Turner v Ulicorp Pty Ltd

CATCHWORDS : CORPORATIONS - winding up - contributory's application - just and equitable ground - whether director misconduct or lack of confidence shown - whether discretion to order winding up should be exercised - where defendant and opposing directors and shareholders willing to join in voluntary winding up in due course

LEGISLATION CITED : Corporations Act 2001 (Cth), ss.461(1)(k), 467(4)

CASES CITED : Netbush Pty Ltd v Fascine Developments Pty Ltd (2005) 189 FLR 320

PARTIES : Peter Turner - Plaintiff Ulicorp Pty Ltd - Defendant

COUNSEL : Mr C.R.C. Newlinds SC/Ms S. Mirzabegian - Plaintiff Mr D.P. Robinson SC - Defendant

SOLICITORS : Gordon & Johnstone - Plaintiff Beswick Solicitors - Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

1 This is an application for a winding up order advanced on the just and equitable ground under s.461(1)(k) of the Corporations Act 2001 (Cth). It is a contributory's application. The plaintiff, Mr Turner, is one of three allied members who, between them, hold 40 per cent of the shares in the capital of the defendant. The remaining 60 per cent of the shares is held by members of the Wise family. Mr Turner and one of his associates are directors. Three members of the Wise family are the remaining directors. 2 The individuals on each side, initially as partners and later through corporate vehicles, conducted a successful hotel business. The defendant was the owner of a substantial hotel which was sold some time ago. 3 Differences between the two groups of individuals led to proceedings in the Federal Court, which were eventually settled. The settlement was effected by a deed dated 19 May 2005. The deed dealt with a range of matters. In relation to the defendant company and what was to happen to it, the relevant provisions of the deed are those in clause 3: "(a) The Turner Parties and the Wise Parties agree that any outstanding business of Ulicorp is to be finalised as soon as is practicable. Any surplus of funds after all-liabilities are paid is to be distributed to shareholders and Ulicorp is to be voluntarily wound up. (b) The parties agree that Peter Crawford of VJ Ryan & Co, accountants of Sydney in the State of New South Wales be appointed to give effect to clause 3(a)."

4 It is accepted by both the Turner interests and the Wise interests that there is one matter within the "outstanding business" category referred to in clause 3(a) of the deed. On the view the plaintiff takes, there is a second matter to which I shall come in a moment. 5 The matter which all agree is within the clause 3(a) concept of "outstanding business" is an uncompleted application by the defendant to the Administrative Decisions Tribunal in respect of a decision of the Office of State Revenue on a claim for a refund of payroll tax. Part of the settlement covered by the deed of 19 May 2005 involved certain persons making payments to the defendant. It is argued that those payments were of such a character as to produce the legal conclusion that payroll amounts returned to the Office of State Revenue in years gone by were unwittingly inflated, so that tax was calculated on an erroneous basis and should now be adjusted. 6 The proceedings in the Administrative Decisions Tribunal are expected to be heard in July, although I do not think there is evidence of a hearing actually having been appointed. In addition, the evidence points to at least a possibility of earlier resolution with the office of State Revenue. 7 The second matter arises from events that occurred immediately before the execution of the deed settling the Federal Court litigation. The defendant company, at the instigation of the three Wise family members on its board, drew two cheques, each for $108,000 and each in favour of one of the Wise directors. Their contention is that these payments were made to those persons to effectuate an arrangement or agreement, in which the Turner parties had concurred, to the effect that the Wise payees should have a financial reward for having made their houses available as security for borrowings undertaken by the company to finance its business. The Turner parties say that there was never any such agreement or arrangement and that they had no notice that the matter of the payment of the compensation was to be on the agenda of the board meeting of the defendant at which resolutions for calculation and payment of the so-called compensation were purportedly passed. 8 There are factual disputes about this matter of notice as well as in relation to the events said to have given rise to the original arrangement or agreement. 9 At this stage it is sufficient to note that the Wise parties maintain that the two payments were validly and properly made by the defendant, while the plaintiff says that there is, at the very least, a serious question to be investigated. Indeed, the plaintiff would go further and say that the payments were invalidly and improperly made and are recoverable by the defendant company. 10 The plaintiff says that it is just and equitable that the company be wound up. He does not - indeed cannot - maintain that the company is in deadlock or malfunctioning. The Wise parties hold 60 per cent of the shares and represent a majority on the board of directors. The board is capable of functioning, albeit in circumstances where the Turner directors, who make up a minority on the board, have given up attending meetings, apparently because they see no point in doing so as they are always out-voted. That, if I may say so, is not an approach that one would be inclined to accept as compatible with responsible attitudes to corporate governance. The analogy is in many ways inapt, but it would be a sad day for the nation if the opposition stayed away from Parliament because they were always out-voted. 11 The circumstances that, on the plaintiff's case, make it just and equitable that the company be wound up are, in essence, that the consensual basis for a voluntary winding up has now been undermined, in the sense that the concurrence of the Turner parties in the deed of 19 May 2005 can now be seen to have been flawed. The Turner parties did not know about the removal of the two sums of $108,000 from the company by the cheques drawn the day before the execution of the deed. If they had known, they would not have agreed to the deed. 12 Furthermore, the plaintiff says, there is a need for a liquidator, armed with the powers liquidators have, to investigate fully the two payments of $108,000. Unless a liquidator is appointed now, it is said, the Wise parties, as directors, may cause the company's funds to be run down so that there is nothing with which a liquidator could make investigations; and of course it is the Wise directors who caused the two controversial payments of $108,000 to be made, thus, in the plaintiff's view, questioning the quality of their stewardship. 13 I should digress at this point to observe that there is no suggestion on either side that the company is insolvent. The two camps were agreed, late last year, that there were cash assets of at least $37,302 and that, if that was the full extent of the assets, there would be a surplus of $13,302 in a winding up. This measure of agreement was reflected in competing versions of a declaration of solvency the parties were considering for the purposes of a voluntary winding up. The reason they could not agree on a single version is that the Turner directors wanted to include an additional asset of $216,000 (albeit with a note about its disputed character) but the Wise directors would not accept the document in that form. 14 The only other matter touching upon the financial position is that there may be a refund of payroll tax that could be of the order of $30,000 or so; and there will be solicitors' costs of pursuing that matter. There is in evidence a fee estimate of $5,412 for the payroll tax recovery matter and, even if one allows for some slight blow-out of the kind that is often unavoidable, there will still be an appreciable part of the agreed surplus left subject, I suppose, to the impact of the costs of these proceedings. 15 The Wise parties do not disagree with the idea that the company should be wound up, but they say that the framework is already there in clause 3 of the deed and that this should be allowed to play itself out once the payroll tax refund issue has been resolved. To that end, the Wise directors, have, through counsel, proffered to the court an undertaking that they will cause the defendant to comply with clause 3 of the deed as soon as the payroll tax matter is resolved. 16 I should therefore approach the plaintiff's application on the footing that the Wise directors, as directors and shareholders, will do whatever they need to do to procure a members' voluntary winding up, once the Administrative Decisions Tribunal proceedings are concluded or some other accommodation with the Office of State Revenue has been achieved in relation to the claim for refund of payroll tax. 17 These matters are relevant to the exercise of the court's discretion, but it is first necessary to decide whether a case for winding up on the just and equitable ground has been made out. If one looks at the traditional list of categories - that is, substratum gone, deadlock or disagreement in the management, fraud in formation, misconduct by directors, constitutional and administrative vacuum and lack of confidence, fairness and public interest and commercial morality - the case the plaintiff seeks to make would have to be brought under either or both of misconduct by directors and lack of confidence. 