Kang v JK Global Pty Ltd & Ors

Judgment 1By Notice of Motion dated 13 May 2013 the Plaintiff, Ms Seo Hee Kang ("Ms Kang") seeks elaborate interlocutory orders in respect of the first Defendant, JK Group Pty Limited ("Company"). In broad summary, those interlocutory orders would provide for each of Ms Kang on the one hand and the Second-Fourth Defendants on the other to nominate an individual to be a trustee of the shares of the Company, and for the trustees to continue to hold all of those shares on trust until further order of the Court. Ms Kang does not seek herself to be appointed as trustee. The orders would provide that no further shares are be issued by the Company. The trustees would be required to appoint two directors of the Company, with Ms Kang not to be a director, and day to day management of the Company would be conducted by those directors until further order, with each director to have an equal vote in management decisions but each director to be restrained from taking certain steps. Any distributions by the Company would then be made on an equal basis between the Plaintiff, on one hand, and the Second-Fourth Defendants on the other. 2The Defendants have, in a somewhat unusual manner, filed a Defence to the Notice of Motion. It appears that they do not agree to Ms Kang nominating a trustee on the basis that, they contend, she does not hold shares in the Company; they agree that no further shares in the Company are to be issued and they also agree to a restraint on disposal of the Company's assets and distributions, which has in any event previously been imposed by interlocutory orders made by Brereton J. They do not otherwise consent to the orders sought. I will return to several jurisdictional and discretionary issues raised by the orders once I have outlined the facts in issue in the application. 3Ms Kang relies on her affidavits dated 12 March, 16 May and 1 August 2013, the affidavit of Ms Kim dated 12 May 2013, and two affidavits of her solicitor, Mr Hong, dated 17 May and 31 July 2013. The Second-Fourth Defendants have each led evidence in opposition to the motion. The witnesses were not examined. While that is common in interlocutory applications, and usually appropriate, it has made it more difficult in this case to resolve significant conflicts of evidence between the witnesses in respect of the fundamental factual issues in dispute. 4In broad terms, Ms Kang's evidence, much of which is contested, is that she was appointed a director of the Company from 27 February 2012 to 7 March 2013. The Second Defendant, Mr Jung, is her husband and they are currently separated. Ms Kang contends that she and Mr Jung were shareholders of the Company since its incorporation on 27 February 2012. There was, surprisingly, no documentary evidence of perhaps the single most critical fact in the proceedings, namely that Ms Kang was a shareholder of the Company at its formation. There is at least a question as to Ms Kang's evidence that she was initially a shareholder in the Company, since a company search dated October 2012 appears to show Mr Jung as then holding the two ordinary shares in the Company. That search is prima facie evidence of the matters stated in it, by reason of s 1274 of the Corporations Act 2001 (Cth). As will emerge below, however, that provision is of little assistance in this case, because there are several ASIC searches at various times disclosing quite different positions. The Company was subsequently appointed as trustee of a trust, of which Ms Kang and Mr Jung are beneficiaries, and purchased a restaurant business at Strathfield in July 2012 in that capacity. 5On 28 December 2012, Mr Jung appears to have sold, or agreed to sell, forty-nine per cent of the shares in the Company to the Third Defendant, Mr Park, who is his brother-in-law. Ms Kang and Mr Jung separated in early January 2013 and it appears to be common ground she has not had a day-to-day role in the management of the business since late January 2013. 6Ms Kang in turn relies on a company search made on 1 March 2013 which shows her as a director of the Company and as holding three shares in the Company. That search is also prima facie evidence of the matters stated in it, by reason of s 1274 of the Corporations Act. However, as will emerge below, it is plain that there is a significant factual contest as to the circumstances in which those shares were issued to Ms Kang. 7A form 484 was subsequently lodged with the Australian Securities and Investments Commission on 7 March 2013 notifying that Ms Kang had been removed as a director of the Company and indicating that she held no shares in the Company. That form indicated Mr Jung's shareholding had increased by one share to three shares and that Mr Park now held two shares, and that Ms Kang's shareholding was decreased from three shares to no shares. Ms Kang's evidence is that she did not resign as a director and did not consent to the transfer of her shares in the Company. Mr Jung's evidence, to which I will refer below, is, in effect, that the form 484 corrected a false record of the allocation of shares to Ms Kang, which had purportedly been effected in October 2012. 8After the form 484 was lodged in March 2013, there was correspondence between Ms Kang's solicitor and the Company contesting the purported cancellation, for want of a better word, of Ms Kang's shares. Ms Kang gives evidence of a conversation with a friend of Mr Jung, although that friend does not himself give evidence, relating a conversation in which Mr Jung had told his friend that he and Mr Park could remove Ms Kang and cancel her shares without her signature and could forge that signature. 9On 10 March 2013, Mr Jung resigned as director and appointed the Fourth Defendant, his sister, Ms Baejung Jung, as director and transferred his three remaining shares in the Company to Ms Jung. 10Ms Kang, in turn, relies on the conversation said to have occurred with Mr Jung in March 2013 in which, she says, he admits making payments to a mutual fund from cash sales from the business and on a further conversation with Mr Park on 3 April 2013 in which, she says, Mr Park said that Mr Jung paid his rent from cash sales from the business. I interpolate that this conduct is said to have occurred after an interlocutory injunction had been granted by Brereton J restraining certain transactions in respect of the Company. Ms Kang did not contend, in terms, that that injunction had been breached, but raised a possibility that there was non-compliance with it. I must approach that question having regard to the serious implications of a finding of non compliance with an injunction, and having regards to the principles in Briginshaw v Briginshaw (1938) 60 CLR 336. Ms Kang also gives evidence that, in late April 2013, she was unable to access the restaurant's point of sale system or to access, at least initially, the restaurant itself, because she was locked out of the restaurant and the password to the point of sale system had been changed. 11Ms Kim gives evidence in her affidavit dated 12 May 2013 that in early April she had dinner at the restaurant and was asked to pay by cash rather than credit card because the restaurant's EFTPOS machine was out of order. Mr Holmes, who appeared for Ms Kang, rightly placed little weight on that evidence. Ms Kang does not seek to show that the explanation given by the restaurant staff member for that request was untrue. It is, of course, possible that that request would be consistent with seeking to obtain cash payments in order to divert revenue from the Company, but it is also possible that, as the staff member is said to have said, that request was made for the reason stated, namely that the EFTPOS machine was not then working. It is not possible to determine that question on an application of this kind. 12Ms Kang also expressed the view, which may or may not be correct, that Mr Park and Ms Jung do not have the capacity to manage the restaurant. That issue has, to some extent, been marginalised by subsequent evidence of Mr Park and Ms Jung that he and Ms Jung were, since May, no longer involved in the day to day management of the restaurant business and Mr Jung's role had been expanded. That evidence does, however, raise a further question, since they indicate that they "no longer partake in managing the business", leaving open the question of whether they are continuing to perform the duties of directors of the Company, which plainly requires a significant degree of oversight of that business. 13Ms Kang also points to inconsistencies in financial records provided to her by suppliers to the restaurant and records supplied by the Defendants, which would, on one view, be consistent with an understatement of the level of supplies to the restaurant and, by extension, an understatement of sales of the restaurant. However, there are also significant factual complexities in this regard. First, Ms Kang relies on a discrepancy between figures provided by a liquor supplier and those produced by the Defendants as to liquor purchases; Mr Jung responds that the restaurant was broken into twice in early 2013, computers were stolen and he has had to reconstruct the figures and accepts the accuracy of the liquor supplier's figures and, implicitly, the incorrectness of the liquor purchase figures which he had supplied to Ms Kang. Ms Kang also relies on a discrepancy between the figures provided by a meat supplier and figures supplied by the Defendants. Here the factual position is even more obscure, since it appears that Mr Jung and the meat supplier are in conflict for personal reasons (which were disclosed by the evidence but which I need not record) and that conflict has escalated to the point that charges have been laid by the New South Wales Police against the relevant employee of the meat supplier. In that situation, there is plainly at least a possible issue as to the accuracy of the figures supplied by the meat supplier, which is also not possible to resolve in this application. 