Ou v Wan

Supreme Court of NSW|2020-11-06|Before: Williams J

INTRODUCTION

This proceeding arises out of a dispute between the shareholders of two small proprietary companies - Ou's International Pty Ltd (Ou's International) and Australian Health International Pty Ltd (Australian Health).
The Plaintiff and First Cross-Defendant, Mr Guozhong Ou (Mr Ou), owns 50% of the shares in each company. Mr Ou is also known by the name "Owen".
The First Defendant and Cross-Claimant, Mr Xianguo Wan (Mr Wan), owns 50% of the shares in each company. Mr Wan is also known by the name "Jason".
Mr Ou and Mr Wan are the directors of Ou's International.
Mr Wan is the sole director of Australian Health.
Mr Ou seeks an order pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth) for the winding up of Ou's International and Australian Health. By the time of the hearing, Mr Wan had abandoned his opposition to that order.
Mr Ou also claims that Mr Wan is liable to him in damages for alleged breach or repudiation of an agreement entered into by Mr Ou, Mr Wan and a third party (Mr Jiahua Zhou) on 21 December 2015, referred to as "the Parting Agreement". Mr Ou claims damages in an amount of approximately $135,000. [1] I will return to the subject of the calculation of the damages claimed by Mr Ou later in these reasons.
Mr Wan denies that he breached or repudiated the Parting Agreement. Mr Wan claims that Mr Ou is liable to him for damages in the sum of $200,398 for Mr Ou's alleged breach of the Parting Agreement and alleged breach of an oral agreement made between Mr Ou, Mr Wan and Mr Zhou in late 2013. Mr Ou denies the alleged breach of those agreements. Mr Ou also contends that the oral agreement made in late 2013 was no longer on foot by the time of the breach alleged by Mr Wan.

