Grego v Copeland
[2011] VSC 521
•20 October 2011
| Do Not Send for Reporting | ||
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
CORPORATIONS LIST
No. 9757 of 2008
| IN THE MATTER OF JIMMI DEXTA PTY LTD (ACN 079 348 217) FRANK GREGO | Plaintiff |
| v | |
| MARK WILLIAM COPELAND & ORS | Defendants |
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JUDGE: | FERGUSON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 5 and 18 August 2011 | |
DATE OF JUDGMENT: | 20 October 2011 | |
CASE MAY BE CITED AS: | Grego v Copeland & Ors | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 521 | |
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CORPORATIONS – Oppression – Application for leave to appeal from decision of Associate Judge – Exclusion from management and failure to make reasonable offer for shares – Characterisation of payments to company as shareholder loans rather than capital – Demand for injection of funds – Failure to hold shareholder meetings – Diversion of assets to new company – Failure to pay for expenses incurred on behalf of the company – Orders for purchase of shares – Date for valuation – Amount to be paid – Corporations Act 2001 (Cth) s 232
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J. Whelen | Soccio & Associates |
| For the Defendants | Mr R. Brett QC with Mr K. Baker | WMB Lawyers |
TABLE OF CONTENTS
Introduction and summary............................................................................................................... 2
The factual background.................................................................................................................... 4
The conduct alleged to be oppressive............................................................................................ 6
(a).... Demand that Mr Grego inject $160,000 into the Company............................................ 6
(b)... Improperly excluding Mr Grego from participation in management......................... 6
(c).... Failing to hold meetings of members............................................................................... 6
(d)... Failing to make a reasonable offer for Mr Grego’s shares............................................. 7
(e).... Incorporating a new company known as JD Brands Pty Ltd........................................ 7
(f).... Failing or refusing to honour the Company’s financial obligations to Mr Grego..... 7
(g)... Denying Mr Grego access to information about the Company’s affairs...................... 8
(h)... Capital contributions or shareholder loans..................................................................... 8
Was the conduct oppressive?......................................................................................................... 14
The relief that was granted............................................................................................................. 19
Conclusion......................................................................................................................................... 22
HER HONOUR:
Introduction and summary
The plaintiff, Frank Grego, together with three of the defendants, Mark William Copeland, Giancarlo Greco and JDR Investments Pty Ltd, are shareholders in the fourth defendant, Jimmi Dexta Pty Ltd (“the Company”). Mr Grego holds 18% of the Company’s shares. He contends that since about June 2006, the defendants have conducted the affairs of the Company in a manner oppressive to him for the purposes of s 232 of the Corporations Act2001 (Cth). Robson J referred the proceeding to an Associate Judge for hearing and determination. After a three day trial, the Associate Judge found in favour of Mr Grego. The Associate Judge ordered that the defendants purchase the shares held by Mr Grego in the Company for $32,142.86. His Honour also ordered that within 21 days the defendants procure National Australia Bank Limited to release and discharge Mr Grego from the guarantee that he had given in favour of that bank and remove him as a guarantor in relation to the Company. His Honour further ordered that the Company pay Mr Grego an amount of $11,658, together with interest of $1,569.04 as reimbursement for an amount that Mr Grego had paid to American Express in respect of a credit card that he had used for payment of expenses related to the Company. In addition, his Honour ordered that the defendants pay Mr Grego’s costs of and incidental to the proceeding.
The defendants seek leave to appeal against the decision of the Associate Judge.[1] Leave may be granted where it is established that the decision of the Associate Judge is arguably affected by error.[2] Matters relevant to both the application for leave and the substantive appeal were heard together.
[1]Leave is required pursuant to r 16.5(2) Supreme Court (Corporations) Rules2003.
[2]Rule 16.5(3) Supreme Court (Corporations) Rules2003.
Mr Grego relied on eight grounds that he contended constituted oppression:
(a)a demand made in May/June 2006 that he inject $160,000 into the Company or else he would be removed as a shareholder and director;
(b)improperly excluding him from participation in management of the Company;
(c)failing to hold any meetings of members to which he was invited since 14 June 2006;
(d)failing to make him a reasonable offer for his shares;
(e)incorporating a new company, JD Brands Pty Ltd, to which assets of the Company were diverted;
(f)failing or refusing to honour the Company’s financial obligations towards him in his capacity as an employee;
(g)denying him access to information about the Company’s affairs; and
(h)incorrectly characterising certain payments that were made as shareholders’ loans, rather than as capital.
The parties accepted the findings of fact of the Associate Judge relating to each of these grounds, other than in respect of the last of them. The defendants argued that, even accepting the findings of fact that the Associate Judge made, the grounds alleged did not amount to oppression in this case.
