Ground and Foundation Supports Pty Ltd v GFS Management Services Pty Ltd - [2002] WASCA 306

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT : THE FULL COURT (WA)

CITATION: GROUND AND FOUNDATION SUPPORTS PTY LTD & ORS -v- GFS MANAGEMENT SERVICES PTY LTD [2002] WASCA 306

CORAM: WALLWORK J
ANDERSON J
BURCHETT AUJ

HEARD: 16 & 17 SEPTEMBER 2002

DELIVERED : 22 NOVEMBER 2002

FILE NO/S: FUL 114 of 2001
FUL 188 of 2001
FUL 189 of 2001

BETWEEN: GROUND AND FOUNDATION SUPPORTS PTY LTD (ACN 009 432 964)
First Appellant (First Respondent)
KERIN FRANCIS SMART
Second Appellant (Second Respondent)
BRENCOLDA NOMINEES PTY LTD (ACN 008 873 175)
Third Appellant (Third Respondent)
AND
GFS MANAGEMENT SERVICES PTY LTD (ACN 051 681 077)
Respondent (Applicant)

Catchwords:

Corporations - Managing director claimed ownership of company's intellectual property - That property basis of company's business - Managing director dismissed - Whether proper notice given - Whether oppression

Legislation:

Corporations Law, s 246AA

Result:

Appeal allowed
Orders of Judge at first instance set aside
Action against appellants dismissed

Category: A

Representation:

Counsel:

First Appellant (First Respondent) : Mr J C Vaughan
Second Appellant (Second Respondent) : Mr M J McCusker QC &
Mr A R Beech

Third Appellant (Third Respondent) : Mr M J McCusker QC &
Mr A R Beech

Respondent (Applicant) : Mr P I Jooste QC &
Ms J M Witcombe

Solicitors:

First Appellant (First Respondent) : Deacons
Second Appellant (Second Respondent) : McCallum Donovan
Sweeney

Third Appellant (Third Respondent) : McCallum Donovan
Sweeney

Respondent (Applicant) : MacKinlays

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

Aqua‑Max Pty Ltd v MT Associates Pty Ltd [2001] 3 VR 473
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
Evans v Llewellin [1787] 1 Cox Eq Cas 333; (1787) 29 ER 1191
Hogg v Dymock (1993) 11 ACSR 14
In re Wondoflex Textiles Pty Ltd [1951] VLR 458
O'Neill v Phillips [1999] 1 WLR 1092
R&H Electric Ltd v Haden Bill Electrical Ltd (1995) 2 BCLC 280
Re Spargos Mining NL [1990] 8 ACLC 1218
Re Westbourne Galleries [1970] 3 All ER 374

Case(s) also cited:

Abigroup Contractors Pty Ltd v Peninsula Balmain Pty Ltd (No 2) [2001] NSWSC 1016
Australian Coal and Shale Employees' Federation v Commonwealth (1953) 94 CLR 621
Blisset v Daniel 10 Hare 493; 68 ER 1022
Commonwealth v Verwayen (1990) 170 CLR 394
Diligenti v RWMD Operations Kelowna Ltd (No 2) (1977) 4 BCLR 134
Dosike Pty Ltd v Johnson (1996) 16 WAR 241
Dynasty Pty Ltd v Coombs (1995) 138 ALR 64
Garrett v Nicholson (1999) 21 WAR 226
GFS Management Services Pty Ltd v Ground and Foundation Supports Pty Ltd & Ors [2001] WASC 280
Giumelli v Giumelli (1996) 17 WAR 159
Golden Bread: Qld Co-Op Milling Ass v Hutchison (1977-1978) CLC 40347
Government Employees Super Board v Martin (1997) 19 WAR 224
Guerinoni v Argyle Concrete & Quarry Supplies Pty Ltd (1999) 34 ACSR 469
In re A Company (No 002567 of 1982) (1983) 1 WLR 927
Jenkins v Enterprise Gold Mines NL (1992) 10 ACLC 136
John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A'Asia) Pty Ltd (1991) 6 ACSR 63
Metro Meat Ltd v Werlick (1993) ATR 81-242
Mike Gaffikin Marine v Princes Street Marina Pty Ltd (1995) 13 ACLC 991
Re Norvabron Pty Ltd (1987) 5 ACLC 184
Roberts v Walter Developments Pty Ltd & Ors (1997) 15 ACLC 882
Sargent v ASL Developments Ltd (1974) 131 CLR 634
Shamsallah Holdings Pty Ltd v CBD Refrigeration & Air-conditioning [2001] WASC 8
Thomas v MacKay Investments Pty Ltd (1996) 22 ACSR 294
Townsend v Townsend (No 2) [2001] NSWCA 145
Trade Practices Commission v Nicholas Enterprises Pty Ltd (No 3) (1979) 28 ALR 201
Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387
Wayde & Anor v New South Wales Rugby League Ltd [1982] 180 CLR 459

WALLWORK J: The issue in this appeal is whether the acts of two directors of the first appellant ("GFS") being Mr Black and Mr Patterson constituted oppression when they dismissed the Managing Director of GFS, Mr Menz, at a directors meeting on 11 February 1999.

