Read-Zorn v Origin Distillers Group Pty Ltd

1. Origin Distillers Group Pty Ltd be wound up pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth).
2. Geoffrey Trent Hancock of Hamilton Murphy Advisory, a registered liquidator, be appointed as liquidator of the defendant.
3. The plaintiff's costs of the winding up application be paid out of the assets of the Company. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

JACKMAN J 1 This is an application to wind up Origin Distillers Group Pty Ltd (the Company) on the ground expressed in s 461(1)(k) of the Corporations Act 2001 (Cth) (the Corporations Act): that the court is of the opinion that it is just and equitable that the Company be wound up. 2 This matter came before me on 1 March 2022 for case management. On that occasion, the plaintiff sought to proceed for final relief, despite the lack of any appearance by the defendant Company or the other director and shareholder of the Company, Mr Lloyd Davis. I was unable to deal with the matter on that day and adjourned the matter until today for final hearing. 3 I am satisfied that Mr Davis is aware of today's hearing and that final relief will be sought today by the plaintiff. On 1 December 2022, a solicitor, Mr Legg, confirmed that he had instructions to accept service on behalf of Mr Davis of the originating process and affidavit. On 28 February 2023, an email from the plaintiff's solicitor to Mr Legg confirmed a conversation they had had that day, in which Mr Legg advised that his client, Mr Davis, takes no position in relation to the application to be heard the next day, noting that it was discussed that the plaintiff intended to proceed with the application and that Mr Legg would not be appearing. On 7 March 2023, three days ago, Mr Legg confirmed that Mr Davis was aware of the listing of the matter on Friday, 10 March 2023, and the evidence shows that emails were sent to him containing the relevant documents for today's hearing. When the matter was called outside the court at the outset of today's hearing, there was no appearance by any party other than the plaintiff. In those circumstances, the plaintiff has proceeded ex parte and I see no reason not to proceed to give judgment on the evidence and the arguments which have been presented today. 4 The salient facts in relation to the matter are as follows. Mr Lloyd Davis and the plaintiff, Mr Read-Zorn, have known each other since 1986, that is for approximately 36 years. Around September 2020, they incorporated the Company with a view to operating a distillery business, which received an Australian Taxation Office (ATO) licence on 10 November 2022. Mr Davis and Mr Read-Zorn are both directors of the Company. The constitution of the Company does not provide for a casting vote on the part of the chairman so that if there is an equality of votes, then the proposed resolution would be defeated. 5 Mr Davis holds 1,100,000 shares, for which he paid $10,000, and 1,100,000 shares are also held by a company called Marakon Pty Ltd, a company of which Mr Read-Zorn is the sole director and shareholder. Mr Read-Zorn subsequently invested by way of loans approximately $45,000 and Mr Davis invested an amount of $324,486.70 by way of loans and the provision of plant, property and equipment in the business of the Company. 6 In terms of the division of labour between the two directors, the plaintiff was responsible for the administrative matters of the Company, including the keeping of books and records (involving both internal recordkeeping and engagement with the Company's external accountant), the lodgement of statutory obligations, such as tax returns, dealing with payables and receivables, and other such tasks. Mr Davis was primarily responsible for the Company's manufacturing operations, including the operation of the still and fermenters and related processes and tasks, operation of an onsite tasting room, and management of the staff. 7 As the business manufactures alcohol, it is required to pay taxes based on the amount of alcohol manufactured. As such, there is a need for a strong working relationship between the person lodging the alcohol excise accounts and the distiller. In particular, as the Company holds an Excise Manufacturer's Licence, it is required to pay excise duty on alcohol, which is paid through the ATO tax lodgement of excise returns. To hold the Excise Manufacturer's Licence, the Company is required to maintain records of several matters related to the production of alcohol, including details of the materials used in such production, volume of alcohol produced and a range of technical measurements in relation to the produced alcohol. The Company is required to lodge excise returns monthly. 