Draft your pleadings with care

Professor Bob Baxt reviews a recent court case that highlights why it is vital to draft your pleadings carefully to obtain the best outcome when a breach of duty or the oppression remedy can be established.

Often when corporate disputes occur, especially when family companies are involved, allegations are made that the directors have breached their duty to act with appropriate good faith and, sometimes, with appropriate care and diligence. These claims can also be coupled with claims of oppression, based on a breach of section 232 of the Corporations Act 2001. Care needs be taken when cases are pleaded involving both sets of allegations because judges find it difficult – especially if the facts are complex – to craft a suitable set of remedies if wrongs are proven to have occurred.

A classic example of this is the recent New South Wales Supreme Court decision of Justice Black in In the matter of Ledir Enterprises Pty Limited [2013] NSWSC. This case concerns a family dispute involving a number of companies in the Ledir Group. The major remedies sought were based on claims that the directors had breached their duties of care and diligence, as well as their duties to act in good faith. There were also allegations that the directors’ behaviour amounted to oppression against Rosemary Aboud (the major plaintiff in the case). Rosemary was the daughter of one of the founders of the main company. She and another shareholder sought personal remedies as well as remedies on behalf of the main company, Ledir Investments, in a derivative action. The defendants were Ledir Enterprises (the main defendant company) and other members of the family (David and Ian Aboud). These two directors had been the main players running the company’s business over the years. 

Justice Black noted (para 7 of the report) that the pleadings were “complex and in some respects convoluted, with some allegations (for example, a breach of directors’ duties) pleaded in very wide terms; others (for example, oppression), cross referenced to numerous paragraphs appearing elsewhere in the pleading and factual allegations combined in different combinations to give rise to multiple alternative pleadings”.

He said the structure of the case made it difficult for him to formalise his judgment because he had to deal with many matters that related to allegations of breaches of directors’ duties and which were also relevant to allegations of oppression and fraudulent conduct.

Allegations were made by the plaintiff and on behalf of the main company that certain payments made by the directors of the holding company placed her (and her interests) at a significant disadvantage to others in the company. She argued that these payments, structured to favour one group against the others, amounted to a breach of directors’ duties.

Often, in cases relying on the remedy in oppression, claims will include that dividends were not distributed as equitably as they might have been to all shareholders and, as a result, some shareholders suffered from the terms of the arrangements when compared to others. While some of the claims were based on the way in which investments were made, other arguments relied heavily on the interpretation of the company’s constitution. The defendants argued that this allowed a certain degree of latitude in the way the board of directors carried out its obligations.

Rosemary and her colleagues believed a number of other decisions made by David and Ian relating to the various companies’ financial arrangements amounted to unfairness and alleged breaches of duty.

A considerable portion of the judgment was concerned with whether a resolution to remove Rosemary as a director was lawful. Justice Black noted that when one interpreted the company’s constitution, one had to give due regard to language “used by the parties in the purpose and object of the transaction and, at least where there is uncertainty or ambiguity in the document, the court may have regard to the surrounding circumstances known to the parties … the same principles are generally applicable in the construction of a company’s constitution” (para 47).

Despite facing a number of difficulties, Justice Black felt that most of the arguments raised by Rosemary and her colleagues did not favour a decision that the directors acted improperly when administering the company.

A number of arguments were also raised about statutory duties – the duty to act with care and diligence and the duty to act in the best interests of the company.

As a group of companies was involved, Justice Black had to consider some of the interesting case law that had developed over the years in determining what duties directors owed to different companies within the group when considering the affairs of a particular company in relation to the issues being argued.

On the allegation that the directors were not acting with appropriate care and diligence in conducting the affairs of the companies, leading to the re-arrangements, Justice Black was persuaded that it was appropriate to take into account the fact that the companies being considered were family companies where directors would “not necessarily have corporate experience and their affairs might be conducted in a relatively informal way”. The implications are that there was no breach of the duty of care and diligence (para 75).

In relation to section 181 of the Corporations Act (the duty of directors to act in good faith and in the best interests of the company), Justice Black referred to the recent decision in the Western Australian Court of Appeal in the Bell Group case and the different views expressed by the judges in that case on aspects of that duty. He concluded that there was at least an arguable case established that a breach of section 181 of the Act had been committed by David and Ian to the extent that they allowed the companies to make payments to lawyers acting on their individual behalf. But he noted: “The extent of the breach and the amount of any compensation recoverable may ultimately require a detailed scrutiny [of the relevant facts]. I do not consider it necessary or appropriate for me to undertake a review of [individual matters and payments now]” (para 153).

Justice Black preferred to refer the matter to a referee to assess the extent to which the claims could be identified in sufficient detail.

On the question of oppression, he expressed some concerns as to how the pleadings had been drafted and the allegations made when linked to other allegations against the company and its directors based on the statutory derivative action. He discussed some earlier cases in which the oppression remedy had been considered in detail, ranging from the very earliest decisions in which a more conservative interpretation might have been preferred. He examined the claims in the context of Rosemary’s exclusion from the management of the main company (a matter which usually excites the interests of a court in determining how to proceed in dealing with these claims) as well as allegations that information may not have been provided in sufficient quantity and consistency to Rosemary. He ruled that her exclusion from management was not oppressive. He also ruled that the payments made for the administration and running of the companies, which might have reduced the opportunities for the plaintiff to receive larger dividends, did not necessarily amount to oppression.

Justice Black noted that many of the matters pleaded referred to events that occurred years prior to the matters before him and there were different arguments as to how much attention should be given to that past conduct. In his view, these events nevertheless did support the grant of some relief for the oppressive conduct that arguably had been established. While Rosemary had been unsuccessful in several aspects of her oppression claim, Justice Black ruled that oppression had been “established in all the circumstances, albeit on narrower grounds than those for which Rosemary contended” (para 233).

He said the way in which these matters would be resolved would be considered at the next hearing.

The facts of the case covered a large number of events going back some years. In considering the oppression remedy, Justice Black noted that they intertwined with the claims of alleged breaches of duty. He held that payments made by the companies in 2008 to the directors, given their nature and the interests they earned for members, could amount to a breach of both sections 180 and 181 of the Corporations Act on the part of David and Ian. He added: “It also seems to me that a narrower finding of oppression would be supported by the fact that David chose to reverse the position that distributions not be made to David at the rate specified in the April 2002 resolution without making any similar change in respect of Rosemary. That matter was squarely an issue in the proceedings” (para 207).

But it was difficult to rule that oppression occurred in relation to many earlier activities.

The judge’s final comments concerned the payments made for the legal advice provided to David and Ian. In his view, David and Ian showed no real effort to differentiate payments for the benefit of the companies and payments for their own benefit. He added: “I have had regard, in determining the oppression claim in respect of these expenses, to the fact that both Rosemary [and another member of the family] appear to have previously authorised the payment of legal expenses, including, in Rosemary’s case, for her benefit… David and Ian contend that the same principles must apply to both; while that may be correct, the payments by David and Ian was substantial in quantum, and I do not consider the fact that Rosemary [and another member of the family] may have applied corporate assets too for personal purposes provides justification for David and Ian to do so, particularly where there was then and is now no consensus of shareholders supporting that cause” (para 211).

Justice Black then added: “The payments of David and Ian’s legal costs in these proceedings would also be capable of constituting oppression [meaning that] this went beyond protecting the company’s [discrete] interests so as to advance David’s interests as a shareholder [in the relevant companies] and David’s and Ian’s interests as directors, and if David were not otherwise entitled to payment of those costs in the exercise of right of indemnity under [the relevant constitution]. The balance of authorities indicate that it is not necessarily improper or inappropriate for a company to incur legal costs in defending an oppression suit, but it may be oppressive for it to do so where its defence goes beyond merely protecting its discrete interests so as to advance the majority’s interests, to have their legal work done at [the expense of the company]” (para 212).

As noted earlier, further hearings will be held in which a judge or referee will have the power to make orders in relation to the damages or compensation, or remedies pursuant to the oppression remedy. The case illustrates clearly that parties should be careful in drafting their pleadings to ensure they obtain the best and most effective remedies if the courts are likely to find if a breach of duty or the oppression remedy has been established.