FEDERAL COURT OF AUSTRALIA

Cemcon, In the matter of Hall Concrete Constructions (Vic) Pty Ltd (ACN 111 087 382) [2009] FCA 696

CEMCON CONSTRUCTIONS PTY LTD (ACN 101 699 352) v HALL CONCRETE CONSTRUCTION (VIC) PTY LTD (ACN 111 087 382) and J. HALL CONCRETE CONSTRUCTIONS PTY LTD (ACN 086 255 852)

VID 178 of 2009

GORDON J

26 JUNE 2009

MELBOURNE

IN THE MATTER OF HALL CONCRETE CONSTRUCTIONS (VIC) PTY LTD (ACN 111 087 382)

UPON THE UNDERTAKING of Cemcon Constructions Pty Ltd (ACN 101 699 352) to indemnify Hall Concrete Construction (Vic) Pty Ltd (ACN 111 087 382) (“HCC”) in respect of both the legal costs incurred by HCC in prosecuting the proceeding for which leave is granted in Order 1 (the “Derivative Proceeding”) and any legal costs which HCC is ordered to pay to other parties in the Derivative Proceeding.

THE COURT ORDERS THAT:

1.                  Cemcon Constructions Pty Ltd (ACN 101 699 352) have leave to issue proceedings in the name of Hall Concrete Constructions (Vic) Pty Ltd (ACN 111 087 382) against James Leonard Hall and Hall Construction Group Pty Ltd (ACN 121 475 107).

2.                  The costs of the application for leave be costs in the cause of the Derivative Proceeding.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

IN THE MATTER OF HALL CONCRETE CONSTRUCTIONS (VIC) PTY LTD (ACN 111 087 382)

REASONS FOR JUDGMENT

INTRODUCTION

1                     This proceeding is an application under s 237 of the Corporations Act 2001 (Cth) (“the Act”) by Cemcon Constructions Pty Ltd (ACN 101 699 352) (“Cemcon”), a shareholder in Hall Concrete Construction (Vic) Pty Ltd (ACN 111 087 382) (“HCC”), for leave to issue proceedings (the “Derivative Proceeding”) on behalf of HCC against James Leonard Hall, a director of HCC (“Mr Hall”) and a company associated with him (of which he is a director), Hall Construction Group Pty Ltd (ACN 121 475 107) (“HCG”).

2                     The application is opposed by the Second Defendant, J. Hall Concrete Constructions Pty Ltd (ACN 086 255 852) (“J. Hall”). 

FACTUAL BACKGROUND

3                     HCC has two equal shareholders – Cemcon (as trustee of the Steven Fitzgerald Family Trust) and J. Hall as trustee of the Hall Investment Trust.  The sole director and shareholder of J. Hall, is Mr Hall.  The sole director and shareholder of Cemcon is Steven Fitzgerald (“Mr Fitzgerald”).

4                     HCC is the trustee of the Hall Fitzgerald Unit Trust (the “HFUT”).  The HFUT was set up on 1 April 2004 and, on 23 September 2004, HCC was appointed trustee of the HFUT.  HCC provides concreting services to the construction industry in Victoria.  It has worked on some of the largest construction projects in that State including the Commonwealth Games Athletes’ Village in 2005, the Austin Repatriation Hospital in Heidelberg and the Melbourne Zoo in Parkville.

5                     The central dispute relates to the management of HCC since about 2007.  Put simply, there has been a substantial falling out between Mr Hall and Mr Fitzgerald.  Where the fault lies is neither possible nor appropriate to determine in these proceedings.  Usually, oppression proceedings or an application to replace the trustee would be made to seek to break the deadlock which currently exists.

6                     However, a number of matters have been raised by Cemcon which raise serious questions about the allegedly unauthorised use of HCC’s assets by, and disposition of HCC’s assets to, another company – HCG, one of the defendants to the Derivative Proceeding.  Mr Hall is a director of HCG and one of his companies is a substantial shareholder in HCG.  There is no dispute that because of the disagreements between Mr Fitzgerald and himself concerning the conduct of HCC, Mr Hall resorted to self help and, in doing so, “transferred” or “subsumed” the assets and undertakings of HCC’s concreting business to or in HCG.  The central issue to be put in dispute in the Derivative Proceeding is whether the actions of Mr Hall (in his capacity as a director of HCC, the trustee of the HFUT) were authorised and, if so, appropriate not only in terms of entitlement to do so but the manner of their exercise? 

