[1972] 2 All ER 492
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97
37 ACSR 672
Joint v Stephens [2008] 26 ACL 1467
Source
Original judgment source is linked above.
Catchwords
[1972] 2 All ER 492
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 9737 ACSR 672
Joint v Stephens [2008] 26 ACL 1467
Judgment (3 paragraphs)
[1]
Solicitors:
Hassett Lee & Co Lawyers (plaintiff)
Whitby & Lear Lawyers (first & third defendants)
File Number(s): 2017/ 111018
[2]
Judgment (ex tempore)
HIS HONOUR: The first defendant company Rafic Pty Ltd was incorporated at the end of 1986 in order to operate a confectionary distribution company. The prime mover in its incorporation was Fred Essie, who was born in 1942 in Lebanon and migrated to Australia as an infant with his parents in 1946.
According to the ASIC register, which is at least prima facie evidence of the matters, the shareholders are Fred (as I shall call him, without intending the slightest disrespect, but it is otherwise difficult to distinguish the family members), who is recorded as holding 120,000 ordinary and one E class share; his wife Carol, who is recorded as holding 30,000 ordinary and one F class share; their first son the plaintiff Joseph, born on 19 April 1964, who holds 50,000 shares; their second son Johnny, born 27 December 1965, who holds 35,000 shares; their third son and the third defendant Paul Fred Essie, born 29 July 1968, who holds 35,000 shares; and their fourth son Colin, born in October 1970, or thereabouts, who holds 25,000 shares.
Fred and Carol had another six children, four daughters and two further sons. One of those sons, Chris, may be beneficially entitled to 5,000 shares which are held in Fred's name in addition to his 120,000 held beneficially.
There is a suggestion, though it does not much matter for present purposes and the evidence does not really establish it, that as a result of a matrimonial settlement between Fred and Carol, 86,512 of his ordinary shares have been transferred to Carol, the consequence of which, if correct, would be that she holds 116,512 ordinary shares while Fred would retain 33,488.
The directors of the company, since the outset, have been Fred, Joseph, Johnny, and Paul, and according to the ASIC extract, they remain the current directors. Until about 2002, Fred was the managing director and operated the company in a manner which can perhaps be described as a benevolent patriarchy, which may be unorthodox and not in conformity with expectations under Australian corporate law, but reflected his paternal authority in the family and no doubt also the fact that it was he who provided the capital which established the company and its subsequent successes. Those arrangements were, in any event, acquiesced in by the other shareholders, at least until recently, and in circumstances where they were effectively the subject of his benevolence, that is unsurprising.
These arrangements appears to have involved the advances of funds, recorded on loan account, to the plaintiff, including to fund the costs of building a home for the plaintiff. Similar advances have been made to other family members, though not necessarily from Rafic. The advances to the plaintiff were made many years ago, and although it appears that they are recorded on loan account, would be well and truly statute-barred, unless the plaintiff, by approving annual accounts of the company at some stage, has subsequently ratified and acknowledged the debt within the last six years.
In about 2002, Fred returned to Lebanon, at least on a part-time basis, and he has lived there permanently since about 2011. From 2002, his third son, Paul, replaced him as managing director. There was thereafter an effective de facto division of responsibility between Paul as managing director, with responsibility for administration and finance, and the plaintiff Joseph, who called himself, "general manager" and was responsible for warehousing and sales.
It is to the enormous credit of the entire family involved on both sides of this litigation, or not involved in it at all, that the business has plainly been an outstanding success, and that they have contributed immeasurably to the community through it. That success is reflected in the fact that this company alone is now worth in the order of $15 million - the precise valuation is a matter to which it will be necessary to return. That success, evidently, has been the product of the cooperative efforts of each of those involved in their different fields of responsibility over many years, indeed, some 30 years since the establishment of the company.
Regrettably, a recent breakdown in that relationship, in particular between the plaintiff Joseph and the third defendant Paul, brings them to this Court in a suit in which the plaintiff seeks the winding up of the company or a compulsory purchase order, essentially on grounds of oppression. That breakdown was manifested in the course of the early months of this year in a number of ways.
