BARBOUTIS -v- THE KART CENTRE PTY LTD [No 2] [2020] WASCA 41 | Case summary

BARBOUTIS -v- THE KART CENTRE PTY LTD [No 2] [2020] WASCA 41 | Case summary | Zoe

[4]

The hearing before the master proceeded on affidavit evidence. There was no cross-examination of deponents. In numerous respects, some of which were material, Mr Barboutis and Mr Freeman gave conflicting evidence. In those circumstances the approach outlined in Tay Bok Choon v Tahanson Sdn Bhd applied: where allegations made in the appellants' affidavits were credibly denied in the opposing affidavits the master had to ignore the disputed allegations. The application fell to be determined by consideration of the undisputed facts.[11]
The master did not refer to the principle in Tay Bok Choon v Tahanson Sdn Bhd. However, in substance (other than in one respect) that is how the master approached the application. Specifically, the master - quite understandably given the absence of cross-examination - did not recount the totality of the conflicting evidence. Instead the master concentrated on the admitted facts and evidence disclosed by the affidavits as relied on for the parties' submissions.
A summary of the background facts is as follows:
1. Mr Barboutis and Mr Freeman formed the Company so as to pursue a business venture involving indoor go kart racing and entertainment.
2. The Company was incorporated on 1 September 2016.
3. The initial shareholders of the Company were Bullsbrook (associated with Mr Barboutis) and Rilyla (associated with Mr Freeman). Each entity held 150 ordinary shares in the Company.
4. On incorporation the directors of the Company were Mr Barboutis' son, Nicholas Barboutis, and Mr Freeman. Mr Freeman has remained a director at all times. However, on 14 December 2016 a change to company details Form 484 was lodged with the Australian Securities & Investments Commission (ASIC). The form recorded that Nicholas Barboutis had been replaced as a director by Mr Barboutis.
5. In December 2016 Bullsbrook and Rilyla entered into a Shareholders Agreement.[12] Among other things, the Shareholders Agreement provided for the board of directors (cl 5), funding (cl 10) and a dispute resolution mechanism (cl 16). Importantly, the Shareholders Agreement provided that its provisions would prevail over any inconsistent articles in the Company's constitution. The shareholders also agreed that the constitution would be amended to remove any inconsistency with the Shareholders Agreement (cl 30).
6. Mr Barboutis and Mr Freeman caused various amounts to be paid to the Company. However, the proper legal characterisation of these amounts was in dispute. So too there was a dispute between the parties as to which entity or entities contributed money to the Company.
7. There was a breakdown in the relationship between Mr Barboutis and Mr Freeman. The reasons for that are unimportant to the proper disposition of the appeal.
8. On 16 March 2018 Bullsbrook and Rilyla entered into a Share Sale Agreement whereby Rilyla agreed to purchase Bullsbrook's 150 shares in the Company for a purchase price of $227,500. At least $202,500 of the $227,500 was paid. There was a dispute between the parties as to whether the remaining $25,000 had been paid. There was also a dispute as to whether the Share Sale Agreement had completed. Moreover, Bullsbrook contended that it validly terminated the Share Sale Agreement on 16 August 2018 (at a time when it was deregistered).
9. On 26 March 2019 Bullsbrook issued a letter of demand to the Company for $243,835.97 (said by Bullsbrook to be the balance of an outstanding loan account due by the Company to Bullsbrook). The Company did not pay the amount claimed.
10. On 5 April 2019 the appellants made application for orders pursuant to s 459P and s 461(1)(k) of the Corporations Act 2001 (Cth) for the Company to be wound up on the ground of insolvency, or alternatively, on the ground that it was just and equitable to wind-up the Company.
Before the master, and on appeal, attention was directed to the certain provisions within the Shareholders Agreement and the Company's constitution.
Clause 5 of the Shareholders Agreement provided:

[13]

The master first addressed the appellants' respective standing to make the winding-up application.
In findings that are now challenged on appeal, the master determined that:
1. Mr Barboutis was not a director of the Company.[14]
2. The second appellant was not a creditor of the Company.[15]
Bullsbrook also contended that it had standing as a contributory. (There was, however, no written application for leave in accordance with s 459P(2)(b) of the Corporations Act so far as the application relied on the insolvency ground.) The master stopped short of finding that Bullsbrook remained the holder of shares in the Company. In circumstances where Rilyla (the putative purchaser of shares from Bullsbrook) was not a party to the proceedings the master determined that it was not appropriate for her to determine the issues that arose in relation to the Share Sale Agreement.[16] The master contented herself with a finding that there was a serious question to be tried as to whether or not Bullsbrook held shares in the Company.[17]
Accordingly, there was no finding that Bullsbrook was a contributory. The failure to make that finding is not challenged on appeal. There being no finding that Bullsbrook was a member of the Company, and no challenge to the absence of such a finding, the appeal must proceed on the basis that Bullsbrook does not have standing to apply for a winding-up order on the basis that it is a contributory.[18]
The finding that Mr Barboutis was not a director of the Company requires elaboration.
The appellants relied on searches of the ASIC's records (which recorded that Mr Barboutis was appointed as a director on 12 December 2016)[19] and s 1274B(2) of the Corporations Act. The master found that the ASIC records were capable of rebuttal.[20] The master then considered the available evidence - including the lack of any consent to act as a director and minutes of a meeting appointing Mr Barboutis as a director - and concluded that Mr Barboutis had not discharged an onus of proving that he was appointed as a director of the Company.[21] Along the way the master rejected an argument that, by reason of cl 5.1 of the Shareholders Agreement, Bullsbrook was entitled to appoint a director in whatever manner it wished. In that respect the master found that there was no inconsistency between cl 5.1 of the Shareholders Agreement and rule 22.2 of the Company's constitution.[22] The master also rejected an argument that Mr Barboutis was appointed as a director by Mr Freeman, finding that Nicholas Barboutis had not validly resigned as a director.[23]
The master did, however, seemingly accept that Mr Freeman - rather than Mr Barboutis - lodged with the ASIC the 14 December 2016 change to company details which recorded that Mr Barboutis had been appointed as a director.[24] The Company challenges that finding by its purported cross-appeal.
The findings as to standing would alone have sufficed to mean that the winding-up application would be dismissed. However, the master went on to consider the substantive merits of the application. The master's conclusions on the substantive merits of the winding-up application provided additional reasons for dismissing the application.
First, the master found that the Company was not insolvent.[25] Key to that conclusion were three findings that: (1) loans recorded in the Company's balance sheet to Mr Barboutis and Bullsbrook were not to be taken into account as loans;[26] (2) there was no evidence, at the date of the hearing, that the Company had been unable to meet its debts as and when they fell due;[27] and (3) the Company had access to funds from a company associated with Mr Freeman - A & M Freeman Enterprises Pty Ltd as trustee for Freespot Trust trading as Fluid Maintenance Australia (FMA).[28]
As to the last matter, the master was satisfied as a matter of commercial reality that, given the relationship between FMA and Mr Freeman, funds would be loaned and would not be called upon by FMA until the Company was able to repay those funds.[29]
In coming to a conclusion on insolvency the master declined to receive two affidavits, namely, an affidavit of Christopher Pearce sworn 20 June 2019 and an affidavit of Monica Hamid sworn 15 August 2019.[30] Mr Pearce was a partner, and Ms Hamid a law graduate, of the solicitors acting for the appellants. The affidavits were filed without leave after the application was heard on 23 May 2019 and the master had reserved her decision. In the course of preparing her reasons for decision the master identified a number of legal and evidentiary questions that neither party had addressed her on at the 23 May 2019 hearing. Accordingly, the master requested that the parties re-appear before her. That occurred on 16 August 2019. After a short mention hearing, orders were made for the parties to file and serve further submissions on the additional questions identified by the master. The master also raised the further affidavits.[31] Counsel for the Company indicated that it would oppose any further evidence after the date of the initial hearing.[32] The master made it clear that the further submissions should also address the admissibility of the further affidavits.[33]
In her reasons for decision the master declined to receive Mr Pearce's and Ms Hamid's affidavits on the basis that they did not constitute a state of events that were known at the date of the 23 May 2019 hearing.[34]
Second, the master said that she would have declined to order a winding-up of the Company on just and equitable grounds for four reasons: (1) Mr Barboutis not being a director of the Company, Mr Freeman did not require Mr Barboutis' knowledge, consent or approval to make decisions on behalf of the Company; (2) there were no conflicting instructions of directors which created a risk to the public interest warranting protection; (3) there were no relevant breaches of the director duty provisions in the Corporations Act as Mr Freeman did not require Mr Barboutis' approval to transfer money out of the Company's bank account or to link the Company's electronic merchant facilities to other bank accounts; and (4) the Company was solvent.[35]
Third, the master concluded that the 'extreme step' of winding-up a solvent company was not appropriate as there was a clear possibility of an alternative remedy which would address the breakdown in the relationship between Mr Barboutis and Mr Freeman.[36]
On delivery of the reasons for decision the Company sought its costs. The appellants did not resist a costs order in favour of Mr Freeman. However, the appellants opposed a costs order in favour of the Company. The master only made a costs order in favour of Mr Freeman. While no reasons were provided for that order the transcript records the following:

[29]

Before the master, the Company and Mr Freeman sought to adduce evidence to the contrary through the affidavit of Mr Stott as to his inspection of the Company's secretarial file. Among other things Mr Stott's evidence was that:[50]
1. There was no signed or unsigned letter of resignation of Nicholas Barboutis as a director of the Company.
2. There were no signed or unsigned minutes of meetings of the directors or the members or record of a resolution for the removal of Nicholas Barboutis as a director of the Company.
3. There was no signed or unsigned ASIC form regarding notification of cessation of Nicholas Barboutis as a director of the Company.
4. There was no signed or unsigned consent to act as a director of the Company by Mr Barboutis.
5. There were no signed or unsigned minutes of meetings of the directors or the members or record of a resolution for the appointment of Mr Barboutis as a director of the Company.
6. There was no signed or unsigned ASIC form regarding notification of appointment of Mr Barboutis as a director of the Company.
Mr Freeman acknowledged that Mr Barboutis told him that he, Mr Barboutis, was replacing Nicholas Barboutis as a director of the Company. But Mr Freeman went on to depose that there was no meeting, agreement or resolution as to Mr Barboutis' appointment.[51] Mr Freeman said that he had never seen any resignation by Nicholas Barboutis. Nor had he seen a consent to act by Mr Barboutis; and there had been no resolution of the directors or the members to appoint Mr Barboutis as a director of the Company.[52] Mr Freeman also gave unchallenged evidence that at the time the Company was formed he had not met Nicholas Barboutis and thereafter it remained the case that he, Mr Freeman, had never spoken with or met Nicholas Barboutis.[53]
Mr Freeman explained this unusual state of affairs on the basis that he understood Mr Barboutis to be his business partner and that he, Mr Barboutis, had been using Nicholas Barboutis as a director 'on paper only'.[54] Mr Freeman also referred to an email exchange between himself and Mr Barboutis on 31 October 2016. That concluded with Mr Barboutis stating that the directors should be left as Mr Freeman and Nicholas Barboutis but that he 'will change out Nic (sic) at a later time'.[55]
There was also evidence that Nicholas Barboutis had purportedly signed a document as a director of the Company after December 2016. The evidence included a circular resolution dated 16 March 2018 agreeing to the sale and transfer of shares by Bullsbrook to Rilyla signed by Nicholas Barboutis as a director of the Company.[56] (Counsel for the appellants sought to answer this apparent inconsistency by saying that the resolution was in error. The Share Sale Agreement contemplated a resolution by the members rather than the directors.[57] Be that as it may, it was undeniable that Nicholas Barboutis had purported to sign the circular resolution as a director of the Company.)
The matters as deposed to by Mr Stott and Mr Freeman, and the documentary evidence comprised in the email and the circular resolution, were undoubtedly evidence. The question is whether they were sufficient to be 'evidence to the contrary' of the statements in the ASIC searches to the effect that Nicholas Barboutis had ceased to be a director and Mr Barboutis had been appointed as a director. That requires consideration of the formal requirements for the resignation and appointment of a director.

[30]

In the context of this case the requirements for resignation and appointment are drawn from the Corporations Act, the Shareholders Agreement and the Company's constitution. It should, in that regard, be noted that the Company's constitution provided that the replaceable rules of the Corporations Act do not apply to the Company.[58] Accordingly, the replaceable rule provisions do not need to be taken into account.
The starting point is the requirements for resignation. The Shareholders Agreement provided for two directors unless the shareholders otherwise determined (cl 5.1). There was no suggestion that Bullsbrook and Rilyla had agreed to increase the number of directors beyond two. Accordingly, if Mr Barboutis was to be appointed as a director, his appointment had to have been preceded by or be coincident with Nicholas Barboutis' resignation (the appellants not suggesting that Nicholas Barboutis had been removed as a director).
The Shareholders Agreement made no provision for resignation. In that regard the appellants correctly identify that cl 5.3 of the Shareholders Agreement - which requires written notice to be received at the Company's registered office - applies to removal of a director rather than resignation of a director.[59]
The Company's constitution confirms that a director may resign his or her office (rule 22.6(e)). No requirements are prescribed to effect a resignation; unlike many constitutions there is no requirement that a director resign his or her office by notice in writing to the company. Accordingly, all that was required for resignation was proper notice. Section 203A (a replaceable rule) provides that a director may resign by giving 'written notice of resignation' to the company at its registered office. However, the replaceable rules have been displaced. Moreover, s 203A is not exhaustive. A binding agreement of resignation may be reached by a director tendering his or her resignation orally and the company accepting that resignation.[60]
Where a director resigns he or she may give the ASIC written notice, in the prescribed form, of the resignation (s 205A(1)). To be effective the notice of resignation must be accompanied by the letter of resignation given to the company (s 205A(2)). However, notice to the ASIC by the director is not mandatory. By contrast, where the former director does not give notice of his or her resignation, the company must lodge notice, in the prescribed form, of the fact that a person has stopped being a director (s 205B(5)). Failure to do so within 28 days after the person ceases to be a director is an offence of strict liability (s 205B(7)).
This is an unusual case. There was never any communication between Nicholas Barboutis and Mr Freeman. It was therefore not possible for Nicholas Barboutis to have given or for the Company, by Mr Freeman, to have accepted an oral resignation. In these circumstances, subject to what is stated at [74] below as to the possibility of resignation through Mr Barboutis as Nicholas Barboutis' agent, prima facie there should be some documentary evidence in relation to any resignation on the part of Nicholas Barboutis in the form of a written resignation.
Moving from resignation to appointment, an initial matter of importance is that there is a statutory requirement that a person consent, by signature, to his or her appointment as a director. Section 201D of the Corporations Act provides:

[32]

