerned the funding of these proceedings. There are loan accounts between Citrus and the Smiths. As at 30 June 2018, the combined debit on those accounts was approximately $128,000. Over the period from 1 July to 31 December 2018 the Smiths drew on their loan accounts by a further $316,000, so that at the end of the period the combined debit was $444,000. 12. In evidence on the application were loan facility agreements between Citrus, CGP and the Smiths. These are undated but said to have been entered into in October 2018. The facility agreements were drawn up by Peterson Haines, who are the Smiths' solicitors in these proceedings. The agreements provided for two loan facilities, each in the sum of $300,000, to be granted by Citrus to the Smiths. Later, in February this year, they were amended so as to increase the facility limit to $425,000. 13. Under the terms of the facilities agreements, interest must be paid by the Smiths (the current benchmark interest rate is 5.2%). The loans are repayable within sixty days of demand. There are minimum annual repayments and they must be fully repaid within seven years. 14. The details of these loan arrangements took some time to extract from the Smiths and the Companies. In late August 2018, the solicitors for the Steingold interests, Gillis Delaney, wrote to Peterson Haines seeking information about the loan accounts and undertakings that further amounts not be drawn down on those accounts. The request was repeated on numerous occasions in September, October and November. The information was not provided. It was only on 1 February this year that the Steingold interests were provided with management accounts for the period up to 31 December which showed the increase in the loan accounts in the first half of the financial year. The management accounts were provided under orders made by the Court on 14 December to which the Smiths had objected. The loan facility agreements were not produced until 15 March, after the present application for an interlocutory injunction had been initiated. 15. As a result of the information about the increase in the Smiths' loan accounts, the Steingold interests decided to bring a cross-claim concerning the funding issue. On 27 February, a Notice of Motion was filed for them seeking the necessary leave. This was filed on the same day, although the Steingold interests were not aware of it, as the loan agreements were varied to increase the facility limit to $425,000. 16. Leave to bring the cross-claim was not opposed; a Cross-Summons and List Statement were filed on 20 March. The cross-claimants are Mr Steingold and Shadean. The Smiths are named as the first and second cross-defendants. The Companies are named as the third and fourth cross-defendants. 17. In the cross-claim, the Steingold interests allege that the grant of the loan facilities by Citrus was for a collateral purpose and was not in the best interests of Citrus. They seek orders that the Smiths purchase Shadean's shares in CGP at a price to be determined by the Court. Mr Steingold also claims payment of approximately $180,000 by way of consultancy fees, commission and salary allegedly owing to him from Citrus. 18. By their Notice of Motion, the Steingold interests also sought interlocutory injunctions in aid of their cross-claim. The form of the orders sought was modified as the application went on. At the hearing, the Steingold interests sought orders against Citrus restraining it from: 1. using its property and assets to pay the "personal expenses" of the Smiths; 2. using its property and assets "directly or indirectly" to pay the legal costs of the Smiths; 3. causing, permitting or otherwise allowing the Smiths to borrow any money from it; 4. increasing the salary or other benefits paid to the Smiths beyond the salary being paid in June 2018; 5. paying any bonus to the Smiths in their capacities as employees, consultants and directors; and 6. taking any steps in the proceedings or applying any of Citrus' funds to the defence or conduct of the proceedings except for the purposes of complying with discovery obligations and defending the claims made by Mr Steingold for payment of consultancy fees, etc. 1. These orders were also sought against the Smiths personally as officers, servants, agents or employees of Citrus. In addition, the Steingold interests sought orders against the Smiths effectively freezing all monies held on trust by Peterson Haines on their behalf. 