French & Ors v Smith & Ors [2004] VSCA 207

2. This is an appeal against the decision of a judge of the Supreme Court who, on 25 September 2000, relevantly ordered that a number of the appellants, who were defendants below, pay certain sums of money to several of the respondents and that the counterclaim of the appellants, which sought, inter alia, a winding up order of the third respondent, Quarry Quip Engineering Pty. Ltd. ("Quarry Quip"), be dismissed. Before proceeding to analyse the relevant issues, it is necessary to give a brief description of the parties to the proceeding and their relationship with one another. Quarry Quip is a successful engineering company that was incorporated in 1989 in circumstances to which we will refer later. The first respondent, Michael Ross Smith ("Smith"), the second respondent, Mark Anthony McCallum ("McCallum") and the first appellant, Walter Murdoch French ("French") are the sole shareholders in Quarry Quip and are shown in the records of the company as its directors. Smith is also its Secretary. At all relevant times, the second, third and fourth appellants, namely, Ballarto Pastoral Pty Ltd ("Ballarto"), Skye Poultry Pty Ltd ("Skye Poultry") and Quarry View Pty Ltd ("Quarry View"), as well as Skye Quarries Sales ("Skye Sales"), have been under the control of French. Each of Smith and McCallum, and French's wife, Nancy French, is the registered holder of one share in the fourth respondent, Skye Quarries Pty Ltd ("Skye Quarries"), of which Smith is also the Secretary.

6. As will become apparent later, one of the main areas of dispute between the parties concerned the operation of a quarry business, first by Quarry Quip and then by Skye Quarries, on land owned by the French interests. It is, therefore, desirable to describe briefly at this point the land in question ("the Ballarto land") and some of the early quarry operations on it. Since approximately 1974, Ballarto has been the registered proprietor of land on the Mornington Peninsula at Skye, being Crown allotment 31A described in the Certificate of Title Volume 9580 Folio 194 ("Lot 31A"). The land immediately to the north of it is Crown allotment 33A ("Lot 33A") and adjoining that land, on its northern side, is Crown allotment 33C ("Lot 33C"). Between 1974 and 1981 sand was extracted from Lot 31A pursuant to an extractive industry licence that was issued under the relevant legislation to the lessees from Ballarto; first, Southern Sand and Gravel Pty Ltd and then, William Edgar Sims and William Eric Sims ("the Sims"). As part of the mining operations, a number of slime dams were created on the property. When, however, the Sims in 1980 ceased to operate the quarry, the reclamation of this portion of the land was neglected. On 29 March 1982, the relevant Minister issued a notice requiring the dams to be drained and the sludge to be dried and disposed. The notice was not complied with. As a result, the licence was on 15 November 1983 revoked. On 13 May 1985, however, the Minister issued to Ballarto a fresh extractive industry licence to mine sand on the Ballarto land on the basis, inter alia, that the previously neglected work on the dams and sludge would be carried out. At that point, Lots 33A and 33C were not owned by the French interests, but in late 1993 Quarry View purchased Lot 33C, although it was not able to exploit it for quarrying purposes until 1996 due to planning restrictions. In May 1994 it also acquired Lot 33A and the bulk of the quarrying operations with which the appeal is concerned were carried out on that land, first by a division of Quarry Quip known as Skye Sand Stone and Soil ("Skye Sand"), even before Lot 33A was owned by Quarry View, then by Skye Quarries between late 1993 and September 1995, and thereafter, so far as is relevant, by Skye Sales.

10. We now come to the circumstances in which Smith, McCallum and French came together to incorporate Quarry Quip and to their participation in its conduct and the quarry operations on the Ballarto land. In 1987, Smith and McCallum, who were good friends and boilermakers by trade, worked for an engineering company, Olivetti Engineering, that was involved in building washing plants for quarrying operations. Smith was, at the time, a manager and McCallum was a foreman. In 1987 French asked Smith whether Olivetti Engineering could build for him a sand washing plant for quarrying operations that he proposed to conduct on the Ballarto land. He said that he was under some pressure to re-commence quarrying otherwise he could lose the benefit of Ballarto's extractive industry licence. French had previous dealings with Olivetti - it had built for him conveyors, a drive-over feed hopper and had assembled screening plants that French had imported. It seems, however, that when French spoke to Smith about building a sand washing plant, the company was, at that time, unable to accommodate his request.

13. In 1989 Smith and McCallum decided to leave Olivetti Engineering and establish their own steel processing and fabrication business. But they had no premises where they could commence their operation, no funds to see them through the initial phase of the business and no machinery to speak of. They also had no work. Consequently, in order to gain work, Smith asked French if they could build a sand washing plant for him. French agreed to engage Smith and McCallum to build such a plant and effectively offered them the use of premises - a large shed - located on Lot 31A, which contained some basic engineering equipment, where they could commence their business. A short time thereafter, Smith and McCallum were approached by a representative of Linotex Australia with a request that they build for it a $200,000 sand washing plant with guaranteed payment upon completion, provided Smith and McCallum could obtain satisfactory premises to build such equipment. Smith discussed the matter with French and, in the end, the three agreed to start, through a corporate structure, an engineering and steel fabrication business in the workshop premises on Lot 31A. French also arranged banking facilities to fund the initial working capital. Through Smith's accountant, John McGillivray, Quarry Quip was incorporated in 1989 and each of Smith, McCallum and French was issued with four shares in that company. Overdraft facilities, which eventually grew to $100,000, were arranged for the new business by French on the security of land owned by him and guarantees signed by each of the shareholders. French, who had an interest in a car sales business, also arranged for motor vehicles for use by Smith and McCallum.

16. Thus, Quarry Quip was established and commenced its operations in 1989 at the workshop made available by French on Lot 31A. In accordance with the agreement between Smith and Linotex, Linotex placed an order with Quarry Quip for the construction of a sand washing plant for $200,000. French, who had no relevant experience in engineering, did not then, or at any time later, take part in the day-to-day operations of Quarry Quip, but Smith and McCallum worked long hours to establish it as a success. The book keeping and office duties were carried out by Smith's wife, Karen Smith. Once the engineering business was established, Ballarto charged Quarry Quip rent for the use of the workshop premises and for the hire of motor vehicles.

20. It was agreed between the parties that, as required, Quarry Quip would perform engineering and associated work relating to the quarry on the Ballarto land and charge out for it at cost. As will be seen later, it was the plaintiffs' case at trial, which was rejected by his Honour, that the parties had agreed that they would conduct not only Quarry Quip, but also the quarry business, which will be described more fully later. Be that as it may, the situation was reached where, in addition to conducting its core engineering and steel fabrication business, Quarry Quip also performed work and provided materials at the request of French in relation to the then proposed quarry operations on the Ballarto land. Some of the work included the construction and fabrication of steel work that was later incorporated into the sand washing plant erected by Quarry Quip on Lot 31A in the circumstances that will be described later. It also assembled quarrying equipment that was imported by French. During 1990 and 1991, Smith and other employees of Quarry Quip, at the request of French, also worked to remove slime from dams on Lot 31A and performed other engineering work on that land. They were paid for that work by Quarry Quip from the proceeds of its engineering business. During that phase of the operation, Quarry Quip invoiced its charges for such work and material to "M&K Quarry Plant" ("M&K"), which was a business name used by French. The books of account of Quarry Quip, as kept by Karen Smith, maintained debtors' cards in respect of, inter alia, M&K, which were tendered in evidence at the trial. Quarry Quip acquired no beneficial interest in the equipment that it constructed for French during that period or in the Ballarto land, the relationship between it on the one hand, and French through M&K on the other, being that of creditor and debtor.

23. One of the major plants that was built by Quarry Quip for the French interests at that time was a rock crushing plant, which was commissioned by Smith in May 1992. It was then that French was involved in an aeroplane accident. The aircraft, of which he was the pilot, crashed into a house, killing a passenger and causing extensive property damage. French himself was severely injured. As a result, all work by Quarry Quip at the quarry ceased and Smith returned to work at its engineering business. In about November 1992**,** however, French asked Smith that Quarry Quip resume work at the quarry, more particularly, reclaiming the remaining slime dams and completing the construction of the sand washing plant with a view to commencing the quarrying and sale of product. French was anxious that this work be carried out as quickly as possible so as to avoid Ballarto's extractive industry licence being terminated by the Minister. His Honour was satisfied that the parties agreed that this work would be financed from the sale of quarry product. In the result, Quarry Quip resumed engineering and fabrication work for the quarry and Smith and its other employees returned to the quarry site and continued with the development of the work so that, by 1993, quarry product was being sold by Quarry Quip through its division, Skye Sand. It should be mentioned that, so far as is relevant, until the end of 1993, it was only Quarry Quip that carried out work at the quarry, including the provision of the necessary washing plant. French and Ballarto, on the other hand, provided operating equipment that was necessary for the reclamation and mining work and French managed the financial and commercial operations of the quarry.

27. In 1993, in order to distinguish the income and expenses of Quarry Quip that related to its engineering business from those that were applicable to the quarry, a separate account was opened by the company in the name of Skye Sand. Thus, its ledger, which was maintained by Karen Smith, recorded income and expenses under either its engineering division or Skye Sand as was appropriate. Furthermore, two separate bank accounts were opened and maintained by Quarry Quip for Skye Sand. One was a cash management account into which the proceeds of sale of product were paid. The other was a cheque account against which cheques relating to quarry expenditure were drawn from time to time. Moneys were paid from the cash management account into the cheque account as was required and they were then used to pay, amongst other expenses, those set out in Quarry Quip invoices.

30. Prior to May 1993 there was little by way of sale of quarry product by Skye Sand so that the work performed by Quarry Quip at the quarry was largely unpaid. French and Smith discussed the company's exposure in that regard and, in the result, at the behest of French, Ballarto executed a debenture charge in favour of Quarry Quip over the assets of Ballarto to secure the payment of $600,000, which his Honour found represented the approximate gross value of work that had been performed and provided by Quarry Quip, through Skye Sand, to Ballarto between November 1992 and May 1993.

33. As the year progressed, more and more product was sold by Skye Sand from the quarrying operations, which were essentially conducted on Lot 33A. Before the sand washing plant was commissioned in June 1993, the product that was extracted from the quarry consisted, in the main, of crushed rock or dry sand and the latter had a market value which was substantially less than that of washed sand. As part of, or as preparatory for, the sand quarrying operations, it was necessary to remove the top soil in order to expose the sand which was to be mined and washed for sale. This overburden and the crushed rock that was excavated by Skye Sand, formed the bulk of the quarry product that was sold by it before the sand washing plant was commissioned, but thereafter and, as his Honour found, during the latter part of 1993, the sand mining and quarrying business that was operated by Skye Sand was flourishing - the substantial increase in revenue deriving primarily from the sale of washed sand. The proceeds of such sales were paid into the cash management account from which, as has been noted, amounts were transferred to the cheque account for payment of Quarry Quip invoices and other expenses.

37. In the latter part of 1993, and in the context of the growing quarry business, Smith and French agreed that a separate company should be formed to conduct the quarry operations in place of Skye Sand. As a result, French arranged for his solicitor, Nicholas Brand, to incorporate Skye Quarries and to procure the allocation of shareholding in it, to which we have already referred. Quarry Quip made a "start up" loan of $10,000 to the new company. His Honour found that the parties agreed that Skye Quarries would conduct the quarry business on the same basis that it had been conducted by Skye Sand and that, as before, in respect of any services that would be provided by Quarry Quip to Skye Quarries, they would charge out at cost. It seems that French did not wish to be a shareholder or director of Skye Quarries because of his potential liability arising from the aircraft accident, so he arranged for his wife to take his place in that regard. At the trial he claimed that Smith and McCallum also held their shares in the company for his benefit. But his Honour rejected this claim and found that Smith and McCallum held their respective shares in Skye Quarries in their own right, and this finding has not been challenged by the appellants. His Honour noted that in relation to a number of other companies in which shares were held beneficially by French - such as Quarry View, Skye Poultry and Skye Sales - French held uncompleted, but signed, share transfer forms, whereas no such documentation had been prepared in respect of Skye Quarries. It is convenient to mention at this point that, to a large extent, his Honour's conclusion on this and other related issues turned on his finding that, generally, French was an unreliable witness whose evidence should not be accepted unless it was independently corroborated. By way of contrast, his Honour considered that Smith was generally a reliable witness.

40. Soon after Skye Quarries was established, on 17 January 1994, the balance in the Skye Sand account of $3,934.48 was transferred to the Skye Quarries bank account and throughout 1994 it was common practice for Smith and French both to sign cheques drawn on that account. Smith continued to work, as before, at the quarry and was instrumental in managing its day-to-day affairs. He was paid by Quarry Quip. McCallum remained at the company, looking after the engineering business. As has been noted, French managed the overall business of Skye Quarries and in particular, its commercial and financial affairs, but he was not paid for that work either by Quarry Quip or by Skye Quarries. Thus, throughout 1994 and until September 1995, Skye Quarries mined and processed sand at the Ballarto quarry, but on the face of things the operations were conducted as though they were beneficially owned by the French interests. For example, French directed its commercial operations and the proceeds of the sale of quarried sand were generally paid, not into the bank account of Skye Quarries, but into that of Ballarto. The land on which the business was conducted, as we have said, belonged to the French interests as did the extractive industry licence. Moreover, as his Honour found, the heavy machinery and equipment that was used by Skye Quarries for quarrying purposes was generally provided by the French interests, probably through Ballarto. Quarry Quip continued to provide some work to these operations and debited Skye Quarries for the costs, but as his Honour said, such work was of relatively little scope.