The statutory requirement for a signed consent reverses an earlier decision in the Supreme Court of Victoria that an appointment as director subsequent to the registration of a company did not require consent in writing.[61] In the case of the Company the statutory requirement is consistent with the Shareholders Agreement. Clause 5.3 of the Shareholders Agreement has the effect that every appointment of director will not take effect until receipt of the written consent to act as a director (if that is later than the receipt of the notice of appointment).
The appellants accepted that there must have been a signed consent to act in order for Mr Barboutis to be validly appointed.[62]
The Shareholders Agreement and the Company's constitution contain a number of provisions as to appointment.[63] Relevantly:
1. By cl 5.1 of the Shareholders Agreement each shareholder is entitled to appoint one director. However, appointment only takes effect once both 'written notice of appointment' and 'written consent' to act as director is received at the Company's registered office (cl 5.3).
2. By rule 22.2 of the Company's constitution the Company, by ordinary resolution, may remove any director and appoint another director as a replacement.
3. By rule 22.1(a) of the Company's constitution the directors may appoint a person as a director to fill a casual vacancy. Indeed, where the number of directors is insufficient to constitute a quorum, the directors may act only for the purpose of increasing the number of directors or to convene a general meeting (rule 24.5).
A number of constructional issues arise in relation to these provisions. For example, is the cl 5.1 Shareholders Agreement appointment power spent after each shareholder makes its initial appointment or does the power continue? If the power continues, how - in the absence of resignation - does the shareholder effect a removal of its nominee so that the power may be exercised to appoint a replacement; for example, is there an implied power to do so? Is the power under rule 22.2 of the Company's constitution inconsistent with or something that may operate to assist the power under cl 5.1 of the Shareholders Agreement? Or, as held by the master, does rule 22.2 of the constitution provide the relevant mechanism by which the parties are to effect the entitlement under cl 5.1 of the Shareholders Agreement? Finally, is the rule 22.1(a) power to appoint to fill a casual vacancy consistent with the cl 5.1 Shareholders Agreement requirement that there be two directors and that each shareholder is entitled to appoint one director?
The parties only made substantive submissions on the third and fourth of these issues, ie the question of whether cl 5.1 of the Shareholders Agreement was inconsistent with rule 22.2 of the Company's constitution.
In the absence of considered submissions on the remaining constructional issues we consider it inappropriate to come to a conclusion on those issues. Nor, in our view, is it necessary to come to a conclusion on the question of possible inconsistency between cl 5.1 of the Shareholders Agreement and rule 22.2 of the constitution as is the subject of ground 3. Let it be assumed that the power to appoint under cl 5.1 of the Shareholders Agreement is never spent. Let it also be assumed that the exercise of such power of appointment may be effected outside of the mechanism provided by rule 22.2 of the constitution (eg by the shareholder itself making an appointment). In other words, contrary to the master's finding, let it be assumed that rule 22.2 does not provide the relevant mechanism to effect the entitlement under cl 5.1 of the Shareholders Agreement. As an alternative means of appointment, let it also be assumed that in the event of a vacancy in office the remaining director may appoint. In each case the appointee must provide a signed consent to act before the appointment and the consent must be retained by the Company. Moreover, on appointment pursuant to cl 5.1 of the Shareholders Agreement, cl 5.3 makes plain that there must be a written notice of appointment and that the appointment cannot take place until the Company receives the written notice of appointment at the registered office. So too, with both appointment under cl 5.1 or appointment to fill a vacancy in office, cl 5.3 of the Shareholders Agreement has the effect that the appointment does not take effect until a written consent to act is received at the Company's registered office.
In short, having regard to the two modes of appointment contemplated by the appellants' primary and alternative arguments that Mr Barboutis was validly appointed as a director of the Company, there should be documentary evidence in relation to any such appointment of the following nature:
1. in the case of appointment by the shareholder pursuant to cl 5.1 of the Shareholders Agreement - a written notice of appointment received at the Company's registered office;
2. in the case of appointment by Mr Freeman under rule 22.1 of the Company's constitution to fill a vacancy in the office of director - some manifestation of the appointment (in this respect the appellants relied on the ASIC Form 484); and
3. in either case - a written consent to act as a director received at the Company's registered office.
To complete the examination of the formal requirements for appointment, a company must notify the ASIC, within 28 days after appointment, if a person is appointed as a director. The notice must be in the prescribed form and give the personal details of the director.[64]

[34]

Once these formal requirements for the resignation and appointment of a director are appreciated, we are satisfied that the Company and Mr Freeman adduced 'evidence to the contrary' and thereby nullified the prima facie evidentiary provision in s 1274B(2) of the Corporations Act. There was evidence that there was no written resignation on the part of Nicholas Barboutis; there was also evidence that, post-December 2016, Nicholas Barboutis had purported to sign a document as a director of the Company. These matters constituted evidence to the contrary of resignation as a director by Nicholas Barboutis. There was also evidence that there was no written consent to act as a director on the part of Mr Barboutis. So too there was evidence that there was no written notice of appointment. These matters constituted evidence to the contrary of Mr Barboutis being validly appointed as a director. Mr Freeman's evidence in relation to the ASIC Form 484 is discussed at [75] below. This constitutes 'evidence to the contrary' so far as the appellants' alternative argument is concerned.
In answer to the respondents' contention that s 1274B(2) did not operate as evidence had been adduced to the contrary, counsel for the appellants contended that the evidence went no higher than that the relevant documentation was not on file. Counsel submitted that simply because the documentation was not in the Company's secretarial volume was not reason to conclude that the documentation did not exist. Counsel for the appellants argued that the ASIC Form 484 as lodged on 16 December 2016 did exist. Counsel also pointed to the late October 2016 email evidence that suggested an accounting firm had prepared ASIC forms contemplating Mr Barboutis' replacement of Nicholas Barboutis.[65] Counsel for the appellants contended that, on the balance of probabilities, someone prepared the appropriate forms, those forms were then signed, but they were never filed within the Company's secretarial volume.
Properly understood, those arguments go to whether, on the evidence, the master was in error in not finding it proved that Mr Barboutis was validly appointed as a director. They do not gainsay the proposition that the Company and Mr Freeman adduced evidence to the contrary as described in [68]. It is all very well to assert - without evidence as to where else the relevant documentation might be found - that the evidence as adduced established no more than that the materials were not within the Company's secretarial volume. As a matter of logic and commercial experience that is where documentation of this nature is kept. The appellants provided no evidence of any alternate place where the relevant records might be kept. In these circumstances the evidence of the absence of the relevant documents in the Company's secretarial volume constituted evidence to the contrary of Nicholas Barboutis' resignation and Mr Barboutis' appointment.

[35]

