MF Lady Pty Ltd (Trustee) v Henry Morgan Ltd

Background and affidavit evidence

1. By way of background, Balamara is an Australian-based mining company which had or has interests in coking coal deposits in the Republic of Poland. It sought, but did not obtain, the requisite permission from the Polish Government to mine the coal deposits and it appears its only significant asset is potential claims against Poland for an allegedly wrongful refusal to issue the requisite permits. It appears that Balamara has little or no income and is the subject of substantial claims by creditors, although it has raised funds from shareholders from time to time. Vulpes has been a significant shareholder in Balamara since 2019.
2. Vulpes read two affidavits dated 28 August 2024 and 11 October 2024 of Mr Mack, who is a director who was appointed to Balamara's board on Vulpes' nomination. In his first affidavit, Mr Mack set out his professional background and referred to the circumstances in which he was appointed to Balamara's board. He addressed several issues which have arisen at the board, including questions as to the adequacy of financial records maintained by Balamara and the fact that audited financial reports had not been prepared for Balamara since June 2020. He refers to the failure to appoint an independent chair to Balamara, as had been required by a Settlement Agreement in respect of earlier proceedings between Vulpes and Balamara, and to other issues that arose in respect of compliance with that Settlement Agreement and to his difficulties in obtaining access to information concerning Balamara's affairs. Mr Mack also addressed the manner in which board meetings of Balamara were conducted, the absence of agreed minutes of those board meetings and issues as to the establishment and conduct of a Litigation Subcommittee from which he and another director of Balamara, Mr Doman, were excluded. Vulpes does not now rely on several of these matters in the narrower application that it now presses. Mr Mack's second affidavit addressed subsequent board meetings of Balamara and responded to affidavit evidence which was to be read by Balamara, but had not been read now that it no longer opposes the winding up order.
3. Mr Mack also gave oral evidence, by leave, as to his concerns as to Balamara's annual financial report for the financial year dated 30 June 2024 ("FY24") (Ex P2), which had been finalised shortly before the commencement of the hearing, approved by Balamara's board other than Mr Doman and Mr Mack at a meeting of which they were given little notice and which neither of them could attend, and then lodged with the Australian Securities & Investments Commission ("ASIC"). Mr Mack identified several difficulties with that financial report, including, among other matters, the fact that it incorrectly described Balamara's continued business; parts of it were incomplete; it recorded payments and share issues which had not been approved by Balamara's board; it recorded substantial payments to suppliers and employees, in circumstances that Balamara had little or no continuing business and few if any continuing employees; it recorded a significant cash outflow for operating activities in 2024, where he did not consider that Balamara had sufficient funds to make such payments; and it did not identify contingent liabilities where he considered that such liabilities likely existed. Mr Mack was only briefly cross-examined, and that cross-examination did not continue after Balamara determined that it would not oppose the winding up application.
4. Vulpes also read the affidavit dated 3 September 2024 of Mr Doman, also a director appointed to Balamara on Vulpes' nomination, which referred to the circumstances of his appointment to Balamara's board, to issues in respect of implementation of the Settlement Agreement and negotiations with the chair of Balamara as to the payment of amounts claimed by him, before he would resign as contemplated by the Settlement Agreement. Mr Doman identified concerns as to a lack of proper corporate governance by Balamara and a lack of compliance with the Settlement Agreement. Mr Doman was cross-examined and was an impressive witness.
5. Vulpes also read the affidavit dated 22 July 2024 of its solicitor, Ms MacDonald, which proved that notice of winding up had been provided to ASIC and the winding up application had been published on ASIC's published notices website. Vulpes also tendered the consent of liquidator of Messrs Reidy and Barnden and Ms Smith (Ex P4) and Balamara's Constitution (Ex P5) on which it relied to contend that Balamara's affairs were not being conducted in accordance with its Constitution.

Applicable principles

1. As I noted above, Vulpes now seeks an order under s 461(k) of the Act that Balamara be wound up and consequential orders. Section 461(1)(k) of the Act provides that the Court may order the winding up of a company if the Court is of the opinion that it is just and equitable that the company be wound up. Mr Balafoutis, with whom Mr Gvozdenovic appears for Vulpes, submits and I accept that whether it is "just and equitable" to wind up a company is a question of fact, and a plaintiff can rely on any circumstance of justice and equity that affects the application in its relations with the company or shareholdings: Re Catombal Investments Pty Ltd [2012] NSWSC 775 at [20] ("Catombal"). He points to several "conventional" categories where a winding up order could be made under the just and equitable ground which include, relevantly, deadlock or disagreement in the management of the company's affairs and a lack of confidence, fairness, and public interest and commercial morality: Re CNPR Ltd [2018] NSWSC 989 at [8], citing Catombal at [19].
2. Mr Balafoutis also points out that the "just and equitable" ground is not confined to particular factual categories; the generality of the words "just and equitable" are not to be limited in any way; and the court can also make a winding up order on the just and equitable ground by reason of the company's failure to comply with the requirements of the Act with respect to financial records and reports: CNPR at [8]; Re Hardy Bros Equipment Pty Ltd [2021] NSWSC 1693 at [6]; MF Lady Pty Ltd (Trustee) v Henry Morgan Ltd [2022] FCA 978 at [59]. Mr Balafoutis also refers to Re Dip Gailey Road Pty Ltd (No 2) [2021] VSC 727 at [20] where Connock J observed that a company may be wound up where there is a "justifiable lack of confidence in the conduct and management of the company's affairs" and thus a risk to the public interest that warrants protection; a lack of confidence may arise where, "after examining the entire conduct of the affairs of the company" the court cannot have confidence in "the propensity of the controllers to comply with obligations, including the keeping of books, records and documents, and looking after the affairs of the company" (emphasis added); and that a winding up order may be necessary to ensure investor protection, or where a company has not carried on its business candidly and in a straightforward manner with the public, or might be justified in order to prevent and condemn repeated breaches of the law.
3. Mr Balafoutis also draws attention to my summaries of the relevant legal principles in cases including Re DJG Securities Pty Ltd [2013] NSWSC 588, Re Munja Bakehouse Pty Ltd [2024] NSWSC 6 at [20]ff and Ratul v Islam [2023] NSWSC 78 at [24], where I observed that: "The Court can also make a winding up order under s 461(1)(k) of the Act on the just and equitable ground by reason of, inter alia, lack of confidence in the conduct and management of a company's affairs, or if a company has not carried on its business candidly and in a straightforward manner with the public, or has failed to comply with the requirements of the Act with respect to financial records and reports. In Australian Securities and Investments Commission v ABC Funds Managers Ltd (2001) 39 ACSR 443; [2001] VSC 383 at [119], Warren J observed that a winding up on just and equitable grounds could take place where there was "a lack of confidence in the conduct and management of the affairs of the company" and "a risk to the public interest that warrants protection", and also noted that the Court would be reluctant to wind up a solvent company. Those principles were subsequently applied in Australian Securities and Investments Commission v Kingsley Brown Properties Pty Ltd [2005] VSC 506; Australian Securities and Investments Commission v Stone Assets Management Pty Ltd (2012) 90 ACSR 523; [2012] FCA 630 at [46] and Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) [2013] FCA 234 at [19]ff, where Gordon J summarised those principles as permitting a company to be wound up where there is a justifiable lack of confidence in the conduct and management of its affairs and a risk to the public interest that warrants protection, and noted that that could be established where the Court could not have confidence that the company's controllers would comply with their obligations, including keeping books, records and documents and looking after the company's affairs."
4. Mr Balafoutis also refers to my observation in Re Vaucluse 29 Pty Ltd [2023] NSWSC 631 at [24] that: "A winding up order may more readily be made where a company is insolvent on a cash flow or possibly a balance sheet basis or fails to maintain appropriate financial records, and I am satisfied having regard to the provisional liquidators' report that that position is established here for the three Companies that are sought to be wound up. A company can also be wound up on the just and equitable ground, where there has been a failure to comply with statutory obligations in respect of taxation: Australian Securities and Investments Commission v Planet Platinum (prov liq apptd) [2015] VSC 682."