For the reasons set out below, I have concluded that the Associate Judge did not err. Oppression has been established and results from the cumulative effect of the exclusion of Mr Grego from management without making a reasonable offer for his shares, re-characterising amounts paid as loans instead of capital, refusing to meet the Company’s financial obligations towards him and diverting assets to JD Brands Pty Ltd. In addition, there was the unreasonable demand that Mr Grego contribute $160,000 into the Company or face removal as a director and loss of his shares.
The orders made by the Associate Judge for the purchase of Mr Grego’s shares at a price of $32,142.86, for procurement of the release of the guarantee that he gave in favour of the National Australia Bank Limited and for payment of the American Express card liability and interest were appropriate. The price for purchase of the shares represents what a third party had offered and Mr Grego would have accepted at a time when he and his co-shareholders were content to part ways and when there had been some oppressive conduct.
The defendants’ application will be dismissed.
My more detailed reasons are set out below. First, I will summarise some of the factual background before dealing with each instance of conduct relied on by Mr Grego. I will then consider whether that conduct constitutes oppression and whether the Associate Judge was in error. Finally, I will consider the relief that was granted by the Associate Judge.
The factual background
For present purposes, the following summary of the factual background (which is based on his Honour’s reasons) is sufficient.
In about 2002, Mr Grego and his son, Todd, decided to establish a wholesale clothing business. At that time, they were working in the clothing industry as screenprinters/designers. They purchased the Company, which was a shelf company at the time, and later changed its name to Jimmi Dexta Pty Ltd. They were both directors and each held 150 fully paid ordinary shares in the Company.
In about early 2004, a friend of Mr Grego, Neville Dudley, together with Mr Copeland, approached Mr Grego to discuss working with him and his son in the Company. They said that they had a friend who imported shoes and wanted to know about artwork and branding for runners and shoes for the lower end of the market. The three men agreed that Mr Grego would be responsible for the artwork and sampling and he would go to China to source supplies and to locate wholesalers. Mr Copeland was to handle the finances and Mr Dudley was to handle the freight for the business. Mr Copeland and Mr Dudley were each to receive shares – Mr Copeland for his financial contribution and Mr Dudley for his freight and customs clearance expertise. For no payment to them, Mr Grego and his son each transferred some of their shares to Mr Copeland and Mr Dudley. Mr Copeland paid $160,000 into the Company progressively over a six month period. This money was used for Mr Grego’s wages, to buy stock and to pay for business travel.
In mid-2004, Mr Greco became an employee of the company. He was an old acquaintance of Mr Grego and he had contacts for footwear suppliers in China. About this time, or a bit later, Mr Romeo became an investor in the Company. He paid $125,000 to the Company in three instalments.
The shareholdings in the Company changed over time as did the directorships. In about mid May 2005, Mr Grego, Mr Dudley, Mr Copeland, Mr Greco and Mr Romeo’s company, JDR Investments Pty Ltd, each held 54 shares in the Company, with Todd Grego holding 30 shares. Subsequently, Mr Dudley transferred all his shares to Mr Copeland.
In about May 2006, Mr Copeland told Mr Grego that he, Mr Greco and Mr Romeo wanted Mr Grego to resign as a director of the Company. A letter in the following terms was given to Mr Grego:
Further to our recent discussions regarding your directorship of Jimmi Dexta, we think it is appropriate for you not to be a director, as discussed on many occasions, for the following reasons:
·You have not made a financial contribution to Jimmi Dexta P/L.
·You have not secured your property against the loans of Jimmi Dexta P/L.
·Your activities in the company are not of an ongoing income producing capacity.
Should you leave Jimmi Dexta P/L, then there is no other financial impact on you as you have stated you have no assets or funds to help offset the $1,000,000+ that Jimmi Dexta P/L owes its creditors. The other directors have all made a financial contribution and/or have their homes secured against this debt.
For these reasons the destiny of the company should lie with those who are impacted the most by its continued existence – good or bad.
At a directors meeting held on 25 May 2006, which was attended by Mr Copeland, Mr Greco and Mr Romeo, they resolved that a resolution to remove Mr Grego as a director be put to a meeting of shareholders. In about late May 2006, Mr Grego received a notice that a shareholders meeting was to be held. He had a discussion about the meeting with Mr Copeland and Mr Greco. He was told that they wanted him to resign as a director and for his son and him to hand over their shares to them because they had a new investor. Mr Grego was told that if he wanted to keep his shares, he would have to invest $160,000 into the Company.
No funds were injected by Mr Grego and he was removed as a director of the Company at a meeting of shareholders on 14 June 2006. He continued to hold his shares.
Mr Grego was originally engaged as a consultant to the Company and later became an employee. His employment was also terminated in June 2006.
The conduct alleged to be oppressive
Having traversed the factual background, his Honour turned to consider each of the alleged grounds of oppression. I will set out below his Honour’s findings of fact in respect of each of those grounds.
(a) Demand that Mr Grego inject $160,000 into the Company
As noted above, in late May/early June 2006, a demand was made that unless Mr Grego contributed $160,000 to the Company, he would lose his shares and be removed as a director.
