Plaintiff v Defendant

3 There are a number of extravagant and unsubstantiated allegations, and ordinarily these can only be resolved by cross-examination. However, in light of the firm view that I have taken, there is no need to resolve any of the allegations that are disputed, both ways.

4 The plaintiff and the first defendant are directors of AI Constructions Pty Ltd ("the Company"). They are also equal shareholders in the Company. The plaintiff's sister brings this application on behalf of the plaintiff pursuant to an order made by the Victorian Civil and Administrative Tribunal on 1 April this year pursuant to the Guardianship and Administration Act (1986).

5 The amended originating process seeks various orders. Orders are sought under s 233 of the Corporations Act ("the Act"), the so-called oppression section. The court has wide powers under that section. Orders are also sought under a number of sub-sections of s 461 of the Act. I refer to the proposed Order 2 in the amended originating process.

6 I should say at this stage that given that I am giving judgment ex tempore, I propose to revise the judgment not as a matter of substance, but in relation to grammar and some terminology. The parties will be given a copy.

7 As an alternative to winding up, either under ss 233 or 461 of the Act, what is sought is an order that the first defendant purchase the plaintiff's shares pursuant to the relevant subsections of s 233 of the Act.

8 There have been three Directions hearings, 21 July, 30 July and 13 August, and on 13 August I fixed the matter for hearing today.

9 Despite orders made over the past month, there is no evidence that the parties can continue to be shareholders and directors of a company, in fact the evidence is overwhelmingly all the other way. There is, at the very least, a classic deadlock, and this is not even seriously disputed. In fact the first defendant has, on the last occasion, offered in court, to purchase the shares of the plaintiff.

10 There is a deadlock in the sense that the parties clearly cannot get on. There are mutual accusations of wrongdoing. It is not necessary to make findings about who is right and who is wrong. The very fact that each party accuses the other and that they have not gone to mediation, demonstrates that they clearly cannot get on. The real question is what is to be done in light of the deadlock and recent events.

11 I was concerned to maintain the status quo and preserve the assets of the Company until the hearing. To this end orders were made restraining completion of the contract of sale entered into with the Ikon Group on 30 December 2009, and also to provide for inspection of documents and mediation.

12 Inspection has revealed the inadequacy of the books and records of the Company and I refer to the affidavit of Judith Elizabeth MacDonald sworn 12 August. There is some hearsay in the affidavit and there are some disputed matters. However it is quite clear, without assigning any blame at this stage, that the books, records and documents of the Company are not adequate. They have not been put forward by anyone to tender explanations that are clearly warranted in light of the evidence. There is no satisfactory explanation for a number of transactions.

13 Returning to the sale to Ikon, there are a number of curious features of that sale. The sale was pursuant to a contract of sale dated 30 December 2009. There are a number of disputes relating to the sale, and again, it is not necessary to resolve these disputes. There is a fundamental dispute as to whether the consent of the plaintiff to the sale was properly obtained prior to the appointment of his sister as his guardian. Again, it is not necessary to resolve that dispute.

14 The contract of sale itself records that a deposit of $352,000 has been paid. Precisely how it was paid and the circumstances surrounding the deposit, have not been adequately explained. I make no findings other than to record that the evidence is insufficient, and in light of the mutual suspicion of the parties, it is one of the factors that has contributed to the deadlock that exists between the parties.

15 There is some evidence that a contribution was made by Mr Ouya Mustafa, presumably to the deposit. There is evidence in an affidavit (Exhibit AM8, to an affidavit sworn by the first defendant on 5 August), that shows that either $140,000 or perhaps $150,000 was contributed by Mr Mustafa to the coffers of the Company. However it does not explain why the $352,000 deposit can simply according to the contract of sale be deemed to have been paid. Further, the sale was due to settle on 30 April 2010. It did not settle, and the Company appears to have taken no steps to rescind the contract.

