Barboutis v The Kart Centre Pty Ltd - [2019] WASC 353

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA
CITATION:   BARBOUTIS -v- THE KART CENTRE PTY LTD [2019] WASC 353
CORAM:   ACTING MASTER WHITBY
HEARD:   23 MAY & 16 AUGUST 2019
DELIVERED          :   2 OCTOBER 2019
PUBLISHED           :   2 OCTOBER 2019
FILE NO/S:   COR 73 of 2019
BETWEEN:   COLIN JOHN BARBOUTIS
First Plaintiff
BULLSBROOK CAPITAL PTY LTD AS TRUSTEE OF THE ATHENA TRUST
Second Plaintiff
AND
THE KART CENTRE PTY LTD
Defendant

Catchwords:

Corporations law - Application for company to be wound up in insolvency under s 459P of the Corporations Act 2001 (Cth) - Whether director of a company has been validly appointed - Whether applicant has standing to apply for winding up order - Plaintiff attempting to prove the defendant is insolvent - Test of solvency

Legislation:

Corporations Act 2001 (Cth) s 459P, s 461(1)(k), s 1274B

Result:

Application dismissed

Category: B

Representation:

Counsel:

First Plaintiff	:	Mr C K Pearce
Second Plaintiff	:	Mr C K Pearce
Defendant	:	Ms P A Martino

Solicitors:

First Plaintiff	:	Blackwall Legal Group
Second Plaintiff	:	Blackwall Legal Group
Defendant	:	P A Martino

Case(s) referred to in decision(s):

Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd [2018] QCA 48
Australian Securities and Investment Commission v ActiveSuper Pty Ltd (No 2) (2013) 93 ACSR 189
China v James Smith (Also Known As James With) [No 4] [2014] WASC 140
Crema Pty Ltd v Land Mark Property Developments Pty Ltd (2006) 58 ACSR 631
Higgins v Drilling Australia Pty Ltd [2018] WASC 254
Inspector James v Ryan (No 3) [2010] NSW IRComm 127
Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459
Lewis v Doran (2004) 208 ALR 385
Sandell v Porter (1996) 115 CLR 666

ACTING MASTER WHITBY:

This is the plaintiffs' application by originating process dated 5 April 2019 for orders pursuant to s 459P and s 461(1)(k) of the Corporations Act 2001 (Cth) (the Act) for the defendant to be wound up on grounds of insolvency or, alternatively, on just and equitable grounds.
In support of the application, the plaintiffs rely upon:
(a)affidavit of Colin John Barboutis sworn on 5 April 2019 (First Barboutis Affidavit);
(b)affidavit of Colin John Barboutis sworn on 29 April 2019 (Second Barboutis Affidavit);
(c)affidavit of Andrew Hamish Neil Taylor affirmed 21 August 2019 (Taylor Affidavit); and
(d)affidavit of Colin John Barboutis sworn 23 August 2019 (Third Barboutis Affidavit).[1]
[1] The plaintiffs also sought to rely upon the affidavit of Christopher Kingsley Pearce sworn 20 June 2019 and Monica Hamid sworn on 15 August 2019. I deal with the admissibility of those affidavits later in this judgment.
The application is opposed by Andrew Noel Freeman, a director of The Kart Centre Pty Ltd, and The Kart Centre Pty Ltd, the defendant in the proceeding. It is accepted by the plaintiffs that, for the purposes of this application, Mr Freeman and the defendant be permitted to oppose the application.[2]
[2] The plaintiffs have not raised an issue as to whether Mr Freeman is entitled, on behalf of the defendant, to instruct the solicitors on the record for the defendant to oppose the application.
Mr Freeman and the defendant rely upon the following in opposition to the plaintiffs' application:
(a)affidavit of Andrew Noel Freeman sworn 18 April 2019 (First Freeman Affidavit);
(b)affidavit of Andrew Noel Freeman sworn on 18 April 2019 (Second Freeman Affidavit);
(c)affidavit of Timothy Paul Stott affirmed on 17 May 2019 (Stott Affidavit);
(d)affidavit of Michael Simon Harders sworn on 17 May 2019 (Harders Affidavit); and
(e)affidavit of Andrew Noel Freeman sworn on 21 May 2019 (Third Freeman Affidavit).

Background

Mr Freeman and Mr Colin John Barboutis entered into a business venture involving indoor go kart racing and entertainment and formed the defendant for the purpose of carrying on such business.[3]
[3] Affidavit of Andrew Noel Freeman sworn 18 April 2019 (First Freeman Affidavit) at [5]‑[6].
The defendant was registered with the Australian Securities Investments Commission (ASIC) on 1 September 2016.[4]
[4] First Freeman Affidavit at [9], Annexure 'ANF1'.
The shareholders of the defendant were (each holding 150 ordinary shares):
(a)Rilyla Pty Ltd (ACN 127 768 825) as trustee for the Freeman Family Trust (Rilyla); and
(b)Bullsbrook Capital Pty Ltd (ACN 611 318 604) for the Athena Family Trust (Bullsbrook) (Mr Barboutis' family trust).[5]
[5] First Freeman Affidavit at [10].
Upon registration of the defendant, the directors were Mr Nicholas Barboutis (Nicholas), Mr Barboutis' son, and Mr Freeman.[6]
[6] First Freeman Affidavit at [10].
On 14 December 2016, a change to company details (Notice of Appointment) was lodged with ASIC to advise that, on 12 December 2016, Nicholas was replaced as a director by Mr Barboutis.[7]
[7] Affidavit of Andrew Noel Freeman sworn on 21 May 2019 (Third Freeman Affidavit) at Annexure 'ANF2'.
As a result of a break down in the relationship between Mr Freeman and Mr Barboutis, Mr Barboutis and Bullsbrook are applying for orders, pursuant to s 459P and s 461(1)(k) of the Act, for the defendant to be wound up on grounds of insolvency or, alternatively, on just and equitable grounds.

The issues

The following issues arise:
(a)In relation to winding up pursuant to s 459P of the Act:
(i)who has standing to apply for a winding up order?
(ii)Is Mr Barboutis a director of the defendant?
(iii)Is Bullsbrook and/or Mr Barboutis a creditor of the defendant? and
(iv)Is the defendant insolvent?
(b)In relation to winding up of the defendant pursuant to s 461(1)(k) of the Act:
(i)is it just and equitable that the defendant be wound up?

Who has standing to apply for a winding up order pursuant to s 459P of the Act?

Section 459P of the Act provides:
(1)[Applications as of right] Any one or more of the following may apply to the Court for a company to be wound up in insolvency:
(a)the Company;
(b)a creditor (even if the creditor is a secured creditor or is only a contingent or prospective creditor);
(c)a contributory;
(d)a director;
…
(2)[Applicants with leave of the Court] An application by any of the following, or by persons including any of the following, may only be made with the leave of the Court:
(a)person who is creditor only because of a contingent or prospective debt;
(b)a contributory;
(c)a director; …
(3)[Company insolvent] The Court may give leave if satisfied that there is a prima facie case that the company is insolvent, but not otherwise.
Section 9 of the Act defines 'director' in the following terms:
Dictionary
…
'director' of a company or other body means:
(a)a person who:
(i)is appointed to the position of a director; or
(ii)is appointed to the position of an alternate director and is acting in that capacity;
regardless of the name that is given to their position; and
(b)unless the contrary intention appears, a person who is not validly appointed as a director if:
(i)they act in the position of a director; or
(ii)the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes.
Subparagraph (b)(ii) does not apply merely because the directors act on advice given by the person in the proper performance of functions attaching to the person's professional capacity, or the person's business relationship with the directors or the company or body.

Is Mr Barboutis a director of the defendant?

Mr Freeman contends that Mr Barboutis is not a director of the defendant for the following reasons:
(a)Clause 5.1 of the Shareholders Agreement between Rilyla and Bullsbrook signed in December 2016,[8] (Shareholders Agreement) provides:
[8] Affidavit of Colin John Barboutis sworn on 5 April 2019 (First Barboutis Affidavit) at Annexure 'CJB1'; First Freeman Affidavit at [14].
5.1The number of directors (excluding alternate directors) must be two unless the shareholders otherwise unanimously determine. Each shareholder is entitled to appoint one director. (emphasis added)
(b)Clause 5.3 of the Shareholders Agreement provides:
5.3Every appointment and removal of a director takes effect when the written notice of appointment or removal is received at the office or, in the case of an appointment, when the written consent to act as a director is received at the office if that is later than the receipt of the notice of appointment.
(c)The corporate secretarial file of the defendant does not contain any of the following documents (either signed or unsigned):
(a)minutes of meetings of directors or members recording a resolution for the appointment of Mr Barboutis as a director of the defendant;
(b)a consent from Mr Barboutis to act as a director of the defendant;
(c)an ASIC form regarding notification or appointment of Mr Barboutis as a director of the Company;
(d)minutes of a meeting of directors or members, or record of a resolution for the removal of Nicholas as a director of the defendant;
(e)a letter of resignation as a director of the defendant from Nicholas; or
(f)an ASIC form regarding notification of cessation of Nicholas as a director of the defendant;[9]
(d)the Constitution of the Defendant defines 'director' as 'any person appointed as, and who, at the relevant time, remains, a director of the [defendant]…'[10]
(e)although each shareholder is entitled to appoint a director, the alleged appointment of Mr Barboutis as a director was not made in accordance with the Constitution and the Shareholders Agreement.
[9] Affidavit of Timothy Paul Stott affirmed on 17 May 2019 (Stott Affidavit) at [6].
[10] First Barboutis Affidavit at Annexure 'CJB5'.
Mr Freeman submits that Mr Barboutis has no standing to apply for the defendant to be wound up pursuant to s 459P of the Act as he is not a director of the defendant.
In response, counsel for Mr Barboutis submits:
(a)Clause 5.1 of the Shareholders Agreement provides that 'each shareholder is entitled to appoint one director', not to nominate for appointment, not to seek a resolution of the directors for appointment, but to actually appoint;[11]
(b)Clause 22.2 of the Constitution, in so far as it requires a director to be removed and replaced by ordinary resolution of the defendant,[12] is inconsistent with cl 5.1 of the Shareholders Agreement. Pursuant to cl 30 of the Shareholders Agreement, the Shareholders Agreement prevails where there is such inconsistency;[13]
(c)it is not unusual for documents not to be in the corporate secretarial file and the absence of such documents in the file is not conclusive evidence that those documents (those listed at [14(c)] above) do not exist;[14]
(d)the parties always treated Mr Barboutis as a director,[15] in particular:
(i)the share sale agreement between Rilyla and Bullsbrook dated 16 March 2018 (Share Sale Agreement), at cl 7.1.2.3, provides that at completion, Bullsbrook is required to 'deliver to [Rilyla] a notice signed by Mr Colin John Barboutis resigning as a director of the [defendant]';[16] and
(ii)a letter from the solicitors for Mr Freeman to the solicitors for Mr Barboutis dated 21 November 2018 states, inter alia, 'On instructions I set out the background of the matter as follows: 1. Mr Barboutis and Mr Freeman are directors of the [defendant]';[17] and
(e)the ASIC register records Mr Barboutis was appointed as a director of the defendant on 12 December 2016,[18] and pursuant to the Act, there is a presumption that the ASIC register stands as proof of any matter contained therein.
[11] ts 16.
[12] First Barboutis Affidavit at Annexure 'CJB5'.
[13] First Barboutis Affidavit at Annexure 'CJB1'.
[14] ts 17.
[15] ts 17.
[16] First Barboutis Affidavit at Annexure 'CJB6'.
[17] First Freeman Affidavit at Annexure 'ANF11'.
[18] Third Freeman Affidavit at Annexure 'ANF2'.

ASIC Register

Section 1274B(2) of the Act provides:
(2)In a proceeding in a court, a writing that purports to have been prepared by ASIC is admissible as prima facie evidence of the matters stated in so much of the writing as sets out what purports to be information obtained by ASIC, by using a data processor, from the national database. In order words, the writing is proof of such a matter in the absence of evidence to the contrary.
Section 1274B(2) of the Act was considered in Inspector James v Ryan (No 3).[19] Two charges under the Occupational Health and Safety Act 2000 (NSW) had been made against Justin Ryan, a director of Dekorform, after an employee of Dekorform was fatally injured in the course of employment. In determining whether Ryan was liable, one of the key issues was whether Ryan was a director of Dekorform. The ASIC register recorded Ryan as a director of Dekorform. The case went to appeal to the Full Bench of the Industrial Relations Court of New South Wales. The Full Bench referred to s 1274B(2) of the Act and said:
Thus, although the ASIC record shows that the respondent was appointed as a director …, the record is capable of rebuttal by showing that no appointment was made in accordance with the company's constitution.[20]
[19] Inspector James v Ryan (No 3) [2010] NSW IRComm 127 [142] - [155].
[20] Inspector James v Ryan (No 3) [142] - [155].
Accordingly, the fact that the ASIC register refers to Mr Barboutis as a director of the defendant is not the end of the matter. There is a presumption that Mr Barboutis is a director, but that presumption may be rebutted if evidence is shown that he was not appointed in accordance with the defendant's Constitution.
In the Ryan case, Dekorform's constitution provided that:
(a)by cl 3.2: 'The Holding Company [Alesco Corporation Limited (Alesco)] may by notice to [Dekorform] appoint a person to be a director ...';[21]
(b)by cl 13.6: '[Alesco] may exercise a power by ... notice in writing:
(i)executed by [Alesco]; or
(ii)executed on behalf of [Alesco] by a director, secretary or executive officer of [Alesco], and delivered to or sent by facsimile or other electronic means to [Dekorform]'.[22]
[21] Inspector James v Ryan (No 3) [117].
[22] Inspector James v Ryan (No 3) [120].
In Ryan, Marks J, with whom the Full Bench agreed on appeal, found that given there had not been strict compliance with Dekorform's constitution as Alesco had failed to deliver notice of Ryan's appointment to Dekorform and Alesco had not appointed Ryan as a director of Dekorform as provided for in the constitution, Ryan was not a director of Dekorform.[23]
[23] Inspector James v Ryan (No 3) [177].
The question then is whether Mr Barboutis was appointed as a director of the defendant in accordance with its Constitution.
Clause 22.2 of the Constitution provides as follows:
22.2Removal
(a)The Company may remove any Director and appoint another Director as a replacement.
(b)The removal or replacement of a Director must be effected by ordinary resolution of the Company.
The Constitution, by cl 1.1, defines Director as:
[E]ach person appointed as, and who, at the relevant time, remains, a director of the Company …
At the time the defendant was registered (1 September 2016), Rilya appointed Mr Freeman as a director and Bullsbrook appointed Nicholas as a director. Whether or not either of those directors was appointed in accordance with the Shareholders Agreement or the Constitution is not in issue in this application. Consequently, I make no finding in relation to the validity of the initial appointments of Mr Freeman and/or Nicholas as directors.
It is Mr Barboutis' position that, on 12 December 2016, he replaced Nicholas as a director of the defendant.[24]
[24] Affidavit of Colin John Barboutis sworn on 29 April 2019 (Second Barboutis Affidavit) at [7].
Mr Barboutis submits that:
(a)clause 5.1 of the Shareholders Agreement gives him the right to appoint a director;
(b)clause 22.2 of the Constitution, which requires the appointment to be done by ordinary resolution, is inconsistent with cl 5.1 of the Shareholders Agreement because it places a restriction on the right of shareholder to appoint a director (as it requires the shareholder to obtain the vote of the majority of shareholders);
(c)clause 30 of the Shareholders Agreement provides that, to the extent of any inconsistency, the terms of the Shareholders Agreement are to prevail over the Articles (Mr Barboutis says 'Articles' is reference to the Constitution);
(d)as a result, he is entitled to appoint a director in whatever manner he wishes.[25]
[25] Plaintiff's further submissions filed 23 August 2018 at [3] - [11].
The Constitution and the Shareholders Agreement set out the following procedure for the replacement of a director:
(a)there must be an ordinary resolution of the defendant effecting the removal and replacement (Constitution cl 22.2(b)); and
(b)the appointment and removal of a director takes effect when written notice of the appointment or removal is received at the office, or in the case of appointment, when the written consent to act as a director is received at the office if that is later than the receipt of the appointment (Shareholders Agreement cl 5.3).
It is clear that the Shareholders Agreement and the Constitution were not drafted in reference to each other (for example, the Shareholders Agreement refers to 'Articles' as opposed to a 'Constitution'). While that is unfortunate and may lead to unintended consequences, I do not consider that cl 22.2 of the Constitution is inconsistent with cl 5.1 of the Shareholders Agreement. Clause 5.1 gives the shareholder the entitlement to appoint, cl 22.2 provides the mechanism by which the appointment must occur.
Even if I am wrong about that and cl 22.2 of the Constitution is inconsistent with cl 5.1 of the Shareholders Agreement (and therefore does not apply), there remains the provision in cl 5.3 of the Shareholders Agreement which provides that the appointment of a director only takes effect when the written notice of appointment, or written consent to act is received at the office (whichever is the later in time).
It is then a question of fact as to whether either of these requirements were satisfied at the time that Mr Barboutis was allegedly appointed as a director.
Mr Timothy Paul Stott, a solicitor in the employ of the solicitors for Mr Freeman, inspected the corporate volume of the defendant and observed that:
(a)there were no signed or unsigned minutes of meeting of directors or members or record of a resolution for the appointment of [Mr Barboutis] as a director of the defendant;
(b)there was no signed or unsigned consent to act as a director of the defendant by [Mr Barboutis];
(c)there was no signed or unsigned ASIC form regarding notification of appointment of [Mr Barboutis] as a director of the defendant;
(d)there was no signed or unsigned minutes of meeting of directors or members or record of a resolution for the removal of Nicholas Barboutis as a director of the defendant;
(e)there was no signed or unsigned letter of resignation of Nicholas Barboutis;
(f)there was no signed or unsigned ASIC form regarding notification of cessation of Nicholas Barboutis as a director of the defendant;
(g)there were no signed or unsigned loan agreement;
(h)there were no signed or unsigned minutes of meeting of directors or members or record of a resolution regarding borrowings by the defendant;
(i)there were no signed or unsigned financial reports or tax lodgements; and
(j)there was an original minutes of meeting of directors for a meeting said to have been held at 9am … on 24 August 2018 signed by Mr Barboutis[26]
[26] Stott Affidavit at [6].

Counsel for Mr Barboutis submits that it is not unusual for documents not to be in the folders when they should be.[27]
[27] ts 17.
In the Ryan case, there was evidence before Marks J to the effect that the assistant company secretary had conducted a search of all of Dekorform's physical and computer records for documents indicative of the appointment of Ryan as a director and had only found a consent to act.[28] Counsel for the appellant submitted that Marks J erred in finding that the absence of such documents was evidence creating a reasonable doubt as to compliance with Dekorform's constitution concerning the appointment of Ryan.[29] In considering that submission, the Full Bench held that:
[28]Inspector James v Ryan (No 3) [102].
[29] Inspector James v Ryan (No 3) [108].
[109][the assistant company secretary] found no documents consistent with the procedure for the appointment of directors of the kind prescribed in the Dekorform constitution …if there had been numerous such documents, but none for [Ryan's] appointment to Dekorform 'a hypothesis that those documents had existed and had been lost might have had some substance.'
[110]Marks J stated:
[93]… In my opinion, the totality of the evidence consisting of that given by [the assistant company secretary], complemented by the oral evidence of Messrs Wareing [30] and Clarke[31] and the presence of the circulating resolution of Dekorform concerning the purported appointment of [another director] effective 31 May 2006 is indicative that there was a course of action pursued at the relevant times… which was inconsistent with the provisions of the constitution of Dekorform.
…
[111]In our opinion, the trial judge was entitled to conclude on the evidence that there was reasonable doubt.
…
[143]… the respondent was correct in submitting the appellant had to prove the affirmative in that he had to prove a valid appointment, not merely to speculate about the possibility of there being other places in which [the employee] might have searched for [the documents].
[30] That evidence being 'Mr Wareing first learnt...in about June or July 2009 that directors of subsidiaries within the Alesco group needed to be appointed by the main board itself. Prior to that time there had not been in force any procedure for the giving of notice by Alesco to subsidiaries that a person had been appointed a director'. Inspector James v Ryan (No 3) [111].
[31] 'The evidence of Mr Clarke was that he commenced work at Alesco in 1995 and had never seen a written notice from Alesco to a subsidiary company appointing a director'. Inspector James v Ryan (No 3) [112].
Mr Stott located an original minutes of meeting of directors of the defendant held on 24 August 2018, signed by Mr Barboutis purportedly as a director of the defendant in the corporate volume of the defendant.[32] The minutes record that Mr Barboutis and Mr Freeman were both present at the meeting and that it was resolved that:
The financial statements and income tax return be signed by both directors as it truly reflects the financial position of the company for the 2017 financial years (sic). Funds loaned to the company by the directors and/or related entities were also reviewed and they truly represent funds that both directors and/or related entities have loaned to the company since it was incorporated.
[32] Stott affidavit at Annexure 'TPS1'.
The onus is on Mr Barboutis to establish in the affirmative that he was appointed as a director of the defendant in accordance with the Constitution.
The corporate volume of the defendant does not contain a resolution appointing any director, nor any consents to act as a director. This is persuasive of the fact that directors were not generally appointed in accordance with the Constitution (rather than just this resolution for this appointment being missing).
Neither Mr Barboutis, Mr Freeman, nor the defendant have adduced any evidence to the effect that there was a meeting of directors of the defendant at which the defendant resolved to replace Nicholas with Mr Barboutis, nor that there was ever a written notice of appointment, removal, or consent to act as a director completed by Nicholas or Mr Barboutis.[33]
[33] Second Barboutis Affidavit at [7]; affidavit of Andrew Noel Freeman sworn on 18 April 2019 (Second Freeman Affidavit) at [47].
In all of the circumstances, I find that Mr Barboutis has not discharged the onus of proving that he was appointed as a director of the defendant in accordance with cl 22.2 of the Constitution, and/or alternatively cl 5.3 of the Shareholders Agreement.
Counsel for Mr Barboutis submits that, if Mr Barboutis was not validly appointed as a director in accordance with the Constitution, then he was appointed by Mr Freeman under cl 22.1 of the Constitution.[34]
[34] First Barboutis Affidavit at Annexure 'CJB5'.
Clause 22.1 of the Constitution provides:
The Directors have the power to appoint any person as a director to fill a casual vacancy or as an addition to the board provided that the number of Directors does not exceed any maximum number of Directors fixed by the Company.[35]
[35] First Barboutis Affidavit at Annexure 'CJB5'.
Clause 24.5 of the Constitution provides:
Where a vacancy in the office of a Director occurs, the remaining Directors may continue to act. If the remaining directors is insufficient to constitute a quorum, the Directors may only act for the purpose of increasing the number of Directors to that required to constitute a quorum or to convene a general meeting.[36]
[36] First Barboutis Affidavit at Annexure 'CJB5'.
The plaintiffs rely upon evidence to the effect that Mr Freeman (not Mr Barboutis) lodged the Notice of Appointment of Mr Barboutis as a director of the defendant with ASIC.[37]
[37] Third Barboutis Affidavit at [5]; affidavit of Andrew Hamish Neil Taylor affirmed 21 August 2019 at [43] ‑ [45].
What this argument does not factor is that there was no vacancy in the office of directors or insufficient quorum as Nicholas had not validly resigned as a director of the defendant. The first limb of cl 22.1 of the Constitution (appointment of director to fill a casual vacancy) and cl 24.5 of the Constitution (only applicable when a vacancy occurs) therefore do not apply.
Likewise the second limb of cl 22.1 of the Constitution (director appointed as an addition to the board) does not apply – cl 5.1 of the Shareholders Agreement provides that the number of directors must be two unless the shareholders unanimously determine. Therefore, Mr Freeman cannot appoint Mr Barboutis as a third director.
Finally, any appointment under cl 22.1 of the Constitution must comply with the requirements of cl 22.2 and/or cl 5.3 of the Shareholders Agreement. Any alleged appointment of a direction by Mr Freeman does not comply.
The fact that Mr Freeman, as opposed to Mr Barboutis, lodged the ASIC Notice of Appointment does not validate the appointment in circumstances where Mr Barboutis has failed to discharge the onus of proving that he was validly appointed in accordance with the Constitution and/or the Shareholders Agreement.
Counsel for the plaintiffs accept that the question of whether Mr Barboutis was a shadow director, or a de facto director does not assist Mr Barboutis is establishing standing for the purposes of s 459P of the Act.
In all of the circumstances, I find that Mr Barboutis is not a director of the defendant and therefore, has no standing to make an application pursuant to s 459P(1)(d) of the Act.

Is Mr Barboutis or Bullsbrook a creditor of the defendant?

Bullsbrook says that it is owed by the defendant, by way of an outstanding loan balance, an amount of $243,835.97 (as at 26 March 2019).[38]
[38] First Barboutis Affidavit at Annexure 'CJB38'.
Mr Barboutis says that he is owed by the defendant, also by way of outstanding loan balance, an amount of $227,968.84.[39]
[39] First Barboutis Affidavit at Annexure 'CJB37'.
There is a dispute between Mr Freeman, Mr Barboutis and Bullsbrook over whom contributed cash to the defendant; whether there were contributions other than cash made; and the proper accounting treatment of contributions.
The relevant evidence before me in this application is:
(a)the defendant's balance sheet (as at 25 February 2019) which recorded loans to both Mr Barboutis and the Bullsbrook,[40] in the following manner:
[40] First Barboutis Affidavit at Annexure 'CJB37'.
Non‑Current Liabilities
Loan – Andrew Freeman $94,311.11
Loan – Freespot Trust $67,600.00
Loan – Bullsbrook Capital $243,835.97
Loan – Colin Barboutis $227,968.84

(b)the evidence of Mr Freeman that:
(i)There was no money in the Defendant so Colin and I paid monies to the Defendant by way of working capital.[41]
[41] First Freeman Affidavit at [20].
(ii)On 14 February 2017 I transferred the sum of $270,035.00 to Athena Capital, an account controlled by Colin…[42]
[42] First Freeman Affidavit at [21], Annexure 'ANF4'.
(iii)On 15 February 2017 Colin transferred the sum of $200,000.00 with the reference 'working capital Af' to the Defendant's National Australia Bank BSB 086 136 Account Number 73 816 3172 ('Defendant's Bank Account').[43]
[43] First Freeman Affidavit at [22].
(iv)On 16 February 2017 Colin transferred the sum of $30,000.00 to the Defendant's Bank Account with the reference 'Af trx'.[44]
[44] First Freeman Affidavit at [23].
(v)The balance sheet … is incorrect as it shows the sum of $227,968.84 owing by the defendant to Colin. This is incorrect as I contributed an amount of approximately $230,000 as working capital. The defendant does not owe money to Colin and/or Bullsbrook.[45]
[45] First Freeman Affidavit at [25].
(vi)Colin made contributions to working capital which were not paid at once but over a series of months.[46]
[46] First Freeman Affidavit at [26], Annexure 'ANF5'.
(vii)The general ledger shows my contribution to working capital and Colin's contribution to working capital…[47]
[47] First Freeman Affidavit at [27], Annexure 'ANF6'.
(viii)Mine and Colin's capital contributions were not loans.[48]
[48] Second Freeman Affidavit at [71].
(ix)Colin and I had from the beginning verbally agreed that we would invest the start-up capital required for the business venture and that we would split the profits made through the business.[49]
(x)At no time, did Colin and I discuss or agree that our capital contributions would be treated as loans to the Company.[50]
(xi)I would not have entered into the business venture with Colin if he could require his capital contribution to be repaid but still retain 50% ownership and an entitlement to 50% of the profits while it was my idea and where I do all the work.[51]
(xii)The Company's assets and liabilities are accurately recorded in the balance sheet prepared at 20 May 2019 – it does not include loans to Mr Barboutis and Bullsbrook.[52]

(c)the evidence of Mr Barboutis that:
(i)Mr Freeman correctly identifies… that he advanced (or more correctly, caused his Superannuation Fund to advance) funds to me, some of which he asked me to invest in the Defendant. In my view, the correct legal analysis of that arrangement is unclear but may be that the Defendant owes the funds to me, and I owe funds (on certain terms) to Mr Freemans's Superannuation Fund. It may not matter materially for the purposes of this application whether the reference in the Defendant's balance sheet to 'Colin Barboutis' should refer to some trust capacity in which the funds were invested or not.[53]
(ii)Separately, … Bullsbrook … is also owed money based upon working capital contributions to the Defendant.[54]
[49] Second Freeman Affidavit at [72].
[50] Second Freeman Affidavit at [73].
[51] Second Freeman Affidavit at [74].
[52] Third Freeman Affidavit at [200]; Annexure 'ANF11'.
[53] Second Barboutis Affidavit at [12(b)].
[54] Second Barboutis Affidavit at [12(c)].

Although the defendant's balance sheet originally records the advances from Mr Barboutis and Bullsbrook as loans, this does not alter or determine the proper legal characterisation of those advances. The party seeking the relief pursuant to s 459P of the Act, bears the onus of proving that they have standing to do so (in this case that either Mr Barboutis and/or Bullsbrook is a creditor).
Mr Barboutis has not discharged the onus of establishing he is a creditor of the defendant for the following reasons:
(a)the evidence suggests that there were two separate arrangements – one whereby Mr Freeman advanced funds to Mr Barboutis and two, Mr Barboutis then advanced those funds to the defendant; and
(b)Mr Barboutis accepts that there is some legal uncertainty as to the proper accounting treatment of those advances.
In any event, counsel for Mr Barboutis submits that there is a separate loan to the defendant by Bullsbrook.
On 26 March 2019, the solicitors for Bullsbrook sent a letter of demand to the defendant for the balance of 'the loan advanced by Bullsbrook capital to the [defendant] in December 2016'.[55] (emphasis added)
[55] First Barboutis Affidavit at Annexure 'CJB38'.
However, the evidence of Mr Barboutis is that 'Bullsbrook contributed at least $239,829.33 commencing with an advance of $59,583.33 to the defendant's landlord on 25 January 2017'.[56] (emphasis added)
[56] Second Barboutis Affidavit at [12(c)].
The date on which the advances by Bullsbrook were made to the defendant does alter the proper characterisation of those advances. The real issue is whether those advances were loans or were capital contributions. The balance sheet of the defendant initially recorded those advances as loans (a balance sheet that was approved by Mr Freeman) but has since been amended to record them as capital contributions. [57]
[57] Second Barboutis at Affidavit at [11]‑[12].
The evidence of Mr Barboutis that '[s]eparately, ... Bullsbrook … is also owed money based upon working capital contributions to the Defendant'[58] is persuasive of the fact that Bullsbrook itself did not classify those contributions as loans. (emphasis added)
[58] Second Barboutis Affidavit at [12(c)].
There is clearly a dispute as to the proper legal construction of the advances made by Bullsbrook.[59] Ultimately, there is no conclusive evidence before me to establish the existence of a debt to Bullsbrook.
[59] ts 26.
I am not sufficiently satisfied, for the purposes of s 459P(1)(b) of the Act, that either of the plaintiffs are creditors of the defendant. Therefore neither have standing to make an application for winding up upon insolvency.

Is the defendant insolvent?

Given I have found that neither Mr Barboutis as a director and/or creditor of the defendant, nor Bullsbrook as a creditor of the defendant, has standing to make an application for a winding up order of the defendant, it is not relevant for me to determine whether the defendant is insolvent or not.
However, if I am wrong about that and either does have standing, then such an order would only be made in circumstances where the defendant was insolvent. I make the following observations about the defendant's solvency.
Section 95A of the Act provides:
(1)a [company] is solvent if, and only if, [it] is able to pay all [its] debts, as and when that become due and payable.
(2)A [company] who is not solvent is insolvent.
Neither of the plaintiffs are relying upon a failure to comply with statutory demand on the part of the defendant and therefore, there is no presumption of insolvency. The onus is therefore on the plaintiffs to prove, on the balance of probabilities, that the defendant is insolvent.
In Leslie v Howship Holdings Pty Ltd,[60] Sackville J summarised the applicable legal principles to be considered when determining solvency:
As Lindgren J observed in Melbase Corporation Pty Ltd v Legenhoe Pty Ltd (1995) 17 ACSR 187 at 198, s95A(1) of the [Act] states that a 'cash flow test' rather than a 'balance sheet test of insolvency'. It follows that the mere fact that the company's assets exceeds its liabilities does not establish solvency. In Re Bond Corporations Holdings Ltd (1990) 1 ACSR 350, at 358, Ipp J quoted the following passage from Buckley on Companies Act (13^th ed, 1957) …, on the question of commercial insolvency:
'…that is, the company being unable to meet current demands upon it. In such a case it is useless to say that if its assets are realised there will be ample to pay 20 shillings in the pound; this is not the test. A company may be at the same time insolvent and wealthy. It may have wealth locked in investments not presently realisable, but although this be so, yet if it have not assets available to meet its current liabilities, it is commercially insolvent and may be wound up.'
[60] Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459.
In Crema Pty Ltd v Land Mark Property Developments Pty Ltd,[61] Dodds‑Streeton J said:
Section 95A of the Act enshrines the cash flow test of insolvency which, in contrast to a balance sheet test, focuses on liquidity and the viability of the business. While an excess of assets over liabilities will satisfy a balance sheet test, if the assets are not readily realisable so as to permit the payment of all debts as they fall due, the company will not be solvent. Conversely, it may be able to pay its debts as and when they fall due, despite a deficiency of assets.
[61] Crema Pty Ltd v Land Mark Property Developments Pty Ltd (2006) 58 ACSR 631, 653
In Sandell v Porter,[62] Barwick CJ stated:
Insolvency is expressed in s 95 [of the Bankruptcy Act 1924 (Cth)] as an inability to pay debts as they fall due out of the debtor's own money. But the debotr's own moneys are not limited to the cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.
[62] Sandell v Porter (1996) 115 CLR 666, 670.
Section 95A of the Act does not include the reference to payment 'out of the debtor's own money'. In Lewis v Doran,[63] Palmer J cited a number of cases decided since s 95A of the Act came into effect which continued to apply Barwick CJ's definition in Sandell v Porter and stated:
[63] Lewis v Doran (2004) 208 ALR 385, 406.
[100]However, in none of those cases has there been any discussion of the absence in s 95A of the CA of the words 'from its own monies', which was the critical feature of the discussion in Sandell v Porter and in the line of authority flowing from it. The decisions implicitly assume that s 95A has not changed the pre-existing law but none of them turns on whether insolvency depends upon the availability of unsecured loans from a third party.
…
[106]I think I must approach the application of s 95A of the CA with two considerations in mind. First, the words of s95A must be construed as they stand, without addition or subtraction. Second, the law both before and after the enactment of s95A is unequivocally and emphatically clear that insolvency is, first and last, a question of fact 'to be ascertained from a consideration of the company's financial position taken as a whole. In considering the company's financial position as a whole, the court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable': Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 53 NSWLR 213 at 224.
…
[113][W]here prospective insolvency is in issue the court, as a general rule, would be sceptical of an assertion that a third party is willing to advance funds unsecured on such terms as would not, in any event, bring about insolvency. Such willingness of the part of a third party would have to be cogently demonstrated, if not as a matter of legal obligation, then as a matter of commercial reality.

Evidence of Insolvency

The plaintiffs (on whom the onus of proof rests) contend that the defendant is unable to pay its debts as and when they fall due, as evidenced by the following:
(a)on 26 March 2019 Bullsbrook issued a letter of demand to the defendant for $243,835.97, being the balance of an outstanding loan account owed by the defendant to Bullsbrook;[64]
(b)the defendant has failed to respond to the letter of demand;
(c)the balance sheet of the defendant shows that, as of December 2018, the defendant had negative equity of $496,406.56;[65]
(d)even with the loans removed from the balance sheet of the defendant, the defendant has current assets of $223,000 and current liabilities of $255,000.[66] Given there is a current asset deficiency, the defendant is insolvent.[67]
[64] First Barboutis Affidavit at [33].
[65] First Barboutis Affidavit at [31].
[66] Third Freeman Affidavit at Annexure 'ANF11'.
[67] ts 27.
In contrast, Mr Freeman and the defendant rely upon the following evidence to establish that the defendant is able to pay its debts as and when they fall due:
(a)the business of the defendant is trading profitably - for the period of November 2018 to April 2019, the defendant made a profit of $86,695.54;[68]
(b)the defendant complied with its tax obligations by lodging Business Activity Statements for the December 2018 and March 2019 financial quarters;[69]
(c)Fluid Maintenance Australia, a business owned and operated through A & M Freeman Enterprises Pty Ltd as trustee for Freespot Trust (of which Mr Freeman is the sole director and shareholder) (FMA), advanced funds to the defendant to cover shortfalls in the day to day operational expenses of the defendant until the defendant became self‑sufficient in August 2018;[70]
(d)loans recorded in the balance sheet of the defendant as owing to FMA (totalling $578,882.98)[71] are interest free, non‑current loans which are only repayable when the defendant has the means to do so (alternatively they would be converted into shares);[72] and
(e)if the defendant requires funding in the future, FMA has the capacity to advance funds to the defendant.[73]
[68] Third Freeman Affidavit at Annexure 'ANF13'.
[69] Third Freeman Affidavit at Annexure 'ANF14'.
[70] Third Freeman Affidavit at [82].
[71] Third Freeman Affidavit at Annexure 'ANF11'.
[72] Third Freeman Affidavit at [85].
[73] Third Freeman Affidavit at [207].

Additional Evidence of Insolvency

The plaintiffs seek to rely upon the affidavits of Christopher Kingsley Pearce sworn 20 June 2019 (Pearce Affidavit) and Monica Hamid sworn on 15 August 2019 (Hamid Affidavit) as additional evidence that the defendant continues to experience cash flow difficulties rendering it insolvent. These affidavits adduce evidence of matters which are said to have occurred after the hearing of the plaintiff's application but before this decision was delivered.
The plaintiffs, Mr Freeman and the defendant accept that the question of solvency must be assessed at the date of hearing. In Leslie v Howship Holdings Pty Ltd,[74] Sackville J said:
The question of solvency must be assessed, as the parties agreed, at the date of the hearing. But this does not mean that future events are to be ignored. In Bank of Australasia v Hall (1907) 4 CLR 1514, a case arising under the Insolvency Act 1874 (Qld), Griffiths CJ addressed (at 1527 ‑ 1528) the meaning of the words 'unable to pay his debts as they become due from his own moneys':
'It was argued that only debts then actually payable and the amounts of which were then actually ascertained should be taken into consideration. One answer to this argument is that the matter for determination is the ability of the debtor, which is a state or condition that cannot be determined without having regard to the all the facts. Another answer is that the debts referred to are not his debts "then" payable, but his debts 'as they become due' – a phrase which looks to the future. No doubt, only the reasonably immediate future is to be looked to, but the anticipated verdict was not beyond this limit. It is not seriously contended that the debtor was, or had any prospect of being, able to pay this debt when it became due, ie when the amount was definitely ascertained, from his own moneys.
…
The words 'as they become due' require, as already pointed out, that some consideration shall be given to the immediate future; and, if it appears that the debtor will not be able to pay a debt which will certainly become due in, say , a month (such as the wages…) by reason of an obligation already existing, and which may before that day exhaust all his available resources, how can it be said that he is able to pay his debts as they become due' out of his own moneys?'
[74] Leslie v Howship Holdings Pty Ltd [23].
I do not consider that the decision in the Leslie case as authority for the proposition that events which occur subsequent to the hearing may be accepted into evidence. The reference to future events in that decision is a reference to a state of events known at the time of hearing which are to, or may, occur in the future. (emphasis added) The matters deposed to in the Pearce affidavit and the Hamid affidavit do not constitute a state of events that were known at the date of the hearing. The Pearce affidavit and the Hamid affidavit are therefore, not read into evidence.
Having regard to the evidence before the court at the hearing on 23 May 2019, I find that it was not sufficient to prove, to the requisite standard of proof (the balance of probabilities), that the defendant was unable to pay its debts as and when they fell due, that is insolvent, for the following reasons:
(a)loans recorded in the balance sheet of the defendant to Bullsbrook and Mr Barboutis are not taken into account (as I am not satisfied that they ought be classified as loans);
(b)the appropriate test to apply is the 'cash flow test' - an excess of current liabilities over current assets in the balance sheet of the defendant is not determinative of insolvency;
(c)there is no evidence, at the date of the hearing, that the defendant has been unable to meet its debts as and when they fall due; and
(d)the defendant has access to funds from FMA – I am satisfied that it is a commercial reality, given the relationship of FMA to Mr Freeman, that funds will be loaned and will not be called upon by FMA until the defendant is able to repay those funds.
Accordingly, even if either or both Mr Barboutis and Bullsbrook had standing to apply for the defendant to be wound up pursuant to s 459P of the Act, I would decline to make such an order on the basis that the defendant is not insolvent.

