Plaintiff v Defendants

2 On 16 February 2011, Efthim AsJ ordered that the original plaintiff, Ms White, be replaced by White Family No. 1 Pty Ltd as plaintiff.

3 The company was incorporated in March 2007. Its directors are Judith White and Margaret Smith. There are ten issued shares of which Ms Smith owns five. Until 20 August 2010, Ms White owned the other five shares and on that day she transferred them to the plaintiff, which is the trustee of Ms White's family trust.

4 Much of the affidavit evidence adduced was hearsay, but no objection was taken by either counsel to the other party's evidence in that regard.

5 In 2006, Ms Smith and Ms White negotiated the establishment of a new business which would sell organic skin and body products. Since 1987, Ms Smith had been a director of Syndet Works Pty Ltd, ("Syndet") a company which manufactured synthetic detergent bars and other non-organic products. Ms Smith and Ms White negotiated an agreement whereby Syndet would become the manufacturer of natural and organic products, which the company would then sell. Ms White indicated to Ms Smith that if Syndet was to be the sole supplier then the price which Syndet would sell to the company would have to be lower than the price it sold its products to its other customers. Ms Smith agreed that Syndet would only charge the company the cost of production plus 10%. As a result of those discussions, the company was incorporated in early 2007 and commenced trading.

6 Over the next two years or so, the relationship between Ms White and Ms Smith deteriorated markedly. Their differences are articulated in the affidavit material which has been filed in support of and in opposition to this application and in cross-examination of each of them by opposing counsel. I need not articulate those matters here save to say that each has made extravagant allegations against the other in respect to the conduct of the company's affairs.

7 It was obvious to me by the time that the oral evidence had concluded in this matter that there was no prospect that Ms White and Ms Smith could continue to operate an enterprise together and that the affairs of the company are deadlocked.

8 I enquired of counsel at the commencement of the hearing as to whether there had been a reference of the matter to mediation. I was informed that was apparently not even possible for the parties to agree on make arrangements for the convening of a mediation and having seen the respective parties in the witness box I am pessimistic about the prospects that any such mediation would have had.

9 It is not possible or indeed necessary for me to make findings about who is right and who is wrong in the disputes that have arisen.[1] The affairs of the company are in disarray. Ms White asserts that there has never been a meeting of the directors of the company since its incorporation but Ms Smith disagreed that this was so, contending that informal meetings occurred.

10 Ms Smith regards the company's accountants, Lipins, as being partisan to Ms White's interests and for that reason she opposes their involvement in bringing the financial records to order. The accountants obtained a judgment against the company in December last year for $7997.14 in respect of unpaid accounting fees although the position in regard to this creditor is confusing as the company is contended to have a credit against Lipins for $7000.

11 The company's books are incomplete and it is not possible to state what its present financial position is. It ceased trading in around August or September 2010. Its liabilities to the revenue authorities, in particular the Deputy Commissioner of Taxation, are unknown. It has never filed an income taxation return. Its Business Activity Statements are presently overdue for the quarterly trading periods since September last year. It has some assets in the form of stock but the ownership of that stock is itself is a controversial subject. There are no recent accounts available for the company. Ms Smith would have it that this is as a result of the conduct of Ms White in denying access to the books of the company.

12 The Court has very wide discretion under s 461(1)(k) of the Act to wind up a company on the just and equitable ground. The House of Lords in Ebrahimi v Westbourne Galleries Limited,[2] stated that the jurisdiction to wind up a company on this ground may arise when one or more of the following elements are present:

(i) an association formed or continued on the basis of a personal relationship, involving mutual confidence ... ;

(ii) an agreement, or understanding, that all, or some ... of the shareholders shall participate in the conduct of the business;

(iii) the restriction upon the transfer of the member's interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.[3]

13 More than a mere breakdown or loss of confidence between the parties is required before winding up on this ground would be justified. Austin J observed in Tomanovic v Argyle HQ Pty Ltd[4] that there are other elements that must generally be satisfied:

[50] 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. Thus, it has been held that winding up on the just and equitable ground may be appropriate:

(a) "where a working relationship predicated on mutual co-operation, trust and confidence has broken down", such that the "continuation of such an association would be a futility": Accurate Financial Consultants Pty Ltd v Koko Black Pty Ltd [2008] VSCA 86; (2008) 66 ACSR 325; quoted with approval in Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ASCR 343, at [322]; [2009] NSWSC 342; Jankar v Dellmain & Ors [2009] NSWSC 766 at [81]- [85];

(b) where there is "no real prospect that the parties can work together sensibly to reach the necessary agreement to be able to conduct the company's business in the future", such that "the company's operations in the future will not be able to be conducted in any commercially viable and sensible way": Johnny Oceans Restaurant Pty Ltd v Page [2003] NSWSC 952, at [32];

(c) there is a "serious and operative state of mistrust and disharmony" between incorporators: McMillan v Toledo Enterprises International Pty Ltd (1995) 18 ASCR 603, at 619; [1995] FCA 1664;

(d) where the relationship between incorporators "has completely broken down", such that the company "could not continue to function meaningfully": Malandris v Palmreef Pty Ltd (Unreported, FCA, Mansfield J, 12/3/1997, BC9701374) at 5;

(e) where "the foundation of the whole agreement that was made, that the [incorporators] would act as reasonable men with reasonable courtesy and reasonable conduct in every way towards each other", and there has been a breakdown in communication: Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426; quoted with approval in Khamo v XL Cleaning Services Pty Ltd (2004) 51 ACSR 397; [2004] NSWSC 1134, at [26]-[27]; Malos v Malos (2003) 44 ACSR 511; [2003] NSWSC 118, at [24];

(f) there is a "justifiable lack of confidence in the conduct and management of the company's affairs" (Loch v John Blackwood [1924] AC 783, at 788; quoted with approval in Stapp v Surge Holdings Pty Ltd [1999] FCA 545, at [49]) or (expressed another way) "it is impossible for the partners to place that confidence in each other which each has the right to expect, and that such impossibility has not been caused by the person seeking to take advantage of it" (Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426; quoted with approval in Ruut v Head (1996) 20 ACSR 160, at 162). Consequently, unfounded lack of confidence should not of itself support a winding up.

(g) mere disagreement is insufficient to ground a winding up order: See Carpenter v Carpenter Grazing Co Pty Ltd (1987) BC8701391 at 23-27.

[51] Secondly, there must generally be a restriction upon the transfer of the member's interest. In circumstances where there are no restrictions on transfer, and there is no evidence that the "board would refuse to register a transfer in favour of a respectable transferee", "this factor alone makes it extremely difficult for the plaintiff to succeed in the application" for wind-up on the just and equitable ground in the absence of oppression: Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692, at 708; see also Ruut v Head (1996) 20 ACSR 160, at 163.

[52] An "important factor" in the exercise of the Court's discretion is the extent to which the applicant is responsible for any breakdown of the relationship Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692, at 708; see also Ruut v Head (1996) 20 ACSR 160, at 162.

14 Applying the above criteria to the circumstances of the company results in my view in the following findings:

(i) The relationship between Ms Smith and Ms White has broken down irretrievably and the continuation of the enterprise would be a futility.

(ii) I do not consider that there is any chance of reconciliation between them such that they will be able to conduct the company's business as a commercially viable enterprise.

(iii) The accusations they make against each other with regard to the conduct of the company's affairs as set out in their respective affidavits and confirmed in their oral testimony reveals complete mistrust and disharmony between them. This is exemplified by accusations of assault, conflicts of interest giving rise to breach of directors' duties, failure to maintain accounts, and denial of access to the books of the company, all of which are denied.

(iv) They are not capable in my view of communicating with each other with regard to the conduct of the company's affairs. It was not even possible to convene a mediation. The situation goes beyond mere disagreement as to how the affairs of the company should be run. There is clearly a mutual lack of confidence in the conduct of the company's affairs however I am not able to decide as to the culpability for this state of affairs.

(v) The company is constituted as a proprietary limited company and its constitution provides for a restriction on the ability of the shareholders to transfer their shares. Aside from a buy-out, which is not practicable, there is no mechanism for one or the other to exit the company.

15 In Ms Smith's affidavit of 24 March 2011, she states that apart from the issue of completing the necessary accounting works, there is no irresolvable dispute between the parties, nor is there a stalemate in important decision making. Such a statement is against all the other evidence which has been put forward in the case and is unsustainable.

16 Mr Agardy, counsel for Ms Smith contended that Ms White, the directing mind of the plaintiff, is not entitled to a winding up order if she has brought about the disarray and turmoil but, as I perhaps labour in these reasons, I am not able to determine where blame really lies in regard to the company' current position.

17 Mr Agardy pressed for an alternative course to winding up to be taken which included the accounts being brought up to date by an independently appointed accountant followed by a members voluntary winding up when the financial position of the company was known. I do not regard that as a practicable course. I appreciate that Ms Smith does not want to be associated with a company which is wound up by the Court but the order I propose is for a winding up on the just and equitable ground. The information in regard to the financial position of the company is so unsatisfactory that I could not and do not need to conclude on the balance of probabilities that it is insolvent.

18 Further, I reject Mr Agardy's submission which pressed for the proceeding to be characterised as a case of oppression such as to enable an alternative to liquidation, such as a buy-out by one of the parties. No such relief was sought in the originating process and the evidence put on in support and in opposition to the application was cast in a form appropriate for a winding up application simpliciter. In any event, a buy-out by one of the shareholders is not an economic or practicable course in these circumstances. Mr Agardy himself accepted as much as it was impossible to readily calculate the value of the shares in the company.

19 In Re Wondoflex Textiles Pty Ltd,[5] Smith J, after concluding that a winding up order should be made on the just and equitable ground in that case, refrained from immediately pronouncing the formal order for winding up so that the parties could have the opportunity to see whether they could come to any agreement which would obviate the necessity for a liquidation. Smith J adjourned the trial to a date to be fixed and noted that if the parties had not advised him within ten days that they had reached some agreement that he would have the case listed and pronounce a winding up order. I do not propose to adopt that course in these circumstances, as I have no confidence at all that given their differences they could negotiate such a resolution.[6] The parties can no longer be left to resolve the situation and the company should be placed in the hands of a liquidator.

20 As to the parties' costs of the application, as I cannot safely conclude who is to blame for the failure within the internal affairs of this company, I consider that each party should pay their own costs. I am not prepared to throw the costs of the parties on the assets of the company given that its financial position is so unclear and I do not consider that the right of creditors to be paid should be postponed or displaced by any priority order for costs in favour of the parties.

1. Organic Products Pty Ltd (ACN 124 482 971) be wound up on the just and equitable ground pursuant to s 461(1)(k) of the Corporations Act 2001.
2. Anthony Robert Cant be appointed liquidator in the winding up.
3. There is no order as to costs.

[1] Galanopoulos v Moustafa& ors [2010] VSC380at [17], [28] and [31].

[2] [1973] AC 360.

[3] [1973] AC 360 at 379.

[4] BC 2010 01057 at [49] and following.

[5] [1951] VicLawRp 65; [1951] VLR 458.

[6] A similar course was adopted by Santow J in the Supreme Court of New South Wales in the matter of Ruut and anor v Head and ors,7 where the application was deferred for a period of three months.