FEDERAL COURT OF AUSTRALIA

 

Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763

Citation:		Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763
Parties:		ALBERT CESARIO VINCIGUERRA v MG CORROSION CONSULTANTS PTY LTD (ACN 084 715 177)
File number:		WAD 90 of 2008
Judge:		GILMOUR J
Date of judgment:		21 July 2010
Catchwords:		CORPORATIONS - derivative action - leave to commence proceedings under s 237 Corporations Act 2001 (Cth) - consideration of requirements under s 237(2)
Legislation:		Corporations Act 2001 (Cth) ss  79, 181, 182, 183, 232, 233, 236(1)(a)(i), 237, 247A 461(1)(k)
Cases cited:		Apollo Shower Screens Pty Ltd v Building and Construction Industry Long Service Payments Corporation (1985) 1 NSWLR 561 cited Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 cited Blatch v Archer [1794] 1 COWP 63 cited Carpenter v Pioneer Park Pty Ltd(2004) 211 ALR 457 cited Cemcon, In the matter of Hall Concrete Constructions (Vic) Pty Ltd [2009] FCA 696 cited Chahwan v Euphoric Pty Ltd (2008) 65 ACSR 661 cited Charlton v Baber(2003) 47 ACSR 31 cited Ehsman v Nutectim International Pty Ltd (2006) 58 ACSR 705 referred to Fiduciary Ltd v Morningstar Research Pty Ltd(2005) 53 ACSR 732 applied FWV Stanke Holdings Pty Ltd v O'Meara; von Stanke v O'Meara [2007] SASC 413 discussed Goozee v Graphic World Group Holdings Pty Ltd(2002) 170 FLR 451 cited Joinery Products Pty Ltd v Imlach (2008) 67 ACSR 520 cited Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 cited Metyor Inc v Queensland Electronic Switching Pty Ltd [2003] 1 Qd R 186cited Oates v Consolidated Capital Services Ltd (2008) 218 FLR 73 cited Power v Ekstein (2010) 77 ACSR 302 cited Ragless v IPA Holdings Pty Ltd (in liq) (2008) 65 ACSR 700 cited South Johnstone Mill Ltd v Dennis (2007) 163 FCR 343 cited Stephen Hooker v Infinity Systems Pty Ltd; Ian James Purchas v Infinity Systems Pty Ltd [2008] NSWSC 188 cited Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313 applied Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd[2001] QSC 324 referred to Vetter v Lake Macquarie City Council (2001) 202 CLR 439 cited Vinciguerra v MG Corrosion Consultants Pty Ltd (2007) 61 ACSR 583 cited Williams v Spautz (1992) 174 CLR 509 cited
Date of hearing:	8 December 2009
Date of last submissions:	12 April 2010
Place:	Perth
Division:	GENERAL DIVISION
Category:	Catchwords
Number of paragraphs:	162
Counsel for the Plaintiff:	Mr D Solomon
Solicitor for the Plaintiff:	Solomon Brothers
Counsel for the Defendant:	Mr M McCusker QC
Solicitor for the Defendant:	Q Legal

INDEX

 

Background............................................................................................................	[7]
Section 237 of the Act........................................................................................	[14]
Probable that the defendant will not itself bring the proceedings – s 37(2)(a) of the Act................................................................	[17]
Ruthven Report..........................................................................................................	[26]
Mr Gorey....................................................................................................................	[47]
Good faith – s 237(2)(b) of the Act..................................................................	[54]
The Plaintiff honestly believes that a good cause of action exists and has a reasonable prospect of success..................................................................................	[59]
Collateral purpose......................................................................................................	[65]
Rejection of offer to buy shares..............................................................................	[71]
Winding up.............................................................................................................	[76]
Competition............................................................................................................	[89]
Competition – water treatment business...............................................................	[91]
Competition - Capic...............................................................................................	[92]
The Ruthven Report...................................................................................................	[98]
The plaintiff was complicit in the matters complained of in the draft statement of claim............................................................................................................................	[101]
It is in the best interests of the defendant that the plaintiff be granted leave – s 237(2)(c) of the Act.............................	[111]
The substance of the redress sought by the plaintiff could be obtained by other means..........................................................................................................................	[121]
Ability of the potential respondents to meet at least a substantial part of any judgment......................................................................................................................	[124]
Whether the plaintiff is the appropriate applicant....................................................	[127]
Ability of plaintiff to indemnify the defendant...........................................................	[131]
Serious question to be tried – s 237(2)(d) of the Act..........................	[140]
Conclusion...................................................................................................................	[160]

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION	WAD 90 of 2008

 

BETWEEN:	ALBERT CESARIO VINCIGUERRA Plaintiff
AND:	MG CORROSION CONSULTANTS PTY LTD (ACN 084 715 177) Defendant

 

JUDGE:	GILMOUR J
DATE:	21 JULY 2010
PLACE:	PERTH

REASONS FOR JUDGMENT

1                     The plaintiff seeks leave pursuant to s 237 of the Corporations Act 2001 (Cth) (the Act) to commence proceedings on behalf of the defendant against each of Malcolm Stewart Gilmour, Tony Armenti and Sola-Kleen Pty Ltd (Sola-Kleen).  In these reasons I have included some material drawn from the written submissions of both parties without attributing this at every point.

2                     The plaintiff read affidavits sworn by:

            (a)        him on 2 and 12 May 2008, 6 and 23 March and 7 December 2009; 

            (b)        Christopher Stephen Williams on 5 and 15 May 2008 and 7 December 2009;

            (c)        Trevor Michael Gorey on 6 March 2009 and 7 December 2009; and

            (d)        James Anthony McCarthy on 7 December 2009.

3                     The defendant read affidavits sworn by:

(a)                Trevor John Harradine on 14 and 16 May 2008;

(b)               Melissa Ruth Rosair on 15 May 2008;

(c)                Malcolm Gilmour on 16 May 2008, 25 February 2009, 19 March 2009 and 25 November 2009;

(d)               Graham Edward Ruthven on 20 February 2009;

(e)                Philip George Reed on 26 November 2009;

(f)                 Jan Schlichthaerle on 16 January 2007 (in WAD 322 of 2006);

(g)                Debra May Stedman on 18 January 2007 (in WAD 322 of 2006);

(h)                Michelle Christine Dalton on 24 January 2007 (in WAD 322 of 2006); and

(i)                  Trevor John Harradine on 5 January 2010.

 

4                     The plaintiff attached a draft statement of claim to his affidavit of 2 May 2008.  The allegations made in it relate to Mr Gilmour breaching both his duties to the defendant imposed by ss 181 to 183 of the Act and his fiduciary duties.  It is further alleged that Mr Armenti and Sola-Kleen were involved in those breaches or received property with notice of the breaches.  The alleged breaches are that Mr Gilmour caused the defendant to incur unnecessary or inflated expenses for his benefit and/or the benefit of Sola-Kleen.  The most significant component of those expenses are large “management fees” that Mr Gilmour allegedly caused the defendant to pay to Sola-Kleen each year.

5                     The plaintiff previously disclosed an intention to seek an order winding up the defendant on the just and equitable ground pursuant to s 461(1)(k) of the Act.  The plaintiff says that this reflected his intentions as at 31 March 2008 but that circumstances have changed since that time citing as an example that Sola-Kleen has shown a willingness to purchase his shares in the defendant.  He says that he will make a decision at an appropriate time as to whether or not to seek this relief. 

6                     The plaintiff’s application also seeks orders for an injunction restraining the defendant from issuing any additional shares without the leave of the Court.  At a hearing on 16 May 2008, the defendant, by counsel, undertook to the Court not to issue any shares until further order.  The defendant has not sought to be discharged from that undertaking.  In the circumstances, unless and until a discharge of the undertaking is sought, the plaintiff does not press his application for an injunction. 

Background

7                     The plaintiff owns 30 of the 100 ordinary shares issued in the defendant.  The remaining 70 ordinary shares are owned by Sola-Kleen.

8                     The directors of the defendant at all material times were:

(a)        prior to 18 July 2000, Mr Gilmour;

 

(b)       between 18 July 2000 and 22 April 2004, the plaintiff and Mr Gilmour;

 

(c)        between 22 April 2004 and 15 January 2008, Mr Gilmour;

 

(d)       between 15 January 2008 and 5 May 2008, Mr Gilmour and Trevor John Harradine; and

 

(e)        since 5 May 2008, Mr Gilmour, Mr Harradine and Kenneth James Byfield.