Background

In early 1989 Mr Menz became interested in a sheet piling system for ground retention. The system was seen as having some particular benefit in the sandy soils around the Perth metropolitan area. At that time Mr Patterson was Mr Menz's solicitor in relation to matters unconnected with the proposed sheet piling business. Towards the end of 1989 Mr Menz told Mr Patterson that he was attempting to obtain the rights to a franchise or licence in Western Australia and other States for the purpose of establishing a sheet piling business. In order to establish the business Mr Menz required finance. Mr Black was a friend of Mr Patterson and an investor who became interested in the proposal.
Towards the end of 1989 arrangements were made for the establishment of a corporate structure. It was agreed that Mr Black would hold 35 per cent of the issued capital in GFS. Mr Patterson would hold 35 per cent and Mr Menz 30 per cent. Some of the shares were partly paid shares. Mr Black and Mr Patterson paid for their shares in cash but Mr Menz only paid for a portion of his shares in cash. The balance of his shares were allotted in consideration of his providing the intellectual property to the company. The intellectual property was valued at $40,000 and Mr Menz was allotted a 20 per cent shareholding in the company in exchange for that intellectual property. Eventually Mr Menz took over another investor's interest by subscribing $12,000 for 20,000 $1 shares partly paid to 60 cents. In the end result, the share ratios were 35 per cent to each of Mr Black and Mr Patterson and 30 per cent to Mr Menz.
At first instance the learned Judge found that it was always Mr Menz's desire and intention that he would one day totally own and control GFS. After the company was established he was appointed Managing Director at a salary which was varied from time to time. Mr Menz, Mr Black and Mr Patterson each became directors of GFS and were paid director's fees. All of the issued shares were of the same class and dividends were to be paid in accordance with the ratio in which the shares were held.
In June 1993 an application was made for an international patent for the sheet piling technology. The application was made in the name of Mr Menz because he told the other directors it could not be in a company name.
Eventually GFS became successful and highly profitable and from time to time paid both director's fees and dividends. In 1995 Mr Menz sought to purchase Mr Black's and Mr Patterson's shares. They thought he was proposing to fund the purchase from the profits of GFS rather than from his own resources and that proposal did not come to fruition.
In August 1996 the directors resolved that dividends should be paid by monthly payments of $1,946 to each of the Black and Patterson's interests and $1,666 to the Menz's interests to reflect the 35/35/30 shareholding in the company. The company traded profitably and in the year ending 30 June 1998 it had a turnover of $2.8 million with a profit of $409,053. Until that stage the three directors, Mr Black, Mr Patterson and Mr Menz, were advancing the interests of GFS amicably.
His Honour found that the first matter of concern arose in July 1998 when Mr Menz employed his step‑son, Mr Martin, in the business. At the end of July 1998 Mr Menz was also seeking a revised salary package. He was dissatisfied with the package offered to him and sought independent accounting advice both as to an appropriate salary and in relation to buying out the Black and Patterson interests. Mr Menz believed his salary should have been in excess of $120,000. His Honour found that matters between the three directors continued to deteriorate and eventually Mr Menz sought legal advice from solicitors, Lenhoff & Co, in relation to his position.
On 11 February 1999 Lenhoff & Co wrote a letter to Mr Patterson. The learned trial Judge found that in many respects that letter was central to the issues between the parties. The letter read as follows:
"We represent Graham Menz and GFS Management Services Pty Ltd (GFS Management Services") which acts as trustee for the Menz Family Trust.
As you are no doubt aware Mr Menz has 30% of the equity in GFS, you have 35% and the remaining 35% is held by Mr Brent Black and Mr Darryl Black. How Mr Menz came to be a minority shareholder in a company which was his brainchild and which conducts its business activities solely through his efforts may well be the subject matter of another enquiry which need not be considered at this stage.
Be that as it may Mr Menz, as you know, is dissatisfied with the current arrangement regarding the management and control of GFS.
One of the grounds of complaint is that Mr Menz is currently on a remuneration package (excluding dividends which, strictly speaking, should not be regarded as part of any remuneration package) of $88,200. Independent advice obtained by our client from Price Waterhouse Coopers has revealed that a reasonable total package remuneration for the position of Managing Director of a company such as GFS should be at least $150,000.
Our instructions are, however, that you have steadfastly refused to increase Mr Menz's remuneration to a reasonable and acceptable level. Having regard to the results achieved by GFS through the efforts of Mr Menz the situation is now intolerable and cannot be permitted to continue. Our instructions are that there are currently negotiations on foot and Mr Menz's grievances will be properly ventilated at the meeting which, we are instructed, will be held later today in order to establish whether the matter can be amicably resolved.
