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[2012] NSWSC 1307
Supreme Court of NSW
2012-10-25
Black J, Hammerschlag J
Original judgment source is linked above.
Judgment 1By Amended Notice of Motion filed on 25 October 2012, the Plaintiff, George Sassine (to whom I will refer, without disrespect, as "George") seeks an order that the First Defendant, Ray & Sons Construction Pty Limited ("Company") be wound up and that David Mansfield of Moore Stephens be appointed as liquidator of the Company. The motion seeks final relief although it is, in form, an interlocutory process. That course is authorised by r 2.2 of the Supreme Court (Corporations) Rules 1999 (NSW). Factual background 2It is desirable that I first set out the background to this motion. The proceedings were commenced by a Statement of Claim filed by George in December 2007, now nearly 5 years ago, which sought declaratory relief in respect of oppression, orders requiring the resignation of certain directors of the Company and orders for the appointment of a receiver to the assets and undertaking of, or alternatively a winding up of, the Company. The Company is, relevantly, the owner of land on which a factory is situated at Holroyd, New South Wales. It appears that the Second Defendant, Charlie Sassine (to whom I will refer, without disrespect, as Charlie) has 2 shares in the capital of the Company; George now has 3 shares in the capital of the Company, one of which is held on trust for George and Charlie; and the economic interest in the Company is therefore equally divided between them. 3A Defence was filed for the other directors and shareholders in the Company in March 2008 which joined issue with the allegations made by George and a Cross-Claim was also filed at that time. Amended pleadings followed, with a Further Amended Statement of Claim being filed on 17 April 2012 and a Further Amended Defence being filed on 18 April 2012. The Further Amended Statement of Claim seeks orders that George buy Charlie's shares and continues the claims for appointment of a receiver to the assets and undertaking of, or a winding up of, the Company. The Amended Statement of Claim alleged that, inter alia, Charlie had excluded George from the management of the Company and that the shareholders of the Company were now in a position of deadlock. 4In early 2012, Hammerschlag J listed the proceedings for hearing and made orders that no further evidence should be filed by the Defendants, who were then in default of directions made by the Court, without leave of the Court. A further hearing to consider an application for such leave significantly clarified the matters in issue in the proceedings and the parties then accepted (as the pleadings already made clear) that the Company was in deadlock. The parties also accepted that the only available options in that situation were that George buy out Charlie's shares; Charlie buy out George's shares; or the Company be wound up. On 28 April 2012, Hammerschlag J vacated the hearing date for the proceedings and noted that: "A central allegation made by [George] is that there exists a deadlock between him and the other defendant shareholders. The active defendants admitted this allegation with the consequence, it seemed to me, that it bordered on the inevitable that unless an alternative remedy was appropriate, the company be wound up. [George] sought, as his principal relief, a buy out of the shares held by the defendants. However, although he also sought a winding up order in the alternative, it was communicated to me from the bar table in no uncertain terms that this was a last resort and that [George] wished, if at all possible, to avoid it. From the point of view of the defendants, even though a deadlock had been admitted, they too eschewed a winding up. ... the parties agreed that there must be relief and that the only real issue remaining live for determination is what the appropriate form of that relief should be. They accepted that there were only 3 practical alternatives: (a) The Second and Third Defendants buy [George's] shares; (b) [George] buys their shares; or (c) The company is wound up." His Honour also noted that the parties were agreed that, unless the Court ordered a buy out, the Company was to be wound up. Mr Rollinson, who appears for Charlie, accepted in submissions before me that there was no dissent from his Honour's analysis of the available alternatives when the matter was heard before him. His Honour indicated that he would refer the question of the Company's net asset values to a referee under Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") Pt 20 in order to facilitate a buy out of one or other interest in the Company. 5His Honour made orders for that reference under UCPR Pt 20 on 27 April 2012 and directed the submission of a report by 1 June 2012, subsequently extended to October 2012. His Honour also made orders that George and Charlie be jointly and severally liable for the referee's fees. 6Neither party contested the starting point of his Honour's analysis, that there was a deadlock between them, in the course of the hearing before me; nearly five years of litigation between them and the matters to which I will refer below provide compelling evidence of the intractability of that deadlock. Neither party contested his Honour's analysis that there were, ultimately, only the three practical alternatives to which his Honour referred, although George's position is now that the Company should be wound up and Charlie's position is that there is no compelling need for the Company to be wound up at this point. 