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[2006] WADC 193
District Court of WA
2006-12-01
Original judgment source is linked above.
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
CITATION : WILLIAMSON -v- NAIDOO [2006] WADC 193
Corporation law - Claim for allegedly unpaid capital - Validity of call - Turns on own facts
Ooregum Gold Mining Co of India Ltd v Roper [1892] AC 125
Salomon v A. Salomon & Co Ltd [1897] AC 22
Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd and Ors [1992] VicRp 68; [1992] 2 VR 279
Heydon v Perpetual Executors, Trustees and Agency Co (WA) Ltd [1930] HCA 26; (1930) 45 CLR 111
Joaquin v Hall [1876] VR 788
Re Duomatic Ltd [1969] 2 Ch 365
1 This action commenced in August 1999 when a company, LPO Transact Pty Ltd (LPO), sued the defendant, a former shareholder and director of LPO, for $31,500. LPO alleged that this sum was the balance owing to it by the defendant for the purchase by him of 120,000 $1 shares in LPO that were issued to him on 22 February 1996. In time, LPO went into liquidation and later the liquidator assigned LPO's cause of action against the defendant to Ian Edward Williamson, another former shareholder and director of the company. This Court has since ordered that Mr Williamson be substituted as the plaintiff. In this judgment when I refer to the plaintiff I am referring to Mr Williamson but the action maintained by him is LPO's.
2 The defendant denies that he is liable to pay the sum of $31,500. He alleges that there was an oral agreement between he and LPO's other two directors, his brother-in-law Yoganathan Soobiah Naidoo (Yogan) and the plaintiff, that each of them would be issued with 120,000 $1 shares and that the consideration for the shares would be a contribution of $88,500 in money and each of the directors entering into a personal guarantee as security for a hire purchase obligation undertaken by LPO with BankWest (the oral agreement). The defendant alleges that LPO was bound by this agreement. The defendant also alleges that, in any event, the call for payment of the $31,500 which was made on 31 May 1999 was not in accordance with the memorandum and articles of association of LPO and consequently he was not liable to pay it.
3 The plaintiff denies these allegations and says there was no oral agreement and that the call was in accordance with the memorandum and articles of association of LPO.
4 The issues I must decide are as follows. Did the plaintiff, Yogan and the defendant enter into the oral agreement and if so, was LPO bound by it?
5 If there was no oral agreement or no oral agreement to which LPO was bound, was the call made on 31 May 1999 a valid call in accordance with LPO's memorandum and articles of association?
6 On 24 March 2006 Judge Sleight ordered that the evidence-in-chief of the witnesses called to give evidence at trial be in the form of signed and dated witness statements. In addition, he allowed the parties to file responsive statements if they wished.
7 The plaintiff filed, and I have received into evidence the following witness statements:
3. Charlie Sam Napoli dated 12 April 2006. Mr Napoli was LPO's accountant.
4. Dougal John McLay dated 24 April 2006. Mr McLay is one of two liquidators appointed for LPO.
5. Responsive statement of Ian Edward Williamson dated 4 May 2006.
6. Responsive statement of Yoganathan Soobiah Naidoo dated 4 May 2006.
8 The defendant filed, and I have received into evidence the following witness statements:
1. Ramakrishna Marriemuthu Naidoo dated 27 April 2006.
2. Geoffrey Kidd dated 26 April 2006. Mr Kidd is an expert forensic accountant.
9 At trial each witness was called and confirmed the truth of his statement and was then cross-examined.
10 Each statement contained a number of documents. The combined length of all the statements including documents approached 1,000 pages. I must say that the statements of both the plaintiff and Yogan were unnecessarily long and contained a considerable amount of documentation which was of little use and which was not referred to during trial. In addition, their statements contained obviously inadmissible material, which I have ignored. The responsive statements of the plaintiff and Yogan were replete with argumentative statements which were in the nature of submissions rather than evidence. In my opinion, the issues in dispute were simple and did not require statements as long as those presented to the court on behalf of the plaintiff and Yogan.
11 The following facts are not disputed.
12 In or about November 1995 Yogan, who was already involved in a post office business, discussed with the plaintiff and the defendant the possibility of them purchasing a post office licence together.
13 On 13 January 1996 Australia Post advertised in The West Australian inviting tenders for the purchase of a post office licence at the Kingsway City Shopping Centre. The advertisement stated in part:
"Accommodation has been secured and the premises will be fitted out to Australia Post's Corporate Standards. The successful tenderer will be required to meet the fit-out, and other establishment costs associated with this new Licensed Post Office.
It is envisaged that the applicants for the licence should have access to funds in the vicinity of $335,000 to cover the fit-out and establishment costs, initial stock requirements and the purchase of the licence."
14 Shortly after the advertisement was published, the three men discussed tendering for the licence. Eventually they agreed to tender for the licence, and if successful, establish the post office as a business.
15 The tender was made by written application dated 30 January 1996. In that application, at par 9, it was stated that the tenderer had funds, not being borrowings, of $375,000 available for the project. By letter dated 13 February 1996 from Australia Post to Yogan, Australia Post advised him that the tender had been awarded to the plaintiff, Yogan and the defendant. The tender price was $217,000. It was thought, at about this time, that the costs of the fit-out would be $94,500, but quotes were later obtained which totalled $87,600.14.
16 On 22 February 1996 LPO was incorporated and its inaugural meeting was held. At that meeting the plaintiff, Yogan and the defendant were appointed directors and a number of resolutions were passed. One of those resolutions was that the registered office of the company be situated at Shop 61, Kingsway City Shopping Centre, Corner Wanneroo Road and Hepburn Avenue, Kingsway, WA, 6026 and that each of the plaintiff, Yogan and Rama, be allotted 120,000 fully paid ordinary shares of $1 each. The shares were duly allotted.
17 Although the shares were expressed to be fully paid, as at 22 February 1996, no one had paid anything for their shares.
18 The reason why 360,000 $1 shares were allotted is not entirely clear but at some point prior to 22 February 1996, it was estimated, that the total cost of establishing the post office business would be no more than $360,000, which sum would cover the purchase of the post office licence, the fit-out and stock as well as provide working capital. The intention was that each of the three men would meet whatever establishment costs were required equally from their own resources.
19 The initial plan I have just outlined was altered to some extent. The defendant proposed and the plaintiff and Yogan agreed, that instead of the fit-out being funded from their own resources it would be financed by LPO entering into a hire purchase agreement with the defendant's bankers, BankWest. Prior to 7 March 1996 BankWest received an application from LPO for hire purchase finance and approved that application. The approval was conditional on each director providing a personal guarantee to secure LPO's obligation under the contract. On 7 March 1996 the company entered into the hire purchase agreement with BankWest and on the same day the directors executed personal guarantees.
20 As a result of LPO entering into the hire purchase agreement with BankWest, neither the plaintiff, Yogan or the defendant was required to contribute to the cost of the fit-out. However, by 25 March 1996 each of them had contributed the following sums which the company treated as contributions towards payment for their allotted shares:
• $8,000 which was paid as a deposit towards the fit-out cost (this sum was ultimately refunded to LPO as a consequence of the hire purchase arrangement);
21 Apart from payment of the sums totalling $88,500, the defendant paid no further sums of money to LPO.
22 The business commenced on 25 or 26 March 1996. The plaintiff and Yogan had more to do with the day to day running of the business then did the defendant who was at all relevant times a busy paediatrician. Unfortunately, the business struggled and never turned a profit. Yogan sold his shares to the plaintiff on 30 November 1998 and resigned as a director. The defendant, too, resigned as a director on 4 January 1999, but retained his shares.
23 As at 31 May 1999 the plaintiff was LPO's sole director and he and the defendant were the company's only shareholders. Up to that day, the defendant had not paid the $31,500 which apparently remained unpaid for the shares.
24 On 31 May 1999 the plaintiff passed a resolution determining that the company made a call on the defendant for $31,500. A notice in writing was sent to the defendant demanding that payment of $31,500 be made by 21 June 1999 to LPO's registered office which was erroneously expressed in the notice to be LPO's accountants Napoli, Fernandes & Moore. The defendant received the notice but refused to pay the call.
25 Ultimately, the post office business was sold in November 1999.
26 On 16 February 2000 the Supreme Court of Western Australia made a winding up order in respect of LPO and appointed Mr Louis Nilant liquidator. Later on 27 February 2003, Mr Nilant was replaced by Mr McLay.
27 There was some brief argument at trial as to who has an onus of proof in this case. Without doubt, the plaintiff carries the obligation of proving that the sum of $31,500 was owed by the defendant to LPO. The defendant agrees that he was obliged to pay $120,000 for his shares and that he has only made payments totalling $88,500 for them. Of course, he alleges that by virtue of the oral agreement and the giving of the personal guarantee he has no obligation to pay the company anything. Because of this, in my opinion, the defendant has the obligation of establishing on the balance of probabilities the existence of the oral agreement.
Evidence of the defendant as to the alleged oral agreement
28 The defendant in his witness statement dated 20 April 2006 set out his recollection of the oral agreement. He said that as a consequence of discussions with Yogan between 1 and 12 February 1996 he realised that there would be tax advantages in leasing the fixtures and equipment necessary to run the post office and this would lead to a reduced cash contribution for the price of the shares "as personal guarantees would need to be given for any lease of the equipment". The defendant went on to state:
26. "It followed that if we were going to be leasing the equipment and providing the personal guarantees on the equipment then there would be no need for us to provide as much cash for the purchase of the shares, Yogan and I therefore agreed that we would only need each to come up with $90,000 cash. The balance of the purchase price of the shares would be paid by the provision of personal guarantees on the leasing of the equipment. Yogan and I discussed this at my house in Duncraig prior to the company being formed.
27. As Yogan also believed it made good business sense to lease the equipment, and also to reduce our cash expenditure. He told me that he would discuss this proposition with Mr Williamson. He subsequently informed me by telephone that Williamson had concurred with our proposal. He advised me to phone Ian Williamson and confirm that he also approved of my recommendation.
28. I came to know that Ian Williamson was the other person who would be joining the partnership through Yogan in approximately January 1996. I can not remember whether I met Williamson prior to our first meeting as directors of LPO Transact. However, I phoned him in or about mid February, a few days after initial discussions with Yogan. I discussed with Williamson my proposal to lease the equipment and fit-out costs. Williamson told me that he agreed with my proposal to lease the equipment and as much of the fit-out costs as possible, and agreed that Yogan's, his and my cash contributions to the purchase would be reduced to approximately $90,000 each, with the balance to be provided by the provision of personal guarantees by each of us."
29 The defendant said that the oral agreement was made on or before 16 February 1996.
30 In cross-examination, the defendant was referred to part of an affidavit that he swore on 14 September 1999 in support of an application for summary judgment against the plaintiff. At par 13 of the affidavit the defendant said, in relation to the alleged oral agreement:
"The allegation that Williamson, Yogan and I agreed to each provide start - up capital of $120,000 is incorrect. Our agreement was that each of us would provide an amount of $88,500 as we each received a discount on the par value of the shares. We received the discount because we each signed personal guarantees for the plaintiff leasing fixtures, fittings and equipment from Shannon Industries for the total amount of $87,600."
The plaintiff's evidence as to the alleged oral agreement
31 The plaintiff in his witness statement dated 20 April 2006 stated that he did not want to finance the fit-out by hire purchase but reluctantly he went along with the defendant's proposal. In the course of par 39 of his statement the plaintiff said:
"At no stage was there any discussion or any agreement concerning a discount of the price paid for the shares for any reason, including as a reward for the personal guarantees that were or would be provided by the directors in respect of the indebtedness of LPO."
Evidence of Yogan as to the alleged oral agreement
32 Yogan in his statement dated 21 April 2006 said that on 16 or 17 January 1996 as a result of speaking to both the plaintiff and the defendant it was agreed that all three men would each contribute share capital of $120,000 and that each man agreed to make payment of that sum by 25 March 1996. Yogan went on to say at pars 29 to 32 of his statement dated 21 April 2006 that:
29. "At no time in the discussions I had with Rama about the abovementioned financing (or subsequently) was there any discussion about the bank financing being in lieu or any part of the outstanding capital contributions owed by Rama.
30. On or about 7 March 1996, LPO entered into a Hire Purchase Agreement with BankWest, borrowing the sum of about $87,000.
This was done at Rama's request.
Annexed hereto and marked YSN 14 are a (sic) true copies of the application for finance made on behalf of LPO on 7 March 1996, signed by Ian, Rama and myself.
31. Shannon Industries refunded the deposit of $24,000 to LPO when the abovementioned bank financing referred to in par 30 was put in place.
32. As a result of obtaining financing from BankWest for the cost of the fit-out and the refund for Shannon Industries, the balance of $31,500 to you by each shareholder was not immediately required, and was not paid by any of us, but there was no agreement that the requirement to pay these balances was waived."
Cross-examination of the plaintiff, Yogan and the defendant on the alleged oral agreement
33 The cross-examination of the plaintiff, Yogan and the defendant on the oral agreement was in each case very brief. Each of them maintained the positions set out in their statements.
34 However, the witnesses were cross-examined at some length on other matters which were directed towards their credibility generally.
35 For example, Mr Staffa, counsel for the plaintiff, cross-examined the defendant and suggested that he had given different versions of the alleged oral agreement in the affidavit dated 14 September 1999 as compared to the way it is expressed in the amended statement of claim. The defendant agreed that there were differences but said, in effect, that as far as he was concerned the differences were only matters of semantics.
36 Mr Staffa also reminded the defendant that in an affidavit for the appointment of a liquidator sworn 21 December 1999, the defendant said "at the time of the formation of the company Williamson, Yogan and I were friends". Mr Staffa asked the defendant if that statement was true. The defendant said that the statement was not right. He said that he and Williamson were not friends and never had been. He said he overlooked this when he read the affidavit.
37 Mr Staffa questioned the defendant about why his solicitor's letter dated 4 June 1999 in response to the call made no reference to the oral agreement. I will later refer to this letter in greater detail, but for the time being it is sufficient to note that the defendant said in cross-examination that when he initially instructed his solicitors in respect of the call he did not mention the oral agreement because he did not have time to tell them about it.
38 Mr Staffa questioned the defendant about why in a meeting between he and the plaintiff on 16 December 1999, which was tape recorded, the defendant did not mention the oral agreement. The defendant's response was to the effect that the meeting was about the proceeds of sale of the business and not the oral agreement. Let me say immediately, having read the transcript, it is obvious that the meeting was about the proceeds of sale of the business and it is hardly surprising the oral agreement was not discussed.
39 Mr Dharmananda when cross-examining the plaintiff highlighted his admitted failure to read the declaration on LPO's accounts for the financial year ended 30 June 1996 concerning receipts of benefits by directors.
40 Mr Dharmananda cross-examined the plaintiff about the attendance of the defendant at LPO's meetings. Initially the plaintiff stated that the defendant attended all meetings of the company, but later he used the word "most" and later still he said the defendant attended "all" meetings.
41 Mr Dharmananda asked the plaintiff if the defendant had signed LPO's financial statements for the year ended 30 June 1996. Initially, the plaintiff said that the defendant had but when shown the document conceded that the defendant had not.
42 The plaintiff was asked about his relationship with Yogan by Mr Dharmananda and readily agreed that he and Yogan were friends.
43 As far as Yogan is concerned, Mr Dharmananda cross-examined him as to his university qualifications. Initially, Yogan was asked whether he had a university degree. His response, to this innocuous question, was to claim privilege against self incrimination. He was not pressed at that point and the cross-examination proceeded onto another areas. However, later the matter was raised again. This time Yogan said that he had a commerce degree from the University of Durban but he did not have any proof that he held such a degree.
44 During Yogan's cross-examination, (and for that matter in the plaintiff's cross-examination) it became evident that LPO had paid sizable sums by way of consulting fees, a substantial amount of which had been paid to Yogan. Mr Dharmananda focused on the undisputed fact that after the business was sold substantial consulting fees were paid from the proceeds of sale of the business of which Yogan received a significant proportion. It was suggested to Yogan that the amounts he received were excessive. Yogan explained the receipt of consulting fees by saying that over the years he did work for the company for which he was entitled to payment but the business was not in a position to pay him. He said that he kept records of his work and once the business was sold he was able to recoup the previously unpaid consulting fees. Mr Dharmananda suggested in cross-examination that this was implausible, a suggestion that Yogan rejected.
45 The minutes of LPO's inaugural meeting, a meeting at which all three directors attended, records that each of them were allotted 120,000 fully paid $1 shares. The shares were not issued at a discount (nor could they lawfully be issued at a discount without the leave of the Supreme Court; s 190 Corporations Law) nor were they recorded as partly paid. There is no mention in the minutes of that meeting or any subsequent meeting of the oral agreement.
46 There is, of course, the hire purchase agreement itself dated 7 March 1996 which includes the personal guarantees.
47 LPO's accounts record that all issued shares were fully paid.
48 The notes to the accounts of LPO make no reference to the oral agreement. But the accounts for the period 26 March 1996 to 30 June 1996, the year ended 30 June 1997 (not 30 June 1998), the year ended 30 June 1999 and the draft accounts to 31 October 1999 reveal that each of the plaintiff, Yogan and the defendant were recorded as owing the company $31,500. LPO's accountant, Mr Charlie Napoli, said in cross-examination that this is how the outstanding sum of $31,500 on the payment for the shares were dealt by him. Mr Geoffrey Kidd, the defendant's expert accountant, said that in the circumstances, that was an appropriate way to account for unpaid amounts on shares said to be fully paid.
49 As I have already observed the call was made on 31 May 1999. On 4 June 1999 the defendant's then solicitors wrote to LPO. It is I think necessary to set out all of that letter omitting its formal parts:
"As you would now be aware we act on behalf of Dr. Rama Naidoo. Our client has provided to us a copy of your letter dated 31 May 1999 purporting to make a call on shares.
Pursuant to the notice we have had various searches undertaken at the Office of the Australian & Securities Investment Commission ("ASIC") which reveal:
1. Since the resignation of our client in January of 1999 as a director of the company, the company has been in operation illegally and in breach of its articles. The company's articles do not provide for the company to have a single director. Our enquiries reveal that the articles of the company require the company to have a minimum of two directors. Therefore any resolution that you have made in your purported capacity as sole director is wholly and completely invalid.
2. The annual return of the company signed by you on 28 January 1999 states that the 120,000 ordinary shares that our client has in the company are fully paid. The annual return was signed by yourself. You may care to advise how you now arrive at the conclusion that our client's shares are now not fully paid.
3. Even if the shares are not fully paid, we enquire whether the remaining shareholders in the company, namely yourself, and Mr Yogan Naidoo, who each hold 120,000 shares (which you also maintain are fully paid) received a call on those shares or whether you have made a call only on our client's shares. If the call has been made only on our client's shares, then we will consider that the above conduct is oppressive on a minority shareholder. Should you proceed to endeavouring to enforce the invalid call we shall advise our client to resist any attempt to enforce the call on the purported consequences of such call upon our client.
4. We note from a letter received from your accountant that they have not prepared the 1997/1998 financial accounts of the company, no doubt due to your failure to provide the relevant information. Why have they not been prepared and what are your intentions?
We have therefore advised our client that the call that you have made, in your purported capacity as sole director, is invalid and our client is to ignore that call."
50 Mr Dharmananda submitted that I should prefer the evidence of the defendant over the evidence of the plaintiff and Yogan.
51 Mr Dharmananda submitted that the plaintiff's account of events as to the amount each of the men was to contribute was inherently improbable. This submission was on the basis that no call had been made earlier nor had a call been made on the plaintiff and Yogan. He pointed out that because LPO entered into the hire purchase agreement, it no longer needed the $31,500 being the difference between the value of the issued shares and the amount each of the directors contributed, and this made the existence of the oral agreement more likely.
52 Mr Dharmananda submitted that the hire purchase agreement only made commercial sense if there was an oral agreement as alleged by the defendant. Finally, it was submitted the documents do not support the plaintiff's position.
53 Mr Staffa submitted that I should prefer the evidence of the plaintiff and Yogan over the defendant.
54 Mr Staffa submitted that there were no documents supporting the defendant's alleged oral agreement and that the documentation supported the plaintiff's position, that the defendant owed $31,500 as an unpaid share call. He also submitted that if the agreement was reached on 16 February 1996 there would have been no need to issue 120,000 $1 shares. The company would instead of issued 88,500 $1 shares.
55 Mr Staffa pointed to the defendant's solicitors letter of 4 June 1999 and submitted that in answer to the call there is no reference in that letter to the alleged oral agreement.
56 Finally, it was submitted that any oral agreement, was, according to the defendant, reached before LPO came into existence and therefore any agreement did not bind the company. According to Mr Staffa, the company did not ratify the agreement after its incorporation. Mr Dharmananda answered this submission by reference to the doctrine of unanimous assent which he said arose from the execution of the hire purchase agreement by all three men on the 7 March 1996.
The contractual obligations of subscribers to a company
57 Each of the plaintiff, Yogan and the defendant promised, by virtue of their subscription to purchase 120,000 $1 shares to give good consideration for those shares. Each was liable to pay the issue price of the shares until the company received consideration which it genuinely believed was equivalent to that value; Ooregum Gold Mining Co of India Ltd v Roper [1892] AC 125.
58 The plaintiff's case is that LPO did not receive full consideration for the defendant's shares and was therefore entitled to make a call for the outstanding balance. The defendant's case is that LPO did receive full consideration for the shares because the three directors and shareholders paid money to LPO and entered into the hire purchase guarantee.
59 It is very difficult to judge the credibility of the testimony of the plaintiff, Yogan and the defendant as to the oral agreement, given that the conversations said to give rise to it occurred over a decade ago.
60 The situation is further complicated by some other factors. First, there has been a falling out between Yogan and the defendant, partly as a result of this failed business venture but mostly, I believe, because of a family dispute unrelated to this case. Second, the defendant has disputed and continues to dispute Yogan's entitlement to the consulting fees which were paid to him. Finally, the cross-examination of the three men exposed certain weaknesses in their credibility generally.
61 For example, the plaintiff appears to some extent to be allied to Yogan and hostile towards the defendant. Yogan is hostile towards the defendant and his reaction to questions concerning his university qualifications indicated, on this issue at least, a reluctance to be full and frank. The defendant is hostile towards Yogan and to a lesser extent the plaintiff and showed by wrongly swearing in the affidavit of 21 December 1999, that he and the plaintiff were friends and that he had a tendency to be careless when making statements on oath.
62 In these circumstances I believe that I am best served by examining the contemporaneous documents and behaviour subsequent to the making of the alleged oral agreement to decide whether it, in fact, exists.
63 As to the contemporaneous documents, there are none. No note, minute of the company, letter, or document of any kind made at or around the time of the alleged oral agreement was presented to me which specifically refers to the oral agreement. It was submitted that the hire purchase agreement which contains the personal guarantees is, by implication, contemporary documentary evidence of the oral agreement. I reject this submission. In truth this document supports the plaintiff's and Yogan's account of events as much as the defendant's.
64 Although LPO's accounts record the shares as being fully paid, this does not assist the plaintiff because the shares were issued as fully paid on 22 February 1996 when no consideration had been received from any subscriber and have, from this point on, been recorded as fully paid.
65 It is, I think, very telling against the defendant, that the oral agreement was not referred to in his solicitor's letter of 4 June 1999. This letter was a direct response to the call, but nowhere in the letter is the alleged oral agreement mentioned.
66 The defendant said in cross-examination that he did not tell his solicitors about the oral agreement because he did not have time. In my opinion, this explanation is implausible. While I accept that the defendant was a busy man, I do not accept that he had so little time as to give his solicitors proper instructions. The first and most obvious answer to the alleged call was the oral agreement, an explanation which was not complicated and could have been easily given by the defendant even if he was pressed for time. I infer from the defendant's failure to tell his solicitor's about the oral agreement that no such agreement had, in fact, been made.
67 It is of some significance that the companies accounts record (save for the year ended 30 June 1998) that the directors each owed LPO $31,500 for their shares and that the defendant did nothing about it. The defendant said that when he saw the accounts for the year ended 30 June 1996 he noted the entry under the heading "loans - unsecured" and queried it with Yogan. The defendant said that Yogan told him "not to worry it is only a paper entry to boost the balance sheet of the company" and that Yogan said "something to the effect that this reflected our continuing guarantees". The defendant said that he did not fully understand how the entry reflected the guarantee but did not speak to his own accountant about the matter because Yogan had told him in the past that he was an accountant. Yogan denied making the alleged statements.
68 I do not accept that Yogan told the defendant that the loans were shown in the companies accounts to boost the balance sheet nor did he say that the entry reflected the guarantees. The two statements, especially the latter, if made, would have strained credibility from the defendant's perspective to the point where he would have taken advice from his own accountant or sought to query the position with LPO's accountant, Mr Napoli. The defendant took neither course.
69 It is obvious that the defendant has some grievance associated with the fact that he was the only person who was the subject of a call. This, I think, has, perhaps understandably, coloured his view of events. The fact that the defendant was the only person subject to a call does not detract from the fact that, in my view, he owed money to the company. This issue was answered to some extent by the plaintiff who said that he had been propping up the company with his own money for a long time and that he did not want to keep on pumping money into the company. It is also evident from analysis of the loan accounts of LPO that following the plaintiff's acquisition of Yogan's shares, the plaintiff assumed liability for Yogan's liability to pay for his shares. It would have been pointless for the plaintiff to make a call on himself for the monies that he and Yogan owed the company for the shares because at the time the call was made the company owed the plaintiff between $81,300 and $95,069, an amount greater than the sum owed by the plaintiff to the company to the contrary even after assuming Yogan's liability. In the end, I do not think it matters that the defendant was the only person who was subject to a call but, if the matter was of some importance, I am satisfied that the plaintiff sincerely believed that the defendant was the only one of the three subscribers who still owed money for his shares.
70 I reject the defendant's submission that the plaintiff's and Yogan's account of events was implausible. If anything, the notion that LPO would treat the giving of personal guarantees for the hire purchase agreement was proper consideration for a total of $94,500 worth of shares is, in my opinion, implausible. I say this because the company itself was primarily liable to BankWest and although it is possible that the personal guarantees would be called on, in the event that the company failed to meet its obligations to BankWest, there is no evidence that the plaintiff, Yogan or the defendant thought that this risk was so great as to, in effect, be worth $94,500, bearing in mind that the total liability under the hire purchase agreement in the event that not one cent was ever paid by LPO was $101,610.72.
71 Finally, I turn to the submission that the existence of the oral agreement is more likely because LPO entered into hire purchase agreement as a result of which each shareholder was relieved of this obligation to contribute to the fit-out. While it is undoubtedly true that the hire purchase agreement relieved each shareholder of the obligation to pay for the fit-out from their own resources, this does not necessarily mean that there was an agreement as alleged by the defendant. I return once again to the absence of contemporary documents which support the defendant's position. The strong impression I have from the evidence as a whole is that that the issue of the consideration for the shares was just not addressed by either the plaintiff, Yogan and the defendant in light of the decision to obtain hire purchase financing. It may be that the defendant considered that a consequence of obtaining the hire purchase financing was that his shares would cost less but that was not, in my opinion, specifically agreed to by the plaintiff and Yogan.
72 Drawing all these threads together, on the evidence before me, I am not satisfied on the balance of probabilities that there was any oral agreement as alleged by the defendant. In my opinion, each of the subscribers including the defendant was obliged to pay LPO $31,500 being the amount each of them owed for the shares they subscribed to. A call was made on the defendant in on 31 May 1999, at a point in time when the plaintiff was not prepared to invest more of his money propping up the company on a day to day basis and when the company owed him more than he owed it. I think it is particularly telling that there is no contemporary documentation that supports the existence of the oral agreement and the defendant's solicitor's letter of 4 June 1999 makes no mention of the oral agreement.
73 In case I am wrong in deciding that there was no oral agreement, I think it is as well that I deal with the defendant's submission concerning the doctrine of unanimous assent.
74 This issue arose because the defendant's evidence was that the oral agreement occurred prior to the registration of the company. How then could the company be bound by such an agreement? The defendant submitted that the doctrine of unanimous assent applied. Mr Dharamananda's submission was that on 7 March 1996 when all members of the company signed the personal guarantees to BankWest securing the hire purchase arrangement, the members were all binding LPO to the oral agreement.
75 At common law, a contract which purports to bind a company before it is registered is invalid as against the company. This is because until a company is registered it is not a legal entity. This position has been modified by statute. As at March 1996, s 183 of the Corporations Law applied. This provision allowed a company to ratify a contract made before the company was registered provided the ratification occurred within a reasonable time after the making of the contract. This provision was not relied upon by the defendant.
76 The effect of the doctrine of unanimous assent is that a company is bound in a matter intra vires by the unanimous agreement of all its members; Salomon v A. Salomon & Co Ltd [1897] AC 22 at 57. The learned authors of Ford's Principles of Corporations Law 12th ed 2005 at p 304 identify a number of limitations to the doctrine. One of those limitations is that the doctrine requires actual and not merely potential assent. This means there must be some evidence that when the three members signed the guarantee they knew that they were binding LPO to the oral agreement and not merely executing personal guarantees. There is no evidence to this effect. There is no evidence to suggest that there was actual assent or ratification of the oral agreement when the personal guarantees were signed on 7 March 1996. Accordingly, the doctrine of unanimous assent does not apply even if there was an oral agreement as alleged by the defendant. In other words, any agreement did not bind the company and so, the company was free, if it saw fit to do so, to call up any sums owed to the company for shares.
77 In my opinion, there was no oral agreement as alleged by the defendant and even if there was, the agreement did not bind the company. In my opinion, the defendant was obliged by virtue of his subscription to pay for 120,000 $1 shares and although he received the shares he did not pay in full for them. I find that the defendant made payments to and on behalf of the company in part payment of the shares in the total sum of $88,500 but he has not paid the balance of $31,500 and that amount was due and payable by him to the company at the time of the call.
Evidence of the defendant's expert, Geoffrey Kidd
78 I have not, up until now, made any detailed reference to the evidence of Mr Kidd who was called by the defendant as an expert investigating accountant.
79 I do so now for the sake of completeness.
80 Mr Kidd's report was commissioned by the defendant's solicitors and dealt with a number of topics, three of which, it was submitted were relevant to the case namely;
a) the financial position of LPO in the months leading up to and including 31 May 1999;
b) a review of the loan accounts of shareholders; and
c) the consultancy fees paid to Yogan and two other entities Transact 155 Pty Ltd and LPO Professional Pty Ltd.
81 Mr Kidd confirmed that LPO's financial position had not been strong up to May 1999 and that the business had only remained viable through contributions by the plaintiff and Yogan. Although Mr Kidd noted that the operating performance of LPO had been poor for a significant period before the call was made, he was of the view that the demand made on the defendant did not follow any apparent unforeseen cash short fall from business operations. Exactly why this conclusion was relevant is not clear to me as the resolution passed by the plaintiff on 31 May 1999 referred to the need to urgently make stock purchases. In any event, the plaintiff was, in my opinion, entitled to make the call on the defendant especially in circumstances where he had had enough of propping the company up with his own money.
82 The analysis of the shareholders loan accounts showed, in Mr Kidd's opinion, that Yogan's personal loan account had unusually high level of activity compared to the cash flow and turnover of the business. From his experience, cash advances and drawings posted through Yogan's loan account were not usual business transactions. Significantly, Mr Kidd was unable to comment as to the circumstances behind the transactions.
83 Finally, with respect to consultancy fees, Mr Kidd analysed the company's general ledger and concluded that for the years 30 June 1996 to 30 June 2000 the company paid a total of $321,982.86 to Yogan, Tansact 155 and LPO Professionals for consultancy fees. In his opinion a number of transactions required further investigation and he was not in a position to provide an opinion as to the commerciality of the payments to Transact 155 and LPO Professionals. Nevertheless, in his opinion the total consultancy fees paid were excessive.
84 The question of consultancy fees is not directly relevant to the issues that I have to decide in this case. It was submitted to me that the payment of excessive consultancy fees impacted adversely on the credibility of the plaintiff and Yogan. I cannot decide the legitimacy or otherwise of the consultancy fees especially given that the plaintiff and Yogan both claim the consultancy fees were properly paid and Mr Kidd did not undertake a complete investigation with respect to the transactions. While the total amount paid for consultancy fees is considerable, I do not think that the evidence is such that I can find as a fact that the consultancy fees were illegitimate.
85 Overall, Mr Kidd's evidence had little impact on the issues which I have to decide in this case.
86 The parties proceeded before me on the basis that the defendant would not be bound to pay the $31,500 to the LPO unless the call for that sum was valid, that is, it was made in accordance of the memorandum and articles of association of LPO.
87 The relevant provisions of the articles of association as are follows:
"14. (1) The Directors may make calls upon the members in respect of any money unpaid on the shares of the members (whether on account of the nominal value of the shares or by way of premium) and not by the terms of issue of those shares made payable at fixed times.
(2) Each member shall, upon receiving at least 14 days notice specifying the time or times and place of payment, pay to the Company at the time or times and place so specified the amount called on his shares.
15. A call shall be deemed to have been made at the time when the resolution of the Directors authorising the call was passed and may be required to be paid by instalments.
...
17. If a sum called in respect of a share is not paid before or on the day appointed for payment of the sum, the person from whom the sum is due shall pay interest on the sum from the day appointed for payment of the sum to the time of actual payment at such rate as the Directors may determine but, not exceeding 8% per annum as the Directors determine, but the Directors may waive payment or in (sic) in part.
...
21. (1) If a member fails to pay a call or instalment of a call on the day appointed for payment of the call or instalment, the Directors may, at any time thereafter during such time as any part to the call or instalment remains unpaid, serve a notice on him requiring payment of so much of the call or instalment as is unpaid, together with any interest that has accrued.
(2) The notice shall name a further day (not earlier than the expiration of 14 days from the date of service of the notice) on or before which the payment required by the notice is to be made and shall state that, in the event of non-payment at or before the time appointed, the shares in respect of which the call was made will be liable to be forfeited.
22. (1) If the requirements of a notice served under article 21 are not complied with, any share in respect of which the notice has been given may at any time thereafter, before the payment required by the notice has been made, by forfeited by a resolution of the Directors to that effect."
88 The resolution passed by the plaintiff as sole director (no issue was taken as to the validity of this appointment) on 31 May 1999 is as follows:
1. That a call of $31,500 be made upon Rama Naidoo being the balance due and payable to the company in respect of 120,000 ordinary shares of $1.00 held by Rama Naidoo in the share capital of the company, such call to be paid on or before 5pm on the 21st day of June 1999, at the company's registered office.
2. That pursuant to Clause 17 of the memorandum and articles of association of the company, interest at the rate of 8% per annum be charged to Rama Naidoo if the sum of $31,500 is not paid on or before 5 pm on the 21st June 1999.
89 The call notice that was sent to the defendant dated 31 May 1999 is in the following terms omitting formalities:
"In my capacity as the sole director of LPO Transact Pty Ltd, I have resolved to call up the balance of $31,500, due to the company in respect of the 120,000 ordinary shares of $1.00 held by you in the share capital of the company.
I require payment of the sum of $31,500 to be made on or before 5.00 pm on 21 June 1999 at the company's registered office situate at Napoli, Fernandes & Moore, Chartered Accountants of 5th Floor, London House, 216 St George's Terrace, Perth.
I invite your attention to Clause 17 of the Memorandum of Articles of Association of the company which provides for payment of interest, up to the rate of 8% per annum, on the balance due to the company, in respect of this call, if payment to the company is delayed beyond the due date.
I hereby give you formal notice that interest at the rate of 8% per annum will be charged against the amount owing by you if you delay payment beyond 5.00pm on Monday 21 June 1999."
90 The defendant submits that the call was invalid because:
1. According to the relevant articles, two notices needed to be served on the defendant in order for there to be a valid call. The first pursuant to article 14 and the second pursuant to article 21. The only notice served on the defendant was pursuant to article 14. No notice under article 21 was ever issued.
2. The plaintiff as sole director had determined the rate of interest in the event that the call was not paid at the same time he resolved to make the call. According to Mr Dharmananda, the plaintiff was not able to do that because article 17 required the determination of the rate of interest to be made in a separate resolution after default on the call.
3. The notice was defective because the address to which payment was to be made was wrong. The registered office of LPO was not Napoli, Fernandes and Moore Chartered Accountants of 5th Floor, London House, 216 St Georges Terrace, Perth but rather at Shop 61, Kingsway City Shopping Centre, Corner Wanneroo Road and Hepburn Avenue, Kingsway, WA, 6026.
91 There is, in my view, no substance to any of these submissions.
92 As to the first submission, the requirement to send a second notice is only relevant where the company seeks forfeiture of the shares. At no stage did LPO seek forfeiture of the shares. The provisions in article 21 plainly relate to a situation where forfeiture is sought. This is obvious by reference to the words of the article and in particular the last line of article 21 (2).
93 As to the second submission, there is no statement in article 17 that the determination of the rate of default interest can only be made after default on the call has occurred. The article makes it clear that the company may charge interest if the call is not paid at a rate it chooses but no greater than eight percent per annum. The provision does not require the directors of the company to meet twice - once to resolve that a call should be made and a second time, after default, to determine the interest rate.
94 As to the third submission, I accept the proposition put to me by Mr Dharmananda that notices must strictly comply with the articles of the company. Article 14 (2) provides that the notice must specify the "time or times and place of payment". The notice in this case specifies both the time and the place of payment. The place of payment is expressed to be LPO's then accountants. Although that address is erroneously expressed to be the company's registered office, there is no requirement in article 14 (2) that payment be made to the company's registered office. In my opinion the notice sufficiently complies with the articles of LPO.
95 In my opinion there is no substance in any of the submissions made on behalf of the defendant as to the invalidity of the call. In my view the call was made in accordance with the articles of LPO and was valid.
96 In my opinion the defendant has failed to pay the sum of $31,500, an amount properly due and owing to the company in accordance with a valid call. Accordingly, there will be judgment for the plaintiff in the sum of $31,500. I will hear from counsel with respect to interest and costs.
# Williamson
Naidoo \[2006\] WADC 193
(1930) 45 CLR 111