Malos v Malos

• 9 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

5262/02 - JASON MALOS v JACOVOS BILL MALOS & 2 ORS JUDGMENT 1 This is an unusual case. Before the court are two competing applications for relief by shareholders of a family company. The respective applicants are the only shareholders. They are an uncle and his nephew. 2 The nephew alleges conduct in the affairs of the company that is contrary to the interests of the members as a whole, oppressive to him, unfairly prejudicial to him or unfairly discriminatory against him as a member (Corporations Act 2001 (Cth), s.232). On that basis, the nephew seeks certain orders directed towards the convening of a meeting of members of the company and compulsion upon the uncle to attend in person or by proxy with a view to changing the composition of the board of directors. The uncle opposes the nephew's application. 3 The uncle, for his part, has filed an interlocutory process in the nephew's proceedings by which the uncle seeks an order for the winding up of the company on the just and equitable ground (Corporations Act, s.461(1)(k)). The nephew opposes the making of a winding-up order. 4 The nephew holds 5,002 shares in the capital of the company and the uncle holds 3,002 shares. The directors, if there are any validly in office (a matter to which I shall come), are the uncle and his wife who is the second defendant. 5 The nephew is aged 29. He was orphaned at 15 and lived with his grandmother until she died two years later, after which he continued to live in her house without supervision. The uncle was his guardian before he attained his majority and, as I shall mention presently, attended to the nephew's financial and other needs. 6 The nephew says that he has never known much about the affairs of the company. He believes he inherited his 5,002 shares from his mother. For as long as he can remember, the uncle has managed the affairs of the company. 7 In 2002, the nephew asked his solicitor to make some inquiries about the company after finding in his tax return, prepared by the family accountant, Mr Papandreas, a reference to his having received from the company consulting fees he says he never in fact received. The solicitor's inquiries brought to light minutes and other documents which heightened the nephew's concerns. 8 Documents purporting to be minutes of general meetings of the company held on 31 December 1992, 31 December 1993, 29 December 1995, 30 October 1996, 30 June 1997, 2 June 2000 and an unspecified date around April 1999 show the nephew to have been present as a shareholder. He says that he received no notice of any of these meetings, that he was not present and that he did not vote at any of the meetings. Other documents purporting to be minutes of general meetings held on 30 June 1998, 27 January 2000, 3 January 2001, 30 June 2001 and 27 March 2002 show as present the uncle and his wife. She is not (and was not at any time) a member. 9 The business purportedly conducted at these meetings included the election of the uncle and his wife as directors, the declaration of dividends, the payment of directors' fees and a buy-back of shares. In relation to the purported meeting held on 2 June 2000, there is recorded a resolution to pay dividends of $20,961 to the uncle and $34,925 to the nephew. The nephew says he never received any such dividend. The purported minutes of a meeting held on 30 June 2001 record a resolution for the payment of directors' fees of $25,000 to the uncle and $25,000 to his wife. The undated apparent minutes of April 1999 or thereabouts are accompanied by a Form 205 lodged with ASIC identifying 27 April 1999 as the date of a proposed meeting of members to consider a share buy-back scheme, while a separate Form 205 refers to a unanimous resolution of shareholders approving an offer to buy back 20% of all issued shares, but with eligibility confined to members with shareholders divisible by 10. The buy-back price is stated as $107.93 per share. 10 Also in evidence are accounts of the company for several recent years. These show a decrease in the number of issued shares between 30 June 1998 and 30 June 1999 from 8,754 to the current 8,004, from which I infer that shares were bought back supposedly pursuant to some buy-back offer of the kind the subject of the notifications to ASIC. The reduction by 750 shares at the rate of $107.93 per share referred to in the ASIC notification would account for something of the order of $80,000. The nephew says that he had no knowledge of any such buy-back at the time, from which it must be inferred that, if anyone participated in it, it was the uncle alone. 11 The accounts in evidence also show, in addition to the directors' fees of $50,000 in the year ended 30 June 2001 to which I have referred, directors' fees of $13,000 in the year ended 30 June 1999 and $56,307 in the year ended 30 June 2000. The company has been, at all material times, an investment company holding properties which are leased. It also has a shareholding in another company. Dividends in the sum of $56,307 in one year and $50,000 in another year substantially exceeded the annual income. 12 The documents to which I have referred were put into evidence by the nephew. He obtained the various documents by means of requests made by his solicitor. After those requests were initiated, the uncle offered, through the nephew's solicitor, to meet with the nephew, sit down with him and explain to him the affairs of the company. That offer was not accepted. In fact, in a letter to the nephew's solicitor dated 22 June 2002, the uncle says that the response was: "an abrupt 'don't speak to me, speak to my solicitor'." 13 This letter contains statements by the uncle that he was a supportive relative and guardian and that he had, until the nephew commenced gainful employment for the first time in 1999, supported him by providing a home, a motor vehicle, a restaurant business and living items, as well as providing money. It may be (the uncle's letter does not make it clear) that this support included support from the company. The uncle rejects the suggestion that he had not informed the nephew about the company and its affairs. He says: "I reject the suggestion that requests for information regarding the company assets were ignored. I have always advised Jason what the company was involved it [sic] during this time [scil the period 1991 to 1999] although I doubt his ability to absorb what was being said due to his then current heroin addiction." 