2. When the application came on for hearing before me, the Companies were represented by senior and junior counsel. The Companies offered undertakings not to pay the personal expenses of the Smiths or their costs of the proceedings. This was accepted and I made a consent notation in the following form: By consent and without admissions, as between the third defendant/proposed third cross defendant ("CG Partnership"), the fourth defendant/proposed fourth cross defendant ("Citrus Group") and the first and second defendants/proposed first and second cross claimants (collectively "Mr Steingold"), the Court: … 2. Notes that, upon the usual undertaking as to damages given to the Court by Mr Steingold, Citrus Group undertakes to the Court, until further order of the Court, that it will not use its property or assets directly to pay: a) the personal expenses of the first plaintiff and the second plaintiff or either of them; and b) the legal costs of these proceedings of the first plaintiff and the second plaintiff or either of them. … 1. The legal representatives of the Companies then withdrew from the interlocutory injunction proceedings. The only remaining issue as between the Steingold interests and the Companies was the question of costs. This was the subject of written submissions and I deal with it at the end of this judgment. 2. The withdrawal of the Companies left the application to continue as against the Smiths. In support of that application, counsel for the Steingold interests referred to cases where the court has intervened in situations where a company the subject of oppression-style claims was actively involved in the defence of the proceedings. The cases included Re DG Brims & Sons Pty Ltd [1995] QSC 053; 16 ACSR 559; Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413; 28 ACSR 688 and Power v Ekstein [2010] NSWSC 137; 77 ACSR 302. 3. The cases recognise that a company may have a legitimate interest in resisting such claims. That interest may justify active participation by the company in defending the proceedings, and consequent expenditure on costs. But the problem that arises is to distinguish the interests of the company in doing so from the interests of the alleged oppressors. A situation can readily arise where the company bears the financial burden of defending the personal case of the alleged oppressors. And, if the claims succeed, this may result in a costs order which results in the successful shareholders' costs being borne by the company, and thus in part by the successful shareholders themselves. 4. In Re a company (No 1126 of 1992) [1994] 2 BCLC 146, Lindsay J said at [156]: …the court's starting point is a sort of rebuttable distaste for such participation and expenditure, initial scepticism as to its necessity or expediency. The chorus of disapproval in the cases puts a heavy onus on a company which has actively participated or has so incurred costs to satisfy the court with evidence of the necessity or expedience in the particular case. What will be necessary to discharge that onus will obviously vary greatly from case to case. 1. Both Re DG Brims & Sons Pty Ltd and Power v Ekstein are both cases in which the companies the subject of the proceedings were commonly represented with the alleged oppressors. The present case does not have this feature. 2. The Companies are represented separately from the Smiths. No doubt the Smiths, as joint managing directors of the Companies, are responsible for giving instructions on the Companies' behalf to the Companies' legal advisers in the proceedings. This creates a potential conflict for the Smiths between their responsibilities as directors of the Companies and their personal interests in defending the claims of wrongful and oppressive conduct against them. But the Companies' legal advisers have no such conflict. Their responsibility is to represent the Companies' corporate interest without any regard for the personal interests of the Smiths, for whom they do not act. 3. None of this means that the propriety of the Companies' defence cannot be challenged where the company is separately represented from the alleged oppressors. Fexuto was a case where the Court considered that the defence put forward on behalf of the company, separately from the alleged oppressors, was too vigorous and extensive. The Court concluded that the defence had exceeded the bounds of what was permissible in the interests of the company. But I do think that separate representation makes the case for the Court's intervention, especially when it involves a prior restraint on action by the company rather than an evaluation of a defence actually put forward by the company after the event, more difficult. In Re a company, Lindsay J ultimately declined the relief sought, which was an order granting prior authorisation to the company to defend the proceedings actively. At the same time, his Lordship said that there was nothing to stop the company conducting a defence at the director's own risk. See also Trojan Equity Ltd v CMI Ltd [2011] QSC 346; 87 ACSR 144 at [40]. 