Islam v Australian Real Estate Relation Pty Ltd [2023] NSWCA 47 | Case summary

Court of Appeal (NSW)|2023-03-20|Before: Gleeson JA, Black J

Background

Up until 30 November 2022, the company conducted the business of a licensed real estate agency at Ingleburn as a franchisee of Raine & Horne Real Estate. Each of Mr Islam and Mr Abu Ratul held 50 fully paid shares in the company and each were directors and secretaries of the company. Disputes arose between Mr Islam and Mr Ratul in mid-2022, as recorded by the primary judge at [4]-[9]. Mr Ratul commenced proceedings for the winding up of the company. Mr Islam brought separate proceedings against the company, Mr Ratul and his wife, Ms Diba, for monies allegedly owing to him. His Honour found that the relationship between the two directors/shareholders had irretrievably broken down, since at least 22 June 2022, and that the company no longer has the benefit of an established real estate franchise to support it: at [21]. The dispositive reasoning is contained at [26], which it is convenient to set out in full: I am satisfied that ARER commenced as a quasi-partnership or a business requiring mutual cooperation and a level of trust and the trust and confidence required in such a relationship has irretrievably broken down so that an order should be made for it to be wound up under s 461(1)(k) of the Act. I accept that Mr Ratul's conduct, and the level of payments to Ms Diba when there was no return to shareholders, has contributed to that breakdown, but Mr Islam's conduct in July 2022 and his unauthorised withdrawals from the trust accounts have also done so, and the conduct of both shareholders reinforces rather than diminishes the need for a winding up order. I am also comfortably satisfied that Mr Islam's dealings with ARER's trust accounts, which placed client funds at risk, give rise to a lack of confidence in the conduct and management of a company's affairs that warrants a winding up order.