In the meantime we place on record the fact that you have indicated to Mr Menz that he can acquire your shareholding and that of the other shareholders for an amount of $1,400,000 from which it follows that you value GFS in an amount of $2,000,000. On that basis, are you prepared to acquire our client's equity in GFS for $600,000?
As far as GFS Management Services is concerned, an opinion obtained from Mr Richard McCormack of Counsel is to the effect that GFS Management Services is the owner of the intellectual property currently utilised by GFS in its business activities and we are instructed that immediate negotiations should be conducted in regard to the question of both past and future royalties and licence fees as may be appropriate.
We are further instructed that, in the absence of suitable arrangements being made between GFS and GFS Management Services, our client's rights, inter alia, to terminate the present licence whereby GFS utilises our client's intellectual property free of appropriate remuneration are strictly reserved.
We await your response.
Yours faithfully
David Lenhoff"
I note in passing, although it was not referred to at the appeal, that in the second paragraph of the letter there is a question raised concerning how Mr Menz came to be a minority shareholder. In my view, that paragraph is argumentative.
In the fifth paragraph it is stated: "Having regard to the results achieved by GFS through the efforts of Mr Menz the situation is now intolerable and cannot be permitted to continue." When it is realised that the letter is in effect from the Managing Director to his two fellow directors and owners of the company, it can be seen that the attitude is wrong.
However, it is the second paragraph after that which really caused the problem. That informs Messrs Black and Patterson that the Managing Director, Mr Menz has obtained an opinion of counsel to the effect that Mr Menz's family trust company "is the owner of the intellectual property currently utilised by GFS in its business activities and we are instructed that immediate negotiation should be conducted in regard to the question of both past and future royalties and licence fees as may be appropriate."
The letter to the two fellow directors then states "We are further instructed that in the absence of suitable arrangements being made between GFS and GFS Management Services (Mr Menz's company) our client's rights inter alia to terminate the present licence whereby GFS utilises our client's intellectual property free of appropriate remuneration are strictly reserved."
It is apparent from the last two paragraphs of the letter that although Mr Menz, as found by the learned trial Judge, had been allotted a 20 per cent shareholding in the company in exchange for his intellectual property and had made an application for an international patent for it at the company expense, Mr Menz was asserting that he still owned the intellectual property. More than that, he was claiming both past and future royalties and licence fees and threatening to terminate the so‑called "present licence whereby GFS utilises our client's intellectual property."
It was following the receipt of that letter and on the same day that the two relevant meetings took place. His Honour found that the first was a meeting at which Mr Lenhoff was present. The question of the price for which the Black and Patterson interests were prepared to sell their shares or buy out Mr Menz's shares was discussed.
Mr Menz gave evidence that the meeting took about 20 minutes and that the discussions revolved entirely around the purchase or sale of the issued shares in order that either the Black/Patterson interests or the Menz interests would totally own GFS.
His Honour found that that meeting closed without resolution. A further meeting of the directors of GFS then took place. The minutes show that Messrs Patterson, Black and Menz were present at the meeting and reveal the following:
"Motion:
1.That Graham Menz appointment as Managing Director be terminated. Motion BB Second PP
2.Graham Menz undertook to return company vehicle on or before 15 February 1999.
3.Graham Menz advised that he would cease to be signatory on bank accounts for GFS Pty Ltd.
P J Patterson
Chairman."
A formal resignation as director was signed by Mr Menz four days later on 15 February 1999. On 18 February 1999 he registered a new company, Compile Australia Pty Ltd ("Compile"), with himself as its sole director. Compile immediately went into business in opposition to GFS utilising very similar technology and similar intellectual property. It was common ground that one of the main operators employed by GFS went with Mr Menz to Compile as did a company accountant.
On 17 June 1999 Mr Menz's company sought, amongst other things, an order winding up GFS. At the eventual hearing that order was not pursued.
Following Mr Menz's departure from the company Mr Black took over the management of GFS. The company's profitability sharply declined. His Honour found that the decline of the company was due in part to the fact that Compile was trading in opposition to GFS; also because Mr Menz took a great deal of the goodwill of GFS with him to the new business.
There was correspondence between the Menz interest and the Black/Patterson interests concerning the value of Mr Menz's shares in GFS. No agreement was reached.
