Issue
Issue: The present interlocutory proceedings were related with the eligibility of the applicant to have a default judgment against the Isak Constructions (Aust) Pty Ltd (or simply The Company) to be set aside and for the stay of any enforcement proceedings in accordance with the statutory derivative action provisions that have been mentioned in the Corporations Act, 2001 (Cth) or simply the Act.
The brief facts of this case are that the Company had initiated proceedings in the District Court on 4 December, 2002 through a statement of liquidated claim. In this regard, the service of statement was made on 17 December, 2002 through the registered office of the Company. The defendant was Mr. Faress in the proceedings that were initiated in the District Court. He was the applicant in the area that took place before Barett J. It was stated by Mr. Faress. The statement of claim was handed over by him on 18th of December to the second plaintiff, Mr. Isaaka in order to allow Mr. Isaaka to deal with it on behalf of the Corporation. The reason behind this situation was that the applicant has been removed as the director of the Company through a purported resolution. That was passed on 4 November 2002. However, the Company did not take any action after the statement of claim was received by Mr. Isaaka. The applicant came to know regarding the default judgment only in May 2003.
Rule: the first issue was related with the standing of the applicant in accordance with s236(1)(a), Corporations Act. In this regard, it was submitted by the counsel for the applicant that the standing of the applicant to bring proceedings in accordance with s236(1)(a) of this legislation has been derived as a result of his status as the former officer of the Corporation. But in this regard, it was noted by Barett J that the steps that were taken in order to remove the applicant has the director of the company were of doubtful efficacy and therefore needed to be addressed during the trial. Even if the court had not accurately stated if the applicant can be considered as a former director of the Corporation or he was still a director of the Corporation, it has been provided by s236(1)(a)(ii) that an officer or a former officer of the Corporation has the standing to initiate derivative action. As a result, in this case, as the applicant falls within the purview of this section taken as a whole, the court was satisfied that the required standing was present on part of the applicant.
Rule
The second issue was related with the requirements of section 237(2). While considering the application that was implicit in this case, the court had re-enforced the opinion that has been expressed by the court in Charlton v Baber [2003] NSWSC 745. According to this view, if the requirements that have been prescribed by section 237(2) are satisfied, there is an obligation present on part of the court to grant an application is sought. In this regard, the five requirements that have been mentioned by section 237(2) can be described as follows:-
It is likely that the proceedings are not going to be initiated by the company itself or, the Corporation will not take proper response it for them or regarding the steps that are necessary; and
The applicant can be described as acting in good faith; and
Granting leave to the applicant will be in the best interests of the corporation; and
A serious question is present that needs to be tried in case. The applicant is applying for the league to initiate proceedings; and
Either (i) The applicant has given notice to the garbage and at least 14 days before the application is made, to apply for leave and also regarding the reasons for applying or (ii) it can be described as appropriate to grant leave to the applicant even if the requirement mentioned in above sub-paragraph is not satisfied.
Regarding the requirements that have been described by s237(2)(a) the court was of the opinion that they were clean and others on the basis of which it can be stated the Corporation is not going to take responsibility on itself regarding the proceedings going on in the District Court. First of all, Mr. Issaka did not take any steps on behalf of the company. The second matter was that even if a dispute was going on regarding the ownership and control over the Corporation, Mr. Issaka knew very well that proceedings going on in the District Court fell under his responsibility. The third such matter was that despite having no disregarding the interlocutory proceedings, notice was given by the company’s solicitors that he is going to cease to act in the proceedings and he had not made an appearance on behalf of the Corporation.
While dealing with the question if the applicant can be said to be acting in good faith, the court had relied on the approach that was used by Palmer J. in Swansson v R A Pratt Properties Pty Ltd (2002) 42 ASCR 313. Therefore, while doing so it was held by the court that the affidavit submitted by the applicant clearly reveals that there is an honest Billy present on part of the applicant that there was a good cause of action. Another interesting fact that needs to be noted was that the court had not committed on the issue if a reasonable prospect of success was present on part of the cause of action. Therefore, it was clear that the applicant was not trying to use the process of derivative action in order to fulfill collateral purpose that may be considered as the abuse of process. Clearly the defense of the proceedings was in the interest of the Corporation apart from the interest of the applicant as a guarantor regarding some of the contractual obligations of the Corporation.
Standing of the Applicant
Due to the reason that the provisions of section 237(2)(d) were not considered to be relevant. In case of the present proceedings, the only other that was left in the application made by the applicant for leave was the inability on part of the applicant to establish that he had fulfilled the requirements related with the notice of 14 days. Particularly, the interlocutory process as well as the supporting affidavits have been filed by the applicant and then there were served on the company’s solicitors on 15 August, 2003. The meaning of this situation was held that the notice was not according to the provisions of section 109X, Corporations Act due to the reason that the notice has been incorrectly provided to the solicitors of the company and not to the company itself. Moreover, the period of notice that has been provided by s. 237(2)(e)(i) was also held not to be fulfilled because the notice was not given even after the filing of the interlocutory process.
This was aground on the basis of which it was submitted by the counsel for the applicant that it was still appropriate to grant leave as provided by s 237(2)(e)(ii). It was submitted by the counsel for the applicant that the steps that have been taken by the applicant can be described as a suitable substitute for the requirement mentioned in s237(2)(e)(i) and it was also stated that the corporation view regarding the intention of the applicant to make an application on the basis of his affidavit submitted on 23rd of July, 2003 and the judgment delivered by Austin J on 25th of July. It was accepted by the court that in the present case, a substance over form approach needs to be adopted regarding the issue if the company was aware of the intention of the applicant. But the court also noted that the company should also note regarding the reasons behind the application. Hence in the opinion of the Court, any departure from the requirements that have been provided in s237(2)(e)(i) can be justified only in cases where the corporation already knows regarding the relevant matters that were related with the obligation or in the cases where a good reason was present to allow the applicant to represent the corporation without the company being aware of such matters. Under these circumstances, it was held by the court in this case that the company knew regarding the intentions of the applicant as well as the reasons behind making the application. This was held on the basis of the fact of the affidavit and judgment delivered in July 2003. Moreover, it was also stated by the food in this case that the same would have been reinforced as a result of the document and the covering letter that was sent to the company’s solicitors on 15 August, 2003. As a result, the court decided to grant the leave that was sought by the applicant.
Requirements of Section 237(2)
According to s240, it is required that the proceedings initiated or intervened with leave of court could not be discontinued, compromise was settled without obtaining the permission from the court. Where leave has been granted to the applicant but later on, it is decided that substantive action will not be immediately, all the costs that have been entered by the company as well as the defendant need to be paid by the applicant. This issue was also present in this case. The applicant succeeded in obtaining leave of court, but later on decided not to pursue derivative action and sought the permission from the court not to bring substantive action. It was held by the court in this case that even if the circumstances that were present in this case have not been expressly dealt with by s 240, still discretion is available to the court to grant permission to the applicant according to which substantial proceedings may not be initiated. Under these circumstances, the court said that it will be appropriate for the applicant to indemnify the company and also the proposed defendant regarding all the costs that have been incurred by them.
Application: In case an application for leave is discontinued, and the responsibility falls on the applicant, then such applicant is required by the law to pay costs. For example, in Foyster v Foyster, there were two applicants, the directors of the company. Both of them were fiercely against each other. Due to this reason, the company fall under a deadlock and an application was made to the court. So that derivative action can be initiated on behalf of the company. The meaning of the designation given by one director was that there was no longer such a deadlock present in the company and as a result, the company was in a position to initiated proceedings to itself. The meaning of the designation given by one director was that there was no longer such a deadlock present in the company and as a result, the company was in a position to initiated proceedings to itself It was ordered by the court that costs should be paid to the company by the director who had ultimately decided to resign. Similarly, in cases it can be considered to be appropriate that a cost order should be used as a penalty under certain circumstances. Such a situation was present in Jeans v Deangrove. In this case the court arrived at the conclusion that “the present application due to which the court had to spend many days of its time, on urgent basis, should not be initiated so belatedly”. Under the circumstances, the court ordered the applicants. Not only to pay costs to the company, but it also ordered the payment of costs to the Commonwealth Bank even if it was not a party to the proceedings, but was given a right to be heard.
Conclusion:
On the above-mentioned grounds, the court had granted the leave as sought by the applicant.
References
Foyster v Foyster Holdings [2003] NSWSC
Isak Constructions v Faress [2003] NSWSC 784
Jeans v Deangrove P/L [2001] NSWSC 84
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