(b) Improperly excluding Mr Grego from participation in management
As noted above, Mr Grego’s employment was terminated in June 2006 and he was removed as a director on 14 June 2006.
(c) Failing to hold meetings of members
Since 14 June 2006, no notices of any shareholder meetings have been sent to Mr Grego and there have not been any official shareholder meetings held since that date.
(d) Failing to make a reasonable offer for Mr Grego’s shares
On 2 June 2006, Mr Grego wrote a letter to the Company and stated that if the directors wanted his son and him to leave, then they would have to pay them what their shares were worth. The other shareholders assessed the value of the shares as nil and offered this to Mr Grego and his son.
In June 2007, Mr Grego was approached by John Georgiadis in relation to Mr Grego selling his shares. Mr Georgiadis told Mr Grego that he had been approached by Mr Copeland and Mr Greco to invest in the Company. By mid July 2007, a formal agreement was sent by Mr Georgiadis to Mr Grego to buy his shares and those of his son for $50,000, subject to due diligence. Mr Grego was prepared to sell his shares at that price. However, the sale did not eventuate. His Honour found that the defendants had not assisted Mr Grego to sell his shares to Mr Georgiadis.
(e) Incorporating a new company known as JD Brands Pty Ltd
His Honour concluded that the company, JD Brands Pty Ltd, was set up for the purpose of diverting assets from the Company. The shareholders and directors of JD Brands Pty Ltd are Mr Copeland, Mr Greco and Mr Romeo. Since 1 March 2008, the business name, “Jimmi Dexta”, has been held by JD Brands Pty Ltd. Further, the lease of the premises from which the Company operates is in the name of JD Brands Pty Ltd. One of the Company’s debtors, The Shoe Gallery, owed it $140,000. Instead of payment of that debt to the Company, The Shoe Gallery offered a business to the defendants which the defendants took over and ran in the name of JD Brands Pty Ltd. The Company received no consideration from that transaction. Further, invoices issued in respect of sales of the Company were styled in the name of JD Brands Pty Ltd, rather than in the name of the Company. His Honour concluded that assets were diverted from the Company.
(f)Failing or refusing to honour the Company’s financial obligations to Mr Grego
Mr Grego had an American Express card issued in his own name that was used only for work-related expenses in relation to the Company. Whilst he was employed by the Company, he provided the credit card statements, together with all relevant receipts, to Mr Copeland and was never asked to provide any further proof that the expenses were for Company purposes. However, after his employment was terminated in June 2006, he forwarded a letter to Mr Copeland and Mr Greco regarding his American Express card and requesting payment. The Company continued to make interest payments after Mr Grego was removed from the Company but stopped doing so shortly after Mr Grego commenced this proceeding in late 2008.
(g) Denying Mr Grego access to information about the Company’s affairs
Mr Grego complained that he had been unable to obtain information in relation to the conduct of the Company and its business since mid June 2006. However, his Honour found that this ground of oppression was not entirely proven. Only some documents, such as some bank statements and invoices, had not been shown to Mr Grego.
(h)Capital contributions or shareholder loans
In accounts prepared by external accountants, payments that were made by Mr Copeland and Mr Romeo were characterised as loans rather than as capital payments. One effect of this was to produce a balance sheet that showed an excess of liabilities over assets, which might lead to the conclusion that the shares in the Company were worthless. It was argued that this constituted another ground of oppression.
As noted above, the defendants did not accept the Associate Judge’s conclusion that the payments that were made by Mr Copeland and Mr Romeo were capital contributions to the Company, rather than shareholder loans. In arriving at the conclusion he did, his Honour accepted the evidence of Mr Grego which had been corroborated by the evidence of Mr Dudley. His Honour concluded that there was no loan to the Company; that Mr Grego and his son and Mr Greco were given shares for their expertise that they brought to the Company, whilst Mr Copeland and Mr Romeo put in funds and, in return, were given shares. His Honour stated that there was no loan and no documentation supporting the proposition that there was a loan when funds were put into the Company by Mr Copeland and Mr Romeo.
Mr Copeland and Mr Romeo both gave evidence that the funds that they paid to the Company were by way of loan and were not contributed in exchange for shares. Both were cross examined and maintained the same position. Mr Romeo gave evidence that “[t]he understanding was that [he] put money into a business to get it off the ground” and that he received a 10% share for the loan he injected into the Company.
Mr Grego denied that there were any loans from Mr Copeland or Mr Romeo and gave evidence that the amounts were paid for shares.