Stay application

Mr Islam represented himself at trial and in this Court. The second and third respondents, Mr Ratul and his wife, Ms Diba (together the respondents), opposed the stay application.
The principles to be applied when exercising the Court's power to grant a stay pending an appeal or a proposed appeal, are well-known: Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 at 694-695 and Kalifair Pty Ltd v Digi-Tech (Australia) Ltd (2002) 55 NSWLR 737; [2002] NSWCA 383 at [17]-[20]. It is appropriate to consider first whether the proposed appeal raises a serious question to be tried, in the sense of arguable grounds, and if so, where the balance of convenience lies.
The proposed appeal against the winding up order requires leave: Supreme Court Act 1970 (NSW), s 101(2)(a). The draft notice of appeal is not particularly informative; it relies upon the following grounds: 1. The Court err by making findings and the drawing of inferences in the absence of evidence supporting winding up the company 2. There was no evidence in support a factual finding 3. The court erred in law in granting for an Order to commence winding up proceeding in respect of Australian Real Estate Relations Pty Limited Pty Ltd (A.C.N. 619 522 182) 4. The Court abused its discretion in awarding cost against Mr. Islam 5. The court erred in law when it dismissed Plaintiff's claims in relation to proceedings 2022/325554, and the order to pay cost of the proceedings
The draft notice of appeal does not state, briefly but specifically, the grounds relied upon in support of the appeal: Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r, 51.18(1). Nor does the draft notice of appeal specify, as required by r 51.18(2), any material facts that the applicant contends that the court below should, or should not, have found. As the respondents correctly submitted, grounds 1 and 2 fail to identify the finding or inference drawn by the Court which Mr Islam seeks to challenge. Grounds 3 and 4 are general in nature and do not identify any error. Ground 5 relates to dismissal of Mr Islam's separate money claim against the company, Mr Ratul and Ms Diba. This ground is not presently relevant.
These defects may not be fatal if there is reason to believe that the draft notice of appeal could be amended to state properly arguable grounds: Vaughan v Dawson [2008] NSWCA 169 at [22] (Campbell JA). This requires consideration on a broader basis of whether Mr Islam has shown a prospect of successfully obtaining leave to appeal and if leave is granted a prospect of succeeding in setting aside the winding up order. Adopting that approach here, I have considered the applicant's summary of argument.
Mr Islam's essential complaint is that the primary judge should have found under s 467(4) of the Corporations Act that the Mr Ratul was acting unreasonably in seeking to have the company wound up instead of pursuing some other remedy, which Mr Islam says is that Mr Ratul and Ms Diba should pay to Mr Islam "all outstanding payment which is equitably due to him". That submission conflates Mr Islam's challenge to the dismissal of his money claim against the company, Mr Ratul and Ms Diba with the question of whether the company should have been wound up.
Mr Islam also contends that Mr Ratul's purpose in seeking a winding up order was to avoid being liable for uncommercial transactions. However, he fails to identify any error in the primary judge's reasons for rejecting this submission at [30] because: … The evidence does not establish that is Mr Ratul's purpose in seeking a winding up, which is an appropriate order in the circumstances. There is no real risk such a "strategy" would succeed, where there is every reason to think that a liquidator would investigate and pursue claims for any material improper transactions, where recoveries would funds his or her remuneration and be available to meet claims of ARER's creditors and contributories, including Mr Ratul and Mr Islam. It is, of course, also open to Mr Islam to fund a liquidator's investigations as to those matters. …
Mr Islam further contends that the winding up order should not have been made in circumstances where the company was solvent. That ignores that if a company is solvent, whilst that may point against a winding up on the just and equitable ground, it is not a bar: Australian Securities and Investments Commission v AGKM Green Pty Ltd [2017] FCA 846 at [48]; Vasco Trustees Ltd (as Trustee of the IPO Wealth Fund) v IPO Wealth Holdings No 2 Pty [2020] VSC 733 at [64]. Here, there were additional considerations, including that the company had ceased operating its business and there was a public interest in protecting the interests of clients who had money in two trust accounts held by the company which had been the subject of unauthorised withdrawals, at least by Mr Islam, and on Mr Islam's case, also by Mr Ratul and Ms Diba.
Beyond stating that it seems to me that the proposed appeal is barely arguable, it is unnecessary to express a view on the merits of the appeal.
Turning to the issue of balance of convenience (or balance of hardship or prejudice), this requires a comparison of the positions the parties will respectfully occupy if a stay is granted, or a stay is refused.
As indicated, the company's franchise with Raine & Horne came to an end on 30 November 2022 and the company substantially ceased to operate on or about that date. There is evidence from the liquidator that the company's financial statements for the period ending 30 June 2022 record that the company was balance sheet insolvent as at that date; the book value of assets were recorded as $90,030.11 and liabilities were recorded as $405,730.08. Further, the company had accumulated losses to 30 June 2022 of $535,574.05 which included losses in the 2022 financial year of $133,644.85. The liquidator indicated that he does not presently have a view on the assets and liabilities of the company as at the date of his appointment.
Mr Islam gives several reasons why he wishes to stay the winding up order. One reason is that the company is solvent and "has a lot of profit" but has been portrayed as a company which is suffering losses by spending (by the respondents). Whether or not expenditure by the respondents, authorised or not, is the cause of the losses recorded in the company's financial statements, the company currently has no business. Nothing in the evidence before this Court supports the submission that the company is presently solvent: see [15] above.
Another reason is Mr Islam's desire that the company pursue claims which he considers the company has against Mr Ratul and Ms Diba. As his Honour found, the liquidator is best placed to assess any such claims and make decisions on behalf of the company as to whether to bring any claims and against whom: see [11] above. Further, there is nothing preventing Mr Islam from providing all relevant information in this regard to the liquidator.
Another reason is Mr Islam's desire that the company continue trading as a real estate agency. Mr Islam says that he has lost his business and has been left with nothing. Accepting that is the case, the loss of Mr Islam's investment in the company qua shareholder is not prejudice of the type to justify a stay of the winding up in circumstances where the company ceased to hold a Raine & Horne franchise at the end of November 2022 and also substantially ceased to operate at that time.
Given the evidence from the liquidator that the company was, at least, balance sheet insolvent as at 30 June 2022, and noting that the company currently has no operating business, if a stay of the winding up order was granted, it is inevitable that the company would need to be placed in some other form of external administration such as voluntary administration, or alternatively a provisional liquidator would need to be appointed. In either case, there is no evidence that the company would be able to resume trading as a real estate agency. That is a good reason to refuse a stay.
Further, as the primary judge observed, the deterioration of the company's position, as a result of the parties' conduct in the proceedings below, means that the shares in the company are now likely to have little value: at [8]. In these circumstances, there is little prospect of demonstrable prejudice to Mr Islam if the winding up order stays in place.
A final matter to be considered on the stay application is the nature of the judgment subject to the proposed appeal. The decision to wind up the company on the just and equitable ground involved an exercise of discretion by the primary judge. To the extent that his Honour's decision was based upon the breakdown in the relations between the two directors/shareholders and the finding that the conduct of both shareholders reinforced, rather than diminished the need for a winding up order, no error has been identified by Mr Islam. Nor has any error been identified insofar as his Honour's decision took into account the need to protect the interests of clients whose money was held in the two trust accounts of the company.
The balance of convenience favours the refusal of the stay application.

Conclusion

The application for a stay is refused because the proposed appeal is barely arguable and the balance of convenience favours maintaining the external administration of the company under the control of the liquidator pending the outcome of the application for leave to appeal, and the appeal itself, if leave is granted.

Orders

The Court makes the following orders: 1. Dismiss the applicant's notice of motion filed 6 March 2023. 2. Order that the applicant pay the second and third respondents' costs of the stay application.

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: 23 March 2023

Solicitors: Mitry Lawyers (Second and Third respondents) File Number(s): 2023/50407 Decision under appeal Court or tribunal: Supreme Court of New South Wales Jurisdiction: Equity Division - Corporations List Citation: [2023] NSWSC 78 Date of Decision: 10 February 2023 Before: Black J File Number(s): 2022/277860; 2022/325554

Islam v Australian Real Estate Relation Pty Ltd

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