Maine v Chelia

Corporations Act 2001 (Cth), ss 232, 233 LEGISLATION CITED : Spam Act 2003 (Cth)

Atwood v Maude (1868) 3 Ch App 369 Bernhardt v Beau Rivage Pty Ltd (1989) 15 ACLR 160 Desktop Marketing Systems Pty Ltd v Telstra Corporation Ltd [2002] FCAFC 112 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 CASES CITED : Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478 Lyon v Tweddell (1881) 17 Ch D 529 O'Neill v Phillips [1999] 1 WLR 1092 Rigden v Pierce (1822) 6 Madd 353; 56 ER 1126 Taylor v Neate (1888) 39 Ch D 538

Anthony Leonard Maine (P1) Newsnet.com Pty Limited (P2) Coomar Chelia (D1) PARTIES : Indrajit Solomon Arulampalam (D2) Jardine Thompson Pty Limited (D3) Digital Messaging Solutions Pty Limited (D4)

G Lucarelli (P) COUNSEL : B Goldsmith (S) (D)

Landerer & Company (P) SOLICITORS : Goldsmiths Lawyers (D)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2352/05 - MAINE v CHELIA JUDGMENT 1 HIS HONOUR: Basically this is an oppression suit between shareholders in Digital Messaging Solutions Pty Ltd ("DMS"). The 10,000 issued shares of 10 cents each in DMS are held as to 4,500 shares by the second plaintiff Newsnet.com Pty Ltd ("Newsnet"), 2,125 shares by the first defendant Coomar Chelia ("Mr Chelia"), a further 2,125 shares by a company associated with Mr Chelia and 1,250 shares by a company associated with the second defendant, Indrajit Solomon Arulampalam ("D2"). Newsnet is a company held by Anthony and Peter Maine and Anthony Maine's former wife Judith. Thus the plaintiff Anthony Maine and his associates hold 45% of the shares in DMS and the defendants and those associated with them, 55%. 2 This case was heard concurrently with 2351/05 in which DMS was the plaintiff and Newsnet and Messrs Maine were defendants. That suit was to determine the ownership of certain domain names and business names. Its fate falls to be determined by the outcome of the present proceedings. Accordingly, I will proceed to decide the present proceedings and then stand the matter over for short minutes so that short minutes may be brought in for both matters. 3 DMS is a corporate vehicle for a joint venture between the Maines and Mr Chelia and his associates. The statement of claim pleads, and it is admitted, that on 15 September 2004 they entered into a joint venture which was recorded in certain heads of agreement. The defendants say, however, that these heads of agreement were superseded by a joint venture deed of 30 September 2004. However, these heads of agreement and/or the joint venture deed are the foundation of what the parties might call their "legitimate expectations" in and about the operation of DMS. 4 I digress here to note that in oppression suits it is important not only to look at the legal rights of the parties but also what equitable restraints might exist upon the exercise of those legal rights. As Lord Hoffman said in O'Neill v Phillips [1999] 1 WLR 1092 at 1102, there are equitable principles which make it unfair for a party to exercise rights under the articles. It is a consequence not a cause of the equitable restraint. This equitable right is often described as a "legitimate expectation" though this may be an unfortunate term because of its use in other connections. I am using the term in that sense because I cannot think of a better one. See also Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 at 745. 5 The final version of the statement of claim alleges that there was a joint venture which was evidenced by heads of agreement on 15 September 2004, that the interests of Newsnet.com, controlled by the Maines and Opipo Pty Ltd (the former name of the third defendant, Jardine Thompson Pty Ltd), controlled by Chelia and Arulampalam would merge their operations and interests into a new commercial entity, DMS, of which 55% would be owned by Jardine Thompson's interests and 45% by Newsnet.com's interests. The heads of agreement provided that each side would contribute two directors, Mr Chelia would be appointed chairman and Anthony Maine, CEO. Anthony Maine would receive a consultancy fee of $10,000 per month and Peter Maine would be employed at an annual remuneration of $80,000. There were other provisions. 