Nature of the application, background facts and affidavit evidence
These two proceedings relate to issues as to the governance of a company, Australian Real Estate Relation Pty Ltd ("ARER") which conducts a real estate business. The two proceedings were heard together with the evidence in one to be the evidence in the other. The proceedings were commenced in the General List of the Equity Division although they plainly related to an application under the Corporations Act 2001 (Cth) ("Act"), were punctuated by applications to the Equity Duty Judge and were ultimately referred to and determined in the Corporations List, where they should have been commenced.
I will first refer to several background facts, which appear to be uncontroversial, and then to the voluminous affidavit evidence read by the parties. ARER was incorporated on 4 June 2017 and Messrs Ratul and Islam each held 50 of its 100 fully paid shares and were appointed as, and have remained as, its directors and secretaries. ARER conducted the business of a licensed real estate agent at Ingleburn in New South Wales and held a licence under the Property and Stock Agent Acts 2002 (NSW) in order to permit it to conduct that business. Mr Ratul is the principal licensee in respect of that real estate business and Mr Islam also held a licence as a class 2 agent under the Property and Stock Agents Act, subject to conditions as to the scope of his activities. Until 30 November 2022, the Company traded as a franchisee within the Raine & Horne real estate network but its franchise has now lapsed.
ARER operated two trust accounts and two trading accounts. Each account was set up in such a way that Mr Ratul and Mr Islam are co-signatories on all accounts. Real estate agent trust account operations are governed by directions issued by the Secretary of the Department of Fair Trading pursuant to s 32(4) of the Property and Stock Agents Act which require a principal licensee to prepare and maintain written procedures for the review of trust accounts and daily or next day banking practices with respect to the receipt of trust money. The Guidelines also provide that the procedures must ensure that each trust account has only one licensee in charge who can authorise the withdrawal of trust money from that account, and ARER breached and continues to breach that requirement.
A dispute arose between Mr Ratul and Mr Islam in mid-2022 including about the basis on which Ms Diba, who is Mr Ratul's wife, was paid commission as a real estate agent working in ARER's business. Mr Ratul relies on events when Mr Islam attended the business premises of the Company on 20 and 22 July 2022.
On or about 15 September 2022, after an approach by Mr Islam, the Commonwealth Bank of Australia ("CBA") placed a stop on ARER's trust and trading accounts which prevented, inter alia, any accounting to its clients for rental income held in its trust account or for deposits paid in relation to the sale of properties and also prevented it from paying salaries for its employees. On 16 September 2022, the Equity Duty Judge made orders requiring that Mr Islam cause that stop to be removed and he did so.
On or about 6 October 2022, the CBA placed a further stop on ARER's trust and trading accounts and, on 12 October 2022, the Equity Duty Judge made further orders which also restrained Mr Islam from accessing ARER's bank accounts or transferring funds from or between the Company's trust and trading accounts and restrained him from placing further "stop instructions" on ARER's bank accounts. There is a dispute, which I need not resolve, as to whether the CBA was acting under any "instruction" of Mr Islam in placing that stop order in the relevant circumstances.
On 7 October 2022, Mr Islam commenced proceedings in the District Court against Mr Ratul and Ms Diba which claimed an entitlement to certain payments and, from 20 October 2022, Mr Islam caused withdrawals to be made from the Company's trading and trust accounts. The description attached to those transactions, apparently by Mr Islam, make clear they did not relate to obligations owed to clients in respect of the trust accounts. Mr Ratul contends that Mr Islam's conduct in respect of the withdrawals was in contempt of orders made by the Duty Judge on 12 October 2022 but it is not necessary to decide that question in order to decide these proceedings.
Between 20 to 29 October 2022, and again in November and December 2022, Mr Islam transferred funds from ARER accounts that do not appear to have been for transactions in the ordinary course of its business. On 24 November 2022, Mr Ratul offered to purchase Mr Islam's shares in ARER for $400,000, and Mr Islam did not respond to that offer. The parties did not lead evidence to allow any assessment of whether that offer was made at fair value of the shares, although the subsequent deterioration in ARER's position, as a result of the parties' conduct in these proceedings, means that those shares are now likely to have little value. On 30 November 2022, ARER's franchise with Rain & Horne came to an end and Ms Diba resigned from ARER and set up a competing business in the same suburb, with a franchise from the same franchisor.
On 9 December 2022, Mr Islam made three further and larger unauthorised withdrawals from ARER's trust accounts totalling $47,500that were transferred to one of ARER's trading accounts and then transferred to Mr Islam's personal bank account. These withdrawals were not authorised by Mr Ratul, the principal real estate agent responsible for the ARER trust accounts, and prompted an application for urgent interlocutory relief before the Equity Duty Judge on 9 December 2022. Kunc J then made an order restraining Mr Islam, up to and including 14 December 2022, from exercising any control of, or carrying out any dealings (including deposits, withdrawals or any other operations or transactions) in respect of specified bank accounts. Mr Ratul contends that conduct has exposed the Company to the risk of prosecution or the imposition of penalties under the Property and Stock Agents Act and contends that he has caused amounts from the Company's working capital to repay the monies taken from the trust accounts. On 15 and 20 December 2022, the Equity Duty Judge made further orders. CBA will now not process any transaction that involves a withdrawal or transfer from the Company's trust accounts unless Mr Ratul personally attends a branch of the bank to allow that transaction to occur.
