MATTER : MCJ PTY LTD (ACN 103 302 343) (IN LIQ)

GEORGE AUBREY LOPEZ AS LIQUIDATOR OF MCJ PTY LTD (ACN 103 302 343)

MICHAEL CHARLES PAUL JOHNSTON AS TRUSTEE FOR THE JOHNSTON FAMILY TRUST

Corporations - Termination of winding up - Relevant principles - Turns on own facts

Corporations Act 2001 (Cth), s 263, s 266, s 482

Anderson v Palmer [2002] NSWSC 192

Dubolo Pty Ltd v Codrington Investment Corporation Pty Ltd (1998) 26 ACSR 723

Maamari v Ringwood & Ply Pty Ltd [2005] NSWSC 40; (2005) 52 ACSR 370

Metledge v Bambakit Pty Ltd (In Liq) [2005] NSWSC 160

Re Warbler Pty Ltd (1982) 6 ACLR 526

Re Calgary & Edmonton Land Co Ltd (In Liq) [1975] 1 WLR 355

Re Nicholls Pty Ltd (1982) 7 ACLR 76

Sutherland v Rahme Enterprises Pty Ltd (In Liq) [2003] NSWSC 673; (2003) 46 ACSR 458

1 MASTER NEWNES: This is an application under s 482 of the Corporations Act 2001 (Cth) ("the Act") to stay and terminate the winding up of MCJ Pty Ltd ("MCJ"). The plaintiffs are the shareholders of MCJ.

2 The current application arises out of a long running dispute between the plaintiffs and the second defendant ("Mr Johnston"). It is necessary to trace that dispute to some extent in order to put the application in its proper context.

3 From about July 2002, Mr Johnston carried on the business of manufacturing and selling camper trailers under the name "Pioneer Camper Trailers". That business was a customer of "Highpoint Timbers", which was carried on by Highpoint Asset Pty Ltd ("Highpoint"). The plaintiffs and one Nigel Barron ("Mr Barron") were the shareholders of Highpoint. The second-named plaintiff ("Mr Fleet") and Mr Barron were the directors.

4 In October 2002, Highpoint lent to Mr Johnston the sum of $30,000 to assist him in his business. In or about November 2002, there were discussions between Mr Barron and Mr Johnston about the possibility of Highpoint purchasing an interest in Mr Johnston's business. On about 22 November 2002, there was a meeting between the first-named plaintiff ("Mr McConnochie") and Mr Barron and his wife on behalf of Highpoint, and Mr Johnston and his wife.

5 What was said at the meeting is the subject of dispute between the parties. The plaintiffs contend that Mr Johnston said the business was "too big" for him and he was seeking a "partner". They say Mr Johnston said the income of the business from the sale of five trailers per month was sufficient to pay all operating costs of the business, that without additional employees the business could produce 25 trailers per month, that a dealer network had been established throughout Australia, that the profit margin on trailers was approximately $4800 per trailer and that the average monthly profit of the business was about $20,000.

6 Mr Johnston, on the other hand, says he told the Highpoint representatives that the business was growing and he needed a business partner. He says he does not recall saying that the sale of five trailers per month would pay the operating costs, although that was the case. Otherwise he denies making the statements attributed to him.

7 Following the meeting the parties agreed that Highpoint would purchase a 75 per cent interest in Mr Johnston's business for the sum of $375,000. The purchase was to be effected by the incorporation of a company which would be the trustee of a unit trust to be established. The business would be sold by Mr Johnston to the company in its capacity as trustee of the unit trust for the sum of $500,000. Mr Johnston would receive 125,000 units and Highpoint would receive 375,000 units in the unit trust. Mr Johnston would receive three shares in the company and Highpoint would receive nine shares. The company was to pay Mr Johnston the sum of $375,000.

8 To give effect to that agreement, MCJ and the Pioneer Industries Unit Trust (the "Pioneer Trust") were established early in 2003. The directors of MCJ were Messrs Barron, Fleet and Johnston. Pursuant to the deed of settlement ("the trust deed"), the trustee of the Pioneer Trust was MCJ and the unit holders were Mr Johnston as trustee of the Johnston Family Trust and Highpoint.

9 After the transaction was settled, Mr Johnston was employed by MCJ as manager of the business for a term of five years. There is a dispute between the parties as to the terms of Mr Johnston's employment. Mr Johnston says it was agreed that MCJ would pay him an annual salary of $72,000 a year. The plaintiffs say that that figure was never agreed to on behalf of MCJ.

10 In May 2003, Mr McConnochie relocated to Perth from New Zealand and assumed the position of manager of MCJ. He says he then commenced a review of the company's financial position. He says the review revealed Mr Johnston's salary of $72,000 per annum and other matters of concern regarding the business and Mr Johnston's conduct of it. Mr McConnochie then spoke to Mr Johnston, seeking an explanation for what Mr McConnochie considered had been misleading statements made by Mr Johnston at the meeting of 22 November 2002. Having not received what he considered was a satisfactory response, Mr McConnochie convened a meeting of the directors of MCJ on 20 May 2003.

11 In fact, on 20 May 2003, immediately before the meeting, Mr Johnston resigned as the director and shortly afterwards went on annual leave. Mr Johnston, however, denies that Mr McConnochie raised with him any of the alleged misrepresentations and says he resigned because he lacked confidence in Mr McConnochie who, he claims, had not provided the funds for MCJ that had been promised.

12 On 25 June 2003, Mr Johnston was suspended as an employee of MCJ pending further investigation of matters said to be of concern to the company. Mr Johnston subsequently made an application to the Industrial Relations Commission for payment of his contractual entitlements. MCJ filed an answer to it and, on 19 August 2003, MCJ's solicitors wrote to Mr Johnston's solicitors setting out MCJ's claims against him. Mr Johnston withdrew the application in November 2003. Mr Johnston says he did so because he could not afford the legal costs involved and was advised that he could bring the claim again at a later date.

13 There the matter seems to have rested until, by notice dated 31 March 2005, Mr Johnston offered, pursuant to cl 9 of the trust deed, to sell his 125,000 units in the Pioneer Trust for 80 cents per unit, that is, for $100,000.

14 The directors of MCJ sought legal advice on the offer and were advised by solicitors that MCJ was entitled to set off against the purchase price of the units the value of various claims the company had against Mr Johnston. The amount claimed by MCJ exceeded $100,000. The units were accordingly redeemed but no payment for them was made to Mr Johnston, MCJ saying it had set off the redemption price against money owing to it by Mr Johnston.

15 Mr Johnston's solicitors then wrote to MCJ contending first, that the election of the company to redeem the units had been made outside the 21-day period specified in the trust deed, so MCJ had no right to redeem them, and secondly, that Mr Johnston held the units as trustee for the Johnston Family Trust so that any claim against him personally by MCJ could not be set off against the redemption price. The plaintiffs say that the solicitors then acting for MCJ did not advise MCJ that it was not entitled to set off the redemption price and that, had they done so, MCJ would have restored the units to Mr Johnston, the plaintiffs considering them to have no value. As it was, the units were not restored to Mr Johnston.

16 On 26 July 2005 Mr Johnston, as trustee for the Johnston Family Trust, sought payment from MCJ of the sum of $100,000 for the redemption of the units. Having received no satisfactory response, on 22 September 2005 Mr Johnston, as trustee for the Johnston Family Trust, caused a statutory demand to be served on MCJ for payment of the $100,000.

17 The plaintiffs say that MCJ sought legal advice from new solicitors in relation to the statutory demand and was advised that MCJ could oppose any winding up application Mr Johnston may bring, on the basis that the debt was disputed. MCJ was not advised that in fact, unless within 21 days of service of the statutory demand an application was made to set it aside and that application was successful, MCJ would be deemed to be insolvent and the dispute as to the debt could not be raised as a ground for resisting a winding up application.

18 On 24 October 2005, an application to wind up MCJ was made by Mr Johnston, as trustee for the Johnston Family Trust. That application came before Master Sanderson on 4 April 2006. It was adjourned to enable the parties to negotiate. On 2 May 2006, MCJ paid to Mr Johnston the sum of $100,000 and interest on it, the funds having been advanced to MCJ by Mr McConnochie.

19 Mr Johnston, nevertheless, pressed for the winding up order to be made and, on 11 May 2006, MCJ was wound up in insolvency.

20 In the meantime, on 28 October 2005, by resolutions passed by Messrs Fleet and McConnochie in their capacities as directors of MCJ and Argyle Campers Pty Ltd ("Argyle Campers") respectively, MCJ retired as trustee of the Pioneer Trust and Argyle Campers was appointed trustee. Argyle Campers has since conducted the business previously run by MCJ. MCJ has not traded since 28 October 2005. The plaintiffs are the sole directors and shareholders of Argyle Campers.

21 The plaintiffs wish the winding up of MCJ to be terminated and for the plaintiffs to be restored to control of MCJ to enable the company to pursue a claim against Mr Johnston and a claim against its former solicitors in respect of the advice MCJ received in relation to the winding up. The claim against Mr Johnston is based on the alleged representations he made in November 2002 to induce MCJ to purchase the business for $500,000. The plaintiffs say that, in fact, the business was at the time trading at a loss and had no value beyond the value of the plant, equipment and stock, an amount of some of $58,707.28. It is alleged that MCJ has therefore suffered damages in the sum of $441,292.72.

22 A report of the liquidator of MCJ has been provided to the Court. It appears the liquidator does not have any funds to enable detailed enquiries to be made into the affairs of the company and his report relies upon the reports as to the affairs submitted by MCJ's directors, Mr McConnochie and Mr Fleet. Those reports show liabilities of $380,653 owing on loan accounts and a contingent liability to Mr Johnston in the sum of $275,000 in respect of his claim for wrongful dismissal. The liabilities are made up of a sum of $47,611 said to be owing to Mr Fleet on his loan account, the sum of $332,420 said to be owing to Mr McConnochie on his loan account and the sum of $622.00 said to be owing to Mr Johnston on his loan account.

23 The only asset of MCJ is a right of indemnity from the Pioneer Trust and that claim is shown as an amount of $655,653, with an estimated realisable value of $380,653. The latter figure is equal to MCJ's liabilities on the loan accounts alone. It excludes Mr Johnston's claim for wrongful dismissal. The plaintiffs say that the claim by Mr Johnston for unpaid salary cannot be maintained as the salary was never agreed to by MCJ and, in any event, the amount claimed could never be recovered in light of Mr Johnston's duty to mitigate his loss.

24 In affidavits filed subsequently in this application, Messrs Fleet and McConnochie each said that the reference in their respective statement as to affairs to the right of indemnity having an "estimated realisable value of $380,653" was simply a reference to the amount of the actual debts for which they considered MCJ was entitled to indemnity, not to the limit of the funds of the Pioneer Trust available to meet any claim for indemnity.

25 The liquidator notes that Messrs Fleet and McConnochie each claim that the debt owing to them by MCJ is secured by a charge over the assets of MCJ. He observes, however, that ASIC's records reveal that neither charge was registered within the 45-day period following its creation and he therefore contends that, pursuant to s 266 of the Act, the charges are void as against the liquidator.

26 There is also a claim by Highpoint, of which Mr Barron is now the sole director, against MCJ based on what Mr Barron alleges was misleading and deceptive conduct by Messrs Fleet and McConnochie in inducing Highpoint to sell its units in the Pioneer Trust for $152,000 when the real value of the units was much greater than that. The claim by Highpoint is not quantified. The claim is denied by Messrs Fleet and McConnochie.

27 It was argued on behalf of the plaintiffs that to compel the liquidator to pursue the claim for misleading and deceptive conduct against Mr Johnston, and the claim for negligence against MCJ's former solicitors, would simply be to increase the cost of doing so for no good purpose. It was submitted there is no risk of further debts being incurred by MCJ as it is no longer trading.

28 Mr Johnston and MCJ's former solicitors would be entitled to, and it is reasonable to expect them to obtain, security for costs, so they would not be exposed to liabilities that could not be met.

29 The plaintiffs say that as Mr Johnston's claim for wrongful dismissal is against MCJ in its capacity as trustee of the Pioneer Trust, if the claim is made out it is liable to be paid from the trust assets and the plaintiffs undertake that Argyle Campers will continue to conduct the trust business in the usual course. The plaintiffs say they will not seek to enforce the debts owed to them by MCJ until after Mr Johnston's claim against MCJ has been resolved. In any event, the plaintiffs say they will personally undertake that Mr Johnston's claim will be paid if he is successful against MCJ, so in fact the value of the assets of the Pioneer Trust is irrelevant.

30 It was submitted that there was therefore no need to lead evidence about the value of MCJ's assets or the value of the assets of the Pioneer Trust. The only proposed activities of MCJ, if the application were successful, are the claims against Mr Johnston and its former solicitors and, so far as necessary, the defence of the claims by Mr Johnston and Mr Barron. All of the potential liabilities of MCJ in respect of the first can be dealt with by way of those parties making applications for security for costs and the potential liabilities in respect of the claim by Mr Johnston are covered by the plaintiffs' personal undertakings. It was submitted that the claim by Mr Barron was patently misconceived, it being at best a claim against the plaintiffs personally, not MCJ.