7                     So, for example, evidence was provided to the Court that despite Mr Fitzgerald writing to Mr Hall on 2 February 2009 and stating that “[HCC] and [its] business must continue with its current ownership …” and that he did not consent to the “transfer of the business to another entity”:

1.                  on 5 February 2009, Mr Fitzgerald received emails from HCC’s suppliers confirming receipt of advice from HCC that the company had a new name (HCG) and a new ABN;

2.                  after 5 February 2009, Mr Fitzgerald saw a letter addressed to one of HCC’s suppliers showing details of the new company (HCG), of the change of name and the new ABN and ACN;

3.                  on 11 February 2009, Mr Fitzgerald visited the Melbourne Zoo site and saw three documents from suppliers addressed to “Hall Construction Group” or “Hall Construction Group Pty Ltd”;

4.                  on 12 February 2009, Mr Fitzgerald visited HCC’s office and located copies of documents including delivery dockets to HCG;

5.                  subsequently, Mr Fitzgerald was provided with a set of other documents including invoices and payments in respect of HCC’s Lilydale Retirement Apartment project which allegedly show that invoices were issued by and sums paid to HCC in 2008 but that in 2009, the invoice was issued by HCG and payment was made to a new bank account in the name of HCG.

This list is by no means complete.

8                     Mr Fitzgerald submitted that these and other facts indicate that Mr Hall and / or HCG have without authorisation appropriated to themselves the business of HCC and its assets.  Mr Hall and HCG (through Counsel for J. Hall) disputes these contentions.  Mr Hall alleges that the actions complained of were done with Cemcon’s “knowledge and / or indifference” and that he had no other choice given the refusal or inability of Mr Fitzgerald to participate in the management or operations of the business conducted by HCC.

9                     Against that background, I turn to consider the application for leave.

APPLICATION FOR LEAVE

10                  The application by Cemcon is made pursuant to s 237 of the Act.

STANDING TO BRING THE APPLICATION FOR LEAVE

11                  Section 236 of the Act provides, inter alia, that a person may bring proceedings on behalf of a company if the person is a member of the company.  Cemcon, being a member of HCC, therefore has standing to bring the application for leave to issue proceedings on behalf of or in the name of HCC.

12                  As a preliminary matter, Counsel for J. Hall submitted that a “corporate trustee” is “not amenable to sections 236-237 of the [Act]” by virtue of falling outside of the definition or scope of “company” as it is referred to in s 236 of the Act.  The argument in support of this proposition was that (a) HCC is a corporate trustee and has no business other than as trustee of the HFUT, (b) the Derivative Proceeding is entirely directed at recovering the property of the HFUT and as such (c) ss 236 and 237 do not apply as it cannot be said that these are proceedings “brought on behalf of a company”.  Instead, Counsel for J. Hall submitted that they are brought on behalf of the HFUT.  The substance of this submission was repeated with respect to the “best interest” criterion in s 237(2)(c) (see my discussion of the submission in that context at [19] – [23] below).  I do not accept that submission.  First, there is nothing in the legislation, and nothing in any authority to which I have been directed, that would support such a contention.  The words of the Act are clear.  The Act makes no relevant distinction between a company that is a trustee and any other form of company.  Secondly, as a practical matter, I do not accept that it is inappropriate for a corporate trustee to use ss 236 and 237 of the Act in an attempt to recover trust property.  The relevant trust property is the business of HCC, and the Derivative Proceeding is an attempt to recover that property for the benefit of HCC (in its capacity as trustee of the HFUT).  Moreover, Courts have in the past granted leave under s 237 where the company in question was a corporate trustee – see e.g. Vigliaroni v Concrete Precast Systems Pty Ltd [2009] VSC 253 at [8];  Showtime Management Australia Pty Ltd v Showtime Presents Pty Ltd [2008] NSWSC 618 at [83] and [110];  Vanmarc Holdings Pty Ltd v P W Jess and Associates Pty Ltd (2000) 34 ACSR 222 at [36].  For these reasons, the submission that leave granted under ss 236 and 237 is inappropriate where the company is a corporate trustee and the Derivative Proceeding would only recover property of the relevant trust is rejected.

CRITERIA

13                  The criteria for the grant of leave are set out in s 237(2) of the Act.  The Court must grant leave if the criteria in s 237(2) of the Act are satisfied.  Cemcon bears the onus of satisfying the Court that the criteria have been met:  South Johnstone Mill Ltd v Dennis (2007) 163 FCR 343 at [60] – [61].

First Criterion - Probable that HCC will not bring proceedings:  s 237(2)(a) of the Act

14                  It is not in dispute that this criterion is established.  Having regard to the contents of the affidavits filed in this proceeding, it is probable that HCC will not itself bring proceedings or take responsibility for them.  This criterion is satisfied.  

Second Criterion - Good faith:  s 237(2)(b) of the Act

15                  The principles are now well established:  South Johnstone 163 FCR 343 at [64]-[69].  First, an applicant must honestly believe that a good cause of action exists with a reasonable prospect of success, and secondly the applicant must not seek to bring the derivative proceeding for a collateral process that would amount to an abuse of process: see Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 311 at [36].

