REASONS FOR JUDGMENT
1 On8 December2009anoriginatingprocesswasfiledinproceedingsVID 879of2009and VID 880 of 2009 by parties who were, variously, directors and persons with interests in two businesses. One was known as the Deep Creek Marina Hotel, and the other was the Deep Creek Supermarket. In the originating processes relief was sought in relation to the conduct of the two companies owning the businesses, declarations as to breaches by the first defendant, Mr Ian Matheson, of his duties as a director of the companies, and also a winding up order was sought pursuant to s 233(2) of the Corporations Act 2001 (Cth) ("the Act").
2 On the same day, an interlocutory process was filed in each proceeding in which, in substance, the plaintiffs sought interlocutory orders that the two businesses be operated by the directors of the companies, other than Mr Matheson, and interlocutory injunctions be granted restraining the defendants from being involved in the businesses or disrupting them. Other consequential orders were also sought, not relevant for present purposes.
3 On 18 December 2009, upon certain undertakings being given to the Court by the first, second and third defendants by their counsel, I adjourned the interlocutory processes to 22 December 2009. On that date, certain amendments were given to the undertakings proffered by the first, second and third defendants by their counsel and the applications for interlocutory relief were adjourned to 28 January 2010. The circumstances giving rise to the giving of the undertakings are set out in my reasons for judgment on 18 December 2009 and I do not propose to repeat them. Those reasons for judgment should be read in conjunction with these reasons.
4 In substance, it was alleged by the plaintiffs that Mr Matheson and Ms Macintosh had controlled the businesses to the exclusion of the plaintiffs since about 1 April 2009. I was told that, on about 28 April 2009, Mr Matheson and Ms Macintosh appointed Mr and Mrs Pettitt as managers of the businesses and caretakers of the properties. In my earlier reasons, I set out the substance of the plaintiffs' complaints in par [40] and [41] as follows:
"[40] The plaintiffs complain that since 1 April 2009 Mr Matheson has conducted the businesses without reporting any information to them about the trading and operation of the businesses and they have not received any of the takings. They complain that Mr Matheson has refused to return the businesses to them. The plaintiffs are concerned that their investment in the businesses is in jeopardy as they do not trust Mr Matheson and they believe that he is acting in his own interests rather than in the interests of all the investors. I was informed by Senior Counsel for the plaintiffs "in the strongest or plainest possible terms" that the breakdown in trust between the plaintiffs and the defendants is so profound that there is no possibility of any form of agreement or co‑operation between them. The plaintiffs are not prepared to work together with Mr Matheson in relation to the management and conduct of the businesses.
[41] In particular, the plaintiffs are concerned that certain expenses relating to the businesses have not been paid. They refer to insurance payments, PAYG deductions, compulsory superannuation and Workcover payments and BAS statements. They are also concerned about the overdraft levels of the two bank accounts the businesses have with Westpac Banking Corporation which presently total approximately $79,000 which is close to the overdraft limit of $90,000. Mr Matheson does not have access to these accounts."
5 In par [50] of my earlier reasons, I said I was prepared to assume, for the purposes of the interlocutory applications, and without making any definitive findings, that there was a serious question to be tried, that Mr Matheson had acted in breach of the duties he owed the two companies as a director by reference to his exclusion of the other directors and investors from the management and conduct of the two businesses, and by what Mr Fenlon had observed on the CCTV security footage. I also said that there was a serious question to be tried as to whether Mr Matheson had misappropriated, or been a party to the misappropriation of, any funds or stock otherwise belonging to the two businesses.
6 I observed in par [53] of my earlier reasons that the status quo at that time was that Mr Matheson had been running the businesses for over eight and a half months. I noted that some of the serious matters of which the plaintiffs complained had occurred prior to 1 April 2009. Importantly, in par [56], I observed that, at that time, the plaintiffs did not point to any particular issue which had arisen recently or become urgent at that time, or which had suddenly emerged after a lapse of eight and a half months which required the interlocutory relief they sought.
7 In par [58] of my earlier reasons, I asked whether the balance of convenience required the granting of injunctive relief. In my reasons, I paid particular attention to, and identified significance in, a letter the defendants' solicitors had sent to the plaintiffs' solicitors on 27 October 2009 in which it was stated that:
"Our client agrees to give an undertaking to provide current financial accounts for the businesses, including providing ongoing accounts to the other partners."
8 I reached the conclusion, as shown in par [60] of my earlier reasons, that the plaintiffs' concerns in relation to the financial health and aspects of the two businesses could be addressed in the short term by the defendants giving undertakings to the court in an expanded form along the lines of the contents of the letter of 27 October 2009. I considered that the balance of convenience was in favour of the preservation of the status quo at that time in relation to the two businesses, particularly if Mr Matheson was prepared to give suitable undertakings to the Court.
9 I observed in par [65] of my reasons that, if the undertakings were given, the applications for interlocutory injunctions would be adjourned to a date to be fixed, and I said that, if the undertakings were not given, I would then grant the plaintiffs interlocutory relief in terms which I would publish. Senior Counsel for the plaintiffs, at that time, said he was instructed to give the usual undertakings as to damages on behalf of the plaintiffs.
10 It was critical to my reasons for not granting the plaintiffs the relief sought that undertakings in an expanded form, which were recorded in the orders made on 18 and 22 December 2009, be given by the defendants. The performance of the undertakings was seen by me as an answer to the plaintiffs' concerns about their lack of knowledge about the finances of the businesses as a result of their exclusion from the day-to-day management of them. If the undertakings had not been given, I would have granted the plaintiffs interlocutory relief. The situation now facing me is that the undertakings have not been observed in significant respects. This is demonstrated by an exchange of correspondence between the plaintiffs' solicitors and the defendants' solicitors which started on 4 January 2010 with the plaintiffs' solicitors noting in a paraphrased form the undertakings which had been given, and stating that the plaintiffs had attempted to access the Quest system at the hotel via remote connection, but that connection had not been re-established. The plaintiffs' solicitors said that they looked forward to the receipt in their office of the accounts and records, the subject of the undertakings, by 12 and 15 January 2010. On 11 January 2010, the defendants' solicitor replied by email and noted that he had spoken to a technician - I assume a technician experienced in IT matters - and that he wanted to speak to Mrs Fenlon about attempting to log on to the system.
11 On 22 January 2010, the plaintiffs' solicitors sent a letter by fax to the defendants' solicitors in which they set out in considerable detail their contentions that the undertakings which had been given to the Court, had not been the subject of compliance by the defendants. It was also noted that, as at that date, 22 January 2010, no data records or other documentation had been provided in relation to the operation of the supermarket business. The letter then set out a number of matters in respect of which such information as had been supplied by the defendants was not clear, and there was substantial contentions challenging or questioning the amounts said to have been received in the two businesses.
12 The solicitors noted that such records as had been provided did not disclose any remittances being made in respect of WorkCover, superannuation payments in respect of employees, PAYG tax deductions, or GST remittances. These were matters which had been the subject of complaint by the plaintiffs in the earlier interlocutory application. The letter concluded with a request that there be a response by 4.00 pm on Monday 25 January on the basis that the matter would be before the Court three days later. There was attached to the letter a number of questions and concerns arising out of the documents provided which numbered 147 items.
13 Later that day the defendants' solicitors sent an email to the plaintiffs' solicitors at 1.33pm noting the receipt of the letter of 22 January, 2010. The email concluded with the observation:
"Given the timing, it will not be possible to answer your queries by close of business Monday. I will contact you again on Monday."
14 It does not appear that any contact was made on Monday, and it was only this morning when an affidavit sworn by the defendants' solicitor today and filed in Court that the plaintiffs were provided with a response to the issues raised in their letter, and an explanation as to what had happened after the undertakings had been given. The affidavit sworn by Mr Nicholas Rolfe sets out a number of matters in explanation for why the undertakings, given by the defendants, had not been the subject of compliance.
15 In my view, that affidavit demonstrates a casual approach to observance of undertakings to the Court and the fact that the defendants made no serious or significant attempt, immediately after the undertakings were given, to commence what needed to be done in order to comply with the undertakings within the timeframe specified in them. It appears from Mr Rolfe's affidavit that the defendants, particularly Mr Matheson, left the matter of compliance with, and performance of, the undertakings to their solicitor.
16 The problem about that was that the solicitor closed his office from 23 December 2009 until 11 January 2010, and went on an annual leave. Not only did the office close down, but no process for compliance with the undertakings was ever activated before the office closed down. There is no evidence before me of anything that Mr Matheson or the other defendants did at that time in relation to performing their obligations under the undertakings. Counsel for the defendants informed me this morning that Mr Matheson was not involved in the businesses, nor was Ms Macintosh, and that Mr and Mrs Pettitt were the persons to whom the solicitor had recourse for the purpose of overseeing the compliance with the undertakings.
17 In his affidavit, Mr Rolfe explained a number of matters. He explained why it took some considerable number of days to get the Quest system operative and available to the plaintiffs. No serious attempt was made to do that expeditiously. On 23 December 2009, the solicitor spoke to Mrs Pettitt, explained the undertakings to her, and telephoned the office of the consultant or the contractor to inquire about a technician attending on the next day, 24 December 2009, to reconnect the Quest system. He was told that he would be contacted either that day or the next. He was not contacted by anyone on 24 December 2009, and he let that matter ride until 5 January 2010 when again, he contacted the consultant or the contractor's office, and was told that a technician would attend shortly.
18 He made a further phone call on 6 and 7 January and 11 January 2010, and he said that, on 12 January 2010, the remote access to the Quest system had been reconnected. The terms of the undertaking in relation to the Quest system required the defendants to provide that access, in substance, immediately after the undertakings were given. I consider that the fact that nothing was done about the undertakings by the defendants between 24 December 2009 and 5 January 2010, demonstrates that the defendants were not seriously approaching the matter of the performance of the undertakings. Counsel for the defendants adverted to the fact that it was the end of the year when it was, in substance, holiday time for many people.
19 But that does not excuse the defendants from doing whatever they could to comply with the undertakings. The undertakings were significant because their purpose and the intent of them, as was demonstrated in my earlier reasons, was to give the plaintiffs immediate information about the way the businesses were being managed, and immediate information as to how the businesses were practically being conducted. I will deal shortly with the question of the accounting records. I regard the explanation in relation to the Quest system as unsatisfactory and serious. I accept the fact that it required a third party technician to attend the premises, but to do nothing for a period of 10 or 11 days, when the purpose of the exercise was to put the plaintiffs in immediate contact with the finances of the business, was regrettable.
20 More significant is the failure to comply with the undertaking in relation to the provision of financial records. It is apparent from my reasons and the form of the undertakings given that it was critical that the plaintiffs obtain information about the financial accounts and records of the businesses within a very short space of time. Initially, on 18 December 2009, that information had to be provided by 8 January 2010. As a result of the order made on 22 December 2009, that time was probably put out until 12 or 13 January 2010. The manner in which the defendants approached the performance of this undertaking, again shows a failure to understand the significance of the undertakings, and a failure to act responsibly in relation to the performance of them.
21 It is significant to note that, on 23 December 2009 when Mr Rolfe attended Deep Creek Marina and spoke to Mrs Pettitt, she told him that she had limited bookkeeping experience, but had done the best she could in the circumstances. It is apparent that, as at 23 December 2009, there were no proper, adequate, complete, or probably even draft financial accounts and records available certainly in relation to the period from 2 April 2009 to 30 November 2009 which had been prepared and which could be made available to the plaintiffs. I pointed out to counsel in the course of argument that this observation by Mrs Pettitt demonstrated that the offer of the undertaking in the letter of 27 October 2009 about the provision of accounting records was made without there being any basis upon which the defendants were able to comply with such undertaking.
22 Counsel for the defendants, in the course of argument, cautioned me about placing great significance on the letter of 27 October 2009. He submitted that I should take into account the fact that:
(a) It was only "an offer of an undertaking" and not an undertaking itself;
(b) The undertaking had been offered for a shorter period than was provided for in the undertakings to the Court;
(c) If the undertaking had been accepted at that time, it may not have been as problematic as it was on, or shortly after, 22 December 2009 to engage a bookkeeper to get the records into order.
I do not accept that that submission provides any explanation for the delay, or the inability of the defendants to provide the records required by the undertaking.
23 What that submission and Mr Rolfe's affidavit demonstrate, is that the defendants had not kept prepared, or arranged for the preparation, of proper accounts and financial records of the company as at 27 October 2009. Indeed, as at 22 December 2010, they were in a similar position. What is a matter of concern is that there has been a manager running the business for some eight and a half to nine months or more who has limited bookkeeping experience.
24 This is significant because the plaintiffs' earlier complaints were that, on 27 March 2008, they found that there was little stock kept in the businesses, and a loss of stock of approximately $10,700. As I noted earlier, that issue is controversial and existed prior to the Pettitts coming into the business, but it demonstrates the concerns the plaintiffs had about the finances which continued.
25 Surprisingly, the preparation of the material in relation to financial records in order to comply with the undertakings has also proceeded at a casual and dilatory pace. Mr Rolfe said that on 23 December 2009, he was given a cash payments book and a cash receipts book by Mrs Pettitt for the period 2 April 2009 to 30 November 2009, although Mrs Pettitt had not reconciled the bank account at any time since the commencement of her employment.