Issues as to corporate governance

1. Vulpes submits that Balamara should be wound up on the just and equitable ground for two reasons. First, Vulpes submits that there has been a breakdown in the corporate governance of Balamara, evidenced by ongoing breaches of its obligations under the Act and its Constitution. Mr Balafoutis submits that: "Balamara has contravened, and/or continues to contravene, a number of the requirements of its own Constitution and various statutes, including the Act. These breaches … evidence a high level of dysfunction and disorganisation within the company; which, in turn, results in a justifiable lack of confidence in the conduct and management of the company's affairs, and thus a risk to the public interest that warrants protection."
2. Vulpes points to Balamara's failure to lodge statutory reports, including financial reports, from FY20 until mid-October 2024; its failure to hold annual general meetings since January 2022; the failure of its directors to stand for re-election; its failure to comply with taxation obligations; its failure to keep minute books which record proceedings and resolutions of directors' meetings (including meetings of a committee of directors) and resolutions passed by directors without a meeting; and its failure to satisfy the domestic residency requirement for directors and company secretaries of public companies.
3. First, Mr Balafoutis points out that s 251A(1) of the Act requires a company to keep minute books which record specified matters and, relevantly, s 251A(2) requires it to ensure that minutes of a meeting are signed within a reasonable time after the meeting by either the chair of the meeting or the chair of the next meeting. The minute books must be kept at either the company's registered office, its principal place of business (provided it is within Australia) or at any other place (within Australia) as approved by ASIC: s 251A(5). Breach of any of the obligations in s 251A is an offence of strict liability: s 251A(5A). Clause 20.1 of Balamara's Constitution also requires its directors to cause to be kept, in accordance with s 1306 of the Act, minutes of all directors meetings and all appointments of officers. It is plain that Balamara has not complied with its obligations to keep minutes and its failure to do so likely reflects wider issues as to its governance.
4. Mr Balafoutis also points out that s 250N(2) of the Act requires Balamara to hold an AGM at least once every calendar year, and within five months of the end of its financial year and that Balamara has not called or held an AGM since 25 January 2022, almost three years ago, in breach of s 250N(2) of the Act and cl 11.8 of its Constitution. This is a significant matter, where an AGM is an important aspect of directors' accountability to a company's shareholders. It appears that Balamara also does not presently meet the requirement in s 201A(2) of the Act that a public company must have at least three directors, and at least two directors must ordinarily reside in Australia, where none of the current directors ordinarily reside in Australia. That matter would likely not warrant a winding up order, without more, but it does not stand alone. Balamara has also not complied with cl 13.2 of its constitution which requires that one-third of its directors are to retire at each AGM and, broadly. the term of office of a director is limited to three years unless he or she is re-elected. It appears that there has been no election of directors since 2020 and two of its directors, Mr Hale and Mr Leung, have remained in office for more than three years, where they were last elected on 6 January 2020. This is also a significant failure in directors' accountability to shareholders.
5. It appears that Balamara has also not lodged any tax returns since 1 July 2018, although this likely reflects its wider difficulties with preparing accounts. It has also not complied with its financial reporting obligations as a public company under Ch 2M of the Act and corresponding requirements in cll 19.1 and 19.2 of its Constitution for several years, until it lodged financial reports with ASIC in mid-October 2024, just before this hearing. I address the issues arising as to the content of its FY24 financial accounts below.
6. I accept that these matters, combined with the other issue, to which I now turn, support an order winding up Balamara on the just and equitable ground, and I recognise that Balamara no longer opposes such an order.

Balamara's FY24 financial report

1. Second, Vulpes points to the circumstances surrounding Balamara's recent lodgement of its financial statements and the content of the financial statements. It points out that, immediately before this hearing, between 12 October and 15 October 2024, Balamara lodged its audited financial statements for FY21 to FY24 with ASIC. Vulpes submits that the content of Balamara's FY24 financial report and the circumstances in which it was filed with ASIC also support the making of a winding up order on the just and equitable ground. It relies on the fact that that report was signed and lodged without being reviewed or voted upon by two of Balamara's directors, Mr Mack and Mr Doman, and that Balamara's auditor disclaimed any audit opinion on the content of that report. Vulpes also points out that Balamara's FY24 financial report reveals that Balamara has net liabilities for FY24 of negative $17,554,521 which, it submits, raise serious questions regarding Balamara's solvency; and that report reveals that Balamara has raised capital by issuing 735,531,395 shares, but the share issues have not been approved by its board and are not recorded in its share register.
2. Mr Balafoutis refers to correspondence between the directors in respect to the accounts, which I need not set out, which indicates both a breakdown in their working relationship and a failure to give sufficient notice of the meeting to approve the accounts or a sufficient opportunity to attend that meeting or raise issues as to the accounts to Mr Mack and Mr Doman. That failure is not justified by any strategic objective of Balamara to finalise those and earlier accounts before this hearing, in any hope that would mitigate earlier failures to prepare them. As I have noted above, the FY24 financial report was not put to a vote of all five directors, but Balamara's chair signed that report on 13 October 2024 on behalf of all directors, and it does not disclose the fact that it was not approved by all directors.
3. The auditor's report contains a disclaimer as follows: "We do not express an opinion on the accompanying financial statements of the Group because of the significance of the matters described in the Basis for Disclaimer of Opinion section of our report. Based on the audit evidence available and our inability, based on ongoing litigation, to obtain support from shareholders and lenders to either, defer payments owing by the company, or provide additional financial support, we are unable to provide a basis for an audit opinion on these financial statements".
4. The auditors' "Basis for Disclaimer of Opinion" then addresses issues as to uncertainty as to whether Balamara is a going concern, although Note 1 to the financial statements indicates that they have prepared on the assumption that the Group (as defined) will continue as a going concern; trade payables and the auditors' inability to verify the existence and completeness of the stated balances or obtain sufficient and appropriate evidence that the Group can defer such payments or has an alternative source of funds to settle trade payables when they fall due; an issue as to payables to the Ministry of Environment (Poland); an inability to obtain confirmations from lenders or noteholders as to the existence of a loan of $4,807,429; and a lack of information to verify the existence of unearned revenue. The auditors then state that: "In view of the above matters, we have been unable to obtain alternative evidence which would provide sufficient appropriate audit evidence as to whether the Group may be able to obtain financing, and hence remove significant doubt of its ability to continue as a going concern within twelve months of the date of this auditor's report."
5. Mr Balafoutis then addresses issues as to Balamara's solvency and the apparent issue of over 735 million shares with a value of $3.6m, which it appears has not been approved by the board as a whole, and which are not recorded on the share register (Ex P3). Mr Balafoutis also pointed to the concerns identified by Mr Mack in his oral evidence in chief, to which I have referred above.
6. In summary, Mr Balafoutis points out that the manner in which Balamara's FY24 financial report was lodged reveals further failings as to Balamara's corporate governance, where it had not been reviewed or approved by two of Balamara's five directors; the auditors do not express an opinion on the financial statement; the consolidated balance sheet records total net liabilities as negative $17,554,521 including substantial current liabilities and Balamara has minimal assets; and the conversion of convertible notes in that report does not appear to have been approved to or reported to the board. I am satisfied that these matters also support a winding up order on the just and equitable ground, and I again recognise that Balamara no longer opposes such an order.

Other matters

1. I accept that Vulpes has standing to apply for a winding up order under s 462(2)(c) of the Act and has complied with the other applicable statutory requirements in connection with its winding up application. The consent of Messrs Reidy and Barnden and Ms Smith to appointment as joint and several liquidators of Balamara has been tendered (Ex P4). Mr Balafoutis recognises that s 467(4) of the Act provides that where a winding up order is sought on the just and equitable ground, the Court must have regard to the availability of some other remedy and whether a plaintiff would be acting unreasonably in seeking to have the company wound up instead of pursuing that remedy. It does not seem to me that any order other than a winding up order would address the issues noted above. I have recognised elsewhere that the Court should also be reluctant to order a buyout in circumstances where a company is not properly managed and this state of affairs is likely to continue and, in any event, no party seeks to acquire Vulpes' shares in Balamara: Re Bicher & Son Pty Ltd (2020) 147 ACSR 108; [2020] NSWSC 7111 at [119], [121], [135]; Re Gunyahweh Pty Ltd [2023] NSWSC 1133 at [143]. Even if Balamara is solvent, there is no absolute rule that the Court will not wind up a solvent company in a proper case: Re Pure Nature Sydney Pty Ltd [2018] NSWSC 914 at [76]; Munja at [24]; Snell v Glatis (No 2) [2020] NSWCA 166 at [6].

Orders

1. I was satisfied that, for these reasons, an order should be made winding up Balamara and I made that and consequential orders at the conclusion of the hearing on 17 October 2024.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 October 2024