Federal Court of Australia

Townshend as Legal Representative for the Estate of Mervyn Townshend v Fendall Farms Pty Ltd [2022] FCA 848

ORDERS

UNDERTAKINGS BY THE SECOND PLAINTIFF:

A    The second plaintiff, Mervyn T Nominees Pty Ltd as trustee for the Mervyn Townshend Family Trust No 2 (“Mervyn T Nominees”), will pay the legal costs of the first defendant, Fendall Farms Pty Ltd (“Fendall Farms”), in pursuing the derivative claims for which leave is granted in accordance with Order 1 below (“the Fendall Farms Derivative Claims”).

B    Mervyn T Nominees will pay any adverse costs orders made against Fendall Farms in connection with pursuing the Fendall Farms Derivative Claims.

C    Mervyn T Nominees will not seek contribution from Fendall Farms to any adverse costs order made against it in pursuing the Fendall Farms Derivative Claims.

D    Mervyn T Nominees will inform both the Court and the parties as soon as practicable, and within no less than 2 business days, if Claims Funding Australia Pty Ltd (ACN 158 551 967) as trustee for the Claims Funding Australia Discretionary Trust gives any notice to terminate the Funding Agreement dated 30 June 2020 (and varied on 14 September 2021).

UNDERTAKINGS BY THE EIGHTH DEFENDANT:

E    The eighth defendant, David Townshend, will pay the legal costs of the seventh defendant, VBI Properties Pty Ltd (“VBI Properties”), in pursuing the cross-claim found at Tab 9 of Exhibit DMT-2 to the affidavit of David Townshend filed on 13 July 2022 (“Cross-Claim”);

F    David Townshend will indemnify VBI Properties in respect of any adverse cost orders made against it as a result of the Cross-Claim.

G    David Townshend will not seek contribution from VBI Properties in respect of any adverse cost orders that may be made against him as a result of the Cross-Claim.

UPON THE SECOND PLAINTIFF GIVING THE UNDERTAKINGS ABOVE, BY ITS COUNSEL, THE COURT ORDERS THAT:

1.    Mervyn T Nominees (the second plaintiff) have leave pursuant to s 237 of the Corporations Act 2001 (Cth) (“Corporations Act”) to bring on behalf of Fendall Farms (the first defendant), the derivative claims in substantially the form pleaded in Parts F, G and H of the proposed statement of claim, against each of:

(a)    Diane Townshend (as legal representative for the estate of Vernon Townshend) – the fifth defendant;

(b)    VBI Properties Pty Ltd (“VBI Properties”) – the seventh defendant;

(c)    David Townshend – the eighth defendant;

(d)    Canterbury Hills Pty Ltd – the ninth defendant;

(e)    Townshend Financial Services Pty Ltd – the tenth defendant; and

(f)    Townshend Financial Services (Vic) Pty Ltd – the eleventh defendant.

2.    On or before 4.00pm on Friday 22 July 2022, the plaintiffs have leave to file and serve a statement of claim, in substantially the form that is set out in pages 8 to 124 of Annexure DW-3 of the third affidavit of Demian Walton, sworn on 15 July 2022.

UPON THE EIGHTH DEFENDANT GIVING THE UNDERTAKINGS ABOVE, BY ITS COUNSEL, THE COURT ORDERS FURTHER THAT:

3.    Subject to Order 4 and 5 below:

(a)    David Townshend, the eighth defendant, be granted leave pursuant to s 237 of the Corporations Act to intervene on behalf of VBI Properties, the seventh defendant, to bring the Cross-Claim pleaded in the proposed statement of Cross-Claim; and

(b)    the eighth defendant have leave to file the Cross-Claim.

4.    Pursuant to s 56 of the Federal Court of Australia Act 1976 (Cth) and the inherent jurisdiction of the Court, without prejudice to the right of the parties to seek further security, the eighth defendant is to provide:

(a)    the fifth defendant with security for costs in the sum of $200,000;

(b)    the plaintiffs with security for costs in the sum of $200,000; and

(c)    the third and fourth defendants with security for costs in the sum of $50,000 jointly;

in respect of their costs incurred in defending the Cross-Claim.

5.    The security referred to in Order 4 above is to be provided by bank guarantee within 7 days of this Order.

6.    On or before 4.00pm on Friday 22 July 2022, the eighth defendant have leave to file and serve a statement of cross-claim, in substantially the form that is set out in pages 44 to 56 of Annexure DMT-2 of the supplementary affidavit of David Townshend, sworn on 13 July 2022.

AND THE COURT ORDERS FURTHER THAT:

7.    The proceeding continue by pleadings.

8.    On or before 4.00pm on Wednesday 19 October 2022, any defences to the plaintiffs’ statement of claim (which includes their derivative claims on behalf of Fendall Farms) and the eighth defendant’s statement of cross-claim (on behalf of VBI Properties) be filed and served.

9.    The plaintiffs’ costs of their interlocutory process dated 30 June 2021 are the plaintiffs’ costs in the proceeding (in relation to the derivative claims).

10.    The eighth defendant’s costs of his interlocutory process dated 30 May 2022 are the eight defendant’s costs in the proceeding (in relation to the derivative claims).

11.    The proceeding be listed for a further case management hearing on Friday 21 October 2022 at 10.15am.

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

EX TEMPORE REASONS FOR JUDGMENT

MCEVOY J

1    Before the Court are two applications for derivative leave made under s 237 of the Corporations Act 2001 (Cth) (“the Act”). They are made in the context of an originating process seeking relief under various sections of the Act filed on 30 June 2021 by the first plaintiff, Patricia Joan Townshend, as legal representative for the Estate of Mervyn Arthur Townshend, and the second plaintiff, Mervyn T. Nominees Pty Ltd (“Mervyn T Nominees”), as trustee for the Mervyn Townshend Family Trust No 2 (“Mervyn Trust”).

2    For present purposes it is unnecessary to descend into the details of the originating process, but it is brought in reliance on ss 175, 180-182, 232-233, 461, 1317E and 1317H of the Act. The originating process summarises the parties and the nature of the claims which are pressed. The plaintiffs have prepared a proposed statement of claim, which is referred to in a supporting affidavit, and on the basis of which the relief set out in the originating process is sought.

30 June 2021 application

3    By interlocutory process dated 30 June 2021 the plaintiffs seek orders that:

(a)    the second plaintiff, Mervyn T Nominees, have leave pursuant to s 237 of the Act to bring on behalf of Fendall Farms Pty Ltd (“Fendall Farms”), the first defendant, the derivative claims in substantially the form pleaded in Parts F, G and H of the proposed statement of claim, against each of:

(i)    Diane Townshend (“Diane”) as legal representative for the estate of Vernon Townshend (“Vernon’s Estate”) – the fifth defendant

(ii)    VBI Properties Pty Ltd (“VBI”) – the seventh defendant;

(iii)    David Townshend (“David”) – the eighth defendant;

(iv)    Canterbury Hills Pty Ltd (“Canterbury Hills”) – the ninth defendant;

(v)    Townshend Financial Services Pty Ltd (“TFS”) – the tenth defendant; and

(vi)    Townshend Financial Services (Vic) Pty Ltd (“TFS (Vic)”) – the eleventh defendant;

(b)    they have leave to file a proposed statement of claim, in substantially the form that is set out in Annexure SPD-5 of the second affidavit of Suzanne De Klerk, affirmed on 23 September 2021 (with certain amendments made since that time); and

(c)    the proceeding continues on the basis of pleadings.

4    The materials that have been filed by the plaintiffs in relation to this application are:

(a)    the affidavit of Suzanne DeKlerk affirmed on 25 June 2021;

(b)    the affidavit of Suzanne DeKlerk sworn on 23 September 2021;

(c)    submissions dated 11 November 2021;

(d)    the affidavit of Demian Walton sworn on 11 November 2021;

(e)    the affidavit of Demian Walton affirmed on 16 November 2021;

(f)    submissions dated 18 November 2021;

(g)    submissions dated 15 July 2022;

(h)    the affidavit of Demian Walton affirmed on 15 July 2022; and

(i)    submissions dated 18 July 2022.

