Morris v McConaghy Australia Pty Ltd

Objections to the proposed amended originating application 4 It is useful to begin with the objections to the proposed amended originating application. The first of these is to ¶2 which is as follows (emphasis indicates the scope of the proposed amendment): 'In the alternative to order 1 above, an order under s 583(c)(ii) of the Corporations Act 2001 (Cth), or alternatively in the exercise of the court's inherent or implied jurisdiction, that the second respondent be wound up on the just and equitable ground.' 5 The Second Respondent, MC² Composites Ltd ('MC²'), is a company incorporated in the Cayman Islands. Section 583(c)(ii) of the Corporations Act 2001 (Cth) ('the Act') provides relevantly that a 'Part 5.7 body' may be wound up under Ch 5 ('External Administration'). For MC² to be wound up under s 583 it must therefore be a 'Part 5.7 body'. In paragraph (b) to the definition of that expression in s 9, it is defined as a foreign company that is registered under Div 2 of Pt 5B.2 or, if not registered, one which 'carries on business in Australia'. It is not in dispute that MC² is not registered under Pt 5B.2 so there is an initial question as to whether it was carrying on business in Australia. In the appeal concerned with whether Tiger could be served outside the jurisdiction, the Full Court accepted at [76] that Mr Morris had a prima facie case that MC² was carrying on business in Australia. Mr Hughes, for Tiger, accepted that this was sufficient to maintain the claim for winding up under the Act and Tiger did not submit that the current form of prayer 2 should be struck out. 6 The objection was instead to the proposed additions to prayer 2. It was apparent that Mr Morris' advisors had now sought to buttress the claim under s 583 in prayer 2 by calling upon an implied or inherent power in the Court to wind up a foreign corporation (presumably lest Mr Morris ultimately end up on the losing side of the argument of whether Tiger was carrying on business in Australia). Tiger's submissions was that there was no such jurisdiction citing Pearson J in Re Lloyd Generale Italiano [1885] 29 Ch D 219 at 220 where it was said: 'The jurisdiction to wind up a company is a purely statutory one under the Companies Acts. If I were to adopt Mr Farwell's argument, I must come to the conclusion that, in every case in which a foreign company has had any dealings in this country - whether the company is established in China, or Japan, or Australia - there is jurisdiction to order it to be wound up.' 7 It was submitted on behalf of Mr Morris, by Mr Fagir of counsel, that the position in Australia was unclear and that it was inappropriate to decide the issue on a summary basis. It was submitted that Mr Morris' position that there was such an inherent jurisdiction was supported by the decision of Young J in Re Kalblue Pty Ltd (1994) 12 ACLC 1057 at 1058. That case involved a situation where a standing limitation in s 462(2) of the Corporations Law was overcome (the applicant not being on the list of permissible winding up applicants set out in s 462(2)). Apart from the absence of a permissible applicant, however, there was no question that the Supreme Court of NSW had jurisdiction under the former Corporations Law to wind up the company. Young J concluded that the standing issue in s 462(2) could be circumvented by the invocation of an inherent jurisdiction. It is possible to read this case as authority for both a wide and a narrow proposition. The wide proposition is that the Supreme Court has an inherent jurisdiction to wind up entities other than under the relevant companies legislation. The narrow proposition is that where the Supreme Court has jurisdiction to wind up a company under statute then it has an inherent jurisdiction to entertain a suit seeking that kind of relief from an applicant who otherwise lacks standing. I accept for present purposes that Re Kalblue may well be authority for the wider proposition. 8 Everyone who has looked at the question, apart from Young J, has however thought him to be wrong. Master Bredmeyer declined to follow Young J in Western Interstate Pty Ltd v Deputy Commissioner of Taxation (1995) 13 WAR 479 ('Western Interstate') at 481. In Re Botar-Tatham Pty Ltd [2001] NSWSC 613; 52 NSWLR 680 Young J adhered to his previous position despite Western Interstate (at 683 [21]-[22]). In Lunn v Cardiff Coal Company [2002] NSWSC 1247; 171 FLR 430 at 437 [30] Barrett J distinguished Re Kalblue (holding it only to be authority for the narrow proposition above) but held nevertheless at 436 [26] that the Supreme Court did not have a general inherent jurisdiction to wind up entities not otherwise within its statutory jurisdiction. The New South Wales Court of Appeal has subsequently confirmed the correctness of Barrett J's position in Treadtel International Pty Ltd v Cocco [2016] NSWCA 360; 316 FLR 318 ('Treadtel') at 342 [84] at footnote 34 per Barrett AJA (Gleeson JA agreeing at [1] and Leeming JA at [8]). 