ATH Air Transport v JAS (International)

[2002] NSWSC 1121

CITATION:	ATH Air Transport v JAS (International) [2002] NSWSC 1121
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	SC 4832/02
HEARING DATE(S):	10/10/02, 11/10/02, 15/10/02, 17/10/02, 18/10/02, 01/11/02, 21/11/02 Written submissions: 22/10/02, 23/10/02, 25/10/02
JUDGMENT DATE:	26 November 2002
PARTIES :	ATH Air Transport Holding SA - Plaintiff JAS (International) Australia Pty Limited
JUDGMENT OF:	Barrett J

COUNSEL :	Mr D E Grieve QC/Ms P E McDonald/Ms P Ryan - Plaintiff Mr M L D Einfeld QC/Mr K L Andronos - Defendant
SOLICITORS:	Blessington Judd - Plaintiff Cara Marasco & Company - Defendant
CATCHWORDS:	CORPORATIONS - winding up - just and equitable and related grounds - no question of principle
LEGISLATION CITED:	Corporations Act 2001 (Cth)
CASES CITED:	Embrahimi v Westbourne Galleries Ltd [1973] AC 360 Loch v John Blackwood Ltd [1924] AC 783 O'Neill v Phillips [1999] 1 WLR 1092 Riviana (Aust) Pty Ltd v Laospac Trading Pty Ltd (1986) 10 ACLR 865
DECISION:	Application dismissed

- 43 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BARRETT J

TUESDAY, 26 NOVEMBER 2002

4832/02 – ATH AIR TRANSPORT HOLDING SA v JAS INTERNATIONAL (AUSTRALIA) PTY LIMITED

JUDGMENT

JAS Australia and its activities

1 JAS International (Australia) Pty Limited (“JAS Australia”) was incorporated in New South Wales on 14 May 1987. There were, at inception, three shareholders, Teresa Paroli a resident of Sydney, Marino Pizzuto also resident in Sydney and the plaintiff, ATH Air Transport Holdings SA of Lugarno, Switzerland. These three remain the shareholders today. Each holds 400 shares. The shares are of different classes. All shares have equal voting and capital rights. There is provision in the constitution for dividends to be paid at different rates on shares of different classes and for dividends to be paid on shares of one or two classes to the exclusion of the others or other.

2 JAS Australia carries on a business of air freight forwarding. It arranges consignments of air freight to and from Australia and arranges ancillary services such as transportation and warehousing at the Australian end. Consignors of freight from Australia wishing to have services of that kind at the foreign port of destination may make the necessary arrangements through JAS Australia. It, in turn, gives appropriate instructions to a correspondent at the foreign port.

3 Contacts with reliable organisations in other countries are thus important to JAS Australia. In order to be associated with such organisations, JAS Australia is a “member” of the JAS worldwide “group”, which is co-ordinated by the plaintiff and consists of companies with some common threads of ownership. The plaintiff has an ownership interest in all but one of these JAS group companies. The shareholding arrangement varies from country to country. In some countries, local restrictions on foreign ownership dictate that the plaintiff’s interest is a minority interest. In others (such as Australia), the plaintiff has a minority interest by choice. In others it has a majority interest. The plaintiff is not involved in the active administration of any of the companies in the group.

4 Membership of the JAS worldwide group entails, for each group member, acceptance of certain contractual arrangements with all other group members. These involve the group members providing services to one another in their respective countries to ensure the efficient transportation of cargo from a customer in one country to a destination in another. As part of the contractual arrangements, sums payable to and receivable by the respective companies are subjected to a netting system administered by a separate accounting administration company based in London, JAS Financial Services PLC (“JAS London”). As a result of this system, each group company either makes a single monthly payment to or receives a single monthly payment from JAS London which acts as a clearing house accordingly. The single monthly payment to or by each individual company causes all debts due as between individual companies to be satisfied.

5 The commercial relationship between JAS Australia and JAS Italy became the subject of an agreement entered into between the two companies on 1 August 1987. Each undertook to the other certain service obligations in relation to carriage of goods between the two countries. This agreement provided for a sharing of the gross profit realised by each of them from such carriage. The agreement was for an initial term of ten years and was expressed to be terminable thereafter by either party “for any cause or reason whatsoever on giving to the other party six (6) months’ prior written notice”. There was also a provision allowing termination for unremedied breach.

6 A separate agreement also dated 1 August 1987 was made between the plaintiff, JAS Australia, Mr Pizzuto and Ms Paroli. By this agreement, the plaintiff was granted a right of first refusal in the event of the receipt by JAS Australia of an offer to purchase its business. In return, the plaintiff agreed that JAS Australia would have the exclusive right to the “JAS” name and logo for use in its business.

7 The present proceedings arise from disputes that have arisen between the plaintiff and the other two shareholders in JAS Australia, being Mr Pizzuto and Ms Paroli. The disputes concern a number of specific matters to which I shall come. They have arisen in a context where Mr Pizzuto and Ms Paroli have worked full time in the business in Australia. Mr Pizzuto is the sole director of JAS Australia. Ms Paroli was previously a director but resigned in about June 2000. Mr Pizzuto and Ms Paroli are the senior managers, Mr Pizzuto being the financial controller and Ms Paroli being the operations manager. The plaintiff, for its part, has played no direct role in the day to day affairs of JAS Australia.

8 The principal representative of the plaintiff is Mr Biagio Bruni, based in Milan. He is also the principal of JAS Jet-Air Service SPA (“JAS Italy”), the JAS group member in Italy. Mr Bruni has acted for both those companies in the events relevant to these proceedings. A subsidiary role has been played by Mr Sergio Bariviera, the JAS group’s vice-president for Asia. Both these gentlemen gave evidence.

9 The plaintiff – or, more particularly Mr Bruni – does, however, keep an eye on the financial performance of JAS Australia. For quite some time up to about September 1998, the monthly management reports of JAS Australia were sent regularly to Mr Bruni. Since then, a different reporting system has applied. Under that system, JAS Australia makes monthly reports to JAS London in connection with the netting system. The integrity of that system depends on the maintenance of financial stability in the respective operating companies and it is natural for the plaintiff to concern itself with those matters. Each participating company submits to London a monthly report known as a “frango”.

The plaintiff’s claims

10 By its originating process filed on 26 September 2002, the plaintiff seeks an order for the winding up of JAS Australia under s.461(1)(e), s.461(1)(f) or s.461(1)(k) of the Corporations Act 2001 (Cth) on the footing that

(a) the directors of JAS Australia have acted in its affairs in their own interests and in a manner that is unfair or unjust to other members;

(b) the affairs of JAS Australia are being conducted in a manner that is contrary to the interests of the members as a whole; or

(c) it is just and equitable for JAS Australia to be wound up.

11 By an interlocutory process of the same date, the plaintiff seeks the appointment of a provisional liquidator in the first instance.

12 I heard the proceedings over four days. At the end of the fourth day, there was time for only brief oral addresses by Mr Grieve QC for the plaintiff and Mr Einfeld QC for the defendant. These were supplemented by written submissions filed on 22, 23 and 25 October 2002. On 25 October 2002, I reserved my decision. On 1 November 2002, the defendant made oral submissions in relation to one matter raised in the plaintiff’s submissions in reply. On 21 November 2002, the defendant applied to re-open (which the plaintiff did not oppose) and, in the event, I received further affidavit evidence from both sides.

13 It was, I think, acknowledged that, if the court were to conclude that winding up was otherwise appropriate, it should so indicate, with a view to one of two courses then being taken. The first course would entail completion of advertising and other formalities by the plaintiff to enable a winding up order to be made. The defendant submitted, however, that if that point were reached, the court should take further steps towards making an order that the plaintiff buy the shares of the other two shareholders, given the directive in s.467(4):

“Where the application 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.”

14 The defendant has, by leave, filed a cross-claim which it may seek to activate if the plaintiff is unsuccessful in its claim for a winding up or an order appointing a provisional liquidator.

The plaintiff’s complaints

15 The plaintiff’s claim for a winding up order is based on several episodes which, perhaps individually but certainly collectively, it says activate one or more of ss.461(1)(e), 461(1)(f) and 461(1)(k).

16 The first complaint concerns the purported payment by JAS Australia of dividends totalling $200,000 to Ms Paroli and Mr Pizzuto in the year ended 30 June 2002. No dividend was paid to the plaintiff as the third shareholder. The $200,000 payment, according to the plaintiff, was inconsistent with an agreement made among the shareholders in 1998 as modified in 1999 and also entailed breach of JAS Australia’s constitution.

17 The second complaint centres upon matters of alleged mismanagement. This complaint is advanced by reference to a “limited scope valuation” of JAS Australia as at 28 February 2002 prepared by BDO, chartered accountants. In reaching a fair value of the company, BDO made what it described as a number of “normalisation” adjustments. These related to a number of matters including, in the words of BDO:

“excessive advertising expenses;
excessive entertainment expenditure;
reversal of directors’ personal expense payments;
substantial reduction in travel expenses to accommodate the fact that 70% apparently related to personal travel on their part;
excessive directors’ salaries.”

18 The plaintiff maintains that this demonstrates application of JAS Australia funds in imprudent or extravagant ways - with negative effects on profitability – in each of the periods the subject of the report (being the financial years ended 30 June 1998, 1999, 2000 and 2001 and the period of eight months to 28 February 2002).

19 A further complaint of the plaintiff concerns an apparent practice within JAS Australia of altering airway bills so as to cause increased freight charges to appear. It is said that such a practice is, to say the least, highly irregular and possibly a deliberate deception or sharp practice.

20 The plaintiff next refers to the non-payment by JAS Australia of a sum of $1.28 million due for payment to JAS London on 30 September 2002 under the group netting system. It is pointed out that this represents, in reality, moneys due to a number of other members of the JAS group; and it is said that there is no good reason or proper basis for the withholding of payment.

21 There is also a suggestion by the plaintiff that JAS Australia may be insolvent or approaching insolvency.

The surrounding circumstances

22 I shall consider these complaints in due course. First, it is necessary to say something about the circumstances in which they have arisen.

23 The BDO “limited scope valuation” was commissioned by Mr Pizzuto and Ms Paroli in February 2002. They obtained it to assist them in negotiations with the plaintiff at a time when possible purchase of their shares by the plaintiff was under consideration. Mr Bruni of the plaintiff came to Sydney in April in connection with those negotiations. The parties did not reach any agreement. The evidence is to the effect that the prospective sellers were not happy with extended payment terms proposed by the prospective buyer and that another stumbling block was the question of non-competition by Mr Pizzuto and Ms Paroli after completion of any sale.

24 Mr Pizzuto deposes in one of his affidavits that, at about the time negotiations were discontinued, Mr Bruni said to him words to the effect:

“If you don’t accept our offer, I will put the company into liquidation. I will destroy you. I will start up a new company.”

25 Mr Bruni denies having spoken words to this effect. He does, however, recall a conversation with Mr Pizzuto in which he said words to the following effect:

“If you don’t accept ATH’s offer or you or Teresa won’t buy ATH’s share then the only option is to liquidate the company and divide the proceeds by three.”

26 The possibility of winding up of the company was thus, on both accounts, mentioned by Mr Bruni as a consequence of the failure to negotiate a separation, although on one account the winding up would be consensual and on the other it would be forced by the plaintiff.

27 It is necessary to say something about the way in which the unsuccessful negotiations began. On 15 March 2002, Mr Pizzuto and Ms Paroli informed Mr Bruni by email of their intention to sell their shares in JAS Australia to another party, claiming that they had received “a very favourable offer” from an unidentified third party. By email of 21 March 2002 they described the third party’s offer as “very genuine” but declined to provide any details of it. Communication of these matters to the plaintiff (effectively, to Mr Bruni) was made by reference to the second agreement of 1 August 1987, that is, the agreement giving the plaintiff a right of first refusal in the event of a proposed sale of the business. (The precise operation of the agreement may be open to question, but the parties apparently accepted it as relevant to the circumstances.) It was this development that caused Mr Bruni to travel to Sydney in April 2002.

28 Mr Bruni received a copy of JAS Australia’s financial statements for the year to 30 June 2002 during September 2002. He noted payment of dividends of $200,000 during the year, compared with $40,000 in the preceding year. Mr Bruni also noted a reduction in gross profit to $5,605,889 from $5,775,050, a reduction in freight income received to $38,420,339 from $43,316,180 and an increase in wages to $2,979,257 from $2,447,759.

29 During May/June 2002, Mr Bruni received in Italy an envelope containing photocopies of two JAS Italy airway bills in respect of freight forwarded to Sydney pursuant to the intra-group arrangements. He saw that different type fonts were used for typewritten entries for “Rate” and “FS/WR” (i.e., Fuel Surcharge/War Risk), compared with the other entries. He obtained from JAS Italy’s records its file copies of these airway bills and saw that “Rate” and “FS/WR” amounts in those differed from the amounts in the copies received in the envelope. Mr Bruni then took steps in July 2002 to obtain from JAS Australia, on a pretext, copies of two further airway bills, in relation to which he carried out the same process of comparison, again finding differences of the same kind. The overall effect of the changes, in each case, was to cause the total collect figure in the altered version to exceed the corresponding figure in the version originally generated by JAS Italy. JAS Italy did not know that JAS Australia was engaging in this practice. He came to the conclusion that JAS was, through the alteration process, obtaining additional profit that was not being shared with JAS Italy under the agreement of 1987.

30 In July 2002, Mr Bruni initiated action towards obtaining registration by the plaintiff of the “JAS” trade mark in Australia. In August, steps were taken to register a new company “JAS Forwarding Worldwide Pty Limited”, with the plaintiff as sole shareholder, the member of the firm of solicitors acting for the plaintiff with the carriage of these proceedings as sole director and secretary and the registered office at the solicitors’ office. Further developments in relation to this emerged upon the re-opening on 21 November and will be referred to in due course.

31 Mr Bruni wrote to Mr Pizzuto of JAS Australia on 11 September 2002 as follows:

“Re: Termination of agreement
It has come to our attention that Jas Australia has breached our agreement and betrayed our good faith.
This has happened in the form of hidden profits, not shared 50/50 with Jas Italy, as demanded in paragraph 4, chapter 4.1(a) of the agreement between JAS – Jet Air Service Spa and Jas International (Australia) Pty Ltd, signed on August 1st, 1987.
Bills of Lading have been repeatedly amended (by your goodselves) increasing the amounts, without our knowledge or consent. The 50/50 profit share on said increment, has not been rightfully credited to Jas Italy.
We consider this a serious breach of trust and deem it impossible to continue our association with your company.
We, therefore, invoke paragraph 5, chapter 5.2(a) and herewith serve you due notice. As of October 11th, 2002, our contractual agreement will be considered null and void.
ATH – AIR TRANSPORT HOLDING S.A. has been informed accordingly.”

32 On 13 September 2002, Mr Pizzuto sent an email to Mr Bruni as follows:

“Re: Termination of agreement
Following your letter dated 11/9/02, in order to finalise termination and liquidation of association please be informed that Mrs Teresa Paroli will be in Italy beginning of next week and the matter can be discussed/finalised during that time.”

33 On 15 September 2002, however, Mr Pizzuto wrote to Mr Bruni disputing the validity and effectiveness of the purported termination of the agreement and asking for details of the shipments involving the “hidden profits”, as well as pointing out the need for notice under clause 5.2(a).

34 On 22 September 2002, JAS Italy unilaterally changed the terms of dealing between JAS Italy and JAS Australia to a “collect” basis rather than the “prepaid” basis which had prevailed for many years. This meant that JAS Australia could only obtain release of in-bound freight by paying by bank cheque at retail freight rates, as distinct from the situation where freight was prepaid by the overseas office and debited to JAS Australia in the monthly netting system administered by JAS London.

