Federal Court of Australia

Noah’s Ark Veterinary Services Pty Ltd v Hudson [2023] FCA 1094

ORDERS

THE COURT ORDERS THAT:

1.    The application be dismissed.

2.    The parties provide mutually available dates for a hearing on costs to the Associate to Perram J by 4.00 pm on 22 September 2023.

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

REASONS FOR JUDGMENT

PERRAM J:

Introduction

1    Donald Hudson is a shareholder in Noah’s Ark Veterinary Services Pty Ltd (‘Noah’s Ark’). The question is whether the Court should grant him leave pursuant to s 237 of the Corporations Act 2001 (Cth) to bring proceedings on behalf of Noah’s Ark against its directors. Noah’s Ark conducts business as a provider of veterinary services at a practice situated at Medowie near Port Stephens in New South Wales. It has three shareholders each of whom holds 100 shares. The shareholders are Donald Hudson (a veterinary surgeon), his former wife Ilona Hudson (also a veterinary surgeon) and Victoria Ireland, the practice manager. I will refer to the shareholders without disrespect as Donald, Ilona and Victoria. The current directors of Noah’s Ark are Ilona and Victoria.

2    As a shareholder Donald is entitled to make this application: ss 236(1)(a) and 237(1). If Donald satisfies the Court of the criteria set out in s 237(2) it must grant him the leave he seeks. Section 237(2) provides:

(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.

3    The proposed proceeding is set out in Donald’s affidavit filed on 16 June 2023. Although not in form a pleading it is evident that the affidavit sets out the material facts from which a pleading could be drawn and it is useful to assume for present purposes that a proper pleading could in due course be drawn. As it happens, there is a draft of the proposed pleading attached to a letter from Donald’s solicitors to Ilona’s solicitors dated 26 April 2023.

4    For the reasons which follow I am satisfied that the requirements of sub-ss (2)(a), (d) and (e) are met. However, I am not satisfied that the grant of leave would be in the best interests of Noah’s Ark (sub-s (2)(c)) or that Donald is acting in good faith (sub-s (2)(b)). In brief, this is because the proceeding is: (a) pointless since I am satisfied that Donald will not be a shareholder by the time the derivative suit comes to trial; (b) unnecessary since the same dispute is already before the Federal Circuit and Family Court of Australia (Division 2) (‘the Federal Circuit Court’); and (c) brought by Donald for a purpose alien to s 237(2); namely, to persuade Ilona and Victoria to pay him certain alleged employment entitlements which, if they exist, are not sums owed to him by Ilona and Victoria but rather by Noah’s Ark. As such it would be an abuse of process.

Noah’s Ark

5    Noah’s Ark was incorporated on 12 September 2002. The directors were initially Donald and Ilona but Victoria became a director on 22 September 2005. Donald, Ilona and Victoria were each also employees of Noah’s Ark – Donald and Ilona as veterinary surgeons and Victoria as the practice manager. Donald’s employment ceased on 3 August 2021 and he resigned as a director on 31 August 2021.

6    Initially, Noah’s Ark operated a practice at 55 Donald Street, Nelson Bay but in 2004 it opened a second practice in nearby Medowie. Since at least 2016, Noah’s Ark has also provided rehabilitation services for animals including chiropractic and acupuncture treatments. I shall refer to these as the rehabilitation services. As will be seen, these rehabilitation services are central to Donald’s application for leave.

The breakdown of Donald and Ilona’s marriage

7    Donald and Ilona’s marriage broke down around August 2019 and their marriage was dissolved in October 2022. Donald commenced a proceeding against Ilona for property orders in the Federal Circuit Court on 22 July 2021. As I will explain in due course, it is evident that the shares in Noah’s Ark are part of the subject matter of that proceeding. On 14 September 2022, Victoria was joined as a party to the Federal Circuit Court proceeding by reason of her ownership of shares in Noah’s Ark.

8    In the Federal Circuit Court proceeding Donald seeks orders against Ilona and Victoria which, inter alia, would see Donald transfer his 100 shares to Ilona in return for a payment by Ilona and Victoria of $420,045.33. Ilona and Victoria are seeking, inter alia, orders that Donald transfer his 100 shares to them so that each receives 50 shares in return for a number of other property adjustments between Donald and Ilona. Donald agreed under cross-examination that the value of the shares in Noah’s Ark was a significant issue in the family law proceeding (T27.28). He thought that the shares in Noah’s Ark represented about one-third of the asset pool (T27.30).

9    As the Federal Circuit Court proceeding is presently constituted it follows that the parties are ad idem that Donald should cease to be a shareholder. The debate between them concerns, in substance, the price at which this should occur. Under cross-examination, Donald indicated that he was also willing to buy out Ilona and Victoria (T30.11-20). However, that proposal is not presently being advanced by any party in the Federal Circuit Court proceeding. That proceeding is fixed for hearing for three days on 16-18 October 2023 before the Honourable Judge Betts sitting at Newcastle.

Whether Donald worked full time at the Nelson Bay practice

10    This question does not relate to any issue which is actually in dispute between the parties. However, Donald gave evidence about it and the Defendants submitted that his evidence about it showed him not to be a witness of credit. It is chronologically convenient to deal with this point at this juncture. Because it will be relevant throughout these reasons, it should also be noted here that Donald is experienced in treating koalas.

11    Under cross-examination, Donald denied that he worked exclusively as a veterinary surgeon at the Nelson Bay practice (T25.18), that he attended the Medowie premises very rarely (T25.21) and that he was exclusively doing large or complex surgeries (T25.23). Donald has sworn an affidavit in the Federal Circuit Court proceeding dated 17 February 2023 (Exhibit 3). In this affidavit at §20 he said that he had worked up to six days per week for Noah’s Ark at Nelson Bay and the Port Stephens Koala Hospital and performed all of its major surgeries ‘at any clinic’. Contrary to the Defendants’ submission I see no inconsistency between his denials under cross-examination and §20. I therefore do not accept that this evidence was not to his credit.