4. In Sellar v Lasotav Pty Ltd [2008] FCA 1766, Foster J said that the court will generally be reluctant to interfere at the interlocutory stage and declined to grant an injunction against a company incurring legal fees at the instance of the majority shareholders in oppression proceedings. Austin J in Power v Ekstein declined to follow that approach, but Foster J maintained his view in Sandalciyan v International Development & Construction Pty Ltd [2010] FCA 1145; 80 ACSR 31. Black J referred to the conflict in approach in Re Therma Truck Pty Ltd [2016] NSWSC 266 at [45]. In saying what I have said, I do not mean to take sides in this dispute. All I am saying is that, where the company is separately represented from the alleged oppressor, the Court will usually start from the assumption that the company's legal advisors will be aware that those who control the company are under a duty not to abuse the company's resources, and will advise and act accordingly. That assumption will be an additional hurdle to overcome where interlocutory relief which would restrict the conduct of the defence is sought. 5. So it was in this case insofar as the injunctions sought against the Companies were concerned. Counsel for the Steingold interests accepted (and this was reflected in the form of the injunctions sought) that some active defence and expenditure on the proceedings by the Companies was justified. The integrity and professionalism of the Companies' legal representatives were not questioned. In the circumstances, I would have been very reluctant to second-guess the view that has been taken as to the proper scope of the Companies' interests in defending the proceedings. As the application as against the Companies was ultimately resolved by agreed undertakings, it is not necessary to pursue this further. 6. So far as the orders as against the Smiths were concerned, counsel strongly criticised the delay in providing the Steingold interests with information about the loan accounts and the loan agreements. Counsel particularly criticised the fact that the loan agreements were entered into after requests for information were made and the increase in the facility limit in February this year, counsel submitted, wore the appearance of an attempt to forestall an application for interlocutory relief. There is force in these criticisms. The Smiths must understand that Mr Steingold is a shareholder in the company, and so long as he retains that status, they must respect it. I was very troubled by the Smiths' conduct. But ultimately I thought that the Court had to deal with the circumstances as they were at the time the application was heard. 7. Whatever else one might say about the financial arrangements which have been made, they have the benefit (belatedly) of transparency. The Smiths are personally liable for their own costs whatever the outcome of the proceedings. They will only recover those costs to the extent that they succeed in the proceedings and obtain a costs order against the Steingold interests. If the Smiths are unsuccessful in the proceedings, a costs order may be made against them in favour of the Steingold interests which will have the effect of casting the burden of the unsuccessful defence of their interests on them and not the Companies. 8. Thus neither CGP nor Citrus has assumed liability for the Smiths' costs of the proceedings. No doubt most, if not all, of the monies the Smiths have borrowed have been used to pay their lawyers. But that fact is not, strictly speaking, relevant to the alleged breaches of duty and oppressive conduct alleged against the Smiths in the cross-claim. The analysis would be the same if the Smiths had used the monies borrowed from Citrus for some other purely personal purpose, such as a holiday. 9. Counsel for the Smiths submitted that the loans were on commercial terms. This may be true in a narrow sense. But Citrus' business does not involve the lending of money. There is no reason to think that Citrus would have made the advances it has made to the Smiths since mid-2018, or entered into the facility agreements, in ordinary circumstances. It has obviously only happened because the Smiths wanted to use Citrus' resources to enable them to fund the litigation. The loans to the Smiths are uncommercial in the broader sense in that there appears to be no business motivation for them. 10. For the directors or shareholders of a company to cause it to lend them money for their own purposes may readily amount to breach of duty or oppressive conduct. But not always. If the Smiths were the sole shareholders of CGP (and thus indirectly of Citrus), and sufficient monies were kept on hand to satisfy Citrus' creditors, it would be open to the Smiths to deploy Citrus' remaining monies in accordance with their own wishes as CGP's shareholders. This could include making loans to themselves which were not necessary for the conduct of Citrus' business. 