Turning now to the affidavit evidence, Mr Ratul relies on two affidavits dated 21 January 2023 and 1 February 2023 sworn by him and on three affidavits dated 14 October 2022, 18 October 2022 and 1 February 2023 sworn by Ms Diba. In his first affidavit dated 21 January 2023, Mr Ratul outlines the circumstances in which he met Mr Islam and later worked with Mr Islam in Mr Islam's mortgage broking business. He refers to the circumstances in which ARER was established to conduct a real estate agency and became a franchisee of Raine & Horne; to the circumstances in which he commenced trading as a mortgage broker in another company and Mr Islam's involvement in that company; and to the manner in which ARER's business is operated. He describes the bank accounts held by ARER and outlines the circumstances in which Ms Diba began working for ARER, initially as a property manager without a contract or payment, then in assisting agents with property sales, and from April 2021 as a full time sales agent. Mr Ratul contends that he and Mr Islam agreed that Ms Diba would be paid 50 percent of gross commissions and ARER would retain the other 50 percent of the commissions. Mr Ratul also refers to an arrangement by which Ms Diba was held out as an owner of ARER, as part of a discreditable scheme to avoid regulatory requirements which would have prevented her being paid by commission only unless she held a Class 1 licence or was a director or owner of the real estate agency. Mr Ratul also outlines the position in respect of other agents employed by ARER and denies that he had reached agreement with Mr Islam in respect of any payment of a salary to Mr Islam. He addresses subsequent developments in respect of Mr Islam's mortgage financing company and discussions with Mr Islam as to the basis on which Ms Diba was paid commission in May or June 2022. Mr Ratul also refers to Mr Islam's attendance at ARER's office in July 2022, Mr Islam's then claim that he (Mr Islam) was taking over ARER's operations and the steps then taken by Mr Ratul to change the locks to ARER's office and then to move ARER's offices to another location owned by another company in which he, Mr Islam and their respective spouses are directors and shareholders. Mr Ratul also refers to the stops placed on the Company's bank accounts and the withdrawals made by Mr Islam from those accounts, which I have noted above.
By his second affidavit dated 1 February 2023, Mr Ratul refers to several affidavits of Mr Islam and disagrees with Mr Islam's evidence as to the extent of Mr Islam's contribution to ARER and ARER's funding. Mr Ratul also gives evidence of the effect of withdrawals from ARER's trust account made by Mr Islam in preventing ARER making all payments due to be made to landlords and suppliers from the property management trust account on 9 December 2022. Mr Ratul also addresses the position in respect of commissions paid to Ms Diba and also addresses occasions where Ms Diba was paid a commission more than 25 per cent or 50 per cent, where he contended she had personally covered a cost associated with a sale. Mr Ratul also addressed ARER's financial performance, which involved a loss in 2022, and the consequences of this dispute, including the expiry of the Raine & Horne franchise agreement with ARER, the resignation of several employees, ARER's lack of capacity to properly manage property sales or secure vendors or manage obligations under any sales agreement, and the termination of numerous property management arrangements with clients. Mr Ratul was cross-examined by Mr Islam, and I have had regard to that cross-examination, but I have not summarised it where it did not significantly advance the issues which I have to decide in these proceedings.
By her first affidavit dated 14 October 2022, Ms Diba indicates that she is Mr Ratul's wife and had worked as a sales agent at ARER's business, although she has now started up a competing business which holds the Raine & Horne franchise that ARER has now lost. She refers to the circumstances in which she began work in the real estate business and to her transition to undertaking sales work from July 2020; to an agreement which she contends was reached with her husband, Mr Ratul, by October 2020 that she would be paid 25 per cent of the commission from the sale of a property where she assisted with managing the process and closing the sale; and a subsequent agreement by around April 2021 that she would receive a sales commission of 50 per cent when she began selling properties by herself. She says that no written agreement was ever prepared for her role in the business, and she was content with the arrangement because she was working with her husband. While Mr Ratul and Ms Diba may well have been content with that undocumented arrangement, it appears that ARER was paying substantial sums to Ms Diba without having documented any obligations that she owed to ARER and it is likely that arrangement did not properly protect ARER's corporate interests. Ms Diba also refers to sales that she had undertaken, which she claims related to gross commissions of $1.68 million, in which she was paid over $733,000 between October 2020 and September 2022. She also contends that she has worked hard for the business and refers to the properties owned by her and her husband, and other properties owned by her and her husband with Mr Islam and his wife. She claims to have paid the expenses of the business, and asserts that the business owes her $91,227.18, although she identifies no documentary evidence of the amount of that debt or loan.
By a second affidavit dated 18 October 2022, Ms Diba gives hearsay evidence (to which no objection was taken) of a conversation between Mr Ratul and Mr Islam, in which Mr Islam accepted that she would receive 50 per cent of the sale commission and the agency would pay all marketing and other costs. She also refers to damage done by Mr Islam to ARER's premises on 20 July 2022. By a third affidavit dated 1 February 2023, Ms Diba addressed the question of Mr Islam's contributions to ARER and references to her as an owner and director of the business and the circumstances of Mr Islam's attendance at the business premises on 20 and 22 July 2022. Ms Diba was cross-examined by Mr Islam. I have had regard to that cross-examination, although I need not summarise it where it did not significantly advance the issues which I need to decide below.
Mr Islam in turn relied on several affidavits. Parts of those affidavits were inadmissible, but I admitted them with a limiting order under s 136 of the Evidence Act 1995 (NSW) as a submission, having regard to the fact that Mr Islam was self-represented. In his affidavit dated 21 September 2022, Mr Islam referred to his background, the start of his business relationship with Mr Ratul and the establishment of ARER. He contended that he worked from ARER's office on Wednesday, Friday and some Saturdays, and on other days he worked remotely, although there was a dispute as to that question. Mr Islam's evidence is that he brought in his rental property business for ARER from his work as a mortgage broker. Mr Islam refers to the circumstances in which Ms Diba commenced employment with ARER and acknowledges that he had then agreed that Ms Diba would receive 50 per cent of the sales commission if a lead was brought in by her and 25 per cent if someone else brought in that lead, on the basis that Ms Diba pay her own costs, including for advertising and administrative support employees, and that he relied on Mr Ratul as to whether that was the usual arrangement in other real estate agencies. The evidence does not allow the Court to determine whether that arrangement has that character.
Mr Islam refers to the conduct of ARER's bank accounts and to a report prepared by Raine & Horne in September 2022, which indicated an understatement as to commissions from sales of properties and rental property management. He contends that he had not been provided with any share in profits of the business, although that proposition turns on the premise that ARER had (or at least should have) made such profits, contrary to the position disclosed in its his financial reports. Mr Islam did not address the events of July 2022 in that affidavit but contended that he was denied access to ARER's premises in August 2022 and that Mr Ratul cancelled business credit cards and a motorpass card issued to him in September 2022. He also addressed the position as to access to ARER's books and records and contended that he was denied access to them. He acknowledges that he told CBA that he was concerned that Mr Ratul had been making unauthorised payments to his wife and failing to make necessary payments to Raine & Horne, and I infer that that communication contributed to CBA's placing the initial hold on ARER's accounts. Mr Islam in turn expresses his belief that ARER is being run oppressively to his interests and entirely to the profit of Mr Ratul and Ms Diba, so that he obtains no share of its profits. If that concern is well-founded, then it would support a winding up order, and the appointment of a liquidator who may investigate the Company's affairs if adequately funded to do so, rather than the relief sought by Mr Islam in the proceedings that he has commenced.
By his second affidavit dated 11 October 2022, Mr Islam referred to the commission to Ms Diba and contended that ARER had amounts overdue in respect of office rent and taxation liabilities. It is not possible to determine the correctness of that allegation, given the form in which it was made and the limited evidence that has been led. If that matter was established, it would also support a winding up order in respect of ARER rather than the relief sought by Mr Islam in his proceedings.
By a third affidavit dated 18 October 2022, Mr Islam refers to several of his dealings with the CBA and responds to aspects of Mr Ratul's evidence, and contends that ARER had been funded by income from mortgage businesses with which Mr Islam and Mr Ratul are associated. By his fourth affidavit dated 26 October 2022, filed in proceedings 2022/325554 which he had commenced, Mr Islam repeated significant parts of the evidence led in his affidavit dated 21 September 2022, and added additional information as to his dealings with the CBA from October 2022 onwards and as to allegations concerning Mr Ratul's dealings with Ms Diba. Parts of that evidence were inadmissible and I admitted them with a limiting order under s 136 of the Evidence Act as submission only. Mr Islam led evidence, largely by way of assertion, that funds had been "skimmed" from ARER and applied by Mr Ratul and Ms Diba to improper expenditures. On the face of it, those allegations would also support a winding up of ARER which would allow a liquidator to investigate them. Mr Islam also addressed, in a form that was largely inadmissible and in the nature of submissions, his concerns as to ARER's operations and repeated his belief that ARER was being operated in a manner that was oppressive to his interests and to advance the interests of Mr Ratul and Ms Diba.
By a further affidavit dated 14 December 2022, Mr Islam led evidence as to the monies paid to him by ARER on 9 December 2022, which he contended were paid for client referrals, builder referrals and lead generation. That evidence did not address the fact that Mr Islam authorised those payments to be made to him without any apparent decision of ARER to make them and, whether or not he believes that he is entitled to them, that they were made from trust funds held for lessors of properties and sales clients and the payment of those amounts to Mr Islam put those clients' interests at risk. By a fifth affidavit dated 19 December 2022, Mr Islam advanced further allegations against Mr Ratul. A sixth affidavit of Mr Islam dated 31 January 2023 overlapped with his affidavit dated 19 January 2023 and addressed matters that had already largely been addressed in his affidavits, and sought to provide justifications for withdrawals from ARER's accounts. That did not, however, provide any justification for monies withdrawn from trust accounts to be applied to Mr Islam's personal claims against ARER or Mr Ratul.
Mr Islam was cross-examined. He plainly understood the questions which were asked and was able to give rational, although sometimes fulsome, answers to them, although I also had the impression that he was in a heightened mental or emotional state at the time of his cross-examination which may have affected the manner in which he gave evidence. I do not have any doubt that the answers that he gave genuinely reflected the views which he strongly holds and fairly expressed his position. Most significantly for present purposes, Mr Islam fairly and frankly conceded that he transferred funds from ARER's client trust account to its business account and then to his personal account to discharge part of the amounts that he claims against ARER or Mr Ratul. He also fairly accepted that he intended (and, presumably, if has the opportunity, intends) to take an additional amount of in the order of $230,000 from those accounts to meet his remaining claims. Plainly, that intent has no regard to the nature of the client trust accounts or the risk to clients if funds held in them for the benefit of clients are dissipated to meet one shareholders claims against the other shareholder or against ARER.
[3]
Mr Ratul's claims in proceedings 2022/277860
The first proceedings were brought by Mr Ratul by Summons on 16 September 2022 which sought different relief from that which is now sought. He initially sought interlocutory relief in respect of the "stop instruction" in respect of ARER's bank accounts; leave to commence derivative proceedings in ARER's name against Mr Islam; relief in respect of an alleged breach of fiduciary duties owed by Mr Islam to ARER; relief in respect of an alleged breach of a "Partnership Agreement"; and relief in respect of an alleged breach of directors' duties under s 181 of the Act. By his Statement of Claim subsequently filed on 13 January 2023, Mr Ratul now seeks an order that ARER be wound up under s 461(1)(e) or s 461(1)(k) of the Act. Mr Ratul contends that Mr Islam has engaged in misconduct associated with the management of ARER's business and that his conduct has significantly impeded ARER's ability to account to clients in respect of trust monies held on their behalf; that that conduct represents an ongoing risk to the public in respect of the integrity of the trust accounts; and that the relationship between Mr Ratul and Mr Islam has broken down and there are irreconcilable differences between them concerning ARER's ongoing management and operation.
Mr Bolster, who appears for Mr Ratul, submits that the need for ARER to be wound up is manifest, on the basis that its shareholders and directors cannot work together, its business is failing and the public interest demand that the interests of clients who have money held in two trust accounts with ARER are protected. He submits, and the evidence to which I have referred and the conduct of these proceedings amply demonstrates, that the relationship between the two shareholder/directors, Mr Ratul and Mr Islam, has irretrievably broken down, since at least June 2022, and ARER no longer has the benefit of an established real estate franchise to support it. He also points to Mr Islam's unauthorised withdrawals from ARER's two real estate trust accounts that are subject to the requirements of Part 7 of the Property and Stock Agents Act 2002 (NSW). Mr Bolster submits that the breakdown in the shareholders and directors' relationship is such as to materially frustrate ARER's commercially viable and sensible operations in accordance with the shareholders' expectations. He submits that the extreme step of liquidation is warranted despite ARER's present solvency where its ability to be successful and prosper into the future is under threat from the loss of its ability to use the Raine and Horne name, the loss of its sales staff and from Mr Islam's conduct. He submits that Mr Islam's misconduct surrounding the operation of the trust account and his current attitude prevents the proper operation of the business and that Mr Islam, as a director of ARER, has engaged in misconduct in the operation of ARER's trust account for his own benefit, and that there is now a lack of confidence in the company's conduct and management of its affairs and a risk to the public interest that warrants protection, where Mr Islam's conduct has placed the proper operation of the ARER trust accounts containing client funds at risk. Mr Bolster also submits that Mr Islam does not seem to have any awareness of his responsibilities in this regard.
[4]
Mr Islam's claims in proceedings 2022/325554
In proceedings 2022/325554, Mr Islam seeks several orders, which I address below. By his Statement of Claim, he pleads ([16]-[18]) aspects of his contribution to ARER, including bringing in rental and sale clients and attending various meetings, but says he was not involved in promoting sales and that he has not been paid for work undertaken for ARER until 9 December 2022. He pleads the circumstances of ARER's bank accounts and contends ([26]) that he did not sign one form authorising Mr Ratul to operate a Commbiz platform although he accepts he signed a second form to the same effect and alleges Mr Ratul "has engaged in signature fraud to gain complete authority of Commbiz accounts held" by ARER. That claim has difficulties, including that Mr Ratul plainly does not have complete control of relevant accounts, where Mr Islam was able to make unauthorised withdrawals from them, and that it is not apparent why Mr Ratul would fraudulently apply Mr Islam's signature to one authorisation form, where Mr Islam accepts he had signed another. Mr Islam also claims that Mr Ratul, a third party and Ms Diba carried out unauthorised transactions in the Commbiz account, but it is not clear whether this allegation is limited to ordinary course of business transactions which Mr Islam says he has not personally approved. It is not necessary to determine that claim where, if it was established, it would support the winding up order made on other grounds. Mr Islam also contends ([31]) that payments of $691,009.66 being 73.3% of ARER's total sale commissions were made to Ms Diba from June 2020 to July 2022 without his knowledge of their basis and also refers ([33]) to costs incurred in marketing and advertising promoting Ms Diba as a sales agent and pleads ([34]) that he "believes that the payments made to [Ms Diba] are not in the ordinary course of the business as it was not in keeping with the agreement with [ARER]". He also contends ([35]-[37]) that public statements characterising Ms Diba as an owner or director of ARER were misleading and deceptive and contravened s 42 of the Fair Trading Act 1987 (NSW) (which has been repealed) and s 52 of the Trade Practices Act 1974 (Cth) (which has also been repealed). I address these allegations below.
Mr Islam also pleads ([38]) a report prepared by Raine & Horne in September 2022 and contends ([39]-[44]) that he has not received payments or a director's allowance from ARER. I address the relevance of that matter to an oppression claim and Mr Islam's claim to payment of $10,000 a month on that basis below. Mr Islam accepts ([45]) that an ongoing dispute exists concerning the basis of Ms Diba's work with ARER and contends ([46]) that the allegation that he (Mr Islam) had damaged ARER's premises in July 2022 is false. It is not necessary to determine that matter to decide the proceedings. He also contends ([49]) that he does not have access to ARER's records and pleads ([51]ff) the circumstances in which he contacted the CBA, the CBA placed a stop on ARER's bank accounts and the first proceedings were commenced by Mr Ratul. He also pleads ([56]ff) that his transactions from ARER's accounts were in the "ordinary course of business". I have addressed that issue above, and that contention plainly cannot be accepted where Mr Islam applied trust funds held for ARER's clients to meet his disputed claims against ARER, including for substantial referral fees which should not have been paid from client funds. By way of a "conclusion", Mr Islam pleads that Mr Ratul has engaged in "misconduct and fraud" ([64]ff) and managed ARER to advance his and Ms Diba's interests and brings claims of conflict of interest and oppression. This allegation emphases the extent of the breakdown of confidence between ARER's directors and shareholders. I address that issue briefly below, although it is not necessary to decide it where a winding up order should be made on other grounds.
[5]
Costs
The principle that costs will generally follow the event is, of course, well-established. Section 98 of the Civil Procedure Act 2005 (NSW) confers a discretionary power to determine costs on the Court. Rule 42.1 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") in turn provides that:
"Subject to this Part, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs."
A successful party has a "reasonable expectation" of being awarded costs against an unsuccessful party, unless there is good reason for that presumption to be displaced: Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 at [22], [134]. I bear in mind that, in a winding up order, an order can be made that costs be paid out of the assets of the company
I am satisfied that Mr Islam must pay the costs of both proceedings. It seems to me that the evidence, including matters that were not contested by Mr Islam, was such that a winding up order was inevitable, and that the orders sought by Mr Islam could not have been made. That is sufficient basis to make an order that Mr Islam pay those costs, rather than they be paid by ARER with the result that ARER's unsecured creditors (if the Company has a deficiency of assets on a winding up) or Mr Ratul would bear a share of them.
[6]
Orders
In proceedings 2022/277860, I make the following orders:
1 Australian Real Estate Relations Pty Limited Pty Ltd (A.C.N. 619 522 182) be wound up.
2 Mr David Levi be appointed as the liquidator of the second defendant.
3 Mr Islam pay the Plaintiffs' costs of the proceeding as agreed or as assessed.
In proceedings 2022/325554, I order that the proceedings be dismissed and Mr Islam pay the Defendants' costs of the proceedings as agreed or as assessed.
[7]
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: 13 February 2023
Parties
Applicant/Plaintiff:
Ratul
Respondent/Defendant:
Islam; In the matter of Australian Real Estate Relation Pty Ltd
So far as Mr Ratul seeks an order that the Company be wound up under on the just and equitable ground under s 461(1)(k) of the Act, I have largely drawn my account of the applicable principles from my decision in Re Bicher & Son Pty Ltd [2020] NSWSC 711 ("Bicher") at [122]ff. At least where a company is established on the basis of relationships of mutual confidence, a winding up order may be made on the just and equitable ground under s 461(1)(k) of the Act where irreconcilable differences emerge between its members: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672; [2001] NSWCA 97 ("Fexuto") at [89]-[90], where Spigelman CJ observed that:
"It may be accepted that the existence of irreconcilable differences amongst persons involved in what is, in effect, a partnership, will destroy the personal relationship involving mutual confidence, that lies at the heart of the partnership analogy. This analogy has been applied both to applications for winding up on the just and equitable ground and also to oppression suits. … Irreconcilable differences may establish a basis for winding up, they do not of themselves constitute oppression or unfair prejudice. … Nevertheless, the destruction of the personal relationship establishes a basis for granting relief in the usual case, not for concluding that the partnership analogy has ceased to be pertinent. ...
There will be circumstances in which the emergence of irreconcilable differences will cause the court to conclude that an understanding or expectation as to participation in management should be taken to have ceased, in a manner not entitling the person excluded from such participation to relief under the statutory provisions. That would be so where the Court decides that it is the person excluded who is responsible for the breakdown in the relationship. This appears to have been the case in Guerinoni v Argyle Concrete & Quarry Supplies Pty Ltd (2000) 34 ACSR 469. See also Belgiorno-Zegna v Exben Pty Ltd (2000) 35 ACSR 305 esp at [142], [151]." [emphasis added]
See also Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343; [2009] NSWSC 342 ("Nassar") at [97]-[98].
The Court may make a winding up order on that basis in circumstances that do not amount to oppression, although a person who is responsible for the breakdown of the relationship is less likely to be afforded relief: Fexuto; Nassar at [90], [96], [117]. A winding up is the characteristic remedy in circumstances that a working relationship predicated on mutual cooperation, trust and confidence has broken down, and there is no absolute rule that the Court will not wind up a solvent company, while winding up is generally a last resort: Accurate Financial Consultants Pty Ltd v Koko Black Pty Ltd (2008) 66 ACSR 325; [2008] VSCA 86 at [119]; Re Pure Nature Sydney Pty Ltd above at [76]; Asia Pacific Joint Mining v Allways Resources Holdings Pty Ltd above at [52].
The Court can also make a winding up order under s 461(1)(k) of the Act on the just and equitable ground by reason of, inter alia, lack of confidence in the conduct and management of a company's affairs, or if a company has not carried on its business candidly and in a straightforward manner with the public, or has failed to comply with the requirements of the Act with respect to financial records and reports. In Australian Securities and Investments Commission v ABC Funds Managers Ltd (2001) 39 ACSR 443; [2001] VSC 383 at [119], Warren J observed that a winding up on just and equitable grounds could take place where there was "a lack of confidence in the conduct and management of the affairs of the company" and "a risk to the public interest that warrants protection", and also noted that the Court would be reluctant to wind up a solvent company. Those principles were subsequently applied in Australian Securities and Investments Commission v Kingsley Brown Properties Pty Ltd [2005] VSC 506; Australian Securities and Investments Commission v Stone Assets Management Pty Ltd (2012) 90 ACSR 523; [2012] FCA 630 at [46] and Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) [2013] FCA 234 at [19]ff, where Gordon J summarised those principles as permitting a company to be wound up where there is a justifiable lack of confidence in the conduct and management of its affairs and a risk to the public interest that warrants protection, and noted that that could be established where the Court could not have confidence that the company's controllers would comply with their obligations, including keeping books, records and documents and looking after the company's affairs.
In dealing with this claim, I bear in mind that s 467(4) of the Act applies where a winding up order is sought on the just and equitable ground, and the matters identified in that section include the availability of some other remedy and whether the applicant is acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy. I also bear in mind McMurdo JA's observation in Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd (2018) 125 ACSR 227; [2018] QCA 048 ("Asia Pacific") at [46] that:
"In my view, the reasonableness of the applicant's position is to be assessed by reference to the consequences of the events and circumstances upon which the application is founded and what is necessary to redress them. If they could be redressed only by a winding up, then the pursuit of a winding up order would not be unreasonable in the relevant sense. On the other hand, if there is an alternative remedy which would equally redress those consequences, then an applicant's preference for a winding up order would usually be considered to be unreasonable, because ordinarily the winding up of a solvent company will have far reaching effects. It will not only deprive the other shareholders of their investment in a solvent enterprise, but it will also be likely to affect the interest of others, such as the company's employees and third parties whose interests from transacting business with the company would be affected. It is the likelihood of substantial and wide ranging prejudice of this kind which would cause judges to describe a winding up of a solvent company in this context as an extreme step."
I am satisfied that ARER commenced as a quasi-partnership or a business requiring mutual cooperation and a level of trust and the trust and confidence required in such a relationship has irretrievably broken down so that an order should be made for it to be wound up under s 461(1)(k) of the Act. I accept that Mr Ratul's conduct, and the level of payments to Ms Diba when there was no return to shareholders, has contributed to that breakdown, but Mr Islam's conduct in July 2022 and his unauthorised withdrawals from the trust accounts have also done so, and the conduct of both shareholders reinforces rather than diminishes the need for a winding up order. I am also comfortably satisfied that Mr Islam's dealings with ARER's trust accounts, which placed client funds at risk, give rise to a lack of confidence in the conduct and management of a company's affairs that warrants a winding up order.
Alternatively, Mr Ratul seeks a winding up order on the basis that Mr Islam is and has been conducting ARER's affairs in his own interests, rather than in the interests of the members as a whole, or in a manner which appears to be unfair or unjust to Mr Ratul within the meaning of s 461(1)(e) of the Act. That claim would have difficulties, where Mr Ratul has had primary conduct of ARER's affairs and has plainly applied substantial funds to paying remuneration to his wife, in circumstances where there was no return to shareholders. However, it is not necessary to determine it given the findings that I have reached above on other grounds.
Mr Islam also contends ([70]) that Mr Ratul's "strategy" is to "seek liquidation [of ARER} to avoid being held liable for uncommercial transactions carried from bank accounts [sic] after having done signature fraud in the Commbiz application form of the Company bank account." The evidence does not establish that is Mr Ratul's purpose in seeking a winding up, which is an appropriate order in the circumstances. There is no real risk such a "strategy" would succeed, where there is every reason to think that a liquidator would investigate and pursue claims for any material improper transactions, where recoveries would funds his or her remuneration and be available to meet claims of ARER's creditors and contributories, including Mr Ratul and Mr Islam. It is, of course, also open to Mr Islam to fund a liquidator's investigations as to those matters. Mr Islam also claims ([72]) to have suffered loss of work, income, reputation and psychological distress as a result of these matters and says he should be "appropriately compensated", presumably by way of a reduction in any price paid to acquire Mr Ratul's shares in ARER. Mr Rahul and Ms Diba take issue with these claims in their Defences. I address Mr Islam's claims for relief below.
First, Mr Islam seeks an order that Mr Ratul sell to him his shares in the company at an unspecified price, which is to be adjusted for damages and losses incurred by him arising out of "breach of director's duties and fraud" alleged against Mr Ratul. The Court could make such an order if ARER's affairs had been conducted by Mr Ratul in a manner that is oppressive to the interests of its members as a whole and/or oppressive to or unfairly prejudicial to, or unfairly discriminatory against Mr Islam within the meaning of s 232 of the Act.
I should note the applicable legal principles, as to which I have drawn upon Counsels' submissions and my summary of the relevant principles in Bicher at [73]ff. Section 233(1)(d) of the Act relevantly provides that the Court may make an order for the purchase of shares by a member of a company and s 233(1)(j) allows the Court to make an order requiring a person to do a specified act. Such an order may be made where the matters specified in s 232 of the Act are established. Section 232 of the Act in turn provides that the Court may make an order under s 233 if:
"(a) the conduct of a company's affairs; or
(b) an actual or proposed act or omission by or on behalf of a company;
or
(c) a resolution, or a proposed resolution, of members or a class of members of a company;
is either:
(d) contrary to the interests of the members as a whole; or
(e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity."
Section 232 of the Act and its predecessors extend to conduct involving "commercial unfairness" or where the conduct complained of involves a visible departure from the standards of fair dealing and a violation of the conditions of fair play, or a decision has been made so as to impose a disadvantage, disability or burden on the plaintiff that, according to ordinary standards of reasonableness and fair dealing, is unfair: Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459; [1985] HCA 68; Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 704. The principles applicable to a claim for oppression were also summarised by Austin J in Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152 at [39], and the Court of Appeal noted the parties did not challenge that summary of the applicable principles in Tomanovic v Global Mortgage Equity Corporation Pty Ltd (2011) 84 ACSR 121; [2011] NSWCA 104 at [140]. His Honour observed that:
"(a) consistent with the principle that the purpose of relief is to terminate the effects of oppression, relief will generally be inappropriate as a matter of discretion if there is no continuing oppression: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, at [182]; [2009] HCA 25;
(b) unfairness is assessed by reference to whether "objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair": eg, Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359, per Basten JA at [181]; [2008] NSWCA 95;
(c) while it is recognised that conduct may be oppressive if inconsistent with the "legitimate expectations" of shareholders, expectations are not immutable. The non-fulfilment of expectations will not establish oppression, if there has been some good reason for the extinguishment of the expectation: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672, at [85], [86], [175]; [2001] NSWCA 97; Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343, at [96]; [2009] NSWSC 342 per Barrett J;
(d) "it is important when assessing corporate activities to see if there has been oppression that judges do not remain in their ivory tower": Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1988) 28 ACSR 688, Young J at 739; [1998] NSWSC 413;
(e) a particular matter which will be taken in account in assessing the gravity of any allegation of oppression, is the extent to which the minority shareholder has "baited" the majority shareholder to act in an oppressive manner: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1988) 28 ACSR 688, at 741; [1998] NSWSC 413 …"
In Munstermann v Rayward [2017] NSWSC 133 at [22], Stevenson J summarised the applicable principles as follows (omitting citations):
"(1) The test of oppression is an objective one of unfairness ...
(2) The court must look to determine whether on the balance of probabilities the objective commercial bystander would be satisfied that the affairs of the company were being conducted unfairly …
(3) A director may act oppressively in the sense relevant to the operation of s 232 and yet not breach any fiduciary or other duty owed as a director ...
(4) Conduct of a company's affairs may be oppressive even though the conduct is otherwise lawful ...
(5) Conduct that has the effect of paralysing a company in the operation of its business is properly characterised as conduct contrary to the interests of the members as a whole …
(6) A shareholder of 50 per cent of the shares in a company can seek relief for oppressive conduct because they do not have control in the form of power to prevent the oppression, particularly where individual strong arm tactics are used …
(7) The court must formulate an opinion about oppression or unfair prejudice as at the date of the institution of proceedings and the issue of relief under s 233 must be determined at the date of the hearing …
(8) The discretion under s 233 is wide as to the appropriate remedy …
(9) The nature of the remedy chosen by the court under s 233 will be dependent upon the conclusions drawn by the court as to the type of oppression with which the court is dealing and the court will choose the remedy which is least intrusive ….
(10) The aim of any order under s 233 must be to put an end to the oppression …
(11) The court should only look to wind up an otherwise solvent company as a "last resort" …
(12) As a remedy for oppression, an oppressor can be ordered to sell their shares to the oppressed party ….
(13) If an order is to be made for the purchase of shares under s 233 the task of the court is to fix a price that represents a fair value in all the circumstances." [citations omitted]
Mr Islam's claim for breach of directors' duties and fraud seems to be founded on his complaints about the amount of commission paid by ARER to Ms Diba and the payment of expenses associated with Ms Diba's work as a real estate agent for ARER, the representations that Ms Diba was a director or owner of ARER and ARER not paying Mr Islam a monthly directors' allowance. Mr Ratul and Ms Diba have filed Defences and deny those allegations.
So far as the claims as to the amount of commission paid to Ms Diba and associated expenses are concerned, Mr Bolster addresses Mr Islam's claim that, between June 2020 and July 2022, Ms Diba was paid commission of $691,009.66 which is said to be 73.6% of total net sales commissions earned by the Company during that period, and to exceed the amount of commission that Mr Islam had agreed to. Mr Bolster points out that the allegation that the sum of $691,009.66 amounted to 73.6% of total net sales commissions appears to be based on an audit report carried out by Raine & Horne prior to 5 September 2022, which Mr Islam claims, "found" that for the "Financial Years 2020-2022, the Company received Sales Commission of $1,080,860". Mr Ratul responds that, in FY 2021, ARER earned total gross sales commission $410,515.72 from which Ms Diba was paid commission of $116,161.13 or 28.29% and, in FY 2022, ARER earned total gross sales commission $812,994.85 from which Ms Diba was paid commission of $404,303.34 or 49.73%. I am not satisfied that, without expert evidence, I could reach an affirmative view that either figure is correct on the balance of probabilities, and Mr Islam's claim as to the amount of that commission must fail on that basis. Mr Ratul and Ms Diba in turn lead evidence that seeks to establish that she worked hard and was successful as a sales agent, and Mr Islam contests at least the latter proposition, but the evidence again does not establish either her success or lack of success, compared with other agents in comparable businesses, or that the commission paid to her was reasonable or unreasonable on that basis.
I recognise that there are cases in which then payment of excessive remuneration to working directors or their associates, where there is little or no return to shareholders, may constitute oppression: Sanford v Sanford Courier Service Pty Ltd (1986) 10 ACLR 549; 5 ACLC 394. It seems to me arguable that the level of payments to Ms Diba, when there was no return to shareholders in ARER, could amount to oppression, although the evidence does not establish whether her remuneration was more than would ordinarily be paid to an estate agent with similar results. However, it is not necessary to determine that question, because the evidence does not allow a determination of the value of ARER's shares so as to make the buy-out order sought by Mr Islam, and a winding up order on the basis of oppression would add nothing to the winding up order that I propose to make on Mr Ratul's application on the just and equitable ground.
Mr Islam relies, in support of his allegations concerning false and misleading conduct as to Ms Diba's role with ARER, on screenshots of advertisements websites and emails which refer to that role. Mr Ratul's evidence is that he understood from 2019 that employees of a real estate agency could not be paid on a commission only basis unless they held a class 1 license or were otherwise a director or owner of the agency (Ratul 21.1.23 [92]) and that he and Mr Islam agreed that Ms Diba should be described as a director and owner of the business. There is no suggestion that she held that position and I have referred above to the discreditable character of this scheme to avoid the regulation of Ms Diba's remuneration, whether or not Mr Islam was party to it. Mr Bolster points out that Mr Islam was at least on notice that Ms Diba was being referred to as a director of the business as early as September 2019 and did nothing about it; there is no suggestion he was misled by this conduct; and there is no evidence that anyone else suffered loss from being misled by this conduct, other than possibly Ms Diba, to the extent she was paid only by commission.
While I have dealt at some length with Mr Islam's claim to an order that he buy out Mr Ratul's shares, and the matters said to give rise to deductions from that value, it is obvious why that order could not be made. As I noted above, the evidence does not allow a determination of the value of ARER's shares, before or after any such adjustments, so as to make a buy-out order sought by Mr Islam. A winding up order is the only realistic alternative even if oppression by Mr Ratul were established, but that would add nothing to the winding up order that is to be made on the just and equitable ground.
Second, Mr Islam claims payment of $10,000 a month for a specified period by way of a director's allowance from ARER. As Mr Bolster points out in submissions, Mr Islam gives evidence of several conversations with Mr Ratul where, not unreasonably, Mr Islam raised the possibility of receiving payment from ARER, but no agreement for a director's allowance of $10,000 a month was reached. The first conversation occurred in August 2021; Mr Islam queried why he was not being paid any profit from ARER, Mr Ratul responded that there was no profit by reason of the commissions and expenses being paid, and no agreement was reached. A further conversation occurred in November 2021 when Mr Islam sought payment of a director's allowance of $10,000 a month and Mr Ratul responded that ARER could not then afford that payment but that it may be possible for it to make it in a "couple of months". In a third conversation in January 2022, Mr Islam again raised and Mr Ratul did not agree to that payment on the basis that ARER was "struggling". Mr Islam's evidence is that, in March 2022, Mr Islam raised the possibility of, and Mr Ratul rejected, a payment of $1,500 a month for his uncle's nursing fees in Bangladesh. Mr Islam raised the issue again in April 2022, but his evidence is he was then told that he could not be paid that allowance because of the need to pay expenses associated with Ms Diba being promoted as a "gold salesperson" and did not agree to that position. Mr Ratul's evidence is that there was never any agreement between him and Mr Islam about the payment of any director's allowance although, in December 2021, he and Mr Islam agreed that ARER should pay the lease costs of a luxury car for Mr Islam. There is a dispute whether Mr Islam agreed that payment should be made in substitution for a director's allowance, or whether Mr Ratul forced that approach upon him, although he did receive the benefit of that car. In any event, that did not amount to agreement to pay a monetary director's allowance to Mr Islam, still less one of $10,000 per month.
Mr Islam's claim for compensation in the amount of the unpaid director's allowance cannot succeed, because the evidence does not establish that there was an agreement to pay him that amount, or a basis on which compensation for the non-payment of that amount could be ordered without such an agreement. I have recognised above that the lack of return to Mr Islam as a director and shareholder in ARER is relevant to his oppression claim and I have addressed that matter above.
Third, Mr Islam seeks an order that Mr Ratul and Ms Diba pay a penalty of $200,000 for "false and misleading conduct promoting [Ms Diba] as owner and director of [ARER]". It is not clear whether that amount is sought to be paid by each of them, so the total penalty sought is $400,000, but nothing turns on that for present purposes. Mr Bolster responds that there was no misleading and deceptive conduct and that Mr Islam does not point to any loss that he has suffered or any claims being made by customers of ARER alleging that they suffered any loss by reason of such conduct. Mr Bolster also points out that Mr Islam brings this claims under (the repealed) s 52 of the Trade Practices Act and s 42 of the Fair Trading Act and, so far as those claims were treated as brought under s 18 of the Australian Consumer Law, there is no jurisdiction to impose a penalty for a contravention of that section. He points out that, although s 224 of the Australia Consumer Law allows the ACCC to apply for a pecuniary penalty in respect of certain contraventions of that Law, s 18, contained within Part 2-1 of the Act is not listed in the schedule to ss 224(3) of the Australian Consumer Law, and no pecuniary penalty is payable in respect of a contravention of that section, and Mr Islam has no standing to apply for a penalty in any event. This claim can be determined briefly. Even if relevant conduct was capable of misleading members of the public, it did not mislead Mr Islam and no basis been shown for an order for damages, still less some form of penalty in that respect. There is also no apparent basis for quantifying a penalty, even if the Court had an unidentified power to impose it, of $200,000.
Fourth, Mr Islam seeks an order that ARER pay him $645 for car related expenses. Where ARER is to be wound up, it is not necessary or appropriate for the Court to determine that claim, and Mr Islam can lodge a proof of debt for that claim in the liquidation in the usual way.
Fifth, Mr Islam seeks a suppression order to prevent prejudicial publicity which is likely to harm him, his reputation, and his business long term. Mr Bolster responds that Mr Islam does not articulate any particular matters, representations or imputations that might be said to give rise to a claim for relief. He points to a concern expressed by Mr Islam, in paragraph 55 of his affidavit of 31 January 2023, that clients have been given certain "misinformation" by Mr Ratul and his associates, including a report that Mr Islam has sold his shares in ARER, but it is not apparent how that claim would warrant an order constraining a fair report of these proceedings which took place in open Court. Again, this claim can be addressed briefly. There is no basis for a suppression order which would be inconsistent with the public interest in open justice.
Mr Islam seeks an order that ARER pay the costs of these claims and I address the question of costs below.