Donald’s dismissal from employment

12    On 28 July 2021 Victoria wrote a letter to Donald in her capacity as the practice manager instancing what she said were examples of serious misconduct on Donald’s part (this was six days after Donald commenced his proceeding in the Federal Circuit Court on 22 July 2021). These included allegations of aggressive communication with Ilona and Victoria, threatening and intimidating behaviour towards colleagues which had once resulted in a call being made to local police, and bullying a young nurse. Donald’s solicitors replied by letter the next day on 29 July 2021 and sought particulars of the allegations. The particulars were provided the following day on 30 July 2021. Donald’s solicitors made a formal response to the allegations on 3 August 2021 denying them.

13    At the hearing of the present application the Defendants invited me to conclude that Donald had engaged in the misconduct described in the letter of 28 July 2021. I do not think this would be appropriate. The factual material upon which this would need to be judged consists only of the letters which have passed between the parties which include some screenshots of various text messages. No metric is available to me by which I would be able to evaluate this material. In particular, neither Donald nor Victoria were cross-examined about these matters. A resolution of the debate would involve concluding that aspects of the letters are not correct. But where that has not been put to either of the parties, I do not see how I could make such a finding without denying them procedural fairness. I therefore make no findings as to whether the allegations made against Donald in the letter of 28 July 2021 are correct or not correct. The only conclusion open is that Noah’s Ark accused Donald of serious misconduct and he denied it.

14    Seemingly before receiving Donald’s response of 3 August 2021, Noah’s Ark terminated his employment that same day on the grounds of serious misconduct. His final pay slip dated 11 August 2021 indicates that he was paid his accrued long service leave but no sum was included for annual leave or for time in lieu of notice. According to Noah’s Ark, Donald had no accrued annual leave since he had already accessed his leave entitlement that year and was not entitled to time in lieu of notice because he had been dismissed for serious misconduct.

15    Donald then made an application to the Fair Work Commission on 23 August 2021. The following week on 31 August 2021 Donald resigned as a director of Noah’s Ark. A conciliation conference took place on 27 September 2021 which resulted in the settlement of the Fair Work Commission proceeding. Donald was not re-employed although the evidence suggests that he was paid a sum of money: CB617

The events at the Port Stephens Koala Hospital and the Oakvale Wildlife Park

16    In 2020 Noah’s Ark commenced providing services at the Port Stephens Koala Hospital although it appears that it had provided similar services to home-based carers of koalas prior to that time. Noah’s Ark’s services were provided under a service agreement. Donald gave evidence that the hospital rehabilitated koalas: T13.47. By the beginning of 2021, Noah’s Ark had a need for more veterinarians, in large part to fulfil its obligations to the hospital. It advertised for two further veterinarians in January 2021 and filled the positions within two months.

17    However, on 3 May 2021 Donald’s solicitors wrote to the hospital and asked it not to enter into contractual relations with Noah’s Ark without his consent. They also asked that the matter be dealt with following the conclusion of the family law proceedings. This correspondence is curious for two reasons. First, at this point, Donald was still employed by, and a director of, Noah’s Ark. Secondly, the family law proceedings were not commenced until 22 July 2021.

18    Unsurprisingly Donald was cross-examined about this letter and why he caused it to be sent. In particular, he was asked how it was in the best interests of Noah’s Ark – of which he was then a director – to send the letter. This exchange occurred at T14.19-28:

You do. So, now, can I take you to page 128 of the court book? Have you got that?---Yes.

Now, that’s a letter that you instructed your solicitors to send?---Yes.

Yes. And you were a director at that time, weren’t you?---Yes.

Yes. So how was that in the best interest of the company?---The company was looking to sell the share of the koala hospital to me, at that point. The paperwork that was to be signed for the contract for the koalas would have interfered with the company’s ability to sell – send – to sell me that proportion of the business. I emailed Victoria on that account and that’s it.

Any reason why you didn’t put any of that in your affidavit?---It wasn’t relevant. No.

19    Even assuming that at this time Noah’s Ark was offering to sell to Donald its rights under the service agreement with the hospital, this explanation does not make sense. Had a fresh contract been entered into between Noah’s Ark and the hospital and had the sale of Noah’s Ark’s rights to Donald proceeded, the new contract would simply have formed part of that which was sold. The existence of such a proposal does not thereby provide any rational reason for asking the hospital not to enter into contractual relations with Noah’s Ark. I do not therefore accept that the reason Donald now puts forward was in fact the reason that he caused this letter to be sent and in that regard I am satisfied that this aspect of his evidence was false. In his closing address Mr Baroni, counsel for the Defendants, submitted that Donald’s evidence about the letter of 3 May 2021 was one of four matters which suggested that Donald was not a reliable witness. I accept that this is so in relation to the letter of 3 May 2021.

20    On 7 September 2021 the hospital wrote to Noah’s Ark terminating the service agreement because it could no longer meet the charges and costs under the agreement. The termination was to take effect on 29 October 2021 and in the meantime the hospital desired Noah’s Ark to continue providing its services. I reject Donald’s evidence under cross-examination that the hospital had terminated Noah’s Ark’s contract on three months’ notice. It appears to have been a little over seven weeks’ notice.

21    In its email, the hospital also indicated that it was going to apply for its own licence to operate as a veterinary hospital (a legal requirement) and that it intended to ‘employ its own part-time veterinary surgeon to lead PSKH activity in this area in conjunction with our own recently employed veterinary nurses’. The hospital noted that it would advertise for the surgeon position immediately. About three weeks later on 27 September 2021 the hospital engaged Donald as its new superintendent.

22    Donald said under cross-examination that Noah’s Ark had shortened the notice period from three months to one month. As I have explained, the notice period was about seven weeks. I think it is likely that Noah’s Ark brought forward the termination of the service agreement once it learnt that Donald would be the hospital’s superintendent from 27 September 2021 as it would be very difficult to envisage Ilona and Victoria being able to work alongside Donald. I therefore accept this aspect of Donald’s evidence although the shortened period seems to have been about three weeks rather than one month. Such an error on Donald’s part is however of little consequence. General immersion in the communications which passed between Donald and Victoria persuades me that paperwork and legal niceties are not Donald’s strong suit but very much are Victoria’s. This different approach to detail seems to be the source of some of the friction which exists between Donald and Victoria.