RELEVANT FACTS

Mr Ou and Mr Wan were friends, and had mutual trust and confidence in one another, when they decided in late 2013 to establish a retail business together with a third person, Mr Jiahua Zhou. At that time, Mr Zhou had an existing business. According to Mr Ou's unchallenged evidence, Mr Zhou agreed to be involved in the business on the basis of Mr Ou's trust and confidence in Mr Wan, in circumstances where Mr Zhou trusted Mr Ou but had no previous relationship with Mr Wan.
There are minor differences between Mr Ou and Mr Wan concerning the conversations that they had with Mr Zhou in late 2013 in which they agreed to establish this business to be conducted by a company. Given that both parties rely on these conversations as constituting the oral agreement that Mr Wan alleges was breached Mr Ou, it is convenient to set out their respective versions of the conversations in full.
According to Mr Ou, he and Mr Wan met with Mr Zhou in Mr Zhou's office at Parramatta in about October or November 2013 and had a conversation in which they agreed to form a new company to carry out a retail business. Mr Zhou stated that he would hold 40% of the shares in the new company, with the remaining 60% to be held by Mr Ou and Mr Wan equally, Mr Ou and Mr Wan would each receive an annual salary of $45,000 and the three shareholders would contribute to the capital requirements of the business in the same proportions as their respective shareholdings, with Mr Zhou's contributions to be in the form of stock and Mr Ou and Mr Wan's contributions to be in the form of cash. According to Mr Ou, both he and Mr Wan said "Ok" in response to each of these statements by Mr Zhou.
According to Mr Wan, there were three conversations between himself, Mr Ou and Mr Zhou concerning the establishment of the new business. In the first conversation on 20 December 2013, either he or Mr Ou told Mr Zhou that they had already registered Australian Health as the company that would conduct the new business and Mr Zhou agreed to the business being conducted by Australian Health. Mr Zhou said that, as Mr Ou and Mr Wan would be working in the business but Mr Zhou would not, he would like to have 30% of the shares, with the remaining 70% to be split equally between Mr Ou and Mr Wan. Mr Zhou also said that Mr Ou and Mr Wan should each receive a salary of between $40,000 and $50,000. Mr Wan and Mr Ou agreed to Mr Zhou's proposals in this conversation. Their annual salaries of $45,000 and the shareholding split of 40% to Mr Zhou and 30% to each of Mr Ou and Mr Wan was agreed in a second conversation that occurred just after Christmas 2013 when the Kingsford retail premises for the new business had been secured. During a third discussion in about January 2014, Mr Ou proposed that Ou's International, which had recently been registered by Mr Ou, be used to conduct the new business. Mr Wan and Mr Zhou agreed to this proposal and the lease of the Kingsford premises was then signed in the name of Ou's International.
The minor differences between the parties' respective accounts of these conversations were not the subject of any cross-examination, and it is not necessary to make findings resolving those differences. What is relevant for the purposes for resolving the issues in dispute in these proceedings is that neither party's account of the conversations involved any agreement or discussion about the manner in which any profits of the new business were to be distributed between shareholders.
Ou's International was incorporated on 8 January 2014. Mr Ou was initially the sole director of the company. Mr Wan was appointed as a director in December 2014. There is a disagreement between Mr Ou and Mr Wan about whether Mr Wan should have been appointed as a director earlier, and the reasons why he was not appointed until December 2014. However, that disagreement is not relevant to the issues raised for determination on the pleadings.
A company associated with Mr Zhou initially held 40% of the shares in Ou's International. That was reduced to 20%, and the shareholding of Mr Ou and Mr Wan increased to 40% each, in December 2014.
Ou's International commenced trading in early 2014 and was conducted out of the leased premises at Kingsford. Mr Ou and Mr Wan worked in the business.
There is some disagreement between Mr Ou and Mr Wan about the extent to which, and the manner in which, each of them contributed to the funding of the business. However, that disagreement is not relevant to the issues raised for determination on the pleadings.
Each of Mr Ou and Mr Wan were paid a salary of $45,000 for working in the business during 2014.
It is common ground that Mr Wan was not paid a salary for 2015. [2]
Ou's International operated a Commonwealth Bank account ending in the number 870 (the Ou's bank account). There was no evidence to suggest that it operated any other bank account during the period from its commencement of trading in early 2014 until the end of 2015.
The evidence included statements for the Ou's bank account for the period from 1 January 2015 to 30 June 2015 and 1 October 2015 to 31 March 2016.
Those bank statements show that, during that period, the proceeds of point of sale transactions (recorded as "POS"), various direct credits and electronic funds transfers were credited to the Ou's bank account. The debit entries recorded on the statements are electronic funds transfers to various other accounts, electronic payments to various merchants, BPAY payments, DEFT payments and cheques presented against the account.
Mr Wan gave evidence to the effect that Ou's International made cash sales, and paid some expenses in cash. He exhibited to his affidavit handwritten sales records for the Kingsford premises during the period February 2015 to November 2015 that record the total sales for each day, and then divide that total into "EFS" and "cash". Mr Ou gave no evidence disputing this aspect of Mr Wan's evidence. Nor was Mr Wan's evidence challenged in cross-examination.
Neither party presented any detailed analysis of the "EFS" and cash sales records. For at least parts of the period from about June 2015 to November 2015, the records appear to deduct from the cash sales figure any expenses paid in cash and record the balance as a "supposed deposit". The "supposed deposit" at the end of one day does not appear to have been carried over into the following day. There are daily "supposed deposit" figures ranging between approximately several hundred dollars and $4,000.
There are no cash deposits recorded in the statements for the Ou's bank account statements.
The relevance of this will become apparent below.
In about June 2015, Mr Ou and Mr Wan agreed to commence another retail business, similar to the business of Ou's International, and to conduct that business through Australian Health. Mr Zhou had no involvement in this business.
Australian Health had been incorporated on 15 October 2013 and Mr Wan was its sole director and shareholder. At some stage after June 2015 and before 21 December 2015, 50% of the shares in Australian Health were transferred to Mr Ou.
The new business commenced in about July 2015, trading out of premises at Ultimo. Mr Ou contends that, from mid-2015 onwards, Mr Wan worked only in the Ultimo store and no longer worked at the Kingsford premises operated by Ou's International. Mr Wan claims that he continued to do some work at the Kingsford premises, although he was working far more hours at the Ultimo store. It is not necessary to resolve this disagreement between the parties for the purpose of determining the issues raised by the pleadings.
Stock of Ou's International was periodically transferred from its Kingsford premises to the Ultimo premises for sale by Australian Health. Mr Ou gave evidence that this was done because "inventory in Kingsford was relatively large and it was more cost-effective to share the inventory between the two shops".
Mr Ou exhibited to his affidavit affirmed on 18 June 2019 an Excel spreadsheet that he prepared which he described as summarising contemporaneous handwritten records of the amount and price of stock transferred from the Kingsford premises to the Ultimo store during the period from July to November 2015. According to Mr Ou, stock with a total price of $232,155.36 was transferred from the Kingsford premises to the Ultimo store during that period, with only $26,022.62 being transferred from the Ultimo store to Kingsford. Mr Wan did not adduce any evidence to the contrary and did not challenge this aspect of Mr Ou's evidence in cross-examination.
Mr Shuqing Ni (known as James Ni) was the accountant for Ou's International from 2014 and Australian Health from mid-2015.
It is common ground between Mr Ou and Mr Wan that their personal relationship broke down in late 2015, and that this caused their business relationship to deteriorate. It is not necessary to address the evidence concerning the reasons for the breakdown in any detail. It suffices to say that the evidence suggests that it originated in a dispute between their respective partners concerning their work at Ou's International, each man taking the side of his own partner in that dispute.