11. The Smiths contend that this is the position they will be in if their undue influence claim succeeds and they recover "their" shares in CGP/Citrus from Shadean. Initially, I wondered how the Smiths could emerge with 100% of the shares in CGP when, at the point Mr Steingold was first involved, they held only fifty per cent of Citrus' shares. But I was informed by counsel that the Smiths' case is that when Mr Steingold first became involved, the Smiths had an opportunity to acquire the Halkin interest and that, on the Smiths' case, but for Mr Steingold's undue influence, they would have done so. Counsel for the Steingold interests made no contrary submission, and it certainly has not been suggested that Mr Steingold actually subscribed money to CGP in order to pay Halkin out (if Halkin was paid out). It is also possible that, even if the Smiths are unsuccessful on undue influence, they could still succeed on oppression. They might also emerge with full ownership of the Companies in that event. 12. As already mentioned, the relief sought by the Steingold interests in the cross-claim is an order for compulsory purchase of Shadean's shares in CGP by the Smiths. Thus, if the cross-claim succeeds, Shadean will receive a payout for its shares in CGP, leaving the Smiths with the group structure and the loans. Again, in this event, there would be nothing necessarily objectionable about the loans to the Smiths, provided that the Companies' creditors were not prejudiced, and provided that there were sufficient funds left over to buy Shadean's shares at fair value and to satisfy Mr Steingold's claims, to the extent successful, for consultancy fees etc. 13. The financial performance of Citrus has greatly improved in the last year or so. In the first half of the 2019 financial year, Citrus generated a net profit of approximately $1 million. Counsel for the Steingold interests disclaimed any suggestion that the loans to the Smiths represent a threat to the solvency of the Companies. 14. The Smiths contended that the orders sought would result in stultification of a genuine claim by them, relying on the finding of McDougall J that their claim gave rise to a serious question to be tried. The Smiths gave evidence that their only income is derived from their employment with Citrus, such that any restriction on their salary would deprive them the opportunity to fund legal costs of the proceedings. Counsel for the Steingold interests contested whether the Smiths had established the likelihood of their claim being stultified, in particular as they put on no evidence of any attempts to seek funding for the proceedings. 15. Both Mr and Mrs Smith's oral evidence before me concerning the requirements for funding the proceedings was confusing. Mrs Smith said that the Smiths initially received a cost estimate of approximately $300,000. She was asked whether they had received an estimate "from this point onwards" and said it "would be" $150,000 to $200,000. She was asked whether "that estimate" was provided before the cross-claim and said it had and that no further estimate had been provided since the filing of the cross-claim. 16. Mrs Smith then said that the Smiths had already paid $300,000 to $400,000 in costs. In cross-examination Mrs Smith was asked how much was still in the Peterson Haines trust account and she said it was $150,000. She was referred to the variation of the loan agreement on 27 February and asked how much of the limit had been used to pay Peterson Haines, but replied that she would have to check and was not sure. 17. When Mr Smith gave evidence, he said that the initial cost estimate was around $300,000 but that had changed because of the cross-claim (thereby contradicting Mrs Smith) and now another $150,000 to $200,000 would be needed. He said that about $300,000 had been paid in total. He was not asked about how much money was still held by Peterson Haines in trust. 18. The evidence is confusing and not entirely consistent. But if Mrs Smith is right that Peterson Haines are holding $150,000 in trust, then there would appear to be no further need for any money to fund the rest of the litigation. 19. Counsel for the Smiths submitted that the cross-claim by the Steingold interests will inevitably result in further costs to prepare the cross-claim for trial. But it was not clear on the evidence whether the estimate of a further $150,000 or $200,000 in costs pre-dated or post-dated the bringing of the cross-claim. 20. Another complicating factor is the possibility of an application being made on the Smiths' behalf for the Steingold interests to provide security for the costs of the cross-claim. If security is ordered but is not provided, the cross-claim will not proceed and the need for any further money may disappear. Counsel for the Steingold interests resisted any enquiry into the question of security at this stage. 21. Finally, a question was raised about whether the Steingold interests would be able to meet the undertaking for damages if an injunction were granted. I found the evidence from the Steingold interests a little unclear on this. On the other hand, it was not clear exactly what sort of damages would ultimately be covered by the undertaking if an injunction were granted on an interlocutory basis but ultimately discharged. Again the issue was not fully covered by the evidence before me and would be dependent on the future course of proceedings. 