[2013] FCA 234
Australian Securities and Investments Commission v AGM Markets Pty Ltd (2018) 129 ACSR 223
[2018] FCA 1119
Australian Securities and Investments Commission v M101 Nominees Pty Ltd (2020) 147 ACSR 537
[2020] FCA 1166
Australian Securities and Investments Commission v Uglii Corporation Ltd (2016) 116 ACSR 389
[2016] FCA 1099
Australian Securities Commission v Solomon (1996) 19 ACSR 73
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
Source
Original judgment source is linked above.
Catchwords
[2013] FCA 234
Australian Securities and Investments Commission v AGM Markets Pty Ltd (2018) 129 ACSR 223[2018] FCA 1119
Australian Securities and Investments Commission v M101 Nominees Pty Ltd (2020) 147 ACSR 537[2020] FCA 1166
Australian Securities and Investments Commission v Uglii Corporation Ltd (2016) 116 ACSR 389[2016] FCA 1099
Australian Securities Commission v Solomon (1996) 19 ACSR 73
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360[1972] 2 All ER 492[2004] NSWSC 1134
Re Alon Pty Ltd [2022] NSWSC 64
Re New Cap Reinsurance Corporation Holdings Ltd (1999) 32 ACSR 234(1999) 17 ACLC 1,024[1999] NSWSC 536
Re Catombal Investments Pty Ltd (2012) 30 ACLC 12-031
Judgment (6 paragraphs)
[1]
Introduction
The plaintiff - Glad Holdings Pty Ltd (Glad Holdings) - commenced these proceedings on 19 October 2023 seeking an order for the winding up of the defendant - Glad Indigenous Pty Ltd (the Company) - on the just and equitable ground under s 461(1)(k) of the Corporations Act 2001 (Cth).
These reasons for judgment concern Glad Holdings' application made by interlocutory process filed on 14 November 2023 for the appointment of a provisional liquidator to the Company pursuant to s 472 of the Corporations Act.
For the reasons explained below, that application is dismissed with costs.
[2]
Background matters
The shares in the Company are owned by Mr Scott Franks (as to 51 per cent) and Glad Holdings (as to 49 per cent). Mr Natajle (Nick) Iloski is the sole director and shareholder of Glad Holdings. Mr Iloski is also the principal of several other companies related to Glad Holdings, which are collectively known as the Glad Group. Mr Franks and Mr Iloski have been the two directors of the Company at all times since its incorporation on 8 March 2021. They are also the joint company secretaries of the Company.
The Glad Group has been operating businesses in the cleaning services industry for many years. The Company was established as the vehicle for a new cleaning business to be operated as joint venture between Mr Franks and Glad Holdings. Mr Franks is an Indigenous Australian from the Wonnarua tribe. The Company was established as an Indigenous-owned, managed and controlled entity, which is advantageous when tendering and competing for cleaning services contracts by reason of the Australian Government's Indigenous Procurement Policy. That policy sets annual targets by volume and value of contracts to be awarded to Indigenous businesses by the Commonwealth and its portfolios. The States have implemented similar policies.
The recitals to the Shareholders Agreement between the Company, Mr Franks and Glad Holdings dated 8 October 2021 state:
"A. The parties acknowledge and agree:
(i) Scott Franks and Glad Holdings (Shareholders) have established, and currently operate, a joint venture through the Company;
(ii) the Company must at all times have at least fifty-one percent (51%) of its shares owned by an Aboriginal and/or Torres Strait Islander person(s), either through direct individual shareholding or cumulative shareholding through a parent or holding company;
(iii) the shareholding of the Company is as follows:
a. Scott Franks (in his personal capacity) holds 51% of the total shares on issue (Indigenous Partner); and
b. Glad Holdings holds 49% of the total shares on issue (non-Indigenous Partner).
B. The purpose of this agreement is for the Shareholders to record their agreement in relation to the finance, control and management of, and the Shareholders' rights and obligations as members of, the Company and to ensure the terms of this agreement satisfy the certification requirements for an indigenous incorporated joint venture set by Supply Nation."
On 22 April 2022, Supply Nation - the organisation that is recognised by the Australian Government to certify indigenous businesses - certified that the Company is "at least 51 per cent owned by Indigenous Australians, managed by Indigenous Australians, and controlled by Indigenous Australians". The certificate issued by Supply Nation states that, under its certification policy, "all businesses will be subjected to a rolling audit process in order to ensure continued compliance with Supply Nation's certification criteria".
Clause 4 of the Shareholders Agreement provides that the Board is to comprise two - and only two - directors. Each of the Indigenous Partner and the non-Indigenous Partner is entitled to appoint (and, from time to time, replace) one director. Clause 4 records that, as at the date of the Shareholders Agreement, Mr Franks was the Indigenous Director and Chairperson of the Board, and Mr Iloski was the executive director nominated by Glad Holdings. Mr Iloski's position is defined as the non-Indigenous Director. As I have already mentioned, Mr Franks and Mr Iloski continue to hold those offices.
Clauses 4 and 5 of the Shareholders Agreement establish indigenous control of the Company by: (1) providing that the overall direction and management of the Company is vested in the Board; (2) requiring a quorum of both directors for Board meetings, failing which the meeting must be adjourned and reconvened up to twice, following which the presence of Mr Franks alone will constitute a quorum if all directors are not present at the third adjourned meeting; and (3) providing that each director is entitled to one vote on a Board resolution, and that Mr Franks as Chairperson has a casting vote in the event of an equality of votes.
Clause 5 of the Shareholders Agreement provides for Indigenous management of the Company by: (1) recording that the Board has appointed Mr Franks as Chief Executive Officer with responsibility for managing the day to day business of the Company, including for the purpose of being responsible for the Company's finances, operations, personnel and strategy; and (2) by providing that the Board may also appoint a General Manager to assist the Chief Executive Officer with the day to day management, and that any such appointee must be an Aboriginal or Torres Strait Islander person.
