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Re Industry Education Networking Pty Ltd

 

[2008] QSC 67

 

SUPREME COURT OF QUEENSLAND

  

PARTIES:

FILE NO/S:

Supreme Court of Queensland

PROCEEDING:

Application

ORIGINATING COURT:

DELIVERED ON:

11 April 2008

DELIVERED AT:

Brisbane 

HEARING DATE:

14 November 2007

JUDGES:

Mackenzie AJA

ORDERS:

  1. That the application for an order for inspection of the books of the first respondent and ancillary orders under s 247A Corporations Act 2001 (Cth) be dismissed;
  2. That the application for leave for the applicants to bring proceedings on behalf of Industry Education Networking Pty Ltd against the sixth and seventh respondents Kenneth O’Brien and Kenneth O’Brien as Trustee for the Ken O’Brien Trust be dismissed; and
  3. That the applicants pay the costs of the respondents of this application on the standard basis.

CATCHWORDS:

CORPORATIONS – MANAGEMENT AND ADMINISTRATION – INSPECTION OF OR ACCESS TO FINANCIAL RECORDS, REGISTERS, DOCUMENTS AND OTHER INFORMATION OF COMPANY – BY SHAREHOLDERS OR OTHER PERSONS – where applicants alleged numerous contraventions of the Corporations Act 2001 (Cth) – where  applicants sought to inspect the books and records of the first respondent – where one or both applicants were Directors of the first respondent at the time of the conduct complained of – where the first applicant’s solicitor had previously inspected the first respondent’s books – where voluminous information of a detailed nature within the personal knowledge of the applicants – whether the discretion to order inspection should be exercised in the applicants’ favour

CORPORATIONS – MEMBERSHIP, RIGHTS AND REMEDIES – MEMBERS’ REMEDIES AND INTERNAL DISPUTES – PROCEEDINGS ON BEHALF OF COMPANY BY MEMBER – STATUTORY DERIVATIVE ACTION – where  applicants were members and former Directors of the first respondent – where applicants sought leave to bring proceedings on behalf of the first respondent, alleging numerous contraventions of the Corporations Act 2001 (Cth) – where relief sought included an order winding up the first respondent – whether the proposed action is in the best interests of the first respondent company

Corporations Act 2001 (Cth), s 140, s 175, s 180, s 181, s 182, s 232, s 236, s 237, s 247A, s 254T, s 260A-D

Acehill Investments Pty Ltd v Incitec Ltd (2002) 223 LSJS 97; [2002] SASC 344, applied

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, cited

Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732; [2005] NSWSC 442, cited

Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859, applied

Quinlan v Vital Technology Australia Ltd (1987) 5 ACLC 389, cited

Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313; [2002] NSWSC 583, cited

COUNSEL:

S C Fisher (sol) for the applicants

M D Martin for the respondents

SOLICITORS:

Neumann & Turnour Lawyers for the applicants

Farrellys Lawyers for the respondents

  1. MACKENZIE AJA:  The present application is brought within proceedings commenced by originating application on 6 September 2007 in which a variety of orders is sought.  There are a number of precise orders sought in the originating application, some of which are ancillary to others.  They can be summarised as being the following:
  • An order winding up the first respondent;
  • Rectification of the share register;
  • An order for the purchase by the first respondent of the applicants’ shares;
  • Orders regarding the future conduct of the first respondent;
  • Relief against conduct of the first respondent’s affairs that is contrary to the interests of its members as a whole;
  • Relief against oppression, unfair prejudice or unfair discrimination against the first and second applicants and all or any other members of the first respondent; and
  • An order for the applicants to bring proceedings in the name of the company against all of the seven respondents.

The present application is limited to orders for inspection of the books of the first respondent and ancillary orders (s 247A of the Corporations Act 2001 (Cth)) and for leave for the applicants to bring proceedings on behalf of the company, but only against the sixth and seventh respondents.  (s 237).

Background

  1. The history of the respective relationships between the first and second applicants and the first respondent is set out in great detail in affidavits filed on their behalf. There is a helpful chronology in the applicants’ written submissions. It will be necessary to summarise the chain of facts and reasoning advanced on behalf of the applicants in oral and written submissions. As the chronology shows, the genesis of the first applicant’s complaints is to be found in a deterioration of the relationship between her and the sixth respondent in 1998. Some of the matters complained of occurred within a short time after that. As the chronology shows, the matters in contention have occurred at various times in the intervening years. The second applicant’s concerns crystallised later, for reasons explained in her affidavit, which include issues concerning corporate governance.
  1. There is an issue of delay in relation to a number of the matters about which complaint is now made. Nothing appears to have been done within a reasonable time to challenge them. In some instances to which reference will be made later, there appears to have been at least acquiescence. Some are more recent occurrences. The first applicant deposes to the reasons why it took until September 2007 to institute proceedings.  Essentially, she says that she sought advice in September 2004 until June 2006 from a firm which is no longer acting for her.  She had spent over $70,000 by then.  Because of concern over the likely level of expenses to take the matter further, she sought another solicitor.  To finance further pursuit of the issues from her own debt collecting company, she had to wait until there were sufficient surplus funds to enable her to do so.  However, commencement of the process of obtaining legal advice, only began almost five years after the first share transaction and associated issues about which she complains and more than three years after her removal as a Director.  The reason why delay of this order occurred in seeking advice or otherwise contesting the validity or appropriateness of some of the matters now complained of is not adequately explained.
  1. Going into more detail, the first respondent was incorporated on 17 August 1993. The first applicant and the sixth respondent, who had previously worked together, received one ordinary share each. They started off on a modest scale, working in the training services industry from premises in Mackay belonging to the first applicant.  As time went by, Government contracts were obtained and the business grew.  In February 1998, the relationship between the first applicant and the sixth respondent started to deteriorate, about the time when the first respondent moved to Brisbane to expand the sphere of operations of the first respondent in Southeast Queensland and to start another business in the field of debt collection and debt management services.  Her affidavit records that the sixth respondent resigned as Director of that company on 7 August 1998.  According to her affidavit, the deterioration of the business relationship caused difficulties in regard to discussion of company business and with regard to particular transactions.
  1. One of the underpinnings of the first applicant’s arguments, as explained in oral submissions, although not developed very explicitly in her affidavits, is that because of the original nature of the first respondent, the principle in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 operated to import equitable considerations notwithstanding the corporate structure.  This example highlights one of the problems about the applications.  There are no pleadings and the matters of concern therefore have to be gathered from the submissions or from the affidavits, from passages that are sometimes less precise than is desirable. 
  1. The starting point seems to be a transaction in September 1999 which is the conversion of the first applicant’s ordinary share into an A-Class share. How and why this happened is obscure. The main consequence seems to be a possibility of differential treatment with regard to dividends and returns of capital. So far, there has been no practical detriment since nothing of that kind actually happened.
  1. The first respondent was reasonably profitable and a dividend of $43,000 per share was paid on 9 November 1999. Pursuant to decisions taken at a meeting held on 6 November 1999, on 30 November 1999, another 25 shares were issued to the sixth respondent at a premium of $999 per share.  The first applicant was entitled to purchase a similar number but chose not to, apparently because she believed that foreshadowed “revenue problems” conveyed, and were intended to convey, that they would not be a good investment.  Associated with this is an allegation, expressed as a belief on her part, that certain expenses associated in setting up the Brisbane premises had been wrongly debited to her in her loan account with the first plaintiff.  She advances an explanation of what was comprised in the additional debt.  She asserts that the sixth respondent did this so she was unable to take up the share offer.
  1. On 1 December 1999 the second applicant was appointed as a Director. She remained a Director until 2 February 2006. The minutes of the meeting at which these decisions were taken show that the first applicant attended by telephone and agreed to the allotment of the further shares. Her affidavit does not deny this, although she deposes in the same paragraph of the affidavit to voting against the appointment of the second applicant as a Director. The payment of consideration for the additional shares is alleged to have been effected by a reduction of a loan to the company by the sixth respondent. The first applicant takes issue with whether the sixth respondent’s advances to the company were sufficient to fund this.
  1. On 17 April 2000, the sixth respondent’s son, Chris O’Brien and the second applicant were awarded one ordinary share each and Chris O’Brien was made a Director.  Minutes of the meeting at which those decisions were made show that the first applicant attended by telephone and all present were in favour. 
  1. Insofar as the first respondent now complains about the process followed in relation to each of these allotments of shares, it is hard to escape the conclusion that she acquiesced in them, and, since so many years have elapsed since they happened, any discretionary element would weigh against her. Inspection of the books of the company would not advance that aspect any further. If, as seems to be the case, the purpose may be to seek information bearing on the value of shares at times when, it is said, a right of preemption arose, it is by no means clear that any loss occurred by virtue of not being able to exercise it in these instances. Also, there seems to be no assertion that it would have been exercised in any instance.
  1. With regard to the issue of sufficiency of consideration, the first applicant was a Director for about 18 months after the transaction with the opportunity to enquire if she wished. The evidence in support of her concern that he did not have sufficient owed to him to fund the purchase consists of financial statements which show that, as at 30 June 1999, there was a non-current liability of almost $33,000 to him, still over $20,000 at 30 June 1999. At best for the applicants, that is inconclusive.
  1. Then, on 22 June 2001 a “General Meeting” was held at which, amongst other things, a resolution was passed that the Directors be reduced to three, with the removal of the first applicant as a Director. The first applicant was the only dissentient. It is complained that, if it was a General Meeting, sufficient notice of the meeting was not given. No complaint appears to have been made about this at the time, or in a timely way subsequently. The first applicant expresses a belief that one reason she was removed as a Director was because she refused to sign a guarantee as Director in connection with a property (“the Croker property”) being acquired by the sixth respondent for the first respondent to live in. He deposes that residence in the property was part of his salary package and denies the allegations about the motivation for the first applicant’s removal, saying that it had already been negotiated with the bank that her guarantee was not required.
  1. The next significant event was a share purchase on or about 10 May 2002 by the second applicant, the sixth respondent and Chris O’Brien. One issue raised in this regard is whether there had been improper financial assistance given by the company to its Directors to purchase the shares. The second applicant’s first affidavit sets out what occurred.  It is not a contravention of s 260A to financially assist a person to acquire shares in a company unless there is evidence that the lending falls outside the circumstances set out in s 260A.  There is no compelling evidence in what is before me that that is so.  There is no doubt that the first applicant was not given the opportunity to fund the purchase by means of a similar loan; but there was no reason why an obligation to do so was suggested.  Her complaint that she was not offered the shares themselves seems at odds with other evidence.  The sixth respondent explains that the offer of the opportunity to borrow from the company was extended to Directors, (which the first applicant no longer was), in accordance with long-standing company policy. 
  1. Another share transaction referred to occurred on 5 August 2003 when the sixth respondent divested himself of his 28 shares by transferring 20 to the fourth respondent and eight to the seventh respondent.  The complaint in this regard is that this was a contravention of the preemptive rights provided for in Regulation 22 of the Articles of Association of the company because, in particular, the first applicant was not given the opportunity to elect to either take up or decline the purchase of any of those shares.  It is admitted by the sixth respondent that the preemptive right procedure was not followed, apparently because, he says, he was not aware that the transfers, done for tax purposes on his accountant’s advice, were subject to the process.  He asserts that had he been aware of the problem, he would not have proceeded. 
  1. There was also an issue raised in oral submissions about a dividend paid on 26 September 2003.  The complaint is that, if there was an underlying quasi-partnership between the first applicant and the sixth respondent, distribution of a dividend on a per share basis conflicted with that quasi-partnership.  The resolution of this issue, the facts of which do not seem in dispute, does not depend on inspection of the books.
  1. On 27 April 2004, pursuant to decisions taken at a meeting on 10 March 2003, there was a bonus share issue on the basis of two for one. The first applicant did not participate in that because, I was told in submissions, she was still concerned about the quasi-partnership issue. It was alleged that an associated share transfer did not observe the requirements of the Articles of Association with regard to pre-emptive rights. On 4 October 2005 there was a share split which assigned a face value of 0.1 cents to the shares.  This did not of itself alter the relativity between the competing groups of shareholders but there was another transfer of 19,000 shares by Chris O’Brien to a company controlled by him, for $71.55 per share.  In this instance, there was a notice given in accordance with reg 22(3) nominating his company as purchaser.  The sale was approved by the Directors.  It is not suggested that the shares were offered to the first applicant.  There is no information as to whether reg 22(7) was implemented to set new rules concerning rights of members.  The material also refers to other valuations which vary from $37.05 to $160 per share, the last being done in about September 2006 in connection with securing additional contracts. 
  1. In December 2006 the sixth respondent offered 5,000 shares to all shareholders, including the first applicant, of which 3,000 were taken up by Garry Johnson, the General Manager of the first respondent and the remaining 2,000 by Nicole Akers, the daughter of the sixth respondent. The price asked was $45 per share; the valuation of $160 per share was disregarded because the sixth respondent “felt the calculations were based on inflated maintainable profits” and a capitalisation rate that was too high. The first applicant believed these purchases were funded by loans from the company. The sixth respondent deposes that the funds were sourced from the fourth respondent.

