(2006) 227 CLR 57
- Stratford Sun Limited v O M Holdings Ltd [2011] FCA 414
Source
Original judgment source is linked above.
Catchwords
(2006) 227 CLR 57
- Stratford Sun Limited v O M Holdings Ltd [2011] FCA 414
Judgment (4 paragraphs)
[1]
Solicitors:
George Xylas (Plaintiff)
Hicksons (First Defendant)
File Number(s): 2015/251324
[2]
Judgment - ex tempore
By Originating Process filed on 27 August 2015 the Plaintiff, Mr Stephen Ashworth, sought a range of relief in respect of the ownership of shares in, and the identity of the director of, two entities, Buel Maintenance Services ("BMS") and Buel Inspection Testing and Monitoring Services ("BIT"). In particular, Mr Ashworth sought a declaration as to the validity of a purported transfer of shares in respect of the companies from the First Defendant, Mr Joshua Green, to the Second Defendant, Mortlock McCormack Law Company (2006) Limited on or about 25 June 2015, and as to the validity of a purported termination by Mr Green, on or about that date, of an agreement by which Mr Green had, it is alleged, agreed to transfer all shares in respect of the companies to Mr Ashworth. Mr Ashworth also sought declarations, on a final basis, that he is the sole owner of all shares issued in respect of the companies and that he is the director of both companies.
I should note, at this point, that the First Defendant, who is resident in New Zealand, has appeared. The Second Defendant, which is also resident in New Zealand, has not appeared, and Mr Davidson, who appears for Mr Ashworth rightly recognises that Mr Ashworth would require leave to proceed against the Second Defendant under r 11.4 of the Uniform Civil Procedure Rules 2005 (NSW), absent such appearance. There is evidence that the relevant documents have been served upon the Second Defendant, by Mr Xylas' affidavit dated 31 August 2015. I had foreshadowed a view, in my judgment granting leave for short service of the proceedings, that the proceedings were likely to fall within the Court's jurisdiction on several bases, one of which was that they were founded upon an alleged contract formed within the jurisdiction, being the alleged contract relating to the transfer of shares from Mr Green to Mr Ashworth. That would be sufficient to allow jurisdiction for the proceedings, under paragraph (c) of Sch 6 of the Uniform Civil Procedure Rules, on the basis that the subject matter of the proceedings was a contract made in New South Wales. I am satisfied that that is a sufficient basis to grant leave to proceed against the Second Defendant and I grant such leave.
Today, Mr Ashworth seeks interlocutory relief, and, in particular, an order that the Defendants be restrained from interfering with his causing either BMS or BIT to make payments from available funds in their bank accounts in the ordinary course of business, including payment due and owing to employees and independent contractors engaged by either of them. Mr Ashworth also seeks wider relief, also on an interlocutory basis, restraining the respondents from interfering with his managing the business of the companies in the ordinary course of business.
I should pause there to anticipate an issue which I will address further below. Mr Ashworth puts significant weight, in the course of the submissions, upon the hardship which may be suffered by employees who have a right to payment, if payment is not made by reason of the dispute as to the identity of shareholders and directors of the companies. That hardship is no doubt very real, and I give great weight to it. However, it is important to recognise that neither of the first form of interlocutory relief, still less the second, is limited to making payments to persons who are presently entitled to it, to address that hardship. The first relief is expressly not limited to that matter and would extend to payments for any purpose that could be described as within the "ordinary course of business". No doubt such payments could be made to employees, as to amounts due to them and Mr Ashworth has submitted that that is the intent. However, the order sought would also permit payments to be made, for example, instead to other parties who might be now or in the future entitled to them within what might be described as the "ordinary course of business". The second form of relief is wider still in contemplating the continuing management of the companies, going forward, in the "ordinary course of business".
The other interlocutory relief sought is to restrain the First and Second Defendants from holding themselves out as the owner of shares in either of the companies. An immediate difficulty with that relief is that it appears to presuppose Mr Ashworth will succeed, on a final basis, in respect of the primary issue in the proceedings, namely, who is the owner of the shares in the companies or a director of them.
The application is supported by an affidavit of Mr Ashworth dated 27 August 2015, and I should say something as to the nature of that evidence. It appears that Mr Ashworth established a previous entity, Buel Pty Limited ("Buel"), which was involved, as are BMS and BIT, in providing services to mining companies. That earlier entity, Buel, was placed into voluntary administration in March 2015. Mr Ashworth's evidence is that, before that occurred, he started to plan a new business venture, which he indicates would conduct the same type of business as was conducted by Buel. It appears that Mr Ashworth took the view, for reasons that he does not explain, that it was desirable that, while Buel was going into administration, the new business should have a new corporate structure and a different director "for the time being". He indicates he was planning to take over the role of sole director of the new business after the administration of Buel was completed. His evidence is that he reached an arrangement with Mr Green, the First Defendant, in respect of each of the two companies, one established before and one after Buel went into administration, to facilitate that approach. He refers to a conversation with Mr Green where agreement was reached that Mr Green would be sole shareholder "on paper" and hold the shares for Mr Ashworth until he was ready to take back the company. Documents were then executed including, in respect of both companies, a transfer form for non-market transactions, which recorded payment of consideration of $100, a director's resolution approving the transfer, which did not identify the transferee, a document by which Mr Green certified that he had transferred his shareholding, possibly then in blank, and a deed of indemnity which recorded Mr Ashworth's request to Mr Green to act as director of the various companies.
It appears that, in late June 2015, a dispute arose between Mr Ashworth and Mr Green for reasons which do not now need to be recorded. On 26 June 2015, the solicitors for Mr Green, who claimed to act for the two companies, notified Mr Ashworth that his role with both companies was terminated and referred to an agreement between Mr Green and Mr Ashworth for the transfer of shares in the companies, which was also said to be terminated. There is no doubt a real issue in these proceedings as to whether termination of that agreement was possible, and whether it was properly made, having regard to the basis on which it took place. I am satisfied that there is at least a serious question to be tried as to that question. It appears that, on or about the same date, shares in the companies were purportedly transferred to a trustee company associated with the firm of solicitors, which is now the Second Defendant, for a sum of NZ$1. It is not clear whether the transfer of those shares, or any other relevant transfer was registered, since the companies' share registers have not been placed in evidence before me. I am also satisfied that there is a serious question as to the validity of that transfer, and, if it was liable to be set aside, as to whether the trustee company was a purchaser for good faith for value without notice.
Subsequently, at a date which is not presently clear, it appears Mr Ashworth took steps to implement the transfers which previously had been signed by Mr Green and, at least by 7 July 2015, he gave notice of the transfer of the shares to the Australian Securities and Investments Commission. Again, it is not clear whether those transfers have been effected in law, because the registers of the companies are not in evidence and notification of a share transfer to ASIC does not cause that share transfer to become effective in law, if it has not taken place in accordance with a company's constitution. The companies' constitutions are in evidence and appear to contemplate the need for registration of a transfer, the entry of the name of the transferee in the register of members, and an exercise of discretion by directors whether to register any transfer of shares. In the present circumstances, it might be thought unlikely that Mr Green, the then director of the companies, would have exercised a discretion in favour of such registration, so as to approve the transfer of the shares to Mr Ashworth, as an anterior step to Mr Ashworth removing Mr Green as a director. However, that is entirely speculative, because neither party has sought to lead evidence as to steps which occurred at that time and, in particular, the position disclosed by the registers of the companies.
There have been an escalating series of subsequent disputes in respect of the companies. Mr Ashworth's evidence is that he is concerned that funds have been misappropriated from the companies, and there is at least some evidence that suggests there may have been a transfer of funds to Mr Green. In saying that, I do not express a view as to whether that transfer was justified, or unjustified, or had the character of a proper appropriation or a misappropriation, since those matters are not addressed by evidence before me. Mr Ashworth took some steps to investigate the nature of these dealings which, it appears, could not be completed, once the companies' bank was notified of the dispute between the shareholders and froze access to the accounts. It appears that the present position of the companies' bank is that that stop will remain in place until the bank receives suitable documentary evidence regarding entitlement to the accounts. I would understand that statement as directed to the position as to the entitlement to control the accounts.
The position has also been made more difficult, at least in some respects, so far as the solicitors acting for Mr Green have in turn notified the companies' clients, by letters which are in evidence, of the existence of the dispute between Mr Green and Mr Ashworth, of the lodgement of documentation by Mr Ashworth with ASIC recording his appointment as a director of the companies, and of the block to the companies' accounts, and that the companies are therefore not in a position to pay their employees and cannot provide any further works until the dispute with Mr Ashworth is resolved. That notification, as would be expected, would have caused significant difficulty, if not brought the companies' business to an end. Whether it was justified, of course, depends upon matters of the companies' financial position, where there is evidence in the correspondence to issues as to superannuation and income tax, but no substantive evidence of the companies' financial position has been led before me.