14Ms Kang also pointed to a decline in sales of the restaurant between the three months to the end of December 2012 and the three months to March 2013; Mr Jung responds that sales were depreciated because of "malicious rumours" spread by Ms Kang and her attempt to initiate a boycott of the restaurant and, additionally, that the sales figures for the period to December were inflated because Ms Kang had suggested that course in order to sell the business at a higher price to give her more money after their separation. Once again, the factual contest as to this one matter is substantial, and it is not a contest of the kind that can be resolved at an interlocutory application, particularly in circumstances where neither of the proponents of the radically conflicting versions of events has been cross-examined. 15Next, Ms Kang relies on issues which she characterises as a failure to produce documents by the Defendants as required by orders made by the Court, although those issues appear to be properly characterised as a dispute as to production under an arrangement agreed between the parties as an alternative to production of documents on notice to produce or under subpoena, rather than as non-compliance with Court orders. I give little weight to that matter, since issues as to the adequacy of production of documents, whether under compulsory process or otherwise, can properly be addressed by the Court's usual processes and would not warrant orders of the kind sought by Ms Kang in any event. I also accept, and it is common ground, that Ms Kang remains a guarantor, with Mr Jung, of the restaurant's lease and I accept that she plainly has a significant interest in the restaurant's continuing performance for that reason. 16Mr Jung's evidence, on the other hand, is that he purchased the restaurant business and funded the purchase of provisions, the giving of a bank guarantee, renovation and installation costs for that business. He concedes that the restaurant business began with Ms Kang and him as "equal share partners" although he says the funds for the purchase came from him and loans he had secured. He claims to have subsequently reached agreement with Ms Kang that she would give up her half share in the business "in lieu of money she had misappropriated from earlier businesses in which she had been involved". He contends that Ms Kang subsequently forged his signature on minutes of a meeting and a share certificate for the issue of three shares to her in October 2012, so as to obtain the sixty per cent interest in the Company which she now claims to have been deprived of. I note that Ms Kang does not lead evidence in response to this quite significant allegation. Mr Jung also contends that he agreed with Ms Kang that forty-nine per cent of the restaurant would be sold to Mr Park, so as to fund a settlement with her following their separation, and claims that he paid her $250,000 in January 2013. 17Mr Park, who is Mr Jung's brother-in-law, gives evidence of purchasing his interest in the restaurant in January 2013, by a bank cheque and cash paid to Mr Jung; it appears the reference is to an acquisition of shares in the Company, rather than an acquisition of an interest in the business. His evidence is that his solicitor relied on information provided by the Company's accountants as to shares held by the Company which, as noted above, then showed Mr Jung as holding the two ordinary shares in the Company. Mr Park gives evidence of his shock on discovering, when he later sought to open a bank account for the Company, that Ms Kang was shown as holding sixty per cent of the shares in the Company. He, in turn, gives evidence that the Company's accountant had advised him that the accountant made the change to record Ms Kang as holding her shares because he had been informed by Ms Kang that that change was to occur, and that the accountant later provided access to permit the "redress" of that change in the ASIC records. 18Finally, by way of background, on 13 March 2013, Ms Kang sought, and Brereton J declined to grant, wider interlocutory relief in respect of the restaurant, but restrained the disposal of the Company's assets or the distribution of its profits subject to certain exceptions. 19In the context of this substantial factual dispute, Ms Kang seeks the complex interlocutory orders to which I referred earlier in my judgment. Mr Holmes, who appeared for her, drew my attention to principles governing oppression claims which are well established. I accept Ms Kang arguably has standing under s 234(c) of the Corporations Act to bring an application under ss 232-233 of the Act, since she is at least arguably a person who ceased to be a shareholder and the application relates to the circumstances in which that occurred. I say "arguably" because whether Ms Kang has ceased to be a shareholder depends on the anterior question whether she was a shareholder, which in turn depends upon the disputed question of the allocation of the shares to her in October 2012. 20Ms Kang relies on the Court's power to make orders modifying the Company's constitution under s 233(1)(b) of the Corporations Act, to regulate the conduct of the Company's affairs in the future under s 233(1)(c) and to order the purchase of shares under s 233(1)(f) of the Act. Ms Kang also relied on the Court's power to restrain conduct, on an interlocutory basis, under s 66 of the Supreme Court Act 1970 (NSW). I accept that power is available; indeed, it has already been exercised by Brereton J in this case in granting the interlocutory relief to which I referred above. Mr Holmes also referred to s 1324 of the Corporations Act, but the Court's power to grant an injunction under that section is directed to conduct in contravention of the Act, and the oppression provisions are directed to conduct which may not involve such a contravention and Ms Kang does not specifically allege such a contravention in this case. 21In any event, I accept the Court has power to grant interlocutory relief, by reason of s 66 of the Supreme Court Act. In determining whether such relief should be granted, I should apply the principles outlined by the High Court of Australia in Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57 at [65] which in turn reflect earlier authorities requiring that there be established a prima facie case or serious question to be tried in respect of the application, and also that the balance of convenience favours the grant of an injunction on an interlocutory basis, including by reference to the question whether damages would be an adequate remedy. The relevant principles are helpfully summarised in the judgment in Stratford Sun Ltd v OM Holdings [2011] FCA 414; (2011) 83 ACSR 84 at [7]ff. 22Mr Pierce, who appeared for the Defendants, properly accepted that a serious question to be tried existed at least in respect of the oppression case. That concession seems to me to have been correctly made. The existence of a serious question to be tried is the necessary consequence of the conflict in the witnesses' evidence and the conflicting information disclosed by the various searches conducted with ASIC. It also seems to me that there is a serious question to be tried as to whether Ms Kang held the shares which she claims to hold, and, if she held them, whether they were subsequently appropriated by lodging the Form 484 with ASIC purporting to record the reduction in her shareholding from three to nil. I therefore proceed on the basis that a serious question to be tried has been established, so as to support the grant of interlocutory relief. 23The real dispute between the parties was, however, whether the balance of convenience favoured the grant of such relief, at least in the form sought by Ms Kang. I accept the possibility that damages would not be an adequate remedy in this case, both because of the risk of failure of the business, to which Ms Kang refers and the possibility of cash diversion raised by the evidence. Nonetheless, I am not satisfied that the balance of convenience favours the grant of the interlocutory relief in the form sought. Mr Holmes properly conceded, in the course of submissions, that there were potential difficulties with at least some aspects of that relief and it seems to me that those difficulties are fundamental. 24First, the orders sought do not seem to me to preserve the status quo, but to significantly change it in Ms Kang's favour; that significant change would be substantially adverse to the Defendants, if it were ultimately determined at a final hearing, that in truth, Ms Kang had never held shares in the Company. 25Second, there are issues of principle and practicality in respect of the implementation of the orders sought. They contemplate the appointment of trustees to hold the shares in the Company, but the terms of the suggested trust are not identified. There are unanswered questions as to whether the trustees should be remunerated, and by whom; what are their duties, other than to appoint the suggested directors; and to what extent would they be liable for breach of them. 26Further, the proposed removal of the existing directors of the Company and the appointment of directors by the trustees, who had in turn been appointed by the Court, would have the further difficulty that those directors would neither be removed nor appointed by any mechanism contemplated by the Company's constitution, if it is in common form (noting that it is not in evidence) or by the Corporations Act. They would, if appointed in this way, potentially be de facto directors for the purposes of s 9 of the Corporations Act so at least to be subject to the statutory duties of care, skill and diligence, to exercise their duties for a proper purpose and in good faith and not to exercise their duties improperly imposed by ss 180-183 of the Corporations Act. However, the other provisions applicable to the usual conduct of directors of a business, particularly those arising under the Company's constitution, might well not be applicable or not clearly applicable to them. 27I recognise that that particular difficulty, namely of an appointment outside the established structure of the constitution and the Corporations Act, could perhaps be avoided by adopting a different mechanism, for example by an interlocutory order that required the existing shareholders - putting aside, for a moment, the unresolved question as to who they are - to remove the existing directors and replace them with new directors, adopting the procedures established by the Company's constitution and the Corporations Act for that course. However, I am not persuaded that an order in that form, even if it were sought, would be a proper exercise of the Court's discretion on an interlocutory basis, particularly where the potential appointees as directors are not identified; their suitability for appointment is not established, and there is no particular reason to think that persons appointed by the Plaintiff and the Defendants respectively would not be in conflict or deadlock, so as to give rise to further difficulties in respect of the conduct of the restaurant's business. 28It may be that these circumstances would, if a winding up order was sought in respect of the Company, permit the appointment of a provisional liquidator, who would be an insolvency practitioner with appropriate qualifications and experience, and with the capacity to seek to maintain an independent position between the parties in contest. Ms Kang did not seek such an appointment, and there may be very good reasons for her not to take that course, since it may well be that the restaurant business in issue, first, could not support the costs of appointment of a provisional liquidator and, second, would be unable to conduct its business if such an appointment were made, where that business depends upon those who presently have ownership of the business working within it. In any event, such an order was not sought, and I am satisfied that I cannot properly make the orders which were sought by Ms Kang. The Plaintiff's notice of motion dated 13 May 2013 should therefore be dismissed. 29It remains to address three additional matters. First, it was common ground between the parties that there is an error in naming the first Defendant, the Company, when the proceedings were commenced, and the reference in the name of the proceedings to "JK Global Pty Limited" should instead be to "JK Group Pty Limited". I order that the title of the proceedings be corrected accordingly. 30Second, I will hear the parties as to costs. Third, at the time of reserving my judgment, I expressed concern that, as with many oppression cases in respect of small businesses, the longer these proceedings lasted, the less likely it was that the business which was their subject matter would exist by the time they came to a final hearing. I invited the parties to consider whether there was scope for making directions which would allow an early hearing date to be allocated, so as to at least mitigate, if not entirely avoid, the risk that the business in issue would collapse under the weight of the parties' disputes about it. 31Having heard the parties in respect of costs of the application, Mr Pierce fairly concedes that the Defence filed by the Defendants to the Notice of Motion identified the costs order that was being sought as costs in the cause. However, not surprisingly in the circumstances, the Defendants seek their costs of the application. Mr Holmes places some weight upon the Defendants' identification of their position in that Defence, although he does not, and probably could not, contend that the Plaintiff has been prejudiced by that matter, since it seems highly unlikely that she would have taken a different course had it been suggested that the Defendants might seek their costs if she were unsuccessful in this application. Mr Holmes rightly points out that the factual contest between the parties is such that it is impossible to predict who will succeed, at a final hearing, in establishing that their version of the disputed facts is correct. While I accept that submission, it does not seem to me that it follows that costs should not be ordered in favour of the Defendants in this application. 32The application was a discrete application; it has taken a significant amount of time; and the orders sought were, in my view, orders which were of a kind that would be, at best, difficult to obtain in an application of this kind. In these circumstances, a finding at a hearing that Ms Kang ultimately establishes the other matters for which she contends in the proceedings would not, in fact, have made it more likely that she would succeed in the application today. She would still fail in the application today, because the orders sought were not orders which the Court could properly make an interlocutory level, given the difficulties of their structure to which I have referred. For these reasons I consider that the proper course is that the Plaintiff pay the Defendants' costs of today, as agreed or assessed.