Morris v McConaghy Australia Pty Ltd

(REVISED FROM THE TRANSCRIPT) RARES J: 1 This proceeding concerns a shareholders' dispute involving a boat-building business conducted in various countries, but which originated in Australia.

Background 2 On 21 February 2014, Jonathan Morris, who, with the third respondent, Mark Evans, sold their boat-building business called the McConaghy Group, including McConaghy Pty Limited and McConaghy One Pty Limited, both of which were incorporated in Australia, that they had operated since about 2000, to a Cayman Islands special purpose vehicle, MC2 Composites Limited. The sale occurred under a shareholders' agreement between Mr Morris, Mr Evans, MC2 and Tiger Yacht Management Limited, another Cayman Islands company under the control of Graham Porter. On the same date, 21 February 2014, the four parties to the shareholders' agreement also entered into an investment agreement with McConaghy Holdings Limited and Mr Porter. The investment agreement related to MC2, which, in both agreements, was called "the company". 3 The shareholders' agreement provided that the business of MC2 included, first, any subsidiary and, secondly, the business of designing and manufacturing marine and industrial products incorporating composite technology, whilst preserving the core business of boat-building. The shareholders' agreement recited that the parties wished to conduct the business as an equal partnership between Mr Morris and Mr Evans on the one hand and Tiger on the other hand. The parties agreed that the business of MC2 would be conducted in accordance with a business plan that would be approved by the board of MC2 at its first directors' meeting, sound and good business practice and the highest ethical and professional standards. 4 The board of MC2 was to consist of six directors, three of whom were appointed by Mr Morris and Mr Evans jointly, and the other three by Tiger. The board originally included Mr Porter, two of his nominees, together with Mr Morris, Mr Evans and a Richard Hudson who was the latter two's nominee. The parties agreed that directors' meetings would be held on 14 days' notice with an agenda identifying what was the proposed business to be discussed. 5 The shareholders' agreement provided that, unless otherwise agreed by the shareholders, no fees or other remuneration would be paid to directors in their capacity as such, but that the directors would be entitled to be reimbursed for out-of-pocket expenses reasonably incurred by them (cl 4.5). Responsibility for the overall management and supervision of MC2 and its business was vested in its board, but Mr Morris and Mr Evans were to be its joint managing directors with responsibility for its day-to-day management and supervision. They had to report to the board (cl 5). 6 Only "eligible" persons were entitled to be shareholders and in the event that a shareholder, other than a party to the shareholders' agreement, being possibly Mr Morris, ceased to be an employee of MC2, then that shareholder had to offer their shares for sale under a pre-emptive rights provision and the shares would be sold at a fair value (cl 11). 7 One of the disputes between the parties is that after Mr Morris fell out with the other partners, so called, his shares were not sold in accordance with cl 11 or at all and he wishes them to be acquired at a fair value. 8 The investment agreement provided that Mr Morris and Mr Evans had to transfer the business then owned by McConaghy Pty Ltd to the first respondent, McConaghy Australia Pty Ltd, which would be a wholly owned subsidiary of MC2. It is common ground that this occurred and that, during the period until about June 2017, when the disputes arose that culminated in Mr Morris leaving the partnership, he and Mr Evans acted as joint managing directors. Mr Morris was resident in Sydney. Mr Morris was paid money that appeared to be by way of salary in respect of which McConaghy Australia issued him with PAYG statements from time to time under the provisions of Australian income tax laws. After a short initial period in which he received USD20,000 per month, for most of the period of his employment Mr Morris was paid USD10,000 per month. There is a dispute between the parties as to whether Mr Morris was entitled to be remunerated, with Mr Evans, at the rate of USD20,000 per month each for the whole period of his employment.

The Federal Circuit Court proceeding 9 On 12 April 2017, Mr Morris commenced proceedings in the Federal Circuit Court of Australia by filing a statement of claim seeking judgment against McConaghy Australia for USD361,239.91 in respect of his claimed unpaid remuneration. He based that claim upon McConaghy Australia's alleged breaches of its contract to pay him an agreed remuneration of USD20,000 per month as a term of his employment. He also sought relief by way of judgment in a similar sum under ss 545 and 547 of the Fair Work Act 2009 (Cth). 10 When McConaghy Australia filed its defence, it denied, first, that it was Mr Morris' employer and, secondly, any liability to him. It admitted that minutes of a directors' meeting of MC2 held on 27 March 2014 recorded that Mr Morris and Mr Evans were to be paid, as joint managing directors, USD20,000 per calendar month, but, McConaghy alleged, this was in their capacities as joint managing directors of MC2. The defence also alleged that in about mid-2014 the directors of MC2 had agreed that the monthly payment to each of Mr Morris and Mr Evans as joint managing directors would be USD10,000 a month. 11 Because of those allegations, it was clear that MC2 was a proper and necessary party to Mr Morris' claim but the Federal Circuit Court did not have jurisdiction to order service of its process out of the jurisdiction on other persons, such as MC2. Accordingly, by reason of the failure of the parties to agree to MC2 submitting to its jurisdiction, Mr Morris discontinued the Federal Circuit Court proceeding.

This proceeding 12 Mr Morris then immediately commenced this proceeding by an originating application filed on 18 July 2017. Here he seeks orders under s 583(c)(ii) of the Corporations Act 2001 (Cth) for the winding up of MC2, as a Pt 5.7 body, on the just and equitable ground, a declaration that McConaghy Australia breached s 323(1) of the Fair Work Act and orders under ss 545 and 547 of that Act for payment of his outstanding wages and entitlements, or, alternatively, damages based on breach of contract between him and McConaghy Australia or, alternatively, MC2. Mr Morris also joined as respondents Mr Evans and Tiger, being the other two parties to the shareholders' agreement. 13 On 29 September 2017, Jagot J made ex parte orders granting Mr Morris an anti-suit injunction that restrained Tiger from prosecuting or continuing an application it had made for an anti-suit injunction against Mr Morris in the Grand Court of the Cayman Islands, Financial Services Division. Her Honour made that order until further order. 14 Today, counsel for Tiger appeared for the purposes of seeking to challenge this Court's jurisdiction to grant the anti-suit injunction and to contest the amenability of Tiger to the jurisdiction of this Court in any event. Those challenges will be decided at a future time, but Tiger seeks to make its appearance without prejudice to Tiger's right to challenge this Court's jurisdiction over it. 15 The evidence before me includes draft minutes of a meeting of the board of MC2 held on 25 May 2016 in which one of the directors, Mark Hilton, said that MC2 was the sole co-investment parent company, through which the shareholders participated in respect of all operating subsidiaries. He said that the management of the undertaking and affairs of each of MC2's subsidiaries was (i.e consisted of) power and responsibility that ultimately resided with MC2 and the responsibility of the subsidiaries was to report up to MC2 as the holding company. 16 On about 26 June 2017, MC2 removed Mr Morris, without his agreement or consent, as a director of McConaghy Australia and all other subsidiaries of MC2 of which he was a director. That action is part of the foundation for his claim that the affairs of MC2, as a Pt 5.7 body, should be wound up on the just and equitable ground because it conducted operations within Australia by reason that decisions of MC2's board would govern the conduct of the Australian subsidiaries.

Consideration 17 Such an allegation is closely analogous to the situation considered in Ho v Akai Pty Ltd (in liq) (2006) 247 FCR 205 at 219 [62]-[66] per Finn, Weinberg and Rares JJ. There, the Full Court held that, in a situation where there was a prima facie case that the directors and officers of an Australian company regarded themselves as being bound to follow the instructions of a foreign holding company, this Court had jurisdiction to order service out on the foreign holding company and its chief executive officer on the basis that each was a shadow director for the purposes of the Corporations Act. 18 In my opinion, there is a prima facie case against McConaghy Australia that it is in breach of contract to pay Mr Morris' salary of USD20,000 per month. That case is supported by McConaghy's Australian taxation records and the minutes of MC2. 19 In the present case, the defence of McConaghy Australia in the Federal Circuit Court denied that it was the employer of Mr Morris and called in aid the minutes of MC2 as evidencing that company's potential capacity as his employer. If correct, those denials necessitated that Mr Morris be able to bring proceedings against his putative employer for its alleged breach of contract, within Australia, to pay him those wages within the meaning of item 2 in the table to r 10.42 of the Federal Court Rules 2011. Moreover, if McConaghy Australia were able to make out its pleaded defence, MC2 is likely to be Mr Morris' employer and as such, it is a proper and necessary party within the meaning of item 20 in the table to r 10.42 in circumstances where McConaghy Australia has been served within the jurisdiction. That being so, there is a prima facie case that the Court can order service of the proceeding on MC2 in the Cayman Islands: BY Winddown, Inc v Vautin [2016] FCAFC 168. 20 There is a dispute between the parties as to whether the amount of the monthly salary was varied, as between Mr Morris and either putative employer, McConaghy Australia or MC2, and, if so, on which of those companies the obligation to make the payments fell. Clearly, that dispute can only be finally resolved if both potential employers or parties liable under the contract to pay Mr Morris remuneration for his work and services in acting as a joint managing director or employee are before the Court in the one proceeding. 21 In addition, Tiger and Mr Evans appear to be proper and necessary parties to Mr Morris' claim to wind up MC2 based on the just and equitable ground. Their joinder will ensure that all four parties to the shareholders' agreement, that regulated the conduct of the affairs of MC2, are before the Court. The winding up claim is founded on Mr Morris' allegation that MC2 is a Pt 5.7 body which has assets and operations within Australia and conducted its business here through McConaghy Australia in accordance with the way in which the shareholders' agreement and investment agreement contemplated the affairs of its subsidiaries would be conducted. 22 In my opinion, there is a prima facie case that, on the evidence contained in the affidavit of Drew James affirmed on 11 August 2017, the relationships between the parties have broken down and that that dispute is sufficiently connected to Mr Morris' claim for unpaid wages that the other two investors in MC2, Mr Evans and Tiger, should also be joined and served out of the jurisdiction in Hong Kong and the Cayman Islands respectively, subject to the question of whether Tiger is capable of being, or ought be, joined. That question will be a matter for argument on the return of its application to set aside the anti-suit injunction.

Conclusion 23 For these reasons, there is a proper basis for ordering service out of the jurisdiction on Mr Evans and MC2. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares .

SCHEDULE OF PARTIES NSD 1195 of 2017 Respondents Fourth Respondent: TIGER YACHT MANAGEMENT LIMITED (A COMPANY INCORPORATED IN THE CAYMAN ISLANDS