6 The statement of claim then pleads that on 30 September 2004, the parties entered into a joint venture deed prepared by Goldsmiths Lawyers. It alleges that no-one on the Maine side had any input into the preparation of the deed nor were they consulted by Goldsmiths. However the deed did contain provisions as to Anthony Maine's consultancy fee and Peter Maine's annual salary, but it also contains the following provision: "16.1 After the commencement date, neither Newsnet, Opipo, Tony (that is Anthony Maine) nor Coomar (that is Mr Chelia) shall, directly or indirectly, and in any form or manner, participate or otherwise become involved in any messaging related business other than the business of DMS, it being the intention of the parties that they shall use their best endeavours to promote and increase the business of DMS. This clause shall apply during the duration of this deed and for a period of 1 year from the date upon which Tony or Coomar shall cease to hold office in DMS. The parties acknowledge that the provisions of this clause are in all circumstances reasonable." 7 The plaintiffs complain that the affairs of DMS have been conducted by Messrs Chelia and Arulampalam in a manner contrary to the interests of the members of the company as a whole and oppressively unfairly prejudicially to and unfairly discriminately against the interests of Anthony Maine. 8 The particulars of this allegation are essentially that Anthony Maine has been purportedly removed as a director and his employment terminated. He has been excluded from the business premises and prevented from having access to his office or records, the majority have purported to appoint one Nicholas Fyfe as a director, the majority have given notice to remove Peter Maine as a director and have his duties and responsibilities restricted and they have conducted DMS's business and made important commercial decisions without any reference to the views of Anthony and Peter Maine. Moreover, the majority have not paid the consultancy fees due to the Maines. There are also charges that the majority instructed Goldsmiths to prepare the joint venture deed without any consultation with the Maines, including a non-competition clause which was never discussed. A further complaint is that an all monies charge was granted by DMS to Mr Chelia contrary to the provisions of the heads of agreement and that DMS has been made to enter into a contract with an externally accessed distribution system in Canada named Protus to the commercial detriment of DMS whereas an agreement with Topcall (which provided a competing service which the plaintiffs preferred) would in fact benefit it. 9 Apart from interlocutory orders the plaintiffs seek orders for winding up. However, the real claim of the Maines is for some restitutionary relief. As their counsel eloquently put it, "We want our assets back". This was to be a joint venture company entered into in good faith. Messrs Chelia and Arulampalam, according to the plaintiffs, misused their position and the proper order is to unscramble everything so far as the court can, and restore the parties to their pre "merger" position. Alternatively, if the restitutionary exercise is too difficult, the plaintiffs seek an option to buy the majority shares at a price on terms of restitution of property. 10 The first matter for me to determine is whether there has been, what might loosely but usefully be called "oppression", because if the answer to that issue is in the negative, I do not need to consider questions of remedy. 11 The statement of claim alleges that there has been oppression and 29 discrete particulars are given of the alleged oppression. I will not set them all out, but the principal ones are (my numbering):

