Corporations - Winding up - Advertisements defective in stating Company's name incorrectly - Whether injustice caused thereby - Insolvency - Whether facts disclosed that Company insolvent

Contract of Loan - Meaning of word "investment" in context of loan to Company - Whether a term is to be implied in the contract of loan that the loan should not be repayable unless and until the Company be wound up, through no fault of the lender

Oppression - Whether alleged breach of contract to advance further funds to Company is oppressive conduct - Whether application to wind up Company constitutes oppressive conduct

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360

These two matters were argued together. The applicants in COR 310 of 1997 (to whom I shall refer as "Cheng") have applied for the winding-up of Vision Image (Aust) Pty Ltd ("the Company") upon two grounds, namely, (1) that the Company is insolvent and (2) that it would be just and equitable to order that the Company be wound up.

The applicants in COR 349 of 1997 (to whom I shall refer as "Yeo") seek an order pursuant to s260(1)(a) of the Corporations Law that John William Yeo ("Mr Yeo") be authorised to give instructions on behalf of the Company to the Company's solicitors in relation to the conduct or settlement of the proceedings which Yeo wishes the Company to institute against Chew Heng Cheng ("Mr Cheng") for damages, the return of certain property said to have a value of $47,000.00, an account of profits in respect of the use of such property, repayment of $9,000.00 in interest payments made to him by the Company and other relief.

In relation to the allegation that the Company is insolvent, Cheng points to the financial statements of the Company, prepared by the Company's accountants and signed by both Cheng and Yeo, for the financial year ended on 30 June 1996 (being the latest accounts available to them). Those statements reflect the following position:

3. Current liabilities (including Cheng's loan of $153,592.59) - $216,765.17

The evidence seems to establish that, since about February 1997, the Company has not operated any business and both Mr Cheng and Mr Yeo are engaged in other businesses of a like nature to that formerly operated by the Company. Accordingly, the Company has no income. Its real property has been sold, I am informed and there is an amount of some $80,000.00 in cash in the Company's bank account.

Yeo contends that, notwithstanding the aforegoing figures, which are not challenged, the Company is not insolvent because the loan to Cheng is not presently due and payable. There is no dispute as to the fact of the loan having been made by Cheng to the Company.

The substance of the submissions on behalf of Yeo is based upon the contention that the terms "invest" or "investment", in the context of the present case, import into the contract of loan, by necessary implication, a term to the effect that "the loan was not repayable unless and until the Company was wound up, other than by reason of Mr Cheng's wrongdoing."

The aforegoing is the way in which the alleged implied term was finally formulated. Previously, however, Yeo had alleged that the term to be implied was that "Cheng's loan would be long term and would not be repayable unless and until the company was wound up or sold as (sic) its undertaking."

The submissions in support of the existence of an implied term such as that contended for were as follows:

"2. The Applicants, to show insolvency, must show they are owed money which is due and payable. There are no other creditors save the Respondents, who oppose the application.

3. Mr Yeo's evidence indicates the money owed to the Applicants is not due and payable. It shows that Mr Cheng wished to invest in Mr Yeo's business not merely for business reasons but also, and perhaps, principally so that the Applicant's immigration application would be approved. The evidence suggests that, in the Applicants' case, investment in Australia (sic) business was a requirement of approval.

4. Mr Yeo admits that he agreed the money advanced by Mr Cheng would be treated as a loan. Admittedly, without more, an agreement for a loan without any stipulation as to repayment date would be deemed a loan on demand, but here the circumstances show the parties did not intend the loan to be repayable upon demand. Mr Cheng was an investor not merely a lender.

5. It follows that the money was advanced pursuant to an agreement for Mr Cheng to invest in the company, the investment to be, in form, a loan. To give efficacy to that agreement it is necessary to conclude it was a term of the agreement that the money would remain in the company in the same way as if the money was used to subscribe to the capital of the company, save only that on a winding-up (other than one procured by Mr Cheng's wrongdoing) Mr Cheng would rank equally with unsecured creditors and ahead of shareholders. BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 282-3.

6. In more concrete form, the implied term is that the loan was not repayable unless and until the company was wound up other than by reason of Mr Cheng's wrongdoing. To hold the loan was payable on demand would be to ignore the quality of the money as an investment which, in the light of the immigration issue, would be to adopt a view of matters which Mr Yeo and Mr Cheng must have rejected at the time of the agreement.

In BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (a decision of the Privy Council) their Lordships said:

"Their Lordships venture to cite only three passages - albeit they are familiar to every student of this branch of the law. In The Moorcock (19) Bowen LJ said:

'I believe if one were to take all the cases, and they are many, of implied warranties or covenants in law, it will be found that in all of them the law is raising an implication from the presumed intention of the parties with the object of giving to the transaction such efficacy as both parties must have intended that at all events it should have. In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men ...'

