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.