Grace v Grace

Principles

1. There was no dispute as to the relevant principles. They are well settled.
2. The appointment of a provisional liquidator is a drastic intrusion into the affairs of a company and is not to be contemplated if other measures will be adequate to preserve the status quo. [1]
3. Two questions arise. The first is whether there are good prospects of the plaintiff obtaining a winding up order in due course. The second is whether the balance of convenience requires the appointment of a provisional liquidator and, particularly, whether the assets of the company are in jeopardy. [2]
4. A question relevant to the application before me is whether "the impasse in the management and stewardship of the company means that there is a need for the installation of an external official to take matters in hand and to introduce some stability". [3]
5. Regard must be had to the adverse effect that the appointment of a provisional liquidator may have on the company. There is always a "very real risk that the appointment of a provisional liquidator could have a drastic effect on the Company's business and in turn impact on the value of the shares in the Company and on the position of its employees". [4]

Breakdown in relations

1. There is no dispute that relations between the parties have broken down. In effect, the Company is in deadlock.
2. The plaintiff has deposed that: "Since January 2022 virtually all communications between [the first defendant], [the second defendant] and I has [sic] ceased other than sporadic arguments. There have been no directors meetings between all three of us during the 2022 financial year. I do not believe [the first defendant], [the second defendant] and I can work together in the ongoing management of the Company".
3. Relations are so strained that the police have been called to the premises on a number of occasions, at least once by the second defendant.
4. Such disharmony has been in place for over two years.
5. The plaintiff and the first defendant separated in 2020 and are, I have been told, now divorced. On 27 May 2022, the first defendant commenced proceedings, to which I will return, against the plaintiff in the Federal Circuit and Family Court of Australia. The plaintiff commenced the proceedings in this Court less than two weeks after he was served with the first defendant's Initiating Application and supporting documents. Nonetheless, as I have said, the first defendant does not oppose the winding up of the Company.
6. Mr Smith submitted that these problems are not frustrating the profitable operations of the Company. [5]
7. Mr Smith pointed to the most recent financial statements of the Company for the year ending 30 June 2021. Those statements show that for FY21 the Company achieved profit from ordinary activities before income tax of some $196,000.
8. The Company's draft management accounts comprising a profit and loss account for June 2022 show a net profit of $125,576.71 for that month. However, the plaintiff contends that this document is not reliable or complete. I am not able to make any assessment about that matter on this application.
9. What is clear is that on 19 May 2022 the lessor terminated the lease of the premises from which the Company conducts its business in Lansvale on the basis that the Company had not paid rent since 1 January 2022. On 20 May 2022 the lessor also gave notice of its intention to re-enter the premises. It has not yet done so and, I was informed, the Company now occupies the premises on a "month-to-month" basis. The rent for July 2022 has not been paid and a total of some $70,000 is owing to the lessor. The Company's tenure at Lansvale is thus precarious. The Company has a little over $1,000 in its bank account, although, as I set out below, the plaintiff has recently opened an account in his name through which company funds are evidently being processed.
10. The Company's financial position is thus problematic, to say the least.

The bonus and wages issue

1. So embittered have the relations between the parties become that the plaintiff has made a number of serious allegations as to the conduct of the defendants.
2. The plaintiff contends that the defendants have made unauthorised payments to themselves from the Company's bank account "over and above wages" to which they were entitled. This was a matter relied on by the plaintiff to show that the Company's assets are in jeopardy.
3. Ms Perry, who appeared for the plaintiff, pointed to: 1. a directors' meeting held on 5 September 2020 at which the defendants, but not the plaintiff, were present and at which the defendants passed resolutions concerning the directors' weekly salary and six monthly bonuses; and 2. a "Notice to Directors" that the plaintiff sent to the defendants on 9 October 2020 in which he pointed out that the Company's Constitution provided that directors' remuneration was to be determined in a general meeting, [6] that there had been no general meeting, and that the defendants' decision at the meeting of 5 September 2020 concerning "changes in director remuneration" was improper and void.
4. However, as Mr Smith pointed out, it is necessary to have regard to the events preceding the 5 September 2020 meeting in order to assess the probity of the first and second defendants' conduct.
5. From 2005, the Company paid to the defendants wages of $1,500 per week after tax. The second defendant deposed that from 2016, $500 of his wages was paid in cash and the balance was paid by bank transfer. In April 2020, evidently following an argument with the plaintiff, the Company ceased paying weekly cash amounts to the second defendant so that the second defendant received only a bank transfer of $1,000 per week for his wages.
6. The second defendant deposed that in April 2020 he approached the plaintiff about this and asked "why am I not getting the rest of my pay?". The second defendant alleges that the plaintiff replied "what do you mean? Give me proof that your wage is $1,500 per week".
7. The second defendant then prepared a schedule in which he set out his contentions as to the wages he had been paid.
8. On or about 27 June 2020 the first defendant drew a cheque on the Company's account for $3,500 for the second defendant's "back pay".
9. That led to the plaintiff sending the directors a "Notice" on 29 June 2020 saying that there was "zero backpay" owing to the second defendant and that if the second defendant banked the cheque "these funds will be considered fraudulent and relevant authorities will be contacted to investigate further". The second defendant did not bank the cheque.
10. The defendants then sought to convene a directors' meeting to deal with this question.
11. Thus, on 1 July 2020, the second defendant sent a "Notice" to the directors: "In response to your letter regarding this cheque, I … would like to call a Directors board meeting to discuss this matter further on Saturday, 4th July 2020 at 1.30pm in the office room. Please confirm attendance in writing by no later than 5pm, 3rd July 2020. Before making false accusations, we endeavour to reach the resolution of this matter through the Directors board meeting, therefore I will be holding on to the Commonwealth Bank cheque … until the Directors board meeting."
12. The following day the first defendant sent the plaintiff a "Notice" saying that it was "essential that we have a meeting amongst the Directors".
13. A number of meetings were convened. The plaintiff did not attend.
14. On 4 August 2020 the second defendant notified the plaintiff and the first defendant that the meeting of 5 September 2020, to which I have referred, would take place to discuss, amongst other things "Directors remuneration".
15. As I have said, the plaintiff did not attend the 5 September 2020 meeting.
16. The first and second defendants resolved: "● All Directors present at the meeting voted in favour for directors pay to remain the same at $1500 a week (after tax) plus bonuses paid 6 monthly ($10,000 per 6 monthly bonus) for the 2020 financial year. … ● Directors voted in favour that for the 2021 financial year directors salary should account for inflation, which means there should be ≈ 7% increase in pay which brings the salary up to $1600 a week (after tax)."
17. The resolution did not comply with the Company's Constitution, which required that any resolution concerning directors' remuneration be made by the members in a general meeting. However, in this case, the three directors of the Company are also its members and, under the Constitution, any one of them could have convened a general meeting to consider the question of remuneration. [7] It appears the first and second defendants misunderstood their position.
18. The plaintiff then sent the first and second defendants the 9 October 2020 "Notice" to which I have referred.
19. The Company's bank statements show that, thereafter, the defendants received a weekly bank transfer of $1,178 on account of their wages. The defendants also caused to be transferred to themselves a further weekly amount of $422. This brought their weekly payments to a total of $1,600, consistent with the purported resolution of 5 September 2020.
20. As Mr Smith submitted, this does not appear to be conduct of directors seeking to transfer to themselves money to which they were not entitled.
21. As to bonuses, in his reply affidavit, the plaintiff deposed: "I did cause the Company to pay bonuses to employees including [the second defendant] and [the first defendant] and I of approximately $10,000 every six months when the Company was trading well and I exercised my discretion as managing director to pay such bonuses, which was recorded in the Company's accounts".
22. Nonetheless, Ms Perry submitted that the defendants had received unauthorised bonuses of $10,000 every six months, as recently as 5 February 2022.
23. However, the plaintiff has not alleged in his affidavits that he did not also receive those bonuses. Indeed, the evidence that I have set out suggests that his intention was that he would receive the same bonuses as did the first and second defendants.
24. In any event, the bonuses were the subject of the purported directors' resolution of 5 September 2020 about which the plaintiff has known since, at least, his 9 October 2020 "Notice".
25. However, the fact remains that the parties are in an ongoing dispute about these matters.

Alleged retention by the first and second defendants of cash

1. The plaintiff also alleges that the first defendant has retained cash from cash sales and that both the first and second defendants are "undertaking cash sales to customers without raising invoices".
2. In his first affidavit, the plaintiff accepted that "[u]ntil 2022 the cash and cash invoices reconciled".
3. The plaintiff also deposed that there were "no other employees of [the Company] that attend to cash sales".
4. That evidence is inconsistent with other evidence adduced on behalf of the plaintiff. Thus, the plaintiff's (and the first defendant's) son, Mr Jason Mi, deposed: "Until 2020 all cash sales at the Company's premises were undertaken by my mother who prepared the invoices and received the cash. However, from 2022 onward I from time to time assisted with the cash sales. Whenever I made a cash sale, I gave the cash to my father …".
5. Further, in his second affidavit, the plaintiff deposed: "… I deposited cash received by me from time to time by my sons Alwyn Mi and Jason Mi into the Company's bank account or otherwise used those funds to pay Company expenses and employee wages".
6. There is no evidence to contradict the plaintiff's contention that the cash received from Alwyn and Jason ultimately made its way into the Company's bank accounts.
7. But nor is there admissible evidence before me that the defendants are misapplying cash they have received.

The plaintiff's diversion of the Company's eBay revenue

1. In the plaintiff's second affidavit, he said that he had: "… recently opened account number ending 827 in my own name to prevent [the first defendant] and [the second defendant] from taking further funds from the Company's bank account given their ongoing conduct of taking funds without a proper basis from the Company's bank account. These funds have been used by me to pay for purchases of parts for the benefit of the Company."
2. The plaintiff has not established, on this application, that the defendants are "taking funds without a proper basis" from the Company.
3. The implication I draw from this passage is that the plaintiff is diverting Company income into this account.
4. That appears to be confirmed by the following evidence.
5. The Company sells goods on eBay. In its profit and loss account for June 2022, to which I have referred, the bulk of the income received by the Company for June 2022 is described as coming from an eBay platform known as "4WDME".
6. The Company has another eBay account, not mentioned in that profit and loss account, known as "Suzukisuper". Thus, the second defendant deposed, and in his reply affidavit, the plaintiff did not dispute, that one of the eBay accounts the Company used to sell parts online was "Direct Spares Automotive/ Suzukisuper".
7. There is in evidence a document obtained from eBay showing that for the period 22 May 2022 to 21 June 2022, the Company achieved sales in the order of $125,000 from the eBay "Suzukisuper" "Seller Hub" and achieved net sales in the order of $107,000.
8. A further document from eBay shows that, between 23 and 28 June 2022, eBay made "payouts" to the Company from the "Suzukisuper" "Seller Hub" of some $19,500 into an account described as "BANK Commonwealth Bank of Australia '827'."
9. That suggests, at least on a prima facie basis, that the plaintiff has caused Company income from eBay to be diverted into the "827" account that he described in his affidavit. This has been done without the knowledge of the first or second defendant.
10. It does not follow from this that the plaintiff has not used these funds for the Company's benefit. There is no evidence that he has not.
11. However, this evidence does show that the plaintiff has placed this asset in an account he controls and thus beyond the Company's control.
12. It appears to me that this points in favour of placing the Company's affairs in the hands of an independent party.

Engagement of DirectSpares Pty Ltd

1. Mr Smith also drew attention to the evidence given by the plaintiff that: "As an interim measure whilst I was trying to sort out my disputes with [the second defendant] and [the first defendant], DirectSpares Pty Ltd being a separate entity of which I have no ownership or shareholding was able to obtain credit accounts and as such the Company now purchases the parts from DirectSpares Pty Ltd."
2. The current directors and shareholders of DirectSpares Pty Ltd are the plaintiff's and the first defendant's sons, Alwyn and Jason.
3. There is in evidence an invoice from DirectSpares Pty Ltd to the Company dated 4 April 2022 for $3,042.56 and a document showing that payment of that invoice was made from an account whose number ends "827".
4. It thus appears that the plaintiff is using Company funds, which he is diverting to his "827" account, to pay his sons' company for stock.
5. This evidence does not show that the plaintiff is misusing Company funds. But it does suggest he is using an account in his own name to pay Company expenses and thus removing from the defendants' oversight this aspect of the Company's business.
6. I see this as a further reason to place the Company's affairs in the hands of an independent third party.

Delay and evident motivation

1. Mr Smith pointed to the fact that the deadlock between the parties appears to be of long standing and that the matters about which the plaintiff complains, particularly the dispute about wages, have been brewing for a number of years.
2. Mr Smith also submitted that the plaintiff's applications should be seen as an abuse of process and brought to pre-empt and change the complexion of the proceedings brought by the first defendant in the Federal Circuit and Family Court. [8]
3. As I have said, on 27 May 2022, the first defendant filed an Initiating Application in the Federal Circuit and Family Court of Australia.
4. In that application the first defendant seeks the following orders: "2. That [the plaintiff] forthwith pay all outstanding liabilities of [the Company] including all sums owed by [the Company] to the landlord of Area C/18 Cutler Road, Lansvale in State of New South Wales and all sums owing in respect of electricity for that same premise. 3. That, pending further Order, [the plaintiff] arrange and implement payment of all invoices charged to [the Company] of whatsoever nature, and all liabilities of [the Company], as and when they fall due."
5. The first defendant also sought the appointment of a business valuer to act as the single expert to "enquire into and prepare a report in relation to the value of" the Company.
6. The plaintiff was served with the Initiating Application on 28 May 2022. As I have said, he commenced these proceedings less than two weeks later.
7. Mr Smith submitted that the orders sought by the plaintiff, including those regarding the appointment of a provisional liquidator, would render nugatory the relief sought by the first defendant in the Federal Circuit and Family Court.
8. That may be so, but the first defendant makes no such submission. Indeed, as I have set out above, despite the relief she has sought in the Federal Circuit and Family Court, the first defendant does not oppose the winding up of the Company.
9. In her reply submissions, Ms Perry submitted that it should be inferred that the plaintiff's true motivation in bringing this application was the lessor's decision to terminate the Company's lease of the Lansvale property, rather than any apprehension about the first defendant's application to the Federal Circuit and Family Court. However, the plaintiff said nothing to that effect in his affidavits.
10. Overall, I do not see these matters as assisting the resolution of the questions before me.

The likely effect of the appointment of a provisional liquidator

1. Finally, Mr Smith pointed to the fact that the Company has only around $1,000 cash at bank and submitted it was likely that a provisional liquidator would conclude that the business could no longer continue and cause the Company to cease trading.
2. That may be so, but insofar as the second defendant's apprehension relates to his pending oppression suit, the plaintiff, through Ms Perry, has undertaken to the Court that he will not contend that the fact of the appointment of a liquidator to the Company will, itself, be a reason to deny the second defendant such relief under s 233 of the Act as he might otherwise be entitled.

Conclusion as to the appointment of a provisional liquidator

1. Overall, I am satisfied that this is an appropriate case for the appointment of a provisional liquidator.
2. The Company is in deadlock. Accusations and counter-accusations of improper conduct are made by the directors/shareholders of the Company. The working relationship between the parties has broken down. The Company's tenure at the Lansvale premises is insecure. There appears to be no sensible basis upon which the Company can continue successfully to trade. There is a real prospect that the Company will be wound up on a final basis. Appointment of a provisional liquidator will secure the Company's assets in the troubled circumstances I have outlined above.
3. There was debate before me as to the identity of the provisional liquidator. The plaintiff seeks the appointment of Mr Liam Bailey of O'Brien Palmer Insolvency & Business Advisory. The defendants seek the appointment of Mr Andrew Barnden and Ms Sichu Wang of Rogers Reidy Liquidators, principally upon the basis that Ms Wang is a Mandarin speaker.
4. Each one of the parties is of Chinese origin. Their first language is Mandarin. However, each swore a lengthy affidavit without the assistance of an interpreter. The records of the Company are in English, and emails generated within the Company are in English.
5. Ms Bailey, for the first defendant, pointed to an email that the plaintiff sent to her solicitor on 10 January 2022 concerning a proposed mediation, in which the plaintiff insisted that there be a "professional Chinese (Mandarin) translator present at all times" and to an email that the plaintiff sent the first defendant's solicitor on 24 February 2022 stating that "unfortunately as my English is not the best all correspondence must be translated to me to understand & my reply must be translated back to English etc". Nonetheless, the plaintiff deposed that the mediation was conducted in English and without an interpreter being present.
6. In any event, the evidence discloses that Mr Bailey has access to Mandarin speakers should such services be necessary.
7. The rates now proposed by Mr Bailey are a little less than those proposed by Mr Barnden and Ms Wang. I do not see the fact that Mr Bailey agreed to adjust his rates as being a reason to doubt his suitability for the task.
8. I propose to appoint Mr Bailey as provisional liquidator.
9. Mr Smith submitted that I should require from the plaintiff an undertaking as to damages before appointing a provisional liquidator. I do not see that as being necessary nor appropriate.
10. However, I note from Ms Perry's reply submissions the undertaking proposed to be given to the Court by the plaintiff that he will pending resolution of the Originating Process: 1. continue to offer his services to Mr Bailey; 2. cause Mr Bailey to be paid his costs and remuneration to the extent that his remuneration expenses cannot be paid out of the ongoing trading receipts of the Company and available funds in the Company; and 3. pay to Mr Bailey the funds in his "827" account referred to above.

Conclusion

1. I note the undertakings that the plaintiff proposes to give to the Court as set out at [87] and [97] above.
2. I direct the plaintiff to provide by email to my Associate a document signed by him setting out those undertakings by 5.00pm today.
3. I order pursuant to s 472 of the Act that Liam Thomas Bailey of O'Brien Palmer, Level 9, 66 Clarence Street, Sydney NSW 2000, registered liquidator, be appointed provisional liquidator of the third defendant.
4. As to costs, to the extent there is disagreement, the parties should confer and agree on a timetable for written submissions. I will determine any issue on the papers, unless any party seeks an oral hearing.

Endnotes

1. Zempilas v J N Taylor Holdings Ltd (No 2) (1990) 55 SASR 103 at 106 (King CJ, Cox and Olsson JJ agreeing).
2. See, for example, Grace v Grace [2007] NSWSC 6 at [29] (Brereton J) (as his Honour then was).
3. Labraga v Pomfret [2005] NSWSC 490 at [39] (Barrett J) (as his Honour then was).
4. In the matter of Therma Truck Pty Ltd [2016] NSWSC 266 at [55] (Black J).
5. See In the matter of Amazon Pest Control Pty Ltd [2012] NSWSC 1568 at [19] (Black J).
6. Clause 63.1.
7. Clause 40.
8. Adopting the language used by Barrett J, in the particular circumstances of the case before his Honour, in Roberts v Wayne Roberts Concrete Constructions Pty Ltd [2004] NSWSC 734 at [65]. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 22 July 2022