Khamo v XL Cleaning Services Pty Ltd [2004] NSWSC 1134 | Case summary

1 The plaintiff, Mr Khamo, is a shareholder in XL Cleaning Services Pty Ltd. In that capacity, he seeks an order for the winding up of that company on the just and equitable ground under s.461(1)(k) of the Corporations Act 2001 (Cth). His standing to make this application is conferred by s.462(2)(c). 2 XL Cleaning was formed in October 2002. There were two shareholders, each holding one share, namely, the plaintiff and the second defendant, Mr Jung. They were also the only directors. Each of them already had an established cleaning business. The plaintiff's business was UEC. The second defendant's business was Jichy. Each serviced Coles Myer stores. In 2001 the principals came to know one another through that connection and later decided that it would be advantageous for them to join forces, particularly when Coles Myer decided to rationalise its cleaning contractor arrangements. 3 Each of the principals now appears to have a different understanding of the arrangement they agreed to pursue through XL Cleaning. They agree that it was to be a 50/50 arrangement, but what that was intended to mean is unclear. The two existing cleaning businesses continue, but under the umbrella of XL Cleaning, in the sense that it is XL Cleaning that deals with Coles Myer, but the separate businesses actually provide cleaning services as, apparently, sub-contractors to XL Cleaning. As far as the evidence shows, no written agreement covering this loose arrangement was brought into existence. 4 The plaintiff's wife, Maria Eleftheriades, worked on the administrative side of the business as did the wife's sister, Simoney. The second defendant says, however, that did he not agree to Ms Eleftheriades's involvement and was concerned when he saw that she had been nominated as a contact person for Coles Myer. By mid 2003 the plaintiff and Ms Eleftheriades had developed a concern that better bookkeeping was needed. They say that the second defendant agreed to do the bookkeeping, but they were worried that quarterly BAS returns were not being attended to. 5 Some time in October 2003, the plaintiff and Ms Eleftheriades were presented with some accounting documents by the second defendant. The plaintiff disagreed with the figures. Although Jichy (the second defendant's business) was doing about 70 per cent of the work undertaken by XL Cleaning, GST expenses were being shared 50/50; also, Simoney's salary was being charged to UEC not to XL Cleaning. The plaintiff regarded these matters as out of line with the parties' 50/50 arrangement. He took them up with the second defendant who said that he would look into them. But, according to the plaintiff, nothing was done. 6 The plaintiff says that he later became concerned about the quality of Jichy work being done under the XL Cleaning banner. There were also concerns about Jichy's employing people without appropriate visas. By February 2004, Ms Eleftheriades had received complaints, she says, from Coles Myer about the quality of work for which the second defendant (or Jichy) was responsible. It became necessary, according to the plaintiff's case, for the plaintiff to take over some Coles Myer sites that had been serviced by Jichy. In March 2004, the plaintiff raised the possibility of the parties going their separate ways, he says. This led to a meeting at which plans for improvement were made, including by way of setting a salary for Ms Eleftheriades. 7 According to the plaintiff, the second defendant eventually said he could not find anyone to fill Ms Eleftheriades's position at under $130,000 per annum. The plaintiff says he suggested that Ms Eleftheriades instead have a share in the company and that the second defendant agreed to this. The second defendant denies this version of events. He says that he never agreed to Ms Eleftheriades being a shareholder. He also says that Ms Eleftheriades was held out to Coles Myer as managing director of XL Cleaning without his knowledge or consent. The plaintiff says he continued to be worried about not having an accountant and that he also wanted to tie down an arrangement about Simoney's wages. There was a continuing concern about the second defendant not applying himself sufficiently to the business. In April 2004, according to the plaintiff's evidence, the plaintiff and Ms Eleftheriades spoke to Coles Myer about splitting the cleaning contract between UEC and Jichy, so making XL Cleaning redundant. 8 In May 2004, the plaintiff and Ms Eleftheriades went to see their own accountant about Ms Eleftheriades becoming a shareholder in XL Cleaning. Ms Eleftheriades, as I have said, was apparently represented as being the managing director. The accountant conducted a search of ASIC records over the internet and told them that Ms Eleftheriades was not recorded as a director. According to their evidence, they told the accountant that the second defendant had agreed to Ms Eleftheriades's receiving a share in the company instead of a salary. They said that the accountant asked whether a meeting had been minuted dealing with this, that Ms Eleftheriades said they never had minutes, and that the accountant said that minutes were usual and then someone goes to ASIC and signs a form, but if the company was run on a verbal basis, then only the form is needed. The plaintiff and Ms Eleftheriades say that they went to ASIC on 11 May and filled out forms which they thought would record Ms Eleftheriades as a director and the holder of one share in XL Cleaning. 