Bulktec P/L v Geothetis P/L

[1994] FCA 353

BULKTEC PTY. LTD., RAMRAY PTY. LTD. AND VISMATEC PTY. LTD. v. GEOTHETIS PTY.
LTD., SIMVILLE PTY. LTD., WILLIAM EDGAR MATTHEWS, TERRENCE NORMAN FERN, DAVID
WEBSTER, BULKTEC PTY. LTD., RAMRAY PTY. LTD., JOHN ALTHAUS AND VISMATEC PTY.
LTD.
No. QG78 of 1992
FED No. 353/94 Number of pages - 7
Corporations
(1994) 12 ACLC 643

COURT

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
DRUMMOND J

CATCHWORDS

Corporations - Application for appointment of provisional liquidator - members deadlocked - company not actively trading - sole asset of company its patents which had to be periodically renewed - undertaking offered by director/member opposing appointment to maintain patents - government development grant to company conditional upon submission of final report - director opposing appointment willing to complete report - that applicants were also suing the other directors in a members' derivative action for damage caused to the company not enough in circumstances to require appointment sought - application dismissed.

Rural Industries Co-operative Society Limited v Porky Pigs Pty. Ltd. (1988) 6 ACLC 383

HEARING

BRISBANE, 22 and 23 February, 1994
#DATE 23:2:1994

Counsel for the applicants: D.A. Savage

Solicitors for the applicants: N.R. Barbi

Counsel for the respondents: W. Sofronoff QC and

K. Varley

Solicitors for the respondents: Barker Gosling

ORDER

1. Upon the undertaking of Mr. John Althaus contained in paragraph 79 of his affidavit filed 18 February, 1994, the application filed 18 January, 1994, insofar as it seeks the appointment of a provisional liquidator, is dismissed.
2. Costs are reserved to 20 May, 1994.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

DRUMMOND J I have already dealt with the respondents' motion insofar as it contains applications in respect of security for their costs of the action and in respect of particulars of the applicants' claims. There remains only the respondents' application for the appointment of a provisional liquidator to Vismatec.

1. In the reasons I gave yesterday for ordering the applicants to provide security for the respondents' further costs of the action, I dealt with Vismatec's role as the joint venture vehicle for the development and the exploitation of certain patented technology invented by Mr. Althaus, and with the relationship between each of the parties to the proceedings. This application has been argued, as I mentioned in those reasons, on the agreed basis that there is a triable issue as to there being a deadlock in the control of Vismatec, such that, if established at trial, the making of the winding-up order would be justified. The appointment of a provisional liquidator was sought against this agreed background, essentially because of two considerations.

2. Firstly, the sole asset of Vismatec is its patents. Because they need to be renewed from time to time, they are said to be in the nature of wasting assets which should be sold as soon as possible and the proceeds held, pending the resolution of the litigation. The respondents also point to the fact that the breakdown of trust between the principals of the applicants and the respondents played a part in no one taking action to ensure, by paying the renewal fees on time, that certain of Vismatec's European patents did not lapse. Mr Fern, in his affidavit says:
   

"There will be ongoing renewal fees in the future in relation to those countries in which Vismatec held its patent rights, however, the task of reaching agreement as and when these fees fall due is increasingly difficult. The renewal fees per year are likely to be in the vicinity of $30,000. At present, apart from the proceeds of the unauthorised sale ... of a portion of Vismatec's assets being approximately $27,350, Vismatec is not possessed of any significant funds to meet the renewal costs. Ultimately it is likely that unless an independent person takes control of Vismatec, Vismatec's patent rights will progressively diminish country by country ... As its only significant asset, the patents should, in my view, be sold. An independent person should take control of Vismatec and its assets for this purpose."

1. Vismatec was only able to operate in the past due to the provision of loan funds provided by the first and second respondents. The deadlock that it is conceded exists, at least for the purposes of this interlocutory application, and of the existence of which there is a good deal of evidence, going on what I was directed to in the course of argument, has caused this, as Vismatec's sole significant source of funding, to dry up. It is no longer actively operating. Very extensive efforts by Mr. Althaus and those on the respondents' side to sell or otherwise commercially exploit Vismatec's sole asset, viz., the patented technology, have failed to date. I referred to this matter in some detail in the reasons I gave yesterday.

2. Despite the lack of success in marketing the technology, there is no evidence suggesting that the patents are of a wasting nature for any reason other than the difficulties that have existed in the past in ensuring that action was taken, when needed, to maintain the patents. If these difficulties can be overcome, the justification for seeking to sell the patents in an uninterested market now largely disappears. Despite the difficulties flowing from the fractured relationship between the protagonists that in the past have put the assets at risk, Mr. Althaus now says:
   

"I am and have always been willing and able to take whatever measures are necessary which I as a director of Vismatec or as a director of either Bulktec or Ramray am empowered to do to ensure that moneys are appropriated out of the Vismatec account to keep the patents alive. I am prepared to give undertakings to the court in this regard."

