Ananda Marga Pracaraka Samgha Ltd v Tomar

Background

1. By Amended Originating Process dated 7 December 2015, the Plaintiff, Ms Sibila Espinosa seeks an order that the First Defendant, Therma Truck Pty Limited ("Company") be wound up and that liquidators be appointed. The Defendants to the proceedings are the Company and Mr James Betzis, who is the other shareholder in the Company and arguably its sole director. By Amended Interlocutory Process also dated 7 December 2015, and pursued at a hearing on 25 and 26 February 2016, Ms Espinosa also seeks an order under s 472(2) of the Corporations Act 2001 (Cth) that a provisional liquidator be appointed to the Company, or alternatively an order that the proceedings be expedited. The second order was not the subject of submissions and does not appear to be necessary, since the proceedings are being heard in a managed list which generally has the capacity to allocate a hearing date shortly after proceedings are ready for hearing.
2. It is necessary to say something further as to the factual background to the application for the appointment of a provisional liquidator to the Company, and the circumstances in which the application was pressed, before turning to the applicable legal principles. The Company is a manufacturer, importer and repairer of refrigerated truck bodies and has a staff of about 40 persons (Espinosa 3.12.15 [5]-[6]). The Company was founded by the parents of Mr James Betzis' former spouse and Mr James Betzis had worked in that business for many years. From about March 2006, Virtual Logic Ltd ("Virtual Logic"), a company controlled by Mr Andrew Betzis, who is Mr James Betzis' brother and Ms Espinosa's husband, lent the Company the amount of $600,000 over a period of about 12 months (Espinosa 3.12.15 [10], Annexure A). After the death of Mr James Betzis' father-in-law, Virtual Logic then purchased all of the shares in the Company from Mr James Betzis' mother-in-law on 5 May 2008 (Espinosa 3.12.15 [11]-[12]). Mr James Betzis was appointed by Virtual Logic as sole director of the Company on the day it purchased the Company's shares (Espinosa 3.12.15 Annexure C) and appears to have held that position since that time, although there are uncertainties as to the basis of that appointment in the Company's constitution to which I will refer below. Mr Andrew Betzis and Ms Espinosa contend, and Mr James Betzis denies, that there was an informal agreement between them that all three of them would be involved in the Company's management and the control of its affairs (Andrew Betzis 3.12.15 [6]-[7], Espinosa 3.12.15 [27]-[30]). Whether or not such an agreement existed, Mr Andrew Betzis and Ms Espinosa initially had control of the Company, from May 2008, and had the capacity to determine the manner in which it would be managed.
3. In about mid-2009, Virtual Logic transferred the shares in the Company to Ms Espinosa and Mr James Betzis and issued further shares to Mr James Betzis, with the result that shares in the Company were from then owned equally by each of Ms Espinosa and Mr James Betzis. There is a dispute as to whether Mr James Betzis was gifted those shares, in whole or part, which it is presently not necessary to resolve.
4. The Company leases the premises which it occupies from what the parties describe as a "partnership" comprised of Ms Espinosa and Mr James Betzis, in which Ms Espinosa has a 70% interest and Mr James Betzis has a 30% interest. A dispute arose as to the quantum of rent paid to the partnership of Ms Espinosa and Mr Betzis by the Company in October 2015, where Mr James Betzis contended that nearly $430,000 in rent had been overpaid in the period since 2009. There is a dispute as to the basis of such payments, with Ms Espinosa contending, and Mr James Betzis denying, that the payments made were supported by an oral agreement between the parties. After that dispute arose, the Company failed to pay rent for the premises for a period. Ms Espinosa initially relied on evidence that the Company's failure to pay the rent of the premises to the partnership had the consequence that she would have to meet liabilities to the lender in respect of the property personally, or the loan would otherwise go into default. Serious questions have arisen as to the accuracy, or at least the completeness, of that evidence. Ms Espinosa also raised concerns as to the conduct of building works at the premises, and there is a dispute as to whether those works are structural in character. Those matters can properly be addressed at a final hearing, provided the Court can be satisfied that the status quo can be preserved by the undertakings given to Ms Espinosa and the Court in December 2015 ("December undertakings").
5. The Company's management accounts suggest that it has substantial net assets and is profitable (Andrew Betzis 3.12.15, [37], [65], [71], Annexure J; Clarke 16.12.15 [10]-[11]) and Ms Espinosa had advised Mr James Betzis, in July 2015, of a substantial figure (which I need not record in this judgment) which she considered was the value of her shareholding in the Company (Espinosa 3.12.15 [68], Annexure "P").
6. In support of the application for appointment of a liquidator and a provisional liquidator to the Company, Ms Espinosa initially relied on a breakdown of the relationship between her and Mr James Betzis, the two equal shareholders in the Company; a failure of the parties to reach any alternative arrangement for the purchase by one shareholder of the shares of the other; criticisms of Mr James Betzis' behaviour; a suggested lack of financial or managerial oversight of Mr James Betzis' conduct; and concerns about the manner in which the Company's affairs and finances were being managed by Mr James Betzis. It is common ground between the parties that their relationship has broken down since mid-2015. Mr Andrew Betzis, who had previously worked in the Company's business, ceased to work in that business in April 2015 and Mr James Betzis has since resisted the appointment of either Mr Andrew Betzis or Ms Espinosa as a director of the Company. There is also dispute as to the circumstances in which personal expenses have been paid from the Company's accounts and as to whether allegations of "erratic behaviour" made against Mr James Betzis are well-founded (Clarke 16.12.15 [31]) and those matters will need to be determined at a final hearing.
7. Ms Espinosa had sought an order for an appointment of a provisional liquidator when these proceedings were commenced. That application was listed for hearing on 18 December 2015, but the application did not proceed after the December undertakings were given by the parties to the Court and to each other. The undertakings then given by the Company and Mr James Betzis to Ms Espinosa and the Court dealt, first, with the payment of arrears of rent by the Company, partly into Court and partly to Ms Espinosa and Mr James Betzis, and as to the payment of future rental obligations; they disclosed bank accounts presently held by the Company and contained undertakings as to future dealings with those accounts; and they dealt with the conduct of the Company's future business, including limiting disposition of assets and acquisition of new assets, dealings with material contracts, termination of employment of employees, dealings with share capital and other financial dealings, other than in the ordinary and usual course of the Company's business.
8. A dispute has now arisen as to whether the December undertakings have been complied with. It is apparent, as I will note below, that at least one of those undertakings has not been complied with in material respects over the two month period since it was given, and the Company and Mr James Betzis did not restore the matter before the Court to seek to address that non-compliance. Ms Espinosa now relies on that breach, and other alleged breaches of the December undertakings of lesser materiality, in order to press her original application for appointment of a provisional liquidator to the Company.

The evidence led in this application

1. The parties read, in this application, the evidence on which they relied in respect of the original application to appoint a provisional liquidator and further evidence as to the circumstances since the December undertakings were given, including in respect of the alleged breaches of those undertakings.
2. Ms Espinosa relied on her affidavit dated 3 December 2015, sworn in support of the original application for appointment of a provisional liquidator, prior to the giving of the December undertakings, which sets out the history of the establishment of the Company's business and the roles which Ms Espinosa contended the various parties played in that business and also dealt with the lease of the Company's premises and with matters relating to use of the Company's funds in the period to July 2015 and other aspects of the dispute between the parties. Ms Espinosa's evidence, which was ultimately common ground, was that there had been a breakdown of trust, confidence and the working relationship between Mr James Betzis and Ms Espinosa (Espinosa 3.12.15 [87]). Ms Espinosa's evidence was also that Mr James Betzis had not made an offer that she could buy his shares, had refused her offer that he buy her shares and, because of concerns about the Company's financial affairs, she would find it difficult to determine the likely value of the equity in the Company, and she did not consider that a third party purchaser would be interested in acquiring her shares, given Mr James Betzis' present control of the Company's affairs (Espinosa 3.12.15 [93]-[95]). Ms Espinosa did not there address the possibility that a third party might acquire all of the shares in the Company, resolving any issue as to control. The latter possibility seems to be a realistic one, since Ms Espinosa advised Mr James Betzis, on 17 July 2015, that she had received a credible offer to purchase her shares from a third party at a specified price (Espinosa 3.12.15 Annexure P).
3. Ms Espinosa also relied on Mr Andrew Betzis' affidavit dated 3 December 2015, also sworn prior to the giving of the December undertakings. Mr Andrew Betzis referred to the circumstances in which Virtual Logic acquired the shares in the Company and to the existence of an "unwritten agreement" between himself, Ms Espinosa and Mr James Betzis that they would each play a role in determining the Company's affairs. Mr Betzis also referred to concerns as to Mr James Betzis' behaviour in the period since 2014, to withdrawals made by Mr James Betzis from the Company's account and to Mr Andrew Betzis' resignation from his employment with the Company in March 2015. Mr Betzis also referred to unpaid rent relating to the premises occupied by the Company and to other matters arising from his resignation.
4. Ms Espinosa also relied on the affidavit of Mr Raines, the former general manager of the Company, dated 26 November 2015, also filed prior to the giving of the December undertakings, which referred to concerns as to Mr James Betzis' behaviour and as to Mr Betzis' access to the Company's funds, including dealings with monies held in an account at the ANZ Bank and a particular withdrawal made by Mr Betzis from the Company's account.
5. Ms Espinosa also relied on Mr Andrew Betzis' further affidavit dated 8 December 2015 which dealt with payments made by the Company in respect of the lease of its premises and also referred to an oral agreement between Ms Espinosa, Mr James Betzis and Mr Andrew Betzis concerning payment of rent and outgoings due under the lease. Ms Espinosa relied on a further affidavit of Mr Andrew Betzis dated 17 December 2015 which referred to the amount of money available in the joint account from which rent for the Company's premises was to be paid, and expressed the view that any loan payments on the loan on the premises would have to be paid from Ms Espinosa's account. That evidence was, at best, seriously incomplete, so far as it failed to take account of monies held in an offset account into which rent on the premises had previously been paid by the Company, and in which substantial funds were held at all relevant times (Ex R4). Mr Andrew Betzis in turn responded to aspects of Mr James Betzis' evidence in that affidavit. The factual disputes as to aspects of that evidence are again matters that are properly left to be determined at a final hearing, if the Court can be satisfied that the status quo can be preserved by the December undertakings or otherwise.
6. The Plaintiffs relied on a further affidavit of Ms Espinosa sworn 11 February 2016. Ms Espinosa's evidence was that she had been provided profit and loss statements and balance sheet statements as at 11 January 2016 and 31 January 2016 in respect of the Company but had not been provided continuing read-only access to the Company's Reckon accounting system as contemplated by the undertakings, or with access to the Reckon data file on a USB disk. Her evidence was that the Defendants had offered that she could attend the Company premises, without Mr Andrew Betzis, to access that accounting system but she did not know how to use that system and relied on Mr Andrew Betzis to use it and pass relevant information to her. Ms Espinosa also gave evidence of other matters relied on as breaches of the December undertakings, to which I will refer below, and to a suggested decrease (by a modest amount) of the Company's income as between 2015 and 2016 and a modest increase in the Company's expenses as between those periods. Ms Espinosa's evidence was that also she did not vote on, and was not aware of any resolution being passed by members of the Company, adopting any of the later corporate constitutions on which the Defendants relied to claim that Mr James Betzis was entitled to act as the Company's sole director.
7. The Defendants relied on evidence of a solicitor in the firm that represents them, Mr Brodie Clarke, largely on information and belief based on information provided by Mr James Betzis. Mr Clarke's affidavit dated 16 December 2015 referred to steps that had been taken to agree on the December undertakings pending a final hearing, referred to the Company's position that it was solvent and to possible adverse impacts of the appointment of a provisional liquidator, and also set out Mr James Betzis' response to matters alleged in the affidavits on which Ms Espinosa relied. The Defendants also relied on Mr Clarke's further affidavit dated 18 December 2015 which responded, on information and belief from Mr James Betzis, to Mr Andrew Betzis' affidavit dated 17 December 2015.
8. By a further affidavit dated 16 February 2016, also on information and belief from Mr James Betzis, Mr Clarke referred to steps which had been taken to implement the December undertakings and led evidence as to the circumstances relating to the alleged breaches of those undertakings on which Ms Espinosa relied. I will refer further to those matters below. Mr Clarke also referred to issues as to access to the joint account and offset account of the partnership, which was to be provided by Ms Espinosa to Mr James Betzis pursuant to those undertakings, to which I will also refer below. By a further affidavit dated 24 February 2016, Mr Clarke led evidence to establish that an earlier account held by the Company with the ANZ Bank had been closed and as to the circumstances of withdrawals from that account. As I will note below, the issues in respect of that account were known prior to the giving of the December undertakings.
9. A further affidavit of Mr Clarke dated 26 February 2016 addressed an issue as to the treatment of employee leave provisions in the Company's financial statements which had emerged in the course of the hearing. The accounting issues relating to that treatment are relatively complex and were not fully explored in evidence, and it is sufficient for present purposes to note that the Defendants' evidence as to this matter provides a plausible explanation of the treatment of that matter in the Company's accounts.