31 It was submitted that in the circumstances there is no public interest in the winding up continuing.

32 It was submitted on behalf of Mr Johnston that the plaintiffs had failed to make out a case for the termination of the winding up. MCJ was wound up in insolvency. In the absence of cogent evidence to the contrary, it must be assumed that MCJ continues to be insolvent. The sole asset of MCJ is, and at the time of the winding up order was, its right of indemnity out of the assets of the Pioneer Trust. It was not sought to be said on the winding up application that by virtue of that right MCJ was solvent. It is properly to be inferred that that contention was not sought to be advanced because it was not the case.

33 There is nothing to suggest the position has changed. There is no reliable evidence as to the current value of the assets of the Pioneer Trust. It was within the power of the plaintiffs to adduce that evidence, the current trustee, Argyle Campers, being a company of which Messrs Fleet and McConnochie were the sole directors and shareholders. No such evidence had been sought to be adduced. As there is no evidence of the current financial position of MCJ, and as MCJ was wound up in insolvency, it is appropriate to assume that MCJ continues to be insolvent.

34 It was submitted that, in the absence of credible evidence as to their financial circumstances, the personal undertakings of the plaintiffs to meet any claim that Mr Johnston might make out was valueless.

35 It was further submitted that any security held by the plaintiffs under the charge over the assets of MCJ was void as against the liquidator. That would not be the case if the winding up was terminated. The termination of the winding up would therefore give the plaintiffs an unfair advantage over past and future creditors.

36 In addition, counsel submitted that Mr Johnston was entitled to a profit distribution from the Pioneer Trust in the sum of $53,072.89 as at 30 June 2005, which sum had not been paid and remained a debt owing by MCJ to Mr Johnston. I should say that that debt was emphatically denied by the plaintiffs who contended that Mr Johnston had no entitlement to any distribution.

37 Counsel also noted that no provision has been made by the plaintiffs to secure payment of the liquidator's remuneration and costs.

38 Counsel for Mr Johnston stressed that it was not proposed that MCJ would conduct business in any manner for the benefit of those interested in the company's affairs or the public. The sole purpose of the stay was to permit the legal actions to be brought, principally a claim against Mr Johnston. It was submitted that if the proposed legal actions were to be brought, that should be left to the liquidator. There was no reason why, if such action were warranted, it could not be brought by the liquidator who was eminently qualified to do so, and was independent and objective. One of the primary roles of a liquidator is to ascertain the claims made for and against a company and to resolve those in an appropriate way.

39 Counsel submitted that, particularly given there was a considerable degree of animosity between the parties, all would benefit from the intervention of the liquidator as an independent party who, it can be presumed, would act appropriately and in the interests of all affected parties.

40 Accordingly, nothing had been put forward on behalf of the plaintiffs that would justify the termination of the winding up.

41 On an application of this nature the Court is not asked to, and cannot, review or countermand the winding up order. The Court, and the parties, must accept the full force and effect of the winding up order: Maamari v Ringwood & Ply Pty Ltd [2005] NSWSC 40; (2005) 52 ACSR 370.

42 The principles to be applied in the exercise of the discretion on an application of this nature were summarised in Re Warbler Pty Ltd (1982) 6 ACLR 526, in a passage which has often been cited. They are as follows:

"1. The granting of a stay is a discretionary matter, and there is a clear onus on the applicant to make out a positive case for a stay.

2. The nature and extent of the creditors must be shown, and whether or not all debts have been or will be discharged.

3. The attitude of creditors, contributories and the liquidator is a relevant consideration.

4. The current trading position and general solvency of the company should be demonstrated. Solvency is of significance when a stay of proceedings in the winding up is sought.

5. The general background and circumstances which led to the winding up order should be explained.

6. The nature of the business carried on by the company should be demonstrated, and whether or not the conduct of the company was in any way contrary to 'commercial morality' or the 'public interest'."

43 The list is not, however, to be regarded as a set of rigid principles or as exhaustive: Dubolo Pty Ltd v Codrington Investment Corporation Pty Ltd (1998) 26 ACSR 723.

