WAM Active Limited v Keybridge Capital Limited

Pty Ltd (2008) 66 ACSR 359; [2008] NSWCA 95 Chan v First Strategic Development Corporation Ltd (in liq) [2015] QCA 28 Commonwealth Bank of Australia v Begonia Pty Ltd (1993) 11 ACLC 1075 David Grant & Co Pty Ltd (rec apptd) v Westpac Banking Corporation (1995) 184 CLR 265; [1995] HCA 43 Donaldson v Natural Springs Australia Limited [2015] FCA 498 Dwyer and Davies v Chicago Bot Co Pty Ltd [2011] SASC 27 Edwards v Australian Securities and Investments Commission (2009) 264 ALR 723; [2009] NSWCA 424 Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711; [2003] NSWCA 163 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688; [1998] NSWSC 413 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672; [2001] NSWCA 97 Gerard Cassegrain & Co Pty Ltd v Cassegrain [2011] NSWSC 1156 Goozee v Graphic World Group Holdings Pty Ltd [2002] NSWSC 640 Hillam v Ample Source International (No 2) (2012) 202 FCR 336; 289 ALR 192; [2012] FCAFC 73 Hislop v Paltar Petroleum Ltd (No 3) [2017] FCA 1253 In the matter of Gladstone Pacific Nickel Limited [2011] NSWSC 1235 In the matter of Keybridge Capital Limited [2020] NSWSC 1917 Kelly v J Stockwell & Co Pty Ltd [2007] NSWSC 214 Keybridge Capital Ltd v WAM Active Ltd [2021] NSWCA 203 Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478; [1995] NSWSC 54 L & D Acoustics Pty Ltd v Pioneer Electronics Australia Pty Ltd (1982) 1 ACLC 536 Lewis (as liquidator of Doran Constructions Pty Limited) v Doran (2005) 54 ACSR 410; [2005] NSWCA 243 Li v Ye [2024] NSWSC 1176 Loch v John Blackwood Ltd [1924] AC 783 Munstermann v Rayward; Rayward v Munstermann [2017] NSWSC 133 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266; [1996] HCA 21 Queensland Phosphate Pty Ltd v Korda [No 2] [2019] VSCA 215 Re Bideena Pty Ltd atf the Bideena Pty Ltd Superannuation Fund [2016] NSWSC 735 Re Catombal Investments Pty Ltd [2012] NSWSC 775 Re CNPR Limited [2018] NSWSC 989 Re Custom Bus Australia Pty Ltd (in liq) [2021] NSWSC 1036 Re Etna Developments Pty Ltd [2023] NSWSC 1239 Re Pure Nature Sydney Pty Ltd [2018] NSWSC 914 Re New View Windows Pty Ltd [2020] NSWSC 1905 Re Tweed Garages Ltd [1962] Ch 406 Re Wetherill Park Holdings Pty Ltd [2021] NSWSC 282 RHG Mortgage Ltd v Ianni [2015] NSWCA 56 Sarina; Ex parte Wollondilly Shire Council (1980) 32 ALR 596; [1980] FCA 138 Shakespeares Pie Co Australia Ltd v Multipye Pty Ltd [2005] NSWSC 1338 Southern Cross Interiors Pty Limited v Deputy Commissioner of Taxation (2001) 39 ACSR 305; [2001] NSWSC 621 Sutherland as Joint Liquidators of Australian Coal Technology Pty Ltd v Hanson Construction Materials Pty Ltd (2009) 254 ALR 650; [2009] NSWSC 232 Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583 Tomanovic v Argyle HQ Pty Ltd; Tomanovic v Global Mortgage Equity Corp Pty Ltd; Sayer v Tomanovic [2010] NSWSC 152 Treloar Constructions Pty Ltd v McMillan [2017] NSWCA 72 Tzavaras v Tzavaras & Sons Pty Ltd [2023] NSWCA 168 Williams v Spautz (1992) 174 CLR 509; [1992] HCA 34 Category: Principal judgment Parties: WAM Active Limited (Plaintiff) Keybridge Capital Limited (First Defendant) Nicholas Francis John Bolton (Second Defendant) Lowe Lippman Pty Ltd (First Supporting Creditor) Kerrs Law (Second Supporting Creditor) Representation: Counsel: MR Pesman SC w D Krochmalik (Plaintiff) F Assaf SC w A Gandar (First Defendant) S Cromb (First Supporting Creditor) L Tindal (Solicitor) (Second Supporting Creditor)

Solicitors: Mills Oakley (Plaintiff) Gadens (First Defendant) HDL Legal (First Supporting Creditor) Kerrs Law (Second Supporting Creditor) File Number(s): 2024/65373 Publication restriction: Nil

JUDGMENT

1. By Amended Originating Process filed 3 October 2024, the Plaintiff, WAM Active Limited, seeks orders: 1. winding up the First Defendant, Keybridge Capital Limited, in insolvency pursuant to sections 459A and 459P of the Corporations Act 2001 (Cth) (the Act); 2. alternatively, winding up Keybridge on the basis of conduct that is oppressive, pursuant to s 233(1)(a) of the Act, or on the just and equitable ground, pursuant to s 461(1)(e), (f) or (k) of the Act.
2. The proceeding commenced as an action to wind up Keybridge in insolvency, consequent upon Keybridge's failure to comply with a statutory demand issued by WAM Active following the dismissal of Keybridge's application to set that demand aside.
3. Subsequently, WAM Active expanded its application to include the other grounds set out above. The submissions concerning those grounds related primarily to two transactions which Keybridge had entered with its managing director, Mr Nicholas Bolton, who is the Second Defendant. The effect of those transactions was, in broad terms, as follows: 1. first, in December 2023, Keybridge agreed to pay Mr Bolton the sum of $4.75m in return for his agreeing to enter into and comply with the terms of a standstill agreement with Magellan Financial Group Ltd, such amount being payable in December 2025, at the end of the two-year period specified in the standstill agreement (the Restraint Agreement); and 2. secondly, in June 2024, Keybridge agreed to advance to Mr Bolton and an Italian company associated with him, Crotto del Nino, S.r.l., an amount of $4.75m, which was to be repayable in December 2025 by set-off against Keybridge's liability to pay the amount due to Mr Bolton at that time under the Restraint Agreement (the Loan Agreement).
4. Mr Bolton used the funds which were advanced pursuant to the Loan Agreement in July 2024 to buy all of the shares in Crotto, which owns a residential property on Lake Como.
5. In the event only that the Court determines not to make a winding up order, WAM Active seeks leave pursuant to ss 236 and 237 of the Act to bring a derivative suit in the name of, and on behalf of, Keybridge, alleging that Keybridge's directors breached their duties by causing Keybridge to enter into the Restraint Agreement and the Loan Agreement, and seeking compensation from the directors and Crotto for the loss suffered as a result of such breaches.

The parties

1. Keybridge is a public company limited by shares that was incorporated on 25 June 1999. It is listed on the Australian Securities Exchange (the ASX), although its shares are currently suspended from trading.
2. Mr Bolton is the Managing Director and Chief Executive Officer of Keybridge. At the time of Keybridge's entry into the Restraint Agreement and the Loan Agreement, Keybridge had two other directors, Mr John Patton and Mr Anthony Catalano. Mr Patton is the non-executive chairman of Keybridge.
3. WAM Active is a public company limited by shares which is listed on the ASX as an investment company. WAM Active's investment manager is a subsidiary and controlled entity of Wilson Asset Management (International) Pty Ltd. The Wilson Asset Management Group has over $5 billion in funds under management.
4. WAM Active and related entities hold 93,753,501 (or 44.05%) of the ordinary shares on issue in Keybridge.
5. Keybridge has not paid any dividend to its shareholders since 2019.