It appears to have included, on 2 March, a discussion between Joseph and Paul in which, amongst other things, Joseph is said to have been abusive of his brother Chris and to have been dismissive of requests that he approach pricing in a particular way. Thereafter Joseph retained a solicitor and sought access to the books of the company, and that produced further friction and disputation. Then, on 22 March, Joseph had a meeting with the accountant, at which he sought information about the company's financial position. There are differing versions, which it is not necessary to reconcile or resolve, as to just how much information he was provided. Subsequently, Joseph, the accountant and Paul had a conversation in which an employee was also involved, to whom it is said Joseph was abusive and offensive.
On any view, however, immediately following that meeting, the third defendant - presumably supported by other directors - decided to take steps for Joseph's removal as a director, and a notice of an extraordinary general meeting to consider a resolution for his removal was given to him.
On 5 April, Joseph attended the company's premises with a solicitor in an endeavour to inspect company books. On 6 April, there was further correspondence between Joseph's solicitor and the company accountant. The defendants now say that on 6 April it was discovered that Joseph had $10,000 cash in a drawer in his office, of which at least $8,000 was, as Joseph accepts, company money being the proceeds of sales. He says that it was a routine matter for daily sales to be collected in that way and then passed on to those responsible for receiving and banking them. I cannot think that the so-called discovery of this money was seen as a matter of any import at the time, because when Joseph's employment was summarily terminated the very next day, on 7 April, the reasons given in the notice of dismissal did not refer in the slightest to that matter.
On 7 April there was an incident at the premises which led to Paul making a complaint to the police of assault, resulting in the issue of an interim apprehended violence order and criminal charges for assault which were ultimately dismissed on 21 July 2017.
As I have said, on 7 April Joseph's employment was terminated. The reasons then given were:
1. That he had engaged in serious and wilful misconduct on 5 April 2017 by having his solicitor attend the business premises and demand access to company books and records.
2. That his behaviour towards staff was objectionable and that he had on many occasions been verbally abusive and used obscene language inconsistent with his duties.
3. That there were many incidents where he had failed to carry out lawful or reasonable instructions.
4. That on 6 April he had police attend the premises without just cause or reason.
5. That on 7 April he attended the premises and intimidated and threatened to assault (presumably) Paul.
Joseph commenced these proceedings by originating process filed on 12 April 2017. On 19 April 2017, at the extraordinary general meeting convened pursuant to the notice of 22 March 2017, the other shareholders resolved to remove Joseph as a director.
I have referred to the basis on which the company was formed and conducted. The company has never paid a dividend to ordinary shareholders, although it has in recent years declared a dividend on the E and F class shares as a means of making provision for Fred and Carol. So far as the other shareholders are concerned, all of whom have worked in the business, they have derived their benefits not from dividend but in other ways. Those other ways include, chiefly, that they have been paid a salary for working in the family business owned by the company, and in addition, they have received other benefits such as motor vehicles, and also the provision of motor vehicles for members of their family or their dependents, including in some cases ex‑spouses. Some of this might be regarded as irregular and inappropriate in a conventional corporation, but these were arrangements in which all the shareholders appear to have acquiesced and ultimately, they reflect a means of extracting benefit from the company for the shareholders other than by way of dividend.
In support of his case that the affairs of the company are being conducted in a manner oppressive of him, Joseph has pointed to and relied on a number of matters.
The first is the making of what I will call advances of substantial sums of money to members of the company other than by way of dividend. I am not satisfied that in connection with this particular company any such advances have been made, other than to Joseph himself. Joseph admittedly received a total of about $400,000 in connection with the erection of his home, and that amount has been debited to his director's loan account. It remains shown as such in the company accounts, although it is as I have said probably statute-barred. In any event, realistically I do not think there was ever any intention that it be repaid, and though documented as a loan it was intended to be what in the vernacular has been called a non‑recourse loan.
It was suggested that a sum of money - perhaps $900,000 - had been provided to Johnny to assist him to purchase a property, and it seems likely that such a sum was provided to Johnny, but not from this company; rather, it came from another company, Candy Van Pty Ltd, and is not relevant to this proceeding, which is confined to Rafic and its affairs.