(1) The majority have purported to remove Anthony Maine as a director and terminate his employment with the company.

(2) The majority have excluded Anthony Maine from the business premises.

(3) The majority have purported to appoint a Mr Fyfe as an additional director.

(4) The majority have restricted Peter Maine's duties, and indeed, removed him as a director.

(5) The majority have made important commercial decisions without any reference to the views of the Maines.

(6) The majority have declined to pay Anthony Maine his consultancy fee or to reimburse him for any expenses.

(7) The majority have authorised a charge in favour of Mr Chelia to secure the company's indebtedness to him.

(8) The majority paid the company's funds to their own lawyers for their own personal legal fees.

(9) The majority have caused the company to enter into a contract with Protus which favours themselves to the significant commercial detriment of the company.

(10) The majority have usurped the exclusive right of signing cheques. 12 The defence admits that Anthony Maine has been removed as a director but says that he was lawfully so removed. It admits that the majority excluded Tony Maine from the business premises. It admits that Nicholas Fyfe was appointed as director, but says that it was appropriate to appoint him. 13 The defendants admit that they have removed Peter Maine as a director. They admit that they have made important commercial decisions in relation to the business and operations of the company without reference to the views of Tony Maine and say they were not obliged to seek his views nor would it have been appropriate to do so. They admit that they have not paid the consultancy fee and say they have properly withheld all monies otherwise due to Anthony Maine. 14 It was apparent at the very beginning of this case that the defendants had taken the view that if they had power to do something, then it could be done without any regard to what I have called earlier in these reasons, the legitimate expectations of the corporators and the equitable restraints upon the exercise of those powers which must necessarily follow. 15 In my view, the admissions made in the defence are sufficient in themselves to show that there has been oppression of the minority so as to make way for an order under s 233 of the Corporations Act. 16 However, the real problems in the company go very much deeper. It is so obvious that there has been oppression it is not necessary for me to go into these other matters in the detail which they would otherwise deserve, but as they are the core of the real dispute I must at least consider them in some detail. 17 Prior to the joint venture, the second plaintiff, Newsnet.com Pty Limited, carried on business as a media broadcaster from O'Connell Street, Sydney. In summary, this business involved multi-media messaging including fax, e-mail, voicemail, image and video distribution. 18 Again, prior to the joint venture, the third defendant, Jardine Thompson Pty Limited, then known as Opipo Pty Limited, carried on the business of: (a) providing fax broadcast distribution at the lower end of the market price range; and (b) electronically distributing advertising material via Protus. Integrated with this latter business was a fax database sales operation where most of its customers were sold combined list access and fax broadcast as an integrated service at a single price. Only business (a) was brought into the joint venture. The database and associated activities were retained by Jardine Thompson. 19 Newsnet.com plied its product through an agency known as Topcall. Topcall was in opposition to Protus. The Maines considered that development of the association with Topcall was the only way in which the business would progress. Mr Chelia in particular was interested in developing relations with Protus, the plaintiffs say, because that was to the advantage of the continued business of Jardine Thompson. 20 As I have said, the joint venture agreement was made and then a joint venture deed was produced. 21 There appears to be little debate that the joint venture deed was duly signed by all parties, though not on the date it bore. Mr Chelia says that what happened was that originally this joint venture deed was signed by Peter Maine as attorney for his brother Anthony. When Anthony returned, further adjustments were made to the deed, it was re-engrossed and re-signed including a signature by Anthony Maine. It would appear this was about 13 November 2004. 22 The Maines say that they made the assumption that the deed was exactly the same as the joint venture agreement and was just being put in a more formal way. They say they did not notice that there had been adjustments in Mr Chelia's favour including an adjustment upwards of Mr Chelia's remuneration. 23 Mr Goldsmith, the solicitor who appeared for the majority, said that as no complaint was made in the pleadings that there had been any fraud associated with the deed or any misrepresentation, that the deed must be taken as it stands. It is quite clear that the Maines read the deed before they signed it. I accept Mr Chelia's version of the additional matters inserted in the deed. Accordingly, as a matter of law the deed must be accepted as defining the parties' rights. 24 However, the joint venture heads of agreement are still relevant as showing the milieu and the expectations of the parties. There does not appear ever to have been anything said which would disabuse the Maines that what they had agreed after long negotiations in the joint venture heads of agreement remained basically untouched. 25 The DMS company was incorporated on 20 September 2004. 26 It is alleged by the majority that its constitution was adopted on 16 November 2004 and that that constitution is the document annexed "I" to Mr Anthony Maine's first affidavit. Anthony Maine denies that the constitution was ever adopted. 27 However, the minutes of 16 November 2004 merely read: "CONSTITUTION Tony advised that he would like to review the constitution of the company." 28 Mr Chelia says that he gave a copy of the constitution to Tony Maine on about 5 October 2004. The constitution was registered and on 13 October 2004 there was a circular board minute amending the constitution. I cannot accept Mr Anthony Maine on this and the constitution which I have referred to appears to be the constitution of the company. 29 In some respects it would seem that the constitution differs from what was in the heads of agreement or joint venture agreement. The heads of agreement seems to suggest that the directors were to be paid the remuneration that the company determined whereas the joint venture agreement suggests that they were only to be paid consultancy fees and reimbursement of expenses. The constitution makes the quorum at meetings two (clause 152), yet the company seems to have thought that there needed to be three to make a quorum. 30 The Maines say that at the heart of the differences is the activities of the defendants in using more and more of the facilities of DMS to process Jardine Thompson's business. The defendants deny this and say that whilst the two sets of staff were on the same premises they were kept separate. The plaintiffs also say that they have a reasonable fear that the majority are using the DMS facilities for what they class as illegal purposes. This, they say they fear may have repercussions for them. There appear to be two aspects to this, first that some of the Jardine Thompson database has been acquired from Desktop Marketing Systems Pty Ltd, a company against which Telstra Corporation Ltd obtained orders restraining breach of copyright; see Desktop Marketing Systems Pty Ltd v Telstra Corporation Limited [2002] FCAFC 112. It is alleged that part of the Jardine Thompson database has been acquired in breach of copyright from Telstra. Secondly, it is alleged that the activities of Jardine Thompson breached the Spam Act 2003 (Cth). 31 The defendants deny that the current Jardine Thompson database is infected from the material originally obtained from Desktop Marketing Systems. As to spam, whilst it is clear that the principal business of Jardine Thompson is to send unsolicited facsimile and other messages to people, including Australians, promoting sales of product, they say that there is no breach of the Spam Act with which they are well familiar, there is no Australian link as defined by s 7 and that agents and consultants are hired and the work system adopted to make sure that this is so. 32 Little is gained by seeking to establish whether the defendants' contention is correct or not. There is sufficient evidence to show that the plaintiffs had reasonable grounds for suspicion that the Jardine Thompson activities being carried on in the premises of DMS were very questionable. 33 Mr Chelia and Mr Arulampalam say that the reason why they removed Anthony Maine was because of his conduct. First they say that Anthony Maine continually upset the staff and themselves by using obscene language. Secondly they say that Anthony Maine distributed a photograph of nude women, and thirdly that he deliberately upset Mr Chelia by indicating that the Tamil Tigers' cause in Sri Lanka was a lost cause well knowing that Mr Chelia was a prominent member of the Tamil Tigers. They also say the Maines got nowhere near the productivity target they were supposed to achieve. 34 On their side the Maines deny the foul language. There is evidence in support of their position, but it seems to me on the balance of probabilities Anthony Maine did use what might be called foul language. 35 It must be remembered that some key members of the staff were Indian or Australians of Indian descent. Whilst the custom is for many third generation Australians to use foul language and think nothing of it, that is not the way in which persons of Indian descent regard such language. Many people of Indian descent have extremely high moral standards. 36 So far as the photograph of naked women is concerned, Mr Anthony Maine puts this down as a laugh because the photograph was of a nudist camp and there were naked women and naked men. The print in the evidence is a very poor reproduction and nothing offensive could be seen from it, but whether the version distributed to the staff was of high quality I do not know. I could well imagine how, particularly people of Indian descent, would be offended by it. 37 Thirdly, there is no doubt at all that upon resumption of work in January 2005 Mr Chelia was extremely upset about the effect of the Boxing Day Tsunami on Sri Lanka and particularly the Tamil Tigers and that the Sri Lankan Government did not appear to be directing any aid effort to helping the Tamil Tigers. In this connection, Mr Anthony Maine almost certainly made some remark about the Tigers being a lost cause which Mr Chelia took very much to heart. In cross-examination, Mr Lucarelli, who appeared for the plaintiffs, put to Mr Chelia that this was the beginning of the end of the relationship, a matter which Mr Chelia denied, but I consider there is probably a lot of truth in it. 38 So far as failure to meet production targets is concerned, I cannot see the evidence that would justify this view. The dismissal of Mr Cuickshank and the explanation given for his dismissal in not meeting targets appears to me to be extremely harsh. I accept the plaintiffs' suggestion that Mr Chelia was obsessive about sales targets and that he did not examine too closely the real causes for DMS not achieving what Mr Chelia thought could be achieved. 39 Whichever way one looks at it, the relationship between the parties has completely broken down. There is no longer any hope of there being a joint venture in the way suggested in the heads of agreement and the joint venture deed. The majority have used their legal rights to benefit themselves and to exclude the minority from any significant part in the business so that it is no longer a joint venture business. They would also appear to have manoeuvred matters since they gained a controlling position so as to favour Protus and themselves, as opposed to what might have been the course taken had there been full debate as to what was best for the company. 40 Accordingly, in my view the plaintiffs have made out a case under ss 232 and 233 of the Corporations Act. 41 Indeed, my reading of the way in which counsel for the plaintiffs and the solicitor for the defendants treated the matter is that they foresaw that that finding was virtually inevitable so that a lot of effort was put into the submissions as to the order that should be made. 42 The plaintiffs' principal submission is that there should be a demerger. A detailed proposal was put dealing with the details of such a demerger. Essentially its terms were these:

A. Within 7 days from the demerger date DMS will at its expense transfer the Domain names to Jardine Thompson ("JT").

B. Messrs Chelia and Arulampalam would resign as directors of DMS and Messrs Maine would be reinstated as directors.

C. Messrs Chelia and Arulampalam would execute transfers of shares in blank, of all their shares in DMS.

D. From the demerger date certain clauses of the joint venture deed were to be wholly unenforceable; and

E. That there would be non-solicitation clauses binding the parties from approaching each other's customers for six months after demerger. 43 Mr Lucarelli, in his submissions, said that whilst the law is clear that the standard order when a minority succeeds in these sort of proceedings is that the majority buy it out at a proper price, where assets are identifiable, in this case there is a joint venture company where the joint venture was of short duration and there is grossly unfair conduct on behalf of the majority. So, by analogy with partnership law, an order for demerger should be made. 44 It is true that in partnership cases where, for example, the situation exists that a junior partner has paid a premium prior to entering into a seven year partnership and the partnership is dissolved after two years because of incompatibility, that the court will, on taking accounts between the partners, credit the junior partner with five-sevenths of the premium; see eg Atwood v Maude (1868) 3 Ch App 369; Lyon v Tweddell (1881) 17 Ch D 529. However, there is no general need for provision for demerger because the partnership is not an incorporated entity. Even if the partnership agreement contains provision for distribution of partnership assets in specie, the court may still order a sale if it appears to be most beneficial to the parties: Taylor v Neate (1888) 39 Ch D 538 and see Rigden v Pierce (1822) 6 Madd 353; 56 ER 1126. 45 Accordingly, the partnership avenue does not seem to be worth further exploration. 46 It is true that, so far as everyone's researches are concerned, no case where a demerger order has been made in an oppression suit has been found. The fact that this is so does not necessarily mean that such an order cannot be made, it is just that it makes one pause when one can see that the present case may very well not be unique. 47 Mr Lucarelli refers to the Court of Appeal decision in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672. In that case it was found that there had been oppression and one of the remedies which the minority sought was that the assets of the company be split between its shareholders. Spigelman CJ and Fitzgerald JA did not consider that appropriate: however, Priestley JA dissented on this issue. 48 The company in that case was not a short term joint venture company. It was a family company which had expanded into quite a considerable business, perhaps being the biggest private bus company in Australia. Accordingly, one could easily distinguish the Bosnjak case on the facts. However, it is useful to look at what the various Judges said on this issue. At 706-707, the Chief Justice pointed out that there would be considerable problems in dividing up the assets of the bus company because there would need to be negotiation with governments over licences and with financiers over the credit arrangements made for the acquisition of the buses and that the court should not be placed in a position where it had to make commercial judgments or ran the risk of being dependent on commercial or political negotiations. 49 The Chief Justice also drew attention in paras 209 and 210 to the fact that there was no precedent for dividing up the assets of a going concern either in corporate or in partnership law and set out the partnership rules that I have already considered. Fitzgerald JA agreed in para 699 on p 793. 50 Priestley JA, at [575] on p 773, said that neither of the brothers Bosnjak raised objections to some sort of split and that "Since they were agreed on a split, but not on how it should be done, I think at this stage the relevant parties should be given an opportunity of seeing whether they can agree … on an appropriate division of assets, and if they cannot, then it will be for the court to decide for them." 51 I am not at all convinced that the assets could simply be restored to their pre-merger condition. Indeed, it would seem to me that what has happened since the defendants Chelia and Arulampalam took control and their negotiations with Protus in itself may have altered things. Furthermore, the property appears to be property like Domain names which, for all I know, may require consent to transfer etc. 52 There is also the problem that at the date of the merger the Maines' company owed their landlord a considerable amount of money for rent which apparently they had difficulty in paying and that this debt and others was paid out by DMS using monies borrowed from Mr Chelia. 53 In all the circumstances it seems to me that what the Chief Justice said in Fexuto applies to this case, that because of the apparent difficulties in the unusual nature of the order it should not be made. 54 I must now turn to the question as to whether it can be said that any side was at fault in making the joint venture unworkable. 55 In my view, both sides contributed to that situation. The language and Tamil Tiger remarks had their part to play. So did the reasonable suspicions of the Maines that Jardine Thompson were taking advantage of the company for their apparently questionable activities. However, it is completely clear that the defendants misread the situation in believing that they could exploit their legal rights to the fullest without recognising that there were equitable restraints because of the joint venture agreements. Their exploitation of the minority by using those legal rights unconscionably is the oppressive conduct which grounds the order so that in that sense it is the Chelia/Arulampalam group which can be said to be at fault. 56 The standard order in this type of case is that the majority buy out the minority at a fair price. The principal reason why this is the standard order is that it is fair that the minority's capital should be released from an enterprise which is being oppressively operated. 57 Mr Lucarelli puts that it would be quite inequitable in such a situation for the people at fault to be rewarded by getting all the assets of the company for a small price. I would agree with that. 58 Furthermore there is great difficulty in fixing a fair price. 59 The assets of DMS appear to consist of intangibles, mainly intellectual property. The company has virtually no cash and owes Mr Chelia money for funding its partner's debts. 60 In Exhibit PX06, the two valuers agree, however, that a reasonable assessment of the pro rata value of the plaintiffs' 45% interest in DMS is $175,500. However, the valuers disagree as to what would be a reasonable price for Mr Chelia to pay to buy that 45% interest. Mr Vella, the defendants' valuer, says $72,000, Dr Ferrier, the plaintiffs' valuer, $175,500. 61 It may be that it is appropriate to make the standard order and fix the price at which the plaintiffs should be bought out at $175,500. However, there may be some complications with loan accounts which I am not too sure was taken into account when that price was fixed. 62 Winding up is an order of last resort under s 233, particularly the winding up of a solvent company. However the authorities show that it may well be the appropriate remedy particularly in a case where there is animosity between the principal shareholders: Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478 and see Bernhardt v Beau Rivage Pty Ltd (1989) 15 ACLR 160. 63 Although both parties resist a winding up, it seems to me that it is probably the appropriate order in this case. A liquidator can be appointed, and like a receiver in a partnership, can sell the assets of the company to the highest bidder and then can distribute the proceeds after the costs of administration are met. 64 There needs to be a consent filed of an official liquidator. I had intended to stand the proceedings over for three weeks to give the parties one last chance of reaching a commercial resolution in the light of these reasons. However as this appears to be only a remote possibility I should list the matter for 9.30 am next Thursday 1 September. If I am not provided with the consent of some official liquidators, I will choose a candidate and a back-up candidate by random selection and order a party to obtain consent. 65 As to costs, both parties are at fault to some degree. The principal fault is with the defendants who took the path that it was virtually impossible to defend by relying on their legal rights and abandoning their equitable obligations. 66 My tentative feeling is that the defendants should pay 50% of the plaintiffs' costs. 67 The case will thus stand over to 1 September at 9.30 am. I will have the other suit 2351/05 listed at the same time for directions.

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