HIS HONOUR: Pursuant to an originating process filed on 22 April 2016 and amended on 5 May 2016, the plaintiff Louise Thomson, as trustee in bankruptcy of Leslie James Young, and in that capacity the holder of 6 of the 12 issued shares in the second defendant company Smith & Young Pty Ltd, seeks an order that the company be wound up on the just and equitable ground. The first defendant Josephine Aapa Smith is the other equal shareholder and the sole director of the company. The company was the registered proprietor of three parcels of real estate at Wiley Park subject to a mortgage. It appears that that land has been sold, and the proceeds preserved.
The company is the trustee of two trusts: the Josephine Aapa Smith Family Trust and the Leslie Young Family Trust. I am satisfied that it was incorporated for the purpose of acting as trustee of those trusts, and that since its incorporation, its only function has been in the capacity of trustee and that it holds all of its assets and has incurred all of its liabilities as such trustee.
The trust deeds of each of the trusts, which are in identical terms, provide by cl 21.3 that the trustee is deemed automatically to be removed if, inter alia, it is wound up. The consequence of the matters to which I have so far referred include that, because the company has no property of which it is the beneficial owner and holds all of its property upon trust, there will be no property available for distribution to the contributories, and accordingly no apparent benefit in a winding-up for the plaintiff, who stands in the shoes of a contributory. Conversely, if the winding-up order she seeks is made, then the company will cease to be the trustee of the trusts, and to that extent the plaintiff will be one step further removed from the Leslie Young Trust, in which she might otherwise have some interest (given that Mr Young was the appointor of that trust, at least until his bankruptcy, and is the primary beneficiary of that trust).
Further, there appears to be no detriment to the trusts, or to the first defendant Ms Smith, in the making of a winding-up order, as the effect would simply be that the company would cease to be trustee, and she (and whoever is or becomes appointor of the Leslie Young Trust) would then be able to appoint a replacement trustee who has no relationship or connection with the trustee in bankruptcy.
These considerations all suggest that there is no benefit for the plaintiff in pursuing a winding-up order, and no benefit for the defendant in resisting one. Despite that, for whatever mysterious reasons, the plaintiff does pursue a winding-up order and the defendant resists one. One consequence of the defendant's resistance, if successful, is that the trustee in bankruptcy will remain involved in the administration of the trusts as a shareholder in the trustee company. Should the trustee be wound up, that would no longer be the case.
I of course appreciate that, by operation of (CTH) Corporations Act 2001, s 467(5), the mere reason that no return will be available for contributories is not a ground upon which a winding-up on the just and equitable ground can be refused. That section brings to an end the earlier line of authority under which it was necessary for a contributory to show that there would be a surplus available on winding-up, in order to justify a winding-up on the just and equitable ground.
However, all s 467(5) does is to provide that the absence of property available for distribution to contributories is not of itself a ground to refuse a winding up. It is still necessary for a plaintiff to show that it is just and equitable that the company be wound up. In this case, the plaintiff essentially argued that the relationship between the shareholders was unworkable in the context of a closely-held company, and that she ought to be able to realise the bankrupt's investment and exit the company.
Corporations Act, s 461(1)(k), provides that the Court may order that a company be wound up if it is of the opinion that it is just and equitable to do so. Although the "just and equitable" concept is a broad one, incapable of exhaustive definition, conventionally, the decided cases are recognised to fall into a number of classes which include, first, failure of the substratum of the company; secondly, deadlock or disagreement in the management of the company's affairs; thirdly, fraud in the formation of the company; fourthly, misconduct by the directors of the company; fifthly, constitutional and administrative vacuum in the management of the company; and finally, lack of confidence, public interest and commercial morality. However, the Court is not restricted in exercising its discretion to particular factual categories, [1] and the question of whether it is just and equitable is a question of fact, in respect of which each case must depend on its own circumstances. [2] The words "just and equitable" are general words which must remain general, and an applicant is entitled to rely on any circumstances of justice and equity that affects him or her in his or her relations with the company or shareholdings, [3] at least so long as those circumstances have a direct and immediate relationship to or bearing upon the management or administration of the affairs of the subject company or the conduct of its business. [4]
In International Hospitality Concepts Pty Ltd v National Marketing Concepts (No 2)(1994) 13 ACSR 368, Young J (as he then was) referred to what his Honour described as "a good analysis of the just and equitable ground for winding up", to be found in an article written by McPherson JA when at the bar, in "Winding up on the just and equitable ground" [5] :
His Honour then said and what he said remains true today, that "The situations in which orders will be made on the ground that it is just and equitable may be reduced fundamentally to three in all. They are as follows: (1) Where initially it is, or later becomes, impossible to achieve the objects for which the company was formed; (2) Where it has become impossible to carry on the business of the company; and (3) Where there has been serious fraud, misconduct or oppression in regards to the affairs of the company". The reason for restricting the remedy to these three broad heads is that the basic purpose of forming a limited liability company is that the quasi partners contribute their money to a venture and commit their funds to the venture without power of withdrawal unless and until the venture comes to a frustrating event.
