Foxwell v Westbury Joinery Co Pty Ltd [1998] VSC 94

Supreme Court of Victoria|1998-10-02|Before: Hansen J.

CORPORATIONS - Internal disputes - Finding of oppression - Subsequent appointment of administrators followed by liquidation - Relief - Orders against directors. COSTS - Informal offers - Effect - Plaintiff failing on one issue - Discretionary considerations.

This is an oppression case under s.260 of the Corporations Law. Following a trial in April I gave judgment on 26 June. I found oppression and stood the matter over to 31 July to enable the parties to consider their position. The amended notice of motion included orders for winding up, under s.260 and s.461, but at trial winding up was not the primary or preferred relief. For that reason and because, in any event, it would have been a course of last resort, I did not find it necessary to consider the case for winding up.

The case was brought by Joseph Michael Foxwell against Westbury Joinery Co. Pty. Ltd. ("Westbury Joinery"), Guiseppe Umberto Ganci (who is known as Joe Ganci), William Kerr Strachan, Michael Angelo Giurleo, Carlo Ganci and Santo Antonio Ganci. Each individual held shares in Westbury Joinery (Foxwell, Joe Ganci, Strachan and Giurleo who as the original founding and working directors held 80 each, while Carlo and Santo Ganci held 40 each). In my judgment I found that Carlo and Santo Ganci became directors on 2 December 1993. They continue to question whether they were ever directors. Whether they were or not I readily accept that they did not play an active role as such and that all relevant decisions were made by the other directors.

Two related companies were not defendants at the time of the trial. Those companies are Westbury Joinery Services Pty. Ltd. ("Westbury Services") and Westbury Joinery and Co. (Holdings) Pty. Ltd. ("Westbury Holdings").

An issue at the trial was the value of Foxwell's interest in Westbury Joinery. At the time of the trial the company, or the Westbury Group as the three companies might be called, was trading and, to all intents and purposes, would continue to do so. It was then proper to approach the valuation on the basis of maintainable future earnings. In my judgment I did not resolve the valuation issue. I refrained from doing that deliberately, as I indicated to the parties that I would. Indeed I was invited to take that course so as to give the parties the opportunity to consider that aspect along with all other questions of relief, and perhaps to resolve their differences.

In addition to his 80 shares in Westbury Joinery, Foxwell and the other three original founding directors held one share in Westbury Services and Westbury Holdings. Foxwell ceased to be a director and the secretary of each company on 30 October 1995, pursuant to a resolution of the continuing directors, following his departure from the business in July 1995.

In addition to the shareholding there were director's loan accounts. I found that Foxwell's loan account with Westbury Joinery was $135,940 and in Westbury Holdings was $113,475. The total of these loan accounts owed to Foxwell is $249,415.15. Joe Ganci, Strachan and Giurleo also have loan accounts with each company in the same amounts.

Since giving judgment the following relevant events have occurred. In the result each company is now in the hands of a liquidator. How did this come about?

On Friday 24 July Messrs. M.R. Auty and G.J. Keith were appointed as administrators of each company by resolutions of the directors under s.436A of the Law. Prior to those appointments the parties had not agreed upon terms to resolve the litigation. On 24 July the administrators wrote to creditors advising of their appointment and giving notice of a meeting of creditors on 30 July at 3.00 p.m. In the attached report to creditors the administrators referred to this proceeding and to Foxwell seeking recovery of his loan funds and the realisation of his shares, and stated that the other directors (meaning Joe Ganci, Strachan and Giurleo) wished to recover their loans. The report stated that those directors had advised that the companies do not have the resources to satisfy the claims, and "Hence their decision to appoint voluntary administrators". They also referred to three other "solvency related problems".

Foxwell's first knowledge of this turn of events came at about 3.00 p.m. on 24 July when Woods told him that the Westbury Group had "closed its doors". Foxwell spoke to his solicitor who at 4.29 p.m. that afternoon faxed a letter to the defendants solicitor seeking confirmation of the true state of affairs. The reply of the defendants solicitor by a letter dated 27 July was not received until Wednesday 29 July. The letter confirmed that the three companies had gone into administration on 24 July 1998 and stated that Auty was the administrator.

In the meantime, on Monday 27 July, Foxwell continued with his enquiries in an effort to ascertain the position of the Group. A creditor provided him with a copy of the administrator's letter, from which Foxwell learned of the creditor's meeting at 3.00 p.m. on 30 July. On Tuesday 28 July Foxwell saw newspaper notices advertising the meeting. Foxwell says that it was not until 29 July that he received documentation from the administrators and, he says, even then all that he received were proxy forms and proofs of debt in respect of Westbury Services and Westbury Holdings but not Westbury Joinery. The administrators say that they did send Foxwell the letter they sent other creditors.

In the circumstances Foxwell says that he developed a concern that the continuing directors had placed the companies in administration out of a desire to defeat or avoid any judgment in his favour in the litigation. He formed the opinion, in the face of the information before him and the somewhat puzzling scenario which confronted him, that the directors were motivated by a desire to create a situation in which the assets could be purchased from the administrators at a "rock bottom" price with a view to continuing the business under a different guise. In my view it was not unreasonable to have such reactions and concerns. What had apparently happened was inexplicable in light of the position at trial which was that of an ongoing business. In the result Foxwell resolved to have the administrators replaced by a different administrator. He sought proxies to assist in that regard and attended the meeting on 30 July with his solicitor. The meeting was told by one Lawrence, an employee of the administrators accounting firm, that Ursini had approached the firm on Monday 29 June and that a meeting had been had with the directors that day. There was discussion about the concept of voluntary administration. The next contact was on 20 July when Lawrence met the directors. They advised that Giurleo and Strachan wanted their money out of the business. Lawrence understood that Joe Ganci also wanted his loan accounts repaid. On that basis Lawrence recommended voluntary administration and he later confirmed this recommendation after a review of the books and accounts. The administrators were appointed the next day. Foxwell's proposal to replace the administrators was defeated on the votes and the administrators' appointments were confirmed.

In these circumstances, on the morning of 31 July and prior to the resumed hearing of the proceeding, Foxwell filed a summons returnable that day in which he sought, inter alia, an order that Westbury Services and Westbury Holdings be added as defendants to the proceeding, that pursuant to s.440D(1)(b) leave be granted to proceed against the three companies, and orders pursuant to s.447B(2) to protect Foxwell's interests while the companies are under administration including orders of or to the effect that Foxwell be paid all amounts for which there is judgment in his favour before any amounts payable to Joe Ganci, Strachan, Giurleo, Carlo Ganci and Santo Ganci are paid to them. There was no appearance by or on behalf of the administrators but by letter from their solicitors which was produced to me and which remains on the Court file it was stated that they neither consented to nor opposed the orders sought save with respect to the order last mentioned which concerned payments to the other directors. In the result I ordered, inter alia, that Westbury Services and Westbury Holdings be added as defendants to the proceeding, that an amended notice of motion be filed and served, that insofar as is necessary there be leave pursuant to s.440D(1)(b) to proceed against the companies, that the further hearing of the proceeding and of Foxwell's summons be adjourned to 7 August and that pending the hearing and determination of the summons no payment be made by the companies or the administrators to the personal defendants or any of them.

An amended notice of motion was filed on 3 August 1998. It added the following claims for relief. As against Westbury Holdings that it pay Foxwell $113,475 in full payment of the loan owing to him together with interest from 6 June 1996 at the rates fixed under the Penalty Interest Rates Act 1983 or, in the alternative, that there be judgment for Foxwell against the company in the said sum together with such interest. A further order was sought that Westbury Joinery, Westbury Services, and the personal defendants jointly and severally compensate and pay to Foxwell the sum of $45,000 in respect of directors' bonuses, superannuation and employee incentive payments made in 1996 and 1997 together with interest thereon from 1 July 1997 at the rates fixed under the Penalty Interest Rates Act 1983, or, in the alternative, that there be judgment for Foxwell against those defendants for that sum together with such interest. Of course these added orders were sought under s.260 and s.461 but, as I have said, winding up was not the preferred form of relief and in view of what has happened it ceases to be relevant. Thus orders are to be made, if at all, under s.260.

On 7 August the matter came on before me again. The three Westbury companies were represented by the administrators' solicitor. Counsel who appeared at the trial for all defendants appeared for the personal defendants. Affidavits by Joe Ganci, Strachan, Giurleo and Ursini had been sworn on 5 August and served in the afternoon of 6 August and Auty, the administrator, had sworn an affidavit on 6 August which had also been served that day. In those circumstances and having regard to the stated desire of counsel for Foxwell to have some cross-examination of deponents and having regard to the extent of the issues I stood the matter over until 12 August.

On 11 August the administrators filed a summons returnable on 12 August for an order, inter alia, that the period of time for convening the second creditors' meetings of the companies be extended from 13 August to 27 August pursuant to s.439A(6) of the Law. The summons was supported by a further affidavit of Auty sworn on 6 August. The affidavits of the administrator gave information as to the state of the administrations and the course of relevant events. The affidavits filed by and on behalf of the personal defendants dealt with the matter of how and why the administrators were appointed.

In essence the point made is this: Giurleo (who as I stated in my judgment had suffered a heart attack in October 1996 and who had not worked since then) desired repayment of his loans and in 1997 and 1998 had requested such repayment and the purchase of his shares by another shareholder, and since my judgment he had renewed his request for payment and had urged liquidation to enable payment to be made as soon as possible; Strachan was concerned that if Foxwell and Giurleo received payment of their loans there would not be sufficient funds to enable his loans to be repaid, which would be unfair to him, and accordingly on 20 July 1998 he requested repayment of his loan; on 22 July Ursini advised that in the circumstances there was no option but to liquidate or appoint a voluntary administrator and he recommended the latter; in those circumstances Joe Ganci also demanded repayment of his loans, and it was resolved to place the companies in voluntary administration.