16                  Counsel for J. Hall submitted that this criterion was not satisfied.  He principally relied on two matters.  First, that until yesterday neither Mr Fitzgerald nor his solicitor had deposed to the merits of the Derivative Proceeding.  That is no longer an issue:  see [17] below.  Secondly, there was no indication that Mr Fitzgerald or Cemcon had ever acted or given any consideration to HCC’s customers, HCC’s creditors, HCC’s employees, HCC’s suppliers and HCC’s contractors.  Instead, Counsel for J. Hall submitted that Mr Fitzgerald’s conduct at all times (as recorded in correspondence and in disputed conversations) had been to obtain a payout or settlement with Mr Hall. 

17                  I dismiss any assertion that Cemcon is acting otherwise than in good faith.  First, it is clear from the affidavit material filed that Mr Fitzgerald believes that the business was profitable (though the extent of such profitability is a matter to be further determined in the Derivative Proceeding) and that the Derivative Proceeding would seek a remedy for the alleged dissipation of that business which occurred, as sworn by Mr Fitzgerald, “without [his] knowledge or consent and for no proper value”, in circumstances where he believed the “business was valuable immediately prior to its being diverted to [HCG]”.  Secondly, Mr Fitzgerald’s solicitor has sworn an affidavit deposing to his belief that there is a reasonable prospect of success in the Derivative Proceeding.  Thirdly, Cemcon, through its principal Mr Fitzgerald, is willing as a condition of leave to issue the Derivative Proceeding to indemnify HCC in respect of both the legal costs incurred by HCC in prosecuting the Derivative Proceeding and any legal costs which HCC is ordered to pay to other parties in the Derivative Proceeding and he has deposed to the fact that Cemcon has, or has access to, sufficient resources to enable it to provide such an indemnity.  Finally, Cemcon (a 50% shareholder in HCC) seeks, inter alia, recovery of property in which HCC holds legal title.  HCC is the trustee of the HFUT in which Cemcon has a 40% unit holding – cf Ragless v IPA Holdings Pty Ltd (in liq) (2008) 65 ACSR 700 at 707-708; Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 311 at [36]-[41].  The 60% unit holder is J. Hall (Mr Hall’s entity).

18                  In my view, these matters are sufficient to demonstrate good faith. 

Third Criterion - Best interests of HCC:  s 237(2)(c) of the Act

19                  In applying the principles to be applied (summarised by Middleton J in South Johnstone163 FCR 343 at [70] to [73]), I consider that the Derivative Proceeding is in the best interests of HCC.  The Derivative Proceeding seeks recovery of property in which HCC holds legal title in its capacity as trustee of the HFUT and, further, Cemcon has accepted it will bear the costs of the proceeding if it is unsuccessful. 

20                  Counsel for J. Hall submitted that as HCC was a corporate trustee it would be impossible to demonstrate that leave should be granted under s 237(2)(c) as no action for which leave was granted would ever be in its best interests – by default it would be in the interests of the beneficiaries of the HFUT (i.e. the unit holders in the HFUT, one of which was Cemcon).  I reject that contention.  It is trite to say that a trustee is under a duty to recover property belonging to the trust – that is what it is seeking to do in the Derivative Proceeding.  It is the appropriate entity to undertake that task:  Alexander v Perpetual Trustees (2004) 216 CLR 109 at [55]-[56]; Young v Murphy [1996] 1 VR 279 at 284; Burns v Burns [2008] QSC 173 at [60]; Vanmarc Holdings Pty Ltd v P W Jess and Associates Pty Ltd (2000) 34 ACSR 222 at [36]; Alsop Wilkinson (a firm) v Neary [1995] 1 All ER 431 at 434-435.  It is contrary to the obligations of a trustee to allow trust property to be misappropriated or recklessly devalued, even assuming for a moment that there is utility in distinguishing in this context between legal and beneficial ownership.  

21                  Allegations have been made, supported by evidence (and in some cases, admissions by Mr Hall and HCG), that the business of HCC was “taken” by HCG.  HCG is currently trading.  HCC is not.  If the Derivative Proceeding determines that some part of the business of HCG is rightfully that of HCC, HCC stands in a position to not only recoup the business but given the nature of that business (i.e. the provision of concreting services to many current projects, see [4] and [7] above), to continue trading and resume its activities in a relatively prompt fashion: see discussion of Austin J in Showtime Management Australia Pty Ltd v Showtime Presents Pty Ltd [2008] NSWSC 618 at [83], [96]-[97] and [100].  

