FEDERAL COURT OF AUSTRALIA

Drew v Lynch, in the matter of Mirage 3.4D Pty Limited [2019] FCA 632

ORDERS

THE COURT ORDERS THAT:

1.    Within seven days of the date of this order, the parties file a short minute of orders to give effect to these reasons.

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

REASONS FOR JUDGMENT

GLEESON J:

1    The plaintiffs, Douglas Drew and Rhett Drew, seek leave pursuant to s 237 of the Corporations Act 2001 (Cth) (Act) to bring proceedings on behalf of the third defendant (company) against the first defendant (Ms Lynch), the second defendant (Dr Patrick) and the fourth defendant (Mary Invents).

2    The s 237 application is made in proceedings in which the plaintiffs currently seek relief against Ms Lynch and Dr Patrick for oppressive conduct in relation to the affairs of the company (oppression suit).

3    A draft statement of claim, annexed to the affidavit of Rhett Drew sworn on 1 April 2019, envisages that the claims made on behalf of the company will be pursued in the oppression suit proceeding. Except to the extent that it makes allegations or claims referable only to the oppression suit, the draft statement of claim sets out the proceeding which the plaintiffs seek leave to bring (proposed derivative action).

4    The defendants opposed the application, relying on an affidavit of Dr Patrick sworn on 1 April 2019.

5    The defendants contended that the Court could not be satisfied that the grant of leave to proceed is in the best interests of the company for two main reasons:

(1)    the plaintiffs’ “end game” is to enable the “Mirage 3.4D technology”, which the plaintiffs contend is owned by the company, to be used for the benefit of JanusKS Pty Ltd (JanusKS), a company associated with the plaintiffs (this is a goal to which Ms Lynch and Dr Patrick are opposed); and

(2)    there is an underlying relationship breakdown between Rhett Drew and Ms Lynch, by reason of which the company cannot develop the “Mirage 3.4D technology” even if it is an asset of the company because, I should infer, Ms Lynch will be unwilling to work for the company while Rhett Drew is involved in the company.

6    For the reasons that follow, I have concluded that the plaintiffs are entitled to be granted leave to bring the proposed derivative action. I will make orders to enable to the proposed action to be brought in this proceeding, or to commence a fresh proceeding to be consolidated with or heard together with this proceeding. I will direct the parties to confer and submit orders to give effect to these reasons.

Background facts

Relevant entities

7    The following facts are established to a prima facie level, principally by the evidence given by Rhett Drew in support of the application.

Company

8    The company was registered as a company on 11 December 2012. Ms Lynch has been a director of the company since its registration. Dr Patrick has been a director since 11 April 2017.

9    Rhett Drew is a former director of the company, having held that position from 11 December 2012 until 8 June 2017.

10    The company was incorporated to raise seed capital for the purpose of creating and promoting a software application, proposed by Ms Lynch and Helena Psotova, which could reproduce the 3D properties of a mirror on a computer screen or television (mirror idea).

11    The initial directors of the company were Rhett Drew, Ms Lynch, Ms Psotova and Ian Mutton, a lawyer.

12    On incorporation, the company had an issued share capital of 100,000 ordinary shares. The founding shareholders and their respective shareholdings were:

(1)    Ms Lynch    25,000 shares

(2)    Ms Psotova    25,000 shares

(3)    Rhett and Irene Drew    20,000 shares

(4)    Douglas Drew    20,000 shares

(5)    Crafters Pty Ltd (a company associated with Mr Mutton)     3,334 shares

(6)    Niente Qui Pty Ltd     3,333 shares

(7)    Strategy Matters International Pty Ltd    3,333 shares

13    Currently, there are 8,191,200 issued shares in the company. The claims for relief in the oppression suit include orders that a resolution of the company, made on or about 13 September 2018, whereby the company resolved to issue 8,000,000 shares, be set aside and for rectification of the company’s register.

14    There are 13 current shareholders in the company, including:

(1)    Douglas Drew, who still holds 20,000 shares;

(2)    Rhett Drew and Irene Drew, who now jointly hold 25,000 shares;

(3)    Dr Patrick, who holds 7,034,200 shares;

(4)    Ms Lynch, who now holds 1,050,000 shares; and

(5)    Ms Psotova, who still holds 25,000 shares.

Ms Lynch and related entities

15    Ms Lynch is a software engineer. Rhett Drew described her software engineering skills as “brilliant”.

16    She is the former partner of Ms Psotova.

17    Mary Invents was registered as a company on 19 June 2018. The directors of Mary Invents are Ms Lynch and Joy Goldfeder, Ms Lynch’s sister. The issued share capital of Mary Invents comprises 4,900 Class G shares and 5,100 ordinary shares. Mary Invents is a wholly owned subsidiary of Maryanne Lynch Pty Ltd.

18    Maryanne Lynch Pty Ltd was also registered as a company on 19 June 2018. The directors of this company are also Ms Lynch and Ms Goldfeder. The issued share capital comprises 49 Class G shares, owned by Ms Goldfeder, and 51 ordinary shares, owned by Ms Lynch.

19    The Smart Boat Company Pty Ltd (SBC) was registered as a company on 18 October 2017. Its current directors are Ms Lynch and Dr Patrick. On about 20 February 2018, the company acquired 100% of the issued shares in SBC. Mary Invents now owns 100% of the issued share capital in SBC.

Drew family and JanusKS

20    Douglas Drew is Rhett Drew’s son.

21    Rhett Drew is the managing director of JanusKS.

22    JanusKS was registered as a company on 14 August 2017. The current directors of the company are the plaintiffs and Paul Schumann. The plaintiffs have been directors of the company since its registration. Colin Watts, another software engineer, was also a director of the company from its registration until 12 January 2018. JanusKS currently has six shareholders, including each of the plaintiffs and Julia Drew. In cross-examination, Rhett Drew agreed that the Drew family had contributed about $280,000 in capital to JanusKS.