35 On 22 September 2002, both the plaintiff and JAS Italy wrote to JAS Australia purporting to terminate its rights to use the “trademark/logo” incorporating “JAS”.

36 The plaintiff commenced these proceedings on 26 September 2002.

The dividend complaint

37 In April 1998, each of Mr Bruni, Mr Pizzuto and Ms Paroli signed a memorandum that had been prepared by JAS Australia’s internal accountant, Ms Sevilla, to record “agreed guidelines regarding treatment of directors’ expenses”. Ms Paroli was then a direction in addition to Mr Pizzuto. The memorandum included the following:

“Dividends to be paid at the end of each financial year as follows:

Teresa 20,000
Marino 15,000”

38 The difference of $5,000 seems to be explicable by reference to a separate $5,000 allowance for travel by Mr Pizzuto’s wife. On 25 June 1999, it was recorded that the travel allowance for Mrs Pizzuto would cease and that the amended dividends for July 1999 would be $20,000 for each of Ms Paroli and Mr Pizzuto.

39 It is clear that the dividend payments of $200,000 – with the additional $160,000 being paid as to $90,000 to Mr Pizzuto and as to $70,000 to Ms Paroli – were outside the accepted parameters. The explanation lies in a strategy developed by Mr Coles, a chartered accountant who had acted for JAS Australia since about 1995. The strategy was directed towards saving fringe benefits tax to which JAS Australia became subject in respect of the provision of motor vehicles by JAS Australia to Mr Pizzuto and Ms Paroli for their private use. In March 2002, Mr Pizzuto and Ms Paroli decided to update their cars. The cars of both had been of generally equivalent value to that point. In the updating, Mr Pizzuto was to obtain a car much more expensive than Ms Paroli’s. Two consequences would follow: the fringe benefits tax cost would increase; and there would arise an inequality between the overall rewards of the two officers. Mr Coles recorded as follows the decision to resolve these issues:

“ Resolved outcome:

MP and TP would buy their company provided vehicles from JAS at market value prior to 31 March 2002.

This would eliminate the fringe benefits tax liability in respect of the vehicles to JAS effective for the 2003 FBT year.

This would also give MP and TP the option to upgrade to the vehicle of their choice at the time they chose without significantly increasing JAS’s FBT liability.

Sale of the vehicle to MP and TP was effected 28 March 2002 as follows:

Employee Vehicle Sale Price GST Net Price
(Incl GST)
Marino Pizzuto Mercedes 320 90,000.00 8,181.82 81,818.18
Teresa Paroli BMW 328i 70,000.00 6,363.64 63,636.36
160,000.00 14,545.45 145,454.55
It was determined that the amounts due to JAS in respect of the sale of the vehicles would be settled by way of a fully franked dividend payable to MP and TP on 28 March 2002 as follows:
Shareholder Dividend Paid
Marino Pizzuto 90,000.00
Teresa Paroli 70,000.00
160,000.00
MP and TP having been in receipt of the above dividends totalling $160,000 agreed that they would then waive their rights to payment of their annual agreed dividend of $20,000 each payable in July 2002 and subsequent years.
This dividend of $20,000 each had been previously agreed with ATH in May 1998 and paid annually since then.
(Note that MP’s dividend was only $15,000 in the 1998 year).
The dividend of $20,000 was not paid in July 2002 as it otherwise would have been.”

40 The plaintiff says that this supposed explanation for the unscheduled and large dividend payments is disingenuous for the simple reason that the fringe benefits tax that the arrangement was intended to eliminate was only payable because of the excessive use of company cars for the personal use of Mr Pizzuto and Ms Paroli. One might add that, from the perspective of JAS Australia, the arrangement had consequences going beyond elimination of a tax liability. Whereas, under the old system, the company owned the cars and would have continued to have the benefit of that ownership had Mr Pizzuto and Ms Paroli ceased to be employees, the arrangement ensured that that benefit passed to the individuals. While this aspect would remain latent while the two remained employees, it would represent a significant advantage to them if their employment came to an end in the short term.

41 Mr Pizzuto deposes that no attempt was made to conceal the payment of the additional $160,000 dividends in March 2002 (which were in addition to the normal $40,000 paid in July 2001). The dividends appeared in the “frango” report sent on 3 April 2002 by JAS Australia to JAS London for March 2002, as well as in the draft report for the June quarter. An email from JAS London to JAS Australia’s internal accountant dated 14 August 2002 commented on several aspects of the draft “frango” for June. No mention was made of the dividend item, although there was reference to reduced depreciation charges. JAS Australia’s internal accountant replied on 20 August 2002, saying in relation to the query on depreciation:

“Pls note ownership of 2 Motor Vehicles being driven by Marino and Teresa were transferred to them. Consideration for which was satisfied by divided payments. Also we do not actively invest in capital equipment or even business software products. (Alistair is aware of this problem).”

42 Mr Bruni was extensively cross-examined with a view to discovering when he first became aware of the $160,000 dividend payment. It is clear that he knew of it in early September 2002. Mr Bruni denied having been given a copy of the March “frango” during his visit to Sydney which began on 7 April 2002. His evidence was further to the effect that, to the extent that the dividend item may have appeared in or been discoverable from “flash” reports that JAS London forwarded to him by way of distillation of “frango” information, the dividend item did not come directly to his consciousness. It is clear, however, that the item did appear in flash reports that came into Mr Bruni’s possession before September; and it is also clear that financial staff in London were apprised of the matter at an earlier time.

43 The plaintiff says that payment of the additional $160,000 in dividends violated the constitution of JAS, article 63 of which provides that the company in general meeting may declare dividends, but no dividend shall exceed the amount recommended by the directors. It is not disputed that there was never a resolution of the members, whether at a duly convened general meeting or by the paper-based procedure provided by s.249A of the Corporations Act. There is in evidence a notice signed by Mr Pizzuto as secretary convening a general meeting to be held on 28 March 2002 for the purpose of considering and, if thought fit, passing a resolution:

“that the members of the company confirm the payment of a dividend from the profits of the company as follows:
Share Type: $1.00 B Class ordinary Shares Fully Paid
Date Declared: 28/03/2002
Amount Per Share: $225,000
Dividend Type: Interim Dividend
Payment: By Loan Account Credit
Proposed Payment Date: 28/03/02
It was further resolved, pursuant to Section 160AQF(1) of the Income Tax Assessment Act, that the dividend approved above, be franked as:
To The Extent of 30%: $225.0000.”

44 There is also a minute signed by Mr Pizzuto, the sole director, recording a resolution that the directors “recommend the payment of” this dividend. Two other relevant documents are in evidence in relation to this dividend, or proposed dividend, being a form of consent to short notice under s.249H(2) by the holders of shares representing at least 95% of the votes capable of being cast and a document headed “Memorandum of Resolution of the Member(s)” in relation to the dividend. Each of these documents was prepared with provision for execution by all of the plaintiff, Mr Pizzuto and Ms Paroli. The last two have signed, but there is no execution by the plaintiff. (Counsel for JAS Australia have stated in written submissions that corresponding documents exist in like partially signed form in relation to Ms Paroli’s dividend but were not tendered at the trial.)

45 The documents to which I have just referred are concerned with a dividend at the rate of $225 per share on the B class shares. Mr Pizzuto holds all 400 B class shares. The documents thus reflect a proposed dividend payment of $90,000 to Mr Pizzuto. No equivalent documents concerning a dividend on the 400 A class shares held by Ms Paroli are in evidence but it is likely that the same processes were followed in relation to a dividend of $70,000 for her. (Written submissions filed on behalf of the defendant say that equivalent documents in relation to a dividend for Ms Paroli exist but have not been tendered.)

46 It is clear that all the formal steps required to effect the payment of the two dividends in accordance with the constitution of JAS Australia were not taken, although certain steps towards achieving that end were completed, at least in respect of Mr Pizzuto’s dividend. There is no evidence of the third shareholder (the plaintiff) having consented to short notice in terms of s.459H(2) or of having executed the “Memorandum of Resolution of Member(s)” which, in terms of s.249A, would have had the same effect as a resolution passed at a meeting of members if executed by all three shareholders. Nor is there evidence that any relevant resolution was passed at a general meeting on 28 March 2002 or at all.

47 The defendant submits that the dividends were regularly and effectively paid in exercise of the power conferred by the constitution upon the directors to “pay to the members such interim dividends as appear to the Directors to be justified by the profits of the Company”.

48 The problem with this submission is that there is no evidence that Mr Pizzuto, as the sole director, ever turned his mind to, or purported to exercise, that power. On the contrary, there is in evidence, in relation to the proposed dividend on the B class shares, a written “Memorandum of Resolutions of the Director(s)”, signed by Mr Pizzuto, commencing:

“It was resolved that the directors of the Company recommend the payment of a dividend from the profits of the company as follows.”

49 All that has been shown, therefore, is that Mr Pizzuto initiated action towards a decision by members on the question whether a dividend should be declared by the company in general meeting. There is nothing to suggest that, as sole director, he ever intended or attempted to exercise the power of paying interim dividends. Mason J observed in Industrial Equity Ltd v Blackburn (1977) 137 CLR 567 “[t]here is a well recognised distinction between a power to declare a final dividend and a power to pay an interim dividend”. A director who initiates action towards exercise by members of the former power cannot, when that process miscarries or is not completed, say that what he really did was to exercise the latter himself. So much was decided in Industrial Equity Ltd v Blackburn.

The airway bills complaint

50 It is not disputed that JAS Australia altered airway bills issued by JAS Italy so as to increase the total amount chargeable. The alterations were made by applying white-out so as to cover the original figures and by typing new figures over the obscured figures, with a photocopy then being made so as to make it less obvious that there had been a change. Even so, different type fonts would alert a close observer. It is only natural that Mr Bruni’s suspicions should have been aroused when he became aware of such changes.

51 Mr Pizzuto’s evidence was that the practice was engaged in as a means of notifying to customers a single all-inclusive charge for all services rendered, with the increase involved in the alteration being no more than addition to the sum for international freight (and any services at the foreign port) of the domestic charges at the Australian end. Such charges might be cartage, handling, collection, warehousing, customs clearance and the like. Mr Pizzuto said that the practice was engaged in to save JAS Australia the trouble of raising a separate invoice for the additional charges, although that was not the only reason. He did not elaborate on the other reason or reasons but it is reasonable to infer that a customer seeing a single figure on the document apparently generated in Italy would have no means of complaining about separately invoiced Australian items and might be more inclined to pay the global figure without question.

52 The plaintiff sought to draw sinister inferences by showing that, in some of the particular cases involving altered airway bills, an invoice was in fact prepared as well and rendered to the customer. But, as was pointed out on behalf of JAS Australia, each such invoice included only out of pocket items or disbursements, such as duty and airline documentation fees. These were distinct from the charges made by the respective JAS companies for services provided by them.

53 Mr Bruni agreed in cross-examination that charges for domestic services – being the amounts represented by the increases achieved through the alteration process – were not subject to the 50/50 revenue sharing agreement in force between JAS Italy and JAS Australia.

54 The other pertinent point here is that when, having discovered the alteration practice and taken steps to investigate it, Mr Bruni formed an opinion that something irregular or dishonest was happening, he did not take steps to raise the matter with JAS Australia or to seek an explanation. He proceeded immediately to take steps to terminate the co-operation and revenue sharing agreement, followed closely by steps to terminate the trade mark agreement.

The mismanagement complaint

55 The plaintiff says that Mr Pizzuto and Ms Paroli have deprived JAS Australia of substantial money to their personal benefit. This submission is based mainly on the BDO report, as to which the plaintiff says:

“This is substantiated by the BDO Report (Exhibit ‘D’) in which Mr Mentzalis made ‘normalisation adjustments’ to the profits earned by the Defendant over a 5 year period in an aggregate amount of $3,362,000.00. It is submitted that in substance the effect of Mr Mentzalis’s calculation is that the profits as recorded by the company had been effectively reduced by $3,362,000.00 over that period.”

56 It is important, however, to recognise the scope and purpose of the BDO report. These were made clear in the evidence of Mr Mentzalis by whom the report was prepared. He was referred to the particular “normalisation adjustment” items to which reference has already been made. His evidence was as follows:

“Q. Would you be good enough to explain to us please the principles that were applied in the course of that valuation which led to the conclusions on page 11?
A. We determined that the business of JAS was a performing business, a profitable one, and valuation methodology requires in those costs that you look at maintainable earnings of the business and then apply to that an appropriate capitalisation multiple from which you determine the value. Quite often the profit which is expressed in the account is not necessarily the profit that you would accept for purposes of future maintainable earnings.
Particularly in private businesses there can be a range of factors which could impact on operations in any particular year. There could be expenses of a non-recurring nature which might occur just in one year and are not indicative of an ongoing trend and, accordingly, you normalise those by taking them out of results. There may be items which are of a recurring nature but one particular year has an abnormal level of expenditure, either abnormally high or abnormally low, and you make a necessary adjustment.
There may be other matters which of a discretionary nature and management elect to undertake expenditures which a hypothetical third party looking to acquire an interest in the business may not consider to be something which necessarily should be expended in order to generate the level of income of the underlying business.
So we make a judgment of what these items might be. We discuss those with the management or accounting staff of the company being valued and we’ve incorporated our adjustments and conclusions on pages 10 and 11.
Q. May we take it that your objective in determining a valuation is to fix a valuation on the basis of your expectation of what a willing but not anxious purchaser would pay to a willing but not anxious vendor to the business?
A. Correct.
Q. In accordance with what you would regard as accepted accounting principles?
A. That’s correct.
Q. In accordance for determining what the willing but not anxious purchaser might pay do you normalise the expenditure of the type you’ve described in order, as it were, to factor out of the equation amounts which the incoming purchaser might not be expected itself to continue in the future?
A. Correct.
Q. In undertaking your normalisation adjustments you backed out or reversed, as it were, I think, items of a non-recurring or other nature which in some cases you’ve described as excessive, is that right?
A. Yes.
Q. In doing so may we take it that you’ve not passed judgment or whether or not, for that particular company, such expenditure was appropriate or inappropriate?
A. No. That’s not implicit in our comments here. It’s not our role to determine whether or not the expenditure should have been incurred. The facts is it has and it’s reflected in the accounts. Our role is to assess what a third party might, in the alternative, elect to expend on an ongoing basis and accordingly from that derive an appropriate value.”

57 The plaintiff nevertheless seeks to put forward the “normalising adjustments” identified by BDO as indicators of a divergence between JAS Australia as actually managed and JAS Australia as it would have been if “properly managed”. The plaintiff therefore maintains its complaint that JAS Australia had undertaken inappropriate and excessive expenditures, particularly in relation to Melbourne Cup entertainment and excessive advertising, particularly in relation to Formula One motor racing. There was also a complaint about excessive remuneration.

58 In relation to the entertainment and advertising expenditure, there is evidence of Mr Bruni having, from time to time, raised the issue in a general way. The evidence on that can be summarised by saying that Mr Bruni raised questions about the usefulness of particular entertaining and advertising, in response to which Mr Pizzuto said he believed the expenditures were worthwhile, whereupon the matter was not pursued. There does not seem to have been any prolonged debate or any clear dissent or objection by Mr Bruni who professed himself compelled to accept the decisions of Mr Pizzuto and Ms Paroli on these matters.

59 The matter of remuneration and fringe benefits was obviously one that generated discussion periodically. I have already referred briefly to the memorandum of April 1998 containing “agreed guidelines regarding treatment of directors’ expenses”. Earlier, in November 1997, Mr Bruni, Mr Pizzuto and Ms Paroli signed a memorandum prepared by Ms Sevilla, the JAS Australia internal accountant, as follows:

“TO: Teresa Paroli Date: November 7, 1997
Marino Pizzuto
CC: Biagio Bruni
FR: Charmaine Sevilla
Following a meeting between myself and Mr Bruni relating to remuneration of company directors’ Mr Bruni feels it appropriate that remuneration should be limited to salaries of directors’ & associates at current levels and provision of a fully maintained company vehicle of the standard currently held by directors.
Any additional expenses of a personal nature will not be met by the company and are to be paid from the directors’ personal resources. The company will only meet all expenses which are company related and can be fully substantiated (i.e. receipts/invoices detailing name of recipient and nature of expense). Therefore corporate credit cards and alike must be used accordingly.
Please indicate your agreeance to the above by signing below:
Ms Teresa Paroli (signed)
Mr Marino Pizzuto (signed)
Mr Biagio Bruni (signed)
Please find as follows Directors Resolution in relation to this matter for inclusion in the Company Minutes for future reference.”

60 Mr Pizzuto and Ms Paroli signed a written resolution of directors dated 7 November 1997 that:

“- the company will only meet all expenses which are company related and can be fully substantiated (i.e. receipts/invoices detailing name of recipient and nature of expense). And any additional expenses of a personal nature will be paid from our personal resources.

- corporate credit cards and alike will only be used to pay for company related expenses.”

61 The general issue of directors’ benefits and expenses continued to occupy the attention of the parties into 1998. On 3 April 1998, Ms Sevilla wrote to Mr Bruni saying that, after their recent meeting in Sydney, she had endeavoured to document a set of procedures on the subject – but had been unable to distil an agreement “between the three of us”, which I take to be a reference to Mr Bruni, Mr Pizzuto and Ms Paroli. Matters covered include continuation (or otherwise) of a company credit card and mobile phone for Mr Pizzuto’s wife, company funding of the wife’s travel and Ms Paroli’s requirement that there be equality in such matters as between her and Mr Pizzuto. The accountant then set out two possible ways of resolving matters. These were conveyed by her to Mr Pizzuto and Ms Paroli by memorandum dated 6 April 1998. The “guidelines” to which I have already referred were then issued by Ms Sevilla in a memorandum of 7 April 1998 which was signed by Mr Bruni, Mr Pizzuto and Ms Paroli. These covered, in addition to dividends, travelling expenses, cash and travellers cheques for travel, company funded personal health and insurance and home phone expenses. Two paragraphs should be quoted:

“No expenses to go through the company accounts (regardless of whether it is reimbursed or not) apart from what has been agreed to as detailed in this memorandum.
To avoid confusion, all expenses in relation to the two Directors will require both directors’ signatures prior to payment being made by the company.”

The “netting default” complaint

62 JAS Australia does not dispute that it has failed to pay to JAS London under the netting arrangements a sum of $1.28 million due on 30 September 2002. That failure followed a direction by Mr Bruni on 20 September 2002 that freight from Italy to Australia be shipped on a “freight collect” basis. He explained that by reference to an action of JAS Australia in routing an Australia-Argentina consignment through a non-JAS agent.

63 The matter was dealt with as follows in cross-examination of Mr Pizzuto:

“Q. Is it your evidence that as matters stand at this instant, JAS Australia was justified and remains justified in failing to pay the $1.28m due to JAS London at end September?
A. No. It is not justified by this situation, but is justified for the change by JAS London that ATH have done against us. And in order to protect the interests of JAS Australia and continue to operate, I have no other alternative but to act this way for at least the September netting.
Q. I didn’t quite hear?
A. For at least concerning the September netting.
Q. Does it will from what you have said that as you see it, according to matters that exist at this instant, JAS Australia had some justification for withholding the $1.28m due to JAS London at end September?
A. I wouldn’t call it justification. I would call it to protect to our interests due to the fact that the plaintiff is using a method which would put JAS Australia in cash flow problem if that is continued.
Q. Does it follow from the first sentence of that answer that you accept that JAS Australia neither has now, nor ever has had since end September, any justification at all for withholding the $1.28m due to JAS London?
A. No.
Q. You maintain, do you, that JAS Australia has some such justification for withholding that money?
A. I just say, I wouldn’t call it justification, I would call them a form of protection.
Q. You used the expression in the answer that you gave to my question a few moments ago, cash flow; do you recall that?
A. Correct.
Q. You used that expression, if I recall it correctly, in the context of protecting JAS Australia’s cash flow; is that right?
A. Cash flow, meaning the interest of JAS Australia.
Q. My question: Did you use that expression in conjunction with the concept of protecting JAS Australia’s cash flow?
A. Correct.
Q. Your evidence is, is it, that you have caused JAS Australia to withhold the $1.28m payable to JAS London to protect JAS Australia’s cash flow; is that it?
A. Yes.
Q. You complain in these proceedings on behalf of JAS Australia, do you not, that the decision by other JAS companies to impose upon JAS Australia a regime of collect payment has impacted adversely on JAS Australia, do you not?
A. Yes, on JAS Australia.
Q. You don’t suggest, do you, that JAS Australia has had to outlay since the imposition of that regime by way of collect freight charges amounts in excess of $1.28m, do you?
A. Up to now, no --
EINFELD: Can the witness be permitted to finish his answer?
HIS HONOUR: Q. If you had not finished your last answer, please do so?
A. Not at the moment, but due the amount of traffic we move in import, it wouldn’t take too long.
GRIEVE: Q. How much do you assert JAS Australia to have outlaid in relation to collect assignments since the regime was introduced?
A. It would be approximately in excess of $300,000.
Q. In round terms, you are over $800,000 in front, aren’t you?
A. Approximately.
Q. At that rate, assuming the rate continues, you will remain in front for another several months, won’t you?
A. No, this $300,000 that I just say relates only to two weeks of freight.
Q. So if we assume that the rate continues without much variation, you are going to be in front for at least another six weeks, aren’t you?
A. No, this $300,000 that I just say relates only to two weeks of freight.
Q. So if we assume that the rate continues without much variation, you are going to be in front for at least another six weeks, aren’t you?
A. I can’t say that.
Q. Why not, it is simple arithmetic?
A. Because now we are going into the a period due to Christmas, and due to the last economy problem a lot of importers don’t have stock, and no money at this time to increase the amount of orders. So it could be also that we are going to break even in less than six weeks but I can’t be precise on that.
Q. But to be on the safe side, I suppose, as matters presently stand, you have in mind withholding whatever money may be due by JAS Australia to JAS London as at the end of October, may I take that to be so?
A. I can’t say. I haven’t thought about it yet.”

64 It is thus clear that JAS Australia has defaulted in its payment obligations under the netting system. But that action was prompted by adverse treatment of JAS Australia instigated by Mr Bruni which Mr Pizzuto considered to be unwarranted and a threat to JAS Australia’s ability to continue its activities in the way contemplated by the JAS worldwide group.

65 Evidence given upon the re-opening on 21 November showed that JAS Australia also failed to pay the sum due to JAS London on 31 October 2002. The same motivations were no doubt at work.

The impending insolvency complaint

66 The plaintiff points to declining profitability of JAS Australia. I quote from Mr Grieve’s written submissions:

“The financial accounts of the plaintiff show a company in which, since the year 2000, the profit before tax has been decreasing whilst other expenses have been increasing. This is reflected in the following table:
1998 1999 2000 2001 2002
Profit before $122,000 $221,000 $426,000 $387,000 $229,000

tax

Wages $1.48m $1.67m $1.89m $2.44m $2.97m

Entertainment $27,670 $19,737 $22,748 $24,544 $52,664

Advertising $409,375 $800,543 $353,343 $1,038,322 $809,789

Travel $89,667 $73,632 $96,201 $105,431 $141,391”

The submissions

67 The plaintiff’s main submission is that a winding up order is justified, and should be made, on the basis of principles stated by Lord Wilberforce in Embrahimi v Westbourne Galleries Ltd [1973] AC 360. The first passage on which the plaintiff relies is:

“The winding up order was made following a doctrine which has developed in the courts since the beginning of this century. As presented by the appellant, and in substance accepted by the learned judge, this was that in a case such as this the members of the company are in substance partners, or quasi-partners, and that a winding up may be ordered if such facts are shown as could justify a dissolution of partnership between them. The common use of the words ‘just and equitable’ in the company and partnership law supports this approach. Your Lordships were invited by the respondents’ counsel to restate the principle on which this provision ought to be used; it has not previously been considered by this House. The main line of his submission was to suggest that too great a use of the partnership analogy had been made; that a limited company, however small, essentially differs from a partnership; that in the case of a company, the rights of its members are governed by the articles of association which have contractual force; that the court has no power or at least ought not to dispense parties from observing their contracts; that, in particular, when one member has been excluded from the directorate, or management, under powers expressly conferred by the Companies Act and the articles, an order for winding up, whether on the partnership analogy or under the just and equitable provision, should not be made. Alternatively, it was argued that before the making of such an order could be considered the petitioner must show and prove that the exclusion was not made bona fide in the interests of the company.”