7On 17 May 2012, Brereton J made further orders, including orders that Charlie lodge documents to correct records maintained by the Australian Securities and Investments Commission ("ASIC") to record that George was a director of the Company and held three shares in its capital and that Michael Sassine was not a director of the Company. Over three months later, on 20 August 2012, Charlie lodged a Form 484 with ASIC purporting to record, inter alia, that George was appointed as director of the Company on 20 August 2012 and the issue of a "trust" share in the Company. That course did not, in my view, comply with the order made on 17 May 2012; since the purported appointment was not a correction reflecting the previous position. The issue of a so-called "trust share" recorded in that document was also not, it appears, authorised by any meeting of the Company's directors. 8Charlie has subsequently filed further motions in the proceedings. A motion filed on 21 May 2012 included, for example, applications for injunctive relief against George and orders dealing with the treatment of rental income from the factory and cancellation of a share in the Company's capital. The motion filed on 27 June 2012 sought overlapping relief. Charlie has also filed further evidence in the proceedings seeking to establish that George owes the Company a substantial amount and to establish the value of the shares in the Company. 9On 17 July 2012, Brereton J made an order restraining George and Charlie from excluding each other from the factory premises or, without the consent of the other, making decisions on behalf of the Company or holding themselves out as being able to do so. His Honour also made orders that George file and serve a Second Amended Statement of Claim and Charlie file and serve an Amended Cross-Claim, each setting out the relief they seek including the price and terms of any buy out order. While Charlie filed an Amended Cross-Claim on 27 July 2012, it did not set out the price and terms of any buy out order, but instead contended that such buy out should be at a price agreed or determined by the Court, neither providing any information as to the price which Charlie sought in a sale of his own shares nor as to the price he was prepared to pay to purchase George's shares. That Amended Cross-Claim purportedly sought further relief on behalf of the Company, as well as an order for cancellation of a third share owned by George and an order for George's resignation as a director of the Company. That Amended Cross-Claim was subsequently struck out by Brereton J on 3 September 2012, since it was not in accord with the leave that his Honour had previously granted. 10By letter dated 14 August 2012, George's solicitors wrote to Charlie's solicitors enclosing a draft motion for winding up and ancillary relief and indicating that motion would be pressed unless certain conditions were met, including a confirmation as to Charlie's participation in the reference in good faith. Charlie's solicitors did not respond. 11As at 22 October 2012, Charlie had made none of the payments due by him in respect of the cost of the referee and the amount of $25,396.80 was currently unpaid by him. The amounts unpaid relate to invoices rendered in May, June, July and August 2012 so the oldest of those invoices has now been unpaid for over 5 months from its date of issue. 12Charlie relies on an affidavit dated 17 September 2012. Significant parts of that affidavit were not in admissible form and were not admitted into evidence. Charlie refers to negotiating a new loan facility with the Company's bank in May 2012. George sought production, by notice to produce, of documents comprising that new loan facility and communications by or on behalf of Charlie in relation to the establishment of that facility and those documents were not produced. Charlie refers to having attempted to contact George by phone and text message prior to undertaking the "refinancing"; there is no evidence of any attempt to obtain consent to the "refinancing" by correspondence between the parties' solicitors; and that refinancing was apparently negotiated and completed without George's involvement or agreement. There is no evidence that the "refinancing" was approved by the Company's board; the notice to produce required production of the Company's board minutes from 1 January 2007 to date and no such board minutes were produced. 13Charlie gives evidence that, in May 2012, he engaged an accountant to attend to the management of the Company's financial issues. Again, that appears to have occurred without George's involvement and without any decision by the Company's board, and the Court was advised in the course of submissions that that accountant is the same person who has been retained to give expert accounting evidence for Charlie in the proceedings. Charlie also gives evidence that the Company's previous accountant has declined to allow him access to the Company's books. 14Charlie's evidence is that he did not want the Company wound up and wanted an opportunity to continue to operate it because he believed it was a viable vehicle. He also gave evidence that he wanted the reference ordered by Hammerschlag J in April 2012 to proceed. That evidence was qualified by the written submissions on his behalf in this application which suggested that the reference could be revised and expressed concern that estimates in the order of $300,000 had been given for the costs of the reference; and further qualified by oral submissions, on instructions, that Charlie wished the reference to proceed subject to conditions that all relevant documents are supplied, which he contends has not occurred, and that copies of such documents are also supplied to the accountant who he has engaged for the proceedings. Application of the relevant legal principles 15I turn now to the circumstances in which the Court can make a winding up order on the just and equitable ground under s 461(1)(k) of the Corporations Act 2001 (Cth) and the application of those principles in these circumstances. 16Although the circumstances in which such an order can be made are not closed or rigid, they include circumstances where there is mismanagement or a lack of confidence in the conduct and management of a company's affairs and where a company was based on an association formed on the basis of a personal relationship involving mutual confidence and that confidence has broken down, or a shareholder has been denied access to information or excluded from major decisions: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672; Deputy Commissioner of Taxation (Cth) v Casualife Furniture International Pty Ltd [2004] VSC 157; (2004) 9 VR 549; Nassar v Innovative Precasters Group Pty Ltd [2009] NSWSC 342; (2009) 71 ACSR 343 at [90], [96], [117]; Australian Securities and Investments Commission v Letten (No 10) [2011] FCA 498 at [12]-[13]. A breakdown of relations or loss of confidence between a company's members may support a winding up on the just and equitable ground where it frustrates the commercially sensible operations of the company in accordance with the incorporator's expectations and any "loss of confidence" is justified: Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152 at [49]-[51], on appeal as Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104; (2011) ACSR 121. The Court may make a winding up order under s 461(1)(k) in circumstances that do not amount to oppression, although a person who is themselves responsible for the breakdown of the relationship is less likely to be afforded relief: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd above; Nassar v Innovative Precasters Group Pty Ltd above at [90], [96], [117]. In the present case, although it is common ground that the shareholders are in deadlock and neither party led evidence to establish that the other was primarily responsible for the breakdown of the relationship. 17George contends that the basis of the reference ordered by the Court in April 2012 has been departed from, in that Charlie is now seeking to introduce issues other than the terms of any buy out in the proceedings; the reference has now run for several months with no end in sight; the appointment of a liquidator will bring protracted proceedings to an end, with savings in legal costs; and liquidation will result in the sale of the factory, which will allow each of George and Charlie an opportunity to acquire it and make submissions to the liquidator as to the distribution of the surplus in the winding up. These may all be practical advantages of a winding up; however, Courts do not wind up companies, without the consent of all shareholders, simply because that will effectively terminate proceedings or may be commercially advantageous to some shareholders. George also contends that there is a history of non-compliance with the orders made by the Court, although that would also not, in itself, be a basis for a winding up. 18Mr Rollinson contends that the evidence does not establish oppression by Charlie but accepts that a deadlock between the shareholders now exists. He submits that a winding up order could have an adverse affect on the value of the Company's assets and on its relationships with, for example, its bank, the real estate agent who attends to leasing of the factory and tenants in the factory. I accept that is a possibility, although Charlie led no evidence to allow any more informed assessment of the extent of that risk. Mr Rollinson contends that there has been no full hearing on the merits of the proceedings. The parties have had an opportunity for such a hearing, since the application listed before me was an application for a final winding up order; the Court set aside two days in order to hear that matter, although it was ultimately completed in half a day; and each party had a full opportunity to lead evidence in respect of that application, although each party ultimately chose to lead limited evidence. Mr Rollinson contends, and I accept, that there is no evidence of any "crisis" in the Company's dealings with third parties; however, it is plain that there exists a longstanding and continuing inability of the Company's directors and shareholders to work together in the management of its affairs. 19In the present case, there seem to me to be compelling reasons to order a winding up of the Company, both on the basis that the Court can have no confidence that its affairs will be properly managed and on the basis that confidence between the shareholders has broken down and George has been excluded from major decisions. The parties accept that the shareholders are in deadlock and the history of these proceedings demonstrates the profound breakdown of confidence between them. The Company has entered into the new loan facility with its bank and Charlie has appointed the expert witness retained by him in the proceedings as the Company's accountant without George's involvement or agreement. George is unable to obtain information as to these dealings, including access to the terms of the loan facility or copies of the Company's bank statements, even by means of the proper use of the compulsive processes of the Court. Conversely, Charlie cannot obtain access to the Company's books held by the Company's former accountant. The multiple applications to the Court, including as to issues as to access to the premises, further demonstrate the inability to resolve management issues in a proper manner. Charlie has failed to implement a mandatory order made by the Court to rectify the position in respect of George's directorship and has approved the issue of a "trust share" and notified the issue of that share to ASIC without George's involvement or agreement. Directors' meetings of the Company are not held, or are not minuted as required by the Corporations Act, or at least Charlie is not prepared to make copies of any such minutes available to George even in response to a notice to produce properly issued in these proceedings. 