14 The letter continues: "I would like Jason and myself to meet at Mr Papandreas' office so that his inquiries may be addressed. Please advise if this course is acceptable to your client. If so, I undertake to make an appointment suitable to all parties for this purpose. If Jason's sincere wish as a shareholder is simply to obtain an understanding of the operations of Malos Holdings P/L then surely this suggestion of a family meeting should be acceptable to him." 15 This invitation or suggestion was not accepted by the nephew. Instead he continued with requests for documents through his solicitor. Such documents were supplied to him. 16 In August 2002, the nephew purported to requisition the convening of a general meeting of the company to consider resolutions removing the existing directors and appointing in their place himself and one S J Marshall. The requisition went on to specify further proposed resolutions which, on their face, appear to be beyond the province of the general meeting, namely, a resolution changing the registered office and a resolution directing the uncle and his wife to deliver to the new office certain enumerated books and documents. A further requisition was delivered in September. The apparent directors (the uncle and his wife) took no steps in response to either requisition. On 2 October 2002, the nephew alone proceeded to take various actions which were represented as having constituted a general meeting at which no quorum was present and which was supposedly adjourned to the same day in the following week. On 9 October 2002, the nephew with another person described as "non-member - professional counsellor" purported to constitute the adjourned meeting at which it was resolved that the uncle and his wife be removed as directors, that the nephew and Marshall be appointed as directors, that the registered office be changed to the address of the nephew's solicitor and that the directors instruct the company's legal representative to write to the uncle, his wife and the accountant, Mr Papandreas, requiring the delivery of company books and records. 17 On the basis of these actions, the nephew caused to be lodged at ASIC a return showing that the uncle and his wife were no longer directors and that the nephew and Marshall had been appointed directors. Correspondence between the solicitors ensued. As a result, the nephew's solicitor eventually conceded that the procedures the nephew had sought to implement to remove directors and appoint new directors in their place had been ineffective. In the meantime, the nephew had commenced these proceedings maintaining, in the first instance a claim for declarations as to the validity of the actions taken. That claim was afterwards abandoned in favour of a claim by the nephew for the relief with which I am currently dealing. Following the events of 2 and 9 October 2002, the uncle had written direct to the nephew as follows: "Jason Is Bizannes [i.e., the nephew's solicitor] really acting under your instructions when he sends me and our close family friend, Colin Papandreas, letters threatening to take us to the Supreme Court and to sue me for damages? I'm not sure what the answer is but I have my suspicions. In any event what this whole ugly business shows is that you and I cannot continue to operate the company together anymore. The sense of outrage I feel about you, and I suspect your de facto's actions, has made me sick to my stomach. I want the company to end and in so doing end my association with you and your family. Your mother destroyed both my parents through her excesses and it looks like you and your actions are doing the same to my late father's family company. My suggestion to you is that we agree to dissolve the company, distribute the assets (a course I'm sure your de facto will welcome) and go our separate ways. In the event that you reject this proposal the cost of continuing litigation will be substantial and the only persons who will stand to benefit will be the lawyers. Please give this proposal your careful consideration and do attempt to stop Bizannes sending me threatening and insulting letters. Bill 13/10/2002" 18 The whole of the evidence to which I have just referred was adduced by the nephew upon the hearing of his application for orders directing steps aimed at bringing about a meeting of members at which directors of his choosing might be installed in place of the current directors. 19 The evidence adduced by the uncle in support of his application for a winding-up order consisted of an ASIC search of the company and a brief statement by the uncle's solicitor about the general nature of the company's business ("property management and development"), an affidavit of a solicitor employed by the uncle's solicitor annexing correspondence between the respective solicitors about the effectiveness of the steps of October 2002 and an affidavit of Mr Papandreas, the accountant, confirming that he had, in response to the nephew's solicitor's letter of 9 October 2002, sent certain original books and documents to the nephew's solicitor. 20 Mr Newton of counsel, who appeared for the uncle, expressly disavowed reliance on the evidence adduced by the nephew upon the hearing of the application by the nephew for orders directed towards the convening of a general meeting. He conceded, however, that, although the nephew seeks to resist the uncle's application for the making of a winding-up order, it is open to the court to have regard to that evidence in relation to the uncle's application. 21 I said at the beginning that this is an unusual case. I said that because the evidence adduced by the nephew points, in my judgment, quite strongly towards the need for the company to be placed under a suitable form of external administration, yet the nephew resists any such outcome. The appropriate course, as I see it, is to consider the two competing applications in the light of the whole of the evidence. 