First Plaintiff Second Plaintiff v First Defendant Second Defendant Third Defendant

PRACTICE AND PROCEDURE - Overarching purpose - Where trial inutile - Civil Procedure Act 2010 (Vic) ss 7, 8(1)(a), 19, 22, 23, 24, 25.

1 The first plaintiff, Antonio Di Gioacchino (Antonio) and the first defendant, Umberto Di Gioacchino (Umberto) each hold 50 per cent of the shares in the third defendant, Wyndham Park Estate Pty Ltd (WPE). They are also directors of WPE which acts as trustee of the Di Gioacchino (Wyndham) Unit Trust (DGW Trust). The unitholders of the DGW Trust are their corporate entities, the second plaintiff (Hydrill Pty Ltd) and the second defendant (Di Gioacchino & Sons Pty Ltd) respectively.

2 WPE does not trade or carry on business. Aside from cash in the sum of about $9,000 and an amount held in a solicitor's trust account in the sum of about $143,958, its main asset comprises the holding of 500,000 units in the Bundaberg BGC 2011 Trust (Bundaberg Trust). The primary asset of the Bundaberg Trust is a homemaker centre in Bundaberg. According to Antonio the estimated value of WPE's interest in the Bundaberg Trust is between $500,000 to $600,000. WPE receives dividends from the Bundaberg Trust in respect of its holding of less than 10 per cent of the total units. It has no liabilities of any substance.[1] The assets and liabilities of WPE and the DGW Trust have been assessed and calculated by an expert, Mr Paul Lom (Lom), as referred to below.

3 Given the nature of the dispute, it was dealt with under the Oppression Program recently introduced by the Court.[2] The aim of the Program is to deal with these matters in the most efficient and cost effective manner. This usually includes a valuation and mediation at the earliest possible stage and limited evidence.

4 By this proceeding, both the plaintiffs and the first and second defendants (together, the defendants) seek relief pursuant to s 233 of the Corporations Act 2001 (Cth) (the Act) in relation to the conduct of the affairs of WPE. The real difference between the parties is that the plaintiffs' primary prayer for relief is an order that they buy the defendants' shares in WPE and units in the DGW Trust, whereas the defendants primarily seek the winding up of WPE and the vesting of the DGW Trust.[3] The plaintiffs do not seek an order that WPE be wound up or that the DGW Trust be vested.

5 Each side alleges wrongdoing by the other. These allegations establish both deadlock and the necessary conduct so as to enliven the jurisdiction under s 233 of the Act.[4] Indeed, neither party has submitted (and in my view, appropriately so) that the jurisdiction has not been enlivened. The plaintiffs also seek orders for an accounting of any monies due to them by Umberto. Antonio also maintains and pursues a claim for remuneration based upon alleged misleading and deceptive conduct by the defendants or on a quantum meruit basis. There is a claim for $15,694.41 as monies had and received and other allegations of wrongdoing by the defendants.

6 The time and cost of dealing with the alleged wrongdoing is, in my opinion, not only disproportionate to the amount and issues in dispute, but also unnecessary and irrelevant.[5] The defendants effectively agreed to and submitted this much. Mr Lom has already dealt with many of the issues raised by the parties in his report as referred to below. He is obviously in the best position to deal with any of the remaining issues.

7 On 4 October 2018, Randall AsJ ordered that an expert be appointed to enquire and report as to various questions including what the net amount received by the plaintiffs and the defendants from WPE was. After revising his report the expert, Mr Lom, concluded that the defendants had received $19,364 more than the plaintiffs. The defendants do not accept this discrepancy.[6]

8 The Lom Report was delivered on 30 November 2018, but updated on 19 December 2018. Mr Lom delivered the report in his capacity as a Court appointed expert pursuant to s 65M of the Civil Procedure Act 2010 (Vic) (CPA) and as agreed to by the parties. The Lom Report addresses the following matters:

(a) the total net amount received by the plaintiffs and the first and second defendants from WPE;

(b) the value of the carried-forward tax losses for WPE and the DGW Trust; and

(c) the value of WPE and the DGW Trust.