By 21 December 2015, Mr Ou and Mr Wan acknowledged that they could no longer work together. Together with Mr Zhou, they signed the Parting Agreement on 21 December 2015.
At the time of the Parting Agreement: 1. Mr Ou and Mr Wan each owned 40% of the shares in Ou's International and the remaining 20% of the shares were still owned by a company associated with Mr Zhou; and 2. Mr Ou and Mr Wan each owned 50% of the shares in Australian Health.
By the end of the final hearing, it was common ground between Mr Ou and Mr Wan that, at the time of the Parting Agreement, Ou's International owed Mr Wan $45,000 in unpaid salary for the 2015 year and Mr Wan was entitled to be paid a dividend of $155,398. [3] The $155,398 amount represents 40% of an amount of $388,495.82, which Mr Zhou, Mr Wan and Mr Ou jointly calculated in December 2015 to be the "net profits" generated by Ou's International during the entire period from the commencement of its business in January 2014 until the end of November 2015. [4] It is clear from Mr Wan's affidavit affirmed on 18 November 2019 that this calculation of "net profits" represents net profits before tax.
A copy of the Parting Agreement, and two competing English translations of it, was in evidence. [5] There is no significant difference between the two translations. It is convenient to set out in full the translation relied on by Mr Ou, with some differences in the translation relied on by Mr Wan noted in square brackets and italics. It will be recalled that Mr Ou is also known as "Owen", Mr Wan is also known as "Jason", Mr Zhou's first name is Jiahua, Ou's International operated the business conducted from retail premises in Kingsford and Australian Health operated the business conducted retail premises in Oatley. "Agreement on Transferring Kingsford [Kingsfrod] and Ultimo Shops [stores] The Kingsford shop is located at Shop 1, 277 Anzac PDE, Kingsford [Kingsfrod]. The Ultimo Shop is located at 171 Broadway, Ultimo. Owen shall transfer 40% of the shares in the Kingsford Shop [of Kingsfrod] and 50% of the shares in the Ultimo Shop [of Ultimo] at a total transfer cost of $80,000.00 (Eighty thousand Australian dollars), i.e. Owen shall transfer all his shares, and Jiahua shall transfer 20% of the shares in the Kingsford (shop) [of Kingsfrod]. Jason shall [take over and] pay Owen $80,000 when taking over, and the goods in stock at Kingsford shall be settled at the buying price [The inventory of Kingsfrod is cleared at the purchase price]. The goods that are due to expire in the next six months shall be deemed as loss incurred by the original company (the shareholders shall take away respectively the products that are about to expire). The quantity of milk powder can be determined via stocktake, and the total price can be determined based on the current market price (the buying price at present), which will then be paid to the original company and shared by its shareholders as dividend. For the Ultimo Shop, Jason shall pay Owen a total fee of $135,000 (one hundred and thirty-five thousand Australian dollars), including $30,000 as principal, $25,000 as dividend [bonus] and the transfer payment. After that Jason shall own 100% of the shares in the two shops. [Afterwards, Jason shall own 100% shares of the two stores.] The accounts for the past two quarters [the previous two years] have been worked out properly [were settled], but Owen failed to extend payment to Jason [while Owen did not pay Jason], and in turn Jason can use the salary of $45,000 that he earned and the dividend [bonus] of $155,398 to offset the relevant amount. Summary: Jason shall obtain 100% of the shares in the two shops and shall pay $135,000. The actual payment for goods in the Kingsford Shop [Kingsfrod store] shall be calculated as per stocktake undertaken [is calculated based on inventory]. Jason shall not be liable for any right or debts of the original company, nor liable to pay other costs."
The text set out above is signed by Mr Zhou, Mr Ou and Mr Wan.
As will become apparent later in these reasons, there is a dispute between the parties concerning the construction of the Parting Agreement. The principal issue in dispute is the proper construction of the fifth paragraph set out above. It is convenient to refer to that paragraph as the offset clause.
The only material difference between the two translations of the Parting Agreement arises from the translation of the accounts for "the last two quarters" or "the past two years" in the offset clause. As I referred to in [37] above, immediately before entering into the Parting Agreement, the parties had undertaken an exercise of calculating the profits of Ou's International in respect of the period from January 2014 to November 2015. The amount of $155,398 is derived from that calculation. I therefore consider that the correct translation is "the past two years".
In the translation relied on by Mr Wan, "Kingsford" is wrongly spelled "Kingsfrod". However, this work was written in English characters in the original document, and its misspelling in Mr Wan's translation replicates the misspelling in the original document. I therefore consider that "Kingsfrod" is the correct translation.
In his affidavit sworn on 18 June 2019, Mr Ou referred to the Parting Agreement as including an additional page. Like the Parting Agreement, the document written in the Chinese language used English characters for the words "Kingsford" and "Ultimo". The word "Kingsford" was not misspelled in that document.
The English translation of the additional page tendered by Mr Ou reads as follows: "1. To count the goods in stock at Kingsford and figure out the actual value of goods in stock by deducting the costs of expired (within the next six months) products. 2. To figure out the actual net profit based on the prices after depreciation. 3. To distribute dividend and principal based on the prices after depreciation. 4. The rest shall be owned by Owen himself. 5. The debt incurred by Ultimo to Kingsford must be repaid prior to 1. 6. 38,000 should be repaid prior to 1. 7. The goods taken by Ultimo must be returned to Kingsford prior to 1."
Mr Wan deposed that he had never seen the additional page before it was provided to him as part of Mr Ou's affidavit in these proceedings.
I find that the additional page was not created by or agreed between the parties at the time that they entered into the Parting Agreement and therefore did not form part of the Parting Agreement.
There are four reasons for my finding. First, the signatures of Mr Zhou, Mr Ou and Mr Wan appear at the foot of the first page set out in [38] above, but do not appear anywhere on the additional page. Second, the correct spelling of the word "Kingsford" on the additional page, points strongly to the conclusion that the additional page had a different author than the author who misspelled "Kingsfrod" on the signed page (or, alternatively, that the two pages were prepared a different times). Third, point 6 of the additional page referred to a sum of $38,000 that "should be repaid". It is clear from Mr Ou's evidence that this is a reference to the amount of $38,000 that Mr Wan transferred from the Ou's bank account on 20 December 2015. According to Mr Ou's own evidence, he first became aware of this transfer and asked Mr Wan to pay it back on 29 December 2015, some eight days after the Parting Agreement was entered into. This is another factor that points to the conclusion that the additional page was created at a different time to the Parting Agreement and, indeed, after the Parting Agreement. Fourth, Mr Wan was not challenged in cross-examination on his evidence that he had not seen the additional page prior to these proceedings.
For completeness, I note that counsel for Mr Ou did not identify any reason why the evidence supported the conclusion that the Parting Agreement included the terms on the additional page. Counsel merely asserted that it did because Mr Ou had said so.
Before turning to the events that occurred after the Parting Agreement was signed, I note that the financial statements prepared by Mr Ni for Ou's International for the 2014, 2015 and 2016 financial years are not consistent with that company having earned net profits before tax of $388,495 before tax during the period from January 2014 to November 2015, as calculated by Messrs Zhou, Ou and Wan in December 2015.
The unsigned financial statements tendered by Mr Ou recorded that: 1. in the financial year ending 30 June 2014, Ou's International made a net profit before tax of $111.48 and net profit after tax of $78.18 and had net assets of $1,078.18 at the end of the financial year; 2. in the financial year ending 30 June 2015, Ou's International made a net profit before tax of $824.74 and net profit after tax of $577.54 and had net assets of $1,665.72 at the end of the financial year; and 3. in the financial year ending 30 June 2016, Ou's International made a net profit before tax of $184.16 and net profit after tax of $131.72 and had net assets of $1,787.44 at the end of the financial year.
According to Mr Ou, those financial statements were prepared on the basis of the following information that Mr Ou provided to Mr Ni on a quarterly basis: 1. reports of daily sales of Ou's International produced by the "point of sale system" that "captured" all sales; and 2. the bank statements of Ou's International.
There was no evidence concerning how the "point of sale system" referred to by Mr Ou operated. However, I infer from his description of the system as "producing" reports of daily sales that this was an automated process that generated a report based on data recorded in a computerised system.
As I have already explained in [23]-[26] above, handwritten records of "EFS" and "cash" sales were also maintained by Ou's International and its net cash receipts were not deposited into its bank account.
Even though the Ou's International profit calculation undertaken by Messrs Zhou, Ou and Wan in December 2015 covered only the period from January 2014 to November 2015 and the financial statements prepared by Mr Ni cover an additional period of seven months up to June 2016, the net profit before tax calculated by Messrs Zhou, Ou and Wan ($388,495) exceeds the total net profits before tax recorded in the financial statements prepared by Mr Ni for the three financial years 2014, 2015 and 2016 ($1,123) by $387,372.
In my view, the evidence gives rise to a compelling inference that the financial statements prepared by Mr Ni did not take into account the cash sales receipts of Ou's International, which were recorded in the handwritten records and were not banked in the Ou's bank account. The would also explain why Messrs Zhou, Ou and Wan, who were aware of the nature of the business and the cash sales receipts, undertook their own calculation of profits for the purpose of the Parting Agreement rather than relying on Mr Ni's financial statements for the 2014 and 2015 financial years and preparing their own calculations or instructing Mr Ni to prepare a calculation for the period from 1 July to the end of November 2015.
After the Parting Agreement was signed, Mr Zhou relinquished his 20% shareholding in Ou's International, but Mr Ou did not transfer his shares in the companies to Mr Wan and neither of them made any payment to the other. Mr Ou continued to operate the business of Ou's International until that company ceased trading in about March 2017, and Mr Wan continued to operate the business of Australian Health. Mr Ou had no involvement in the business of Australian Health and received no dividends from Australian Health. Similarly, Mr Wan had no involvement in the business of Ou's International even though he continued to be a director of that company, and he received no dividends from it. Mr Ou transferred Ou's International's funds from the Ou's bank account in a different name without Mr Wan's agreement or approval. [6]
Mr Wan says that he made several demands on Mr Ou for payment of $200,398. Mr Ou acknowledged this in cross-examination, but said that he had made demands for Mr Wan to pay the $135,000 even more often than Mr Wan had requested payment from him.
Mr Ou says that he made several demands on Mr Wan for payment of $135,000 in full. Mr Wan denies this.
Mr Wan says that he also received several calls from Mr Ni during 2016 and 2017 in which Mr Ni referred to an agreement having been reached between Mr Ou and Mr Wan for them to take one company each, and discussed the need for shares to be transferred to give effect to this agreement. Mr Wan understood Mr Ni to be calling on behalf of Mr Ou. Mr Wan refused to transfer any shares unless and until he was paid the $200,398 owed to him.
Mr Ni gave evidence that he has no recollection of having any such conversations with Mr Wan (or Mr Ou) in 2016 and 2017.
Mr Ou denies telling Mr Ni that he had reached an agreement with Mr Wan for them to have one company each.
I accept Mr Ou's denial. It is inherently unlikely that Mr Ou would seek to have Mr Ni do his bidding by arranging for Mr Wan to sign share transfers to give effect to some different agreement to that recorded in the Parting Agreement signed on 21 December 2015. Given that the parties had negotiated the Parting Agreement directly and Mr Wan was speaking to Mr Ou directly in 2016 and 2017 pressing him for payment of the $200,398, it is more likely that Mr Ou would have spoken to Mr Wan directly during one of these conversations about any alternative agreement that Mr Ou wished to enter into. Mr Ni did prepare documentation requested of him in 2018 and 2019 (as referred to below). However, there is no evidence that he prepared or provided to Mr Wan documentation for share transfers to give effect to an arrangement of the kind Mr Wan claims Mr Ni spoke to him about in 2016 and 2017.
No steps were ever taken by either Mr Ou or Mr Wan to determine the "buying price" of "the goods in stock at Kingsford" for the purpose of calculating the payment to be made by Mr Wan to Ou's International in accordance with the fourth paragraph of the Parting Agreement.
In his affidavit affirmed on 18 June 2019, Mr Ou deposed that Ou's International ceased trading in about March 2017.
In early March 2018, Mr Ni contacted Mr Wan because ASIC annual fees were due for Ou's International. Mr Ni suggested that Ou's International be deregistered to avoid paying this fee, as it had ceased trading. Mr Ni gave evidence that Mr Wan agreed with this suggestion, and also asked Mr Ni to prepare documentation to cancel Mr Ou's shares in Australian Health at the same time.
Mr Ni then prepared and emailed to Mr Ou and Mr Wan: 1. ASIC Form 484 for the cancellation of Mr Ou's shares in Australian Health; and 2. ASIC Form 6010 for the voluntary deregistration of Ou's International.
Mr Wan signed both forms on 18 March 2018, but the forms were not signed by Mr Ou. Accordingly, the deregistration of Ou's International and the cancellation of Mr Ou's shares in Australian Health did not proceed.
Mr Ou commenced this proceeding on 27 March 2018.
Australian Health ceased trading on 30 June 2018.
On 25 October 2018, Mr Ou directed the preparation of audited financial reports for Australian Health pursuant to s 293 of the Corporations Act. Mr Wan, who is the sole director of Australian Health, did not comply with this direction.
On 26 November 2018, Mr Ou called a meeting of directors of Ou's International with an agenda to approve a resolution to be proposed at the meeting for the commencement of legal proceedings against Mr Wan. The meeting did not proceed after Mr Wan indicated that he would not attend.
Mr Ni gave evidence that he contacted Mr Wan again in early May 2019 in relation to the ASIC annual review fee. Mr Ni told Mr Wan that the only way to avoid having to pay the fee was to voluntarily deregister the company with ASIC. It was at this stage that there was a conversation between Mr Ni and Mr Wan about the possibility of Mr Wan and Mr Ou keeping one company each. I infer that this subject arose as a result of Mr Wan and Mr Ou have failed to take all of the steps necessary to deregister Ou's International in 2018 after it had ceased trading. Mr Ni advised Mr Wan that, if he and Mr Ou each wanted to keep one company, then both members needed to sign the ASIC Form 484 to cancel the other person's share in the company. Mr Ni's evidence is that Mr Wan agreed with this suggestion and instructed him to prepare the ASIC Form 484 and send them to him and to Mr Ou for signing.
Mr Ni did prepare the forms, which provided for cancellation of Mr Ou's shares in Australian Health, cancellation of Mr Wan's shares in Ou's International and resignation of Mr Wan as a director of Ou's International. Mr Ni sent the forms to Mr Wan for signing, and Mr Wan did sign both forms. Mr Ni gave evidence that he had a telephone conversation with Mr Ou, in which he told Mr Ou that Mr Wan wanted to cancel Mr Ou's shares in Australian Health and cancel Mr Wan's shares in Ou's International. Mr Ni told Mr Ou that this would result in each of he and Mr Wan being the sole director/shareholder of one of the companies. According to Mr Ni's affidavit, "Mr Ou told me it was fine and to ask Mr Wan to sign the form first".
According to Mr Ou, it was in early March 2018 that Mr Ni contacted him and told him that Mr Wan had asked him to prepare forms to "swap" Mr Ou's shares in Australian Health and Mr Wan's shares in Ou's International. Mr Ou says that he told Mr Ni he would have a think about it.
It is clear from the forms created by Mr Ni in March 2018 and in May 2019 that Mr Ou is mistaken about the timing of this conversation and that it occurred in May 2019 rather than March 2018. It is not necessary to make any finding about whether Mr Ou agreed to sign the ASIC forms cancelling his shares in one company and Mr Wan's shares in the other, or whether he merely said that he would think about it. He did not sign the forms that Mr Ni sent to him.
In his affidavit affirmed on 18 June 2019, Mr Ou deposed that he has no trust and confidence in Mr Wan.