The relevant application before the learned Judge was brought pursuant to Part 2F.1 of the Corporations Law. The applicable provisions were s 246AA(1), s 246AA(2) and s 246AA(5), pursuant to which, if it was found that the affairs of the company were being conducted in a manner which was oppressive or unfairly prejudicial to or unfairly discriminatory against a member, the court was empowered to make an order for the purchase of the shares of any member by other members.
At the hearing before the learned Judge it was maintained that three separate matters had constituted oppressive conduct by the majority shareholders and directors. They were firstly that Mr Menz had been grossly underpaid for his services as Managing Director. That claim was dismissed. The second was that the circumstances surrounding the dismissal of Mr Menz's step‑son, Mr Martin, as an employee of GFS were oppressive. That claim was also dismissed. The claim which succeeded was that the so‑called summary dismissal on 11 February 1999 of Mr Menz as the Managing Director of GFS constituted oppressive conduct.
In coming to his decision the learned Judge said that generally speaking, in his view, the evidence given by Messrs Black and Patterson was to be preferred to that of Mr Menz. His Honour found that the salary of Mr Menz had been agreed by the directors of GFS from year to year prior to 1999 and that that issue was usually resolved without difficulty. He found that the dismissal of Mr Menz's step‑son had been properly open and was a responsible commercial decision for GFS to make in the interests of all shareholders. However, his Honour found that it was because of the breakdown in the relationship between Messrs Patterson and Black on the one hand and Mr Menz on the other arising out of Mr Martin's dismissal, that the resolution of Mr Menz's salary had become such a matter of contention.
His Honour found that prior to the first meeting on 11 February 1999, Mr Menz had consulted the solicitors Lenhoff & Co. The letter of 11 February 1999, which has been referred to above, was a result of that consultation.
The learned Judge found that Mr Patterson had been taken by surprise by the letter because in July 1998 Mr Black and he had agreed to Mr Menz's request for a total salary package of approximately $100,000. In addition a bonus incentive of 2.5 per cent of the net profit of the company was to be provided for. Mr Patterson said that at a later meeting at his house Mr Menz had indicated that from his point of view the salary proposed was not acceptable and he believed he was being underpaid. Additionally, a dispute had arisen between the three directors over a decision made by Messrs Black and Patterson not to pay Mr Menz directors fees, in view of the fact that as Managing Director he was obliged to attend directors' meetings in any event. However, his Honour did not rely on that aspect of the matter in his decision. His Honour said that he was not persuaded that the alleged underpayment of Mr Menz was an act of oppression even though the salary paid to him was at the lower end of the appropriate range.
Importantly, his Honour found that upon receipt of the Lenhoff letter of 11 February 1999, Mr Patterson had taken the view that Mr Menz's position as Managing Director of GFS had become untenable. His Honour found that in his opinion, that was a view properly open because the letter written on behalf of Mr Menz suggested that the intellectual property, which was the basis of GFS's business, belonged to Mr Menz and not GFS. His Honour found that it had always been understood by Messrs Patterson and Black that in exchange for the capital contributions they had made to GFS and the issue of shares to Mr Menz, the intellectual property had been acquired by that company. The suggestion by Mr Menz that this was not so and the threatened litigation between him and GFS, in his Honour's opinion, put Mr Menz in a position where he could no longer properly act as Managing Director of GFS.
In his Honour's view however, the critical matter in relation to oppression and the matter central to the applicant's claim, related to the summary dismissal of Mr Menz on 11 February 1999. His Honour said:
"In that respect it is common ground that following the meeting with Lenhoff and Menz a directors' meeting of GFS at which only Black and Patterson attended, resolved to terminate Menz's position as Managing Director. No notice was given to Menz of that resolution and he was never given an opportunity to put his case in relation to the proposal that he be dismissed."
It appears that his Honour's finding in that respect may have been reached on a misunderstanding of what had occurred. There were only two formal meetings of the directors on the 11 February 1999. It is clear from the minutes of the second meeting which have been referred to above, that the three directors, including Mr Menz, were present at that meeting. The minutes revealed that a formal motion was put that Mr Menz's appointment as Managing Director be terminated. Mr Menz also undertook to return the company vehicle and advised that he would cease to be a signatory on the bank accounts. So, contrary to what his Honour said, and if he was referring to the meeting where the minutes were taken, there was notice given to Mr Menz by the moving of the resolution. By inference Mr Menz was also given the opportunity to put his case in relation to the proposal that he be dismissed although there is no direct evidence of that. His Honour's finding that no notice was given to Mr Menz of the resolution and that he was not given an opportunity to put his case seems to be incorrect.