 

9                     During the period from 1998 to 29 July 2006, the plaintiff was also an employee of the defendant.

10                  Mr Gilmour is the sole director and shareholder of Sola-Kleen.

11                  Mr Armenti is the external accountant for the defendant.   

12                  In November 2006, the plaintiff applied for orders pursuant to s 247A of the Act requiring the defendant to permit him to inspect its books.  On 22 May and 5 June 2007 respectively I made orders in favour of the plaintiff permitting that inspection with costs: Vinciguerra v MG Corrosion Consultants Pty Ltd (2007) 61 ACSR 583.  In accordance with those orders Mr Gorey inspected the books of the defendant and provided the plaintiff with a report regarding the results of his investigation (the Gorey Report). 

13                  The plaintiff commenced this application in May 2008.  At the interlocutory injunction hearing on 16 May 2008, referred to above, orders were made referring the matter to mediation.  The mediation process continued until 15 December 2008.

Section 237 of the Act

14                  Pursuant to s 237 of the Act, a member of a company, being a person referred to in s 236(1)(a)(i), may apply to the Court for leave to bring proceedings in the name of the company.  The plaintiff is such a person.  Pursuant to s 237(2) the Court must grant the application if it is satisfied that:

(a)        it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them;

 

(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 their 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.

 

15                  Leave under s 237 should not be given lightly.  Applications for leave are not interlocutory, but final; and the applicant bears the onus of establishing all five requirements in s 237(2): Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313 at [24].  If any of the prescribed conditions is unsatisfied, the court must refuse the application: Goozee v Graphic World Group Holdings Pty Ltd(2002) 170 FLR 451 at [27].

16                  It is not in dispute that notice was given in accordance with s 237(2)(e)(i). The defendant submits, however, that none of the other requirements of s 237(2) have been satisfied.

Probable that the defendant will not itself bring the proceedings – s 37(2)(a) of the Act

17                  Section 237(2)(a) of the Act will be satisfied if the plaintiff establishes that it is “probable” that the defendant will not itself bring the proceedings or properly take responsibility for them or for the steps in them.  Nothing more than probability is required: Ragless v IPA Holdings Pty Ltd (in liq) (2008) 65 ACSR 700 at [25]-[27] per Debelle J with whom Sulan and Vanstone JJ agreed.

18                  A company's response to an applicant's notice of intention to apply for a grant of leave will be the most direct and probative item of evidence in the court's assessment of whether this criterion is satisfied.  Sometimes, however, there may be equivocation on the company's part and, in that case, the applicant bears the onus of establishing that in all the circumstances actual refusal or the probability of refusal is to be inferred: Swansson at [29].

19                  The defendant received the plaintiff’s draft statement of claim on 31 March 2008. 

20                  The defendant submits that a response which reasonably seeks further information or verification, or to the effect that its Board will seek an independent, second opinion, as in this case, is not evidence that the company will not itself bring the proceedings, if satisfied it is in the best interests of the company.

21                  It further submits that pending proper consideration by the defendant of whether it will or will not bring proceedings itself, or take responsibility for them, the Court cannot be satisfied that it is probable that the defendant will not bring the proceedings or take responsibility for them, and therefore cannot be satisfied that the requirements of s 237(2)(a) of the Act have been met: Stephen Hooker v Infinity Systems Pty Ltd; Ian James Purchas v Infinity Systems Pty Ltd [2008] NSWSC 188 at [28].  In that case, the defendant company was in receivership and the receivers did not have access to the company’s records.  In this case the defendant submits that "proper consideration" must mean making a fully informed decision that the proposed proceeding has reasonable prospects of success. 

22                  In a letter dated 11 April 2008, the then solicitors for the defendant informed the plaintiff's solicitors that the defendant took “responsibility for investigating the allegations as a first step towards deciding whether there is sufficient substance in the allegations that warrant [the defendant] taking appropriate action, which may include legal action against proper parties.”  The defendant said it proposed to investigate the claims by:

(a)        not making any decision regarding the matters in the draft statement of claim until the appointment of a second independent director (noting that one independent director, Mr Harradine, had already been appointed);

(b)        the defendant's independent directors addressing the matters raised by the plaintiff, by conducting its own investigation, including an examination of any report commissioned by the plaintiff;

(c)        Mr Gilmour abstaining from voting on any directors' resolutions regarding the investigation of the matters in question and, if it were found that there was some substance in the allegations in the draft statement of claim, in any directors' resolutions as to the institution of any proceedings against all or any of the parties named in the draft statement of claim; and

(d)        the defendant acting upon the resolutions passed by the independent directors.

23                  According to the defendant this reasonable course which it says it has followed was rejected out of hand by the plaintiff’s solicitors in letters dated 17 April 2008 and 28 April 2008.  I do not regard this as a fair characterisation of the plaintiff’s responses.  These were detailed and placed considerable importance, with stated reasons, upon the perceived lack of independence of Mr Harradine.

24                  The defendant contends that notwithstanding the plaintiff’s rejection of its proposal, it has sought to investigate the allegations by:

(a)        appointing Mr Harradine and Mr Byfield as independent directors of the defendant;

 

(b)       appointing Mr Harradine to act as Chairman of all board meetings with Mr Gilmour abstaining from voting on any directors' resolutions regarding the investigation of the matters in question;

 

(c)        instructing Mr Graham Ruthven, an experienced and qualified independent accountant, to produce a report commenting on the items referred to in paragraphs 7-9 of the draft statement of claim and providing a copy of the report to the solicitors for the plaintiff; 

 

(d)       requesting a copy of the Gorey Report so as to assist the defendant in investigating the plaintiff's assertions and identifying disputed transactions;

 

(e)        repeatedly requesting that Mr Ruthven and Mr Gorey meet in order to refine the issues in dispute and seek better to understand the plaintiff's allegations; and

 

(f)        offering to allow Mr Gorey access to the 21 lever arch files of relevant documents (including relevant documents of Sola-Kleen) held by Mr Ruthven in the process of compiling his report.

 

25                  The defendant submits that the continual refusal by Mr Gorey to meet with Mr Ruthven to discuss and attempt to resolve their differences was not justified by bald assertions that Mr Ruthven's report was “totally inadequate” and that “nothing could be gained” by meeting, or by Mr Gorey's insistence that he be provided with full access to the records of both the defendant and Sola‑Kleen.

Ruthven Report

26                  Mr Graham Ruthven was instructed by the defendant to produce a report commenting on the items referred to in paras 7-9 of the draft statement of claim.  A copy of his report with supporting schedules is annexed to his affidavit of 20 February 2009 (the Ruthven Report). 

27                  Mr Gorey, in his affidavit of 6 March 2009, accepts that the annexures to the Ruthven Report contain “detailed financial analysis” of the defendant.  A summary of Mr Ruthven's findings on each item listed in the draft statement of claim is stated at paras 20(a)-20(s) of his affidavit.  The draft statement of claim asserts that the defendant has incurred expenses which were additional, unnecessary and/or excessive totalling $2,057,968. Mr Ruthven's report is to the contrary.  

28                  The plaintiff argues that the Ruthven Report does not constitute expert evidence as his affidavit does not depose to the accuracy of the facts stated in it.  His affidavit sworn 20 February 2009 and on which he was not cross-examined, includes a summary of his conclusions as stated in his report annexed.  The plaintiff submits that the fact that Mr Ruthven summarises the conclusions that were drawn in his report goes no further than Mr Ruthven annexing the report and that what Mr Ruthven does not do is depose to him holding the opinions set out in the report.  I do not accept this argument.  Viewed reasonably Mr Ruthven put forward his report as just that – his report.  I regard its content, for present purposes, as containing his considered views and opinions. 

29                  Regrettably Mr Ruthven died on 11 January 2010.  Mr Gorey never met with him to discuss the differences in their reports.  

30                  In summary the defendant’s contentions are as follows.  The two independent directors are, and have been at all material times, ready and willing to fully inform themselves, in order to decide whether, in the best interests of the defendant, the defendant should bring the proposed proceedings.  Mr Gilmour has undertaken not to participate in the making of such a decision.  They considered, however, that it would be irresponsible for them to commence the proposed proceedings, solely on the basis of the Gorey Report, in light of the Ruthven Report, which refuted many of the claims made in the Gorey Report, and casts doubt on the validity of others.

31                  The defendant also emphasises that resolution of the significant differences between the two reports has been frustrated by, first, the plaintiff's initial and extended refusal to provide the Gorey Report; and secondly Mr Gorey's refusal to meet with Mr Ruthven in an attempt to resolve the differences between their respective reports.

32                  At first blush the defendant’s contentions in this respect have significant weight.  However, I am not persuaded by them and principally so because I do not regard Mr Harradine as independent of Mr Gilmour.  I have come to this conclusion for the following reasons. 