44 It would not be an appropriate or prudent exercise of the Court's discretion to re-launch a company which is insolvent or which, while technically solvent, is likely to become insolvent: Anderson v Palmer [2002] NSWSC 192 at [6]. In Metledge v Bambakit Pty Ltd (In Liq) [2005] NSWSC 160, Barrett J said, in connection with an application under s 482:

"In any application under s 482 for an order terminating winding up, the onus is on the applicant to make out a positive case for termination: Re Calgary & Edmonton Land Co Ltd [1975] 1 WLR 355 at pp 358-9. Where the ground for winding up was insolvency, an indispensable part of the applicant's task is to prove solvency. As a matter of public policy or commercial morality, the court will not countenance the return of an insolvent company to the mainstream of commercial life: see, for example, Re Mascot Home Furnishers Pty Ltd [1970] VicRp 78; [1970] VR 593; Re Denistone Real Estate Pty Ltd [1970] 3 NSWR 327; Re Data Homes Pty Ltd [1971] 1 NSWLR 338. Upon an application of the present kind, as in the case of defence to a winding up summons where the presumption of insolvency operates, the party bearing the onus of proof must lead the 'fullest and best' evidence of the financial position: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 477. And as was pointed out in Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711 by Santow JA (with whom Meagher and Handley JJA agreed), 'proper verification of assets and liabilities is critical to rebut the presumption of insolvency' ".

45 In the present case, it appears that the plaintiffs' intention as to the future activities of MCJ is not to return it to "the mainstream of commercial life" but, at least for the immediate future, to limit its activities to commencing and pursuing litigation against Mr Johnston and MCJ's former solicitors. The relief sought, however, does not limit MCJ's future activities to that - if indeed the Court has power to so limit them.

46 I do not consider that the plaintiffs have made out a case for the relief they seek.

47 On the material before me, there is no reason to believe that the solvency position of MCJ has relevantly changed since the winding up order was made on 11 May 2006. MCJ's only asset is its right to indemnity from the assets of the Pioneer Trust. The plaintiffs have not sought to demonstrate the value of those assets, although it would appear that that is a matter plainly within their knowledge. In addition, to the extent MCJ's right of indemnity has value, no proposal has been made by the plaintiffs to secure that right.

48 Counsel for the plaintiffs referred in oral argument to the (unaudited) accounts of the Pioneer Trust as at 30 June 2005, which showed a net surplus of assets over liabilities of $439,667. Those accounts were annexed to Mr Johnston's affidavit but their accuracy was not attested to by him. I do not consider the accounts to be of any significant weight on this application. In that connection it is notable, first, that when the winding up order was made on 11 May 2006 it was not sought to be suggested on behalf of MCJ that it was solvent by reason of its right of indemnity from the trust assets, although the directors of MCJ (who are also the directors of the current trustee, Argyle Campers) were clearly in a position to advance that case if it could be made out. Secondly, some 14 months have passed since the date of those accounts and the plaintiffs have not sought to adduce evidence as to the current financial position of the Pioneer Trust.

49 I do not consider that the absence of evidence as to solvency is overcome by the plaintiffs' undertaking to pay any amount to which Mr Johnston is found to be entitled as against MCJ. Apart from any other consideration, there is no satisfactory evidence as to the plaintiffs' financial capacity to make good that undertaking.

50 It is also clear that the only real purpose of terminating the winding up would be to enable MCJ to bring legal proceedings against Mr Johnston and its former solicitors. It seems almost inevitable that if the winding up were terminated MCJ would, in addition, become embroiled in proceedings brought against it by Mr Johnston and Highpoint. As counsel for Mr Johnston put it, "[MCJ] is simply going to be a vehicle for litigation."

51 I do not consider that the plaintiffs have shown any good reason why the course they propose is preferable to resolving these matters in the course of the winding up. One of the primary roles of a liquidator is to ascertain the claims made by and against a company and to resolve those in an appropriate manner. In the absence of good reason to the contrary, where a company is being wound up that is the course that should be followed to resolve outstanding claims. Nothing has been put forward to demonstrate why, if the proceedings the plaintiffs propose against Mr Johnston and MCJ's former solicitors are appropriate, they cannot be brought by the liquidator. There is no evidence that the liquidator would decline to bring such proceedings if they ought to be brought and he was put in funds.

52 Although it was submitted on behalf of the plaintiffs that proceedings by the liquidator would involve additional, unnecessary, cost, the extent of any such additional cost was not sought to be established by the plaintiffs and there is nothing before me to suggest that any such cost would be so substantial as to warrant a stay or termination of the winding up, or to outweigh the benefit of having the proposed proceedings left to the independent judgment of the liquidator.

53 I am not satisfied that grounds have been made out for the exercise of the discretion to stay or terminate the liquidation and I would therefore dismiss the application.