9 The conclusions in the Lom Report (as updated) are summarised below.

(a) The plaintiffs introduced capital of $1,568,850, received drawings of $2,788,456 and is due the sum of $615,276 representing their share of the profits: table appearing in Mr Lom's letter dated 19 December 2018.

(b) The first and second defendants introduced capital of $1,061,344, received drawings of $2,300,312 and is due the sum of $595,912 representing its share of the net profits: table appearing in Mr Lom's letter dated 19 December 2018.

(c) Accordingly, this means that the current state of the evidence is that the first and second defendants received from WPE's funds $19,364 more than the plaintiffs.

(d) WPE has no relevant tax losses: Lom Report, [E.1].

(e) The DGW Trust has carried-forward tax losses of $970,313 (income) and $127,968 (capital): Lom Report, [E.4] and [E.5].

(f) WPE's net assets comprise of unappropriated profits in the form of dividends declared to WPE by two family trusts controlled, respectively, by the plaintiffs and the defendants. The total amount of these profits is $742,000 (each family trust declared distributions of $371,000): Lom Report, [E.1].

(g) The maximum value of WPE is $742,000 and could be as low as $615,860 depending on taxation position of the purchaser of WPE's shares. This valuation does not allow a margin in respect of the process required by a purchaser to realise the value of the loans / unappropriated profits: Lom Report, [F.2.4] and [F.2.5].

(h) The value of the DGW Trust is nil: Lom Report, [F.3.2] and [F.3.4].

10 The Originating Process was filed on 16 February 2018. As noted, the proceeding was referred to the Oppression Program.

11 On 28 August 2018 Randall AsJ ordered that points of defence be filed by 3 September 2018.

12 On 4 October 2018 and, as noted above, Randall AsJ appointed Mr Lom as an expert of the Court. His Honour adjourned the further hearing of the proceeding to me and fixed the directions for 30 November 2018.

13 On 22 November 2018, and as the Lom Report had not been completed, I made orders extending the time by which Mr Lom was required to file his report to 30 November 2018 and adjourned the directions hearing to 13 December 2018.

14 On 13 December 2018, and concerned that the costs and time spent on the matter were entirely disproportionate given the issues involved, I ordered each party to file submissions by 1 February 2019 as to the appropriate disposition of the case. I adjourned the directions hearing to 15 February 2019.

15 Each party filed written submissions and proposed orders were submitted by each party and discussed on 15 February 2019 at the directions hearing.

16 The plaintiffs submitted that if the parties were unable to resolve the matter by mediation within 21 days, they should purchase the shares and units held by the defendants for $320,101 (the Buy-Out) and that the remaining claims of the plaintiffs be referred to an Associate Judge for hearing and determination.

17 The defendants suggested that the proceeding be fixed for trial on an estimate of five days. The usual trial orders were sought.

19 On 20 February 2019, I delivered my Ruling. It was read into the transcript in the usual way and I reserved the right to edit the transcript. I ordered that if the matter was not resolved by mediation within 21 days, the Buy-Out was to go ahead but at a value to be determined by Mr Lom. I provided for any further submissions to be made to him. After the filing of his second Report, I directed that any party objecting to the adoption of the second Report by the Court should file and serve written submissions in advance of the next directions hearing.

20 Although desirably short and to the point, the defendants politely suggested that more detailed reasons were necessary to enable consideration to be given to an application for leave to appeal, which of course is their right. These are the reasons, which will be delivered prior to the authentication of any order.

21 There can be no doubt that the plaintiffs have consistently submitted that a Buy-Out is the appropriate remedy, and the defendants have consistently submitted that a winding up is the appropriate remedy.