43. Throughout its operation, French treated Skye Quarries as if it was his own and, from time to time, drew out large amounts from its bank account for his own purposes or those of Ballarto. In the main, such drawings were made by cheques that were countersigned by Smith who, on nearly all such occasions, was aware that the payments were not being made for the benefit of Skye Quarries. In order to account for such transfers in the financial records of Skye Quarries, French often raised fictitious invoices which, on their face, showed that Ballarto had sold sand to Skye Quarries. It is common ground that on two occasions in December 1994 French, without notifying Smith or McCallum, caused to be withdrawn from the bank account of Skye Quarries and paid to Ballarto, by way of bank transfer, two sums each for $200,000 which, French said, were used to pay for the purchase of two expensive machines by Ballarto, namely, an excavator and a dump truck, the purchase price of which was approximately $400,000. Both items were delivered to the quarry before December 1994. It should be noted for completeness, however, that, in cross-examination, French accepted that the vehicles were purchased pursuant to hire purchase agreements, but said that the money was needed by Ballarto as operating capital, essentially to fund its acquisition, through Quarry View, of Lots 33A and 33C and to enable it to continue its facilities with the bank. He said that he did not consider it necessary to consult Smith about the transfer of the $400,000 "because Skye Quarries was my company". In order to provide a justification for the transfer of the $400,000 in the financial records, French created two invoices, dated 30 November 1994 and 16 December 1994, each for $200,000, which showed that Ballarto supplied to Skye Quarries 40,000 tons of mineral sand at $5.00 per ton. In fact, there was no such sale and the invoices reflected no more than fictitious transactions in order to give the appearance of a legitimate commercial basis for the transfer of the funds. His Honour considered that this was an example of the preparedness of French "to use the funds and moneys of Skye Quarries [and] appropriate such moneys for his own use and that of Ballarto and to [create] fictitious documents which, on their face, purported to record the sale of sand, for `accounting purposes' when the moneys appropriated from Skye Quarries to Ballarto were direct transfers of moneys held in the account of Skye Quarries." His Honour recognised that French took large sums of money from Skye Quarries and transferred them to Ballarto against fictitious invoices and that, on his own admission, since 1993, he caused to be prepared, for the Ballarto accounts, false depreciation schedules totalling hundreds of thousands of dollars in order to inflate artificially the apparent cost of Ballarto's operation, thereby minimising the profit of the company.

47. Shortly after Christmas 1994, Smith left for a holiday and not long thereafter learned (from his wife) of the transfers totalling $400,000. He became upset and angry at French having taken that course of action without consulting him and, largely because he was angry with French over the transfers but also due to personal problems he was experiencing at that time, refused to return to Skye Quarries. It should be noted, however, that at no relevant stage did Smith demand that French repay those moneys to Skye Quarries.

50. After 1994 Smith took no direct interest in the affairs of Skye Quarries, nor did McCallum. Furthermore, as his Honour noted, neither required a statement of accounts to be provided to them at the end of the financial year 1995 or, for that matter, the previous year. Nevertheless, and notwithstanding Smith's departure from Skye Quarries, the sale of quarry product from the Ballarto land continued to be made in its name and debts were incurred by the company in the working of the mine. Furthermore, Quarry Quip continued to invoice Skye Quarries for the material and services provided. French, meanwhile, continued to treat Skye Quarries as his company and, between January and September 1995 withdrew large sums of money from it which he paid to Ballarto. It was the plaintiffs' case at trial that most of those withdrawals were unlawful and the effective return of those moneys was sought by Skye Quarries in the proceeding, as is explained more fully later. In September 1995, Skye Sales took over the quarrying operation from Skye Quarries but its employees were not transferred to Skye Sales until the "end of the financial year 1996" when Ballarto took over the quarrying business from Skye Sales.

54. After 1994, Smith resumed the day-to-day running of the engineering business at Quarry Quip with McCallum. Some of the events that occurred at or not long after this time at the company formed the basis of the appellants' counterclaim, which alleged, so far as is relevant, that the conduct of Smith and McCallum in the management of Quarry Quip was oppressive or unfairly prejudicial to or unfairly discriminatory against French as a member of Quarry Quip and/or conducted in a manner that was contrary to the interests of the members of the company as a whole.[1] On that basis the appellants sought, inter alia, an order for the winding up of Quarry Quip or that Smith purchase French's shares in the company. Essentially, the complaints levelled against the conduct of Smith and McCallum were these. First, it was said that Smith and McCallum borrowed money from Quarry Quip on terms that were not commercial terms. In that regard, evidence was adduced that Smith and McCallum each had outstanding loans from the company of $113,200. It was said that when the loans were made no agreement was sought from French as to that course and there was no documentation prepared in relation to them. It was only some time later, said the appellants, that a formal written agreement relating to the loans was executed.

57. Secondly, it was claimed that McCallum left Quarry Quip and set up a company, M. Steel Pty. Ltd. ("M. Steel") that was conducted in competition to Quarry Quip. The appellants claimed that McCallum ceased working at Quarry Quip and set up M. Steel and Jenmar Holdings Pty Ltd ("Jenmar Holdings"). M. Steel performed work similar to that done by Quarry Quip while Jenmar provided the equipment that was used as well as the premises that were occupied by M. Steel. While he was still at Quarry Quip, it was said, McCallum effectively induced a large number of its customers to leave Quarry Quip and to do business with his new company. In the result, it was alleged that 90 per cent of M Steel's customers were former clientele of Quarry Quip. Notwithstanding such conduct by McCallum, said the appellants, he stayed on as a director and continued, for a time, to take a salary and use a company car. It was next claimed that, although Quarry Quip brought a proceeding against McCallum in respect of his conduct relating to M. Steel, Smith had offered to compromise that proceeding in return for McCallum agreeing to sell his shares in Quarry Quip to Smith in circumstances where he would continue to hold them in his name on behalf of Smith until the proceeding was concluded. It was also claimed that, in April 1999, Smith had offered to purchase, or obtain the control of, the shares McCallum held in Quarry Quip on various terms, one of which was that Smith would pay McCallum $100,000 upon the signing of an agreement and a further $170,000 within six months of a ruling in relation to the case. A further term stipulated that Smith would not pursue McCallum in regard to any possible breach of duty that he may have committed as a director of Quarry Quip. No like offer was made to French, said the appellants

60. French also alleged that Smith and McCallum had taken for their own use substantial sums of money, in cash, which were proceeds of sales of scrap metal by Quarry Quip and which, he claimed, belonged to it. His Honour noted that, although Smith had acknowledged as much in cross-examination, he said that this conduct was consistent with that which had been agreed upon between the three parties near the outset of their operation and that French, who had been a recipient of such proceeds in the past, had effectively sanctioned the practice.

63. It was further claimed that, in 1996, Smith and McCallum took payments by way of superannuation contribution in the sum of $50,000 and bonuses that year in the sum of $25,000 that were made without the agreement of French and, which it was said, were "a de facto distribution of profits of Quarry Quip". His Honour, however, rejected this claim holding that the payments were made effectively to them as working directors of Quarry Quip. Finally, it was contended that the relationship between Smith, McCallum and French as shareholders and directors of Quarry Quip had irretrievably broken down and because of that, it was just and equitable that the company be wound up, or alternatively, that an order be made that Smith purchase French's share in Quarry Quip. Relevantly, his Honour considered that the circumstances relied upon by French as constituting evidence of the breakdown between the parties arose outside the conduct of the affairs of Quarry Quip; the breakdown stemmed from Smith's discovery that French had, unbeknown to him, withdrawn the $400,000 from the account of Skye Quarries to which we have referred. His Honour considered that it was only after this time that Smith effectively withdrew from the affairs of Skye Quarries and resumed the engineering business at Quarry Quip and that McCallum decided to withdraw from the day-to-day business of Quarry Quip in order to concern himself with M. Steel. The business of Quarry Quip, said his Honour, continued to prosper notwithstanding those events. In all the circumstances, his Honour concluded, there was no proper basis on which to order the winding up of Quarry Quip. Consequently, he dismissed this aspect of the appellants' counterclaim.

67. We now turn to the respondents' claims in the proceeding. For convenience we divide them into two categories. The respondents' principal case was that Smith, McCallum and French reached an agreement in 1989, not only to establish an engineering company, but also to participate as joint venturers in the quarry operations that were to be conducted on the Ballarto land. They claimed that it was agreed between them that Quarry Quip would contribute to the quarry business by providing, at cost, the plants necessary for such an undertaking as well as associated engineering works, including the building of roads and the reclamation of slime dams. They contended that, under the joint venture agreement as it was propounded by them, French and Ballarto would provide the land and the necessary machinery and equipment. According to the plaintiffs, the three men further agreed that the profits from the quarrying operations, after deduction of Quarry Quip's costs and those of French and Ballarto referrable to the quarrying operations, would be divided on a 50/50 basis between Quarry Quip and Ballarto. The plaintiffs alleged that this agreement was breached by the French interests and that, in the circumstances, they were entitled to damages amounting to many millions of dollars by way of lost profits or loss of opportunity to earn profits. It is not necessary to deal with this claim further because it was unequivocally rejected by his Honour, who did not accept the claim of Smith and McCallum that they had conversations with French by which the extended joint venture was established and this aspect of his Honour's decision is not challenged on appeal.

70. So far as is relevant, the second category of claims made by the respondents in the proceeding comprised two monetary claims. The first was a claim by Quarry Quip for moneys due from the French interests for work and materials supplied by it in relation to the quarry development on the Ballarto land. The claim was particularised in Schedule 1 to the Statement of Claim ("Schedule 1") and, together with the claim for $24,397.50, amounted to $1,020,755.92**.** The first five items in Schedule 1 (amounting to $135,652.80) related to the building by Quarry Quip of the rock crushing plant at the behest of French, which, as has been mentioned, was commissioned in May 1992. The balance related principally to the work that was carried out by Skye Sand in the circumstances described earlier. In his comprehensive judgment, his Honour analysed each claim in Schedule 1 and concluded that the amount proved as the cost of the work carried out by Quarry Quip for which it was not paid by the French interests totalled $696,339.08. The learned judge then reduced the sum of $696,339.08 by $92,000 - being the total sum paid by Skye Sand to Quarry Quip between 4 June and 15 December 1993, which his Honour said was not taken into account in the preparation of Schedule 1 - thereby leaving the balance due to Quarry Quip at $604,213.54. Accordingly, his Honour ordered that French pay this amount to Quarry Quip. Subject to one qualification, to which reference will be made later, there is no challenge to his Honour's decision in relation to the Schedule 1 claims.

73. The second monetary claim was made by Skye Quarries against a number of the appellants for over $1.8m., as set out in Schedule 2 to the statement of claim ("Schedule 2"). In broad terms, Skye Quarries contended that the Schedule 2 claims represented the money that it said was wrongfully withdrawn from its account at the behest of French and used for his benefit and the benefit of a number of the appellant companies.

76. The resolution of this claim depended almost entirely on whether the quarry business that was operated by Skye Quarries belonged to it, or whether it was beneficially owned by the French and Ballarto interests. It has already been noted that his Honour rejected the appellants' claim that Smith and McCallum held their shares in Skye Quarries for the benefit of French. His Honour also rejected French's claim that Skye Quarries, like Skye Sand, was a mere "marketing" entity. It was claimed by French that Smith had acknowledged to him that Skye Quarries was set up "as a marketing company as a result of your [aeroplane] accident", but this was denied by Smith. His Honour was not prepared to accept that Smith made such an acknowledgment and, as we have said, he rejected the notion that the role and function of Skye Sand and Skye Quarries were limited to that of marketing. He considered that each of Skye Sand and Skye Quarries was actively involved in the working of the quarry, the mining of the sand and also of its sale. But this is as close as his Honour came to saying, in terms, that the quarry business belonged to Skye Quarries. Nevertheless, that must have been his Honour's conclusion given that he accepted, as we have said, that the Skye Quarries money that French appropriated belonged to that company and given that he held that the French interests must pay Skye Quarries essentially the whole of the Schedule 2 claims. In his reasons for judgment the learned trial judge closely analysed the Schedule 2 claims and effectively concluded that $1,749,149.38 had been misappropriated from the Skye Quarries bank account at the behest of French. Accordingly, he ordered that French and some of his companies pay this amount to Skye Quarries. As will be seen, the appellants challenge this aspect of his Honour's decision on the basis that the quarry business belonged beneficially to the French and Ballarto interests and that, therefore, there was no basis for his Honour making the above order in respect of the Schedule 2 claims.

80. The appellants claimed before us that his Honour erred in the following respects.

(1) Under ground 5, it was said that his Honour wrongly concluded that Skye Quarries conducted the quarry business for its own benefit and not on behalf of the French and Ballarto interests. Consequently, it was said, since his Honour's order that the French and Ballarto interests pay Skye Quarries the balance of Schedule 2 was based on that conclusion, it should be set aside.[2]

(2) In grounds 6, 7 and 8 the appellants claimed that his Honour failed sufficiently to reduce (by $135,947.06 and $183,065.84) the amount otherwise payable by the French and Ballarto interests to Quarry Quip in respect of the Schedule 1 claims.

(3) Under cover of ground 13 it was claimed that his Honour erred in finding that the affairs of Quarry Quip were not conducted in a manner that was oppressive and unfairly prejudicial to, or unfairly discriminatory against, French and that, in the circumstances, it would not be just and equitable to wind up Quarry Quip, or order that Smith purchase French's shares in the company.

Ground 5

86. We turn first to consider ground 5. In essence, the appellants submitted that the starting point in the analysis of the question whether Skye Quarries owned the quarry business in its own right was the determination of the capacity in which Skye Sand operated the quarry. It was said for the appellants that, if Skye Sand conducted the business for the French and Ballarto interests, it must mean that, given his Honour's finding that Skye Quarries merely took over the business from Skye Sand, Skye Quarries also conducted it for the French and Ballarto interests. The appellants argued that the evidence made it plain that Skye Sand operated the quarry business, not for the benefit of Quarry Quip, but for the French and Ballarto interests. Moreover, they said, a conclusion to the contrary would be inconsistent with the underlying basis of his Honour's decision that the various French and Ballarto interests were required to pay Quarry Quip the balance of the Schedule 1 claims, namely, that the work carried out by Skye Sand at the quarry was conducted for the French and Ballarto interests and not for the benefit of Quarry Quip.