23    In any event, at this stage, the hospital did not have a licence to carry on business as a veterinary hospital. On 30 September 2021, during a meeting between the hospital (including Donald) and Noah’s Ark (represented by Victoria, Ilona and another veterinarian) held for the purposes of providing a handover, Donald demanded that Noah’s Ark transfer its licence to the hospital. Victoria refused and a heated altercation ensued. The licence was not transferred. I infer from the email of 7 September 2021 that the hospital thereafter procured its own licence.

24    The hospital was Noah’s Ark’s largest client and the loss of its business had a negative impact on the business. One of the newly hired veterinarians was let go and the other was upskilled to work with pocket pets and exotic animals. Victoria gave evidence at §119 of her affidavit that the gross revenue generated for Noah’s Ark by its work for the hospital was in the order of $196,208.21 in 2021 or about 7.8% of its gross revenue that year. Donald was asked whether this figure represented the revenue generated by this work. He said he was unable to recall given the lapse of time: T23.28. It was not submitted that I should not accept this aspect of his evidence.

25    Turning then to the events at the Oakvale Wildlife Park (‘Oakvale’), the evidence suggests that this establishment is a zoo which, amongst other animals, keeps koalas. Oakvale had been a client of Noah’s Ark and had provided a diversity of work for its veterinarians. After Donald began working for the Port Stephens Koala Hospital he also began doing work with koalas at Oakvale. On 28 February 2022 he sought patient records for particular koalas from Noah’s Ark which, by law, it was obliged to provide. This appears to have resulted in the loss to Noah’s Ark of the revenue generated by the Oakvale koala work, which Victoria estimated to be in the vicinity of $19,311.09 in 2022 in gross terms.

26    On the other hand, this appears to have occurred well after Donald ceased to be a director of Noah’s Ark. The Defendants submitted that some of Donald’s duties as a director endured after he ceased to hold that office and to that one may add the possibility that he may have used some of Noah’s Ark’s confidential information. On the other hand, Donald was a veterinary surgeon with expertise in koalas and Oakvale was a local zoo which kept koalas. The blossoming of a business arrangement between them beneficial to both (and to the koalas) might be thought susceptible to a more innocent explanation.

27    The events at the Port Stephens Koala Hospital and Oakvale persuaded Victoria that Donald was seeking to use his client contacts, connections and relationships gained as a director and employee of Noah’s Ark for his personal advantage. On 6 March 2023 Noah’s Ark’s solicitors, Mills Oakley, wrote to Donald alleging he was in breach of his statutory and fiduciary duties.

28    Under cross-examination Donald denied that he was seeking to siphon off work from Noah’s Ark, saying instead that he was unemployed and looking for work: T21.4-9. I accept that one of the reasons he took up employment with the hospital was because he was unemployed and was looking for work. However, I also accept the Defendants’ submission that he was seeking to siphon off its work.

29    There are a number of factual matters which bear upon this. First, Donald had caused his solicitors to write to the Port Stephens Koala Hospital on 3 May 2021 suggesting it not enter into contractual relations with Noah’s Ark. I have already found his testimony about why he did this to be false.

30    Secondly, the hospital had told Noah’s Ark on 7 September 2021 that it could not afford Noah’s Ark’s services. This statement is problematic. The evidence before this Court is that the annual revenue derived by Noah’s Ark from the hospital had been around $196,208.21. One of Donald’s payslips issued to him by the hospital was in evidence. It shows that his gross fortnightly pay was $6,153.84 which represents an annual salary of $160,000.00. On top of this his superannuation fund was paid 11% which is a further $17,600.00 so that the total cost to the hospital of Donald’s services was $176,600.00 per year. Although there was no evidence of the amounts in question, as an employer the hospital would have had additional expenses relating to Donald’s employment such as professional indemnity insurance and workers compensation. It would also now have to have provided for itself the various medicines and equipment used to treat koalas which previously had been provided by Noah’s Ark. I am unpersuaded that the total cost to the hospital of employing Donald to treat the koalas was materially different to what it had been paying Noah’s Ark to do so. The statement in the hospital’s email that it could no longer afford Noah’s Ark’s services appears to me therefore to be difficult to reconcile with the fact that it was able to afford Donald’s.

31    Thirdly, the statement by the hospital in its email of 7 September 2021 that it was going to employ its own veterinary surgeon is also problematic. It had in the same email told Noah’s Ark that it was terminating the service agreement. The termination was not to take effect until 29 October 2021. It therefore needed to employ another veterinary surgeon to do the koala work by that date. One may infer from the email that the hospital was confident that in this seven-week period it would be able to advertise the position and find a suitable specialist veterinary surgeon who worked with koalas. Victoria gave evidence that when Noah’s Ark hired the two additional veterinary surgeons in March of that year, she had been surprised that it had been able to do so within two months. There was no evidence from either party that Port Stephens or its nearby environs were overrun with veterinary surgeons specialising in the treatment of koalas. The seven weeks the hospital gave itself to find a veterinary surgeon with a speciality in koalas before Noah’s Ark departed on 29 October 2021 strikes me as a somewhat ambitious timeline.

32    On the other hand, the hospital was well acquainted with just such an unemployed veterinary surgeon – Donald – because until 3 August 2021 it was Donald who had in fact been doing the work. It is reasonably open to infer that the hospital knew when it sent the email of 7 September 2021 that it was going to employ Donald since, if it did not, it would no longer be able to treat koalas after 29 October 2021 having dispensed with the services of Noah’s Ark.

33    Fourthly, Donald’s testimony as to why the letter of 3 May 2021 was sent was, as I have found, false. A witness may give false evidence for a number of reasons and one must be cautious about what may be inferred from it. In particular, one must be astute that witnesses may have motives to lie which are unrelated to the subject matter of a case. For example, a witness in a criminal trial may deny that they were at the scene of the crime but the fact that it is proved that they were does not necessarily demonstrate that they committed the crime because the lie may be related to the fact that their presence at the scene of the crime is embarrassing for some other reason. On the other hand, false evidence may also be evidence of consciousness of guilt. Bearing this caution in mind, I am unable to conceive of a reason why Donald would lie about the email of 3 May 2021 other than that he was seeking to conceal the fact that he had been acting in breach of his fiduciary and statutory duties as a director. I therefore conclude that the reason Donald gave false evidence about the email of 3 May 2021 is because he knew that he had been acting in breach of his duties as a director.

34    From these four matters it is reasonably open to infer that Donald actively sought to replace Noah’s Ark’s services with his own and that his efforts to do so began by no later than 3 May 2021. This is a serious finding to make and one must pause before making it to consider whether the evidence is really sufficient to justify such a conclusion given the general unlikelihood of people behaving in such an inappropriate and unlawful fashion. Bearing that caution in mind, I think the inference should be drawn. I therefore find that Donald actively sought to replace Noah’s Ark’s services with his own and that his efforts to do so began no later than 3 May 2021.

35    I also note for completeness that on 1 August 2022 Donald became a director of a company which operated a veterinary practice under the name Greenhills Vet Clinic in nearby East Maitland. In the family law proceedings, Donald gave evidence that he stepped into this role as a favour to an acquaintance because, by law, the company was required to have at least two directors with veterinary qualifications and that he obtained no benefit from doing so. Donald resigned as a director on 3 February 2023. I accept that this clinic competed with Noah’s Ark. However, there was no suggestion that Donald solicited Noah’s Ark’s clients from this practice.

36    Counsel for the Defendants submitted that Donald’s evidence about when he started working for the hospital was a second matter from which it should be concluded that he was not a satisfactory witness. Donald began working at the hospital by no later than 27 September 2021 as an email of the same date from the hospital shows (‘I would like to take this opportunity to advise you that PSKH have appointed Dr Don Hudson as our new Hospital Superintendent’). It was put to him at T19.17 that he had begun working at the hospital around 7 September 2021 which he denied. It was then put to him that he started working for the hospital ‘not long after you ceased to be a director’ and he responded ‘Not long being months, then yes’. Donald ceased to be a director of Noah’s Ark on 31 August 2021. There was therefore a period of no more than 27 days between the time he ceased being a director and the time he began working at the hospital.

37    The criticism of Donald’s evidence which can be made is therefore that he sought to put the time at which he started at the hospital as being months after he resigned as a director whereas the evidence would tend to suggest that it was under a month. These events are nearly two years ago. There was some confusion in the questioning which began from the incorrect premise that he had been employed on the same day that the hospital had terminated the services agreement, i.e. 7 September 2021. I do not feel sufficiently confident on the basis of this material to conclude that Donald was lying about this and this is so even though I accept that he had a motive to put as much time as possible between his resignation as a director of Noah’s Ark and subsequent commencement with the hospital. This is particularly so where I have observed that Donald’s mastery of detail is poor. I therefore reject this second challenge to his credit.

38    It is also possible that Noah’s Ark made a further attack on Donald’s credit relating to his evidence of his work at the hospital. Under cross-examination Donald said that he was employed full time by the hospital but denied having worked full time from September 2021. In fact, it is apparent from the evidence filed in the family law proceedings that Donald claims to be suffering from a mental health condition as a consequence of which he only works four days per week. On the other hand, it does appear that he is in fact employed on a full-time basis. Donald said, and I accept, that the hospital was content with this arrangement. It is therefore the case that Donald is employed on a full-time basis but in fact only works four days per week. As such I do not accept that this evidence deleteriously impacts on his credit.

The sale of the Nelson Bay practice

39    Notice of the termination of the service agreement was given by the Port Stephens Koala Hospital on 7 September 2021 and, as I have said, it employed Donald no later than 27 September 2021. At this time, Noah’s Ark continued to maintain a practice at Nelson Bay and a practice at Medowie. According to Victoria once Noah’s Ark had terminated Donald’s employment this left only one veterinary surgeon at the Nelson Bay practice and it did not make sense to continue operations there. At some point a decision was made by Noah’s Ark to sell the Nelson Bay practice.

40    On 13 October 2021 Noah’s Ark’s solicitors wrote to Donald to advise him that Noah’s Ark intended to sell the Nelson Bay practice. Donald gave evidence under cross-examination that he was offered the opportunity by Noah’s Ark to purchase the Nelson Bay practice which he rejected: T14.33-35. It is unclear whether this was before or after 13 October 2021 but this does not, in any event, matter.

41    Under cross-examination Donald also gave evidence that he had indicated in writing that he did not consent to the sale of the Nelson Bay practice and that whilst he had eventually signed the paperwork (which related to an assignment of the licence to conduct a veterinary hospital) this was because he had been told by Noah’s Ark that it would not return his possessions unless he agreed. The parties did not explore the nature of these possessions in their submissions but I assume that they likely included his tools of trade. Donald went on to say that this demand had been made in writing: T17.17-47.

42    There is evidence to the contrary. Exhibits 5 and 6 are letters from Donald’s solicitors sent on 20 October 2021 in which Donald indicated that he consented to the sale but sought that the proceeds be held pending the outcome of the family law proceedings. I raised with Donald’s counsel the written correspondence to which Donald referred in his cross-examination and asked whether it was in evidence. By the end of the trial no correspondence to this effect had been tendered.

43    I reject Donald’s evidence that he did not consent to the sale. Exhibits 5 and 6 show that he agreed to the sale within a week of his consent being sought. I also reject his evidence that he signed the paperwork relating to the assignment of the licence because he had been told in writing that only by so doing would he be able to obtain the return of his possessions. As I have said, no such correspondence was tendered by Donald. Neither did he lead evidence explaining that he no longer had possession of the correspondence or that there was some other reason why he could not tender it. I infer that there is no such correspondence.

44    The paperwork to permit the assignment of the licence appears to have been signed by Donald in December 2021 with the sale being completed on 22 December 2021 for a price of $600,000.00 (which was then held pending the outcome of the family law proceeding). Since Donald had agreed to the sale by no later than 20 October 2021 it is difficult, on the face of the evidence before this Court, to understand why he would have been refusing to sign the licence paperwork in December 2021.