22 That evidence indicates, in my judgment, that there are cogent grounds for thinking that the uncle and his wife (who may well not be validly in office as directors, since their successive elections derive from general meetings which may have never occurred or were not quorate) have been party to actions entailing payment by the company to them of directors' fees bearing no rational relationship to the services provided by them as directors; that dividends ostensibly paid to both shareholders did not reach one of them; and that the uncle alone obtained funds from the company through a share buy-back (the regularity of which, according to its own terms, is suspect) without the other shareholder having had any knowledge that a buy-back offer was available or having had an opportunity to participate in relevant corporate decision making. The uncle has not attempted to put on any evidence about these matters or to show to be erroneous the indications I have just stated. The evidence also shows that there has been an attempt (one would call it a botched attempt) by the nephew to wrest control of the board of directors from the uncle by means of legal procedures and without any attempt or willingness on the nephew's part to discuss matters with the uncle. Furthermore, there exists between the two individuals a state of animosity which has caused the nephew to refuse to communicate with the uncle except through solicitors and the uncle to write to the nephew the letter of 13 October 2002 I have quoted above. 23 The nephew, clearly enough, does not trust the uncle. The events involving directors' fees, dividends and share buy-back have caused him to lose confidence in the uncle. The uncle, for his part, has developed a sense of deep resentment towards the nephew who he regards as ungrateful, irresponsible and untrustworthy. 24 This company is within category (i) referred to in the judgment of Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd [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". 25 This company was founded in 1966 by the uncle's father (nephew's grandfather). Before the death of the nephew's mother, the shares were held, it appears, by the son and daughter of the founder. The company was an investment vehicle through which wealth accumulated by the founder was enjoyed by his children. The grandson of the founder has now taken the place of his deceased mother. He and his uncle are no longer able to "act as reasonable men with reasonable courtesy and reasonable conduct in every way towards one another", to quote a formulation found in Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426. While the impasse at which they find themselves might, in an immediate and naked sense, be broken by assisting the nephew to exercise the undoubted majority voting power he possesses, that will exacerbate the situation of rupture and distrust rather than heal or improve it. It is clear from the events of October and afterwards that the nephew intends to exclude the uncle altogether. 26 It is the uncle who applies for winding-up. Normally, the court would be unwilling to grant relief where the situation of breakdown has been created by the applicant's misconduct. But I do not think that there is any inflexible rule to that effect. I refer, in that connection, to the following observation of Santow J in Ruut v Head (1996) 20 ACSR 160 (a partnership case to which the principles now relevant applied): "As a matter of logic, lack of clean hands could not be an absolute bar, else otherwise for example, where both partners are equally at fault, neither could obtain a winding up order. Nonetheless it must be an important factor in the exercise of the court's discretion along with other factors, such as whether the partnership is truly deadlocked." 27 In any event, I do not consider that the apparent misconduct on the uncle's part has been the cause of the breakdown in this case. It is more deep-seated than that. The nephew feels that he has been wrongly excluded. But he is unwilling to communicate with his co-shareholder The events of October 2002 represented his attempt, in turn, to exclude the uncle from decisions at director level. In a company such as this, that is no kind of foundation upon which to build a viable future. 28 It is sufficiently clear that, quite apart from the particular conduct of the uncle, grounds for the making of a winding-up order on the just and equitable ground have been shown, this being a family company which is no more than an investment vehicle for two family members who have become entirely distrustful and estranged. 29 The nephew's opposition to winding-up is based on nothing more than considerations of cost. The solicitor who appeared for him submitted that it would be to nobody's benefit for the fees of a liquidator to be incurred - yet in the same breath said that the nephew had accountants ready and willing to become involved in an examination of the company's affairs. 30 The complete breakdown in relations between the family members who make up this company and their demonstrated inability to communicate makes a winding-up order appropriate. Imposition of winding-up will have the added advantage that a liquidator can undertake a full investigation of the events surrounding the apparent payments by way of directors' fees, dividends and share buy-back, armed with the particular weapons that the law places in the hands of liquidators for that purpose. 31 I intend to make an order for winding-up upon the uncle's application based on s.461(1)(k). The uncle has not proffered to consent of any registered liquidator to act. In view of my last remarks, I would prefer to appoint a liquidator nominated or, at least, approved by the nephew assuming, of course, that there is no objective reason why that person is not an appropriate appointee. 32 The proceedings - that is, the nephew's amended summons and the uncle's interlocutory process - are both stood over to 9.30 am on Tuesday 11 March 2003 before me so that I may hear any submissions that need to be made on the choice of liquidator and receive the form of consent called for by s.532(9). **********

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