5    The fifth defendant, Diane, and the sixth defendant, VT Nominees Pty Ltd (as trustee for the Vernon Townshend Family Unit Trust No 2) oppose the grant of leave sought by the plaintiffs.

6    The materials that have been filed by the fifth and sixth defendants in relation to this application are:

(a)    the affidavit of Diane Townshend affirmed on 12 November 2021;

(b)    submissions dated 15 November 2021;

(c)    submissions dated 18 July 2022; and

(d)    the affidavit of Justin Vaatstra sworn on 18 July 2022.

7    On 17 and 18 November 2021 Anastassiou J commenced to hear the plaintiffs’ derivative leave application. Ultimately his Honour ordered the preparation of an Independent Expert Report by the fifth and sixth defendants and adjourned the plaintiffs’ application for derivative leave pending the completion of that report. His Honour ordered that, once the report had been obtained, the parties confer in relation to proposed orders for the future conduct of the matter.

8    It is unnecessary to detail the tortuous path travelled in the preparation of the Independent Expert Report (“the Report”) by the fifth and sixth defendants, save to observe that it was not prepared in the timeframe contemplated by his Honour.

9    Ultimately the Report was not finalised until, it would seem, 15 July 2022, and was not served on the plaintiffs until Sunday 17 July 2022. It was filed on 18 July 2022 (that is to say, yesterday). The plaintiffs would appear to have considered the Report because they have filed submissions criticising it and senior counsel for the plaintiffs has expanded upon those criticisms in argument today. They say, with some force, that the Report does not achieve its intended purpose and that any conferring with the fifth and sixth defendants in relation to it would lack in utility.

10    Notwithstanding the contents of the Report, the plaintiffs press today for the determination of their 30 June 2021 application for derivative leave. They are critical of the Report on the basis that it does not substantially advance the issues for determination in the litigation. They submit that it is not the product of a detailed or responsive investigation of the facts that was contemplated by the fifth and sixth defendants at the hearing in November 2021 before Anastassiou J, and the observations made by his Honour when ordering the preparation of the Report. The plaintiffs submit that the Report brushes over claims worth millions of dollars, and makes factual assumptions that will be fundamentally (and obviously) contested.

11    There is some merit in the plaintiffs’ submissions in this regard, and in my view, unfortunately, the Report does not avoid the need to consider whether there should be a grant of leave for the proposed derivative claims to proceed. I do not accept, as senior counsel for the fifth and sixth defendants contended, that there would be utility in the parties being required to confer further before hearing the application for derivative leave. For the reasons that follow the plaintiffs’ application for derivative leave will be granted.

12    The plaintiffs’ submissions in support of their application for derivative leave filed on 11 November 2021 describe the parties relevant to the leave application as follows.

13    The dispute has arisen between members of the Townshend family, and their associated entities, and concerns a group of companies here referred to as the “Townshend Group”. Relevantly, the Townshend Group was originally established by two brothers, both now deceased, Mervyn Townshend (“Mervyn”) and Vernon Townshend (“Vernon”). The proceeding concerns conduct that is alleged to be oppressive and/or in breach of fiduciary or other duties, carried out by Vernon and/or David or entities under their control, following Mervyn’s death in 1997, and subsequently concealed or withheld from Mervyn’s widow Patricia Townshend (“Patricia”), the first plaintiff who sues on behalf of Mervyn’s Estate, and other members of the family.

14    Mervyn T Nominees: As has been mentioned, the second plaintiff is Mervyn T Nominees, which sues in its capacity as the trustee of the Mervyn Trust. It seeks leave to bring derivative claims in this proceeding on behalf of Fendall Farms. Its director is Suzanne De Klerk, the eldest of Mervyn and Patricia’s nine children. The Mervyn Trust is a discretionary family trust, of which Mervyn and Patricia’s children are beneficiaries (except for David), which holds shares in various entities in the Townshend Group, including Fendall Farms.

15    Vernon Townshend: Vernon was a co-founder of the Townshend Group in its current form. In relation to the claims for which derivative leave is sought, he was a director of Fendall Farms (and his estate is sought to be sued for conduct by him in that capacity) as well as of Mervyn T Nominees, Canterbury Hills, TFS, TFS (Vic) and VBI. Vernon died on 28 September 2020. Diane is the executor and legal personal representative of his estate.

16    David Townshend: David is the second eldest of Mervyn and Patricia’s nine children, and the eldest son. In relation to the claims for which derivative leave is sought, he is a director of Fendall Farms (and is sought to be sued for conduct by him in that capacity) as well as of Canterbury Hills, TFS (Vic) and VBI.

17    Fendall Farms: Fendall Farms is a company in the Townshend Group. It owns development land forming part of the Canterbury Hills Estate in Sunbury. Relevantly:

(a)    Mervyn T Nominees (as trustee of the Mervyn Trust) has a 20% shareholding in Fendall Farms. Prior to the dilution of its shares in 1998, it had a 50% shareholding. That dilution is not the subject of any of the derivative leave claims, but it is one of a number of dilutions that is the subject of non-derivative claims as set out in the proposed statement of claim at Part E (“Purported 1998 Share Issues”).

(b)    In 1999, Fendall Farms sold part of its development land at the Canterbury Hills Estate to Canterbury Hills (“the 1999 Fendall Farms Land Sales”). That sale is the subject of the derivative leave claims set out in the proposed statement of claim at Part G (1999 Sale of Land to Canterbury Hills), and referred to in more detail below.

(c)    Fendall Farms was also the target of what is alleged to be a scheme (“the Intercompany Loan Scheme”) by which funds were extracted from it in favour of Vernon and David and other companies within the Townshend Group associated only with them (i.e. in which neither the Mervyn Trust nor Mervyn’s Estate held any interest). The effect is said to have been to diminish Mervyn’s interests (or those of the Mervyn Trust and Mervyn’s Estate) in favour of increasing Vernon’s and/or David’s interests, while concealing that fact from both Patricia and Mervyn’s other children. That scheme is the subject of the claims set out in the proposed statement of claim at Part H (the Intercompany Loan Scheme), and referred to in more detail below.

18    Canterbury Hills: Canterbury Hills is a company forming part of the Townshend Group, and substantially controlled by Vernon (subsequently Vernon’s Estate) and David. It was the purchaser in the 1999 Fendall Farms Land Sales, and is said to be a knowing beneficiary of the Intercompany Loan Scheme.

19    TFS and TFS (Vic): These companies operated as central treasuries for the Townshend Group, and are said to have facilitated the Intercompany Loan Scheme. TFS was substantially controlled by Vernon, and TFS (Vic) by Vernon and David.

20    VBI: VBI was a company substantially controlled by Vernon and David, and it is said to be a knowing beneficiary of both the Purported 1998 Share Issues and the Intercompany Loan Scheme.

21    VT Nominees: This company was owned and controlled by Vernon and acted as the trustee of the Vernon Trust.

22    Insofar as the subject matter of the derivative leave claims is concerned, there are two relevant matters. The first is the 1999 Fendall Farms Land Sale; the second is the Intercompany Loan Scheme. These are the subject of Parts G and H of the proposed statement of claim.

23    The plaintiffs’ submissions describe matters as follows.

24    The 1999 Fendall Farms Land Sales: In December 1999, Fendall Farms is said to have sold a large portion of its development land to Canterbury Hills.

25    At that time, the members of Fendall Farms were:

(a)    Mervyn T Nominees (as trustee of the Mervyn Trust); and

(b)    VT Nominees (as trustee of the Vernon Trust);

which had each held 50% of the pre-dilution ordinary share capital of Fendall Farms – or 20% each post-dilution; and

(c)    51 Glebe Management; and

(d)    KC Management;

which each held 30% of the post-dilution share capital.

26    Neither Mervyn T Nominees (as trustee of the Mervyn Trust) nor Mervyn’s Estate held any interest in Canterbury Hills, which was (and remains) a company owned and controlled by Vernon (now Vernon’s Estate) and David.

27    The effect of the sale is said by the plaintiffs to have:

(a)    deprived Fendall Farms (and therefore the Mervyn interests) of the commercial development opportunities associated with the land in question; and

(b)    diverted those opportunities to Canterbury Hills.