A winding up order pursuant to s 461(1)(k) of the Act?

Section 461(1)(k) of the Act provides:
(1)[Grounds for winding up by Court] The Court may order the winding up of a company if:
…
(k)the Court is of the opinion that it is just and equitable that the company be wound up.
Section 462 of the Act provides:
1.[Interpretation] A reference in this section to an order to wind up a company is a reference to an order to wind up the company on a ground provided for by section 461,
2.[Who may apply] Subject to this section, any one or more of the following may apply for an order to wind up a company:
(a)the company; or
(b)a creditor (including a contingent or prospective creditor) of the company; or
(c)a contributory;
(d)or the liquidator of the company; or
(e)ASIC pursuant to section 464; or
(f)ASIC (in the circumstances set out in subsection (2A)); or
(g)APRA.
Given that I have found that Mr Barboutis is not a creditor of the defendant, he has no standing to apply for an order pursuant to s 461(1)(k) of the Act.
Although I am not satisfied that Bullsbrook is a creditor of the defendant, the issue to be determined is whether it has standing to make an application pursuant to s 461(1)(k) as a contributory.
Section 9 of the Act defines a 'contributory' to include:
1.…
(ii)for a company with share capital – a holder of fully paid shares in the company
There is a dispute as to whether Bullsbrook still holds fully paid shares in the defendant.

Share Sale Agreement

On 16 March 2018 Rilyla and Bullsbrook entered in the Share Sale Agreement whereby Rilyla agree to purchase from Bullsbrook its 150 shares in the defendant for a purchase price of $227,500.[75]
[75] First Barboutis Affidavit at [15], Annexure 'CJB6'.
Relevant terms of the Share Sale Agreement include:
RECITALS:
…
D. Upon Completion of this Agreement, the Purchaser will be the holder of 100% of the shares in the Company and the Vendor will be the holder of 0% of the shares in the company.
Clause 1.1 Definitions
'Completion' means 60 days from the date of execution of this Agreement.
Clause 5 Title Property and Risk
The title to, property in and risk of the Shares:
5.1.1until Completion, remains solely with the Vendor; and
5.1.2passes to the Purchaser on and from Completion.
Clause 2 Agreement to sell and buy the shares
2.1Sale and Purchase
…
2.1.3In the event that the Purchaser cannot make payment of the balance of the Purchase Price within 30 days of the date of this Agreement, the Agreement will come to an end and the Deposit will be forfeited by the Purchaser with the effect that the Vendor remains the holder of 50% of the share in the Company.
Counsel for each of Mr Barboutis and Mr Freeman raise the issue of whether the Share Sale Agreement has been completed, or whether it was validly terminated by Mr Barboutis.
A number of issues arise on the evidence. I will address each of those issues in turn.

Performance of Share Sale Agreement

The first issue is whether or not the full purchase price under the Share Sale Agreement has been paid. Mr Barboutis withdrew $25,000 from the defendant's bank account post execution of the Share Sale Agreement ($5,000 per week for five weeks from 21 September 2018 to 2 November 2018).[76] Mr Freeman treated these withdrawals as a part payment of the sum agreed to be paid by Rilyla to Bullsbrook pursuant to the Share Sale Agreement[77]. Mr Barboutis says he was entitled to withdraw those funds as a mixture of directors' fees and loan repayments.[78] If these funds are to be treated as payments of the purchase price, then there is evidence that the full purchase price of $227,500 has been paid.[79]
[76] First Freeman Affidavit at [47].
[77] First Freeman Affidavit at [48].
[78] Second Barboutis Affidavit at [18].
[79] First Barboutis Affidavit at Annexure 'CJB11'.
Given I have found that Mr Barboutis was not validly appointed as a director of the defendant, and that he is not a creditor of the defendant, it is not open to Mr Barboutis to withdraw funds from the defendant for directors' fees and/or repayment of the loan.
Whether or not Mr Freeman was entitled to allocate those funds to the purchase price under the Share Sale Agreement is not an issue that I can determine in the absence of Rilyla being joined to these proceedings. As Rilyla is not a party (and no relief is sought in relation to the Share Sale Agreement), it is not open to me to determine whether the purchase price has been paid in full.

Date of Completion and Termination of Share Sale Agreement

Bullsbrook asserts that it validly terminated the Share Sale Agreement on 16 August 2018 by letter from Bullsbrook to Rilyla.[80]
[80] Third Freeman Affidavit at Annexure 'ANF7'.
Bullsbrook was deregistered with ASIC between 12 August 2018 and 7 February 2019.[81] Counsel for Mr Freeman submits that Bullsbrook was unable to terminate the Share Sale Agreement because it was unregistered at the time it purported to do so.[82]
[81] Second Freeman Affidavit at [42], Annexure 'ANF10'.
[82] ts 34.
In any event, counsel for Mr Freeman submits that, given the Share Sale Agreement defined 'Completion' as 60 days from the date of execution, the title of the shares passed to Rilyla on 16 May 2018. Given the Share Sale Agreement had been completed prior to the purported termination on 16 August 2018, the termination could not be valid in any event.
Counsel for the plaintiffs submits that Bullsbrook terminated the Share Sale Agreement on 16 August 2018 and was entitled to do so because the purchase price had not been paid (even if the $25,000 drawings were entitled to be allocated to the purchase price, such amount was not allocated to the purchase price until 9 November 2018 – after the Share Sale Agreement had been terminated)[83].
[83] First Barboutis Affidavit at Annexure 'CJB11'.
The definition of Completion in cl 1.1 of the Share Sale Agreement originally provided that Completion was to occur '30 days from the date of execution' but was amended by the parties from '30 days' to '60 days'. It appears that the 30 days, as originally drafted in the Share Sale Agreement, was intended to coincide with the 30 day payment of the purchase price obligation in cl 2.1.3 of the Share Sale Agreement. Clause 2.1.3 of the Share Sale Agreement was not amended to reflect the 60 day amendment. The inconsistency between the clauses creates an issue as to how the Share Sale Agreement is to be interpreted.
Both parties have adduced evidence which goes to variations of the Share Sale Agreement, such that the date for payment of the balance of the purchase price was extended beyond the original 30 days in cl 2.1.3 of the Share Sale Agreement.[84] Even on Mr Barboutis' case, the Share Sale Agreement was still on foot until 16 August 2018, the date upon which Mr Barboutis submits he terminated the Share Sale Agreement.
[84] First Barboutis Affidavit at [18]; First Freeman Affidavit at [39]; Second Barboutis Affidavit at [17].
Again, given that findings concerning the Completion, or alternatively, the termination of the Share Sale Agreement impact upon the rights of Rilyla, it is not appropriate for me to determine these issues when Rilyla is not a party to this proceeding.
In my view, there is a serious question to be tried as to whether or not Bullsbrook holds shares in the defendant. Given that question is not one that is appropriate to determine on this application, and no relief is sought in relation to the Share Sale Agreement, I will nonetheless consider the application for winding up pursuant to s 461(1)(k) of the Act (in the event that Bullsbrook does have standing to make the application as a contributory).