Applicable legal principles

1. It is common ground that, under s 472(2) of the Corporations Act, the Court has power to appoint a provisional liquidator after the filing of a winding up application and prior to the making of a winding up order. The jurisdictional requirements for such an appointment are satisfied, so far as Ms Espinosa has standing to bring, and has brought, an application for the winding up of the Company. There is also no substantial dispute between the parties as to the principles applicable to the appointment of a provisional liquidator, as summarised in Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd [2003] NSWSC 535; (2003) 47 ACSR 197 at [105]-[106], Roumanus v Orchard Holdings [2007] NSWSC 1480 at [7]-[11] and Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) [2013] FCA 234; (2013) 93 ACSR 189 at [11]-[18].
2. In Re New Cap Reinsurance Corporation Holdings Ltd [1999] NSWSC 536; (1999) 32 ACSR 234 at [23], Barrett J observed, by reference to authority, that: "the power to appoint a provisional liquidator is by no means limited, the grounds on which a provisional liquidator may be appointed are infinite, and all that really has to be shown is that there is a bona fide application constituting sufficient ground for the making of the order." An applicant for the appointment of a provisional liquidator must establish, inter alia, that there is a reasonable prospect that a winding up order will be made on the application: Australian Securities Commission v Solomon (1996) 19 ACSR 73 at 80. Tamberlin J there noted that the court should only appoint a provisional liquidator where it is satisfied that there is a valid and duly authorised winding up application and that there is a reasonable prospect that a winding up order will be made; whether assets of the corporation may be at risk is a relevant consideration; the court should consider the degree of urgency, the need established by the applicant and the balance of convenience; and the appointment of a provisional liquidator may be appropriate in the public interest where there is a need for an independent examination of the state of the company's accounts by someone other than its directors or where the company's affairs have been carried on casually and without due regard to legal requirements so as to leave the court with no confidence that the company's affairs would be properly conducted with due regard for shareholders' interests. His Honour also noted (at 81-82) other relevant matters including whether there was a deficiency of assets against liabilities or a lack of control over the company's assets.
3. In Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) above at [13]-[14], Gordon J in turn noted that: "It is well established that appointment of a provisional liquidator pending the determination of a winding-up application is a drastic intrusion into the affairs of the company and will not be done if other measures would be adequate to preserve the status quo ... Therefore, an applicant must also show some good reason for intervention prior to the final hearing of the winding-up application. For example, an applicant may show that the appointment is needed in the public interest or to preserve the status quo or to protect the company's assets or affairs …" [citations omitted]
4. Mr James Betzis and the Company rightly point to matters relevant to the balance of convenience in such an application, including whether appropriate undertakings have been offered which could preserve the Company's assets until a final hearing, so as to avoid the need for appointment of a provisional liquidator: Nikolaidis v Camden Retail Pty Ltd [2010] NSWSC 977 and see the other cases cited in Austin & Black's Annotations to the Corporations Act [5.472]. I will return to that issue below.

Whether there is a reasonable likelihood that a winding up order would be made

1. Ms Espinosa recognises that the first step in establishing a basis for an appointment of a provisional liquidator is that the Court would need to be satisfied that there is a reasonable likelihood that a winding up order would be made.
2. As Ms Espinosa points out, a winding up on the just and equitable ground can be made where there is an irretrievable breakdown of the relationship between the members of a company and that remedy may be more likely where a company has a small number of members and its management requires cooperation and trust between those members: Nassar v Innovative Precasters Group Pty Ltd [2009] NSWSC 342; (2009) 71 ACSR 343 at [132]; Re Amazon Pest Control Pty Ltd [2012] NSWSC 1568 at [15]-[17]. Ms Espinosa submits, and I accept, that several matters may support the possibility of a winding up order in this matter, including the fact that each of Ms Espinosa and Mr James Betzis hold one half of the Company's shares; that Ms Espinosa is currently excluded from any role in the Company's governance, and there are uncertainties as to the constitutional basis for the present arrangements; there is evidence that both family interests previously worked in the business; and Mr Andrew Betzis and Ms Espinosa had at least been primarily responsible for the purchase of the Company's shares in 2008. Mr Krochmalik, who appears for Ms Espinosa, submits, and I accept, that the evidence that interests associated with Mr Andrew Betzis financed the purchase of the shares, and Mr Andrew Betzis' previous involvement in the management of the Company's affairs, provides some support for the suggestion that the parties contemplated that they would each have a role, or at least both Andrew Betzis and James Betzis would have a role, in the Company's management (T34-35). The evidence indicates that there are also significant issues as to the past financial management of the Company, although it seems to me that those issues are capable of being addressed by the December undertakings, provided the Court is satisfied they will be complied with.
3. Mr Karam, who appears with Mr Gee for Mr James Betzis and the Company, submits, and I bear in mind, that Ms Espinosa's case for a winding up order relies on several oral agreements that are denied by Mr James Betzis, including in respect of their right to involvement in management of the Company and as to the arrangements for payment of rent on the property occupied by the Company. Mr Karam also submits that any winding up order must be just and equitable, not only for the applicant, but for all shareholders, and that such an order may be withheld where an applicant for the order has been a primary contributor to the breakdown of the relationship: Re David Ireland Productions Pty Ltd [2014] NSWSC 1411 at [6]-[7]. Mr Karam points to various aspects of the conduct of Ms Espinosa and Mr Andrew Betzis in respect of the Company's affairs which are open to criticism, including their sending a highly inflammatory email to the Company's staff in July 2015, and contact with the Company's lender which had the capacity to adversely affect the Company's relationship with that lender. I accept that these matters are relevant to the likelihood that a final winding up order would be made. It is preferable that, given the findings which I have reached on other grounds, they otherwise be left to determination at a final hearing.
4. Mr Karam submits that a winding up order is a remedy of last resort and that s 467(4) of the Corporations Act requires the Court to consider whether some other remedy is available and whether the applicants are acting unreasonably in seeking to have the Company wound up instead of pursuing the other remedy: Roumanus v Orchard Holdings above at [9]; Re Amazon Pest Control Pty Ltd above at [31]. Mr James Betzis and the Company point to the possibility of other remedies, including an order for compulsory acquisition of shares by one of the shareholders, and the possibility of an out of court offer by one shareholder to purchase the others shares. Mr James Betzis has made a suggestion as to a mechanism by which such a purchase could occur, although that mechanism is complex and falls well short of an offer capable of acceptance for Ms Espinosa's shares. Mr Krochmalik responds that negotiations towards a buyout of the business have been underway for a considerable period, without any substantial progress in them (T35). Mr James Betzis and the Company also emphasise that the Courts are reluctant to wind up solvent companies, if other remedies are available, although that is not an absolute rule.
5. It seems to me that the preferable course, given the conclusions that I have reached on other grounds, is to assume without deciding that there is a reasonable likelihood that the Company will be wound up at a final hearing and to determine the application on that basis.