23    JanusKS is another software development company, although there is a dispute between the parties as to whether its interests are in competition with the interests of the company. In particular, Dr Patrick’s affidavit evidence was that, by 31 May 2018, it was clear in his mind that he would not invest in any company that would “allow the technology to go over to JanusKS” because it was “not the best path forward” for the company.

Chronological facts

24    At a meeting of the company’s directors on 4 January 2013, Ms Lynch was appointed as the managing director of the company.

25    In about March 2013, the company issued 9,500 ordinary shares at a value of $2.00 each, raising initial capital of $19,000. Dr Patrick acquired 2,500 shares in the company around this time. His evidence is that he made an investment of $5,000 in December 2012 in respect of which he was issued 2,500 shares. It is unnecessary to resolve any material inconsistency in the evidence on this point for the purpose of deciding the s 237 application. Another seven entities and individuals acquired the other 7,000 shares, including individuals apparently related to Ms Lynch.

26    Between December 2012 and late 2016, Ms Lynch and Ms Psotova worked together on behalf of the company to develop the mirror idea and the initial capital of $19,000 was used for that purpose.

Late 2016

27    In late 2016, following communications between Rhett Drew and Dr Patrick, Mr Watts was engaged (apparently by the company) to report on the potential of technologies then being developed by the company.

28    Dr Patrick’s evidence was that, when he arranged to engage Mr Watts, Rhett Drew asked Dr Patrick to pay $11,000 for Mr Watts’ report.

29    The defendants allege that Rhett Drew did not consult Ms Lynch about the appointment of Mr Watts and note that Ms Lynch was not sent a copy of Mr Watts’ curriculum vitae in an email sent to Mr Mutton and Ms Psotova. The email from Rhett Drew, dated 3 December 2016, suggests that Rhett Drew asked the recipients not to tell Ms Lynch about a meeting with Mr Watts.

February 2017

30    On 23 February 2017, there was an exchange of emails between Rhett Drew and Ms Lynch concerning the issue of additional shares in the company, totalling 57,500 new shares (of which 25,000 were to be issued to Ms Lynch, 15,000 were to be issued to Ms Psotova, 5,000 to Rhett Drew, 5,000 to Mr Mutton and 7,500 to Dr Patrick) on the following three conditions:

1.    Issue is in full settlement of all expenses, remuneration or any other claim to date.

2.    No other parties to participate.

3.    Subject to the receipt of the first payment of funds from Jim Patrick after the date of this email.

31    On the face of the emails, it appears that Ms Lynch agreed to those conditions.

32    Rhett Drew claims that the shares were issued at a value of $2.00 per share.

33    In February 2017, Mr Watts delivered a report entitled “Mirage 3.4D Diligence Report” dated 27 February 2017, which considered three products identified as “X”, “Y” and “Z”. Rhett Drew’s unchallenged affidavit evidence was that, in his report, Mr Watts outlined two areas that could potentially be patented, being:

(1)    “image depth enhancement technology”, later described as “camera projection technique system and method”; and

(2)    the “X Platform operating system”, later described as “semantic multidimensional coordinate system for software object models”.

34    According to Rhett Drew, the former technology is a new technique for capturing images from a camera and projecting those images with depth of field.

35    In his report, Mr Watts referred to product “X” as having been conceptualised and developed by Ms Lynch over the previous four years with the company.

March 2017: Patrick share purchase agreement and Dr Patrick’s alleged part performance

36    On about 21 March 2017, Dr Patrick applied for 20,000 shares in the company. The application form, signed by Dr Patrick, records the following:

Terms of issue

1.    Mirage 3.4D offers to place with you 20,000 shares at $12.50 each for a total consideration of $250,000 to fund Stage 1.

2.    You agree to subscribe $250,000 to fund Stage 2 (as per the Expenditure Model) upon agreed completion of Stage 1 for an additional 20,000 shares.

3.    Mirage also confirms that an invitation for you to join the Board and have oversight over expenditure.

4.    Mirage also confirms that you have not agreed to any further investment beyond funding Stage 2.

37    The plaintiffs allege that this document evidences an agreement between Dr Patrick and the company that Dr Patrick would invest a further $500,000 in the company by subscribing for 40,000 shares in the company in two stages (Patrick share purchase agreement), namely:

(1)    stage 1, where the company would issue to Dr Patrick 20,000 shares for an investment of $250,000, which was to be used to fund the investigation into, preparation and lodging of patent applications including legal, planning and in-house costs; and

(2)    stage 2, where the company would issue to Dr Patrick 20,000 shares for a further investment of $250,000, to fund completion of the software development of the company’s technologies in preparation for licencing.

38    There is a dispute between the parties as to whether “agreed completion of Stage 1” has occurred.

39    However, on about 28 March 2017, the company issued and allotted to Dr Patrick 20,000 ordinary shares and in return, Dr Patrick paid the sum of $250,000 to the company.

40    In cross-examination, Dr Patrick agreed that since March 2017, he has made further payments to the company but disputes that they were made in performance of the share purchase agreement. The plaintiffs allege that Dr Patrick ultimately paid $97,489.14 to the company, and that these payments were in performance of Dr Patrick’s obligations under the share purchase agreement in relation to “Stage 2”. The plaintiffs allege that as at 11 June 2018 and at all material times thereafter, Dr Patrick had a continuing obligation pursuant to the agreement to pay a further $152,510.86 to the company.

April 2017

41    On about 7 April 2017, Fencl Pty Ltd, a company associated with Ms Psotova, was issued 15,000 shares in the company at a price of $2.00 per share.

42    There is a dispute between the parties about whether that share issue was pursuant to the share issue referred to in the 23 February 2017 email exchange and, perhaps, whether the difference between the share price and the price of $12.50 agreed with Dr Patrick reflects some wrong done to Dr Patrick.