22. The Court was thus left in the position where there would be a reasonable argument that the loans to the Smiths would be improper if there were potential prejudice to creditors, or to the ability of the Smiths to buy out Shadean's shares for a proper price and meet Mr Steingold's claim if the cross-claim were to succeed. But there was no concrete evidence of any such prejudice. 23. On the other hand, there was potential argument against an injunction if that would stultify the Smiths' claim. But there was no clear evidence about whether any such risk of stultification actually existed. 24. It seemed to me in these circumstances that the Court could not be satisfied of the need for a restraint, until the case is decided, on Citrus making further loans to the Smiths. At the same time, it could not be said that further loans would necessarily be justified. In particular, it was not clear that the stultification defence would be made out. I therefore considered that the Court should effectively hold the position by granting "light touch" relief. The Court would grant an injunction, but only against further loans being made without prior notice being given to the Steingold interests. This would mean that, if they object, they could bring the matter back to Court. I think this approach is similar in effect to that taken by Black J in Re Therma Truck Pty Ltd (at [47]). 25. I announced my decision to this effect on 22 March and invited the legal representatives for the Steingold interests and the Smiths to bring in short minutes of order reflecting the decision. They subsequently did so, agreeing that the costs of the application should be costs in the cause. 26. This left the issue of the costs of the application as between the Steingold interests and the Companies. In his written submissions, counsel for the Steingold interests acknowledged that they could not resist an order that they pay the costs of the Companies from 15 March onwards. Counsel submitted, however, that the costs should not include the costs of both senior and junior counsel. Counsel for the Companies was prepared to accept a costs order from 15 March, so this dispute fell away. Counsel submitted that the question of reasonableness of costs should be determined by the costs assessor but there was nothing wrong with senior and junior counsel appearing. I agreed that the matter was one for a costs assessor. On assessment, the retainer of senior and junior counsel may well be considered reasonable. Accordingly, no notation or restriction on the costs order is appropriate. 27. The orders agreed by the parties as reflecting my decision on 22 March were brought in and made on 26 March. They were (omitting the definitions) as follows: Upon the First and Second Defendants by their counsel giving the usual undertaking as to damages to the Court, the Court orders that: 1. The First Plaintiff and the Second Plaintiff be restrained from causing, permitting or otherwise allowing the Fourth Defendant to: (a) advance to either or both of them any further money by way of loan, including but not limited to any drawdown under the First Facility and/or Second Facility and any loan to which clauses 2.3 of the First Facility and/or of the Second Facility may apply; (b) increase the salary and/or other benefits paid to either or both of them, whether in their capacity as employee, consultant and/or director of the Fourth Defendant or at all, including but not limited to Remuneration pursuant to clause 8 of the Employment Contracts; or (c) pay to either or both of them any discretionary or other bonus, whether in their capacity as employee, consultant and/or director of the Fourth Defendant or at all, including but not limited to Remuneration pursuant to clause 8 of and/or Schedule A to the Employment Contracts. without first giving 7 days written notice of the quantum of the proposed advance, increase or payment and its specific purpose to the solicitors for the First and Second Defendants. 2. The First and Second Defendant pay the costs of the Third and Fourth Defendant of and incidental to the Notice of Motion of the First and Second Defendants filed 27th February 2019 on an ordinary basis limited to costs incurred from and including 15th March 2019 and there otherwise be no order as to costs of the Notice of Motion as between them. 3. Costs of the Notice of Motion as between the Plaintiffs and the First and Second Defendants are to be costs in the cause. 4. Liberty for any of the parties to apply to relist the proceedings before His Honour Justice Parker on 24 hours' notice. ********** 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: 01 May 2019