Clause 3 of the Shareholders Agreement relevantly provides:
"3.2 Conduct
The Shareholders shall (so far as they lawfully can) use reasonable endeavours to ensure that the Company complies with all of its obligations under this agreement and the Constitution, including but not limited to:
(a) co-operating with each other in relation to all matters concerning the affairs and activities of the Company (including in respect of any variations to the business of the Company);
(b) doing or causing to be done all acts necessary or desirable for the implementation of this agreement including, without limitation, causing their nominees to the Board to implement this agreement; and
(c) not unreasonably delaying any action, approval, direction, determination or decision required under this agreement.
3.3 Exercise of power
The Parties shall at all times exercise their votes, rights and any other powers of control available to them in relation to the Company (whether as Shareholder, Director or otherwise) and shall otherwise take all reasonable steps which are within their power and are necessary to:
give full force and effect to this agreement and its intent;
cause the Company to give full force and effect to this agreement;
cooperate with each other in relation to all matters concerning the affairs and activities of the Company, including without limitation, in relation to the:
(i) company's registration and certification with Supply Nation; and
(ii) Supply Nation Documentation; and
(d) not unreasonably delay any action, approval, direction, determination or decision required under this agreement.
…
3.5 No Partnership
This agreement is to be interpreted so as to not create or give rise to a relationship of agency, partnership or of fiduciary nature between the Parties."
As I have already mentioned, the Glad Group had extensive experience in the cleaning services industry before Glad Holdings entered into the joint venture with Mr Franks. Clause 7 of the Shareholders Agreement provides that the Company may engage Glad Cleaning Service Pty Ltd (Glad Cleaning) to provide services on the terms of the Shared Services Agreement that is annexed to the Shareholders Agreement.
The Company did in fact enter into the Shared Services Agreement with Glad Cleaning on the same date that it entered into the Shareholders Agreement with Glad Holdings and Mr Franks.
Clauses 2 and 3 of the Shared Services Agreement provide that Glad Cleaning is to provide the "Services" to the Company, in consideration for which the Company must pay the "Service Fees" to Glad Cleaning. The "Services" are defined as: (1) the "Management Services", including administration and operations support, sales and marketing support, business development support, human resources support, and assistance with legal and regulatory compliance requirements; and (2) the "Project Support Services", including consultancy and project management, and provision of labour, plant and equipment.
The "Service Fees" are defined in clause 3.3 and Schedule 2 of the Shared Services Agreement as: (1) for Management Services, a monthly fee of 6.6 per cent of the Company's total revenue for the relevant month; and (2) for Project Support Services, such fees as may be agreed between the parties for each particular Project.
Clause 3.2 of the Shared Services Agreement provides that Glad Cleaning will invoice the Company for the provision of the Management Services and the Project Support Services on a periodic basis, with each such invoice "detailing the Services provided by Glad Cleaning or that Invoice period".
Clause 9.2 of the Shared Services Agreement provides that either party may terminate the agreement at any time by giving three months' notice in writing to the other party.
Pursuant to clause 13 of the Shareholders Agreement, each shareholder undertakes to the other shareholder and to the Company that they will not establish a business in Australia engaged, concerned or interested in, or carrying on, any business that is the same as, substantially similar to, or in competition with, the business conducted by the Company, that is to be registered or certified with Supply Nation.
[3]
Summary of relevant evidence
I have considered all of the parties' written and oral submissions, and the evidence referred to in those submissions. The nature of the application requires that it be determined promptly. I will therefore confine myself to summarising below the key elements of the evidence identified in those submissions.
Mr Franks has given evidence that, over a period time leading up to late July or early August 2023, he had become concerned about the Services being provided and the Service Fees being charged to the Company under the Shared Services Agreement. Mr Franks' concerns included that tenders being prepared on behalf of the Company under the Shared Services Agreement were often unsuccessful because they were non-compliant with the request for tender. Mr Franks had a conversation with a representative of the Company's main client in late July 2023, which led him to believe that the Company should be profitable based on the fees that the client was paying to the Company. According to Mr Franks' evidence, he was not seeing any profits and thought that the business was "flat lining".
Mr Iloski has deposed that Mr Franks told him on 4 August 2023 that he had a new job because the Company was not making enough money for him to commit his time to it, and that he wanted to promote his son - Mr Danny Franks - to the position of General Manager of the Company. According to Mr Iloski's evidence, he told Mr Franks that he did not approve of that proposed appointment because he considered that Mr Danny Franks did not yet have enough experience for the role of General Manager.
On 5 September 2023, Mr Franks caused a revised agenda to be circulated for a Board meeting that was scheduled for 11 September 2023. That revised agenda included a motion to appoint a qualified third party to conduct a "thorough pulse check review of the current JV" in order to "facilitate and understand the full transparency of the current management fee structure as provided by Glad Group".
On 5 September 2023, Mr Iloski caused the sum of $130,000 to be transferred out of the Company's bank account. Mr Iloski has given evidence that this transfer was made in partial repayment of a loan or series of loans that the Glad Group had made to the Company. According to Mr Iloski, the Company owed a total amount of $200,206.39 to the Glad Group as at 5 September 2023. According to Mr Iloski's evidence, he had a conversation with Mr Franks at the inception of the business in which he proposed, and Mr Franks agreed, that Glad Group would lend funds to the Company to cover start up and operational costs, and that Glad Group would be entitled to withdraw funds to pay back the loan when the Company started making money.