Mr Dudley gave evidence that at the time moneys were paid by Mr Copeland and Mr Romeo to the Company, they were not treated as loan funds. Rather, Mr Dudley said, the money was simply what they put on the table as their contribution to the Company in order to get shares, in the same way as Mr Dudley’s customs broking expertise was what he contributed to the Company in order to get his shares. Mr Dudley’s evidence was that he was not involved in any conversation where there was any suggestion made that Mr Copeland or Mr Romeo were making a loan to the Company, nor did he see any paperwork to that effect. As examples, he said there were no discussions about repayment terms, interest rates or that the Company would repay the money when it was able to do so. In cross examination, Mr Dudley agreed that there had been a falling out between him and Mr Copeland that resulted in legal action that was settled in favour of Mr Copeland.
There are minutes of a meeting of 12 January 2005 which state:
Joe [Romeo] offered to increase his financial commitment to Jimmi Dexta by a further $50,000, however in view of the fact that he has already contributed $125,000 for a 10% share, if he was to do this he asked that his shareholding be increased to 18% this could be done by Mark [Copeland], Neville [Dudley], Frank [Grego] and Carl [Greco] each giving Joe 2% of their 20% share, this would give all an equal shareholding of 18% with the exception of Todd [Grego] on 10%. This would alleviate the immediate financial constraints on Jimmi Dexta and provide the necessary means to fund orders essential for our success. Both Mark and Neville agreed to this proposal, Frank was not in favour and Carl was undecided. As this was not a unanimous decision one way or the other it will again be discussed at our next meeting.
Mr Romeo prepared these minutes. When he was asked why he wrote the minutes in those terms if the funds were provided as a loan, he replied:
Look, Your Honour, at the time we were all friends and really being new to this sort of situation you just don’t know what it is that you need to put down. It was an initial investment provided by myself that – it was agreed upon that the money, when the company started making money the capital that I had put into the company would be returned. In the meantime there was an interest payment to me and a shareholding be given to me.
There was no written loan agreement between the Company and either Mr Copeland or Mr Romeo. However, there is some other documentary evidence in relation to the money paid by Mr Copeland and Mr Romeo. First, there are accounts that were kept on a day to day basis by the directors. These were referred to as the MYOB accounts. The MYOB June 2005 balance sheet lists assets and liabilities with net assets shown as -$203,842.50. There is no debt owed to either Mr Copeland or Mr Romeo shown as a liability in the balance sheet. Beneath the net assets appears the following:
Equity
Owner’s/Shareholder’s Equity
Owner’s/Shareholder’s Capital $245,893.30
Total Owner’s/Shareholder’s Equity $245,893.30
Current Year Earnings -$449,735.80
Total Equity -$203,842.50
Similar entries appeared in the MYOB accounts for June 2006 and June 2007. Mr Copeland gave evidence that he made entries in the MYOB accounts but they were only used as a record of “money in/money out to the bank account” and were “only a guide.”
The Company’s Financial Statements for the year ended 30 June 2006 were prepared by ITG Partners, Chartered Accountants. Mr Copeland gave evidence that these were the “accurate” accounts. The balance sheet included as liabilities, loans by Mr Copeland and Mr Romeo. Listed under the heading “equity” is paid up capital of $300. Mr Copeland denied that these accounts represented a re-characterisation of capital contributions as loans and that the reason for doing this was to reduce the value of Mr Grego’s shares.
As noted above, the defendants did not accept the Associate Judge’s finding that the moneys paid by Mr Copeland and Mr Romeo were capital payments. At the hearing before me, counsel for the defendants submitted that the MYOB accounts are ambiguous and are not conclusive either that the moneys constitute a capital contribution or that they were lent to the Company. Counsel contended that the accounts were consistent with what is a common situation where a kind of equity is put into a company, not as capital but rather as long term debt finance which, if the company succeeds, will be repaid in due course. On the other hand, counsel pointed to the accounts prepared by the external accountants which were not ambiguous and clearly characterised the payment of moneys as loans. Counsel for the defendants conceded that by the time these accounts were prepared, there was a dispute between Mr Grego and his co-shareholders, but said that Mr Grego was not at that time contending that there was any issue about how the funds put into the Company by Mr Copeland and Mr Romeo were to be treated.
It was also submitted on behalf of the defendants that although Mr Copeland and Mr Romeo were cross examined, neither of them resiled from their position that they lent funds to the Company. Apart from the fact that it was in their interests to give that evidence, counsel contended that there was no particular reason to disbelieve them. It was submitted by the defendants that very little weight should be placed on Mr Dudley’s evidence in circumstances where he had previously had a dispute with Mr Copeland and where his evidence merely stated conclusions.
Reference was also made by the defendants to the evidence of Mr Grego that shares were transferred to Mr Copeland on the basis that he would provide working capital. It was put that no sensible business investor would pay large sums of money for shares in a shelf company that had no value. Further, it was submitted, Mr Grego and his son were not given shares for their expertise because, at the outset, the Company was a shelf company in which they owned all the shares. It was contended that they transferred shares to Mr Copeland and Mr Romeo’s company in return for the provision of funds to help in the establishment of the business of the Company. It was put that the shares had no value other than their issue value of $1.00 each, because the Company was not trading at that time and had no assets.