As is implicit in the comments which I have made above, in the meantime, Mr Ashworth has taken steps, purportedly as a shareholder of the companies, to seek to remove Mr Green as a director and to appoint himself as a director and to notify that matter to ASIC.
In these circumstances, there is plainly a dispute both as to the identity of the shareholder in the company and the identity of the directors of the companies. It seems to me that Mr Ashworth at least has established a serious question to be tried as to the validity of the transfer of the shares to the Second Defendant, and as to the validity of the purported termination of the agreement which contemplated the transfer of shares to him. I am not presently satisfied that Mr Ashworth has established a serious question to be tried that he is the registered shareholder of the companies, since the essential evidence of that proposition, the companies' share register, is not before me and there is no evidence that the steps required by the companies' constitution to register the transfer of the shares to him were taken. I am also not satisfied that Mr Ashworth has established a serious question to be tried that he is presently the director of the companies, since that would depend upon his having become the registered shareholder of the companies, so as to be in a position that the company in general meeting or otherwise could remove Mr Green as director.
In these circumstances, Mr Ashworth has established a serious question to be tried as to part of the relief which may be sought, but not as to all of it. That is in turn the first aspect that would need to be established in respect of the grant of interlocutory relief, namely, that there is a prima facie case or serious question to be tried in respect of the application. Australian Broadcasting Corporation v O'Neil [2006] HCA 46; (2006) 227 CLR 57 at [65]; Stratford Sun Limited v O M Holdings Ltd [2011] FCA 414; (2011) 83 ACSR 84 at [7]. However, in order to obtain the interlocutory relief that is sought Mr Ashworth would also have to demonstrate that damages would not be an adequate remedy so as to warrant the grant of the injunctive relief and that the balance of convenience favours the grant of an injunction on an interlocutory basis. The question whether there is a seriously arguable case and the question of balance of convenience are interrelated, since the stronger the case for the final relief, the less might be required to tip the balance of convenience.
In the present case, it seems to me clear that damages may not be an adequate remedy, so far as the companies' ability to conduct their business are presently substantially affected by the relevant event. However, I am comfortably satisfied that the balance of convenience does not warrant a grant of the interlocutory relief at least in the form that is sought. I have foreshadowed some of the matters which go to that view above, but I should now address them in greater detail. The first relief sought, that the respondents be restrained from interfering with payments from available funds in the bank accounts of BMS and BIT goes well beyond the concern which has been addressed as to the payment of employees. In any event, it seems to me that the relief has little if any utility on an interlocutory basis because the present difficulty is not what the respondents might in future do by way of interfering with such payment, but that the companies' bank does not know who has authority to conduct the relevant accounts. An interlocutory order now made preventing the respondents from in future interfering with those matters will do nothing to address the bank's uncertainty as to that question, which the Court has not and cannot determine on an interlocutory basis.
The second order sought seeks to have the respondents restrained from interfering with Mr Ashworth managing the companies' business in the ordinary course of business. The difficulties with that proposition are, it seems to me, first, that it goes beyond the point at which a serious question to be tried has been established, if by essentially assuming that Mr Ashworth will be successful at a final hearing, both on the basis that if he is in fact registered as a shareholder, and on the basis that he has effectively removed Mr Green as a director, in circumstances where neither is the subject of adequate evidence before me.
The width of the relief is such that there is a significant risk that, if wrongly granted, it would have an adverse effect on the First Defendant and third parties and the range of third parties that are likely to be affected are well beyond those of the parties to the proceedings. In particular, an order that permitted Mr Ashworth to manage the business of the companies in the ordinary course of business would have a significant impact on Mr Green, so far as it appears he has given a guarantee, which would not be terminated, in respect of dealings with a financier of the companies. It would have a significant impact upon the creditors of the companies, so far as Mr Ashworth's management of the companies may involve the payment of some creditors, and that issue is of greater significance when there is reference in the material to the possibility of unpaid superannuation or tax debts, and there is no evidence before me as to the companies' financial position. I am not satisfied that such an order should be granted on an interlocutory basis, where there would be a real question as to the adequacy of an undertaking as to damages, and there is no evidence as to Mr Ashworth's ability to compensate the range of third parties who might be adversely affected by such an order.