43    On about 11 April 2017, Dr Patrick was appointed as a director of the company.

May and June 2017

44    On about 30 May 2017, apparently following a dispute between Ms Lynch and Ms Psotova, Ms Psotova resigned as a director of the company.

45    On 8 June 2017, Rhett Drew also resigned as a director of the company. The defendants submitted that it ought not to be in contest that the relationship between Rhett Drew and Ms Lynch had broken down. The evidence on the application suggests that, around the time of Rhett Drew’s resignation, Ms Lynch had expressed both a belief that Mr Watts used the company’s confidential information in connection with his February 2017 report, and a lack of trust in Rhett Drew “because he wants my inventions for his other company, JanusKS Pty Limited”.

46    An email exchange between Rhett Drew and Dr Patrick dated 9 June 2017 records that, among other things:

(1)    Mr Watts refuted an allegation that he had stolen Ms Lynch’s ideas; and

(2)    that there was a “Mirage-Janus co development proposal”, following a suggestion by Mr Watts that he would like to “re-write his Janus prototype using X when it was available”.

47    The defendants noted that, in his November 2018 affidavit, Rhett Drew said (at 76):

After I resigned [as a director of the company], I contacted Ian Mutton and [Dr Patrick] by telephone and outlined my reasons for resigning. I also suggested that Colin Watts could take control of the project.

48    Apparently in accordance with this suggestion, on 20 June 2017, Mr Watts emailed a proposal for “Mirage Implementation” to Dr Patrick and Rhett Drew. Mr Watts described the proposal as “based on using Janus as the commercial target”. Rhett Drew said that he asked Mr Watts to prepare the proposal for Dr Patrick’s evaluation.

49    The proposal was entitled “Janus/Mirage”. In the introduction, the proposal is described as a “technical note” that “overviews a strategy which supports both the development of Mirage technologies to MVP (Minimal Viable Product) and the necessary synchronisation with Janus development”.

50    Within a few hours, Dr Patrick replied to Mr Watts saying:

Your review of management techniques is certainly relevant to this project, but while your advice is very helpful I think that the control of Mirage activities must remain in Mirage hands.

…

One other topic that must be agreed up front is the licencing arrangement. Please share your thoughts here.

I would like feedback from the Mirage team before we move forward. Are you comfortable if I copy them with your email (below)?

51    In his return, Mr Watts replied promptly saying:

I think there is a misunderstanding. My note is not a proposal to take over the project. But rather a shape & structure for Mirage execution. I would expect that all involved are employed by Mirage as contractors (me included). My role (if any) would be to act in the project management role (as a contractor). For Janus to proceed it would need a license in perpetuity and access to the code if Mirage fails.

Please feel free to circulate my note within Mirage.

52    In cross-examination, Dr Patrick stated that his understanding of the proposal was that it would subordinate Mirage’s interests to JanusKS. It is not obvious that this understanding is accurate, but that is not a fact to be determined on the s 237 application.

October 2017

53    On 24 October 2017, Ms Lynch wrote separately to Douglas Drew and Ms Psotova, stating that the share price for the company had doubled that day to $25 per share. Ms Lynch also wrote to Ms Psotova stating: “Today, Mirage is buying a boat from a film director, then he buys shares from us with the money we gave him. I get the boat for free and get a film director.”

54    It is not clear what event caused Ms Lynch to say that the value of the company’s shares had increased to $25.

55    However, there is evidence suggesting that, on 30 October 2017, the company paid $24,900 in relation to the purchase of a boat.

56    Rhett Drew’s affidavit evidence is that on or around 16 November 2017, the company paid $2,500 to Chris Malone to purchase 100 shares in SBC.

57    In December 2017, Ms Lynch wrote that “Mirage/SmartBoatCo has a boat berthed next to the Sydney to Hobart yachts”.

December 2017

58    On about 11 December 2017, Ms Lynch again wrote to Ms Psotova concerning the value of the company in the following terms (errors in original):

We’re millionaires this Christmas. The company is worth just over $5m, so it’s a average of 1m/year for that.

The share value will rise shortly because of the patent stuff too.

We might get a second mil for Christmas if we’re lucky.

59    On around 22 December 2017, a provisional patent application for a patent covering a “camera projection technique system and method” (“first patent application”) was lodged with IP Australia. As initially lodged, the owner was identified as the company.

60    The same day, Ms Lynch wrote to Douglas Drew as follows: “We filed a patent today and doubled the share price for the next capital raising in jan [sic]. I think that gives you mill for Christmas ”.

61    In early 2018, Mr Watts died.

May 2018

62    On about 18 May 2018, a provisional application for a patent covering a “Semantic multidimensional coordinate system with software object models” (second patent application) was lodged with IP Australia. As with the first patent application, the original owner was identified as the company.

63    The plaintiffs allege that, at the time of the lodging of the first and the second patent applications and at all material times thereafter, the intellectual property the subject of those applications was the property of the company.

64    On or about 24 May 2018, Mr Mutton resigned as a director of the company.

65    Following Mr Mutton’s resignation, the remaining directors of the company were Ms Lynch and Dr Patrick who, at that time (and with members of Ms Lynch’s family), collectively held 84,200 of the total shares issued by the company, representing 44% of the total issued share capital.

66    At around this time, Ms Lynch wrote to Douglas Drew as follows: “We rolled Ian (finally) and Mirage is joining the bionic eye project to cure blindness. The other patent is going to MSFT.”

67    The plaintiffs believe that the “bionic eye” project is a project of IBionics Inc, a company of which Dr Patrick is a director and that “MSFT” refers to Microsoft.

68    Also, around May 2018, JanusKS was involved in a software project working with Rising Sun Pictures Ltd, a visual effects film company, to install an “Intelligent Decision Support System”. JanusKS was bidding on projects that could benefit from a “Rapid Development” software tool kit. Rhett Drew believed that the company’s technology could be of use to JanusKS for its project with Rising Sun Pictures.

