FEDERAL COURT OF AUSTRALIA

Dinomyte Pty Ltd v Australian Securities & Investments Commission, in the matter of Hanwood Pastoral Co Pty Ltd [2019] FCA 1989

ORDERS

THE COURT ORDERS THAT:

1.    Leave be granted to the plaintiffs to file further evidence in support of their application including a further draft statement of claim on or before Friday 24 January 2020.

2.    The matter be listed for further submissions on Friday 31 January 2020 at 10.15 am.

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

REASONS FOR JUDGMENT

GLEESON J:

1    The first and second plaintiffs (Dinomyte and Mr Renton) seek leave pursuant to s 237 of the Corporations Act 2001 (Cth) (Act) to bring proceedings on behalf of the second defendant (company) against six proposed defendants including Frederick Norman Kelly, the first proposed defendant (Mr Kelly).

2    Mr Renton was a director of the company from 14 February 1994 to 20 May 2014. Mr Renton alleges that he was removed as a director of the company by Mr Kelly without his consent.

3    There is evidence that Dinomyte is presently the sole shareholder in the company. According to a search of the records of the Australian Securities and Investments Commission (ASIC) dated 22 May 2015, as at that date Dinomyte was the sole shareholder in the company and Mr Kelly was the company’s sole director, having been appointed on 3 December 1998.

4    According to an ASIC search dated 23 April 2014, as at that date, Mr Renton was a director of Dinomyte and the beneficial owner of one of two issued shares in Dinomyte.

5    The company was registered as a company on 14 May 1990, and deregistered on 8 October 2017. On 1 August 2019, I ordered that ASIC reinstate the registration of the company pursuant to s 601AH(2) of the Act.

6    The proceedings are proposed to be brought in an action in which Dinomyte and Mr Renton will also be plaintiffs. A draft statement of claim (SoC), annexed to submissions dated 26 September 2019, sets out details of the proceeding which Dinomyte and Mr Renton seek to bring, on their own behalf and on behalf of the company (proposed derivative action).

7    At the hearing of the application for leave on 27 September 2019, I granted leave to Mr Kelly to be heard in the proceeding without becoming a party to the proceeding pursuant to r 2.13 of the Federal Court (Corporations) Rules 2000 (Cth). I also ordered the joinder of the company as the second defendant to the proceeding.

8    Mr Kelly’s primary contention was that the proposed pleading was sufficiently defective as to warrant a conclusion that there is no serious question to be tried. Mr Kelly also contended that the proposed action has not been shown to be in the best interests of the company, relying on the absence of a serious question to be tried: Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 1007; (2004) 51 ACSR 299; (Carpenter (No 2)) at [10]; the lack of evidence that the proceeding would result in recoveries for the company; and the absence of an indemnity for the company’s costs of the proceeding.

9    For the reasons that follow, I have concluded that the evidence suggests that there may be a serious question to be tried and that the plaintiffs should be given leave to adduce further evidence in support of the application.

Background facts

10    The following facts are established to a prima facie level, principally by documents exhibited to an affidavit of Danielle Francis, a paralegal employed by the plaintiffs’ solicitor, Farrar Lawyers. The plaintiffs also relied on an affidavit made by David Farrar, the principal of Farrar Lawyers.

11    The company formerly owned land comprising lots 3, 4 and 5 in DP1042140 located at North Rothbury in the Hunter Valley, New South Wales (North Rothbury property).

12    In about July 2013, the company entered into a written agreement with Matthew Somers (Mr Somers) and Kerry Glen Nichols (Mr Nichols) (consultancy agreement) to undertake work for the purposes of securing the “Optimum Biodiversity Value” for the North Rothbury property, which was thereafter to be sold. The agreement was signed by both Mr Kelly and Mr Renton on behalf of the company.

13    In about March 2015, the company sold the property to Warkworth Mining Limited (Warkworth) for a sale price of $3,300,000.00 plus GST. The plaintiffs do not complain that the property was sold at an undervalue.

14    As a result of the sale, the company received $3,627,557.81 (sale proceeds).

15    The plaintiffs’ principal complaint is that the sale proceeds were disbursed generally without Mr Renton’s knowledge and to various persons who were not entitled to receive the amounts paid to them.

16    The plaintiffs concede that, around this time, the company paid $500,000.00 to Mr Renton and $241,545.00 to the Australian Taxation Office from the proceeds of sale. No complaint is made about either of these payments.

