DRB Constructions Pty Ltd v BWC Constructions Pty Ltd
[2019] FCA 2096
•4 December 2019
FEDERAL COURT OF AUSTRALIA
DRB Constructions Pty Ltd v BWC Constructions Pty Ltd [2019] FCA 2096
File number: QUD 714 of 2019 Judge: DERRINGTON J Date of judgment: 4 December 2019 Catchwords: CORPORATIONS – oppression action – interlocutory relief – where purported termination of director’s employment – whether injunction to prevent general meeting from occurring to ratify termination ought to be granted – injunctions in relation to employment – injunctions to restrain payments to directors or associates Date of hearing: 4 December 2019 Registry: Queensland Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 30 Counsel for the Plaintiffs: Mr P Hackett Solicitor for the Plaintiffs: Ronan Fox Counsel for the Defendants: Mr APJ Collins Solicitor for the Defendants: McInnes Wilson ORDERS
QUD 714 of 2019 BETWEEN: DRB CONSTRUCTIONS PTY LTD
First Plaintiff
DEAN RODERICK BANNERMAN
Second Plaintiff
AND: BWC CONSTRUCTIONS PTY LTD ACN 125 176 463
First Defendant
BWC PROPERTIES PTY LTD ACN 009 992 974
Second Defendant
NICK ZANGARI & MEGAN ZANGARI ATF ZANGARI FAMILY TRUST (and others named in the Schedule)
Third Defendant
JUDGE:
DERRINGTON J
DATE OF ORDER:
4 DECEMBER 2019
UPON THE PLAINTIFFS:
1.providing the usual undertaking as to damages until trial or earlier order; and
2.undertaking not to unreasonably withhold their consent pursuant to order 7 below,
THE COURT ORDERS THAT:
1.The first, second, third, fourth, and fifth defendants be restrained until trial or further order from proceeding with a general meeting of members of the first defendant convened to commence at 10.00 am 6 December 2019 pursuant to a NOTICE OF GENERAL MEETING OF MEMBERS dated 21 November 2019.
2.The defendants be restrained until trial or further order from taking any steps to remove the second plaintiff as a director or employee of the first defendant.
3.The first defendant continue to pay the second plaintiff’s salary until trial or further order.
4.That the first defendant appoints an auditor to audit the first defendant’s 2019 financial report dated 26 November 2019.
5.That for the purposes of giving effect to order 4, the plaintiffs within 7 days provide the first defendant with the name of three audit firms from which the first defendant will select an auditor to conduct the audit.
6.The costs of the audit be paid by the first defendant in the first instance but otherwise be reserved inter partes.
7.That the first defendant be restrained until trial or earlier order from making any payment in excess of $25,000.00 other than to a trade creditor, supplier or the ATO without the written consent of the second plaintiff, which consent the second plaintiff undertakes not to unreasonably withhold, until further order.
8.That the first, fourth and fifth defendants be restrained from paying any money of the first defendant to the fourth or fifth defendants, or any entity in which they have an interest, other than:
(a)in the case of the first plaintiff and third defendant any amount payable by them in relation to the repayment of money advanced to the first plaintiff and third defendant to purchase shares in the first defendant but limited to $29,666.00 per month;
(b)in the case of the fourth defendant any amount payable to the sixth defendant pursuant to the management agreement between the first and sixth defendant entered March 2018;
(c)in the case of the fourth defendant any amount payable to him, or any entity in which he has an interest in, in reimbursement of genuinely incurred expenses incurred on behalf of the first defendant;
(d)in the case of the fifth defendant any amount payable to him:
(i)as salary; or
(ii)in reimbursement of genuinely incurred expenses in the discharge of his role as project manager of the first defendant;
9.That the first defendant be restrained until trial or earlier order from paying any legal costs of the second to sixth defendants.
10.Costs reserved
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
DERRINGTON J:
In these proceedings, the plaintiffs, DRB Constructions Pty Ltd (DRB) and Mr Dean Bannerman, seek relief against the defendants in respect of alleged oppressive conduct in the operation of the company, being the first defendant, BWC Constructions Pty Ltd (BWC). DRB is a 20 per cent shareholder in BWC. BWC Properties Pty Ltd (BWC Properties), the second defendant, owns 60 per cent of the shares in BWC, and all of the shares in the sixth defendant, Kenalodge Pty Ltd. Mr Brett Walker is the sole shareholder of BWC Properties. The remaining 20 per cent of the shares in BWC are held by Mr and Mrs Zangari.
The shareholders, between them, have sought to regulate their affairs by entry into a shareholders agreement. By it, their obligations, inter se, are modified and regulated by covenants, including to act in good faith in relation to their dealings with each other. Another aspect of the shareholders agreement is the ability of shareholders to acquire the shareholding of the other or others where the certain identified persons is no longer an employee of BWC.
There is no need to detail at any length the background to this matter. It suffices to observe that Mr Bannerman and Mr Zangari had previously worked in the business which BWC now operates, although the exact identity of the original owner of the business is not entirely clear. It is clear however that the business is now conducted by BWC, and that it is a construction business.
Over time, the interests which control the shareholdings in BWC, Mr Walker, Mr Bannerman and Mr Zangari, have been relevantly employed in the BWC business in various capacities. Relevantly, for today’s purposes, Mr Bannerman was employed as a project manager, and the evidence before the Court indicates that he has engaged in substantive work in that capacity over a number of years. In recent times, it appears that the relationship between the directors, Mr Walker, Mr Bannerman and Mr Zangari, has deteriorated. The cause of the deterioration is presently unclear, but that as a consequence of it, Mr Walker, and possibly Mr Zangari, have sought to terminate Mr Bannerman as an employee of BWC. If that termination is effective, the consequence is that as a result of the shareholders agreement, the shares of DRB may be acquired by the remaining shareholders at 50 per cent of their actual value.
The attempt to terminate Mr Bannerman’s employment has crystallised various disputes between the parties, and the action by Mr Bannerman and DRB alleges oppressive conduct in a number of respects, including the attempted termination of employment. The applicants also allege oppressive conduct as a result of other directors failing to provide Mr Bannerman with information, and particularly financial information of the company. Thirdly, they rely on the other directors’ attempts to remove him as a director. Fourthly, they allege the misuse of company funds by Mr Walker for the benefit of his other company, Kenalodge.
It is essential to keep in mind that, at present, the application has been brought on for an urgent hearing. Material has been filed, but with the limited ability of parties to respond, or at least to respond fully. That is in the nature of interlocutory injunctions. It follows that any findings are of a preliminary nature only, and the facts which the evidence presently disclose may well be subsequently dispelled when the plaintiffs’ evidence is tested and further time is available for contradicting evidence to be advanced.
Putting that to one side, on the material before the Court today there are substantial grounds for accepting that the plaintiffs have established a serious question to be tried that they have been subjected to oppressive conduct. Mr Collins of Counsel, who appeared for the respondents, very properly acknowledged that the requirement of the existence of a serious question, has been overcome. Nevertheless, it is necessary, given the interplay between the issue of a serious question and the balance of convenience, to consider, at least briefly, the evidence in relation to those allegations of oppressive conduct.
As to the allegation that Mr Walker and Mr Zangari, through their respective companies and BWC, have attempted to unlawfully or improperly remove Mr Bannerman, the evidence as it presently stands supports that contention. In earlier interlocutory proceedings brought by DRB and Mr Bannerman, undertakings were given not to proceed with a meeting which was scheduled at an earlier point in time. That was a directors’ meeting at which it was intended to ratify the termination of Mr Bannerman as an employee. The material shows, at least to a prima facie extent, that the purported termination was not in accordance with the agreement between the parties.
What has occurred since is that a proposed meeting of shareholders is intended to be held on 6 December 2019. It has been convened for the purposes of ratifying the removal of Mr Bannerman. It is in relation to that meeting that the plaintiffs primarily seek injunctive relief. Putting aside the evidence of the prior attempts to terminate Mr Bannerman’s employment, the defendants now assert that the reason for his termination is that his position has become redundant. There is evidence before the Court which strongly suggests that purported ground of termination is contrived.