It was his Honour's finding that at the first meeting between the three directors on 11 February 1999, at which Mr Lenhoff was also present, Mr Lenhoff had raised the question of the price at which either Mr Menz was prepared to sell his shares or at which the Black/Patterson interests were prepared to sell their shares. Mr Patterson, whose evidence his Honour generally accepted, had given evidence that the attitude from the Menz interests was that Mr Menz was either going to take over GFS or to dispose of his interest therein. Mr Patterson's evidence was that he was shocked and did not know whether Mr Menz was genuine in his approach.
His Honour came to the view that the central question which fell for determination was whether the act of Messrs Patterson and Black:
"in summarily terminating Menz's position as Managing Director of the company was an act of oppression. It is important in considering that aspect of the matter to bear in mind that, in my view, Menz's approach to the problem, as exhibited at the meeting which Lenhoff attended, was that he was not pursuing his future employment with GFS."
His Honour came to the conclusion:
"On balance I have come to the view that the act of Black and Patterson in dismissing Menz as Managing Director of GFS, without giving him notice of that proposed course, was in all the circumstances an act of oppression. I have come to that conclusion notwithstanding the fact that at the meeting with Lenhoff, Menz did not seek to continue his employment as Managing Director. Nonetheless, in my view before Menz could properly have been summarily dismissed, he should have been given the opportunity of stating his position and answering the allegations which Patterson and Black considered had made his position untenable."
Having reached the conclusion that there was oppression, his Honour then decided on the proper basis for payment for Mr Menz's shareholding in GFS.
In my view, it is a fair conclusion from his Honour's reasons for judgment, in which he twice stated that Mr Menz had not been given notice of his proposed dismissal and that he should have been given the opportunity of stating his position and answering the allegations which Patterson and Black considered had made his position untenable, that his Honour made a mistake concerning the facts of the relevant second meeting on 11 February 1999.
Having stated his conclusion that Mr Menz should have been given the opportunity of stating his position and answering the allegations which Patterson and Black considered had made his position untenable, his Honour commented:
"In that respect the case is not unlike that in Haden Bill discussed earlier in these reasons. See also: Hogg v Dymock (1993) 11 ACSR 14 per Malcolm CJ at 20."
In R&H Electric Ltd v Haden Bill Electrical Ltd (1995) 2 BCLC 280 Mr Pitt had helped a former employee of his, a Mr Hogg, and Mr Hogg's wife, to set up a company business. Mr Pitt had arranged for very generous loans to the company and for various accountancy services to be provided to it. Mr Pitt was the Chairman of Directors and Mr and Mrs Hogg were directors and so was a fourth person, Mr Watkins. Difficulties arose between the parties and the other three directors decided to remove Mr Pitt as Chairman and also his daughter from the position of Company Secretary. The learned Judge found that Mr Hogg was a very ambitious man "with a much keener awareness of his talents (as he sees them) than his limitations. He seems quite unaware of how much he owes Mr Pitt for giving him the chance to be (in Mr Hogg's words) 'his own governor'." His Honour found "for the sum of £50 Mr Hogg and his wife had acquired 50 per cent of the shares in the company which was to be loaned £100,000 interest free (soon supplemented by a further £100,000 at a reasonable commercial rate and by further advances). The company was to have the benefit of Mr Pitt's experience, and his company's office facilities in looking after the books and supplying management information."
In view of the situation which had arisen between the directors in Haden Bill (supra) the learned Judge found in that case that it would be unthinkable to attempt to compel them to work together in harmony. Having recited the facts his Lordship found that the company had been set up on trust. It was his view that Mr Pitt had a legitimate expectation of being able to participate in the management of the company. When the other three directors removed Mr Pitt from his position as the director the learned Judge found that the circumstances could not "justify the majority shareholders in summarily ejecting him without consultation or discussion about the future of Mr Pitt's equity capital and R&H's loan capital in Haden Bill." His Honour found that "had the position been considered and discussed between the majority shareholders and Mr Pitt in February 1994, I think the solution likely to have emerged, and a fair solution, would have been that Mr Pitt should cease to be Chairman and a director of Haden Bill, that his shares should be bought by the majority shareholders without a discount for it being a minority holding, and that R&H's loans to Haden Bill should be repaid as soon as reasonably possible (either by refinancing or out of retained profits, but in any event substantially sooner than if the minimum instalments fixed by the deed of 5 April 1993 had continued)."
It can be seen from the facts in the Haden Bill case that they were quite different to those in the present case. It is also relevant that Mr Menz was not removed as a director but his appointment as Managing Director was terminated. His formal resignation as a director was signed by Mr Menz four days later, on 15 February 1999.
The learned Judge in this case, also referred to the words of Malcolm CJ in Hogg v Dymock (1993) 11 ACSR 14 at 20 where Malcolm CJ said:
"The directors of a company are required to conduct the affairs of the company in the interests of the company and its shareholders as a whole. They may not engage in conduct which would be oppressive or unfairly prejudicial to or unfairly discriminatory against a shareholder…
The key word in s 260 of the Corporations Law is 'unfairly'; … In Re Spargos Mining NL (1990) 3 ACSR 1 at 43 Murray J said:
'… unfairness may lie in the harm suffered as a result of conduct of management, the prejudice caused, the lack of reasonable commercial justification for the course taken, or simply in the decision making processes within the company.'
Removal from a salaried position within the company may be unfair, even though it might be a valid exercise of the powers of the majority of the directors: Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 378‑9 per Lord Wilberforce. While that case involved a partnership which had been converted into a company, it is common ground that the parties in this case envisaged in the first instance that they would be partners and share equally in the day to day conduct of the business as well as in the management of it at the level of directors. In the Westbourne Galleries case there was an expectation of continuing participation. This was also the case in Diligenti v RWMD Operations Kelowna (1976) 1 BC 36 in which a founding member was removed as a director and dismissed as a salaried manager.
As against this, the Board may properly decide what is in the best interests of the company, even where the majority of the directors decide to terminate the employment of an equal shareholder. In Re Terri Co Pty Ltd (1988) 12 ACLR 457; 6 ACLC 402 a business judgment, which was judged to be objectively reasonable and untainted by improper motives, was described as one which will be respected by the courts."
In my view, those last two sentences of Malcolm CJ's reasons are applicable to this case because Mr Menz, having obtained counsel's advice, had his solicitors write a letter querying firstly, how he came to be a minority shareholder "in a company which was his brainchild and which conducts its business activity solely through his efforts", and then claiming that his situation was "now intolerable and cannot be permitted to continue". He then claimed both past and future royalties and licence fees concerning the company's intellectual property which he contended was his. He threatened, in the absence of suitable arrangements, that his rights "to terminate the present licence whereby GFS utilises our client's intellectual property free of appropriate remuneration are strictly reserved".
In my view, Mr Menz acted in what could only be described as an astounding manner considering he was the Managing Director of the company. It was reasonable that in the company's interests he should have been dismissed as Managing Director.
On the facts found by the learned trial Judge, Mr Menz was claiming the company property to be his own and was attempting to hold the company he was supposed to be managing, to ransom.