ISSUES TO BE DETERMINED

The issues that must be resolved in order to determine the parties' claims for relief may be summarised as follows: 1. What is the proper construction of the Parting Agreement, particularly the offset clause? 2. Did Mr Wan breach or repudiate the Parting Agreement? 3. Did Mr Ou breach the Parting Agreement and/or the 2013 oral agreement? 4. Should Ou's International and Australian Health be wound up pursuant to s 461(1)(k) of the Corporations Act?

Issue 1 - Proper construction of the Parting Agreement

Counsel for Mr Ou submitted that the Parting Agreement was a commercial contract, the purpose of which was to bring the business relationship between Mr Ou and Mr Wan to an end. He submitted that the Parting Agreement must be construed according to what a reasonable person in the position of the parties would have understood the words to mean. I accept those submissions, noting that the understanding to be attributed to the reasonable person is informed by the commercial circumstances in which the Parting Agreement was entered into.
The applicable principles were recently summarised by Bathurst CJ (with whom Bell P and McCallum JA agreed) in Macquarie International Health Clinic Pty Ltd v Sydney Local Health District (2020) 19 BPR 40,463; [2020] NSWCA 161 at [229]: "The principles surrounding the construction of commercial contracts are well established. In Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] H CA 7 at [35] the plurality (French CJ, Hayne, Crennan and Kiefel JJ) stated, 'The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean'. The Court stated that 'it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract': see also Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [20 15] HCA 37 at [46]-[49]; Simic v NSW Land and Housing Corporation (2016) 260 CLR 85; [201 6] HCA 47 at [78]; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HC A 12 at [16]; Victoria v Tatts Group Ltd (2016) 90 ALJR 392; [2016] HCA 5 at [51]. As was pointed out by Gleeson CJ in McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; [2000] HC A 65 at [22], commercial contracts should be given a businesslike interpretation and that requires attention to the language used by the parties, the commercial circumstances which the document addresses and the objects which it is intended to secure."
In the application of those principles, preference is to be given to a construction that supplies a congruent operation to the various components of the whole contract: see Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17 at [16] (Gleeson CJ, McHugh, Gummow and Kirby JJ).
The pleadings raise an issue about whether the sum of $135,000 referred to in the fourth paragraph of the Parting Agreement as payable by Mr Wan to Mr Ou was: 1. as Mr Ou, contended, the price for Mr Ou's shares in Ou's International and Australian Health; or 2. as Mr Wan contended, a total amount for the price for Mr Ou's shares in the two companies ($80,000) plus a further amount of $30,000 reflecting capital or "principal" of Australian Health and a dividend of $25,000 payable to Mr Ou as a shareholder in Australian Health for the period up to the date of the Parting Agreement ($25,000).
I accept Mr Wan's contention because it reflects the language used by the parties. Mr Ou's contention is irreconcilable with the words of the Parting Agreement. The third paragraph of the Parting Agreement expressly states that the price for Mr Ou's shares in Ou's Intentional and Australian Health is $80,000. It is clear from the penultimate sentence of the fourth paragraph that the $135,000 sum is comprised of that $80,000 payment for the transfer of the shares, plus $30,000 and $25,000 being a payment for "principal" and a dividend or bonus respectively in respect of Australian Health which is referred to as "the Ultimo shop" .
It is common ground that the Parting Agreement also included an express term to the effect that Mr Wan would pay a further sum to be determined by a stocktake of the goods then existing at the Kingsford premises operated by Ou's International. It is clear from the words used in the fourth paragraph of the Parting Agreement Mr Wan was not required to pay this amount to Mr Ou directly. Rather, the payment for the stock at the Kingsford premises was to be made "to the original company and shared by its shareholders as a dividend". Given that the stocktake obligation refers only to the Kingsford premises, a reasonable businessperson would have understand the reference to "original company" to mean Ou's International. In my opinion, a reasonable businessperson would have understood the word "original" in this context as meaning that the stocktake amount, once paid to Ou's International, was to be distributed to Mr Zhou, Mr Ou and Mr Wan as if they still held shares in Ou's International in the same proportions as immediately prior to the Parting Agreement.
Mr Ou pleads that the Parting Agreement included: 1. an express term to the effect that Mr Wan would cause Australian Health to return goods previously consigned to it by Ou's International, less a sum of $200,398; and 2. a term implied in order to give business efficacy to the Parting Agreement to the effect that Mr Wan would cause Australian Health to return the consigned goods to Ou's International at its Kingsford premises.
Mr Wan denies that the Parting Agreement included express or implied terms to this effect.
I reject Mr Ou's contention that the Parting Agreement included an express term to the effect that Mr Wan would cause Australian Health to return goods previously consigned to it by Ou's International, less a sum of $200,398. The words of the Parting Agreement make no reference to stock being returned or transferred from Australian Health or Ultimo to Kingsford at all. Nor do they contain any reference to the amounts of $45,000 and $155,398 being deducted from any stock. On the contrary, the offset clause expressly provides for those amounts to be deducted from the "relevant amount". Counsel for Mr Ou submitted that the "relevant amount" referred to the sum of $135,000 payable by Mr Wan to Mr Ou as referred to in the fourth paragraph of the Parting Agreement, as adjusted following the stocktake. [7] Mr Wan did not make any submission to the contrary. I accept that the words "relevant amount" in the context of the offset clause and the Parting Agreement as a whole refer to the $135,000 payable by Mr Wan directly to Mr Ou plus the amount payable by Mr Wan to Ou's International for stock, as determined in the Kingsford stocktake to be conducted by the parties.
I also reject Mr Ou's contention that the Parting Agreement included an implied term to the effect that Mr Wan would cause Australian Health to return the consigned goods to Ou's International at its Kingsford premises. I do not consider that the proposed implied term could be said to be reasonable and equitable, necessary to give business efficacy to the Parting Agreement and so obvious that it goes without saying: Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 347 (Mason J). That is because, if the stock at the Ultimo premises was returned to the Kingsford premises of Ou's International, this would be likely to interfere with Mr Wan's ability to operate the business of Australian Health as a going concern from its premises in Ultimo upon becoming the sole shareholder of that company pursuant to the Parting Agreement. There is no apparent reason why the parties would have intended that Mr Wan, as the new owner of both companies, should not be free to choose what stock was required at what premises.
Mr Ou contends, and Mr Wan denies, that the Parting Agreement also contained a term implied as a matter of business efficacy to the effect that the stocktake of the goods at the Kingsford premises, and the transfer and payment for shares, would take place within a reasonable time after signing of the Parting Agreement.
In my opinion, the Parting Agreement did include an implied term to this effect. The parties entered into the Parting Agreement in order to separate their business affairs because the business and personal relationship between Mr Ou and Mr Wan had broken down. It was in all parties' interests for the share transfer to be completed within a reasonable time after execution of the Parting Agreement so that their business interests were separated promptly following the breakdown of the relationship between Mr Ou and Mr Wan.
Moreover, the amount to be paid by Mr Wan to become the sole owner of both companies included an amount for the stock held at the Kingsford premises and the parties agreed to undertake a stocktake to determine that amount. I infer that the stock of the retail business fluctuated frequently, and that a stocktake that was not taken within a reasonable time after the Parting Agreement was signed would not reflect the value of the stock as at the date of the agreement and/or the date of the transfer of the shares which was to be completed within a reasonable time after signing.
In those circumstances, the implied terms referred to in [88] above are reasonable and equitable, necessary to give business efficacy to the agreement, and obvious. They are also capable of clear expression and do not contradict any express term - the Parting Agreement was silent about the time period within which the share transfer, stocktake and payments (after offset) were to take place.
The most significant aspect of the dispute between the parties as to the construction of the Parting Agreement concerns the meaning of the offset clause.
Mr Wan did not directly address the offset clause or its proper construction in his oral submissions. However, it is clear from his pleadings that he contends that the clause entitled him to deduct the sum of $200,398 from payments he was required to make under the Parting Agreement. [8]
Counsel for Mr Ou submitted that the natural and ordinary meaning of the offset clause is that Mr Wan's liability under the preceding clauses of the Parting Agreement to pay the consideration for transfer of Mr Ou's shares in the two companies may be applied to reduce the amount of any liability owed by Mr Ou personally to Mr Wan. It was submitted that this was the natural and ordinary meaning of "offset". It was submitted that the offset clause did not permit Mr Wan to apply the amounts of $45,000 and $155,398 referred to in the clause against the amount of $135,000 payable by Mr Wan to Mr Ou because the amounts of $45,000 and $155,398 were owed to Mr Wan by Ou's International and not by Mr Ou personally. [9]
In further support of this submission, counsel for Mr Ou submitted that, if the offset clause were construed as permitting Mr Wan to deduct the amounts of $45,000 and $155,398 from the sum of $135,000 payable to Mr Ou, this would result in Mr Ou parting with the shares in the two companies and paying a net amount of $65,398 to Mr Wan. Counsel submitted that this construction "would do violence to the very words of the Parting Agreement and is uncommercial". [10]
I reject the construction contended for by Mr Ou because it is contrary to the ordinary meaning of the words used in the offset clause, namely that the $45,000 and $155,398 amounts can be deducted from the "relevant amount". As noted above, the "relevant amount" means the $135,000 payable by Mr Wan directly to Mr Ou plus the amount payable by Mr Wan to Ou's International for stock, as determined in the Kingsford stocktake to be conducted by the parties. Thus, the operation of the offset clause construed in accordance with the ordinary meaning of the words would not result in Mr Ou being required to pay $65,398 to Mr Wan in addition to transferring his shares in the two companies to Mr Wan.
I accept Mr Ou's submission that he is not personally liable to Mr Wan for salary payable to him by Ou's International or for any dividends payable to Mr Wan as a 40% shareholder in Ou's International as at the date of the Parting Agreement. In their discussions in late 2013 that resulted in the establishment of Ou's International, Mr Zhou, Mr Ou and Mr Wan did not guarantee the company's payment of the salaries they discussed for Mr Ou and Mr Wan. The evidence does not reveal that they had any discussions about dividends at all, although they no doubt assumed that any profits of the company would be distributed between them in proportion to their respective shareholdings in accordance with usual commercial practice. The Parting Agreement does not contain any express term imposing personal liability on Mr Ou for a salary payable by Ou's International to Mr Wan or for Ou's International's distribution of profits between shareholders.
Nevertheless, a reasonable businessperson in the position of the parties would have understood offset clause to mean precisely what the words say - that is, that Mr Wan was entitled to deduct the $45,000 owed to him by Ou's International in respect of his 2015 salary and $155,398 (being Mr Wan's 40% share of the net profits of Ou's International calculated by Messrs Zhou, Ou and Wan) from the "relevant amount". A reasonable businessperson would not have considered this to be an uncommercial outcome in circumstances where: 1. it is clear from the words of the offset clause that Ou's International owed Mr Wan $45,000 in salary for the 2015 year, and Mr Ou had some responsibility for the company's failure to pay that salary to Mr Wan; 2. it is also clear from the words of the offset clause and from the accounting exercise that the parties had undertaken prior to entering into the Parting Agreement that the parties considered that Mr Wan was entitled to a dividend of $155,398, and Mr Ou had some responsibility for the circumstances in which no dividend had been distributed to Mr Wan; 3. Mr Wan was buying Mr Ou's shares in Ou's International, which had insufficient assets to pay an accrued salary of $45,000 or a dividend of $155,398 to Mr Wan; and 4. the offset clause was the mechanism that the parties had agreed upon to ensure that the price to be paid by Mr Wan for Mr Ou's shares in the two companies and for the stock of Ou's International appropriately reflected the fact that Ou's International was unable to pay Mr Wan's accrued salary and had no funds or assets to pay him the dividend of $155,398 that the parties had agreed.
In those circumstances, it is my opinion that this construction of the offset clause does not produce an uncommercial result, even if it results in Mr Wan making no payment to Mr Ou. Whether or not the clause produced that result would depend on the outcome of the Kingsford stocktake, which is unknown because the parties did not perform the stocktake.
On my construction of the offset clause, the clause itself would not result in Mr Ou being required to make a net payment to Mr Wan. The words of the clause allow Mr Wan to offset the specified sums against the "relevant amount" but do not impose personal liability on Mr Ou to pay any resulting shortfall to Mr Wan. As I have said above, Mr Ou did not have personal liability to Mr Wan to pay him the $45,000 salary or a share of any net profits of Ou's International. If the parties had intended by the Parting Agreement to create such personal liability, it is to be expected that they would have used clear words to this effect. They did not do so. Instead, they included a clear statement that Mr Wan was entitled to offset specific amounts against the "relevant amount".
To construe the offset clause in the manner contended for by Mr Ou would leave the offset clause with no work to do. It would also produce an uncommercial result, in that the Parting Agreement imposed an obligation on Mr Wan personally to pay $25,000 to Mr Ou for dividends in respect of Australian Health (as part of the total payment of $135,000), yet Mr Wan would be left with no possibility of recovering any part of the salary or dividend that the parties had agreed was owing to him in respect of Ou's International notwithstanding that it is clear from the express words of the offset clause that the parties regarded the non-payment of those amounts to Mr Wan as a failure on the part of Mr Ou.
For completeness, I note that there is no evidence that Ou's International in fact made sufficient net profits to fund distributions to shareholders totalling $388,495, and a 40% distribution to Mr Wan of $155,398. That is because the method of calculation of "net profits" described in Mr Wan's affidavit affirmed on 18 November 2019 that resulted in the calculation of total "net profits" of $388,495 (of which 40% is $155,398) does not take into account the company's liability to pay tax. However, I do not regard this as relevant to the construction of the offset clause. The parties had agreed on the total "net profits" amount and that 40% of that amount was payable to Mr Wan as a "dividend". No submission was made on behalf of Mr Ou that this involved any mistake. On the contrary, the evidence suggests that the parties made no mistake and that their calculations took into account cash income which was not banked and not recorded in the financial statements prepared by the company's accountant: see [21]-[26], [37] and [49]-[55]. Whether the company failed to comply with its taxation obligations and whether any director caused "dividends" to be paid to any shareholder in excess of that shareholder's proportionate share of the actual net profits of the company are matters that may be investigated by the liquidator to be appointed pursuant to s 461(1)(k) of the Corporations Act.