Firstly, it is noted that, on 16 October 2019, Mr Walker in fact offered to Mr Bannerman the opportunity to stay on as an employee with BWC. That was, however, on the condition that he sell his shares for the sum of $1.1 million. When I say “his shares”, I am referring to DRB’s shareholding, but I am expressing these issues in terms of the “interests” rather than with respect to the more specific legal rights. In any event, the allegation that that offer was made has not been contradicted, and I accept for these purposes that it was made. That being so, subsequent evidence by the defendants, including Mr Zangari, to the effect that Mr Bannerman’s work was below the standard expected or inadequate, has to be considered cautiously. It is most unlikely that he would have been offered continued employment were that to have been the case. The fact that, following Mr Walker having offered the continued employment, Mr Zangari and Mr Walker might suggest that he was unfit to remain, is important for another matter. That is because the defendants, in opposing the injunctive relief, Mr Zangari and Mr Walker, offered undertakings to the Court. However, on the evidence which is presently before the Court, their conduct raises some concerns.
The other issue in relation to Mr Bannerman’s employment was that BWC purported to terminate him on the basis that his position was redundant. As it transpires, his position was not redundant at all and Mr Walker has stepped in and undertaken the work previously performed by Mr Bannerman. It may have been that the work Mr Walker had previously done was no longer required, but it is quite obvious, on the evidence as it presently exists, that redundancy was not a genuine ground for Mr Bannerman’s removal. Prima facie, that leads to a conclusion of a lack of good faith by the defendants.
A very disturbing side issue arises in relation to the termination of Mr Bannerman’s employment, and that is that, at or around the purported termination, it is apparent that Mr Walker sought advice from the firm McInnes Wilson about that matter. The advice was given, but when Mr Bannerman, who was a director of the company, sought to consider it, it was not provided to him. Subsequently, Mr Walker says that the advice was not provided to the company, but to himself personally. Mr Hackett, for the plaintiffs, has drawn my attention to a number of indicia which suggest that may not be correct. The first is that it is apparent that a file was opened at McInnes Wilson in the name of the company, BWC Constructions, and continued in that name for some time. McInnes Wilson also sent to the company at its address, an invoice for professional fees and the like. That invoice was paid for by the company BWC Constructions.
The work identified in McInnes Wilson’s statement of account related to both a review of the shareholders agreement and some discussion about that, as well as advice relating to options for terminating Mr Bannerman’s employment. It seems there were meetings between Mr Walker and McInnes Wilson lawyers about that. That advice concerning the termination of Mr Bannerman’s employment was relevant to BWC as his employer. It was not relevant, or is in no way relevant, to Mr Walker in his personal capacity. Those elements strongly suggest that the company was, in fact, the client of McInnes Wilson, either alone or to an overlapping extent with Mr Walker.
When the matter was called on for today’s hearing, affidavits were filed by a principal of McInnes Wilson. In that affidavit, it is suggested that the fact that the account went to BWC and not Mr Walker was an administrative error. It is said that the work was done by McInnes Wilson for Mr Walker and not for BWC. Because the affidavits are by a legal professional admitted in the State of Queensland, and who was not cross-examined, I will accept the evidence contained therein. Part of the interlocutory relief sought is for the provision of McInnes Wilson’s advice. As the evidence presently stands, it is not possible to reach any final conclusion about the entitlement of Mr Bannerman or DRB to it, and whether or not it is actually the advice given to BWC or to Mr Walker personally. It suffices only to observe that a serious question arises around that issue. No order should be made in respect of that relief presently, but a further hearing will be held in the near future where cross-examination of the relevant parties can take place and the entitlement to the advice can be finally determined.
DRB and Mr Bannerman also allege that Mr Walker, and probably with the concurrence of Mr Zangari, have been using the funds of BWC inappropriately. It is said that Mr Walker has caused BWC to make substantial loans to his own company Kenalodge. The evidence before the Court suggests that, as at 19 November 2019, the amount lent was $5.7 million. That is a substantial amount for a company with a relatively small turnover.
There exists some doubt in the material as to whether or not Mr Bannerman was aware or fully aware of the nature of the loans, or when they were made. It is also unclear whether they were made with his approval. The fact that he makes complaints about the occurrence of the loans in these proceedings tends to suggest that he was either not aware of the making of the loans or, if he were aware of the fact of the loans, he was not aware of them being made or not aware of their full extent. That is not insignificant, in the circumstances where the directors, Mr Walker and Mr Zangari, have caused the company to enter into new loan agreements with third parties. In particular, they have caused BWC to enter into a new facility which would not be required if those loans to Kenalodge had not been made. Substantial interest is payable on the loans under the new facility.