At the hearing on 12 August counsel for the plaintiff cross-examined Joe Ganci and Strachan and each counsel addressed submissions as to the appropriate disposition of the proceeding. In the end, it became unavoidable to further adjourn the hearing of the proceeding because until the creditors had met and determined what was to happen to the companies it was not possible to form a view as to the value of Foxwell's shares or what amount of his loans might be repaid. In addition one did not know whether a proposal might be forthcoming which would resuscitate the business and which would have a material effect upon these matters.

In adjourning the hearing I ordered, inter alia, that the previous order concerning the payment of moneys to personal defendants be varied so as to permit the payment of wages to Strachan and Carlo and Santo Ganci in their capacity as employees of Westbury Joinery, I extended the time in which the administrators may convene the second creditors' meeting to 27 August, and adjourned the further hearing to 11 September.

The second creditors' meeting was held on 3 September. The creditors of each company resolved that the company be wound up and that the administrators be appointed joint liquidators of each company. In a further affidavit sworn by Auty on 10 September for the purpose of informing the Court as to the position, Auty produced a copy of the administrators' report to creditors and brought up to date the position of the administration. The report recommended that the companies be placed in liquidation. In the administrators' opinion liquidation was the only available outcome. The administrators disclosed that they had attempted to sell the business but that no adequate offer had been received and they were, at the time of the meeting, negotiating with one interested party to sell the plant and equipment as a whole, failing which the plant and equipment together with furnishings and fittings and motor vehicles would be sold by way of public auction. The report included the following -

"The directors have advised that the group ran into financial difficulties in the months prior to the administrators' appointment as a result of poor sales levels being unable to support continued high overhead costs. Furthermore, substantial amounts of directors' loan accounts had been demanded for payment and the companies were unable to pay such amounts. Our investigations into the affairs of the companies have not revealed any information that would contradict the above reasons for the companies' failure. In particular, the Group had exhausted its overdraft limit with expected debtor collections being too late to remedy this situation. Furthermore, the Group had been holding cheques payable to unsecured creditors being unable to pay these amounts as and when they fell due."

In his affidavit Auty said that to date no significant interest had been shown in the purchase of Westbury Joinery as a going concern and that such a sale was unlikely to eventuate. He said that the liquidators were looking to sell the assets of Westbury Joinery including its land and plant and equipment at auction or by other appropriate means to achieve the best return to creditors. As at the date of his affidavit (10 September) he estimated that the return to unsecured creditors of Westbury Joinery would be 22 cents in the dollar, in the case of Westbury Holdings 23 cents in the dollar and in the case of Westbury Services nil.

For the purpose of the hearing on 11 September counsel for the personal defendants relied upon a further affidavit by Joe Ganci and affidavits by Carlo and Santo Ganci. While I have read these affidavits, and indeed they have been tendered in evidence, I did not receive them if and to the extent that they are intended to be a basis for re-opening matters dealt with at trial and which are the subject of findings in my earlier judgment.

I now deal with the matter of relief. In my earlier judgment I found there had been oppression or unfairness in the financial arrangements adopted by the directors after Foxwell left. I found that Westbury Joinery had the ability to make a repayment to Foxwell on his loan account in 1995/1996 if not in the following year. I expressed myself thus concerning the following year in order to aid the parties reaching a solution to their problem. In other words to leave them with flexibility. However, they did not achieve settlement and I now express my firm view that in relation to the following year I hold applicable the reasoning in my judgment upon which I concluded concerning the 1995/1996 year. The fact is that in each of those years payments could have been made to Foxwell but for the reasons expressed in my judgment the directors chose not to do so.

Both on 12 August and 11 September I heard submissions from counsel as to the appropriate orders. Counsel for Foxwell also provided written submissions. On 11 September the solicitor for the administrators made some, but limited, submissions as to relief. I reserved my decision on the matter of relief having regard to the miscellany of points that have been raised over several hearings and the unusual circumstances of the case which give rise to complexity in its ultimate disposition. I take into account all that was submitted without necessarily setting out all that was advanced.

In his submissions on 11 September Foxwell's counsel commenced by addressing why the present situation of liquidation had arisen. He submitted that if Foxwell had lost there would not have been an administration or liquidation. I accept that submission as accurately stating the position. The reaction of the directors to my decision was borne out of frustration and perhaps included an element of caprice. Faced with my finding that the director's loans were repayable on reasonable notice the continuing directors determined to seek repayment of their loans and to treat the loans as immediately payable in full. It now appears that Giurleo had sought repayment prior to the trial. The directors did not seek to explore whether a programme of repayment acceptable to all, including Foxwell, could be formulated and agreed upon. It was, after all, in the interests of all of them to do so. Further, it was clear that any orders which Foxwell obtained in the proceeding would be made on the basis that the business be able to continue. It was obvious that the business could not afford to pay Foxwell his full entitlement in terms of the value of his shares (as to which I prefer the evidence of Lay) and the amount of his loan accounts, let alone of the other directors. Foxwell could only have been paid over a period of time. A fortiori, all of the directors' loans could not be repaid in full at once. A staggered programme was necessary, but it was not considered by the continuing directors.

If the loan accounts were brought in and considered as current liabilities then and there payable the financial position of the business was worse than it otherwise was. But this was a private company with working directors and these loan accounts were not accounts of external creditors payable on normal terms of trade. Thus it was that a position of insolvency was to be found, because the business could not then and there pay all its debts including the loan accounts. Of course there were some other factors that were relevant to the overall financial position of the business, but absent this treatment of the directors' loan accounts it is most improbable, to the point in my view that administration and liquidation would not have occurred, at least when and in the circumstances it did.

As I say, in my view frustration and caprice are to be counted as significant factors in producing the administration which led, inexorably, to liquidation. At the end of this sorry and expensive piece of wasteful litigation, all of the original directors are losers. Notwithstanding, I do not accept the submission of Foxwell's counsel that the conduct of the defendants subsequent to my judgment in June is a further oppression of Foxwell. If those acts constituted oppression in the relevant sense they had the tendency to be as much if not more oppressive on the continuing directors as on Foxwell. For, like Foxwell, the continuing directors had financial obligations which had been incurred in connection with the business and to the extent that in the winding up they will only receive a partial payment of their loan accounts and nothing for their shares, and yet have a continuing liability to their external lender, they are left in the same sort of position as Foxwell. Further, they run the risk of Foxwell obtaining orders that will advantage him at their expense as unsecured creditors in the winding up. There is, however, another reason why I reject the submission. While the directors' reaction may be thought extreme, yet it was open and taken on advice. I consider that reasonable directors would have considered the possibility of a staggered repayment programme and not moved so quickly to the appointment of administrators. But I think the necessary quality of unfairness is lacking in the actions of the directors. In any event, if there was oppression in the relevant sense, the oppression leads nowhere in terms of relief having regard to the position in which the companies now are.

Counsel for Foxwell submitted that I should find that he could have been paid at least $50,000 in each of the 1995/1996 and 1996/1997 years, and he sought an order accordingly. These were global figures. There was no calculation which produced them. Counsel sought an order for payment of the aggregate sum of $100,000 from Westbury Joinery, the individual defendants and Westbury Holdings together with interest. Counsel also put alternative approaches which produced somewhat different figures. In summary he submitted that these defendants should be liable to pay Foxwell "at least $100,000 and interest or some figure of $45,000 to $100,000 and interest for being deprived of that money". He also submitted that the orders should be moulded so that any distribution to Joe Ganci, Strachan, and Carlo and Santo Ganci in the windings up be paid to Foxwell in satisfaction of any liability of the subject company to Foxwell. I should make it clear that no order is (or was at trial) sought against Giurleo in view of his state of health.

These submissions do not overlook that Foxwell is entitled to repayment of his loan accounts and that he will receive his pro-rata entitlement on that account in the winding up of Westbury Joinery and Westbury Holdings. It is suggested by counsel that I declare that the companies are indebted to Foxwell in the amount of his loan accounts, and I am prepared to do that although in view of my finding there cannot be contention on the matter.

Counsel sought interest on the full amount of the loans from the date of commencement of the proceeding on 6 June 1996. Counsel for the personal defendants submitted that interest was not recoverable under the Supreme Court Act and, as I understood him, counsel for Foxwell ended up by seeking interest under the general power to grant relief in s. 260, and I will consider the matter of interest on that basis. Certainly, Foxwell's counsel did not address argument as to why any provision of the Supreme Court Act was applicable. The loans themselves did not carry interest. Thus, no director is entitled to interest under an agreement with either company. Prima facie I do not consider that Foxwell's loan accounts should carry an award of interest under s. 260, with one exception. The exception is in relation to any amount that I conclude should have been but was not paid to Foxwell in the 1995/1996 and 1996/1997 years. Such an award would compensate Foxwell for the loss of his money; see Coombs v Dynasty Pty Ltd [1994] FCA 1193; (1994) 14 ACSR 60 at 107. Indeed, I did not understand counsel for the individual defendants to argue to the contrary of the allowance of interest on that basis.

I now deal with Foxwell's claim for an order for a sum of money in respect of the 1995/1996 and 1996/1997 years. Counsel for the personal defendants submitted that no such order could be made on the ground that there must be a nexus between the oppression and the remedy. He submitted that once oppression is found - as it has been - the court is not at large to wave a magic wand. If the submission meant that any sum ordered to be paid should be confined to that which, reasonably assessed, might have been paid in the subject years and, if paid, have avoided the finding of oppression, I accept the sense and substance of the submission. However the submission was developed in a different way. It was submitted that even if it be assumed that $20,000 should have been paid by Westbury Joinery on 30 June 1996, Foxwell would now only have "an entitlement to some interest for being held out of that sum since 30 June 1996". Further, that order would be made against the company only with the result that Foxwell would receive only 22 cents in the dollar in the winding up.

Counsel for the personal defendants approached the submission on the basis that any payment Foxwell received would have been paid and received in reduction of his loan account with Westbury Joinery. But would it? There was also a loan account with Westbury Holdings, and there was also his shareholding for disposal. The probability is that if the directors had made a payment it would have been on terms as to acquisition of his shares, so as to totally remove Foxwell from the Group. It is improbable, in my view, that the directors would have simply made a payment on account of one or other or both loans without dealing with the shareholding. This analysis strikes at the foundation of counsel's submission because the submission assumed that any payment would have been made by Westbury Joinery and have been a reduction of the loan account with that company. If those assumptions were sound they provide a basis for counsel's submission that at this stage only interest should be allowed on the amount of the non-payment. That is because Foxwell retains his entitlement to be paid his loan. However he will only be paid at the estimated rate of 22 cents in the dollar both as to principal and interest. This, counsel said, would avoid double dipping.

It seems to me that this is a harsh approach. If Foxwell had been paid money - as he should have been - he would have had the advantage of that money from the time when it was paid. He could have applied that money in reduction of the bank loan which is attributable to his involvement in the Group and in respect of which he has had an ongoing liability and his home is subject to a mortgage as security. It is not suggested how the financial disadvantage thus sustained is to be equated to the suggested allowance of interest, and I do not accept that it is.

Of course Foxwell could not "double dip", to use counsel's expression. I mention only at this point that the argument of double dipping did not address itself to the fact that there were two loan accounts and a shareholding of value in respect of which payments could be made. The likelihood is that the price of making payments to Foxwell would have been that Foxwell give up rights in relation to these assets but it is mere speculation, in view of the fact that the issue never arose between the parties, as to what terms might have been offered and agreed.

It was also a part of counsel's submission that no order should be made against the personal defendants. Indeed, he submitted that there was no power to make such an order. I reject that submission. In my view s.260 enables the making of an order against them. After all, they, as directors, perpetrated the oppression and have caused Foxwell to sustain loss in consequence and the terms of s.260 are wide enough to make orders against individuals who have acted in that capacity. It is another question whether as a matter of discretion I would make an order against Carlo and Santo Ganci in view of their limited role.

As part of the submission that no order should be made against the continuing directors it was said that the effect of not making a payment to Foxwell was merely that Westbury Joinery "remained richer". Assuming that that submission is correct, it was the continuing directors and not Foxwell who had the benefit of the company being "richer". That was by the amount of their remuneration and other benefits and that funds were retained in the company in which they (excluding Giurleo) continued to work. That is a clear benefit to those that remained, and was directly related to the oppression.

This brings me to the determination of the amount which the directors might or ought have paid in the subject years and to Foxwell's claims in that regard. I will not repeat what I said in my judgment as to the relevant personal and corporate financial circumstances. Nor in my view is it necessary to detail the evidence to any greater extent. Further, although I mentioned the payment of a dividend as a possible course in my judgment the probability is that the directors would have dealt with the matter by making a payment to Foxwell in reduction of one or other loan accounts and/or in the acquiring of his shares. As the directors never got to the point of determining upon an amount, or even considering an amount, or any terms of payment, I must consider for myself the amount that was appropriate in the circumstances. The context in which I do that is of an on-going business in which the continuing directors (other than Giurleo) were engaged and were entitled to a reasonable reward for their efforts but having regard of course to the requirement of giving Foxwell due consideration. Nor do I overlook that Foxwell was released from his guarantee to the bank, which release I assume was procured by the continuing directors. That release, however, was not enough.

Counsel for Foxwell submitted a range of figures, from a high point of $50,000 for each of the two years plus interest to a lesser figure of $45,000 up to $100,000 plus interest. I take account of all that counsel said, and the relevant financial circumstances including the remuneration packages of the directors. In my view, regarding the matter overall, an amount of $25,000 could and should have been paid to Foxwell in each of the 1995/1996 and 1996/1997 years.

To compensate Foxwell for the fact that he was not paid anything he should be compensated for the loss of use of the money by an allowance of interest. I allow interest under the wide powers to grant relief in s. 260. In the end counsel for the personal defendants did not dispute that interest could be awarded under that section. The question is from what date and at what rate interest should be allowed.

