Wu v Li

• Jurisdiction: Australian Capital Territory
• Court: Supreme Court of ACT
• Judge: McWilliam AsJ
• Judgment Date: 17 August 2018
• Docket Number: File Number: SC 379 of 2015
• Date: 17 August 2018

[2018] ACTSC 224

SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY

Before:

McWilliam AsJ

File Number: SC 379 of 2015

Tao Wu

(Plaintiff)

and

Yuxin Li

(First Defendant)

Hong Chen

(Second Defendant)

Representation:

Counsel

Mr M Karam (Plaintiff)

Mr B Katekar (Defendants)

Cases Cited:

Ariff v Ian Kim Send Fong [2007] NSWCA

BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783 ; [1982] 1 All ER 925

Cadima Express v Deputy Commission of Taxation [1999] NSWSC 1143

Carpenter v Pioneer Park Pty Ltd [2008] NSWSC 551

Central City Pty Ltd v Montevento Holdings Pty Ltd [2011] WASCA 5

Chahwan v Euphoric Pty Ltd t/as Clay & Michael [2008] NSWCA 52

Clark v Esanda Ltd [1984] 3 NSWLR 1

Flower & Hart (a firm) v White Industries (Qld) Pty Ltd [1999] FCA 773 ; 87 FCR 134

Hall v Poolman [2009] NSWCA 64 ; 75 NSWLR 99

Harpur v Ariadne Australia Ltd (No 2) [1984] 2 QD R 523

Hu v PS Securities Pty Ltd t/as Trustee of Joseph Family Trust [2011] NSWSC 303

In the matter of Dungowan Pty Ltd (in liq) [2014] NSWSC 1721

Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859

Maples v Hughes [2002] NSWSC 617

Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221

Re Cardinal Group Pty Ltd (in liq) [2015] NSWSC 1761

Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 64

Re DH International Pty Ltd (in liq) (sub nom Challis v Hoffman) [2017] NSWSC 870

Re Karinya Haulage Pty Limited [2017] NSWSC 888

Re Sundara Pty Ltd [2015] NSWSC 1694

Re Three Chimneys Pty Ltd (in liq) [2015] NSWSC 1754

Swansson v RA Pratt Properties Pty Ltd [220] NSWSC 583

Varawa v Howard Smith & Co Ltd (1911) 13 CLR 35

Victorian WorkCover Authority v Esso Australia Ltd [2001] HCA 53 ; 207 CLR 520

Williams v Spautz (1992) 174 CLR 509

Young v Queensland Trustees Ltd (1959) 99 CLR 560

Legislation Cited:

Corporations Act 2001 (Cth) s 237

Limitation Act 1985 (ACT) ss 11, 33

Court Procedure Rules 2006 (ACT) r 408

CORPORATIONS — members rights and remedies — application in the Court's inherent jurisdiction for leave to commence a derivative action — where company in liquidation — where liquidator supports application — where proposed actions potentially barred by limitation statute — whether application made in good faith — where collateral purpose not improper — where company indemnified by applicant — application granted

Decision:

See [95]

1 The plaintiff in these proceedings, Mr Tao Wu, is a former director of Golden Constructions Pty Ltd ACN 130 970 106 (in liq) ( the Company), in which he holds a 35 per cent share. He seeks leave in the exercise of the Court's inherent jurisdiction to bring derivative actions on behalf of the Company. The first defendant, Mr Yuxin Li, and the second defendant, Ms Hong Chen (his wife), hold the remaining interest in the Company, in shares of 30 and 35 per cent respectively.

2 There is an additional connection between the Company and the defendants. In or around August 2008, the Company and the defendants entered into a building contract, pursuant to which the Company was to construct a residential dwelling on a property alleged to have been owned by the defendants in O'Malley ( Building Contract).

3 The application seeking leave to bring derivative actions was filed on 14 November 2017. It is part of a larger dispute between the same parties, by which the plaintiff personally makes a liquidated demand against the defendants for approximately $1.2 million under the Building Contract, and approximately $580,000 in respect of specified loan amounts made to the first defendant.

4 In the event that the claim for breach of contract fails, there is an alternative claim brought on a quantum meruit basis. Historically, where goods were supplied as opposed to services, such claim was on a quantum valebat (or valebant) basis, meaning ‘as much as it was worth.’ The sum claimed is approximately $2.8 million.

5 The plaintiff seeks to add the Company as a second plaintiff to the substantive proceedings to guard against the event that the Company is ultimately found to be the proper plaintiff in respect of the claims pleaded in contract or quantum meruit against both defendants, or the loans alleged to have been made to the first defendant.