Issue 2 - Did Mr Wan breach or repudiate the Parting Agreement?

Mr Ou alleges that Mr Wan breached the Parting Agreement by: 1. failing to pay to Mr Ou the $135,000 sum referred to in the agreement; 2. failing to cause Australian Health to return the consigned goods to Ou's International; and 3. failing to pay the further sum to be determined by a stocktake of the goods at the Kingsford premises.
Mr Wan admits that he has not done these things, but denies that this constitutes a breach of the Parting Agreement. Mr Wan contends that that he has no obligation to do those things because: 1. it is a precondition to the performance of Mr Wan's obligations under the Parting Agreement that the sum of $200,398 be paid by Mr Ou to Mr Wan; 2. the payment of the sum of $135,000 by him to Mr Ou under the Parting Agreement was subject to and contingent upon Mr Ou being ready, willing and able to pay the sum of $200,398 simultaneously; and/or 3. Mr Wan was not liable to pay the sum of $135,000 to Mr Ou unless and until Mr Ou indicated that he is ready, willing and able to pay the sum of $200,398 due to him under the Parting Agreement.
In my opinion, Mr Wan did not breach the Parting Agreement by failing to pay Mr Ou the sum of $135,000. For the reasons I have explained under issue 1 above, Mr Wan was not obliged to pay the "relevant amount", including the sum of $135,000, without offsetting the amounts of $45,000 and $155,398 referred to in the offset clause. Unless and until the parties took the steps necessary in order to ascertain the amount payable by Mr Wan to Ou's International for the stock at the Kingsford premises, there was no amount payable by Mr Wan to Mr Ou because the offset total of $200,398 exceeds the sum of $135,000 payable to Mr Ou. Depending on the outcome of the stocktake, if it had been performed, Mr Wan may not have been required to make any payment to Ou's International for stock or to Mr Ou personally for the shares in the two companies and the "principal" and "dividend" for Australian Health.
For the reasons already explained in [97] and [100] above, my rejection of Mr Ou's allegation of breach does not involve acceptance of Mr Wan's three contentions set out in [104] above.
Nor did Mr Wan breach the Parting Agreement by failing to cause Australian Health to return the consigned goods to Ou's International. For the reasons explained in [84]-[87] above, the Parting Agreement did not include an express or implied term requiring Mr Wan to cause those goods to be returned to Kingsford.
In my opinion, the stocktake required to determine the amount to be paid by Mr Wan to Ou's International for the Kingsford stock at the "buying price" after removing products due to expire within the next six months was a process that was intended to be undertaken with the involvement of both Mr Ou and Mr Wan. In circumstances where their business and personal relationship had broken down, a reasonable businessperson in the position of the parties would not have understood that they intended for Mr Wan to unilaterally undertake the stocktake and determine the amount he was to pay, and to merely inform Mr Ou of the outcome. In oral closing submissions, counsel for Mr Ou accepted that the stocktake obligation was a joint obligation. Mr Wan's failure to pay any additional amount to Ou's International for stock is therefore attributable to the non-compliance by both Mr Ou and Mr Wan with the implied terms referred in [87]-[88] above. It cannot properly be described as a breach of the Parting Agreement by Mr Wan alone, particularly having regard to the fact that Mr Ou continued to operate the business of Ou's International after the Parting Agreement was signed until March 2017 [11] and took no steps to perform a stocktake, as counsel for Mr Ou acknowledged in closing submissions.
In any event, there is no evidence to suggest that, if the stocktake had been undertaken, this would have resulted in Mr Wan being required to make any payment to Ou's International for stock, or to make any payment to Mr Ou under the Parting Agreement, including the offset clause as properly construed.
Counsel for Mr Ou urged me to find that there was at least $30,000 worth of stock at the Kingsford premises, based on Mr Wan's evidence in cross-examination. Mr Wan gave a very rough estimate based on his recollection of what the shelves looked like five years ago of stock of between $30,000 and $200,000. Mr Wan emphasised that this was only a very rough estimate and it was likely to be inaccurate. Counsel for Mr Ou nevertheless submitted that the Court should be confident in adopting the lower end of Mr Wan's range, namely $30,000.
Assuming for the moment that the stocktake, if performed, would have identified that Mr Wan was required to pay $30,000 to Ou's International for stock pursuant to the fourth paragraph of the Parting Agreement, that would have left the sum of $170,398 to be offset against the amount of $135,000 payable to Mr Ou, pursuant the offset clause. Thus, even if the failure to undertake the stocktake could fairly be described as a breach of the Parting Agreement by Mr Wan (contrary to my conclusion above), the available evidence does not support Mr Ou's contention that he suffered loss as a result of such a breach.
Mr Ou also alleges that Mr Wan repudiated the Parting Agreement in March 2018 by proposing, through Mr Ni, that Mr Ou transfer his 5,000 shares in Australian Health to Mr Wan in consideration for Mr Wan's 40 shares in Ou's International which Mr Wan would transfer to Mr Ou. By this conduct, Mr Wan is alleged to have evinced an intention to no longer be bound by the Parting Agreement and to have therefore repudiated the agreement.
Mr Ou alleges that he accepted Mr Wan's repudiation (as communicated through Mr Ni) during the same telephone conversation. This is not admitted by Mr Wan.
Mr Wan denies making the alleged proposal in March 2018 or evincing an intention not to be bound by the Parting Agreement. Mr Wan does not admit that Mr Ou accepted (or purportedly accepted) Mr Wan's alleged repudiation in March 2018.
I reject Mr Ou's allegation that Mr Wan (through Mr Ni) made the proposal referred to above in March 2018. The evidence discloses that it was Mr Ni who, at that time, proposed deregistration of Ou's International to avoid ongoing ASIC fees in circumstances where the company had ceased trading in March 2017: see [64]-[67] above.
Mr Wan did propose to Mr Ni that Mr Ou's shares in Australian Health be cancelled at the same time. In circumstances where Mr Ou had taken no steps to transfer his shares in Ou's International or Australian Health since the execution of the Parting Agreement more than two years earlier despite Mr Wan's entitlement to receive those shares without payment of $135,000 by reason of the offset clause, and Mr Ou had caused Ou's International to cease trading in March 2017 thereby rendering any transfer of shares in that company to Mr Wan after that time of no value, Mr Wan's suggestion to Mr Ni cannot fairly be seen as evincing an intention by Mr Wan not to be bound to the Parting Agreement. By his own conduct, Mr Ou had put it beyond his ability to comply with his own obligations under the Parting Agreement.
In any event, even if Mr Wan had repudiated the Parting Agreement in March 2018 (contrary to my finding above), counsel for Mr Ou accepted in oral closing submissions that the evidence did not support Mr Ou's pleaded case that he accepted that repudiation orally in March 2018 bringing the agreement to an end and entitling him to loss bargain damages. This is a further reason why Mr Ou's claim for damages for alleged repudiation of the Parting Agreement must fail. It is not necessary to address the shortcomings in Mr Ou's approach to assessing his alleged loss.

Issue 3 - Did Mr Ou breach the Parting Agreement and/or the 2013 oral agreement?

In his amended statement of cross-claim, Mr Wan alleges that Mr Ou breached the 2013 agreement by: 1. failing to pay Mr Wan the sum of $45,000 with respect to work undertaken by Mr Wan in relation to the business of Ou's International between January 2015 and December 2015; and 2. failing to pay Mr Wan the sum of $155,398, being "40% share of the revenue derived from the business of Ou's International" during the period between early 2014 and December 2015.
Mr Wan claims an order that Mr Ou pay him the sum of $200,398 in damages for those alleged breaches of the 2013 agreement. Although Ou's International is named as the second cross-defendant to Mr Wan's cross-claim, Mr Wan's claims for relief is made only against Mr Ou personally, and not against Ou's International.
Mr Ou denies these alleged breaches.
In addition, Mr Ou contends that: 1. the Parting Agreement terminated the 2013 oral agreement; [12] and 2. further or alternatively, the "proper defendant" to any such claim for damages is Ou's International and not Mr Ou personally.
Mr Wan's cross-claim is dismissed because Mr Ou did not have any personal liability under the 2013 oral agreement (assuming in favour of Mr Wan that it was not terminated by the Parting Agreement) or under the Parting Agreement to pay, or cause Ou's International to pay, Mr Wan's salary or any dividend to which he may have been entitled to receive out of the company's net profits as a 40% shareholder: see [97] above. It is not necessary to decide whether the Parting Agreement terminated the 2013 oral agreement.

Issue 4 - Winding up

Mr Ou claims an order pursuant to s 461(1)(k) of the Corporations Act winding up both companies on the grounds that it is just and equitable to do so in circumstances where it is common ground that the personal and business relationship between Mr Ou and Mr Wan broke down in about late 2015 and, according to Mr Ou, there has been a deadlock in the conduct of each company's affairs and a mutual loss of trust and confidence between them.
On the face of the amended statement of claim, the deadlock is alleged to have arisen from Mr Wan's refusal in November 2018 to participate in a directors' meeting of Ou's International requested by Mr Ou.
However, the case presented by counsel for Mr Ou at the final hearing was that this was "a classic case" for an order under s 461(1)(k) because the two companies were formed on the basis of mutual trust and confidence between Mr Ou and Mr Wan, they had lost that trust and confidence in one another towards the end of 2015, the parties' subsequent conduct demonstrated that they were unable to continue operating the businesses together and the businesses had ceased trading.
Although Mr Wan's defence to the amended statement of claim opposed orders winding up Ou's International and Australian Health pursuant to s 461(1)(k) of the Corporations Act, his opposition to this course was withdrawn at the final hearing as I have referred to earlier in these reasons.
For completeness, I note Mr Wan's defence to the amended statement of claim also pleaded that Mr Ou lacks standing to apply for the winding up orders by reason of s 462(2) and (5) of the Corporations Act. The basis of this contention is unclear, as Mr Ou is a contributory of both companies. It is unnecessary to say anything further about this in circumstances where the contention was not pressed at the hearing and Mr Wan's opposition to a winding up order was withdrawn.

Applicable legal principles

Section 461(1)(k) of the Corporations Act provides: "(1) The Court may order the winding up of a company if: … (k) the Court is of opinion that it is just and equitable that the company be wound up."
I gratefully adopt the detailed, yet concise, summary of the applicable principles by Brereton J (as his Honour then was) in In the matter of Austral Alloys Pty Ltd [2017] NSWSC 1833 at [18]-[20] and [24]-[30].
As his Honour explained by reference to leading cases, the just and equitable ground of winding up may apply in circumstances where: 1. a company has been formed or continued on the basis of a personal relationship involving mutual trust or confidence; and/or 2. there is an agreement or understanding that all or some of the members will participate in the conduct of the business; and/or 3. there is a restriction on the transfer of shares, so that if mutual trust or confidence is lost, or a member is removed or excluded from management, the member cannot withdraw his or her capital from the company.
However, as his Honour emphasised, it is not the case that any breakdown or loss of confidence between incorporators necessarily provides a sufficient foundation for winding up on the just and equitable ground. Referring to Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152 at [47]-[53], [13] his Honour stated (at [24]): "… there are two additional elements that must generally be satisfied: first, the breakdown must be of a nature and degree that materially frustrates the commercially viable and sensible operations of the company in accordance with the incorporators' expectations, and any loss of confidence must be justified; and secondly, there must generally be a restriction upon the transferability of the member's interest."
Applying these principles, I am satisfied that it is just and equitable that Ou's International and Australian Health be wound up. Both companies were formed on the basis of the personal relationship of mutual trust and confidence between Mr Ou and Mr Wan. There was an understanding between them and Mr Zhou when Ou's International was established that each of Mr Ou and Mr Wan would actively participate in the conduct of the business. The division of responsibilities between Mr Ou and Mr Wan changed when Australian Health established its business in mid-2015, with Mr Wan being expected to be primarily involved in the operation of that business whilst Mr Ou took primary responsibility for the business of Ou's International. Their relationship of trust and confidence broke down towards the end of 2015, and their subsequent conduct clearly demonstrates that the breakdown is irretrievable and this has materially frustrated the operation of both companies. They have proved to be unable to implement the straightforward steps required by the Parting Agreement to bring their relationship to an end, with each person insisting on full payment by the other of amounts that the agreement clearly stated were to be offset. They took no steps to carry out a stocktake necessary to ascertain one component of the amount to be paid by Mr Wan. They carried on operating one business each as if the Parting Agreement did not exist, until each business ultimately ceased trading. The cessation of trading removed any realistic possibility of either shareholder withdrawing their capital, either under the terms of the Parting Agreement or under any alternative arrangement if they had sought to agree on an alternative. They have not even been able to facilitate a directors meeting, or agree to have the companies deregistered now that they have ceased trading.
Mr Ou tendered a consent of a registered liquidator, Mr Patrick Loi, to be appointed by the Court and to act as liquidator of both companies.
For those reasons, there will be an order that both companies be wound up pursuant to s 461(1)(k) of the Corporations Act and that Mr Loi be appointed as liquidator.

COSTS

Most of the written and oral evidence and most of the time at the final hearing was occupied with the construction of the Parting Agreement and the parties' respective claims for damages rather than with the question of whether the two companies should be wound up.
Having regard to the matters referred to in [132] above, it is my opinion that each of Mr Ou and Mr Wan bears equal responsibility for their failure to bring the companies' affairs to an end in an orderly manner without needing to approach the Court for a winding up order. In those circumstances, and given that both parties' damages claims have failed, my preliminary view is that each of Mr Ou and Mr Wan should pay his own costs of the proceedings. In Mr Wan's case, that includes his costs of the interpreter. I will make directions permitting either party to file and serve short written submissions in the event that they contend for a different costs order, in which case I will review those submissions and determine the question of costs on the papers.

POSTSCRIPT: AMENDMENT APPLICATION

Both parties were legally represented when the pleadings were filed.
At the hearing on 3 to 6 November 2020, Mr Ou was represented by Mr Chan of counsel, who was instructed by a solicitor. Mr Wan appeared for himself. He conducted the hearing with an accredited interpreter.
After lunch on the fourth and final day of the hearing, Mr Ou made an oral application to amend his claim and the basis of his defence to the cross-claim by pleading that the parties had abandoned the Parting Agreement (and the 2013 oral agreement to the extent that it was terminated by the Parting Agreement).
The application was made orally and the substance of the proposed amendments was expressed orally.
Counsel for Mr Ou offered no explanation for the delay in seeking to make the amendment. It represented a significant shift from the contract claim that had been pressed by Mr Ou until that very late point in the final hearing. In my view, the amendment application was a strategic response to weaknesses in Mr Ou's claims for damages for alleged breach or repudiation of contract that became apparent during oral closing submissions when I raised issues with counsel for Mr Ou concerning the proper construction of the offset clause. The amendment application, if allowed, would have seen Mr Ou give up his claim for damages against Mr Wan but would have also given him a new basis for defending Mr Wan's claims for damages against him.
Mr Wan opposed Mr Ou being granted leave to amend after I relayed the substance of the amendments to him.
I refused leave to amend and indicated that I would provide reasons for that decision in my reasons for judgment.
I refused leave because I considered that it would be contrary to ss 56-58 of the Civil Procedure Act 2005 (NSW) to permit the amendment application to be made orally against a self-represented litigant who required an interpreter, who would be unlikely to appreciate the ramifications of the amendment for his cross-claim without the benefit of legal advice, and who would certainly be ill equipped to address the substance of the amendment (if allowed) there and then on the final day of the hearing. A grant of leave to amend would have unduly delayed what had already been a four day trial in order for Mr Ou to formulate the amendments in writing and Mr Wan to respond to the amended pleading in writing (through an interpreter). This delay was not warranted in the circumstances where the lateness of the amendment application was due to Mr Ou's eleventh hour attempt to remould the issues to better suit what he came to perceive as his strategic interests during the course of oral closing submissions.

ORDERS

For all of the reasons above, I make the following orders: 1. Order pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth) that the Second Defendant/Second Cross-Defendant, Ou's International Pty Ltd ACN 167 459 305, be wound up. 2. Order that Patrick Loi, registered liquidator, be appointed as liquidator of Ou's International Pty Ltd ACN 167 459 305. 3. Order pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth) that the Third Defendant, Australian Health Pty Ltd ACN 166 275 930, be wound up. 4. Order that Patrick Loi, registered liquidator, be appointed as liquidator of Australian Health Pty Ltd ACN 166 275 930. 5. Order that the Amended Statement of Claim is otherwise dismissed. 6. Order that the Amended Statement of Cross-Claim is dismissed. 7. Subject to order 8 below, order that: 1. the Plaintiff/First Cross-Defendant pay his own costs of the proceedings; and 2. the First Defendant/Cross-Claimant pay his own costs of the proceedings. 1. In the event that either party contends for a costs order other than order 7 above: 1. grant liberty to that party to file and serve by 28 January 2021 written submissions of no more than 2 pages directed to the costs order for which that party contends; and 2. grant liberty to the other party to file and serve by 3 February 2021 written submissions in reply of no more than 2 pages.

Endnotes

Written closing submissions on behalf of Mr Ou dated 5 November 2020, paragraphs 15-18; Transcript, page 99 (line 25) - page 100 (line 37).
Transcript, page 4 (lines 20-26); written closing submissions on behalf of Mr Ou dated 5 November 2020, paragraph 6.
Transcript, page 4 (lines 20-26); written closing submissions on behalf of Mr Ou dated 5 November 2020, paragraph 6.
Affidavit of Xianguo Wan affirmed on 18 November 2019, paragraph 32; Transcript, page 44 (lines 35-40); written closing submissions on behalf of Mr Ou dated 5 November 2020, paragraph 6.
Court Book, pages 477-480; Exhibit 3, page 79A.
Transcript, page 62 (line 16) - page 63 (line 15).
Transcript, page 132 (lines 10-15).
Defence to the Amended Statement of Claim, paragraphs 25 and 29(c)(ii).
Transcript, page 3 (line 24) - page 4 (line 20); written closing submissions on behalf of Mr Ou dated 5 November 2020, paragraphs 11-12; Transcript, page 102 (lines 25-36).
Written closing submissions on behalf of Mr Ou dated 5 November 2020, paragraphs 13-14.
See [56] above.
Transcript, page 111 (line 46) - page 112 (line 15).
Reversed on appeal (Tomanovic v Global Mortgage Equity Corporation Pty Ltd (2011) 84 ACSR 121; [2011] NSWCA 104) but the statements of principle expressed by Austin J were referred to by Campbell JA on appeal without disapproval: see (2011) 84 ACSR 121; [2011] 84 ACSR 121 at [289].

Amendments 28 January 2021 - Paragraph [98(1)] - the reference to "Mr Ou" in the second line of this sub-paragraph is changed to "Mr Wan". 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: 28 January 2021

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