22 The position of the plaintiffs is clear and does not require further elaboration. The open offers made by the plaintiffs on 10 July 2018 and 21 January 2019 seek a Buy-Out of the defendants' interest.[7]

23 Paragraphs 8 and 9 of the defendants' submissions dated 1 February 2019 are in the following terms:

1. Notwithstanding their various claims, the defendants remain willing to resolve this proceeding on the basis that WPE simply be wound up and the trust vested. The Court clearly has power to do so. Any such questions of entitlement or overpayment are best resolved by a liquidator.
2. The defendants have previously made open offers to resolve this matter on the basis of a division of the money in the bank accounts and WPE being put into liquidation. These have not being accepted by the plaintiffs. A copy of the defendants' offers is annexure "A".

24 The open offers made by the defendants on 26 June 2018 and 18 December 2018 seek a division of assets and a winding up.

25 Unlike the plaintiffs, the defendants have never asserted the position that they are buyers, despite this course being reserved in paragraph B of their prayer for relief in their defence. This reservation is stated in the defendants' submissions dated 1 February 2019 as 'For completeness there is an alternative ...'. In this case, and perhaps even more generally depending on the circumstances, the defendants must be held to their primary relief. Strategic and tactical positions should be discouraged.[8]

26 Finally, the transcripts will bear out and evidence that the consistent and continued submission of the defendants was that a winding up is the appropriate remedy. The question has always been winding up versus Buy-Out by the plaintiffs.

27 The balance of the claims against WPE and the defendants are less relevant once control of the company passes to Antonio. He can decide on any further course of action.

28 If the plaintiffs wish to proceed against, or continue the proceeding, against the defendants then that would have happened anyway and, of course, they are free to do so.

29 Further, although the defendants, seek a winding up, their only opposition to a Buy-Out is that the amount offered is too low and does not reflect the true value of the shares and units. Again, the defendants do not make and have never made any offer to buy the plaintiffs out.

30 So it does seem that the case is all about value.

31 If I am wrong in my view that the parties have proceeded on the assumption that the jurisdiction has been enlivened, I consider in any event, that this is the case.

32 Section 232(d) of the Act provides that the Court may make an order under s 233 if 'the conduct of the company's affairs' are 'contrary to the interests of members as a whole.'

33 It is convenient to deal with the meaning of the latter phrase first. In Re H R Harmer Ltd, Romer LJ considered the nature of the interests and expectations of the members of a company. His Lordship said the following:[9]

... shareholders are entitled to have the affairs of a company conducted in the way laid down by the company's constitution. Members are entitled to expect that their board shall perform its functions as a board and that the proceedings of the directors shall be carried out in a normal and orthodox manner. They are entitled to the benefit of the collective experience of the directors, and to expect that the directors and each of them can freely express their views at board meetings and that regard shall be had to what they say and to resolutions properly passed.

34 In Exton v Extons Pty Ltd (Extons), and after a review of the relevant authorities_,_ I said:[10]

[39] ... the better view is that s 232(d) is separate and distinct from s 232(e) and that a breach may not necessarily involve commercial unfairness. The court is required to examine all of the relevant facts and circumstances in order to determine whether the conduct under scrutiny is in the best interests of the company as a whole, apart from its members. ...

35 In the present case, two 50 per cent shareholders and directors of a small, tightly held, private company make mutual allegations of oppressive conduct. There may be no commercial unfairness in the traditional sense, however, they are in a state of deadlock, and cannot maintain a proper corporate governance regime for the company. For example, each party complains of the other party having failed to convene a meeting of directors or pass a resolution in respect of whether the 2016 income tax returns for WPE and DGW Trust should be lodged with the Australian Tax Office.[11] Plainly, this state of affairs is contrary to the interests of the members of the company, even if the numerous other allegations which make up the oppressive conduct - that is, the allegations of unauthorised payments and the like - are not established at trial.