33                  Mr Harradine and Mr Byfield were appointed as directors of the defendant for the purpose of acting as independent directors in conducting an independent investigation with no involvement by Mr Gilmour.  Their asserted independence was, understandably, a matter of central importance given Mr Gilmour’s personal interest in the matters complained of by the plaintiff.    

34                  The defendant asserted, by a letter from its then solicitors, Wojtowicz Kelly, dated 21 April 2008 that “Mr Harradine is not in any way related to Sola-Kleen Pty Ltd or Malcolm Gilmour”.  However, Mr Harradine and Mr Gilmour are the directors and only shareholders of Power Savers International (Australia) Pty Ltd.  This was evidenced by annexure “CSW-2” to the affidavit sworn by Christopher Stephen Williams on 15 May 2008 that Mr Harradine was appointed as a director of that company in 1998.  Mr Gilmour’s and Mr Harradine’s involvement in Power Savers International was not disclosed by the defendant either in the Wojtowicz Kelly’s letter or otherwise or by Mr Gilmour or Mr Harradine in their affidavits.

35                  Mr Harradine swore a supplementary affidavit on 16 May 2008.  It is not expressly stated to be in response to Mr Williams’ affidavit.  Mr Harradine, in para 2 of this affidavit said that he did not disclose information pertaining to his directorships or interest in companies other than the defendant and Sola-Kleen because he did not believe that they had any material effect on how he exercised his judgment in his role as a director of the defendant.  Mr Harradine’s personal opinion in this respect is not to the point.  He swore his affidavit in a context where his independence was being questioned by the plaintiff and he, in effect, was asserting his independence.  “Independence” in that context plainly was meant to convey his independence from Mr Gilmour.  It cannot mean merely that he has no financial interest in the outcome of this application or the foreshadowed litigation or that he has no legal or beneficial interest in the defendant.  The Wojtowicz Kelly letter of 21 April 2008 said that Mr Harradine was “not in any way” related to Sola-Kleen or Mr Gilmour.  This was no off-hand remark.  It was an unequivocal statement made in response to a letter from the plaintiff’s solicitors dated 17 April 2008 included in which the “independence” of Mr Harradine was questioned.  It pointed out that Mr Harradine was until 2003 the defendant’s accountant and that he had recently been issued with one “A” class share in the defendant. 

36                  The issue of the share was not explained by the defendant’s then solicitors in its letter of 21 April 2008 although it was later explained in Mr Harradine’s affidavit of 14 May 2008 that he was issued the share to enable the defendant’s board to have a quorum in the event that the plaintiff failed to attend a meeting of the defendant’s members.  In addition to asserting that Mr Harradine had no relationship with Mr Gilmour, the letter of 21 April 2008 stated “If you have any evidence to the contrary, please provide it to us”.  Such evidence ought to have been provided by each of Mr Gilmour and Mr Harradine.  Plainly enough it was not.  Mr Harradine is a professional accountant.  I would expect that he is familiar with the concept of independence in the present context.  Indeed he asserts as much in his affidavit sworn on 14 May 2008. 

37                  The excerpt I have quoted from the letter of 21 April 2008 was less than forthright.  This is not a criticism of Wojtowicz Kelly as I infer that the letter was written on the basis of less than forthright instructions.  Mr Harradine, for his part, in his affidavit sworn on 14 May 2008 made no mention of this relationship with Mr Gilmour although he referred to the fact that he had held a number of public and proprietary company directorships in Australia and overseas during his career.  He did not explain his involvement with Mr Gilmour in Power Savers International in his supplementary affidavit of 16 May 2008 or at all.  He should have done so.

38                  Mr Gilmour, in his affidavit sworn on 16 May 2008 referred to Mr Harradine’s affidavit sworn on 15 May 2008.  I take this to be a mistaken reference to Mr Harradine’s affidavit of 16 May 2008.  He said he had nothing further to add to what Mr Harradine had said.  Again he too failed to say anything at all about Power Savers International.  I regard the failure to mention his involvement with Mr Harradine in Power Savers International as demonstrating, on the part of Mr Gilmour, a lack of candour on the issue of Mr Harradine’s asserted independence upon which the defendant has placed so much reliance in this application. 

39                  In my opinion, an explanation was called for both from Mr Gilmour and Mr Harradine in the circumstances of this application.  I infer that any such explanation by Mr Gilmour and Mr Harradine would not have supported the assertion that Mr Harradine is independent of Mr Gilmour.  Accordingly, it is not merely the fact of the relationship but the failure of both Mr Gilmour and Mr Harradine to mention it in their affidavits sworn prior to Mr Williams’ affidavit of 15 May 2008 or, when exposed in Mr Williams’ affidavit, to explain it, which leads me to conclude not only that Mr Harradine is not independent but is, to the contrary, partisan towards the defendant and Mr Gilmour.

40                  No affidavit of Mr Byfield has been produced.  No explanation of Mr Byfield’s background, his relationship with Messrs Gilmour and Harradine or his involvement in the purportedly independent investigation has been provided. 

41                  Mr Harradine, in his affidavit sworn on 14 May 2008 deposed that he had received the financial records of the defendant for the financial years 2003 to 2007 inclusive.  He said that as a result of what he had been told by Mr Armenti that the management fees paid by the defendant to Sola-Kleen were fees for its use of Sola-Kleen’s premises, equipment and staff.  Mr Harradine, himself an accountant, proceeded to give reasons as to why, in his opinion, these management fees were, in effect, reasonable.

42                  Mr Ruthven, contrary to the position taken by Mr Harradine, concluded that a number of impugned expenses, including a significant portion of the management fees that were paid, were overstated.  In particular, Mr Ruthven concluded that, between 2003 and 2007, the management fees paid by the defendant to Sola-Kleen were overstated by an amount of $382,027.  These conclusions are at such odds with the opinion of Mr Haradine expressed by him after his review of the defendant’s financial records that they add to my view that Mr Harradine in relation to this matter ought not be regarded as independent and objective.

43                  The Ruthven Report concluded that although management fees payable to Sola-Kleen were overstated other expenses had been understated, in an amount almost equal to that in which expenses had been overstated, resulting in the defendant’s net profit being understated during the period from 2001 to 2007 in an amount of $45,013.  

44                  However, given the view I have reached as to Mr Harradine’s lack of independence and moreover his lack of candour in his affidavit I give little weight to the findings in the Ruthven Report for present purposes.  This casts no adverse shadow upon the late Mr Ruthven.  I am simply, for present purposes not prepared to accept that he was fully instructed with all relevant material for the purpose of preparing his report. 

45                  Mr Ruthven did not perform any separate verification validation or audit of information and documents produced to him for the purposes of his report, by the defendant, Sola-Kleen, Mr Gilmour and Mr Armenti.  

46                  The defendant made no closing submissions in reply to these criticisms of the lack of independence of Mr Harradine. 

Mr Gorey

47                  The defendant contends that notwithstanding that it gave notice to the plaintiff on 24 November 2009 that it required Mr Gorey to attend the hearing for cross-examination, Mr Gorey was said to be unavailable.  The defendant says that it has not, at any time, been given the opportunity to discuss with Mr Gorey the contents of his report, although he has been put forward as an independent expert.

48                  The defendant submits thatMr Gorey's refusal to meet with Mr Ruthven before his death, his failure to arrange to be available at the hearing for cross-examination, and his refusal to view the 21 lever arch files of documents held by Mr Ruthven, are all matters which would make it imprudent for the independent directors to decide to commence action, in reliance on Mr Gorey’s report and in disregard of the contradictions of that report in the Ruthven Report and be satisfied that the proposed proceedings have reasonable prospects of success.

49                  However, the defendant’s complaints concerning Mr Gorey are not warranted.  Mr Gorey’s unavailability was fully explained.  Mr Gorey’s affidavit was filed and served in March 2009, some nine months before the hearing.  The application was initially listed for hearing in July 2009 but it was adjourned to December 2009.  However, it was not until 24 November 2009 that the defendant gave notice that it required Mr Gorey to attend for cross-examination.  By that time, Mr Gorey had a conflicting commitment to be called as a witness in proceedings before the State Administrative Tribunal. 

50                  The defendant agreed to the tender of Mr Gorey’s affidavit without Mr Gorey being required for cross-examination, rather than necessitate the hearing being adjourned.  That was its forensic decision to make and it should not now be heard to complain on this topic. 

