Abacus Developments AG v Powerflex Corporation Pty Ltd

[1996] FCA 736

IN THE FEDERAL COURT OF AUSTRALIA   )
VICTORIA DISTRICT REGISTRY         )  No. VG3708 of 1995
GENERAL DIVISION                   ) 

BETWEEN:ABACUS DEVELOPMENTS A.G., ABACUS RESEARCH A.G., DANIEL RUDOLF SENN

Applicants

AND:POWERFLEX CORPORATION PTY. LTD.

First Respondent

AND:DAVID MEREDITH BENNETT

Second Respondent

AND:MARGARET ANN BENNETT

Third Respondent

AND:POWERFLEX SERVICES PTY. LTD.

Fourth Respondent

AND:POWERFLEX SERVICES PTY. LTD., POWERFLEX CORPORATION PTY. LTD., DAVID MEREDITH BENNETT, MARGARET ANN BENNETT

Cross-Claimants

AND:ABACUS RESEARCH AG and ABACUS DEVELOPMENTS AG

Cross-Respondents           

CORAM:    Jenkinson J.

PLACE:    Melbourne

DATE:     23 August, 1996    

REASONS FOR JUDGMENT

Motion for the appointment of a provisional liquidator of the respondent Powerflex Corporation Pty. Ltd.
("Powerflex"), in a proceeding for, inter alia, an order that Powerflex be wound up by the court.

Powerflex was incorporated in Victoria, where its principal place of business is situated, in December 1992.  To the applicant Daniel Rudolf Senn were issued 10,000 shares, to the applicant Abacus Developments A.G. ("Abacus"), a Swiss corporation, 30,000 shares, and to Demileigh Pty. Ltd. ("Demileigh"), which is owned by the respondents David Meredith Bennett ("Dr. Bennett") and his wife Margaret Ann Bennett, 60,000 shares. The nominal and issued capital of Powerflex is 100,000 shares, each of a nominal value of $1.  Powerflex was to be, and has been, the means of giving effect to a joint venture agreement for the further development, and adaptation for use by Abacus and the applicant Abacus Research A.G. ("Abacus Research"), another Swiss corporation, of the computer programs known as Powerflex and PFXplus, which had been developed by Dr. Bennett.

My reasons for judgment delivered on 9 February 1996 in the proceeding in this court numbered VG473 of 1993 are to be taken as having been incorporated into these reasons for judgment : see Data Access Corporation v. Powerflex Services Pty. Ltd. & Ors. (1996) 33 I.P.R. 194. Those reasons are not incorporated as expressions of any finding of fact or of any conclusion of law in this motion, but as a part of the circumstances in which the motion falls for decision. It is of course difficult, if not impossible, for me to put out of mind impressions I formed of the intelligence, and aspects of the character, of each of Dr. Bennett and his wife. Counsel for the parties to the motion were informed shortly after the hearing began - as they had been informed before the hearing began - that I would not hear the motion if either counsel expressed a preference that the motion be heard by another judge of the court.

The proceeding numbered VG473 of 1993 ("the copyright proceeding") was instituted in November of that year.  The trial of the questions resolved by the reasons for judgment of February 1996 was held in August 1995.  This proceeding for winding up was instituted on 23 November 1995, the applicants being represented by the same firm of solicitors as were representing Data Access Corporation in the copyright proceeding.  Orders giving effect to the conclusions I had stated in February 1996 were not made until May 1996, because the parties failed until then to carry the proceeding on.  The second applicant in this proceeding manufactures and sells in Europe a suite of computer programs for the accounts and records of small businesses, written originally in the Dataflex language.  It is alleged in paragraph 8 of the statement of claim that in April 1991 the respondents other than Powerflex "conducted negotiations and discussions with the First Applicant concerning the provision of computer programming services by the Fourth Respondent to the First Applicant".  Under the heading "Particulars" is subjoined to paragraph 8 the following:

"The negotiations were oral.  They were constituted by various conversations in the said period between Claudio Hintermann on behalf of the First Applicant and the Second and Third Respondents on behalf of the Fourth Respondent.  The substance of the conversations was that the First Applicant was interested in developing its computer program through the use of the Second and Fourth Respondent's computer program, known as `Powerflex', which the Second, Third and Fourth Respondents were marketing as equivalent to, or a substitute for, a program known as the `Dataflex' computer program developed and marketed by a company known as Data Access.  The First Applicant at that time was using the Dataflex computer program and Dataflex computer language in the development of its computer programs.  The First Applicant had been writing its computer programs in the Dataflex computer language.  After examination and comparison of the Dataflex computer programs Claudio Hinterman told the Second Respondent that he was concerned about possible infringement of the Dataflex computer program and language by the Powerflex computer program.  The Second Respondent said to Claudio Hinterman that:-

(a)The Powerflex computer program did not infringe Data Access' Corporations copyright in the Dataflex computer program and Dataflex computer language.

(b)The Second and Third Respondents had received legal advice from a leading Australian copyright solicitor stating that the Powerflex computer program did not, or was unlikely to be in, breach Data Access Corporation's copyright in the Dataflex computer program and computer language."

I think it probable that the allegations contained in paragraphs (a) and (b) of that passage will be proved at trial.

Claudio Enrico Hintermann was at relevant times a director of Abacus and Abacus Research (of which latter company he was president) and much concerned in transactions between those companies and the respondents.  After he was informed of the commencement of the copyright proceeding Mr. Hintermann was in communication with Mr. Chip Casanave of Data Access Corporation, to whom reference is made in my reasons for judgment in the copyright case.  Mr. Casanave provided Mr. Hintermann with a copy of the reasons for judgment of Heerey J. delivered on 11 October 1994 in the copyright case.  Those reasons, which are on the court file in the copyright case, would be likely to give a person, situated as Mr. Hintermann was, reason to think it not unlikely that Data Access Corporation would be successful in the copyright case.  I accept Mr. Hintermann's evidence that he unsuccessfully sought from Dr. Bennett a copy of the written advice obtained by Dr. Bennett in 1989, of which Heerey J. had ordered production for inspection by the solicitors for Data Access Corporation.

At about the same time Mr. Hintermann employed Price Waterhouse to examine the financial records of Powerflex.  Paragraphs 37, 38, 39 and 40 of the statement of claim read:

"37.By about the month of November, 1994 differences arose between the Applicants and the Second and Third Respondents as to the conduct of the business and affairs of the First Respondent.    

PARTICULARS

(a) The Second and Third Respondents drew excessive funds for their own ultimate benefit from the First Respondent, either personally or through their legal entities, which they solely control, namely,
Demileigh, the Fourth Respondent, and Wooloon, without informing the Applicants; but to the contrary saying to the Applicants, from time to time, that the Second and Third Respondents only drew a modest sum of money, and certainly no more than would ordinarily be drawn by an employee computer programmer of the First Respondent.

(b) From time to time the Applicants requested that it be provided with copies of the balance sheet, profit and loss statements and other financial information, but was informed by the Second or Third Respondents that the same were unavailable at that time but would be made available sometime in the future, or were provided selected incomplete and relatively uninformative copies of the First Respondent's accounts.

(c) The Applicants notwithstanding its request from time to time of the Second and Third Respondents was not provided with an opening balance sheet as of the 1 January 1993 of the First Respondent.

(d) The Applicants was not provided with the First Respondent's books of account for 1993, nor was it provided with any list of any assets or liabilities transferred between the Fourth Respondent and the First Respondent, or any cash transferred between the First, Second, Third and Fourth Respondents and any associated legal entities.

(e) The drawing of the said funds by the Second and Third Respondents and their associated entities have drained the First Respondent of funds to carry out its work and business activities effectively, efficiently and rapidly, which has made the development and marketing of the Powerflex Software difficult and in a rapidly changing market environment; when rapid technological changes rapid must be met quickly and effectively if the
Powerflex Software is to remain competitive.

38.In about December, 1994 the Applicants informed the Second and Third Respondents that they were no longer prepared to continue in the joint venture and wanted to end their relationship with the Respondents.

PARTICULARS

On the 4th and 5th of December, 1994 there were various meetings between Daniel Senn, a director of the Applicant and the Second Respondent in Switzerland.  Daniel Senn said to the Second Respondent that the First Applicant would pay the First Respondent the sum of $60,00,00 as a final payment of money allegedly due from the First Applicant to the First Respondent for work that was to be carried out by the First Respondent in developing the Powerflex Software, and that the First Applicant would sell its shares in the First Respondent to the Second and Third Respondents or one of their associated legal entities.  The Second Respondent refused to agree and said the matter could not be settled on that basis and left Switzerland.  Shortly thereafter, in the months of December, 1994 and January, 1995 the Respondent's solicitors Trumble, Tzanto Braham have written to the First Applicant making various demands in respect of alleged breaches of agreement and to which the First Applicant through its solicitors have responded.

39.In the circumstances, the business relationship between the First and Third Applicants and the Second and Third Respondents has irretrievably broken down and the said object of the joint venture for which the First Respondent was establish cannot be fulfilled.

40.In the circumstances, it is just and equitable that the First Respondent be wound up."

An order for winding-up is sought also on the ground afforded by s.260(1)(a) of the Corporations Law.  Whether or not the allegations in the particulars subjoined to paragraph 37 of the statement of claim are proved at trial, I think it almost certain that the trial judge will reach conclusions concordant with the allegations in paragraph 39 thereof.  There is a strong probability that in this proceeding an order will be made either that Powerflex be wound up or that the shares held by Abacus and Mr. Senn be purchased by one or more of the other members of Powerflex.

An appeal to the Full Court of this court against the orders I made in May 1996 is pending and may be heard next month.  The appeal must be allowed a real prospect of success.  There is some reason to anticipate an application to the High Court for special leave to appeal from the judgment of the Full Court, whatever that judgment decides.  The value of the shares in Powerflex will be greatly affected by the ultimate outcome of the litigation between Data Access Corporation and Powerflex and those associated with Powerflex.  There is no way in which control of the management of Powerflex by Dr. Bennett and Mrs. Bennet until the hearing and determination of this proceeding can be changed except by curial order, such as, for example, the order now sought by the applicants.  The operation of the orders made by me in May 1996 having been stayed, Dr. Bennett and Mrs. Bennett are carrying on the business owned by Powerflex.  They are capable of conducting that business efficiently and, if left in control of Powerflex, are willing to do so.  Why, then, should a provisional liquidator be appointed?

In the copyright proceeding I observed (33 I.P.R. at 210):

"Dr. Bennett was, as I find, at material times

(a)an expert in computer science;

(b)of a subtle intelligence apt to comprehend the conceptual and linguistic complexity involved in the application of copyright law in the field of computer science;

(c)opinionated and emotionally and intellectually committed to the exploitation of the extensive and challenging work he had expended, in and before 1989, on his application development system.

I do not accept Dr. Bennet's evidence that he regarded the legal advice he received in the middle of 1989 as `entirely favourable', having regard to his own understanding of what the processes were which underlay his development of his system.  I am persuaded that, whatever his assessment of the probabilities of success in defence of an action for infringement of the copyright of DataFlex, he recognised, in the light of his own considerable intelligence and the advice he received, that anybody's assessment of those probabilities could not reasonably be reached with any strong confidence.  He had sought and obtained what he believed to be expert legal advice.  I am persuaded that he recognised that any expert legal advice on the same question which the applicant might obtain would almost certainly concede the impossibility of confidence in such an assessment."

It was submitted by Mr. Kendall of counsel for the applicants that, in failing to disclose the legal advice to the applicants when the joint venture was contemplated and in failing to disclose to them that services were being provided to Powerflex for reward by companies owned by Dr. Bennett and Mrs. Bennett, Dr. Bennett had seriously breached fiduciary duties owed by him to the applicants.  Findings and legal conclusions about those matters must await full examination of the facts at trial.  But on the hearing of this motion there was evidence which convinced me that, under the stress of the litigation in which he has been, and is now, involved, Dr. Bennett is likely to engage in conduct which is both in breach of his legal obligations as a director of Powerflex and irrational.  In May 1994 Dr. Bennett included in a facsimile message to Mr. Hintermann the following:

"They have requested further discovery, 3 items.

1.Compuserve messages - we have nothing of great interest, just the relatively friendly correspondence between myself and Cory.  They've been spitting chips because I won't tell them what we've got.

2.Correspondence between yourselves and DAC.  You sent us copies of a small number of documents, including the letters you sent immediately after their legal action.  We can

(a) conceal them, or

(b) list them but claim confidentiality, or

(c) provide them openly.

The usual is (b).  Are there any documents you know of which you would particularly like us to produce in open evidence, or conceal?"

If Dr. Bennett was prepared to "conceal", his folly in committing the circumstance to a document instead of a telephone conversation is remarkable.  Dr. Bennett's explanation under cross-examination as to the reasons for the cancellation of an annual general meeting of Powerflex, which was to have been held in May 1996, indicated either an inept attempt on his part to mislead the court as to those reasons or, as he testified, confusion and conflicting advice to the directors on the part of the solicitors for the respondents.  Whichever be the correct alternative, I have reason to be concerned that under the pressures to which Dr. Bennett will be exposed until both the legal proceedings in which he is involved have been finally determined, he is likely to breach, and to prevent his wife from effectively discharging, legal obligations they owe to Powerflex and the applicant shareholders, and thereby to put at risk the interests of shareholders and creditors of that company.

Dr. Bleechmore of counsel for the respondents pointed out that the expense to the company of funding a provisional liquidator may embarrass the company's conduct of the litigation in which it is involved. But the work which I contemplate the liquidator undertaking will not be so expensive as the work which a provisional liquidator commonly undertakes. I would order that the provisional liquidator not exercise any of the powers conferred by sections 477(1)(d), 477(2)(a) (except the power to defend a legal proceeding), 477(2)(c) and 477(2)(ca) of the Corporations Law except with the concurrence of Dr. Bennett and Mrs. Bennett or with the approval of the court.  If, as I would expect, the provisional liquidator offers Dr. Bennett and Mrs. Bennett appointment as his agent to manage the company's business, and if the appointments are accepted, the provisional liquidator's role will be limited to defining the acts they may do at their discretion in management of the company and the acts which neither of them may do without his authority, and to keeping their activities in performance of their agency under his scrutiny.  If the offers were not made, or were rejected, further directions by the court would be required.  There would be a direction that the litigation in which the company is now involved be prosecuted by the provisional liquidator not otherwise than in accordance with the advice of the company's present solicitors except with the approval of the court. 

There is some risk that the appointment of a provisional liquidator will dissuade users and potential users of the goods and services which Powerflex provides from dealing with the company.  But those people may be expected to exercise a relatively sophisticated and well informed judgment about the significance for them of the appointment.  No apprehension of insolvency was suggested by the evidence.  The goods and services Powerflex offers were not the subject of criticism.  And the appointment is, as I find and as I think those people would believe, very unlikely to result in any impairment of the conduct of the litigation in which Powerflex is engaged.  The main interests which it is a provisional liquidator's duty to advance - the interests of the company's members and creditors - are in the present circumstances the same as the interests of those to whom the company's goods and services are being provided or offered : success in the copyright case, and in this proceeding a termination of the joint venture satisfactory to all the members of the company.

I have considered whether the exaction of undertakings by Dr. Bennett and Mrs. Bennett as to the performance of their functions in management of the company would be a satisfactory, as it would certainly be a less expensive, alternative to the appointment of a provisional liquidator.  But I am persuaded that Dr. Bennett's strong proclivity to justify to himself and others conduct which is in breach of his legal duty makes that course too hazardous.  My conclusion is that a provisional liquidator of Powerflex should be appointed.  Because of the distrust the opposed parties have of each other and the distrust the respondents have of the firm of solicitors which acts for their opponents in the copyright proceeding and in this proceeding, I will require that the person proposed for appointment swear an affidavit that neither he or she nor any partner of his or hers has or has had, so far as he or she is after due enquiry aware, a personal or business association with any of the parties to the proceeding.  The motion will be stood over to enable that to be done.

The first and third applicants also moved the court for an order under s.319 of the Corporations Law for an order authorising inspection and copying of the books of account of Powerflex and an order that they be at liberty to use the information obtained by the inspection "for the purpose of considering and exercising their rights as shareholders of the Company".  Those applicants may in future gain such an order so that they may form an informed opinion as to the value of the share capital.  But no useful opinion can be formed until the litigation between Data Access Corporation and the company comes to amend.  At present the first and third applicants are engaged in bitter litigation against the owners of the other member of Powerflex and should be left to obtain such information as discovery processes in that litigation and their rights under the company's articles of association afford them, in my opinion.  I will adjourn the motion to a
date to be fixed.

I certify that this and the 13 preceding pages are a true copy of the Reasons for Judgment of the Honourable Justice Jenkinson.

Associate

Dated:  23 August, 1996

Counsel for the Applicants      :    Mr. R. Kendall

Solicitors for the Applicants    :    Stephens Solicitors

Counsel for the Respondents     :    Dr. J.F. Bleechmore

Solicitors for the Respondents   :    Trumble Szanto Braham

Dates of Hearing                :    11, 16 and 17 July, 1996

Date of Judgment                :    23 August, 1996