In the amended notice of motion counsel for Foxwell sought interest from the date of commencement of the proceeding and at the rate fixed under the Penalty Interest Rates Act and, in the alternative, from 1 July 1997 if $45,000 was the only amount which should have been paid. I have not accepted the latter approach. Counsel varied this in his written submissions. In his written submission dated 31 July 1998 counsel for Foxwell referred to the rate the Foxwell's are paying under their mortgage; according to the letter from the bank dated 29 May 1996 the rate is 13.5% variable annually. It is not necessarily to be assumed that that is the current rate. Further, in that written submission counsel sought interest at a lower rate of 10%, although he did not state the basis for selecting that rate. In the end counsel left it to me to determine the appropriate rate and the period. The submission of counsel for the personal defendants left me in the same position. In all the circumstances I conclude that a fair rate is 10%. I am inclined to think that in the overall chronology the date of commencement of the proceeding is the appropriate commencement date for the calculation of interest, but I will hear a submission on the point.

The next question for determination is whether, and to what extent, it should be ordered that amounts payable in the winding up to the continuing directors (other that Giurleo) be paid to Foxwell in satisfaction of the amounts owing to him. This would not be to vary the provisions for priority of payments prescribed by the Law but to require that to the extent necessary to satisfy Foxwell's entitlements the amounts be paid to him. Foxwell concedes, indeed requests, that no such order be made against Giurleo. Nor would I make any such order against Carlo and Santo Ganci in view of their limited involvement and subsidiary role. Further, no such order could be made in respect to the full amount of Foxwell's loans, or the value of his shareholding as that value existed prior to the appointment of the administrators. The administration and the liquidation are facts which must be accepted. Each stands, neither having been challenged by a formal application or set aside. In the result the shares are valueless and there is no point in making an order for their purchase, and the loans will be repaid at the pro-rata rate applicable to unsecured creditors. What Foxwell has lost is the benefit of the payments totalling $50,000 which he will now only receive to the extent of 22 cents in the dollar rather than 100 cents in the dollar. To the extent of 78 cents in the dollar or $39,000 he will suffer a permanent loss. That is, of course, unless that loss can be remedied by an order in this proceeding.

Should an order be made to rectify this loss? A relevant factor is that if the directors had done what they should have done the money would have been paid to Foxwell and the loss (and any question of interest) would not now arise. In other words, the actions of the directors created the problem. Another factor is the insolvency of the Group which may be argued to have intervened and operated as an independent cause to create the present situation in which all the directors including Foxwell will suffer. It is argued, as I apprehend, that it is fair and just that they should all suffer together. There are two points to be made about this. First, Foxwell's present loss is founded in the director's actions which constituted oppression, and which should never have occurred. Those actions continued to operate and to have an effect upon Foxwell, and the present circumstances manifest the effect of the directors' actions. The subsequent insolvency does not have the effect that the directors' earlier actions cease to be a cause of Foxwell's present loss. Second, the continuing directors chose to do what they did, and for them now to contend that Foxwell should suffer together with them when they had previously preferred their interest to his is to seek to take advantage of the subsequent insolvency to further the disadvantage to Foxwell.

In my view it is just and appropriate in all the circumstances to make orders which require that to the extent of $39,000 and to the extent of interest upon $50,000 the amounts otherwise payable to Joe Ganci and Strachan as unsecured creditors in the winding up of Westbury Joinery and Westbury Holdings be paid to Foxwell.

I now turn to the question of costs. Counsel for Foxwell seeks costs against all defendants. He submits that in the first instance the order should be against the personal defendants and, in the alternative against all defendants. He submits that Foxwell has succeeded and that costs should follow the event.

It should be noted that at the time of the trial and when I gave judgment Westbury Joinery was the only corporate defendant. Thus it was that when I found oppression it was expressed to be in relation to that company. The other two companies in the Group are now defendants and one - Westbury Holdings - also owes Foxwell money. I have already expressed my conclusion on the probabilities that if the continuing directors had determined to make payment to Foxwell they would have sought terms in respect of one or more of his loans and his shares. In other words, the problem involved more than one loan with Westbury Joinery.

Counsel for the personal defendants submitted that Foxwell should pay the costs of the proceeding. He relied on offers of settlement which Foxwell had rejected. These offers were submitted to have been for amounts greater than anything Foxwell will recover in or as a result of the proceeding. It was even submitted that Foxwell had brought about the liquidation "by his own action". I reject this latter submission. A singular feature of the way in which the directors acted in appointing the administrators (and which has led to the liquidation) is that they never attempted to investigate or establish a regime for repayment or managing the directors' loans and never sought any discussions with Foxwell or his advisers on the point in an attempt to avoid incurable insolvency. Foxwell was entitled to pursue his rights at law, as he saw them and may have been advised. Whether he is to be deprived of his costs in doing so because in the circumstances his continuance of the proceeding was unreasonable is another matter.

Counsel for the personal defendants had an alternative approach. This was concerned with the cost of issues on which Foxwell was unsuccessful. He submitted that about two-thirds of the time at trial was taken up with issues on which Foxwell failed. These were the issues on the point whether there was conduct of the other directors which had the effect of forcing Foxwell out of the business. I held against Foxwell on this point. I concluded, on balance, that the conduct complained of was not of itself unfairly prejudicial or discriminatory against Foxwell. It is not necessary to repeat what I have said in my judgment. It took many pages to deal with the issues on the point. It should be said however that while Foxwell failed on the point the directors also failed in some of their arguments and on some of their evidence relating to it. They were not blemish free on the facts. Indeed, on the important matter of the farm I found that the defendants evidence scraped the bottom of the barrel and exaggerated the true position. It is difficult with hindsight to accurately and fairly divide the time taken at trial by the failed point, although it was substantial. At the very least counsel submitted Foxwell should be deprived of a very substantial part of his costs.