Finally, counsel for the defendants asked rhetorically, if the money did not go in as a loan, what did it go in as? Counsel submitted that it did not go in as a gift nor as share capital; Mr Copeland and Mr Romeo both acquired their shares from Mr Grego and his son, but no money was paid to them for the shares and there was no share capital subscribed for or issued. Counsel contended that this leads to the conclusion that it was not share capital.
The evidence that the funds were provided by way of loan is supported by the subsequent accounts that were prepared by the Company’s external accountants. However, that evidence is not persuasive. The accounts were prepared long after the events.
It is true that the shares were transferred to Mr Copeland and Mr Romeo’s company from Mr Grego and his son, but that does not necessarily lead to the conclusion that the funds which they paid and which ended up being used in the Company were not a capital contribution. The shareholders were each to bring something to the company – some were to make a monetary contribution (Mr Copeland and Mr Romeo) and others (including Mr Grego) were to make a non-monetary contribution. The fact that the amount that Mr Copeland and Mr Romeo paid was more than the $1.00 issue value of the shares is beside the point. If they wanted to go into business with Mr Grego and his son, then they had to pay to do that. In circumstances where shares had already been issued, it is not surprising that rather than issuing additional shares, the existing shareholders relinquished some of their shares and transferred them to the new shareholders. By this means they achieved the same practical outcome that might have been achieved by the issue of new shares to the incoming shareholders.
The evidence that Mr Grego, his son and Mr Greco were to make a contribution through their expertise and that Mr Romeo and Mr Copeland were to contribute money best accords with a characterisation of the payments having been made by way of capital. Further, this is how the payments were characterised in the MYOB internal accounts prepared by Mr Copeland at the time. Most telling are the minutes of the meeting of 12 January 2005 where the language used is not the language of loan. Rather, the language is consistent with the payments having been made by way of capital contribution. The evidence of Mr Copeland and Mr Romeo that the funds were lent to the Company is not compatible with the minutes of meeting nor with the MYOB accounts. I do not accept the submission that the MYOB accounts were “ambiguous”. Each of the MYOB balance sheets for June 2005, 2006 and 2007 include as long term liabilities, “Loan - Salcorp Pty Ltd” and for the last two years, “Bank Loans”. In contrast, the same balance sheets record the amounts paid by Mr Copeland and Mr Romeo as “Owner’s/Shareholder’s Equity” and “Owner’s/Shareholder’s Capital.”[3] This strongly indicates that the payments were by way of capital contribution, not loan. Were it otherwise, one would have expected the amounts to be recorded as loans with the other loans in the long term liabilities section of each MYOB balance sheet.
[3]See [34] above.
Mr Dudley’s evidence goes to prove a negative proposition: that there were no loans. Whilst some of his evidence is stated in the form of a conclusion, that is not true of his evidence that there were no discussions as to repayment terms or interest rates. In any event, even if little weight is given to Mr Dudley’s evidence, as I have noted above, the documentary evidence supports the conclusion that the moneys paid should be treated as capital.
The finding by his Honour that the payments were made by way of capital contribution is not affected by error.
Was the conduct oppressive?
Having made the relevant factual findings, the Associate Judge turned to consider whether the grounds relied upon constituted oppression for the purposes of s 232 of the Corporations Act. In part, that section provides that the Court may make an order under s 233 (including orders for the purchase of shares) if the conduct of a company's affairs is oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.
Whether conduct is unfair or oppressive in a commercial company is assessed objectively through the eyes of a commercial bystander.[4] If the conduct is so unfair that reasonable directors would not have thought it fair, then relief will be granted.[5] The conduct will be considered in its context[6] and while separate instances of conduct on their own may not be unfair, cumulatively they may constitute oppression.[7]
[4]Aqua-Max Pty Ltd and Others v MT Associates Pty Ltd and Others (2001) 3 VR 473, Wayde v NSW Rugby League Ltd (1985) 180 CLR 459, Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692.
[5]Ibid.
[6]Vigliaroni & Ors v CPS Investment Holdings Pty Ltd & Ors (2009) 74 ACSR 282.
[7]Aqua-Max Pty Ltd and Others v MT Associates Pty Ltd and Others (2001) 3 VR 473.
His Honour noted that all of the factual allegations underlying the grounds relied upon by Mr Grego had been proven except the allegations that he had been denied access to information about the Company’s affairs. His Honour noted that although the alleged grounds of oppression had been proved, that did not necessarily mean that those grounds amounted to oppression.
His Honour found that the defendants had not assisted Mr Grego to sell his shares to Mr Georgiadis, but found that they were under no duty to do so. His Honour could not conclude that the defendants obstructed the sale of the shares.
