“You can’t sue in the company’s shoes. You’re not coming in good faith!”
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ShopCo had two 50% shareholders, P and D. Each of P and D were Cos. P’s dir and D’s dir were the dirs of ShopCo. ShopCo owned a retail centre with a possible value of ~$53m: [2], [3], [57]
The dirs had a falling out: [3]
D provided property services to ShopCo, with P’s knowledge The arrangement was longstanding, but not reduced to writing: [5]
Some of the services D provided were managing tenants, negotiating leases, collecting rent etc for ShopCo: [6]
P alleged this work was real estate agent work and, as D was not a real estate agent, any commission should be repaid to ShopCo as a debt: [7] - [9]
P sought leave to bring a claim pursuant to s237 leave to sue D for ~$700K it received on the above basis: [11], [12]Derivative action criteria (a) (will the Co bring the claim?), (d) (is there a serious question?), and (e) (notice requirements) were all met: [15]
It remained for the Court to consider (b) (good faith), and (c) (best interests of ShopCo): [15]
(There is, with respect, a useful summary of some relevant derivative actions principles at [18] - [29])
P’s dir and D’s dir ran similar developments together in the past. Their enmity appeared to arise from disagreements about other projects: [45], [46]
Attempts were made by P and P’s dir to cause ShopCo to pursue its alleged claims against D. Those attempts failed: [47], [48]
In relation to the best interests test, the Court considered no decision was necessary due to a conclusion P was not coming in good faith: [61]
In doing so, the Court considered the proportionality of the sum potentially claimed from D (~$700K) alongside the possibility of some costs being unrecoverable in any action (due to not being real estate agent work): [59]
In considering good faith, the Court noted a successful applicant must show (a) honest belief in the cause of action’s prospects, and (b) an absence of collateral purpose: [62]
The Court gave 11 reasons (or perhaps up to 13: [66], [67]) for finding P did not come in good faith.Those included: (i) P put forward no basis for P’s belief in the prospects of the claim, nor any legal advice on that point, (ii) there were real risks in the proceedings, (iii) a strong argument that D provided services at cost (i.e. for no benefit) was not addressed by P, (iv) the cost estimate of the proposed litigation was $500K for a possible $700K benefit, and (v) there was no suggestion of any defect in the services provided by D: [65]
P’s proposed course would see $500K in costs for a $700K return that would arise only if P’s submission that ALL work done by D was “real estate agent work” succeeded. A commercial return required complete success for P. This pointed away from good faith: [67]
Having found the P did not meet the good faith requirement, leave was not granted: [72]
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