Nor am I persuaded that funds of this company were applied to fund the acquisition of a property in Lebanon for Fred. Joseph asserts in conclusionary form, without supporting evidence, that when Fred relocated to Lebanon in about 2011, he mortgaged the Lidcombe property of the company in order to fund the acquisition of a property in Lebanon, and left the shareholders with the debt. Although the evidence does establish that in about 2013 a mortgage of the Lidcombe property to Westpac was discharged and replaced by a mortgage to the Commonwealth Bank, the evidence does not go so far as to establish that there was any additional borrowing at that time. While the Commonwealth Bank mortgage bears a stamp that indicates a concessional amount of $1 million and a further advance of $2.7 million, that was explained by Paul as resulting from an error in the original stamping of the document. There is nothing to show that that explanation is not correct, and I am not prepared to reject it.
But even if moneys had been provided out of the company for other shareholders in that manner, and evidently money has been provided for Johnny, albeit out of a different company, that was just a feature of the manner in which, with the acquiescence of all the shareholders, the company was controlled by their father. It was a means of providing for them as and when he thought it necessary to provide for them. It was unconventional, but that of itself does not make any case of oppression. After all, the shareholders, other than Fred, did not subscribe any moneys for their shareholdings, and the capital which founded the company came from Fred, although it is fair to record that the plaintiff says, and I accept, that he did contribute some funds to the company at two different points in the course of its history - funds which, since his exclusion, he has at least in large part withdrawn. But the conclusion that there is no oppression in this respect is reinforced by the circumstance that, so far as one can tell from the current financial statements of the company, the plaintiff, through his loan account, has benefited more than anyone else from the patriarchal management of this company.
Complaint was also made that the making of payments to relatives of shareholders was oppressive. This refers to salaries paid to a sister Vanessa, said to be in excess of the value of the work she does, and the provision of motor vehicles for spouses and ex‑spouses of shareholders. Again, in a conventional company, that may be seen to be inappropriate, but in the circumstances of this company it was part of the way in which the shareholders extracted benefit from the company without declaring dividends. A benefit to a shareholder's spouse or ex‑spouse is, in effect, a benefit to that shareholder.
In 2003, the company advanced funds (perhaps $75,000) and guaranteed borrowings (perhaps to the extent of $275,000) from a New Zealand bank, to fund the acquisition of a property in Auckland. According to the plaintiff, this property was identified in the course of the company's business with a view to being used for the company. Ultimately, it was acquired by two entities as trustees of the Essie Trading Trust. One of those entities, Frederick Investments Limited, is a company in which Paul Essie holds 100% of the shares; the other was a professional trustee company, which has since been replaced by a firm of solicitors so that there are two trustees. Although it is at the margin of what really matters in the case, it is only fair to note that, despite the repeated suggestions that Paul controlled the trust, there is another independent trustee with its own fiduciary duties. In circumstances where trustees are usually required to act jointly, the existence of that other trustee provides a substantial comfort that the trust will be properly and duly administered.
The beneficiaries of the trust, which is a discretionary trust, are essentially the members of the Essie family, including, but not limited to, the shareholders in Rafic. So far as appears from the evidence, the loan to the trustees remains an asset of Rafic, but it does not bear interest. It is difficult to see, and Paul Essie did not really dispute, that there was no real benefit to Rafic in this transaction, on two counts: first, that it could not be said to be genuinely for the benefit of the company as a whole; and secondly, on the basis that it involved using for another entity a corporate opportunity which ought to have been used, if at all, for the benefit of Rafic.
Prima facie, breaches of equitable duty were involved in that transaction. It may be that Rafic's consent to the transaction would provide a defence to any such claim. There is some evidence that the plaintiff knew of and was involved in it. At least one document bearing his signature, addressed to the trustees at the time of the transaction, has been produced.
This transaction took place in 2003. Although it is very likely that it involved a prima facie breach of duty, the passage of time since 2003 and the probability that the plaintiff was in some way implicated in it, deprives it of present relevance to a suit for oppression.