At the end of his submission on costs counsel for the personal defendants presented a further alternative. He suggested that one might take the attitude that what has happened here is unfortunate, that the defendants have lost their life's work and that costs should lie where they fall. This was a final option but counsel quickly stated that his preferred option was that Foxwell pay the costs.

For the liquidators it was submitted, depending on the terms of the orders, that costs should be awarded in their favour (or in favour of the companies) incurred since the appointment of the administrators.

The "offers" which the defendants relied upon are referred to in paragraphs 7-9 of an affidavit sworn by Joe Ganci on 9 September 1998. He states that prior to the commencement of the proceeding his solicitors informed Foxwell's solicitors that he would be willing to purchase Foxwell's shares for $105,000 and that very shortly after the commencement of the proceeding he offered Foxwell $120,000 for the purchase of his shares and to settle the proceeding. He said that in a further attempt to settle the proceeding on 30 September 1997 he increased his offer to $130,000. None of the offers was accepted by Foxwell. Joe Ganci expressed his view that the continuance of the proceeding by Foxwell was unreasonable, that as a result of the proceeding Westbury Joinery had been placed in liquidation and he lost his employment on the appointment of the administrators, and that Strachan's employment would cease on 11 September when the company will cease trading. Finally, he believed that the above offers represented more than Foxwell is likely to recover from the liquidation of the Group and requested that Foxwell be ordered to pay the defendants' costs of the proceeding.

Counsel for Foxwell submitted that evidence of the offers was not admissible because each had been made on a without prejudice basis. I put this objection to one side and consider the substance of the submissions. Further, he said that none of the offers had been made in writing, or stated how the amount was made up, the time for payment, or what the offer covered (that is, shares, loans and costs). He submitted that if the defendants had wished to rely on an offer in this way, the offer should have been put in writing and the terms should have been stated with precision. As the defendants did not do so one only knows that a global figure was offered. One does not know the terms on which it was offered. It may be that those terms were never known, and that the defendants were seeking to open negotiations in which the terms would be worked out. In my view this is a legitimate criticism of the offers and of the ability of the defendants to rely upon them on costs.

Counsel for Foxwell further pointed to the fact of the valuations of Luntz ($212,000 plus the loans) and Lay ($234,456). Ursini's valuation ignored the inter-company loans and the director's loans. I preferred the evidence of Luntz and Lay to that given by Ursini, and as mentioned above I would have accepted Lay's evidence of value. The offers were well below his (and Luntz's) valuation. Further, the business was on-going and profitable.

In these circumstances it was reasonable for Foxwell to continue with the case, in my opinion. The case was strenuously fought. Foxwell put his case on three bases. He lost on the first, he succeeded on the second, and the third (as to not holding annual meetings) was a minor point of no consequence in time at the trial and which it was not necessary to deal with. As I have said, I reject the submission that Foxwell caused or brought about the liquidation. In my view Foxwell has succeeded in the proceeding and is entitled to his costs unless some allowance should be made for the first point on which he lost.

It is true that Foxwell led into issues of fact on the first point in an attempt to establish that he had been forced out of the business. By the same token the defendants' responses were not all upheld. A successful litigant is not lightly to be denied his costs. The question is one of discretion and whether circumstances exist which warrant a departure from the ordinary rule such as by depriving the successful party of portion of his costs or the costs of an issue or even giving the unsuccessful party a proportion of its costs or the costs of an issue. Counsel did not refer to any cases on the nature of the discretion on costs and the approach to be taken on the points argued. I note however the following cases which are relevant to the discretion on costs: Ritter v. Godfrey [1920] 2 KB 47 at 52 - 53; Hughes v. Western Australian Cricket Association (Inc.) (1986) ATPR 40 - 748 at 48, 136; Mok v. The Minister For Immigration, Local Government & Ethnic Affairs (No.2) [1993] FCA 650; (1993) 47 FCR 81 at 84. I am concerned with what is just in all the circumstances.

I conclude that it would not be just to make an order which deprived Foxwell of part of his costs. He was forced to bring his case and he has succeeded. The mere fact that on some aspects his case was not accepted, and that he failed to establish that he was forced out of the business, does not mean that it was unreasonable for him to have advanced that case or so unreasonable that in all the circumstances a special order on costs should be made. It is correct that his evidence suffered from some over-stating, but so too did that led for the defendants in response. Indeed the defendants put forward matters which I did not accept. In my view it would be artificial and harsh on a plaintiff who had a difficult case to hold that having failed on a point that was not unreasonably brought he should pay the costs of the issue or otherwise suffer an order as the defendants have sought. In my view the order that is fair and just in all the circumstances is that Foxwell should have his costs of the proceeding including the issue on which he did not establish his case.

