Cassegrain & anor v CTK Engineering Pty Limited & anor

4277/04 THOMAS JEAN ROGER CASSEGRAIN & ORS V CTK ENGINEERING PTY LTD & ORS JUDGMENT Outline 1 This judgment deals with two interlocutory applications. The first is by the plaintiffs who seek the appointment of a provisional liquidator to the first defendant, CTK Engineering Pty Limited (CTK). The second is by CTK seeking security for costs from the plaintiffs. In the substantive proceedings the plaintiffs, by originating process filed on 2 August 2004, seek an order for the winding up of CTK on the just and equitable ground and shortly put for oppression. Other orders are sought but they are of no consequence here. Facts 2 There are two classes of shares in CTK. The holders of the "A" class shares have the right to appoint directors (who must each hold an "A" class share) and the right to vote at meetings of CTK. They control it. Holders of the "B" class shares have the right to receive financial reports and until recently the right to attend meetings, but not to vote at those meetings. They have the right to receive such dividends as are declared by the directors and the right to participation in the distribution of surplus assets on winding up. 3 Most of the background and history relevant here is described in some detail in the judgment of Barrett J in Dunn v CTK Engineering Pty Ltd [2002] NSWSC 365. I will not repeat it, as this is an interlocutory matter. 4 The plaintiffs each hold 551 "B" class shares in CTK. That total of 1,102 represents 59% of the "B" class shares. The second defendant, Claude Cassegrain holds one "A" class share and 146 "B" class shares. The other "B" class shareholders, apart from the second defendant and a Mrs Cameron have signed a document stating that they support the plaintiffs in these proceedings and in the application for appointment of a provisional liquidator. 5 There are a number of facts put forward by the plaintiffs to support their claim in the substantive proceedings for winding up. The main matters are:

(a) that it was accepted in the Dunn proceedings, and it has been confirmed since by the directors and later the sole director of CTK, that the intention was to wind up CTK once the landholdings had been sold. Those landholdings were the major asset of CTK at the time of the Dunn proceedings. Sale of all the land was completed by September 2002;

(b) that in spite of inquiries by "B" class shareholders, the directors failed to disclose what they had done with the proceeds of sale;

(c) that in fact the proceeds of sale were applied: (i) in part to lend $150,000 to Oceania Agriculture Limited, a company controlled by the second defendant as director in which a company controlled by the second defendant held all the shares. This loan appears to have been secured by an unregistered bill of sale; (ii) in part on loan of $324,000 to Felicity Cassegrain, the wife of the second defendant, secured by unregistered second mortgage; (iii) in carrying on a tea tree business formerly carried on by OAL as manager under a managed investment scheme.

(d) that the loans to OAL and Mrs Cassegrain were not repaid until these proceedings commenced by which time they were overdue;

(e) that CTK adopted a new constitution as a result of which it was no longer necessary to hold annual general meetings, which up to that time at least had given the "B" class shareholders an opportunity to question the directors;

(f) that when the OAL loan was repaid the sum of $72,000 was immediately paid back to OAL for lease fees under the agreement under which it is said CTK acquired the right to harvest the tea trees on certain lands, it having leased certain machinery from OAL to enable it to do so. The sum of $72,000 represented payments not due under the document but well in advance, including for a period when any purpose for which such a lease would be required would have passed;

(g) that the tea tree business is making losses, that these may continue, that there is no documentation assigning to CTK the produce of the trees grown on land owned by a company in receivership, leased to another company and sub-leased to OAL, with whatever rights CTK may have being subject to consent of the lessor and sub-lessor, which consent is not shown to have been given;