A major feature of the plaintiff's complaints was the allegation that Paul Essie as managing director had total control of the company - that he could do as he liked, and that since the relationship had broken down there was no prospect that the plaintiff would receive any benefit from the company in the future.
As counsel for the defendant correctly pointed out, (CTH) Corporations Act 2001, s 232, is concerned with past or proposed acts or omissions of a company, not with speculation as to what might or might not happen in the future. Moreover, that Paul has "total control" of the company is something which he has only by the consent of, and with the acquiescence of, the other directors and shareholders. It is always in the power of the directors, by majority, to make a decision contrary to that of the managing director, or to control the managing director. It is always open to the shareholders, by majority, to remove directors. In those circumstances, the fact that Paul may be at present the managing director and exercise extensive powers within the company as such, is not of itself oppressive.
Complaint was also made that upon termination of his employment Joseph had not been paid the correct amount of long service leave. This involved two elements: the first was that his long service leave was calculated for only 20 years and not for 30 years, and the second that it was calculated at a rate less than his actual wage. As to the first, it seems that Joseph left the employment of the company for some time in or about 1997 after ten years' employment. Although, in his affidavit, he says in general terms that he has never been paid any long service leave, the evidence does not descend to any detail as to what happened when he left the company in 1997. Ordinarily, one would expect that any accrued entitlement would have been paid out on termination of employment. In any event, with a break of continuity of employment at that point, his current long service leave entitlement would apparently run from his re‑employment at the end of 1997 or early 1998.
As to the rate at which it was paid, it seems that it was calculated according to what was shown on his group certificate, or in the company's books. Those documents have not been produced and the matter is not capable of verification, although it appears clear enough that he in fact received a greater amount by way of salary than that on which his long service leave was calculated. However, if he has been underpaid his long service leave, he has a simple remedy, and that is to sue for his long service leave entitlement. I do not see underpayment or miscalculation of long service leave as a matter of oppression going to relief under s 232.
For those reasons, many of the grounds on which the plaintiff relies do not make out a case of oppression, but there remains one matter which requires further consideration. As I have said, this is a company that has never declared a dividend to ordinary shareholders, who have derived their benefits from the company by other means, most particularly through their remuneration and emoluments for their employment as working shareholders in the company. The company was founded as a family company, to run a family business, on the basis that all four of the sons who were shareholders, as well as their father, would work in the business. They were given shareholdings inferentially as a means of providing for them and reflecting their involvement on a sustained basis, as it was then anticipated, in the business. Whatever were the precise intentions of Fred at the time the company was established, as it came to be conducted over decades, it seems to me clear that each of the sons who were shareholders had a legitimate expectation that they would be employed in the business and that they would, in the absence of dividends, derive benefits from their shareholding through employment in the business.
When the plaintiff's employment was terminated on 7 April 2017, his ability to benefit from the business, in the way in which the shareholders had traditionally and conventionally extracted benefit from it, was brought to an end. He is now left to the hope of future dividends, if at some stage the company declares them, and the entitlement to share in capital on a winding up, if there ever is one. The question is whether that is oppressive within s 232.
There is no doubt that the mere fact that a minority shareholder is disgruntled, disaffected and frustrated but unable to sell their shares is insufficient to make a case of oppression. Likewise, it is insufficient that a minority shareholder is locked in and no dividend is paid. Something more than that is required to make a case of oppression.
The law in this area, and that relating to the winding up of companies on the just and equitable ground, when the company is in the nature of a quasi-partnership, are closely related. In Ebrahimi v Westbourne Galleries Ltd, [1] Lord Wilberforce first identified the circumstances that commonly give rise to equitable restraints on the exercise of legal powers by directors and shareholders: namely, one or more of an association formed or continued on the basis of a personal relationship involving mutual confidence, an understanding that all or some of the shareholders shall participate in the conduct of the business, and restrictions on the transfer of shares so that a member cannot take out his or her stake and go elsewhere.