45    I suspect that there may be some other dispute between the parties lingering behind the arras of Donald’s evidence about this. One may for example speculate that Noah’s Ark was refusing to return to Donald his possessions in retaliation for his diversion of the Port Stephens Koala Hospital work. That unhappiness had, after all, reached its denouement in the heated altercation on 30 September 2021 between Victoria and Donald about the assignment of Noah’s Ark’s hospital licence to the Port Stephens Koala Hospital. It is not such a big leap to think that if Noah’s Ark was not going to surrender its hospital licence so as not to make Donald’s life any easier, the same line of thought might have led it to retain his possessions. If so, perhaps Donald sought to obtain the return of his possessions by withholding his consent to the assignment of the licence and thereby took as his hostage the completion of the contract of sale (for which the ransom he demanded was his possessions). These sorts of imaginings are easy to summon up in the vituperative soup into which the parties had by then descended.

46    However, all of this lies in the realm of speculation. The finding I make about this is that Donald’s evidence that such a threat had been made to him in writing is not correct. I am not prepared to find, however, that he knew that no such suggestion had been made to him. This does not of course involve a finding about whether such a suggestion was in fact made; merely that it has not been shown that Donald’s statement was knowingly false. As I have said, my impression is that paperwork is not Donald’s forte.

Ilona and Victoria strike back: Move Unleashed Pty Ltd

47    The effect of Donald’s diversion of the hospital work to himself meant that from 27 September 2021 Noah’s Ark lost about $196,200.00 in revenue. Had this been shared three ways between Victoria, Ilona and Donald then Donald’s share would have been about $65,400.00. To this extent, Donald’s actions at least in principle harmed his own economic interests. However, the income he then received from the hospital was around $176,000.00 so the rearrangement was an overall benefit to him.

48    Donald’s actions in harming Noah’s Ark so that he could enrich himself seems to have inspired Ilona and Victoria to employ a similar tactic. It will be recalled that Noah’s Ark had also provided rehabilitation services. There is a dispute between the parties as to whether Donald thought these services were useful. He denied referring to these services to Ilona as ‘witchcraft’: T25.42. It is not necessary to resolve this dispute.

49    As will now be explained, this rehabilitation business was moved out of Noah’s Ark and into a new entity owned by Ilona and Victoria. Although the revenues from the rehabilitation business were much more modest than the revenue from treating koalas at the hospital (which had been Noah’s Ark’s largest client), the economic impact on the parties was the same in kind. The revenue was converted from a stream which otherwise would have been shared with Donald to one which was not.

50    Turning then to the detail, Victoria gave evidence that after the sale of the Nelson Bay practice Noah’s Ark took steps to increase the size of the Medowie practice. I accept this evidence. The termination of the service agreement in September 2021 was a heavy blow to Noah’s Ark and the sale of the Nelson’s Bay practice meant that it needed to regroup and see if its business could be grown at Medowie. Victoria gave detailed evidence of the steps which were taken at Medowie to put Noah’s Ark back on an even keel. These included working out how to fit all of its vets into two consulting rooms; setting up a new website and appointing a social media manager; the creation of a mobile service; opening late on Thursdays; hiring two experienced veterinary surgeons to do complex surgeries and thereby capturing work previously referred to other clinics; training two of its veterinarians to work with exotic animals; purchasing a digital X-ray machine and blood machines; and undertaking extensive renovations. It is evident that Victoria and Ilona’s efforts to turn the business around have borne fruit.

51    Another measure taken at Medowie concerned the rehabilitation business. There is no debate that Noah’s Ark had provided rehabilitation services which were also sometimes referred to as biomechanical services. These services appear to have consisted of chiropractic services and acupuncture. Victoria gave evidence that as at the start of January 2022 Ilona and she wished to expand this business by the addition of two sets of other services: (i) the provision of Chinese medicine and herbs; and (ii) teaching, mentoring and business coaching.

52    Victoria’s evidence was that the size of the Medowie clinic made it impractical to provide all of these services from those premises. Further, the provision of the rehabilitation services was not as lucrative as the provision of more traditional veterinary services such as surgeries. One can follow this. With a finite amount of space in the clinic it would be economically irrational to provide a less profitable line of services if the effect of this was to prevent the provision of a more profitable line of services.

53    Whilst the rehabilitation services were provided by Noah’s Ark they had been provided by Ilona and Victoria and not by any of the other staff. Noah’s Ark ceased providing the rehabilitation services in February 2022 and at the same time those services began to be provided by Move Unleashed Pty Ltd (‘Move Unleashed’), a company incorporated on 13 January 2022. The shareholders of Move Unleashed are Victoria and Ilona and each holds 10 shares. They are also its directors. Victoria gave evidence that Move Unleashed has its own bank accounts, plant and equipment, accounting software and that its business is entirely separate from that of Noah’s Ark.

54    Move Unleashed operates from three sets of premises. These are Noah’s Ark’s Medowie clinic, premises in Mayfield West from which a business called Pet Shop Boyz is conducted and premises at 4 Farm Road, Medowie. From February 2022, when the business began, until 5 May 2023 Move Unleashed did not pay Noah’s Ark for the use of its premises, its telephone system or other administrative support. However, on 5 May 2023 it paid a sum to Noah’s Ark for its use of these services up to that date and from 24 July 2023 began paying Noah’s Ark an ongoing fee. The adequacy of these fees is not presently material. At the end of the financial year it was also decided that Move Unleashed would pay Ilona and Victoria a salary.

55    Victoria says that Move Unleashed operates from the Medowie clinic about two and a half days per week. Move Unleashed appears to have been charged by Pet Shop Boyz for the use of its premises for eight hours per week from which it may be inferred that the business operated for about one day per week from those premises.

56    Victoria and Ilona work full time for Noah’s Ark. I took the burden of their evidence to be that they do their work for Move Unleashed on top of their work for Noah’s Ark. Since the business is conducted for two and a half days per week from the Medowie clinic and for one day from Pet Shop Boyz this would appear to imply that about three and a half days of work are done for the Move Unleashed business between them each week. I accept this is possible.

57    Victoria’s evidence was that it was necessary to move the rehabilitation services out of Noah’s Ark because they were taking up space at the Medowie clinic and preventing the provision of more lucrative veterinary services. And, as I have noted, she also said that it was preventing the expansion of the business into new lines such as Chinese medicine and herbs and the provision of teaching, mentoring and business coaching services.