It is because the implication of a term rests on the presumed intention of the parties that the primary condition must be satisfied that the term sought to be implied must be reasonable and equitable. It is not to be imputed to a party that he is assenting to an unexpressed term which will operate unreasonably and inequitably against himself.

In Reigate v Union Manufacturing Co (20), Scrutton LJ said:

'A term can only be implied if it is necessary in the business sense to give efficacy to the contract i.e., if it is such a term that it can confidently be said that if at the time the contract was being negotiated some one had said to the parties, "What will happen in such a case?", they would both have replied: "Of course, so and so will happen; we did not trouble to say that; it is too clear."'

In Shirlaw v Southern Foundaries (1926) Ltd. (21), MacKinnon LJ said:

'Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common, "Oh, of course."'"

In argument, counsel for Yeo pointed to an exhibit to the affidavit of Mr Yeo sworn on 2 February 1998, being a copy of a letter to Cheng from Australian Visa & Migration Services Pty Ltd, dated 26 February 1996 referring to the requirements for immigration, which includes a passage reading:

"For 12 months prior to the date of application you need to show that . . . - you, or you and your spouse together, have net assets in Australia of at least $250,000 of which the net assets in your main business(es) is no less than $100,000;"

It seems to me that Yeo is reading too much into the terms "invest" or "investments". Yeo admits that the moneys contributed by Cheng was a loan. According to the Macquarie Dictionary, the primary meaning of the word "invest" is:

"1. to put (money) to use, by purchase or expenditure, in something offering profitable returns, esp. interest or income."

Similarly, the primary meaning of the term "investment" is said to be

"1 the investing of money or capital in order to secure profitable returns, esp. interest or income."

As I have mentioned, the Company has sold its real property and has not traded since February 1997, its assets are exceeded by its liabilities and, as I understand it, there is no intention that the Company will ever resume operations. Yeo's opposition to the application for the winding-up of the Company rests simply on the basis that they wish the Company to sue Cheng for damages and the other claims foreshadowed.

On Yeo's submissions, in their latest form, Cheng would, by implication, not be entitled at any time in the future, to claim repayment of their loan to the Company, even if the Company were to trade profitably and to be able to repay the loan without difficulty, so long as the Company was not wound up. A fortiori, it is Yeo's submission that in the circumstance that the Company's assets are exceeded by its liabilities, that it has sold its assets save for cash on hand and that it has for the past 12 months or so ceased to operate any business, nonetheless, Cheng is debarred from claiming repayment of the moneys admittedly loaned by them to the Company. And this position is said to arise by necessary implication from the fact that Cheng agreed to make an investment in the Company by way of loan.

I am not persuaded that the facts demonstrate that the loan to the Company by Cheng was subject to an implied term in either of the two versions put forward by Yeo. (Incidentally, the fact that there are two versions in itself derogates from the contention that any such term is to be implied into the contract of loan.)

In the circumstances, I am satisfied that the Company is insolvent.

In relation to the allegation that it would be just and equitable to order the winding up of the Company, Cheng alleges:

"(4) Further, the company should be wound up on just and equitable ground as follows:-

(a) the Company's four directors are not able to agree on the management of the Company; and

(b) the Company's four directors have alleged impropriety by each of the other directors."

"8. The company is not deadlocked in the sense that the directors have irreconcilable differences about the management of the business of the company. Here the company is not carrying on business because, as the Respondents allege, one director, in breach of contract, has brought the company to a standstill.

9. In this case Mr Yeo's evidence shows that Mr Cheng starved the company of the further finance he promised, wrongfully and prematurely demanded repayment of the moneys he had invested, wrongfully and prematurely demanded interest upon the moneys invested and wrongfully refused to pay the Respondents (the active directors) their due wages until his demand for interest was met.

10. In any event winding up should be refused where applicant is solely responsible for the deterioration in relationships: Ebrahimi v Westbourne Galleries Ltd [1973] AC 360.

11. The company has no future as a business but it holds an important asset in the form of a chose in action against Mr Cheng which the company ought to be allowed to convert to money for the benefit of its shareholders, in practice for the benefit of the Respondents. Unsurprisingly the company is not capable of producing a Board resolution for the prosecution of its claim against Mr Cheng and in these circumstances the Court is empowered under section 260 to authorise those proceedings.

12. There is a good prospect here of the company succeeding in recovering damages for breach of contract from Mr Cheng together with a declaration that the money already advanced is not due and payable by Mr Cheng. On the key points of investment and repayment Mr Yeo's evidence is largely unrebutted; if anything confirmed by, the evidence of Mr Cheng."

There is a factual dispute between Cheng and Yeo as to whether Cheng agreed to make or arrange further finance over and above the moneys actually lent to the Company and that is not a dispute which I could resolve on affidavit evidence. It is plain that the directors have fallen out with one another, for whatever reason and that there is no prospect of the Company continuing to operate its business. On that basis, I consider that Cheng has made out a case for the winding-up of the Company.