On Appeal

On appeal the counsel for the second and third appellants relied on the learned Judge's finding that it had always been understood by Messrs Patterson and Black that in exchange for the capital contributions they had made to GFS, the intellectual property had been acquired by the company. His Honour had said:
"The suggestion by Menz that this was not so, and the threatened litigation between him and GFS, in my opinion, put him in a position where he could no longer properly act as managing director of GFS."
That finding was not challenged on the appeal.
Counsel submitted that Mr Menz had been given the opportunity to be heard on the question of his dismissal. He had been present at the relevant meeting. There had been no evidence that Mr Menz could not have resiled from his claims at the meeting. It was submitted that the learned Judge had erred in coming to the conclusion that Mr Menz had been not given an opportunity to put his case in relation to the proposal that he be dismissed. It was pointed out that neither in Mr Menz's points of claim which were quite extensive, nor in his evidence had he contended that he had wanted to be heard on the question of his dismissal but had been denied the opportunity. It was submitted that the real issue between the parties had become, who was going to buy out whom and for how much. It was contended that all the remodifications and improvements in technology with respect to the intellectual property, had been done by Mr Menz and others on behalf of the company. He had told the company the patent had to be put in his name because it had to be registered in the name of an individual.
It was pointed out that it had never been contended by Mr Menz after a letter had been written to him on 12 February 1999, that at the directors meeting at which his position as Managing Director had been terminated, he had not been in attendance or had not been allowed to put his case in relation to the proposal that he be dismissed. It was also submitted that he had remained a member of the Board for some days after that, but had then resigned, clearly taking the correct view that what he was about to do in setting up in opposition to GFS was inconsistent with his position as a director of GFS. He had registered his new company on 18 February 1999 and immediately commenced in opposition to GFS. Mr Menz had been the sole director of the new company.
The appellants' counsel contended that there had been no evidence before the learned Judge and no assertion that Mr Menz had not been given an opportunity to state his case or put his case. He had not asked for time to consider his position. It was submitted that in the affidavit evidence, and the evidence generally, there was no suggestion that he had not been given an opportunity to refute the reasons for his termination. There was no evidence that he had ever asked for an opportunity to mend his ways.
The unfairness alleged in the particulars before the learned Judge was at page 36, par 24 of the substituted points of claim:
"24.The unfairness generally culminated on or about 11 February when the applicant was summarily terminated as Managing Director jointly at the instance of the respondents unfairly and with no sufficient reason on the same day as receipt of an allegedly offending solicitor's letter."
It was pointed out that the learned trial Judge had found that Mr Menz could no longer properly act as Managing Director of GFS. The act of oppression found by the learned Judge had been that Mr Menz had been dismissed as Managing Director "without giving him notice of that proposed course." That had been incorrect.
Although it was not referred to at the hearing, it is my view that having sent the letter on counsel's advice and having been present at the first directors' meeting on that day with his solicitor, Mr Menz and certainly his legal advisors, should have expected that he would be dismissed. That is relevant to the question of whether he was given sufficient notice of what occurred. The first meeting on 11 February 1999 was by arrangement with the solicitors. The second meeting which was held following that first meeting, had been scheduled beforehand.
Counsel submitted that the question of the correct interest to be paid on the judgment which Mr Menz had obtained and the question of the orders for costs would be "quite irrelevant" in the event of the appeal succeeding.
It was accepted for the respondent that Mr Menz's position as Managing Director had become untenable. However reliance was placed on the words of Lord Wilberforce in the decision Re Westbourne Galleries [1970] 3 All ER 374 at 379 where his Lordship said:
"The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements:
(i)An association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre‑existing partnership has been converted into a limited company;
(ii)an agreement, or understanding, that all, or some (for there may be 'sleeping' members), of the shareholders shall participate in the conduct of the business;
(iii)restriction upon the transfer of the members' interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere."
It was submitted that in this case equity had demanded fair play which would at least have involved proper notice to Mr Menz and an opportunity to be heard.
Counsel for the respondent contended that there had not been only two meetings on 11 February 1999 but three, and that a meeting at which Mr Menz was not present had taken place between Mr Patterson and Mr Black after the first meeting on 11 February 1999.
In his Honour's reasons at par 44 he says:
"It is common ground that Menz was dismissed as manager of GFS following two meetings held on 11 February 1999."
In par 47 he says:
"In that respect it is common ground that following the meeting with Lenhoff and Menz, a directors' meeting of GFS at which only Black and Patterson attended, resolved to terminate Menz's position as Managing Director. No notice was given to Menz of that resolution and he was never given an opportunity to put his case in relation to the proposal that he be dismissed."
Earlier in his reasons at par 18 his Honour had said:
"Following receipt of that letter [the Lenhoff letter] it is common ground that two directors' meetings took place. The first was a meeting at which Mr Lenhoff was present…"
In par 19 he said:
"The meeting between Black, Patterson, Menz and Lenhoff closed without resolution and a further meeting of the directors of GFS took place."
His Honour then referred to the minutes of the meeting where Mr Menz's appointment as Managing Director was terminated.
It is my view that his Honour thought there had been only two meetings on that day and that at the second meeting Mr Menz had not been present. The minutes which appear in par 19 of his Honour's reasons establish that Mr Menz was present at that second meeting, and no claim was ever made that those minutes were incorrect.
Counsel for the respondent said that the first meeting had taken place at 5 pm and the second minuted meeting had taken place some time after the conclusion of the first meeting, and at 6 pm.
Those submissions are contrary to the learned Judge's reasons in par 18, par 19 and par 20 because in par 19, having discussed the first meeting in par 18 the learned Judge said:
"A further meeting of the directors of GFS then took place."
In par 20 he said:
"The significance of the second meeting of 11 February and the circumstances surrounding it, which is central to this application will be discussed later in these reasons."
It seems that his Honour thought there were only two meetings.
It was submitted for the respondent that before the meeting at which the motion that Mr Menz's appointment as managing director be terminated was put, he should have been given adequate notice of the dismissal motion. The question was asked whether it was fair to have a motion for dismissal put at the meeting when the matter had not been discussed at the earlier Lenhoff meeting at which all the directors had been present, together with Mr Lenhoff as Mr Menz's solicitor. The questions were asked: Why had it not been put to Mr Lenhoff? Was it fair in all the circumstances? What would a reasonable Board do? Was it fair to respond immediately? Why the haste? It was submitted that Mr Lenhoff should have been asked whether he wished to discuss the matter with his client.
It was conceded that at the meeting at which the motion was put Mr Menz could have asked for more notice. However, it was said that the whole thing was too sudden. The three people had been in business for 11 years. It was conceded that the question really boiled down to whether or not Mr Menz had adequate notice of the motion. It was submitted he had not had the luxury of being afforded the opportunity to seek counsel's advice.
A consideration arises whether or not Mr Menz had already made up his mind to set up his own company. It was conceded that at the Lenhoff meeting, according to Mr Patterson, Mr Menz was either going to take over GFS or to dispose of his interests therein.
The facts are that the Managing Director had wrongly, in my view, claimed to be the owner of the company's main asset. He was asserting that ownership. He had made a demand for royalties. It was conceded that that was a matter which made his position as the Managing Director untenable. Further, there was his Honour's finding that Mr Menz was not pursuing his further employment with GFS.
It is a significant consideration that Mr Menz had instructed his solicitors to write a letter after taking counsel's advice. He would have expected the only logical and reasonable response. To that suggestion it was said that Mr Menz had not been given an opportunity to even consider the situation. However, Mr Menz had already taken legal advice and then, by his letter, destroyed the substratum on which the corporate arrangement was based. With legal advice, he was claiming for himself the main asset of the company.
It is significant that Mr Menz's solicitor's letter arrived on the day of a scheduled meeting. There was nothing unconsidered about it. It was not a case of the other two directors oppressing the respondent. It was clear from the demands in the letter that the company could not go on as it was. The respondent had decided that he was not prepared to continue, not the other way around. On his Honour's findings the intellectual property was not his. It was conceded for the respondent that there was no way he could justify his actions.
The learned Judge seems to have considered that there was not sufficient notice to the respondent because he was not at the meeting. However, it was suggested for the respondent that the other two directors should have said to the respondent, "We are giving you one last warning" before he was dismissed as Managing Director. It is significant that the other directors did not purport to remove Mr Menz as a director. Also he remained a shareholder for the full extent of his holdings.

