Herbert v Herbert [2005] NSWSC 1034 | Case summary

4809/05 - HERBERT v HERBERT JUDGMENT 1 HIS HONOUR: This is an interlocutory application to preserve the assets of a company prior to the hearing of an oppression suit. The company concerned is the second defendant, South Coast Truck Sales & Spares Pty Limited, a company that was incorporated on 13 December 1976 and has thereafter carried on business in the Illawarra area of the nature that its name suggests. 2 According to the report known to the parties as the Greenwood Report, the company is trading profitably with operating profits averaging $253,256 per year and its gross sales are approximately $3 million per year. 3 The plaintiff challenges those sorts of figures but they do show that we are here dealing with a trading company which is profitable. The authorities make it clear that courts should not wind up such companies unless there is virtually no other way of dealing with their problems: see, for instance, Cumberland Holdings Ltd v Washington H Soul Pattinson & Company Ltd (1977) 2 ACLR 307 (PC). 4 The company was, until his death in 2004, under the control of Barry James Herbert. The shareholder structure was that there were, I think, three management shares and a large number of ordinary shares. The management shares were held by Barry Herbert and his wife Lorraine, who died in 1990. 5 The Articles of Association provide that the holders of ordinary shares shall not be entitled to vote at any meetings of the company (Article 3) and that dividends shall not be declared or be payable on management shares and that on the death of the holder for the time being of any management shares such shares shall become an ordinary share (Article 4). As the holders of all the management shares are now deceased, it must be strongly argued there are only ordinary shares left in the company. 6 There is, however, an argument that can be put against that proposition. There is in the papers a purported transfer of all management shares from the estate of the late Lorraine June Herbert to the first defendant, Gail Herbert, dated 3 September 2002. Mr Glasson, for the first and third defendants, argued that one could construe that as an allotment by the company of a new management share. I must confess I find it very hard to accept that argument but I will record it in case it be of value at the final hearing for the Judge to know it was raised. 7 I do not want to find facts which will be held to amount to some sort of estoppel at the final hearing. However, I need to consider what, on the evidence before me at the moment, is more likely to be correct than not. On this basis my view is that Article 3 of the Articles of Association should be construed as meaning that so long as there are any management shares, ordinary shares have no votes. As my view is that on the material before me there are no management shares, the voting is with the ordinary shareholders of the company. 8 The assets of Barry Herbert would appear to be only fifty per cent of the shares in the company plus the land on which the company's business is carried on. Under Mr Herbert's will the first defendant, Gail Herbert, is the beneficiary of this fifty per cent of the shares and she is also the executor of the estate. However, Family Provision Act 1982 applications have been lodged, not only by the plaintiff but also Robyn Herbert, the widow of Barry Herbert, and two other relations. Putting aside the possibility of success of any of those applications, the ordinary shares in the company are held as to 25.1 per cent by the plaintiff and 74.9 per cent by the first defendant. 9 The first defendant has at all material times played a key part in the management of the company. She had a managerial role while her father was still alive and continues to have it. She is recorded as a director, though it would seem clear that she was not eligible to be a director of any company between November 1992 and November 1997. 10 Under Special Article 10, clause 63 of Table A to Schedule 4 of the Companies Act 1961 was modified so that so long as Barry James Herbert continued to hold the office of director, he could from time to time and at any time appoint and remove directors. What happened after he died was rather obscure because Article 63 was completely removed from Table A but one would have thought that apart from filling casual vacancies under Article 68, the flavour was that there would be some election of directors. Article 64 indeed refers to the fact that one-third of the directors are to retire from office at each annual general meeting. 11 However, it would appear, within the material I have, that there was no further election of directors and no general meetings, at least general meetings at which shareholders such as the plaintiff were permitted to participate. 12 The directors, according to records, are the first and third defendants. Their legitimacy must be questionable. 13 The plaintiff lives in Queensland. She has not been associated with the running of the business of the company at any material time. However, since her father died, the plaintiff has made it quite clear to her sister, the first defendant, that she is not happy with the fact no dividends have ever been paid; with her sister receiving remuneration of $4000 gross per week; that debts which appear to be debts of the estate are being paid or lent out of the company's moneys and that a re-investment policy of profits has been adopted, which means, instead of dividends, moneys are paid back into the company. 14 The plaintiff, accordingly, has issued an interlocutory process in an endeavour to put some brake on the defendants' administration pending a final hearing of these proceedings. 15 Paragraphs 2 to 5 of the interlocutory application seek an order that the defendants join with the plaintiff authorising the second defendant to appoint as its auditor a person nominated by the President, for the time being, of the Institute of Chartered Accountants of Australia and requiring an audit to be conducted from the year ended 30 June 1993 to 30 June 2005. 16 The plaintiff strongly relies on Article 97 of the Articles of Association which provides that the directors are to keep proper accounts and distribute copies of balance sheets as required "by the Act". Mr Smallbone, who appears for the plaintiff, points to the definition in clause 1 of the 1961 Table A that "the Act means the Companies Act 1961". He points to the fact that that Act requires there to be audited balance sheets at least until the company negates that right by the appropriate procedure. He says, accordingly, that from 1993 onwards there should have been made available to the members audited balance sheets. That did not happen and should now happen. He points to the fact that his client was, at least in equity, a member of the company since 1992 and at law since 1994. 17 The present requirements of the Corporations Act 2001 (Cth) do not require audited accounts for this type of company. The question has been raised as to how Article 97 is to be construed. Mr Smallbone strongly relies on the principle, which I strongly acknowledge, that Articles are to be construed as at the date they were entered into. The word "Act" must mean Companies Act 1961, as defined in Article 1. 18 However, the counter argument is that Article 97 shows a contrary intention and that one construes Articles like Article 1 as meaning that unless the context otherwise requires, the definition shall apply. 19 In my view, the words "by the Act" in Article 97 do not mean "by the 1961 Act" but "by the statutory requirements as from time to time in force". 20 It may be that prior to the coming into effect of the Corporations Law there was a requirement to have audited balance sheets, but since the coming into effect of the Law that has not been the case. I do not consider that as a matter of general discretion I should order audited balance sheets to be provided prior to the year 2004 and because of that it is unnecessary to go fully into the arguments as to whether the plaintiff has standing or not. I cannot see any benefit that would flow to the shareholders in going back into the history. Further, the cost of a thorough audit for such a long period of time in respect of a small company is to be avoided, if at all possible. So I think that, in light especially of ss 56 and 58 of the Civil Procedure Act 2005 I should go no further along those lines. 21 However, so far as 2004 and 2005 are concerned, the plaintiff has made a requisition under s 293 of the Corporations Act. That section gives shareholders of at least five percent of the votes in a small proprietary company the right to give the company a direction to prepare a financial report and directors' report for the financial year and send them to all shareholders. Section 293(3) says that the direction may specify that the financial report is to be audited. 22 The plaintiff, on the view that I have taken of Article 3, has more than five per cent of the voting rights. Section 293 of the Corporations Act is within Pt 2M.3 of the Corporations Act. Section 344(1) of the Act provides that a director of a company contravenes that section if he or she fails to take all reasonable steps to comply with Pt 2M.3. The section would seem to apply to the first and third defendants even if they are not properly appointed as directors and it seems to me that s 1324 allows the Court to make orders in the nature of an injunction to enforce the right. 23 It seems to me that this is an appropriate thing to do. The basal reason for saying this is that the material presented by the plaintiff gives a very strong flavour of a company that has been run almost solely in the interests of the first defendant. That may or may not be found to be correct when all the evidence is in, but the reluctance to come forward with material, the discrepancies in figures in the material that has been presented, the non-compliance with the requirements of the Act as to the formulation of the first defendant's remuneration, the non-holding of general meetings, seems to me to show that there is a need for an independent auditor or some consulting accountant to provide a proper audit and report to the members as to what those in control of the company have been doing and how accountable they should be for the profits of the company. 24 Accordingly, I will make some such order as in order 2 but only for the years ended 30 June 2004 and 30 June 2005. The parties have asked me to postpone the making of any formal orders for seven days and I think this is appropriate. I will comply with this request and stand the matter over for short minutes of order. 25 The next set of orders sought is to restrain the first defendant from receiving any property or money from the company. The basis of this is that there has never been any authority given to the first defendant to receive money from the company. 26 The basal proposition at common law is that directors act in an honorary capacity. That rule was formulated at a time when directors were rather like trustees more than full-time professionals. However, Article 70 provides that the remuneration of the directors shall be determined by the company in general meeting and the company in general meeting never passed any resolution to that effect. 27 Mr Smallbone puts forward an argument that because of Article 46 a special resolution would be required under Article 70. That Article requires that business, other than specified business, would be special, but I believe all that it requires is that it be specially put in the notice of meeting as a resolution rather than requiring a special resolution. It is unnecessary to decide the point at this stage. 28 The fact remains that there was never any resolution special or otherwise granting the directors remuneration. What in fact appears to have happened is that there was a meeting between the first defendant and the third defendant and they agreed on the remuneration. That would not, to my mind, seem to be sufficient for a number of reasons. First, it gave the plaintiff no opportunity to object. Secondly, the first defendant was interested in the contract and, thirdly, there was no meeting in which the pros and cons could have been debated. However this third reason is perhaps more apparent protection than real. 29 Accordingly, there is no warrant, to my mind, for the first defendant being paid $4000 a week out of the proceeds of the company. 30 Mr Glasson has told me that his clients are intending to bring some proceedings under s 1322 of the Corporations Act to regularise matters. Unless that happens, it may well be that the auditor will need to report that that money ought to be repaid. However, Mr Smallbone says that the authorities make it clear that a director who does work as an employee is not even entitled to be paid as an employee because it is impossible to sever the offices of director and employee. He relies on the decision of the English Court of Appeal in Hutton v West Cork Railway Co (1883) 23 Ch D 654, particularly at 671-672. I have not had time to delve into all of this but in my view the situation since Lee v Lee's Air Farming Ltd [1961] AC 12 and Shindler v Northern Raincoat Co Ltd [1960] 1 WLR 1038 is that the law nowadays does recognise the difference between what a director does qua a director and what he or she does as a worker. 31 The evidence suggests that Gail Herbert is working a considerable number of hours in the business and that on a quantum meruit basis she would be entitled to remuneration of at least $60,000 per year - she is getting $208,000 a year. 32 I believe, as I have said, apart from an application under s 1322 of the Corporations Act, an order would have to be made in due course that Gail Herbert refund some of that money and should not be paid anything more than what a market survey would show would be a reasonable remuneration for a person in her position from now onwards. However, I do not think I have sufficient information to be able to quantify that; nor do I think it would be fair or appropriate unless a provisional liquidator be put in - a matter to which I will come in a moment - that I should stop her receiving remuneration at all. I think all I can do at the moment is to give these reasons and decline to make any order at this stage. 33 However, it should be made clear that the first and third defendants have no warrant to make any loans or payments in respect of any priority personal expenses out of the moneys of the company and if that has occurred then they should refund the money or, alternatively, make a section 1322 application in the very near future. 34 The next question is whether a provisional liquidator should be put into the company or, alternatively, some regime put in place where there can be some control over the activities of the first and third defendants. As I have said earlier in these reasons, putting in a provisional liquidator is something that courts are reluctant to do in a thriving company. 35 I bear in mind also that it may be that as a result of the Family Provision Act applications made by persons who are not a party to the present proceedings, other interests may be involved as well. 36 On the other hand, the suggestion that the plaintiff or her representative sign off on any payment over $2000 seems to me to be completely unworkable. 37 The plaintiff is in Queensland so there is a distance problem. The plaintiff has never been involved in the business of the company on an administrative or managerial level and if she were to do her job properly she would have to ask for explanations and details which would be costly to supply, and creditors would be held up. 38 The normal way one would go about this sort of exercise would be to authorise a local accountant to approve payments over a certain amount, but that has not been suggested to date by either party. 39 I very much feel that this is a case where I should put in a provisional liquidator, but my feeling, from experience is, I would not do that in the next four to six weeks because it may be as a result of what I have said that the parties can get together and save themselves $486 an hour, or whatever the cost of a provisional liquidator is, but that is going to require co-operation to an extent I have not yet seen in this case. Those in control of the company will need to be far more willing to give to the plaintiff's solicitor details sought and the plaintiff will have to trust her sister to a certain extent to run the business, which she seems to be running profitably. However, if in four to six weeks' time that has not happened, the only thing I can do is put in a provisional liquidator. 40 The last matter is whether these proceedings should be heard with and at the same time as the trial of the proceedings in the old Family Provision Act application. Both parties consent to this. However, it seems to me that there are considerable logistical problems. I will continue to order that the two proceedings travel together and it may be that at the end they can be listed in the same list together, but I would be reluctant at this stage to order that they be tried together for two principal reasons: first, I do not think it would be appropriate for people who have got no interest in the company who might be entitled to an order for costs to have their costs thrown on to the company to pay and, secondly, that as appears from the plaintiff's affidavit, there is a lot of material which is completely irrelevant to the company which may be relevant to the Family Provision Act proceedings which would make the trial of the company matter take much longer. 41 Another internal problem is that Family Provision Act applications are usually tried by an Associate Justice and oppression proceedings by one of the mainstream judges. Having the two sets of proceedings combined could cause complications and delay in listing them. Thus, I decline to make that order at this stage. 42 I should add there was also an application that the plaintiff be permitted to inspect the books and records of the company but I understand that matter has now been agreed between the parties. 43 I order that costs be costs in the cause.

Herbert v Herbert

At a glance

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Before

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Judgment (12 paragraphs)

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Legislation Cited (1)