69    Accordingly, on about 28 May 2018, Rhett Drew contacted Dr Patrick to discuss the possibility of JanusKS acquiring a licence to use the company’s “Platform X technology”. Dr Patrick asked whether JanusKS would be prepared to pay for a licence. By email dated 29 May 2018, Rhett Drew (as chief executive officer of JanusKS) said, relevantly:

I would like to re visit the possibility of using Mirage in our RSP Project. Paul Schumann below has set out some early thoughts for my (and your) consideration.

Doug Drew and I are substantial shareholders in Mirage and I have spoken with Helena and she supports this approach. Mirage could benefit from the RSP Project, being an opportunity to turn Alpha/Beta code into a Production version in a “live” development product.

I fully understand that this approach may be unacceptable to some. However, this is an opportunity for all to “move on” and benefit both companies.

70    Dr Patrick forwarded Rhett Drew’s email to Ms Lynch, apparently for discussion the following day.

71    On or about 30 May 2018, Ms Lynch and Dr Patrick caused the company to apply to IP Australia to change the name of the applicant in respect of the two patent applications from the company to Ms Lynch. On or about 4 June 2018, the patent applications were amended to name Ms Lynch as the applicant to each of those applications in place of the company.

72    The plaintiffs allege that the company received no, or inadequate, consideration for these changes and that they constituted breaches of Ms Lynch’s and Dr Patrick’s statutory and general law duties to the company.

73    There is a minute of a meeting of Ms Lynch and Dr Patrick as directors of the company on 31 May 2018. According to the minute, the directors resolved that the company had not completed stage 1. The minute also states:

Based on the evidence of stage 1 not being completed, the directors passed the following resolutions:

○    The company has no income or cash on hand and in order to avoid insolvent trading, the Directors resolved to cease trading.

○    The Directors resolved to notify members of cease to trade.

○    The directors resolved to accept Maryanne Lynch’s invoice of $376,500 as a creditor to the company, for activities conducted between June 2013-9th November 2016.

○    The directors resolved to loan $25,000 to the company to pay external creditors.

○    The directors resolved to:

▪    Transfer the two patents fillings (2017905170 and 2018901747) to Maryanne Lynch in consideration of the company, Mirage 3.4D Pty Ltd, not being able to pay her invoice, and her agreeing not to take any action for payment. This decision was also made with the consideration the company had no formal contract with Maryanne Lynch.

▪    Return ownership of the Smart Boat Company to Maryanne Lynch for the sum of $1.

▪    Loan Maryanne Lynch non-current assets of the company, including the marine vessel.

○    Furthermore, the directors resolved to audit the company’s accounting books, articles of the company and intellectual property breaches. The directors are undertaking these actions to ensure they are acting in the best interest of the company and fulfilling their duties whilst winding up operations.

○    During the audits and wind up process, both directors, Maryanne Lynch and James Patrick, will rely upon the “Business judgment rule” and on “reasonable reliance on information or professional or expert advice provided by others” to ensure all decisions are in the best interest of the company.

June 2018

74    On 2 June 2018, Rhett Drew sent an email to Dr Patrick saying relevantly: “On reflection … yes … Janus would be willing [to] purchase a licence for Mirage’s X&Z software if the software was production ready.”

75    Dr Patrick also forwarded this email to Ms Lynch. In response, Ms Lynch said, among other things, that Rhett Drew had shown himself to be untrustworthy and she did not see any need to work with him again.

76    Subsequently, by letter dated 8 June 2018, Rankin Ellison lawyers wrote to Rhett and Irene Drew as follows:

We act for Mirage 3.4D Pty Ltd.

According to our instructions you are a shareholder in that company.

As at Friday 1 June 2018 the company was in the following situation:

1.    It has no assets and current liabilities have been discharged from cash at the bank.

2.    The company has no income or cash on hand and in order to avoid insolvent trading, the Directors have resolved to cease trading.

All further correspondence should be directed to this firm and not to any other shareholder or director of the company.

77    The plaintiffs allege that, contrary to the Rankin Ellison letter, the company had substantial assets as at 1 June 2018, including:

(1)    a credit balance of $18,672 in its bank account from which it was paying Ms Lynch’s rent and salary, Ms Goldfeder’s salary and Shelston IP’s accounts;

(2)    its rights under the Patrick share purchase agreement;

(3)    the intellectual property rights the subject of the two patent applications;

(4)    a contingent right to be paid an R&D grant from the Australian Tax Office;

(5)    the boat purchased in October 2017; and

(6)    100% of the shares in SBC.

78    In support of this allegation, the plaintiffs noted that on 28 June 2018, Dr Patrick wrote to Shelston IP as follows:

Please use this email as confirmation that the Mirage 3.4D Board of Directors acknowledge and confirm that patent applications 2018901747 and 2017905170 have been assigned to Maryanne Lynch.

79    Further, there is a document entitled “Confirmation of Assignment of Patent Rights” dated 13 August 2018 and signed by Ms Lynch and Dr Patrick which recites, relevantly, that the company “is the owner of certain patent applications and patents”, identified as Australian Provisional Patents 2017905170 and 2018901747. However, the assignment referred to in the document is expressed to have taken effect on and from 30 May 2018.

August 2018

80    On 3 August 2018, the company received an R&D grant payment of $42,045.30 from the ATO for the year ending 30 June 2018.

81    On 21 August 2018, the company paid the sum of $5,500.00 to Glasshouse Advisory, which the plaintiffs allege is affiliated with Shelston IP, and which they allege was as a fee for advising on the lodgement of the company’s R&D grant.

82    On about 27 August 2018, Rhett and Irene Drew requisitioned a general meeting of the company pursuant to s 249D of the Act and proposed resolutions to be moved at the general meeting that Ms Lynch and Dr Patrick be removed as directors of the company with Mr Mutton, Douglas Drew and Rhett Drew to be appointed as directors in their place.

September 2018

83    On 14 September 2018, the company circulated a notice of general meeting for a meeting to be held on 26 October 2018.

84    On about 13 or 14 September 2018, Ms Lynch and Dr Patrick caused the company to issue a total of 8,000,000 shares to themselves at $0.01 each, namely:

(1)    7,000,000 shares allotted to Dr Patrick at a subscription value of $70,000; and

(2)    1,000,000 shares allotted to Ms Lynch at a subscription value of $10,000.

85    The plaintiffs allege that the share issue and subsequent allotment of shares to Ms Lynch and Dr Patrick:

(1)    contravened clause 10.4 of the company’s constitution;

(2)    was issued for no, or inadequate consideration; and

(3)    was not in the interests of the company as a whole, but for an improper purpose, namely, to dilute the value of the plaintiffs’ and other shareholders’ shares so as to ensure that Ms Lynch and Dr Patrick were the majority shareholders for voting purposes at the general meeting.

86    The plaintiffs allege that on 21 September 2018, Ms Lynch caused the company to transfer all of the shares in SBC to Ms Lynch for no, or inadequate, consideration. The plaintiffs allege that later the same day, Ms Lynch transferred the SBC Shares to Mary Invents.

October 2018

87    Prior to the general meeting, Rhett Drew received proxies for 104,000 shares which, based upon an issued share capital of 191,200 shares, amounted to 54% of the shares of the company.

88    On 26 October 2018, the general meeting was held. During the meeting, Rhett Drew and the shareholders for which he held proxies voted in favour of the resolutions that he and his wife had proposed in late August 2018. Ms Lynch and Dr Patrick voted against the resolutions, which were defeated because Ms Lynch and Dr Patrick were the majority shareholders as a result of the September 2018 share issue.

November 2018

89    On 14 November 2018, Hegarty Legal (on behalf of the plaintiffs) wrote a detailed letter to Ms Lynch and Dr Patrick summarising the allegations against them, including the allegations of their breaches of duty to the company, and sought undertakings that Ms Lynch and Dr Patrick restore to the company its property, including the two patent applications, the boat and the SBC shares.

90    Ms Lynch and Dr Patrick did not respond.

91    The company responded, reiterating that it had no income or cash on hand and stating that, consequently, it was unable to make a detailed response to the letter.

92    Thereafter the plaintiffs determined to commence this proceeding.

Draft statement of claim

93    The draft statement of claim alleges various material facts from paras 1 - 78. At paras 79 - 81, it alleges that Ms Lynch and Dr Patrick owed various duties to the company. At para 82, it is alleged that they breached their various duties by the following seven acts and one omission:

a.    By causing the Company to apply to amend the First Patent Application and Second Patent Application, so that on or about 4 June 2018 the name of the applicant on each application ceased to be that of the Company and was changed to Lynch for no, or alternatively, inadequate consideration.

b.    By failing to cause the Company to explore and exploit the Company’s interest in the First Patent Application, the Second Patent Application and the Patent Rights.

c.    By causing the Company to purport to assign all of its rights, title and interest in and to the Patent Rights to Lynch for no or alternatively inadequate consideration.

d.    By causing the Company on or about 13 September 2018 to issue the 8 million shares issue in contravention of clause 10 of the Company’s Constitution and for no, or inadequate consideration.

e.    By causing the Company to issue the 8 million share issue not in the interests of the Company as a whole; but for the Improper Purpose, namely to dilute the value of the plaintiffs’ and other shareholders’ shares so as to ensure the Lynch and Patrick were the majority shareholders for voting purposes at the EGM.

f.    By filing the PCT Application on or around 21 December 2018, in Lynch’s name and not in the name of the Company.

g.    By causing or allowing the Company to transfer the SBC Shares initially to Lynch and, thereafter to Mary Invents, for no consideration, or alternatively, inadequate consideration.

h.    By causing or allowing the Company to purchase the Company Boat and thereafter allowing Lynch to convert the Company Boat to her own use.

94    At para 83, the draft statement claim alleges that the company suffered loss and damage as a result of Ms Lynch and Dr Patrick’s breaches of duty.

95    At para 84, the plaintiffs claim that:

In the premises:

a.    Lynch and Patrick are liable to account to the Company for the benefits received by them in breach of their duties and/or to pay equitable compensation to the Company.

b.    Lynch holds the First Patent Application, the Second Patent Application and the PCT Application on trust for the Company.

c.    Lynch holds the Company Boat or any proceeds of any insurance claim relating to the Company Boat on trust for the Company.

96    At para 86, the draft statement claim alleges that:

In the premises:

a.    Mary Invents is a person involved in the Lynch’s and Patrick’s breach of duties referred to in paragraph 82e above within the meaning of s 79 of the Corporations Act.

b.    Mary Invents is an accessory to the Lynch’s and Patrick’s breaches of their general law duties, which breaches are described in paragraph 82e above.

c.    Mary Invents received the SBC Shares from Lynch, knowing that she had obtained those SBC Shares in breach of her general law duties to the Company, as described in paragraph 82e above.

97    At para 87, it is alleged that Mary Invents is liable to account to the company for benefits received by it and/or pay equitable compensation to the company; and/or it holds the SBC shares on trust for the company.

98    Paragraphs 88 to 90 plead the company’s claim for damages for Dr Patrick’s alleged breach of the Patrick share purchase agreement.

99    At para 91, the plaintiffs plead the conduct alleged to have contravened s 232 of the Act.

100    Thereafter, the plaintiffs set out their claims for relief. In respect of the claims sought to be made on behalf of the company those claims comprise:

(1)    Twelve orders in the nature of declaratory relief.

(2)    Orders pursuant to various of ss 233, 1317H and 1324 of the Act or the general law.