9 If I were now deciding the issue at trial Treadtel would persuade me that I should hold that the Court has no inherent jurisdiction to wind up a company not otherwise subject to the Act. However, the question which arises is not whether Mr Morris' contention is correct but whether it is arguable. There is always the possibility of further appellate development or review of clear, but contestable, authority. So, for example, although it was clear at the time of a summary dismissal application that a trustee could not have imposed upon it a common law duty of care, it was incorrect to give summary judgment on that basis. This emerged from the NSW Court of Appeal's decision in Wickstead v Browne (1992) 30 NSWLR 1 ('Wickstead v Browne'). There the majority would have struck out such an allegation. Kirby P, in dissent, concluded that this should not occur saying (at 5): 'Common experience teaches that it is usually more efficient and just to consider the viability of a cause of action when the facts said to support it are adduced and the suggested action can be judged with a full understanding of all relevant evidence. Testimony gives colour and content to the application and development of legal principle.' 10 However, an appeal was allowed by the High Court which expressed general agreement with the reasons of Kirby P: Wickstead v Browne (1993) 10 Leg Rep SL 2. 11 There is some reason to think the present issue may be contestable. There are academic writings which support the position of Young J in Re Kalblue: see, for example, Ashley K Ehlers, 'Inherent equitable jurisdiction and the plenary power of the Supreme Court of New South Wales to order the winding up of companies' (2010) 18 Insolvency Law Journal 52. 12 Were this all, I would apply Wickstead v Browne and conclude that whilst Mr Morris' position is incorrect on the current state of the authorities nevertheless it remains arguable and should be allowed to proceed. A difficulty with this, however, is that Treadtel was itself a pleading dispute. The primary judge had explicitly relied upon Wickstead v Browne to allow the allegation to be pleaded. But the Court of Appeal thought that the issue should not be allowed to go trial. At 348 [102] Barrett AJA said this: 'There may be occasions on which it is appropriate for the court to determine, upon the hearing of substantive proceedings, a question going to disputed standing of a plaintiff. That has been said to be so where, for example, the dispute is one that it is "very easy to decide": Re QBS Pty Ltd [1967] Qd R 218 per Gibbs J; see also Re Ocean City Ltd v Southern Oceanic Hotels Pty Ltd (1993) 10 ACSR 483, Lanepoint Enterprises Pty Ltd (receivers and managers appointed) v Australian Securities and Investments Commission (2010) 78 ACSR 499 at [52]-[59]. A case in which an issue of disputed standing surfaces at the final hearing is, however, to be distinguished from one such as the present in which a question about the course the litigation should take is raised for decision by the court and involves potentially difficult questions of standing depending for their resolution on matters of evidence and, potentially, issues of credibility (on the material currently available, it seems that four persons were present at the meeting in Milan on 12 February 2012). Even allowing for the principle of just, quick and cheap resolution of the real issues in proceedings that, in accordance with s 56(1) of the Civil Procedure Act 2005 (NSW), must be applied in every matter of procedure and case management, the decision in this case to allow Mr Cocco to proceed towards a final hearing under both Pt 2F.1 and Pt 5.4A despite obviously disputed and equivocal standing is one that cannot stand. No question of re-exercise of discretion by this Court arises.' 13 However, I do not read this passage as entirely foreclosing the possibility of permitting a case such as the present to go to trial. Rather I read it as a statement that in the particular procedural constellation involved in Treadtel it was useful and appropriate to deal with the issue in a preliminary fashion. Colvin J in this Court has also accepted that Treadtel does not prevent the question of the standing of an applicant to apply to wind up a company being determined at trial rather than in a preliminary fashion: Hooke v Bux Global Limited [2018] FCA 740 at [19]-[21]. Of course those remarks have nothing to do with the present debate about the correctness of Re Kalblue but they do provide some support, limited perhaps, for the idea that Treadtel should not necessarily be seen as determining that Wickstead v Brown ought not to apply. 14 I do not favour the views of Young J in Re Kalblue and the views of Barrett J seem to me the result of more detailed consideration. Not without some misgivings, I do not think that the matter is so clear, however, that Mr Morris should be denied a trial of the issue. In essence, the situation looks very similar to Wickstead v Browne. 15 The next amendment was that proposed to Prayer 3. It was as follows: 'An order that the second respondent be dissolved.' 16 MC² was incorporated under the law of the Cayman Islands. It is under that law that it derives its legal personality. I do not understand how an order could be made in Australia which could have the effect of depriving it of legal personality conferred under foreign law. I decline to permit such an allegation to be made. 17 Proposed Prayer 7 was as follows: 'A declaration that each of third and fourth respondents: (a) was involved (within the meaning of s 550 of the Fair Work Act 2009 (Cth)); and (b) is jointly and severally liable with the first respondent and the second respondent for any compensation payable to the applicant.' 