9 On or about 13 May, the plaintiff received an e-mail from Coles Myer requesting the removal of the second defendant from one of the cleaning sites. There was later a speaker phone conversation between the plaintiff, Ms Eleftheriades, and the second defendant at one end and the relevant Coles Myer officer at the other. The Coles Myer officer, according to the plaintiff's evidence, was insistent that changes be made and said he was sick of excuses. 10 Toward the end of May, the second defendant found that Ms Eleftheriades had been recorded at ASIC as a director and shareholder of XL Cleaning. A lawyer for the second defendant demanded at a meeting also attended by the second defendant that this be reversed within two days or litigation would follow. The second defendant says that the plaintiff and Ms Eleftheriades agreed to comply but failed to do so. Proceedings separate from these winding up proceedings were commenced on 23 August. 11 According to the plaintiff, the second defendant took files from Simoney's computer without her knowledge, after which a password was installed at the instigation of the plaintiff. The second defendant and his wife demanded that Simoney give them the password. The second defendant says it was not her computer but the company's and that the password had been put on to block him. 12 The plaintiff refers to moves made unilaterally by the second defendant to prevent access to XL Cleaning's bank accounts through internet banking. The plaintiff says that the second defendant also instructed the bank that only cheques with two signatures were to be honoured. The second defendant says that in June all the company's records and cheque books were removed from the office without his knowledge or consent. Early in July, the plaintiff acknowledged in an e-mail to the second defendant that he had had Simoney bring him the cheque book. 13 Evidence filed for the plaintiff is to the effect that, in late June, Coles Myer phoned Ms Eleftheriades to demand that the second defendant leave a Coles Myer site at Mona Vale. At about the same time, the plaintiff and Ms Eleftheriades could not get into the XL Cleaning office because the lock had been changed. The next day, the second defendant gave the plaintiff a set of keys. Some cheques were signed by both of them in strained circumstances. The plaintiff was later told that the cheques had been dishonoured because a stop had been put on them. New cheques were signed by both signatories a few days later. Payment of sub-contractors and creditors became erratic. Ms Eleftheriades made some attempt to engage the assistance of Coles Myer in having the second defendant attend to signing of cheques, but Coles Myer understandably declined to become involved in the internal dispute. 14 Things deteriorated from there to a situation of impasse. The second defendant purported to terminate Simoney's employment. The second defendant renewed his demands for Ms Eleftheriades to relinquish any claim to be a director or shareholder. At some point, it emerged that Ms Eleftheriades had been recorded at ASIC as the holder of three shares, not one. 15 In August 2004, the plaintiff sought as best he could to have a firm of accountants prepare accounts and sent that firm the records he had. It was said that there were at that point five quarterly business activity statements for GST outstanding and in need of urgent preparation. 16 There was continuing wrangling about the signing of cheques. Creditors were going unpaid. A system was introduced under which cheques were written and left in the office to be signed by each signatory separately when he went there. There were suggestions that one feared that he might sign cheques relevant to business attended to by the other, but that the other would not sign cheques relevant to business attended to by the first. The impression created is that there was a race to be the second signatory. Eventually, solicitors' letters became the medium through which arrangements were made for the payment of creditors. The solicitors' correspondence was also the means by the which the parties attempted to agree on the choice of an external accountant. 17 The plaintiff did eventually have an external accountant prepare some draft accounts for XL Cleaning for year ended 30 June 2004. One draft was prepared on 10 November. It shows current assets of $413,000 and current liabilities of $174,000 at 30 June 2004, as well as an operating profit before the for the year ended 30 June 2004. The current liabilities include $18,933 for trade creditors and a shareholder loan of $64. On 15 November the accountant produced a second draft which showed current assets still at $413,000 but the current liabilities increased to $428,000 reflecting an increase in trade creditors from $18,933 to $410,837. In the first draft there was a provision for income tax of $102,000 and provision for GST of $41,000. In the second draft the provision for income tax disappeared and the provision for GST reduced to $5,990. 18 These drafts, of course, could only reflect information given to the accountants. In light of the fact that the accountants were retained by the plaintiff, I infer that the information came from the plaintiff. On 16 November, the day after the second draft of the accounts was prepared, the plaintiff had an e-mail from the second defendant referring to an accrued liability of $51,592 for GST exclusive of "the first quarter this year". The e-mail said that, in order to accommodate that payment and other XL expenses "which need to be paid as they fall due, we must both deduct $35,000 each from our respective Jichy and UEC invoice amounts". This e-mail from the second defendant was in response to one from the plaintiff in which he asked the second defendant to send to the accountants who had prepared the draft accounts the XL Cleaning bank statements and cheque butts as well as all invoices and receipts for XL Cleaning. This request obviously referred to items not in the possession of the plaintiff. The second defendant did not mention that request in his reply which only referred to the need for Jichy and UEC to forgo or defer part of the amounts due to them. 19 The second defendant has accused the plaintiff of "habitual dishonesty", "constant deceit", "immoral actions" and of having abused his position by using "illegal means" to "cheat me from my shares and position". The second defendant has also referred to "hypocrisy" and "unprofessional behaviour". The plaintiff's solicitors on 26 August wrote to the second defendant's solicitors saying among other things "our client has lost all confidence in your client". 20 I have referred briefly to the separate proceedings commenced by the second defendant on 23 August 2004. The defendants in these proceedings are the present plaintiff, Ms Eleftheriades, and XL Cleaning. An appearance has been filed by each of the first two. The second defendant seeks in those proceedings declarations that Ms Eleftheriades is not a director or shareholder of XL Cleaning and orders that her appointment as a director and the allotment of shares to her be "set aside". The action is listed for hearing on 8 March 2005. 21 The second defendant's position in the winding up proceedings with which I am currently dealing is that the disagreements between the plaintiff and the second defendant only really began when the second defendant found out about what had been done ostensibly by way of introducing Ms Eleftheriades as a director and shareholder of XL Cleaning. It was that which acted as a catalyst in producing disharmony. It was in late May 2004 that the second defendant found out about Ms Eleftheriades's introduction in the company. But it seems clear that dissatisfaction and disharmony had existed for some months before that. The second defendant says that this winding up application should not be entertained until the proceedings challenging Ms Eleftheriades's position have been determined. Only then, says the second defendant, will there be a proper definition of the issues relevant to the winding up application. 22 I do not see matters that way. One possible outcome in the other proceedings (and the one that, on the surface at least, looks less likely) is that Ms Eleftheriades will be found to have been regularly and properly installed as a director and shareholder. If that is the result, there will have been what the second defendant regards as a fundamental shift from the basis on which he entered into what was effectively a 50/50 partnership with the plaintiff. The alternative outcome is that Ms Eleftheriades will be found not to be properly installed. In that event, the plaintiff will be of the view that the second defendant has gone back on an agreement which the plaintiff says is vital to the proper conduct of the business in which Ms Eleftheriades is represented to be the managing director. Either way, therefore, the other proceedings are not going to do anything to smooth relationships between the plaintiff and the second defendant in such a way as to enable them to work constructively together. One of them will be left with a heightened resentment against the other. 23 This company was conceived as a 50/50 partnership in corporate form. The parties made the mistake of not recording clearly their common understanding of the commercial terms. It may be that at the beginning, as now, they were at odds on precisely what a 50/50 partnership meant in the context of their preexisting circumstances. The principals are now in a position where simple but fundamental business matters such as drawing and signing cheques and paying creditors can only be achieved through solicitors' correspondence. The second defendant has used strong language in questioning the honesty and integrity of the plaintiff. The plaintiff in turn thinks that the second defendant has not pulled his weight and by inattention to the company's business has caused Coles Myer, the pivotal customer, to become dissatisfied, and that has thereby put the company's goodwill in jeopardy. He has lost confidence in the second defendant. 24 There are claims and counter claims about removing files from computers, installing a computer password to block access, taking away cheque books and bank statements and installing new locks on the company's office. GST returns have fallen into arrears. It has not been possible to agree on a selection of external accountants. One side has had accountants prepare two sets of draft accounts which show very substantially very different current assets and current liabilities positions and nothing or virtually nothing by way of shareholder loans, even though I understand both sides to say that there are such loans. The draft accounts have obviously been prepared without access to all necessary sourced materials and are in a real sense worthless. I say this without intending any disrespect to the accountants. 25 This company is within category (i) referred to by Lord Wilberforce in Embrahimi v Westbourne Galleries Ltd [1973] 1973 AC 360, that is, a company based on "an association formed or continued on the basis of a personal relationship involving mutual confidence." This is, therefore, a case in which equitable considerations of the kind to which his Lordship referred come into play, "considerations, that is, of a personal character arising between one individual and another which may make it unjust or inequitable to insist on legal rights or to exercise them in a particular way." 26 The relationship between the plaintiff and the second defendant has suffered a form of irretrievable breakdown. There is mutual disillusionment and distrust. They communicate only through solicitors. They cannot even sign cheques to pay routine creditors without the intervention of the solicitors. The major client, Coles Myer, understandably will not become involved in the internal dispute and is dissatisfied not only with the uncertainties those disputes involve but also with the standard of some of the work being done. The judgment of the Master of the Rolls, Lord Cozens-Hardy, in Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426 might almost have been written about this company and its principals. In that case, competing tobacco manufacturers had agreed to pool their resources through a corporate structure on the basis of equal shareholdings. They fell into dispute over whether an employee had been properly terminated. There was a determination of that issue which inflamed rather than settled the disputation. One party sued the other saying, in effect, that he did not bring to the joint venture what he had promised to bring. The parties were no longer on speaking terms. Communications they should have had with one another were routed through a third party. After describing these circumstances, the Master of the Rolls continued (at pp.431-2): "It is proved that these two directors are not on speaking terms, that the so-called meetings of the board of directors have been almost a farce or comedy, the directors will not speak to each other on the board, and some third person has to convey communications between them which ought to go directly from one to the other. Is it possible to say that it is not just and equitable that that state of things should not be allowed to continue, and that the Court should not intervene and say this is not what the parties contemplated by the arrangement in which they entered? They assumed, and it is the foundation of the whole of the agreement that was made, that the two would act as reasonable men with reasonable courtesy and reasonable conduct in every way towards each other, and arbitration was only to be resorted to with regard to some particular dispute between the directors which could not be determined in any other way. Certainly, having regard to the fact that the only two directors will not speak to each other, and no business which deserves the name of business in the affairs of the company can be carried on, I think the company should not be allowed to continued. I have treated it as a partnership, and under the Partnership Act of course the application for a dissolution would take the form of an action; but this is not a partnership strictly, it is not a case in which it can be dissolved by action. But ought not precisely the same principles to apply to a case like this where in substance it is a partnership in the form or the guise of a private company? It is a private company, and there is no way to put an end to the state of things which now exists except by means of a compulsory order. It has been urged upon us that, although it is admitted that the 'just and equitable' clause is not to be limited to cases ejusdem generis, it has nevertheless been held, according to the authorities, not to apply except where the sub-stratum of the company has gone or where there is a complete deadlock. Those are the two instances which are given, but I should be very sorry, so far as my individual opinion goes, to hold that they are strictly the limits of the 'just and equitable' clause as found in the Companies Act. I think that in a case like this we are bound to say that circumstances which would justify the winding up of a partnership between these two by action are circumstances which should induce the Court to exercise its jurisdiction under the just and equitable clause and to wind up the company." 27 Those observations apply here with equal force. There is deadlock, mutual distrust and a complete breakdown in communication and relationships which make the company unable to function in its current configuration. It is unnecessary to seek to apportion blame. Both participants have contributed to the present situation. 28 The case for winding up on the just equitable ground has been made out. Although the plaintiff's case was opened on the basis that insolvency would also be relied on, that was not pressed and I am not at all satisfied that insolvency has been shown. 29 In these proceedings, 5307/04, I make the following orders: 1. Order that XL Cleaning Services Pty Ltd be wound up on the ground stated in s.461(1)(k) of the Corporations Act. 2. Order that Christopher John Palmer, whose consent to act has been filed, be appointed liquidator of XL Cleaning Services Pty Ltd. 3. Order that the plaintiff's costs of the application to wind up be dealt with in accordance with ss.466(2) and 556(1)(b) of the Corporations Act . 30 In the other proceedings, 4637/04, I vacate the hearing date of 8 March 2005. I direct that the matter be placed in the Registrar's call-over on 15 June 2005. **********

Khamo v XL Cleaning Services Pty Ltd

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Judgment (7 paragraphs)

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