Turning to the present case, it seems to me that all three of those requirements are satisfied. First, it is clear that the association of the shareholders was at least continued on the basis of a personal relationship, that is to say they are brothers, involving mutual confidence. That is particularly established by what I have referred to as the unconventional or unorthodox manner in which benefits were sometimes extracted from this company. The fact that the shareholders were prepared to acquiesce in those arrangements is redolent of mutual confidence between them that ultimately those exercising powers of benefaction and munificence will do so in a fair and proper way. The fact that they remained associated in the company which was administered first by Fred and then, to an extent, in a similar way by Paul, speaks strongly of there being a high degree of mutual confidence and trust between them. Without it, such a basis of administration would not have been tolerated.
As to the second, it was clear from the outset that it was understood that each of the sons would participate in the conduct of the business and, as I have said, it was through their participation in the conduct of the business and their drawing of a wage for working in it and the other emoluments associated with their employment, that they in fact extracted benefit from it rather than through a dividend.
Thirdly, as to restrictions on the transfer of shares, no‑one has bothered to put in evidence the articles of association but, given the shareholdings in the company, and the fact that it is a proprietary company, I can infer that the plaintiff would not be able to take out his share and go elsewhere. No‑one other than a member of the family would likely be prepared to purchase his share from him.
In Mopeke Pty Ltd v Airport Fine Foods Pty Ltd, [2] I said that references in the judgment of the House of Lords in O'Neill v Phillips [3] to the standard case in which the shareholders have entered into association upon the understanding that each of them who has ventured his capital will also participate in the management of the company, coupled with the identification of the three features drawn from Ebrahimi that contribute to making such a case as I have described them above, and the conclusion that it followed that it would have been unfair for the majority to use its voting powers under the articles to remove the minority from participation in the conduct of the business without the opportunity to sell its interest at a fair price, is instructive and showed that it is usual, rather than exceptional, for equitable considerations to arise in such a case, on the basis that it would usually be considered unjust, inequitable or unfair for a majority to use their voting power to exclude a member from participation in management, without giving him the opportunity to remove his capital upon reasonable terms. In other words, the aggrieved member had a legitimate expectation that he would be able to participate in the management, or otherwise withdraw from the company with his or her capital.
As it was put in Ford's Principles of Corporations Law, [4] we assume that equitable considerations underpin the oppression remedy. A party may have a legal right which the Court refuses to allow the party to exercise, on the basis that it would be unfair to do so. It may be unfair because exercise of a legal right may breach an understanding between the parties.
An example is a company formed by a majority and minority shareholder, on the basis that both shareholders will participate in the management of the company and each be directors. The majority shareholder has a legal right to remove the minority shareholder as a director. However, where this breaches the understanding of the shareholders that both will be involved in management and be directors, the Court can restrain the exercise of the legal right by the majority shareholder, on the basis that its exercise would be oppressive.
Similarly, in the context of the just and equitable winding up remedy, in Ebrahimi, where there were ultimately three equal shareholders, it was held that the basis for a winding up order on the just and equitable ground existed where after a long association and partnership, during some of which the plaintiff had an equal share in management, and had joined in the formation of the company, the inference was indisputable that that had been done on the basis that the character of the association would, as a matter of personal faith, remain the same, so that the other shareholders were not entitled, in justice and equity, to make use of their legal powers of expulsion and to bring about a situation where, by removing the plaintiff as a director, he lost his right to a share in the profits through director's remuneration, retaining only a chance of receiving dividends, and was unable to dispose of his interest without the consent of the majority shareholders.
In my view, all the relevant considerations which would make the exclusion of the plaintiff from management, and in particular employment, and thus from extracting benefit from the company in the way all the shareholders traditionally have done and the others continue to do, is prima facie within the concept of oppression in s 232 based on the authorities to which I have referred.
The remaining question is whether that prima facie position is displaced by the circumstance, if it be established, that the plaintiff is responsible for his own exclusion. In Ebrahimi, to which I have referred, Lord Cross said: [5]
A petitioner for an order who relies on the just and equitable ground must come to the Court with clean hands and if the breakdown in confidence between him and other parties to the dispute appears to have been due to his misconduct he cannot insist on the company being wound up if they wish it to continue.