28    Moreover, the plaintiffs say, the sale proceeds ‘received’ by Fendall Farms were effectively rendered illusory or temporary by means of the Intercompany Loan Scheme.

29    The 1999 Fendall Farms Land Sale is said by the plaintiffs not to have been disclosed to Mervyn T Nominees or any of the beneficiaries of the Mervyn Trust, other than to persons with a conflict of interest (i.e. Vernon, Diane, and David).

30    If derivative leave is granted, Mervyn T Nominees (as trustee for the Mervyn Trust) will seek relief on behalf of Fendall Farms from Vernon’s estate and David for asserted breaches of fiduciary and other duties owed by Vernon and David in their capacity as directors of Fendall Farms, and against Canterbury Hills as an accessory to those asserted breaches of fiduciary duty.

31    The Intercompany Loan Scheme: This is said by the plaintiffs to be a scheme by which, between FY2000 and FY2019, funds were extracted from Fendall Farms, and in favour of entities associated with Vernon and/or David, by the following means:

(a)    Fendall Farms received sale proceeds from the 1999 Fendall Farms Land Sales;

(b)    Fendall Farms mortgaged its remaining land to borrow money from external lenders (“External Loans”);

(c)    Fendall Farms used the proceeds from the 1999 Fendall Farms Land Sales and the proceeds of the External Loans to do two things, namely (1) pay so-called administration and management fees and (2) advance unsecured loans to TFS (between FY2000 and FY2012) and TFS (Vic) (between FY2013 and FY2019) (“Intercompany Loans”);

(d)    Each of TFS and TFS (Vic) on-lent the loan moneys it received from Fendall Farms to other companies within the Townshend Group, including Canterbury Hills, and to each of Vernon and David; and

(e)    Fendall Farms paid interest on its External Loans at commercial rates, but only received interest on the Intercompany Loans at lower than commercial rates, and not on a consistent or commercial basis. It suffered a loss from the shortfall between the two, in the amount of at least $13.9 million (“Shortfall”), and paid more than $3.6 million in administration and management fees.

32    The plaintiffs proffer the following by way of example by reference to the proposed statement of claim:

(a)    in FY2014, Fendall Farms suffered a shortfall loss of $704,874 between the annual cost of its External Loans and the annual income from its Intercompany Loans, and paid $110,000 in administration and management fees to TFS (Vic);

(b)    in FY2015, Fendall Farms suffered a shortfall loss of $874,500 between the annual cost of its External Loans and the annual income from its Intercompany Loans, and paid $900,000 in administration and management fees to TFS (Vic); and

(c)    in FY2016, Fendall Farms suffered a shortfall loss of $960,985 between the annual cost of its External Loans and the annual income from its Intercompany Loans, and paid $250,000 in administration and management fees to TFS (Vic).

33    According to the plaintiffs, the accounts do not identify any legitimate matters justifying (1) the imposition of administration and management fees of this magnitude or (2) the $790,000 increase in fees charged in FY2015 compared with the fees charged in FY2014. Such matters, the plaintiffs submit, provide strong support for the conclusions for which they contend. Similarly, the plaintiffs submit, the fact that Vernon and David caused or permitted Fendall Farms to suffer the Shortfall is another matter providing strong support for these conclusions.

34    If derivative leave is granted, Mervyn T Nominees (as trustee for the Mervyn Trust), will seek relief on behalf of Fendall Farms from Vernon’s estate and David, for breaches of fiduciary and other duties alleged to be owed by Vernon and David in their capacity as directors of Fendall Farms, and from TFS, TFS (Vic), Canterbury Hills and VBI Properties as accessories to those breaches of fiduciary duties.

35    The requirements for leave to bring derivative proceedings on a company’s behalf are set out in s 237(2) of the Act. Leave must be granted (i.e. the grant of leave is not discretionary) if the Court is satisfied that:

(a)    It is probable that the company will not itself bring the proceedings, or properly take responsibility for them: in this case, Fendall Farms has expressly declined to do so, and is controlled by hostile parties. In this regard, see the letter of Fendall Farm’s solicitors dated 31 August 2021. It is unnecessary to say any more about this requirement: it may be regarded as having been met.

