Roumanus v Orchard Holdings [2007] NSWSC 1480 | Case summary

3731/07 ARTHUR ROUMANUS & ORS V ORCHARD HOLDINGS (NSW) PTY LTD JUDGMENT 1 HIS HONOUR: By an originating process filed in court on 20 July 2007, the plaintiffs seek orders that the defendant ("the Company") be wound up and that liquidators be appointed. The originating process says that the application was made under ss 461(1)(c) (company suspended business for a whole year), 461(1)(e) (directors acting in their own interests or unfairly or unjustly to members), 461(1)(f) (affairs of company being conducted oppressively etc), 461(1)(g) (act or omission that is oppressive etc) and 461(1)(k) (the just and equitable ground). The plaintiffs also filed an interlocutory process on the same day, seeking the appointment of provisional liquidators. They filed a verified statement of claim on 23 November 2007. There does not appear to be any pleading based on insolvency. 2 When the interlocutory process came before Hammerschlag J on 24 July 2007, and was adjourned with directions for the filing of evidence, the court noted the Company's undertaking, until 14 August 2007 or further order of the court, not to complete the sale of its land at 123-179 Paton's Lane, Orchard Hills in New South Wales ("the Property") or deal with a deposit paid on the sale of the Property, or deal with any of its assets other than in the ordinary course of business. On 14 August 2007 the interlocutory process was dismissed on the Company's undertaking not to complete its contract of sale of the Property dated 20 July 2007 (semble, 22 July 2007) without first giving seven days' written notice to the plaintiffs' solicitor. 3 The proceedings returned to the court on 16 November 2007, when Hammerschlag J made orders by consent, noting the Company's further undertaking to the court not to enter into a contract for the sale of the Property without first giving seven days' written notice to the plaintiffs' solicitors, and also noting that the undertaking given on 14 August applied in respect of any other contract entered into for the sale of the Property. 4 The plaintiffs made a further application for the appointment of provisional liquidators by an interlocutory process filed on 26 November 2007, apparently after discovering that, notwithstanding the undertakings to which I have referred, the company had entered into a further contract to sell the Property. That application, which was contested, was heard by me in the Corporations List on 10 December 2007. 5 The evidence read and tendered in support of the application is very sketchy. There are 14 affidavits, some repetitive and others omitting obviously material facts. This has made the judge's task of piecing together the evidence to make sense of it an unnecessarily time-consuming one. The exhibits to one of the affidavits were not tendered, making it challenging to understand part of the text of the affidavit. One of the exhibits was a lever-arch folder of e-mails, unpaginated, in reality comprising only about half a dozen pertinent pages, the remaining bulk consisting of the historical e-mail chain repeated again and again. It would have helped considerably if the new e-mails were tabbed or highlighted. The applicant left it to the judge to identify those few pertinent pages by trawling through the folder, page by page. By the time the application was heard, it had been before me in the Monday Corporations List on two earlier occasions, and so it can hardly be said that the application was brought on with such urgency that corners had to be cut. Judges are called upon by counsel, again and again, to tolerate unnumbered documentary exhibits and poorly constructed affidavits, but this case reached such an extreme as to demand comment. 6 Notwithstanding the deficiencies in the plaintiffs' evidence, I have reached the view that the case for the appointment of provisional liquidators has been made out. Some legal principles 7 Section 472(2) empowers the court to appoint an official liquidator provisionally at any time after the making of a winding up application and before the making of a winding up order. The principles governing the exercise of the court's discretion under this provision have been frequently stated in the cases and there is no general disagreement about them in the present case. A brief statement is sufficient here. 8 As a general proposition, the plaintiff must establish an urgent need for intervention, or some other good reason to take control away from the directors (Re JWD Pty Ltd (1990) 5 WAR 31; Re Capital Services Ltd (1983) 1 ACLC 1270; Re Gasbourne Pty Ltd (1984) 2 ACLC 103). However, the "good reason" must be established having regard to the urgent circumstances of the application. The urgency of the application almost inevitably means that the court will have before it substantially less evidence than will be adduced at the final hearing of the winding up application (Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625, 635). Frequently, as in the present case, the hearing of the application takes place without oral evidence, and therefore without the court having any opportunity to assess the credibility of witnesses. In those circumstances the court deals with questions of fact only to the interlocutory standard, determining whether the plaintiff has established a serious question to be tried as to the grounds for winding up (Boral Resources (WA) Ltd v Innovative Precast Systems Pty Ltd, Supreme Court of Western Australia (Sanderson M), 24 August 1998, BC 9804409 at 15). As in the case of an application for any other interlocutory order, much attention must be given to the question of balance of convenience, including the need for urgent intervention. 9 Generally, the purpose for which a provisional liquidator is appointed is to preserve the assets of the company and the status quo in relation to its affairs (Zempilas v JN Taylor Holdings Ltd (No 2) (1990) 55 SASR 103; 3 ACSR 518 per King CJ). However, an order for the appointment of a provisional liquidator is different from some other kinds of interlocutory orders in that the order unavoidably disturbs the status quo to a degree, if at the time the application the company is carrying on business in a commercial environment. The very appointment of a provisional liquidator can have a drastic effect on the company's business, perhaps even leading to its commercial death (see the discussion by Kirby P in the Constantinidis case, at 635ff, and also Commonwealth v Hendon Industrial Park Pty Ltd (1995) 17 ACSR 358). This leads to the observation that "the appointment of a provisional liquidator pending adjudication upon the petition for winding up, is a drastic intrusion into the affairs of the company and is not to be contemplated if other measures would be adequate to preserve the status quo" (Zempilas per King CJ, approved by Kirby P in Constantinidis at 635). 10 While the ultimate fate of the application for winding up must be left to the court finally hearing the matter, a provisional liquidator will not usually be appointed unless it appears in the material before the court that a winding up order is likely; that is, there should be adequate evidence adduced to show that winding up is likely in the absence of material to the contrary (Re McLennan Holdings Pty Ltd (1983) 7 ACLR 739, approved by Kirby P in Constantinidis at 636). Although the court's assessment of the evidence can only reach the interlocutory standard, there must be some assessment made of the overall strength of the case as a foundation for the ground of winding up that is invoked (Allstate Explorations NL v Batepro Australia Pty Ltd [2004] NSWSC 261). 11 The court can and sometimes does appoint a provisional liquidator where the ground for winding up is oppression or the just and equitable ground. But it is appropriate to bear in mind, where the applicant relies on the oppression ground, that under Part 2F.1 of the Corporations Act the court has the power to make a variety of orders and winding up is only to be ordered as a last resort (Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413 per Young J). Where an application for winding up is made on the just and equitable ground, the court is required by s 467(4) to consider whether some other remedy is available and whether the plaintiffs are acting unreasonably in seeking to have the company wound up instead of pursuing the other remedy. Similar considerations apply, as a matter of exercise of the court's discretion, where the ground is oppression (Re Quest Exploration Pty Ltd (1992) 6 ACSR 659). Other interim regimes can be devised that may protect the status quo (Triulco v Chase Property Investments Pty Ltd [2003] NSWSC 861; Labraga v Pomfret [2005] NSWSC 490). The principal protagonists 12 Arthur Roumanus (the first plaintiff) and Raymond Roumanus (the second plaintiff) are brothers, and Sandra Roumanus is Arthur's wife. Waratar Pty Ltd is a company the directors and shareholders of which are Raymond Roumanus and Cecilia Roumanus, and it acts as trustee of the Roumanus Superannuation Fund. Rosemaree Maroon (the fifth plaintiff) is the wife of Morris Maroon, who was involved in the transactions I shall describe but did not personally invest in the Company. Mary Maroon (the sixth plaintiff) is the wife of Anthony Maroon, who was also involved in the transactions but did not invest personally. Anthony and Morris Maroon are brothers, and Raymond Roumanus is their first cousin. 13 The Kady family comprises, for present purposes, the father and mother (Raymond and Therese Kady) and their children Mona, Ray (deceased), Mark, Paul and Robert, and their cousin David Kady. David Bourchdan is related to Mark Kady. 14 The Maroun brothers, George, Charbel and Anthony, invested in and dealt with the Company at a later stage, in circumstances I shall explain. Anthony and George Khouri, also brothers, were indirect investors in the Company, through a trust. Relevant companies 15 The Company was formed by members of the Kady family and Steven Sarkis in June 2001, to acquire the Property. Initially the directors were Mona Kady and Mr Sarkis, and they remained in office until 8 February 2006, when they were replaced by Mark, Robert and Paul Kady. 16 From the outset the issued capital was 100 shares. Initially Mona and David Kady, David Bourchdan, Steven Sarkis and Rosemaree Maroon were the shareholders, but that changed when the plaintiffs invested. Now Arthur and Sandra Roumanus each hold one share, and in addition, they jointly hold one share. Waratar holds two shares, as trustee for the Roumanus Superannuation Fund, and claims to be a creditor of the Company for $210,000 plus interest. Rosemaree Maroon holds five shares as trustee for the Maroon Family Trust and also claims to be a creditor of the Company for approximately $360,000, and Mary Maroon holds three shares beneficially. Therefore altogether the plaintiffs have 13 of the 100 issued shares. 17 As at 12 July 2006, the remaining shares were held as follows: Steven Sarkis atf the Sarkis Family Trust: 10 shares David Bourchdan atf Bourchdan Family Trust: 5 shares David Kady atf Kady No 2 Family Trust: 10 shares Bretant Pty Ltd atf Khouri Group Unit Trust: 10 shares Mona Kady atf the Kady Family Trust: 52 shares By December 2007 the 10 shares formerly held by Mr Sarkis had been acquired by Lucky Investment Group Pty Ltd. 18 Reference should be made to Erskine Park Quarry (NSW) Pty Ltd (registered in 2002), Advanced Earthworks Pty Ltd (registered in 2001) and All Ways Recycle Pty Ltd (registered in 2001). They, together with the Company, are sometimes referred to in the evidence as "the EPQ Group" or "the Group". Until 2006 the directors of these three companies were Mona Kady and Steve Sarkis, but Mr Sarkis ceased to be a director on 28 September 2006. On 24 February 2006 a voluntary administrator was appointed to each of the three companies, and he became liquidator in a creditors' voluntary winding up of each company on 23 March 2006. The shareholders of Advanced Earthworks and All Ways Recycle include some members of the Kady family, Mr Bourchdan, Mr Sarkis, Rosemarie Maroon and Waratar. 19 Recyclex Pty Ltd was registered on 16 March 2006. Its director, secretary and sole shareholder is Robert Oke. The Company's acquisition of the Property and subsequent trading 20 The Company completed the acquisition of the Property on about 8 November 2001 and it still holds title. The Property is the only significant asset of the Company and is a valuable landholding. Apparently its other assets are five trucks, a fourwheel drive and a trailer, all encumbered (Raymond Roumanus denied that the Company owns these assets, but his other evidence indicates that he is not in a position to know). 21 The Property is a 60 ha tract of land beyond Penrith, near Sydney. A valuer has described it as originally undulating grazing land, which over the past 26 years has been extensively quarried and now features a number of deep, open cut pits. The surrounding development consists of rural residential properties and grazing land. It is situated only a few kilometres from a Sydney residential suburb, St Clair. There seems to be significant potential for future use of the site for further quarrying and waste landfill, and perhaps eventually residential/light industrial development. 22 In November 2001 the Company granted a fixed and floating charge to Arab Bank Australia Ltd, the discharge of which was notified to ASIC in September 2005. In August 2002 the Company granted a further fixed and floating charge to Westpac Banking Corporation, notification of the discharge of which was lodged with ASIC in September 2005. On 19 August 2005 the Company created a fixed and floating charge in favour of Provident Capital Ltd. Provident Capital has a registered mortgage over the Property. The Provident Capital facility was arranged by a finance broker called Con Morris, who has given evidence. It has twice been rolled over for extra terms, the last of which ended on 21 July 2007. 23 The Property is zoned "1(A) - Rural 'A' - zone - general". However, the Property is subject to the Sydney Regional Environmental Plan No 9 - Extractive Industries (No 2 - 1995). A licence has been issued to the Company by the New South Wales Environmental Planning and Assessment Authority to extract clay and shale from the Property and replace it with Virgin Excavated Natural Material ("VENM"). The Company has been extracting clay and selling it to CSR Ltd since about 2002. CSR uses the clay to produce bricks and pavers. This generates, on average, approximately $80,000 per month for the Company. The exact amount each month depends upon certain variables including the type of material ordered by CSR, the quantity required and the weather conditions. The money received from CSR is used to pay day-to-day expenses of the Company, including truck and machine fees, fuel costs and interest expenses on its finance facility, currently provided by Provident Capital. 24 The terms of the arrangement between the Company and CSR are not in evidence, but I note that on 13 December 2006 CSR lodged a caveat to prevent dealings with the Property, relying on alleged profits a prendre to remove a stockpile of clay and shale and to extract clay and shale, said to have arisen upon termination in March 2006 of an undated supply agreement executed in about May 2002 between itself and Erskine Park Quarry, and an oral but partly performed agreement made in March 2006 between CSR and Recyclex Pty Ltd. 25 The financial statements of the Company for the 2003/04 year, evidently the last financial statements available, showed accumulated losses of over $1.5 million. The Company's balance sheet showed $2.99 million of receivables including a loan of over $800,000 to Erskine Park Quarry and substantial loans to entities apparently related to the Kady family, Mr Sarkis and Mr Khouri (as well as the Maroon Family Trust). There were also substantial borrowings from related entities. The plaintiffs' investments in the Company, and the alleged development plans 26 According to Morris Maroon's evidence, his wife Rosemaree was one of the initial shareholders in the company, acquiring her five shares (which she holds as trustee for the Maroon Family Trust) by allotment from the Company, together with shares in other companies in the EPQ Group. The consideration was $200,000 per share, with $200,000 paid initially and (according to Morris Maroon) the balance to be payable when rezoning was achieved. According to him, the other plaintiffs all acquired their shares by purchase from other shareholders, as no further shares were issued after the initial issue of 100 shares. The shares are described on the share certificates as $1 shares. Perhaps they were bought for $1 each and the remainder of the consideration of $200,000 per share was provided to the Company by way of loan. The evidence is very unclear on this matter, and need not be resolved for present purposes. 27 Raymond Roumanus gave evidence to the effect that the former directors of the Company, when in control of the Company, planned to make a development application for permission to expand the area of land on the Property from which clay and shale could be extracted, and for permission to deposit construction and demolition ("C & D") landfill on the property. The C & D landfill was to be non-VENM. His general claim was that members of the Roumanus and Maroon families invested in the Company on the faith of representations made by Mona Kady and Steven Sarkis that their money would be used to obtain development consent, leading to greatly enhanced income for the Company and a substantial improvement of the value of the Property, for the benefit of all investors. It is necessary to explore the evidence supporting these claims. 28 Raymond Roumanus had dealings with Mona Kady in the early 1990s, when he was a bank manager, financing the construction of a funeral home on property owned by Raymond and Therese Kady. Mr Roumanus later left the bank and became a finance broker, eventually (from about October 2000) carrying on business in the name of Salisbury Partners (NSW) Pty Ltd. In that capacity he assisted Mona Kady to refinance the funeral parlour and to finance the purchase of a new home for the Kady family. 29 In early 2001 the Kady family and Steven Sarkis engaged Raymond Roumanus to put in place a finance package for them to purchase the Property. He made some arrangements for finance to be provided by BankWest, who appointed a valuer to assess the Property for financing purposes. The valuer was Donald Reed. 30 Mr Roumanus said that if the company obtained development consent to allow it to dump C & D material on the Property, the landfill would permit the site to be used for residential or light industrial subdivision. He also said that, at the time the valuation was being undertaken, it was not known that the clay in the quarry was of a high grade, which subsequently came to be sought after. He said that in 2003 Mona Kady and Steven Sarkis said to him at various times that the clay on the Property was first-class and that PGH and Boral wanted it for the manufacture of bricks and pavers. In fact, as I have mentioned, the company had a commercial arrangement with CSR which began in 2002. The excavation of clay deepened the hole available for dumping C & D waste, increasing potential revenue and hence the value of the site. 31 The BankWest financing proposal did not proceed, evidently because the lender's requirements for financial reporting and additional security were judged by Ms Kady and Mr Sarkis to be excessive, and they were able to reach a better deal with the Arab Bank. Raymond Roumanus introduced the Kady family and Mr Sarkis to his cousin Morris Maroon, a tax partner with Ernst & Young. He did so because the Kady family and Mr Sarkis already had companies operating waste disposal, excavation and demolition businesses, and Mr Roumanus told them they needed structuring advice, which Mr Maroon could provide. 32 As a result of taking instructions, and over the following years, Mr Maroon learned that the Kady family and Mr Sarkis each separately operated earthworks/excavation businesses prior to the merging of their business interests at the time of acquisition of the Property. He gave evidence that Mr Sarkis had identified the business opportunity involved in purchasing the Property, and he invited the Kady family to join him because he needed financial assistance to acquire and develop the Property. Once the Kady family agreed to participate, Mr Maroon was briefed to advise on implementation, from a tax point of view. He recommended the formation of new companies, which became the EPQ Group. 33 As a result of Morris Maroon's advice, the Company was formed to become the owner of the Property. Advanced Earthworks Pty Ltd was formed to operate the demolition/excavation business. Erskine Park Quarry (NSW) Pty Ltd was formed to conduct the quarrying business on the Property. All Ways Recycle Pty Ltd eventually conducted a recycling business on a site at Fairfield owned by members of the Kady family and Mr Sarkis. 34 Raymond Roumanus gave evidence that in about April 2001, he was approached by Morris Maroon to invest in the Company, which was said to need about $3.5 million to pay for a development application for non-VENM landfill and extended quarrying, roads and a weighbridge. He had a meeting with Mona Kady and Steve Sarkis and they confirmed the Company's needs and the use to which the money would be put. Subsequently, in October 2001, Mr Roumanus caused Waratar as trustee for Roumanus Superannuation Fund to pay $200,000 at the direction of the Company to acquire one share. As I have said, it may be that the purchase money (apart from $1) was really a loan to the company either by the purchaser or the seller of the shares. 35 If, as Mr Roumanus asserted, Ms Kady and Mr Sarkis estimated that $3.5 million would be needed for the proposed development of the Property, that estimate was very excessive. Donald Reed and Robert Corkery have given evidence that the cost of preparing an environmental impact statement and making a development application would have been substantially less. 36 Mr Reed said that, after providing a valuation for BankWest, he was engaged by the Company to carry out work of various kinds, including business valuations, work on the day-to-day operations of the quarry and a development application to access the quarry via Paton's Lane. He was paid about $150,000 over the period from 23 April 2001 to 28 July 2005. He also had discussions with Mona Kady and Steven Sarkis shortly after the acquisition of the Property, in which he advised them to prepare and lodge a development application to rehabilitate the site using C & D waste as backfill. He told them the gate receipts for C & D waste were approximately $45-50 per tonne compared to $6-8 per tonne for VENM. But he was not engaged to do this further development work. He advised them to approach Robert Corkery's firm for assistance with their development application. He estimated that the cost of a development application to expand the quarry and import C & D waste as backfill for site rehabilitation would be no more than $200,000 as long as approval was forthcoming without legal challenge. 37 Mr Corkery works in the field of geological and environmental consulting services for the quarrying, mining, construction and waste industries. He prepared an environmental impact statement and an accompanying development application for the Property in 1980, modified in 1986. In April 2002, he provided an outline of the tasks involved to obtain development consent for a new landform, placement of VENM and C & D material, and in 2003 the Company engaged him to define and assess the quantity of remaining clay/shale resources as a precursor to the preparation of such a development application. However, he was not engaged to proceed with the preparation of an environmental impact statement and an accompanying development application for any such development. His evidence was that the cost of preparing an environmental impact statement and development application for this extended use would be in the order of $250,000-400,000. 38 Raymond Roumanus said he was approached again by Mona Kady and Steve Sarkis in December 2002. They asked him to lend the Company $200,000, suggesting it was needed to pay Mr Reed who (they said) was liaising with Penrith Council about the development application for the quarry. According to Mr Roumanus, they told him they had obtained experts' reports for the development application and they felt the development approval was close. He agreed that Waratar would supply the money in its capacity as trustee of the superannuation fund. The loan was advanced by Waratar to the Company in the period from December 2002 to January 2003 (although it came from other sources). Mr Roumanus said that subsequently, when the loan was overdue, Ms Kady and Mr Sarkis both told him that the Company could not repay the loan and after further discussions, it was agreed that the money would remain with the Company and Waratar would obtain another share. According to Mr Roumanus, during those discussions Ms Kady and Mr Sarkis told him that "the DA is looking good". 39 According to Raymond Roumanus, he spoke to Arthur Roumanus and Anthony Maroon and told them Ms Kady and Mr Sarkis needed more money to get the DA approved. They asked him to make an application for finance on their behalf to assist them to pay for shares in the Company. Arthur Roumanus gave evidence that in about March or April 2003 he had a number of conversations with his brother Raymond and also Morris Maroon, who told him the Company needed more money for a development application, and that when the land had been used as a quarry and for building fill, it could be used to build homes or industrial properties. He discussed the proposal with his wife Sandra and they decided to purchase two shares from Mr Sarkis for $200,000 per share, mostly with borrowed money. Mr Roumanus said he was told that Mr Sarkis would use the purchase money to pay the expenses of getting the development application through the Council. 40 According to Morris Maroon, Mary Maroon decided to invest $600,000 to acquire three shares from Mr Sarkis at about this time. 41 In June 2003 Raymond Roumanus, Morris Maroon, Anthony Maroon and Steve Sarkis met in Sydney and at their meeting, cheques were handed over to Mr Sarkis for $1 million for the acquisition of five shares in the Company. According to the evidence of Mr Roumanus, Mr Sarkis said the money would be used for obtaining the development approval. I infer that three of the five shares were acquired by Mary Maroon and the other two shares were acquired by Arthur and Sandra Roumanus respectively. 42 Raymond Roumanus gave evidence that although he was not provided with any documentation in relation to the development application, and relied on information supplied to him orally about the status of the application, he was not surprised that several months elapsed after the June 2003 meeting before further contact, because he was aware that such processes take a long time. However, in February 2004 a meeting was held at the quarry, at his request, to discuss progress. Also present were Arthur and Sandra Romanus, Morris Maroon, Anthony Maroon, the Kady family, Mr Bourchdan, Mr Sarkis, and Anthony and George Khouri, as well as the internal accountant for the Company, Joseph Moussa. 43 According to Raymond Roumanus, Mona Kady told the meeting that the Company had "struck gold" because of the quality of the clay on the property and the value of the airspace in the hole for landfill. She and Anthony Khouri said that over about 15 years the Property would produce approximately $300 million in income. 44 Arthur Roumanus said that during the meeting Mr Sarkis took him and his wife for a drive over the Property and told them their money was needed for a development application to permit the quarrying of shale and the dumping of C & D fill. Mr Roumanus said that he and his wife extended their loan facility in about July 2004 and purchased another share in the Company for $200,000. This holding was registered in their joint names. The Company's alleged debt to Waratar 45 Raymond Roumanus said that Mona Kady contacted him on about 6 May 2004 to say that the Company needed a short-term loan for another $200,000 to pay Donald Reed and for geotechnical reports, and that when this was done, the development application would be ready to be submitted to the Council. On 13 May 2004 Ms Kady came to Raymond Roumanus' house with a single page document signed by her and Mr Sarkis and witnessed by Mr Moussa, according to which the Company promised to pay Waratar $200,000 plus interest of $10,000 on 13 August 2004. 46 According to Mr Roumanus, Waratar lent the $200,000 to the Company, by cheque payable to Erskine Park Quarry, with money partly obtained from Rosemaree Maroon. Morris Maroon gave evidence that in truth the lenders were his wife Rosemaree as to $140,000 and Waratar as to $60,000. Mr Maroon said that the letter of 13 May 2004 was wrong in describing the loan as being from Waratar alone. 47 Mr Romanus and Mr Maroon agreed that the money has not been repaid and they claimed that it remains wholly due and outstanding. 48 In an e-mail dated 12 October 2005, Robert Oke, the Company's current accountant, referred to the $200,000 as having been lent to "the EPQ Group", and he said that the money would be repaid as soon as a capital injection was received from "the Maroun boys". The reference to "the Maroun boys" is the first occasion, chronologically, when the evidence refers to this potential capital injection. I shall return to the negotiations with the Maroun brothers. 49 Raymond Roumanus caused Waratar to take proceedings against the Company, Mona Kady and Steven Sarkis to recover the $200,000 loan. By letter dated 13 October 2005, which is not in evidence, a proposal was communicated to Mr Roumanus for payment by instalments, and he replied on 17 October 2005, in a letter expressing concerns about the governance of the Company and stating that he would defer action for five weeks subject to the directors responding to his concerns. 50 The evidence before me about the outcome of the District Court proceedings is unclear. According to Raymond Roumanus, default judgment was entered on 24 August 2006 for $210,000 plus costs. He annexed to his affidavit a court document supporting that assertion. But Mr Roumanus said he did not cause Waratar to take the proceedings further "because of legal issues raised by the solicitors for the defendants", which he did not specify. 51 That statement appears to be somewhat coy. Robert Kady gave evidence that the Company filed a defence, and in July 2006 it was successful in resisting an application to strike the defence out. Mr Kady said he was not aware of any judgment against the company and denied that Waratar is a creditor of the Company. He produced documents to show that the proceedings were dismissed on 30 January 2007 for want of prosecution and Waratar was ordered to pay the Company's costs, which he said amount to approximately $13,000. 52 In the present interlocutory circumstances I am not able to conclude that the debt is owing. While it appears that a loan was made and the Company promised to repay it, it is not clear whether the whole loan was made by Waratar, whether it was made to the Company or some other entity in the EPQ group, and the evidence does not exclude the possibility that subsequent events may have occurred to extinguish the debt (though the dismissal of Waratar's proceedings for want of prosecution would presumably not be sufficient, of itself, to extinguish the debt). Plainly the court has been given less than the full story about the District Court proceedings, and the materials in evidence are not sufficient to enable me to sort out what really happened. My conclusion, taking particularly into account Mr Roumanus' acknowledgement that "legal issues" were raised on behalf of the defendants, is that the plaintiffs have not established, even to the interlocutory standard of a serious question to be tried, that Waratar is a creditor of the Company. The Company's declining fortunes, 2005 53 Morris Maroon gave evidence which, if accepted, would lead to the conclusion that the management of the Company was infected by many conflicts of interest and that the directors engaged in many related party transactions not authorised by the shareholders. He said that: · he was told by Mona Kady during 2005, and also 2006, that lease payments for her father's Mercedes Benz car and a Mercedes Benz and a Porsche used by Mr Sarkis were paid for out of the funds of the companies in the EPQ Group; · Mr Sarkis had opened up a recycling site in direct competition with the business of All Ways Recycling at Fairfield (the Fairfield recycling business was eventually closed down and went into external administration on 23 March 2006, and the Fairfield property was sold to a company called Lisbon Waste Depot Pty Ltd, a shareholder of which is Anthony Khouri; and · conflict arose between Mr Sarkis and the Kady family concerning a company called Bin Go Wastebins Pty Ltd (established by the Kady family and Mr Sarkis in 2002 without participation by the other shareholders in the Company) which conducted a waste bins business out of the Fairfield site, dumping waste in the Property, evidently (according to Mr Maroon) without charge. 54 Mr Maroon's allegations are uncorroborated and I am not in a position to make findings of fact about them. But they raise concern about the management of the Company, when coupled with the absence of financial statements and various other indications in the evidence that business affairs may have been conducted more by reference to family ties than to commercial considerations. 55 A meeting of the shareholders of the Company was held on 2 November 2005, attended by Mona Kady and her brothers and Steve Sarkis, Raymond Roumanus and Morris Maroon. Ms Kady told the meeting: "We've run out of money with the development application. We're doing everything we can to generate income from All Ways Recycling, from the quarry and from the soil to pay the company's debts. We've been put on notice by the Tax Office for unpaid taxes." 56 In response to a question, she said that other businesses had been servicing the loan for the quarry. Mr Roumanus objected, alleging that the quarry's money was being used to fund her other businesses, and he demanded to see the Company's accounts. Mr Sarkis said he had to go to Queensland to put in place an arrangement to repay the EPQ Group's taxes. 57 After the meeting, Ms Kady told Raymond Roumanus that the Maroun brothers were cashed up and wanted to come into the project, and they would run Always Recycling, which would free Mr Sarkis up to go out and source more work for the Group. She said the Maroun brothers would provide funding of $500,000 for the quarry, and that their money would be used to pay off back taxes and then they would fund the completion of the development application. 58 On 24 November 2005 Mr Roumanus followed up this conversation by asking Ms Kady to obtain a written proposal from the Maroun brothers with evidence that they had access to funds. She replied on 28 November 2005, saying she would keep him posted about the Marouns, and then telling him that the quarry loan was due to expire in February, and asking him for advice about another possible direct lender. The lender for the "quarry loan", as at November 2005, was Provident Capital, whose fixed and floating charge over the Company's assets was created in August 2005. 59 Mr Roumanus spoke to Ms Kady and said he would be happy to look at other avenues to finance, but that he would need to see the financials for the companies in the Group. She told him: "We don't have financials. Don't worry, I can get the money other ways with Robert Oke." 60 On 28 November 2005 Mr Oke sent an e-mail to Mr Sarkis and Ms Kady, with copies to others including Raymond Roumanus and Morris Maroon, saying that the ATO accounts for Advanced, EPQ, All Ways and Orchard were in default and that the companies could and would be wound up. Ms Kady sent an e-mail to Mr Roumanus and others on the same day saying she had paid some current taxes, and she listed amounts still outstanding. 61 It appears that by December 2005 Mr Roumanus was pressing for the return of the $200,000 loan, and evidently he believed that this would depend upon the Maroun brothers investing in the Company. There is in evidence some e-mail correspondence between him and Ms Kady in which he demanded funds by 14 December 2005. Findings as to the evidence of the events up to February 2006 62 Ms Kady and Mr Sarkis are no longer directors and they have not given evidence on the present interlocutory application. I am not in a position to make any firm findings about the plaintiffs' claims. However the plaintiffs have, in my view, adduced sufficient evidence to provide an arguable case to the interlocutory standard, that: · they were induced to invest in the company by misrepresentations and other misleading conduct by Ms Kady and Mr Sarkis with respect to a proposed development application to expand the quarry and permit the dumping of non-VENM landfill; · the money that they provided was not used, or not wholly used, for the purpose of any such development application; · they have not received any written reports with respect to the destination of their funds or the progress of the proposed development application; · there has been no proper accounting to show that the money has not been applied to unauthorised related-party uses; and · the company has not prepared any financial statements for any period since 30 June 2004. 63 In my opinion this constitutes a prima facie case that the affairs of the Company were being conducted, while Ms Kady and Mr Sarkis were directors, in a manner that was oppressive or unfairly prejudicial to, or unfairly discriminatory against, the plaintiffs as minority members, and in a manner contrary to the interests of the members as a whole. The plaintiffs' evidence on these matters would provide strong grounds for the court to intervene by interlocutory orders of some kind, if Ms Kady and Mr Sarkis were still in office. Given the change of directors, those circumstances are less compelling and the focus of attention needs to be placed on how the present directors have responded to the circumstances existing when they took over, including the Company's inadequate financial records and lack of financial statements. Replacement of directors, February 2006 64 In January 2006 Raymond Roumanus called Mona Kady, and she told him the company could no longer afford to proceed with the development application. She said there had been a falling out between Steve Sarkis and the Maroun brothers and that Mr Sarkis had left to set up another business in competition with All Ways Recycle. Mr Roumanus accused her of spending his money on other projects that the Group was involved with, unrelated to the quarry. She denied this but said "It's been Steve's fault that things have not been run properly". 65 Subsequently Mr Roumanus telephoned Mona's brothers, Mark and Paul, separately, and they each told him that Mona and Steve had "blown all the money we've invested in the company", and they suggested that the directors be voted out and new directors appointed. Mr Roumanus followed this up with an e-mail to Ms Kady dated 31 January 2006, proposing a shareholders' meeting as soon as possible because the shareholders were "demanding answers from not only the directors but also the chairman" (at various stages in the evidence Anthony Khouri is described as the "Group Chairman", but it does not appear that he was ever a director of the Company). No shareholders' meeting was convened. 66 On 31 January 2006 Mr Oke sent an e-mail to Ms Kady and Mr Sarkis, copied to others including Raymond Roumanus, saying that a loan application fee had not been paid and therefore nothing had commenced in relation to the refinancing of the company, which would be in default with its current loan from Provident Capital, evidently in the ensuing two weeks. 67 On 1 February 2006 Mr Oke sent an e-mail to Raymond Roumanus saying that Mark Kady had called for a shareholders' meeting, and proposing a time. The meeting was not immediately held but eventually there was a meeting on 8 February 2006. No minutes of the meeting are in evidence but there is an unsigned letter to the directors dated 14 February 2006, purportedly prepared by Anthony Khouri as Group Chairman. The letter says that the shareholders removed Ms Kady and Mr Sarkis as directors of various entities in the group "by consent", and appointed new directors to replace them. It referred to lack of confidence of the shareholders in the former directors and the state of the financial affairs of the group. 68 The new directors who were appointed at the meeting were Mark, Robert and Paul Kady, Mona's brothers. It appears that each of the plaintiffs voted in favour of the resolutions. Robert Kady gave evidence that he and his brothers agreed to undertake the role of directors because of concerns about the prior management of the Company, though he says they did so reluctantly in circumstances where none of the other shareholders was prepared to act (although, evidently, they were not invited to do so). He also said that following their appointment as directors, he and his brothers were each required to sign a deed of guarantee and indemnity in favour of Provident Capital in respect of the Company's obligations. 69 Mr Khouri's unsigned letter of 14 February stated that Mr Roumanus had informed him that "the Maroun boys" had in fact injected "the funds" that would be sufficient to meet the Company's urgent obligations. Mr Roumanus gave evidence denying that he had said this. 70 On 8 February 2006, after the shareholders' meeting, there was a further meeting at which, according to Raymond Roumanus, Mark and Paul Kady said: "We apologise to the shareholders. Mona and Steve have blown all of the money. We have sold our 51 shares in the company to the Marouns for $51. The Marouns have put up their money to keep the DA going so that the company can realise the full benefits of the DA." 71 Some mystery surrounds the alleged transfer of shares to the Marouns. Raymond Roumanus gave evidence that late in July 2007, he and Morris Maroon attended a meeting with George Maroun and Anthony Khouri at which Mr Maroun produced a document purporting to be a transfer of 51 shares "held by the Kadys in the Company for $51 to the Marouns". Mr Maroun said he wanted to call a shareholders meeting to have all shareholders agree to the transfer, but Mr Roumanus queried why the transfer should be approved. 72 The evidence does not show any capital injection by the Marouns (although Anthony Maroon is the director of the purchaser of the Property, Shining and New). According to an ASIC search dated 4 December 2007, the 52 shares held by Mona Kady as trustee for the Kady Family Trust remain in her name. Morris Maroon gave evidence that he was told recently by Mark Kady that the transfer in favour of the Maroun brothers was not effective because the transferor was not the legal owner of the shares. Waste dumping on the Property, 2006 73 Morris Maroon gave evidence that two companies in the EPQ group, Advanced Earthworks and All Ways Recycle, dumped building materials (presumably non-VENM) at the Property without charge. He also said that Bin Go Wastebins dumped waste (again, presumably non-VENM) on the Property. 74 Raymond Roumanus gave evidence that he was told by George Maroun in June 2006 that potential buyers had visited the Property and had seen contaminated fill that had been illegally dumped. Mr Roumanus said that the Property could not be accessed unless the gate was unlocked. He also said that Morris Maroon sent an e-mail in which he called for a meeting of members to discuss the question of dumping contaminated waste on the Property. It is not clear whether such a meeting was held. 75 Mr Roumanus purported to call a meeting of shareholders for 20 July 2006 but the directors did not attend. However a man called Nasr attended, who told Mr Roumanus that he had bought Steven Sarkis's shares, and that Mr Sarkis no longer had any interest in the Company. Mr Roumanus said he believed that Mr Nasr owned an excavation and recycling business called "Number 1". At around this time the 10 shares previously held by Mr Sarkis were transferred to Lucky Investment Group Pty Ltd. 76 Raymond Roumanus said that in September 2006 he was informed by Arthur Roumanus, who was working at the Property and recording details of trucks entering the site to dump material, that a company called Earthworx was dumping considerable quantities of fill on the Property. A company search reveals that the director and secretary of Earthworx Pty Ltd is Anthony Maroun. Arthur Roumanus said that many trucks were dumping material on the Property at that time. 77 Mr Kady gave evidence contradicting the contention that non-VENM material has been dumped on the Property. He said that he and his brothers had never permitted this to occur, and that all material brought on to the Property from external sources is checked and classified as VENM before it is dumped on the Property, and turned away if it does not match the VENM specification. 78 I am not in a position to resolve this conflicting evidence on the present interlocutory application. It seems to me, however, that the plaintiffs have established an arguable case to the interlocutory standard that unauthorised dumping has occurred on the Property by entities related to the Kady and Maroun families. Attempts to hold meetings, September-October 2006 79 On 19 September 2006 Mr Oke sent an e-mail to various parties saying that there would be a shareholders' meeting on the following day (giving an incorrect date). Only Raymond and Arthur Roumanus and Anthony Khouri attended. The directors did not attend. 80 By e-mail dated 19 October 2006 Mr Oke proposed a meeting for 25 October. But on the latter day, after the scheduled commencement time for the meeting, Mr Oke sent an e-mail to various persons including Raymond Roumanus saying he had received apologies from all directors for that meeting, that the directors would be able to convene a meeting for the following Wednesday, and that they would have some details for the group. 81 Mr Roumanus said he was informed by Anthony Khouri on the following day that prospective buyers of the property had been turned away by the conduct of the directors and that there was contaminated soil on the Property. On 26 October he sent an e-mail to Mr Oke and various others saying he would not attend another meeting unless he received a written agenda and financials for the Group, pointing out that he had asked for financial information on many occasions and it had not been supplied. Anthony Khouri took offence at part of the e-mail, which had referred to him as the "self-appointed chairman", and he responded at length in an e-mail dated 27 October 2006, which showed the depth of hostility that had developed between Mr Khouri and the majority shareholders in the Company. Mr Khouri said that the majority shareholders had thwarted his best efforts to organise the sale of the quarry and he accused them of mindless greed. Financial information 82 According to Raymond Roumanus, he has been requesting information about the financial position and financial accounts of the Company from 2004 onwards, as part of Waratar's compliance obligations in relation to its superannuation fund. That is corroborated by Helen Argiris, the accountant for the superannuation fund, who refers to her "frequent contact" by telephone and fax with Mr Oke, the accountant for the Company. 83 On 4 May 2007 Ms Argiris wrote to Mr Oke requiring a copy of the Company's financial statements for the year ended 30 June 2006. Mr Oke replied by a facsimile transmitted on the same day, in which he said that the Company had not finalised its accounts for 2005 or 2006 "as its position has changed". He also said that the company had not traded profitably over those two years and that it was "dormant until they find a resolution to move forward". 84 Mr Roumanus gave evidence that he has not received financial statements of the company for any period after 30 June 2004, nor has he been given any material to show the progress of any development application to allow the deposit of non-VENM waste on the land or to increase the area of land available for quarrying operations. His evidence is that until he saw Mr Oke's facsimile of 4 May 2007, he had never been advised that the company was "dormant". 85 Mr Oke's statement that the company was "dormant" seems to be simply wrong, in light of the evidence that the Company has ongoing arrangements with CSR for the extraction of clay in return for payment of about $80,000 per month. Perhaps all he meant to say was that the Company was not pursuing any development application or expansion plans for the time being. In any event, the evidence as a whole does not provide support for winding up on the ground that the company has suspended its business for a whole year (s 461(1)(c)). 86 Robert Kady gave evidence that upon their appointment as directors, he and his brothers discovered that the books and records of the Company were in disarray. He said that since becoming directors, they had appointed an accountant to review the Company's records and prepare accounts, but although many days had been spent on this task, lack of information was hampering the finalisation of the accounts. He said the external accountant of the company had had difficulty preparing accounts because the records of the Company were incomplete in respect of events and transactions occurring prior to 8 February 2006. He claimed that, since he and his brothers were not directors before 8 February 2006, they have been unable to provide answers to the external accountant's queries. 87 Mr Kady's evidence on this matter is incomplete. It fails to deal with the position of Robert Oke, who held the position with the EPQ Group, apparently in an accounting capacity, well before 8 February 2008. He wrote e-mails to Raymond Roumanus and others, using an e-mail address of "Epqgroup", in October 2005, and appeared at that time to be providing some secretarial or financial services to the Company. Mr Kady's evidence seems to imply that efforts to prepare financial statements in respect of any period before February 2006 have been stymied and are not progressing. That is unacceptable. 88 It seems to me, in light of Mr Kady's inadequate response, that the plaintiffs have established an arguable case, to the interlocutory standard, that the new directors have failed to deal adequately with the Company's lack of financial records and the absence of financial statements for periods after 30 June 2004. The Company's dealings with Provident Capital 89 As I have previously noted, the facility with Provident Capital, which had been rolled over twice, was due to mature on 21 July 2007. The principal amount owing was approximately $3.65 million. There is e-mail correspondence in evidence about the facility, between Mr Oke and Mr Morris, and also Robert Kady, and representatives of Provident, during May-June 2007. 90 A letter of offer was sent by Provident, directly and via Mr Morris, to Mr Oke and Robert Kady on 30 May, which needed a signed response. Subsequently Mr Morris pursued Mr Oke by e-mail for a response. On 20 June 2007 Mr Oke said "getting close" and then "couple of days". On 26 June he said "It's not in my hand yet …. might be today though?". But it seems that the letter of offer was never accepted on behalf of the Company. On 16 July 2007, Provident wrote to Mark, Robert and Paul Kady, care of Mr Morris, advising that it would no longer be offering an extension or rollover of the existing facility, and noting that if the loan was not repaid on or before the due date of 21 July the higher rate of interest provided for the documentation would be applicable. 91 On 23 July 2007, apparently through efforts by Mr Morris and his colleagues, Provident Capital wrote to Mark, Robert and Paul Kady care of Mr Morris saying that it would accept the letter of offer of 30 May on the conditional basis that settlement would be effected on or before 6 August 2007 and interest would be kept up to date. The letter said that if the necessary documentation was not returned by that date, the offer would be withdrawn. It invited acceptance of the conditions by signature and return of a copy of the letter by close of business on 26 July. 92 A signed acceptance letter was faxed to Provident on 26 July and Mr Croom of Provident confirmed receipt on that day, and said Provident's solicitors would be instructed to document the loan (a message confirmed by Mr Walker of Provident on 27 July). Puzzlingly, Mr Morris said in his affidavit that Provident denied having received the acceptance letter. That seems to be wrong on the face of the e-mail correspondence. 93 Be that as it may, by letter to Mark, Robert and Paul Kady care of Mr Morris dated 6 August 2007, Provident withdrew its offer to extend the facility "due to conditions of settlement not being met". The evidence does not identify which settlement conditions were relied on by Provident as not having been met, though obviously settlement did not occur on 6 August as stipulated. Provident's letter said that it would proceed on the basis that the Company would refinance the loan within the 90 day rollover period, as from the maturity date of 21 July 2007. 94 Provident Capital commissioned a valuation report for first mortgage purposes from CD Chenoweth & Associates Pty Ltd, whose valuation is dated 13 August 2007. The valuation was prepared on a "broad acre" basis, assessed by the direct comparison method, although the valuer noted that the Property had a value as a quarry which was evidently not taken into account. A fortiori, the valuation did not take into account any potential upside that might arise from prospects of development approval to extend the quarry and permit the dumping of non-VENM landfill, or any subsequent residential/light industrial development. The valuation report gave the Property an unencumbered freehold market value of $5.4 million. 95 On 13 November 2007 Provident Capital's lawyers wrote to the Company's lawyers asserting that the Company was in default, and that Provident proposed to finalise the appointment of a receiver and manager if the arrears of $182,808.23 were not paid by 4 p.m. on 15 November 2007. The document attached a draft deed of appointment of receivers. 96 According to the evidence of Mr Morris, on 28 November 2007 Robert Oke said to him: "We have paid $185,000 to Provident a few weeks ago and that includes your commission of $40,150. They are now paid up to date." 97 Mr Morris said he then telephoned Theresa O'Hare, the head lending manager at Provident and told her what Mr Oke had said. Mr Morris said she replied: "We didn't receive any money for you. We're taking steps to sell them up." 98 Robert Kady's evidence on this point was that a deposit of $185,000 was paid and released by the purchaser, Shining and New, when contracts of sale were exchanged on 15 November (see below). He said that shortly after the exchange of contracts, the Company's lawyers attended the offices of Provident Capital and paid the demand amount. I accept this evidence because it is supported by a copy of a trust account cheque and remittance advice for that amount dated 15 November. In addition, the payment was confirmed by the Company's lawyers in their letter to Provident Capital's lawyers dated 29 November 2007. It may be that at the time of Mr Morris' enquiry, Ms O'Hare had simply not been told that payment had occurred. 99 On 29 November 2007 the Company's lawyers wrote to Provident Capital's lawyers providing certain information about the Property, asserting that the Company continued to meet its obligations under the loan documents, and seeking the co-operation of Provident leading up to the settlement due on 28 February 2008. The letter indicated that further money might be received from the purchaser under the contract of sale and if it were, it would be paid to Provident to reduce the principal outstanding. There is no admissible evidence of Provident Capital's current attitude to the sale to Shining and New. 100 Mr Morris's evidence of the Company's (that is, Robert Oke's and Robert Kady's) dealings with Provident Capital creates a concern about the competence of the management of the company. The evidence does not explain why, having received the signed acceptance of the offer, Provident decided to withdraw from refinancing on 6 August. But one would expect a borrower, anxious to secure the rollover of a facility, to make very sure that all conditions of the rollover offer were met. What appears on the face of it to be failure by the Company to do so itself suggests incompetence. Then there is the evidence of failure by the directors to deal with Provident's letter of offer of 30 May for a period of about six weeks, with no indication in the evidence of any reason for that delay. There is a reasonable basis for the inference that, if the directors of the Company had returned the accepted letter of offer promptly after 30 May, the rollover of the loan would have been well and truly secured at an early time, and the difficulties leading to the Company's rushed sale of the Property would have been avoided. Attempts to sell the Property, 2006-7 101 Anthony Khouri's emotional e-mail put Raymond Roumanus and Morris Maroon on notice that, at least according to Mr Khouri, the majority shareholders were using the quarry as their personal cash cow at the expense of the other investors, and were creating a mess there that potential buyers would not be prepared to clean up. I am not in a position to find that Mr Khouri's allegations have been proven, but it is significant that they are made by someone who is apparently not in any other respect "in the plaintiffs' camp". 102 Morris Maroon gave evidence that he introduced a company called Wessex Estates Pty Ltd to the Property, which carried out some due diligence for a proposed purchase for $11.5 million, but the transaction did not proceed, for undisclosed reasons. 103 Mr Maroon said he and Mona Kady were involved in some sale negotiations with Wanless Wastecorp Group. He said that on 24 January 2007 he had a meeting with representatives of that company at which the managing director confirmed an interest in his company buying the Property for $12.5 million. A couple of weeks later he was told by Ms Kady that Wanless Wastecorp were not going ahead because they could not raise the necessary finance. 104 He also gave some fairly specific evidence to the effect that Wanless Wastecorp approached the Company again in June 2007. He said Paul Kady telephoned him on 13 July 2007 to say that the sale of the Property was approaching and the buyer was Wanless Wastecorp for $6.5 million for a 50% interest. According to Mr Maroon, Mr Kady advised him to sell his shares so that he would at least receive something for his investment. Mr Maroon objected because the majority shareholders, who would retain their holdings, would receive all the upside of the new investment. He said Mr Kady acknowledged that retaining the existing ownership would be a fair outcome but that his brother Robert had "gone off the rails" and would not agree. 105 There is evidence that George Khouri made efforts to find a buyer for the Property during 2007. John Talbot and Cameron Smart gave evidence about Mr Khouri's efforts. Robert Kady gave evidence that Mr Khouri had been invited to make or obtain offers for the purchase of the Property. 106 Mr Talbot is Australian Head of Capital Markets for Jones Lang LaSalle ("JLS"), and has worked in the field of commercial and industrial property for about 25 years. Late in June 2007 he was introduced to the Property by a colleague, John Wilkinson, who is based in London. Mr Wilkinson told him he and a partner (naming George Khouri) were interested in the Property and asked Mr Talbot to introduce a buyer who potentially would take a longer-term joint-venture development role. Mr Talbot subsequently spoke to George Khouri, who said he was representing the owners and that the property had potential for redevelopment for residential and commercial use. 107 At one stage Gavin Carrier, JLS's Director of Development, indicated a potential interest in JLS itself taking an equity position in the project, but later said he was no longer interested. Mr Talbot then approached Cameron Smart. Mr Smart is a director of Homebush Bay Development Corporation Pty Ltd. Mr Talbot sent him an information memorandum on 6 July 2007, which referred to a proposal for rezoning for retail, commercial and residential lots and projected total income from subdivision of US$412.5 million. In the ensuing weeks Mr Smart had a number of discussions with Mr Talbot and inspected the Property, accompanied by Mr Talbot and George Khouri. 108 Encouraged by Mr Khouri, and after making further enquiries and searches through his solicitor, Mr Smart asked Mr Talbot to "discuss with the vendor's representative a figure of $13 million for the property". Mr Talbot communicated this figure to George Khouri but Mr Khouri said that it would not be enough to secure the property, and Mr Talbot relayed that information to Mr Smart. 109 It appears that, meanwhile, the directors of the Company were negotiating another sale for a lower price, and this time the negotiations led to the contract, though a conditional one. Robert Kady gave evidence that on 22 July 2007 the Company entered into a contract for the sale of the Property to Leda Holdings Pty Ltd for $8.25 million inclusive of GST (that is, $7.5 million plus GST), apparently without any advertising of the Property for sale. The present proceedings had commenced two days earlier. On 24 July 2007 consent orders were made which gave the plaintiffs' solicitor and counsel access to the contract, subject to their undertaking to keep its terms confidential. Subsequently Mr Kady has given evidence disclosing that the contract contained provisions entitling Leda to conduct due diligence for a stated period, with the option to terminate if it did not wish to proceed after its due diligence enquiries. The due diligence period, as extended, was until 6 November 2007. 110 As noted previously, on 24 July 2007 the court noted the Company's undertaking not to complete the sale of the Property until 14 August, and on the latter date the Company undertook not to complete its contract of sale without first giving seven days' written notice to the plaintiffs' solicitor. 111 It appears that the efforts of Mr Khouri and Mr Wilkinson continued notwithstanding the sale to Leda Holdings, and perhaps in ignorance of it. Mr Wilkinson sent Mr Talbot an e-mail on 13 August expressing concern that little progress was being made with the sale that had been discussed with Mr Talbot. Mr Talbot replied expressing frustration that he could not "get any clarity" as to who was in control, commenting that "the wheels are spinning and we have no traction". Given that the Property had already been sold to someone else, that was an accurate assessment. 112 After further investigations, and apparently still in ignorance of the sale, Mr Smart instructed Mr Talbot to submit a written offer for Homebush Bay Development Company to acquire the Property for $14 million plus GST. Mr Talbot did so, by e-mail to George Khouri dated 20 August 2007. The offer was subject to completion of due diligence prior to exchange, and was conditional on acceptance by all members of the owning syndicate and an early exchange of contracts and quick settlement. The offer was open until 23 August 2007. Although the full terms of the Leda Holding contract are not in evidence, it appears on the face of it that Mr Smart's offer was hugely superior to the Leda Holdings deal. In particular, the purchase price was much higher, and the contract, if eventually entered into after due diligence, would not be conditional. 113 When neither Mr Talbot nor Mr Smart received any response to that letter of offer, Mr Talbot wrote a letter dated 28 August 2007, on instructions from Mr Smart, addressed to the directors of the Company at an address in Fairfield (which, as other evidence shows, had been the Company's registered office until 16 August 2007). The letter was a more general expression of interest and did not mention a figure. It was returned to Mr Talbot marked "return to sender - unknown". According to Mr Smart's evidence, on 30 August 2007 he wrote to each of the shareholders (including Robert Kady) in similar terms to Mr Talbot's letter to the directors, without mentioning any figure. He then received a call from Morris Maroon, who discussed the present legal proceedings with him. 114 Robert Kady's evidence was that neither he nor (he said) the Company received any offer, notice or evidence that Mr Smart or Homebush Bay Development Company or any prospective purchasers introduced by Mr Talbot or JLS were interested in acquiring the Property. Specifically, he said he did not receive any of the offers, e-mails or letters referred to in the affidavits of Mr Talbot and Mr Smart, and that he had been informed by his brothers, Mark and Paul, that they did not receive any of those documents. 115 Mr Talbot gave evidence that in subsequent discussions with George Khouri, he formed the view that a deal had been done with another party and the opportunity to acquire the Property no longer existed. He said that in early November 2007, he received a telephone call from George Khouri, who told him that the property might be available again and asked whether his client was still interested. Mr Talbot made enquiries and sent Mr Khouri an e-mail on 2 November 2007, saying that Mr Smart continued to be genuinely interested but that it would be important for Mr Smart "to understand the certainty with which a deal can be consummated with all of the current owners". Mr Talbot asked for a copy of the draft contract of sale. There was no response to that e-mail. 116 However, on 5 November 2007 Leda served a notice of rescission of its contract with the Company. On 8 November George Khouri sent an e-mail to Mr Wilkinson, saying that the quarry was back on the market, and claiming that this was because of his "persistence and hassling". He asserted that he had been given a first right of refusal, and set out some proposed contractual terms. Mr Wilkinson immediately e-mailed Mr Talbot, saying that their suspicions, caused by lack of information, may have been ill founded, and urging him to "get [his] client to move". There were further e-mails in which they discussed a joint venture involving George Khouri. Then on 14 November 2007 Mr Talbot sent an e-mail to Mr Khouri confirming that his client was willing to offer $14 million, subject to satisfactory contract documentation and a reasonable due diligence period of at least 6-8 weeks prior to exchange of contracts. 117 Robert Kady gave evidence that, in the period from 5 to 15 November 2007, he had numerous discussions with George Khouri on behalf of Quarry One Pty Ltd, and George and Anthony Maroun on behalf of Shining and New Pty Ltd. He said that, because the Company did not have sufficient cash to pay the amount Provident Capital had demanded to be paid by 15 November, he and his brothers decided it would be in the best interests of the Company and its shareholders and creditors for the Company to enter into a new contract for the sale of the Property, to be exchanged before the deadline nominated by Provident, with immediate release of the deposit so that Provident could be paid. There was insufficient time between 13 November and 15 November to advertise the Property for sale, and so (according to Robert Kady) he and his brothers decided to canvass prospective purchasers. 118 According to Mr Kady, an offer was received from Quarry One (for which George Khouri was acting as agent) to acquire an option to purchase the Property for an option fee of $20,000 and with a sale price of $9 million. Mr Kady said that since the Company required payment and release of a deposit sufficient to meet the demand being made by Provident Capital, Quarry One was invited to resubmit its offer on the basis that it would execute an unconditional contract of sale as opposed to an option to purchase. He said that the best offer made by Mr Khouri on behalf of Quarry One was for $7 million plus GST, an offer made about two hours before the Company executed a contract of sale with Shining and New for a higher price. Mr Kady said he told Mr Khouri that the Company had a better offer and Mr Khouri insisted that Quarry One would only pay $7 million. 119 On 15 November 2007 the Company entered into a contract to sell the Property to Shining and New Pty Ltd for $8.25 million including GST. Shining and New was registered on the same day. Its director is Anthony Maroun and its sole shareholder is Rema Maroun. There is some evidence that it will be able to obtain finance to complete the purchase. The contract is not in evidence. A copy of it was provided to the plaintiffs' solicitor subject to a confidentiality undertaking that would permit him to disclose to his clients only the name of the purchaser and the purchase price. Robert Kady subsequently gave evidence disclosing that the contract provides for completion on 28 February 2008 and permits the deposit of $185,000 to be released to the vendor. He said the deposit was immediately released on exchange of contracts. 120 Mr Kady said that the directors of the company resolved to sell the Property to Shining and New having regard to several matters, namely: the rescission of the Leda contract after extensive due diligence; the need to pay the demand amount to Provident Capital by 4 p.m. on 15 November to avoid the appointment of a receiver and manager; the fact that (he said) the best offer received for the purchase of the Property was the offer by Shining and New; the fact that Shining and New's offer was not conditional on due diligence; and (he said) the absence of any better offers. 121 On 19 or 20 November 2007 Mr Khouri telephoned Mr Talbot and told him that a deal had been done with another party, and consequently the property was no longer on the market. 122 On the face of it, this record of events shows an appalling degree of mismanagement of the sale process on the Company's behalf. In particular, George Khouri was allowed by the directors to continue negotiations with one group of potential purchasers, while others in the company (presumably including the directors themselves) were negotiating, first, with Leda Holdings and then subsequently with the Marouns (through Shining and New). Worse still, the higher offer from Mr Smart, produced through Mr Khouri's efforts, was not responded to on behalf of the Company at all. Further, the e-mail evidence indicates that Mr Khouri was having difficulty in dealing with others within the Company, and overall that evidence supports Mr Talbot's contention that due to the inadequate management of the Company, the wheels were spinning but there was no traction. 123 I am not in a position to determine whether Mr Smart's offer of $14 million plus GST was ever communicated to the directors. But nevertheless certain conclusions can be drawn. If the directors were made aware of Mr Smart's offer but did not pursue those negotiations, their conduct would on its face be so irrational as to raise a serious question of ulterior motives. On the other hand, if the directors did not find out about Mr Smart's offer, there is still substantial cause for concern because such a lack of communication reinforces the impression given by the other evidence about the sale process, that it was seriously mismanaged. 124 The inference that there was serious mismanagement is reinforced, in my opinion, by what happened at the hearing before Hammerschlag J on 16 November. The court's record shows that an undertaking by the company was already in place, that it would not complete the Leda contract without first getting the plaintiffs seven days' written notice, but that undertaking had become irrelevant because the Leda contract had been terminated. On 16 November, by consent, the court noted an undertaking by the Company not to enter into a contract for the sale of the Property without first giving seven days' written notice to the plaintiffs' solicitors. These facts suggest, ex facie, that those who caused the Company to give that undertaking were engaging in misleading conduct. 125 Robert Kady gave evidence that the Company used different lawyers for the sale and the litigation, and he said that the litigation lawyers were not informed about the contract for the sale of the Property to Shining and New, dated 15 November, until 16 November, the day of the hearing. Mr Kady said he had been informed by his litigation solicitor, and believed, that the solicitor appeared on behalf of the Company when the matter came before Hammerschlag J on 16 November and that he disclosed the execution of the Shining and New contract before the undertaking was received and orders were made in court. 126 Telling the court that in fact the property had been sold on the previous day (if that is what occurred) may have been enough to avoid any allegation that the Company and its solicitor engaged in misleading conduct. But it does not deflect the criticism that these events reflected a substantial measure of mismanagement. If the property had been sold, the terms of the draft undertaking should have been revised to take account of that sale, because it is prima facie misleading to give an undertaking to the court not to sell a property that has been sold on the previous day. To avoid misleading the court, the undertaking should have been revised so as to become an undertaking not to sell to anyone else if the existing sale went off for any reason, as well as an undertaking (apparently given) not to complete the existing contract without seven days' written notice to the plaintiffs' solicitors. Plaintiffs' submissions 127 Senior counsel for the plaintiffs placed before the court a written "Statement of Matters which Plaintiffs Intend to Prove for the Purposes of Application for Appointment of Provisional Liquidator". His oral submissions were substantially directed towards the exposition of the document. The written statement is in four parts. I shall set out the allegations and my findings, to the interlocutory standard, in respect of the first three parts. The fourth part deals with the balance of convenience. It is more convenient to consider that subject separately, bringing to bear the submissions of both parties. Plaintiffs' allegations about directors' untrustworthiness 128 Para 1 of the plaintiffs' written statement makes six allegations said to prove the directors' untrustworthiness. The allegations and my findings are set out below.

Roumanus v Orchard Holdings

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (18 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (8)

Cited By (3)