Mr Hackett, for the plaintiffs, submitted that the seeking and obtaining of the new loan was a contravention of the shareholders agreement. That does not seem to be disputed in these proceedings. Certainly, Mr Bannerman was not aware of it, and it was made without his knowledge or approval. Although he is not a guarantor of the loan, it is a substantial liability for the company and it was a breach of the shareholder agreement for it to have been entered into without his approval.
Prima facie, there is substantial evidence to the effect BWC is being operated to the exclusion of Mr Bannerman as a director and that, in doing so, Mr Walker at least is using the funds of the company for his own personal benefit or for the benefit of companies associated with him.
There is no need to consider in too much detail the two other matters on which the applicants relied being the failure to provide Mr Bannerman with financial information and the attempts to remove his as a director. Their complaint appears to be well-founded. However, in relation to the issue of the provision of financial information, significant concern arises from the vague nature of the accounts which have produced, some of which have been inconsistent. When Mr Bannerman’s solicitors have sought information as to the veracity of the accounts, or as to issues which concern them, they have not been met with any detailed or proper response, but rather some obfuscation. In particular, an issue arose in relation to a loan owed by Kenalodge to BWC Constructions in the sum of $2.2 million. Whilst that loan existed and was reported in the 2018 financial year accounts as an amount owing to BWC, or as income accrued and payable by Kenalodge, in draft accounts for 2019, Mr Catalano, the accountant for BWC, purported to reduce its amount by $2.42 million, being the amount of the loan plus GST. That attempt to reduce Kenalodge’s liability to BWC is unexplained. No attempt was made today to adjourn the matter so that further evidence could be produced to explain why Mr Catalano purported to adjust the amount down. That too raises significant concerns, but it supports Mr Bannerman’s allegation that the company is being run for the benefit of others. It follows that the test of whether or not there is a prima facie case is well and truly satisfied.
Thereupon remains the question of the balance of convenience. In this case, the orders sought somewhat unusually ask that the company be restrained from taking any steps to remove Mr Bannerman as a director or as an employee. This, of course, is problematic. The parties are in litigation involving significant disputes. The consequence of that is that if a Court makes the order sought, there is the possibility of continuing supervision.
Weighing also against making the orders sought is the issue of the undertaking as to damages by Mr Bannerman. Mr Collins, for the defendants, quite rightly submitted that, at its highest, the evidence of the value of an undertaking offered by the plaintiffs is somewhat thin. In his affidavits Mr Bannerman deposed as to what he said were the value of his assets. He was, however, not cross examined on that, and the passages were not objected to. To some extent, therefore, I am entitled to rely upon that evidence, although I am entitled not to give it great weight. That is not to say there is any significant reason to disbelieve it. DRB Constructions also offers its undertaking and whilst it is the owner of shares in BWC, it is most likely that those shares are encumbered to some significant degree.
In considering the issue of the undertaking as to damages, the other aspect is the nature of the damages which might possibly be suffered by the defendants. In the present case, the damage which might be suffered by BWC or the other defendants is somewhat vague and difficult to ascertain. If Mr Bannerman’s employment is not terminated, the company will have to continue to employ him and pay his wages. That will, no doubt, be an impost on the company, but it has substantial assets and it is unlikely to be of any great burden. It can also be observed that Mr Bannerman is prepared to continue to work in the company, despite the defendants’ allegation that his work is below standard and that some clients have complained. It is not suggested that there would not be sufficient work for him to do and nor would I give that evidence great weight in the light of Mr Walker having previously offered to continue Mr Bannerman’s employment.
If Mr Bannerman is continued in his employment for the next short while, it is difficult to see that any significant damages will be sustained and, in that respect, the undertaking as to damages might be satisfactory. It is difficult, if not impossible, to predict what, if any, damage will be sustained on the assumption that some clients have expressed dissatisfaction with his work. Nevertheless, it is certainly not impossible for BWC to organise its affairs around any allegedly dissatisfied clients. A further issue raised by Mr Collins, which is also of importance, is the question of whether, if the injunction is not granted, the plaintiffs will suffer any irreparable damage. This was not a point to which a lot of attention was given and probably because it is, in the circumstances, somewhat difficult to articulate. Perhaps the most important factor relevant to this topic is the ability of Mr Bannerman to have access to and be confident of the information relating to the affairs of the company of which he is a director.
Certain undertakings have been offered by the remaining BWC directors not to cause the funds of the company to be used other than in the ordinary course of its business until the resolution of this matter, not to cause BWC to use its funds to repay the existing loans, and to supply the plaintiffs with evidence of the expenditure incurred by them on a monthly basis. It is obvious that the plaintiffs do not accept that undertaking. They have concerns about the accuracy and veracity of the information with which they will be provided. Mr Collins submitted that a contravention of any undertaking has serious consequences and that should ensure compliance. He also submitted that the undertakings may be tightened or re-drafted in order to make them more secure for the plaintiffs. The defendants have also offered to ensure that the 2019 financial year statements are independently audited.
Despite the undertakings offered by the defendants, the circumstances of this case reveal that neither Mr Bannerman, nor this Court, can have any degree of confidence that if they are accepted they will be complied with or complied with properly. The conduct of Mr Catalano — and it should be said he is not here to defend himself — as it appears from the evidence presently before the Court, gives rise to a significant concern about the type of information with which Mr Bannerman might be provided were he not to be a director of the company. I add that it can be expected that Mr Catalano only acted upon instructions given to him by Mr Walker.
Although it is difficult to ascertain what damages may be sustained and whether damages that are sustained are capable of being remedied, it is possible to say that, given the concerns I have expressed in relation to the conduct of the company, if Mr Bannerman is forced subsequently to attempt to ascertain at a later stage what has occurred in the management of BWC, he may very well be put in the position of being unable to do so. That risk will mean that his lack of accurate information will possibly cause him significant damage.
Orders which ought be made
In those circumstances, the plaintiffs have satisfied the court that the balance of convenience weighs in favour of granting injunctive relief to restrain the members of the first defendant from proceeding with a meeting convened to commence at 10.00 am on 6 December 2019, pursuant to a notice of general meeting of members dated 21 November 2019; and similarly, the defendants ought to be restrained from taking any steps to remove Mr Bannerman as a director of the company or to terminate his employment. The plaintiffs initially sought orders for the production, by 6 December 2019, of finalised accounts for the 2019 financial year, but that has already occurred, and there is no need to further deal with that issue.
The applicants also seek to restrain the defendants from interfering in any way with the second plaintiff’s ability to discharge his employment duties as project manager for BWC. That order, in those wide terms, gives some pause for concern. It would be one which would almost require the continued supervision of the Court. I am not prepared to make such an order at this stage. Whilst Mr Bannerman’s employment may be restored, the order in the form sought might be thought to give him scope to undertake whatever duties he was previously undertaking. Those duties were always subject to the direction of the company in any event, so for present purposes, order 4 would be inappropriate. Nevertheless, order 5, which is an alternative to order 4, ought be made: that is, that the first defendant pay the salary of the second plaintiff until the termination of this matter; and it is implicit in what I have said that the circumstances that existed prior to the attempts of the defendants to oust DRB and Mr Bannerman from the affairs of BWC should be restored.
Order 7 sought by the plaintiffs was for the production of the advice and other documents. For the reasons I have given, I would refuse that relief at this stage, but I will make directions in the future setting that matter down for a full hearing.
The plaintiffs seek an order restraining the first, fourth and fifth defendants from paying any of BWC’s money to the fourth or fifth defendants or to any entity in which they have an interest, other than in certain specified circumstances. Prima facie, the plaintiffs have raised a serious question to be tried about the propriety of the conduct of the financial affairs of BWC and, in particular, by attempts to transfer its economic value to entities owned or controlled by Mr Walker. In those circumstances, and in order to preserve the value and position of the company, I am prepared to make an order in terms similar to paragraph 9 of the amended interlocutory process.
I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Derrington. Associate:
Dated: 4 December 2019
SCHEDULE OF PARTIES
QUD 714 of 2019 Defendants
Fourth Defendant:
BRETT WALKER
Fifth Defendant:
NICK ZANGARI
Sixth Defendant:
KENALODGE PTY LTD ACN 065 705 151
0
0
0