FEDERAL COURT OF AUSTRALIA

Cooper v Myrtace Consulting Pty Ltd [2014] FCA 480

THE COURT ORDERS THAT:

1.    The applicant’s application for leave to bring proceedings pursuant to s 237 of the Corporations Act 2001 (Cth) be dismissed.

2.    The applicant pay the respondent’s costs of the application.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

Introduction

1    Warwick Cooper, who holds one of the two issued shares in Myrtace Consulting Pty Ltd (“the company”), seeks leave under s 237 of the Corporations Act 2001 (Cth) (“the Act”) to commence a proceeding in the name of the company against Serge Ambrose, the other shareholder and the sole director of the company. Section 237(2) of the Act contains the criteria for the grant of leave and provides as follows:

(2)    The Court must grant the application if it is satisfied that:

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

(b)    the applicant is acting in good faith; and

(c)    it is in the best interests of the company that the applicant be granted leave; and

(d)    if the applicant is applying for leave to bring proceedings – there is a serious question to be tried; and

(e)    either:

(i)    at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or

(ii)    it is appropriate to grant leave even though subparagraph (i) is not satisfied.

2    Mr Cooper has standing to apply to the Court to bring proceedings on behalf of the company because he is a shareholder of the company: s 236(1)(a)(i) of the Act. If all five criteria in s 237 have been met, the Court is bound to grant the application: Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534; [2002] NSWSC 640 (“Gooze”) at [27]. Correlatively, the failure to satisfy any one of those criteria means that leave must be refused: Goozee at [27]; South Johnstone Mill Ltd v Dennis (2007) 163 FCR 343; [2007] FCA 1448 (“South Johnstone”) at [60]. Mr Cooper, as the applicant for leave, bears the onus of satisfying the Court on the balance of probabilities that each of the criteria has been satisfied: Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313; [2002] NSWSC 583 (“Swansson”) at [24]; South Johnstone at [61].

3    Contrary to the submission for Mr Cooper, whether leave should be granted is not a matter of discretion but a matter of satisfying the requirements of s 237 of the Act: Maher v Honeysett and Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 (“Maher”) at [12]. The Court does not have a residual discretion to grant leave, if any of the five criteria are not met.

Background to the proposed proceeding

4    The company was incorporated by Mr Ambrose in June 2007 with himself as its sole director and shareholder. In August 2007, Mr Ambrose transferred one of two issued shares to Mr Cooper and Messrs Ambrose and Cooper used the company as the vehicle through which they supplied their IT services to Canberra Data Centres Pty Ltd (“CDC”). The company also took a 5% shareholding interest in CDC.

5    Around December 2008, the relationship between Messrs Ambrose and Cooper broke down and the company ceased operating in July 2009.

6    In March 2012, CDC paid the company $1.2 million to buy back its shares (“the CDC proceeds”) and, in April 2012, the CDC proceeds were placed into a bank account in the name of the company. According to Mr Cooper, he and Mr Ambrose discussed how best to distribute the CDC proceeds and agreed that the best option was to wind the company up. The winding up of the company has not occurred however, nor has a distribution of the CDC proceeds otherwise been effected between the shareholders. Mr Ambrose does not dispute that they had discussions about winding up the company but he does dispute Mr Cooper’s claim that he (Mr Ambrose) agreed to the winding up of the company. Mr Ambrose’s evidence was that he was “happy to have [the] discussion” about winding up the company but that he never agreed to that step and that, ultimately, in late 2012 he decided not to wind up the company as further opportunities had emerged for it. Mr Ambrose also made the decision to appoint an independent non-executive director to the company, although that proposal did not eventually proceed.

7    The company’s bank statements record that between April 2012 and January 2013, multiple payments were made from the CDC proceeds to Mr Ambrose. It appears to be uncontroversial that Mr Ambrose has used the CDC proceeds to reimburse himself for business expenses that he incurred on the company’s behalf and to pay himself a salary which he claims he is entitled to be paid under the terms of an employment contract that he made with the company back in June 2007.

8    It also appears uncontroversial that Mr Ambrose had 11 additional shares in the company issued to himself in June 2009 and that Mr Ambrose purported to rely on an intellectual property licence agreement (that he also made with the company in June 2007) for his entitlement to the issue of the additional shares to him.

9    Mr Cooper deposed that he only learnt for the first time about the existence of both contracts and of the share issue in October 2012.