Mr Franks gave evidence that the directors of the Company had never resolved to borrow money from Glad Holdings. In circumstances where he has asked to see records relating to the loan, and those records have not been provided to him, Mr Franks does not accept that the Company was indebted to Glad Group in the amount claimed by Mr Iloski, or at all, as at 5 September 2023.
It is common ground that the Company has one bank account. Glad Holdings tendered the statements for that account, which record certain payments received from Glad Group, in addition to payments made out of the account to Glad Group. The bank statements record relatively frequent payments received from Jones Lang LaSalle from August 2021 in varying amounts. Jones Lang LaSalle is associated with an incorporated joint venture known as Evolve FM Pty Limited, with which the Company entered into several cleaning services contracts. The Company's bank statements also record numerous payments out of the account to an account number ending in 968. Mr Franks does not know what these payments are for, and wishes to investigate them once he gains access to the Company's records that are presently held by the Glad Group under the Shared Services Agreement. As explained below, Mr Franks has been seeking access to those records for some time.
Mr Franks gave evidence and that he had no prior notice of Mr Iloski's intention to withdraw $130,000 from the Company's bank account on 5 September 2023. Mr Iloski does not suggest otherwise. He has given evidence that Glad Group had authority to operate the Company's bank account, and that he caused Glad Group to arrange the payment.
Mr Iloski gave evidence of a further conversation with Mr Franks on 11 September 2023, in which Mr Franks again raised with him his desire to appoint Mr Danny Franks as the General Manager of the Company, and Mr Iloski again expressed his opposition on the basis that he believed that Mr Danny Franks' did not have the necessary experience because "my son worked in the business for 20 years before I promoted him". According to Mr Iloski, he also expressed the view that the Company needed to generate more income before incurring the expense of a General Manager.
The minutes of the 11 September 2023 Board meeting record that the resolution to appoint Mr Danny Franks as General Manager was passed. Mr Iloski voted against the resolution, and it was passed by Mr Franks using his casting vote. Mr Franks has given evidence that he also used his casting vote to pass a resolution to appoint Mr Sundar Raman as a bookkeeper for the Company. Mr Iloski also voted against that resolution. Mr Franks has given evidence that he believed he was acting in the Company's best interests in using his casting vote to pass these two resolutions, by seeking to understand its finances, maximise its profitability and ensure that it was being operated as a genuine Indigenous-owned, managed and controlled business in accordance with its Supply Nation certification. According to Mr Franks, he was aware that clients and potential clients of the Company were concerned to ensure that it was genuinely Indigenous-owned, managed and controlled, as they did not wish to engage in, or be seen as engaging in, "black cladding". Mr Franks understands the term "black cladding" to refer to the creation of a business model designed to appear as if it is Indigenous-owned and controlled in order to leverage opportunities available under government Indigenous Procurement Policies, but which does not have genuine involvement or oversight of Indigenous persons, and which does not benefit Indigenous persons. Mr Franks has given evidence that one potential client told him that "We've been busted for black cladding before, we want to get this right."
Mr Iloski has given evidence that he formed the view based on "Scott Franks' behaviour" at the 11 September 2023 Board meeting that "a working relationship with him going forward was not going to be possible". Mr Iloski's evidence did not identify the particular "behaviour" that caused him to form that view.
Mr Franks has given evidence that the meeting lasted two hours, during which time Mr Paul Kamper, who had been invited by Mr Iloski to attend the meeting, frequently interrupted and interjected. According to Mr Franks, Mr Kamper repeatedly asserted that Mr Iloski was going to wind up the Company and that the relationship had broken down.
Mr Franks has given evidence that he became suspicious about what was going on with the Company after the 11 September 2023 Board meeting, particularly in light of what seemed to him to be a determination on the part of Mr Kamper to "derail" that meeting. On the morning of 12 September 2023, Mr Franks went to the bank and asked to see the Company's bank account balance. He was told by the bank officer that he was not authorised to view the account because it was "part of the Glad Group profile". Mr Franks was permitted to view the account after providing identification to establish that he was a director and shareholder of the Company. He questioned the $130,000 transfer that he saw had been made on 5 September 2023, which was described on the account statement as "Repayment of Loan". At Mr Franks' request, the bank officer traced the payment and informed him that it had been paid to a Glad Group account. Mr Franks then lodged a dispute in respect of that transaction with the bank.
The minutes of the 11 September 2023 Board meeting record a list of six cleaning services tenders in which the Company was then participating, in addition to six upcoming tenders or other opportunities. One of those opportunities involved the provision of cleaning services to Serco Group Pty Limited (Serco). The minutes noted that a meeting with Serco was scheduled for the following afternoon.
Mr Iloski gave evidence that he wanted to attend the Serco meeting with Mr Franks, but that Mr Franks told him on 12 September 2023 that the meeting had been cancelled "because you and I cannot work together".
Mr Franks denies telling Mr Iloski that "you and I cannot work together". According to Mr Franks, he confronted Mr Iloski about the $130,000 transfer after returning from the bank on the morning of 12 September 2023. Mr Franks asked for the documents evidencing the loan that Mr Iloski claimed to have repaid by the $130,000 transfer. Mr Iloski did not respond, but sat in his chair smirking. Mr Franks then went to leave the office and Mr Iloski asked whether they were still meeting with Serco that afternoon. Mr Franks replied: "I believe that you have a conflict in attending that meeting so I've moved the meeting to take place elsewhere and you will not be attending". Mr Franks attended the meeting at Serco's offices, without Mr Iloski.
Mr Franks has given evidence of a number of other concerns that he developed during the weeks after the 11 September 2023 Board meeting about the affairs of the Company, Glad Group's involvement in the Company's affairs through the Shared Services Agreement, and the reluctance of the local branch of the bank to recognise Mr Franks as having any authority in relation to the Company's bank account. Mr Franks' concerns included that: (1) the Company had paid payroll tax when it was entitled to an exemption because it was not over the threshold for payroll tax; (2) Evolve FM had informed him that it had been asking for months for the Company to issue approximately $290,000 worth of invoices to Envolve FM and Mr Franks did not know why those invoices had not been issued by Glad Group personnel under the Shared Services Agreement; (3) a full-time employee of the Company was being used to service Glad Group properties, and Glad Group was not reimbursing the Company for that employee's wages; and (4) the Glad Group was charging rent to the Company in addition to charging for the Services under the Shared Services Agreement.
On 15 September 2023, Mr Franks caused the bank to put a block on the Company's account. Mr Franks has given evidence that he took this step after being advised by the bank that this was the only way to prevent Glad Group from making further transfers out of the account similar to the disputed $130,000 transfer in circumstances where the account had been set up within the bank as a Glad Group account.
Mr Iloski has given evidence to the effect that the block on the Company's account prevented it from paying employees' wages and making payments to the Australian Taxation Office in September and October 2023. By arrangement with Mr Franks, Mr Iloski caused the Glad Group to pay the Company's employees on 20 September 2023 and to invoice the Company for this payment. For subsequent payrolls, Mr Franks and Mr Iloski have signed documents authorising the bank to make the payments notwithstanding the stop on the bank account.
On 4 October 2023, solicitors acting for Mr Iloski wrote to Mr Franks advising that they were instructed to commence proceedings to wind up the Company under s 461(1)(k) of the Corporations Act.
Mr Franks responded by requesting documents so that he could consider and take legal advice about the matters raised in the solicitors' letter, and by convening a Board meeting to be held on 20 October 2023 to consider, amongst other things: (1) the financial statements for the 2023 financial year and the first quarter of the 2024 financial year, which Mr Franks requested be circulated by Glad Cleaning under the Shared Services Agreement; (2) revising the signatories for the Company's bank account and lifting the stop on the bank account; and (3) delinking the Company's payroll tax from the Glad Group.
As I have already mentioned, these proceedings were commenced on 19 October 2023. The Board meeting went ahead the following day on 20 October 2023.
According to Mr Iloski's evidence, Mr Franks sought to discuss with him at the 20 October 2023 meeting whether he would re-consider his intention to apply to wind up the Company if the Company is profitable. Mr Iloski declined to discuss this, saying that the matter was with his lawyers. Mr Iloski has also given evidence that Mr Franks expressed a lack of confidence in the Services provided under the Shared Services Agreement, including by the Glad Group's finance department. Mr Franks has given evidence that he and Mr Raman have been asking for the invoices that Glad Cleaning is obliged to issue under clause 3.2 of the Shared Services Agreement "so that we can have some transparency around the services alleged to have been provided". Ms Bianca Yardley, who is the Head of Finance of Glad Group, has given evidence that Glad Cleaning has issued monthly invoices to the Company under the Shared Services Agreement, but that it would be "burdensome, labour intensive, and disproportionate to the value of the monthly invoices" to generate invoices in the level of detail now sought by Mr Franks.
The minutes of the Board meeting on 20 October 2023 were not in evidence. Mr Iloski has given evidence that resolutions were passed changing the Company's registered office, delinking the Company's payroll tax from the Glad Group, appointing an external information technology support services provider for the Company, and appointing an external accountant and tax agent for the Company. Mr Iloski voted against each of these resolutions, which were passed by Mr Franks using his casting vote. According to Mr Iloski, Mr Franks said: "I am going to pass any motions I want. If you want to stop me, you're going to have to take me to the Supreme Court of NSW".
There is a dispute between Mr Franks and Mr Iloski about the terms of the resolution that was passed concerning the Company's bank account at the Board meeting on 20 October 2023. According to Mr Iloski, it was resolved to introduce A and B signatories for the account, so that both Mr Franks (or his nominee) and Mr Iloski (or his nominee) were required to approve transfers out of the account. According to Mr Franks, the resolution authorised him to operate the bank account and authorise payments using the bank's online portal as he deems fit, including introducing Group A and Group B signatories.
Mr Iloski has given evidence that the resolutions passed at the 20 October 2023 Board Meeting had the effect of discontinuing many of the Services that were provided by Glad Group under the Shared Services Agreement, and he formed the view after that meeting that Mr Franks was unable to work productively with the Glad Group and that the relationship between the Company and the Glad Group established by the Shared Services Agreement was no longer tenable. On 27 October 2023, Mr Iloski sent an email to Mr Franks attaching a notice of termination pursuant to clause 9.2 of the Shared Services Agreement. The termination will take effect on 27 January 2024.
Mr Iloski has given evidence that Mr Franks wrote to him on 31 October 2023 and again on 3 November 2023 seeking access to the Company's records that were in the possession of the Glad Group as a result of the arrangements under the Shared Services Agreement. Mr Franks' email to Mr Iloski on 3 November 2023 stated that the Company required the documents in order to make arrangements to take over the services that the Glad Group had been providing. Mr Iloski wrote to Mr Franks on 10 November 2023 stating that the documents would be provided on the date of termination of the Shared Services Agreement on 27 January 2024 "and not before".
Mr Franks has given evidence that he has decided that it is in the Company's best interests to separate the Company's bank account from the Glad Group's banking arrangements. To that end, Mr Franks sent an email to Mr Iloski on 9 November 2023 convening a Board meeting for 23 November 2023 to vote on numerous resolutions, including: (1) resolutions authorising Mr Franks to close the Company's bank account with its existing bank (National Australia Bank) and to open a new account with the Commonwealth Bank; (2) a resolution authorising Mr Franks, as CEO and Chairperson of the Company, to operate bank accounts and determine the authorised signatories for payments out of those accounts. Mr Franks' email explained the reasons for those resolutions in the following terms:
"… to avoid concerns with NAB's connection with Glad Holdings Pty Ltd (GH) and Glad Group of companies (GG). The account was not run independently of GH and GG. The other concern is NAB opened the bank account for Glad Indigenous Pty Ltd (GI) without due proper process being followed.
In accordance with clause 5.1 of the Shareholder's agreement and Scott Franks' appointment as CEO, the day to day responsibility for finance lies with Scott. Based on advise received, Scott is of the view that CBA has the best online portal and has excellent security in place to protect customers.
For internal control purposes it is important to have one person uploading payment details and two signatories authorising payments and details of payment provided to all concerned. This has not been happening until now."
Mr Franks' notice convening the Board meeting for 23 November 2023 also included notice of a motion for Mr Raman to take over the books of accounts and documents of the Company, following the notice of termination of the Shared Services Agreement by Glad Cleaning. Mr Franks' email stated:
"Since the termination of notice has been given by Glad Cleaning Services Pty Ltd (GCS), the day to day financial matters will no longer be done by GCS. The company has appointed Sundar Raman to take over the day to day operations. In order to ensure smooth transition and uninterrupted service to be provided to our customers, the transition needs to be managed smoothly and efficiently, the company needs access to all documents and transactions.
Discussion to take place as to how this can be achieved with minimum interruption."
At the time of the hearing before me, the Board meeting convened for 23 November 2023 had not proceeded due to lack of a quorum on account of Mr Iloski's non-attendance. The Glad Group has continued to refuse to provide the Company with access to its records that are in the possession of the Glad Group as a result of the arrangements under the Shared Services Agreement. It was only at the conclusion of the hearing before me that Glad Holdings accepted - for the first time, as I understand it - that the Company, and Mr Franks as the Chief Executive Officer of the Company, should be entitled to view and make copies of those books and records. Counsel for Glad Holdings informed the Court that it did not oppose a direction to that effect being made under s 467(3) of the Corporations Act if a provisional liquidator is not appointed. The Company accepts that, although it requires copies of the books and records, the Glad Group is entitled to retain them pending termination of the Shared Services Agreement on 27 January 2024. The Company does not oppose any direction under s 467(3) of the Corporations Act including a direction requiring the Company to take such steps as may be necessary to ensure that Mr Iloski is able to view the records of the Company's bank accounts, including the new account that Mr Franks is proposing to open with the Commonwealth Bank.
Mr Franks' notice convening the Board meeting for 23 November 2023 included notice of a motion concerning the procedure for documenting Board resolutions, to ensure "clarity and transparency around what resolutions have been made by the Board particularly in light of current disputes".
Although the Board meeting convened for 23 November 2023 has been adjourned due to the absence of a quorum, Mr Franks and Mr Iloski did consent to short notice of a meeting that was held on 13 November 2023. At that meeting, Mr Franks and Mr Iloski unanimously resolved to appoint solicitors to represent the Company in these proceedings. Mr Iloski had proposed that the directors also resolve whether to accept or oppose the winding up order sought by Glad Holdings in these proceedings. Mr Franks used his casting vote to defer that agenda item until after the Company had had an opportunity to take legal advice from its newly appointed solicitors, including about whether to make any cross-claim in the proceedings. The potential cross-claim relates, amongst other things, to Mr Franks' concerns that the Glad Group has been competing for cleaning services contracts in a manner that he considers breaches the non-compete obligations under clause 13 of the Shareholders' Agreement. Mr Iloski disputes that Glad Holdings has breached that clause.
On 31 October 2023, the Australian Taxation Office issued a demand to the Company for payment of amounts totalling $98,045 in respect of income tax and business activity statements. Mr Franks and Mr Raman have certain concerns about the accuracy of some of the information contained in the Company's returns prepared and lodged by the Glad Group under the Shared Services Agreement. There were discussions and disagreements between Mr Franks and Mr Iloski in early November 2023 about arrangements to pay the outstanding tax, in which Mr Franks sought to link these arrangements with a resolution of the disputed question of authority to operate the Company's bank accounts. At the time of the hearing of Glad Holdings' application to appoint a provisional liquidator, Mr Franks and Mr Iloski had signed the necessary form to authorise payments out of the Company's account of the outstanding amount in respect of income tax, and of amounts due for workers' compensation insurance premiums. The Company was in the process of negotiating an arrangement with the Australian Taxation Office in relation to the amount outstanding in respect of its business activity statements.
Mr Iloski has given evidence that he had "tried to be very supportive of Mr Franks" but that "it is clear that we no longer have a positive working relationship".
[4]
Consideration and determination
As counsel for Glad Holdings acknowledged, the Court's wide power to appoint a provisional liquidator, should only be exercised where: (1) the Court is satisfied that there is a reasonable prospect that a winding up order will be made following the hearing of the winding up application; and (2) some good reason is shown for placing the company's affairs under external control prior to the hearing of the winding up application, such as public interest considerations, a need to preserve the status quo or the protection of the company's assets and affairs. That reflects the reality that the appointment of a provisional liquidator is a drastic intrusion into the affairs of the company. Before appointing a provisional liquidator, it is necessary to consider whether less intrusive measures are available that would be adequate to preserve the status quo. [1]
Glad Holdings submitted that it is clear from the evidence of Mr Iloski and Mr Franks that their relationship has broken down. Glad Holdings characterises the present state of affairs as "a significant and irredeemable breakdown in the relationship between Mr Franks and Mr Iloski and the rest of the Glad Group" and a consequential "deadlock in the operations and management" of the Company. Glad Holdings submitted that there is therefore a reasonable prospect that the Company will be wound up on the just and equitable ground following the hearing of the winding up application.
Counsel for Glad Holdings referred to Lord Wilberforce's description of the just and equitable ground of winding up in Ebrahimi v Westbourne Galleries Ltd as enabling the court to subject the exercise of legal rights, such as those arising under the Shareholders Agreement, to equitable considerations "of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way". His Lordship continued: [2]
"It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence -- this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be "sleeping" members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members' interest in the company -- so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere."
Counsel for Glad Holdings submitted that elements (i) and (ii) identified by Lord Wilberforce are present in this case.
Glad Holdings emphasised that the Company was established as a joint venture between Glad Holdings and Mr Franks, on terms that each of them is obliged under clause 3 of the Shareholders Agreement to exercise their votes, rights and any powers of control to give, and to cause the Company to give, full force and effect to the Shareholders Agreement, and to cooperate with each other in relation to all matters concerning the affairs of the Company. Glad Holdings relied on the joint venture relationship, the terms of clause 3 of the Shareholders Agreement, and the manner in which the Company's affairs had been conducted up until mid-2023, as establishing a relationship in which Board decisions must be made by consensus. Counsel characterised Mr Franks conduct in exercising his casting vote to pass the resolutions at the meetings on 11 September, 20 October and 13 November 2023, [3] which were opposed by Mr Iloski, as "wresting" or "seizing" control of the Company. Counsel submitted that was unjust or inequitable for Mr Franks to exercise his casting vote to pass resolutions in respect of which there was no consensus as between Mr Franks and Mr Iloski.
When asked whether this meant that the provisions of the Shareholders Agreement giving Mr Franks a casting vote were a sham, counsel retreated from that submission to some extent. Counsel submitted it was unjust or inequitable for Mr Franks to use his casting vote to pass resolutions opposed by Mr Iloski without first taking reasonable steps to cooperate with Glad Holdings by consulting with Mr Iloski, giving genuine consideration to his views about the subject matter of the resolution, and seeking to achieve consensus before exercising his casting vote. Counsel submitted that the evidence referred to above demonstrates that Mr Franks has abandoned any attempt to engage in genuine cooperation or consultation, and that he is using his casting vote to exercise sole control over the Company.
Counsel's retreat from his initial submission was well advised, in my opinion. As I have explained at [9] above, Mr Franks' casting vote underpins the Company's certification by Supply Nation as an indigenous-controlled company. That certification is central to the Company's business model, and is one of the matters about which the shareholders are expressly obliged to take reasonable steps to cooperate under clause 3 of the Shareholders Agreement.
Counsel for Glad Holdings also submitted that the Shared Services Agreement between the Company and Glad Cleaning was fundamental to the joint venture relationship between Glad Holdings and Mr Franks. Counsel relied on the termination of that agreement in response to Mr Franks' alleged conduct as further evidence of an irretrievable breakdown in the relationship between Glad Holdings and Mr Franks. It was submitted that Mr Franks is "actively dismantling the venture by separating [the Company's] operations from those of the Glad Group".
Referring to Khamo v XL Cleaning Services Pty Ltd [4] and In the matter of Cartwright Transport Pty Ltd, [5] counsel for Glad Holdings submitted that the evidence in this case discloses an irretrievable breakdown in the relationship between Mr Franks and Mr Iloski - in that there is a sense of mutual disillusionment and distrust, they are unable to communicate except through solicitors, and cannot even agree on payments to be made to routine creditors of the Company - which has resulted in "deadlock" or "paralysis" in the affairs of the Company, and which has put the financial affairs of the Company "in jeopardy". It was submitted that, by instigating a "battle" for control of the Company's bank account, Mr Franks has prevented the Company from meeting its obligations to pay workers compensation insurance premiums, and has also prevented the Company from complying with its taxation obligations. It was submitted that, notwithstanding that Mr Franks' casting vote is a mechanism designed to prevent deadlock, the Company is in a state of deadlock or paralysis because "this company and the relationship which was intended to operate equally … is not functioning on that basis", and the two directors "see no future for the joint venture" and "can no longer communicate meaningfully".
I accept that the evidence presently before the Court shows that there has been a breakdown of trust and confidence as between Mr Franks on the one hand, and Mr Iloski and Glad Holdings on the other hand. However, contrary to the submissions made by counsel for Glad Holdings, this has not resulted in Mr Franks and Mr Iloski communicating only through solicitors. Nor has it prevented the Company from paying its employees, paying workers compensation insurance premiums, and complying with its taxation obligations. As senior counsel for the Company submitted, the evidence includes extensive email communications between Mr Franks and Mr Iloski, which have continued since the commencement of these proceedings. They have also communicated at the Board meetings held after the commencement of these proceedings on 20 October and 13 November 2023. The evidence referred to above demonstrates that they have cooperated to ensure that wages are paid to the Companies' employees, and to facilitate the Company complying with its obligations to pay workers compensation insurance premiums and income tax.
As was submitted on behalf of the Company, the characterisation of the disagreement concerning the Company's bank account as a "battle" for control of that account does not accurately reflect the events that have occurred. The evidence summarised above indicates that Mr Franks seeks to ensure that the Company's account cannot be treated as simply another repository of funds for the Glad Group, and Mr Iloski objects to Mr Franks being entitled to authorise payments out of the account without co-authorisation from Mr Iloski or a nominee of Mr Iloski. However, as senior counsel for the Company submitted, there is no allegation by Mr Iloski or Glad Holdings that Mr Franks might misappropriate funds of the Company if he is able to authorise transactions without co-authorisation. As referred to earlier in these reasons, Mr Franks accepts that Mr Iloski should have complete visibility of all transactions on the account.
As the Company submitted, the present state of the relationship between Mr Franks, Mr Iloski and Glad Holdings has not resulted in the Company being in a state of "paralysis" or "deadlock". To some extent, decisions have continued to be made cooperatively, including in relation to payments of wages, workers compensation insurance premiums and income tax. To the extent that there has been disagreement, deadlock has been avoided by the very mechanism agreed upon by the shareholders in their agreement setting out the terms of their joint venture. Glad Holdings' characterisation of Mr Franks' use of his casting vote without consensus as a "deadlock" is contrary to the very meaning of a deadlock. The comparison that counsel for Glad Holdings sought to draw between this case, and an earlier case in which the shareholders agreement expressly required decisions to be made unanimously, was not meaningful. [6]
Contrary to Glad Holdings' submission, the evidence presently before the Court does not establish that Mr Franks has used his casting vote without consulting with Mr Iloski in the spirit of the shareholders' obligation of cooperation under clause 3 of the Shareholders Agreement. Mr Franks has exercised his casting vote at Board meetings to pass resolutions of which notice was given prior to the relevant meeting. The evidence presently before the Court does not disclose the extent of discussion and consultation about the subject matter of the resolution prior to and at the Board meeting before the votes were taken. However, the evidence does show that Mr Franks provided explanations to Mr Iloski for proposing the resolutions in the most recent notice of meeting. [7] Mr Franks' evidence about his reasons for each use of his casting vote, the ongoing email correspondence between Mr Franks and Mr Iloski, their agreement to convene a Board meeting on short notice on 13 November 2023, and their cooperation to facilitate payment of wages, workers compensation premiums and income tax, appears, on the face of it, to be inconsistent with the statement that Mr Iloski attributes to Mr Franks at the 20 October 2023 Board meeting that "I am going to pass any motions I want. If you want to stop me, you're going to have to take me to the Supreme Court of NSW." This evidence has not yet been tested in cross-examination. There was no cross-examination of Mr Iloski or Mr Franks on this interlocutory application. If Mr Franks did make that statement at the 20 October 2023 meeting, he does not appear based on the evidence presently before the Court to have conducted himself in that way.
I reject Glad Holdings' submission that Mr Franks is "actively dismantling" the joint venture between the shareholders by separating the Company's operations from the Glad Group's operations. The evidence presently before the Court points to sound reasons why, for example, the disaggregation of the Company from the Glad Group for payroll tax reporting may be in the Company's best interests. The termination of the Shared Services Agreement cannot properly be characterised as undermining or destroying the joint venture relationship. As senior counsel for the Company submitted, the Company was empowered, but not obliged, to enter into the Shared Services Agreement under clause 7 of the Shareholders Agreement. The Shared Services Agreement expressly provided that either party may terminate it on three months' written notice. There is no provision in the Shareholders Agreement for the shareholders to terminate their joint venture and wind up the Company in that event.
I accept the Company's submission that it is simply too early to characterise the breakdown of trust and confidence as between Mr Franks on the one hand, and Mr Iloski and Glad Holdings on the other hand, as irretrievable. It seems to me that much will depend on the conclusions that Mr Franks draws from his review of the Company's books and records that have been maintained by Glad Group, to which he has been denied access until now. The relationship may also be affected - possibly for better, possibly for worse - if the Glad Group provides detailed invoices specifying the Services provided, and the calculation of the Service Fees charged, to the Company, as requested by Mr Franks. This uncertainty surrounding the likely state of the relationship at the time of the future hearing of the winding up application is the result of Glad Holdings' decision to commence winding up proceedings before engaging with Mr Franks' requests for access to Company records and information about the Services and Service Fees.
For those reasons, I accept that the evidence presently before the Court discloses a possibility that a winding up order will be made on the just and equitable basis following the hearing of the winding up application, but I consider that it would be putting it too highly at this stage to describe that outcome as a reasonable prospect.
That is sufficient reason to dismiss the application for the appointment of a provisional liquidator.
Even if I had been persuaded that there was a reasonable prospect of the Company being wound up on the just and equitable basis, I would have declined to appoint a provisional liquidator because I would not have been satisfied that there was some good reason to do so pending the hearing of the winding up application in all the circumstances of this case.
As I have mentioned at [53] above, the need to show some good reason to appoint a provisional liquidator pending the hearing of the winding up application serves the important function of restricting such appointments to cases where that intrusion into the company's affairs is warranted, even before the court has had an opportunity to consider all of the evidence that will be adduced, and tested by cross-examination where appropriate, at the final hearing of the winding up application. In the present case, the winding up order is sought on the basis that it is just and equitable. The concept "just and equitable" is a broad one incapable of exhaustive definition, and each case turns on its own facts. [8] It is only after weighing up all of the evidence adduced at the final hearing that the Court will be in a position to determine the extent to which the difficulties presently affecting the relationship between Mr Franks and Mr Iloski are persisting and, if so, whether they are of a nature and degree that materially frustrates the commercially viable and sensible operations of the Company in accordance with the shareholders' expectations, and whether it is just and equitable to wind up the Company in all the circumstances. [9]
The written submissions served on behalf of Glad Holdings prior to the hearing relied on the Company's outstanding taxation obligations and unpaid workers compensation premiums as good reason for the appointment of a provisional liquidator. It was submitted that there is no comfort that those obligations (and future obligations of that nature) would be addressed prior to the hearing of the winding up application unless without the appointment of a provisional liquidator. As I have explained above, that submission had been overtaken by events by the time of the hearing of the present application.