51                  The defendant submits that the plaintiff did not cross-examine its directors about their intentions to commence proceedings.  Beyond stating that it was in the interests of the defendant to undertake an assessment of the plaintiff’s claims made in the draft statement of claim, Mr Harradine did not give any evidence about his intentions.  Mr Gilmour gave no evidence about his intentions.  Mr Byfield gave no evidence at all.  In these circumstances, nothing turns on the decision of the plaintiff not to cross-examine any of the defendant’s directors.

52                  I have no confidence that these significant differences can be resolved by the parties through discussion or mediation even if all relevant documents were exchanged between them.  The defendant continues to oppose this application.  I am far from persuaded that this position is likely to change.

53                  I find that it is probable that the defendant will not itself commence the proceedings and the requirement of s 237(2)(a) of the Act is satisfied. 

Good faith – s 237(2)(b) of the Act

54                  There are at least two interrelated factors to which the Courts will always have regard in determining whether the good faith requirement of s 237(2)(b) of the Act is satisfied.  The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success; and the second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process: Swansson at [36].  The onus is on the plaintiff to satisfy the Court that he is acting in good faith: Chahwan v Euphoric Pty Ltd (2008) 65 ACSR 661 at [69].

55                  It is not necessary for the plaintiff to depose to his belief that the defendant has a good cause of action.  The Court need only be satisfied that he is acting in good faith: South Johnston Mill Ltd v Dennis (2007) 163 FCR 343 at [67]-[69]; Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 at [32] to [37].  It is not simply a matter of bald assertion: Swansson at [36].  Nonetheless, the plaintiff has deposed to holding this belief and to his purposes. 

56                  The Court may draw inferences as to the applicant’s good faith by assessing the nature of the allegations and the circumstances out of which they arose. Objective facts and circumstances will speak louder than the applicant's own assertions: Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732 at [22].

57                  In Morningstar at [20], Austin J referred to the following explanation of the ‘good faith’ criterion in the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998. 

In assessing whether the applicant is acting in good faith, the Court could be expected to have regard to whether:

(a)        there was any complicity by the applicant in the matters complained of by the applicant; and

(b)        the application is being made in pursuit of some interest other than that of the company.

 

58                  This was also referred to in Chahwan at [72].

The Plaintiff honestly believes that a good cause of action exists and has a reasonable prospect of success

59                  As I earlier mentioned in accordance with the orders in Vinciguerra v MG Corrosion Consultants Pty Ltd (2007) 61 ACSR 583, Mr Gorey inspected the books of the defendant and provided the plaintiff with a report regarding the results of his investigations, the Gorey Report.   

60                  The plaintiff states that, as a result of the inspection of the defendant's books by Mr Gorey and the content of the Gorey Report he believes that the defendant has causes of action against Mr Gilmour, Mr Armenti and Sola-Kleen. 

61                  Considerable evidence was adduced, as to whether or not the plaintiff unreasonably refused to have Mr Gorey meet with Mr Ruthven to discuss their respective reports.  The plaintiff, under cross-examination, appeared to have little knowledge of these matters as he, it appears, had left the running of his application to his solicitors.  I do not regard this as exceptional.  Even if the decision that Mr Gorey not meet Mr Ruthven or review Mr Ruthven’s selection of documents can be criticised, this does not reflect on the plaintiff’s good faith.  Leaving such matters to his solicitors and Mr Gorey does not detract from the plaintiff’s good faith.

62                  Mr Gorey regarded the information provided by the defendant as inadequate.  Part of his complaint related to the non-production of books and records of Sola-Kleen.  This, in my view, was not an unreasonable complaint.  Whatever books and records of the defendant have or have not been produced that is part only of the factual picture.

63                  The defendant submits that it cannot require Sola-Kleen to grant the plaintiff access to its books and records.  However, Mr Gilmour is the sole director, secretary and shareholder of Sola-Kleen.  The defendant in turn is under the control of Sola-Kleen which holds 70% of its shares.  Moreover Mr Gilmour is aware that the principal allegations made by the plaintiff in his draft statement of claim are that management fees were wrongfully paid by the defendant to Sola-Kleen.  If leave to bring an action on behalf of the defendant were to be given, Sola-Kleen would be a defendant in such an action and would have to provide discovery of documents which would include its relevant books and records.  It is, at least, disingenuous of Mr Gilmour, who has control of Sola-Kleen, to adopt this position in relation to its books and records.

64                  I think it is fair to describe some of the conduct of both the parties as less than mutually co-operative.  However, on the strength of the Gorey Report I accept that the plaintiff has an honest and reasonable belief that a good cause of action exists and has a reasonable prospect of success.  Mr Gorey, as I said, was not cross-examined.  I have earlier concluded that I do not place much weight on the Ruthven Report for reasons given.

Collateral purpose

65                  The plaintiff states that his purpose in bringing the application is to cause the defendant to pursue that cause of action which, if successful, will increase the defendant's assets and the value of his shareholding in the defendant.

66                  However, as the defendant submits, if an applicant for leave under s 237 seeks by the derivative action to receive a benefit which, in good conscience, he or she should not receive, then the application is not made in good faith, even if the company itself stands to obtain some benefit if the derivative action is successful: Swansson at [43].

67                  Palmer J pointed out however at [35] that the issue of good faith is not confined to those two factors and “the law will develop incrementally as different factual circumstances come before the courts”.  This approach was approved by the New South Wales Court of Appeal in Chahwan at [69]-[84] per Tobias JA with whom Beazley and Bell JJA agreed.  Tobias J stated at [81] that whether or not a person is “acting in good faith” extends beyond conduct constituting an abuse of process, and then at [82]-[83] that where an applicant is in reality seeking to further his or her own personal interests, other than as a current or former shareholder of the company, rather than the interests of the company as a whole the onus of establishing good faith would not be discharged.  It matters not that the applicant’s conduct would not constitute an abuse of process.

68                  Abuse of process in the context of an application such as this involves for example using the derivative proceedings, not in order to prosecute them to a conclusion, but as a means to obtain some advantage for which they were not designed, or some collateral advantage beyond what the law offers: Williams v Spautz (1992) 174 CLR 509 at 526-527 per Mason CJ, Dawson, Toohey and McHugh JJ.

69                  Referring to these passages from Williams v Spautz in Goozee v Graphic World Group Holdings Pty Ltd, the Court found that in bringing the proposed action the applicant had the collateral purpose of seeking to persuade other shareholders to concur in and procure the payment of dividends by the company or to buy the applicant's shares in the company (at [68]).  This was held to be a "collateral purpose amounting to an abuse of process".

70                  The defendant says that such an abuse of process or a collateral purpose, even if not amounting to an abuse of process, is present in this application.  The allegations are several but taken together are to the effect that the real purpose of the plaintiff behind this application is to destroy the defendant and remove it as a competitor of his other interests.  Although I deal with the several allegations discretely below they are each manifestations of the one collective allegation to which I have referred.

Rejection of offer to buy shares

71                  Sola-Kleen made an open offer to the plaintiff in a letter from its then solicitors Dutton Legal dated 7 May 2008 to purchase his shares in the defendant for fair value to be determined at the date of acceptance of the offer by the plaintiff.  

72                  The offer was rejected by the plaintiff's solicitors by a letter dated 14 May 2008.  However, it would appear that the plaintiff no longer wishes to be associated with the defendant and says he will consider “any substantial offer that Mr Gilmour may make for the acquisition of his shares in” the defendant.  

73                  The defendant relies on the plaintiff’s failure to accept this offer made by Sola-Kleen to purchase his shares in the defendant to demonstrate that this application is an abuse of process and that the plaintiff is thereby not acting in good faith. 

74                  However, Sola-Kleen’s offer did not specify a price for the plaintiff’s shares in the defendant.  Rather it provided for the shares to be purchased for a “fair value” which was to be agreed or, failing agreement, to be determined by an accountant.  The determination of “fair value” was to be on the basis of a notional accounting (without an accounting necessarily actually taking place) in respect of amounts which have been expended by (the defendant) in an unreasonable or excessive manner (including amounts not at fair and commercial rates).     

75                  The plaintiff has raised serious issues concerning alleged breaches of fiduciary duties and breaches of duties imposed by ss 181 and 182 of the Act.  The amounts said by the plaintiff to have been paid to Sola-Kleen as a result of such breaches as excessive are substantial.  The legal questions cannot be determined by an accountant.  The plaintiff, reasonably in my view, rejected Sola-Kleen’s offer because each of the alternative processes for determining “fair value” is unreasonable and unlikely to have resulted in a “fair value” in the ordinary sense.  Accordingly, I do not regard the plaintiff’s rejection of the offer made by Sola-Kleen as evidencing a collateral purpose and thereby a lack of good faith on his part.

Winding up

76                  Further the defendant alleges a collateral purpose that in truth the proposed litigation is to enable the plaintiff to wind up the defendant.

77                  The defendant submits that the plaintiff has not stated that he would not seek to wind up the defendant notwithstanding that he has received an offer to purchase his shares at fair value.  At para 9 of the affidavit of the plaintiff sworn 23 March 2009, he states that:

should leave to pursue a derivative action be granted to me, I will make a fresh decision as to whether to apply to wind up the Defendant simultaneously with the commencement of, or at the conclusion of, the derivative proceedings. 

78                  The defendant submits that in cross-examination the plaintiff stated that if his shares were not purchased and he did not receive dividends, it was his intention to seek to wind up the defendant.

79                  That is not what the plaintiff said.  His evidence in cross-examination was as follows:

And is it your intention to seek to wind up MG Corrosion?---No.

Is that something that you have given consideration to?‑‑‑All I’ve given consideration to is how funds are returned back to the company and, at that point, if the company trades successfully and I’m a shareholder and I get dividends, fine, if it doesn’t intend on doing that then I’ll seek to get my share of the assets.

 

80                  Later in cross-examination his evidence was:

Is your present intention to seek to wind the company up or not?‑‑‑Present intentions are to get the fair return of funds back to the business and then a decision will be made as to what happens.

 

I’m asking you what your intention is, as you understand, as to whether or not to seek the company up?‑‑‑That decision would have to be based on what business MGs has and whether MG wants to pay me dividends for business they have.  If they don’t intend on doing that as a 30 per cent shareholder, I don’t think I would have too many other options.

81                  The defendant also relies upon the evidence of Ms Michelle Dalton, one of its former employees who deposed, in an affidavit, that the plaintiff said to her words in or about May or June 2006 to the effect that “I'm really looking forward to destroying this company”.  The plaintiff does not deny that he stated words to this effect.  The plaintiff, it appears, “was upset” and “angry” with Mr Malcolm Gilmour, the sole director of the defendant at that time and the putative respondent.  The plaintiff has stated that, considering the relationship between the plaintiff and Mr Gilmour, it was his intention to wind up the defendant. 

82                  There is no reason why a proposal to wind up a company by a party seeking leave to pursue a derivative action in the name of that company must be demonstrative of bad faith: Power v Ekstein (2010) 77 ACSR 302 at [101] per Austin J.  This is particularly so in this case where the underlying premise of the defendant’s submission is that the plaintiff is keeping this option open despite the offer to purchase his interest at a ‘fair value’ on a premise I do not accept as established.

83                  The plaintiff has a 30% shareholding in the defendant.  The defendant’s assets include the potential claims against Sola-Kleen, Malcolm Gilmour and Tony Armenti which are substantial.  The defendant is a small proprietary company the shareholding of which is ultimately held, as to 70%, by Mr Gilmour and, as to 30%, by the plaintiff.  The plaintiff and Mr Gilmour have irretrievably fallen out.  It is understandable that statements such as the one made by the plaintiff may be spoken in anger. 

84                  As Palmer J said in Swansson at [41]:

… even if the applicant is spurred on by intense personal animosity, even malice, against the defendant: it is not the law that only a plaintiff who feels goodwill towards a defendant is entitled to sue: see eg Dowling v Colonial Mutual Life Assurance Society Ltd (1915) 20 CLR 508 at 521-2, 21 ALR 425 at 433; IOC Australia Pty Ltd v Mobil Oil Australia Ltd (1975) 11 ALR 417 at 426-7; 2 ACLR 122 at 131.

. . .

Further, if an applicant for leave under s 237 seeks by the derivative action to receive a benefit which, in good conscience, he or she should not receive, then the application will not be made in good faith even though the company itself stands to benefit if the derivative action is successful. 

85                  However, the actions taken by the plaintiff, in the overall, appear to me to be reasonable whatever ill-advised words he may earlier have spoken.  I accept the plaintiff’s submission that on the issue of good faith the objective facts and circumstances speak louder than the plaintiff’s words: Ehsman v Nutectim International Pty Ltd (2006) 58 ACSR 705 at 717 [51] per Austin J.  The objective facts are that the plaintiff:

(a)        raised concerns regarding the defendant’s affairs;

 

(b)       successfully obtained an order pursuant s 247A of the Act to inspect the defendant’s books.  To do so, the plaintiff satisfied the Court that he was acting in good faith: Vinciguerra v MG Corrosion Consultants Pty Ltd (2007) 61 ACSR 583 at [78]; 

 

(c)        caused Mr Gorey, a forensic accountant, to inspect the defendant’s books;

 

(d)       received the Gorey Report;

 

(e)        provided the defendant with a draft statement of claim based on the Gorey Report; and

 

(f)        sought leave to commence a derivative action in respect of allegations raised in that statement of claim. 

 

86                  In the circumstances, the plaintiff wants to realise his interest in the defendant by the most expedient means available.  In May 2008, it appeared to the plaintiff that the most expedient method of realising his investment was to obtain the Court’s leave to pursue a derivative action and then cause the defendant to be wound up, thus enabling him to obtain the value of his shares at the time when the only significant asset of the defendant was its claims against Sola-Kleen, Mr Gilmour and Mr Armenti.  The plaintiff’s earlier proposal to apply for a winding up order was made in this context.

87                  However, the winding up of the defendant is not an inevitable outcome of the granting of leave to the plaintiff to pursue a derivative action.  The plaintiff would be prepared to sell his shares in the defendant to Sola-Kleen or some other party for a satisfactory fixed price or subject to a satisfactory process for the determination of a price.

88                  I do not regard the plaintiff’s proposal, potentially, to seek to have the defendant wound up as establishing a collateral purpose and thereby a lack of good faith on his part.

Competition

89                  Several allegations have been made, going to alleged bad faith that the plaintiff has engaged in competition with the defendant.  These allegations suggest a motive or purpose behind the other assertions that the plaintiff wants to wind up or destroy the defendant’s business. 

90                  The plaintiff, according to Mr Gilmour, is (or was) involved with SNF, a competitor of the defendant.  The plaintiff concedes that he assisted SNF with some elements of its tender for the supply of Inhibitor Products in October 2006 knowing that SNF was tendering in competition with the defendant, but claims that he did not disclose any of the defendant’s confidential information and that he has not since had any involvement with SNF.  This was about two and one-half years after he resigned as a director of the defendant and about two months after his employment with the defendant ceased.  I accept this explanation for present purposes.  The plaintiff made no secret of his role with SNF.  He attended the tender meeting convened by KLGM Supply Department on 3 October 2006 at which Mr Gilmour amongst others was in attendance.  It is not unlawful, of itself, to work for a competitor of a former employer. 

Competition – water treatment business

91                  According to the defendant, the plaintiff attempted, while still employed by the defendant, to sell the customer list and business of the defendant to Mintech, without Board approval.  The plaintiff disputes the evidence of Mr Schlichtaerle, Managing Director of Mintech in that regard, but admits that he offered to establish the water treatment business in Kalgoorlie in competition with the defendant.  Mr Schlichtaerle was not cross-examined on his affidavit.  I cannot presently resolve the conflicts in the evidence.

Competition - Capic

92                  The plaintiff is the sole director, secretary and shareholder of Northfield Nominees Pty Ltd, the owner of the Capic business name.  Capic is a chemical cleaning company in direct competition with the defendant’s business.

93                  The origins of the company Cipac Pty Ltd (originally named Capic Pty Ltd) were explained by the plaintiff in his affidavit sworn on 7 December 2009.  That company was, with Northfield Nominees Pty Ltd, incorporated in 2006 at a time when the plaintiff was still employed by the defendant for the purpose of undertaking share trading activities.  It was only subsequent to the plaintiff’s employment by the defendant that either of those companies have had involvement in chemical businesses.

94                  The fact that the plaintiff is involved in a business that in some way competes with the defendant does not necessarily lead to a conclusion that the plaintiff lacks good faith.  

95                  However, the defendant is concerned that the plaintiff has intimate knowledge of the defendant’s formulae, tender processes, costs, suppliers and clients and is now, through the Capic business, seeking to directly compete with the defendant and improve its competitive position by bringing these proceedings and, in particular, stating an intention to wind up the defendant if he does not receive dividend payments.