36 I now turn to whether the allegations of oppressive conduct constitutes conduct that has occurred within the affairs of WPE. Section 53 defines the 'affairs of a body corporate,' and applies to ss 232 and 233. Subsection 53(c) includes within this non-exhaustive definition, 'the internal management and proceedings of the body.' The definition is broad. It encompasses the calling and holding of meetings,[12] the regulation and election of the company's directors,[13] and indeed more generally, a great majority of the matters that are governed by the constitution of the company.[14]

37 In my opinion, the effect and evident consequences of the allegations, in this case, clearly concern the affairs of the company. Each side holds 50 per cent of the shares in the company and acts as a director. They cannot hold meetings or pass necessary resolutions. Plainly, the existence of a dispute, the effect of which is to preclude the proper functioning of the 'internal management and proceedings' of the company is encompassed within the affairs of the company.

38 In my opinion, the defendants are not, in the circumstances of this case, entitled to the relief that they seek, that is a winding up of WPE and vesting of the DGW Trust. The orders that the Court may make, once the oppression jurisdiction (s 232) is enlivened, are contained in s 233 of the Act. Relevantly:

(a) the defendant seeks an order 'that the company be wound up;' and

(b) the first and second plaintiffs seek an order 'for the purchase of any shares by any member or person', that is, an order that they purchase the shares and units owned by the first and second defendants.

[89] Courts are "extremely reluctant to wind up a solvent company". ... As the Court of Appeal has observed, "[i]t is well accepted that the winding up of a solvent and flourishing company should be a last resort". Courts will consider whether any other relief would be preferable to a winding up order... (citations omitted)

40 Further, where an application is made, and the Court is satisfied of circumstances that justify a winding up on the just and equitable ground under s 461(1)(k) of the Act, the grant of that relief is subject to the Court's satisfaction of the proviso contained in s 467(4).[16] That section provides as follows:

Where the application is made by members as contributories on the ground that it is just and equitable that the company should be wound up or that the directors have acted in a manner that appears to be unfair or unjust to other members, the Court, if it is of the opinion that:

(a) the applicants are entitled to relief either by winding up the company or by some other means; and

(b) in the absence of any other remedy it would be just and equitable that the company should be wound up;

41 McPherson J (as he then was) said, in relation to a predecessor provision to s 467(4) of the Act, in Re Dalkeith Investments Pty Ltd:[17]

However, the effect of s 367(3) of the Code, is, as I see it, that winding up is to be regarded as a remedy of last resort and one which ought not to be granted if some other less drastic form of relief is available and appropriate.

42 These observations apply equally to the power or discretion to order a winding up, pursuant to either ss 461 or 233 of the Act. McMurdo JA said in Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd:[18]

[62] As the present case illustrates, there will often be facts and circumstances by which the court has powers both under s 233 and s 461. Conduct in the nature of oppression can make it just and equitable that a company be wound up. In such cases, s 467(4) will not be engaged by the exercise of a judicial discretion. Rather, it will be engaged by an application being of the kind described in the chapeau to the provision, and by the formation of the court's opinion that the applicant is entitled to relief, either by winding up the company or by some other means, and that in the absence of any other remedy, it would be just and equitable that the company should be wound up. Where, as in the present case, that opinion is reached, the provision by its mandatory terms, requires a winding up order unless the court is also of the opinion which is described in the proviso. The requirements of s 467(4) cannot be avoided by a court declaring that it is exercising only the discretion under s 233.

[63] It is, of course, a question for the court to decide upon the appropriate relief. But where it is engaged, s 467(4) confines the exercise of that discretion, whether or not there is also a claim for relief under s 233. The consequence of that operation of s 467(4) is unremarkable, once it is understood that the discretion under s 233 is itself subject to a substantially similar limitation. (emphasis added)

43 In summary, I must take into account the weight of authority to the effect that winding up is remedy of last resort. I must consider whether there is an alternative and less drastic form of relief that is available and appropriate. I must also consider whether the defendants are acting unreasonably in seeking to have WCP wound up. In my opinion, each of these factors weighs against the making of a winding up order.