Counsel for Glad Holdings then submitted that the Court should exercise its power to appoint a provisional liquidator because the present state of affairs - which Glad Holdings characterises as an irretrievable relationship breakdown, deadlock or paralysis, and an inequitable state of affairs - should not be permitted to continue pending the hearing of the winding up application. It was submitted that there is no evidence of any prospect of the relationship being repaired or cooperation being re-established in the period leading up to that hearing. Counsel for Glad Holdings submitted that, if the Court accepts the submissions made on this application that it would be just and equitable for the Company to be wound up, then "the question that arises is whether it would be just and equitable to allow Mr Franks to operate in this manner until a final hearing". Counsel for Glad Holdings accepted that the appointment of a provisional liquidator would be a drastic intrusion into the affairs of the Company. Amongst other things, it would put the Company's certification with Supply Nation at risk by placing the Company in the control of a provisional liquidator. It would also give rise to a risk that the Company's clients may exercise contractual rights to terminate their contracts with the Company on notice, either by reason of the appointment per se or by reason of the Company ceasing to be an Indigenous-controlled entity. However, counsel for Glad Holdings submitted that these were not matters that weighed against the appointment of a provisional liquidator because they are simply problems that will inevitably arise on the winding up of the Company following a final hearing.
I reject those submissions for two reasons. First, I have already rejected Glad Holdings' submissions about the status of the relationship for the reasons explained at [54]-[68] above. Second, Glad Holdings did not identify any good reason to appoint a provisional liquidator over and above the prospect of a winding up order being made following a final hearing. By relying solely on what it submitted was a reasonable prospect of a winding up order being made after final hearing, and by asking the Court to accept at this stage that it would be just and equitable for the Company to be wound up, [10] Glad Holdings was, in truth, asking the Court to determine the question that must be determined at final hearing. I accept the submission made by senior counsel for Mr Franks that, on the pretext of an interlocutory application, Glad Holdings was attempting to agitate matters for final hearing and obtain relief that would effectively operate as final relief due to the likely consequences of the appointment of a provisional liquidator to which I have referred above. The Court will not entertain an expedited winding up application under the guise of an application to appoint a provisional liquidator.
[5]
Conclusion and orders
For those reasons, the application for the appointment of a provisional liquidator must be dismissed with costs. I accept that it is appropriate to make directions under s 467(3) of the Corporations Act in relation to access to Company records in terms that the parties informed the Court during the hearing of this application they would did not oppose.
The orders of the Court are as follows:
1. Order that the interlocutory process filed by the plaintiff on 14 November 2023 is dismissed.
2. Pursuant to s 467(3) of the Corporations Act 2001 (Cth), direct that:
1. the plaintiff take all reasonable steps to ensure that the defendant, through its officers Mr Scott Franks (Chief Executive Officer), Mr Danny Franks (General Manager) and Mr Sundar Raman (Chief Financial Officer), and its external accountants (Award Accounting), is given access within 24 hours of the making of these orders to any books of the defendant within the meaning of s 9 of the Corporations Act 2001 (Cth) that are in the possession, custody or control of the plaintiff (or any other company in the Glad Group of Companies) for the purpose of inspection and copying of those books; and
2. the defendant take all reasonable steps to ensure that Mr Natajle Iloski, in his capacity as a director of the defendant, has at least viewing access to each bank account of the Company through the online portal of the relevant bank, on and from 24 hours after the making of these orders.
1. Order that the plaintiff is to pay the costs of the defendant of the interlocutory process filed by the plaintiff on 14 November 2023 and the hearing on 30 November 2023 on the ordinary basis, in such amount as may be agreed or assessed.
2. List the matter in the Corporations Directions List on 11 December 2023 for directions with a view to programming the winding up application for hearing.
[6]
Endnotes
Re New Cap Reinsurance Corporation Holdings Ltd (1999) 32 ACSR 234; (1999) 17 ACLC 1,024; [1999] NSWSC 536 at [23] (Young J); Australian Securities Commission v Solomon (1996) 19 ACSR 73 at 80 (Tamberlin J); Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) (2013) 93 ACSR 189; [2013] FCA 234 at [11]-[16] (Gordon J); Australian Securities and Investments Commission v Uglii Corporation Ltd (2016) 116 ACSR 389; [2016] FCA 1099 at [72] (Davies J); In the matter of Therma Truck Pty Ltd [2016] NSWSC 266 at [18]-[21] (Black J); Australian Securities and Investments Commission v AGM Markets Pty Ltd (2018) 129 ACSR 223; [2018] FCA 1119 at [78]-[87] (Beach J); Australian Securities and Investments Commission v M101 Nominees Pty Ltd (2020) 147 ACSR 537; [2020] FCA 1166 at [37] (Anderson J); In the matter of Pages Equipment Holdings Pty Ltd (admin apptd) [2020] NSWSC 959 at [6] (Black J).
[1973] AC 360; [1972] 2 All ER 492; [1972] 2 WLR 1289 at AC 379.
The resolutions appointing Mr Danny Franks as General Manager, appointing Mr Raman as bookkeeper, changing the registered office, delinking the Company's payroll tax reporting from the Glad Group, engaging an external information technology service provider, engaging an external accountant and tax agent, and deferring a decision about whether to defend the winding up application in these proceedings.
In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98.
See [46]-[47] above.
Re Catombal Investments Pty Ltd (2012) 30 ACLC 12-031; [2012] NSWSC 775 (Re Catombal) at [19]-[20] (Brereton J); In the matter of CNPR Ltd [2018] NSWSC 989 (Re CNPR) at [8] (Black J); In the matter of Austral Alloys Pty Ltd [2017] NSWSC 1833 (Re Austral Alloys) at [30] (Brereton J); In the matter of Pure Nature Sydney Pty Ltd [2018] NSWSC 914 (Re Pure Nature) at [69] (Black J); Re Alon Pty Ltd [2022] NSWSC 64 at [13]-[15] (Gleeson J).
In the matter of Amazon Pest Control Pty Ltd [2012] NSWSC 1568 at [19] (Black J); Re Austral Alloys at [24]-[30] and the authorities there cited; Re Pure Nature at [70] and the authorities there cited; In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98 at [170] (Williams J).
See the submission recorded at [73] above.
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 05 December 2023