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  • Unreported Judgment

Ipswich Markets Pty Ltd v Novak

 

[2008] QCA 104

 

SUPREME COURT OF QUEENSLAND

 

PARTIES:

FILE NO/S:

SC No 7597 of 2007

Court of Appeal

PROCEEDING:

General Civil Appeal

ORIGINATING COURT:

DELIVERED ON:

2 May 2008

DELIVERED AT:

Brisbane

HEARING DATE:

21 April 2008

JUDGES:

McMurdo P, Muir JA and  Fraser JA

Separate reasons for judgment of each member of the Court, each concurring as to the orders made

ORDERS:

1. Appeal dismissed

2. Leave is given for the parties to make submissions on costs in accordance with the requirements of Practice Direction 1 of 2005, paragraph 37A

CATCHWORDS:

CORPORATIONS – MEMBERSHIP, RIGHTS AND REMEDIES – MEMBERS’ REMEDIES AND INTERNAL DISPUTES – PROCEEDINGS ON BEHALF OF COMPANY BY MEMBER – STATUTORY DERIVATIVE ACTION – where the primary judge granted the respondent leave to commence proceedings on behalf of the company against its directors pursuant to s 237 Corporations Act 2001 (Cth) – where a number of transactions were entered into by the directors on behalf of the company allegedly in breach of their fiduciary duties – where there is conjecture as to the amount of money available to meet a successful claim – where the respondent undertakes to indemnify the company for its costs in the proposed proceedings against any costs order which may be made against it – whether it is in the best interests of the company that leave be granted

Corporations Act 2001 (Cth), s 237, s 461(1)(e), s 461(1)(f), s 461(1)(k)

Uniform Civil Procedure Rules 1999 (Qld), r  766(2)

Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36, cited

Metyor Inc & Anor v Queensland Electronic Switching Proprietary Limited & Ors [2003] 1 Qd R 186; [2002] QCA 269, considered

Phipps v Boardman [1967] 2 AC 46, cited

Regal (Hastings) Ltd v Gulliver & Ors [1967] 2 AC 134, cited

Warman International Ltd v Dwyer (1995) 182 CLR 554; [1995] HCA 18, cited

COUNSEL:

A J H Morris QC, with B W J Kidston, for the appellant

B D O’Donnell QC for the respondent

SOLICITORS:

Cartner Capner as town agent for Strategy Legal for the appellant

Allens Arthur Robinson for the respondent

[1]  McMURDO P:  The learned primary judge concluded that it was in the best interests of the appellant, Ipswich Markets Pty Ltd, to grant the respondent, Arpad Paul Novak, leave to bring proceedings on behalf of the appellant under s 237 Corporations Act 2001 (Cth).  Her Honour accordingly ordered that Mr Novak be granted leave to bring those proceedings against Lawrence Michael Cullen and David Stewart Tonkin, both on their own behalf and in their capacity as trustees of the FDN Trust.  For the reasons given by Muir JA, the appellant has not demonstrated that the judge was wrong in finding that the bringing of these proceedings was in the best interests of the appellant and in granting Mr Novak's application.  The appeal should be dismissed.  I agree with Muir JA's proposed orders.

[2]  MUIR JA:  The appellant company appeals against an order of a judge of the Supreme Court granting the respondent leave pursuant to s 237 of the Corporations Act 2001 (Cth) to bring proceedings on behalf of the Company against Lawrence Cullen and David Tonkin, both on their own behalf and in their capacity and as trustees of the FDN Trust.  The application was resisted on the grounds that the respondent was not acting in good faith and that it was not in the best interests of the Company that leave be granted.  No reliance was placed on the former ground on appeal. 

Relevant facts

[3] Before considering the grounds of appeal, it is desirable to say something of the evidence before the primary judge.  At relevant times, until the resignation of the respondent on 18 August 2003, the respondent, Mr Cullen and Mr Tonkin were the directors of the Company.  Messrs Cullen and Tonkin continued to be the Company’s directors.  At all relevant times the shares in the Company have been held in equal proportions by Mr Cullen, the respondent and a company controlled by Mr Tonkin.