However, his Honour concluded that the offer by Mr Copeland and Mr Romeo of a nil value for the shares of Mr Grego was not a meaningful offer. His Honour further held that the failure to make a reasonable offer for Mr Grego’s shares after he had been removed from management of the Company did constitute oppression. His Honour referred to O’Neill v Phillips & Ors[8] where Lord Hoffman stated that such conduct would almost always be unfair for the minority shareholder.
[8][1999] 2 All ER 961.
His Honour also found that there were other clear cases of oppression that had been proved by Mr Grego. First, there was the incorporation of JD Brands Pty Ltd, to which assets of the Company were diverted. His Honour noted that this could only be described as burdensome, harsh and wrongful conduct by the defendants. His Honour noted that another act of oppression occurred when Mr Copeland described as a loan the money he put into the Company for the purchase of shares. As his Honour noted, if it was regarded as a loan, then the value of the Company would diminish and Mr Grego would be prejudiced. His Honour also referred to the refusal by the directors to honour the Company’s financial obligation in relation to the American Express card as another example of oppressive conduct. His Honour concluded that not only were there individual grounds of oppression that had been made out, but when one looked at the conduct of the defendants and took into account the totality of the grounds complained of, even though some of those grounds may not amount to oppression in isolation, the whole conduct could be regarded as oppressive conduct. His Honour found that there was a continuing course of oppressive conduct.
It was submitted by the defendants that his Honour erred in finding that there had been oppression. The defendants contended that the making of the demand that Mr Grego inject $160,000 into the Company or face removal as a director was not oppressive in circumstances where the Company was short of revenue and in financial difficulty, he was not bringing in any income, there was no longer a role for him in the Company and other shareholders had contributed funds and provided mortgage security for the debt owed to the National Australia Bank Limited. As to the threat that Mr Grego would lose his shares, it was submitted that, as this could not be carried out and was not carried out, it did not amount to oppression (even though it should not have been said).
As to the ground of exclusion from management of the Company, the defendants submitted that termination of Mr Grego’s employment and his removal as a director came about because he was not performing well as an employee and was not bringing in any income to the Company. The defendants contended that the relationship between Mr Grego and his co-directors had broken down such that it was in the interests of the Company to remove him as an employee and director. They pointed to the power to terminate Mr Grego’s employment and remove him as a director by majority vote and contended that this conduct did not constitute oppression. The defendants also contended that there was no obligation on them to make an offer to Mr Grego for his shares, but they had done so by offering him the nil value which they attributed to the shares. If this offer had been accepted, and the shares had been transferred then, based on correspondence from National Australia Bank Limited, it is likely that Mr Grego would have been released from the guarantee which he had given in favour of the bank. As such, it was submitted that the offer was reasonable. Further, the defendants pointed to the Company’s articles of association which prescribe a procedure for a member of the Company who wants to sell his shares. That procedure provides for a member to give a transfer notice, nominate a price and offer to sell their shares to the other shareholders (who have the right of first refusal). If the other shareholders do not want to buy the shares then the shareholder may sell them to a third party. Counsel for the defendants pointed out that Mr Grego did not pursue that procedure.
As to JD Brands Pty Ltd, the defendants submitted that there was no evidence that there had been any significant transfer of assets of value from the Company to JD Brands Pty Ltd, or that the existence of JD Brands Pty Ltd resulted in a diminution in the value of the Company. It was contended that the funds that came to JD Brands Pty Ltd were used to pay down the debt that the Company owed to National Australia Bank Limited. In those circumstances, it was submitted that there had been no oppressive conduct, or at least not oppressive conduct that would justify making any orders.
In relation to the ground of alleged oppression concerning payment of the American Express account, the defendants submitted that all necessary invoices and receipts to support Mr Grego’s claim had not been provided by him to the Company. It was further submitted that it was open to Mr Grego to sue the Company for the amount he claimed and that non-payment of a debt, in circumstances where there is a dispute about whether the debt is genuinely payable or not, cannot be said to be oppressive.
The conclusion that the Associate Judge reached was not affected by error. Looking at the evidence as a whole, it is clear that this was more than a simple case where the majority shareholders were in control of the Company and exercising their powers as such. The cumulative effect of the conduct over time resulted in oppression. Looked at objectively, from the position of a reasonable director, it was unfair to Mr Grego to exclude him from management of the Company without offering to make any payment to him for his shares. This is so even if the shares may not have had a significant value at the time and also taking into account that if he had transferred his shares for nil consideration, he would have secured a release of his liability to the National Australia Bank Limited. The Company was a small company that brought together two friends and friends of those friends to work together in the business. The Company operated on the basis that each of the shareholders would play an active role in the Company. If they were to be removed from the Company, then the objectively fair thing to do was to pay the outgoing shareholder the value of that person’s interest. This is so even though the removal of Mr Grego as an employee and director was within the power of the board of directors. The fact that Mr Copeland and Mr Romeo may have thought the offer they made reasonable, does not mean that it was objectively reasonable. I am not satisfied that Mr Grego’s interest in the Company had a nil value.
The fact that Mr Grego did not follow the formal procedure set out in the articles of association for sale of his shares is not fatal to his claim. He proceeded in a less formal way (consistent with how the Company operated) and wrote the letter stating that if the other directors wanted him and his son to leave, then they would have to pay what their shares were worth. The practical reality was that Mr Copeland and Mr Romeo were not prepared to pay anything and they made that clear. In those circumstances, it is no answer to a claim of oppression to say that Mr Grego did not follow the formal procedure for sale of his shares.
The attempt from mid 2007 to characterise the payment of moneys by Mr Copeland and Mr Romeo as loans such that the Company’s value would be diminished also supports the finding of oppression. The argument that all this should lead to is a correction to the formal accounts may be accepted in other circumstances. However, when this conduct is considered objectively in the context of the other conduct of the defendants, including Mr Grego’s ongoing exclusion from management of the Company, it leads to a conclusion that there has been oppression. Similarly, the refusal to continue paying the liability on the American Express card used by Mr Grego for Company purposes was unfair. It is no answer to say that Mr Grego could have sued for the debt. What is unfair is the non-payment of the liability in circumstances where the Company had previously paid without requiring Mr Grego to provide all supporting documentation. The key to this is the change in behaviour at a time when Mr Grego had commenced these proceedings.
The establishment of the company JD Brands Pty Ltd and the diversion of at least some assets to it, also supports the finding of oppression. The contention that no assets of real value had been transferred or that any revenue generated by JD Brands Pty Ltd had benefited the Company is no answer. Diverting assets away from the Company is not appropriate, even if those assets may be thought by the defendants to have minimal value. Looked at objectively, the diversion of the business name alone to JD Brands Pty Ltd is, at best, inappropriate.
These matters taken together clearly constitute conduct of the type that establishes a basis for relief to be granted under s 233 of the Corporations Act. In addition, there was the demand that Mr Grego inject $160,000 into the Company or else he would be removed as a director and lose his shares. That was not a reasonable demand to make in circumstances where it had earlier been accepted that Mr Grego would not contribute money.
The relief that was granted
His Honour determined that it was appropriate that Mr Copeland, Mr Greco and JDR Investments Pty Ltd purchase the shares held by Mr Grego in the Company.
The task of the Court is to select the date for the valuation of the shares that would best do justice to the parties with any necessary adjustments to the valuation to be made.[9] His Honour referred to the decision in Foody v Horewood & Ors,[10] where the Court of Appeal accepted that the date for valuation of the shares in an oppression case depends on all the relevant circumstances:
... the court’s discretion in determining the date of valuation in respect of shares to be purchased from an oppressed minority shareholder is wide and absolute, subject to the requirement that it be exercised judicially, and is to be informed by the justice and fairness of the particular situation. In his reasons, his Honour recognised, correctly, I think, that there is no firm rule by which the relevant date of valuation is to be selected, and that the observation of Nourse J in Re London School of Electronics Ltd[11] that “prima facie an interest in a going concern ought to be valued at the date on which it is ordered to be purchased” was only a starting point for the enquiry. After considering a number of authorities his Honour said that his task was to fix a price for the shares that represents “a fair value in all the circumstances of the case”.
In my view it is plain, on the authorities, that his Honour applied the correct criteria in determining the date of valuation.[12]
[9]Rankine v Rankine (1995) 124 FLR 340.
[10](2007) 62 ACSR 576.
[11][1986] Ch 211 at 224.
[12](2007) 62 ACSR 576 at 589.
Having considered this authority, the Associate Judge noted that there were two valuations before the Court. The defendants engaged PKF Corporate Advisory (East Coast) Pty Ltd to prepare a valuation report as to the indicative fair value of the Company as at 30 June 2008. In their opinion, the value of the equity of the Company was nil as at that date.
The other valuation was provided by Mr Geoff Long, a director of HLB Mann Judd, pursuant to an order of Robson J. It was an independent valuation report and valued the shares in the Company as at 30 June 2007 (which was the date contended for by Mr Grego) in the sum of $652,275. The valuation at that date included a figure of $797,802 for goodwill. The Mann Judd report valued the Company as at 31 December 2008 (being a date shortly after the proceeding had commenced) as nil.
The Mann Judd valuation included as liabilities the amounts that had been paid in by Mr Romeo and Mr Copeland. If an allowance was made to record correctly those amounts as capital, then the value of Mr Grego’s shares increased as at 30 June 2007 from $17,409.50 to $162,378 and as at 31 December 2008 from nil to $13,878.
His Honour was concerned about the report of Mann Judd and the amount that was attributed to goodwill. His Honour was of the view that that figure was speculative.
His Honour noted that Mr Grego was prepared to sell his shares, together with his son’s shares, in mid 2007 to Mr Georgiadis for $50,000 (of which $32,142.86 was referable to Mr Grego’s shares). His Honour concluded that to set a purchase price for the shares in accordance with the Mann Judd valuation (which included the artificial amount allowed for goodwill) would be unfair. His Honour concluded that the real value of the shares was what a buyer was prepared to pay. His Honour therefore ordered that the defendants pay the sum of $32,142.86 to Mr Grego.
The defendants submitted that the appropriate date for valuation of the shares was 31 December 2008 that being the date closest to when the proceeding was commenced (17 November 2008). Counsel for the defendants contended that this date is the appropriate date (in the absence of some other obvious date) and there was no reason why 30 June 2007 was chosen. Mr Grego submitted that 30 June 2007 should be chosen because it was a date closer to when the oppression started; the value of the shares decreased markedly after that date and at a time when Mr Grego had no role in the Company; it approximates the date when the defendants stood in the way of Mr Grego selling his shares and quarantines the value of his shares from the most egregious forms of oppression.
As to value, the defendants submitted that the evidence established that, save for one short period, the Company’s shares had a nil value. They contended that his Honour ignored the following evidence:
(a)a draft report of Deloitte Touche Tohmatsu dated 19 December 2008 which was prepared for the Company’s banker, National Australia Bank Limited. That report suggested that the bank would likely suffer a shortfall if the Company’s assets (which were subject to a charge in favour of the bank) were sold;
(b)audit reports for 2007, 2008 and 2009 all of which showed that the liabilities of the Company exceeded its assets by a significant amount;
(c)that Mr Georgiadis only made a tentative offer to purchase shares from Mr Grego and he never went ahead with the proposed purchase.
The Deloitte Touche Tohmatsu draft report might only provide assistance if the date for valuation is December 2008. However, as will be seen from what is said later in these reasons, it is not unfair for the value of the shares to be assessed at an earlier date.
As to the audit reports, they all include as liabilities of the Company the amounts paid by Mr Copeland and Mr Romeo. However, those amounts should be treated as capital payments. If an adjustment is made to the accounts in this regard, then as at 30 June 2007, the Company had net assets of approximately $143,000. For the other years, there would remain an excess of liabilities over assets.
In relation to the unfulfilled offer by Mr Georgiadis, what is relevant is that the amount offered was the amount that Mr Grego was prepared to accept and that a third party was prepared to offer. Whilst it is not conclusive evidence of the value of the shares at the relevant time, it is evidence of what was considered to be a reasonable price at the time.
As to the appropriate date for valuing the shares, it is true that not all of the conduct that amounted to oppression had occurred by mid 2007. However, by that time, the demand for contribution of $160,000 had been made, Mr Grego’s employment had been terminated and he had been excluded from participation in the Company, no meaningful offer had been made by the other shareholders to purchase Mr Grego’s shares and shareholder meetings had not been held for about 12 months. Further, at that time, the defendants wanted Mr Grego out of the Company as a shareholder and he was apparently content to relinquish his shares, subject to the payment to him of what he considered a reasonable amount for them of approximately $32,000. Having regard to those matters, the amount ordered to be paid and the date at which it has been assessed is fair on the facts of this case. It is what would best do justice between the parties.
His Honour accepted that Mr Grego was owed approximately $11,658 in respect of the American Express card and had not been reimbursed for that amount when the Company ought to have made such payments. His Honour ordered that that amount plus interest be paid to Mr Grego by the Company. This relief was appropriate to address the oppression that resulted from the requirement that Mr Grego provide additional substantiating documentation in relation to the American Express account that had not previously been required.
Conclusion
I am satisfied that when assessed objectively, the cumulative effect of excluding Mr Grego from management of the Company without paying him for his shares, re-characterising the amounts paid by Mr Copeland and Mr Romeo as loans instead of capital, refusing to pay the liability on the American Express card that Mr Grego used for Company expenses and transferring assets to JD Brands Pty Ltd constitutes oppressive conduct. In addition, there was the unreasonable demand that Mr Grego contribute $160,000 into the Company or face removal as a director and loss of his shares.
The remedy for the oppression is an order that the defendants purchase the shares held by Mr Grego in the Company for $32,142.86; that they procure the National Australia Bank Limited to release and discharge Mr Grego from the guarantee that he had given in favour of that bank and remove him as a guarantor in relation to the Company (if this has not already been done); and that the Company pay Mr Grego the amount of the liability to American Express together with interest.
I am not of the opinion that the Associate Judge’s decision is affected by error. Having reached that conclusion and having heard matters relevant to both the application for leave to appeal and the substantive appeal itself, it is not necessary for me to express a view as to whether or not the decision of the Associate Judge was arguably affected by error. The defendants’ application will be dismissed.
I should also note that there were some preliminary issues relating to whether the application for leave to appeal had been brought within time, whether alleged substantial delay on the part of the defendants ought to militate against the granting of leave and whether Mr Grego would suffer prejudice if leave to appeal was granted. In view of the conclusions which I have reached, it is not necessary for me to make any findings in this regard.
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