It seems to me that the third and fourth orders sought on an interlocutory basis restraining Mr Green or the trustee company from holding themselves out as the owner of shares in the ordinary course of business should not be granted so far as they amount to the grant of relief which could only be properly granted on a final basis, when the question in issue had actually been determined.
I am conscious that the present position leaves the parties in an entirely unsatisfactory position, with the risk of disruption or destruction of the companies' business, if that position continues. That is obviously a matter of concern to Mr Ashworth, so far as he contends that he is a person who is entitled to the shares in the companies, and to be their director. It ought to be a matter of considerable concern to Mr Green, because, if he was or is a director of the companies, then he would face the risk of significant liability, in respect of a potential claim for breach of directors' duties, if he has contributed to this position coming about, whether a claim against him is ultimately brought by the companies, by Mr Ashworth in a derivative claim, or by a liquidator of the companies if the present position continues and forces the companies into liquidation. There is every reason that both parties should reach, although they have not to date been able to reach, an arrangement that will allow the companies to function in some manner so as to avoid the destruction of their business, which has the capacity to impact adversely, and possibly substantially, upon both of them. However, that cannot be achieved by the making of the interlocutory orders which are sought in this form.
I should note that Mr Svelha, who appeared for Mr Green, indicated that he is instructed to seek an appointment of a provisional liquidator. Mr Svelha, by reason of shortness of time, was not in a position to provide consent of a provisional liquidator at the time the application was made. It is, however, possible to deal with that application on a narrower basis. The first and most obvious difficulty with it, was that the Court may appoint a liquidator provisionally at any time after a winding up order is sought. No application to wind up the companies has been filed, and the Court does not have jurisdiction to make such an appointment. The second difficulty with such an appointment, as Mr Davidson pointed out, is that there is a real question, in the present state of events, as to whether Mr Green would have standing to bring the application, in circumstances where he has purported to transfer his shares to the Second Defendant, and where Mr Ashworth has purported to transfer Mr Green's shares to Mr Ashworth. The probability is that Mr Green is no longer a shareholder of the companies, although there may be a question as to who now holds shares in his place, although that ultimately turns as well on questions of registration of any transfer. The third reason why such an appointment should not be made, at least at this point, is that Mr Davidson is correct that the appointment of a provisional liquidator potentially has a significant adverse effect upon a company, and is a last resort.
I should note that, also as a last resort, it may be open to the Court, on the application of a person whose interests are adversely affected by the present state of events, to appoint receivers and managers over the companies' businesses in its inherent jurisdiction. However, such an appointment might well raise similar discretionary considerations to those which would arise in respect of a provisional liquidator, so far as the appointment of receivers and managers is equally likely to have a destructive impact on the companies' businesses.
Accordingly, the only orders which I make:
Grant leave to the plaintiff pursuant to rule 11.4 of the Uniform Civil Procedure Rules, to proceed against the Second Defendant, Mortlock McCormack Law Trustee Company (2006) Limited.
The Interlocutory Process dated 27 August 2015 be dismissed with costs.
I will hear the parties as to whether the matter should be referred to a mediation to take place within a short time.
[3]
Costs
After I indicated a view that the interlocutory process should be dismissed with costs, Mr Davidson very fairly drew to my attention that the fact that, while there was substantial argument as to the interlocutory process, an unsuccessful application had also been made by the Defendants for the appointment of a provisional liquidator, which I had not granted. There is force in Mr Davidson's submissions that some allowance should be made for the costs of the unsuccessful application for appointment of a provisional liquidator. That is, to some extent, a matter of impression, but my strong impression is that the very substantial part of both parties' efforts was devoted to the Plaintiff's interlocutory application and a relatively small part of the time taken today to the application for appointment of a provisional liquidator, which largely depended on the matters that had been canvassed in respect of the substantive application. However, Mr Davidson is correct that an allowance should properly be made for the fact that his client had some partial success in resisting that application.
Accordingly, I will amend the costs order I made to order that the plaintiff pay 75% of the First Defendant's costs of the application today, as agreed or as assessed.
[4]
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Decision last updated: 25 September 2015