1. The Vismatec account I take to be a reference to the trust account in which the $27,350.00 is held. These funds comprise the proceeds of sale by Mr. Althaus of certain of Vismatec's other assets, which are held in trust for Vismatec by Mr. Althaus' solicitor. They will be enough to keep up the patents for at least a year and maybe 18 months. The cost associated with even the limited administration sought by the respondents will mean that these funds would not extend as far as that. The litigation, in any event, may well be resolved within that period. This fund comprises, according to Mr. Fern, the only moneys that Vismatec can look to to maintain the patents. There is no reason to think that the first and second respondents will continue to pour more money into Vismatec on top of all they have put into the company in the past. Despite what has happened in the past, I think that Mr. Althaus' proffered undertaking which, if accepted by the Court, will be subject to the sanctions for contempt if it is breached, is sufficient to guarantee that the respondents and the applicants as shareholders in Vismatec will now be able to ensure that these trust funds are applied, when needed, to keep up the patents for 12, and possibly 18, months.

2. I do not think the respondents' argument here provides any justification for the appointment sought.

3. The second consideration relied on to justify the appointment flows from the fact that Vismatec obtained a grant of nearly $80,000.00 in public moneys from the Rural Industries Research and Development Corporation ("RIRDC") for the purpose of assisting in a project for the development of the technology. The project commencement date, for the purposes of this grant, was July 1988 and its termination date was June 1990. The grant was paid in two instalments, a year apart, the last in 1991. It was a condition of the grant that a final report be made by Vismatec. RIRDC has been demanding the report from Vismatec since early 1992. It has not yet been provided. This is due to the breakdown of the relationship between the principals of the applicants and the respondents.

4. Mr. Fern says that the consequence is that Vismatec is in breach of the grant conditions and is liable to repay the grant to RIRDC, although it does not appear that any demand has yet been made in that regard. Mr. Fern says:
   

"The moneys the subject of the grant were paid in two instalments pursuant to clause 19 of the Conditions of the Grant. Those monies were paid directly to the registered office of Vismatec in Brisbane. At the time I was residing, and still reside, in Sydney. The expenditure of those moneys was under the control of Althaus who after all was the `inventor' of the technology. Despite requests he has not accounted to Vismatec, the RIRDC or the respondents for the manner in which they were expended ... I have attempted on a number of occasions to have Althaus provide the report required by the RIRDC and to properly account for the expenditure of the moneys. To date, Althaus has neglected to do so ... I say that since the monies were received in Brisbane and expended here by Althaus, only he is in a position to provide such a report and to account for such expenditure. This he refuses to do."

1. It is now, however, common ground that the second instalment of the grant was expended under Mr. Althaus's control. There is a dispute as to whether he also had control of the first instalment. But Mr. Althaus says, with respect to the first instalment, in contrast to Mr. Fern:
   

"Shortly after receipt of the advice from the Council, commencing Monday, 26 September 1988, the directors of Vismatec, myself, Mr Fern, Mr Matthews and Mr Webster, together with a Dr R Solman, met at a directors' meeting of Vismatec for the purpose, inter alia, of considering the terms of the grant. That meeting was held in Sydney, in offices in Pitt Street, otherwise occupied by companies associated with Mr Fern, including Geothetis, one of the respondents herein. Apart from dealing with many other matters, the meeting discussed the application of the grant moneys ... Shortly after September 1988, the initial grant money was paid to the account of the company in Sydney."

1. Minutes of the meeting exhibited by Mr. Althaus record a decision by the participants at this meeting, including Mr. Fern, Mr. Matthews and Mr. Webster, on the respondents' side of the record, that:
   

"The grant be administered out by Vismatec's Sydney directors."

1. That is, by Mr. Fern and Mr. Matthews. Mr. Althaus and Mr. Webster resided in Brisbane. The grant was used to pay for two consultants, Dr. Solman and Mr. McCullagh, who worked from Sydney and who, Mr. Althaus says, were paid out of the Sydney office rather than the Brisbane office for which alone he was responsible. He says he has had no reports or information concerning Dr. Solman or Mr. McCullagh's work, but took action to provide Mr. Matthews with information concerning the expenditure of a second grant instalment in Brisbane, so that Mr. Fern could prepare the report. Mr. Althaus says, in explanation of his attitude now to the question of who should prepare the report:
   

"Until I read Mr Fern's affidavit filed in January 1994, I was not even aware that the report had not been submitted. If Mr Fern does not wish to prepare the report, and if it is the view of both Mr Webster and Mr Matthews that Mr Fern not prepare the report, but that I prepare the report, then I am perfectly happy to do so. All that I will require is the information that will allow me to satisfy the conditions contained in the first paragraph of (the instructions for the report issued by RIRDC)."

1. The history of what happened with respect to the report is indicative of the extent of the breakdown in the relationship between the principals. This, I think, is essentially its significance, although Mr. Sofronoff, senior counsel for the respondents, also relied on this matter in support of a submission that the need to lodge the report was a justification for the appointment of a provisional liquidator who could attend to having that done, given that the parties have proved unable to arrange for that, to date. It is unnecessary for me to form a concluded view on who is responsible for the failure to prepare and lodge the report, although I note that Mr. Althaus's detailed explanation in his affidavit filed last Friday of what happened here is not contradicted and that Mr. Fern seems to have resiled from the position he adopted in his affidavits with respect to the first instalment.

2. It seems to me, in view of the nature of the reporting requirements, that it is Mr. Althaus who has the necessary technical expertise, who is best fitted to attend to preparation of the report. He swears to his willingness to do that, provided he can obtain certain necessary information from those on the respondents' side. Mr. Althaus's affidavit only very recently became available to the respondents, but the information he identifies as that which he needs to prepare the report, he says, is all with the respondents, save insofar as some has been tendered in evidence here. That has not been disputed. Given these circumstances, including Mr. Althaus's professed willingness to attend to preparation of the report, I would not regard the appointment of a provisional liquidator as a justifiable way of ensuring that this responsibility resting on Vismatec will be discharged. The expense involved in the provisional liquidator retaining someone suitably qualified to attend to this would, in my view, unjustifiably diminish the small amount of cash belonging to the company and for which there are more useful applications in keeping up the patents.

3. Mr. Sofronoff also put forward another proposition that he suggested favoured the appointment of a provisional liquidator. The applicants, as shareholders in Vismatec, have brought a derivative action in which they allege improper behaviour by the controlling directors to the detriment of the company and in turn themselves. Mr. Sofronoff submitted that a provisional liquidator would be able to make an objective assessment as to whether the action should be resisted or accepted as well-founded. He relied on a decision of von Doussa J, Rural Industries Co-operative Society Limited v Porky Pigs Pty. Ltd. (1988) 6 ACLC 383. There, the majority shareholder of Porky Pigs sought the appointment of a provisional liquidator to the company, which was the sole plaintiff in an action against certain of its former directors who had been appointed by the majority shareholder, on the ground that the minority shareholders were now in exclusive control of Porky Pigs and there was a conflict between their interests and those of the company, as they were pursuing the action against the former directors for their own personal ends, at the expense of Porky Pigs, when that action might not succeed. The company had sold its business, paid its debts and had ceased to trade. Its only remaining asset was a substantial amount of cash. Subject only to the need to resolve the issues in the action, the company would inevitably be wound up. The only live question, as his Honour put it, was when that should occur. His Honour said at page 387:
   

"There is a clear divergence of views between Rural Industries and the minority shareholders as to how the affairs of the company should be managed. This is the very type of case where the power to appoint a provisional liquidator should be exercised to place an entirely independent person between the company and the two warring factions of shareholders. A provisional liquidator could objectively assess the merits of the disputed allegations, and proceed with the litigation if and how he sees fit in the interests of the company."

1. The critical consideration that led his Honour to this conclusion was that the minority shareholders were seeking to obtain large damages from the majority shareholders' appointees by suing, not in their own names, but in the name of a company as sole plaintiff. Moreover, because they controlled the company to the exclusion of the majority shareholder in the events that had happened, they were able to fund this action with the company's sole asset, its cash reserves. It was to enable an independent provisional liquidator to decide whether the company should continue with the action and to continue to expend its own moneys for that purpose that his Honour decided to make the appointment to a company the members of which were in irreversible deadlock.

2. The facts here are very different. While there may well be a deadlock of a kind that will result in a winding-up of Vismatec, its presence on the record is merely to ensure all relevant parties are before the Court. Vismatec is not using up its assets in running the action at the behest of one group of shareholders. It has no assets other than the patents, which do not appear to be readily convertible into money, at the moment at least, and the fund of $27,000.00, effectively frozen in the trust account of Mr. Althaus's solicitor. It is the first and second applicants who are funding the action. The damages they seek in claim A are for the first and second applicants alone, while the damages and other relief they seek in claim B are only partially for the benefit of Vismatec. In that claim, they also seek damages in respect of the diminution in the value of their individual shareholdings in Vismatec because of the conduct of the respondents. A provisional liquidator thus could not terminate the litigation, even if he were to come to the view that it was of no possible benefit to Vismatec for it to be continued. Whether the litigation continues is effectively for the first and second applicants alone to determine. No purpose will be served, in my view, by imposing on the company the costs of putting it under the control of a provisional liquidator. It is more advantageous to the company that such of its funds as remain are used to keep up the patents, since they may, contrary to all present indications, at some time in the future become assets of some value to the company.

3. On Mr. Althaus's undertaking offered in paragraph 79 of his affidavit filed 18 February, 1994, remaining available, I will dismiss the application insofar as it seeks the appointment of a provisional liquidator.