58    I have trouble understanding this evidence for three reasons. First, if space were the problem then it is not easy to understand why Noah’s Ark could not lease separate premises as Move Unleashed itself seems to have done through Pet Shop Boyz and, perhaps, the Farm Road premises. Put another way, the fact that the Medowie clinic was not large enough to provide the rehabilitation services justifies the acquisition of other premises but does not rationally explain the need to give the business up by transferring it to a new entity. Secondly, the evidence sits uncomfortably with the fact that Move Unleashed continues to conduct the rehabilitation services from the Medowie clinic for two and a half days per week. Thirdly, there is at least the possibility that Move Unleashed is obtaining the services of Victoria and Ilona for three and a half days per week for nothing when they are both working for Noah’s Ark on a full time-basis.

59    I do not therefore accept Victoria’s evidence that the transfer of the rehabilitation services to Move Unleashed was made necessary by these matters or the submission made on the Defendants’ behalf that it reflected a bona fide business decision. At least at the level required on a leave application, it much more resembles the kind of conduct which Donald had engaged in by diverting to himself the koala work at the Port Stephens Koala Hospital. Victoria and Ilona had both the motive and the means to do to Donald what he had done to them. I conclude that the obvious is the case and that the setting up of the Move Unleashed business at a prima facie level appears to have involved Victoria and Ilona in breaches of their fiduciary and statutory duties as directors.

Donald’s demand of 16 May 2022

60    On 16 May 2022 Donald by his solicitors demanded compensation from Noah’s Ark for the termination of his employment. A sum of $161,262.84 was sought comprising payment in lieu of notice and for accrued annual and long service leave. On 15 June 2022 his entitlement to these sums was denied by Noah’s Ark on the basis that he had no entitlement to notice since he had been terminated for serious misconduct and that the alleged accrued entitlements had not in fact accrued.

The proceedings in the Federal Circuit Court

61    It is clear that a significant issue in the Federal Circuit Court proceedings is the value of the parties’ shares in Noah’s Ark. It is also equally clear that as presently constituted the parties are united in their view that Donald should cease to be a shareholder of Noah’s Ark. Donald is presently seeking an order that Ilona and Victoria pay him $420,045.33 and that he transfer all of his shares to Ilona. In her response Ilona seeks orders that Donald transfer 50 of his shares in Noah’s Ark to Ilona and 50 of his shares to Victoria.

62    It remains possible that one or more of the parties may change their position on this. In this Court, Donald gave evidence that he might seek to buy out Ilona and Victoria. It is also possible that Judge Betts might arrive at this view independently of the parties. I regard both possibilities as distinctly unlikely. As to the former, it is evident that Ilona and Victoria have expended considerable effort at Medowie and are unlikely to wish to hand over the fruits of their labours to Donald. Further, Donald presently has some health issues which mean that he is only able to attend work at the Port Stephens Koala Hospital four days per week (although he is employed there full time). I do not think that he would be able to handle running the Medowie practice on his own.

63    As to the latter possibility, I think it unlikely that Judge Betts would go against the wishes of the parties on such a significant asset. As such I conclude that the result of the trial before Judge Betts will include Donald ceasing to be a shareholder of Noah’s Ark.

Move Unleashed

64    Donald filed an affidavit in the family law proceedings dated 17 February 2023. It became Exhibit 3 on the present application. In the affidavit Donald explained at §5 that Victoria and Ilona had established Move Unleashed in January 2022 and identified its website and Facebook page as outlining the rehabilitation services it was providing. At §8 he observed that he was proposing an order that Ilona provide to his solicitors the general ledgers and management accounts relating to Noah’s Ark and Move Unleashed for the financial year ending 30 June 2022. At §9 he set out his concern, inter alia, that the clinic (which can only be a reference to the Medowie clinic) and company funds ‘have been directed away from the business and that [Noah’s Ark’s] association with Move Unleashed is reducing the revenue and increasing the expenditure of [Noah’s Ark]’. He also said that he was concerned that these factors may affect the value of Noah’s Ark.

65    He then returned to this topic in more detail at §11. There he referred to the fact that the Medowie clinic had been valued by accounting firm William Buck on 5 April 2022. There was a proposed consent order before the Federal Circuit Court which required an updated valuation as at 30 June 2023. Donald reiterated his concern that this valuation process was being negatively impacted by Move Unleashed and he observed that Move Unleashed had not yet been valued as part of the Federal Circuit Court proceeding. At §11(f) Donald traced in some detail the relationship between the rehabilitation services formerly provided by Noah’s Ark and those now being provided by Move Unleashed. This included a descent into an examination of Move Unleashed’s accounts which Donald felt showed that former clients of Noah’s Ark were now paying Move Unleashed. He complained that the role of Move Unleashed had not been disclosed to William Buck when it conducted its valuation of the Medowie practice.

66    The heading to this evidence shows that it was adduced in support of a proposed order 9 which would require the production of the general ledgers of Noah’s Ark and Move Unleashed. From Donald’s affidavit at §7 it is apparent that Victoria and Ilona opposed the making of order 9 and that the question of whether it should be made was to be determined by Judge Kearney. Although it is likely not material to the issues in this case, it would appear that order 9 should not have been opposed for, as Ilona admitted under cross-examination in this proceeding, as at September 2022 she had not given full and frank disclosure of her interest in Move Unleashed in the Federal Circuit Court: T75.29-30.

67    Order 11 made by Judge Kearney was in these terms:

11.     The single expert for the business, David Sharp of William Buck, shall prepare an updated valuation report and for the purpose of that valuation:

a.    The wife do all acts and things to serve upon the husband of Noah’s Ark Veterinary Services Pty Ltd, the tax return and financial statements for the 2023 financial year by 28 July 2023.

b.     By 4 August 2023 the parties are to send to the single expert, David Sharp of William Buck Pty Ltd, a joint letter of instruction requesting an updated valuation of Medowie Clinic owned by of Noah’s Ark Veterinary Services Pty Ltd as at 30 June 2023 with the costs of the updated valuation to be borne equally by the husband and wife.

c.    It is noted David Sharp has indicated it will take approximately 2 weeks in which to prepare the updated valuation report.