18 As to the possibility of misconduct by directors in the matter of the two payments of $108,000, I would express significant disquiet, if I may put it that way, about a procedure by which the three Wise directors met as a board and quantified, at $108,000 each, payments to be made to two of them in satisfaction of a right which their solicitors had represented to come from an agreement reached among individuals long before the company was formed, being an agreement, as other evidence on the defendant's side suggests, that came from what can have been no more than a very short conversation. 19 There is a real question as to whether the three Wise directors acted properly, first, in causing the company to act upon a supposed agreement to which, as a matter of timing, it could not have been directly a party; and, second, in causing the company to make payments to two of the Wise directors quantified in accordance with board resolutions in the passing of which the payee directors and a third member of their family were the only participants, despite their clear pecuniary interest in the matter at hand. These circumstances could, I think, be capable of being brought under the director misconduct aspect of the just and equitable ground, but more definitely, in my view, they come under the lack of confidence ground, particularly when it is recognised that the payments were initiated just the day before the execution of the deed implementing the settlement of the Federal Court proceedings and that deed, which was obviously intended to cover the parties' differences and relationships in a comprehensive way, did not refer to any such payments. 20 Section 461(1)(k) enables the court to proceed by reference to the need for persons associated together as members of a company to have confidence that their relationship is one reflecting concepts of just and fair dealing. Where the court can see that the basis for that confidence has been eroded, it may take steps to bring about dissociation. I am satisfied that the matters of which the plaintiff complains represent a basis for winding up on the just and equitable ground. 21 There is then the question whether the court should exercise the discretion that it undoubtedly has to make a winding up order. The defendant says that a winding up order should not be made. The undertaking proffered to the court will, it is said, lead to a voluntary winding up in the relatively near future. In addition, the defendants point out the plaintiff has known about the matter involving the two payments amounting to $216,000 since the middle of 2005, yet only in December 2006 did he see fit to institute these proceedings. 22 The defendant also says that the only matter still to be dealt with is the payroll tax matter and that it would be wasteful for a liquidator appointed now by the court to have to come to grips with that matter, rather than letting it proceed as it is at the moment. The plaintiff says by way of riposte that the liquidator could use the same solicitors and the additional costs would be minimal. 23 Section 467(4) of the Corporations Act makes it clear that, in a case such as this, the making of a winding up order should be a measure of last resort. I adopt, in that respect, what was said by Simmons J at paragraph [72] of his judgment in Netbush Pty Ltd v Fascine Developments Pty Ltd (2005) 189 FLR 320: "If there is conduct within s 461(1), there is a discretion to order the company be wound up: see Fernlake (supra) [ Re Fernlake Pty Ltd [1995] 1 QdR 597]; and compare the position under an earlier form of the legislation, where it had been held, in Re National Discounts Ltd (1951) 52 SR (NSW) 244, winding up was mandatory. There is provision (in s 467(4)) that where the application is made on the 'just and equitable' ground (s 461(1)(k)), or on the ground that the directors have 'acted in a manner that appears to be unfair or unjust to other members' (which in my view takes in s 461(1)(e), (f) and (g)), the Court 'must make' a winding up order. This is unless it is of the opinion that some other remedy is available to the applicants and that they are 'acting unreasonably' in seeking a winding up 'instead of pursuing that other remedy'. This confirms that winding up is a remedy of 'last resort' that ought not to be granted if 'other less drastic relief is available and appropriate': Ford H A J et al (supra), at [27.094]." 24 The court must explore whether there is some other remedy that is more appropriate than a winding up order. There has been some debate in the cases about what "other remedy" means: see the discussion at page 54,348 of Australian Corporations Law Principles and Practice. My own view, I must say, is that the section directs the court to consider all methods of alternative resolution and to avoid a winding up order if it can see that justice will be served by something else reasonably available. 25 In my opinion, the course indicated in this case at this time is to wait and see. This is particularly so in light of the undertaking proffered by the Wise directors to which I have already referred. I have not so far mentioned, however, that there is in place already an undertaking given to the court by the defendant, being an undertaking not to make any payment, whether by dividend or otherwise, to any of its shareholders or their associates until the completion of the final hearing of the originating process or further order. 26 Although grounds for the making of a winding up order have been established, the discretion of the court will be best exercised in this case, at least for the time being, by adjourning the originating process until after the expected conclusion of the Administrative Decisions Tribunal proceedings and a further period to arrange and initiate the voluntary winding up. But this will be so only if it is clear that there are in place not only the proffered undertaking of the Wise directors concerning implementation of clause 3 of the deed but also the separate undertaking of the defendant which subsists only until the final hearing of the originating process which, on one view anyway, might be said to have happened today. If that undertaking by the defendant is renewed so as to be effective to the adjourned date, the court will accept that undertaking as well as the undertaking proffered by the Wise directors and, on the basis of those two undertakings, will stand the matter over to a date which I will discuss with counsel.

[Matter stood down for Mr Robinson SC to seek instructions] 27 I note that defendant, by its counsel, now gives to the court an undertaking not to make any payment by way of dividend or otherwise to any of its shareholders or their associates until final disposition of these proceedings. Upon that undertaking, and upon the undertaking of Colin Wise, Stephen Wise and Roslyn Wise, in the terms to which I have already referred, now given to the court through counsel, I will order that the proceedings be adjourned.

[Discussion with Mr Newlinds SC and Mr Robinson SC re dates] 28 Upon the two undertakings to which I have referred, I order that the proceedings be adjourned to 9.30am on 11 September 2007 before me, with liberty to any party to apply to restore the matter to the list in the meantime, such application to be to me or, in my absence on leave, to any other judge. 29 The remaining matters, including costs, are reserved. **********

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