David Alexander Grace v Deborah Sharon Grace & 5 ors

David Alexander Grace v Deborah Sharon Grace & 5 ors - [2007] NSWSC 6 - NSWSC 2006 case summary — Zoe

[13]

15 On 23 October 2006, Ms Grace sent Mr Grace a notice of Annual General Meeting of the members of Sharander, to be held on 6 November 2006 at the offices of Curwoods at 1630, including notice of a resolution that Mr Grace be dismissed as a director. On the same day, Mr Grace issued a notice of Extraordinary General Meeting of the members of Dutchie, to be held on 6 November 2006 at the offices of Nova at 1515, including notice of resolutions for the removal of Dr Grace as director and public officer, the retirement of Ms Grace as secretary, and the appointment of Mr Grace as public office and secretary. He says he did this because he was concerned that if Ms Grace and Dr Grace continued to control the board of Dutchie, in which Mr Grace held 99.3% of the shares, they might approve a transfer of Dutchie's shares in Sharander to Grace Securities, which they had previously proposed (at independent valuation, as part of a proposed separation of interests). On 24 October 2006, Ms Grace sent Mr Grace a notice of Annual General Meeting of the members of Holdings, to be held on 7 November 2006 at the offices of Curwoods at 1000, including notice of a resolution that Mr Grace be dismissed as a director. On 30 October 2006, Ms Grace sent Mr Grace a notice of a Directors' Meeting of Dutchie, to be held on 6 November 2006 at 41/10 Etham Avenue, Darling Point, at 1200 - 3 hours 15 minutes before the meeting which Mr Grace had convened - including notice of a resolution to accept an offer made by Grace Securities on 23 July to purchase the 175 A shares held by Dutchie in Sharander at independent valuation. On 1 November, Nova on behalf of Mr Grace sought undertakings that Ms Grace and Dr Grace would not proceed with the proposed meetings of directors of Dutchie and shareholders of Sharander and Holdings. Curwoods responded on 2 November that, as insufficient notice was alleged, the notices of the proposed shareholders meetings of Sharander and Holdings were withdrawn and those meetings would not proceed, but the directors meeting of Dutchie would proceed.

[15]

17 Between 7 November and 1 December 2006, Mr Grace (and Nova on his behalf) sought information about the affairs of the companies, and confirmation of the undertaking given on 8 August 2006, from Ms Grace (and the solicitors acting for Ms Grace and Dr Grace, Teece Hodgson & Ward). The information requests elicited no substantive reply, and no confirmation of the undertaking was given. On 16 November, Teece Hodgson advised Nova that Ms Grace and Dr Grace had given instructions that they were agreeable to Mr Grace having access to company records, provided that a third party arranged by them was present to prevent removal of material from the files, that the matter was to be discussed with counsel that afternoon, and that a considered response would follow. On 28 November, Ms Grace responded to requests which Mr Grace had made and repeated in letters of 7, 14, 16 and 24 November, to the effect that as he had commenced proceedings, legal advice would have to be sought before any of his questions could be answered. On 1 December, Nova wrote to Teece Hodgson, complaining that no meaningful response had been received to the requests for information and undertakings, and that despite the promise of "a considered response" to follow, no further communication had been forthcoming, and offering "a final opportunity" to avoid an application for appointment of a provisional liquidator by giving undertakings to the effect that the Grace Companies would not, without 7 days prior written notice to Mr Grace, purchase or sell any material asset, nor incur any liabilities or pay any expenses incurred other than in the ordinary course of business, nor transfer funds between the companies, nor declare or pay any dividend, nor make any loan; and would deliver all books and financial records to an agreed neutral location at which all directors and their advisers could have equal unfettered access, and provide Mr Grace electronic access to all current bank accounts and term deposits. No meaningful response was forthcoming, and on 8 December 2006 Mr Grace's application for appointment of a provisional liquidator was filed, returnable on 20 February 2007, and served.

[31]

31 However, where the winding up order is sought under Corporations Act, s 233 (the oppression ground), or on the just and equitable ground, it is sufficient that there is a reasonable prospect that some form of relief under s 233 ultimately being granted, even if that relief not include a winding up order, so long as the assets are in some degree of jeopardy. In Re J N Taylor Holdings Ltd; Zempilas v J N Taylor Holdings Ltd (1990) 3 ACSR 600, in a judgment which was upheld by the Full Court on appeal [Zempilas v J N Taylor Holdings Ltd (No 2) (1990) 3 ACSR 518] Debelle J said (at 614):- Generally speaking, a provisional liquidator will be appointed only if the court is satisfied that there is a valid and duly authorised winding up application and there is a reasonable prospect that a winding up order will be made: Re McLennan Holdings Pty Ltd (1983) 7 ACLR 732; Montgomery Windsor (NSW) Pty Ltd v Ilopa Pty Ltd (1984) 2 ACLC 224. However, as Young J observed in Alessi v The Original Australian Art Co Pty Ltd (1989) 7 ACLC 595, this is not a rule of law and in the appropriate extraordinary circumstances the court will appoint a provisional liquidator, notwithstanding that it is unlikely that the company will finally be wound up. In Re Brylyn No 2 Pty Ltd (1988) 12 ACLR 697, Senior Master Lee QC came to a like conclusion. In that case, the application was made to wind up the company on the just and equitable ground. Master Lee decided that the fact that the court might grant a remedy other than a winding up order was no reason for not deciding to appoint a provisional liquidator if, in all the circumstances, the application was justified. In such a case, if the applicant has made a prima facie case for relief, be that relief a winding up order or some other order, the court may appoint a provisional liquidator. Other examples of where a provisional liquidator has been appointed notwithstanding that there was a real possibility that the winding up proceedings might not ultimately proceed are Tickle v Crest Insurance Co of Australia Ltd (1984) 2 ACLR 493, admittedly, a case on its own special circumstances ; Re Nerang Investments Pty Ltd (1985) 9 ACLR 646, where a provisional liquidator was appointed because there was a strong possibility that, unless the appointment was made, the affairs of the company would be conducted for the benefit of one of the directors and not for the benefit of the company as a whole; and South Downs Packers Pty Ltd v Beaver (1984) 2 ACLC 541, where it was not possible for the directors to meet civilly and discuss and manage the affairs of the company. In short, the circumstances in which a provisional liquidator might be appointed are various: see, for example, the observations of Bright J in Re Club Mediterranean Pty Ltd (1975) 11 SASR 481 at 484, where the fact of the conflict of interest between the directors and the proper interests of the company was recognised as a ground to justify the appointment of a provisional liquidator. Such is the variety of commercial affairs that it would be imprudent to limit the circumstances in which a provisional liquidator might be appointed.

[61]

53 Accounting irregularities. Correspondence on behalf of Mr Grace has expressed a concern that the defendants may tamper with the accounts, to the advantage of Ms Grace and Dr Grace and the detriment of Mr Grace, and the changes in the "drafts" of the 2005 accounts lend some support to these concerns. The accounts for 2006 are apparently "final" - since they have been used for the preparation and lodgement of tax returns - and it is difficult to understand how there could be final accounts for 2006 if the 2005 accounts are now said not to have been finalised. However, the differences between the first and second versions of the 2005 accounts do not appear, overall, to favour the majority. Whereas the first draft showed as current assets of Sharander, in addition to cash at bank and prepayments, only a loan to Grace Securities of $24,644 (2004: $7,644), the second draft shows a loan to Grace Securities of $71,644 (2004: $50,644), to Debid of Nil (2004: $56,096), to Dr Grace of $9,388 (2004: $6,500), to Ms Grace of $2,292 (2004: $2,292), and to Mr Grace of $4,000 (2004: $4,000). The first draft showed current liabilities, in addition to bank overdrafts, other creditors and provisions, debts to Holdings of $4,148 (2004: $4,148), Investments $7,320 (2004: $31,543), Dutchie $19,739 (2004: $19,739), Dr Grace $2,930 (2004: $8,248), Mr Grace $2,000 (2004: $5,000), and Ms Grace $5,000 (2004: $5,000); whereas the second draft shows as liabilities Holdings $3,498 (2004: $3,498), Investments $33,514 (2004: $22,514), and Dutchie $13,739 (2004: $13,739), with nothing recorded for the others. Thus the differences between the two drafts involve debt of the majority increasing from $24,644 to $83,324 and debt to the majority reducing from $7,930 to nil, a net change adverse to their position of $66,610, while debt of Mr Grace increases from nil to $4,000 and debt to Mr Grace and Dutchie reduces from $21,739 to $13,739, a net adverse change of $12,000. Intercompany debt, to the Nevilda companies, increases from nil to $11,468, which operates to David's overall advantage, particularly if his claim to beneficial control of the Nevilda companies succeeds. These curiosities in the accounts show that the precise financial position of Sharander is or may require clarification, and perhaps that not all transactions have been correctly booked in the past, but even coupled with the lack of documentation and absence of explanation for the "related party" transactions, they do not establish that the assets are in jeopardy, or even that there is a risk of tampering with the accounts, which are apparently prepared by a firm of chartered accountants. Moreover, it is not apparent how the appointment of a provisional liquidator would ameliorate the supposed risk of tampering with the accounts: while it may, as a result of the provisional liquidator assuming control of the books, avoid further entries being made which could further confuse the position, it should be possible in any event for the parties to identify entries in the ledgers; it will be necessary for all parties to investigate and establish the true position, and appointment of a provisional liquidator will not avoid a dispute as to the accuracy of either, or any further, set of accounts, nor the need for investigation of the accounts to enable that dispute to be resolved.

At a glance

Court

Decision date

Before

Source

Judgment (90 paragraphs)

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Cases Cited (6)