68    It will be seen that order 11(b) contemplated the sending of a joint letter of instruction to the valuer. This letter of instruction does not appear to have found its way into evidence in this Court. I infer from Donald’s affidavit in the Federal Circuit Court proceeding dated 17 February 2023 that an issue he is going to seek to ventilate before Judge Betts is that the value of Noah’s Ark has been diminished by the diversion of the rehabilitation business to Move Unleashed. The trial of the matter has been fixed for hearing on Monday 16 October 2023 for three days.

The irrelevant dividend questions

69    There are two dividend questions. The first concerns whether Noah’s Ark failed to pay Donald a dividend. There is no doubt that a dividend was declared but the Defendants say that the company set off the debt it owed Donald arising from the dividend against a debt he owed it in respect of car finance arrangements relating to a vintage Porsche.

70    The second concerns whether Ilona and Victoria have failed to declare a dividend in Noah’s Ark in breach of their duties as directors. Although some time was devoted to these topics in the cross-examination of Donald, neither relates to any issue sought to be raised by Donald in his proposed derivative suit.

The letter of 28 April 2023

71    For some time before 28 April 2023, the parties’ legal representatives traded blows about Donald’s entitlement to be paid annual leave, long service leave, time in lieu of notice and various other entitlements (such as car lease payments and internet). Donald’s solicitors also wished to find out more about the dividend situation and sought access to the books and records of Noah’s Ark. At various junctures the correspondence also included allegations that Ilona and Victoria were breaching their fiduciary and statutory duties by diverting the rehabilitation business to Move Unleashed. The final expression of these various complaints may be found in a letter sent by Donald’s solicitors on 28 April 2023 to the solicitors for Noah’s Ark which became Exhibit 4.

72    The letter offered ‘to settle the current dispute between the parties in relation to our client’s unpaid employment entitlements’. The proposal was that Noah’s Ark pay Donald $103,995.37 and the parties enter into a deed of settlement. The letter was expressed to be an offer in accordance with the principles of Calderbank v Calderbank [1975] 3 All ER 333. Although therefore subject to without prejudice privilege, this was waived on the present application. It was said in the letter that if the offer was not accepted then Donald would seek leave to file ‘the proposed statement of claim in the Federal Court’. No proposed statement of claim was attached but a draft of such a pleading had been earlier provided under cover of a letter dated 26 April 2023. That pleading (and the letter of 26 April 2023) were concerned with the matter presently before this Court; that is to say, Donald’s allegations that Ilona and Victoria had breached their duties by diverting the rehabilitation business to Move Unleashed. It contained no allegations concerning Donald’s industrial entitlements.

73    The letter of 28 April 2023 therefore sought payment of Donald’s alleged industrial entitlements in return for not commencing a proceeding in the name of Noah’s Ark against Ilona and Victoria alleging breach of fiduciary and statutory duties. That proposed suit had nothing to do with Donald’s alleged industrial entitlements. Indeed, on no view could Ilona and Victoria even be liable for those entitlements since Donald’s rights in that regard lie against Noah’s Ark. Donald repeatedly denied that this was what the letter said at T70.33-44 and at T72.2-3 he said that it was ‘solely to do with leave entitlements at the time of dismissal’. I do not accept this evidence. The letter of 28 April 2023 clearly threatened the bringing of the current derivative suit (which had nothing to do with his alleged industrial entitlements) if his alleged industrial entitlements were not met. Donald’s denial of the obvious was not to his credit.

74    This is evidence from which one could infer that Donald’s purpose in pursuing the current proceeding is not to recover compensation for Noah’s Ark from Ilona and Victoria for breaching their fiduciary and statutory duties but instead to persuade them to cause Noah’s Ark to pay him his alleged industrial entitlements.

75    The drawing of that inference would find support from two other matters. First, it is evident that the question of what value is to be attributed to Move Unleashed is an issue before Judge Betts. Secondly, it is very likely (since all parties seek it) that Donald will cease to be a shareholder of Noah’s Ark after the Federal Circuit Court proceeding is determined. Counsel for Donald made some submissions as to why the derivative proceeding was not pointless to which I will return below but, for present purposes, it will suffice to say at this stage that I do not accept them.

76    These matters lead me to conclude that Donald has brought this derivative suit only for the purpose of putting pressure on Ilona and Victoria to cause Noah’s Ark to pay him his alleged industrial entitlements and not for the purpose of recovering compensation for the breaches of fiduciary and statutory duties he seeks to allege.

Should leave be granted?

77    The answer to this question is no.

78    Three of the preconditions in s 237(2) are satisfied. I am satisfied that if leave is not granted then Noah’s Ark will not itself bring a proceeding against Victoria and Ilona since they have no interest in suing themselves. Section 237(2)(a) is therefore satisfied. I am also satisfied that there is a serious question to be tried. On the face of it, the diversion of the rehabilitation business to Move Unleashed appears to have involved Ilona and Victoria in a breach of their fiduciary and statutory duties. In that regard, as I have outlined above, I did not find persuasive Victoria’s explanation for why the rehabilitation services had been transferred to Move Unleashed for reasons of business efficacy. Thus s 237(2)(d) is satisfied. I am also satisfied that Noah’s Ark was given sufficient notice of the derivative suit to permit the conclusion that s 237(2)(e) has been satisfied.

79    However, I am not satisfied in terms of s 237(2)(c) that the proceeding is in the best interests of Noah’s Ark or, in terms of s 237(2)(b), that Donald is acting in good faith. The reasons for this are interrelated and are fourfold.

The Federal Circuit Court proceedings make the derivative suit unnecessary

80    The extent to which the business of Move Unleased is to be treated as an asset of the marriage is a live question before the Federal Circuit Court. The extent to which it will be treated as such an asset will depend on the extent to which that Court is persuaded that a diversion of the business of Noah’s Ark to Move Unleashed has occurred. To the extent that it has occurred it will be treated as an asset of the marriage. Donald accepted under cross-examination that the question he wished to ventilate in this Court was the same issue which was before the Federal Circuit Court: T54.19-55.2.