101    The relief sought pursuant to s 1317H, s 1324 and under the general law is sought on behalf of the company.

102    The draft statement of claim seeks three orders pursuant only to s 233 of the Act, seeing relief in relation to the September 2018 share issue and orders for the removal of Ms Lynch and Dr Patrick as directors of the company, and the appointment of the plaintiffs and Ian Mutton as directors in their place.

Legal framework

103    Section 237 of the Act provides relevantly:

(1)    A person referred to in paragraph 236(l)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.

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

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

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

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

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

(e)    either:

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

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

104    In Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 973; (2004) 51 ACSR 245 (Carpenter (No 1)) at [16], Barrett J explained that the provisions of Part 2F.1 of the Act, which includes s 236 and s 237:

… enable anyone with a particular form of ‘insider’ status described in s 236(1)(a) to seek the court’s assistance in taking over the role of the normal decision makers in relation to a particular proceeding. The court’s function is essentially a screening function. It must assess against specified criteria the litigation proposal the applicant has in mind for the company. If that proposal is found by the court to meet the criteria, it must grant leave enabling the applicant to pursue it for the company.

Good faith

105    Concerning s 237(2)(b), in Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432 (Re Gladstone), Ball J stated (at [58]):

The requirement that the applicant be acting in good faith has at least two elements. One is that the applicant must honestly believe that the company has a good claim with reasonable prospects of success. The other is that the claim must not be brought for some collateral purpose as would amount to an abuse of process: [Swansson v Pratt 2002] NSWSC 583; (2002) 42 ACSR 313 at [36]]. See also Maher [2005] NSWSC 859 at [29]; Gerard Cassegrain & Co Pty Ltd v Cassegrain [2010] NSWSC 91 at [110]-[111]; Fitzpatrick v Cheal [2010] NSWSC 717 at [40]. In my opinion, the applicant must also honestly believe that it is in the best interests of the company that the action be brought.

106    In Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 (Swansson) at [38], Palmer J stated:

Where the application is made by a current shareholder of a company who has more than a token shareholding and the derivative action seeks recovery of property so that the value of the applicant’s shares would be increased, good faith will be relatively easy for the applicant to demonstrate to the court’s satisfaction.

107    This is a case where the proposed derivative action is substantially directed to the recovery of property.

Best interests of the company

108    In Swansson, Palmer J was not satisfied that the plaintiff was acting in good faith in seeking leave to bring the proposed derivative action. Even so, his Honour considered whether it was in the best interests of the company that leave be granted. At [55] - [56], Palmer J stated:

[55]    At the outset, it is important to note that s 237(2)(c) requires the Court to be satisfied, not that the proposed derivative action may be, appears to be, or is likely to be, in the best interests of the company but, rather, that it is in its best interests. In this respect, s 237(2) differs significantly from its counterpart in the Canadian legislation, which requires the Court to be satisfied that the proposed derivative action “appears to be” in the interests of the company, and from s 165(3) of the New Zealand Act which requires that the Court “have regard to ... the interests of the company”. These provisions seem to have led the Courts of those countries to the view that the best interests of a company need be considered only in a prima facie way: see e.g. Re Bellman and Western Approaches Ltd (1981) 130 DLR (3d) 193 at 201; Vrij v Boyle (1995) 3 NZLR 763 at 765; Techflow New Zealand Ltd v Techflow Pty Ltd (1996) 7 NZCLC 261 at 138.

[56]    The requirement of s 237(2)(c) that the applicant satisfy the Court that the proposed action is in the best interests of the company is a far higher threshold for an applicant to cross. It requires the applicant to establish, on the balance of probabilities, a fact which can only be determined by taking into account all of the relevant circumstances.

(Original emphasis.)

109    In Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31 (Charlton) at [46], Barrett J said:

The expression “best interests”, taken literally, is apt to create a false impression that some absolute or superlative is in contemplation. Its true meaning emerges from a consideration of other contexts in which it is used.

110    At [52], Barrett J concluded:

“Best interests” is thus an expression concerned with a person’s separate and independent welfare. Where the concern to which the “best interests” assessment is relevant centres upon possibilities of undue influence and, perhaps, improper purpose, the task is to consider what the putative victim would have done in seeking to protect his or her own position and promote his or her own advantages with such a degree of selfishness as the circumstances will admit.

111    Thus, in this case it is relevant to consider what the company would have done in seeking to protect and its own position and promote its own advantages.

112    In Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732 at [44], Austin J set out the following explanation of the “best interests of the company” criterion in the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 (Cth):

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, the 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.

113    Counsel for the defendants, Mr Knoll, emphasised the importance of considering the purpose of the proposed derivative action, which he referred to as the “end game”.

114    At [47], Austin J said:

It seems to me that, where the company in question is a joint-venture vehicle and one of the venturers alleges that the other has acted unlawfully causing the company loss, it will usually be appropriate to allow the complaining venturer to bring proceedings in the company’s name against the other venturer and its representatives on the board, even though there are no other shareholding interests than those of the litigants and the effect of success of the litigation will be indirectly to benefit the complaining venturer proportionately to its shareholding.

115    At [51], Austin J also observed that:

[T]here 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.

116    In Chahwan v Euphoric Pty Ltd t/as Clay & Michel [2008] NSWCA 52; (2008) 65 ACSR 661 (Chahwan), Tobias JA with Beazley P and Bell JA agreeing, at [89] implicitly accepted that the existence in an applicant of a personal interest in the outcome of a proposed derivative action cannot be significant let alone decisive as few if any actions would be brought but for the personal interest on the part of the relevant applicant in doing so, citing Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 at [44]. Tobias JA found that the personal interest of the relevant applicant was of a different character. The proposed derivative action sought declarations that the company held properties on trust for the applicant. In that case, it was obvious that the proceeding was designed to secure the interests of the applicant rather than to advance the “separate and independent welfare” of the company.

