Smit v J Smit & Sons Contracting Pty Limited, in the matter of J Smith & Sons Contracting Pty Limited

Federal Court of Australia|2018-03-26|Before: Mr J, Gleeson J

Pursuant to r 30.11 of the Federal Court Rules 2011, this proceeding be heard together with proceeding NSD 2249/2017, with evidence in one proceeding to be evidence in the other.
The plaintiffs file and serve a concise statement of the basis for their claim for relief by 9 April 2018.
The defendants file and serve any cross-claim, and accompanying concise statement of the basis for their cross-claim, by 23 April 2018.
The defendants file and serve their evidence-in-chief by 7 May 2018.
The plaintiffs file and serve their evidence-in-reply by 4 June 2018.
The proceedings be listed for a case management hearing on 7 June 2018 at 9.30 am.
Any notices to produce the parties serve one another may be made returnable before the Court on 7 June 2018.
The proceedings be provisionally listed for a three-day hearing on 16 to 18 July 2018. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Parties 3 The company that is the subject of the two proceedings is J Smit & Sons Contracting Pty Ltd ("company" or "J Smit & Sons"). The company was incorporated in May 1979 and carried on a business involving the hire of earth moving equipment, apparently for many years. The company is no longer trading. According to a balance sheet as at 30 June 2016, the company has net assets of $3,110,159 including bank accounts with balances totalling $167,680. 4 Herman Smit, the first plaintiff in the oppression proceeding and the second-named defendant in the winding up proceeding and John Smit, the second defendant in the oppression proceeding and the first-named plaintiff in the winding up proceeding, are brothers. Herman Smit owns 18,750 shares in J Smit & Sons, while John Smit owns 12,500 shares in it. 5 Negosi Pty Ltd ("Negosi"), the second plaintiff in the oppression proceeding and the third-named defendant in the winding up proceeding, is a company of which Herman Smit is the sole shareholder, director and secretary. Negosi owns 6,250 shares in the company. According to a balance sheet for the company as at 30 June 2016, an asset of the company is a "loan at call" to Negosi in an amount of $491,063. 6 Premium Sands Pty Ltd ("Premium Sands") is the third defendant in the oppression proceeding. It is a company controlled by John Smit and his wife, Rita. Rita and John Smit are the directors of Premium Sands. The sole shareholder of Premium Sands is Premium Sands Holdings Pty Ltd. John and Rita Smit each own one of the two issued shares in Premium Sands Holdings Pty Ltd. Premium Sands owns 12,500 shares in J Smit & Sons. According to the 2016 balance sheet, an asset of J Smit & Sons is a "loan at call" to Premium Sands in an amount of $2,736,157. 7 Thus, Herman and John Smit each own or control 50% of the shares in the company and each of them owns or controls (in the case of John Smit, with his wife) a company which is a substantial debtor of the company. 8 In these reasons, Herman Smit and Negosi are referred to as the "Herman Smit parties". John Smit and Premium Sands are referred to as the "John Smit parties".

Dispute between the parties 9 There is a long-standing dispute between Herman and John Smit arising out of the difference in the amounts lent by the company to Negosi and Premium Sands. Based on the 2016 balance sheet, Premium Sands was lent $2,245,094 more than Negosi. The loans appear to have accumulated over many years, up to 30 June 2013 in the case of Premium Sands and up to 30 June 2011 in the case of Negosi. 10 Based on evidence submitted on behalf of the Herman Smit parties (including an affidavit sworn by John Smit on 20 December 2017 and filed in the winding up proceeding), the background to the dispute includes the following matters: (1) The company's business activities ceased between about 2004 and 2006. (2) Herman Smit was not involved in the senior management of the business and, up until 2005, he oversaw the spare parts operation of the business. After 2005, Herman stopped working in the business and attended the office only infrequently. (3) In November 2013, the brothers' mother died, and they have not spoken to each other since (communicating only through lawyers and accountants). (4) In December 2013, an accountant acting for Herman Smit, Michael Lee, observed in an email to the company's accountant, that it was "quite obvious that [the company] needs to be wound up and Herman and John go their separate ways". He proposed a settlement involving a payment of $886,000 to the Herman Smit parties. (5) The closure of the business was completed in 2014 and the company has been dormant since that time. (6) In early September 2015, Mr Lee, wrote to George Morice, the accountant for the company, saying relevantly: I have now reworked the figures to show what the position would be if the company was wound up. This would appear to be the only rational solution to enable John and Herman to finalise matters and move on. (7) Later in September 2015, Mr Lee wrote to John Smit expressing the views that "in a liquidation … substantial amounts would be due to" the Herman Smit parties and that "[w]hen you apply a large amount of franking credits there appears no other rational view than to proceed immediately to a liquidation". (8) By letter dated 23 March 2016, from Robinson Legal (then solicitors for John Smit, his family and related entities) to Mr Lee, Robinson Legal said relevantly: 8. We have read your email dated 25 September 2015 which appears to be based on the prospect of recovery in full of a loan apparently owning by Premium Sands Pty Ltd to J Smith & Sons Contracting Pty Ltd. The balance sheet of the debtor shows net assets as at June 2014 of $654,768, assuming full recovery of receivables. What is the basis of your confidence that any of this loan account is commercially recoverable even if your client had standing and merit to seek recovery? Any objective review of the balance sheet of the debtor would conclude that no recovery at all would be achieved from the pursuit of this loan account. 9. On the other hand, we are instructed that pursuit of the loan account of Herman's company, Negosi Pty Ltd in the amount of $491,063 would yield a material return … (9) By letter dated 26 July 2016, from Robinson Legal to Farrar Lawyers (the solicitors for the Herman Smit parties), Robinson Legal replied to a letter dated 8 July 2016 in which Herman Smit had apparently foreshadowed an application to wind up the company. Relevantly, the letter said: If a liquidator is appointed, his or her only ability to meet costs and then your client's alleged claim will be from calling in the two related party loans. We have previously explained that Premium Sands Pty Ltd is not in a position to meet any material claim, so we are not sure what your client seeks to achieve by winding up Contracting. The letter also contended that loans made by the company are repayable on demand but were "statute barred to the extent that they were made more than 6 years ago". (10) In September 2017, Farrar Lawyers wrote to the John Smit parties saying relevantly: (a) There was a mutual understanding that the Company would finalise its ongoing trading operations from 2006 and the shareholders would be paid their entitlements. John was responsible for doing this on behalf of the Company: (b) The business of the Company appears to have been wound down by John. The Clients have not received any monies from the Company since December 2013 and John has offered no explanation for this; … (d) There has been a complete breakdown of personal relations between Herman and John; … (h) The present situation cannot continue. The letter proposed that the Herman Smit parties transfer their shares in the company to the John Smit parties for the sum of $750,000. (11) The John Smit parties do not wish to acquire the Herman Smit parties' shareholdings in the company.

Oppression proceeding 11 By the oppression proceeding, the Herman Smit parties contend that the loans made to Premium Sands are the product of conduct of the company's affairs by John Smit contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against the Herman Smit parties. 12 The Herman Smit parties seek an order that the John Smit parties purchase their shares in the company from the Herman Smit parties at fair market value. 13 The oppression proceeding was commenced on 12 October 2017, by an originating process filed on 10 October 2017 accompanied by two affidavits: an affidavit of Herman Smit sworn 5 October 2017 and an affidavit of Mr Lee sworn 14 August 2017. These affidavits comprise the evidence on which the Herman Smit parties will seek to rely at a trial in the oppression proceeding. 14 On 14 December 2017, the Herman Smit parties filed an amended originating process. By that document, the Herman Smit parties seek leave to commence proceedings on behalf of the company against John Smit for breach of statutory and fiduciary duties owed to the company and against Premium Sands for involvement in those breaches.

Winding up proceeding 15 By letter dated 1 November 2017, Robinson Legal foreshadowed to Farrar Lawyers the intention of the John Smit parties to apply for a winding up of the company on the just and equitable ground. The letter proposed that the winding up application be heard and determined in advance of the oppression proceeding because, if the winding up order was made, the oppression proceedings would no longer be necessary. The letter argued that this approach would save the parties considerable expense and time. 16 The winding up proceeding was commenced on 21 December 2017 by an originating process filed on 20 December 2017. In the proceeding, the John Smit parties seek an order that the company be wound up in reliance on ss 461(1)(c) and 461(1)(k) of the Corporations Act 2001 (Cth), on the bases that the company's business has been suspended for a whole year and it is just and equitable that the company be wound up. The application is supported by John Smit's 20 December 2017 affidavit, referred to earlier.

Consent to consolidation of the proceedings 17 By letter dated 29 January 2018 from Farrar Lawyers, the Herman Smit parties' solicitors, to the John Smit parties' solicitors, Robinson Legal, David Farrar proposed that the two proceedings be consolidated and enclosed a draft short minute of orders to give effect to that proposal. By email later that day, Nazley Khan, a solicitor at Robinson Legal, informed Mr Farrar that Robinson Legal had instructions to agree to the proposed short minutes with an amendment to the date for a case management hearing. 18 On 30 January 2018, Farrar Lawyers sent Ms Khan amended draft orders. Ms Khan returned the amended draft orders, signed on behalf of the Herman Smit parties, and requested confirmation from Mr Farrar once the orders were filed. The same day, Farrar Lawyers sent the agreed short minute of orders to the Court in an email, copied to Ms Khan. District Registrar Wall declined to make the consolidation order and the matter was listed for a case management hearing before me on 8 February 2018. 19 On 6 February 2018, Mr Farrar wrote again to Ms Khan proposing orders to be made at the case management hearing, including an order for the consolidation of the two proceedings. 20 In response, Robinson Legal wrote to Farrar Lawyers acknowledging their clients' previous agreement to a proposed consolidation order but saying: In communicating our clients' consent to that proposed order, we inadvertently omitted to point out that our clients would seek to have the winding up proceedings heard and determined in advance of the oppression proceedings. This was an oversight on our part. 21 Robinson Legal foreshadowed an application to have the winding up proceeding determined in advance of the oppression proceeding, pursuant to an order under r 30.11(f) of the Federal Court Rules 2011 that the oppression proceeding be stayed until after the determination of the winding up proceeding.