(b)    The applicant is acting in good faith: in this case, the applicant Mervyn T Nominees is seeking to recover what it says are substantial losses where critical information is said to have been withheld or concealed from it for many years, where it has provided undertakings as to costs, backed by a litigation funder, and where there is significant overlap with the extant oppression and other claims which it brings. It will be necessary to return to the issue of the applicant’s good faith, and what is said against this by the fifth and sixth defendants.

(c)    It is in the best interests of the company that the applicant be granted leave: here, the claims are by the company against its officers (and their related parties), in order to recover what are said to be very substantial sums, for the benefit of all shareholders; the defendants would seem to have capacity to meet any judgment; the company is protected by undertakings and indemnities in relation to litigation costs; and the claims are said to have a reasonable prospect. It will be necessary to return to this issue also, and what is said about it by the fifth and sixth defendants.

(d)    There is a serious question to be tried: this is submitted by the plaintiffs to be a relatively low threshold, and the plaintiffs contend that it is amply supported by the evidence. It will be necessary to return to this issue also, and to the submission of the fifth and sixth defendants in this regard.

(e)    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 apply: this requirement has also been met, as to which see the letter to Fendall Farms dated 24 March 2021.

36    The applicant, obviously enough, bears the onus of proving these matters: Slea Pty Ltd v Connective Services Pty Ltd [2017] VSC 609 at [51], citing Swansson v RA Pratt (2002) 42 ACSR 313, at 319 [26] (Palmer J).

37    Turning then to the issue of good faith. The plaintiffs’ submissions of 11 November 2021 describe the basis on which it is contended that the application is made in good faith. It is unnecessary to set these submissions out in full, but the substance of them is that Ms DeKlerk believes that the proposed claims are good ones with a reasonable prospect of success, there are objective facts and circumstances which support the causes of action sought to be advanced, appropriate undertakings to indemnify Fendall Farms have been proffered, there is considerable overlap with the oppression and other principal claims, and the possibility that some claims may be time barred is ultimately not a proper matter for detailed consideration or determination in the context of an application to bring derivative proceedings (as to which see Pentridge Village Pty Ltd (in liq) v Capital Finance Australia Ltd (2018) 339 FLR 358 at [236] (Connock J)).

38    The fifth and sixth defendants contend that the plaintiffs cannot establish the “good faith” criteria, including in respect of the Intercompany Loan Scheme claims. They say that the plaintiffs have not made genuine attempts to resolve the issues in respect of the Intercompany Loan Scheme claims prior to commencing the proceeding, that there has been a lack of transparency on the part of the plaintiffs in relation to their proposed derivative action, and that the plaintiffs have long delayed raising their concerns with Fendall Farms (and other defendants) about these matters.

39    The fifth and sixth defendants also contend that the plaintiffs cannot satisfy the “best interests” test insofar as the Intercompany Loan Scheme claim is concerned because resolution of the underlying issues will be time consuming and costly, and that the preferable course was to appoint an independent forensic accountant to review the alleged Intercompany Loan Scheme claims. This, according to the fifth and sixth defendants, would have provided a more cost effective, efficient and appropriate way to resolve the issues underlying the alleged Intercompany Loan Scheme. They say that it still could, and complain that the Report prepared by Mr Stone has been rejected by the plaintiffs. The fifth and sixth defendants submit that if the Court accepted that the Report could assist the parties to resolve their differences, it would not be in Fendall Farm’s best interests for leave to be granted under s 237(2) of the Act in respect of the Intercompany Loan Scheme claims.

40    The fifth and sixth defendants also maintain that the plaintiffs cannot satisfy the “best interests” test because the plaintiffs rely on the allegations in relation to the Intercompany Loan Scheme not only for the purposes of the proposed derivative action but also in the context of the statutory oppression claim. It is said that there is no reason why the plaintiffs need to be granted leave to commence a derivative action in respect of the Intercompany Loan Scheme claims in circumstances where all of the same matters will be dealt with in the context of the statutory oppression claim. It is also said that Mr Stone, in his Report, is critical of the Intercompany Loan Scheme and this suggests that litigation may not be the best means for this matter to be pursued.