17    On 18 March 2015, Mr Kelly authorised payment of the sale proceeds as follows:

(1)    To the proposed fourth defendant (HDB)    $ 43,183.17

(2)    To Patey & Murphy Solicitors (Patey & Murphy)    $ 6,518.76

(3)    To PBN Property Investments Pty Ltd (PBN), or as it may direct    $ 452,150.18

(4)    To the proposed sixth defendant (AAJS), or as it may direct    $ 452,150.18

(5)    To the company, into an account opened on 16 March 2015    $2,673,555.52

18    No complaint is made about the payments to Patey & Murphy and the company. The payments to HDB, PBN and AAJS are the subject of the proposed proceeding.

19    From the amount received by the company, Mr Kelly caused the following payments to be made which are also the subject of the proposed proceeding:

(1)    the following four payments to the proposed second defendant (Stintari):

(a)    $50,000.00 on 19 March 2015;

(b)    a further $9,000.00 on 19 March 2015;

(c)    $100,000.00 on 17 April 2015; and

(d)    $931,000.00 on 5 June 2015,

(2)    $700,000.00 to a St George term deposit on 19 March 2015;

(3)    $25,000.00 to TW Staines & Co on 25 March 2015;

(4)    payments of $1,500.00 each to Westmead Millennium Foundation, Kids with Cancer Foundation and Australian Cancer Research Foundation on 5 June 2015;

(5)    $30,033.00 to Keith Hainsworth on 5 June 2015;

(6)    $30,033.00 to Phyllis Hainsworth on 5 June 2015;

(7)    $50,284.00 to Biba Zupan on 5 June 2015; and

(8)    $3,000.00 to the Melanoma Foundation.

20    The evidence addressed in detail the efforts made by Farrar Lawyers on behalf of Mr Renton and Dinomyte to obtain documents relevant to the proposed proceeding. Those efforts commenced in August 2015 and included preliminary discovery proceedings brought in the Supreme Court of New South Wales in October 2017.

21    In the preliminary discovery proceeding, the plaintiffs sought discovery of the following documents by Mr Kelly:

1.    All documents which evidence or record communications in respect of the proposed appointment/engagement of the Consultants by the Company in 2013.

2.    All documents which evidence or record the appointment of the Consultants by the Company in 2013.

3.    An executed copy of any agreement to provide services to the Company entered into between the Company and the Consultants in 2013, including any agreement prepared by Hills Solicitors styled “Property Consultancy Agreement”.

4.    All documents which evidence or record the services provided by the Consultants to the Company pursuant to any agreement entered into in 2013.

 5.    All documents which evidence or record the value of the Land as at:

(a)    31 December 20013;

(b)    31 December 2014;

(c)    7 January 2015;

(d)    13 March 2015.

6.    An executed copy of the contract for sale of land entered into between the Company and Warkworth dated 7 January 2015 (Sale Contract).

7.    All documents which evidence or record the sale price under the Sale Contract.

8.    All documents which evidence or record:

   (a)    any direction to pay given to Warkworth under the Sale Contract;

(b)    the monies received, for, or on behalf of the Company, under the Sale Contract;

   (c)    any adjustments to the sale price under the Sale Contract;

(d)    the payment of monies to any person or entity from the proceeds of sale under the Sale Contract;

(e)    any monies paid to you, or entities controlled or associated with you, from the proceeds of sale under the Sale Contract;

(f)    any monies paid to the Consultants pursuant to any agreement entered into between the Company and the Consultants in 2013;

(g)    any monies paid to the Consultants from the proceeds of sale under the Sale Contract.

9.    All documents which evidence or record monies paid to you, or entities controlled or associated with you, by, or on behalf of the Company, in the period commencing 1 January 2013 to 1 January 2017.

22    The summons also sought the production of documents from, among others, Mr Somers and Mr Nichols and Patey & Murphy, but the summons was ultimately not pursued in this respect.

23    On 13 March 2018, by consent, orders were made in the Supreme Court proceeding for Mr Kelly to give preliminary discovery of the documents identified above. Mr Kelly gave discovery, although there was a dispute as to whether he had complied sufficiently with the orders.

24    By letter dated 12 June 2018, Farrar Lawyers sought the production of additional documents including documents evidencing the company’s obligations to make payments to Mr and Mrs Hainsworth and Biba Zupan. The evidence does not refer to any request to Mr Kelly to explain or justify the payment from company funds of the other amounts set out at [19] above.

Legal framework

25    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.

26    In Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 973; (2004) 51 ACSR 245 at [16], Barrett J explained that the provisions of Pt 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.

Best interests of the company

27    In In the matter of Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432 , Ball J stated at [57]:

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 v R A Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313] at [56].

28    Ball J’s identification of the relevant considerations was approved by Bathurst CJ (McColl JA and Barrett AJA agreeing) in Huang v Wang [2016] NSWCA 164; (2016) 114 ACSR 586 at [38] and [67]. 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 (No 2)at [19]]; [Chahwan v Euphoric Pty Ltd Trading As Clay and Michel [2008] NSWCA 52; (2008) 245 ALR 780 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 v Caplan [2010] NSWCA 115; (2010) 78 ACSR 167] 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] …

29    In In the matter of Legal Practice Management Group Pty Ltd, nSynergy Pty Ltd, nSynergy International Pty Ltd [2018] NSWSC 527; (2018) 125 ACSR 513 at [68], Black J addressed the relevance of an indemnity in assessing the best interests of the company as follows:

The existence of an indemnity given by a shareholder who seeks leave to bring the derivative proceedings in favour of the relevant company in respect of costs is relevant to whether it is in the company’s interests to bring the proceedings. The Applicants accept that the case law has recognised the desirability of an indemnity to be given to the company to protect it from adverse costs exposure: Cassegrain v Gerard Cassegrain & Co Pty Ltd [2008] NSWSC 976; (2008) 68 ACSR 132 at [73]-[76]; Power v Ekstein [2010] NSWSC 137; (2010) 77 ACSR 302 at [108]; MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367 at [64] and refer to my observations in Re Fishinthenet Investments Pty Ltd and Coastal Waters Seafood Pty Ltd [2014] NSWSC 260 at [31] that:

“... the question of an adequate indemnity to be given by [the applicant] and those standing behind it in favour of the companies in respect of the costs which they would incur in conducting the proceedings and the costs to which they would be exposed if the proceedings were unsuccessful, and in respect of any amount which they may be ordered to pay by way of security for costs, is significant. The case law emphasises the importance of such an indemnity as a means of addressing the risk of prejudice to the companies from the commencement of the proceedings, should they ultimately prove to be unsuccessful, and the risk of exposure to costs and expenses of litigation including costs orders.”

30    In Ragless v IPA Holdings Pty Ltd (In Liq) [2008] SASC 90 at [35] (Ragless), Debelle J (Sulan and Vanstone JJ agreeing) said that the inquiry into the best interests of the company would normally require the applicant to adduce evidence on at least the following matters:

•    the character of the company, that is to say, the nature of the company’s operations;

•    the business of the company so that the effects of the proposed litigation on the conduct of the business may be appreciated;

•    whether there are other means of obtaining the same redress so that the company does not have to be brought into litigation against its will; and

•    the ability of the defendant to meet at least a substantial part of any judgment in favour of the company so that the court may ascertain whether the action would be of practical benefit to the company.

Serious question to be tried

31    The Court must determine whether the applicant has demonstrated that there is a real question to be tried, that is to say, whether the plaintiffs are able to identify the legal or equitable rights to be determined at trial in respect of which the final relief is sought: Ragless at [40].

32    The applicant bears the onus of proving sufficient material to enable the court to make this determination, although it does not normally enter into the merits of the proposed action to any great degree: Ehsman v Nutectime International [2006] NSWSC 887 at [59].

33    It is not necessary for the plaintiffs to establish that it is more probable than not that the derivative action would succeed: South Johnstone Mill Ltd v Dennis [2007] FCA 1448; (2007) 163 FCR 343 at [79].

Consideration

34    Mr Kelly did not contest that the requirements of s 237 of the Act are satisfied except for s 237(2)(c) and (d).

35    Each of Mr Renton and Dinomyte is a “person” who may apply for leave to bring proceedings under s 237(1): Mr Renton is a former officer of the company and Dinomyte is a member or former member of the company.

36    Having regard to the previous deregistration of the company and the fact that the sole director of the company is the main defendant, I infer that the company will not itself bring the proposed proceeding: cf. Huang v Wang [2015] NSWSC 510 at [22]. Accordingly, s 237(2)(a) is satisfied.

37    The evidence, given on information and belief, is that the plaintiffs believe that, if money were recovered by the company in the proposed proceeding, the likely ultimate beneficiary is Dinomyte as the company’s sole shareholder. The plaintiffs submitted that the sole purpose of the proposed proceeding is to recover monies for the benefit of the company with a view to the distribution of those monies to the company’s sole shareholder, Dinomyte. Having regard to these matters, the efforts made to bring the application for leave, including the proceeding for preliminary discovery, and the fact that Mr Kelly did not contest the proposition, I accept that s 237(2)(b) is satisfied.

38    Mr Renton and Dinomyte gave written notice of the intention to apply for leave and of the reasons for applying by letter from Farrar Lawyers to the company dated 9 August 2019. Accordingly, s 237(2)(e) is satisfied.

Serious question to be tried

39    In short, the plaintiffs contend that a substantial portion of the proceeds of sale of the North Rothbury property was wrongfully distributed by Mr Kelly to third parties, acting in breach of his various duties as a director of the company.

40    The allegation that Mr Renton was removed from his position as company director by Mr Kelly without his knowledge is a serious allegation of wrongdoing on Mr Kelly’s part. That allegation gives rise to a question as to whether Mr Renton was wrongfully shut out from decisions about the distribution of the sale proceeds.

41    The plaintiffs relied on the draft SoC to demonstrate that there is a serious question to be tried, in connection with various payments made from the sale proceeds. However, the draft SoC is deficient in several respects. In order to explain the deficiencies clearly, the draft SoC is analysed in some detail. The analysis does not attempt to identify comprehensively the deficiencies in the draft SoC.

Proposed plaintiffs

42    As noted above, there are three proposed plaintiffs: Mr Renton, Dinomyte and the company. Mr Renton and Dinomyte do not require leave to file the draft SoC. However, as Mr Kelly observed, the draft SoC does not identify any relief sought by either of Mr Renton or Dinomyte. Accordingly, it is not presently clear that Mr Renton and Dinomyte are proper or necessary parties to the proposed proceeding. Rule 9.07(a) of the Federal Court Rules 2011 (Rules) provides, however, that a proceeding will not be defeated only because a party has been improperly or unnecessarily joined as a party.

43    The present significance of the inclusion of Mr Renton and Dinomyte as plaintiffs to the proposed proceeding is that they will be liable to pay the costs of the proceeding in the event that it is unsuccessful, in circumstances where the company has only recently been reinstated, is not trading and, I infer, has no resources from which to pay any adverse costs order.

Proposed defendants

44    The draft SoC pleads relevantly that, at all material times in the period 3 December 1998 to 8 October 2018, Mr Kelly:

(1)    acted as an officer and or director of the company; and

(2)    was the controlling mind and will, sole director and secretary of Stintari; and the owner of two ordinary shares in Stintari.

45    The draft SoC alleges that Mr Nichols is and was at all material times:

(1)    the sole director and secretary of HDB;

(2)    the controlling mind and will of:

(a)    HDB; and

(b)    K & J Nichols Holdings Pty Limited (KGNHH); and

(c)    PBN,

(3)    the sole director and secretary of KGNHH; and

(4)    the holder of all issued shares in the paid up capital of KGNHH and PBN.

46    The draft SoC alleges that Mr Somers is and was at all material times:

(1)    the sole director and secretary of each of AAJS and MJS Custodians Pty Limited (MJS);

(2)    the controlling mind and will of AAJS and MJS; and

(3)    the beneficial holder of shares in AAJS and MJS.

47    KGNHH and MJS are not mentioned again in the draft SoC. Accordingly, it is not clear why they are referred to in the draft SoC.

Statutory and fiduciary duties

48    The draft SoC pleads that, at all material times, Mr Kelly owed duties to the company under ss 180(1), 181(1) and 182(2) of the Act.

49    Further, it is alleged that at all material times, Mr Kelly was in a fiduciary relationship to the company whereby he owed fiduciary duties to the company, expressed in the following terms:

(a)    a duty to avoid being in a position of conflict where there was conflict (or a significant possibility of conflict) between his fiduciary duty to the company and his own personal interests in the pursuit or possible receipt of such a benefit or gain; and

(b)    a duty to account for any benefit or gain he obtained or received by use of, or by reason of, his position or opportunity or knowledge resulting from it.

Dealings with company property

50    The draft SoC pleads the company’s ownership of the North Rothbury property and the consultancy agreement referred to above.

51    It is alleged that the consultancy agreement was prepared solely on the instructions of Mr Nichols and Mr Somers, and Mr Kelly did not on behalf of the company seek or obtain any legal advice in relation to the rights and obligations affecting the company by its entry into the consultancy agreement.

52    As pleaded, the stated objectives of the consultancy agreement included various steps to optimise the aggregate value of the North Rothbury property and, ultimately, the formulation of a marketing strategy for the sale of the property, or its parts, so as to maximise the value of the property. Further, the consultancy agreement allegedly provided for the distribution of the sale proceeds as follows, after accounting for GST:

(1)    the company would receive the “Base Land Owner Sum”;

(2)    the company would pay Mr Nichols and Mr Somers the “Consultant’s Expenses”; and

(3)    Mr Nichols and Mr Somers would receive the “Consultancy Fee”, being 40% of the balance of the proceeds.

53    The draft SoC alleges that Mr Kelly made the following oral misrepresentations to Mr Renton on or about 16 July 2013, and that Mr Kelly signed the consultancy agreement (presumably as a director of the company) in reliance on the misrepresentations:

(1)    that Mr Kelly’s son had been injured and it was necessary for Mr Renton to sign the consultancy agreement urgently so that Mr Kelly could visit his son in the hospital;

(2)    that Mr Renton did not need to seek any advice (legal of otherwise) regarding the company entering into the consultancy agreement on the basis that Mr Kelly had had the agreement properly reviewed and was comfortable with its content;

(3)    that the consultancy agreement was a “standard document”; and

(4)    Mr Kelly expressed confidence that Mr Nichols and Mr Somers would be able to achieve significant outcomes for the company.

54    Alleged misrepresentation (4) is not expressed as a representation. It is implicit in the allegation that these statements were misrepresentations that each of them was false. The alleged falsity of alleged misrepresentation (4) requires clarification. For example, the intended case may be that Mr Kelly’s expression of confidence was false because he did not have reasonable grounds for it, or that Mr Kelly had knowledge of facts that were inconsistent with his expression of confidence.

55    The SoC next pleads that, on 20 May 2014, without Mr Renton’s knowledge or consent, Mr Kelly removed Mr Renton as a director of the company from ASIC’s records.

56    Next, the SoC pleads several facts leading up to the sale of the North Rothbury property. Since the plaintiffs do not complain about the sale price or any other aspect of the terms of the sale of the property, the significance of these allegations is not obvious. If they are not material to any cause of action, they should not be included in the SoC: see r 16.02(1) of the Rules. In substance, the allegations are:

(1)    The removal of Mr Renton as a director of the company had the effect of enabling Mr Kelly to enter into contracts, or purportedly enter into contracts, for and on behalf of the company, in his capacity as sole director, without recourse to Mr Renton. The relevance of this allegation is not clear because, except for the retainer of Patey & Murphy, the SoC does not identify any contract entered into by the company, or purportedly entered into, without recourse to Mr Renton.

(2)    Without prior consultation or discussion with Mr Renton, in or around December 2014, Mr Kelly engaged a solicitor, Mr Murphy, to act for the company in connection with a proposed sale of the North Rothbury property. The relevance of this allegation is not clear because no complaint is made concerning Mr Murphy’s engagement or, in particular, the payment of Patey & Murphy pursuant to the engagement.

(3)    Without prior consultation or discussion with Mr Renton, on 7 January 2015, Mr Kelly caused the company to enter into a contract for sale of the North Rothbury property to Warkworth for a sale price of $3.3 million plus GST. There is no apparent relevance to the absence of consultation or discussion in circumstances where Mr Renton does not complain about the sale price or any other aspect of the contract for sale of the property.

(4)    The sale contract contained certain special conditions, including concerning completion. As noted above, there is no subsequent complaint in the draft SoC about the identified special conditions and, accordingly, the relevance of this allegation is not apparent.

(5)    From time to time, after exchange of the sale contract, instructions were provided variously by Mr Kelly, Mr Nichols and Mr Somers to Mr Murphy, in connection with the conveyance that was the subject of the sale contract.

(6)    There is no subsequent complaint about the instructions that were given to Mr Murphy, except as to the directions given by Mr Kelly (referred to later in the draft SoC) to pay the sale proceeds to various third parties.

(7)    On 26 February 2015, Warkworth requested an extension of the time to complete the sale contract until 13 March 2015 and the company agreed to the requested extension. Again, there is no subsequent complaint concerning these facts.

57    The draft SoC alleges that, on 13 March 2015, the sale contract was completed and Warkworth paid $3,627,557.81 (including the deposit of $363,000) to Patey & Murphy on behalf of the company.

58    Next, it is alleged that on about 18 March 2015, Mr Kelly purported to authorise and direct Mr Murphy to pay the sale proceeds as set out at [17] above, and the sale proceeds were paid out broadly in accordance with Mr Kelly’s instructions.

59    Next, it is relevantly alleged, that Mr Kelly caused the payments set out at [19] above to be made from the company’s share of the proceeds of sale.

Breach of duties

60    At paras 39 to 50, the draft SoC alleges several breaches of duty by Mr Kelly. In each case, the draft SoC purports to provide particulars of the alleged breach.

61    The alleged breaches of duty owed to the company involved the following conduct:

(1)    causing the company to enter into and assume various obligations under the consultancy agreement (SoC 39);

(2)    making the alleged misrepresentations referred to at [53] above (SoC 40);

(3)    the unlawful removal of Mr Renton as a director of the company and the notification of that removal to ASIC (SoC 41);

(4)    giving Mr Murphy the authority to disburse the sale proceeds as he did and by causing the making of the various payments from the sale proceeds to HDB, PBN and AAJS (SoC 42, 43, 45, 46); and

(5)    causing the making of the various payments set out in [59] above (SoC 47).

62    The draft SoC alleges that by this conduct, Mr Kelly:

(1)    misused his position as a director and officer of the company and, in breach of s 180(1) of the Act, failed to exercise his duties with the requisite care and diligence:

(2)    misused his position as a director of the company and, in breach of s 181(1) of the Act, failed to exercise his powers and duties:

(a)    in good faith and in the best interests of the company; and

(b)    for a proper purpose (SoC 48),

(3)    improperly used his position to gain an advantage for himself and caused detriment to the company in breach of s 182(1) of the Act (SoC 49).

(4)    misused his position as a director and officer of the company and in breach of his fiduciary duties pleaded above has:

(a)    acted as a director and officer of the company and caused the company to engage in the conduct complained of notwithstanding being in a position where his duties and interests in respect of the company and him were in conflict; and

(b)    failed to account to the company for the benefits he obtained personally by reason of engaging in such conduct.

63    The draft SoC alleges that the company suffered loss and damage as a result of Mr Kelly’s breaches of duty, comprising the loss of the use of the payments made in breach of duty and interest on those payments. Paragraph 52 of the draft SoC alleges that Mr Kelly is liable to pay damages to the company and compensate the company under the Act or make equitable compensation to the company in respect of the pleaded breaches and/or to restore the company to the position it was in prior to the commission of the breaches.

Entry into consultancy agreement

64    Paragraph 39 of the draft SoC pleads that Mr Kelly misused his position as a director and officer and breached s 180(1) of the Act by “causing [the company] to enter into, and assume various obligations under the Consultancy Agreement”.

65    The allegation that Mr Kelly “misused his position” does not correspond to any of the duties pleaded earlier in the draft SoC. Accordingly, I understand this paragraph to allege a single breach of duty, being the statutory duty in s 180(1) of the Act.

66    Although the allegation is of a failure to exercise duties in accordance with s 180(1), para 39 does not identify the relevant duties. As expressed, the allegedly contravening conduct seems more in the nature of an exercise of power. A similar issue arises in relation to each alleged contravention of s 180(1), where there is an allegation that Mr Kelly “failed to exercise his duties” to the requisite standard but it is not plain that the allegedly contravening conduct involved an exercise of Mr Kelly’s duties as a director.

67    If proved, the allegation gives rise to a claim for relief under s 1317H of the Act. However, the draft SoC does not expressly seek relief under this section. By r 16.02(1)(e) of the Rules, a pleading must state the provisions of any statute relied upon. As Mr Kelly noted, by s 1317K of the Act, proceedings for a compensation order may be started no later than six years after the contravention, giving rise to a possible limitation if the proposed proceeding involves a claim for a compensation order based on the entry into the consultancy agreement as a relevant contravention.

68    In addition, to grant relief under s 1317H, the Court must be satisfied that the company suffered damage which “resulted from the contravention”. The draft SoC does not plead that the alleged breach of s 180(1) resulted in damage to the company or any material facts that might support such an allegation. This issue may require attention to any relevant counterfactual, for example, if the plaintiffs wish to contend that the property would have been sold for the same price in different circumstances. The draft SoC is defective to this extent: cf. Graham & Linda Huddy Nominees Pty Ltd v Byrne [2016] QSC 22 at [26]-[31].

69    The pleading is similarly defective in relation to each alleged breach of duty. That is, in each case, there is no specification of the statutory provision or provisions pursuant to which relief is sought and there is no pleading of any necessary allegation of causation or material facts to support causation.

Alleged misrepresentations

70    Paragraph 40 of the draft SoC pleads that Mr Kelly “misused his position as a director and officer” and breached s 180(1) of the Act by making the misrepresentations referred to at [53] above.

71    In addition to the defects mentioned at [69] above, the particulars to para 40 are not referrable to the alleged breach, which is a failure to exercise duties with care and diligence. Accordingly, the basis on which the representations contravened s 180(1) is not clear.

Removal of Mr Renton as director

72    Paragraph 41 of the draft SoC pleads that Mr Kelly “misused his position as a director and officer”, breached s 180(1) of the Act and failed to exercise due care and diligence, in effect, by removing Mr Renton as a director of the company. This may indicate an intention to plead a common law breach of duty in addition to the breach of s 180(1), particularly in the light of the claim for damages in para 50 of the draft SoC.

73    The particulars to para 41 are not referrable to the alleged breach. It is hard to imagine how the removal of a director by another director without consent may have involved a failure to exercise care and diligence. In addition, the pleading does not allege that Mr Kelly used his position in a way that caused particular damage beyond causing or making the payments that are the subject of later alleged breaches. Accordingly, it is not clear what, if anything, this allegation adds to the succeeding paragraphs.

Authority to solicitor to pay third parties from sale proceeds

74    Paragraph 42 of the draft SoC identifies a breach of s 180(1) by Mr Kelly’s conduct in authorising Mr Murphy to pay the sale proceeds to various persons. It is not clear how the conduct constitutes a breach in the light of the plaintiffs’ case that the company was (wrongfully) subjected to contractual obligations under the consultancy agreement, which is reflected in the particulars to para 42.

75    The particulars to para 42 are as follows:

(b)    The Consultancy Agreement was not entered into in the best interests of Hanwood;

(c)    The payment obligations assumed by Hanwood pursuant to the Consultancy Agreement ought never to have arisen given the wholly uncommercial nature of the Consultancy Agreement;

(d)    The obligation of the Company to pay any monies, and for the Company to give the Purported Authority arises from an agreement that ought never have been entered into, namely, the Consultancy Agreement.

76    These particulars do not appear to support the allegation of breach in para 42. However, if they are part of the proposed case, the allegation that the consultancy agreement was “not entered into in the best interests of” the company requires particularisation. It is not clear whether the case is the complaint concerns the parties to the agreement or its terms or, perhaps, some other matter. Similarly, the allegation that the consultancy agreement was “wholly uncommercial” requires identification of the concept of uncommerciality.

Payments pursuant to consultancy agreement

77    Paragraphs 43, 45 and 46 of the draft SoC are pleaded in similar terms. It is not clear whether the alleged facts are contended to give rise to distinct breaches of duty or whether the case is only that the payments following necessarily from the company’s obligations under the consultancy agreement.

Payments made by the company from sale proceeds

78    Paragraph 47 of the draft SoC pleads that Mr Kelly “misused his position as a director and officer” and breached s 180(1) of the Act by making the various payments set out at [19] above. As Mr Kelly’s counsel fairly observed, this allegation is tantamount to an allegation of fraud in the sense of misappropriation of company funds. It is not clear how the facts give rise to a contravention of s 180(1) and the particulars, which set out the alleged lack of entitlement of the recipients to the payments, do not assist. Further, the basis for these particulars is not apparent from the evidence. So far as I can see, there is no correspondence in which Mr Kelly has been asked to explain the basis upon which the company made the payments. In my view, this is a significant gap in the evidence on the issue of serious question to be tried.

Paragraphs 48, 49 and 50 of the draft SoC

79    These paragraphs are not adequately particularised.

80    As drafted, the case appears to be that contraventions of s 180(1), taken together, constitute a single contravention of each of s 181(1) and s 181(2).