16 There is simply inadequate documentation and explanation surrounding the sale of the property to what I would loosely call a related party. There are also questions associated with the $200,000 loan allegedly made by Mr Mustafa to the Company in order to enable it presumably to acquire the property and perhaps some working capital. Again, I am not in a position to make any findings about these matters, but the matters have been raised and do call for an adequate explanation, which has not been given. This of course has contributed in no small way, to the mutual suspicion that the parties have which obviously has contributed to the deadlock between the parties.

17 In a number of these cases it matters not what the underlying facts are. It does in certain cases, and it does in relation to oppression, and it is often necessary to make factual findings, not simply to refer to the fact that there is a dispute. However I content myself in light of the decision that I have come to, merely to identify the existence of the dispute without the need to resolve it, because in my opinion, the existence of the dispute is sufficient to highlight the fact that the parties are in a deadlocked position and are unable to move forward. This invites the question as to what the court is to do in the circumstances.

18 It does appear that the plaintiff has to some extent been excluded from the decision-making process of the Company. Reference was made, and it is common ground, that the main asset of the Company, a property situated at 84-92 Sydney Road, Coburg, has been sold by the National Australia Bank ("the bank") as mortgagee in possession. As both parties agree, this is a most unfortunate circumstance and there may well be consequences for what again may well be a sale for inadequate value. Each party accuses the other of being responsible for the state of affairs and again, the court will not make a finding as to who is responsible. The fact that there are mutual accusations is sufficient to highlight the fact that the parties are deeply deadlocked and cannot continue going forward with the Company.

19 They will not be able to decide precisely what the Company should do, given the unfortunate circumstances of yesterday.

20 The question remains what is to be done. It is not an easy question; the question is easy, the answer is not. Three are three alternatives to the court. The first alternative is to dismiss the application, the second alternative is to order a buyout, and the third alternative is to wind the company up.

21 The first alternative, to dismiss the application, is not an option. I will not dismiss the application. The consequences of dismissing the application will be that the parties will remain shareholders, remain directors, and there will be a deadlock as to how to proceed further. The asset of the Company has been replaced by possible causes of action including a possible cause of action against the bank. The parties will not be in a position to agree on how to progress further with the assets of the company. Further, there is a dispute as to the extent of the creditors of the Company.

22 It may well be, that each shareholder applies to sue the other in the name of the Company, so there are competing applications, each one asserting the justness of their case, and seeking leave to sue in the name of the Company against the other alleged delinquent shareholder. That is a position that seems to me to be, on the evidence to date, a likely outcome, or sufficiently likely outcome to raise concerns. So, I am not going to leave the parties to their own devices by dismissing the application.

23 I pause to say that the three options I have identified are really the only options, and it does illustrate the limitations on the part of the court in dealing with applications of this kind.

24 I return to the options. I will not dismiss the application, I will not order a buyout either. Although application has been made in the alternative for a buyout, and Mr Magowan of counsel who appeared for the plaintiff indicated that this was an alternative available for consideration, I do not consider it an available option and I decline to order a buyout. Briefly the reasons are as follows:

25 The court cannot simply order a buyout, even if it is by consent. As a foundation for an order for a buyout, the court must conclude that there has been oppression. Indeed the buyout provisions are recorded in s 233 of the Corporations Act, and the section which is headed "Orders The Court Can Make", is in the following terms:

"The court can make any order under this section that it considers appropriate in relation to The Company including an order for the purchase of any shares by any member".

26 There is of course authority as to the date of any buyout, and the date as to the valuation of any shares, and indeed, as the cases show, these are often complex matters. However, to order a buyout, the court must make a finding that there has been oppression, and that appears in s 232 which states, "The court may make an order under s 233", that is, the buyout, "if" and then what follows are the usual oppression sections, including, "if the affairs of the company are being conducted in an oppressive manner".

27 I cannot on the material, and will not on the material, conclude that there has been oppression. I have read the submissions of Mr Magowan and I have heard the argument of Mr Schlicht of counsel who appeared for the first defendant. It is difficult for a court on a hearing of this sort to accede to an application based on oppression, without cross-examination, and without definitive findings of fact that underpin the oppression.