26 Terms of the undertakings required the records and accounts to be provided within 21 days after 22 December 2009. But what happened between 23 December 2009 and 11 January 2010 - that is 19 days? The answer is absolutely nothing. Why? Presumably because the solicitor went on vacation. But that is no defence or explanation, response or answer to the obligation of the defendants and, in particular, Mr Matheson to comply with the undertakings which he had given through his counsel. On 11 January 2010, Mr Rolfe spoke to Mr Bryan Phyland about him being employed as a bookkeeper, and he asked Mr Matheson on that day to seek his permission to employ a bookkeeper. On 12 January 2010, Mr Rolfe forwarded a copy of the cash payments and cash receipts records to the plaintiffs' solicitors.
27 Again, 20 days after the undertaking had been given, and one day before it had to be complied with, nothing was done about employing a bookkeeper to do the work that had to be supplied within 21 days of 22 December 2009. Those accounting records have not yet been finalised, and Mr Rolfe said that, on 25 January 2010, Mr Phyland went on holidays for a two-week period, and Mr Rolfe now has to endeavour to employ another bookkeeper. This, again, shows a complete casual and inappropriate attitude towards performance of the undertakings given to the Court.
28 Another matter of concern in relation to the undertakings is that Mr Rolfe says that the cash register in the supermarket is inoperable. Therefore, it is not possible to ascertain the actual break up of any takings from the supermarket as the cash register is unable to produce any reports. The takings for the groceries, fuel, ice and ice creams are deposited into this cash register. Endeavours are being made to have the cash register repaired. If it cannot be repaired, a new cash register should be installed forthwith.
29 Putting the matter bluntly, performance of the undertakings will have to wait so far as the involvement of the cash register is concerned. When that will be able to be completed is completely up in the air. The plaintiffs will just have to wait. So much for the undertakings given to the Court.
30 Mr Rolfe said that there had been substantial compliance with the undertakings in a number of respects. He is correct in the sense that there has been compliance with the undertakings in a number of respects. But he then says in the final paragraph of the affidavit:
"I believe that it would take at least another four weeks to be able to provide the information required by the undertakings."
31 The end result is that the undertakings have been ineffective to provide the plaintiffs with the information which they were seeking, and which was intended by me to be made available to them by the performance of the undertakings. In substantial respects, the position is as if the undertakings had not been given. Although given in form, they have not been complied with in substance. I said in my earlier reasons that if the undertakings were not given I would grant the plaintiffs interlocutory relief.
32 In all these circumstances, I am satisfied that injunctions should be granted in order to protect and preserve the position of the plaintiffs. What troubles me about these proceedings is that ordinarily in circumstances such as exist here, I would appoint a provisional liquidator to both companies forthwith in order to have an independent person managing, supervising and keeping the records of the companies. The plaintiffs do not seek the appointment of a provisional liquidator at this stage. I therefore turn to the form of the orders which they propose. Counsel for the defendants has submitted a number of matters in relation to the draft orders proposed which I need to consider.
33 If the plaintiffs are prepared to give the usual undertaking as to damages it should be in the form of Practice Note 14 of the Federal Court practice notes promulgated by the Chief Justice on 25 September 2009. That is in a different form to the form of undertaking submitted by counsel for the defendants.
34 I propose to make orders until the hearing and determination of the originating processes or further order, which, in substance, provide for the defendants to give access to the plaintiffs to the two businesses, and injunctions restraining the defendants from disrupting or interfering with the daily operation of the businesses.
35 One of the issues that needs to be addressed is that the parties, both plaintiffs and defendants, are involved in the two businesses as a result of a Stakeholders' Agreement which was entered into by the parties on 28 August 2008. Section 9 of the agreement deals with the management of the companies which is vested in the directors.
36 Mr Matheson, as a director of the two companies, has obligations and duties as a director of the companies to act in a responsible manner. I refer, for example, to the obligations cast upon him and the other directors in ss 180 and 181 of the Act. It seems to me, in the circumstances which exist, that, notwithstanding Mr Matheson's obligations as a director, and the manner in which there has to be unanimous agreement by the directors as set out in the Stakeholders' Agreement in relation to a number of matters, that it is an appropriate exercise of the power to grant interlocutory relief, to provide, in substance, that the plaintiffs operate and manage the businesses. Such orders would provide a basis to alleviate any concern Mr Matheson might have if it was suggested hereafter, during the duration of the interlocutory orders which I propose to make, that he was not taking an active or responsible part in the management or control of the businesses.
I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg.