Rocco Triulcio v Chase Property Investments Pty Ltd [2004] NSWSC 311 | Case summary

3778/03 ROCCO TRIULCIO v CHASE PROPERTY INVESTMENTS PTY LTD & ORS JUDGMENT 1 The plaintiff held a minority interest in the defendant companies. The Elias family held the majority interests. The relationship between the plaintiff and the Elias family broke down. The plaintiff claimed that it was just and equitable to wind up the companies under the Corporations Act 2001 (Cth), s 461(1)(k). He also claimed that a basis for winding them up had been made out under s 461(1)(e), s 461(1)(f) and s 461(1)(g) in that the directors had acted in their own interests and the affairs of the companies and its acts had been conducted oppressively, unfairly prejudicially or discriminatorily of his interests. Each of the companies was solvent. 2 By their cross claim, the defendants sought an order for the purchase of the plaintiff's shares under the Corporations Act 2001 (Cth), s 233(1)(d) on the basis that the conduct of the companies' affairs was oppressive to, unfairly prejudicial to, or unfairly discriminatory against the majority shareholders in terms of s 232. Alternatively, the defendants argued that the court could make such an order in the plaintiff's proceedings under s 467(1)(c) which empowered the court on a winding up application to make any interim or other order as it saw fit. 3 The eight, ninth and tenth defendants were wholly-owned subsidiaries of the second defendant in which the plaintiff held 45 shares. The plaintiff held 45% of the issued capital in the first, third and fourth defendants. He held 40% of the issued capital of the seventh defendant and 26% of the issued capital of the fifth defendant. The sixth defendant was the trustee of the Chase Trust in which the plaintiff held 45% of the beneficial interests. In each case the Elias family held the remaining interests. 4 In his pleading the plaintiff alleged that he was excluded from the management of the defendants, they had not kept proper accounts and the Elias family had benefited at his expense in dealings with the companies. At trial the plaintiff relied on specific matters to make good his case. Not all the allegations in the statement of claim were prosecuted. The plaintiff retained two accountants to investigate matters on his behalf. In the course of those investigations some of the matters of complaint were explained. It was submitted that to raise all issues of complaint would be like trying to conduct an audit. That was not feasible and, in consequence, reliance was placed on limited specific allegations. 5 The plaintiff was, with Anthony Stephen Elias, a director of each of the defendants. In some cases there was a third director. The plaintiff said that until 1999 the relationship between him and the Elias family was harmonious. He said that thereafter he was excluded from decision making and his requests for board meetings and copies of financial statements went unanswered. Mr Elias said the breakdown occurred earlier in 1996 when the plaintiff's behaviour became irrational. For whatever reason, neither side contests the fact that there has been an irretrievable breakdown in the relationship. What had commenced and been conducted as an association based on personal relations and conjoint participation in the affairs of the companies came to an end and the plaintiff ceased to play a part in those affairs. 6 Mr Elias was a mechanical engineer. He was not a qualified accountant. He said he had no role in overseeing the accounts. That evidence belied the detailed familiarity with the accounts of the companies he demonstrated in his oral evidence. It was he who provided Geoffrey Allan White, the defendants' accountant, with information to enable him to prepare the annual accounts. It was he who provided information to Scott Darren Pascoe, the chartered accountant retained by the defendants to provide a report. It was he who spent nearly six weeks working with Deloitte Ross Tomatsu to prepare a report on the Italian Forum, a development carried out by the second defendant at Leichhardt in Sydney. 7 Far from playing a minor role in accounting matters, I find that Mr Elias was the director responsible for the provision of the information from which the company accounts were prepared. From the breakdown of the relationship with the plaintiff, it was he who controlled the financial information within the defendant companies to the exclusion of the plaintiff. 8 Some of that information was provided on request to the accountants retained by the plaintiff in the course of their examinations. Both said they received insufficient information to enable them to complete their tasks. John Campo said he was retained to review the accounts to ascertain the financial position of the group and the value of the plaintiff's shareholding. He said that he had not been provided with some of requested documentation and he raised concerns as to the accounting treatment of a number of transactions. John Robert Wilcox was retained to conduct an audit of the accounts of the defendants. He said that because of the incomplete and inaccurate state of the records and a lack of cooperation from Mr Elias and Mr White, he was unable to complete his task. While Mr Elias and Mr White denied that they failed to cooperate, I have no doubt that Mr Campo and Mr Wilcox lacked sufficient information to carry out their tasks. As will appear, the quality of the accounting records of the group was poor. 9 One of the allegations made by the plaintiff was that Mr Elias took $307,000 in cash from the seventh defendant that was not recorded as a charge against his loan account. Thao Thi Ngoc, also known as Vanessa Tran, was employed as the bookkeeper of the seventh defendant. It was part of her responsibility to maintain the bank account records and document receipts from the restaurant businesses carried on by that company at the Italian Forum. Each day she received cash and cheque takings sheets from the managers of the restaurants. She transferred the total receipts to a cash column on a monthly summary sheet she maintained. The cash was kept in a safe. Periodically she would work out how much of the daily receipts of cash and cheques should be banked. She prepared the deposit slip and recorded the amount banked in a banking column on her monthly summary sheet. She also recorded miscellaneous amounts of cash taken for the payment of wages, miscellaneous expenses and petty cash. Finally, she entered the balance of cash and cheques that should have been held in the safe. 10 Ms Tran said that between August 2001 and June 2002, Mr Elias gave her cheques drawn on various companies in the Chase Property group for which she gave him cash, usually in the amount of the cheque but sometimes less. He asked her to record the cheques as loans from the companies concerned. She said she was told not to keep a record of the cash transactions. 11 Ms Tran calculated the amount of actual loans made to the seventh defendant. This included such part of a cheque presented to her by Mr Elias for which he did not receive cash. By subtracting the total of these amounts from the total amounts banked she calculated the amount of cash provided to Mr Elias in the amount of $307,000. 12 Mr Campo was asked to ascertain whether any cash amounts were reimbursed to the company in the Chase Property group upon which the cheques had been drawn. He discovered that only $21,000 had been reimbursed and that $15,300 of this amount was recorded as loans to those companies from Elias family members. 13 Mr Elias denied this practice. He pointed to deposit slips that included bankings of cheques and cash and argued that amounts Ms Tran said were provided to him in cash were banked. That was not, however, the point. Ms Tran's evidence was that the bankings included cheques substituted by Mr Elias for cash drawn by him. Furthermore, this line of reasoning was not put to Ms Tran in cross examination. 14 After Ms Tran's affidavit had been served, Deloitte Ross Tomatsu was retained by the defendants to investigate an allegation that the plaintiff's brother, Ross Triulcio, had stolen cash from the seventh defendant. He was charged with stealing. They came to substantially the same conclusion as Ms Tran as to the amount of cash involved. It was common ground that the amount was $307,000. When Mr Elias became aware of Ms Tran's allegations he did not raise with Deloitte Ross Tomatsu the allegation that he had taken cash from the seventh defendant. It was submitted on behalf of the defendants that it was Mr Ross Triulcio and not Mr Elias who had taken the cash. 15 If Ms Tran's evidence was correct, the takings of the businesses of the seventh defendant were understated by $307,000, the loan account of Mr Elias had not been charged with $307,000 and the loan accounts of the members of the Elias family who deposited $15,300 with the Chase Property group had been wrongly credited in this amount. 16 In cross examination it was put to Ms Tran that Mr Elias had not taken cash from the seventh defendant. She denied it. I have no reason to doubt her evidence. The consequence is that the financial accounts of the seventh defendant and of the other defendants upon which the cheques were drawn cannot be accepted at face value. 17 Gary Mangano formerly held interests in the Chase Property group. His interests were bought out in June 2001. He held shares in the fifth defendant which was profitable, shares in the seventh defendant which had a negative value and he had an interest sharing the profits and losses of the third defendant which was also unprofitable. The Chase Property group owed him $470,000. On a calculation sheet of his interests totalling $676,028 is a notation of a payment of $676,002.50. That accords with a debit to the bank account of the fifth defendant on 29 June 2001. 18 The buy out was not reflected in the accounts of the companies until the 2002 accounts were being prepared. Mr White indicated that until then the company with the loan accounts was in a loss situation and there was no attempt to reconcile the loan accounts within the group. The payment of $676,002.50 was recorded in the books of the first defendant as a loan advance made to it by the fifth defendant and it was credited to a loan account in the name of Lewarne & Goldsmith, solicitors. 19 It was not until after queries had been raised with respect to the transaction on behalf of the plaintiff that a journal entry was raised in the first defendant's books as of 1 July 2001 debiting the plaintiff with 1/25 of a net amount of $153,028 and debiting Elias family members with 24/25 of that amount. 20 Mr Wilcox criticised this approach. He pointed out that Elias family members received 24 of the 25 shares in the profitable fifth defendant whereas the plaintiff received 13 of the 30 shares in the loss making seventh defendant. He said the effect of the transaction was that the plaintiff incurred a net liability with respect to his share of the Mangano interests of $413,423. Whereas the Elias family received benefits of $628,710 in respect of the interests acquired by them. He said the Elias family loan accounts should be debited for that amount while the plaintiff's loan account should be credited for his assumption of liability. 21 In cross examination of Mr Wilcox it was not suggested that his approach was in error and no expert evidence was called by the defendants to the contrary. 22 It was submitted on behalf of the defence that I could determine which accounting approach was correct or that issue could be determined in an enquiry as to the value of the plaintiff's interests in the defendants. 23 In my view, however, the treatment of the Mangano purchase is a further indication of the inaccuracy of the accounts of the Chase Property group. Mr White said that since Mr Wilcox had been retained by the plaintiff he had not prepared any further accounts. None of the accounts of the Chase Property group had been audited. What were said to be the final versions of the 2002 accounts were produced to the court but, as Mr Elias subsequently pointed out, the copies had been drawn from his office and further adjustments had been made by Mr White and copies kept in his office. No accounts for the year ended 30 June 2003 were available. The result was that there were inconsistencies in balances on intercompany transactions within the group demonstrable on the face of the 2002 accounts produced to the court. 24 The defendants complained that information had been sought on behalf of the plaintiff in dribs and drabs and the correspondence between the solicitors revealed appropriate responses to requests. It was submitted that all that had been requested had been appropriately dealt with. Whether this was so or not is beside the point. The financial records of the defendants as presented to the court were in such a state that they could not be audited and they could not form a proper basis for a determination of the value of the plaintiff's shareholding. 25 The second defendant borrowed $4 million from a company associated with the Bank of Singapore. $1 million of those funds ended up in the hands of Lewarne & Goldsmith. Mr Elias said it was held as a security deposit for the construction of the Italian Forum. As portions of the fund were drawn upon by the first defendant, they were recorded in its books as loans from Lewarne & Goldsmith. 26 The defendants conceded that the effect of this accounting treatment was to overstate Chase Property group liabilities by $1 million. It was submitted that there was nothing sinister in this regard and the entries were a coding error. 27 However, the Elias family was aware that the funds were on deposit with Lewarne & Goldsmith and yet there was no asset recorded in the group accounts. Mr White had described it as a "slush fund" but said that was "pretty loose phrasing". 28 In my view the accounting treatment of the funds held by Lewarne & Goldsmith was further evidence of the unreliability of the accounts of the Chase Property group. 29 The plaintiff did not seek to rely upon other allegations in his pleading. His purpose was to demonstrate that the accounts of the Chase Property group were in such a state that it would be inappropriate to order the compulsory acquisition of his shares because there were no sufficiently reliable accounts upon which a valuation of the shares could be based with any degree of comfort as to its accuracy. 30 It was not in dispute that there had been an irretrievable breakdown in the relationship between the plaintiff and the Elias family. It was not submitted that a case had not been made out for the winding up of the defendants on the just and equitable ground in the Corporations Act 2001 (Cth), s 461(1)(k). It is unnecessary, therefore, for me to determine whether the plaintiff also established that the directors acted in their own interests or unfairly and unjustly to other members, the affairs of the defendants were conducted in a manner that was oppressive or unfairly prejudicial to or unfairly discriminatory against the plaintiff or that acts or omissions on behalf of the defendants were oppressive or unjustly prejudicial to or unfairly discriminatory against the plaintiff in terms of s 461(1)(e), s 461(1)(f) and s 461(1)(g). 31 It was submitted on behalf of the plaintiff that the defendants were in the nature of quasi-partnerships. As was said by the House of Lords in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, the court can subject the exercise of legal rights in companies to equitable considerations of a personal character arising between individuals that might make it inequitable to insist on legal rights or to exercise them in a particular way. At 379 Lord Wilberforce explained that the superimposition of these equitable considerations typically arose from the presence of one or probably more of the elements of an association formed or continued on the basis of a personal relationship involving mutual confidence, an agreement or understanding that all or some of the shareholders would participate in the conduct of the business and a restriction on the transfer of a member's interest in the company so that if confidence was lost or a member was removed from management he could not take out his stake and go elsewhere. 32 As Young J observed in Alessi v The Original Australian Art Co Pty Ltd (1989) 7 ACLC 595 at 597, although corporate vehicles are utilised to carry on a business, the relationship between the shareholders may be essentially that of partners and where the intimate relationship between them breaks down the court very often considers that it is just and equitable to wind up the companies in the same way as it would have wound up their affairs had they chosen the vehicle of a partnership in its strict form (see also Stapp v Surge Holdings Pty Ltd (1999) 17 ACLC 896). 33 In my view, notwithstanding the absence of pre-emptive rights of acquisition of shares in the defendants by other shareholders, elements sufficient to establish the superimposition of equitable considerations arose in this case. The association that led to the formation and continuation of the companies was based on the personal relationship between the plaintiff and the Elias family and involved mutual confidence. The understanding was that the plaintiff and the Elias family would participate in the conduct of the businesses of the defendants. Because that mutual confidence has broken down it is appropriate that the defendants be would up on the just and equitable ground. 34 The defendants point out, however, that courts are extremely reluctant to wind up solvent companies (International Hospitality Concepts Pty Ltd v National Marketing Concepts Inc (No 2) (1994) 13 ACSR 368 at 372). Reference was made to McPherson, The Law of Company Liquidation, 4th ed, LBC Information Services, Sydney, 1999, 162 where it was said that it was essential that the misconduct complained of should have reached virtually incurrable proportions. That observation was made in the context of the availability of alternative forms of redress and the comment that despite the alternatives, winding up remained the appropriate form of procedure in cases where fraud or breaches of duty had been serious and persistent. 35 The plaintiff pointed out that the activities of the defendants were confined to the ownership of property put out on lease although a few had long-term prospects as redevelopment sites. In Wallington v Kokotovich Constructions Pty Ltd (1993) 11 ACLC 1207 at 1216 the company in question owned land which it leased to other companies in the group but did not otherwise conduct a business itself. In the absence of a bona fide offer to buy the opponent out at a fair price, it was held that a winding up was as good a way of resolving the conflict as any other. An appeal from that decision was dismissed (Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113). 36 It was submitted that a winding up would not necessarily result in a fire sale of the properties that had long-term redevelopment prospects. Those particular properties could be distributed in specie to shareholders. 37 In reliance upon the Corporations Act 2001 (Cth), s 467(1)(c) the defendants submitted that the court could order the purchase of the plaintiff's shares at a figure to be determined by a referee. In Alati v Wei Sheung (2000) 34 ACSR 489 at 494-495 Young J observed that there was paucity of authority on the extent of the power but that it was expressed in wide words. 38 The Corporations Act 2001 (Cth), s 467(4) provided that where a winding up was sought by a member as a contributory on the just and equitable ground or on the ground that the directors had acted unfairly and there was an alternative remedy, the court was to make a winding up order unless of the opinion that the member was acting unreasonably in not pursuing the alternative remedy. It was in the following terms: "Where the application is made by members as contributories on the ground that it is just and equitable that the company should be wound up or that the directors have acted in a manner that appears to be unfair or unjust to other members, the Court, if it is of the opinion that: (a) the applicants are entitled to relief either by winding up the company or by some other means; and (b) in the absence of any other remedy it would be just and equitable that the company should be wound up; must make a winding up order unless it is also of the opinion that some other remedy is available to the applicants and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy."