41    The fifth and sixth defendants also submit that leave should not be granted under s 237 of the Act in respect of the 1999 Land Sale claims because the relevant circumstances occurred such a long time ago. This is said to be relevant to the Court’s satisfaction in relation to the serious question to be tried criterion, the best interests criterion, and the good faith criterion. The relevant statutory limitation periods are invoked in support of this submission.

42    I do not accept the fifth and sixth defendants’ submissions in relation to any of these matters. Insofar as the “best interests” criterion (s 237(2)(c)) is concerned, the time and cost factors which were said to favour the preparation of an expert report have plainly not been realised. This process has now taken some four months longer than the fifth and sixth defendants said it would, and as has been observed, the Report can hardly be said to have advanced matters very far, if at all. I do not regard Mr Stone’s conclusions as supportive of an argument that it would not be in the best interests of Fendall Farms for the derivative proceedings to be brought.

43    Further, and as the plaintiffs submit, Fendall Farms will not be out of pocket – Mervyn T Nominees has undertaken to indemnify it and, in turn, the costs of Mervyn T Nominees, including its exposure to adverse costs orders, are indemnified by a litigation funder. It cannot be said that the funder would profit at the expense of Fendall Farms: the funder is not entitled to any commission at Fendall Farms expense. The funders commission would be paid only by Mervyn T Nominees should it recover. Further, in relation to the funding agreement, I am not persuaded by the submissions of the fifth and sixth defendants that the plaintiffs’ failure to produce an entirely un-redacted copy of the funding agreement reflects adversely on their good faith, a matter to which I will shortly turn.

44    Insofar as the overlap with the statutory oppression claims are concerned, I accept the plaintiffs’ submission that the existence of a factual overlap between the proposed derivative claims on behalf of Fendall Farms and the Mervyn parties’ oppression claims under s 233 of the Act is a factor which strongly supports the grant of leave.

45    In addition, and as the plaintiffs also submit, a claim under s 233 of the Act is not an appropriate avenue for protecting the interests of Fendall Farms itself, as opposed to those of the oppressed shareholders. It does not clearly contemplate an action for damages, let alone against a third party: see LPD Holdings (Aust) Pty Ltd v Phillips Hicky and Toigo & Anor (2013) 281 FLR 227 at [41] and [51]. I accept that a claim under s 237 of the Act is the more appropriate and natural cause of action, and one that protects Fendall Farms’ interests.

46    Also, I accept the plaintiffs’ submissions that it is incorrect for the Vernon parties to characterise Fendall Farms as an active defendant to the oppression claim. Although a winding up order is sought, the primary relief sought is a buy-out order. It is correct, in my view, that Fendall Farms ought not play an active role in defending the oppression claim.

47    I also accept, as the plaintiffs have submitted, that where buy-out orders are sought in an oppression proceeding it may first be necessary to “add back” any compensation that is owing to the company from the third parties (that is, in respect of any derivative claims brought on behalf of the Company): Foody v Horewood [2003] VSC 347 at [303]. I consider it likely that any relief under s 233 of the Act would be inadequate without also bringing the claims for which derivative leave is now sought.

48    Insofar as the good faith criterion (s 237(2)(b)) is concerned, I do not accept the fifth and sixth defendants’ contention that the Mervyn parties have not made genuine attempts to resolve the dispute. The evidence tends to suggest that they have made such attempts, one way or another, since at least 2007. It may also be, as the plaintiffs submit, that for much of this time the claims in question were concealed from them. In this regard I accept the plaintiffs’ submission in paragraph 28 of their reply submissions that, despite entreaties, the Vernon parties have failed to make any substantive responses to the matters alleged in the proposed statement of claim. The evidence discloses that the Vernon parties have failed to deal in other than a very limited way and on the basis of an uncompromising final position. And of course the Vernon parties did not file their proposed expert report until yesterday, thereby effectively delaying matters for some nine further months.