18 Mr Hughes submitted that the suggestion that it had been 'involved in' a contravention of the Fair Work Act 2009 (Cth) ('FW Act') within the meaning of s 550 of the FW Act necessitated that Tiger knew of the contravention citing Yorke v Lucas [1985] HCA 65; 158 CLR 661. Section 550 of the FW Act provides: 'Involvement in contravention treated in same way as actual contravention (1) A person who is involved in a contravention of a civil remedy provision is taken to have contravened that provision. Note: If a person (the involved person) is taken under this subsection to have contravened a civil remedy provision, the involved person's contravention may be a serious contravention (see subsection 557A(5A)). Serious contraventions attract higher maximum penalties (see subsection 539(2)) (2) A person is involved in a contravention of a civil remedy provision if, and only if, the person: (a) has aided, abetted, counselled or procured the contravention; or (b) has induced the contravention, whether by threats or promises or otherwise; or (c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in or party to the contravention; or (d) has conspired with others to effect the contravention.' 19 Prayer 7 does not identify the contravention that Tiger was involved in under s 550. However, I assume that it was the conduct of McConaghy Australia or MC² referred to in renumbered prayer 4, i.e., a contravention of s 323 of the FW Act in failing to pay Mr Morris his agreed wage and leave entitlements on termination. So I proceed on the assumption that what prayer 7 is suggesting is that Tiger was involved in the failure by MC² to pay Mr Morris his wage and leave entitlements. 20 Although s 550 does not refer to knowledge, it is textually identical to s 75B of what was formerly the Trade Practices Act 1974 (Cth). In Yorke v Lucas the High Court explained that this language was drawn from the criminal law and imported a requirement of knowledge; that is to say, it was necessary for it be shown that Mr Lucas knew that the conduct was misleading. The Court's reasoning was confined to s 75B(a) and (c) but Mr Fagir did not suggest that this mattered and, indeed, prayer 7 does not specify which subparagraphs of s 550 his client relied upon. I therefore accept for present purposes that to make good such an allegation it will be necessary for Mr Morris to demonstrate that Tiger was acting intentionally, i.e., that it knew that MC² was not paying Mr Morris his entitlements. 21 Tiger submitted that the terms of the statement of claim contained no allegations which made good the idea that Tiger knew this. Mr Morris submitted in response that such allegations could be discerned from ¶¶17, 28, 31-33, 40-41,43-45 and 60-64 of the statement of claim. There is no need to set these out but their effect may be summarised as follows: (a) Tiger was a 50% shareholder in MC² and appointed half the directors of MC2; (b) MC² managed McConaghy Australia; (c) McConaghy Australia, or alternatively MC², was Morris' employer; (d) Tiger, Morris and Evans agreed that Morris should be paid $20,000 a month; (e) McConaghy Australia, or alternatively MC², failed to pay Morris the amounts due; and (f) McConaghy Australia, or alternatively MC², thereby breached s 323 of the FW Act. 22 This does not include any allegation that Tiger knew that MC² or McConaghy Australia were not paying Mr Morris his entitlements. I do not think I should permit the proposed prayer 7 unless that allegation appears in the statement of claim. I therefore decline to permit prayer 7 at this stage. Mr Morris will need in due course to apply to amend the statement of claim to address these Yorke v Lucas issues. I decline to give him a blank cheque to do so by granting that leave now. I have in mind preserving the right of Tiger to contend, should it choose, that (a)-(f) are not capable of supporting an inference of knowledge (a proposition I accept). On the other hand, if Mr Morris can come up with something else apart from (a)-(f) to support the idea that Tiger knew that MC² and/or McConaghy Australia were not paying Mr Morris his entitlements, then he can apply at that time. 23 The proposed amended prayer 10 is as follows: 'A declaration that it would be unconscionable for the third and fourth respondents: (a) to continue to exclude the applicant form [sic] the day-to-day management of the first respondent and second respondent; and that the third and fourth respondents are in breach of their obligation to act in good faith, and their fiduciary obligations, by continuing to exclude the applicant from the management of the first respondent and the second respondent. (b) to deny that the applicant is entitled to sell his shares to the third respondent and/or the fourth respondent pursuant to clause 11.4 of the Shareholders Agreement upon the applicant ceasing employment with the first respondent and/or the second respondent.' 24 The attack on this was twofold. First, it was submitted that prayer 10(a) was too vague in its use of the expression 'excluding the applicant from "day-to-day management"'. I do not find that a difficult concept to understand, however. No doubt, it could be much more detailed and, perhaps after trial, the form of any eventual declaration will be. But at this stage I do not see prayer 10(a) as being drafted in such a way that it ought not be allowed to go forward. The second attack was upon prayer 10(b). It was submitted that it sought to assert a contractual interpretation which had already been described by the Full Court as weak such that it had no reasonable prospects of success. 