Legal framework 22 Rule 30.11 of the Federal Court Rules 2011 provides: If several proceedings are pending in the Court and the proceedings: (a) involve some common question of law or fact; or (b) are the subject of claims arising out of the same transaction or series of transactions; any party to any of the proceedings may apply to the Court for an order that the proceedings be: (c) consolidated; or (d) heard together; or (e) heard immediately after one another; or (f) stayed until after the determination of any of the other proceedings. 23 In Humphries v Newport Quays Stage 2A Pty Ltd [2009] FCA 699 at [11], Besanko J identified the following factors relevant to the exercise of the Court's discretion under the predecessor to this rule (O 29 r 5 of the former Federal Court Rules), which was in materially similar but not identical terms: 1. Are the proceedings broadly of a similar nature? 2. Are there issues of fact and law common to each proceeding? 3. Will witnesses (lay and expert) in one proceeding be witnesses in one or more of the other proceedings? 4. Has there been an alternative proposal put forward that there be a test case and have the parties agreed to abide the outcome, or, at least, the determination of common issues of fact and law? 5. Is there a prospect of multiple appeals with substantial delays if the proceedings are not tried at the same time? 6. Will there be a substantial saving of time if the proceedings are tried at the same time, compared with each proceeding being tried separately? 7. Will an order that the proceedings be tried at the same time create difficulties in terms of trial management, complexity of procedural issues and difficulties in determining cross-admissibility of evidence? 8. Is one proceeding further advanced in terms of preparation for trial than the others? 9. Are there parties to one or some only of the proceedings who will be inconvenienced if all of the proceedings are tried at the same time? 24 In In the matter of Mudgee Dolomite & Lime Pty Limited [2016] NSWSC 1933 at [12], Black J referred to the possibility of winding up and oppression proceedings being heard together and noted a contention that the winding up proceeding could be heard at an earlier date than the oppression proceeding. His Honour identified, as a relevant factor, the risk of inconsistent findings in the two proceedings, unless identity of parties had the consequence that the findings made in the winding up proceeding would bind the parties in both proceedings.

Consideration 25 The commencement of the oppression proceeding followed a long period of disagreement about the circumstances in which the company should be wound up. The brothers have been unable to agree about whether the loans to Negosi and Premium Sands are repayable to the company and whether they are recoverable. The parties cannot agree on how those issues should be determined. The Herman Smit parties seek that determination in the oppression proceeding, and contend that those issues should be determined before the company can be wound up on the just and equitable ground. The John Smit parties argue that the issues should be determined through the liquidation process. 26 I concluded that the two proceedings should be heard together for the following reasons: (1) The parties in both proceedings are the same and there is a substantial overlap between the issues in both proceedings. The Herman Smit parties will seek to rely on the alleged oppressive conduct of the John Smit parties as a reason why the company should not be wound up, particularly on the just and equitable ground. (2) Although long standing, on the evidence filed by the Herman Smit parties, the ambit of the factual dispute between the parties is relatively confined. It concerns the circumstances in which the loans to Premium Sands and Negosi were made, whether those circumstances reveal oppressive conduct in the affairs of the company and, if so, what orders should be made. Both proceedings could be determined in a relatively short final hearing. (3) Hearing the two proceedings together would not involve any substantial delay to either proceeding. The oppression proceeding could be ready for a hearing in July 2018, and the winding up proceeding, if heard alone, would be heard around the same time. (4) I did not accept that there is any benefit to be achieved by permitting the John Smit parties to seek a winding up of the company before the oppression proceedings are heard, with a view to permitting the parties' disputes to be investigated by a liquidator (presumably funded by the Herman Smit parties). I was concerned that this approach is likely to involve significant extra expense to the Herman Smit parties. I also did not find it obvious that this approach would be significantly less costly for the John Smit parties. While the John Smit parties may avoid the need to prepare evidence in admissible form (at least in the first instance) if the dispute is investigated by a liquidator, it is reasonable to assume that the Herman Smit parties would provide the filed evidence to a liquidator and, accordingly, the John Smit parties would need to respond to that whether the dispute is resolved in these proceedings or through the liquidation process. (5) No obvious procedural difficulties in hearing the two proceedings together were apparent to me. (6) No third party would be inconvenienced by hearing the two proceedings together.

Conclusion 27 Accordingly, I made the order that the proceedings be heard together, and ancillary orders for the preparation of the proceedings for a final hearing in July 2018. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.

Corporations Act 2001(Cth)ss 461(1)(c)

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