[4] The Company was acquired with a view to the purchase and development of a shopping centre in Ipswich.  In order to fund the acquisition and development, the Company borrowed $7,165,000 in January 2003 from Perpetual Trustee Co Ltd and a further $700,000 in May 2003. 

[5] On or about 6 February 2002, the Company entered into a building contract with Gardner Vaughan Group Pty Ltd to renovate the shopping centre.  A dispute arose in respect of the works performed under the building contract.  Gardner Vaughan commenced proceedings against the Company in the Supreme Court which Messrs Cullen and Tonkin caused the Company to defend.  In advancing that defence Messrs Cullen and Tonkin swore affidavits denying that any money was owed to Gardner Vaughan by the Company.  They further swore that Gardner Vaughan’s work was defective in a number of respects, that it had abandoned the work without completing it and that the Company had a claim against Gardner Vaughan for $590,939.

[6] On 19 July 2004 Bundy Properties Pty Ltd, the directors of which were Messrs Cullen and Tonkin, for a consideration of $150,000 took a written assignment from Gardner Vaughan of its rights under the building contract.  By this time an administrator had been appointed to Gardner Vaughan.  On 23 July 2004 Messrs Cullen and Tonkin caused the Company to enter into an agreement with Bundy Properties under which the Company accepted a liability to pay the sum of $419,658 claimed by Bundy Properties, as assignee of Cullen and Tonkin’s rights, and agreed to pay that sum together with interest (the Bundy “Repayment Agreement”).  Consequently, for an expenditure of $150,000 Bundy Properties acquired an entitlement to receive $419,658 plus interest from the Company.  Messrs Cullen and Tonkin were in a position to cause the Company to pay the monies.

[7] Messrs Cullen and Tonkin, on 5 September 2005, caused Bundy Properties to assign to themselves as trustees of the FDN Trust, Bundy Properties’ rights under the Bundy Repayment Agreement for $1.  On the same day they also caused the Company to grant to them as trustees of the FDN Trust, a fixed and floating charge over the Company’s assets, securing the amount owing by the Company under the Bundy Repayment Agreement.  The foregoing transactions took place without the informed consent of the members of the Company in general meeting and without the knowledge of the respondent.

[8] Mr Cullen swears that he and Mr Tonkin agreed that Macarthur Regional Constructions Pty Ltd, a company of which Mr Cullen was the sole director, would complete the works which Gardner Vaughan failed to carry out and would rectify defects.  According to Mr Cullen, it was part of the agreement that Macarthur would invoice Bundy Properties for the cost of the work.  Mr Cullen swears that Macarthur carried out the work at no additional cost to the Company and that Macarthur made no profit from the transaction.

[9] In an affidavit filed in these proceedings Mr Cullen deposed to the following facts.  In addition to the monies borrowed from Perpetual, the Company’s purchase and development of the shopping centre was financed by loans from himself and Mr Tonkin, either directly or through companies which they respectively controlled.  On 24 January 2003 at a meeting which Messrs Cullen and Tonkin alleged was attended by all three directors “It was agreed that all shareholders’ loans will accrue interest at the same rate as second mortgage loans.” 

[10]  On 7 January 2005, Messrs Cullen and Tonkin caused the Company to enter into an agreement described as the “Repayment Agreement”.  Under the Repayment Agreement the Company agreed to pay to the trustees of the FDN Trust the sum of $2,343,818.85, together with interest at the rate of 15 per cent per annum calculated from the date of the agreement.  The Repayment Agreement recited that the Trust had acquired “ ‘the shareholders’ loans as recorded in the accounts of the Company for the year ending 30 June 2003.”  The obligations of the Company under the Repayment Agreement were secured by a second mortgage over the shopping centre and by a fixed and floating charge over the assets and undertaking of the Company.

[11]  On 6 November 2006 at an extraordinary general meeting of the Company, attended by only Messrs Cullen and Tonkin, it was resolved that “the Company approve an interest rate of 8 per cent per annum to be paid monthly in arrears or credited to the loan account and capitalised from the date of payment for all related party loans advanced to the Company.”  The minutes in which this resolution is recorded state that Mr Cullen informed the meeting that the Company had been charged interest at 15% by the FDN Trust for the year ended 30 June 2005 but that the Trust had agreed to reverse that interest charge if the Company agreed to pay interest at 8% per annum “from the date each loan was received by” the Company. 