(h) that CTK has operated with only one director contrary to its Articles and later constitution; that the appointment of the son of the second defendant as a director was invalid as on appointment he did not hold an "A" class share, and in any event he is young, inexperienced and has nothing to contribute as a director. 6 There are other complaints and allegations made some of which may go to a consideration as to whether or not an order for winding up of CTK should be made. For the most part the significance of the matters I have listed will be considered at the final hearing fixed to commence on 14 February 2005. This action was commenced, as I have said, on 2 August 2004. The evidence is complete or is almost complete. It has been treated as urgent and given an early hearing date. 7 The second defendant, Mr Cassegrain, does not appear to dispute that it is appropriate to wind up CTK and he has stated that this will be done, although naturally he would prefer a members' voluntary winding up rather than a court ordered winding up. However, he says that two things must be done before the winding up can take place. These are: (a) to determine the position of a debt claimed owing to CTK by Expressway Spares Pty Ltd; and (b) to establish whether or not Mr Dunn is in fact entitled to the 290 "B" class shares held in CTK in his name or whether his correct holding is 100 shares. The view of the second defendant is CTK cannot be wound up until all the assets are held in cash and the shareholdings determined. In the meantime he concluded that it was proper to invest the proceeds of the sale of the land in the loans which have now been repaid and in the tea tree business. 8 Whether or not these are good reasons, particularly in respect of the claimed debt having regard to earlier proceedings arising on statutory demand served on Expressway Spares, which demand was set aside by Justice Austin some years ago with nothing being done in the meantime it is not necessary to determine here. That may be relevant to the trial. The same applies to the shareholding claimed by Mr Dunn. These matters are quite irrelevant to the claim for appointment of a provisional liquidator, particularly in view of the early hearing date now obtained. 9 Of all these matters discussed, the only ones relevant to the application for a provisional liquidator are the dealings with the proceeds of sale of the land. It was not until these proceedings commenced that the plaintiffs became aware of the loan to OAL and the loan to Mrs Cassegrain. Nor were they aware of the involvement in the tea tree business. The response by Messrs Burns, solicitors of 17 August 2004 on behalf of CTK to a letter from Messrs Turks, solicitors for the plaintiffs in this matter dated 13 May 2004, appears deliberately not to disclose relevant matters, but again as the loans have been repaid they pose no risk to the company now. It can be accepted that the defendants will not allow CTK to make any further such loans before the hearing in view of the interlocutory orders in place as any such loans would not be in the ordinary course of business of the company. Those matters, therefore, do not pose any present threat to the company and should be disregarded when considering the application for appointment of a provisional liquidator. 10 I turn to the tea tree business. The arrangements between CTK and OAL seem to be restricted to a document called "Machinery Lease Agreement" dated 2 September 2003. Under this two page document OAL leases specific equipment to CTK from 1 September 2003 "until such time as CTK has completed two harvests and sold the proceeds of two harvests". The consideration stated to be given by CTK was payment of $70,200 per annum lease fee by monthly payments; maintenance of the leased equipment; maintenance of a property called "Minnamurra" in accordance with agricultural practice, and establishment of markets for the tea tree oil and tea tree mulch. The consideration stated to be given by OAL was (a) a warranty that it was entitled to sub-contract to CTK the rights to enter the property, harvest the crop and assign the crop and its proceeds; (b) to pay rates and taxes on the land; (c) to replace capital equipment as required; and (d) to maintain its website and pass on to CTK all contacts and inquiries of the sale of oil and mulch. 11 On any view to enter into this arrangement on the basis of this document was a high-risk venture. The warranty of the right to assign was not itself an assignment. In addition the lease of the land on which the trees were planted and the sub-lease included covenants restricting the use of the land to use in accordance with a managed investment scheme project deed which has come to an end. It is apparent the access to the trees was and is by no means secure and the rights of original investors in the scheme are uncertain. 12 The evidence is clear that although Mr Cassegrain, in figures put before Mr Terp, the other director of the company at the relevant time, considered the prospect was likely to be profitable, this expectation has not been met, at least up to the present time. There was a small loss of either $18,697 or $33,697 from October 2003 to 30 June 2004. There is an estimated loss - based on closing stock figures - of $20,202 for the period from 1 July 2004 to 8 October 2004. It is said that there will be increased production over the December period and perhaps for the two months after that. There is no certainty of future production and no evidence of markets for the oil and mulch, which the second defendant expects to be produced from the plantation. Unless there are markets for the oil and for the mulch, and it appears at least there is a possible market for the mulch, expenditure incurred in harvesting the trees will not be recouped. Mr Humphreys, one of the authors of the joint report but otherwise an expert engaged by the plaintiffs, considers that even if the claimed expected harvest of oil and mulch is produced then the return will not be any better than having the money invested on bank deposit. As he has seen nothing to show that there are contracts in place or possible contracts for the sale of the product, his opinion would be that the prospect of a loss is high. The expert engaged by the defendants has a different view, but that different view appears to be based on the claimed prospect of oil sales to Israel. If there was any real prospect of this then one would have expected the evidence to be put forward on this application. 