You can’t stand in the company’s shoes!

Wonga Pastoral Development Co Pty Ltd [2023] NSWSC 133

In the recent decision of Wonga Pastoral Development Co Pty Ltd [2023], the Supreme Court of New South Wales considered a scenario where an application for leave to bring derivative application was sought by a shareholder in respect of a family company.

In this family dispute, the plaintiff wanted the Court’s leave to pursue a $10m claim on behalf of the Company. The plaintiff said the $10m was owed by the first defendant, a trustee of a family trust, as a loan to be repaid.

The plaintiff also sought leave to proceed against the second and third defendant for breaching their duties to the Company.

The plaintiff said the loans were made where the first defendant had doubtful capacity to repay, and where interest was not charged.

At a 2021 meeting, the Company’s directors (including an independent director) considered the loan from the first defendant and resolved not to seek repayment at that time.

The plaintiff gave an undertaking to pay the Company’s costs if leave was granted, despite not having much money.

A dispute regarding the third defendant’s removal as trustee of a family trust led to a far-reaching settlement deed being entered into in 2019 that had established the Company’s corporate governance structure, including the independent director.

There are a number of related pieces of litigation on foot between the parties.

It was accepted by all that the Company was not going to bring proceedings seeking repayment or alleging breaches of duty.

Whether the plaintiff was acting in good faith in pressing a claim against the first defendant was considered in the context of the plaintiff being a shareholder in the Company, there being inconsistencies in the plaintiff’s claim, and the plaintiff’s offering of an indemnity of dubious value.

Whether the plaintiff was acting in good faith in pressing the claims against the second defendant and third defendant was assumed to be so but, later, found to be irrelevant as the claims raised no serious question to be tried.

The Court was not satisfied that the claim was in the Company’s best interests. No financial evidence comparing alternatives was tendered, and the Court was reluctant to disturb the commercial judgement of the Company’s directors.

The Court noted the established corporate governance principle that directors could legitimately make decisions against the wishes of a majority of shareholders.

It was found to be contrary to the Company’s best interests to “sidestep” or “outflank” the decision of Company’s board not to pursue the debt now, especially as no challenge was raised to the decision-making process used.

Was it in the best interests of the Company for the plaintiff to bring the claim? The Court said no, due to the existing family tensions and possible inability of the plaintiff to separate the interests from his own, and the fact that the plaintiff did not propose instructing independent lawyers if leave was granted.

As the claim was not brought in good faith or in the Company’s best interests, the plaintiff was not granted leave to pursue the Company’s claim against the first defendant.

Nor were the claims against the second or third defendant seriously arguable. The plaintiff’s claim was poorly pleaded and contradictory in part – whether the loan would or would not be repaid, whether it was currently statute-barred or not.

The plaintiff’s application was dismissed.

This case illustrates the principle of derivative action and the importance of bringing a claim in good faith and in the best interest of the relevant company. If you would like advice in relation to corporate disputes please do not hesitate to reach out to our team.

*This article was prepared with the assistance of Christie Preston*

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