Whether the December undertakings were breached

1. A significant issue in this application was whether the December undertakings were breached by the Company and Mr James Betzis and whether the effect of such a breach was that the Court cannot now place weight upon them. That matter is significant because, where Ms Espinosa previously accepted the December undertakings, presumably on the basis they were sufficient to protect her position, it is difficult to see that the Court would now appoint a provisional liquidator to the Company in the absence of a significant change of circumstances, and if those undertakings were complied with or if the Court can now have confidence that those undertakings will in future be complied with.
2. Mr Karam submits that the Court should give little weight to any breach of the December undertakings, which he submits is properly a matter determined in separate proceedings for contempt rather than in determining whether a provisional liquidator should be appointed. In Triulcio v Chase Property Investments Pty Ltd [2003] NSWSC 861 at [29]-[30] Barrett J gave limited weight to an alleged breach of undertakings, where he was not satisfied that the breach had occurred and it was in any event of a technical character and not prejudicial to the plaintiff in that case. Mr Karam also relies on observations of Palmer J in Evans & Tait Premium Wines Pty Ltd v Australian Beverage Distributors Pty Ltd [2005] NSWSC 186 at [8], where his Honour observed that an issue of earlier breaches of undertakings should be addressed in contempt proceedings, rather than intruding on the question whether a company should be wound up on the just and equitable ground. I do not doubt the correctness of those decisions on their facts. However, in the circumstances of this case, it seems to me that I must have regard to the alleged breaches of the December undertakings, because they would have a significant impact on whether the Court can rely on those undertakings, going forward, as preserving the status quo in a manner that avoids the need for appointment of a provisional liquidator. Mr Karam also submits, and I accept, that the assessment of the significance of any breach of the December undertakings has to have regard, not only to any breach of them, but also to the extent to which they have been complied with, including in respect of payment of rent into Court and to Ms Espinosa and the provision of access to bank accounts to Ms Espinosa.
3. Ms Espinosa contends that the December undertakings were not complied with in several respects. First, Mr James Betzis and the Company had undertaken: "to provide, within [three] business days, to [Ms Espinosa], continuing read-only access to the Reckon (or any other) accounting system [the Company] uses, with full access to all ledgers, for the purpose of inspecting but not making any changes to those ledgers or accounting system, and [Ms Espinosa] will keep this information confidential to herself, Andrew Betzis and her legal representatives."
4. That undertaking required such access to be provided within three business days of 18 December 2015 and it was not. Mr James Betzis and the Company led evidence of some efforts that had been made to allow access to the Company's accounting system (Clarke 16.2.16 [17]-[21]). The Defendants' solicitor advised Ms Espinosa's solicitor on 23 December 2015 that: "The Defendants have taken steps to comply with undertaking 1(g) and have been advised by the 'Reckon' accounting system provider in response, that the [Company] is not entitled to 'remote access with [its] package' and any such use would be in breach of its license conditions." (Ex R2, CB 496) Mr James Betzis and the Company initially claimed in this application that such remote access to the Reckon system was not "feasible", but the evidence which they lead to support that proposition goes no further than to suggest that it was not feasible under the Company's existing "package" with its accounting software provider, and there is no evidence that Mr James Betzis or the Company inquired whether it would be feasible if that package was amended.
5. By an email dated 14 January 2016, the Defendants followed up as to that issue and suggested that access to the Company's accounting system would be provided to Ms Espinosa at the Company's premises (Ex R2, CB 497). That approach, whatever its merit as to an alternative to paragraph 1(g) of the December undertakings, would not have complied with the December undertakings. Extended correspondence followed (Ex R2, CB 499-518) and a dispute arose as to whether Mr Andrew Betzis would be permitted to attend the Company's premises with Ms Espinosa in order to access the accounting information (Ex R2, CB 512-518). It seems to me that the approach adopted by the Defendants at this point was open to criticism, not only because it did not comply with the December undertakings, but also because the timing of Ms Espinosa's access to the Company's accounting systems would have been restricted by the requirement that she make an appointment, presumably at the Company's convenience, and the attempt to exclude Mr Andrew Betzis from attendance with Ms Espinosa had the potential to deprive her of the practical ability to take advantage of such access, even if that was motivated by the animosity between the Messrs Betzis to which the Defendants refer.
6. Ms Espinosa then raised the possibility of provision of a data file to her containing the relevant information although that also was not provided by the Defendants. Mr James Betzis and the Company subsequently reversed their position refusing permission for Mr Andrew Betzis to accompany Ms Espinosa to the Company's premises to review the relevant information, but Ms Espinosa and Mr Andrew Betzis did not take advantage of the opportunity to undertake such a review. The Company subsequently provided Ms Espinosa with limited information, going little further than a summary profit and loss statement and balance sheet, in spreadsheet form.
7. Mr Krochmalik contends that Mr James Betzis and the Company have not complied with their undertaking as to access to the Company's accounting systems. It seems to me that that contention is plainly correct, and that matter involves a material breach of the undertakings given to the Court and to Ms Espinosa. It seems to me that the materiality of that breach is emphasised by the fact that the provision for access to financial information was the only basis for Ms Espinosa to determine whether issues as to which she had previously complained, as to the way in which the Company's assets were being applied, were continuing. I recognise that the issue arose late in the Court term and correspondence continued during the Court vacation, when a Duty Judge was in any event available. Nonetheless, it seems to me that the Defendants failed to give sufficient weight to the fact that the undertaking was an undertaking to the Court and that it was not reasonably open to them to proceed in non-compliance with it for nearly two months without taking any step to regularise the position. That difficulty is exacerbated by the fact that they initially approached this hearing on the basis that the December undertaking would remain in place, with the necessary result that they would simply continue in breach of the undertaking as to remote access to the accounting system to Ms Espinosa. That position only changed when the significance of a continuing non-compliance with that undertaking was raised in the course of submissions in the application.
8. I give significant weight to the breach of this undertaking in this application. However, it seems to me that the effect of that breach is mitigated by two matters. First, after the Company reversed its position and permitted read-only access to the relevant accounting information at its premises, both to Ms Espinosa and Mr Andrew Betzis, they did not take advantage of that access. That suggests that the access to such information did not, in fact, have the significance for them which one might otherwise have expected. Second, and importantly, the parties agreed, in the course of the hearing before me, a further undertaking, which has now been given by Mr James Betzis and the Company to Ms Espinosa and to the Court, which provides for the Company to seek to implement remote read-only access to the Reckon accounting system by a specified date and provides an alternative mechanism that will provide ongoing access to detailed financial information, if difficulties continue in respect of the provision of such remote access.
9. It seems to me unlikely, as a practical matter, that the Company and Mr James Betzis will breach that amended undertaking, going forward, where it must be apparent to them from this hearing and this judgment that there is a substantial prospect that such a breach could lead to the position that the Court could no longer have any confidence in the Company's or Mr James Betzis' willingness to comply with the undertakings that have been given to it and that could warrant the appointment of a provisional liquidator, notwithstanding the adverse impact which that may have on the Company's affairs. I should also have regard, in addressing this matter, to the fact that the consequences of the breach of the undertaking need to be weighed against the consequences of the appointment of a provisional liquidator to the Company, to which I will refer below.
10. Next, Ms Espinosa refers to an undertaking given by the Company and Mr James Betzis that it would not cause the Company to acquire any new assets, enter into any new material contract, or incur or enter into commitments to incur capital expenditure in excess of $10,000 for any individual item, except in the case of specified conduct in the ordinary and usual course of the Company's business, without Ms Espinosa's prior consent. Ms Espinosa contends that, since 18 December 2015, the Company has commenced a different line of business involving the proposed leasing of refrigerated trucks, although the Company had not engaged in business operations of that nature in the last several years. Ms Espinosa points out that the Company has acquired, for a sum of $130,000, a truck for use in that business and refers to the fact that the tax invoice for that truck is dated 4 January 2016 and payment for it was made on 20 January 2016.
11. The circumstances in which the truck was purchased is addressed by evidence of the Defendants' solicitor, on information and belief from Mr James Betzis (Clarke 16.2.16 [37]-[50]). It appears that the proposal for purchase of the truck had arisen prior to the commencement of the proceedings and the giving of the December undertakings, following an approach by a client of the Company in November 2015, and agreement for the purchase of the truck had been reached in mid-November 2015, which contemplated a higher purchase price than was ultimately paid (Clarke 16.2.16 [41]-[43]). An invoice had been issued by the vendor of the vehicle to the Company, at that higher price, on 2 December 2015, prior to the commencement of the proceedings and the giving of the December undertakings (Clarke 16.2.16 [44]; Ex R2 CB 533). The truck was delivered on 9 December 2015, the day after the proceedings were served, and again prior to the giving of the December undertakings (Clarke 16.2.16 [46]). The Defendants drew the Plaintiff's attention to the arrangements for the purchase of the truck on 11 December 2015, by a letter from their solicitors, again prior to the giving of the December undertakings, advising that (Ex R2, CB 530): "we are instructed that the [Company] has recently entered into an underwritten agreement to purchase an Isuzu 850 [t]ruck to be available for hire to customers of the [Company]. Consistently with the approach contemplated by the parties, if your client accepts the proposed undertakings, we envisage that the proposed asset acquisition would be an action that is notified to your client via proposed undertaking (d) in the attached Annexure A."
12. I am not satisfied that the December undertakings were breached in this respect. The evidence indicates that the truck had been acquired prior to the giving of the December undertakings; the Company and Mr James Betzis had, properly, been transparent about that matter, including specifically drawing it to the attention of Ms Espinosa's solicitors; and what in fact occurred was that the previously agreed purchase price of the truck was varied downwards, after the date of giving of the December undertakings, leading to the issue of a reduced invoice and a reduced payment after that date. The Defendants also point out that there is no suggestion that the truck was acquired for more than fair value, or that its acquisition involves any risk to the assets of the Company. I am not satisfied that this matter gives rise to any reason to doubt the Company's or Mr James Betzis' willingness to comply with this undertaking going forward, or that a breach if, contrary to my view, it occurred, was of sufficient seriousness as to warrant the appointment of a provisional liquidator.
13. Ms Espinosa also relies on the fact that a loan was made to one of the Company's employees without her prior consent and submits that involved a breach of the undertaking not to lend any money to any person. The Defendants fairly accept that the December undertakings were breached by this transaction, although they lead evidence and make submissions in mitigation of the breach. I have had regard to the detail of the evidence led in respect of this matter, although it does not seem to me necessary to set out the detail of that evidence in the judgment, where the amount involved was minimal, and an account of the circumstances would disclose the private affairs of an employee who is not otherwise involved in the dispute. This matter involves a loan that was reasonably made, in a small amount, to an employee for reasons that were consistent with good business practice and good employee relations, and does not suggest to me any wider lack of commitment to compliance with the December undertakings. Mr James Betzis and the Company submit, and I accept, that it is unlikely that they would repeat such conduct in the future, having regard to this application. It also seems to me that this matter could not, in itself or combined with other matters, warrant the appointment of a provisional liquidator given the damage which that course would likely cause to the Company, to which I will refer below.
14. Ms Espinosa submits that these breaches of the December undertakings demonstrate that their purpose has not been achieved and that they will not preserve the status quo, allow her to understand the manner in which the Company's affairs are being managed or allow her an active opportunity to consider and consent to decisions within their scope. She also submits that the failure to adhere to the undertakings demonstrates that Mr James Betzis and the Company do not take their obligations to the Court or the purpose of the undertakings with sufficient seriousness, and that highlights the continuing issues as to the management of the Company's affairs. It seems to me that this submission has most force in respect to the breach of the first undertaking, as to access to the Company's accounting system, which I have addressed above. However, for the reasons which I have noted above, it does not seem to me that that breach or the other matters addressed above, provided they are not repeated, are sufficient to warrant the appointment of a provisional liquidator at this stage.
15. Ms Espinosa also advanced criticisms, in her evidence and in submissions, of disclosure made in the December undertakings as to the Company's bank accounts, which had not disclosed an account previously held with ANZ Bank. I give little weight to that matter, because the disclosure in that undertaking was expressly directed to the accounts then held by the Company and the ANZ Bank account appears to have been closed in August 2015, some time before the undertakings were given. There were, I accept, issues as to previous transactions involving that account, but Ms Espinosa was aware of and had relied on those issues in support of the application for the appointment of a provisional liquidator made in December 2015, which had then been addressed by the provision of the December undertakings and no aspect of the treatment of this account undermines the utility of those undertakings.
16. An issue also arose in the course of the hearing as to the Company's incurring legal expenses in relation to these proceedings. The profit and loss statement for the Company to 12 February 2016 (Ex A1) indicates that legal expenses incurred to 12 February 2016 had increased by nearly $40,000 since the position as at 11 January 2016 (Espinosa 11.2.16 Annexure A), although the evidence does not explain whether the legal expenses incurred in that period were wholly attributable to the Company's conduct of these proceedings. I am conscious that, for a small part of that period, the Company was the only Defendant in the proceedings, and that the Company arguably has an interest in opposing the appointment of a provisional liquidator.
17. In oral submissions, Mr Krochmalik contended that it is unclear what allocation of legal fees has been made as between the Company and Mr James Betzis or whether Mr Betzis has indemnified the Company for its legal fees, and that the appointment of a provisional liquidator might well cause the Company to cease to incur legal fees in respect of the application, since a provisional liquidator could reasonably take the view that this was a dispute between two equal shareholders of the Company and not one in which the Company should continue to incur legal fees (T32-33). It seems to me that a provisional liquidator might well take that view.
18. Mr Karam responded in the course of oral submissions that the Defendants acknowledged that there was an issue as to payment of legal costs; that that issue needed to be addressed; and indicated that the Defendants had not yet reached a concluded position as to that issue, where it had arisen in the course of the hearing and the Defendants had also had to address other matters in the course of the hearing (T76-77). Mr Karam also relied on Mavromatis v Haspaz Pty Ltd (1993) 10 ACSR 473 where Davies J observed (at 475) that it was a novel proposition that a company which has an arguable defence to a winding up application should not expend its funds in financing that defence or that its directors should not authorise that expenditure. However, the balance of authority, at least in oppression cases, takes a much more sceptical view of such expenditures, although recognising that a company's funds may be expended to protect its discrete interests. In Re DG Brims & Sons Pty Ltd [1995] QSC 053; (1995) 16 ACSR 559 at 591-592, Byrne J observed that: "Many thousands of dollars of company funds have been spent on lawyers, accountants and valuers in defending these proceedings on behalf of the majority shareholders. This is unfair and infringes the basal principle that 'the powers, and the funds, of a company may be used only for the purposes of the company' ... Expenditure to protect its discrete interests ... may be made from company resources. The essential dispute here, however, is between the shareholders; and company funds should not have been used to defend the majority shareholders." [emphasis added] That passage was in turn cited with approval by Austin J in in Power v Ekstein [2010] NSWSC 137; (2010) 77 ACSR 30) at [112], a case in which the plaintiff initially sought a winding up order in the alternative although that relief was not pressed at the hearing. His Honour also there approved (at [114]-[115]) the observations of Lindsay J in Re a Company (No 1126 of 1992) [1994] 2 BCLC 146 that: "the test of whether the company's participation and expenditure is proper is whether it is necessary or expedient in the interests of the company as a whole … the court's starting point is a sort of rebuttable distaste for such participation and expenditure, and initial scepticism as to its necessity or expediency, and so a company that has actively participated bears a heavy onus."
19. Mr Karam also relied on the decision in Sellar v Lasotav Pty Ltd [2008] FCA 1766, where Foster J declined to grant an interlocutory injunction to restrain a company incurring legal fees to the benefit of its majority shareholders in oppression proceedings. That decision was not followed in by Austin J in Power v Ekstein above at [113]-[115], although Foster J subsequently maintained his view in Sandalciyan v International Development & Construction Pty Ltd [2010] FCA 1145; (2010) 80 ACSR 31 and Dodds-Streeton J suggested the difference in approaches may be more apparent than real in Ananda Marga Pracaraka Samgha Ltd v Tomar (No 2) [2010] FCA 1342 at [121].
20. There may be a question whether the incurring of significant legal expenses by the Company, in the defence of these proceedings where the shareholders are in conflict, would breach paragraph 1(e) of the December undertakings, by which the Company undertakes that it will, and Mr James Betzis undertakes that he will cause the Company to carry on and conduct its business in the ordinary usual course, unless he gives at least three days' notice to Ms Espinosa of an act outside that course. I do not address that question further where it was not the subject of submissions before me. There may also be a question whether Mr James Betzis could properly resolve, as the sole director of the Company, to authorise the payment of legal expenses by the Company in respect of proceedings in which he is personally a defendant, since he may well have a conflict of interest and duty in that respect, or be at risk of preferring his own interests to the Company's interests, potentially in contravention of s 181 of the Corporations Act. That issue was raised but not fully addressed in submissions. I noted, in the course of submissions, that I would afford the parties a further opportunity to make submissions before reaching any finding adverse to the Defendants on that basis.
21. It does not seem to me to be necessary to determine the issues as to the Company's expenditure of legal costs to date in order to determine this application. The December undertakings, as they have been amended, seem to me to be sufficient to address this issue. If the undertaking as to access to financial information is complied with, then Ms Espinosa will have visibility of any legal expenses incurred by the Company in the defence of these proceedings on an ongoing basis. If any question then arises as to a breach of the December undertakings or the rule against conflict of interest or ss 181 or 182 of the Corporations Act, in respect of the Company's payment of legal expenses in these proceedings, Ms Espinosa could restore the matter before the Court and renew her application for the appointment of a provisional liquidator. I recognise that, if the undertaking as to access to financial information is again not complied with, Ms Espinosa would not have visibility of such expenses. However, if that occurred, there would in any event be a real prospect that the Court would appoint a provisional liquidator to the Company, since it may well then no longer have confidence that the December undertakings were sufficient to preserve the position. It seems to me that it is preferable to defer any determination of this issue on that basis, subject to reserving liberty to the parties to apply on three business days' notice, specifying the relief sought, if any further issue arises in this respect.