28 There are some unsubstantiated allegations. There are allegations that call for full or fuller explanations, but I am not prepared at this stage to go as far as to conclude that the first defendant has conducted the company for his own benefit. I have reservations, I should say, about the conduct of the first defendant, and his conduct may well have been oppressive, but on the material before the court, and in light of the quality of the evidence, I am not prepared to go so far and indeed, I do not need to go so far, for the purpose of this application.

29 The Company should be wound up, under the provisions of s 461 of the Corporations Act, which is the alternative provision relied on by the plaintiff. That is a section that permits the court to wind up a company in a number of situations, including oppression, but I do not rely on that subsection.

30 In my opinion, it is desirable, most desirable, that the company be wound up under the provisions of s 461(1)(k) of the Corporations Act. The section reads as follows:

"The court may order the winding up of a company if the court is of the opinion that it is just and equitable that the company be wound up".

31 In my opinion it is just and equitable that the Company be wound up for a number of reasons. The authorities are to the effect that the court can look at all of the circumstances obtaining in a particular company in order to determine whether it is just and equitable. Matters that are relevant include deadlock and whether there is a lack of confidence in the conduct and management of the company's affairs. In my opinion there is a lack of confidence in the management of the affairs of the company in light of the state of affairs, including the state of the books, records and documents. Again it is not necessary to attribute blame, the fact is the books, records and documents are inadequate. Even if the plaintiff is fully to blame on the basis that during the year that he was a director and the first defendant was not, the books were not adequately kept. However, in my opinion and on the available evidence, the plaintiff has far less blame than the first defendant, but as I say, I have made no findings and I think it is the wrong approach to attribute blame.

32 One looks at the entire affairs of the company, as Justice Hansen did in the case of Deputy Commissioner of Taxation v Casual Furniture International Pty Ltd.[1] If, after examining the entire conduct of the affairs of the company, the conclusion is that there is a lack of confidence in the propensity of the controllers to comply with obligations, including the keeping of books, records and documents, and looking after the affairs of the company, that is sufficient to conclude that it is just and equitable that the company be wound up.

33 There are also cases that provide that where there is a management deadlock that prevents the Company from pursuing any cause of action, the Company should be wound up, and I refer to the case of Clarke v Bridges,[2] and indeed there are several other cases to such effect.

34 Looking forward, there will be a deadlock, after the National Australia Bank has settled the sale as mortgagee in possession, in that the parties will remain undecided as to what to do. As I pointed out before, they will perhaps each endeavour to blame the other as indeed is the situation today and seek to use the Company for the purpose of suing the other. The only way that can be avoided is to appoint an independent party, such as a liquidator, to take control of the Company, its remaining assets, and bring an objective view, unrestrained, unrestricted and unencumbered by the views of the parties, in order to determine the fate of the company.

35 It was suggested in argument that there is little point in winding up a company when the main asset has been sold by the secured creditor? I am satisfied though that it is not an exercise of futility. I am concerned about the sale. I was very surprised to read about the sale. The parties were notified on Monday and, again, I think the parties sensibly were ad idem at their surprise at the fact that the sale took place so quickly and perhaps without adequate advertisement or marketing of the property (although I make no finding to such effect) and there may well be consequences.

36 A liquidator would be in the best position to examine the history, the past, and the present in order to determine what, if anything, should be done. Of course there are funding issues if matters are to be pursued, but liquidators and parties are very industrious these days and if there is a cause of action one would suspect that the matter may well go forward.

37 In all of the circumstances (and I have regard to all of the evidence in this case including inadequate responses provided by the first defendant to numerous attempts by the plaintiff to get information and endeavour to arrive at a satisfactory conclusion), the Court does not have any confidence whatsoever, that the parties will be able to proceed further to determine what, if any, causes of action are to be commenced by the Company, and indeed to run the Company. In fact, the evidence is overwhelmingly to the contrary.

38 Finally, I conclude by saying that winding up on the just and equitable ground does not necessarily involve any criticism of anyone. I have tried to avoid criticism or findings on unsubstantiated allegations. It is simply a recognition of the reality of the situation and in this case the reality is that the Company needs proper stewardship and that can only be done by the appointment of a liquidator.

[2] (2004) FCA 394.