Matters of Concern to Applicants

  1. The transactions and dealings with the first respondent that are of the concern to the applicants, on the basis that they may involve the first respondent in contraventions of various provisions of the Corporations Act, are summarised in the submissions on behalf of the applicants as follows: 
  1. The payment of dividends other than from profits contrary to s 254T.
  • This relates to a dividend of $525,000 declared by the company on 12 February 2007 comprising $5 per share when, it is alleged, the company had declared a loss in the 2006/2007 financial year and a dividend of $86,000 declared on 13 October 1999 “even though the company was going to experience revenue problems”.  (The first applicant had the benefit of this dividend).
  1. Non-receipt of dividends by the first respondent in parity with other shareholders.
  • This concerns an allegation that she did not receive a dividend in or about December 2002 when the company declared a dividend of $52,500, equating to $1,500 per share.  The allegation is that she did not receive a cash dividend payment or the choice as to how it would be paid, because she was not aware that the dividend was declared.  It appears from the affidavit of the second applicant that the money was credited against the first applicant’s loan account. 
  1. The provision of financial assistance relating to the acquisition of shares in the first respondent contrary to s 260A-260D.
  • This relates to the share purchases on 10 May 2002 and 1 March 2007, discussed above. 
  1. Non-compliance with rights of preemption in relation to transfers of shares contrary to s 140.
  • These have already been discussed above.  It is suggested by the applicants that this may also indicate oppression contrary to s 232. 
  1. The removal of the first applicant from office as a Director of the first respondent on 22 June 2001.
  • The circumstances giving rise to the complaint has been previously discussed.  It is also said that this may indicate oppression.
  1. Improper transactions involving loan account liabilities between the first applicant and the first respondent by which the first respondent (at the instigation of the sixth respondent) increased liabilities said to be owed by the first applicant to the first respondent without her consent. 
  • This has also been discussed previously.  It is also said that this may indicate oppression.
  1. Transactions of the first respondent instigated or directed by the sixth respondent indicating conduct contrary to s 180. 
  • These appear to relate to a relationship with a company Studio No 2 and in relation to the second respondent Community Enterprises Australia Limited obtaining a Community Development Employment Project Contract valued at almost $9 million instead of the first respondent.  The applicant says she is concerned that the Directors of the company improperly diverted a business opportunity belonging to the first respondent to the second respondent without any compensating offsets or benefits accruing. 

There is an explanation given in the sixth respondent’s affidavit of the nature of the relationship between the second respondent and the first respondent and an assertion the first respondent benefited significantly from the transaction.  It is impossible to resolve that issue of fact.  The issue with regard to Studio No 2 appears to be concerned with the employment of staff by Studio No 2, the staff performing work with the first respondent and invoicing by Studio No 2 of it for provision of services.  The underlying issue is whether the first respondent has entered into the staff leasing and certain loan transactions enabling Studio No 2 to remain viable in a way that disguises or masks liabilities owed by Studio No 2 to the first respondent.

