In the matter of Pharmacy Depot Hurstville Pty Ltd (in prov liq) [2018] NSWSC 961

Background

1. Mr Youssef and Mr Zoghbi are shareholders in the company which, as its name implies, operated a pharmacy business at Hurstville. According to a search of records of the Australian Securities and Investments Commission, the 180 shares in the company are held by Mr Youssef as to 60 shares beneficially and Mr Zoghbi as to 120 shares beneficially. (Mr Youssef claims that the shareholdings in the company were to be held equally by him and Mr Zoghbi.) Mr Youssef and Mr Zoghbi are the only directors of the company.
2. On 24 November 2017, Black J gave directions that the parties give notice of the application and serve the originating process and evidence filed in the proceedings upon the Australian Federal Police (AFP).
3. On 4 December 2017, the Court made orders including an order pursuant to s 474(2) of the Corporations Act 2001 (Cth) appointing Mr Daniel Frisken as provisional liquidator of the company. The provisional liquidator was given power to carry on the pharmacy business owned and operated by the company in the Westfield Shoppingtown at Hurstville.
4. The orders made on 4 December 2017, included an order (Order 9A) that the provisional liquidator is not authorised to take and must not take any step which is inconsistent with or will reduce the level of assets subject to freezing orders made in favour of AFP, without leave of the Court in an application made on two business days' notice to the AFP. That was a reference to freezing orders obtained by the AFP against various persons, including the company, in separate proceedings.
5. On 15 December 2017, the Court appointed Mr Frisken and Mr Maxwell Prentice as joint and several provisional liquidators of the company. Also, on 15 December 2017, Black J made an order that the provisional liquidators must not allow the company to dispose of or deal with the assets of the company other than in the ordinary course of business or without providing the AFP with seven days' notice in writing.
6. It is not necessary to explain the background to the orders relating to the AFP, other than to note that it was recognised that the AFP had a potential interest in the winding-up application, insofar as it had obtained freezing orders in respect of matters that were, at least, associated with those in this application.
7. The final relief sought in the originating process includes a declaration that Mr Youssef holds a 50 percent legal interest in the company and an order under s 461 of the Corporations Act that the company be wound up and Mr Frisken be appointed as liquidator. Mr Youssef relies upon two grounds for the winding-up of the company. First, that the affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, him or in a manner that is contrary to the interests of its shareholders as a whole (s 461(1)(f)). Second, the just and equitable ground under s 461(1)(k).
8. The proceedings were fixed for hearing on 18 May 2018 for the determination of the question of the respective shareholdings of Mr Youssef and Mr Zoghbi in the company. On that day, Mr Klooster of counsel appeared for Mr Youssef and mentioned the matter for Mr Zoghbi and the provisional liquidators. Ms Booth, solicitor, appeared for the Commissioner of the AFP.
9. Mr Klooster handed up signed short minutes of order containing the following terms: 1. A declaration that the Plaintiff holds a 50% legal interest in Pharmacy Depot Hurstville Pty Ltd ACN 163 892 939 (in Provisional Liquidation) ("the Company"). 2. The Company be wound up pursuant to section 461 of the Corporations Act 2001 (Cth). 3. The current Provisional Liquidators, Messrs Daniel Frisken and Maxwell Prentice, be appointed liquidators of the Company. 4. The First Defendant to pay the Plaintiff's costs of the proceedings as agreed or assessed. 5. Such further or other order as the Court deems expedient and just. 6. That these orders be taken out forthwith.
10. A number of issues arose which prevented orders being made in the terms sought by the parties. First, notice of the proposed orders had not been given to the Commissioner of the AFP. Ms Booth, solicitor for the Commissioner, objected to the Court making orders in terms of the consent orders without affording the Commissioner an opportunity to consider the proposed orders.
11. Second there was an issue as to whether Mr Youssef, as plaintiff, required leave to proceed under s 471B of the Corporations Act insofar as he sought declaratory relief that would be binding upon the company in circumstances where the company was in provisional liquidation. Section 471B provides that: 471B Stay of proceedings and suspension of enforcement process While a company is being wound up in insolvency or by the Court, or a provisional liquidator of a company is acting, a person cannot begin or proceed with: (a) a proceeding in a court against the company or in relation to property of the company; or (b) enforcement process in relation to such property; except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.
12. The third matter was whether the Court should make a declaration by consent.
13. On 18 May 2018, the Court made the following orders: (1) The matter is stood over, part-heard, to Monday, 25 June 2018 at 10am. (2) The plaintiff is to forward to my Associate proposed Short Minutes of Order, including any relevant consents from the 1st or 2nd defendants. (3) Direct plaintiff to give notice of adjourned date to the solicitor for the Commissioner of AFP. (4) Note that on the next occasion, it is anticipated that the plaintiff will seek final relief in terms of order 2 of the Originating Process filed 22 November 2017, namely, an order for the winding up of the company and the appointment of the provisional liquidators as liquidators of the company. (5) Direct provisional liquidators of the second defendant company to lodge with my Associate no later than 20 June 2018, a short report indicating the present position in relation to the provisional liquidation of the company, including the opinion of the provisional liquidators as to whether or not the company is insolvent.
14. Since the orders made on 18 May 2018, the following has occurred: 1. On 21 May 2018, counsel for Mr Youssef has provided to the Court consent orders signed by the respective legal representatives for each of the parties which are in the following terms: 1 Leave granted under s 471B of the Corporations Act 2001 (Cth) for the plaintiff to proceed with respect to the declaratory relief below. 2 A declaration that the plaintiff and first defendant each hold a 50% beneficial interest in the second defendant company. 3 First defendant to pay the plaintiff's costs of the proceedings on an ordinary basis as agreed or assessed. 1. The solicitors for for Mr Youssef informed the Court by email to my Associate dated 31 May 2018 that Ms Rebecca Kougellis, the legal representative for the Commissioner of the AFP, neither consents nor opposes the proposed consent orders. 2. In accordance with the direction made on 18 May 2018, the provisional liquidators have provided a report to the Court dated 20 June 2018 (Ex P2). In summary: 3. The provisional liquidators expressed the opinion that the company is insolvent and was insolvent prior to their appointment. 4. During the period 4 December 2017 to 31 May 2018, the provisional liquidators incurred trading losses totalling $66,199.79. 5. On 11 April 2018, the provisional liquidators signed a Business Sale Deed with a purchaser of the business. The purchase price under that sale was subsequently reduced by $70,000 after difficulties were encountered in negotiations between the purchaser and the landlord in respect of rent for the leased premises. 6. On 13 June 2018, the Pharmacy Council of New South Wales approved the sale and currently the settlement date for the sale of the company's business has been fixed for 28 June 2018. 7. On the assumption that the sale completes on that date, the current financial position of the company is estimated assets of $10,282,208.01 (which includes cash subject to the freezing orders obtained by the Commissioner of the AFP of $9,606,349.97) and estimated liabilities of $21,652,470.18.

Consideration

1. Two issues require determination. First, whether it is appropriate to grant declaratory relief. Second, whether the Court should order that the company be wound up.
2. There are two aspects of the first issue. One concerns the requirement of leave to proceed under s 471B. The requirement for leave under s 471B applies where, among others, a provisional liquidator of the company is acting. That is the present case. The proceeding concerns the identity of the shareholders of the company. While it is not a proceeding in relation to "property of the company", it is a proceeding "against the company" in which the company is joined as the second defendant and the declaratory relief is sought to bind not only the shareholders, but the company.
3. In my view, leave to proceed is required under s 471B. The provisional liquidators consent to the grant of leave and the relief sought by Mr Youssef. Given that consent and the application for declaratory relief will not interfere with the orderly administration of the provisional liquidation, it is appropriate to grant leave to proceed.
4. The other matter is whether it is appropriate for the Court to make a declaration, in effect, by consent.
5. In Australian Competition and Consumer Commission v MSY Technology Pty Ltd (2012) 201 FCR 378; [2012] FCAFC 56 (ACCC v MSY Technology), the Full Court of the Federal Court (Greenwood, Logan and Yates JJ), after referring to the speech of Lord Dunedin in Russian Commercial and Industrial Bank v British Bank for Foreign Trade Ltd [1921] 2 AC 438 at 448, cited in the judgment of Gibbs J in Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421 at 437-438, noted that Lord Dunedin explained that a proper contradictor was: "Some one presently existing who has a true interest to oppose the declaration sought". The Full Court continued at [14] observing: There is a difference between having an interest to oppose the granting of declaratory relief and, having that interest, choosing whether or not to oppose the granting of that relief.
6. After referring to the remarks of Dawson J in Oil Basins Ltd v Commonwealth of Australia (1993) 178 CLR 643 at 648-650, the Full Court concluded in ACCC v MSY Technology that it was sufficient for a party to be a "proper contradictor" if the party had a true interest in the plaintiff's claim even if the party came to see that interest served by not opposing the relief claimed: at [16]. In this regard, the Full Court referred to the remarks of French J in IMF (Australia) Ltd v Sons of Gwalia Ltd (Administrator Appointed) (2004) 211 ALR 231 at [47] and Lockhart J in Aussie Airlines Pty Ltd v Australian Airlines Ltd (1996) 68 FCR 406 at 414.
7. In the present case, Mr Zoghbi had an interest to oppose the declaratory relief sought by Mr Youssef. That was sufficient to make him a proper contradictor. Indeed, Mr Zoghbi appeared by counsel at an early stage in the proceeding. In any event, the Court has the benefit of the evidence of Mr Youssef in his affidavits sworn 22 November 2017 and 8 February 2018 which were read on the hearing on 18 May 2018. That evidence establishes the factual basis for Mr Youssef's contention that the agreement between Mr Zoghbi and himself was that they would be equal shareholders in the company and would make equal monetary contributions to the company.
8. I am satisfied that in addition to Mr Zoghbi's consent, Mr Youssef has demonstrated the factual basis underlying the declaration sought. It is appropriate in the circumstances to make a declaration in the terms consented to by the parties.

Should a winding-up order be made?

1. Mr Youssef seeks a winding-up order by the Court under s 461(1) of the Corporations Act. It is sufficient to address his reliance on the just and equitable ground: s 461(1)(k).
2. It is plain that there has been an irretrievable breakdown between the directors and shareholders of the company and that its affairs are deadlocked: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672; Nassar v Innovative Precasters Group Pty Ltd [2009] NSWSC 342; (2009) 71 ACSR 343 at [132] (Barrett J); Booker v You Run the Business Pty Ltd [2008] FCA 1762 at [11]-[13] (Finkelstein J). It is unnecessary to refer to the detail of that evidence.
3. In addition, given the sale of the pharmacy business by the provisional liquidators, the sub-stratum of the company has failed, and the report of Mr Frisken, one of the provisional liquidators, demonstrates that the company is plainly insolvent.
4. Mr Youssef seeks an order that the current provisional liquidators, Mr Daniel Frisken and Mr Maxwell Prentice be appointed liquidators of the company. They have each signed a Consent to Act. Given the work they have already undertaken as provisional liquidators, it is appropriate that they be appointed as liquidators.

Orders

1. The Court makes the following orders: 1. Grant leave pursuant to s 471B of the Corporations Act 2001 (Cth) for the plaintiff to proceed with the declaratory relief sought in par 1 of the originating process filed 22 November 2017 under the heading "Final relief sought". 2. Declare that the plaintiff and the first defendant each hold a 50 percent beneficial interest in the 180 issued shares in the second defendant. 3. The first defendant pay the plaintiff's costs of the proceedings on an ordinary basis as agreed or assessed. 4. Order pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth) that the second defendant, Pharmacy Depot Hurstville Pty Ltd (prov liqds apptd) ACN 163 892 939, be wound up. 5. Order that Daniel Frisken and Maxwell Prentice of BPS Recovery be appointed liquidators of the company. 6. That these orders be taken out forthwith.

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: 25 June 2018