There is a possible difficulty in the way of my making a winding-up order at this stage, however, in that the advertisements relating to the winding-up application did not (despite Mr Derwent's affidavit evidence to the contrary) correctly name the Company. The advertisements referred to "Vision Image Pty Ltd" and not to "Vision Image (Aust) Pty Ltd."

There is evidence before me, by way of a Company Search, which shows that there was formerly a company incorporated in New South Wales under the name Vision Image Pty Ltd. It appears from the Search, however, that that company was deregistered on 4 January 1991.

The Company was incorporated on 4 October 1995. It would seem that there is no likelihood the creditors of the Company (if any) would have been misled by the error in the name of the Company appearing in the advertisements.

Section 467A of the Corporations Law provides, relevantly, that an application under Part 5.4 (and this is such an application) must not be dismissed merely because of a defect or irregularity in connection with the application, unless the Court is satisfied that substantial injustice has been caused that cannot otherwise be remedied.

The evidence of both Cheng and Yeo shows that there are no creditors of the Company other than the parties.

In these circumstances, I am not satisfied that any substantial injustice has been caused by the error in the name of the Company as advertised, nor do I consider that an adjournment or re-advertising is warranted.

In the circumstances, I am disposed to make an order for the winding up of the Company in terms of the application.

I turn now to consider Yeo's application pursuant to s260(1)(a) of the Corporations Law.

The grounds on which this application is based are stated to be:

"(a) that the affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against members John William Yeo and wife Lynn Yeo, or in a manner that is contrary to the interests of the members as a whole; and/or

(b) An act or omission by or on behalf of the company was or would be oppressive or unfairly prejudicial to or unfairly discriminatory against members John William Yeo and Lynn Yeo or was or would be contrary to the interest of the members as a whole."

Yeo's case is based upon the allegation that, in or about July 1995, Mr Cheng made an oral agreement with him on terms that, in consideration of Mr Yeo transferring his existing digital pre-press and graphic design business of Vision Image Works to the Company and the allotment of equal shares in the Company to Cheng and Yeo, Mr Cheng would invest, by way of a loan, $160,000.00 in the Company and would raise further finance of between $60,000.00 and $80,000.00 if and when required, the loans to be free of interest until the Company was profitable. Mr Cheng advanced $153,592.59 in or about March 1996.

It is alleged that, in or about March 1996, Mr Yeo approached Mr Cheng with the request that he provide the further funds of between $60,000.00 and $80,000.00 as the Company was in need of working capital. Mr Cheng told him that he had no further funds. In June 1996, Mr Yeo alleges, Mr Cheng asked for interest on his outstanding loan. Because the bank account was operated on the basis that cheques be signed by a representative of both Cheng and Yeo and because Mr Cheng refused to sign cheques in favour of Yeo for their wages unless they, in turn, signed cheques in favour of Cheng for interest, Yeo signed the latter cheques in an amount, it is said, of $9,000.00 notwithstanding that the Company was not operating profitably.

In Mr Yeo's affidavit sworn on 16 December 1997, he says, in part:

"17. I say that the affairs of the Company are being conducted in a manner that is oppressive or unfairly prejudicial or unfairly discriminatory against myself and my wife, and/or and act or omission by or on behalf of the Company was or would be oppressive or unfairly prejudicial to or unfairly discriminatory against myself and my wife as members/creditors or would be contrary to the interests of the members as a whole in that:

(a) Cheng and his wife have applied for winding up of the Company and if such an order was granted it would deprive the Company of the opportunity to pursue a damages claim against Cheng for wrongful breach of the agreement referred to in paragraphs 7 and 9 herein, for return of interest of approximately $9,000.00 to which Cheng was not entitled, and for damages for conversion and use by Cheng of equipment belonging to the Company and for an account of profits derived by Cheng from such use.

(b) In paragraph 11 of Cheng's affidavit sworn the 11th November 1997 in proceedings Cor 310 of 1997 in which Cheng and his wife seek winding up of the Company, Cheng states that to his knowledge, other than each of the directors (for wages) he is the only creditor of the Company (for money which he loaned the Company at the time of its constitution). I say that such moneys as were loaned by Cheng to the Company are not presently owing as the terms of the loan were that it would not be repayable until the Company was trading profitably and as at the time when the Company ceased trading (on or about 7th February 1997), the Company had not reached a stage where it was trading profitably. Further, if, which I deny, the loan was repayable on demand, to the best of my knowledge information and belief no demand for payment has been made."

In my opinion, as I have indicated that the Company should be wound up, it would obviously be in the interests of the Company that the liquidator, as an impartial officer not involved in the existing disagreements between Cheng and Yeo, consider the question of an action against Cheng for damages, as foreshadowed by Yeo. It appears that there are sufficient funds in the Company to finance such an action, if the liquidator, having considered the matter from the point of view of the interests of the Company, does decide to pursue the action. I say nothing as to the apparent merits of that action.