Whether the balance of convenience would support the appointment of a provisional liquidator

1. There is a substantial dispute between the parties as to whether the balance of convenience would favour the appointment of a provisional liquidator.
2. Ms Espinosa also submits that she and Mr Andrew Betzis had not been provided with details of the Company's financial position since July 2015. Mr Krochmalik also submits, in oral submissions, that the Company's financial affairs cannot be adequately verified and that supports an order for the appointment of a provisional liquidator (T35). It seems to me that that submission might well have had considerable force, if there were a continuing breach of the December undertaking contemplating access to the Company's financial records, including at a level of detail below the balance sheet and profit and loss statement. However, I should not assume that there will be a continuing breach of such an undertaking, particularly where further undertakings have now been given to the Court and to Ms Espinosa.
3. Ms Espinosa also submits that draft accounts for the 2015 financial year had been prepared on an incorrect basis which had yet to be rectified. In oral submissions, Mr Krochmalik also raised the possibility that dividends of the Company may be paid on an incorrect basis, if there are errors in the loan account (T36); however, Mr Krochmalik ultimately pressed this submission in reliance on Ms Espinosa's lack of access to financial information, which I have addressed above. So far as this issue depended upon the treatment of long service leave and accrued annual leave in the Company's management accounts, it was sufficiently addressed by the further affidavit of Mr Clarke to which I have referred above and the fact that Ms Espinosa will have visibility of the Company's accounts under the amended undertakings.
4. Ms Espinosa also submits that, since the preparation of the draft 2015 financial accounts, there has been an increase in the loan provided by the Company to Mr James Betzis, including regular drawings by Mr James Betzis from the Company, without explanation (Espinosa 11.2.16 [22]-[23]). Ms Espinosa also submits that, since 18 December 2015, the Company has loaned money to one of its customers, on terms that are not disclosed. Mr Krochmalik also raised concerns as to the level of Mr James Betzis' loan account in submissions (T39-40) but the issues in that respect appear to reflect dealings prior to the giving of the December undertakings and are addressed by those undertakings, and there is no suggestion of any subsequent breach of the undertakings in that respect.
5. Mr Krochmalik advanced a wider submission that Mr James Betzis had treated the Company's funds as his own, and without regard to its separate legal personality and the statutory and fiduciary duties he owes to it, and that he is in a position of conflict between his duties to the Company and his personal interest by reason of his borrowing of funds from the Company, and referred to the recognition in several cases of the fact that that matter may support the appointment of a provisional liquidator: for example, Re Huntford Pty Ltd (1993) 12 ACSR 274 at 277-278; Maertin v Klaus Maertin Pty Ltd (2006) 233 ALR 358 at 366-367 (T43-44). I recognise that the evidence shows transfers of funds from the Company to Mr James Betzis prior to the giving of the December undertakings. However, Mr James Betzis and the Company respond that the Company's practice was that both he and Mr Andrew Betzis operated loan accounts with the Company and contends that Mr Andrew Betzis' loan account was generally higher than his own (Clarke 16.12.15 [11.2], [27]; Ex R1, CB 257). At this point, it seems to me that any risk that Mr James Betzis would treat the Company as his own or appropriate the Company's property to himself is addressed by the December undertakings, as amended, provided the Court may be comfortable that they will be complied with.
6. Ms Espinosa also points to the uncertainty as to the Company's present constitution. The initial form of the Company's constitution provides that the number of directors is to be determined and there is no evidence of such a determination (Espinosa 3.12.15 [20], Annexure D). Mr James Betzis and the Company point to subsequent revisions of the constitution (Clarke 16.12.15 [22]; Ex R1, CB 276, 306) which allows the appointment of a sole director of the Company. Mr James Betzis' evidence, admitted as submission only, was that the second constitution was operative but there is no probative evidence that that constitution was adopted by the Company. It seems to me that there is arguably uncertainty as to the present form of the Company's constitution, the minimum number of directors of the Company and the manner in which Mr James Betzis was appointed to that position. However, that matter seems to me to be sufficiently addressed as between the shareholders by the undertakings that have been given as to the Company's management, provided the Court is satisfied they will be complied with, and any uncertainty arising from that issue in respect of the Company's dealings with third parties is sufficiently addressed by the assumptions that third parties are entitled to make in dealing with the Company under ss 127-128 of the Corporations Act.
7. Ms Espinosa submits that, where there are concerns about the manner in which a director is managing a company's affairs, undertakings are not, or at least are not always, an appropriate substitute for the appointment of a provisional liquidator: Re Huntfort Pty Ltd above at 278. The Defendants' respond that an urgent need for intervention has not been established, at least if the Court can be satisfied that the December undertakings, as amended, will be complied with, where a number of the allegations on which Ms Espinosa relies relate to conduct in earlier years. There seems to me to be substantial force in that submission. It seems to me that comprehensive undertakings were offered by the Defendants in December 2015; they were then accepted by Ms Espinosa, who was represented by competent legal advisers at that time; there is no reason why those undertakings, if complied with, would not have preserved the status quo pending the hearing, particularly if Ms Espinosa and Mr Andrew Betzis were given full access to corporate financial information so as to be in a position readily to identify any breach of them; and the risk of breach of the undertakings needs to be weighed against the damage to a trading entity which would very likely arise from the appointment of a provisional liquidator.
8. Mr Karam submits, and I accept, that there is a very real risk that the appointment of a provisional liquidator could have a drastic effect on the Company's business and in turn impact on the value of the shares in the Company and on the position of its employees (T 71-72). There is at least some evidence that such an appointment, or at least the displacement from Mr James Betzis from management of the Company, could have an adverse effect upon its relationship with at least one significant customer (Clarke 16.12.15 [12]-[16]; Ex R1, CB 267). Mr Karam also rightly points to the fact that Courts have recognised the substantial adverse consequences of the appointment of a provisional liquidator in other cases. In Roumanus v Orchard Holdings above at [9], Austin J observed that: "Generally, the purpose for which a provisional liquidator is appointed is to preserve the assets of the company and the status quo in relation to its affairs …. However, an order for the appointment of a provisional liquidator is different from some other kinds of interlocutory orders in that the order unavoidably disturbs the status quo to a degree, if at the time the application the company is carrying on business in a commercial environment. The very appointment of a provisional liquidator can have a drastic effect on the company's business, perhaps even leading to its commercial death …. This leads to the observation that 'the appointment of a provisional liquidator pending adjudication upon the petition for winding up, is a drastic intrusion into the affairs of the company and is not to be contemplated if other measures would be adequate to preserve the status quo' …" [citations omitted]. It seems to me that his Honour's observation reflects commercial good sense and that the Court generally will not need substantial evidence to proceed on the basis that a trading entity is likely to be adversely affected, and potentially substantially adversely affected, by the appointment of a provisional liquidator.
9. Ms Espinosa responds that Mr James Betzis and the Company had led limited evidence to identify prejudice if a provisional liquidator were appointed. Mr Krochmalik refers to observations of Thomas J in Re Back 2 Bay 6 Pty Ltd (1994) 12 ACSR 614 at 616 that the appointment of a provisional liquidator can preserve the goodwill of a business and keep it alive for the benefit of the ultimate controlling party. It seems to me, however, that that is a somewhat optimistic view and that the Court should recognise that the business community does not necessarily have a comprehensive understanding of the fact that a provisional liquidator can be appointed in circumstances that do not involve a company's insolvency, and that there is a substantial risk that persons who might otherwise trade with the Company would be concerned that the appointment of a provisional liquidator was indicative of its insolvency, and would either cease to trade with the Company or insist on more onerous trading terms if such an appointment took place. Mr James Betzis and the Company also rightly point to the fact that the impact on third parties is relevant in determining whether to appoint a provisional liquidator, and I accept that the risk involved in such an appointment in this case has the capacity to affect not only the Company but also its employees.
10. A further factor tending against the appointment of a provisional liquidator, at this point, is the fact that the parties had arranged to attend a mediation of the issues between them on 7 March 2015. An order for the appointment of a provisional liquidator, whether immediately before or indeed immediately after such a mediation, might well adversely affect the parties' ability to seek to resolve the differences between them, in a less costly and less destructive manner than may arise from the continuance of these proceedings.
11. For completeness, I note that Mr James Betzis and the Company also rely on a suggested non-compliance by Ms Espinosa with her obligation to provide read only access to the accounting system for the partnership between Ms Espinosa and Mr James Betzis and there is also contested evidence as to that issue. It seems to me that, if both parties were in breach of their undertakings as to access to that system, that might have made the appointment of a provisional liquidator marginally more likely, rather than less likely as Mr Karam contends, but it is also not necessary to address that issue given the findings that I have reached on other grounds.