8 The plaintiff's evidence is that Mr Davis began seeking the reduction of the plaintiff's involvement in the business in June 2021 and October 2021, which grew to regular arguments, with the plaintiff struggling to have a civil and workable relationship with Mr Davis. The breakdown became acute in January 2022, when the plaintiff requested certain documents, such as manufacturing records required to be maintained by the ATO. The plaintiff says that Mr Davis produced records that were unclear, incomplete, and not compliant with the ATO's recordkeeping requirements. Further requests for documents in January and February 2022 were not complied with. 9 As Mr Davis was primarily responsible for the production of alcohol by the Company, Mr Davis was also the only person who was in a position to collect and maintain the records of the raw data required by the ATO, including the data required to produce the various lodgements the Company was, and is, obliged to lodge. As the person in the Company responsible for formally submitting such records to the relevant authorities, the plaintiff needed that data from Mr Davis. As a result of Mr Davis' conduct, and the consequent breakdown of the relationship, the plaintiff could not properly keep the Company's books and records and attend to statutory obligations, such as the ATO tax lodgement. 10 The plaintiff brought these requirements to Mr Davis' attention on many occasions, in particular on 21 April and 8 September 2021. The plaintiff prepared a series of spreadsheets to facilitate the recording and maintaining of all of the data he understood the ATO required the Company to maintain, and provided links to those spreadsheets by email to Mr Davis on or around 12 and 13 September 2021. This issue was again brought to Mr Davis' attention at a board meeting held on 6 September 2021, requesting that Mr Davis update the centralised register in relation to distilling information with the relevant information to comply with the ATO's record keeping requirements, and facilitate the completion of lodgements as required. Further such requests were made on 14 different occasions. 11 Adequate records were never provided by Mr Davis. Due to Mr Davis' conduct, involving failure to provide the requested information, and the subsequent breakdown of the relationship, the plaintiff is unable to fulfil the ATO responsibilities as a director of the Company without Mr Davis' cooperation. As detailed in the ATO correspondence, the ATO granted a deferral of lodgement enforcement action (but not a lodgement deferral) to 26 October 2022 in relation to lodgement of the company's 2021 income tax return. As such, Mr Davis' failure or refusal to provide the plaintiff with the requested information has meant that the plaintiff has been unable to finalise the company's income tax return for the 2021 financial year. 12 A key aspect of the business depended on collective agreement, particularly in banking matters, as the bank accounts of the Company required the authorisation of both directors, that is, the plaintiff and Mr Davis, to facilitate outgoing payments. As such, the plaintiff could not fulfil his role as the administrative director without the cooperation of Mr Davis. 13 The plaintiff had approved outstanding payments to creditors and to the ATO by 17 January 2012, 14 of which initially remained unapproved by Mr Davis. Nine payments remained unapproved by Mr Davis as of 9 February 2023, and six of them subsequently remain unapproved by Mr Davis as at 23 February 2023. The evidence thus demonstrates concrete examples of the breakdown in the relationship and its potential consequences for the ATO. Something of the flavour of the breakdown in relationships can be gauged by statements by Mr Davis himself. On 2 February 2022, Mr Davis said in an email: I suggest now is a very good time to dissolve the partnership and put the business on the market. Because, clearly, your [sic] unable to work in a team. 14 On the same day, Mr Davis said: I cannot work with you anymore. You make everything far too difficult. Consider your options. I am okay for you to remain a shareholder, but you will have NO operational or administrative role. 15 On 20 December 2021, Mr Davis had suggested taking over the plaintiff's functions, saying: I think that the best result is that I assume all reporting responsibility from this point forward. 16 On 22 February 2023, the plaintiff made a proposal to Mr Davis to either buy him out of the company or be bought out himself. In an offer that was made on that day, the plaintiff set out the terms of his proposal but also said that the proposed settlement sum was to be paid by Mr Read-Zorn within 14 days of the date of Mr Davis' written acceptance of the offer and subject to the entry into a deed of settlement, which would provide for mutual releases between the two gentlemen and that would include any claims to possession or ownership of particular property of or used by the company, and any claims against the company for director or shareholder loans or liabilities. Mr Davis' solicitor purported to accept that offer on 24 February 2023, but then added, in his response of that day, that: I propose that it be agreed that all of the plant and equipment which remains at the premises, ie, Unit 1, 33 College Street, Gladesville, at the end of day is agreed to be owned by Origin Distillers Group Pty Ltd. 17 Having received that communication on 24 February 2023, on the next day, Mr Read-Zorn conducted an audit of the property at the business premises of the Company, which showed that a number of valuable items of Company property were missing from the Company's premises. In my opinion, there is a reasonable inference that it was Mr Davis or Mr Davis' agents who went to the premises and removed the Company's property on 24 February 2023. That inference is supported by the communication by Mr Legg of 24 February 2023, which showed some sensitivity towards the property which would remain on the premises by the end of business that day. The inference is also supported by evidence of a rival business being established using the same mark as the company, namely "Thunderbolt Distillery", and that rival business is apparently conducted by an associate of Mr Davis. 18 The principles relevant to winding up on the just and equitable ground have been helpfully summarised in the submissions by counsel for the plaintiff, Mr Bagley, and I summarise those principles below. 19 Winding up on the just and equitable ground has been recognised as applicable in a number of conventional categories, such as where the substratum of the company has failed, where management of the company's affairs is in deadlock or disagreement, where the company's formation involved fraud, where there has been misconduct on behalf of the company's directors, where there is a constitutional or administrative vacuum in the company's management, and where there is a lack of fairness, confidence and commercial morality in the company's affairs: Catombal Investments Proprietary Limited [2012] NSWSC 775 at [19] (Brereton J). 20 In that case, Brereton J said at [20] that the Court is not restricted to those scenarios, as the term "just and equitable" is broad and a party may seek an order under s 461(1)(k) of the Corporations Act whenever there is something: [affecting] him or her in [their] relations with the company or shareholdings, at least so long as those circumstances have a direct and immediate relationship to, or bearing upon, the management or administration of the affairs of the subject company, or the conduct of its business. 21 His Honour also pointed out that whether winding up is just and equitable is a question of fact, in respect of which each case will depend on its own circumstances. A well-established circumstance is where mutual cooperation and a level of trust are essential for the smooth running of the company's day-to-day management. As Barrett J said in Nassar v Innovative Precasters Group Pty Ltd [2009] NSWSC 342; (2009) 71 ACSR 343: Winding up is the characteristic remedy in circumstances where a working relationship predicated on mutual cooperation, trust and confidence has broken down. 22 Similarly, the New South Wales Court of Appeal in Fexuto Proprietary Limited v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ASCR 672 at [89] said that the jurisdiction to order winding up on the just and equitable ground may be exercised in circumstances that do not amount to oppression, unfair prejudice or unfair discrimination, particularly so where "irreconcilable differences" between shareholders have led to an irretrievable breakdown in a "personal relationship involving mutual confidence". 23 Similarly, in Mudgee Dolomite & Lime Pty Ltd v Murdoch [2020] NSWSC 1510, the company which was established on the basis of a relationship of mutual confidence suffered irreconcilable differences emerging between the members. In that case, the personal relationship between the parties failed and, ultimately, actions such as unwillingness to sign documents or attend meetings caused the disintegration of the relationship and, subsequently, a reason for the court to wind up the company on the just and equitable ground. 24 In addition to those principles, s 467(4) of the Corporations Act obliges the court to determine whether the applicant seeking a winding up order is doing so reasonably, and whether some other remedy is readily available. There have been occasions, such as in Nassar v Innovative Precasters Group Pty Ltd, above, where other options were considered impracticable because the financial situation of the shareholders would prevent a remedy such as one shareholder purchasing the shares of another, and winding up was the only viable option in resolving the deadlock. 25 That may be contrasted with Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104, where it was decided that a more reasonable remedy to the dispute in that case was the compulsory acquisition of the appellants' shares by the other shareholders or company. In Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd [2018] 3 Qd R 520, McMurdo JA expressed the view that 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 address 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, and consequently, a winding up will be ordered if there is no other remedy which is adequate in that it would redress the consequences of the facts and circumstances which are the basis for relief. In that case, the Queensland Court of Appeal upheld the longstanding principle that winding up is to be regarded as a remedy of last resort: see the judgment of McMurdo JA at [47]-[53], approving Re Dalkeith Investments Pty Ltd (1984) 9 ACLR 247 at 252 (McPherson J); and Short v Crawley (No 30) [2007] NSWSC 1322 at [1222] (White J). 