81    Counsel for Donald, Mr Parish, submitted that the principles of compensation which would govern the derivative suit would be different to the principles which would govern the proceeding in the Federal Circuit Court. I accept that the Federal Circuit Court will divide the marital assets in accordance with what is just and equitable. However, its consideration of whether Move Unleashed is to be treated as an asset of the marriage will be anterior to that exercise. It will either conclude that it is and, as was put in argument, the business (or part of it) will be ‘put in the pot’ or it will not. In this Court, any remedies which would be awarded would likewise be bent towards the end of restoring the same pot.

82    I accept that in the derivative suit a more expansive range of remedies may be available. For example, this Court might conclude that the acupuncture and chiropractic services were diverted to Move Unleased by Ilona and Victoria but the Chinese herbs and coaching services were not and were instead created by Move Unleashed. In that circumstance it is nevertheless conceptually possible that a constructive trust might yet be imposed on these businesses. I am prepared to assume that this might not be possible in the Federal Circuit Court proceeding. However, in Donald’s proposed proceeding no such claim is made. Even if it had been, I would not be persuaded that it would be a worthwhile suit to pursue for that sole purpose having regard to the protean form of these businesses, the small sums involved and the cost that the derivative suit would necessarily entail.

83    It is also true that an account of profits is sought against Ilona and Victoria. The profits thus far consist of a fully franked dividend of $6,000.00 paid on 28 April 2023. I see no reason why that could not be brought to account in the Federal Circuit Court proceeding by way of adjustment in the division of the marital assets. In particular, I note that under cl 9.3 of the shareholding agreement between Ilona and Victoria concerning their ownership of Move Unleashed each has indemnified the other in relation to liabilities arising out of the Move Unleashed business. The $6,000.00 dividend may therefore be adjusted as between Donald and Ilona by Judge Betts and should that occur Ilona will then be entitled to seek contribution from Victoria as to $3,000.00. The possibility of an account of profits therefore serves no actual purpose. Further, the sum involved does not warrant litigation in this Court. To the extent that their salaries may be similarly characterised, the same observation may be made with the caveat that income tax will need to be paid on the salaries.

84    In this particular case, the existence of the family law proceeding in the Federal Circuit Court renders the proposed derivative suit unnecessary. Everything which Donald professes to seek in this proceeding will, in substance, be litigated before that Court. This may not be so in every case in which a derivative suit overlaps with family law proceedings. However, in this case it is.

The derivative suit is pointless

85    There is no prospect of the derivative suit being determined before the family law proceedings. The outcome of the family law proceedings will be that Donald will cease to be a shareholder in Noah’s Ark. Once that occurs it would be pointless to have on foot a derivative suit in the name of Noah’s Ark against what will then be its only shareholders. Mr Parish, in his measured and useful submissions, sought to parry this with two arguments. First, it was not an inevitable outcome of the family law proceedings that Donald would cease to be a shareholder of Noah’s Ark. I have dealt with this contention above concluding that whilst it is conceptually possible it is distinctly unlikely. My sense that it is distinctly unlikely is augmented by my conclusion that the reason Donald wishes to bring the proposed derivative suit has nothing to do with his desire to ensure that the value of Move Unleashed is recovered by Noah’s Ark and everything to do with an attempt by him to extract from Noah’s Ark (or Ilona and Victoria) his alleged industrial entitlements.

86    Mr Parish’s second point was that if this Court granted leave, it could then cross-vest the proceeding to the Federal Circuit Court. I accept that this is possible. I also accept that if this were done it would entail that the derivative suit would be determined at the same time as the Federal Circuit Court proceeding and, hence, whilst Donald was still a shareholder. However, as I have explained, even in that scenario the proceeding would not add anything useful to the Federal Circuit Court proceeding. Indeed, it would complicate that proceeding and carry with it the possibility that the hearing scheduled for October 2023 would need to be adjourned.

The derivative suit would have a deleterious impact on Noah’s Ark

87    Even if the derivative suit could achieve something which cannot be achieved in the Federal Circuit Court proceeding (which it cannot) and even if it could be determined in this Court in advance of that proceeding (which it cannot), it would involve Victoria and Ilona in having to attend to the suit in Sydney and would detract from the work they do for Noah’s Ark. Since they are the principal employees of Noah’s Ark I am satisfied that this would have a deleterious impact on its operations. Given the significant lack of utility of the proceeding, this interference with its business is another reason why the suit is not in the best interests of Noah’s Ark.

Donald is not acting in good faith

88    For the reasons I have given, I am satisfied that the proposed derivative suit is both pointless (since Donald will cease to be a shareholder before its determination) and unnecessary (because the issue will be determined in the Federal Circuit Court). The letter of 28 April 2023 satisfies me that Donald’s purpose in pursuing the suit is to extract from Noah’s Ark (or Ilona and Victoria) his alleged industrial entitlements. This is not a proper purpose within the ambit of s 237. These three matters provide factual material from which it could be inferred that this purpose is Donald’s only purpose. I draw that inference. Donald does not propose to bring the suit to recover the harm he says that Ilona and Victoria have caused to Noah’s Ark. He brings it solely for the purpose of recovering his alleged industrial entitlements. Consequently, the derivative suit would be an abuse of process: Williams v Spautz (1992) 174 CLR 509 at 526, applied in the context of s 237(2) in Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; 42 ACSR 313 at [37] per Palmer J.

89    Mr Parish submitted at T118.7-13 that this was not so because Donald’s purpose in bringing the derivative suit was not to influence the outcome of the Federal Circuit Court proceeding. I accept this submission but it is not to the point. It is an abuse of process because it is being pursued for a purpose which s 237 does not contemplate. That it would be an abuse of process if pursued for some other purpose which the evidence does not suggest Donald has is irrelevant.

Conclusions

90    For those reasons I am not satisfied that the requirements of ss 237(2)(b) or (c) are met. The Court’s power to grant leave is not enlivened and Donald’s application must therefore be dismissed. The parties indicated that they wished to be heard separately on the question of costs. The orders I make are:

(1)    The application be dismissed.

(2)    The parties are to provide mutually available dates for a hearing on costs to my Associates by 4.00 pm on 22 September 2023.

Associate:

Dated:    15 September 2023