Evidence

6 In support of the application, the plaintiff relied on affidavit evidence sworn by him, by the liquidator of the Company (Mr Henry Kazar), and by the solicitor with carriage of the matter (Ms Hannah Griffiths). The defendants relied on the affidavit evidence of their solicitor, Mr Stephen Gavagna. No deponent was required for cross-examination.

Issues for determination

7 There was no issue as to the standing of the plaintiff, as a shareholder, to make an application of this type. It is well established that creditors and members of a company have standing to seek leave to bring a derivative action in the name of a company in liquidation: Chahwan v Euphoric Pty Ltd t/as Clay & Michael [2008] NSWCA 52; ( Chahwan v Euphoric) at [124], cited in the judgment of Re DH International Pty Ltd (in liq) (sub nom Challis v Hoffman) [2017] NSWSC 870 ( Challis v Hoffman) at [5] per Gleeson JA.

8 The parties were also agreed as to the applicable principles in such an application. They were summarised by Barrett J in Carpenter v Pioneer Park Pty Ltd [2008] NSWSC 551; 71 NSWLR 577 ( Carpenter) at [34], stating that the Court will have regard to “three main matters”:

• (1) Whether the proceedings proposed to be pursued have some solid foundation, in that they exhibit such a degree of merit as to be neither vexatious nor oppressive and to present reasonable prospects of success ( Issue 1).

• (2) The liquidator's attitude to the question whether the proceedings should be pursued ( Issue 2).

• (3) Whether practical considerations support the initiation of the proceedings, with particular reference to financial protection of the liquidator and the estate of the company by means of indemnity and, if indicated, security ( Issue 3).

9 Those principles were adopted by Ward J (as her Honour then was) in Hu v PS Securities Pty Ltd t/as Trustee of Joseph Family Trust [2011] NSWSC 303 at [38] and by Black J in cases such as Re Sundara Pty Ltd [2015] NSWSC 1694 ( Re Sundara) at [10]; and In the matter of Dungowan Pty Ltd (in liq) [2014] NSWSC 1721 ( Dungowan) at [25] (citing an earlier decision of his Honour to the same effect).

10 These matters are not exhaustive, as the Court is here called upon to exercise a general equitable jurisdiction, rather than the jurisdiction under s 237 of the Corporations Act 2001 (Cth) ( Act). The Court thus retains a general exercise of discretion, having regard to all the circumstances of the case: Challis v Hoffman at [28]–[29]; Dungowan at [26] per Black J.

11 The parties framed their submissions in terms of the three main matters above, although as will be seen, some of the arguments made in relation to each overlap.

Issue 1 — Whether there is a solid foundation for the proceedings proposed

12 The plaintiff must provide the Court with sufficient material to enable it to determine that there is a serious question to be tried: see Re Karinya Haulage Pty Limited [2017] NSWSC 888 at [12] per Brereton J and the authority there-cited.

13 The requirement that each claim have a ‘solid foundation’ involves, as a practical matter, that there are reasonable prospects of success and some tangible benefit is genuinely in prospect: Carpenter at [30]; cited in Re Sundara at [10].

The prospects of the claims — whether there is a serious question to be tried

14 The claim as articulated turns primarily on the Building Contract, a copy of which was in evidence. It includes on the front page the Company as the builder and the defendants as the contracting parties, although only the second defendant appears to have signed each page. Further, some of the appendices to the Building Contract were incomplete and not signed by anyone. The Company was contracted to build a residential dwelling at the site in O'Malley for $1.8 million inclusive of GST. The Building Contract names Mr Li as the owner of the site.

15 As outlined above, the first proposed claim in the proceedings is that the Company performed work in constructing the dwelling in which the defendants now live, for which it remains substantially unpaid, and for which it is entitled to be paid, either in contract or on what was described as a quantum meruit basis. Further, the Company made loans to the first defendant, which also remain unpaid.

16 The plaintiff contends the joinder of the Company to the existing proceedings being pursued by him is necessary as there is now a question about the operation of a non-assignment clause in the Building Contract, namely clause 18. The terms of clause 18 prohibit the assignment of “rights or obligations under the [Building Contract] without the written consent of the other [party].”

17 The plaintiff has been proceeding on the basis that he held a valid assignment of the Company's rights to sue for recovery of the unpaid amount, which was entered into by the liquidator pursuant to a Deed of Assignment dated 13 August 2014 ( Deed of Assignment), a copy of which was also in evidence.

18 By the Deed of Assignment, the liquidator purported to assign all claims, rights, actions, suits and demands the Company may have against the defendants whether at law, in equity or under statute which arise to any extent out of or in consequence of any act or omission by the defendants in relation to the Company or the Company's construction of the dwelling in O'Malley.

19 The defendants contend that they did not give written consent to such assignment. In the event that the Deed of Assignment is ineffective, the legal claim to pursue...