26 In the present case, I am of the view that a winding up of the defendant Company on the just and equitable ground should be ordered on the basis of a clear breakdown and deadlock in the working relationship between the directors of the Company. The deadlock appears to me to be an irreparable problem, which has caused subsequent issues for the Company's dealings with the ATO and compliance with its statutory obligations. There has been an irreparable breakdown between the two members of what is, in substance, a quasi-partnership, founded at least initially on a relationship of trust and confidence. 27 The business was established on the basis of a long pre-existing relationship between the directors. They are equal shareholders and controlling directors. It is difficult to see how the business of the Company could be operated without trust and cooperation between them, which is no longer possible. 28 Both of their roles are critical to the business. If the alcohol manufacturing stops, the business cannot operate. If the administration responsibilities are not met, particularly those regarding tax compliance, the manufacturing licence could be removed. This has led to the failure of the substratum of the Company. The circumstances here include the inability of the plaintiff on behalf of the Company to meet the Company's tax obligations, including not only payment of tax but also the impairment in keeping adequate records for the ATO, which I have already referred to, that being a condition of the manufacturing licence. 29 Making payments to the creditors, including the ATO, requires the approval of both directors, and Mr Davis has been uncooperative in doing so. These matters have a direct bearing upon the management and administration of the affairs of the Company and the conduct of its business and provide, in my opinion, sufficient grounds for ordering the winding up on the just and equitable ground of the Company. In my view, the situation has been exacerbated by the removal of important and valuable items of property from the Company's premises, apparently by Mr Davis or people acting on his instructions. It has also been exacerbated by the apparent establishment of a rival business using the Company's mark. 30 The problems appear irreconcilable. In circumstances where such a working relationship predicated on mutual cooperation, trust and confidence has broken down, winding up is the natural remedy, absent any reasonably practicable means of the shareholders buying out the other. 31 In relation to that matter, while the plaintiff's offer of 22 February 2023 was purportedly accepted by Mr Davis through his solicitor, that purported acceptance has not given rise to any binding agreement for the following reasons. In the first place, the agreement was subject to entry into a deed of settlement providing for mutual releases and also dealing with claims to possession or ownership of particular property of or used by the company. No such deed has been propounded, and the settlement sum was not paid within the 14 days stipulated in the plaintiff's offer. 32 Second, the communication from Mr Davis' solicitor of 24 February 2023 constituted a counteroffer by adding a further term concerning the proposed agreement that all of the plants and equipment remaining at the premises at the end of 24 February should be treated as being owned by the company. As a counteroffer, that communication constituted an implied rejection of the original offer made by the offeror and a new offer which has not been accepted by the plaintiff: see Nationwide News Pty Ltd v Vass [2018] NSWCA 259 at [52]. 33 It does not appear that there is any realistic prospect of a further offer being made by either party and accepted by the other, particularly in circumstances where various items of valuable property which were of material importance to the operation of the business were removed from the Company's premises on 24 February 2023. In those circumstances, I do not think that there is any reasonable likelihood of the impasse between Mr Read-Zorn and Mr Davis being resolved by one of them purchasing the shares of the other. The consequence, in my view, is that winding up is the only reasonably practicable way of dealing with the irretrievable breakdown in the relations between the directors and shareholders of the company. 34 In those circumstances, I make the following orders: (1) Origin Distillers Group Pty Ltd be wound up pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth). (2) Geoffrey Trent Hancock of Hamilton Murphy Advisory, a registered liquidator, be appointed as liquidator of the defendant. (3) The plaintiff's costs of the winding up application be paid out of the assets of the Company. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackman.