Stanton (WA) P/L v Vasquez Investments

Before the Court is a Notice of Motion filed by the Plaintiff, for whom Mr P.T. Russell of Counsel appears, by which the Plaintiff seeks to amend its claim but which also involves an application pursuant to s 237 of the Corporations Act 2001 (Cth) (“the Act”).

The history of this matter is as follows:

SWAPL (in liquidation) commenced proceedings against Vasquez and Bryve in August 2016. I shall in the balance of these reasons refer to SWAPL (in liquidation) as SWAPL.

These proceedings have been fixed for hearing with an estimate of two days commencing on 15 March 2017.

SWAPL now seeks leave to amend its Amended Summons and Amended Commercial List Statement (“ACLS”) by filing a Further Amended Summons (“FAS”) and a Further Amended Commercial List Summons (“FACLS”). Mr Russell provided the Court with written submissions on behalf of SWAPL before the hearing of the motion on Monday.

The Defendants, for whom Mr D.K. Ratnam of Counsel appears, do not consent to the amendments and oppose the grant of leave under s 237 of the Act to bring proceedings on behalf of Bryve. Mr Ratnam’s predecessor, Mr D. Barlin of Counsel, provided written submissions on Monday morning on which Mr Ratnam relied.

Section 237 of the Act is in the following terms:

By the Amended Summons and the ACLS, SWAPL seeks:

By the FAS and FACLS, SWAPL seeks the following additional relief and raises the following additional allegations as summarised in Mr Russell’s outline of submissions:

Those amendments which do not involve s 237, paragraphs 26A, 26B and 33A of the FACLS, seek to expand the ambit of the s 37A claim to include the vesting of the assets in the Trust in Vasquez, in addition to the issue of the 19,000 new shares – in other words to attack all of the constituent parts of the process by which SWAPL’s rights to recover the debt became of little or no value.

In my view SWAPL should be permitted to expand its case in this manner. It does not seek to lead any new evidence in support of its claim and whilst it may be that the Defendants will want to expand the evidence from Mr Stanton and Ms Fernandez whose affidavits have already been served it is unlikely to involve extensive new evidence.

The Defendants complain of the delay in the bringing of these amendments but I do not think the delay has been inordinate, particularly having regard to the fact that SWAPL sought discovery from the Defendants and no company records or indeed any documents were produced. This became clear in late November with the draft amended pleadings being served on 16 December 2016. No report as to the affairs of SWAPL was ever provided by Mr Stanton to the liquidator. I am not satisfied that there would be any ‘irremediable’ prejudice to the Defendants as claimed by the Defendants if the amendments (including those relating to the s 237 application) are allowed. Nor am I persuaded that there is any need to vacate the hearing date. I will make orders for the filing of any further evidence by the Defendants.

Before dealing with this it is necessary to say something about the SWAPL claim and the Defendants response to it. SWAPL claims:

The Defendants accept [14](a). They do not accept [14](b) asserting that the relevant clause of the Trust Deed, clause 8.4(i), does not apply because when SWAPL made a claim for indemnity from the Trust it was no longer a trustee – Clause 1.1(17) provides that:

The Defendants also assert that the Trustee Act was ‘ousted’ by the terms of the Trust Deed so that the Trustee Act cannot be relied on to support the claim to indemnity. No authority was cited in support of that claim but the Defendants solicitors assert that such authority exists.

In relation to the s 37A claim, SWAPL contends that the transfer of shares is an alienation of property within the meaning of that section and there is authority: Hall v Poolman (2007) 215 FLR 243 particularly at [550] per Palmer J to support that contention. Those advising SWAPL are aware, however, that there is a contrary view. Against the possibility that it may be held that the issue of shares is not an alienation, SWAPL wishes to attack the issue of shares by Vasquez as a breach of the constitution of Vasquez and as involving a breach of directors’ duties by Mr Stanton.

The Defendants’ opposition to the amendments involving s 237, which I shall refer to as “the derivative proceedings”, has a number of limbs, but they do not dispute that notice was given nor that Bryve will not itself bring the proceedings that SWAPL wishes to bring, matters required to be established by s237(a) and (e). The first basis of opposition is that the application by SWAPL is not brought in good faith because it is brought for an ulterior purpose. The second is that it would not be in the best interests of Bryve to have the share issue set aside because the $8,500 paid for the 19,000 shares would have to be refunded to the Third to Sixth Defendants (who have each filed submitting appearances in the proceedings and who did not appear on the motion.) The third basis is that Bryve cannot be both a defendant and a plaintiff in the same proceedings with two sets of Counsel contending for opposite results. The fourth basis is delay, with which I have already dealt.

In my view the proceedings are not brought for an ulterior purpose in the sense required, namely that they would have to amount to an abuse of process: see Swansson v Pratt [2002] NSWSC 583 at [36] – [38]. The personal interests of the applicant are not relevant: see Maher v Honeysett [2005] NSWSC 859 – it is obvious that persons who have a financial interest in the outcome will be the likely applicants for leave and such an interest is not an ulterior purpose.

SWAPL has seen its prima facie legitimate entitlement to be paid out of Trust assets seriously eroded and it is entitled to attack the issue of new shares which appear to have been created to deny the Plaintiff any prospect of recovery of its $945,000. This can also be expressed as a serious question to be tried for the purposes of s 237(d).

SWAPL contends that it is in the best interests of Bryve that SWAPL be entitled to maintain its derivative claims because:

The Defendants contend that these benefits are illusory and they further contend that if the share transfers were set aside Bryve would be required to refund the $8,500 received from the new shareholders.

The question of what is in the best interests of a company involves quite complex issues as the consideration in Swansson v Pratt [2002] NSWSC 583; 42 ACSR 313 per Palmer J and Chahwan v Euphoric Pty Ltd [2008] NSWCA 52; (2008) 65 ACSR 601 per Tobias JA with whom Beazley and Bell JJA concurred and see also Gerard Cassegrain & Co Pty Ltd v Cassegrain; Cassegrain v Gerard Cassegrain & Co [2010] NSWSC 91 (“Cassegrain”) at [114] demonstrates.

So far as the return of the $8,500 is concerned, there is a question as to whether any money was in fact paid, the amount is relatively small and there may well be a question as to whether the new shareholders would be entitled to recover their money (if paid) in any event if, for example, they were not informed that a former trustee of the Trust was or might be entitled to a lien on and indemnity out of the Trust assets including the shares, with the strong prospect of proceedings against Bryve (and Vasquez), which proceedings have already materialised and in which the new shareholders have filed submitting appearances.

In Cassegrain there was a prospect of recovery of money from the director but no such relief is sought here. If Bryve is protected against costs by, for example, SWAPL undertaking not to seek any order against it and accepting that should SWAPL fail in its claims including its attack on the share issue by reason of an alleged breach of Bryve’s constitution or by Mr Stanton of his duties it will meet those costs, that should ameliorate the downside of the derivative proceedings.

The integrity of a company’s register is an important matter and I think it is in the best interests of a company that any irregularity in the issue of its own shares is investigated and if disputed determined. It is clear that there will be no investigation whilst Mr Stanton is in control since he is the person who, on his own evidence, organised the issue of the new shares. It may well be that Bryve, through the actions of Mr Stanton, has assisted Vasquez to defeat SWAPL’s legitimate interest in the total share capital of Bryve.

I think there is a clear advantage or benefit to Bryve to have the legitimacy or otherwise of the share issue determined in these proceedings, rather than in separate subsequent proceedings.

Bryve is a small company that does not appear to itself carry on any trade or business, but it holds an interest in Shaw River Management and there is some evidence that it may have a security interest registered under the Personal Property Securities Act 2009 (Cth).

I observe that it seems to have been accepted in Swansson and Chahwan that for an order to be made the Court must be satisfied that it is in the best interests of the Company but the section literally says that the Court must grant leave if all of the conditions are fulfilled and does not say that it cannot grant leave if one or more conditions have not been fulfilled. This point was not argued before me and I do not therefore express any concluded view on this topic.

It has been held that in considering what is in the best interests of the company for the purposes of s 237 context is important and includes the best interests of shareholders: Cassegrain at [79] and the interests of the general body of creditors when the company is insolvent: Charlton v Baber [2003] NSWSC 745 per Barrett J (as his Honour then was). SWAPL is a creditor of Vasquez as the new trustee, rather than Bryve, but the shareholding in Bryve, held by Vasquez, and Bryve’s worth as a company are very closely linked to SWAPL’s ability to be indemnified out of the Trust assets. Clearly Vasquez has no intention of protecting the worth of the shareholding that it formerly held in Bryve, eroded by the creation of the new shares. Vasquez’s role in the diminution of value will no doubt be the subject of scrutiny in the proceedings, but it is only SWAPL that is willing to challenge the validity of the share issue.