That leaves unresolved several issues on costs. One is whether Giurleo should pay costs. I take the statement of Foxwell's counsel to extend to there being no order for costs against him. Another issue is whether Carlo and Santo Ganci should be ordered to pay costs. Counsel for Foxwell relied on my finding that they were directors and that they had supported the other defendants, in submitting that they should pay costs. For reasons which I have mentioned I conclude against ordering them to pay costs. On the basis of the ASC records it was reasonable for them to have been joined as defendants. Further, they did support the other directors. Nevertheless they were lesser players and the critical decisions were made by the other directors. They were added as defendants in 1997 along with the other continuing directors. It was not suggested by any counsel that any particular costs were incurred by reason of their joinder. In my view it is just that the plaintiff not recover costs against them and that they bear their own costs assuming that there be any.

The next issue concerns the costs of the companies. Westbury Joinery was always a defendant. It opposed the claim at trial and failed in that opposition. Following judgment it, and the other two companies, went into administration and then liquidation. The liquidation was only resolved upon as recently as 3 September. The solicitor for the companies questioned why the proceeding was continued against them in light of the orders I made on 31 July 1998 when Westbury Services and Westbury Holdings were joined. The orders which I then made held the situation until final orders could be made. The circumstances in which the orders were made on that day were that the ground on which the case had been fought had been radically changed without any reference to Foxwell and were such as to reasonably give rise to apprehensions as to what was going on, and why, and for whose benefit. The circumstances gave rise to concern. They also made it hard for Foxwell, let alone the court, to be confident as to the appropriate form and terms of relief and against which party or parties relief ought be ordered. The status of the Group was unknown. Would there be a buyer? Would the shares have value? Would the loans have value? Would orders be made concerning the shares? Might orders come to be required and be properly made against one or more of the Group companies? The situation was fluid and it would be some time before certainty was introduced. In my view the joinder of Westbury Services and Westbury Holdings was reasonable in the circumstances which existed and confronted the plaintiff. Indeed, one could understand why, apart from considerations of costs, the administrators neither objected nor consented to the companies being joined as parties.

I do not overlook the importance to the unsecured creditors generally of the size of the pool of funds available for distribution but in my view it would be harshness out of all proportion to deprive Foxwell of some of his costs against Westbury Joinery.

As to Westbury Services, no order for primary relief is sought against it and, assuming there be any costs that especially or appreciably relate to it by reason of the joinder, it is my view that they should lie where they fall. In fact I am not aware of any such costs.

As to Westbury Holdings, it is indebted to Foxwell and I will make a declaration to that effect. In substance the directors failure to make a payment to Foxwell applied as much to that debt as it did to the Westbury Joinery debt and to ensure satisfaction to Foxwell under this judgment I will make an order which will affect payments in the winding up. The joinder was necessary to enable the making of that order. Foxwell should have his costs against Westbury Holdings from the time of the joinder.

For these reasons, subject to any submissions of counsel, I will make the following orders:

1. A declaration that the first defendant is indebted to the plaintiff in the sum of $135,940.

2. A declaration that the eighth defendant is indebted to the plaintiff in the sum of $113,475.

3. An order that the second and third defendants pay to the plaintiff the sum of $39,000.

4. An order that the second and third defendants pay to the plaintiff the sum of $................ as interest on the sum of $50,000 calculated from the commencement of the proceeding to judgment.

5. For the purpose of effecting payment of the said sums of $.............. and $............ to the plaintiff it is ordered that the first and eighth defendants or the liquidators thereof in the winding up of the first and eighth defendants pay to the plaintiff any amount that is payable to the second and third defendants as unsecured creditors in the said winding up but to the extent only that it is necessary to satisfy the liability of the second and third defendants to pay such sums to the plaintiff, and payment to the plaintiff pursuant to this order shall be and constitute a good receipt therefor and to the extent of the payment a discharge of the liability of the first or eighth defendant or the liquidators thereof to the second and third defendants and a discharge of their liability to the plaintiff in respect of that sum.

6. The first, second and third defendants pay the plaintiff's costs of the proceeding including reserved costs.

7. The eighth defendant pay the plaintiff's costs including reserved costs of the proceeding against it as from and including costs incurred from its joinder as a defendant on 31 July 1998.

8. To the extent to which it is necessary leave is granted nunc pro tunc to proceed against the first, seventh and eighth defendants following the commencement of their liquidation and to enforce the orders herein.

I certify that this and the 22 preceding pages are a true copy of the reasons for judgment of Hansen J. of the Supreme Court of Victoria delivered on 2 October 1998

Interest Rates Act 1983

At a glance

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Decision date

Before

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Judgment (72 paragraphs)

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Legislation Cited (1)

Cases Cited (1)