The third of McPherson JA's heads was dealt with in Loch v John Blackwood Ltd at 788, where Lord Shaw, giving the judgment of the Privy Council said: "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 statutes just and equitable that the company be wound up."
Thus, the mere subjective failure of confidence even by the majority in the minority is insufficient to found a winding-up order on the just and equitable ground. One reason for that is that a voluntary winding-up requires a special resolution, not a simple majority, and thus the decision of a bare majority that it wishes to bring the company's function and business to an end and extract its investment is an insufficient basis.
In this case, the plaintiff has become registered as a shareholder because she is the trustee in bankruptcy of the former equal shareholder Mr Young. Her rights can rise no higher than those of Mr Young, whose shares were transmitted to her. Ms Smith is the sole director of the company. So far as I can tell, there is no evidence of any current impasse, or at least any irreconcilable impasse, in the management of the company. Indeed, there is no evidence that any corporate decision has had to be made but has not been able to be made, or otherwise of deadlock in respect of any decision in the management of the company. Although in a letter of 16 April this year, shortly before proceedings were commenced, the plaintiff demanded that she be appointed a director and sole director, and that Ms Smith resign, no basis upon which that was a reasonable demand has been demonstrated, and the Court is in any event now informed that the plaintiff does not wish to be a director. The plaintiff has submitted that the relationship between her and Ms Smith is adversarial. Certainly in these proceedings it is. The plaintiff has pointed to other litigation in which Ms Smith has been involved, but so far as I can ascertain, at least from the limited material before this Court, the plaintiff was not herself a party to those proceedings, although Mr Young was at least at some stage a party to some of them. But even if there is an "adversarial relationship" between them, that does not of itself establish the just and equitable ground. As I have said, even if Ms Thomson were the majority shareholder, loss of confidence on her part in the minority would not of itself establish a ground for winding up.
It was consistently argued that this was a case of a quasi‑partnership founded on personal confidence between the corporators. Even if that were so as between Mr Young and Ms Smith, it cannot be suggested that there has ever been any substratum of personal confidence between the plaintiff and Ms Smith. If the replacement of Mr Young by the plaintiff as a shareholder frustrated Ms Smith's expectations and assumptions so far as personal confidence was concerned, then that might conceivably have provided a ground on which Ms Smith could apply for the winding-up of the company. But the plaintiff assumed her shareholding - as she was entitled to - without any assumption or expectation that her relationship with the other shareholder would be one of personal confidence. There has never been a relationship of confidence between the plaintiff and Ms Smith, and in those circumstances, the absence of such relationship does not provide a ground for winding-up.
Moreover, there is no evidence that there are any restrictions on the transferability of shares in the company. It might be thought, or even inferred, in the context of a proprietary company that there would be some restrictions on transfer; but no evidence to that effect has been adduced. Nor has any evidence been adduced that the director would refuse to register a transfer to a suitable purchaser. Nor has any evidence been adduced that any endeavour has been made to negotiate a sale of the shares to Ms Smith, who is an obvious potential purchaser.
There is no evidence of any acts of the director, particularly since the plaintiff became a shareholder, which would provide an objective basis for a lack of confidence in her as a director. There are references in the evidence, of an inadmissible kind, to observations said to have been made by other judges in other proceedings, but objection was rightly taken to them and they were rejected, and there is no evidence before me of anything adverse to Ms Smith in that respect.
Fundamentally, the purpose of these proceedings was, as the plaintiff deposed, to have a liquidator appointed, the assets realised, the creditors paid, and any surplus distributed amongst the shareholders. But as has been clear, from at least very soon after the institution of the proceedings, because the company does not hold assets beneficially but only upon trust, there will never be any assets available for division amongst the shareholders. Shorn of that, if the plaintiff's position is that she wishes to exit this company and not remain in a relationship with Ms Smith through it, then her remedy is to sell the shares, realising them for whatever they are worth. But it is not to proceed, at least on the evidence currently before the Court, to a winding-up.
Accordingly, I am not satisfied that the just and equitable ground has been made good.
The Court therefore orders that the originating process be dismissed with costs. The Court further orders that the defendants are released from this day from the undertaking given to the Court on 6 May 2016.
[3]
Endnotes
See Re Straw Products Pty Ltd 1942 VLR 222 at 223
See Re Bleriot Aircraft Co Manufacturing Limited (1916) 32 TLR 253 at 255
See Re Ebrahimi Galleries Ltd [1973] AC 360 at 370
See Re Nestor [1981] ALR 114 at 119; Catombal Investments Pty Ltd [2012] NSWSC 775 at [19]-[20].
See generally Wedderburn, 'Winding Up on the 'Just and Equitable' Ground' (1964) 27 MLR 228
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: 27 June 2018