117    In McEvoy v Caplan [2010] NSWCA 115; (2010) 78 ACSR 167 (McEvoy), the Court of Appeal dismissed as incompetent an appeal and refused leave to appeal from a refusal of leave under s 237. Macfarlan JA (Allsop P and Beazley JA agreeing) concluded that Barrett J was correct in refusing the application on the basis that, if leave had been granted, the plaintiff would have had inconsistent roles to play in the relevant litigation, described by Barrett J as “positive duties in direct collision”. Barrett J concluded that the creation of that situation would not be in the best interests of the relevant companies.

118    In Macralink Pty Ltd & Saristavros v Saris [2011] VSC 665 (Macralink), Ferguson J refused an application for leave to proceed, not being satisfied that it was in the best interests of the company (RHD) to bring a claim for unpaid present entitlements. The Court noted that RHD was a family company and that only one of its two shareholders was of the view that the company should demand payment (by another family company, Poseidon) and sue it if it failed to pay. The Court found that RHD “may very well be acting properly by not requiring that [the alleged debtor] immediately make payment to it”, and that it was not clear that the proposed claim ought to be brought where there had been a long standing arrangement that Poseidon could retain certain amounts as working capital, Poseidon did not have the funds immediately available to pay and Ms Saristavros (one of the proposed plaintiffs) would not permit it to borrow to do so.

119    In Macralink at [36], Ferguson J applied reasoning similar to that in McEvoy. His Honour noted that Ms Saristavros would be in a difficult position because as a director of RHD, she would be obliged to cause RHD to argue that the earlier arrangement was no obstacle to demanding immediate payment as a director of Poseidon, she should would be duty bound to investigate whether it had a plausible defence to RHD’s claim.

120    In Re Gladstone at [57], Ball J stated:

The requirement that the court be satisfied that it is in the best interests of the company that the applicant be granted leave raises two questions. One is whether it is in the best interests of the company that the action be brought. The other is whether it is in the best interests of the company that it be brought by the applicant. The court must consider the interests of the company as a whole. As Brereton J said in Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 at [44]:

The phrase “best interests” directs attention to the company’s separate and independent welfare [Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31 at [52]]; [Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732 at [46]]. This imports the familiar concept of the interests of the company as a whole. ... Whether the “best interests” of the company as a whole reflect those of the shareholders taken together in light of the corporate objects, or those of the creditors which will prevail in the context of insolvency, will be influenced by the status of the company [Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1]; [Spies v R [2000] HCA 43; (2000) 201 CLR 603]; [Charlton at [53]].

In considering what is in the best interests of the company, it is necessary to consider the prospects of success of the action, the likely costs and likely recovery if the action is successful and likely consequences if it is not. One relevant matter in considering these issues is the nature of any indemnity the applicant has offered to the company if the action is brought and the likelihood that the company will recover under that indemnity. It is also necessary to consider the resources the company will be required to devote to the action and the resources it has available, together with the effect that the action may have on other aspects of its business. Finally, it is necessary to consider whether some other remedy is available to the applicant so as to make the proposed action unnecessary from its point of view: see Swansson at [56] and following.

121    Ball J’s identification of the matters necessary to consider was approved by Bathurst CJ in Huang v Wang [2016] NSWCA 164; (2016) 114 ACSR 586 (Huang) at [38] and [67].

122    In Huang, Bathurst CJ also said (at [57]-[59]):

[57]    … In Swansson, Palmer J at [24] stated that leave should not be given lightly. He stated that the requirement of best interests requires the applicant to establish on the balance of probabilities that the action is in the best interests of the company, a fact which can only be determined by taking into account all relevant circumstances. That approach has been followed consistently: [Goozee v Graphic World Group Holdings Ltd [2002] NSWSC 640; 42 ACSR 534 at [72]]; [Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; 53 ACSR 732 at [46]]; [Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 1007; 51 ACSR 299 at [19]]; [Chahwan at [85]].

[58]    It is correct that these cases were decided at a time when it was considered that proceedings under s 237 of the Act were final in nature, a view held to be incorrect in McEvoy at [4] per Macfarlan JA, Allsop P and Beazley JA agreeing. In my opinion, that does not alter the requirement that an applicant satisfy the court on the balance of probabilities that the proceedings are in the best interests of the company. That is consistent with the words of s 237(2)(c) and recognises the serious nature of an order requiring a company to bring proceedings which it is unwilling to take itself.

[59]    The appellants were correct in submitting that the best interests of the company means best interests in the sense of its separate and independent welfare: Chahwan at [88]. Best interests, at least assuming the company concerned is solvent, will predominantly reflect the interests of shareholders in that capacity: Charlton at [52].

Consideration

123    There is no dispute that the plaintiffs are persons who may bring proceedings on behalf of the company pursuant to s 236(1) of the Act.

124    Further, there is no dispute that the Court may be satisfied that the criteria for leave in ss 237(2)(a), (d) and (e) are satisfied in this case.

125    As to s 237(2)(a), it is evident from the fact that the proposed derivative action is against the only two directors of the company and a company related to one of those directors that the company will not itself bring the action: cf. Huang v Wang [2015] NSWSC 510 at [22].

126    As to s 237(2)(d), on the evidence set out above, there is plainly a serious question to be tried as to each of the elements of the proposed derivative action, as alleged in the draft statement of claim and set out at [93] above.

127    Section s 237(2)(e) is satisfied by a letter from the plaintiffs’ lawyers to the company’s lawyers, Rankin Ellison, dated 9 August 2018.

128    As to s 237(2)(b), the defendants did not suggest that the plaintiffs do not honestly believe that the company has a good claim with reasonable prospects of success. The plaintiffs’ affidavit evidence verified the existence of those beliefs, and I accept that those beliefs are honestly held.

Best interests of the company

129    Each of the plaintiffs depose to their belief that the proposed derivative action is in the best interests of the company. Rhett Drew gives the following reasons for his belief:

(1)    his opinion that the company has good causes of action against Ms Lynch, Dr Patrick and Mary Invents with good prospects of success;

(2)    if the company’s claims are successful, the company’s valuable property will be returned to the company for the benefit of all of the shareholders and the company will receive a further injection of capital from Dr Patrick; and

(3)    no other party is likely to bring the company’s claims against Ms Lynch and Dr Patrick.

130    Douglas Drew holds his belief on substantially similar grounds.

131    The defendants contended that the plaintiffs sought to bring the proceeding for a collateral purpose, but did not go so far as to contend that they lacked the requisite honest belief. On the plaintiffs’ evidence, I accept that the plaintiffs honestly believe that it is in the best interests of the company that the action be brought.

132    The defendants emphasised the plaintiffs’ claim for an order appointing themselves and Mr Mutton as directors of the company in the place of Ms Lynch and Dr Patrick. As the defendants put it in their written submissions, the case is about an attempt by the plaintiffs and Mr Mutton to replace the present directors of the company. Once achieved, the plaintiffs and Mr Mutton would be able to use the company’s intellectual property for the benefit of JanusKS.

133    On the evidence, I do not accept that the proposed derivative action is about replacing the directors of the company with the plaintiffs and Mr Mutton. That relief is explicitly sought as part of the oppression suit. Mr Newton explicitly disclaimed seeking that relief in the proposed derivative action.

134    Evidently, the extent of the benefit to the plaintiffs of replacing Ms Lynch and Dr Patrick as directors would be affected by what relief, if any, can be obtained on behalf of the company. However, it is not clear that the proposed derivative action would advance the plaintiffs’ prospects of achieving their own appointment as directors of the company.

135    Further, even if it be assumed that the s 237 application is being made to advance that goal, the evidence does not suggest that it is part of the plaintiffs’ purpose in seeking to bring the derivative action.

136    Rather, in my view, the evidence is consistent with what might reasonably be expected on the facts set out above, namely, that the plaintiffs’ purpose in seeking to bring the derivative action is to recover the company’s property, particularly, its intellectual property but also other assets of the company.

137    As to the defendants’ contention that the plaintiffs’ purpose “appears to be to facilitate Mirage 3.4D technology being utilised for the benefit of JanusKS”, the evidence does not support such a finding if it is suggested that the plaintiffs’ purpose is to take action that would not be in the best interests of the company.

138    Further, the defendants’ contention that it is not in the best interests of the company for its technology to be used for the benefit of JanusKS is not supported by evidence.

139    Historically, Rhett Drew has promoted a commercial arrangement between the company and JanusKS. A particular example is the June 2017 “Mirage-Janus co development proposal” and the June 2017 suggestion that “Colin Watts could take control of the project”. The defendants noted that the proposal included the statement: “This note divides Mirage development for Janus into four stages”. The proposal is evidently intended to benefit JanusKS, but the defendants did not explain how it was not also in the best interests of the company. As I understood it, the concern was that the proposal would involve the company giving its technology to JanusKS, or access to its technology. However, the proposal does not state this as an element, and Mr Watts expressly disavowed that intention. It is not obvious that Rhett Drew’s proposal that “Colin Watts could take control of the project” entailed giving Mr Watts rights or permissions inconsistent with the best interests of the company.

140    The defendants also noted that in about May 2018, Rhett Drew again sought to “obtain” the company’s technology for the benefit of JanusKS. I accept that this is another instance in which Rhett Drew was plainly seeking to advance the interests of JanusKS but, again, it is not obvious that his proposal was not intended also to be in the best interests of the company. Rhett Drew expressly claimed to be seeking to benefit both companies.

141    I am not satisfied that this evidence reveals that the plaintiffs or either of them intends, as an “end game”, to benefit JanusKS by acting other than in the best interests of the company. I accept that, if leave is granted, the company is successful and the plaintiffs are successful in the oppression suit, they may become directors of the company. However, the evidence before me does not support a finding that, in that event, they would not act in the company’s best interests.

142    Mr Knoll contended that if Rhett Drew has a purpose which objectively and inevitably puts him in a position of a conflict of interest, he cannot meet the best interests test, relying on McEvoy. I do not accept that McEvoy supports that contention. As noted above, McEvoy was a case involving “positive duties in direct collision”.

Futility of derivative action

143    The defendants contended that if the “intended takeover” of the company proceeds, there is little or no prospect of Ms Lynch completing the development of the relevant technology. It was said that Ms Lynch was unlikely to work for the benefit of the company if Rhett Drew was a director and that without her inventive energy, the company and the intellectual property would cease to exist.

144    I understood this submission to be directed to the question of whether the proposed derivative action is in the best interests of the company.

145    In my view, and assuming in the defendants’ favour its factual correctness, the submission is of more potential relevance to the oppression suit. The relief sought by the derivative action does not include or enable a takeover of the company. Rather, it seeks to vindicate the company’s rights.

146    As earlier noted, in determining what is in the best interests of the company, the task is to consider what the company would have done to protect those interests: Charlton at [52]. Even if it be correct that the company would not, in due course, benefit from the complete development of the intellectual property, the derivative action seeks other benefits for the company, principally in the nature of the return of its property. Without more evidence, I do not accept that the intellectual property has no value or would “cease to exist” in the hands of the company. There are obvious practical benefits for the company arising out of the derivative action which can be secured regardless of the unlikelihood of Ms Lynch working for the benefit of the company.

Conclusion

147    Accordingly, having regard to the obvious benefits to the company if the proposed proceeding is successful, I am satisfied that the proposed proceeding is in the best interests of the company and is not proposed to be brought for the purpose suggested by the defendants.

Conclusion

148    The Court must grant the plaintiffs’ application for leave to bring proceedings.

Associate:

Dated:    9 May 2019

SCHEDULE OF PARTIES