The enquiry then turns to whether, on the evidence as a whole, the master was in error in finding that Nicholas Barboutis had not validly resigned as a director and the appellants had not discharged their onus of proving that Mr Barboutis had been validly appointed as a director. These were both factual findings. The master enjoyed no significant advantage over this court in deciding these questions given that the way in which the trial was conducted resulted in the approach to fact finding and conflicts in the evidence as outlined in Tay Bok Choon v Tahanson Sdn Bhd. Even so it remains necessary for this court to conclude that the master's decision is wrong and should be corrected.
The two findings are connected. The Shareholders Agreement provides for only two directors. Thus Nicholas Barboutis' resignation had to precede Mr Barboutis' appointment. For that reason the two matters ought to be considered together.
The evidence on resignation was sparse. Mention has been made of the evidence as to absence of any written resignation and Mr Freeman's evidence as to the lack of any communication with Nicholas Barboutis. In affidavit evidence Mr Barboutis baldly asserted that Nicholas Barboutis had resigned in December 2016.[66] However, Mr Barboutis did not condescend to particulars as to how the resignation was delivered to and accepted by the Company. In terms of contrary evidence, the 16 March 2018 circular resolution is incompatible with Nicholas Barboutis having resigned as a director.
The appellants pointed to the ASIC Form 484 of 16 December 2016 as evidence that Nicholas Barboutis had resigned as a director (as well as being evidence of Mr Barboutis' appointment as a director). Counsel for the appellants asserted that the resignation and appointment must have happened if someone lodged the ASIC form. That submission is overly simplistic; it might equally be that someone thought that these events had occurred but, so far as the formal requirements for resignation and valid appointment were concerned, nothing had actually been effected. Nevertheless, if the ASIC Form 484 was lodged by Mr Freeman it was potentially significant. The lodgement might have provided a basis to infer that Mr Freeman (on behalf of the Company) was informed of, and accepted, Nicholas Barboutis' resignation through Mr Barboutis as an agent. So too it might have provided the necessary factual premise for the appellants' alternative argument (ie that Mr Freeman appointed Mr Barboutis to a vacancy in the office of director). Consideration must then be given to the finding, apparently made by the master at [47] of the primary reasons, that it was Mr Freeman, as opposed to Mr Barboutis, who lodged the change of company details with the ASIC on 14 December 2016.[67] The Company's purported cross-appeal challenged that finding. As we have mentioned, this point should be dealt with as if it were raised by notice of contention rather than the purported cross-appeal.
There is substance in the respondents' complaint that the finding is apparently based on affidavit evidence filed without leave after the hearing.[68] The finding also overlooks Mr Freeman's express evidence before the master at the hearing that he, Mr Freeman, believed that Mr Barboutis had lodged the form because it was not done by Mr Freeman nor by a firm of accountants as an ASIC registered agent and because Mr Barboutis had the Company's ASIC corporate key.[69]
The ASIC Form 484 itself purports to have been lodged by Mr Freeman. However, it is unsigned.[70]
It is not necessary to address whether the master was in error in referring to the further affidavits of Mr Barboutis sworn 23 August 2019 and Mr Taylor affirmed 21 August 2019. There was a clear conflict between Mr Freeman's affidavit evidence and Mr Barboutis' affidavit evidence as to who was responsible for the 14 December 2016 lodgement with the ASIC. The conflict could not be resolved on the affidavit evidence. In accordance with the principle in Tay Bok Choon v Tahanson Sdn Bhd the master should have concluded that she was unable to make a positive finding as to whether Mr Freeman lodged the ASIC Form 484 as opposed to Mr Barboutis. The finding at [47] of the primary reasons, as challenged by the purported cross-appeal, was in error and cannot stand. In the circumstances the ASIC Form 484 is of little, if any, assistance in resolving the question of resignation; and also whether there was a valid appointment as director.
At the hearing of the appeal counsel for the appellants accepted that the appellants' alternative argument (ie that Nicholas Barboutis had resigned and Mr Freeman had appointed Mr Barboutis to fill the vacancy in the office of director) was dependent on maintaining the master's finding that Mr Freeman lodged the change of company details with the ASIC.[71] That finding, challenged by the Company's purported cross-appeal, was erroneous. On this basis alone the appellants' alternative argument cannot succeed.
In written submissions the appellants argued that there was a significant amount of evidence of Mr Barboutis acting as a director.[72] Apart from the ASIC Form 484, which has already been addressed, that evidence may be summarised as follows:
1. Mr Barboutis had signed minutes of a meeting of directors[73] and financial statements[74] purporting to be a director of the Company. So too he had executed a lease for the Company purporting to be a director.[75]
2. There was correspondence in which the Company's and Mr Freeman's solicitor had described Mr Barboutis as a director.[76]
3. The Share Sale Agreement between Bullsbrook and Rilyla contemplated that Mr Barboutis would resign as a director on completion.[77]
4. There was a considerable amount of correspondence sent on Mr Barboutis' behalf, and his own affidavit evidence, in which it was asserted that Mr Barboutis was a director.
However, to point to evidence that Mr Barboutis was acting as a director misstates the relevant enquiry. The relevant question, as counsel for the appellants correctly accepted at the hearing of the appeal, was whether Mr Barboutis was validly appointed as a director of the Company. On that question the evidence was again sparse. The evidence of absence of a written consent to act as director or any instrument of appointment as a director has already been mentioned. So too has Mr Freeman's affidavit evidence that there was no meeting, agreement or resolution as to Mr Barboutis' appointment. Mr Barboutis asserted in affidavit evidence that he had been appointed under cl 5.1 of the Shareholders Agreement.[78] Mr Barboutis did not, however, give any evidence that either: (1) he had signed a written consent to act as a director and delivered it to the Company's registered office; or (2) Bullsbrook had executed an instrument of appointment under cl 5.1 of the Shareholders Agreement and it had been delivered to the Company's registered office. There was simply no direct evidence that either of those things had occurred.
Mr Barboutis' failure to give evidence in support of the factual contention that he signed and provided a written consent to act as director is significant. So too his failure to give any evidence in support of the contention that Bullsbrook delivered a written notice of appointment to the Company's registered office. Evidence is to be weighed according to the proof which it was within the power of one side to have produced and in the power of the other to have contradicted. It was to be expected that Mr Barboutis would have given such evidence had these events occurred. Counsel for the appellants sought to explain the lack of evidence from Mr Barboutis by suggesting that the issue did not emerge until immediately before the hearing. That cannot be accepted. In an affidavit sworn more than a month before the initial hearing Mr Freeman raised the issue of whether Mr Barboutis had been validly appointed as a director.[79]
The appellants' challenge to the master's findings essentially relied on the ASIC Form 484, Mr Barboutis having purported to act as a director (admittedly with acquiescence on the part of Mr Freeman) and speculation that the absence of formal documentation in the Company's secretarial volume did not mean that the documentation did not exist (there being a basis to believe that draft documentation had been prepared). The ASIC form has already been addressed; it does not have the significance that the appellants ascribe to it. The evidence that Mr Barboutis purported to act as a director does not answer the relevant enquiry. The suggestion that the necessary documentation may be found elsewhere had no evidentiary support and was without substance. Moreover, the evidentiary lacuna that was presented to the master was one where - had the necessary formalities been attended to - it was to be expected that Mr Barboutis could and would have given evidence detailing the steps taken to effect resignation and appointment. There was evidence inconsistent with Nicholas Barboutis having resigned and the Company having received a written consent to act or written notice of appointment at its registered office.
Viewing the evidence as a whole, the matters relied on by the appellants, both individually and collectively, could not sustain findings on the balance of probabilities that:
1. Nicholas Barboutis resigned his office as a director of the Company;
2. Mr Barboutis signed a written consent to act as a director which consent was received at the Company's registered office; and
3. a written notice of appointment, whereby Bullsbrook appointed Mr Barboutis as a director of the Company pursuant to cl 5.1 of the Shareholders Agreement, was received at the Company's registered office.
It follows that the master's findings, as challenged by grounds 2 and 4, were not in error. To the contrary, in relation to the appellants' primary argument, the master was correct to conclude that the appellants had not discharged their onus so far as it was necessary for the appellants to prove that Mr Barboutis was validly appointed as a director. The appellants could not do so in the absence of establishing that a written consent to act and written notice of appointment had been received at the Company's registered office. The alternative argument has already been rejected insofar as it relied on the ASIC Form 484 (see [78] above). But it too is dependent on proof of a written consent and written notice of appointment and must also fail for t[80]t reason.80 In relation to both the primary argument and the alternative argument, the evidence did not sustain a positive finding that Nicholas Barboutis had resigned his office.
Grounds 2 and 4 should be dismissed. It is not necessary to resolve ground 3. Even if it is assumed, consistent with success on ground 3, that appointment of a director may be effected outside of an ordinary resolution of the Company's members, the appellants did not demonstrate error in the master's finding that Mr Barboutis did not discharge the onus of proving that he was validly appointed as a director of the Company in compliance with the requirements of cl 5.3 of the Shareholders Agreement and s 201D of the Corporations Act.

[37]

The master acknowledged that Bullsbrook had contributed cash to the Company, referring to relevant documentary and affidavit evidence to that effect.[81] The master considered, however, that there was a dispute as to the proper legal characterisation of the advances made by Bullsbrook. On that basis the master decided that there was no conclusive evidence before her to establish the existence of a debt due by the Company to Bullsbrook.[82] The master was not satisfied that Bullsbrook was a creditor of the Company.[83]
The appellants contended that the master had made an error of fact in failing to find that a debt was owed to Bullsbrook by the Company. In substance the appellants submitted as follows:
1. Funding contributions could be made in the form of equity - by applying for shares - or by loan.
2. Descriptions such as 'working capital' as given by the parties were not determinative.
3. If the contributions had been an equity subscription, the result would have been the issue of new shares. However, no new shares were issued (the documentary evidence unequivocally demonstrated this to be the position). It followed that the funding contributions were loans.
4. The evidence was consistent with the parties' contributions, including those of Bullsbrook, being loans. In particular the appellants relied on the Company's 2017 financial statements and the Company's other financial records.
The respondents made two initial submissions in answer to ground 6. First, that the overwhelming evidence was that there was no advance of $250,000 by Bullsbrook to the Company in December 2016 as was claimed in correspondence sent by Bullsbrook's solicitors and a statutory demand subsequently issued on Bullsbrook's behalf. That may be so. But the timing error in the correspondence and other materials provides no substantive answer to the assertion that a debt was owed. Mr Freeman acknowledged that contributions had been made[84] and the contributions were recorded in the Company's financial records. Second, the respondents said that as the initial shares were issued with no funds being paid it did not follow that the contributions might not result in the issue of shares. That too is a mere attempt at deflection. The contributions having been made, the real question is what legal relationship resulted from the contributions. Put alternatively, having regard to the burden of ground 6, ought the contributions to be characterised as a loan; and, if so, on what terms?
At the oral hearing, however, counsel for the respondents developed a proposition that any debt constituted by the contributions was a disputed debt where the debt was disputed bona fide on substantial grounds.[85] There was also debate as to the repayment terms of any putative debt.[86] Counsel for the appellants accepted that the appeal could not result in the making of a winding-up order on the insolvency ground if all that was established was that Bullsbrook was a putative creditor with an alleged debt that was bona fide disputed on substantial grounds.[87]
In assessing ground 6 the starting point is to consider the relevant evidence.
There was a great deal of self‑serving affidavit evidence on the subject of whether the amounts paid by Bullsbrook to the Company were a loan or something else. [88] Mr Barboutis asserted that there was an amount due and payable pursuant to a loan account[89] (although also referring to a 'working capital contribution' to the Company).[90] Mr Freeman contested that characterisation claiming that the amounts were 'start-up capital'[91] and were contributions to the Company by way of 'working capital'[92] or a 'capital contribution'.[93] Mr Freeman asserted that the Company did not owe money to Bullsbrook[94] and that the capital contributions were not loans.[95]
The high point of the evidence in support of the contention that the debt asserted by Bullsbrook was bona fide disputed on substantial grounds were the following unchallenged statements in Mr Freeman's affidavit evidence:
1. Mine and Colin's [ie Mr Barboutis'] capital contributions were not loans.
2. Colin and I had from the beginning verbally agreed that we would invest the start-up capital required for the business venture and that we would split the profits made through the business.
3. At no time, did Colin and I discuss or agree that our capital contributions would be treated as loans to the Company.
4. I would not have entered into the business venture with Colin if he could require his capital contribution to be repaid but still retain 50% ownership and an entitlement to 50% of the profits while it was my idea and where I do all the work.[96]
Previously Mr Freeman had stated that he and Mr Barboutis had 'verbally agreed' to put in the start-up capital in equal shares. They prepared a budget of the start-up costs for the venture. The estimate was that $500,000 would be needed as start-up capital. Mr Freeman's evidence was that Mr Barboutis and he agreed that they would initially each put in $230,000 as the start-up capital. More would be put in if needed.[97] Cash contributions were made accordingly during 2017.
The tenor of the evidence was that the 'start-up capital' was mainly required to fit‑out premises by the construction of the indoor racing track. The construction work commenced in around February 2017 and was completed at about the end of April 2017.
The cash contributions were made in a context where the Shareholders Agreement addressed funding obligations. Relevantly, cl 10 provided:

[42]

These 2017 financial statements were the subject of evidence by Mr Freeman.[104]
Mr Freeman said that he attended a meeting at Calder Roth & Co's offices on 30 August 2018. At that time he was presented with a financial report for the Company for the year ended 30 June 2017. The report had been prepared based on figures provided by Mr Barboutis. Mr Freeman said that the financial report wrongly represented that the Company owed four loans. These included a loan owed to Bullsbrook. Mr Freeman said that the Company had no such loans. Mr Freeman's evidence was that he said to the accountant, in the presence of Mr Barboutis, that the financial report was not accurate but that it did not matter as it was his company anyway and he would clear it up when the last payment was made (referring to the purchase under the Share Sale Agreement). There was no response and Mr Freeman then signed the 2017 financial statements. Mr Freeman said that he was then handed an unsigned version of the 2017 financial statements which was different to the version he had signed (although, on examination, the non-current borrowings are the same).[105]
The 2017 financial statements are also the subject of what, on its face, is a directors' resolution by Mr Barboutis and Mr Freeman at a meeting at Calder Roth & Co on 24 August 2018. The purported minutes of the meeting were signed by Mr Barboutis as chairman.[106] However, Mr Freeman gave unchallenged evidence that there was no meeting of directors on 24 August 2018 - the only time he had ever attended Calder Roth & Co's offices having been on 30 August 2018.[107]
Mr Freeman's affidavit sworn 21 May 2019 attached a balance sheet for the Company as of April 2019 that did not refer to any liability due to Bullsbrook.[108] Little weight can be given to the omission of the alleged debt in that document. It was plainly prepared after proceedings were commenced and with an eye to the litigation. Beyond asserting that the December 2018 balance sheet was not an accurate reflection of the Company's assets and liabilities, and having earlier asserted that the 2017 financial report wrongly represented that the Company owed loans to Bullsbrook,[109] Mr Freeman did not provide any reconciliation between the April 2019 balance sheet and the December 2018 balance sheet.[110]
It is surprising that the hearing before the master proceeded without cross-examination of deponents or closer examination of the evidence bearing on whether Bullsbrook's contributions were by way of loan; and, if so, on what terms. The unsatisfactory state of the evidence necessarily impacts on the task of assessing the proper legal characterisation of the advances. The failure to fully explore the conversations concerning the 'start-up capital', and how the parties conducted their affairs - all in the context of the Shareholders Agreement seemingly providing a broad framework for funding obligations and the repayment of shareholder loans - affects what inferences or implications are properly to be drawn.
In circumstances where the appellants bore the onus of proof, and apparently credible denials on the part of those opposing the winding-up application are to be viewed as resulting in no more than a disputed allegation, the course that the hearing took has adverse consequences for the cogency of the appellants' contention that the cash contributions were loans that were repayable on demand.
In substance there is a dispute between the parties as to whether the cash contributions in the form of 'start-up capital' were by way of loan as opposed to an investment of capital. Those were not the only two possibilities. In theory, money could also be advanced by way of a gift - or perhaps even a loan not intended to be legally enforceable. However, no party contended that such alternative characterisations were open on the evidence. They are in any case contraindicated by the business context in which the contributions were made and by the terms of the Shareholders Agreement (which contemplated funding by way of either equity - in the form of new fully paid shares - or loan).
The respondents relied on Mr Freeman's characterisation of the contributions as capital. It must be acknowledged that Mr Barboutis also used the language of 'working capital' in relation to the contributions. The terms 'capital' and 'working capital' - or sometimes 'short-term capital' - are common parlance in commercial life. So too they are often employed as legal terminology. The authorities sometimes even speak of 'loan capital' - a form of funding which arises where 'capital is raised by loan'.[111] In this sense the loan funds so received are regarded as a capital asset. But the relevant transaction is nevertheless one by way of loan. On the other hand sometimes what is said to be a 'loan' cannot be characterised as such but is found to be a capital contribution. The characterisation question depends on the facts as found as influenced and informed by the context in which the contributions were made.
We accept, given the terms of the Shareholders Agreement, that the parties' funding obligations to meet the Company's funding requirements were to be satisfied by either equity subscription or shareholder loans. Thus, as the master correctly summarised,[112] the real issue was whether the advances were loans or were capital contributions.
We are unable, despite Mr Freeman's evidence, to conclude that it is arguable that Bullsbrook's cash contributions had the character of subscriptions for the issue of new fully paid shares. There is no documentary evidence to sustain such a conclusion. To the contrary, the documentary evidence unequivocally supports the cash contributions being made and received as a loan. In that respect the 2017 financial statements, as verified by Mr Freeman's signature, are compelling. But that is not the only relevant documentary evidence. The Company's books recorded the contributions as a loan. We acknowledge Mr Freeman's unchallenged evidence that he disputed the veracity of the 2017 financial statements. Mr Freeman nevertheless signed the financial statements and thereby unequivocally accepted that the financial statements presented the Company's financial position fairly. We also acknowledge Mr Freeman's evidence disputing the character of the contributions and referring to the contributions as a form of capital. While the terminology used is consistent with the funds being received as a 'capital asset' in the broader sense, that is not determinative of the proper legal characterisation of the underlying transaction. To the extent that Mr Freeman's evidence disputed that the contributions were received as a loan, he never went as far as to suggest that the contributions were by way of subscription for further fully paid shares. The evidence asserted a characterisation - ultimately a matter for the court - and in that respect was outside the principle in Tay Bok Choon v Tahanson Sdn Bhd.
In circumstances where, because of the way in which the hearing was conducted, the master had no significant advantage over this court in coming to factual findings, we are satisfied that the master was in error in not concluding that Bullsbrook was a creditor of the Company. The competing hypothesis - that the cash contributions were share subscriptions - had no support in the evidence and was contrary to the Company's books and records including financial statements as verified by Mr Freeman. There was no credible denial that there was a loan based on a contention that the contributions were by way of subscriptions for the issue of new fully paid shares in the Company. The master should have held that Bullsbrook was a creditor of the Company. Ground 6 should be upheld.
The appellants' success on ground 6 means that Bullsbrook is a creditor of the Company. It remains necessary, however, to consider the repayment terms of the debt.
A loan of money is repayable on demand in the absence of agreement to the contrary as to the terms of repayment. When the evidence is considered as a whole this is a case where, in our view, there is a serious question to be tried as to whether Bullsbrook's debt was repayable on demand. When regard is had to the evidence before the court there are other available possibilities which might be found to be the relevant repayment term once the issue is considered more fully at a trial where the evidence is properly presented and interrogated. For example, the loan might only be repayable on reasonable notice. Alternatively, when regard is had to cl 12.7 of the Shareholders Agreement, it might be that - absent agreement between the shareholders - repayment need only occur on a transfer of Bullsbrook's shares (at a time when the share transferee must provide an equivalent loan thereby providing the Company with the means to pay the debt). Accordingly, while, for the reasons already given, the debt itself was not disputed bona fide on substantial grounds, the matters relied on by the respondents do, in our view, give rise to a bona fide dispute on substantial grounds as to the terms of repayment of Bullsbrook's cash contributions to the Company - specifically whether, as implicitly contended for by the appellants, the debt is repayable on demand.
The following three matters, especially when considered collectively, demonstrate that there is a serious question to be tried as to the terms of repayment of Bullsbrook's loan to the Company in circumstances where roughly equivalent loans were made to the Company by its two shareholders so as to provide for the Company's initial funding requirements:
1. First, Mr Barboutis' and Mr Freeman's common account that the cash contributions were in the nature of 'working capital' or 'start-up capital'. Those descriptions, while consistent with a transaction by way of loan in the absence of any share subscriptions, are inconsistent with the contributions being repayable on demand. That understanding is broadly consistent with the more general tenor of Mr Freeman's affidavit evidence as to the contributions being capital contributions not loans - they were 'not loans' in the sense of being repayable on demand.
2. Second, the cash contributions were applied to the substantial costs involved in fitting-out the Company's premises and the construction of the Company's indoor racing track. The contributions followed a budget for such start-up costs and discussions between the representatives of the two shareholders to contribute funds to provide working or start-up capital to meet those budgeted costs. The nature of the outgoings to which the funding from its shareholders was applied, and the Company's nascent business and lack of other available resources, belies an objective intention that the funding so provided was to be repayable on demand. The Company was not going to be in a position to bring about repayment on demand. The commercial reality of the Company's financial position and its incorporators' business plan is inconsistent with an intention that one of the shareholders could unilaterally require repayment of its loan on demand.
3. Third, the cash contributions were made in the context of cl 12.7 of the Shareholders Agreement. That clause contemplated shareholder loans to the Company being repaid on a shareholder realising its capital investment in the Company, ie on transfer of the outgoing shareholder's shares in the Company to a replacement shareholder. Moreover, as the incoming shareholder was to put the Company in funds to bring about repayment of the loan to the outgoing shareholder, the repayment would not adversely affect the Company's cash flow or solvency. Nor would it require the Company to have to seek external borrowings from a third-party credit provider to effect repayment of the outgoing shareholder.
The last matter is particularly significant. It does more than manifest an arguable objective intention that the Company was to have an available resource to meet the loans from the shareholders. It is consistent with an objective intention - itself to be expected in a two shareholder quasi-partnership company such as the Company - that the shareholders will contribute and maintain proportionate contributions to the Company's funding requirements. That objective intention is also manifest in cl 10 of the Shareholders Agreement (see in particular cl 10.1 and cl 10.7.1). If shareholder loans were repayable on demand the expectation of equivalency manifested in cl 10 and cl 12.7 of the Shareholders Agreement would become illusory.
Mention has already been made of the unsatisfactory state of the evidence given the way in which the parties chose to conduct the hearing before the master. There was no cross-examination of Mr Barboutis or Mr Freeman as to the circumstances of the 'start-up' cash contributions. In circumstances where the repayment term is a matter of inference or implication from the evidence - and there are unresolved disputes on the limited available evidence as between Mr Barboutis and Mr Freeman - the position is analogous to that which prevails where factual allegations made on affidavit are credibly denied. The winding-up application must proceed on the basis that the appellants have not established that Bullsbrook's loan to the Company is repayable on demand - and, moreover, that it has not been established that the loan is presently due and payable.
This conclusion means that, contrary to the finding of the master, Bullsbrook had standing as a creditor to apply to wind-up the Company in insolvency. However, as it was not established that the loan was due and payable, Bullsbrook was a prospective creditor and required leave to make application.[113] The failure to establish that the loan was due and payable is also significant for the insolvency question to which we now turn.

[46]

What is required is an assessment of the available assets and financial resources of the company, and the company's likely liabilities and the probable dates that these will fall due, to determine whether the company will be able to meet its liabilities.
Thus the court considers the company's immediately realisable assets. The examination will involve consideration of the nature of the assets, and, in the case of a trading company, the nature of the business. The court must also assess the company's debts which are or will become due and payable. Having determined the debts, the court assesses the company's ability to meet them. The assessment is fact sensitive. For example, where debts are long term, and the company is making profits, it may be that a company with substantial indebtedness could trade its way out of difficulties.[120] Regard may be had to the company's recent trading history, income, current assets, other assets and their convertibility into money, ability to borrow money in time to meet its debts and the company's overall asset and liability situation. The question is to be decided as a matter of commercial reality taking into account the financial position and prospects of the company as a whole.
On appeal the appellants suggested that the question of insolvency was bound up with the question of whether Bullsbrook was owed money by the Company.[121] The appellants contended that the Company was 'clearly insolvent' if the Bullsbrook debt was established.[122] That contention was implicitly premised on an assumption that the Bullsbrook loan was repayable on demand meaning that it was presently due and payable. For the reasons given in addressing ground 6 the appellants' assumption has not been established: the question of insolvency falls to be assessed in a context where it has not been established that the Bullsbrook debt is due and payable.
The words 'as and when they become due and payable' in s 95A make it clear that while insolvency must be determined as at a particular time the determination calls for a degree of forward looking.[123] Consideration is given to the 'immediate future'.[124] How far into the future will depend on the circumstances including the nature of the company's business and, if it is known, of the future liabilities.[125] Where the question is one of prospective insolvency (as with a winding-up application) the court will be reluctant to look too far into the future because there will be too many unknowns and contingencies.[126]
There are limits to what future debts will be taken into account. The court is concerned with existing debts which will fall due, or, at the most, contingent or prospective debts. But there must be an appropriate degree of certainty as to those debts and whether (and, if so, when) they will become due and payable within the immediate future. The court does not consider whether circumstances may arise at some future time which will then cause the company to be in a position whereby it will not be able to meet its liabilities which will then exist.[127]
It was not established that Bullsbrook's loan to the Company would become due and payable in the immediate future. To the contrary, depending on what might, following a trial, be found as to the terms of repayment, it could even be that repayment is not to occur until a transfer of Bullsbrook's shares (at which time the expectation would be that the Company would be put in funds to meet the liability). In any case, contrary to the appellants' assertion that insolvency would inevitably follow if the Bullsbrook debt was established, the failure to establish that the loan was repayable on demand and is presently due and payable - or will become due and payable in the immediate future - means that the debt is not determinative so far as the question of insolvency is concerned.
It not being established that the Bullsbrook loan is presently due and payable - or will become due and payable in the immediate future - the Bullsbrook debt is not of immediate significance to the question of insolvency.
The appellants' argument on insolvency was heavily dependent on the Bullsbrook debt. However, ground 8 stood alone and, at least as it was expressed, was pursued irrespective of whether the Company owed a debt to Bullsbrook that was presently due and payable. Accordingly, it remains necessary to examine the appellants' challenge to the master's finding that the Company was not insolvent. Before doing so it is necessary to consider ground 9 (challenging the refusal to accept further affidavit evidence going to the question of solvency) and ground 7 (attacking the master's reliance on the availability of financial support from FMA). In then returning to consider the master's finding that the Company was not insolvent the analysis must proceed on the basis that it has not been established that Bullsbrook's loan to the Company must be repaid in the immediate future.

[48]

The appellants contended on appeal that the master was in error in refusing to accept into evidence the further affidavits of Mr Pearce and Ms Hamid. The affidavits were said to be further evidence that the Company was insolvent.
The parties accepted that the question of solvency must be assessed at the date of the hearing. There is authority that supports that position.[128] From there the master reasoned that post‑hearing events should not be accepted into evidence at all.[129] That conclusion does not follow. Post-hearing, one or both parties may seek leave to re-open; if leave is granted the 'date of the hearing' is then the final date on which the re-opened hearing concludes. In substance the appellants were seeking leave to re-open so as to rely on the further affidavits. Rather than simply reject the affidavits on the basis that they did not deal with a state of events known at the date of the initial hearing, the master should have considered whether the appellants ought to have leave to re-open so as to thereby extend the hearing. If leave was granted there might, if necessary, have been a further oral hearing. But even if the affidavits were simply considered on the papers the consideration of the further affidavits would still be occurring as part of the hearing before the master.
Ground 9 should be upheld to the extent that the master erred in not considering whether the appellants should have been granted leave to re-open to rely on the further affidavits of Mr Pearce and Ms Hamid.
The appellants' success on ground 9 is not dispositive of the appeal. This court must consider for itself whether there should have been leave to re-open; and, if so, the implications for the finding of insolvency. That necessitates, among other things, consideration of the affidavits insofar as relevant factors in the exercise of the discretion include the materiality of the evidence and whether the interests of justice would be advanced by its admission.[130]
Mr Pearce's affidavit sworn 20 June 2019 established that on 27 May 2019 the Australian Taxation Office (ATO) had issued a garnishee notice to the Company's bank due to failure to pay an amount of $116,825.05. By way of explanation, however, the solicitors for the Company had stated in correspondence to the solicitors acting for the appellants that:
1. The garnishee notice had been issued by mistake and the bank had not actioned it.
2. There was a short term payment arrangement in place between the Company and the ATO.
3. The payment arrangement was entered into because funds earmarked for the ATO remained frozen in the Company's bank account as a result of the dispute between the parties.
4. The frozen funds could be made accessible to the Company for its use in payment to the ATO if the appellants would join in providing the Company's bank with clear instructions as to the transfer of the funds.
It was also said that, were the garnishee notice to be introduced into evidence, the Company would seek to have an opportunity to address it by way of further affidavit evidence.
Ms Hamid's affidavit sworn 15 August 2019 referred to a further garnishee notice issued by the ATO, this time dated 29 July 2019, claiming an amount of $96,044.71.
In the evidence before the court there was support for the assertion made in the Company's solicitors' correspondence that the bank had frozen funds because of the dispute between Mr Freeman and Mr Barboutis. Indeed, Mr Barboutis himself gave affidavit evidence that the Company's bank froze its accounts on the basis that the bank was receiving conflicting instructions.[131] The solicitors acting for the appellants also referred to the bank having frozen the accounts thus preventing direct debits and halting pre-authorised payments.[132]
The appellants submitted that the further affidavits of Mr Pearce and Ms Hamid provided additional evidence that the Company was and is insolvent. That overstates the significance of the affidavits. The affidavits established that the ATO had issued garnishee notices because a tax-related liability was unpaid. The non-payment of debts is one indicia of insolvency. Here, however, the garnishee notices could be seen as an effective means to facilitate payment from the Company's own resources - its bank account - which could not be accessed by the Company due to the dispute between Mr Barboutis and Mr Freeman. There was a reason for the non-payment and the issue of the garnishee notices that was inconsistent with insolvency. Thus, while providing relevant evidence so far as the further affidavits demonstrated non-payment of a tax-related liability, the affidavits themselves did not establish insolvency. Nor were the affidavits necessarily inconsistent with solvency.
The further affidavits of Mr Pearce and Ms Hamid provided material evidence in the sense discussed in the previous paragraph. The circumstances before the master were that: (1) judgment was reserved; (2) the evidence concerned events post-hearing (ie it was fresh evidence rather than new evidence); and (3) the master had invited further submissions in any event. In those circumstances, provided the Company and Mr Freeman were afforded a reasonable opportunity to answer the further affidavits, it was in the interests of justice that the additional evidence be received. The master should have accepted the further affidavits into evidence.
However, for the following reasons, even taking the additional evidence into account, we are not satisfied that the Company was proven to be insolvent. Accordingly, while ground 9 should be upheld, it does not result in the appeal being allowed. Nor - while we will take into account the further affidavits of Mr Pearce and Ms Hamid in assessing whether the master was in error in finding that the Company was not insolvent - is it necessary to invite the respondents to provide affidavits in response to the further affidavits.[133]

[55]

Before the master there was no cross-examination of deponents. Thus there was no challenge to Mr Freeman's evidence that FMA had capacity to advance further funds to the Company should it be required. That was in a context where the unchallenged evidence was that FMA had advanced some $630,000 in the past of which $578,882 remained in the form of an interest free loan which was only repayable when the Company had the means to do so (or alternatively was to be converted to shares).[146] Nor, having reviewed the appellants' written submissions and the transcript of the oral hearing before the master, does it appear that there was then any suggestion on the part of the appellants that there was no or no sufficient evidence by which the master could be satisfied that FMA had the capacity to make a loan to the Company.
Mr Freeman's unchallenged affidavit evidence was evidence that FMA had capacity to advance further funds to the Company if required (albeit evidence that was unparticularised and unsupported by meaningful contemporaneous verification of FMA's financial position). The appellants' sole submission in support of ground 7 was that there was 'no evidence' by which the master could be satisfied of FMA's capacity. We are unable to accept that submission given the affidavit evidence referred to. That is all the more so when it is recalled that FMA had previously advanced some $630,000 most of which remained as a non-current loan. The fact that FMA had previously advanced significant amounts supported Mr Freeman's assertion of capacity. It was open to the master to conclude that FMA was able to and would loan further funds to the Company; it cannot be concluded that the master was in error in so doing. Ground 7 should be dismissed.
While, for these reasons, the master's finding of available financial support from FMA has been sustained, two matters should be appreciated. First, this finding is not determinative on the question of insolvency. The Company's access to further unsecured borrowing from FMA is simply one matter be taken into account as an aspect of the overall commercial reality by which the Company's solvency is to be judged. Second, the weight to be given to this finding is significantly affected by the lack of information as to the extent of FMA's capacity to provide further funding to the Company on a deferred payment basis.