  1. Transactions of the first respondent instigated or directed by the sixth respondent indicating conduct contrary to s 181.
  • This relates to the same transactions as those in (g).  Possibly also falling under this heading, and perhaps others, is an issue concerning a house at Mossman purchased by the sixth respondent by agreement between the first applicant and the sixth respondent, that he would purchase it and the first respondent would lease it.  This proposal was conceived when it was tendering, unsuccessfully, for government contracts in that area.  There is contradictory evidence as to whether the first respondent or the sixth respondent paid the expenses and outgoings over the years, and a dispute about whether, when the property was sold some seven years later to the first respondent, the sixth respondent should have accounted for all payments made by the latter in the intervening years.  There is also a complaint, involving determination of the price, about the process of the sale
  1. Transactions of the first respondent with other companies indicating profit sharing on a non-commercial basis contrary to s 182.
  • This relates to the same matters referred to in (g) and (h).  There is also, in the second applicant’s affidavit, hearsay evidence concerning these transaction and others. 
  1. The declaration of dividends by the first respondent on 12 February 2007 in order to offset borrowings by the sixth respondent from the first respondent. 
  • The gist of this, as appears from the second applicant’s affidavit, seems to be that the only cash dividends paid were $15,000 to the first applicant and about $12,000 (apparently the balance after repayment of her company’s loan) to the second applicant.  The second applicant says that she believes that the dividend declaration was to benefit the sixth respondent and Chris O’Brien by allowing them to repay their personal loans and other company debts.  It is said that this may also indicate oppression.

This allegation is replied to by the sixth respondent on the basis that the projected net income/profit of the company for the financial year ended 2006/2007 was over $1 million.  It was anticipated that the net profit position projected for that financial year would continue in the near future under the current contract with the relevant Commonwealth Government Department.  It is deposed that taking into account the financial performance of the company in the preceding years and the projected net profit for the company for the year ending 30 June 2007 and ongoing anticipated income, declaration of the dividend was considered by the Directors to be financially responsible.  He refers to the long standing policy of the company that if shareholders or related entities have outstanding debts or loans to the company at the time of declaration of the dividend, the shareholder will not receive the payment direct by way of cash but rather it will be offset against any outstanding debt.  He says that this policy was in place during the first applicant’s period as a Director of the company. 

It is said by the applicants that this explanation is defective by failing to differentiate properly between the 2005/2006 and 2006/2007 financial years; by declaring a dividend when the requirements of s 254T had not been satisfied; and by stating that the dividend was from future profits instead of current or past year profits.

(k)There is also an issue about whether the first respondent has been improperly disadvantaged by dealings with the third respondent.  The areas of focus are certain financial transactions and arrangements, and whether the third respondent is competing with the first respondent as a result of conduct that favours it over the first respondent.  There are evidentiary conflicts that cannot be resolved without a trial.

Order under s 247A?

  1. Turning now to the issue of whether an order should be made allowing inspection of the books and records of the first respondent, the first applicant requested access to them during March 2007. The response was to the effect that there was no obligation on the first respondent to allow such an inspection without a court order.
  1. An order under s 247A is dependent on proof that the applicant is a member of the company, is acting in good faith and that the inspection sought is to be made for a proper purpose. The court has a discretion to make such an order which may only be exercised if the court is satisfied as to those matters. Each of the applicants is a member of the company. The applicant’s counsel adopted the judgment of Debelle J in Acehill Investments Pty Ltd v Incitec Ltd (2002) 223 LSJS 97; [2002] SASC 344 as a statement of applicable principles. 
  1. Relevantly to the present application, they are that the requirements that the applicant is acting in good faith and that the inspection is to be made for a proper purpose expresses a composite notion. The court will determine whether each has been demonstrated by applying an objective test. The onus is on the applicant to demonstrate those matters. The section operates where an applicant seeks to protect some specific or personal right by the making of the order. If the applicant’s primary or dominant purpose is a proper purpose, it is not the point that an inspection may be of benefit to the applicant for some other purpose. The rights provided by s 247A should not be regarded as affecting the basic rule of company law that a shareholder should not ordinarily have recourse to the courts to challenge a managerial decision made by or with the approval of the Directors. Applicants do not necessarily lack a proper purpose merely because they are hostile to the Directors.
  1. The procedure under s 247A is not intended to be a process as wide ranging as the process of disclosure of documents, so that as a general rule inspection will be confined to, say, the results of decisions of the Directors rather than all the documents such as board papers leading to decisions. However, that is a general rule and there may be occasions where it is proper to permit inspection of board papers. Even where an applicant is acting bona fide and has shown a proper purpose, it has a discretion whether to order inspection.
  1. In connection with the issue of good faith, the applicants also relied on what Pigeon J said in Quinlan v Vital Technology Australia Ltd (1987) 5 ACLC 389 that the credibility of the applicants in giving evidence is a material consideration in determining whether or not the applicant is acting in good faith.  No oral evidence was given in this case.  However, on a more general plane, formation of a view on the material generally as to the ultimate prospects of success in proceedings that have been commenced or foreshadowed may not be irrelevant. 
  1. The applicants submitted that they had satisfied the criteria of good faith and proper purpose. It may be accepted that the first applicant relies on personal rights she wishes to protect. They include improper dilution of her share holding contrary to the agreement arrangement or understanding on which she says she and the sixth respondent incorporated the first respondent; share transfers contrary to the preemptive rights contained in the Articles of Association; and rectification or correction of the share register of the first respondent under s 175.  None of the voluminous evidence is directed towards expressly proving that there is a lack of good faith or an improper purpose on the part of the applicants. 
  1. It is submitted that it is a proper purpose for a shareholder in the applicant’s position to seek information from the company under s 247A to determine the value of shares in a company of this kind if there is to be a transfer of shares at valuation to be determined. It is also a proper purpose for the shareholder to seek information relating to dealings between related companies. It is a proper purpose for an application for an inspection order to be motivated by the desire to uncover evidence of misconduct by Directors and officers of the company with a view to bringing proceedings against the company or its Directors if the suspicions of the applicant are confirmed. It is also acceptable that the purpose of the application is for a shareholder to obtain information relating to the safety and security of the shareholder’s investment.
  1. The respondents opposed the making of an order for inspection. In doing so the respondents pointed out that there was evidence from the sixth respondent and from Mr Green, an accountant, that Mr Green and the applicants’ then solicitor undertook an inspection of the company’s books on the applicants’ behalf on 3 March 2006. The list of issues referred to in Mr Green’s affidavit that were explored appears extensive. He described his brief as being engaged to review the financial and corporate records to identify the benefits and income distributions made in connection with or from the first respondent and all of its associated parties. The respondents also point out that the only transaction of the company since that date that has been subject to criticism is the payment of the dividend of $525,000 declared on 12 February 2007. It is also pointed out that the relevant minutes of the Annual General Meeting where the dividend was declared have been disclosed together with the unaudited financial records of the company for the period ending 30 June 2007.
  1. It was submitted that it should be inferred that the applicants have an ulterior motive in seeking inspection, namely the advancement of an application to have the company wound up. (Whether that is impermissible may be debatable). The discretionary nature of the order was referred to along with the fact that the applicants would have access to the books and records of the company through the disclosure process in the principal proceedings in any event. Although perhaps of more relevance to the other limb of the application, one striking feature of the matter is that for much of the relevant period, one or other, and for a short period both, of the applicants were Directors of the first respondent. That, together with their ultimate collaboration in events leading up to this application has led to another striking feature. It is unusual in my experience in these sorts of proceedings that there is such a volume of information of a detailed nature within the personal knowledge of the applicants. This is not a case where, in relation to some of the matters complained of, further inspection would be likely to reveal much more about the company’s activities than is already known.
  1. In the balance of the matters in contention, an interpretation of the nature and character of transactions and relationships between various people and businesses has been offered in the affidavits and correspondence which are in evidence. The material before me attributes the kinds of faults previously discussed to the respondents. The case the respondents will be advancing to rebut the allegations made has equally been exposed in considerable detail. Whether in the end, the impugned dealings turn out to be ordinary business dealings or not can only be determined in a trial.
  1. The point is that even in cases where it may be that company records will contain the details of transactions that will ultimately have to be proved, it is difficult to see why, in the circumstances, given the wealth of information available, pleadings cannot be adequately drafted exposing the issues relied on by the applicants, following which disclosure of documents directly relevant to issues will occur and the matter can move ahead. It is not, in my view, established that this is a case where the discretion to order inspection at this stage ought to be exercised. The application is therefore dismissed.

Order under s 237?

  1. Sections 236 and 237 relevantly provide for a member, officer, or former officer of a company to obtain leave to bring proceedings on behalf of the company. This is distinct from proceedings brought on a person’s own behalf in respect of a personal right.
  1. If an application is made by a member, officer, or former officer, the court must grant the application if it is satisfied that:
  1. 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
  1. The applicant is acting in good faith; and
  1. It is in the best interests of the company that the applicant be granted leave; and
  1. If the applicant is applying for leave to bring proceedings – there is a serious question to be tried.  There is a requirement of notice to be given but it is not suggested that appropriate notice has not been given.

The “prevailing view” is that unless all criteria are satisfied, leave must be refused (Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859,[12]). 

  1. A rebuttable presumption arises in certain circumstances that leave is not in the best interests of the company. One of the requirements for the presumption to arise is that the proceedings are by the company against a third party. A person is a third party if the company is not a public company and the person would not be a related party of the company if the company were a public company (s 228).  A related party is defined in s 228 as including Directors.  The sixth defendant is in that category and a presumption would not arise in his case.  An entity controlled by a related party is also a related party.  Since the form of order asked for relates to the sixth respondent and seventh respondent, that is to say Mr O’Brien in his personal capacity and Mr O’Brien as trustee for the Ken O’Brien Trust, it is a case where the presumption is not enlivened.  (Maher, [39]).  The essence of the action that the applicants would bring if leave were granted seems to be that there have been contraventions of duties relating to the exercise of powers and discharge of duties with care and diligence and in good faith in the best interests of the company and for a proper purpose; improper use by a Director of his position in the companies to gain an advantage for himself or someone else or to cause detriment to the company; improper use of information gained by a Director of a company to gain advantage for themselves or someone else, or to cause detriment to the company; breaches of fiduciary duty giving rise to equitable relief; breach of contract of employment between the sixth respondent and first respondent and of the contract comprising the Memorandum and Articles of Association; breach of the obligation to pay dividends only out of profits; and providing financial assistance by the company for the acquisition of shares in itself. 

Conclusions

  1. It can confidently be taken that the company will not itself bring proceedings. On the state of the evidence, including legal advice given to the applicants and produced subject to a claim of privilege, I am prepared to assume that the applicants are acting in good faith. There are issues of fact, including the proper characterisation of a variety of transactions to be resolved. Each side’s interpretation of what has occurred is, in many instances, strongly contested by the other side. At the heart of them is the question whether they are ordinary legitimate commercial transactions or have some other less benign character which affects the applicants’ and the first respondent’s interests.
  1. For reasons given earlier, some of the matters complained of are not ones that are likely to lead to the first respondent’s financial position being improved (cf Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732; [2005] NSWSC 442).  They are more concerned with the personal rights of the applicants vis a vis the first respondent.  They can conveniently be pursued in proceedings to wind up the company on the just and equitable ground.  Some of the remainder also probably involve a serious question to be tried, some to a greater extent than others having regard to the nature of the evidence already led with respect to them. 
  1. The most important issue, given the circumstances, is whether it is in the best interests of the company that the applicants be granted leave to bring proceedings in the company’s name. While it is perhaps not curious that applicants in these proceedings would be former Directors of the company, it is unusual that they were Directors at various periods during which impugned actions occurred and were each apparently acquiescent in some instances. There also generally seems to be an absence of any overt disagreement with them at relevant times.
  1. The discussion in the authorities of what is relevant in determining whether a proposed action of the kind proposed is in the best interests of the company shows that a variety of factors (not exclusively expressed) may be relevant. Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313; [2002] NSWSC 583, and Maher and Morningstar deal with these issues.  Having regard to the way the matter has been conducted it is necessary to focus only on two of them.  Insofar as the effect of the proposed litigation on the company’s operations is concerned, it is pointed out by the applicants that there is no specific evidence concerning the effect of such a proposed litigation. 
  1. The first respondent is in the business of providing employment services through having won Australian Government Employment Training Services Contracts. It is difficult to think that the kind of action intended to be brought would not have some detrimental effect while it remained unresolved. However the same may be said for an application to wind up on the just and equitable ground, so that element should be considered neutral.
  1. The other is the existence of alternative means of redress other than the proposed litigation. It is accepted by the applicants that they have personal rights of actions relating to unpaid dividends and discrimination in the payment of dividends, improper share issues, non-compliance with preemptive rights with regard to shares and rectification of the share register. It is submitted, however, that pursuit of those personal rights would not generate any of the benefits which would accrue to the first respondent if it instituted proceedings against the sixth respondent.
  1. The forms of relief sought in the originating application in which the present application is brought include an order winding up the first respondent, the purchase of the applicant’s shares by the first respondent, and relief against the conduct of the first respondent’s affairs that is contrary to the interests of its members as a whole and against oppression, unfair prejudice or unfair discrimination against the first and second applicants and other members of the first respondent. If those issues are litigated as aspects of a winding up on the just and equitable ground, it seems that the character of the transactions which are alleged to be in breach of various duties under the Corporations Act would be likely to be litigated.  They would also have a bearing on the true value of the company and its shares.  The difficulty in being certain of this is compounded by the absence of any pleadings in the personal action; if at some time in the future those assumptions prove inaccurate, the issue might be revisited if no winding up order were to be made. If a winding up order were to be made, it would be within the province of the liquidator to consider whether there was any conduct that required action by him.
  1. I have come to the conclusion that, as the matter stands, it has not been established to my satisfaction that it is in the best interests of the company, the first respondent, that an order under s 237 be made.
  1. The issue of costs on the indemnity basis was foreshadowed in the respondents’ written submissions. This submission is based on correspondence between the solicitors in which the view was expressed by the respondents’ solicitors that the applications were unnecessary because, in an application to wind the company up on the ground of oppression, the issues that the applicants would wish to raise on the action on the company’s behalf would be ventilated. It was also pressed that documents would be provided pursuant to disclosure obligations in those proceedings, rendering the course of applying for an order for inspection unnecessary. I have considered this issue in the orders that I propose to make, but am of the view that notwithstanding the outcome, the issues were arguable to such an extent that it would not be appropriate to make an order for indemnity costs despite the perceptive prediction of the respondents’ solicitors as to the outcome.
  1. Orders:
  1. That the application for an order for inspection of the books of the first respondent and ancillary orders under s 247A of the Corporations Act 2001 (Cth) be dismissed;
  1. That the application for leave for the applicants to bring proceedings on behalf of Industry Education Networking Pty Ltd against the sixth and seventh respondents Kenneth O’Brien and Kenneth O’Brien as Trustee for the Ken O’Brien Trust be dismissed; and
  1. That the applicants pay the costs of the respondents of this application on the standard basis.
Close

Editorial Notes

  • Published Case Name:

    Industry Education Networking Pty Ltd & Ors

  • Shortened Case Name:

    Re Industry Education Networking Pty Ltd

  • MNC:

    [2008] QSC 67

  • Court:

    QSC

  • Judge(s):

    Mackenzie AJA

  • Date:

    11 Apr 2008

Litigation History

No Litigation History

Appeal Status

No Status