Witnesses

1. WAM Active led lay evidence in support of its application from Mr Geoffrey Wilson and Mr Jesse Hamilton.
2. Mr Wilson is the Chairman of each of WAM Active and Wilson Asset Management, and the Chief Investment Officer of Wilson Asset Management. Mr Hamilton is the Joint Company Secretary of WAM Active and the Chief Financial Officer of Wilson Asset Management.
3. Keybridge led lay evidence from Mr Patton, but not from Mr Bolton or Mr Catalano.
4. Each party submitted that I should make adverse credit findings in respect of the other party's witnesses.
5. Insofar as the submissions addressed particular respects in which oral evidence was not borne out by, or was inconsistent with, contemporaneous documents, I address those matters, where relevant, below.
6. Insofar as each party submitted that the other party's witnesses were giving anything other than their genuine recollection of matters, I do not accept such criticisms in respect of any of the three main witnesses. Having observed each of them being cross-examined at length, I am satisfied that each was, as a general matter, attempting to answer honestly and directly the questions put to them.
7. While I acknowledge that, at times, each of Mr Patton and Mr Wilson was argumentative, was slow to make concessions and used emotive language, such instances were relatively isolated and probably reflected the fact that each of the opposing personalities in this matter has entrenched, but genuinely held, views regarding the merits of the application and regarding the conduct of the opposing organisation.
8. Accordingly, I have not rejected the whole of any witness' evidence, but have instead assessed the oral evidence of each witness in respect of particular issues by reference to the specific challenges made to such evidence in cross-examination, the contemporaneous documents and the inherent likelihood of events.
9. WAM Active submitted that Mr Catalano and Mr Bolton could have "shed light" on the issues in the case and that, in circumstances where their absence is unexplained, an inference should be drawn that any such evidence would not have assisted Keybridge's case, referring to RHG Mortgage Ltd v Ianni [2015] NSWCA 56 at [75]-[79]. However, as Keybridge submitted, there is a divergence in interests in this proceeding between, on the one hand, Keybridge and, on the other, Mr Bolton and Mr Catalano, in circumstances where Keybridge does not oppose WAM Active being granted to bring a derivative suit against those persons, making serious allegations of breach of directors' duties and seeking substantial compensation. In any case, WAM Active did not identify any particular inference of fact which was available on the evidence and which the Court should more confidently draw by reason of the absence of Mr Catalano and Mr Bolton.

Statutory Demand

1. On 13 November 2023, WAM Active issued a creditor's statutory demand to Keybridge for the amount of $275,032.22 (the Statutory Demand). This represented the sum of two judgment debts obtained by WAM Active following the registration of cost certificates in respect of cost orders which had been made in its favour.
2. The first judgment debt related to cost orders made in proceeding numbered 2020/163276 which was commenced by Keybridge in this Court on 1 June 2020, alleging that WAM Active had contravened provisions of the Act in relation to an off-market takeover bid. On 24 December 2020, Ward CJ in Eq dismissed Keybridge's claim with costs: In the matter of Keybridge Capital Limited [2020] NSWSC 1917.
3. The second judgment debt related to cost orders made in proceeding numbered 2021/17104 by which Keybridge sought to appeal that decision. On 8 September 2021, Bathurst CJ, White JA and Emmett AJA dismissed Keybridge's appeal with costs: Keybridge Capital Ltd v WAM Active Ltd [2021] NSWCA 203.
4. On 4 December 2023, Keybridge commenced a proceeding in this Court, seeking to set aside WAM's Active's Statutory Demand (the Statutory Demand Proceeding).
5. On 12 February 2024, the Statutory Demand Proceeding was heard before Black J. On the same day, his Honour made orders dismissing Keybridge's application. Black J subsequently made, on 20 March 2024, a gross sum costs order in the Statutory Demand Proceeding against Keybridge in the sum of $37,038.80.
6. A presumption of insolvency arose when Keybridge failed to pay the amount of the Statutory Demand within seven days after the dismissal of the application to set it aside, pursuant to s 459F(2)(a)(ii) and s 459C(2)(a) of the Act.
7. On 20 February 2024, WAM Active commenced this proceeding seeking that Keybridge be wound up in insolvency.
8. Keybridge sought to rebut the presumption of insolvency by leading expert evidence of an insolvency practitioner, Mr Mark Roufeil. In response, WAM Active led evidence from another insolvency practitioner, Mr Quentin Olde. The areas of dispute between the experts are addressed below.
9. Keybridge did not pay the judgment debts which were the subject of the Statutory Demand until early October 2024. Those payments were made in circumstances where, after Keybridge made disclosures to the ASX regarding the Restraint Agreement and the Loan Agreement, WAM Active brought an application for the appointment of a provisional liquidator, and Keybridge offered various undertakings to the Court on 1 October 2024, in lieu of that application being determined. The undertakings given by Keybridge included an undertaking to pay the amount of the costs judgments which were the subject of the Statutory Demand, plus post-judgment interest.

Restraint Agreement

1. The Restraint Agreement was entered at around the time that an agreement was reached between Keybridge and Magellan Financial Group Ltd for Magellan to buy-back options which Keybridge held in the Magellan Global Fund.

Agreements between Keybridge and Magellan

1. Magellan is a public listed company focussing on investment in global equities and listed infrastructure. It operates the Magellan Global Fund. Prior to December 2023, the capital structure of the Magellan Global Fund consisted of "closed class" securities traded on the ASX, "open class" securities traded on a platform known as AQUA, and options in the Magellan Global Fund (MGFO). Broadly speaking, the term "closed class" refers to a fixed number of securities on issue which trade at the prevailing market price on the ASX, as opposed to an "open class" where the number of securities may fluctuate as a result of trading on AQUA at Net Asset Value.
2. Throughout 2023, Mr Bolton caused Keybridge to acquire approximately 178 million MGFO at an average cost of 0.7 cents per option and a total cost of approximately $1.3m. The MGFO were due to expire on 1 March 2024 and would have been worthless if Keybridge was not in a position to exercise them. Keybridge did not have the capital to exercise the MGFO in its own right, which would have required over $350m.
3. On 6 December 2023, following negotiations between Keybridge and Magellan, Magellan agreed to buy-back the 178m MGFO which Keybridge held, at a price of 10 cents per option (the Magellan Trade). Keybridge made what was described as a "super profit" of around $16.55m from this trade. Magellan also agreed to accelerate the conversion of its closed class securities to open securities. This occurred in June 2024, such that there is now only one form of security in Magellan Global Fund.
4. As part of these negotiations, Magellan and Keybridge agreed to enter into a standstill agreement. This agreement was subsequently executed on 11 December 2023 by Keybridge, Magellan, Mr Bolton and Aurora Funds Management Limited (the Standstill Deed). Mr Patton agreed in cross-examination that he did not have any role in the negotiation of the Standstill Deed, which was undertaken by Mr Bolton and Mr Catalano.
5. Clause 2.1 of the Standstill Deed provided as follows: "Restrictions Subject to clause 2.2, each of Keybridge, Aurora and [Mr Bolton] agree that, for a period of two years after the date of this Deed, each of Keybridge, Aurora and [Mr Bolton] will not (and will procure that each of its Related Entities and Associates do not) either alone or with others, directly or indirectly: (a) (acquire or dispose of Securities) (i) make or cause to be made any offer, invitation or solicitation for; or (ii) acquire, purchase or dispose of, or agree to acquire, purchase or dispose of, Securities in any [Magellan] Group Member or Magellan Fund, excluding any disposal, or agreement to dispose, any Securities that have not been acquired in contravention of this Deed to a [Magellan] Group Member; (b) (acquire economic interest) enter into any agreement, arrangement or understanding that would involve the conferring of rights on Keybridge, Aurora and / or [Mr Bolton] or a Representative of Associate of Keybridge, Aurora and / or of [Mr Bolton], the economic effect of which is equivalent, or substantially equivalent, to Keybridge, Aurora, [Mr Bolton] or any of their respective Representatives or Associates (as the case may be) acquiring, holding or disposing of Securities in any [Magellan] Group Member or Magellan Fund or a Relevant Interest in Securities of any [Magellan] Group Member or Magellan Fund (including any cash-settled equity swap or similar derivative relating to any of Securities in any [Magellan] Group Member or Magellan Fund); (c) (solicit proxies) solicit proxies from any holder of Securities or otherwise seek to influence or control the management or policy of [Magellan], any [Magellan] Group Member, any Magellan Fund (including, without limitation, seeking to call, or seeking support for the calling of, a general meeting of the securityholders of any [Magellan] Group Member or Magellan Fund); (d) (Prohibited Conduct): engage in any Prohibited Conduct including any steps taken to: (i) interfere or seek to interfere with any Magellan Fund or any business relationship between [Magellan] or any of its Related Entities and any client, customer or supplier of [Magellan], any of its Related Entities or any Magellan Fund; (ii) otherwise hold any discussions in relation to Prohibited Conduct or other transaction in relation to any Magellan Fund or [Magellan] or any of its businesses, assets or affairs; or (iii) do or say anything publicly or take any action that harms the reputation of any [Magellan] Group Member or any of their Representatives, or that would reasonably be expected to lead to adverse publicity to any [Magellan] Group Member or any of their Representatives; (e) (litigation): commence, undertake, participate in, fund or procure the commencement of any legal proceedings, or any legal, administrative or regulatory action, or take any other legal action or step against any [Magellan] Group Member (including any [Magellan] Group member acting in the capacity as trustee or responsible entity of a Magellan Fund), Representative or Associate and they shall not use the existence of this deed as an admission for any purpose whatsoever; (f) (assistance): co-operate with, assist, or enter into any agreement or arrangement of any kind with, any person relating to (or in any way connected with) any action contemplated in clause 2.1(a), 2.1(b), 2.1(c), 2.1(d) or 2.1(e)."

Restraint Agreement between Keybridge and Mr Bolton

1. On 6 December 2023, Keybridge agreed to pay Mr Bolton an amount of $4.75m as consideration for Mr Bolton entering into the Standstill Agreement (the Restraint Agreement). This sum was agreed to be payable after two years, that is, at the conclusion of the period of the restraint specified in clause 2.1 of the Standstill Deed.
2. Mr Patton gave evidence that the board of Keybridge (comprising himself and Mr Catalano, with Mr Bolton recusing himself) determined on 6 December 2023 to enter into the Restraint Agreement. There were minutes of this board meeting in evidence, which appear (based on the metadata of the Word file) to have been created on around 29 February 2024. Mr Patton explained that, if he did prepare the document on around that date, he would have done so based on the handwritten notes which he kept at the time. Although a copy of those notes were not in evidence, there were a number of other examples of the detailed handwritten notes which Mr Patton took in the course of board meetings, and which were used by him to prepare typed minutes.
3. The minutes record that the meeting between Mr Patton, Mr Catalano and Mr Bolton on 6 December 2023 was conducted by video conference, and took place between 8.38pm and 8.47pm.
4. The first item in the minutes relates to the offer by Magellan to buy the MGFO held by Keybridge for a price of 10 cents per option. The minutes record a resolution by the Board (including Mr Bolton) to proceed with this transaction.
5. The second item in the minutes is as follows: "2. PAYMENTS TO [MR BOLTON] (WITH [MR BOLTON] BEING RECUSED) A key condition of any proposed deal between Magellan and Keybridge involves [Mr Bolton] being personally restrained for a period of two (2) years from pursuing alternative strategies which are against the interests of Magellan and its associated entities. As such, [Mr Bolton] is required to be personally named in the Standstill Agreement with Magellan. Keybridge is also keen that [Mr Bolton] adheres to the Magellan Standstill Agreement given the importance of this transaction for Keybridge. The concept of a special one-off payment by Keybridge to [Mr Bolton] as consideration for [Mr Bolton] entering into some form of restraint agreement with Keybridge was considered prudent. Further, a fee of up to $4.75 million payable to [Mr Bolton] was considered commercially reasonable, subject to (i) Keybridge consummating a deal, as outlined above, with Magellan, (ii) Keybridge booking an after-tax profit of circa $16.5 million, and (iii) subject to suitable documentation being prepared."

Announcements to the ASX in December 2023

1. On 7 December 2023, Magellan published an ASX Announcement entitled "Purchase of Options over Closed Class Units in Magellan", which included the following statement: "[Magellan] will acquire up to 500 million outstanding Options at a price of 10 cents per Option. The purchase by [Magellan] will generally be conducted on-market and holders of Options can sell through their stockbroker or financial advisor. This includes the purchase of approximately 178 million Options from Keybridge Capital Limited, which has entered into a standstill deed in support of [Magellan's] purchase initiative."
2. On 12 December 2023, Keybridge published an ASX Announcement in relation to the Magellan Trade entitled "Trade Realisation and Loan Repayment". It relevantly stated as follows: "Magellan Global Options Trade: Keybridge Capital Limited (Keybridge) advises that it has sold its position in the Magellan Global Fund Options (ASX:MGFO) for $17.8 million. To facilitate the trade, Keybridge and its Managing Director Nicholas Bolton agreed to enter a standstill agreement with Magellan Financial Group Limited (MFG), limiting future dealings in MFG and its related entities for a period of 2 years. On an after tax, costs and provisions basis, Keybridge expects its after tax NTA [Net Tangible Assets] to improve by approximately 4c per share relative to its reported 31 October 2023 NTA as a result of the realisation (noting that part of the trade profits had already been booked at this time)."
3. This announcement did not refer to the Restraint Agreement by which Keybridge had agreed to pay $4.75m in December 2025.
4. On reviewing this announcement, WAM Active realised that there was a discrepancy between the amount which Keybridge would have earned from the MGFO trade and the extent of the increase in Keybridge's Net Tangible Assets (NTA) as a result of the trade. On 12 December 2023, WAM Active's solicitors, Mills Oakley, sent a letter to Keybridge's solicitors, Gadens, stating as follows: "The Realisation Announcement appears to be defective. It announces the sale proceeds of $17.8 million will result in an increase of only $0.04 net asset backing (NTA) per share after tax. … This represents approximately $5.6 million unaccounted for."
5. Further letters were sent by WAM Active's solicitors regarding this discrepancy on 13 and 15 December 2023, foreshadowing an application under s 247A of the Act for an order authorising WAM Active to inspect the books of Keybridge relating to the "tax, costs and provisions" which were said, in Keybridge's announcement, to have reduced the NTA impact of the Magellan Trade.

29 February 2024 - Advice and Announcement

1. On 29 February 2024, Keybridge obtained legal advice from Allen & Overy regarding the payment which Keybridge was "contemplating agreeing to make" to Mr Bolton in return for his entry into the Standstill Agreement, which was to be payable at the end of the two-year standstill period. It is apparent from the terms in which the payment was described that Allen & Overy understood that no commitment to pay that amount had yet been made. Allen & Overy noted that when they used the term "bonus" in their advice, they intended to refer not only to a discretionary bonus of $200,000 which Keybridge was proposing to pay to Mr Bolton, but also to "the proposed standstill payment". It is not apparent from the terms of the advice whether Allen & Overy were informed that the payment was to be in the amount of $4.75m.
2. Allen & Overy stated, in setting out the background to their advice, that Mr Bolton's employment agreement "is currently a fixed remuneration", and does not provide for any discretionary bonus. However, "the board has recognised that a bonus is (as a commercial matter) properly payable to Mr Bolton, particularly in lieu of the personal covenants that he has entered into in the Standstill Deed with the Magellan group". Allen & Overy noted that they had not reviewed any of the relevant communications or documents and assumed these instructions to be correct.
3. Allen & Overy's advice included the following opinions under the heading "Governance/Board": "The [Keybridge] board will need to consider the commercial rationale for any bonus. In terms of any significant bonus payment, this becomes more challenging if there was no obligation to grant a discretionary bonus and if the issue is only considered after the event. … The directors will need to rigorously test the rationale for the grant of any discretionary bonus. If any director has a conflict he should disclose the interest and recuse himself from consideration of the matter. Mr Bolton should not be involved in decision making about his remuneration. If there are no directors able to bring proper independent judgment to the matter they either need to appoint alternate directors (who will need to consider their positions) or refer the matter to shareholders. The directors need to seriously challenge themselves why the payment is in the best interests of [Keybridge], for a proper purpose, that they have exercised their judgments and discretions in good faith and for a proper purpose. They should also consider all risks associated with the matter (including challenge from Wilson Asset Management, ASIC, ASX etc) and the potential liabilities to [Keybridge] as a result of the prior disclosures. The board's reasons should be documented and appropriate expert advice sought regarding the commerciality of the arrangements. For example, [Keybridge] has a policy regarding engagement of remuneration consultants - consideration of that policy should be given and documented."

ASX concerns about disclosure and shareholder approval

1. On 1 March 2024, ASX Limited announced that the securities of Keybridge would be suspended from quotation immediately, under ASX Listing Rule 17.3. The Market Announcement recorded that the securities were suspended "pending response to ASX queries in relation to [Keybridge's] half year accounts for the period ended 31 December 2023 lodged on 29 February 2024".
2. Following a number of requests by ASX for information and a number of responses by Keybridge, ASX sent a letter to Keybridge on 23 April 2024, stating that "ASX has determined that [Keybridge] has breached Listing Rule 10.1 by entering into the Bolton Restraint Agreement". The letter stated that ASX required Keybridge "to do the following": "Either: 7.1 seek the approval of the holders of [Keybridge's] ordinary securities under Listing Rule 10.1 for the payment of the $4,385,658 restraint of trade payment to Mr Bolton, and promptly document in writing, signed by [Keybridge] and Mr Bolton, an agreement to make this payment conditional upon the approval of the holders of [Keybridge's] ordinary securities under Listing Rule 10.1; or 7.2 reverse or cancel the agreement for [Keybridge] to pay $4,385,658 to Mr Bolton, and promptly document in writing, signed by [Keybridge] and Mr Bolton, this arrangement."
3. ASX also required Keybridge to provide an announcement to the market, in a form satisfactory to ASX, which disclosed, inter alia, ASX's determination regarding the Restraint Agreement and "how [Keybridge] has rectified the breach of Listing Rule 10.1 by complying with" the direction set out above.
4. Keybridge provided ASX with draft announcements on 7 and 9 May 2024. These draft documents stated that Keybridge was of the view that the arrangements with Mr Bolton "strictly comply with Listing Rule 10.1", but set out the position adopted by ASX and stated as follows: "Consequently, Keybridge confirms that prior to the payment of the restraint liability, which is not proposed to take place until the end of the two (2) year Standstill period, the Company will seek shareholder approval."
5. On 7 May 2024, Mr Patton had a telephone conversation with Mr James Gerraty of ASX, who is Head of Listings Compliance. Mr Gerraty kept a detailed filenote of this call, and in cross-examination Mr Patton confirmed that the note was accurate. According to this note, Mr Patton told Mr Gerraty that: "If [Keybridge] don't pay [Mr Bolton] he will sue. That's what he does." Mr Gerraty recorded that he "offered no comfort" in response, reiterating that "ASX needs all of what it has asked for and nothing less", including that Mr Bolton sign an agreement that the $4.7m payment "is subject to LR 10.1 approval". Mr Patton "repeated a number of times [Mr Bolton] won't sign, and that he will sue if not paid". Mr Gerraty recorded that Mr Patton "didn't give a clear answer about why [Mr Bolton] had this leverage over [Keybridge] to negotiate his payment".

Meeting of Keybridge board - 6 June 2024

1. On 6 June 2024, a meeting of Keybridge's directors was held by videoconference, which was attended by each of Mr Patton, Mr Catalano and Mr Bolton. The minutes of this meeting also appear to have been prepared well after the meeting, but in this case Mr Patton's contemporaneous handwritten notes were available.
2. The meeting's minutes relevantly state as follows: "4. [MR BOLTON] MAGELLAN PAYMENT [Mr Catalano] asked for the status of this payment. [Mr Bolton] requested that the Company make a loan to him for the quantum of the Restraint of Trade liability which complies with ASX Listing rule 10.1. [Mr Bolton] requested that Keybridge lends to an entity connected with him which owns real property in Italy. The loan would be unsecured however the borrowing entity is asset rich. The loan term would be tied to the Restraint of Trade liability, thereby offsetting the liability on maturity. The loan is a related party transaction and will be disclosed in the accounts as such. [Mr Patton] asked that the Company obtains legal advice to confirm that the provision of such a loan to [Mr Bolton] does not give rise to any issues including the ASX Listing Rules. [Mr Catalano] said he was ok with the advance being made and added that in his view the payment should have been made before 31 December 2023. The Board ([Mr Catalano]/[Mr Patton], with [Mr Bolton] recused) RESOLVED that a loan be advanced to an entity connected with [Mr Bolton], subject to the receipt of legal advice confirming it satisfies ASX Listing Rule 10.1, with the repayment tied to the maturity of the Restraint of Trade liability. [Mr Patton] outlined the structure of the Restraint of Trade payment and why it complies with ASX Listing Rule 10.1. [Mr Catalano] asked if it would be treated as a loan and, if so, should it have an interest component. Given that [Mr Catalano] believes [Mr Bolton] should have been paid in December 2023, it was his view that no interest ought to be charged. The loan is to be offset against the Restraint of Trade liability."
3. This loan arrangement which the board of Keybridge resolved to enter (the Loan Agreement) essentially involved bringing forward, by some 18 months, the payment of the sum that Mr Bolton would receive under the Restraint Agreement in December 2025 in the event that he complied with the terms of the Standstill Agreement in the intervening period. The loan was to be repaid at the time of, and be offset by, Keybridge's obligation to pay the equivalent sum under the Restraint Agreement.

Advice on Loan Agreement and Advancing of Funds

1. The minutes record that the Loan Agreement was "subject to the receipt of legal advice confirming it satisfied ASX Listing Rule 10.1". It appears that Mr Patton sought oral advice on this issue. On 2 July 2024, he sent an email to Mr Catalano, which set out this advice: "In relation to the loan to Nick [Bolton] which was approved at our Board meeting on 6 June 2024, I have spoken with Sina Kassra from Piper Alderman who confirmed: - loans to related parties fall outside Chapter 10.1 of the Listing Rules as they do not represent disposal of an asset, however the related party provisions of the Corporations Act still need to be considered by directors - Chapter 2E of the Corporations Act is the relevant section that sets out the director duties considerations in relation to related party loans. Within this section, s. 210 of the Corporations Act states that shareholder approval is not required where the transaction is on a commercial arms length basis."
2. As set out above, the extent of this advice, so far as compliance with the Act was concerned, was that the terms should be "on a commercial arms length basis". Mr Patton continued as follows: "As such, we need to consider the proposed terms to ensure they are commercial arms length, including: - Loan Amount: final amount to be determined - Loan term: which is tied to the period set out in the Magellan Standstill Agreement (being two (2) years from Dec 23) - Security: the loan is to be unsecured, although will be set off against the restraint liability, assuming compliance with the obligations under that agreement are satisfied - Interest rate: rate to be determined - Other terms: to be determined - Documentation: an appropriate loan agreement needs to be prepared and executed."
3. As shown by the last of the points set out above, Mr Patton was of the view that in order for the Loan Agreement to be on a commercial arm's length basis, it would be necessary for the agreement to be documented. This did not in fact occur until 30 September 2024.
4. Mr Patton's email to Mr Catalano appears to have been copied to Mr Bolton, who responded shortly afterwards as follows: "On corps act and interest, there is a carve out for employees where it is a benefit related to their employment. So there is no need to charge interest, but if there is to be interest on the instrument, then I'd want to pick it up someway under the employment side. For present purposes, why don't we just put in the same interest rate we charged Ant on the $2.4m unsecured loan for similar circumstances - 10% pa and we can sort it out in the wash. As discussed, it's loaning into a property backed entity with considerable net equity, so whilst unsecured, in practice there is recoverable security above and beyond the restraint payment."

Funding of advance

1. Keybridge did not, as the beginning of July 2024, have sufficient cash at bank to advance the funds to Crotto under the Loan Agreement.
2. It obtained the funds for this advance from two sources: first, by borrowing $1.35m from Yowie Group Ltd on 1 July 2024; and secondly, by borrowing $3m from Mishtalem Pty Ltd on 3 July 2024.
3. Keybridge has a relevant interest of 78.359% in Yowie, which is a public company listed on the ASX. Mr Patton is the chairman of Yowie, and Mr Bolton is its Chief Executive Officer. Mr Patton explained that the sum of $1.35m was advanced by Yowie pursuant to a reciprocal loan agreement between Yowie and Keybridge, the terms of which enabled loans to be repaid at any time without penalty or called when required; and that there has been no call on the Yowie loan.
4. The loan from Mishtalem was a short-term loan, repayable in August 2024, at an interest rate of 4.1667% per month. Prepayment was permitted, subject to a minimum payment of $125,000 (representing one month's interest at the stipulated rate).
5. Mr Patton gave evidence that this loan was repaid on 19 August 2024, using capital realised by selling listed securities.
6. In cross-examination, Mr Patton said that Keybridge could have, as an alternative to borrowing funds, sold securities in order to fund the advance, but Mr Bolton considered that it was more economical to proceed with the Mishtalem loan: "[Mr Bolton] could have sold securities and he would have sold them at a lesser price, and then he would have had the money. So he wanted some extra time to sell them to get a higher price, so it was more economic to take this loan for a short period of time."

Announcements to the ASX in August 2024

1. Between the meeting of the directors of Keybridge on 6 June 2024 (at which it was resolved to enter into the Loan Agreement) and the advancing of the funds by Keybridge to Crotto on 2 July 2024, Keybridge had received a further letter from ASX on 21 June 2024.
2. In this letter, ASX noted that the Restraint Agreement "remains undocumented". ASX "reiterate[d] the statements in its letter to [Keybridge] dated 23 April 2024 that it has significant concerns about the manner in which [Keybridge] entered into a significant undocumented transaction with a related party". (This letter is addressed in paragraphs [67]-[68] above).
3. ASX stated that, in light of these concerns, it was not satisfied that Keybridge's "existing Related Party Policy or procedures for managing board-level conflicts of interest are adequate and appropriate". ASX required Keybridge to update its Related Party Policy in light of "the concerns expressed by ASX in relation to [Keybridge's] related party transactions", and required that "the updated policy should expressly address the management of conflicts of interest at the board level and should establish a procedure for the management of these conflicts which is practical for, and which will in practice be followed by, [Keybridge]".
4. There followed further correspondence between ASX and Keybridge. In particular, Keybridge provided ASX with various drafts of a proposed announcement in relation to the arrangements which it had entered with Mr Bolton and in relation to the revision of its Related Party Policy.
5. On 19 August 2024, Keybridge published an ASX Announcement, which included a section headed "Keybridge Suspension Update". This section commenced by noting that Keybridge had been suspended from quotation since 1 March 2024 while it had been corresponding with ASX regarding various matters, including the following: "d. An undocumented agreement by [Keybridge] to pay Nicholas Bolton $4.75m to enter into a restraint agreement prohibiting Nicholas Bolton from trading Magellan securities for two years. As disclosed in the unqualified audit reviewed financial statements for the half year ended 31 December 2023, as an essential precursor to the MGFO transaction, the Company agreed to pay Mr Bolton $4.3 million (NPV) to enter into a separate back-to-back restraint agreement, for the benefit of the Company, thereby enabling the Company (and all other MGFO holders) to then realise a considerable gain, with the restraint payment to be made at the end of the two (2) year period. Keybridge considers that such arrangements comply with Listing Rule 10.1, as the arrangements were an essential and valuable precursor to enable the Company, as well as other MGFO holders, to realise a considerable gain that it was not otherwise entitled to at the time, thereby giving rise to the creation of an asset, rather than the disposal of an asset. Keybridge confirms that the back-to-back agreement with Mr Bolton, once finalised, will make payment conditional upon the Magellan standstill agreement with Mr Bolton being satisfied, with payment to occur at the end of the two (2) year Standstill period. In July 2024, Keybridge advanced an unsecured loan to an asset rich entity owned by Mr Bolton equal to the unpaid standstill fee and bonus. The loan is on commercial terms and must be repaid either by the proceeds of the restraint fee or by the asset rich borrower. Further details will be provided in the Company's annual accounts."

Developments in September 2024

1. On 17 September 2024, Black J made orders in this proceeding requiring Keybridge and Mr Bolton to inform WAM Active, by close of business on 18 September 2024, and by way of affidavit, of the full name of the "asset rich" entity which was the recipient of an unsecured loan from Keybridge in the amount of $4.75 million, as referred to in Keybridge's ASX Announcement of 19 August 2024.
2. On 18 September 2024, Mr Patton deposed by way of affidavit that the "asset rich" entity which was the recipient of the loan was Crotto. The sole director of Crotto is Mr Maurizio Critelli and Mr Bolton is now the company's sole shareholder.
3. In that affidavit, Mr Patton confirmed that there "is currently no written loan agreement between Keybridge and Crotto" and stated that Keybridge's board approved the loan to Crotto on the following terms: "a. The Loan is unsecured. b. The loan is for $4.75million. c. The loan is on commercial terms and must be repaid either by the proceeds of the Restraint Liability or by Crotto del Nino, S.r.l. d. Interest is payable on the Loan Funds at a rate of 10 percent per annum, capitalising annually. e. The Loan maturity date is December 2025."
4. On the same day, Mr Bolton deposed by way of affidavit that the Loan Funds had previously been held in the "Caspani Account", which is the bank account of a notary public that Mr Bolton has engaged in order to pay the Loan Funds (as well as other monies) to Crotto's creditors. Mr Bolton gave evidence that the Loan Funds had been disbursed on 8 July 2024 to these various creditors, and that by that transaction, he had become the sole shareholder of Crotto.
5. On 20 September 2024, WAM Active sought, and obtained, a freezing order against Mr Bolton. At the time of granting this order, Black J made the following observations in his reasons for judgment, regarding Mr Patton's evidence that the loan was on "commercial terms": "An immediate difficulty arises in that respect, however, namely that the case law, including the often cited judgment of Santow J in Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72; [2002] NSWSC 171 ('ASIC v Adler') has recognised that, ordinarily, a transaction between a company, and its director, would need to be documented in order to satisfy a requirement that it is on 'arm's length' or commercial terms. However, Mr Patton fairly makes clear that there is no executed written loan agreement between Keybridge and Crotto."

Events in October and November 2024

1. On 1 October 2024, the proceeding was listed for the hearing of an application by WAM Active to appoint a provisional liquidator to Keybridge pursuant to s 472(2) of the Act.
2. WAM Active did not press this application, on the basis of various undertakings which Keybridge gave to the Court and to WAM Active on 1 October 2024. These included undertakings that Keybridge would: 1. not raise capital except as permitted by the Act and the ASX Listing Rules and provided that no less than twenty-four hours' written notice is given to WAM Active prior to the conclusion of any capital raising and WAM Active is offered pro-rata participation with no less than twenty-four hours to accept any such offer; and 2. pay the assessed amount of the cost orders that were the subject of the Statutory Demand, plus post-judgment interest at Court rates. (Keybridge subsequently paid this amount to WAM Active on 11 October 2024.)
3. On 3 October 2024, WAM Active amended its Originating Process, seeking the winding up order also on the basis of alleged oppressive conduct and on the just and equitable ground.
4. On 29 October 2024, Keybridge released to the ASX its Appendix 4E Variance Report and, on 30 October 2024, Keybridge released its audited financial statements for the financial year ended 30 June 2024. Relevantly, there was a reduction in Keybridge's net assets as at 30 June 2024 from $17.547m in the preliminary financial report to $11.431m in the audited financial report, which was principally the consequence of a reduction in the assessed fair market value of the assets as at 30 June 2024.
5. In October 2024, Keybridge offered to place 9,090,909 ordinary shares to sophisticated investors at an issue price of 5.5 cents per share, so as to raise $500,000. Keybridge provided WAM Active with notice of this proposed capital raising, and WAM Active and its associated entities confirmed their intention to take up their full pro rata entitlement.
6. Subsequently, Keybridge sought to increase the amount of this capital raising to $1.7m. Keybridge proposed that the issue of shares to WAM Active and its associated entities be subject to approval by Keybridge, with WAM Active and its associates being unable to vote, because WAM Active was a substantial holder of Keybridge's shares (relevantly holding more than 30% of shares on issue): see Listing Rule 10.11.

Insolvency

1. I address the application to wind up Keybridge in insolvency prior to any of the other issues because it does not depend on the resolution of any of those other issues. In particular, Keybridge accepted that if I were to determine that it is in fact insolvent, then I would proceed to order that it be wound up, irrespective of any conclusion I might reach on its abuse of process arguments.

Principles

1. The relevant principles were helpfully summarised in WAM Active's submissions. Keybridge did not dispute any aspect of that summary.
2. WAM Active has applied under s 459P of the Act for an order that Keybridge be wound up in insolvency on the ground that Keybridge failed to comply with the Statutory Demand.
3. As a result of Keybridge having failed to comply with the Statutory Demand, the Court "must presume that [it] is insolvent": s 459C(2). This presumption "operates except so far as the contrary is proved for the purposes of the application": s 459C(3).
4. In Australian Securities and Investments Commission v Lanepoint Enterprises Pty Limited (2011) 244 CLR 1 at [28]; [2011] HCA 18, the High Court observed that: "where a demand has not been complied with, the statutory presumption of insolvency applies unless the demand is set aside in proceedings brought for that purpose prior to the hearing of the application for an order to wind up. Unless the demand is rendered ineffective, by an order setting it aside, the company is required to prove to the contrary of the presumption."
5. The fact that Keybridge ultimately paid the debts the subject of the Statutory Demand in October 2024 (after giving an undertaking to do so as the price for WAM Active not pressing its application for the appointment of a provisional liquidator) does not displace the presumption of insolvency pursuant to s 459C. Further, given that WAM Active was a creditor of Keybridge at the time this proceeding was commenced, and remained, after payment of the debts the subject of the Statutory Demand, a creditor of Keybridge, WAM Active was entitled to commence and to continue the winding up application: Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 397 at [11]-[15] (Barrett J); and Re New View Windows Pty Ltd [2020] NSWSC 1905 at [7] (Black J). (In any case, Keybridge did not, at the hearing of this matter, advance any submission challenging the standing of WAM Active to prosecute the application.)
6. To discharge the onus of rebutting insolvency, the Court should ordinarily be presented with the "fullest and best" evidence of the debtor's financial position: Re Wetherill Park Holdings Pty Ltd [2021] NSWSC 282 at [156] (Rees J), citing Commonwealth Bank of Australia v Begonia Pty Ltd (1993) 11 ACLC 1075 at 1081 per Hayne J.

Expert evidence

1. The issue of Keybridge's solvency was the subject of competing expert reports. The experts met in conclave and produced a joint report. Neither of the experts was required for cross-examination.
2. Both experts addressed the solvency of Keybridge as at 30 June 2024 (and not as at the date of the hearing). In the joint report they agreed that their solvency opinions related only to that date, "noting the position and solvency of the Company may have changed since that date".
3. Mr Roufeil was of the opinion that as at 30 June 2024 "Keybridge was solvent at that time and had the ability and financial resources to pay its debts as and when they were due then and in the foreseeable future". Mr Olde was of the opinion that the solvency of Keybridge was at 30 June 2024 was "dependent on the ability of the Group to realise its various positions generally in short order (particularly the Listed Securities) to pay its debts as and when they fall due". He concluded that: "On the assumption that the Listed Securities held by Keybridge are considered illiquid, I am of the view that Keybridge was likely insolvent as at 30 June 2024". This was framed as an assumption because Mr Olde acknowledged that he was "not an expert on securities and broking".
4. The experts agreed in their joint report that "the liquidity of the Listed Securities is a major factor to assess Keybridge's immediately available assets to meet its debts due and payable".
5. As at 30 June 2024, Keybridge had cash of $792,046 and shares in listed investments "at fair value" in an amount of $8,783,897 (based on its audited annual report issued on 30 October 2024). The total of cash and listed securities ($9.576m) was significantly greater than the amount of current liabilities as at 30 June 2024 ($5.322m). The amount of current liabilities included a loan from Yowie in the amount of $1.65m. Mr Olde accepted that, on the basis that Yowie is majority owned by Keybridge, there may be an opportunity to seek forbearance from Yowie in respect of this loan.
6. Mr Olde, in his report, utilised a range of 25%, 50%, 75% and 100% for the recoverable value of the listed securities balance shown in the preliminary report (which differed from that shown in the annual report). He did not express any opinion on the relative likelihood of those scenarios. Mr Olde calculated that, on every scenario except the 25% scenario, the cash plus the recoverable value of the listed securities would exceed the amount of the current liabilities. If the Yowie loan was excluded, the extent of the shortfall on the 25% scenario was only $38,856. In addition, as Keybridge noted in its submissions, Mr Olde's report did not, when considering the assets available to meet current liabilities, take into account current trade and other receivables (which were $86,225 in Keybridge's audited financial report).

Abuse of process

1. Keybridge contended that the winding up application should be dismissed as an abuse of process.
2. Keybridge did not submit that the application for leave to bring a derivative action was an abuse of process and, in particular, did not submit that the Court should find that in seeking leave to bring a derivative action, WAM Active was not acting in good faith: see s 237(2)(b) of the Act.
3. In closing submissions, Keybridge alleged two species of abuse: first, the initiation of proceedings which WAM Active knew were bound to fail; and secondly, the bringing of a winding up application for "the collateral commercial advantages sought to be obtained through the elimination of Keybridge as a competitor or rival insofar as they competed to acquire the same securities from time to time, and the facilitation of WAM [Active] acquiring Keybridge's assets and franking credits".
4. As an initial observation, these two propositions are inconsistent. WAM Active could not both know that the winding up application was bound to fail and, at the same time, be seeking some "collateral commercial advantages" which depended on the winding up application being successful.
5. As regards the first of these matters, Keybridge relied on the following statement of principle by McLelland J in L & D Acoustics Pty Ltd v Pioneer Electronics Australia Pty Ltd (1982) 1 ACLC 536 at 538, which was quoted and adopted by White J in Australian Beverage Distributors Pty Ltd v Redrock Co Pty Ltd [2007] NSWSC 966 at [36]: "Proceedings by a person as creditor for the winding up of a company on the ground that it is unable to pay its debts will ordinarily be held to be an abuse of process: (1) if the winding up proceedings are bound to fail eg if it is clear that the applicant will not be able to prove that he is a creditor within the meaning of s 363(1)(b) of the Code, or will not be able to prove that the company is unable to pay its debts within the meaning of s 364(1)(e);"
6. Keybridge contended that the proceedings were bound to fail, because "at all relevant times, Keybridge was solvent, a fact which WAM was well aware of". Keybridge relied, in particular, on a message sent by Mr Wilson to a colleague, Mr Glennon, on 26 February 2024, less than a week after commencing this proceeding. On that date, Mr Wilson sent to Mr Glennon a copy of the winding application. They then had the following exchange: Mr Glennon: "Let's hope you are successful" Mr Wilson: "We won't. A bit of fun"

Derivative Action

1. By interlocutory process dated 20 September 2024, WAM Active sought leave to bring a derivative action on behalf of and in the name of Keybridge against each of Mr Bolton, Mr Patton, Mr Catalano and Crotto with respect to the claims in prayers 1A to 1E of the Amended Originating Process. Those prayers seek: 1. declarations that Mr Patton, Mr Catalano and Mr Bolton breached their duties to Keybridge by causing Keybridge to transfer or lend the sum of $4.75m to Mr Crotto, and that Crotto knowing received property as a result of those contraventions or knowing assisted or was involved in those contraventions; and 2. relief in the form of equitable compensation, statutory compensation, an account of profits or a constructive trust.
2. Keybridge did not oppose the grant of leave.
3. As a member of Keybridge, WAM Active has standing to apply for leave to bring a derivative action: s 237(1). The Court must grant such leave if it is satisfied of the matters specified in s 237(2)(a)-(e), namely: (a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and (b) the applicant is acting in good faith; and (c) it is in the best interests of the company that the applicant be granted leave; and (d) if the applicant is applying for leave to bring proceedings--there is a serious question to be tried; and (e) either: (i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or (ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied.
4. The notice requirement in subparagraph (e) has been satisfied.
5. As regards subparagraph (a), so long as Keybridge remains under the management of the current directors, it is likely that Keybridge itself will not bring proceedings against those directors. Keybridge did not submit otherwise.
6. As regards subparagraph (b), matters which will routinely present themselves for consideration as part of the good faith enquiry include whether the applicant honestly believed that a good cause of action existed that had a reasonable prospect of success, and whether the applicant was acting for a collateral purpose that would amount to an abuse of process: Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583 at [36] (Palmer J); Bzezinski v Shaw [2022] VSCA 173 at [64]-[65] (Kyrou, McLeish and Walker JJA). It will be relatively easy for an applicant to demonstrate good faith to the Court's satisfaction where the application is made by a current shareholder of a company who has more than a token shareholding and the derivative action seeks recovery of property so that the value of the applicant's shares would be increased: Swansson at [38]. Where an application is brought for such a purpose, the application would be brought in good faith "even if the applicant is spurred on by intense personal animosity" against the defendant: Swansson at [41].

Winding up - Grounds relating to Restraint Agreement and Loan Agreement

Relevant Principles - Just and Equitable Ground

1. Under s 461(1)(k) of the Act, the Court may order the winding up of a company if it is of the opinion that it is just and equitable to do so. In addition, under s 461(1)(e)-(f) of the Act, the Court may make a winding up order if: (e) directors have acted in affairs of the company in their own interests rather than in the interests of the members as a whole, or in any other manner whatsoever that appears to be unfair or unjust to other members; or (f) affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members or in a manner that is contrary to the interests of the members as a whole;
2. In its written submissions, WAM Active referred to paragraphs 461(1)(e), (f) and (k) compendiously as the "just and equitable ground".
3. In Re Catombal Investments Pty Ltd [2012] NSWSC 775 at [19], Brereton J identified six "conventional" categories where a winding up order could be made, namely (1) failure of the substratum of the company; (2) deadlock or disagreement in the management of the company's affairs; (3) fraud in the formation of the company; (4) misconduct by the company's directors; (5) constitutional and administrative vacuum in the company's management; and (6) on the ground of lack of confidence, fairness and public interest and commercial morality. At the same time, his Honour noted that the words "just and equitable" are general words and the just and equitable ground for winding up is "a broad one incapable of exhaustive definition".
4. The case law establishes that this ground is not confined to particular factual categories and the generality of the words "just and equitable" are not to be limited in any way: Re CNPR Limited [2018] NSWSC 989 at [8] (Black J). A person who applies for a company to be wound up on the just and equitable ground is entitled to rely on any circumstances of justice and equity that affect them in their relationship with the company (with each case turning on its own facts): Re Etna Developments Pty Ltd [2023] NSWSC 1239 at [37] (Black J). A winding up under s 461(1)(k) of the Act must be just and equitable for all, not only for the applicant for winding up: ibid.
5. It has long been established that a company may be wound up where there is "a justifiable lack of confidence in the conduct and management of the company's affairs" and thus a risk to the public interest that warrants protection: Loch v John Blackwood Ltd [1924] AC 783 at 788.

Relevant Principles - Oppression

1. Section 232 of the Act provides that the Court may make an order under s 233 (including a winding up order: s 233(1)(a)) if: (a) the conduct of a company's affairs; or (b) an actual or proposed act or omission by or on behalf of a company; or (c) a resolution, or a proposed resolution, of members or a class of members of a company; is either: (d) contrary to the interests of the members as a whole; or (e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.
2. Whereas s 232(a) applies to a course of conduct, s 232(b) and s 232(c) can apply to a single act, omission or resolution.
3. As regards s 232(d), the issue whether the conduct of a company's affairs is contrary to the interests of the members as a whole is to be determined objectively, having regard to accepted standards of corporate behaviour and how reasonable directors would act when attending to the affairs of the company (with the focus on the interests of an individual hypothetical member and not the actual members for the time being): Goozee v Graphic World Group Holdings Pty Ltd [2002] NSWSC 640 at [41]-[42] (Barrett J).
4. As regards s 232(e), the relevant principles as to whether there is oppression were summarised in the following terms by Stevenson J in Munstermann v Rayward; Rayward v Munstermann [2017] NSWSC 133 at [22] (which was referred to with approval by the Court of Appeal in Tzavaras v Tzavaras & Sons Pty Ltd [2023] NSWCA 168 at [74]): "1. The test of oppression is an objective one of unfairness …. 2. The court must look to determine whether on the balance of probabilities the objective commercial bystander would be satisfied that the affairs of the company were being conducted unfairly …. 3. A director may act oppressively in the sense relevant to the operation of s 232 and yet not breach any fiduciary or other duty owed as a director …. 4. Conduct of a company's affairs may be oppressive even though the conduct is otherwise lawful …. 5. Conduct that has the effect of paralysing a company in the operation of its business is properly characterised as conduct contrary to the interests of the members as a whole …. 6. A shareholder of 50 per cent of the shares in a company can seek relief for oppressive conduct because they do not have control in the form of power to prevent the oppression, particularly where individual strong arm tactics are used …. 7. The court must formulate an opinion about oppression or unfair prejudice as at the date of the institution of proceedings and the issue of relief under s 233 must be determined at the date of the hearing …. 8. The discretion under s 233 is wide as to the appropriate remedy …. 9. The nature of the remedy chosen by the court under s 233 will be dependent upon the conclusions drawn by the court as to the type of oppression with which the court is dealing and the court will choose the remedy which is least intrusive …. 10. The aim of any order under s 233 must be to put an end to the oppression …. 11. The court should only look to wind up an otherwise solvent company as a 'last resort' …"

Principles - Relevance of alternative remedy

1. Section 467(4) of the Act provides as follows: (4) Where the application [for winding up of a company] is made by members as contributories on the ground that it is just and equitable that the company should be wound up or that the directors have acted in a manner that appears to be unfair or unjust to other members, the Court, if it is of the opinion that: (a) the applicants are entitled to relief either by winding up the company or by some other means; and (b) in the absence of any other remedy it would be just and equitable that the company should be wound up; must make a winding up order unless it is also of the opinion that some other remedy is available to the applicants and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.
2. In Asia Pacific Joint Mining at [47], McMurdo JA observed that: "The evident purpose of the proviso in s 467(4) is to avoid the extreme step of a winding up if there is an alternative and adequate remedy. Consequently a winding up will be ordered if there is no other remedy which is adequate, in that it would redress the consequences of the facts and circumstances which are the basis for relief. This is another way of saying what McPherson J said in Re Dalkeith Investments Pty Ltd about the statutory predecessor of s 467(4) namely 'that winding up is to be regarded as a remedy of last resort and which ought not to be granted if some other less drastic form of relief is available and appropriate.' In referring to a winding up as 'drastic form of relief', McPherson J was referring to the far reaching consequences of a winding up. In referring to an alternative form of relief which was 'appropriate', his Honour was referring to what was necessary, in the interests of the applicant, to redress the consequences of the relevant events and circumstances."
3. Her Honour also observed (at [62]) that: "there will often be facts and circumstances by which the court has powers both under ss 233 and 461. Conduct in the nature of oppression can make it just and equitable that a company be wound up. In such cases, s 467(4) will not be engaged by the exercise of a judicial discretion. Rather, it will be engaged by an application being of the kind described in the chapeau to the provision, and by the formation of the court's opinion that the applicant is entitled to relief, either by winding up the company or by some other means, and that in the absence of any other remedy, it would be just and equitable that the company should be wound up. Where, as in the present case, that opinion is reached, the provision by its mandatory terms, requires a winding up order unless the court is also of the opinion which is described in the proviso. The requirements of s 467(4) cannot be avoided by a court declaring that it is exercising only the discretion under s 233."

Should a winding up order be made?

1. WAM Active submitted a winding up order should be made because: 1. having regard to the directors' conduct in relation to the Restraint Agreement and the Loan Agreement, there is a justifiable lack of confidence in the conduct and management of the affairs of Keybridge, there is a real danger to the public interest in permitting the current directors to remain in control of the company, and there has been, in the management of Keybridge, patent commercial unfairness to WAM Active and other shareholders who are unrelated to the directors; and 2. "although it has sometimes been said that a winding up order is not made lightly, in the present case, there is no other mechanism to bring the oppression to an end or to deal with the ongoing corporate mismanagement of Keybridge."
2. Keybridge submitted that no winding up order should be made because: 1. insofar as there has been oppression in the management of Keybridge's affairs (and, in particular, by reason of the directors causing Keybridge to enter into the Restraint Agreement and the Loan Agreement), the grant of leave to bring a derivative action in respect of the directors' conduct is a sufficient remedy; and 2. it is not just and equitable to order the winding up of Keybridge in circumstances where: 1. Keybridge is both solvent and profitable; 2. the complaints about corporate governance are confined to two related transactions; 3. the derivative action is available to prosecute any breach of duties in respect of those transactions, and to recover any compensation for loss resulting from such breaches; 4. there have subsequently been changes to the board and to Keybridge's Related Party Policy; and 5. there is no deadlock on the board or between shareholders.
3. For reasons given above, I am satisfied that Keybridge is solvent. In addition, in the last financial year, it reported a profit of $7.158m after tax. While these matters do not present a bar to a winding up order, I recognise that the winding up of a solvent and profitable company is an extreme step and one which must require a strong case (Kokotovich at 494; Hillam at [68]); and that winding up ought be regarded as a remedy of last resort and one which ought not be granted if some other less drastic form of relief is available and appropriate (Tomanovic at [46]).
4. Further, I have determined that WAM Active is entitled to a grant of leave to bring a derivative action against the directors in respect of the Restraint Agreement and the Loan Agreement. In this action, WAM Active proposes to seek compensation for any loss or damage which Keybridge has suffered by reason of its entry into those Agreements. As noted above, Keybridge submitted (and WAM Active did not dispute) that there is "a ready pool of assets" against which any award of compensation may be enforced. Accordingly, I proceed on the basis that, if breaches of duty are established in respect of the Restraint Agreement and the Loan Agreement, and it is found that Keybridge has suffered loss, as a result of those breaches, in the amount paid to Crotto and Mr Bolton in July 2024, then Keybridge will be able to obtain compensation for those breaches.

Conclusion - Form of relief

1. For the reasons outlined above, I am not satisfied that there is a real risk of "ongoing gross mismanagement of Keybridge's affairs" or of "ongoing dissipation of Keybridge's assets for the benefit of Messrs Bolton and Patton", such as to establish "a real danger to the public interest" and such as to justify the extreme measure of the winding up of a solvent and profitable company. Insofar as there has been mismanagement of Keybridge's affairs in relation to the Restraint Agreement and the Loan Agreement (being an issue which I have not determined), this is a matter which can be addressed by the derivative suit against the directors of Keybridge and Crotto. In those circumstances, the grant of leave to bring that suit is a sufficient remedy for any oppression in the management of Keybridge's affairs in relation to those agreements.
2. Accordingly, I reject the application for an order that Keybridge be wound up.

orders

1. I have determined that WAM Active should be granted leave to bring the derivative action, and that its application for an order that Keybridge be wound up should be dismissed.
2. I acknowledge that this reflects the position that Keybridge adopted at the start of the hearing. However, I will give the parties the opportunity to make submissions on the appropriate costs orders, in the event that a costs order cannot be agreed.
3. Accordingly, I make the following orders. 1. The parties are to bring in short minutes of order, by 5pm on 4 December 2024, to give effect to these reasons for judgment. 2. If orders cannot be agreed, the parties are to exchange and provide to the Associate to Nixon J, by 5pm on 4 December 2024, the form of orders which each party proposes and submissions (limited to 5 pages) on those orders, indicating whether, and if so why, an oral hearing is requested to deal with the issues in dispute. 3. In the event that a party requests an oral hearing to deal with the issues in dispute, the matter will be listed for a hearing in respect of such issues at 9.15am on 11 December 2024, or at such other time as may be arranged with the Associate to Nixon J.

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: 27 November 2024