Initiating Proceedings In The Name Of A Company: Lessons From Junior Academy

By Benjamin Caddaye, Law Clerk, and Alicia Hill, Principal, MST Lawyers

The recent decision of the Victorian Supreme Court in Re Junior Academy ELC Pty Ltd (No 3) [2019] VSC 161 serves to highlight how dishonest and deceptive conduct of one director is highly relevant when determining whether the Court could grant leave allowing that director to bring a claim against another director in the name of the company.

In this matter, Mr Urban brought an application seeking leave to bring an action against Mr and Mrs Lahmy (the Lahmys) in the name of a company of which they were equal shareholders. Mr Urban alleged that the Lahmys breached their director’s duties by developing a childcare centre on the same road as a child care centre they owned and operated jointly.

In refusing to grant leave, Justice Robson highlighted the circumstances where granting leave to bring a case is inappropriate, and what considerations about the person bringing an application are relevant.

Background

This application involved three childcare centres in the Caulfield area in Melbourne.

The first centre was located at 249 Glen Eira Road, North Caulfield, and was owned by and operated through the Glen Eira Unit Trust. The trustee of this trust was Junior Academy ELC Pty Ltd (Junior Academy). The trustee, Junior Academy and the units in the unit trust were ultimately owned (through associated companies) equally by the Lahmys, and Mr and Mrs Urban.

The second centre was located at 294-296 Glen Eira Road, South Caulfield, and was owned and operated the Lahmys independently of their interest in the 249 Glen Eira Road centre.  

The third centre was never built, but Mr and Mrs Urban purchased a site nearby the other two centres on Glen Huntly Road and had obtained planning permits intending to build the centre in partnership with another company.

The Application

In September 2017, Mr Urban applied under section 237 of the Corporations Act 2001 (Cth) for leave of the Court to bring an action against the Lahmys in the name of the trustee company, Junior Academy.

Mr Urban alleged that the Lahmys had breached their director’s duties to Junior Academy.

He argued that:

  1. when they were faced with the opportunity to develop the site at 294-296 Glen Eira Road into a childcare centre, they had a duty to develop the site for the benefit of Junior Academy, and by not doing so and using the opportunity for their own personal benefit, they breached their director’s duties; and
  2. the Lahmys breached their director’s duties by not bringing the development opportunity to the attention of the Junior Academy board, as this would have enabled the board to consider whether to acquire it or take steps to prevent a competitor developing the site.

As it was Junior Academy who had allegedly suffered a breach of director’s duties, it was only in the company name which proceedings could be brought against the Lahmys. However, Mr Urban could not ordinarily institute the action in the name of the company, as his and his wife’s share of 50% was insufficient to force the company to initiate proceedings against the Lahmys as they also held a 50% share.

Application For Leave

Under section 236 of the Corporations Act 2001 (Cth) (Act), a person may bring proceedings on behalf of a company, or intervene in proceedings to which the company is a party, if the person is either a member, or former member of the company (such as a shareholder), or an officer, or former officer of the company (such as a director), and leave has been granted under section 237. The purpose of this section is to allow applicants to seek redress on behalf of a company where it fails to do so, such as in this case where the shareholding is equal.

Under section 237(2), the Court must grant an application for leave if it is satisfied that:

(a)   it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and

(b)   the applicant is acting in good faith; and

(c)   it is in the best interests of the company that the applicant be granted leave; and

(d)   there is a serious question to be tried; and

(e)   either 14 days notice of an intention to make an application has been given to the company, or it is otherwise appropriate without notice.

Decision

Justice Robson stated that it was for Mr Urban in pursuing the application to make out all of the five criteria in s 237(2). His Honour found without much comment that criteria (a), (b), (d) and (e) had been satisfied. The main contentious point was in respect of criterion (c). Ultimately the Court found that Mr Urban had failed to make out criterion (c). His Honour relied upon two key findings.

The first finding was that for criterion (c) to be satisfied, it needed to be in the best interests of the company that Mr Urban himself be granted leave to bring the proceeding on behalf of the company.  It was held that to the extent the characteristics of Mr Urban were relevant to the assessment of where the best interests of the company lie, they must be taken into account. Counsel for the Lahmys argued that on an assessment of the character of Mr Urban, and the context of the whole dispute between the parties, it was not in the best interests of the company to allow him to bring the action.

Justice Robson accepted this submission, finding that Mr Urban had a history of telling ‘untruths’ to Mr Lahmy when it suited his own personal interests. His Honour noted one occasion where Mr Urban falsely informed Mr Lahmy that he had arranged a prospective buyer for their business. This falsity was designed to extract further information from Mr Lahmy about the second childcare centre. Once this information was obtained, Mr Urban informed Mr Lahmy the ‘buyer’ had lost interest, when there had in fact never been a prospective buyer. Justice Robson was prepared to see this ground alone as sufficient to deny the application.

The second finding was that there were other mechanisms that could have been used to resolve the dispute. Justice Robson noted that while the existence of alternative mechanisms was not fatal to an application for leave under s 237, Mr Urban still needed to satisfy the Court as to why those other means were inappropriate.

In this instance, the 50% share in Junior Academy was held by another company Unki Pty Ltd (Unki) which was wholly owned by Mr and Mrs Urban. His Honour noted that Unki could have brought oppression proceedings under s 233 of the Act and appropriate relief could have been obtained without resort to using the company vehicle through an application under s 236. Underlying this finding, his Honour held that the considerations for a grant of leave are different in a small company where there is a dispute between two parties, such as members of a family or two co-owners like the Lahmys and Mr and Mrs Urban. In such a case, where there are other means of resolving the dispute it is not appropriate for one of the two protagonists be given leave to use the company vehicle which carried on the common venture to litigate the dispute between the parties.

Finally, his Honour also considered that there was a potential conflict of interest, as there existed the possibility the Lahmys would bring a cross-claim against Mr Urban for the development of the third centre in the vicinity of 249 Glen Eira Road that did not go ahead. In concluding that leave should be refused, Justice Robson considered it relevant that Mr Urban was also guilty of failing to tell the board about the opportunity to develop the Glen Huntly Road centre, and therefore was essentially attempting to bring proceedings in a situation where his own conduct related to the same complaint he wished to make.

Commercial Considerations

The decision highlights the way in which the Court will consider whether a grant of leave under s 237 is in the best interest of the company.

The character and conduct of the person bringing the application for leave will be a relevant and important factor in the Court’s decision. As was the case here, Mr Urban was found to have been dishonest in his dealings with Mr Lahmy, and this was ultimately an important reason why his attempt in bringing proceedings against a fellow director under s 236 failed.

It will also be important to bear in mind that in the case of small companies where there is an underlying dispute between the parties, and where there also exist other means of resolving that dispute, the Court has held that it will not be appropriate to grant leave under s 237.

If you have any questions about the content of this article of the issues raised by it, please feel free to contact Alicia Hill by email or call +61 3 8540  0200.