39 The defendants submitted that the preponderance of authority supported the view that the "remedy" referred to in the provision was not limited to a legal cause of action but included a compulsory acquisition of the shares of the member. Reference was made to Re Johnson Corporation Ltd (1980) 5 ACLR 227, McPherson 173 n 304 and Host-Plus Pty Ltd v Australian Hotels Association [2003] VSC 145. 40 The Corporations Act 2001 (Cth), s 232 and s 233 provided, amongst other things, that if the conduct of a company's affairs were contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member or members, the court might order that the company be wound up or that any shares of any member be purchased. It was argued that it would be a peculiar result if compulsory purchase was limited to oppression, prejudice and discrimination and was not available as an alternative to winding up on the just and equitable basis. 41 In Host-Plus at par 60 it was conceded that the court had power under the Corporations Act 2001 (Cth), s 467(1)(c) to give relief of the kinds referred to in s 233. It was submitted that that concession was properly made and that approach should be preferred to the view expressed in Bernhardt v Beau Rivage Pty Ltd (1989) 15 ACLR 160 at 164 that "remedy" was limited to a cause of action. 42 It was submitted this was not the view taken in Re Dalkeith Investments Pty Ltd (1984) 9 ACLR 247 upon which reliance was placed in Bernhardt. In Dalkeith at 254, McPherson J cited with approval Mincom Pty Ltd v Murphy [1983] 1 Qd R 297 where the court held a failure to adopt the procedure under a pre-emption clause as some evidence of collateral motive or of bad faith on the part of a petitioner for winding up. Support for this contention was sought from Re Brylyn No 2 Pty Ltd (1987) 12 ACLR 697. 43 I do not have to decide this issue because, assuming that an order for compulsory acquisition of the plaintiff's shares is an alternative "remedy" for the purposes of Corporations Act 2001 (Cth), s 467(4), I am not satisfied that the plaintiff acted unreasonably in seeking to have the defendants wound up instead of pursuing an order for the compulsory acquisition of his shares. 44 In Malos v Malos (2003) 44 ACSR 511, Barrett J held that a winding up order on the just and equitable basis was more appropriate than an order convening a meeting of the members of a company conducted as a quasi-partnership upon the complete breakdown in the ability of shareholders to communicate with each other. The appointment of a liquidator would allow a full investigation of alleged payments of directors' fees and dividends and a purported buy back of shares. The plaintiffs submitted that similar principles applied in the instant circumstances. 45 In my view an order for compulsory acquisition of the plaintiff's shares is inappropriate. The accounts that have been prepared of the defendants' affairs cannot be accepted at face value. In order for proper accounts to be prepared investigations into the removal of cash from the seventh defendant and the basis for entries against the loan accounts within the companies' books must be investigated. A proper valuation of the plaintiff's shares requires accurate accounts to be made up. Until that process is completed no referee appointed by the court is in a position to determine the proper value of the shares. 46 In these circumstances, an order for compulsory acquisition of the plaintiff's shares would not, in my view, do justice to the plaintiff. I am of the view that the winding up of the defendant companies is the appropriate remedy.

Rocco Triulcio v Chase Property Investments Pty Ltd

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Judgment (8 paragraphs)

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