[12]  On 29 March 2007, Messrs Cullen and Tonkin caused the Company to enter into a Deed of Variation of the Repayment Agreement, under which:

(a)the interest rate was changed from 15 per cent to 8 per cent;

(b)the default interest rate was changed from 18 per cent per cent to 11 per cent;

(c)the principal became repayable on 31 August 2008;

(d)all interest paid or payable was to be recalculated as if the

substituted interest rates had always applied.

[13]  The Company sold the shopping centre and completion of the sale took place on or about 28 September 2007.  The net proceeds of sale received by the Company were said by Mr Cullen to be $2,401,766 plus $500,000 by way of deposit.

[14]  Mr Cullen swears that as at 30 June 2006 the indebtedness of the Company to the FDN Trust, excluding any liability arising from the assignment of the debt owed to Gardner Vaughan, was $2,489,323, consisting of $1,865,102 principal and $624,221 interest.  The interest was calculated at the rate of 8% per annum and compounded annually on the interest in arrears as at 30 June.

[15]  According to Mr Cullen, after the sale of the shopping centre the Company ceased trading, $1,865,102 was repaid to the FDN Trust by the Company, leaving cash at  the bank of approximately $847,664 and no other assets.

[16]  At the time of the hearing at first instance the monies owing by the Company, according to Mr Cullen, were:

(a)fees of $34,000 payable to the Company’s lawyers and

accountants;

(b)interest of $888,773 claimed by the FDN Trust on the principal sum of $1,865,102; and

(c)the principal sum of $419,658 claimed by the FDN Trust under the Bundy Repayment Agreement and interest thereon of $263,396.

[17]  For convenience I will refer to the transactions effected by or connected with the assignment of Gardner Vaughan’s rights and the Bundy Repayment Agreement as the “impugned transactions”.  The transactions effected by or connected with the shareholders’ loans and the Repayment Agreement will be referred to as the shareholders’ loans transactions.

The Company’s central contention

[18]  The Company’s central argument is that leave to bring proceedings was sought and granted only in relation to claims in respect of the impugned transactions.  If those claims succeeded in full, the Company would recover or be indemnified against, payment of $683,054, made up of principal of $419,658 and interest of $263,396.  That liability is for principal and interest allegedly due to the FDN Trust pursuant to the Bundy Repayment Agreement.  The Company, however, has cash of less than $847,664 and is liable to pay interest to the FDN Trust, pursuant to the Repayment Agreement of $888,773.  There is also the sum of $35,000 owing to solicitors and accountants.  Once the interest of $888,773, payment of which is secured, is paid, the Company cannot pay the impugned liability.  The impugned liability thus becomes of academic interest only.  Additionally, Messrs Cullen and Tonkin, by their counsel, undertook as follows in these proceedings:

“Mr Cullen and Mr Tonkin in their own capacity and as trustees of the FDN Trust undertake not to cause the ‘Gardner Vaughan loan’ in the sum of $419,658.80 and any interest thereon to be paid to the FDN Trust or any other entity without the leave of the court.”

[19]  The respondent adduced no evidence that:

(a)Messrs Cullen and Tonkin received any benefit from the impugned transactions;

(b)anyone else received any such benefit; or

(c)the Company suffered any loss as a result of the impugned transactions.

[20]  Consequently, there are no profits to disgorge or other damages or compensation that Messrs Cullen and Tonkin could be ordered to repay the Company even if the proposed proceedings were successful.

[21]  Additionally, the Company is plainly insolvent.  If the impugned transactions are accepted as valid, that will only increase the degree of insolvency.  It will have no other practical effects. 

The respondent’s contentions

[22]  The Company may not have paid the $419,658 for which it is liable under the Bundy Repayment Agreement, but the Company has incurred a liability.  This  resulted from conduct of Messrs Cullen and Tonkin in breach of their fiduciary duties.  Under the derivative action the impugned transactions may be set aside and the liability extinguished.  If the impugned transactions are not to be set aside, then the amount of the liability may be recovered as a loss.

[23]  If Macarthur incurred costs in carrying out work which benefited the Company that is irrelevant.  Macarthur has been wound up and is deregistered.  If Bundy Properties incurred liability in respect of such work it did so as a volunteer.  The loss to the Company and the profits to Messrs Cullen and Tonkin by their entering into the impugned transactions should be measured without regard to any subsequent voluntary action by Bundy Properties, which formed no part of these transactions.

[24]  The claim by Messrs Cullen and Tonkin that they received no profits from the impugned transactions cannot be accepted.  Through Bundy Properties and the FDN Trust they acquired an entitlement to be paid, $419,658 plus interest at 10 per cent, and an entitlement to have that liability secured.  That is a valuable chose in action.

[25]  The claim that the Company is insolvent was not directly in issue before the primary judge and no evidence directed to an issue of solvency was led by the parties.

[26]  It is not correct to assert that the shareholders’ loans transactions were not the subject of dispute.  The true net balance of the shareholders’ loans is in issue on the pleadings in the winding up proceedings described below.  The respondent contends in those proceedings that the Company’s accounts are unreliable and that the true net balance of the shareholders’ loans cannot be determined from the Company’s records.  Also in issue is the existence of any resolution, let alone valid resolution of the Company on 24 January 2003, relied on by the appellant as having created a liability on the part of the Company to pay interest on the shareholders’ loans.  Alternatively, if there was such a resolution, it does not record an agreement between the Company and each of the shareholders.  Furthermore, any agreement in terms of the resolution would be void for uncertainty as it impossible to determine the actual interest rate from the resolution.

[27]  The Repayment Agreement was entered into without the fully informed consent of the respondent and its validity is thus in question.  The appellant cannot fall back on the Deed of Variation as it is a purported variation of a void agreement.  It also suffers from having been procured by Messrs Cullen and Tonkin in breach of their fiduciary duties. 

[28]  In both sets of transactions each of Mr Cullen and Mr Tonkin acted in breach of his obligation not to make use of his fiduciary position or opportunity of knowledge resulting from it, to make a gain for himself.[1]  In respect of the impugned transaction, it is no defence that the opportunity of which Messrs Cullen and Tonkin availed themselves was not one which the Company could have taken up.[2]

The winding up proceedings

[29]  The respondent, by originating application filed on 21 June 2006, applied for an order that the Company be wound up and also sought such other orders as were appropriate.  The application was on grounds of insolvency and also:

(a)on the grounds that the directors had acted in the affairs of the Company in their own interests rather than in the interests of the members as a whole[3];

(b)on the grounds that the affairs of the Company were being conducted oppressively[4]; and

(c)on the just and equitable grounds[5]

[30]  In the winding up proceedings it was possible for the trial judge to make findings in respect of the impugned and shareholders’ loans transactions with a view to adjusting the rights of the parties.

[31]  An application in the winding up proceedings for the appointment of a provisional liquidator was heard in July 2006 over three days.  In that hearing the respondent relied on alleged breaches of fiduciary duty in respect of both the impugned transactions and the shareholders’ loans transactions to support its claim that a provisional liquidator should be appointed.  Not surprisingly, the trial judge found that prima facie there had been breaches of fiduciary duties by Messrs Cullen and Tonkin rendering the transactions voidable at the instance of the Company.

The other arguments advanced by the Company’s counsel on appeal

[32]  Counsel for the Company identified five alleged errors in the primary judge’s analysis of the question whether the granting of leave to bring proceedings was in the best interests of the Company.  It is convenient to deal with each of them now.

First error – the primary judge in stating “. . . . it is contended that the derivative proceedings are futile because there is little money available to meet any successful claim” misconceives the appellant’s case.