89. It was also submitted for the appellants that, in the circumstances, the conclusion that Skye Quarries owned the quarry business in its own right was inconsistent with his Honour's finding that the agreement between the parties did not encompass the quarry business. Furthermore, it was said, the evidence of the surrounding circumstances, including the conduct of the parties, only permitted the conclusion that Skye Quarries conducted the quarry business for the French and Ballarto interests.

92. The respondents, however, contended that the decision that the French and Ballarto interests pay the Schedule 1 claims was not determinative of the capacity in which Skye Sand carried on the quarry business. According to them, the reason his Honour found that the French and Ballarto interests were required to pay the Schedule 1 claims was that his Honour was satisfied that they had agreed to reimburse Quarry Quip for the costs and expenses incurred by it in relation to the setting-up of the quarry, and not because Skye Sand operated the quarry for their benefit. The respondents also claimed that the nature of the work performed by Skye Quarries was materially different from that which was performed by Skye Sand. It was said that Skye Sand merely carried out work that was preparatory to the mining operation that was ultimately undertaken by Skye Quarries. In particular, the respondents pointed to the fact that Skye Quarries was established shortly after the completion of the sand washing plant, which enabled it to sell washed sand at a significantly higher price than that charged by Skye Sand for the dried (unwashed) sand in addition to the overburden that it already excavated and sold. Such excavation of overburden by Skye Sand, said the respondents, was necessarily preparatory work undertaken to expose the sand for excavation and processing (by Skye Quarries). It was further argued for the respondents that the decision by French and Smith to establish Skye Quarries and to issue the shares in it to the three parties reflected the recognition by French and Ballarto of the material contribution made by Smith and McCallum through Quarry Quip to the setting up of the quarry and preparing it for large scale operations, including the building, at cost, of critical plants, such as the rock crushing and sand washing plants as well as roads and the reclamation of slime dams. Moreover, said the respondents, it was wrong to claim, as the appellants did, that his Honour's finding that Skye Quarries beneficially owned the quarrying business necessarily involved the conclusion that French and Ballarto effectively made a gift of two-thirds of their quarrying business to Smith and McCallum. Such a contention, it was said, overlooked the fact that Smith and McCallum, through their interest in Quarry Quip, contributed towards the quarry business their notional interest in the notional profit component of the engineering and civil works that were provided by Quarry Quip (at cost) for the benefit of the quarry operation and the several years that Smith spent working seven days per week at the quarry to re-establish it as a going concern. The respondents argued that these circumstances explain and justify his Honour's decision that, in the circumstances, it was intended by the parties that Smith and McCallum would own their shares in Skye Quarries in their own right and that, consistently with that position, Skye Quarries would operate the quarry business for its own benefit. In the circumstances, it was said, no error attaches to his Honour's ultimate conclusion that the money in question belonged to Skye Quarries and that the French and Ballarto interests must repay it.

96. In analysing the competing arguments of the parties for the purpose of determining whether his Honour erred as is contended for by the appellants in ground 5, we consider it useful first to establish the capacity in which Skye Sand carried out the work at the quarry, particularly given that the learned primary judge made no specific finding on this issue. Needless to say, if the work was done for the benefit of French and Ballarto and not for itself, that would go a considerable way towards supporting the appellants' claim that Skye Quarries conducted the business on behalf of French and Ballarto given that, as was accepted by the parties and as his Honour found, Skye Quarries took over the quarrying operations from Skye Sand on the basis that it would conduct them in the same capacity as Skye Sand had done. We consider that the following evidence points to the conclusion that Skye Sand carried out the quarry work for the benefit of the French and Ballarto interests and not for the benefit of Quarry Quip. First, according to its own accounting records, Quarry Quip did not regard itself as the beneficiary of its contribution, through Skye Sand, to the development of the quarry. Rather, consistently with its relationship with French and Ballarto during the "M&K period", Quarry Quip viewed itself as a creditor in relation to the cost of its work. Its debtors' card, to which we have referred earlier, treated Skye Sand and, through it, French and Ballarto, as a debtor in respect of its quarry related expenses. Moreover, in accordance with its arrangement with French, Quarry Quip claimed payment for such work, first out of the proceeds of sale of the quarry product and, when those proceeds proved to be insufficient, it claimed the costs from French and Ballarto. In the proceeding this claim was, as we have already noted, particularised in Schedule 1. Secondly, the provision in May 1993 by Ballarto, at the behest of French, of a debenture for $600,000 to secure the amount due to Quarry Quip in relation to the work carried out by Skye Sand, points almost unequivocally to the conclusion that the parties regarded the French and Ballarto interests as the beneficial owner of the quarry business during the period when Skye Sand conducted its operations.

99. Furthermore, we consider that the claim by Quarry Quip that it is entitled to be paid the amount set out in Schedule 1 amounts reflects its recognition that its work, or that of Skye Sand, at the quarry was carried out for the French and Ballarto interests. To say, as the respondents do, that the quarry work undertaken by Skye Sand was carried out for its own benefit and yet claim that French and Ballarto must pay for it only because they promised to reimburse Quarry Quip for such contributions is tantamount to saying that French and Ballarto agreed to Smith and McCallum having two-thirds of their quarry-related assets without them or Quarry Quip being obliged to meet any of the substantial costs associated with the ownership of such assets, including the costs of purchase of the quarry land and the extractive industry licence and the provision of the heavy equipment and machinery for quarrying purposes. Such a conclusion would not only fly in the face of his Honour's finding that the engineering venture did not extend to the quarrying business, but it is also inherently unlikely that French and Ballarto would have agreed to such an arrangement. It is important to note that there is no finding by his Honour, or any evidence, that the parties agreed to such a one-sided relationship.

102. These considerations make it all the more difficult to accept the respondents' claim that his Honour's decision as to who must pay the Schedule 1 claims was based merely on the finding that French and Ballarto agreed to reimburse Quarry Quip for the cost of the Skye Sand work and did not encompass the conclusion that French and Ballarto were the beneficiaries of that work. We consider that, as the appellants have submitted, the underlying basis for his Honour's decision in that regard must have been the conclusion that Skye Sand did not carry out the quarry work for the benefit of Quarry Quip. Were it otherwise, his Honour would not have ordered the French and Ballarto interests to make the Schedule 1 payments.

106. Once it is accepted that Skye Sand carried out the quarry work for French and Ballarto, it is difficult not to conclude that Skye Quarries also conducted the quarrying business for them, given, as we have said, his Honour's finding that Skye Quarries did no more than replace Skye Sand. In an endeavour to meet this conclusion, the respondents argued, as we have said, that the work performed by Skye Quarries was of a materially different character to that which had been undertaken by Skye Sand, so that, although Skye Quarries followed on from Skye Sand, it conducted quite a different business and did so for its own benefit. We have already mentioned that it was the respondents' case that the clearing of the slime dams, the building of roads, the fabrication and erection of plants and the lifting of the overburden to expose the sand were carried out by Skye Sand for the purpose of making the quarry ready for commercial operations by Skye Quarries. Thus, it was said for the respondents, the items of work in respect of which the Schedule 1 claims were made were primarily concerned with establishing the quarrying operations, whereas Skye Quarries actually conducted the business of mining, processing and selling sand from the quarry.

109. But the evidence does not support the contention that there was such a material difference between the quarrying operations of Skye Sand and Skye Quarries. It does not explain why, as the respondents would have it, the work performed by Skye Quarries was conducted for its own benefit. First, the claims in Schedule 1 in respect of work by Skye Sand are not confined to engineering and civil work that was carried out by it for the purpose of establishing the quarrying operations, but include claims for work associated with the mining and sale of quarry products. Next, it is plain on the evidence that Skye Sand did more than just carry out work for the purpose of establishing the quarry. It was involved in a substantial amount of mining and sale of quarry product, particularly during the latter part of 1993. This is reflected in the fact that approximately $690,000 was paid into the Skye Sand management account by way of proceeds of sale of such quarrying product. As has been mentioned, Skye Sand sold an increasing amount of washed sand after May 1993 when the sand washing plant was commissioned. Furthermore, Quarry Quip treated Skye Quarries, as it did Skye Sand, as its debtor and as belonging to French and Ballarto. Thus, as has been noted, it made a $10,000 start-up loan to Skye Quarries that it invoiced to it, but claimed its repayment in the proceeding, not from Skye Quarries, but from French and Ballarto. Moreover, when Skye Quarries was established, Quarry Quip invoiced Skye Quarries for all amounts owed by Skye Sand that remained unpaid at the commencement of the Skye Quarries' operations, thereby confirming that it considered Skye Quarries to be in the same relevant position as that previously occupied by Skye Sand.

112. The surrounding circumstances as found or accepted by his Honour in respect of the quarry are inconsistent with Skye Quarries having conducted quarrying operations for its own benefit. It has already been mentioned that, putting to one side Quarry Quip's contribution to the quarry operations by the provision of work and materials at cost, all the other obviously very substantial costs associated with the quarry operations, such as the cost of the quarry land and all matters pertaining to its reclamation and operation and including the machinery and equipment used in the quarrying business, were all borne by the French and Ballarto interests. Moreover, the critical extractive industry licence was also effectively held by them. In those circumstances, if Skye Quarries had operated the quarry for its own benefit rather than for French and Ballarto, then some arrangement would have to have been reached with the French and Ballarto interests as to the terms on which Skye Quarries could have the benefit of the French and Ballarto quarry assets. That there obviously was no such agreement on foot militates against the conclusion that Skye Quarries operated the quarry business otherwise than for the French and Ballarto interests. And, as we have pointed out in the context of Skye Sand, any suggestion that the French and Ballarto interests "tipped in" two-thirds of their quarry business in the way contended for by the respondents, would be contrary to the critical finding of his Honour, which was not challenged by the respondents, that there was no agreement between the three parties to conduct the quarrying business as a joint venture.

115. Thus, we consider that it was not open to conclude on the evidence that, when Skye Quarries took over the role of Skye Sand in late 1993, it was intended by the parties that it would operate the quarry for its own benefit. Furthermore, it seems plain enough on the evidence that the parties conducted their affairs on the footing that the quarry business belonged to the French and Ballarto interests. Thus, for example, it was French who decided what amounts should be drawn on the Skye Quarries bank account and Smith merely countersigned the cheques that French put in front of him, including many that related to non-quarry expenses and, in particular, a number for the personal expenses of French, all of which the respondents have claimed back for Skye Quarries in Schedule 2. Further, and consistently with this position, French maintained that Skye Quarries "belonged" to him or his group and he used its funds as he saw fit, for his own purposes and those of Ballarto - for example, the $400,000 taken from Skye Quarries in late 1994. On the other hand, Smith gave no indication that he had any beneficial interest in Skye Quarries. Not only did he sign cheques at French's request without question, but he did not request that the $400,000 that he considered was "stolen" from Skye Quarries be repaid by French. Similarly, it is obvious that Smith regarded himself as free to leave the quarry (and Skye Quarries) at any time and without notice, and did so at the end of 1994**.** Furthermore, as the appellants submitted, Smith was prepared to leave Skye Quarries under the control of a person whom he regarded as a thief and whose behaviour caused him to withdraw himself from the quarry business "in shock and disgust". Such conduct, said the appellants, rightly, we think, was not consistent with the claim that Skye Quarries operated the quarry business for its own benefit.

118. In the circumstances, therefore, we consider that his Honour erred in his conclusion that Skye Quarries was the beneficial owner of the quarry business and on that basis ordering that the French and Ballarto interests pay Skye Quarries the balance of the Schedule 2 claims. It follows, that his Honour's order to that effect must be set aside.

122. In light of this conclusion, grounds 1, 2, 3, 4, 10, 11 and 12, which were based on ground 5 not succeeding, fall away. Ground 9 has been abandoned. Thus, two sets of grounds remain to be considered, namely grounds 6, 7 and 8 and ground 13.

126. We turn next to grounds 6, 7 and 8. Although, as we have said, the appellants do not challenge the judge's overall conclusion that certain French and Ballarto interests pay Quarry Quip the balance of the Schedule 1 claims, they maintain under these grounds that the sum ordered to be paid by his Honour should be reduced because it wrongly includes the following amounts:

(a) $135,987.06, being wages paid by Quarry Quip for employees at the quarry during the period January to June 1994.

(b) $183,065.84, reflecting payments of expenses relevant to Quarry Quip or Skye Sand that have already been paid to Quarry Quip out of the proceeds of the sale of sand. It was said that these amounts were credited to the cash management account in the name of Skye Sand.

132. We turn first to (b). It seems that the costs of Skye Sand amounting to $183,065.84 were met out of the quarrying income banked in the Skye Sand cash management account and that his Honour did not take that fact into account in determining the balance due under Schedule 1. In light of that, his Honour should have reduced the balance of the Schedule 1 claims by $183,065.84.

135. As to (a), however, it was said that the debt for those wages was that of Skye Quarries and not of French and Ballarto. But because, as we have concluded, Skye Quarries operated the quarry business for the French and Ballarto interests, the wages paid by Quarry Quip to workers at the quarry during the period January to June 1994, should be borne by the French and Ballarto interests. It is not asserted by the appellants that either Quarry Quip or Skye Quarries has already been reimbursed or compensated in some other form (as in the receipt of sand for which it has not paid) by the appellants in respect of the relevant expenditure. Indeed, it is now conceded by the appellants that, if ground 5 is upheld, ground 8 falls away. It follows, therefore, that, subject to what has been said in the immediately preceding paragraph, these grounds fail.

Ground 13 - Counterclaim : winding up of Quarry Quip

139. French sought a number of orders by counterclaim, made by amended defence and counterclaim dated 10 May 1999. The relief that was sought by him as a shareholder of Quarry Quip was for orders that the company be wound up, that Smith and McCallum pay moneys to Quarry Quip, that the court regulate the company, and that Smith and McCallum purchase his share in the company. The application to wind up was made pursuant to s.461 as well as s.246AA of the Corporations Law, the other orders being sought pursuant to the latter provision. A principal basis of the claim and of the court's power to make these orders was that the court should find that the affairs of Quarry Quip were being "conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against" a member. The question then becomes whether it was shown that French had been oppressed.

142. French's claim was made on a number of bases, the substance of which was that Smith and McCallum had breached fiduciary duties they owed as directors of Quarry Quip. We shall deal in detail with these matters, but it is sufficient to say at the outset that their alleged breaches including failing to act honestly, profiting personally, and failing to account for benefits taken from Quarry Quip, and were said to arise from matters such as their taking salaries and benefits to which they were not entitled, taking loans from the company and taking business of the company for themselves.

145. When the matter was before the trial judge it was reasonably clear that the majority of the issues in dispute related to claims made by the respondents against the appellants. In the detailed written submissions of the parties, which were put before this Court by the appellants' counsel to demonstrate the arguments that were before the trial judge, the appellants' submissions amounted to some 124 pages, only six of which were directed to the counterclaim. By contrast, in this Court, more than one-third of the 150 pages of submissions made for the appellants, not including various schedules, were directed to the counterclaim. Whereas the appellants' claims remained in outline the same, we are left with the strong impression that the appellants' arguments to the trial judge on their counterclaim were very much less substantial than those that were pressed in this Court. It is quite clear from the submissions, and was conceded in argument, that a number of these arguments had been raised for the first time on appeal, notwithstanding that they are based on the transcript of many days of evidence during the trial. The written submissions put to the trial judge certainly did not make reference to a large proportion of the evidence to which we are referred.

149. In general, a party is bound by the way it conducts its case at trial and it is not open to someone who has elected not to pursue a particular course at trial then to argue on appeal points not taken below: Liftronic Pty. Ltd. v. Unver[3]; Coulton v. Holcombe[4]; Barry Martin v. Hendersons Industries Pty. Ltd.[5].

152. In University of Wollongong v. Metwally [No. 2][6], six members of the High Court said -

"Except in the most exceptional circumstances, it would be contrary to all principle to allow a party, after a case had been decided against him, to raise a new argument which, whether deliberately or by inadvertence, he failed to put during the hearing when he had an opportunity to do so."

156. The extent to which a court of appeal is prevented by this rule from interfering with the result of a trial is well demonstrated by the following passage from Water Board v. Moustakas[7] -

"The course taken by the Court of Appeal immediately casts doubt upon whether it was correct in concluding that, upon the facts as found by the trial judge, the plaintiff had made out a case of negligence against his employer. The only case which he could have made out was one which he sought to put, for a trial is not at large but is of the issues joined by the parties. If the case which the Court of Appeal thought was made out was one which the plaintiff had sought to put on trial, then it may not have been unfair as the Court of Appeal appears to have thought it would have been, for judgment to have been entered for the plaintiff on the appeal and for any question of contributory negligence to have been dealt with then and there. Any element of unfairness can only have arisen from the fact that the case against the employer which the Court of Appeal discerned, was not a case which the plaintiff sought to make at trial and was not, for that reason, a case which the employer had been required to meet. It was not a case which could be met upon appeal because the possibility of calling evidence to meet it was denied to the employer at that stage. More than once it has been held by this Court that a point cannot be raised for the first time upon appeal when it could possibly have been met by calling evidence below. Where all the facts have been established beyond controversy or where the point is one of construction or of law, then a court of appeal may find it expedient and in the interests of justice to entertain the point, but otherwise the rule is strictly applied. In deciding whether or not a point was raised at trial no narrow or technical view should be taken. Ordinarily the pleadings will be of assistance for it is one of their functions to define the issues so that each party knows the case which he is to meet. In cases where the breach of a duty of care is alleged, the particulars should mark out the area of dispute."

160. The decision in Water Board v. Moustakas was referred to by Gleeson, C.J., McHugh and Gummow, JJ. in Whisprun Pty. Ltd. v. Dixon[8] in such a way as to show that the rule retains no less than its full force. Their Honours said -

"[51] Accordingly this appeal must be allowed. It would be inimical to the due administration of justice if, on appeal, a party could raise a point that was not taken at the trial unless it could not possibly have been met by further evidence at the trial. Nothing is more likely to give rise to a sense of injustice in a litigant than to have a verdict taken away on a point that was not taken at the trial and could or might possibly have been met by rebutting evidence or cross-examination. Even when no question of further evidence is admissible, it may not be in the interests of justice to allow a new point to be raised on appeal, particularly if it will require a further trial of the action. Not only is the successful party put to expense that may not be recoverable on a party and party taxation but a new trial inevitably inflicts on the parties worry, inconvenience and an interference with their personal and business affairs. [52] As Water Board v. Moustakas makes clear, a point may be a new point even though it is within the pleadings or particulars. The pleadings and particulars are frequently decisive in determining whether a party is seeking to raise a new point on appeal. But they are not conclusive. To determine whether a party is raising a new point on appeal, it is `necessary to look to the actual conduct of the proceedings'. Thus in Water Board, the plaintiff's case at trial had been that his employer was negligent in failing to prevent traffic from crossing into the lane in which he was working. On appeal, the Court of Appeal of New South Wales allowed the plaintiff to raise a case that the employer was negligent in failing to provide a barrier to prevent the plaintiff from straying into the adjoining lane. This Court held that, although this alternative case was within the particulars, it had not been the plaintiff's case at the trial and the Court of Appeal had erred in allowing it to be raised on appeal."

164. The background to the counterclaim, taken with what might have been thought the "throw away" nature of the appellant's submissions in support of it at trial was such that the respondent argued to the trial judge that the counterclaim had been launched as an abuse of process, not with the genuine object of obtaining the relief claimed but with the intention of exerting pressure on Smith and McCallum to force them to the negotiating table, so as to relieve the pressure on French to make good various losses he had caused to the company and to prevent full recovery from him. The judge did not find it necessary to decide whether this contention was justified, but it is nonetheless desirable to make reference to some additional background facts. We shall return to the way the appellants conducted the trial in considering various issues arising in the counterclaim.

168. There was evidence before the trial judge to show that French had launched an oppression application in relation to Quarry Quip in 1996, following receipt of a letter of demand from Smith and McCallum's solicitors. This application was settled on the second day of the proceedings, and French then abandoned his claim and agreed to pay costs, having obtained certain undertakings by Smith and McCallum as to notice of any further increases in their salary, and having obtained relief on the undertaking he gave as to damages. French then initiated further action in February 1999, having agreed with McCallum to join with him in seeking the appointment of an administrator. The present application based on oppression and the just and equitable ground was not initiated until French's defence was, as we have said above, amended in May 1999. No complaint of oppression had been made between 1996 and 1999. Many of the matters upon which French now relies are the same as those upon which he relied in 1996. Indeed, the respondents contended that the only matters of oppression put to Smith when under cross-examination were the loans made to himself and McCallum, being the loans which were the subject of the 1996 proceeding.

172. It is convenient to deal first with French's claim of oppression, and we shall take the particulars alleged, in the order in which they were dealt with by the trial judge.

(a) Outstanding loans taken by Smith and McCallum from Quarry Quip in the sum of $113,200

176. It was submitted in this Court that the making of these loans to Smith and McCallum occurred in consequence of a breach by them of their fiduciary and common law duties to Quarry Quip. The submission was that the moneys advanced to Smith and McCallum were an asset of Quarry Quip. Accordingly, it was said, Smith and McCallum acted in breach of fiduciary duty by borrowing money from Quarry Quip without the fully informed consent of its members. Furthermore it was put that the decision by Smith and McCallum to advance themselves large sums of money from Quarry Quip's resources without security could not possibly have been made in good faith and in the interests of Quarry Quip or for any proper purpose. The loans made to Smith and McCallum, it was said, had been used by them to acquire country properties, and there was no corporate benefit to Quarry Quip involved in the making of the loans, particularly since no interest had been paid by Smith or McCallum and Quarry Quip had had to take legal proceedings against McCallum to recover the loan to him. It was submitted that there was no evidence that the making of these loans was necessary to attract or retain the services of either Smith or McCallum. Reliance was placed on Paul A. Davies (Aust.) Pty. Ltd. v. Davies[9]. In that case, the liquidator of a company sought to recover the original money borrowed by directors of the company and used by them in the purchase of a holiday resort, and the profits made from the contract for the sale of this resort. Waddell, J. held, on the evidence before him, that the moneys used in the purchase of the resort were, in substance, those of the company.[10]

179. In the present case the judge found that Smith and McCallum had each received loans from Quarry Quip, McCallum having received $113,200 in 1994, and Smith a larger sum after that time, which had been reduced to the same amount as McCallum's loan by payment in part by Smith. Both Smith and McCallum had executed formal written agreements in relation to these loans, by the terms of which the amount of the loan was repayable on demand, and interest was required to be paid at "the benchmark rate as is fixed from time-to-time by the Australian Taxation Office". The judge accepted that these loans were made by Quarry Quip without reference to French, and that no interest had yet been paid by either Smith or McCallum. On Smith's instructions a demand for payment had been served on McCallum after noting that Smith and McCallum had parted in 1997, when McCallum left the business of Quarry Quip and set up his own business, M. Steel. His Honour said that Smith had caused proceedings in the County Court to be instituted to recover the amount loaned by Quarry Quip to McCallum. The judge said that Smith's loan had not been called up by Quarry Quip, and that McCallum, in cross-examination before him had said that he was going to repay his loan "when we sort out all our differences". The judge concluded as to this allegation that -

"The fact that French, the third director of Quarry Quip, was not consulted when these moneys were advanced did not make the transaction unfair to him. Although at the time that the moneys were provided to each of Smith and McCallum no loan agreement in writing was executed, the fact is that such agreements witnessing the loans were subsequently executed. The making of the loans did not diminish the assets of the company, Quarry Quip. The loans were not excessive in amount and written agreements provided for a commercial rate of interest to be paid. That these loans were made by Quarry Quip to the working directors of the company, Smith and McCallum, without reference to French did not make such transactions oppressive or unfairly prejudicial to the other director and shareholder, French."

183. The loans carried interest, as the judge said, at a proper commercial rate. The making of a loan did not diminish the assets of Quarry Quip, since the amount of the loans appeared in the books of the company. The transactions were not commercially unfair, and not, in that sense, oppressive to Quarry Quip, since the written agreements entered into by each director provided that interest was to be paid at the benchmark rate fixed by the Taxation Office. The advancement of moneys by loan to senior employees of a company is a not unusual feature of commercial life and it was not suggested that any subterfuge had been involved. The loans were made before 1996, and had been relied upon by French in the proceedings commenced by him in 1996 alleging that, as a minority shareholder, he had been oppressed by Smith and McCallum. That proceeding came on for hearing in November 1996. On the third day of the trial, the proceeding was discontinued and French paid the costs of Smith, McCallum and Quarry Quip. There was evidence from a human resources and business consultant, Peter Ronald Matters, which was unchallenged, that the level of remuneration paid to Smith and McCallum by Quarry Quip, including superannuation, was "a fairly conservative level of remuneration".

186. In our view the judge was entitled to reach the conclusion that the making of these loans did not result in any oppression of French.

(b) The setting up by McCallum of a business, M. Steel, competing with Quarry Quip

190. It was submitted for the appellant that the findings made by the trial judge included that in mid-1997, McCallum ceased working at the premises of Quarry Quip, having decided to go his own separate way, since differences had arisen between McCallum and Smith concerning the running of the company. Before McCallum left he had taken steps to set up a new business with two companies, M. Steel, which was to be a competitor of Quarry Quip, and Jenmar Holdings. The sole director of M. Steel was Mark Griffin, but McCallum held a signed blank transfer of the shares in the new entity and a resignation of Griffin. Before McCallum left Quarry Quip he had told a number of customers of Quarry Quip that he was setting up his own business, and thereafter some 90 per cent of M. Steel's customers had been customers of Quarry Quip, and the work performed by M. Steel for those customers was work that could have been performed for them by Quarry Quip. Notwithstanding that M. Steel was a competitor of Quarry Quip, McCallum continued to be a director of Quarry Quip until well into 1998. Jenmar Holdings provided the equipment used and the premises occupied by M. Steel.

193. Mr Bick submitted that the judge ought to have found that McCallum sourced equipment for the new business before he left Quarry Quip, diverted customers from Quarry Quip, concealed from Smith the fact that he was seeking to divert customers of Quarry Quip to M. Steel, and gave only one week's notice of his intention to leave Quarry Quip. Furthermore it was put that the judge should have found that McCallum secured contracts with customers of Quarry Quip, such as Tubemakers, Capital Stone and Tin Finn before he left Quarry Quip. He argued that the judge should have found that Smith and McCallum had an agreement that after McCallum left Quarry Quip, he would thereafter help Smith with this litigation, and Smith in return would procure Quarry Quip not to take action against McCallum in relation to the customers of Quarry Quip that went to M. Steel. He submitted that there was also evidence that McCallum, after he left Quarry Quip, but while he remained a director of it, had continued to approach other customers of Quarry Quip to inform them of the setting up of his new business and to tell them that M. Steel was available to quote for work they might wish to have done.

196. On the basis of all this evidence it was put that McCallum in these ways, both while he remained an employee and director of Quarry Quip, and after he left Quarry Quip but remained a director, acted in clear breach of his fiduciary duties to Quarry Quip, putting his own interests ahead of those of the company.

199. The judge did indeed find that before McCallum left Quarry Quip he took steps to set up a new business. His Honour put it in the following way -

"Before McCallum left Quarry Quip he told a number of the customers of Quarry Quip that he was setting up his own business. He had also told Smith that he was leaving. After McCallum left Quarry Quip for a period he still received wages from Quarry Quip and for a longer period he continued to have the use of a motor vehicle at the expense of Quarry Quip. McCallum continued to be a director of Quarry Quip notwithstanding that M. Steel was a competitor of Quarry Quip. Some 90% of M. Steel's customers were customers of Quarry Quip. The work performed by M. Steel for those customers was work that could have been performed by Quarry Quip."

203. His Honour also accepted that when McCallum left Quarry Quip he agreed with Smith that he would remain a director of Quarry Quip until this case was concluded, but after leaving took no part in management decisions of Quarry Quip.

206. Notwithstanding these findings, the judge concluded that the fact that McCallum had ceased to work at Quarry Quip and through the use of a corporate structure became directly involved in a company and enterprise which was in competition with Quarry Quip, and the fact that previous customers of Quarry Quip became customers of M. Steel, "does not result in the affairs of Quarry Quip being conducted in a manner which was oppressive or unfairly prejudicial to French as a member of Quarry Quip".

209. McCallum was not represented either at trial or in this appeal, and we heard no argument put on his behalf, although he was, of course, in the witness box for some days. In acting in the manner set out above, McCallum is likely to have been acting in breach of his fiduciary duties to Quarry Quip, putting his own interests ahead of those of the company and, in particular, by soliciting customers of Quarry Quip acting in breach of his duties to that company. In Aubanel & Alabaster Ltd. v. Aubanel[11] Danckwerts, J. considered the law as to competition in relation to the sale of the goodwill of a business and to employees and said that it seemed to be accepted that, although a director is not an employee of the company, he could nevertheless engage in a competing business in the absence of any evidence of an agreement with the company to the contrary. His Lordship continued[12] -

"There is very little authority on these matters. In Buckley on Companies (12th ed.) p.877, there is the following statement: `The principles above referred to' (that is, that a director may not make a profit for himself from the use of the company's funds) `do not, however, preclude a director from carrying on business in the same field as the company on his own behalf, unless in so doing he makes use of the company's property or of some confidential information acquired by him as a director of the company', and this statement is in accordance with the observations of Lord Blanesburgh in Bell v. Lever Bros Ltd.[13]. It seems to me that the dangers of a director using confidential information (acquired as director) to assist him in the competing business and the difficulties of avoiding such use of any confidential information, are considerable, but I must accept the proposition that such competition is permissible. But solicitation of the company's customers is another matter. The function of a director is to supervise the carrying on of the company's business for the benefit of the company and its shareholders and to advance these interests. How can it be compatible with this function that the director should depreciate the value and progress of the company's business by asking the company's customers to cease to deal with the company and to deal with him in his competing business instead? It seems to me that this cannot be proper behaviour by a director. It is not necessary for me to consider the situation of a man who has ceased to be a director. I have to deal with the situation that the Defendant is a director of the Plaintiff Company."

See also Mordecai v. Mordecai & Ors[14].

214. There was however no suggestion that McCallum acted other than on his own behalf and in his own interests in setting up a competing business and soliciting Quarry Quip's customers, to the extent that he did so. Indeed, the appellants' case was, as we have said, that McCallum concealed from Smith the fact that he was seeking to divert customers of Quarry Quip to M. Steel and gave only one week's notice of his intention to leave the company. But the statutory remedy for oppression in s.246AA(2) of the Corporations Law (as at November 1999) upon which Mr Bick relied, provided that the Court may make a variety of orders if the Court is of the opinion that -

"(a) that affairs of a company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members (in this section called the `oppressed member or members') or in a manner that is contrary to the interests of the members as a whole; or (b) that an act or omission, or a proposed act or omission, by or on behalf of a company, or a resolution, or a proposed resolution, of a class of members of a company, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members (in this section also called the `oppressed member or members') or was or would be contrary to the interests of the members as a whole; ..."

218. In our view McCallum's decisions to leave Quarry Quip and commence his own business were, as the respondent contended, his own, made in his personal capacity and not as a director of Quarry Quip. The statutory remedy relates to acts done in the conduct of the affairs of the company or to acts or omissions of the company. McCallum's conduct did not fall within the prescribed categories. His establishment of a competing business was not conduct in the affairs of Quarry Quip, nor did it constitute an act or omission of Quarry Quip. The judge was, we think, accordingly correct in rejecting this allegation as a basis for a finding of oppression.

(c) Smith's offer to compromise Quarry Quip's claim against McCallum

222. In the submissions made at trial, the appellant argued that Smith agreed under cross-examination that he had negotiated with McCallum to purchase his shares, but had not attempted to negotiate with French. It was argued that Smith had sought to settle claims of Quarry Quip against McCallum on terms involving Smith purchasing McCallum's shares at what was presumably a favourable price, with McCallum agreeing to hold his shares in Quarry Quip and Skye Quarries on trust for Smith and to assist Quarry Quip and Skye Quarries in the current litigation.

225. To these allegations Smith responded that the negotiations had been conducted between solicitors and were unexceptionable. They showed that Smith's foremost interest had been at all times to prosecute the present action against French, which was a legitimate and proper interest. No mingling of private and company interests, it was said, had taken place.

228. The judge found that Smith had offered to purchase McCallum's shares and had at no time approached French to purchase his shares in Quarry Quip. The correspondence between solicitors showed that one offer made by Smith to McCallum included terms under which Smith would pay McCallum $100,000 on signing of an agreement and a further $170,000 within six months of a decision in this case being handed down. The offer contained a term that Smith would not pursue McCallum with respect to any breach of duty as a director, and that McCallum would continue to assist Quarry Quip in these proceedings. The negotiations, however, did not result in any agreement being reached. Accordingly, the judge held that the negotiations did not provide a basis for concluding that the affairs of Quarry Quip were being conducted unfairly as against French and, at best, provided evidence that there existed a separation between Smith, McCallum and French as directors of Quarry Quip.

231. In this Court Mr Bick argued that the judge's findings supported the contention that there was a justifiable lack of confidence in the conduct of management of Quarry Quip. It was also argued that the judge should have found that Smith and McCallum had an agreement that McCallum would leave, that McCallum would thereafter help Smith with this litigation and that Smith would procure Quarry Quip not to take action against McCallum in relation to customers of Quarry Quip that went to M. Steel.

234. There was some evidence given by McCallum to this effect. But there was evidence to the contrary given by Smith, which was supported by reference to correspondence between the solicitors. The judge was, we think, plainly entitled to arrive at the conclusion that the negotiations did not result in any agreement being reached and, on this basis, to hold that the conduct of the negotiations did not, by itself, show that the affairs of Quarry Quip were being conducted unfairly as against French.

(d) The failure to prosecute civil action on behalf of Quarry Quip against McCallum

238. The submissions made for French at the trial contained the following -

"Quarry Quip is yet to commence any proceeding against McCallum relating to his competing via M-Steel with Quarry Quip whilst still remaining a director, or for recovery of the sums paid to him by way of salary and in respect of his motor vehicle to the end of 1998. Smith gave evidence that Quarry Quip would eventually get around to instituting these proceedings, but as appears from the evidence relating to Smith's attempt to purchase McCallum's shares in Quarry Quip above, it is respectfully submitted the Court can have no confidence Smith will cause Quarry Quip to commence and conduct such proceedings in a manner which is in the interests of Quarry Quip, rather than Smith personally."

This was relied on both as a particular of oppression and in the derivative action claim.

243. Accordingly French, as a director and shareholder, sought an order that Quarry Quip commence proceedings against McCallum for breach of director's and fiduciary duties and for the repayment of the wages and expenses paid to McCallum since he left his employment with Quarry Quip and against M. Steel and Jenmar Holdings for receipt of the fruits of McCallum's breach.

246. Mr Gunst, for Smith, submitted that the evidence was that Smith had once already initiated civil recovery processes against McCallum, and that he intended to do so again. He argued that it could not be contended that Smith was not genuine in his intention to initiate such process if so advised, and that the fact that he had done so once already was significant in this regard. Mr Gunst argued at trial that Quarry Quip through Smith was already pursuing these matters, having issued in the County Court against McCallum in respect of the loan account in December 1998 and having engaged actively in the preliminaries. Furthermore, Quarry Quip by Smith had retained separate solicitors to bring action against McCallum in respect of the loss of customers, with that having already proceeded to the drawing of a statement of claim. He submitted there was no basis for the Court to find that Quarry Quip would not issue process to recover the moneys and, therefore, no justification for a derivative action.

249. The judge dealt with this issue by saying that the evidentiary material before the Court did not permit him to make any real assessment, if such proceedings were issued, as to what would be the prospects of Quarry Quip succeeding against McCallum. Reference to the appellants' written submissions shows, as we have said, that only two paragraphs dealt with the claims by French that McCallum in setting up M. Steel had committed breaches of his fiduciary duties owed to Quarry Quip. A further two paragraphs related to the contemplated derivative action. In this Court, however, a very much more detailed case was put. To a large extent this appears to have been the result of a scouring of the transcript of a hearing which lasted 55 days, and resulted in reliance on a substantial number of matters that had not been mentioned at all in the particulars supplied on behalf of French.

252. We have already stated our view that McCallum was probably acting in breach of his fiduciary duties in the manner set out above. We also accept that the failure of directors to prosecute an action available to the company can constitute oppression.[15] But to make good a case of oppression on such a basis, it would be necessary for the judge to have been satisfied that there was sufficient evidence to demonstrate a reasonable cause of action against the proposed defendants, secondly that directors of Quarry Quip acting reasonably would have pursued such a cause of action, and thirdly that Quarry Quip would not itself have brought and pursued the action.

255. In this Court submissions were made that there was evidence at the trial showing that McCallum had diverted customers from Quarry Quip, and secured contracts with such customers. There was indeed evidence that various customers of Quarry Quip had become customers of M. Steel. Furthermore McCallum had told other customers of Quarry Quip that M. Steel was available to handle their work for them. Although there was evidence as to these matters, it was not mentioned at all in the written submissions of French at trial, nor was it suggested in this Court that these references were put to the judge in argument. Even if these matters were mentioned to the judge, however, there were very substantial gaps in the evidence insofar as it bore on the strength of any cause of action against McCallum.

258. McCallum gave evidence at trial to the effect that he had sourced equipment for his new business before he left Quarry Quip, that he diverted customers from Quarry Quip and secured contracts from three parties, Tubemakers, Capital Stone and Tin Finn, all of which had been customers of Quarry Quip before he left the company. There was evidence that sixteen former customers of Quarry Quip became customers of M. Steel, and that after McCallum left Quarry Quip, but while he remained a director of the company, he approached eight of the foregoing sixteen to tell them that he was available to quote for work they might have and to invite them to deal with M. Steel. Very little of this evidence was, according to the appellant's written submissions, put to the trial judge. These submissions were, as we have said, put before this Court by the appellants' counsel to demonstrate to us the arguments that were put before the trial judge. The transcript of counsel's closing addresses at the trial were not before this Court.

261. Furthermore, such evidence as was available was sparse. McCallum said that before he left Quarry Quip there had been a lot of tension in the company and that some customers were unhappy. He said that he told Smith he was leaving and, after he left, a number of his customers followed him. He agreed that he secured some contracts from Quarry Quip customers such as the three above-mentioned, (Capital Stone being his brother-in-law's company) after he left that company. But little or none of this evidence was fleshed out to show what profit Quarry Quip had lost. No evidence appears to have been given by Smith on these matters and certainly none was drawn to the attention of this Court to prove what loss Quarry Quip had actually suffered, or whether Quarry Quip had, after McCallum left, the capacity to handle such work. We did not have drawn to our attention, nor did we discover in our reading of the transcript, evidence to prove that Quarry Quip had actually suffered damage by the loss of profit, or to what extent Quarry Quip's workload was such that it could have accepted additional orders from any of these customers had that work been offered. Smith appears not to have been asked questions on these issues during cross-examination. Such evidence as McCallum gave in relation to most of the sixteen customers mentioned as having transferred their business from Quarry Quip to M. Steel did not include evidence as to precisely when the changeover occurred, or whether it happened because of a solicitation by McCallum, as opposed to the customer becoming aware of M. Steel's existence, and simply making its own choice to offer its business to M. Steel.

264. In these circumstances, and particularly in the absence of relevant evidence on the subject from Smith, the judge was, we think, perfectly entitled to decide that the evidentiary material before the court did not permit him to make any real assessment as to whether, if new proceedings were issued, there were reasonable prospects of Quarry Quip succeeding in an action against McCallum for damages to a sufficient extent to justify the taking of proceedings against McCallum for his actions in setting up M. Steel and the diversion of customers from Quarry Quip to M. Steel. Insofar as other matters such as outstanding loans were concerned, Smith had, as we have already said, indicated an intention to continue the existing proceedings against McCallum if so advised. In all these circumstances, we think that the judge was entitled to conclude that the evidentiary material before the Court did not permit him to make any real assessment as to what would be the prospects of Quarry Quip succeeding against McCallum, if further proceedings were issued. Accordingly, his Honour was entitled to conclude that this also had not been established as an omission which could be oppressive or unfairly prejudicial to French as a member of Quarry Quip.

268. French next alleged that Smith and McCallum had admitted receiving cash for scrap metal belonging to Quarry Quip from Sims Metal and Manson Engineering, the amount paid by Sims Metal being $129,129.70 and by Manson Engineering, $47,849.40. French claimed he had not been informed of these receipts.

271. At trial evidence was given by Nicholas Harvey, the operations manager for Sims Metal, that payment of cash for scrap metal was normal in the metal business. Smith gave evidence that when Quarry Quip started off, payments of cash for scrap metal made to Quarry Quip were shared between French, McCallum and himself. When French ceased to be involved with Quarry Quip, the money was thereafter divided between McCallum and himself. McCallum gave evidence to the same effect. Smith and McCallum both spoke of the practice when asked and the matter had previously been adverted to in correspondence between solicitors for Quarry Quip and McCallum. The evidence also was that the payments were receipted by Quarry Quip and had certainly not been concealed by Smith and McCallum. Both Smith and McCallum gave evidence that French was aware of and had participated in this practice and there was no evidence that French had ever complained about it before trial.

274. The judge accepted Smith's evidence on these matters, including that French was aware of the practice, saying that French had not complained about the practice. His Honour said he was satisfied that -

"The practice of scrap metal being paid for in cash and received by the working directors was known to French and he participated in it at earlier times. Smith accepted that the moneys properly belonged to Quarry Quip. It must be accounted for by each of Smith, McCallum and French. The fact that these payments of cash were received by the directors of Quarry Quip at various times even as a perquisite of directors of the company does not mean that the sums received by them should not be accounted for. Having regard to the knowledge of French of this practice and his earlier participation in it, in my view this practice does not amount to an act of oppression or unfair prejudice by one or other of the directors against the others."

278. In this Court Mr Bick argued that the judge must be taken to have also made a finding that the retention by Smith, McCallum and French of the cash for scrap was an unauthorised misappropriation of Quarry Quip's property. The fact that French participated in the practice in the early days could not, in the context of this company's operations, disentitle French from now complaining with some force about the continuation of the practice after he had ceased to participate. French was, accordingly, entitled, along with Smith and McCallum, to a one-third share of the money in cash taken from Quarry Quip by Smith and McCallum in the period from January 1995 to July 1999. He argued that Smith and McCallum had cheated French by not accounting to him for his one-third share after he ceased to participate.

281. There is in our view nothing in this point. The amounts involved over a four-year period were not substantial. Whether they were to be regarded as a perquisite of office of working directors in the business, or, as the judge said, to be accounted for by the directors, in light of French's knowledge of the practice and participation in it and his failure to complain about its continuance, we think the judge was entitled to conclude that the practice could not be regarded as oppressive or unfairly prejudicial to French as a member of Quarry Quip.

(f) That McCallum took a payment of $34,599.70 from Capital Stone Co. Pty. Ltd. which was due to Quarry Quip

285. At trial, French relied on an admission by McCallum made in an affidavit sworn on 9 March 1999 that Capital Stone paid him the sum of $34,599.07 being "his half" of a payment due by Capital Stone to Quarry Quip. The evidence was however that later Quarry Quip sued Capital Stone, and recovered the full amount due on 28 April 1999, after which McCallum repaid the moneys to Capital Stone.

288. The judge found that Capital Stone had offered the other half of the moneys to Smith, who rejected the offer, maintaining that the whole amount was due to Quarry Quip. His Honour said -

"Smith maintained that the whole was due to Quarry Quip from Capital Stone. In the result Quarry Quip through the actions of Smith recovered from Capital Stone the total sums due. This demonstrates that in his conduct of the affairs of Quarry Quip Smith successfully pursued to the end the claim of Quarry Quip. It cannot be reasonably contended that the actions of Smith in pursuit of this claim were unfair to or unfairly prejudicial to French."

292. Mr Bick argued in this Court that it had been open to the judge to find that Smith and McCallum had an agreement to split the amount owing by Capital Stone to Quarry Quip between them, that Smith did not receive his payment because it was not available at the time when McCallum received his, and that the agreement had been made as a way of getting some money out of the company. He submitted that the fact of the agreement provided strong evidence that Smith and McCallum treated Quarry Quip's assets as though they were their own and justified a lack of confidence in the management of Quarry Quip.

295. This submission does not appear to have been put to the trial judge. There is, we think, in any event no substance in the point. Quarry Quip recovered the whole of the debt due from Capital Stone and suffered no loss. The judge was entitled to conclude that in his conduct of the affairs of Quarry Quip, Smith successfully pursued to the end the claims of the company in this respect.

299. At trial French contended that Smith and McCallum had each received superannuation payments of $50,000 in 1996 and bonus payments of $25,000, neither of which payments were offered to or discussed with French. It was claimed that these payments were "one off" payments and must represent a de facto distribution of profits. At the time the payments were made, it was argued, Quarry Quip had retained profits of over $600,000.

"There was no payment of a dividend. I do not accept that the payment of Quarry Quip of a contribution to the superannuation of Smith and McCallum or the payment of a bonus was a de facto distribution of profits. The superannuation contribution payments were made in respect of the working directors of Quarry Quip. Similarly the bonuses were paid. There exists in relation to this matter, in my view, no circumstances where it could be reasonably contended that the payments were oppressive or unfairly prejudicial to French."

306. In this Court it was submitted by Mr Bick that the payments to Smith and McCallum were a de facto distribution of profits. He argued that they were "just a way of getting some money out of the company" made in circumstances where Smith and McCallum "thought French had taken enough money out of the company", the proper inference to be drawn being that these payments were made to cheat French of a part of his proper entitlement to a share of the profits of Quarry Quip. He submitted that the payments were not authorised by the articles and were made in clear breach of them.

309. The submission made at trial was, as we have shown, a much more confined one, that the payments represented a de facto distribution of profits. We have already referred to the unchallenged evidence of Peter Matters that the salaries paid to Smith and McCallum, together with the superannuation payments, were at a fairly conservative level of remuneration, and "well below that you would expect to see". The effect of the evidence was that the making of payments of superannuation contribution to working directors is normal commercial practice and the judge was entitled to conclude that the making of these payments was not oppressive or unfairly prejudicial to French. The company was trading very profitably and we see no error in his Honour's conclusion that the payment of a modest bonus did not amount to oppressive conduct. The judge was entitled to take account of commercial experience under which salaries are paid and that the resulting increase in the company's profitability might be rewarded by bonuses.[16]

(h) McCallum receiving extra salary and the use of a car

313. In this Court Mr Bick contended that there was a further allegation of oppression in that McCallum continued to take a salary from Quarry Quip after leaving its employ around the end of June 1997 until September 1997 and continued to use a motor vehicle owned by Quarry Quip and to charge petrol used in that car to Quarry Quip until about December 1998, and had not accounted to Quarry Quip for these moneys.

316. The judge in his reasons mentioned that McCallum still received wages and had had the use of the motor car after leaving Quarry Quip. His Honour dealt with the matter very briefly, in part no doubt because the submissions made on French's behalf clearly identified as the six grounds for claiming that French had been oppressed the matters previously dealt with under pars (a) to (g) above. The written submissions made no mention of the matter now under discussion. His Honour had previously noted that Smith had caused proceedings to be issued in the County Court against McCallum in respect of the amount loaned by Quarry Quip to McCallum.

319. The salary paid to McCallum terminated shortly after he left Quarry Quip and there was no continuing drain on the company's financial resources. McCallum continued to be a director of Quarry Quip. There was evidence before the judge that the salaries of Smith and McCallum had not been excessive and no evidence had been called to suggest the contrary. There is we think no error established in his Honour's treatment of the matters considered under this paragraph.

323. Mr Bick next submitted that while not the subject of formal particulars, three further significant matters emerged during the course of the trial which provided clear evidence that Smith and McCallum had acted in serious breach of their duties to Quarry Quip. He claimed that these matters related to the fact that Quarry Quip was said to have paid for items used by McCallum and by Smith at their country properties, without French's knowledge, and which items had not been paid for by Smith and McCallum; that when Skye Quarries was ordered to provide security for the costs of this proceeding in 1996, that security was provided by Quarry Quip; and since 1997, Quarry Quip was said to have paid all the legal bills in relation to this litigation for the plaintiffs.

326. None of these matters was, as Mr Bick conceded, the subject of particulars. As Mr Bick said, the judge did not refer to any of these matters in his reasons. This is no doubt due to the fact that the written submissions of French at trial also made no reference to them. For the reasons we have previously given, French should not in our view be permitted to rely upon them now.

330. Having considered the matters raised in submissions before him, the judge concluded finally that he was not satisfied that French was an "oppressed member" of Quarry Quip. For the reasons we have given in the preceding paragraphs, we see no error in the reasoning of his Honour leading to this conclusion.

The appellant's claim that Quarry Quip should be wound up on the just and equitable ground

334. The appellant sought an order for the winding up of Quarry Quip on the just and equitable ground partly on the basis that Quarry Quip was a small company in the nature of a partnership, partly on the ground that the substratum of the company had failed and partly on the ground of serious fraud, misconduct and oppression.

337. Section 461(1)(k) of the Corporations Law gives the Court power to order the winding up of a company if the Court is of the opinion that it is just and equitable that the company be wound up.[17] The first basis upon which Mr Bick sought the winding up of Quarry Quip was that Quarry Quip was a small company in the nature of a quasi-partnership, that French had been excluded from management and that the relationship between the partners had entirely broken down, and that there were restrictions on the transfer of shares.

340. Before turning to an examination of the relevant law, we should say that the written submissions of the appellants before the trial judge suggest that at trial the case for winding up was not made in this way at all. These submissions argue that the relationship between Smith, McCallum and French as directors and shareholders in Quarry Quip and as the three "partners" in Quarry Quip had irretrievably broken down, and that French and McCallum had given notice to Quarry Quip that they wished to sell their shares. McCallum and French had joined in the appointment of an administrator to Quarry Quip at the beginning of 1999. It was said to be obvious from Smith's evidence that he disliked McCallum and despised French. Accordingly it was argued that it was just and equitable that Quarry Quip be wound up.

343. It is convenient to commence the consideration of this submission with some examination of the cases in which an order has been sought for the winding up of small companies in the nature of a partnership. In Ebrahimi v. Westbourne Galleries[18], Lord Wilberforce said in a passage beginning with reference to the expression "just and equitable" that -

"The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The `just and equitable' provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way. It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be `sleeping' members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members' interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere."

In re Wondoflex Textiles Pty. Ltd.[19], Smith, J. (the whole of whose judgment had been described by Lord Wilberforce in his speech in re Westbourne Galleries[20] as being valuable) said that -

"The principle [that where the petitioner has lost confidence in the persons who control the company and this loss of confidence is caused and justified by the fact that they have shown a lack of probity in their conduct of the company's affairs] will, I think, ordinarily be applicable where the members of the company are a relatively small number of persons who have become associated as members in pursuance of an agreement or arrangement involving the creation of a personal relationship between them, and where, in addition, there are restrictions upon the transfer of shares which, as in the case of a partnership, prevent a member from extricating his interest upon just terms without a winding up ... I do not think that for the analogy to apply it is essential that there should be any agreement or understanding that all are to be entitled to take part in the conduct of the company's business. There are some suggestions in the cases that the partnership analogy is not applicable, or is not of much assistance, except where there are only two members: ... but in my view it is clear that this is not so."

Mr Bick in this Court contended that the trial judge had failed to address a central and threshold question, whether it was appropriate to superimpose equitable considerations on Quarry Quip, having regard to what had been said in the cases just mentioned. Reliance was also placed by Mr Bick on the very influential article written by McPherson, J.A. when at the Bar in "Winding Up on the `Just and Equitable' Ground"[21]. It was submitted that the judge had failed to recognise that cases of private companies in the nature of partnerships which were sought to be wound up by analogy with principles governing dissolution of partnerships should be recognised as an independent category. For this purpose he relied also on what was said by Lord Shaw in Loch & Anor v. John Blackwood Limited[22], as follows -

"It is undoubtedly true that at the foundation of applications for winding up, on the `just and equitable' rule, there must lie a justifiable lack of confidence in the conduct and management of the company's affairs. But this lack of confidence must be grounded on conduct of the directors, not in regard to their private life or affairs, but in regard to the company's business. Furthermore the lack of confidence must spring not from dissatisfaction at being outvoted on the business affairs or on what is called the domestic policy of the company. On the other hand, wherever the lack of confidence is rested on a lack of probity in the conduct of the company's affairs, then the former is justified by the latter, and it is under the statute just and equitable that the company be wound up."

Reliance was also placed on what had been said by Lord Cross of Chelsea in Re Westbourne Galleries[23] when discussing Re Yenidje Tobacco Co. Ltd.[24], as follows -

"It is sometimes said that the order in that case was made on the ground of `deadlock'. That is not so. As Mr Frank Russell K.C., who was counsel for the appellant, pointed out, although Mr Rothman and Mr Weinberg were not on speaking terms they communicated through third parties, the company's business was flourishing and the articles contained a provision for arbitration to which resort could be had in the event of their failure to agree on any point. The reason why the petitioner succeeded was that the court thought it right to make the order which it would have made had Mr Rothman and Mr Weinberg been carrying on business under articles of partnership which contained no provision for dissolution at the instance of either of them. People do not become partners unless they have confidence in one another and it is of the essence of the relationship that mutual confidence is maintained. If neither has any longer confidence in the other so that they cannot work together in the way originally contemplated then the relationship should be ended - unless indeed, the party who wishes to end it has been solely responsible for the situation which has arisen. The relationship between Mr Rothman and Mr Weinberg was not, of course, in form that of partners; they were equal shareholders in a limited company. But the court considered that it would be unduly fettered by matters of form if it did not deal with the situation as it would have dealt with it had the parties been partners in form as well as substance."

353. Mr Bick submitted that the facts showed that the association between Smith, McCallum and French in relation to Quarry Quip was formed upon the basis of a personal relationship involving mutual confidence. He argued that when Smith and McCallum ceased employment with Olivetti Engineering in 1989, they decided to establish a steel processing and fabricating business. Because of French's involvement in financial matters such as the provision of workshop premises and the procurement of banking facilities, it was agreed between the three that all would become equal shareholders in the new business. He argued that Quarry Quip was to provide labour and pay the bills for the establishment of French's quarrying business and then be paid for the labour and expenditure out of the product sold when the quarry business was up and running. He argued that Quarry Quip was to provide nine full-time workers to French's quarry business in the expectation that the sale of product produced by the quarry would ultimately meet these expenses. His submissions to this Court continued that the articles of association of Quarry Quip gave members the right to purchase the shares of a member who wished to dispose of his shares at an arbitrated fair price and in default of the members wishing to purchase the relevant shares, the directors could nominate a person they considered to be desirable to be purchaser again at the arbitrated "fair" price. The article the appellants relied on is in the following terms -

"2.2.3 Except as provided in Article 2.2.3 (ix), no transfer of shares shall be registered unless all members of the Company agree, or unless the following procedure is followed:- (i) The person proposing to transfer any shares called `the proposing transferor' shall give notice in writing to the Company that he desires to transfer the shares. (ii) The notice shall specify the sum he fixes as the fair value, and shall constitute the Company his agent for the sale of the shares at the price so fixed, or, at the option of the purchaser, at the fair value to be fixed by arbitration under the Arbitration Act 1958 and shall constitute an offer: (a) in the first instance to the existing shareholders in the proportion of their shareholding which offer shall remain open for acceptance in writing for a period of seven days from the date of offer; (b) in the event of any shareholder not accepting the purchase of his proportion of shares, the number of shares not taken up shall then be offered to those shareholders of the Company who are willing to purchase the same and if more than one in equal shares and such offer shall remain open for acceptance in writing for a further period of seven days; (c) any shares not taken up may then be offered by the Directors to any person selected by the Directors as being one whom it is desirable to admit to membership. (iii) A transfer notice may include several parcels of shares, and in such case shall operate as if it were a separate notice in respect of each parcel. (iv) A transfer notice shall not be revocable except with the sanction of the Directors. (v) If the Company, within twenty-eight days after being served with a transfer notice, finds a member or person called `the purchaser' as aforesaid willing to purchase the shares and gives notice to the proposing transferor, he shall be bound, upon payment of the fair value, to transfer the shares to the purchaser. (vi) In case any difference arises between the proposing transferor and the purchaser as to the fair value of the shares, the fair value shall be fixed by arbitration under the Arbitration Act 1958. (vii) If in any case the proposing transferor, after having become bound under paragraph (v) of this Article makes default in transferring the shares, the Company may receive the purchase money, and shall thereupon execute a transfer of the shares and cause the name of the purchaser to be entered in the register as the holder of the shares, and shall hold the purchase money in trust for the proposing transferor. The receipt of the Company for the purchase money shall be a good discharge to the purchaser, and after his name has been entered in the Register in purported exercise of the power given by this paragraph, the validity of the proceedings shall not be questioned by any person. (viii) If the Company, within twenty-eight days after being served with a transfer notice, fails to find a member or person selected as aforesaid willing to purchase the shares, or fails to give notice as provided in paragraph (v) above of this Article, the proposing transferor at any time within three calendar months after the transfer notice is served on the Company shall be at liberty to sell and transfer the shares (or those not placed ) to any person and at any price. (ix) Any share may be transferred by a member to any child or other issue, son-in-law, daughter-in-law, father, mother, brother, sister, nephew, niece, wife, or husband of the member; and any share of a deceased member may be transferred by the legal personal representative to any child or to other issue, son-in-law, daughter-in-law, father, mother, brother, sister, nephew, niece, widow or widower of such deceased member to whom the deceased member may have specifically bequeathed the same; the shares standing in the name of the trustees of the will of any deceased member may be transferred upon any change of trustees to the trustee for the time being of the will."

357. It was further submitted for the appellant that all shareholders were to and did participate in the conduct of the business of Quarry Quip. Whereas Smith and McCallum were to work in the business, French was to provide security for its financial needs. In 1991 Smith and French had travelled to Europe together for the purpose of investigating further business opportunities of Quarry Quip. French not only provided premises, equipment and security for Quarry Quip's borrowings, but also assisted Quarry Quip to change its bankers. There was evidence that French was involved in the day-to-day decision-making of Quarry Quip until May 1992, and had provided premises, a large loader, a small welding plant and some hand tools for use by Quarry Quip to start its business. Smith agreed that he considered that he, French and McCallum were all working directors when the company first started in business.

360. Mr Bick accordingly argued that in these circumstances, if a member wished to dispose of his shares, the member was required to give notice in writing to the company that he desired to transfer his shares, specifying the sum he fixed as a fair value, which then constituted the company his agent for the sale of the shares of the price so fixed. The regime produced by article 2.2.3 was, it was submitted, significant in that the articles clearly contemplated that existing members or a non-member selected by the directors as being "desirable" were to have first right to purchase a member's shares, and secondly any purchaser under the article had the right to force the vendor member to arbitration in relation to the price to be paid for such shares. The arbitrator was to determine "fair value", and not "market value". He relied on what had been said by Santow, J. in Holt & Ors v. Cox[25] leading to the conclusion that "fair value" was not the same thing as "market value". Accordingly, it was argued that article 2.2.3 contemplated a compulsory sale by a member of his shares to the other members or to a person chosen by the directors at a price other than the price the member could obtain for those shares in the open market. This, he submitted, was a significant fetter upon the right of a person to dispose of their property in the ordinary way by going to the market to obtain the best available price.

363. When the trial judge came to deal with the claim for winding up, he referred to the passage in Lord Wilberforce's speech in Re Westbourne Galleries Ltd. noted above and then said that the fact that the relationship of Smith, McCallum and French as shareholders and directors of Quarry Quip had broken down did not of itself provide circumstances where in equity it should be ordered that the company be wound up, and referred to International Hospitality Concepts Pty. Ltd. v. National Marketing Concepts (No. 2)[26]. His Honour then dealt with the claim as follows -

"[222] In the circumstances of this case Quarry Quip was formed and it commenced to carry out and still carries out its business as an engineering company. The breakdown in the relationship that has occurred between Smith, McCallum and French initially had its roots in the discovery by Smith, that without his knowledge, French had withdrawn by bank transfers sums totalling $400,000 from the account of Skye Quarries. It was following this discovery that Smith withdrew from the affairs of Skye Quarries and returned to and thereafter continued working in the engineering business of Quarry Quip. It was subsequent to that that McCallum withdrew from the day to day business of Quarry Quip and concentrated on the affairs of M. Steel. From the evidence of Smith it is to be concluded that after McCallum withdrew from Quarry Quip and after he appointed a manager of the company and notwithstanding that M. Steel was in competition to the company that Quarry Quip has prospered. It has continued to carry on its business as an engineering company. There has been no breakdown in the relationship between Smith, McCallum and French brought about by the manner in which, initially, McCallum and Smith and thereafter Smith has conducted the affairs of Quarry Quip. [His Honour then quoted the passage from Lord Shaw's opinion in Loch v. John Blackwood Limited quoted above.] [223] In relying on this ground French relied on the fact that the relationship between the three directors of Quarry Quip had broken down. On the evidence the breakdown in the relationship between the directors of Quarry Quip related to matters outside the conduct of the affairs of Quarry Quip and had as its root cause the actions and conduct of French in relation to the affairs of Skye Quarries. In such circumstances it cannot be concluded that it is `just and equitable that the company be wound up'. For the same reasons I conclude that it would not be appropriate for the court to order that Smith purchase the shares of French in Quarry Quip. These matters can be attended to pursuant to the provisions of the articles of association of Quarry Quip."

367. The judge, from the passages just quoted, appears to have accepted that the relationship of the three parties as shareholders and directors of Quarry Quip had broken down. Mr Bick submitted that this finding was clearly correct and well supported by the evidence. His next submission related to the judge's statement that the breakdown of the relationship between the directors of Quarry Quip "related to matters outside the conduct of the affairs of Quarry Quip and had as its root cause the actions of French in relation to the affairs of Skye Quarries". He accepted that the judge was adverting to a discretionary matter against the making of a winding up order on the just and equitable ground to the effect that French did not come to court with clean hands, putting it that this finding was in turn substantially based on his Honour's view that French was misappropriating funds of Skye Quarries. Mr Bick challenged the judge's conclusion that there had been any such misappropriation by French, and we have already stated our view that French was not misappropriating funds of Skye Quarries when he took $400,000 from the account of that company. Mr Bick built on this submission saying that the judge had not made a finding that French was the sole cause of the breakdown of the relationship which had occurred, submitting that no such finding could properly have been made on the evidence. He submitted that the facts demonstrated that the breakdown of the relationship between Smith and McCallum was not caused by any act or omission of French. He argued that Smith and McCallum were content to have a commercial relationship with French in Quarry Quip throughout 1995 and into 1996. He argued that the dispute between Smith and McCallum in December 1994 was not caused by any act or omission of French; the proper inference was that Smith and McCallum became tired of the arrangement by which Smith would devote his time to the quarry business, which led to Smith withdrawing his services from the quarry at the end of 1994 at McCallum's insistence, before Smith was aware of the transfers made by French to Ballarto from the Skye Quarries account. He argued that the proper inference to draw was that the transfers made by French from the Skye Quarries account to Ballarto were of no real significance to Smith. However by mid 1996 the relationship between Smith and McCallum had deteriorated to such an extent that McCallum told Smith he would leave Quarry Quip if things did not improve. He submitted accordingly that the judge erred in not making an order winding up Quarry Quip since the personal relationship involving mutual confidence upon the basis of which Quarry Quip was formed or continued had broken down.

371. It was no part of the case made by French at trial that there was any form of partnership between French, Smith and McCallum before Quarry Quip was formed, or that the company could be regarded as a quasi-partnership between them. Smith and McCallum in their pleadings alleged variously that in April 1989 the three of them set up a joint venture pursuant to which Quarry Quip was incorporated. French in his defence denied that there had been any such joint venture and maintained his denial throughout the proceedings. The judge found that there had been no such joint venture. His Honour said that the evidence in the case did not support a finding that an agreement of the kind alleged by Smith and McCallum was entered into by them with French in or about April 1989. The furthest his Honour was prepared to go was to say that "the fact that in April 1989 French, Smith and McCallum agreed that a company, Quarry Quip, ought to be formed and that each would hold the same number of shares in it may loosely be described that to that extent they were joint venturers in the enterprise of that company".

374. It is reasonably clear on all the evidence, in our view, that the intention of the parties at the time was that Quarry Quip would establish an engineering works and carry out work for Ballarto or French for which it would be paid. French needed a washing plant built at Lot 31A since he was under pressure to get the quarry operating. To assist Smith and McCallum, who had also been approached by Linotex Australia to build a washing plant, to set up Quarry Quip, French helped them with financial arrangements necessary to establish the company by arranging a bank overdraft with the ANZ Bank, secured over land owned by French and by guarantees from the three individuals. All three agreed to the corporate structure for the conduct of the business enterprise.

377. The evidence also supported the contentions of Smith and McCallum that it was always contemplated that the engineering business would be conducted by Smith and McCallum without French participating in it. French's involvement was based on his desire to have the washing plant built, and his provision of security for the initial loan facility followed from this. That security was never called upon and had been discharged before trial. French himself made no further contribution to the business, financial or otherwise, at least after the end of 1994. The engineering business of Quarry Quip has prospered, first under Smith and McCallum and, since McCallum's departure in mid-1997, under Smith's management. The business of Quarry Quip, at the time of trial, was flourishing and then involved twenty long-term full-time employees. French, from at least the start of 1994, had had virtually no involvement in the running of Quarry Quip, and it was not, so far as we have been able to find from the evidence, at any time suggested that this was because he had been excluded from management.

380. In our view it is quite clear that there was no pre-existing partnership between French, Smith and McCallum that was converted into the company Quarry Quip. Mr Bick expressly conceded as much in his submissions. He argued instead that the "association between Smith, McCallum and French in relation to Quarry Quip was formed or continued upon the basis of a personal relationship involving mutual confidence, even though this was not a case where a pre-existing partnership was converted into a limited company." It may well be accepted that there was a relationship of mutual confidence at the outset, when French wanted Quarry Quip to carry out engineering work for him and to carry on later works in the quarry. But since the end of 1994, the work carried out by Quarry Quip was largely if not completely engineering work carried out at new premises in Dandenong to which Quarry Quip moved in September 1994. Since that time the fact that Quarry Quip has flourished is entirely due to the activities of Smith and McCallum up to mid-1997, and thereafter of Smith alone, and French has neither made, nor been expected to make, any contribution whatever to the success of the company. As the judge said the evidence showed there existed a "separation between Smith, McCallum and French as directors of Quarry Quip".

383. The judge made no finding on the respondent's contention that French's present claims of oppression and for a winding up order were made to bring pressure to bear on Smith and McCallum rather than for the stated purpose of seeking a winding up and requiring Smith and McCallum or Quarry Quip to purchase his share at a market price rather than the fair price contemplated by the articles, this being unnecessary to his Honour's conclusions. Although there appears to us to be considerable substance to this contention, we are, in the absence of a finding by the trial judge, unable to decide whether the respondents' contention was established.

Restrictions on the transfer of shares in Quarry Quip

387. The articles of association of Quarry Quip were only tendered by the appellants at trial on 3 December 1999, after the conclusion of the appellants' final address. The articles were not mentioned in the pleadings nor was it pleaded that French was restricted in his ability to sell his shares in Quarry Quip. During the trial no submission was made about the articles to the judge on behalf of the appellants, nor was any submission made that some provision in the articles was relevant to the question of winding up.

390. Mr Bick conceded that the articles were only tendered at the conclusion of his final address, that no submission about the articles was made to the judge and that no submission was made to his Honour that some provision in the articles was relevant to the question of winding up. He argued, notwithstanding this, that the point about the articles should be allowed to be argued in this appeal because there would be no prejudice to the respondents involved, the point depended upon uncontroversial facts and no more evidence is needed.

393. We have no hesitation in rejecting these arguments. In the first place we were not referred by counsel to any evidence from French bearing upon the articles or suggesting that he was impeded in selling his share, and in our reading of his evidence we have not found any such evidence. McCallum said that he had served a notice seeking the sale of his shares on 8 July 1999, and specifying the "fair" price of $100,000 per share. McCallum said that at about the same time French had also served notice under the articles, specifying a price of $175,000 per share. Smith, during cross-examination, agreed that he had negotiated with McCallum, but these negotiations, as we have previously mentioned, did not reach settlement and had been broken off. Smith agreed that he had not negotiated with French or approached him to sell his shares. The cross-examination of both Smith and McCallum was very lengthy but we were not referred to any other evidence given by Smith or McCallum bearing on the articles and we have not, in our reading of their evidence, been able to find any.

396. Article 2.2.3 shows that there are restrictions on the transfer of shares in Quarry Quip, contemplating the possibility of a compulsory sale by a member of his share at a price which may well be less than that which the member could obtain on the open market. But the articles also show, as Mr Bick conceded, that if the company fails to find a member or person willing to purchase the shares, the member is free for a period of three months to sell to any person at any price on the open market. These articles were the basis upon which each of Smith, McCallum and French agreed to incorporate Quarry Quip. We were not referred to any evidence by French, and have not been able to find any, suggesting that he made any attempt to offer his shares in Quarry Quip to any member of the public or that he had been unable to sell at his price or any other price, or that he had been impeded in any way by the restrictions in the articles from selling the shares. It does not necessarily follow from the fact that there is a difficulty in disposing of shares, that there is unfairness to a shareholder; Re G. Jeffery (Men's Store) Pty. Ltd.; Re G. Jeffery Pty. Ltd.[27] No evidence was given, so far as we have been able to find, suggesting that French had taken any step towards selling his shares after giving the original notice. It would not be surprising that no such evidence was given, and that French was not cross-examined on these topics, since the issue had not been pleaded or agitated on his behalf. The case was simply not conducted on this basis at trial. What, however, the articles do show, is that French had the ability to sell his shares on the open market, and it was not suggested that he had attempted, or failed, to do so, or that he was a locked-in shareholder. Quarry Quip was apparently flourishing and there may well have been evidence available to support the view that buyers could have been found on the open market for his shares.

399. Having regard to the cases to which we have previously referred it would, we think, be "contrary to all principle" as was said in the University of Wollongong v. Metwally [No. 2][28] to allow French now to pursue a new argument that was not put during the trial and which might have led to cross-examination and the calling of evidence along the lines previously suggested. French is, we think, bound by the way he conducted his case at trial. But even if we were wrong about these matters, and French were permitted to press these arguments, his case on this aspect would, we think, fail since the articles expressly permitted him to sell his shares and he put no evidence before the Court that he had been impeded or prevented from doing so.

403. The judge, as we have said, rejected French's claim to wind up Quarry Quip, and for an order that Smith purchase his shares in the company on the basis that the breakdown between the parties related to matters outside the conduct of Quarry Quip and had as its root cause the actions and conduct of French in relation to Skye Quarries. As we have said, insofar as his Honour founded this conclusion on the fact that French took $400,000 from the accounts of Skye Quarries, these actions cannot be regarded as misappropriation or wrongful, although it might have been considerably less provocative if French had warned Smith beforehand that he proposed to take this course. French's conduct in other respects does, however, have relevance to the question whether he should be entitled in equity to the orders he now seeks on appeal.

406. The judge said that he was not prepared to accept much of the evidence of French and that French, generally, was not a credible witness, whereas Smith, generally, was a credible witness. His Honour referred to various pieces of evidence given by French, including cross-examination as to whether he had convictions for dishonesty, to which French had replied that he did not. French prevaricated in his answers to this question, but finally accepted that his answers to the first questions he had been asked on the subject were untrue and said as an explanation that his convictions were "that long ago I had really forgotten about them". Having regard to these and other answers, the judge said that French demonstrated that he was a witness who was prepared to make and did make statements in the course of his evidence that were not true. His Honour said it was further demonstrated that French in the course of business was prepared to make and cause to be made accounting records which were false, saying that -

"French caused to be raised invoices which on their face purported to record the sale of mineral sand by Ballarto to Skye Quarries during the period from November 1994 to June 1995. These invoices were false, in that no sand was sold by Ballarto to Skye Quarries. French caused such invoices to be raised to falsely represent that there had been such sales of sand when in fact he had transferred large sums of money from accounts of Skye Quarries to Ballarto."

The judge said it was demonstrated during French's cross-examination that he was prepared to "falsify and cause to be made false accounts concerning the operation of Ballarto". His Honour said -

"French was closely cross-examined on the matter of the depreciation schedules forming parts of the account of Ballarto. In the course of his cross-examination French admitted that in the accounts of Ballarto since 1993, he had put in, and at his instigation there had been put in the depreciation schedules forming part of the accounts of that company, entries which totalled hundreds of thousands of dollars, and which were false. He admitted that this had been deliberately done by him to artificially increase the apparent cost of Ballarto's operation, thereby to minimise the apparent profit of that company."

The judge said that French demonstrated he was a witness whose evidence "must be closely scrutinised and where his evidence was in conflict with that of a credible witness his evidence should only be had regard to if independently corroborated by a reliable witness." On two previous occasions, the evidence of French in this Court has been disbelieved.[29]

413. French admitted that his deliberate purpose in putting items in the depreciation schedules at inflated values was to increase artificially the apparent cost of Ballarto's operations. The figures involved ran into millions of dollars. The respondents contended in this Court that the Ballarto accounts and depreciation schedules were each so comprehensively false that, towards the end of his cross-examination, French declined to answer any further questions about them upon the basis that the answers to those questions might incriminate him. French's evidence was indeed highlighted on numerous occasions by his refusal to answer questions in cross-examination on the ground of self-incrimination.

416. At the outset of his submissions, Mr Bick accepted that he could not in these proceedings seek to challenge the judge's view of French's credibility. It is unnecessary to cite the abundance of authorities which demonstrates that there was no alternative to the making of this concession. Mr Bick sought to make his arguments on a basis that accepted all the unfavourable findings made by the judge in relation to French.

419. It has been said that the absence of clean hands is of no account "unless the depravity, the dirt in question on the hand, has an immediate and necessary relation to the equity sued for".[30] As Dr Spry says in his work Equitable Remedies[31], "The maxim that predicates a requirement of clean hands does not set out a rule that is either precise or capable of satisfactory operation." We would not be prepared to reject French's claim under the just and equitable ground solely on the basis of unclean hands. The significance of French's conduct in the manner described, however, and the very unfavourable view the judge took of French and his evidence plainly informed his Honour's conclusions on significant factual issues at the trial. Whereas the judge disbelieved French as to many matters, his Honour generally accepted the evidence of Smith, which is particularly significant in relation to French's claims of oppression and lack of probity on the part of Smith.

Serious fraud, misconduct or oppression in regard to Quarry Quip's affairs?

423. We have already dealt at length with the appellants' claims of fraud, misconduct and oppression by Smith and McCallum under the heading "Oppression". We concluded that the judge was entitled to decide that the appellants failed to make out a case of oppression. The wording of s.246AA(2) covering conduct of the affairs of a company that is "unfairly prejudicial to" or "unfairly discriminatory against" a member may well contemplate conduct of greater amplitude than that understood by the term "oppressive": Re a Company[32]; Re G. Jeffery (Men's Store) Pty. Ltd.[33]. But the argument was made in this Court on the basis of the same particulars as were relied on for the claim of oppression. Accordingly the appellants failed to establish that there had been serious fraud, misconduct or oppression in regard to the affairs of Quarry Quip.

427. It was briefly submitted that the substratum of Quarry Quip had failed in that the general intention and common undertaking of the members with respect to the independent objects, rather than those objects themselves, could not be realised.[34] It was said to be at the foundation of the establishment of Quarry Quip that Smith, McCallum and French would co-operate in conducting Quarry Quip's business and in particular that Smith and McCallum would conduct Quarry Quip's day-to-day operations. Mr Bick argued that McCallum was no longer involved in the day-to-day operations of Quarry Quip, indeed had set up a competing business. He submitted that French became a shareholder of Quarry Quip upon the basis of a general intention and common understanding that McCallum's involvement in the day-to-day conduct of the business would continue. McCallum's involvement having come to an end, it was just and equitable that French be relieved of his contractual obligation to contribute capital to the company and that an order be made winding up Quarry Quip. Reliance was placed on Cotman v. Brougham[35]; H.A. Stephenson & Son Ltd. (In Liq.) v. Gillanders, Arbuthnot & Co.[36]; Re Tivoli Freeholds Ltd.[37]

430. In our opinion there is nothing in this point. The business of Quarry Quip is flourishing. We do not accept that it was at the foundation of the establishment of Quarry Quip that McCallum would be involved in the day-to-day conduct of the operations, or that his departure would cause the substratum to fail. As the company continues to flourish, so also would French's shares in Quarry Quip increase in value. French agreed to the form of the articles referred to. Under article 2.2.3 French has, as previously discussed, an agreed means of exit from the company, should he choose to exercise it. There is no evidence to show that he has attempted to pursue that means of exit, beyond delivering a notice, the service of which would have permitted him, should he choose to do so, to sell his shares on the open market. It is well accepted that the winding up of a solvent and flourishing company should be a last resort.[38] Nor has it been established that French is in the position of a locked-in minority.

433. For all the foregoing reasons we reject the appellants' contention that it is just and equitable that there should be a winding up of the company, or that an order should be made that Smith, or Quarry Quip, should buy French's shares. As the trial judge said, "these matters can be attended to pursuant to the provisions of the articles of association of Quarry Quip". Although we have taken a different view from the trial judge in relation to the circumstances of the "breakdown in the relationship" between the directors of Quarry Quip, in our view the application for a winding up order of Quarry Quip should be dismissed. We agree with the judge that it would not be appropriate for the Court to order that Smith purchase the shares of French in Quarry Quip.

437. It follows that, save for ground 5 - as to which see paragraph [35] above - and one aspect of grounds 6, 7, and 8, which is dealt with in paragraph [38] above, we consider that the appeal should be dismissed.

[1] There were other claims made by the appellants in the counterclaim which were rejected by the learned trial judge and no challenge is made to that aspect of his Honour's decision. Consequently, there is no need to consider here the events which bore on the counterclaim other than that aspect of it which sought a winding up order.

[2] It is apparent that, if this ground succeeds, grounds 1, 2, 3, 4, 10 and 11 fall away because they are essentially founded on the acceptance of his Honour's decision that Skye Quarries conducted the quarry business for its own benefit. Ground 9 is irrelevant because it has been abandoned.

[3] (2001) 75 A.L.J.R. 867 at [44] and [58].

[4] [1986] HCA 33; (1986) 162 C.L.R. 1 at 8.

[5] [2004] VSCA 19 at [21] to [26].

[6] (1985) 59 A.L.J.R. 481 at 483.

[7] [1988] HCA 12; (1988) 180 C.L.R. 491 per Mason, C.J., Wilson , Brennan and Dawson, JJ. at 496-497.

[8] [2003] HCA 48; (2003) 200 A.L.R. 447 at [51]- [53].

[9] (1982) 1 A.C.L.C. 66.

[11] (1949) 66 R.P.C. 343.

[13] [1931] UKHL 2; (1932) A.C. 161 at p.194.

[14] (1988) 6 A.C.L.C. 370 per Hope, J.A. at 374.

[15] Re Overton Holdings Pty. Ltd. [1985] W.A.R. 224.

[16] Morgan v. 45 Flers Avenue Pty. Ltd. (1986) 5 A.C.L.C. 222.

[17] See also s.246AA(2) of the Corporations Law.

[18] [1973] A.C. 360 at 379.

[19] [1951] VicLawRp 65; [1951] V.L.R. 458 at 465.

[21] (1964) 27 Modern Law Review 282.

[22] [1924] A.C. 783 at 788.

[24] [1916] 2 Ch. 426.

[25] (1994) 15 A.C.S.R. 313 at 336-337.

[26] (1994) 13 A.C.S.R. 368 at 371 per Young, J.

[27] (1984) 9 A.C.L.R. 193.

[28] (1985) 59 A.L.J.R. 481 at 483.

[29] In Mihaljevic v. Eiffel Tower Motors Pty. Ltd. [1973] VicRp 54; [1973] V.R. 545, Gillard, J. at 552 said of French that his demeanour in the witness box had been "quite nonchalant, and deliberately unhelpful, and, at times, ... misleading and prevaricating." In Australian Guarantee Corporation Ltd. v. De Jager [1984] VicRp 40; [1984] V.R. 483 Tadgell, J. described French at 491 as a "thoroughly untrustworthy witness".

[30] Moody v. Cox [1917] 2 Ch. 71 at 87-88.

[32] [1983] Ch. 178.

[33] (1984) 9 A.C.L.R. 193.

[34] See Callaway, Winding Up on the Just and Equitable Ground, The Law Book Company, (1978) at 13.

[35] [1918] A.C. 514 at 520 per Lord Parker of Waddington.

[36] [1931] HCA 47; (1931) 45 C.L.R. 476 at 487 per Dixon, J.

[37] [1972] VicRp 51; [1972] V.R. 445 at 469 per Menhennitt, J.

[38] Cumberland Holdings Ltd. v. Washington H. Soul Pattinson & Co. Ltd. [1906] HCA 60; (1977) 13 A.L.R. 561 per Lord Wilberforce at 573; John J. Starr (Real Estate) Pty. Ltd. v. Robert R. Andrew (A'asia) Pty. Ltd. (1991) 6 A.C.S.R. 63 per Young, J. at 66.