81    For the alleged contravention of s 181(1), it is necessary to recognise that s 181(1) sets two separate duties. Then, it is necessary to state the facts relied upon to allege that Mr Kelly lacked good faith. What elements of the alleged conduct are alleged to have been undertaken dishonestly or in the interests of one or more third parties and what elements are said to involve only a failure to give proper consideration to the best interests of the company? For what purpose or purposes is it alleged that Mr Kelly engaged in the allegedly contravening conduct, which are allegedly not proper purposes?

82    For the alleged contravention of s 181(2), it is necessary to specify whether it is alleged that Mr Kelly’s use of his position was done to gain an advantage for himself; or to gain advantage for someone else or whether it was done to cause detriment to the company.

83    For the alleged breaches of fiduciary duty, it is necessary to identify the factual basis for the allegation that the conduct in paras 39 to 42 involved a conflict of duty and interest between the company and Mr Kelly. Further, it is necessary to specify the benefits that Mr Kelly allegedly obtained by acting in breach of his fiduciary duties.

Liability of proposed second to sixth defendants

84    Further, the pleading of the proposed claims against the proposed second to sixth defendants is deficient for at least the following reasons.

Stintari

85    The draft SoC pleads relevantly:

(1)    when it received monies from the sale proceeds, Stintari knew or ought to have known that the company had no obligation to pay those monies to Stintari and that the payments were made in breach of Mr Kelly’s duties to the company;

(2)    alternatively, Stintari should have known those facts;

(3)    by knowingly participating and assisting in Mr Kelly’s breaches of duty, Stintari breached ss 79, 181(2) and 182(2) of the Act;

(4)    in the premises, Stintari is liable to repay the monies paid to it by the company, or to pay equitable compensation in that amount.

86    As noted in relation to para 47 of the draft SOC, the evidence before me does not identify a basis for the allegation that the company had no obligation to make the payments to Stintari. Without such evidence, I doubt that there is a serious question to be tried against Stintari.

87    Further, the draft SoC does not plead the facts upon which it is alleged that Stintari was “involved” in Mr Kelly’s contraventions of s 181 and s 182 of the Act.

Consultants, HDB and AAJS

88    Paragraph 59 alleges that Mr Somers, Mr Nichols, HDB and AAJS knew or ought to have known that the company had “no proper obligation” to make any payment to them under the consultancy agreement. The particulars for this allegation do not provide a basis for this allegation. In particular, it is not clear whether the case is that the company was not bound by the terms of the agreement or whether the payments made purportedly pursuant to the consultancy agreement did not conform to the company’s obligations under the agreement.

89    Again, no facts are pleaded to support the allegation that these parties were “involved” in Mr Kelly’s contraventions of s 181 and s 182 of the Act.

Conclusion

90    Having regard to the significant deficiencies in the draft SoC, I am not presently satisfied that there is a serious question to be tried in relation to the matters set out in that document. However, the facts do give cause for concern that at least some of the sale proceeds may have been disbursed improperly, principally because of the contention that Mr Renton was improperly removed from his role as director of the company, the evidence that substantial payments appear to have been made to Stintari, an entity related to Mr Kelly and the fact that the payments made by the company from the sale proceeds are unexplained (albeit the evidence does not indicate that an explanation has been sought). In my view, it may be possible to re-draft the proposed statement of claim and to adduce further evidence which demonstrates that there is a serious question to be tried.

Best interests of the company

91    As a general proposition, it is in the best interests of the company to seek compensation for losses sustained by reason of its director’s breaches of duties owed to the company.

92    As Dinomyte and Mr Renton currently intend to be plaintiffs in the proposed proceeding, the absence of an indemnity in favour of the company may be of less relevance than it might be otherwise. On the other hand, any cause of action which either of them may intend to pursue is not presently articulated and Mr Renton did not give affidavit evidence which might have explained the basis upon which he believes that the proposed derivative action is in the best interests of the company. Such evidence may have clarified whether his intention to be a plaintiff in the proceeding effectively reflects a willingness to indemnify the company in respect of costs.

93    Further, in my view, evidence is required as to the prospect of recoveries from the proposed action to demonstrate that the proposed action is in the best interests of the company.

Conclusion

94    I will grant leave to the plaintiffs to file further evidence in support of their application including a further draft statement of claim. I will list the matter for further submissions at a time convenient to the Court and the parties.

Associate:

Dated:    26 November 2019