Mr Allen, who appeared for the defendant, referred to Joint v Stephens, in which the Victorian Court of Appeal said that: [6]
… the task of deciding whether there has been commercial unfairness is to be undertaken in the context of the particular relationship in issue. As is observed in Ford, the assessment of commercial unfairness will not infrequently involve a balancing exercise between competing considerations. In turn that may involve an examination of the conduct of the applicant.
Their Honours refer to two aspects of the conduct of the applicant which may be material: it may mean that the conduct of the respondent, even if prejudicial, is not unfair; or even if the conduct on the other side is both prejudicial and unfair, it may affect the relief which it is appropriate to grant.
In Re R A Noble & Sons (Clothing) Limited, [7] it was said that the conduct of one director in running a quasi-partnership company virtually as his own was not unfair, because the applicant had not shown any interest in being involved. In Morgan v 45 Flers Avenue Pty Ltd, [8] Young J as he then was said that the approach taken by Nourse J in Re London School of Electronics [9] was the correct one, namely that the conduct or misconduct of an applicant may either render the conduct on the other side not unfair, or may affect the relief which the Court thinks fit to grant, but that there is no overriding requirement in an oppression case that the plaintiff come to the Court with clean hands.
The point is also reflected in the judgment of the New South Wales Court of Appeal in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd, [10] where Spigelman CJ said:
89 It may be accepted that the existence of irreconcilable differences among persons involved in what is in effect a partnership will destroy the personal relationship involving mutual confidence that lies at the heart of the partnership analogy. This analogy has been applied both to applications for winding up on the just and equitable ground and also to oppression suits. (Although the differences in form are not immaterial. See In Re a Company 1983 2 All England Reports 854). Irreconcilable differences may establish a basis for winding up, they do not of themselves constitute oppression or unfair prejudice. See McMillian v Toledo Enterprises [1995] 18 ACSR 603 at [64]. Nevertheless, the destruction of the personal relationship establishes a basis for granting relief in the usual case, not for concluding that the partnership analogy has ceased to be pertinent.
90 There will be circumstances in which the emergence of irreconcilable differences will cause the Court to conclude that an understanding or expectation as to participation in management should be taken to have ceased, in a manner not entitling the person excluded from such participation to relief under the statutory provisions. That would be so where the Court decides that it is the person excluded who is responsible for the breakdown in the relationship.
As it seems to me, those cases establish, first, that the existence of irreconcilable differences in a corporate quasi-partnership that destroy the personal relationship involving mutual confidence may found an order for winding up, or if there is something more, an order founded on the oppression ground; and secondly, for reasons I have already explained, that something more may be found where there is an exclusion from a benefit that it was intended the shareholders enjoy and that the other shareholders continue to enjoy - in the present case, employment and its emoluments; but thirdly, that there will not be oppression, and a winding up may be declined, if the person excluded is responsible for the breakdown in the relationship.
That gives rise to the question whether, in the present circumstances, Joseph should be regarded as responsible for the breakdown of the relationship. I have already referred to the history by which the relationship appears to have broken down in March and April of this year. In addressing that question, it is first necessary to bear in mind that this was a family relationship, as well as a commercial one. It is one thing where there is a corporate quasi-partnership between people who are business partners but who do not have a personal relationship; it is a somewhat different thing where there is also a familiar relationship between them, as there was here. The difficulties in attributing blame and responsibility to the breakdown of personal relationships are notorious, and 50 years ago now drove policy from fault-based matrimonial proceedings to non‑fault proceedings, realising the impossibility of sensibly attributing fault for the breakdown of a personal relationship.