20The alternative of a reference to determine the value of the parties' shares so as to allow a buy out to take place, which was apparently supported by the parties in April 2012, is no longer supported by Charlie without significant qualifications and Charlie has not paid his share of the costs of the reference for several months, notwithstanding the orders made by the Court as to the costs of the reference. In this situation, it is unlikely that a reference can be completed in a timely manner or at all. The Court's direction that the parties file amended pleadings indicating the price and terms of any buy out order has also failed to elicit any useful information as to Charlie's position. 21It is well-recognised that a winding up of a solvent company is a remedy of last resort: Corporations Act s 467(4); Cumberland Holdings Ltd v Washington H Soul Pattinson & Co Ltd (1977) 2 ACLR 307; Belgiorno-Zegna v Exben Pty Ltd [2000] NSWSC 884; (2000) 35 ACSR 305; Tomanovic v Global Mortgage Equity Corporation Pty Ltd above at [289], [294], [337]. Charlie contends that the Company is solvent. The evidence establishes that the Company owns the factory premises and there is no evidence that it is presently in default of its obligations on its loan from its bank. However, accepting that the Company has an excess of assets over liabilities, I cannot conclude that it is solvent in the sense of being able to meet its debts as they fall due, where the notice to produce required Charlie to produce, and he has not produced, copies of the Company's bank statements for the period 1 May 2012-1 September 2012 and a copy of the most recent bank statement showing the amount of the relevant loan facility, and there is no other evidence of solvency. Even if it had been established that the Company was solvent in that sense, that would be a matter to be taken into account in the exercise of the Court's discretion and would not, in my view, outweigh the factors that support a winding up order to which I have referred above. Whether a winding up order should be stayed for a short period 22I heard the parties as to whether there were alternatives to the making of a winding up order with immediate effect, including staying a winding up order for a short period of time to allow the parties a further opportunity to seek to reach a consensual resolution of the proceedings, or appointing a provisional liquidator to preserve the Company's assets on the basis that a liquidator would then be appointed if the parties could not reach such a resolution. I had reservations as to whether a stay of the winding up order would be appropriate and was concerned that there would be a real risk to creditors and contributories if the Company's assets were dissipated or security was given during the period of such a stay. I invited the parties to submit agreed orders or undertakings which, if I considered a winding up order should be made, would allow a stay of such an order. The parties were able to agree (with one qualification) such undertakings, which I have incorporated (with minor changes of form) in the orders which I propose to make as set out below. 23George indicated that his consent to those undertakings was "subject to being heard on the length of the period of any stay". I had heard the parties as to that question in the course of the hearing before me. George submitted that any such stay should be for a period of 2 weeks and Charlie that it should be for a period of 6 weeks. I do not consider that I should order a stay for 6 weeks, since it is desirable that the position be resolved and any hearing as to the remaining issues noted below be held prior to the end of the Court term. I will, subject to both parties offering the undertakings to which I refer below, order such a stay for a period of 3 weeks. If such undertakings are not offered, it seems to me the proper course will be to order that the Company be wound up with immediate effect. I should add that I would regard any breach of the orders made by the Court on 17 July 2012 or those undertakings as a most serious matter. Other relief sought by George 24George's Amended Notice of Motion also seeks orders that the proceedings otherwise be dismissed (except in relation to a contempt motion filed by Charlie on 17 July 2012) and an order that Charlie pay George's costs of the proceedings from 20 April 2012 (other than in relation to the contempt motion). Counsel agreed that the questions of dismissal of the proceedings and costs should be deferred pending my judgment in respect of the application that the Company be wound up. I will defer those questions for a further hearing. I am, however, satisfied that, having regard to the history of the matter and consistent with ss 56-58 of the Civil Procedure Act 2005 (NSW), no party should be permitted to file any further process or take any further step in relation to the proceedings, other than in relation to the subsisting contempt motion or the question of costs, without leave of the Court. Orders 25Accordingly, subject to confirming that the undertakings to which I refer below are offered, I propose to make the following orders:
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 15 November 2012
Sassine
Ray & Sons Construction Pty Limited
[2004] VSC 157
(2004) 9 VR 549