Harding Investments Pty Ltd v PMP Shareholdings Pty Ltd

(a) January 2010 - Decision to relocate business offices and sack staff 27 On about 15 January 2010, Gordon and Dick held a meeting without notice. Harding was not invited to attend and did not attend. At this meeting, Gordon and Dick decided (without the involvement of Harding) to (i) close the South Melbourne offices and move the business premises of Lotic back to Lilydale, and (ii) terminate the employment of several staff. This decision was also made without consultation with or the involvement of a fourth director, Mr David Cassidy. Mr Cassidy resigned as a director on 12 March 2010. He was not called to give evidence. 28 Harding's unchallenged evidence was that, on the morning of Monday 18 January 2010, he was pulled aside by Gordon and Dick and told about the meeting that was held on 15 January at which Gordon and Dick had decided to relocate the company's offices from South Melbourne to Lilydale, effective as soon as possible. Harding's further unchallenged evidence was that he was taken "entirely by surprise" that the decision had been made and was going to be put into effect: 1. without any consultation with him; 2. without his involvement in the decision as Managing Director / CEO; 3. without any opportunity to discuss or consider the costs of breaking the lease; and 4. without any cost / benefit analysis. 29 Harding asked Gordon and Dick whether it was financially worthwhile to break the lease which still had six months to run. Harding gave evidence that either Gordon or Dick said it was worthwhile. Harding then said to both Gordon and Dick that Lilydale was a long way from where he lived. His unchallenged evidence was that Dick responded that if the move went ahead, Harding should work in the office two days per week, work from home two days per week and spend one day attending client or site meetings. Gordon did not disagree. 30 In the same meeting, Gordon then said that he and Dick had also decided on the previous Friday that some staff needed to be sacked. Harding's unchallenged evidence was that he was shocked and did not know how to respond. Again, the decision had been made and was to be put into effect: 1. without any consultation with him; 2. without his involvement in the decision as Managing Director / CEO; 3. without any opportunity to discuss or consider the costs of terminating the staff; and 4. without any cost / benefit analysis. 31 Harding then said that if Gordon and Dick were of the view that staff needed to be sacked, he would do an analysis of who it should be and make a decision later that week. Gordon disagreed and said that there was no time for that and that they were going to be sacking people that day. Gordon asked Harding who he wanted to start with. Gordon then informed Harding that he was to sack a named process engineer, a named draftsman, the company's bookkeeper and the receptionist. Harding did not agree with the decision to terminate staff. He persuaded Gordon and Dick not to terminate the receptionist because of the impact this would have on others' workloads if both she and the bookkeeper were sacked. 32 The next day, on 19 January 2010, Harding again raised with Gordon and Dick the decision to leave the South Melbourne premises in an immediate rush. He said that if there was a good business case to move immediately, he wanted to see the figures. Dick said that the savings would be about $10,000 per week and that Harding could see the spreadsheet showing the savings. After the move back to Lilydale, Harding subsequently asked for and received the spreadsheet. 33 As is apparent, Harding was not invited to participate in these decisions, and despite objecting and asking for time to consider the proposals when told about the decisions, no subsequent meeting or discussion took place. The decision to break the lease resulted in a complaint being issued against Lotic in the Magistrates Court on 22 April 2010. The payout to the landlord was said to be $27,000. The evidence did not disclose whether this amount was in fact paid. 34 The Respondents addressed the two decisions separately. In relation to the decision to relocate the business premises, the Respondents submitted that the decision was not one which required a board meeting but, if it did, the decision only required a simple Majority (see cl 4.7), not an Absolute Majority under the BSA. There are a number of answers to these contentions. As noted above (see [17(4)] above), cl 4.7 of the BSA provides that "[a]ll questions relating to the Company shall be decided by a Majority of votes of the Shareholders" (defined as a simple majority in number or value) unless, inter alia, the question "involves a Major Decision in which case any such matter shall be decided by a resolution of an Absolute Majority of the Shareholders": cll 4.7, 37.1 and 37.22. I accept that the relocation of the premises back to Lilydale did not fall within the definition of a "Major Decision" under the BSA because the 'Premises' referred to in the BSA was already defined as 2 Melba Avenue, Lilydale. However, that does not address the failure of Gordon and Dick to comply with cl 17 of the BSA. Given the serious nature of the issues raised, it is to be expected that Gordon and Dick would have given notice of the need to convene a board meeting (providing notice to Harding and Cassidy) to deal with both issues - the immediate surrender of the South Melbourne lease and the immediate termination of staff. As cl 17 provides, not only was proper notice required but also "such other materials and/or information appropriate and proper to transact the Business of the Meeting". None of that was before the meeting on 18 January. The decisions had been made on 15 January and delivered up as a fait accompli. 35 Given the views I have formed about the manner in which the decision was made, it is strictly unnecessary to address the Respondents' contention that the decision was commercially justified. However, it is appropriate that I say something about the commercial aspects of the decision. The lease was due to expire in June 2010. Lotic told the landlord in January 2010 it would only pay 50% of the rent due to "straightened financial circumstances" but would continue to pay the rent for another six months after the term had expired until the company had satisfied the lease obligations. The landlord did not respond well and threatened to lock them out of the premises. The Respondents submitted that paying rent on one premises was better than paying for two. The fundamental problem with this decision at the time it was made was that Lotic was obliged to make the full lease payments until the end of the lease, a fact conceded by Gordon and Dick. Not only did they concede as much, but they had informed the landlord that they would make up the shortfall after they left the premises. In those circumstances, a decision to leave the South Melbourne premises immediately in the absence of any further negotiation with the landlord is, at the very least, surprising. In assessing this decision (and the decision in relation to the termination of staff), what in fact happened (from a commercial perspective) after the decision was made is not relevant to the question of whether or not this conduct was "oppressive to, unfairly prejudicial to, or unfairly discriminatory against [Harding Investments], a member" of Lotic. Put another way, it is not appropriate for the Respondents to seek to commercially justify a decision by reference to facts that happened months after the event and where there is no evidence to suggest that these facts were considered by Gordon and Dick at the time the decision was made.

(b) February 2010 36 In February 2010, Harding's unchallenged evidence was that Gordon usurped Harding's role as CEO by making day-to-day financial management decisions, countermanding directions given by Harding and denying him access to information. The Respondents do not dispute these facts. Indeed, Gordon accepted in cross examination that he decided what creditors were to be paid and when, and directed Joe D'Souza, the finance manager (D'Souza), to disregard directions given by Harding. The Respondents submitted that Harding's demands for information, contemporaneous financial justification for decision making and demands for notice to be given of meetings were "unworkable, excessive, unreasonable, counterproductive and not always bona fide" and that Gordon merely instructed staff to undertake the jobs they were employed to perform and decline to be "distracted by requests" from Harding that "interfered with the due performance of the[ir] functions". These latter submissions were unsupported by evidence and, for the reasons identified earlier, should be rejected. 37 On 23 or 24 February 2010, Gordon and Dick held a further directors' meeting, without due notice, at which meeting a resolution was passed to selectively reduce Harding's emoluments from Lotic. The Respondents did not substantively address this complaint in their written submissions and, despite being afforded an opportunity to do so, did not do so in their oral submissions. Not only was the manner in which the meeting was called contrary to cl 17 of the BSA, the purported decision itself failed to comply with cl 4.7. Why? Because a decision to reduce the then current salary paid to the directors was a "Major Decision": see cl 37.21.2. Any "Major Decision" required an Absolute Majority. The decision was made without the necessary Absolute Majority. Again, the fact that due to financial constraints Gordon and Dick were unable to increase their salaries is irrelevant to the manner in which the meeting was called and the fact that the decision was made.

(c) March 2010 38 In March 2010, Gordon refused to reimburse Harding for expenses whilst on company business in India, disabled Harding's mobile phone access, and did not pay him wages whilst he was away on company business. Gordon does not dispute these facts. In relation to the expenses claimed by Harding whilst in India, Gordon's evidence was that he refused to authorise reimbursement of the expenses because Harding had "reneged" on an "agreement". The "agreement" was never adequately explained. 39 Harding gave evidence that he had put in place a payment plan with the Australian Taxation Office (the ATO) in relation to Lotic's PAYG liabilities. Harding's evidence is that in March 2010, Gordon caused Lotic to breach that payment plan by failing or refusing to honour the terms of that plan and directing that other creditors receive payment in priority to the ATO. That decision was made by Gordon without reference to Harding. It had serious consequences. Lotic and the directors personally became liable for the debt and were issued with director penalty notices. The evidence disclosed that the finance manager, D'Souza, was then required to negotiate further with the ATO. The Respondents raised two matters by way of reply. First, that the director penalty notice did not relate to Lotic. That contention is contrary to the letter D'Souza sent to the ATO on 10 June 2010 on Lotic letterhead. Secondly, that it was a temporary problem rectified by D'Souza and there was no evidence of financial loss to either Harding or Harding Investments. That second contention is no answer to the complaint. It does not address the manner in which the decision was made. 40 In March 2010, another event occurred about which Harding complains. It concerns the withdrawal by Gordon of $127,763.00 from Lotic's account without any reference to Harding and at a time of serious cashflow difficulties. The Respondents do not dispute the withdrawal but submitted that the transfer was not evidence of oppressive conduct. It is common ground that Gordon made the decision unilaterally. The Respondents' answer to this complaint was to submit that the funds were withdrawn because they represented consideration of $127,763.00 passing to PMP Shareholdings for the sale by that company to Harding Investments of shares in Lotic. Even if that is correct, it is no answer to the fact that the funds were paid by Harding to Lotic in reduction of his loan account in accordance with the agreement reached in July 2007: see [19] above. At the time of the repayment by Harding to Lotic, the funds were with Lotic, not PMP Shareholdings. What arrangement PMP Shareholdings had with Lotic was never disclosed. It was never suggested that it was an arrangement that permitted Gordon, as a director of Lotic, to withdraw company funds to reduce his personal home loan account (or for any other personal purpose) without reference to the other directors and principals of Lotic.

(d) April 2010 41 On 1 April 2010, matters came to a head. Gordon called a meeting without notice. Harding attended the meeting. Gordon produced pre-prepared Minutes of Meeting, to which Dick assented, removing Harding from his position as Managing Director and CEO. The parties no longer trusted each other. Gordon did not trust Harding in his role as CEO. Gordon was also unhappy about and had grown tired of the fact that Harding disagreed with suggestions and required analytical justification for decisions. The Respondents contend that the decision to remove Harding was commercially justified because it secured Lotic's survival. There are at least two answers to that contention. First, commercial justification is no answer to the manner in which the decision was made (cf [35] above). Secondly, for the reasons stated earlier, it is impermissible for the Respondents to seek to commercially justify a decision by reference to facts that happened months after the event and where there is no evidence to suggest these facts were considered by Gordon and Dick at the time the decision was made. Finally, the Respondents' submission that although the document was headed "Minutes of Meeting", it was more properly described as an agenda, is rejected. 42 Later that month, on 23 April 2010, Harding received notification that as early as 12 April, Gordon and Dick had resolved to implement an earlier decision to increase their wages so that they were equal to Harding's wage. No notice was given to Harding. He was excluded from the decision making process. Even though the amount was not able to be paid immediately, Gordon and Dick made the decision (as was recognised by them) that this would be in their long term financial interests - a type of "back pay". The matters raised by the Respondents do not address the manner in which the decision was made: see [37] above.

(e) May 2010 43 In late May 2010, Gordon and Dick resolved to terminate the engagement of Lotic's external accountants (Matthew Steer) and engage different ones (TWF). The three directors had previously discussed the change. However, the actual decision to implement the change was made by Gordon and Dick. Harding was told about the decision after it had been made. The Respondents submitted that the conduct was not oppressive because Lotic's former accountants (TWF) were re-engaged and the decision was commercially justified. Harding accepts that TWF were cheaper than Matthew Steer and that the reason for engaging Matthew Steer - international work - no longer existed. The difficulty for the Respondents is the manner in which Gordon and Dick made the decision - no notice of the meeting was given to Harding. In fact, he was not even invited to the meeting - rather, he was simply "told" by Gordon and Dick what decision had already been made.

(f) June 2010 44 We then jump to June 2010. On 23 June 2010, Gordon withdrew $90,000.00 from Lotic's account without any notice to or resolution of the directors at a time of serious cashflow difficulties. The withdrawal was made without reference to Harding. The Respondents do not dispute this contention. Instead, they submitted that: The Applicant cross examined Mr Gordon to the effect that he regarded Lotic as his private family enterprise and was running it accordingly without regard to others (sic) interests. The considerable care of (sic) attention he was paying in the substantial cash injections he made is consistent with this and contrasts sharply with that of Mr Harding. [Gordon] had $426,677 lent (sic) to the company during the critical period of February 2010 to July, 2010 … He had further provided a performance guarantee of $190,000 requiring him to sell an investment property … Total financial assistance: $616,677. Mr Gordon gave evidence that the funds he was injecting were to pay wages and creditors. … By putting so much personal wealth on the line for the company Mr Gordon preserves the prospects of a return on the Lotic Investment to [Harding Investments] … None of the matters raised by the Respondents provide any answer to the unilateral withdrawal of $90,000 by Gordon. The withdrawal was unauthorised. No notice was given to anyone. 45 Then, seven days later, on 30 June 2010, Gordon paid himself a further $9,285 from Lotic funds without any notice to or resolution of the directors. This payment constituted alleged interest on loans made by Gordon to the company. Gordon calculated the amount and ordered D'Souza to pay that amount to him. The payment was made without reference to Harding. The Respondents do not dispute this contention. Instead, they submitted that it was a contradiction to describe the "tiny interest payment" as antithetical to the interests of Harding Investments. Again, none of the matters raised by the Respondents provide any answer to the unilateral charging and then withdrawal of $9,285 by Gordon. Both were unauthorised. No notice was given to Harding. And, for the record, in the circumstances, I do not regard $9,285 as a "tiny interest payment".

(g) July 2010 46 On about 9 July 2010, Gordon directed D'Souza to pay Gordon and Dick, but not Harding, $28,500.00 as salary. At the time the decision was made, Gordon anticipated a $50,000 profit from the NVIRP project. The decision was made without reference to Harding. The amount was never paid. The Respondents submitted that it was a contradiction to classify what was merely a book entry as "antithetical to the interests of [Harding Investments] in the context of such significant … financial support [by Gordon]". Again, none of the matters raised by the Respondents provide any answer to the complaint: see also [37] above. 47 Matters worsened in July. On 12 July 2010, Gordon and Dick decided to terminate Harding as a director and employee of Lotic. Harding was not present and was not invited to the meeting. At that meeting, Gordon said that, put simply, he and Dick decided that it was time for them and Harding to part ways. Gordon and Dick were aware at that time of the terms of the BSA. They knew of Harding Investments' entitlement to have Harding as a director in Lotic. Moreover, they knew that Harding could only be lawfully removed by Absolute Majority: see [17(2)] above. 48 That night, the Respondents emailed Harding giving him notice that a meeting had been convened for 9:00am on 13 July 2010 at Lotic's offices "to consider the following resolutions proposed by Paul and Don that Lotic terminate the employment of … Harding with up to six months full pay in lieu of notice: and that [Harding] be removed as a director of Lotic". A copy of the minutes of the last Board meeting, balance sheet and profit and loss were attached. The meeting was then deferred until 3:00pm on 13 July because the notice of meeting was inaccurate. On 13 July, Gordon and Dick marched Harding out of the building. From that time, Harding ceased as a director of Lotic. 49 The Respondents sought to justify the dismissal on the grounds that the acts were "good for the company". Whether the "acts" were good for the company ignores at least two of the Applicants' principal complaints - that it was not open for Gordon and Dick to unilaterally ignore the provisions of the BSA which required that the company "maintain" a board comprising each of Gordon, Dick and Harding as representatives of the shareholders, and that each "Director" be employed by Lotic in "the Business", the latter being a requirement that was expressed to be only capable of variation by "a resolution of an Absolute Majority of the Shareholders": cl 4. 50 From July 2010 to the present date, Harding has not been a director or employee of Lotic. As a result, Harding and Harding Investments have continued to be effectively excluded from the continued management of and control of Lotic. Gordon saw Harding's attempts to be reinstated as a director as "just part of the game". The problem was that it was not a game - it was a contractual right.

ANALYSIS 51 As a preliminary matter, the Applicants have standing to seek relief under ss 232 and 233 of the Corporations Act. Harding Investments is a "member" for the purposes of s 234 of the Corporations Act. Further, because Harding is Harding Investments' Principal and representative in Lotic (as expressly acknowledged by the BSA), the harm suffered by Harding (as set out in the foregoing paragraphs) was also, therefore, suffered by Harding Investments. On this basis, I reject the Respondents' submissions to the contrary. 52 Harding Investments submitted, and I accept, that for the reasons set out above, the conduct of PMP Shareholdings and Jashtra (through their principals, Gordon and Dick respectively), contravened s 232 of the Corporations Act. The conduct of Gordon and Dick in excluding Harding from the management of Lotic was so unfair that no reasonable director could have considered it fair: see [27] to [50]. The exclusions were wrongful and oppressive. They defeated the purpose of Harding Investments' entitlement to have Harding on the board of Lotic as its representative. Moreover, it was contrary to the express terms of the BSA. I reject the contention that cl 47 of Lotic's Constitution overrides or cancels out the BSA. The conduct was "oppressive to, unfairly prejudicial to, or unfairly discriminatory against" Harding Investments. As the High Court said in Campbell v Backoffice at 360, the fact that Gordon and Dick believed they were acting rightly cannot and does not prevent that finding. Further, it is not to the point to examine Gordon and Dick's motives for acting as they did. As a result, it is not relevant to determine whether the Respondents' submissions concerning Harding's conduct and competence as a CEO have any substance, as the conclusions the Respondents would have the Court reach in relation to those matters do not, in this case, bear upon the question of whether or not the conduct of PMP Shareholdings and Jashtra (through Gordon and Dick) was oppressive conduct within the meaning of s 232 of the Corporations Act. 53 Before turning to consider the appropriate orders, it is necessary to consider that Lotic is now in administration. The Respondents submitted that the oppression must subsist at the time of the making of the order and that it does not now subsist because Lotic is in administration: Bessounian v Australian Wholesale Mortgages Pty Ltd [2007] NSWSC 35 at [6] and [7]. I reject that contention on two bases. First, at a factual level. The principal of Harding Investments has been, and continues to be, excluded from the management of the company and such exclusion was, and is, also contrary to the express terms of the BSA. 54 Secondly, as a matter of principle. Lotic executed a Deed of Company Arrangement and the directors resumed control of the company and remain in control. Lotic is still trading, with the same shareholders and just two directors despite being subject to the BSA. Lotic is in an entirely different position to a company in liquidation or provisional liquidation: see Campbell v Backoffice at [179], [180] and [182]. Moreover, as the High Court said in Campbell v Backoffice at [182]: [T]he current form of the oppression provisions in Pt 2F.1 was introduced [Australia, House of Representatives, Corporate Law Economic Reform Program Bill 1998 (Cth), Explanatory Memorandum, p 34 [6.132]] with a view to making it clear that the Court may make orders even if the act, omission or conduct complained of has yet to occur or has ceased, it may very well be that the fact that there was no continuing oppression when this case came to trial does not entail that the Court had no power to make any of the orders for which s 233 provides. But that is a point that need not be decided. 55 The principal form of relief sought was an order for compulsory purchase of Harding Investments' shares in Lotic by PMP Shareholdings and Jashtra: Campbell v Backoffice at [174] - [178]. In my view, such an order should be made. The Corporations Act does not identify the basis upon which the price for shares is to be fixed if an order for compulsory purchase is made. As the High Court said in Campbell v Backoffice at [178]. Although s 233(1)(d) gives the court power to make an order for the purchase of shares by a member, the Corporations Act is silent about the terms on which such a sale may be ordered. In particular, the Corporations Act does not identify the basis upon which the price for the shares is to be fixed if an order for compulsory purchase is made. Under earlier forms of the oppression provisions of companies legislation, orders were made for the compulsory sale of shares by one member to another at prices to be fixed according to various criteria. In some cases [footnote omitted] the price has been fixed at the value the shares would have had at the commencement of the proceedings but for the effect of the oppressive conduct. In other cases [footnote omitted] a date other than the date of commencement of the proceedings has been fixed. Again, there is no reason to give the present oppression provisions some narrower construction. In particular, the power given to the court by s 233(1)(d) should not be hedged about by implied limitations [footnote omitted]. … 56 In the present case, the parties' submissions did not address the date of the valuation. In those circumstances, it is appropriate that each party file and serve an outline of submissions of no more than five pages identifying the date on which the value should be struck and the reasons for choosing that date.

ORDERS 57 For those reasons, the following declarations and orders are appropriate: 1. a declaration that the Second, Third, Fourth and Fifth Respondents breached the Business Succession Agreement executed on 27 February 2006 by terminating Mr Harding, the Second Applicant, as a director and employee of Lotic Pty Ltd (ACN 116 609 851) (Lotic); 2. a declaration that the First and Third Respondents contravened s 232 of the Corporations Act 2001 (Cth); 3. an order that PMP Shareholdings Pty Ltd (ACN 118 155 856) (the First Respondent) and Jashtra Holdings Pty Ltd (ACN 118 130 233) (the Third Respondent) purchase the shares in Lotic held by the First Applicant, Harding Investments Pty Ltd (ACN 118 130 402) (Harding Investments), in accordance with the following procedure: 3.1 By 4:00pm on 10 June 2011, the parties file and serve an outline of submissions of no more than five pages, identifying the date for fixing the value of the shares in Lotic held by Harding Investments should be struck and the reasons for choosing that date; 3.2 An independent registered company auditor (the independent person) nominated by the President (for time being) of the Institute of Chartered Accountants inspect the books of Lotic, which in his or her opinion, may yield information pertaining to the formation of an opinion as to the value of Lotic and the value of Harding Investments' shares in it; 3.3 If in the opinion of the independent person, it is necessary to do so for the purpose of the valuation, the independent person is appointed to restate the accounts for any period; 3.4 The independent person is appointed by the parties to proceed to value Lotic and the shares in it; 3.5 The independent person must not charge a fee in excess of $45,000 (GST inclusive) subject to review by the Court; 3.6 The fees charged by the independent person, in the first instance, are payable by the shareholders in Lotic in proportion to their individual shareholding; 3.7 Each party is entitled to provide a submission of not more than 10 pages to the independent person on or before 30 June 2011; 3.8 The independent person provide the valuation referred to above by no later than 14 July 2011; and 3.9 The matter be listed for further hearing to consider the question of value by no later than 22 July 2011; 4. the Respondents pay the Applicants' costs of the proceeding up to and including the date of this judgment, such costs to be taxed in default of agreement. 58 The Respondents sought an order that the costs they incurred in retaining a valuer should be paid by the Applicants. I reject that submission. As just foreshadowed, the Respondents will be entitled to make submissions to the independent person appointed in accordance with these orders and, to the extent they consider necessary, be entitled to use and rely upon the report they obtain. I certify that the preceding fifty-eight (58) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.