44 There is, in the circumstances, relief that is entirely available and appropriate. As noted, the parties have clearly proceeded on the assumption that the jurisdiction under s 233 is enlivened,[19] and a Buy-Out order is available in respect of both the shares and units.[20] Once a proper value is given to the shares and units, this remedy is entirely appropriate. As noted:

(a) While WPE does not trade or carry on business, it and the underlying DGW Trust are solvent and have no material liabilities;

(b) Any further adjustments in relation to the allegations of unauthorised withdrawals made by both parties can and are best resolved by Mr Lom following any further submissions;

(c) The balance of claims available to the company need not be prosecuted by a liquidator. Antonio can decide whether to prosecute those claims once control of the company passes to him; and

(d) The only factor which would support the making of a winding up is the existence of a deadlock. This would be resolved by a Buy-Out.

45 There is no particular reason for a winding up other than to resolve the deadlock between the parties, and to enable the parties to effectively go their own way. Winding up is, indeed, a last resort as the authorities point out, and although WPE in its trustee capacity is not trading as such, it and DGW Trust are solvent and the Buy-Out will remove the deadlock. There is no other basis to wind up the company and as noted, alternative relief is available and entirely appropriate.

46 This is not a case in which the Court is required to hear the matters which consist of the allegedly oppressive conduct of each of the parties, in order to determine what bearing that conduct would have on the value of the shares and units. The conduct that is the subject of the alternative claims as noted at paragraph [5], can properly be dealt with by Antonio once the control of the company passes to him. Submissions as to the discrepancy of $19,364 that is disputed by the defendants and any other adjustments that may be required should be made to Lom. This amount is, in the circumstances, de minimis and in light of the overarching purpose referred to below, should not be dealt with by this Court, and certainly not by way of a five day trial.

47 Further, as noted, s 467(4) of the Act in effect restrains and restricts a Court from winding up a company on the just and equitable ground if some other remedy is available and the party seeking the winding up is acting unreasonably in seeking the winding up instead of the other available remedy. For the reasons set out herein, the defendants are acting entirely unreasonably in pursuing a winding up when a buy-out at value is available and in circumstances where they do not, in reality, wish to acquire the shares and units. The winding up can only place them in a worse position.

The Civil Procedure Act 2010 (Vic)

48 Pursuant to s 8(1)(a) of the CPA this Court 'must seek to give effect to the overarching purpose in the exercise of its powers' including in the exercise of those powers contained in its statutory jurisdiction. That overarching purpose is, pursuant to s 7, 'to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute'. While the overarching obligations are not imposed on the Court, they are instructive. In particular, I refer to s 19 (only taking steps to resolve the dispute), s 22 (the use of reasonable endeavours to resolve the dispute), s 23 (the narrowing of issues in dispute), s 24 (ensuring that costs are reasonable and proportionate) and s 25 (minimising delay).

49 As the provisions of s 233 of the Act have clearly been enlivened, the sole question appears is the appropriate remedy and, in my view, it is clear that this is the value of the shares and the units. It is inconceivable that the Court embark on a five day trial, as suggested by the defendants. To what end? Whatever the conduct and oppression - both sides - the jurisdiction is enlivened and the question is one of the appropriate remedy in the circumstances. For the reasons given it is a Buy-Out for proper value. How can the defendants complain when they urged for the demise of the company? This position entirely undermines their alternative position as buyers. They are not. They would rather see the company wound up. The Court would not be achieving the overarching purpose, by allowing a trial to proceed, in circumstances where it is not necessary to resolve the dispute or consider what final relief or value is appropriate in the circumstances.

50 The defendants appear to complain that they were not given an opportunity to put on further material and be heard in relation to the form of relief. They propose to have a five day trial. However, the defendants were given an opportunity to make submissions on this very subject, which they did. They continuously and consistently 'nailed their colours to the winding up mast'. No amount of additional material would be of any assistance and nor would a trial. There is sufficient common ground and agreed facts to conclude, without a trial, that with the jurisdiction having been enlivened, the only question is one of the appropriate remedy. For the reasons advanced, the remedy is clear, available and entirely just. Issues of value and adjustments (as contended by both parties) are best dealt with by Mr Lom. This is the best way of dealing with the matter and is entirely consistent with the CPA.

51 For these reasons I propose to make the orders referred to above.

[1] The assets are extracted from Antonio's affidavit sworn 14 February 2018. In addition, Antonio states that there are tax losses of about $1,091,500 as at 30 June 2016. Umberto agrees about the holding of the units in the Bundaberg Trust but does not give that holding a value. He agrees about the cash amount but has no knowledge of the amount in the solicitor's trust account and deposes further in his affidavit sworn on 1 May 2018, that there are franking credits of $300,000.

[2] Supreme Court of Victoria, Practice Note SC CC 8 - Oppressive conduct in the affairs of a company.

[5] Antonio alleges various conduct issues that relate both to financial dealings and management type issues. The management type issues clearly evidence deadlock. The financial issues include making excessive and unauthorised drawings and making unauthorised payments. Umberto alleges that Antonio used funds from WPE without his authority and for his personal use. Some details are provided in his affidavit sworn 1 May 2018. It appears that Umberto has gone to great length and expense to establish that the amount withdrawn by Antonio as at 30 April 2015 was $74,437. Umberto also alleges non-financial conduct issues on the part of Antonio which confirms the deadlock.

[6] Whether the figure is $19,364 or $74,437, or some variation thereof, hardly justifies a 5 day trial as proposed on behalf of Umberto. Any discrepancy is able to be resolved by Mr Lom.

[7] The first offer was for $320,000 and the second offer was for $320,101. Both were based on figures and calculations from the Lom Report.

[8] Ultimately, and if a trial were to proceed, the defendants would be put to election as to the remedy that they seek. For the reasons set out below, it is clear that they seek a winding up. See also; Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd & Ors [2018] QCA 48 [25] (McMurdo JA) ('Asia Pacific')

[9] [1959] 1 WLR 62, 87 (Romer LJ).

[10] (2017) 53 VR 520, 521-2; [2017] VSC 14; 118 ACSR 411, 421 [39] (Sifris J).

[11] Points of Claim at [25]; Points of Defence at [25].

[12] Turnbull v National Roads and Motorists Association Ltd [2004] NSWSC 577; (2004) 50 ACSR 44, 56 [48] (Campbell J).

[13] Sutherland v National Roads and Motorists Association Ltd [2003] NSWSC 829; (2003) 47 ACSR 428, 430 [15] (Campbell J).

[14] See s 134 of the Act which states that 'A company's internal management may be governed by provisions of this Act that apply to the company as replaceable rules, by a constitution or by a combination of both.'

[15] (2017) 53 VR 520, 545; [2017] VSC 14; 118 ACSR 411, 433 [89] (Sifris J).

[16] In the alternative to relief under s 233, the defendants seek a winding up pursuant to s 461(1)(k) of the Act.

[17] (1984) 9 ACLR 247, 252 (McPherson J). Cited with approval in Asia Pacific [2018] QCA 48 [47], [51]-[52] (McMurdo JA), [95] (Jackson JA).

[18] [2018] QCA 48 [62]-[63] (McMurdo JA).

[19] If I am wrong, I consider that in any event and for the reasons given above, the jurisdiction has clearly been enlivened.

[20] Consistent with authority in the State of Victoria, relief under s 233 may extend to making orders in relation to the affairs of a corporate trustee, as well as orders compelling one party to buy out the units of an underlying unit trust held by the other. See Vigliaroni v CPS Investment Holdings Pty Ltd [2009] VSC 428; (2009) 74 ACSR 282 (Davies J); Wain v Drapac [2012] VSC 156 (Ferguson J); Arhanghelschi v Ussher [2013] VSC 253; (2013) 94 ACSR 86 (Ferguson J).