Taking all matters into account, I think that it is in the best interests of Bryve to have the claims of SWAPL relating to the issue and transfer of shares heard together with the s 37A claim and within the existing proceedings.

In relation to the third issue, this raises a difficult procedural concern. A company cannot be both a plaintiff and a defendant in the same proceedings. Mr Russell drew my attention to Cassegrain in which his Honour had to consider whether a member of a company could intervene on behalf of the company which was already a defendant to bring proceedings pursuant to s 237. Mr Ratnam contended that Cassegrain was distinguishable from the present because here there are no oppression proceedings on foot and he also referred to Power v Ekstein [2010] NSWSC 137, another decision of Austin J in which Cassegrain was applied.

In Cassegrain, Gerard Cassegrain & Co pty Ltd (“the company”) sued a director of the company and the director’s wife claiming that the director (Claude Cassegrain) had transferred real estate away from the company in breach of his duties as a director. Those proceedings, described as the derivative proceeding, had been the subject of leave pursuant to s 237 sought by Denis Cassegrain (“Denis”). Denis also commenced separate proceedings (known as “the oppression proceedings”) in his own right whereby he sought relief on the statutory oppression ground in s 232-234 of the Corporations Act, in which proceedings the company, Claude, and Claude’s wife were defendants.

Austin J described Denis at [120] as seeking “to make a further intervention for the purpose of taking responsibility on behalf of the company for particular steps, namely those concerning bringing and prosecuting the derivative claims.” He held that since Cassegrain was not a case where leave was sought to bring proceedings on behalf of the company, s 236(2) did not apply to require the company to become a plaintiff. His Honour at [121] cited as authority for this approach Metyor v Queensland Electronic Switching [2002] QCA 269. His Honour then went on to say:

In Ekstein, Austin J took the same approach as he had done in Cassegrain and did so in a context where the applicant was seeking leave to commence proceedings in the name of the company but the company was already joined. His Honour said:

In [33]-[34] of Ekstein his Honour recognises that since there were already proceedings on foot in which the company was a defendant there was no need to have fresh proceedings commenced. What the grant of leave pursuant to s 237 did was to enable the Plaintiff to ventilate matters relating to the company’s conduct of affairs that it would otherwise be precluded from doing, but his Honour did not view s 236 of the Act as requiring joinder of the company as a plaintiff where it was already joined as a defendant.

I have given consideration as to whether it would be more appropriate to require SWAPL to commence fresh proceedings by way of Summons and to order that those proceedings be heard together with the extant proceedings, with evidence in one being evidence in the other. Mr Russell contended that such a course would be unnecessary and involve additional cost for no discernible benefit. Mr Ratnam thought that course would overcome the procedural difficulties.

I regard as significant the following matters:

I was not taken to any authority in which the course taken by Austin J in Cassegrain and Ekstein had been the subject of doubt. Mr Ratnam’s only contention as to these cases is that Cassegrain is distinguishable because here the Plaintiff’s Notice of Motion seeks leave to commence proceedings. Mr Russell at T.20.9-T.20.10 conceded that what his client seeks to do is intervene. I think Ekstein at [34] depletes Mr Ratnam’s submission of any force. I think there are sufficient similarities between the situation with which his Honour was dealing in Cassegrain and Ekstein and this case to follow his Honour’s approach. I respectfully agree with his Honour that it would not be appropriate for a company to be both a plaintiff and defendant in the one proceedings. In reality what SWAPL will be able to do by reason of a grant of leave is, within proceedings already commenced, to maintain an argument concerning the issue of the shares which Bryve, under the control of Mr Stanton, clearly does not want to run and will not run. The grant of leave permits SWAPL to maintain an argument that without leave it could not otherwise run because it involves the question of internal corporate management.

It follows that the Plaintiff has met the requirements of s 237 and should be granted leave.

Accordingly the Plaintiff is entitled to the amendments sought and to leave pursuant to s 237, but attention will need to be given to the precise form of orders including the question of an undertaking in respect of Bryve’s costs arising by reason of the derivative claims. I will also hear the parties on the issue of costs of the Plaintiff’s notice of motion.