Just and Equitable Grounds

In China v James Smith (Also Known As James With),[85] K Martin J observed:
Nevertheless, winding up orders are not made lightly, even if consented to. A court must itself first be affirmatively satisfied that the winding up order is an appropriate disposition in the prevailing circumstances, particularly where the just and equitable ground is invoked.
[85] China v James Smith (Also Known As James With) [No 4] [2014] WASC 140.
In Australian Securities and Investment Commission v ActiveSuper Pty Ltd (No 2),[86] Gordon J stated:
[86] Australian Securities and Investment Commission v ActiveSuper Pty Ltd (No 2) (2013) 93 ACSR 189 [20] ‑ [24].
[20]It has long been established that a company may be wound up where there is 'a justifiable lack of confidence in the conduct and management of the company's affairs” and thus a risk to the public interest that warrants protection… In Australian Securities and Investment Commission v ABC Fund Managers (2001) 39 ACSR 443 [2001] VSC 383 at [119], Warren J (as her Honour then was) set out three 'general fundamental principles':
'[119]First there needs to be a lack of confidence in the conduct and management of the affairs of the company… Second, in these types of circumstances it needs to be demonstrated that there is a risk to the public interest that warrants protection. Third, there is a reluctance on the part of the courts to wind up a solvent company.'
[21]In relation to the first, a lack of confidence may arise where, 'after examining the entire conduct of the affairs of the company' the court cannot have confidence in 'the propensity of the controllers to comply with obligations, including the keeping of books, records and documents, and looking after the affairs of the company' (citations omitted).
…
[23]In relation to the second, a risk to the public interest may take several forms. For example, a winding-up order may be necessary to ensure investor protection…
[24]In relation to the third, it has been said that 'a stronger case might be required where the company was prosperous, or at least solvent' (citations omitted).
A winding up order of the defendant is sought by the plaintiffs on the following grounds:
(a)Mr Freeman has unilaterally made decisions on behalf of the defendant without the knowledge, consent or approval of Mr Barboutis as a co‑director;
(b)winding up the defendant is in the public interest because:
(i)the defendant has not carried on its business candidly and in a straightforward manner with the public due to there being conflicting instructions of its directors;[87] and
(ii)Mr Freeman has breached ss 180 and 182 of the Act by transferring money out of the defendant's bank account without board approval and linking the defendant's electronic merchant facilities to bank accounts owned and operated by Mr Freeman.[88]
[87] Plaintiffs' Submissions dated 17 April 2019 at [17] and the references therein.
[88] Plaintiffs' Submissions dated 17 April 2019 at [20] and the references therein.
I decline to make an order winding up the defendant on just and equitable grounds for the following reasons:
(a)Mr Barboutis is not a director of the defendant and therefore, Mr Freeman did not require his knowledge, consent or approval to make decisions on behalf of the defendant;
(b)there are no conflicting instructions of directors which create a risk to the public interest that warrants protection;
(c)Mr Freeman did not breach ss180 and 182 of the Act as he did not require Mr Barboutis’ approval to transfer money out of the defendant’s bank account or to link the defendant’s electronic merchant facilities to bank accounts he operated; and
(d)I have found that, on the available evidence, the defendant is solvent.

Other Issues

Both Mr Barboutis and Mr Freeman adduced evidence as to the reasons for the break down in their relationship. I do not propose to make any findings in relation to those matters as I do not consider them to be relevant to the application before me.
Counsel for Mr Barboutis relied upon the case of Higgins v Drilling Australia Pty Ltd,[89] as authority for the proposition that, where a company is deadlocked it is in its best interests to be wound up. In that case, Master Sanderson stated:
It is difficult to envisage a situation where a company is deadlocked and it would be in the company’s best interests to allow a winding up application to be opposed. Even assuming the company is solvent and assuming leave were granted and the winding up application was dismissed, the company would still be deadlocked. It simply could not go about managing its day to day affairs.
In reality once a company such as this is deadlocked there are only three possibilities. First, one party buys the other out. Second, the assets and undertakings of the company are sold and the proceeds of sale are distributed through the company structure. Third, the company is wound up. There are no other options.
[89] Higgins v Drilling Australia Pty Ltd [2018] WASC 254 [6]-[7]
However, in this case there is no deadlock of the company (the defendant) – Mr Barboutis is not a director.
Further, a winding up order should only be made where there are no other alternatives to redress the circumstances giving rise to the dispute. In Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd,[90] McMurdo JA stated:
In my view, the reasonableness of the applicant’s position is to be assessed by reference to the consequences of the events and the circumstances upon which the application is founded and what is necessary to redress them. If they could be redressed only by a winding up order, then the pursuit of a winding up order would not be unreasonable in the relevant sense. On the other hand, if there is an alternative remedy which would equally redress those consequences, then an applicant’s preference for a winding up order would usually be considered to be unreasonable, because ordinarily the winding up of a solvent company will have far reaching effects. It will not only deprive the other shareholders of their investment in a solvent enterprise, but it will also be likely to affect the interest of others, such as the company’s employees and third parties whose interests from transacting business with the company would be affected. It is the likelihood of substantial and far ranging prejudice of this kind which would cause judges to describe a winding up of a solvent company in this context as an extreme step.
[90] Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd [2018] QCA 48 [46].

I have considered the Share Sale Agreement and am of the view that there is a serious question to be tried in relation its performance. Given that Rilyla is not a party to these proceedings, it is not appropriate that I determine this issue. However, in my opinion, there is clearly the possibility of an alternative remedy to winding up which will address the breakdown in the relationship between Mr Barboutis and Mr Freeman. The “extreme step” of winding up the solvent defendant is not appropriate.

Summary

Mr Barboutis is not a director of the defendant and therefore has no standing to make an application pursuant to s 459P(1)(d) of the Act.
I am not sufficiently satisfied, for the purposes of s 459P(1)(b) of the Act, that either of the plaintiffs are creditors of the defendant. Therefore neither have standing to make an application for a winding up order upon insolvency.
Even if either or both Mr Barboutis and Bullsbrook had standing to apply for the defendant to be wound up pursuant to s 459P of the Act, I would decline to make such an order on the basis that the defendant is not insolvent.
Given I have found that Mr Barboutis is not a director of the defendant, none of the grounds relied upon by the plaintiffs in support of a winding up order of the defendant on just and equitable grounds are valid.
In the circumstances, the plaintiffs' application by originating process dated 5 April 2019 for orders pursuant to s 459P and s 461(1)(k) of the Act for the defendant to be wound up in insolvency, or alternatively, on just and equitable grounds, is dismissed.
I will hear the parties as to final orders and costs.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
EP
Associate to Registrar Whitby
1 OCTOBER 2019