68 Later, after referring to a number of decided cases, Lord Wilberforce said:

“My Lords, in my opinion these authorities represent a sound and rational development of the law which should be endorsed. The foundation of it lies in the words ‘just and equitable’ and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The ‘just and equitable’ provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.
It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence – this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be ‘sleeping’ members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interest in the company – so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.”

69 The plaintiff regards JAS Australia as a company formed or continued on the basis of a personal relationship between, on the one hand, Mr Bruni representing the plaintiff and, on the other, Mr Pizzuto and Ms Paroli. The latter are the parties with day to day control. The plaintiff’s influence is said to be limited. This proposition is advanced by reference to Mr Bruni’s statement that he had to accept the decisions of Mr Pizzuto and Ms Paroli on advertising and entertainment expenditure.

70 The plaintiff accepts that, despite what it portrays as its essentially passive role, JAS Australia considered itself obliged to provide monthly financial reports to JAS London and otherwise to do what was necessary to operate the netting system.

71 It was submitted on behalf of the plaintiff that the three elements referred to in the second extract from Lord Wilberforce’s speech are present in this case. I have already referred to the supposed “personal relationship”, which is relevant to his Lordship’s element (i). As to (ii), it is said, in effect, that Mr Pizzuto and Ms Paroli are involved in the business and that the plaintiff is (or is akin to) a “sleeping member”. As to element (iii), the plaintiff says that there is no restriction contained in the constitution of JAS Australia, but the first refusal right accruing to the plaintiff under the second agreement of 1 August 1987 is generally of the kind contemplated.

72 With the stage thus set, the plaintiff maintains that the trust and confidence that had underpinned the relationship between the plaintiff and Mr Pizzuto and Ms Paroli has broken down; and thus has been a direct product of the events concerning the unauthorised dividend, the altered airway bills and the supposed mismanagement exposed by the BDO report, as well as continuing concerns about excessive expenditures and declining profitability. Written submissions of Mr Grieve QC, senior counsel for the plaintiff, put the matter thus:

“The true analysis is that:

· Pizzuto and Paroli extracted substantial personal reward from JAS Australia by a variety of means over a prolonged period;

· Having done so they determined that they had no further need to be involved in the company and stated their desire to relinquish their interests in it;

· ATH was evidently unwilling to pay their ‘asking price’; and

· In the end result a ‘stand-off’ came to pass.”

73 JAS Australia says that Lord Wilberforce’s three criteria in Embrahimi v Westbourne Galleries are not satisfied; also that, even where they are, a winding up order does not necessarily follow. First, the plaintiff is not a mere minority shareholder devoid or deprived of access to information: on the contrary, it receives regular information through a sophisticated reporting system which entails scrutiny of financial performance and expenditures. Second, says JAS Australia, this is not a case of quasi partnership: it is a straightforward commercial enterprise with no relevant “personal” relationship at work. Third, there is no restriction on sale of any member’s shares: the plaintiff has no more than a right of first refusal.

74 In any event, says JAS Australia, one cannot press the quasi-partnership analogy too far. Reference is made to the speech of Lord Hoffmann in O’Neill v Phillips [1999] 1 WLR 1092 where, in an unfair prejudice or oppression suit, it had been submitted that there should be a form of “no-fault divorce” – in other words, that, whenever it is found that there has been a breakdown in relationships, the court should award a remedy regardless of fault. In the particular context of an application for an order compelling purchase of one shareholder’s shares by the other, Lord Hoffmann said:

“I do not think that there is any support in the authorities for such a stark right of unilateral withdrawal. There are cases, such as In re A Company (No. 996834 if 1988), Ex parte Kremer [1989] BCLC 365, in which it has been said that if a breakdown in relations has caused the majority to remove a shareholder from participation in the management, it is usually a waste of time to try to investigate who caused the breakdown. Such breakdowns often occur (as in this case) without either side having done anything seriously wrong or unfair. It is not fair to the excluded member, who will usually have lost his employment, to keep his assets locked in the company. But that does not mean that a member who has not been dismissed or excluded can demand that his shares be purchased simply because he feels that he has lost trust and confidence in the others. I rather doubt whether even in partnership law a dissolution would be granted on this ground in a case in which it was still possible under the articles for the business of the partnership to be continued. And as Lord Wilberforce observed in In re Westbourne Galleries Ltd [1973] AC 360, 380, one should not press the quasi-partnership analogy too far: ‘A company, however small, however domestic, is a company not a partnership or even a quasi-partnership …’.”

75 Mr Einfeld QC, who appeared for JAS Australia, submitted quite simply that, on the evidence, there has been no fault and no departure from standards of fair dealing, so far as the conduct of Mr Pizzuto and Ms Paroli is concerned and that, while there has been a serious undermining of the parties’ relationship, things are not of such a nature as to ground an order for winding up.

Assessment

76 There can be no doubt that relations between the plaintiff (in the person of Mr Bruni) on the one hand and Mr Pizzuto and Ms Paroli on the other have broken down, in the sense that a significant lack of trust has come to exist. But the breakdown is not, to my mind, clearly attributable to any of the supposed faults or shortcomings to which the plaintiff has pointed.

77 The most serious of those faults and shortcomings is that involving the unauthorised dividend. I shall return to it presently. First, I shall deal briefly with the others.

78 The matter of the altered airways bills understandably aroused Mr Bruni’s suspicions. Anyone seeing an obviously “doctored” document in business is naturally suspicious. Mr Bruni acted prudently in seeking out further documents for examination before jumping to any conclusion. But jump to a conclusion is exactly what he did when his investigation was complete. He did not seek to raise the matter in any way with Mr Pizzutto or Ms Paroli with whom he had been associated in business on an apparently satisfactory basis for almost fifteen years before the discussions in the first half of 2002 about possible sale of shares. Mr Bruni preferred to assume that something fraudulent was going on (it is not clear that he had a view as to exactly what, except that it involved deprivation of JAS Italy) and, based on that assumption, to purport to terminate the services agreement of 1 August 1987.

79 There can be no doubt that the practice of altering airways bills was commercially foolish and gave every appearance of deception. The reality, however, was that it did not cloak anything untoward or dishonest. It was, rather, a somewhat inept way of injecting an undissected grossed-up figure into the consciousness of each relevant customer. The amount added by the alteration was confined to charges for services at the Australian end. The customer was rightly billed for those, although a separate invoice might have been a more orthodox way of effecting the billing. Customers were not overcharged. Equally importantly, Mr Bruni conceded in cross-examination that what he called “the profit derived on a local operation” – including the profit element in the component for Australian services added by an airway bill alteration – was not caught by the profit sharing agreement between JAS Italy and JAS Australia. JAS Italy was therefore not deprived of anything due to it.

80 In the end, therefore, the practice of changing airway bills, although suspicious in appearance, amounted to nothing relevant to any issue of probity. And Mr Bruni would have discovered this had he taken what one might have expected to be the logical step after almost fifteen years of business association, namely, the step of asking Mr Pizzuto and Ms Paroli what was going on.

81 I consider next the case based on supposed mismanagement. To the extent that this complaint arose from the normalisation adjustments referred to in the BDO report, it is simply unsustainable. Mr Mentzalis made it perfectly clear in his evidence that he was engaged in a valuation exercise involving the elimination of actual impacts that a hypothetical buyer might be expected not to continue into the future. While the word “excessive” was used in the BDO description of some of the adjustments, it is clear that it did not carry any adverse judgmental overtone in relation to past stewardship. All that was meant by “excessive” was that the hypothetical buyer on whom the valuation equation is based would probably not incur the particular charges or outgoings. It said nothing at all about the propriety of those charges and outgoings having been incurred in the factual context actually existing. To the extent that the plaintiff’s submissions proceeded on the basis that the BDO report reflected adverse departures from acceptable financial practices, the submission cannot be accepted.

82 Although JAS Australia is not a subsidiary of the plaintiff (which is a one-third shareholder only), the reporting relationship between them as to financial matters and financial performance is similar to that one would find between a subsidiary and its parent. It is true that the reporting relationship exists by reference to the netting system operative among the several companies in the worldwide JAS group. The plaintiff, as already noted, is a shareholder in virtually all the JAS companies. Although it might not, in structural corporate terms, be in a position to exercise control over such companies, the co-ordinating position it occupies in relation to the netting system administered by JAS London means that it has a vital interest in the financial health of each group company – hence the monthly “frango” reporting regime supplemented by the more comprehensive reporting on a half yearly basis.

83 The correspondence between JAS Australia and JAS London which is in evidence shows that the latter had no qualms about querying the former about items in the periodic reports; likewise that JAS responded with necessary explanations. The plaintiff, either directly or through JAS London, had, at any given time, recent and reasonably detailed knowledge about JAS Australia’s financial position and performance. There is no evidence that JAS Australia tried to hide anything or to hold anything back.

84 There is also evidence that the plaintiff, through Mr Bruni, took a direct hand in the resolution of expense issues arising within JAS Australia. The several communications from Ms Sevilla to Mr Bruni on matters to do with travel and other expenses for Mr Pizzuto and Ms Paroli and the memoranda signed by Mr Bruni, Mr Pizzuto and Ms Paroli to record agreements reached on those subjects show quite clearly that, far from being a distant figure who was kept in the dark, Mr Bruni was looked to as a person who was naturally and inevitably involved in the development of necessary solutions.

85 Mr Bruni said in evidence that he was unable to do anything about what he considered excessive expenditure on entertaining and advertising because, in effect, he had to fall into line with what Mr Pizzuto and Ms Paroli wanted. The evidence about the several tripartite memoranda on directors’ expenses suggest to me that, had Mr Bruni wanted to take a stand on these other matters, he would in all likelihood have been listened to and another tripartite agreement might have been formulated. As it happened, I think he was content merely to register his view from time to time and not to press the issue. In addition, one would expect the two senior executives on the ground in Australia and close to the Australian clientele to have had a better idea than the Milan-based Bruni about what was and was not worthwhile promotional spending in Australia. The whole matter was, in any event, one of commercial judgment on which minds might differ without providing grounds for accusations of lack of probity or self-interested excess.

86 The next matter for consideration is the so-called “netting default” – the failure of JAS Australia to pay on 30 September 2002 the $1.28 million due to JAS London under the netting system, coupled with the like failure at the end of October 2002 shown by the further evidence admitted on the re-opening on 21 November. Mr Pizzuto was candid in the evidence he gave about this. He conceded that the payment had not been made when due. The decision not to pay was motivated, however, by what he genuinely considered to be the best interests of JAS Australia. That company was, on 22 September 2002, subjected without warning to a changed basis of dealing imposed unilaterally by JAS Italy. The change to a “collect” basis as distinct from a “prepaid” basis meant that JAS was denied credit it had to that point enjoyed and had to adjust to a new way of doing business that required it to have access to much greater cash resources. Mr Pizzuto’s decision not to pay JAS London on the due date was, I am satisfied, motivated by what he believed to be the interests of JAS Australia. Far from adopting a course which he knew to be harmful to that company, he did what he believed to be conducive to its ability to withstand the pressure brought to bear by the unilateral decision of JAS Italy.

87 Turning to the impending insolvency complaint, I am bound to say that the evidence does not support the propositions advanced by the plaintiff by reference to the profitability position as it existed when written submissions were filed. There is, however, room for concern about the continuing impact of the netting defaults although, for reasons to which I shall come, I do not consider the plaintiff to be entitled to a winding up order on that account.

88 I return now to the complaint about the unauthorised dividend. It is clear that, for reasons I have already outlined, the payments to Mr Pizzuto and Ms Paroli were not made in accordance with the provisions of the JAS Australia constitution dealing with dividends (whether final or interim). It has not been suggested that the supposed dividends were paid otherwise than out of profits so as to attract the statutory sanctions applicable to that species of conduct (Corporations Act, s.254T). The consequences of the payments having been made otherwise than as authorised by the constitution were not debated before me and I shall not go into them here, except to say that JAS Australia may well have a claim to recover the moneys from the recipients. For present purposes, I proceed on the assumption that that it does have such a claim.

89 An important factor here is that the transactions involving the cars and the dividends were devised by Mr Coles, the accountant, and implemented in accordance with his advice – although in saying that I do not suggest that he in any way sanctioned payment without the necessary resolutions having been passed: in fact, the partially signed documents lacking execution by the plaintiff were prepared by Mr Coles with a view to the transaction being properly effected. The real point is that Mr Coles advised that the company could achieve a fringe benefits tax saving by, in effect, giving the cars to Mr Pizzuto and Ms Paroli by means of the dividends coupled with sale for an equivalent amount. There was thus a perceived element of corporate benefit behind what was done.

90 It must nevertheless be accepted that, as submitted by the plaintiff, there was also an element of corporate detriment to JAS Australia. It admittedly avoided the imposition of the tax for the future but, in so doing, it depleted its shareholders funds by $160,000 in a way that benefited two shareholders to the exclusion of the third and without the assent of that third. Notwithstanding the perceived tax benefit to the company, I think it must be accepted that, in this connection, Mr Pizzuto and Ms Paroli acted in their own interests rather than in the interests of JAS Australia.

91 According to the evidence, the only differences that had arisen before March 2002 were those relating to expenses which had resulted in the memoranda prepared by Ms Sevella and signed by Mr Bruni, Mr Pizzuto and Ms Paroli. Apart from those issues, which were apparently resolved, there is nothing else to suggest distrust or disharmony. Things began to change in March 2002 when Mr Pizzuto and Ms Paroli informed Mr Bruni that they had received a “very favourable offer” from a potential buyer who was “very genuine”. They chose to tell Mr Bruni nothing more. But the information they did provide was sufficient to prompt Mr Bruni to travel to Sydney on 7 April 2002 to see whether a basis could be negotiated for the purchase of the shares.

92 By the time Mr Bruni arrived, Mr Pizzuto and Ms Paroli had completed the transactions involving the dividends and the cars. This was done between their informing Mr Bruni of the “very favourable offer” and his arrival in Sydney. They did not tell him of the transactions.

93 Within a few weeks after Mr Bruni had returned to Italy after the conclusion or suspension of negotiations, he received the copies of the altered airway bills from the anonymous sender. This happened, according to his evidence, in “May/June”. His investigations of that matter extended over some time. His request to JAS Australia for further airways bills to be sent was made during July, that is something like a month after he received the material from the anonymous sender. He does not say when the further airways bills were received but, allowing for his request that they be sent by mail and for the likelihood that the JAS Australia employee would have acted reasonably promptly, it is likely that the further airways bills were received about a week after the request. It is therefore likely that Mr Bruni’s investigations were complete by early August at the latest.

94 But it was not until 11 September 2002 that Mr Bruni raised with JAS Australia the matter of the altered airways bills. He did so by means of the pre-emptive letter by which JAS Italy purported to terminate the commercial agreement of 1 August 1987. Termination of the logo agreement and unilateral transfer of JAS Australia to “collect” trading terms occurred eleven days later. In the meantime – that is, between completing his investigations concerning the airways bills and sending the letter of 11 September 2002 – Mr Bruni had taken steps to obtain for the plaintiff Australian registration of the “JAS” trade mark and establishment of a new company “JAS Forwarding Worldwide Pty Limited”.

95 Mr Bruni was aware of the transaction involving the dividends and the cars by at least early September. He had had the BDO report, with its references to “excessive” items, since his visit to Sydney in April. No complaint was made or question asked about those matters in the 11 September letter or at all.

96 There are some curious aspects of this chronology. The dissatisfaction and distrust of the plaintiff (through Mr Bruni) apparently did not arise until after the unsuccessful negotiations of April 2002. The main motivating factor, so far as Mr Bruni was concerned, was the discovery of the altered airway bills. Having received the anonymous consignment, he embarked on a course of investigation that was neither complex nor difficult yet occupied between one and two months. By early August, his worst suspicions were aroused. He had already had the BDO report in his possession for something like four months. By early September (perhaps earlier) he knew of the dividend transactions of which JAS London had been aware since at least 20 August.

97 When he moved, Mr Bruni did not take steps in an attempt to rectify what he considered to be wrongdoing within JAS Australia. He did not ask for explanations or seek to obtain the concurrence of Mr Pizzuto and Ms Paroli in remedial action. Having established a new foothold for the plaintiff in Australia without their knowledge, he proceeded to cut JAS Australia off from the JAS group by changing the terms of trade and terminating (or purporting to terminate) the two agreements that bound JAS Australia to the plaintiff and JAS Italy.

98 The first reaction of Mr Pizzuto to Mr Bruni’s letter of 11 September 2002 was also curious. He seemed to acquiesce in the termination of the commercial agreement. Perhaps his email of 13 September was an attempt to de-fuse matters. Perhaps he thought there was an opportunity to re-open sale negotiations. At all events, that attitude was quickly replaced by the contentions and requests in the letter of 15 September which made it clear that he took issue with what Mr Bruni had said and done.

99 What has really happened in this case is that Mr Pizzuto and Ms Paroli instigated attempts to have the plaintiff buy them out, which attempts were unsuccessful (one of the reasons apparently being their unwillingness to accept a restraint on their future involvement in the same industry). Since then, Mr Bruni has been concerned that JAS Australia, owned as at present, is not a suitable long term vehicle for the JAS group in Australia. Mr Bruni therefore elected to elevate the unexplained practice of altering airway bills (as to which he was tipped off by an anonymous informant) to the level of dishonourable conduct meriting exclusion of JAS Australia from the JAS group. Then, complaining of that plus other matters about which he had previously made no comment or complaint, he has sought to put an end to the business of JAS Australia by winding up proceedings.

100 I have referred briefly to the establishment by the plaintiff of the new company “JAS Forwarding Worldwide Pty Limited” in July 2002. Mr Bruni gave evidence that this was a “parachute”, the clear implication being that it would be held in reserve in case JAS Australia did not survive and a gap in the JAS worldwide group appeared in Australia. Both Mr Bruni and Mr Bariviera, the JAS group vice-president for Asia, were cross-examined about approaches to certain JAS Australia staff, being Ms Sevilla and an employee named Marisa. They said that there had not been attempts to recruit either to JAS Forwarding Worldwide Pty Limited. Mr Bariviera went to the extent of saying:

“I don’t have any job in mind for these people until this case is concluded.”

101 Evidence admitted on the re-opening on 21 November showed that the new company had taken a lease of premises at Banksmeadow and has six employees, including Ms Sevilla and an “M. Magliarachi” who, from job function, I infer to be Marisa. These two, on the plaintiff’s own evidence, commenced employment on 22 October 2002, that is, five days after Mr Bariviera’s cross-examination to which I have referred. Bearing in mind his evidence, he would have the court believe that the plan that resulted in the employment of those two persons by the new company on 22 October 2002 was conceived and executed within four days after the evidence was given and within three days after the last of the four days on which the proceedings were heard.

102 The new company is not in a position to replicate the functions of JAS Australia because it does not have the necessary permits and licences. Mr Bariviera does not expect it to be able to provide a full service before March 2003. But it is, to my mind, clear that that is the track that the plaintiff is on: the new company is being positioned to take over the commercial role of JAS Australia within the JAS group.

103 I am satisfied that there is a lack of trust and confidence between the plaintiff (or Mr Bruni) on the one hand and Mr Pizzuto and Ms Paroli on the other. But I am not satisfied that the lack of trust and confidence has been generated by the matters referable to the affairs of JAS Australia on which the plaintiff has chosen to base its complaint. Nor am I satisfied that any of those matters, except the transaction involving the dividends and the cars, has involved any failure by Mr Pizzuto and Ms Paroli to live up to the standards to be expected among co-corporators.

104 It is important to remember one particular aspect of the jurisdiction to make an order for winding up on the just and equitable ground. It is referred to in the following passage in the speech of Lord Shaw in Loch v John Blackwood Ltd [1924] AC 783:

“It is undoubtedly true that at the foundation of applications for winding up, on the ‘just and equitable’ rule, there must lie a justifiable lack of confidence in the conduct and management of the company’s affairs. But this lack of confidence must be grounded on conduct of the directors, not in regard to their private life or affairs, but in regard to the company’s business. Furthermore the lack of confidence must spring not from dissatisfaction at being outvoted on the business affairs or on what is called the domestic policy of the company. On the other hand, wherever the lack of confidence is rested on a lack of probity in the conduct of the company’s affairs, then the former is justified by the latter, and it is under the statute just and equitable that the company be wound up.”

105 The plaintiff is entitled to be concerned about the impact on JAS Australia of the unauthorised dividend. In that connection, Mr Pizzuto, and Ms Paroli acted in the affairs of JAS Australia in their own interests and in a manner unfair or unjust to the other member (being the plaintiff): s.461(1)(e). I have proceeded on the assumption that JAS Australia has a claim for recovery of the dividend moneys. If it does have such a claim, it is one that the plaintiff can pursue on its behalf with the aid of Pt 2F.1 of the Corporations Act. Otherwise, I do not think that the matters of which the plaintiff complains are “grounded” in the way contemplated by the observations of Lord Shaw.

106 Mr Einfeld submitted on behalf of JAS Australia that the plaintiff should be denied relief because of “unclean hands”. Mr Grieve pointed out that the maxim “he who comes to equity must come with clean hands” has no application where, as here, purely statutory relief is sought and cannot be pleaded as a defence to a summons for winding up. In that connection, he referred to the explicit statement to that effect at para 327 of the third edition of Meagher, Gummow and Lehane, “Equity Doctrines and Remedies”.

107 The fact remains that, in cases of this kind, the court is concerned with probity. The complaints upon which an application for winding up on the grounds relevant to this case are based are, of their nature, complaints by the plaintiff about behaviour of co-corporators. But the court will not close its eyes to complaints in turn levelled at the plaintiff. What is just and equitable and whether the court, in its discretion, should order winding up are matters that can only be determined according to an assessment of the whole of the surrounding circumstances and the conduct of all the parties.

Conclusion

108 The immediate relief the plaintiff seeks is an order for the appointment of a provisional liquidator. In order to obtain such an order, the plaintiff must discharge the onus referred to by Young J in Riviana (Aust) Pty Ltdv Laospac Trading Pty Ltd (1986) 10 ACLR 865:

“… the plaintiff must show a real prospect that on the hearing of the winding up proceedings the company will be ordered to be wound up and that the circumstances are such as to render it proper and desirable in the public interest to appoint a provisional liquidator.”

109 On my assessment of the matters at this point, the plaintiff has not shown the “real prospect” to which Young J referred. The interlocutory process filed in court on 26 September 2002 will therefore be dismissed.

110 I shall hear the parties on the question of the fate of the originating process for winding up and also on costs. There is also the matter of JAS Australia’s cross-claim to be considered.

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Last Modified: 12/02/2002