Undertaking as to damages

1. I should note, for completeness, that Ms Espinosa initially had not offered an undertaking as to damages, although she indicated that she did so if the Court would not appoint a provisional liquidator without such an undertaking. Mr Karam points to the fact that the Court will have regard to whether there is any good reason not to require a party seeking the appointment of a provisional liquidator to give an undertaking as to damages: Re Property Corporate Services Pty Ltd [2004] FCA 175; (2004) 48 ACSR 508 at [51]. Had I otherwise been satisfied that an order for appointment of a provisional liquidator was appropriate, I would only have made such an appointment if Ms Espinosa provided such an undertaking, and would have heard the parties further as to whether any such undertaking should be secured. I would have taken that course because the extent of damage to the Company's business that might have arisen from such an appointment is potentially substantial, and there is no evidence before the Court as to Ms Espinosa's capacity to meet such an undertaking. It is not necessary to address that matter further given the findings that I have reached on other grounds.

Costs

1. My preliminary view is that there should be no order for costs of this application, or that costs should be costs in the cause. I am inclined to take that view because, on the one hand, the Plaintiff has not succeeded in obtaining an order for appointment of a provisional liquidator; on the other hand, at the time the application was brought, there was a significant and ongoing non-compliance with one of the undertakings offered by the Defendants to the Court, and it seems to me that it was necessary for the matter to be restored before the Court so that that non-compliance could be addressed, as it has been, and a continuance of that non-compliance might well have justified the appointment of a provisional liquidator. I will, however, hear the parties as to the issue of costs.

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