13 There are two further matters requiring comment. One is that even if the forecast production levels are achieved, sales of all oil produced may not be achieved in the year ended 30 June 2005. On the expected attitude of Mr Cassegrain that would just defer any final decision on liquidation as the assets of the company would not be held in cash. The other matter is that the particular rights of the holders of classes of shares must be taken into account as explained by Barrett J in the other proceedings. In the ordinary course the "A" class shareholders of CTK decide the business of the company. Conclusions 14 Two matters are important. The first is that it is conceded by the defendants that there is a serious question to be tried in the substantive action. That concession is properly made. All that need be said about it is that the case of the plaintiffs is one of reasonable strength. The second matter said to be of significance is that CTK is solvent. Although counsel for the defendants places some reliance on this, it is really a matter of more significance in application for a provisional liquidator made in creditors' winding up proceedings, based on insolvency. This action is between members of the company entitled to surplus if a winding up order is made or if the company is the subject of a voluntary winding up. Their interest is to preserve assets available for distribution to them if there is to be a winding up. 15 It is clear that Mr Cassegrain is intent on continuing the operation. I think it can reasonably be concluded that he did not want the "B" class shareholders to have early information about the operation. It can reasonably be argued that it was not in the interest of CTK to enter into an agreement to pay lease fees for equipment after the harvest and until the sale of two harvests as most of the equipment will not be needed after harvest. It is certainly possible that a person in control, other than Mr Cassegrain, could form an opinion that the risk of continuing with the harvest is one which could not be justified in the interests of the company and its "B" class shareholders. 16 It can certainly be accepted that "the appointment of a provisional liquidator pending adjudication upon the petition for winding up, is a drastic intrusion into the affairs of the company and is not to be contemplated if other measures would be adequate to preserve the status quo": Zempilas v J N Taylor Holdings Limited (No 2) (1990) 55 SASR 103. The status quo here however means preserving the assets of the company so that the consideration is whether there is a reasonable expectation or risk that the financial position of the company will be reduced if the tea tree operation continues. I have come to the conclusion that the possibility of such a risk is sufficient to justify the appointment of a provisional liquidator so that that person can make an independent decision of whether or not the operation should continue. It has been forcibly put by senior counsel for the defendants that all this will do is to involve cost and that Mr Lord, who is put forward as the provisional liquidator, will have to use the services of Mr Cassegrain and obtain his advice on the limited question. That may be so but he can consider that advice but he need not accept it. I consider that a proper case for an appointment has been made and will make an order accordingly. 17 This is a matter where I consider an undertaking as to damages is required. In cases of the appointment of a provisional liquidator this is a discretionary matter, but one of the factors which bears upon my consideration is the very limited rights under the constitution of the "B" class shareholders. Subject to their giving the undertaking as to damages to the court, I will make the order for appointment of Mr Lord. Security as to costs 18 I indicated at the hearing that I proposed to make an order for security for costs. That would be limited to future costs. It was put to me that in cases where there was a relevant treaty such an order should no longer be made, and all that should be done is to make an order for costs of registering and enforcing the judgment overseas. I am not satisfied this is a procedure which should always apply particularly in this type of company litigation. I have, however, given some further consideration to this in view of the assets in Australia of the two plaintiffs. Apart from those assets it appears that they are young people, who are both students, resident in Paris. If satisfactory arrangements can be given for security being made over their shareholdings in CTK I would consider that security to be sufficient. 19 The claim for costs is set out in the affidavit of Katherine Yager sworn 14 October 2004. The amount claimed is $119,815.17. From that figure should be deducted the amount of costs incurred to date, so that the balance remaining for future work would be $65,390.00. There is one mathematical error in that which would bring about an increase of $4,800.00, but in view of the imminence of the hearing and the fact that the matter is ready for final trial, the estimated time required for preparation, is I consider somewhat over-generous so that I will not make that mathematical adjustment. In addition I do not think that the amount of $5,500.00 for the costs of the application for security for costs could be justified. In the circumstances I consider that an appropriate amount in respect of which security should be given is $62,000.00. Proposed orders

Amended Interlocutory Process of plaintiff filed 16 September 2004 (subject to undertaking as to damages) .

1. Order that John Frederick Lord be appointed liquidator of CTK Engineering Pty Limited provisionally.

2. Costs of the application to be costs in the proceedings.

Interlocutory application of defendants filed 19 October 2004.

1. Order the plaintiffs provide security for costs in the sum of $62,000.00 in such form as is agreed or determined by the Registrar, but subject to a direction that it would be proper for the Registrar to accept that security over such number of shares of the plaintiffs in the first defendant as he should determine be sufficient security.

2. Order the said security be provided by 10 December 2004. **********

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