In this case, I do not doubt that Joseph's personality and conduct have from time to time been difficult, confronting, and abusive. That he was warned about such conduct as long as 17 years ago is some evidence to found that, as is his brother's evidence of his more recent conduct. That said, that seems to be part of his personality. Moreover, it has been sufficiently tolerable for 17 years, until he demonstrated an increased interest in the financial affairs of the company. In my view, particularly having regard to the terms of the letter of dismissal, it is entirely artificial to attribute the breakdown in the relationship solely to his attitude to other employees, and while Mr Allen described it in his written submissions, not inaccurately, as bullying, casual racism and unwillingness to listen, that, in my view, was only a little part of the whole story that culminated in his dismissal and exclusion.
I am, of course, conscious that Joseph brought proceedings in the Fair Work Commission for unfair dismissal, and that a Deputy President of that commission dismissed Joseph's claim on 7 July 2017, thereby holding that the dismissal was not "harsh, unjust or unreasonable". That was a decision made in the industrial law context. I am not concerned with the mere question of whether the dismissal was justified - or harsh, unjust or unreasonable - in that context, but with the wider context whether it was unfair that he be dismissed, and excluded from management, and deprived from the only way in which shareholders were extracting benefit from the company without being afforded the opportunity to withdraw his capital on reasonable terms.
As it seems to me, and as the Fair Work Commission decision upholds, the company was legally entitled to dismiss Joseph; but it seems to me that if they were to exercise their legal right to do so, then as a matter of fairness in the context of this company, the basis on which it was established, and the basis on which it was conducted, fairness required that Joseph be afforded an opportunity to withdraw his capital at the same time. In other words, if there was to be a separation between them, it needed to be a complete separation.
Another way of recognising this is that for many years, Joseph, like his brothers, had been prepared to trust those in control to manage the company benevolently, even though not in accord with conventional corporate practice. That trust has broken down, and that of itself would provide grounds for a just and equitable winding up, but no‑one suggests that that is the preferable order in this case. In those circumstances, it seems to me that Joseph made a case for a compulsory purchase order.
It is next necessary to turn to the question of valuation, which is easily addressed. The value of the real estate was ultimately agreed at $14 million. When that was factored into the valuation of the company prepared by Kevin Kwok, and when it was updated using the 2016 financial statements to which Mr Kwok did not have access, the valuation of the company on a net asset basis is $14,925,809.97. Joseph's 16% shareholding, on that basis, is worth $2,388,129.40.
It is then necessary to consider against whom the order should be made. Only the company and Paul were joined as defendants. No relief was pressed against the second defendant, All‑Fect, and it was ultimately accepted that it was an unnecessary or inappropriate party to the proceedings.
Section 233(1) provides for an order for the purchase of shares with an appropriate reduction of the company's share capital, or for the purchase of any shares by any member. I could not make an order against a person who has not been joined as a defendant. The alternatives are to make an order against the company with a reduction in share capital, or to make an order against Paul.
The originating process sought an order against Paul. The ordinary practice of the Court is to make an order against the majority, and there are difficulties in making an order against the company that involves a reduction in share capital. Nonetheless, it seems to me that in this case what is effectively being done is to permit Joseph to withdraw his capital, in company with his departure from the company. In those circumstances, I propose to make an order for the purchase of shares by the company with an appropriate reduction of the company's share capital. It seems to me that that course best addresses the situation and leaves to the company as a whole, rather than Paul alone, the decision as to how Joseph's exit is to be funded.
The Court therefore orders that:
1. pursuant to Corporations Act s 233(1)(e), the first defendant Rafic Pty Ltd purchase the shareholding of the plaintiff Joseph Fred Essie for a price of $2,388,129.40, and that the company's share capital be reduced accordingly.
2. there be liberty to apply by arrangement with my associate on three days' notice for further directions for the implementation of order 1.
3. the first defendant pay the plaintiff's costs.
[3]
Endnotes
[1973] AC 360.
(2007) 61 ACSR 395.
[1999] 2 All ER 961.
12th ed, p 688.
[1972] 2 All ER 492 at 507.
[2008] 26 ACL 1467 [2008] VSCA 210 at [136].
[1983] BCLC 273.
(1986) 10 ACLR 692 at 707.
[1986] Ch 211 at 222.
[2001] NSWCA 97, 37 ACSR 672 at [89] and [90].
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Decision last updated: 09 November 2020