[33]  Her Honour’s statement may not have done justice to the Company’s case but it is apparent from her reasons that her Honour had a much broader focus and it may be seen that the argument advanced by the Company was rejected by inference.  Her Honour started from the undisputed premise that Messrs Cullen and Tonkin had “prima facie acted in breach of their fiduciary obligations as directors” in respect of the impugned and shareholders’ loans transactions.  She considered submissions made by counsel for the respondent to the effect that there were many “voidable transactions” including those entered into by the trustees of the FDN Trust which, the respondent contended, could be set aside.  In that regard she considered also the arguments in relation to the Company’s prospects of contesting payments received by Messrs Cullen and Tonkin, as trustees, from the proceeds of sale of the shopping centre and also the interest charged under the Repayment Agreement.  After referring to these matters her Honour observed:

“It is rather too complex a calculation to establish the dollars and cents benefit or otherwise to the Company and I will not attempt to do so.”

[34]  Her Honour then referred with approval to the following passage from the reasons of McPherson JA in Metyor Inc v Queensland Electronic Switching Proprietary Limited [6]:

“For my part, I cannot accept that, in speaking of “the best interests of the company”, what s. 237(2) has in mind is some kind of cost-benefit analysis of possible outcomes of the prospective litigation, which is an assessment that it would be almost impossible to make with any degree of confidence or accuracy.  There may be cases in which it will plainly not be in the best interests of a corporation considered as a trading entity to engage in litigation that is likely to result in much harm and little or no evident benefit to the company.”

[35]  His Honour earlier observed in terms which have relevance to the issues in the consideration here[7]:

“It is not always possible to say at once whether a particular asset, advantage or opportunity belongs to the company rather than to one or other of two groups of warring shareholders.  If a particular asset is in law corporate property, the company ought to recover it; if it is not, one or other of the shareholders may perhaps be entitled to do so.  Resolving such questions is the principal purpose that the proceedings are designed to serve.”

[36]  It is the case that the shareholders’ loans transactions were not addressed in the pleadings proposed to be filed in the proceedings the respondent was seeking leave to commence, but the shareholders’ loans transactions were plainly and comprehensively impugned in the winding up proceedings.  Her Honour had before her evidence of what was in issue in those proceedings and, properly, took such matters into account.  She had in mind that the two proceedings would be heard together and concluded, with respect accurately, that the addition of the derivative proceedings would cause “little extra cost”. 

Another factor, again indisputably relevant, which her Honour took into account,  was the respondent’s undertaking to indemnify the Company for its costs in the  conduct of the proposed proceedings against any cost orders which may be made  against it.  Her finding in respect of the value of the undertakings was that there  was no evidence before the Court “to suggest . . . . that they could not be met.”

[37]  It is apparent from her Honour’s reasons that she approached the question of whether it was in the best interests of the Company that leave be granted against a background of there being no dispute, or at least no serious dispute, as to the respondent’s allegations that in the ways discussed earlier, Messrs Cullen and Tonkin had acted in breach of their fiduciary duties in significant respects over a substantial period and were, prima facie, answerable to the Company.  She was not in a position to finally determine the nature and extent of the relief which might be granted to the Company or to the respondent in respect of those breaches of duty.  But nor was she in a position to find, as was urged on the Company’s behalf, that the Company could not pay any money in respect of the impugned liabilities as it could not pay the money it allegedly owed to the FDN Trust as a secured creditor.  There was a dispute about what was owed to the FDN Trust and whether in fact it was a secured creditor. 

[38]  The conduct of Messrs Cullen and Tonkin suggested that their assertions as to lack of benefit by them and absence of loss by the Company should not be given undue weight.  As remarked earlier, the appellant did not attempt to make out a case of insolvency at first instance.  Indeed, it would have been odd for it to have done so, not least for the reason that it was contesting the respondent’s winding up application.  That was something which the primary judge was also entitled to take into account.

[39]  When regard is had to all of these matters, it is impossible to conclude that her Honour erred in her conclusion that it was in the best interests of the Company that leave be granted.

The second ground – failure to appreciate the extent of the proposed proceedings

[40] A complaint is made that the primary judge noted that counsel for the respondent contended that “the voidable transactions are many and the FDN Trust transactions can be set aside.  The Trust has received payments from the proceeds and claims interest payable which [claims] are contested.”

[41] It is submitted that it is irrelevant that there may be grounds, in other proceedings, to challenge other transactions.  That contention has been dealt with above.

The third ground – the primary judge’s reliance on the decision in Metyor was misconceived. 

[42]  The point made in this regard by counsel for the appellant is that in Metyor McPherson JA was satisfied that the Company “will benefit, subject only to the proviso that the benefit would be realised only if the Company succeeded.” Reference was made to the following passage in McPherson JA’s reasons:

“Whether the plaintiffs will make good their claim to that effect depends on the outcome of the litigation.  If it does, JV Co will benefit without cost to itself.  If it does not, it will not be disadvantaged.  It will be the plaintiffs, and not JV Co, that will bear the stigma, if any, of defeat as well as the not inconsiderable costs of the proceedings.”[8]

[43]  The circumstances addressed there, as well as in the earlier passages from his Honour’s reasons set out above, are relevant to the circumstances of this case.  The full facts have yet to be determined but the derivative proceedings will be undertaken without cost to the Company.  And, contrary to counsel’s contentions, it is impossible to say that “. . . . the Company will not benefit in any scenario; that is to say, whether the litigation succeeds or fails.”

The fourth ground – the primary judge erred in concluding that the addition of the derivative action would occasion little extra cost

[44]  It was submitted that there was no evidence to support the finding and that whether the costs are great or small “there is no possibility of an outcome favourable to the Company.”  The latter point has already been addressed.  Her Honour was entitled to find as she did.  Many of the same issues were already raised in the winding up proceedings and it could reasonably be expected that if the winding up proceedings went to trial the issues sought to be raised in the derivative action would be the subject of evidence in the winding up proceedings.  It was not contended that the relief sought in the application should have been refused on the grounds that the redress sought by the respondent was, in substance, available in the winding up proceedings.

The fifth ground – the Company is no longer trading and the derivative action will “inevitably prolong the final resolution of the Company’s affairs.”  The proposed proceedings cannot achieve a useful result.

[45]  If, as is contemplated, the two proceedings are heard together it is difficult to see how the final resolution of the Company’s affairs will be prolonged.  The assertion about the impossibility of a useful result has been addressed elsewhere.

Conclusion

[46]  For the above reasons I would order that the appeal be dismissed.  For the sake of completeness I mention that at the commencement of the hearing of the appeal counsel for the respondent sought leave to read and file an affidavit.  It contained what was allegedly “further evidence as to matters that have happened after the date of the decision appealed against.”[9]  The affidavit was received but, as is apparent from the foregoing, it is unnecessary to refer to it in order to determine this appeal.  At the conclusion of the argument counsel for the respondent intimated that, should the appeal be dismissed, the respondent wished to argue that a costs order should be made against Messrs Cullen and Tonkin.  I would give leave to the parties to make submissions on costs in accordance with the requirements of Practice Direction 1 of 2005, paragraph 37A.

[47]  FRASER JA:  I agree with the reasons of Muir JA and the orders proposed by his Honour.

Footnotes

[1] Chan v Zacharia (1984) 154 CLR 178 at 199 and Warman International Ltd v Dwyer (1995) 182 CLR 554 at 557

[2] Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, Phipps v Boardman [1967] 2 AC 46, Warman International Ltd v Dwyer at 558

[3] Corporations Act 2001 (Cth) s 461(1)(e)

[4] Corporations Act 2001 (Cth) s 461(1)(f)

[5] Corporations Act 2001 (Cth) s 461(1)(k)

[6] [2003] 1 Qd R 186 at 194

[7] [2003] 1 Qd R 186 at 194

[8] [2003] 1 Qd R 186 at 195

[9] Uniform Civil Procedure Rules 1999 (Qld) r 766(2)

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Editorial Notes

  • Published Case Name:

    Ipswich Markets P/L v Novak

  • Shortened Case Name:

    Ipswich Markets Pty Ltd v Novak

  • MNC:

    [2008] QCA 104

  • Court:

    QCA

  • Judge(s):

    McMurdo P, Muir JA, Fraser JA

  • Date:

    02 May 2008

Litigation History

No Litigation History

Appeal Status

No Status