[56]

The master summarised the evidence before her on the question of insolvency at [71] to [72] of the principal reasons. It is not necessary to repeat all of what was said by the master. The evidence was that:
1. The Company's balance sheet as of December 2018 had negative equity of $496,406.56.[147] However, this was impacted by non-current liabilities to Mr Barboutis of $227,968.84 (which the master did not accept)[148] and Bullsbrook of $243,835.97 (which, for the reasons previously given, is not established as being presently due and payable).
2. On loans being removed from the Company's balance sheet as of April 2019 the Company had current assets of some $223,000 and current liabilities of some $255,000 meaning that there was a current asset deficiency.[149]
3. However, the Company was trading profitably. In the six months to the end of April 2019 the Company had made a profit of $86,695.54.[150]
On appeal the appellants also sought to emphasise that the Company's balance sheet as at the end of April 2019 showed that the Company had available cash reserves of a mere $62,590.10.[151]
The master made a factual finding, unchallenged on appeal, that there was no evidence that the Company had been unable to meet its debts as and when they had fallen due.[152] In other words this was not a case where there was a history of failing to meet liabilities as and when they fell due. (The finding is, however, subject to the evidence of non-payment of the Company's tax-related liability as contained in the further affidavits of Mr Pearce and Ms Hamid.)
Two additional things enter the insolvency analysis. First, given the conclusion on ground 9, in assessing the question of insolvency we take into account the non-payment of the Company's tax-related liability and the consequential issue of the garnishee notices. However, in the unusual circumstance that the Company's bank account was frozen and unable to be accessed due to the dispute between Mr Barboutis and Mr Freeman, this is not strong evidence of insolvency. There was an alternative reason for the non-payment and issue of the garnishee notices that was inconsistent with insolvency. Second, there is the master's finding, sustained on appeal, that the Company had access to funds from FMA whereby money would, if required, be advanced to the Company as an unsecured loan on deferred payment terms. While this is a countervailing factor against a finding of insolvency, it too is not a strong factor given the absence of evidence as to the extent of FMA's capacity to advance funds to the Company.
None of the usual sort of evidence was adduced in support of the appellants' insolvency case. There was no projected cash flow analysis. There was no aged creditor analysis. There was no detailed examination of the Company's financial position and prospects by reference to the Plymin type indicia of insolvency. The appellants' argument that the Company was insolvent was for all practical purposes dependent on the contention that the Company was unable to pay the Bullsbrook loan.[153] However, for reasons previously given, the Bullsbrook loan is of limited significance in circumstances where because of the way in which the appellants presented their case it could not be established that the debt is presently due and payable or would become due and payable in the immediate future.
Once the evidence as so marshalled is considered as a whole it cannot be concluded that the master was in error in finding that the Company was not insolvent. In considering the Company's ability to pay its debts as and when they fall due in the immediate future it is not necessary to factor in the Company's ability to pay the Bullsbrook loan. The current asset deficiency is slight. It is ameliorated by the evidence of current profitability and, with the exception of the non-payment of the tax-related liability leading to the garnishee notices, the absence of evidence that the Company has been unable to meet its debts as and when they have fallen due. The availability of some further funding from FMA is relevant so far as the appellants rely on the current asset deficiency and the Company's limited available cash at bank. Having so assessed the Company's available assets and financial resources, and its relevant liabilities, the contended for conclusion of insolvency is not clear from a consideration of the Company's position in its entirety.
Ground 8 should be dismissed. So too ground 10 to the extent that it depends on the insolvency ground.

[58]

In respect of whether the Company should have been ordered to be wound-up on the just and equitable ground the appellants posed a single question:[154] was there a deadlock in the management of the affairs of the Company?
The allegation of deadlock depended on the appellants establishing that Mr Barboutis was a director of the Company. Since that aspect of the appeal has failed so too must ground 10 so far as it rests on the just and equitable ground. Ground 5 was not supported by written submissions and attracted little attention in the appellants' oral address. The appellants submitted that it related to the deadlock point but stood alone.[155] It is difficult to understand that submission. It is incompatible with the appellants' acceptance, at the hearing of the appeal, that the claim for winding-up on the just and equitable ground was based on the proposition that there was a deadlock.[156] In any case at the hearing before the master the contention was that Mr Freeman had made unilateral decisions for the Company without the knowledge, consent or approval of Mr Barboutis as co-director and, in so doing, had breached s 180 and s 182 of the Corporations Act.[157] The master resolved that on the basis that Mr Barboutis was not a director of the Company.[158]
Accordingly, having regard to how the case was presented before the master, ground 5 must also fall with the appellants' failure to establish that Mr Barboutis was a director of the Company.
Against that possibility, in apparent further support of grounds 5 and 10, in oral submissions counsel for the appellants argued that if Nicholas Barboutis never resigned as a director - and Mr Barboutis never became a director - then Nicholas Barboutis remained a director of the Company and that meant that there was a deadlock. Also, Mr Freeman was not free to do as he pleased with the Company and could be found to have breached his duties under s 180 and s 182 of the Corporations Act.[159]
There are two difficulties with that contention. First, before the master it was not the appellants' case that Nicholas Barboutis was a director of the Company. Indeed, that contention was inconsistent with the appellants' case before the master. Such a new case should not be permitted on appeal. As appears from the second matter now referred to, it is something that the Company and Mr Freeman could possibly have answered by evidence. Second, so far as there was relevant evidence, it was that Nicholas Barboutis had never communicated with Mr Freeman. In circumstances where Nicholas Barboutis had absented himself from the day-to-day activities of the Company's operations it is prima facie hollow to suggest deadlock and breach by taking action without knowledge, consent or approval on his part.
Ground 5 should be dismissed. So too ground 10 to the extent that it depends on the just and equitable ground. It should also be noted that, had the appellants been successful in establishing that Mr Barboutis was a director of the Company, the claim for a winding-up order on the just and equitable ground would have had to overcome the dispute resolution provision in cl 16 of the Shareholders Agreement and the master's unchallenged finding that the extreme remedy of winding-up was not appropriate as there was a clear possibility of an alternative remedy which would address the breakdown in the relationship. However, given the conclusions on grounds 5 and 10, nothing further needs to be said about those two matters.

[59]

The Company lodged a cross-appeal against the master's refusal to make a costs order in favour of the Company.
The cross-appeal required leave. [160] An appellate court will not, in the absence of strong reasons, interfere with an exercise of discretion on the question of costs.[161] It is necessary to demonstrate manifest error[162] or that the order stands outside the limits of a sound discretionary judgment.[163] The Company's written submissions in support of the cross-appeal did not set out to demonstrate either. To the contrary, the tenor of the submissions was that the Company was wholly successful in defending the winding-up application, there was no unreasonable conduct on the part of the Company and costs should have followed the event.[164]
The Company's submissions on the cross-appeal overlooked the apparent acceptance (before the master) on the part of counsel for the Company and Mr Freeman, as reproduced at [33] to [34] above, that in substance the Company's and Mr Freeman's costs were one and the same - a matter that continued to be accep[165] before this court.165
Counsel for the Company candidly informed the court that, given that orders had only been made permitting Mr Freeman to file and serve affidavits and written submissions, a concern had now developed about claiming costs so far as Mr Freeman was not a party. This was notwithstanding that before the master it was thought that it did not matter if the order was simply directed to Mr Freeman's costs because there was a complete overlap.[166]
Given the exchange between the master and counsel for the Company as to the question of costs, and the absence of any real attempt on appeal to identify an error in principle or outcome in relation to the costs order in the unusual circumstances before the master, the Company cannot establish express or implied error in the exercise of the master's discretion as to costs. Nor is there a miscarriage of justice inherent in the costs order as made. In all the circumstances the Company has not made out a proper basis for leave to appeal against the master's refusal to make a costs order in favour of the Company. Leave to appeal in relation to costs within the discretion of a primary court should not be granted simply because, on re-visiting the matter, a litigant harbours concerns as to a concession made before the primary court. A litigant is bound by the conduct of its case at trial.
Leave to cross-appeal against the master's costs determination should be refused. That aspect of the cross-appeal should be dismissed.

BARBOUTIS -v- THE KART CENTRE PTY LTD [No 2] [2020] WASCA 41 (3 April 2020)

At a glance

Court

Decision date

Before

Source

Judgment (130 paragraphs)

Legislation Cited (2)

Cases Cited (11)