10    Both agreements are in evidence and are dated 28 June 2007.

11    The employment agreement relevantly provides:

(a)    for the employment of Mr Ambrose in the position of Chief Executive/Managing Director;

(b)    for Mr Ambrose to be paid a salary of $250,000 per annum plus superannuation;

(c)    that if the company did not, or was unable to, pay Mr Ambrose his salary in full in any year, that he would be entitled to one additional share in the company for any year or part thereof of service; and

(d)    that the company will reimburse him for all reasonable and legitimate business expenses.

12    The intellectual property licence agreement relevantly provides that:

(a)    the company will utilise Mr Ambrose’s experience;

(b)    the contract is a “perpetual contract” and “cannot be terminated”;

(c)    Mr Ambrose is entitled to one share per year for every 12 months of service; and

(d)    that the company would pay 90% of its annual profit as a licence fee.

13    The additional shares were cancelled in May 2013 pursuant to a shareholder’s resolution in March 2013 but a dispute remains over whether Mr Ambrose is entitled to the amounts paid as salary and reimbursement of expenses out of the CDC proceeds.

Proposed statement of claim

14    It is alleged that Mr Ambrose, in breach of his “fiduciary powers”:

(a)    purported to issue himself 11 $1.00 fully paid shares in the capital of the company for nominal consideration “so as to dilute [Mr] Cooper’s interest in [the company] and to [the] benefit of [Mr Ambrose]”;

(b)    in the period between 4 April 2012 and 2 January 2014, “misappropriated or applied” $1,013,901.74 of the CDC proceeds by causing payments to be made to himself in the amount of $859,276.69, to the company’s solicitor in the amount of $21,840.40, and to the company’s accountant in the amount of $132,864.65;

(c)    sought to have the company continue to trade rather than be voluntarily wound up “so as to attenuate and deny [Mr] Cooper’s interests in [the company] and to enable the CDC share sale proceeds to be further misappropriated or misapplied by or at the direction of [Mr Ambrose]; and

(d)    asserted a power, as the then majority shareholder, to appoint an independent non-executive chairman to the board “to clothe” his misconduct.

15    It is alleged that in the premises, Mr Ambrose is obliged to:

(a)    deliver to the company all share certificates, receipts and agreements relating to the share issue for their setting side and cancellation; and

(b)    account to the company for his management and control of the CDC shares sale proceeds.

16    Further, it is alleged that both the employment contract and the intellectual property licence agreement “are fictitious, uncertain and together constitute a sham” and that in breach of his fiduciary obligation to the company, Mr Ambrose signed the two documents and purported to bind the company to make the performances required under them “which were grossly and unreasonably beneficial to [Mr Ambrose] and highly prejudicial to the interests of [the company]”.

17    By the proposed claims, Mr Cooper seeks:

(a)    an order that Mr Ambrose account to the company for his dealings with the CDC share sale proceeds;

(b)    an order that Mr Ambrose pay to the company equitable compensation for the losses caused to the company in consequence of his abuse of power and/or breach of fiduciary duty;

(c)    declarations that the two agreements are, and were at all times, void, unenforceable and ineffective;

(d)    an order for the delivery up of originals of the two documents;

(e)    an order that all necessary enquiries be taken and made as to the acts done and payments made by Mr Ambrose on the company’s behalf in pursuance of the two documents;

(f)    interest;

(g)    costs assessed on an indemnity basis; and

(h)    such further or other order as the Court thinks appropriate.

Leave sought to bring an action on behalf of the company

Sub-section 237(2)(b) of the Act – whether the applicant is acting in good faith

18    Mr Cooper must show that he is acting in good faith in seeking to commence the proposed proceeding on behalf of the company. I am satisfied there is no real issue concerning this criterion, as Mr Cooper is a shareholder with a legitimate interest in the derivative action which, if successful, may result in the recovery of property which would increase the value of his shares: Swansson at [38], [41]. The evidence does not point to any collateral purpose on the part of Mr Cooper in bringing the action, nor was it suggested on behalf of Mr Ambrose that Mr Cooper may have a collateral purpose for the proposed proceeding.

Sub-section 237(2)(c) of the Act – whether it is in the best interests of the company that the applicant be granted leave

19    Mr Cooper must establish that the proposed proceeding is in the best interests of the company: Swansson at [55]. The phrase “best interests” is concerned with the company’s separate and independent welfare: Maher at [44]; Charlton v Baber (2003) 47 ACSR 31; [2003] NSWSC 745 at [52]; Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732; [2005] NSWSC 442 (“Fiduciary v Morningstar”) at [46].

20    It was submitted for Mr Cooper that the proposed proceeding is in the best interests of the company because it was “difficult to see that [the company] can fail”, so that the possibility of an adverse costs order against the company was “remote”. The proposition was put that the company “should be entitled… as a matter of course” to an accounting from Mr Ambrose as to the application of the CDC proceeds because Mr Ambrose, as a director, is an accounting party and holds a position akin to a trustee of a trust fund in relation to the CDC proceeds. The following passage from H A J Ford and W A Lee, Principles of the Law of Trusts (Thomson Lawbook Co, loose-leaf service, vol 2) at [17.1510] was cited in support:

All trustees are under a primary or “core” duty to keep and render accounts … and can be required to produce an account of what they have received and disbursed in the action for common account …

21    It was further submitted for Mr Cooper that if the company were unsuccessful, such an outcome ought to be accepted by the Court as the price for allowing a shareholder, through the company as the proper plaintiff, to bring proceedings to vindicate a prima facie case that there has been a misapplication of a substantial amount of money.

22    These submissions cannot be accepted for the following reasons.

23    First, the proposed cause of action is not pleaded as an action for account claiming, as against Mr Ambrose, the duty, as an accounting party, to account to the company in respect of the CDC proceeds: cf Peninsular and Oriental Steam Navigation Company v Johnson (1938) 60 CLR 189 at 218 per Latham CJ. The proposed cause of action is pleaded as an action against Mr Ambrose for breach of fiduciary duties owed to the company, the remedy for which may be an order that he must account to the company for any benefit or gain obtained or received by him by reason of his breach: cf Chan v Zacharia (1984) 154 CLR 178 at 199 per Deane J.

24    Secondly, in order to obtain such relief the company must establish that there has been a breach of fiduciary duty and I could not conclude, at this stage, that the company’s prospects of success on the claim are so strong that the possibility of a costs order against the company in favour of Mr Ambrose would be “remote”.

25    Thirdly, the considerations that bear upon whether the proposed proceeding is in the best interests of the company are broader than whether a prima facie case is demonstrated: Swansson at [55]-[60]. The Court must be satisfied that the proposed derivative action is in the company’s best interests, which is a higher threshold than that the proposed claim “may be”, “appears to be” or is “likely to be” in the best interests of the company: Swansson at [56].

26    That said, generally it is reasonable to expect that the pursuit of an action by or on behalf of a company against an officer for recovery of compensation for damage done to the company by the officer’s breach of duty is in “the best in the interests of the company”: MG Corrosion Consultants Pty Ltd v Vinciguerra (2011) 82 ACSR 367; [2011] FCAFC 31 at [60]. If successful, the relief to which the company would be entitled would be of benefit to it, if recoverable. It is therefore relevant for the Court to consider whether the action would be a fruitless exercise: Swansson at [60], [68].

27    Mr Ambrose claims that he would not have the ability to meet a substantial part of any judgment in favour of the company so, he contended, the action would not be of any practical benefit to the company. Mr Ambrose deposed that his net assets amount to about $165,000. Senior counsel for Mr Ambrose submitted, in reliance on the affidavit of Mr Boettcher, solicitor for the company, that the company would spend about $100,000 to $140,000 in defending the action were it to proceed to final hearing. It was further put that, if sued, Mr Ambrose would cross-claim for unpaid salary under his employment agreement which, according to the company’s financial statements, stood at about $750,000 as at June 2013 when, as at June 2013, the company’s net assets were only $298,058.95. Accordingly, it was submitted, if Mr Ambrose should win on his cross-claim, the company would become insolvent. Therefore it was put that whether the company wins or loses, the proposed derivative action would not “positively serve [its] ‘best interests’”: Carpenter v Pioneer Park Pty Ltd (2004) 211 ALR 457; [2004] NSWSC 1007 at [19].

28    I am not satisfied on the basis of the evidence that Mr Ambrose has put before the Court about his financial position that he would not have the ability to meet an order against him. Mr Ambrose’s evidence was not supported by any documents, accounting records or other material and was nothing more than assertion. Moreover, not only did the evidence not disclose anything about his income position, further and tellingly his evidence can readily be shown to be wrong. Mr Ambrose’s statement of assets notably omitted the share that he holds in the company without any explanation provided as to why that was so. I do not, accordingly, regard his evidence about his financial position as reliable and reject his claim that he would not have the ability to meet a substantial part of any judgment.

29    Another of the issues for the Court to consider in determining whether the proposed action is in the best interests of the company is whether the company would be prejudiced by being exposed to the costs and expenses of litigation and the risk of an adverse costs order. The grant of leave has often been made conditional upon the applicant for leave indemnifying the company for its costs of the proceeding and any adverse costs order against the company arising out of the proceeding. The case law emphasises the importance of such an indemnity as a means of addressing the risk of prejudice to the company from the commencement of the proceedings: Power v Ekstein (2010) 77 ACSR 302; [2010] NSWSC 137 at [108]; Fiduciary v Morningstar at [51]; South Johnstone at [69], [72]-[73]; Wood v Links Golf Tasmania Pty Ltd (No 2) [2013] FCA 14 at [31]; Gaertner v Dharah Gibinj Aboriginal Medical Service Aboriginal Corp [2013] FCA 1330 at [53]; Robash Pty Ltd v Gladstone Pacific Nickel Pty Ltd (2011) 86 ACSR 432; [2011] NSWSC 1235 at [57]; In the matter of Fishinthenet Investments Pty Ltd and Coastal Waters Seafood Pty Ltd [2014] NSWSC 260 at [30]-[31].

30    Mr Cooper has deposed that he will indemnify the company for the costs in prosecuting the proceeding and for any adverse costs order but he has also frankly admitted that he does not have the financial capacity to meet those costs and that his only “real” asset is his share in the company. It was contended for Mr Cooper that his inability to indemnify the company for its costs should not be determinative of the application against him and should be weighed in the balance with the factor that it would otherwise be in the interests of the company to permit Mr Cooper to bring an action in its name against Mr Ambrose to recoup the loss caused to the company by Mr Ambrose, as sole director, misappropriating the company’s funds in breach of fiduciary duty. It was also submitted that real injustice will be done to Mr Cooper if leave is not given because he is a 50% shareholder with an interest in a fund that is entirely out of his control and which Mr Ambrose is diminishing by paying himself salary to which he is not entitled.

31    It was argued for Mr Ambrose that Mr Cooper’s inability to indemnify the company for its costs should be determinative against the grant of leave because of the risks to which the company would be exposed without appropriate indemnification. It was also submitted that there is a clear prospect of the company losing the proceeding.

32    In my opinion Mr Cooper’s inability to indemnify the company in relation to costs poses a significant difficulty for him in satisfying this criterion because if the derivative action were ultimately to fail, the company would be exposed to an adverse costs order for which Mr Cooper could not bear responsibility. I am not satisfied that it is in the best interests of the company to permit Mr Cooper to bring the proceedings on its behalf, without Mr Cooper bearing the risk that the proceeding may be unsuccessful. The risk of failure of the claims should not have to be borne by the company but rather by Mr Cooper who advances them and given that the evidence before this Court is that Mr Cooper does not have the capacity to meet an adverse costs order against the company, it is not in the best interests of the company to expose the company to the risk of a substantial costs order against it.

33    Furthermore, I am not persuaded that granting leave to Mr Cooper to bring a derivative action is the only mechanism through which Mr Cooper is able to pursue some remedy against Mr Ambrose in relation to his conduct of the affairs of the company as its sole director. The allegations could, in one form or another, be raised by Mr Cooper in an application brought under s 232 of the Act his capacity as a shareholder on the grounds that such conduct is oppressive to, unfairly prejudicial to, or unfairly discriminatory against him. Such matters, particularly given the deadlock between the two shareholders, might also properly form the subject of an application by Mr Cooper to wind up the company on the just and equitable ground pursuant to s 461(1)(k) of the Act. If the company were wound up, a liquidator would be able to investigate and, if appropriate, pursue any remedies that the company may have against Mr Ambrose in all of the circumstances.

34    In the circumstances, I am not satisfied that it is in the best interests of the company that Mr Cooper be granted leave. This conclusion is sufficient reason to dismiss the application. I should, however, address the remaining criterion for the sake of completeness.

Sub-section 237(2)(d) – whether there is a serious question to be tried

35    It is settled law that the “serious question to be tried” test is the test referred to by the High Court in Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 when seeking a grant of an interlocutory injunction – that is, the applicant must demonstrate a prima facie case, which “did not mean that the [applicant] must show that it is more probable than not that at trial the [applicant] will succeed; it is sufficient that the [applicant] show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial”: at [65] per Gummow and Hayne JJ and at [19] per Gleeson CJ and Crennan J, referring to the principles enunciated by the High Court in Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 at 622-623; Swansson at [25]; South Johnstone at [78]-[79].

36    Senior counsel for Mr Ambrose accepted that there is a serious question to be tried on the claims made with respect to the two agreements, but not on the other claims.

37    There is, in my view, a serious question to be tried on the claim that Mr Ambrose misappropriated CDC proceeds by the payments that he made to himself by way of salary, though there are drafting deficiencies which would need to be rectified if leave were to be granted. An evidentiary basis for that claim has been made out sufficient to show an arguable case that is not gainsaid by the affidavit that Mr Ambrose made in rebuttal, relying on the employment agreement as the source of his entitlement to the moneys. Furthermore, as it is accepted that there is a serious question to be tried as to whether that agreement is a sham, the fact of the employment agreement does not, therefore, provide a complete answer to the misappropriation claim.

38    There is also in my view a serious question to be tried on the claim that Mr Ambrose breached his fiduciary duties by issuing himself 11 shares in 2009. As a proposition of law, where the purpose of an issue of shares is to make a shareholder’s interest valueless and there is no demonstrable benefit to the company, the issue will constitute a breach of fiduciary duty: Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478 at 492-494 per Kirby ACJ (with whom Priestley and Handley JJA agreed). The evidence discloses that Mr Ambrose purports to have relied on the intellectual property licence agreement to issue the shares to himself but unexplained is why 11 shares were issued when his entitlement was to one share per year for every 12 months of service (which was then at most two years). Thus reliance on the intellectual property licence agreement does not provide a complete answer. Moreover, this claim is intertwined with the question as to whether that agreement is also a sham.

39    I also consider that there is a serious question to be tried on the claim that Mr Ambrose breached his fiduciary duties by having the company continuing to trade rather than to be wound up. Viewed in context of the overall claims, it is open on the evidence to infer some improper purpose behind the decision, notwithstanding Mr Ambrose’s evidence that the company had a six month contract from March to October 2013 for which it was paid about $185,000.00.

40    I do not consider that there is a serious question to be tried on the other claims.

41    The pleadings do not disclose the basis of the claims of misappropriation relating to the payments made to the company’s accountant and solicitor and in oral submissions counsel for Mr Cooper acknowledged that some of the amounts paid to them were legitimate expenses of the company. However, counsel indicated that it was sought to challenge the brokerage fee paid to the accountant for acting for the company on the sale of the CDC shares when the deal was arranged by another broker who was paid significantly less, and that it was also sought to challenge some of the legal fees paid to the solicitor on the basis of claims of furthering an improper purpose by his “conduct in stonewalling and refusing information” requested by Mr Cooper concerning the affairs of the company. Apart from the pleading issues, a proper evidentiary basis for the claims is not made out in light of the affidavits sworn by the accountant and the solicitor deposing as to the services they each provided and the basis of their fee entitlements.

42    With respect to the claim that Mr Ambrose breached his fiduciary duties by asserting a power to appoint an independent non-executive chairman to the board, the evidence does not support a claim that the power was sought to be exercised for the purpose of clothing Mr Ambrose’s misconduct “with an aura of legitimacy”, as alleged. Nothing in the evidence indicates that Mr Ambrose’s intention was to appoint a puppet director. Further, and in any event, the evidence was that the appointment did not proceed because Mr Cooper objected to it and, accordingly, there would be no practical benefit to the company in making this claim.

Other criteria - sub-sections 237(2)(a) and (e)

43    Mr Cooper gave notice to the company on 2 September 2013 of his intention to apply to the Court for leave to proceed in the name of the company and of the reasons for so applying. I am also satisfied that it is probable that the company will not itself bring proceedings or properly take responsibility for them, or for the steps in them.

Other matters

44    At the outset it was submitted for Mr Cooper that there were some matters, including those termed “rule of law” matters, which dictated the outcome that leave should be granted. It was submitted that company directors are subject to important common law, equitable and statutory duties and there was evidence that the company had not lodged income tax returns, did not keep written financial records in compliance with s 286 of the Act and had failed to produce any regulatory documents, such as tax file declarations for company employees or evidence indicating compliance with its superannuation or PAYG obligations, when requested. In these circumstances, it was submitted, there was clear evidence the company, under the sole directorship of Mr Ambrose, had miscarried and that Mr Ambrose should not be able to rely upon the corporate form to avoid scrutiny over his actions as director. There is, however, no pleading or claim based upon these matters and the Court has no discretion to consider such matters as a basis for justifying a grant of leave in circumstances where the Court is not otherwise satisfied that the criteria in s 237 of the Act are met.

Conclusion

45    As Mr Cooper has not discharged the burden of satisfying all five criteria in s 237 in relation to the proposed claims, notably the criterion in s 237(2)(c), the application must be dismissed.

46    The orders will be:

1.    The applicant’s application for leave to bring proceedings pursuant to s 237 of the Corporations Act 2001 (Cth) be dismissed.

2.    The applicant pay the respondent’s costs of the application.

Associate:

Dated:    14 May 2014