Family Law Flavour – Former Director’s Derivative Action Dismissed

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Noah’s Ark Veterinary Services Pty Ltd v Hudson [2023] FCA 1094 (15 September 2023)

By Dr Laura Sowden, Partner, Annabel Cheung, Lawyer and Theresa Au, Law Graduate

NOTE – Mills Oakley Lawyers acted for the Defendants instructing Maurice Baroni of Counsel.

Justice Perram dismissed minority shareholder Donald Hudson’s application for leave to bring a derivative suit made under ss 236(1)(a) and 237(1) of the Corporations Act 2001 (Cth).

In this matter Mr Hudson did not bring the leave application in good faith and it was not in the best interests of the Company that leave be granted. A personal dispute between shareholders being dealt with in Family Law Proceedings, is not well suited to a derivative suit.

The case demonstrates leave to bring a derivative suit on behalf of a company against its directors will only be granted if all of the preconditions set out in s 237(2) are satisfied.

Background

Donald Hudson (Donald) was a former employee, former director, and current minority shareholder of Noah’s Ark Veterinary Services Pty Ltd (the Company).

The two other shareholders, and current directors of the Company were Ilona Deborah Hudson (Ex-Wife) and Victoria Ireland (Business Partner). They were the First and Second Defendants respectively.

Donald had previously brought proceedings seeking division of marital property against his Ex-Wife (Family Law Proceeding). The Business Partner was also joined to these proceedings due to her share in the Company.

A significant issue in the Family Law Proceeding is the value of the parties’ shares in the Company. The parties are also currently united in their view that Donald should cease to be a shareholder of the Company after the Family Law Proceeding is determined.

Relevantly, the Company operated two practices at Nelson Bay and Medowie.

In January 2022, Donald’s Ex-Wife and Business Partner established the Third Defendant company, Move Unleashed Pty Ltd (2nd Company). Some rehabilitation services of the Company were moved into the 2nd Company.

Leave application made

On 16 June 2023, Donald filed an application for leave to bring a derivative suit on behalf of the Company.

Donald sought compensation for the Company from his Ex-Wife, the Business Partner and the 2nd  Company for alleged breaches of their fiduciary and statutory duties by diverting part of the Company’s business to the 2nd Company (the Application).

What are the criteria for leave under s 237?

Section 237(2) provides:

(2) The Court must grant the application if it is satisfied that:

  1. 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
  2. the applicant is acting in good faith; and
  3. it is in the best interests of the company that the applicant be granted leave; and
  4. if the applicant is applying for leave to bring proceedings—there is a serious question to be tried; and
  5. either:
    1. at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
    2. it is appropriate to grant leave even though subparagraph (i) is not satisfied.

What did the Court say about the s 237(2) preconditions?

The Court was satisfied that three of the preconditions in s 237(2) were met:

  • s 237(a) if leave was not granted the Company would not bring a proceeding against the Business Partner and Ex-Wife since they have no interest in suing themselves;
  • s 237(d) because there is a serious question to be tried as the diversion of the rehabilitation business to the 2nd Company; and
  • s 237(e) because the Company was given sufficient notice by way of correspondence from Donald’s solicitors.

The remaining two preconditions were good faith and whether the derivative application was in the best interests of the Company. The Court decided the leave application should be dismissed because:

  1. it was pointless as Donald will likely not be a shareholder by the time the derivative suit went to trial as the Family Law Proceeding was set down for final hearing in mid-October 2023;
  2. it was unnecessary since the same dispute is already before in the Family law Proceedings within the Federal Circuit and Family Court of Australia (Division 2);
  3. it was brought by Donald for the purposes of persuading his Ex-Wife and Business Partner to pay him certain alleged employment entitlements, which were allegedly owed by the Company. This is contrary to the purpose of the application which was to recover compensation for the Company from his Ex-Wife and Business Partner for alleged breaches of their fiduciary and statutory duties. This was considered an abuse of process; and
  4. it was not in the best interests of the Company to engage in the litigation, partially because there was a lack of utility. The allegedly diverted work was a profit of $6,000.00, a nominal sum having regard to the cost of the proceedings. Donald had also previously acted contrary to the best interests of the Company in poaching work from it.

What to take away?

In making a successful application for leave to bring derivative proceedings on behalf of a company, the Court will only grant leave if it is satisfied on the evidence of all the criteria in s 237.

In this instance, the applicant needed to be acting in good faith and in the best interests of the company.

In this case, leave was not granted because the Court determined the applicant had ulterior motives, was not acting in good faith and was not acting in the best interests of the company concerned.

This case demonstrates the risks within family businesses if marriages breakdown as disputes between former spouses and shareholders can escalate beyond traditional family law proceedings into the corporations list of the Federal Court of Australia.

For further information, please do not hesitate to contact us.

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