49    Insofar as the alleged lack of transparency is concerned, I am not satisfied that there has been a lack of transparency which could amount to an absence of good faith. I accept that documents recording the work of the plaintiffs’ forensic accountant are privileged; and in any event (as the plaintiffs submit) the product of those investigations can be seen in the proposed statement of claim which includes the derivative claims. Further, I do not consider that there has been a failure to disclose any arrangements between the plaintiffs and David. Plainly David is a defendant to the claims the plaintiffs seek to bring. He now seeks to bring a cross claim himself, and his interests are adverse to those of the plaintiffs.

50    Nor do I consider that the fifth and sixth defendants’ complaints about the plaintiffs’ delay in bringing the action have substance. As the plaintiffs submit, Vernon and his fellow directors had been on notice since 13 February 2019 that the Intercompany Loan Scheme and the role of Fendall Farms in it required an explanation. Vernon did not apparently provide an explanation prior to his death. Further, and as the plaintiffs also submit, there is no irremediable prejudice. Although Vernon is now deceased, it would seem that there are several officers and directors of Fendall Farms with sufficient longevity to give relevant evidence.

51    As to the alleged delays in 2020 and early 2021, the fifth and sixth defendants’ complaints in this regard are without foundation. As the plaintiffs submit, most of the accounts relevant to the Intercompany Loan Scheme were not provided until September and October 2019. Once provided with this material it was necessary for the plaintiffs’ advisers to work through it. Litigation funding was required, and was not obtained until 30 June 2020.

52    Further, and in relation to the criticisms made by the fifth and sixth defendants as to the absence of evidence from Christopher Townshend QC, I accept that this is without foundation at this stage of the proceeding. As the plaintiffs submit, this is not the trial of the proceeding. Mr Townshend QC apparently did not have access to the Townshend Group accounts, and I am not unduly concerned, at this stage, that his lack of knowledge is dealt with on the basis of information and belief. It will be for the plaintiffs to consider whether he will give evidence in due course.

53    Insofar as a serious question to be tried (s 237(2)(d)) is concerned, in the face of the evidence advanced by the plaintiffs, coupled with the detailed allegations advanced in the proposed statement of claim signed by experienced senior counsel, I accept that there is, in fact, a serious question to be tried. I reject the submissions of the fifth and sixth defendants that the question of delay suggests there is not a serious question to be tried. The points that are made as to the existence of limitation defences and other evidential difficulties, are not a proper basis to form a conclusion in the present circumstances that there would be no point to the proceedings. Far from it. In my assessment the time has come for the fifth and sixth defendants to engage meaningfully with the serious claims brought against them.

54    Having regard to all these matters, I am satisfied that each of the criteria in s 237(2) of the Act has been satisfied by the plaintiffs and that the second plaintiff has sanding to bring its application under s 236(1) of the Act. The application for derivative leave must be granted.

30 May 2022 application

55    The second application before the Court is the eighth defendant’s (David’s) application for derivative leave under s 237(2) of the Act to intervene in the proceedings and bring a cross claim on behalf of the seventh defendant, VBI, against Fifty-One Glebe (Management) Pty Ltd, Kooringa Close (Management) Pty Ltd and Diane in her capacity as legal representative of the Estate of Vernon Townshend.

56    Although this application was initially the subject of opposition by the fifth and sixth defendants, after the luncheon adjournment, and having regard to my decision to grant the plaintiffs’ derivative leave application, which I communicated to the parties, senior counsel for the fifth and sixth defendant indicated that David’s application for derivative leave was no longer opposed and that, in all the circumstances, it should be granted. The plaintiffs supported this course, subject to the making of suitable arrangements in relation to the costs of David’s proposed cross claim.

57    In the face of this consensus I am satisfied of the relevant matters in s 237(2) of the Act and David’s derivative leave application will also be granted. It is desirable that all relevant parties and claims be brought within the existing proceeding.

58    There will be orders substantially in the terms proposed by the plaintiffs at the commencement of the hearing this morning and as subsequently agreed between the parties. These orders are as set out at the commencement of these reasons.

Associate:

Dated:    19 July 2022

SCHEDULE OF PARTIES