22                  Counsel for J. Hall submitted that the availability of alternative forms of redress suggest that the Derivative Proceeding is not in the best interests of HCC and, in support of that contention, referred to a report of Simon Patrick Nelson (“Mr Nelson”), a chartered accountant, who lists some of the steps that could otherwise be taken, including the appointment of a new trustee or the appointment of a liquidator.  Ignoring for a moment that Mr Nelson’s report highlights the difficulties and costs associated with such measures, I reject the proposition that the availability of alternative forms of redress necessarily results in the Derivative Proceeding not being in the best interests of HCC.  Not only is HCC as trustee of the HFUT trust under specific duties (see [20] above) but one of the directors of HFUT (Mr Hall) has allegedly “disposed” of trust property to an entity associated with himself.

23                  A proceeding taken in these circumstances is in the best interests of HCC.  

Fourth Criterion - Serious question to be tried:  s 237(2)(d) of the Act

24                  Again, the principles to be applied are summarised by Middleton J in South Johnstone 163 FCR 343 at [77] to [80].  There are two stages.  First, consideration of the evidence in support of the application.  Secondly, that evidence must attain a certain threshold.  In South Johnstone at [79], Middleton J adopted the threshold or test referred to by the High Court in Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 at [65] when seeking a grant of an interlocutory injunction - that the applicant must demonstrate a prima facie case, which “did not mean that the plaintiff must show that it is more probable than not that at trial the plaintiff will succeed; it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial”:  cf the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 where the test for “serious question” was actually described as an ‘alternative’ to having the applicant demonstrate a prima facie case and that all that was required was that “the applicant … simply … show that proceedings should be commenced”. 

25                  Regardless of the test, the Court does not make factual determinations:  South Johnstone 163 FCR 343 at [80].  Moreover, it would be inappropriate on an application for leave to reach any conclusion about the strength of the arguments each side would seek to make in relation to each of the issues identified above.  As the summary of facts demonstrates (see [3] to [9] above), the issues in dispute raise serious questions to be tried. 

26                  Resolution of those disputes involves conflicting accounts of transactions and what was in fact agreed.  It is not a simple matter of evaluating uncontested evidence.  On any view, each of the issues identified is a serious question to be tried.  Even if the evidence of Mr Hall was taken at its highest, the disputed questions raise serious questions about whether and if so, pursuant to what authority and on what terms, HCG “took over” the various projects that were once conducted by HCC, the ownership of the assets being used by HCG to work on those projects and whether the “business” of HCG is in fact the business of HCC.  Questions of valuation and accounting also fall to be determined. 

27                  During the course of argument, Counsel for J. Hall referred me to balance sheets of HCC as at 31 December 2008 and 3 March 2009 together with a valuation of some items of plant and equipment originally owned by HCC.  It was submitted that these documents were evidence of the fact that the assets of HCC had been accounted for and that to the extent that HCG had “taken over” those assets, it had accounted to HCC for them.  In my view, those documents raised more questions than they answered.  First, the records were incomplete.  For example, I was told from the bar table that HCG had in fact paid an additional $725,000 to HCC but no evidence was adduced about that payment whether as to the fact of payment, its timing, what it was for and which party or entity determined the amount that was paid.  Secondly, it was apparent that one of the principal items in the balance sheet (motor vehicles) as at 3 March 2009 was not recorded in the valuation dated 3 weeks later.  Whether they were included in the $725,000 was by no means clear.  There is a real possibility that other questions will arise. 

28                  However, even if I was to assume that HCG had accounted for the assets at arm’s length values, under what authority did Mr Hall have to do what he did and, no less importantly, was he legally entitled to treat trust assets in that manner?

29                  Counsel for J. Hall further submitted that Mr Fitzgerald was either not acting in his capacity as director or was not, in fact, a director at the time of the alleged conduct.  Thus it was submitted that in order to ensure HCC did not engage in insolvent trading and that the assets of the trust were not entirely diminished, Mr Hall undertook the only course of action available to him.  However, such a submission again presents, not answers the question of whether there exists a serious question to be tried in the Derivative Proceeding.  It does not and cannot provide an answer to the question just posed:  see [28].

30                  These matters are precisely what such a trial would determine.  There is clearly a dispute over serious allegations where evidence has been provided by both sides to support such allegations, and given I cannot make an evaluation of such evidence without determining the issues, it is prima facie demonstrated that there exists serious questions to be tried – this criterion is therefore satisfied.

Fifth Criterion - Notice:  s 237(2)(e) of the Act

31                  It was not in dispute that this criterion is satisfied. 

CONCLUSION

32                  For the reasons set out above, it is appropriate that upon Cemcon undertaking to indemnify HCC in respect of both the legal costs incurred by HCC in prosecuting the Derivative Proceeding and any legal costs which HCC is ordered to pay to other parties in the Derivative Proceeding, Cemcon be granted leave pursuant to s 237 of the Act to issue proceedings in the name of HCC against Mr Hall and HCG.  The costs of the application for leave will be costs in the cause of the Derivative Proceeding. 

Associate:

Dated:         26 June 2009