96                  I do not accept this submission.  As the plaintiff submits the defendant is a small proprietary company in which the shareholdings are ultimately held, as to 70%, by Mr Gilmour and, as to 30%, by the plaintiff.  The plaintiff’s allegations are that Mr Gilmour has inappropriately stripped funds from the defendant to the advantage of himself or Sola-Kleen, of which he is the sole shareholder.  The claim concerns historical conduct that would not involve access to any current records of the defendant and there is no reason for it to be inferred that the existence of litigation would impact in any significant way on the defendant’s ongoing commercial affairs.  Further, the plaintiff is no longer involved in the day-to-day affairs or management of the defendant. 

97                  I do not regard the evidence going to the competition-based complaints as supporting the overall collateral purpose alleged by the defendant.  They do not disclose bad faith on the part of the plaintiff.

The Ruthven Report

98                  Further, on the question of good faith, the defendant submits that the allegations in the draft statement of claim are responded to by the findings of the Ruthven Report, but that the plaintiff has resisted providing support for the proposed proceedings, first, in not providing a copy of the Gorey Report until many months after the institution of the application for leave to commence a derivative action (and only after the Ruthven Report had been provided to the plaintiff, the affidavit of Graham Edward Ruthven being sworn on 25 February 2009 and the affidavit of Trevor Michael Gorey being sworn on 6 March 2009) and, second, in rejecting the proposal that the experts should confer.  This, says the defendant, evidences a lack of good faith on the part of the plaintiff. 

99                  In response, Mr Gorey has deposed that he considered that the Ruthven Report was totally inadequate as it did not include information supporting his opinion and that nothing could be gained by Mr Gorey meeting with Mr Ruthven.  Mr Gorey has also deposed that he considered that nothing could be gained by him reviewing any source documents unless he was given full access to all of the books of the defendant and Sola-Kleen.  I have already concluded that there was force in this attitude.  I have also concluded that I am not presently prepared to accept that the late Mr Ruthven was fully briefed for his report.

100               In the circumstances, the fact that Mr Gorey considered that nothing could be gained in him meeting Mr Ruthven or reviewing Mr Ruthven’s source documents does not cast doubt on the plaintiff’s good faith.  The parties have involved themselves in a mediation process over some seven months without a successful outcome.  That of itself tends against any finding of bad faith.  Again I am not satisfied that this complaint is established.

The plaintiff was complicit in the matters complained of in the draft statement of claim

101               The defendant submits that the plaintiff was complicit in the matters complained of in the draft statement of claim.

102               Paragraphs 7 and 9 of the draft statement of claim refer to expenses incurred by the defendant “during the period 1 July 2002 to 30 June 2007.”  The plaintiff was a director of the defendant between 18 July 2000 and 22 April 2004 and was therefore a director for a substantial part of the time in which the expenses are said to have been incurred.

103               The defendant puts this submission because it says that the plaintiff was provided with copies of the annual financial statements of the defendant and, during the period when he was both a director and member of the defendant, signed off the defendant's accounts, in particular:

(a)        copies of Minutes of Deemed Annual General Meeting of the defendant for 1999-2002 state that the members of the defendant were sent a copy of the company's balance sheet and financial statements, including directors' reports and statements for the year and resolved that the financial accounts and statutory reports for the year be adopted; and

(b)        copies of resolutions signed by the Plaintiff and Mr Gilmour as directors of the defendant adopting the financial accounts for the 2001 and 2002 financial years.  

104               Accordingly, the defendant submits that the proposed draft statement of claim would require an examination of the plaintiff's actions, as a director and employee of the defendant, and whether he breached his statutory and fiduciary duties as a director and employee of the defendant.  

105               I do not accept this submission.  All of the alleged disclosure pertained to periods of time prior to the impugned expenses being incurred.  The plaintiff complains about expenses incurred during the period beginning 1 July 2002.  All of the disclosures relied on by the defendant pertain to the year ended 30 June 2002 and earlier.

106               The defendant erroneously submits that the plaintiff, as a director of the defendant, signed off on the accounts for the year ended 30 June 2002, the first year in which the plaintiff claims, in the draft statement of claim, that additional unnecessary and/or excessive expenses were incurred by the defendant. 

107               In fact, the first year in which expenses complained of by the plaintiff were incurred was the year beginning 1 July 2002 which is the year ended 30 June 2003.  This is the year following the year ended 30 June 2002, in which the plaintiff signed off on the defendant’s accounts.

108               There is no other conduct of the plaintiff said to be evidence of his complicity that would result in his having liability to the defendant if the plaintiff’s allegations against Sola-Kleen, Mr Gilmour and Mr Armenti were made good.  The plaintiff has deposed to Mr Gilmour making decisions about the defendant’s affairs without reference to him, even when he was a director of the defendant.  He says that it was this which caused him to resign as a director.  The defendant, through Mr Gilmour, disputes that this was the reason.  I cannot resolve this conflict.  Even if the plaintiff, arguably, had some liability the putative defendants could join him as a third party seeking contribution.

109              The plaintiff has held 30% of the defendant’s ordinary shares for a significant period of time.  If the proposed derivative proceedings are pursued successfully, the defendant will recover funds that were improperly disbursed such that its assets will be increased and the value of the plaintiff’s 30% shareholding will be increased.  In such circumstances, it is a relatively easy task for the plaintiff to demonstrate his good faith to the Court’s satisfaction: Swansson at 320 [38].  

110               I accept the plaintiff’s submission that his actions have, at all times, been those of a significant, but nonetheless minority, shareholder who became concerned about the defendant’s affairs, took steps to investigate those concerns, formed the opinion that the concerns were well founded and now seeks to the have the concerns addressed when the  defendant will not act.  Consequently, I am satisfied that the plaintiff is acting in good faith.

It is in the best interests of the defendant that the plaintiff be granted leave – s 237(2)(c) of the Act.

111               Section 237(2)(c) requires the court to be satisfied that the proposed derivative action is in the best interests of the company: Swansson at [56].  The Court in Chahwan observed that the wording sets a high standard.  It is not sufficient to establish that it may be in the company’s best interests.

112               In Swansson at [56]-[60], Palmer J stated that whether the proposed action is in the best interests of the company can only be determined by taking into account all of the relevant circumstances.  Accordingly, his Honour observed that the inquiry will normally require the applicant to adduce evidence at least as to the following matters:  

(a)        the character of the company, for example whether it is a large public company or a small private family company;

(b)        the impact of the proposed action on the business of the company;

(c)        whether the substance of the relief sought by the applicant could be obtained by other means which does not require the company to be brought into litigation against its will; and 

(d)        the ability of the respondent to the derivative action to meet at least a substantial part of any judgment in favour of the company, so as to enable the court to determine whether the action would be of real practical benefit to the company.

113               The defendant submits that evidence of those matters has not been adduced. 

114               In Carpenter v Pioneer Park Pty Ltd (2004) 211 ALR 457 at [10], Barrett J noted that the strength of the case, at a prima facie level, was not only relevant to the "serious issue" criterion, but also is relevant to what is in the "best interests" of the company.

115               In Morningstar at [44], Austin J cited the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 which provides, with respect to determining the "best interests" of the company:

6.38      This criterion would allow the court to focus on the true nature and purpose of the proceedings. It would recognise that a company might have sound business reasons for not pursuing a cause of action open to it and that its management might legitimately have decided that the best interests of the company would be served by not taking action. For example, a decision may be taken in a case where, although it may be clear that there has been a breach of duty by a director, a loss to the company may only be nominal. In this case, the costs of taking proceedings may outweigh any benefit to the company.

6.39      The inclusion of this criterion would allow the court to refuse to grant leave in these circumstances because the applicant for leave would not be able to show that to do so would be in the best interests of the company.

116               The requirement that the grant of leave be in the best interests of the defendant “directs attention to the [defendant’s] separate and independent welfare… This imports a familiar concept of the interest of the [defendant] as a whole”: Maher v Honeysett at [44].

117               The proposed derivative action is against Mr Gilmour for the breach of the duties he owed to the defendant and against Mr Armenti and Sola-Kleen for their involvement in, or knowing receipt of property as a result of, those breaches of duty.  The plaintiff submits that if the action is successful, funds will be recovered by the defendant which will enhance its assets.  In these circumstances, there is a prima facie presumption that the bringing of the derivative action will be in the best interests of the defendant: Maher v Honeysett at [52]. 

118               The fact that the plaintiff personally stands to gain from the success of a derivative action indirectly through the increase in the value of his shares is not a reason to refuse the application: Maher v Honeysett at [45].  Indeed, the fact that the plaintiff stands to gain by reason of an increase in value of his shareholding demonstrates that it is in the best interests of the defendant if a derivative action is pursued.

119               Ultimately, the question of whether the proposed derivative action is in the best interests of a company is to be determined in the particular circumstances of the case.  There is no fixed test.  It is significant that none of the defendant’s directors has provided any evidence as to any impact that the pursuit of a derivative action may have on the defendant’s ongoing business. 

120               The defendant repeats its submission that it will give proper consideration to whether to take appropriate action including legal proceedings against the proposed respondents in the derivative action after a review of the results of investigations into the allegations alleging that the results of the Ruthven Report are contradictory of most of the allegations in the draft statement of claim, and raise a serious doubt as to the prospects of success of the proposed derivative action.  Again they complain that the delay in receiving a copy of the Gorey Report, the refusal of Mr Gorey to confer with Mr Ruthven and the alleged unwillingness of the plaintiff to mediate have prevented the defendant from attempting to progress its investigation as speedily as it would have wished so as to reach a considered and informed view on that question.  I have already dealt with these submissions adversely to the defendant.  There is no need to repeat the reasons for so doing.

The substance of the redress sought by the plaintiff could be obtained by other means

121               A relevant consideration is whether the substance of the redress sought by the applicant is available by a means which does not require the company to be brought into litigation against its will, in that, if the applicant can achieve the desired result in proceedings in his or her own name, it is not in the best interests of the company to be involved in litigation at all: Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd [2001] QSC 324.

122               The plaintiff asserts that, if leave to commence a derivative action is granted, the plaintiff may also seek to apply to wind up the defendant simultaneously with the commencement of, or at the conclusion of, the derivative action notwithstanding the offer to purchase the plaintiff's shares at a fair price.  Accordingly, the defendant submits, that if the plaintiff is readily able to exit his holding in the defendant, the winding up of the defendant would not serve any utility.  Again I have earlier disposed of this argument as being without a proper foundation. 

123               The defendant refers to a possible alternative of the plaintiff commencing proceedings for oppression, pursuant to ss 232 and 233 of the Act.  Those provisions are not, in my opinion, apt to facts alleged in the draft statement of claim.  In particular s 233 does not contemplate an order for payment of damages or compensation by a director to the company for breach of statutory and/or fiduciary duties.

Ability of the potential respondents to meet at least a substantial part of any judgment

124              The plaintiff has not provided any evidence, or sought to adduce any evidence at the hearing, as to whether the potential respondents would be able to meet any judgment awarded in the derivative action, if leave were granted.  I do not regard this as fatal to the plaintiff’s application. 

125               The plaintiff submits that the evidence adduced by him must be considered in light of the particular circumstances of these proceedings and in light of the maxim that “all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and the power of the other to have contradicted”: Blatch v Archer [1794] 1 COWP 63 at 65; 98 ER 964 at 970 per Lord Mansfield; Apollo Shower Screens Pty Ltd v Building and Construction Industry Long Service Payments Corporation (1985) 1 NSWLR 561 at 560; Vetter v Lake Macquarie City Council (2001) 202 CLR 439 at 454 [36] per Gleeson CJ, Gummow and Callinan JJ.  

126               If the putative defendants are or will not be in a position to meet any judgment debt then such evidence could and should, in this case, have come from the defendant.  Mr Gilmour controls Sola-Kleen and it is to be expected that Sola-Kleen, Mr Gilmour and Mr Armenti would be in the defendant’s camp.  No evidence from them was filed on this question.  Moreover Sola-Kleen made an offer to buy the plaintiff’s shares in the defendant.  I infer it had and has the means to pay for them. 

Whether the plaintiff is the appropriate applicant

127               In s 237(2)(c) the emphasis is on the identity of the applicant who seeks leave: Metyor Inc v Queensland Electronic Switching Pty Ltd [2003] 1 Qd R 186 at [17].  The defendant submits that the grant of leave to the plaintiff may place him in a position where his duty and interest conflict.  The defendant submits that the conflict would be between:

(a)        the plaintiff’s fiduciary duty to the company, as a derivative applicant acting on its behalf; and

(b)        his potential liability to the company and/or any personal claims, as a former director and key employee.

128               The claims in the draft statement of claim allege as against Mr Gilmour breach of the duties imposed by ss 181 to 183 of the Act and fiduciary duties.  These are duties owed by Mr Gilmour to the defendant, not to any of its directors or shareholders: Joinery Products Pty Ltd v Imlach (2008) 67 ACSR 520 at 532 [37].  Consequently, the defendant is the appropriate, and only, plaintiff in respect of these claims.  

129               The defendant further submits that the draft statement of claim does not provide for any investigation of any claims which the defendant may have against the plaintiff, in particular for the period in which the expenses are said to have been incurred and the plaintiff was both a director and employee of the defendant. 

130               The plaintiff ceased to be a director of the defendant on 22 April 2004, more than six years ago.  The defendant, by Mr Gilmour, has occasionally foreshadowed the possibility the defendant may consider contemplating commencing proceedings against the plaintiff.  However, notwithstanding the time that has elapsed, no proceedings have been instituted.  The defendant’s unfulfilled threat of commencing proceedings against the plaintiff is no answer to the alleged conduct of Mr Gilmour in which Sola-Kleen and Mr Armenti were allegedly involved.  No conflict of interest arises on the plaintiff’s part. 

Ability of plaintiff to indemnify the defendant

131               The plaintiff gave an undertaking as to damages in respect of any interlocutory injunction granted.  The plaintiff has also stated that if he is granted leave to commence a derivative action he will undertake to indemnify the defendant against any liability the defendant may incur as a result of any adverse costs orders made in the derivative action.

132               The plaintiff disclosed the following assets and liabilities:

(a)      $100,000 funds in bank;

(b)     a property in Dianella which may be valued at $450,000 - $500,000. The plaintiff is not the registered proprietor of any other land; and

(c)      outstanding liabilities of $100,000.

133               The defendant cites FWV Stanke Holdings Pty Ltd v O'Meara; von Stanke v O'Meara [2007] SASC 413 at [120], as authority for the proposition that the Court should conclude that it is not in the best interests of the defendant for the plaintiff to cause it to engage in litigation, without an assurance of the plaintiff's ability to meet the potential costs liability to the putative defendants in the event that the action failed. 

134               In FWV Stanke Holdings there was a finding of fact that the greater part of the assets of the applicant was not readily realisable and thereby available to meet, by way of indemnity, any adverse costs order against the company.  Further, the likely extent of the costs was the subject of evidence.  That is not the position here.  There is no reason to conclude that the applicant’s assets are or will not be readily realisable.  I do not know the likely extent of the costs of the foreshadowed action.  It would be surprising if they were greater than the net assets of the applicant which are in the order of between $450,000 to $500,000.

135               If leave were to be granted, the defendant submits that it should be made conditional upon:

(a)        the plaintiff producing clear, independent documented evidence of his financial position and his ability to indemnify the defendant;

(b)        the plaintiff paying into a trust account, to be held by the defendant, a sum sufficient to meet both the costs of the defendant in the Proposed Proceedings, and any costs that may be awarded against the defendant; and

(c)        the plaintiff undertaking not to seek any contribution or indemnity from the defendant should the Proposed Proceedings fail.

136               I am not persuaded that, if leave is granted, the first two conditions ought be imposed.

137               In Morningstar, Austin J at [51] stated:

In cases such as this, there is a balance to be struck between the prejudice that the company will suffer if claims are pressed unsuccessfully on its behalf and there is an adverse costs order, and the advantage that it will gain, indirectly for the benefit of its shareholders, if the claims are successful: see McLean v Lake Como Venture Pty Ltd [2004] 2 Qd R 280; [2003] QSC 562 at [7]. … it will often be appropriate for the court to address the question of costs in the event that the claims fail. A suitable way of doing so, addressed during the hearing of the present application, is to grant leave on terms that the applicant is responsible for the costs ordered against the company, and undertakes not to seek contribution or indemnity from the company.

138               In this case the necessary balance may be struck as it was in Morningstar by conditioning the grant of leave upon the plaintiff undertaking to the Court that he will:

            (1)        pay the defendant’s costs of prosecuting the action;

            (2)        indemnify the defendant against any adverse costs order in the foreshadowed litigation; and

            (3)        not claim contribution from the defendant in respect of any adverse costs order. 

139               I am satisfied that, subject to this protection against any adverse costs order, it is in the defendant’s best interests that leave be granted to the plaintiff to commence the proposed derivative action in the name of the defendant.

Serious question to be tried – s 237(2)(d) of the Act

140               I accept the defendant’s submission that in approaching the s 237(2)(d) question, the court must proceed as explained by Debelle J (with whom Sulan J and Vanstone J agreed) in Ragless v IPA Holdings Pty Ltd (in liq); Oates v Consolidated Capital Services Ltd (2008) 218 FLR 73 at [64], by identifying the legal or equitable rights to be determined at trial, in respect of which the final relief is sought: Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 cited in Goozee v Graphic World Group Holdings Pty Ltd at [34].

141               The application must be supported by evidence.  A mere “indication of the evidence” without actual evidence is insufficient: South Johnstone Mill Ltd v Dennis at [81]. 

142               The plaintiff bears the onus of providing sufficient material to enable the court to make this determination: Charlton v Baber (2003) 47 ACSR 31 at [55].  The defendant submits that the plaintiff has not discharged that onus.

143               The defendant claims that it has not been provided with sufficient particulars of the proposed claim and illustrates the point this way in respect of the challenged payments made by the defendant to Mr Philip George Reed:

(a)        the draft Statement of Claim states, at paragraph 7D, that the defendant paid consultant fees to Mr Reed during the period 1 July 2002 to 30 June 2007 in the total sum of not less than $124,800;

(b)        the Gorey Report, at paragraph 12(b), states that the defendant paid consultant's fees which included payments to Mr Reed of $600 per week or $31,200 per year (calculated to be $156,000 for the 5 year period from 1 July 2002 to 30 June 2007) and that the plaintiff advised Mr Gorey that Mr Reed was the quality assurance consultant for Sola-Kleen Pty Ltd; but

(c)        Mr Reed, in his unchallenged affidavit evidence paragraph 7 states that the total value of the services rendered by him to the defendant was only $4,451.50 (exclusive of GST).

144               The defendant submits that neither the plaintiff nor Mr Gorey have explained, or attempted to explain, how these differing amounts may be reconciled, or identified the evidence and documentation on which Mr Gorey relied to calculate the alleged payments to Mr Reed.

145               The defendant cites in support of its submissions on this point Charlton v Baber at [58]-[59], where the Court held that where pleadings simply stated amounts and did not explain why the amounts in question were alleged to be “excessive”, the Court had no material from which to draw even provisional conclusions on the question of whether there has been any misapplication of company funds, and hence whether there is a “serious question to be tried”.

146               The defendant submits that the Court must determine the facts so far as necessary in order to form a view as to whether there is a serious question to be tried: South Johnstone Mill Ltd v Dennis at [87].  It then submits that in order to determine the facts, it would be necessary for the Court to form a view on the reliability and cogency of the evidence of Mr Ruthven and Mr Gorey, respectively but that the recalcitrance of the plaintiff and Mr Gorey have made that task impossible.

147              However, the ascertainment of whether there is serious question to be tried does not require the Court to enter into the merits of the proposed derivative action to any great degree.  The plaintiff “has the same relatively low threshold to surmount as in the case of an application for an interlocutory injunction”: Swansson at 318-19 [25].  The Court does not make factual determinations going to the merits nor is it appropriate to reach any conclusion as to the strength of the arguments of the parties.  It is sufficient if there are serious issues to be tried: Cemcon, In the matter of Hall Concrete Constructions (Vic) Pty Ltd [2009] FCA 696 at [25].  

148               Here, there is no dispute that the expenses of which the plaintiff complains were incurred.  They are recorded in the defendant’s accounts: the defendant’s profit and loss statements for the years ended 30 June 2003 to 30 June 2007.  The question for ultimate determination will be whether they were incurred in breach of duty by Mr Gilmour with the knowing involvement by one means or another of Sola-Kleen and Mr Armenti.

149               The plaintiff has adduced the Gorey Report.  It constitutes expert evidence.  Mr Gorey is an experienced forensic accountant.  His report supports the plaintiff’s contention that each of the payments referred to in paras 7 to 9 of the draft statement of claim were unnecessarily incurred or were incurred in an excessive amount.    

150               No evidence has been adduced by the defendant challenging the plaintiff’s assertion that Mr Gilmour is responsible for the defendant making all of the payments set out in paras 7 to 9 of the draft statement of claim. Insofar as payments were made between April 2004 and 30 June 2007, Mr Gilmour was the sole director of the defendant.  Insofar as payments were made between 1 July 2003 and April 2004, the plaintiff’s uncontradicted evidence is that Mr Gilmour made decisions without reference to him. 

151               The defendant has not denied that, or adduced evidence contradicting the assertions that, the payments set out in paras 7 to 9 of the draft statement of claim were made, that they conferred benefits on Mr Gilmour or Sola-Kleen or, in the case of the debt factoring expenses, were required to be incurred because Mr Gilmour had caused the defendant’s cash to be used to pay expenses for the benefit of him and Sola-Kleen.  Rather, in Mr Gilmour’s case, it appears, is that all of these payments were justified.

152               As Mr Gilmour was the sole director of Sola-Kleen at all material times, if the allegations against him are made good then Sola-Kleen received the amount of all payments made to it, or received the benefit of all payments made in discharge of its expenses, with full knowledge of Mr Gilmour’s breach of duties.  Consequently, pursuant to s 79 of the Act, Sola-Kleen would have been involved in Mr Gilmour’s contraventions of ss 181 to 183 of the Act.  Sola-Kleen, in those circumstances, would also knowingly have received property consequent upon Mr Gilmour’s breaches of fiduciary duty and, accordingly, will be liable to pay equitable compensation to the defendant or to account to the defendant for its profits.

153               Mr Armenti during the relevant period was the defendant’s external accountant, had prepared the defendant’s accounts for each relevant year and calculated the amount of the management fees payable.  Mr Armenti was also Sola-Kleen’s accountant during the relevant period.  Arguably, Mr Armenti had knowledge of all of the circumstances constituting breaches of ss 181 to 183 of the Act by Mr Gilmour and was involved in those breaches.

154               To counter his conclusions that some expenses were overstated (in an amount exceeding $382,027), the Ruthven Report asserts that the amounts by which Mr Gilmour caused the defendant to pay overstated expenses were almost entirely offset by other expenses which were incurred by the defendant in an understated amount.  In particular, the Ruthven Report relies on the fact that the defendant did not pay management fees to Sola-Kleen for the years ended 30 June 2001 and 2002 in an amount the late Mr Ruthven calculated as totalling $338,452.  I have already stated that I place very little weight for present purposes on the Ruthven Report. 

155               Even if the Ruthven Report is correct, the fact that Sola-Kleen would have been entitled to charge management fees totalling that amount for those years is irrelevant.  The fact that Mr Gilmour did not cause the defendant to pay management fees to Sola-Kleen for the years ended 30 June 2001 and 2002 provides no defence to a claim that Mr Gilmour breached statutory and fiduciary duties owed to the defendant by causing it to pay inflated management fees (and other inflated expenses) to or for the benefit of himself or Sola-Kleen for the years ended 30 June 2003 to 2007. 

156               There is a cogent argument that these claims whether contractual or restitutionary are statute-barred because of the lapse of time.

157               I accept the plaintiff’s submission that the fundamental factual basis for the claim set out in the draft statement of claim is established by the plaintiff’s and Mr Gorey’s affidavits.  Both forensic accountants engaged by the plaintiff and the defendant, concluded that a number of expenses that Mr Gilmour caused the defendant to pay were inflated.  Mr Gorey also concludes that a number of expenses were not properly incurred by the defendant at all.

158               The apparent conflict between the allegations in the draft statement and the Gorey Report on the one hand, and the affidavit evidence of Mr Philip Reed, on the other cannot be presently reconciled.  It is, for obvious reasons, that on applications such as this, cross-examination on the merits of a proposed derivative action will usually be permitted only with leave.  Mr Reed’s evidence is only a part of the overall factual matrix which can be resolved in due course at trial. 

159               I am satisfied that the matters alleged in the draft statement of claim together with the evidence raise with sufficient particularity, for present purposes, serious issues to be tried.

Conclusion

160               For all these reasons I am satisfied that the five requirements under s 237(2) of the Act have been established.  I am obliged then to grant leave to the plaintiff to bring proceedings in the name of the defendant against Mr Gilmour, Mr Armenti and Sola-Kleen.  That grant will be conditioned by the plaintiff providing the undertakings to which I have referred. 

161               As to costs, the plaintiff sought orders in the application that the costs of the application be paid by Mr Gilmour, alternatively the defendant.  No submissions were put by the plaintiff on this question although the defendant in its written submissions sought to defer argument, reasonably in my view, pending the outcome of the leave question. 

162               I will invite the parties to agree the terms of a written undertaking by the plaintiff to the Court as well as the terms of the order granting leave and to bring in a minute.  I will hear the parties on the question of costs on a date to be fixed.

I certify that the preceding one hundred and sixty-two (162) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour.

Associate:

Dated:         21 July 2010