25 This requires some unpacking. I accept that prayer 10(b) locates the alleged unconscionable conduct in a refusal by Tiger (and Mr Evans) to accept that Mr Morris was entitled to sell his shares to Mr Evans or Tiger if he ceased to be employed by McConaghy Australia. I think it may also be accepted that there is implied in this assertion an allegation that Mr Morris was, in fact, contractually entitled to do so. Pausing there, it may be queried whether any claim for breach of contract along those lines would subsume a case premised on unconscionable conduct where that conduct is said to be constituted by the other party to the contract asserting an erroneous construction of it. It is worth noting, however, that the assertion of an erroneous but genuinely held construction of a contract is not usually regarded as a repudiation: DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; 138 CLR 423 at 431-432 per Stephen, Mason and Jacobs JJ; Sweet & Maxwell Ltd v Universal News Services Ltd [1964] 2 QB 699 at 733-734 per Pearson LJ 26 One might think that the same outcome, or something similar, might obtain in any parallel analysis based upon unconscionable conduct; that is to say, it may well not be unconscionable to assert an erroneous construction of a contract as long as it is genuinely held. On that view, unconscionable conduct would only occur where a party put forward an erroneous construction knowing it to be unsound. However, it is not necessary to form any view of those matters as that was not the complaint which was made. 27 Rather, Tiger's submission was that the contractual interpretation upon which Mr Morris relied was so untenable that it ought to be given its quietus. The argument went as follows. First, the interpretation which Mr Morris was pursuing was that if he ceased to be employed by McConaghy Australia then he was entitled to dispose of his shares by selling them to Mr Evans or Tiger at a fair value and they would be obliged so to purchase them. Secondly, Tiger pointed to clauses 11.1, 11.2 and 11.4 of the Shareholders Agreement dated 21 February 2014. These provided: '11. Transfers of Shares 11.1 No Shareholder shall, except in accordance with the following provisions of this section 11 or without the prior written consent of the other Shareholders Transfer any Share. 11.2 Notwithstanding 11.1 any shareholder may, at any time, and subject to compliance with this agreement, transfer all, but not less than all of its shares to a wholly owned subsidiary of such shareholder or in the case of an individual shareholder a wholly owned company, without the prior written consent of the other shareholders. … 11.4 Subject to 11.1 and 11.2 and as provided below only Eligible Persons are entitled to be Shareholders. In the event a Shareholder other than a Party (a 'Leaving Shareholder') ceases to be a full time employee of the Company for whatever reason (including his unlawful dismissal) such Leaving Shareholder shall forthwith transfer his Shares to such person or persons as the Board shall nominate against payment to such Leaving Shareholder of the Attributable Net Asset value of such Shares. Each Shareholder hereby irrevocably appoints any Director from time to time to act as his duly authorised attorney to sign and deliver any transfer or other document reasonably necessary to enable the Company or any Shareholder to procure enforcement of this section 11.4.' 28 The 'Parties' were defined to be Mr Morris, Mr Evans, Tiger and MC². Relevantly, the 'Shareholders' were defined to include the Parties and an 'Eligible Person' was defined to mean a full time executive of McConaghy Australia. The effect of cl 11.4 appears to be that only full-time employees who are not Parties come under an obligation to dispose of their shares in the company. Clause 11.4 is silent, of course, on the right of a Party who has ceased to be a member to have the remaining parties buy out his shareholding at a reasonable value. It is also relevant that there is no such express term in the agreement. 29 Mr Morris' statement of claim faces up to this weakness by alleging that there is an implied term to the effect that a Party who ceases to be employed by the Company is entitled to require the remaining Parties to buy him out at reasonable value. Mr Morris alleged that term in his original concise statement and that allegation had been carried over into ¶20 of his statement of claim. It appears to have been accepted by the Full Court - and is not really disputed by Mr Morris - that this alleged implied term is based on a legal argument which is weak: see Tiger Yacht Management Ltd v Morris [2019] FCAFC 8 at [103] per McKerracher, Derrington and Colvin JJ. At the level of legal analysis, as I understood it, the alleged implied term was said to be weak because it was inconsistent with cl 11.4. However, I am not so sure that it is inevitably inconsistent with cl 11.4 which is about an obligation imposed upon departing non-Parties to dispose of their shares rather than being about the right of a departing Party to dispose of shares. I can certainly see that cl 11.4 may sit uncomfortably with the alleged implied term and can see why the Full Court was content to say that it might be a weak claim. However, I do not think it is inevitably doomed to fail so that it ought not to be tried. There may be life in it. I propose to allow prayer 10.

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Judgment (18 paragraphs)

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