Solicitors:
Boyd House & Partners (plaintiff)
Levitt Robinson Solicitors (first and third defendant)
Somerset Ryckmans (second defendant)
File Number(s): 2015/ 140812
[2]
Judgment (EX TEMPORE)
HIS HONOUR: At all material times, there have been 20,000 issued shares in the second defendant company Commercial Indemnity Pty Limited, all of which have been registered in the name of the first defendant John Gardiner, who has also been its sole director. The plaintiff Geoffrey Newling claims to be beneficially entitled to 10,000 of those 20,000 shares. Other claims advanced by the plaintiff in the originating process and points of claim are no longer pressed.
Mr Newling commenced working for Commercial Indemnity on a part time (two days a week) basis in about November 2007, selling rental bonds. He received 50% of the commission earned from the sales he introduced. He became a full time employee in about February 2008. In that capacity, he endeavoured to shift the focus of the company's business from rental bonds to the sale of petroleum bonds. It is not necessary for the purposes of this judgment to describe in any detail what that involved.
According to Mr Newling, in about February or March 2008 he had a conversation with Mr Gardiner at the Dry Dock Hotel in Balmain, to the following effect:
GARDINER: This is a good offer for you Geoff. I have a tax problem. I need to pay the ATO. I will give you 50% of CI and Corporate Indemnity for $25,000, and when and if the first dividends are payable I will take the first dividend for a further $25,000. But you will have to pay out George Watson on top.
NEWLING: That sounds fine. I will have to go and organise to borrow the money. The borrower will be Lorna and my company, G & L Newling Pty Limited.
GARDINER: That's fine. I need it as soon as you can get it. Once you have paid me the $25,000 I will give up 50 per cent of the shares.
A few weeks or so after this conversation, there was a further conversation, to the following effect:
GARDINER: I'm only willing to sell CI. And I'll pay out George Watson for the Corporate Indemnity shares.
NEWLING: Sure.
The reference to "CI" is to the second defendant company. The reference to Corporate Indemnity is to another company owned and operated by Mr Gardiner. Mr Watson was another person who then had an interest in Corporate Indemnity. Lorna is Mr Newling's wife.
Ultimately, Mr Gardiner did not give evidence in the proceedings. However he had sworn an affidavit, which was tendered by the plaintiff and received as an admission against interest. In that affidavit, he said that, in or around June 2009, he had a conversation with Mr Newling to the following effect:
NEWLING: John, I like the business and I would like to have an equity stake in it. Would you be prepared to sell me 50% of your shares in Commercial Indemnity?
GARDINER: I'm mindful of your previous business failure in the real estate business due to your preference for recreational drugs and alcohol.
NEWLING: I assure you I'm not into that any more, I'm clean.
GARDINER: Well, if you understake to no longer touch the drugs, I'll sell you 50% of my shares in CI.
NEWLING: What do you want for the shares?
GARDINER: I'll get back to you.
According to Mr Gardiner, the following day they had a further conversation:
GARDINER: So in relation to the shares, the way I see it is as follows. You pay me $25,000, I take $25,000 in management fees from the company, you become a director and shareholder of Commercial Indemnity, and we sign a partnership agreement which sets out our responsibilities, et cetera. Thereafter, we will each draw management fees from Commercial Indemnity as and when the business can afford to pay. Furthermore, management fees will be a direct derivative of what both "put in" to the business in terms of effort and commitment.
NEWLING: I agree, but I need time to get the money.
At another point in his affidavit, Mr Gardiner said:
I agree that I offered to sell 50% of the rental bond business to Mr Newling for $25,000.
On 29 June 2008, a cheque for $10,000, payable to "Commercial Indemnity", was drawn by Mr Newling's wife Lorna Newling on her account. On 7 October 2008, a sum of $15,000 was transferred from Mrs Newling's bank account to "J Gardiner". There is no direct evidence that Mr Gardiner drew the $25,000 payable to him as the "first dividend", but receipt of that sum by him required no act on the part of Mr Newling - it was entirely in the power of Mr Gardiner, who was the sole director and in control of the affairs of the company. There were undeniably subsequent distributions of income to (or as directed by) each of Mr Gardiner and Mr Newling, from which it might be inferred that Mr Gardiner had first taken anything to which he was entitled by way of "first dividend". Conspicuously, neither in the pleadings, nor in Mr Gardiner's affidavit, to which I have referred, is there to be found any positive suggestion that he never received that sum. In those circumstances, I infer that he did; but, even if he did not, Mr Newling was not obliged to do any more than allow him to draw that dividend, not to contribute it.
Mr Newling says that despite the payments, transfer of the shareholding was deferred by Mr Gardiner for reasons the latter attributed to taxation issues. Mr Gardiner's affidavit denied that, but that affidavit is in evidence only as an admission and not as positive evidence of Mr Gardiner's positions; accordingly I accept Mr Newling's version. However, the formalisation of the transfer was later deferred at Mr Newling's request, as he had exposures to BankWest from another venture in which he had been involved, and he requested and Mr Gardiner agreed to continue to retain Mr Newling's shareholding "in escrow".
Mr Newling's evidence reveals numerous business meetings with various third parties in which each of Mr Newling and Mr Gardiner, in the presence of and without objection or protest by the other, introduced themselves as partners. Mr Gardiner's affidavit contains an admission of this: he says that in relation to the relevant paragraphs of Mr Newling's affidavits, "I admit that I would have referred to Newling in business meetings as 'my partner'".
In July 2009, Mr Newling had made a further contribution of $7,500 to the company, and he and Mr Gardiner met with the company's accountant, Mr Moon, regarding the annual yearly accounts. According to Mr Newling's evidence, which was unchallenged in this respect, he raised the issue of the shareholding in a conversation to the following effect:
NEWLING: What's happening about the transfer of my shares?
MOON: The company still needs cleaning up before the shares can be transferred.
GARDINER: It will have to wait.
NEWLING: Okay.
On 30 June 2010, Mr Newling sent an email to Mr Gardiner, "John, can you get Mr Moon to transfer the shares to Mrs Lorna Lucille Newling", and specified her address, date of birth and nationality. To this, Mr Gardiner responded on the same day, with an email sent to Mr Moon and copied to Mr Newling:
As you are aware, Geoff and Lorna purchased half the shares in Commercial Indemnity Pty Limited some time ago and we need their shareholding reflected with ASIC. How do we go about this? Apparently there is some corporate key or password required.
On 15 March 2012, Mr Gardiner sent an email to Mr Newling:
As discussed this morning please confirm the CI shareholder is G & L Newling Pty Limited ABN, registered office, director details, et cetera.
Mr Newling responded to Mr Gardiner, with a copy to Mr Moon, setting out the ABN, registered office, name of director (being his wife Lorna Newling), and so on.
For various reasons, which are immaterial for present circumstances, the relationship between the parties broke down in 2013. Mr Newling spoke to Mr Gardiner about selling his interests in the company, and undertook some steps towards doing so - some of which, to some extent, involved Mr Gardiner. Mr Gardiner was aware of this. He never suggested that Mr Newling had no interest to sell.
On 5 November 2013, Mr Newling sent an email to Mr Gardiner, attaching the email of March 2012 to which I have referred, and thanking Mr Gardiner for his "kind words" (being good wishes for a medical procedure which Mr Newling was about to undergo) and continuing:
But due to my current health problem I want to get my house in order just in case. As per the attachment (email dated March 2012) please transfer my 50% shareholding in Commercial Indemnity Pty Limited to Mrs Lorna Lucille Newling (for whom date and birth and address was then given).
Mr Gardiner responded the following morning:
Thanks Geoff, I have spoken to my guy and all good this end but both CI and myself will require an indemnity from BankWest, Jamie Fuller etc before the transfer.
Mr Newling responded almost immediately:
John, the shares are going in Lorna's name, not mine, and she has nothing to do with Jamie or BankWest which by the way you can get a copy of the full release it's in the file in my office, please transfer ASAP.
Mr Gardiner responded a few minutes later:
Thanks Geoff, I will grab the file and contact them directly.
However, the shares were never transferred.
Although it was never admitted that there was a binding and enforceable agreement for the sale of the shares (or that Mr Newling was alternatively entitled to them by way of equitable estoppel), perhaps unsurprisingly in the light of the evidence recited above - no serious submission was made that there was not some contract in respect of the shareholding. However, two issues were raised in opposition to Mr Newling's claim that he was beneficially entitled to a 50% shareholding. The first was that it was said not to be established that it was Mr Newling, as distinct from his wife, or them jointly, or their company, who was the purchaser under the contract with standing to enforce it. The second was that (CTH) Corporations Act 2001, s 493A, was said to stand in the way of granting the relief sought.
[3]
Who was the purchaser under the contract?
I turn to the first issue. In neither Mr Newling's version of the contractual conversation of February 2008, nor in any of Mr Gardiner's versions of that conversation, was there any suggestion that anyone other than Mr Newling would be the purchaser. To the extent that Mrs Newling and the company were mentioned, it was as a potential source of funds and not as the purchaser. Notably, in Mr Gardiner's affidavit, in a passage to which I have already referred, he said, "I offered to sell 50% of the rental bond business to Newling for $25,000."
The defendants' suggestion that the plaintiff's wife or their company might be the purchaser is founded on a number of matters - namely, that the source of the payments of the consideration was Mrs Newling's account; that at some stage Mr Newling requested that the shares be transferred into his wife's name, that at other points, Mr Newling requested that the shares be transferred into the company's name, that distributions of profit from the company were made by way of management fees payable to Mr Newling's company, G & L Newling Pty Limited; that in various statements of financial position provided to BankWest, when it was prosecuting a claim against him, he did not disclose any interest in Commercial Indemnity; and that claims and proofs of debt in respect of ongoing payments from the company were made in the name of his company G & L Newling, rather than in his own name.
While it is true that the Court may have regard to post contractual conduct for the purposes of identifying who are the true parties to the contract, the matters to which reference is made by the defendants do not identify the true party to the contract any better than the actual contractual conversation, which on its face was not ambiguous. The source of the payments being Mrs Newling, is entirely equivocal, just as it would be if the source of the payments was a borrowing from a bank. Reference was made in the contractual conversation to their company G & L Newling as a potential source from where the funds would come. That does not mean that it is the purchaser under the contract. The fact that distributions by way of management fees were made to Mr and Mrs Newling's proprietary company, G & L Newling Pty Limited, is also entirely equivocal. It is notable that equivalent distributions were made to Mr Gardiner's proprietary company, Corporate Indemnity, although it was he and not his company that was the registered shareholder in Commercial Indemnity. Consistently with it being Mr Newling's service company, G & L Newling was paid the management fees by way of a distribution of income from Commercial Indemnity. It would then follow that the proper company to make a claim for unpaid fees, and the proper company to lodge a proof of debt for unpaid fees which were believed to be payable, would be the proprietary company that was receiving those fees, and not the beneficial shareholder. The failure to disclose an interest in Commercial Indemnity in the statement of financial position was less than candid, and does Mr Newling no credit; but it is so obvious on the face of the evidence generally that he had such an interest that this cannot outweigh the overwhelming evidence in the opposite direction.
Mr Newling said that, at the time of the contractual conversation in February 2008, he had not thought about in whose name the shares would be held. In my view, that is almost certainly the case, and I accept it. He subsequently, from time to time, changed his intention as to whether the shares would be held by him personally, by his wife, or by their company. The objective evidence is entirely consistent with him as purchaser and deciding and directing into the name of which entity the shareholding would be transferred. It is plain that he was taking into account the fiscal consequences of where the shares would be held, and a desire to protect them from the creditors that were then circling him.
It seems to me that, as between Mr Gardiner and Mr Newling, there was never the slightest doubt or question but that Mr Newling was the purchaser. There are two ways of testing this. First, at no stage during the communications that took place between the parties up to these proceedings - and indeed up to the eve of the hearing - was there any suggestion that anyone other than Mr Newling was the contractual party. The issue was raised for the very first time in the defendant's written submissions, a day or two before the hearing. It did not appear in the pleadings, and it did not appear in the defendant's affidavit material that had been served. Secondly, if one puts the boot on the other foot and asks who, after the conversation of February 2008, the defendant could have sued for the price had the plaintiff not paid the $25,000, the position is very clear: there would have been no basis for suggesting that Mrs Newling had undertaken any liability or that Mr Newling was contracting as her agent on her behalf, nor would there be any basis for suing G & L Newling Pty Limited. The only person who Mr Gardiner could have sued for the price was Mr Newling.
Accordingly, I am very comfortably satisfied that Mr Newling, and Mr Newling alone, was the purchaser under the contract with standing to enforce it, albeit that he is entitled to direct a transfer to his wife, his company (subject to the corporate constitution) or whomever he may please.
[4]
Does s 493A stand in the way of granting the relief sought?
That then brings me to the second issue. Corporations Act, s 493A, relevantly provides that a transfer of shares in a company made after the passing of a resolution for a voluntary winding up is void, except if the liquidator gives written consent and either the consent is unconditional, or (if subject to one or more specified conditions) those conditions are satisfied, or the Court makes an order authorising the transfer. The section provides that the liquidator may give consent only if satisfied that the transfer is in the best interests of the creditors as a whole; that if the liquidator refuses to give consent, the prospective transferor or transferee or a creditor may apply to the Court for an order authorising the transfer; and that, if satisfied on such an application that the transfer is in the best interests of the company's creditors as a whole, the Court may authorise the transfer. The liquidator is entitled to be heard in proceedings before the Court in relation to such an application. Substantially similar provision is made in connection with a court ordered winding up (as distinct from a voluntary winding up) by Corporations Act, s 468A.
The plaintiff commenced these proceedings by originating process filed on 12 May 2015, claiming a declaration that he was entitled to a 50% shareholding; relief for oppression, including a compulsory purchase order against Mr Gardiner; and, alternatively, that Commercial Indemnity be wound up for oppression or on the just and equitable ground. On 15 June 2015, the company resolved that it be wound up. (Presumably there was no declaration of solvency, because the ASIC Register records the winding up as a creditor's voluntary winding up).
Once again, the issue concerning s 493A was first raised in the defendant's written submissions. Following its being raised in that way, the plaintiff's solicitor sought to communicate with the liquidator, by letter dated 7 June 2016, seeking the liquidator's consent to a transfer. Unsurprisingly, there was no formal reply from the liquidator given the timeframe; but in a conversation with the plaintiff's solicitor on 8 June 2016, the liquidator was asked if he had a position on the matter raised in the letter, and responded, "My position is that if the Court orders me to do something, I will do it."
On the face of that evidence, it cannot be said, at this stage, that the liquidator has consented for the purposes of s 493A, nor that he has refused to consent. The plaintiff seeks no relief under s 493A. However, the defendants submitted that the plaintiff should not be granted the declaratory and specific relief he seeks, as it would be contrary to s 493A to do so, and would effectively involve endeavouring to enforce a transfer in the face of a statute that made it void.
In my view, that is not the effect of s 493A. The section voids the legal transfer, not the contract which precedes the transfer, nor any equities arising under that contract. Even if consent to the transfer were refused by the liquidator, the transferee is still entitled in equity to the benefits attached to the share and would be entitled to have the legal owner account for them, including any distribution of surplus made to the shareholder by the liquidator. Moreover, a declaration that the plaintiff is beneficially entitled to the shares in question and the presentation of a duly executed transfer would provide the basis for requesting the liquidator's consent.
These issues were resolved in Biederman v Stone (1867) LR 2 CP 504, which concerned the predecessor section of s 493A, namely Companies Act 1862 (25 & 26 Vict. C. 89), s 131, which provided that:
[W]henever a company is wound up voluntarily, the company shall from the date of the commencement of such winding up cease to carry on its business, and that all transfers of shares, except transfers made to, or with the sanction of, the liquidators, taking place after the commencement of such winding up, shall be void.
The defendant in that case refused to execute a transfer, by reason that the consent of the liquidators had not been obtained. The Court held that the statute made the execution of a transfer without the sanction of the liquidators void, but not illegal, and that the defendant was liable to an action for refusing to execute the transfer, whether it was the duty of the purchaser or of the vendor to obtain the required sanction. Byles J said (at 508):
The defendant is bound to execute the transfer. There is nothing illegal in it. The statute says that the transfer shall be simply void if the assent of the liquidator to it is not obtained. It may be that it is not the duty of the defendant to obtain such sanction. But at all events he must do that which he has contracted to do. He must execute the transfer valeat quantum. If the assent of the liquidator is obtained it will be operative, otherwise not.
Keating J said:
The breach substantially alleged in both counts is, that the defendant did not execute a transfer; and his answer is, "I did not execute the transfer because no assent of the liquidator to the transfer was obtained, and it was not my duty to obtain it." I do not, however, find that the assent of the liquidator is imported into the contract between these parties; nor do I find that there is any illegality in the execution of a transfer without such assent. It is unnecessary to say what will be the position of the plaintiff if he is unable to obtain the assent of the liquidator; but the defendant has contracted to execute a transfer, and he must perform his contract.
Montague Smith J said:
I am of the same opinion … The substantial question upon both the pleas which have been demurred to is, whether the defendant was bound to execute a transfer of the shares. The sale was made by the plaintiff on the defendant's account, according to the rules and regulations of the Stock Exchange; the second count, which is precise, so avers. Now, it has been held in a great number of cases that persons buying or selling stock or shares through members of the Stock Exchange are bound by the rules which govern the transactions of that body. The defendant, consequently, was bound to execute a transfer of these shares and complete the sale unless there is some rule of law or some statute which would make it illegal for him to do so. This Court has already held, in the two cases which have been referred to, that there is no illegality of contracts of this nature. The only other answer which the defendant has attempted to set up is, that to ask him to execute a transfer of the shares in question is calling upon him to do a nugatory act. This turns upon the meaning of the 131st section of the Companies Act... It may be that the defendant's execution of the transfer may not operate as an effectual conveyance of the shares, but it will be a step towards it. This is not like the case put, of a covenant in a lease not to assign without the licence of a lessor.
The two cases to which Montague Smith J referred were Chapman v Shepherd; Whitehead v Izod (1867) LR 2 CP 228, which concerned the corresponding section relating to a court ordered winding-up (Companies Act 1862, s 153), as distinct from a voluntary winding-up. It differed from s 131 (and from the current s 468A) in that it only avoided transfers between the time when the petition was filed and the making of the winding-up order; once the winding-up order had been made, the contributories were fixed and there was no prohibition on or avoiding of transfers after that date. The Court held that a contract for the purchase of the shares entered into but not completed by transfer before the presentation of a winding-up petition, was not rendered void by s 153. In other words, it was only the transfer and not the contract that was avoided, and it was only during the period between presentation of the winding-up petition and the making of the winding-up order.
The rationale was explained in the later case of Rudge v Bowman (1868) LR 3 QB 689, in which Blackburn J said of s 153 (at 696):
The object of this section is obvious, inasmuch as when a petition has been filed any shareholder might transfer his shares to an insolvent person, and get him registered, so as to get rid of his own liability, and the register might thus be made to consist of persons who had nothing to lose, the legislature intervenes, and says, that between the petition and the order no transfer of shares shall take place, unless the Court otherwise orders... But whatever this may mean, a transfer may be made even in the interval if the Court chooses to sanction it; and I have no doubt the Court would allow a transfer from a pauper to a rich man to be registered, although not the converse. As soon as the list of contributories is fixed, although no transfer can be made till after that, I see no objection in substance to a transfer of shares.
Again, this demonstrates that what is avoided is merely the legal transfer, and not the contract from which it springs, nor the equities that arise from that contract.
What was said in Biederman v Stone can equally be applied in this case. Whether or not the liquidator ultimately consents to the transfer, the declaration of the plaintiff's beneficial entitlement and the execution of a transfer to the plaintiff is a step towards obtaining the liquidator's consent. Whether or not the liquidator consents, the purchaser's equitable rights attach to the shares and their emoluments in any event. The plaintiff can then seek the liquidator's consent and, if it is not forthcoming, seek an order from the Court (having first joined the liquidator) and, even if the Court does not make an order as against the liquidator, can still enforce his rights in equity against the legal holder of the shares.
There is, accordingly, utility in granting the relief sought.
[5]
Costs
The plaintiff's case against the third defendant was effectively abandoned at the interlocutory hearing, a couple of weeks ago. The plaintiff's case against the first defendant wholly succeeded in respect of the claims 1 and 2 in the originating process, and was not pressed in respect of the oppression suit - although its abandonment really became apparent only a couple of weeks ago at the interlocutory hearing. None of the issues on which the plaintiff failed occupied any time or evidence at the final hearing, but they would have added to the costs of the proceedings overall.
The first defendant is the sole shareholder in the third defendant. It is highly undesirable to have multiple costs orders defined by reference to issues arising out of the one set of proceedings, and preferable to make a single order that covers all of the issues, albeit on a "broad axe" basis. In principle, the plaintiff should pay the third defendant's costs; the first defendant should pay the plaintiff's costs of the claims for relief in paras 1 and 2; and the plaintiff should pay the first defendant's costs of the oppression suit. As a matter of practical justice, having regard to the time spent on the various issues, I think that will be achieved by ordering that the first defendant pay 75% of the plaintiff's costs of the proceedings, and that there be no other order as to the costs of the proceedings.
As to the submission that the plaintiff's costs should be assessed on the indemnity basis, while the merits of the defences to which I have referred are such as to have caused me to consider making an indemnity costs order, I am not persuaded that the line that warrants an indemnity order, which involves the reckless or wanton incurring of costs, has quite been crossed in this case. Not least because there have been significant procedural delinquencies on the plaintiff's side in the past, which have also increased the overall costs of the proceedings.
[6]
Orders
For those reasons, the Court declares that:
1. The first defendant holds 10,000 shares in the second defendant, being 50% of the total shareholding in the second defendant, on trust for the plaintiff.
The Court orders that:
1. The first defendant execute and deliver to the plaintiff a transfer in registrable form of 10,000 shares, being 50% of shareholding in the second defendant, within 7 days.
2. Save insofar as any interlocutory costs order otherwise provides, the first defendant pay 75% of the plaintiff's costs of the proceedings.
[7]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 15 August 2016