His Honour's finding in par 48 of the reasons is that Mr Menz's attitude was that he was either going to take over GFS or to dispose of his interests therein. He was not pursuing his further employment (par 49). His Honour (par 52) came to the conclusion that at the meeting with Mr Lenhoff, Mr Menz did not seek to continue his employment as Managing Director. If that was his attitude, in my view, he could not complain that he was then dismissed.
I am not aware of any decided case which says that where there is conduct of such a fundamental nature that the mutual trust of a quasi‑partnership company is destroyed, a warning of dismissal has to be given. What is required, according to the authorities, is fair dealing. That must depend upon an evaluation of the particular circumstances. In this case there had been an opportunity for Mr Menz to withdraw his demands at the earlier meeting when his solicitor was present.
Counsel for the respondent relied on the reasons in Aqua‑Max Pty Ltd v MT Associates Pty Ltd [2001] 3 VR 473 where the statements in O'Neill v Phillips [1999] 1 WLR 1092 per Lord Hoffman at 1099, In re Wondoflex Textiles Pty Ltd [1951] VLR 458 at 467, and the reasons of Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 were discussed. Reference was made in that decision to other cases where the question of unfairness in this context was discussed: see 482 and 483.
In the Aqua‑Max (supra) decision the main focus at the trial had been on the validity of a meeting on 15 March based on the contention that a Mr Trihey had been given no notice of the meeting and had never agreed to the holding of it. The Court of Appeal said that it was clear on the evidence that he had been given no notice of the meeting. The trial Judge found he had been "ambushed" by a Mr Rees, in that he had walked into the room in which the meeting took place, without realising that Mr Rees intended to "spring a meeting on him".
Mr Trihey had given evidence that he had not agreed to the alleged directors' meeting being a directors' meeting as there had been no notice, or no sufficient notice. The learned trial Judge was satisfied that Mr Trihey had been ambushed and secondly, that he had protested about the meeting, although he had stayed at the meeting and voted against the motion that Mr D Rees be appointed a director. The trial Judge found that the plan had been to get Mr Trihey into a room, hold a meeting before he could leave, and have Mr D Rees appointed as a director on the casting vote of R Rees as Chairman. The learned trial Judge accepted Mr Trihey's version of what had happened and that he had been deceived into going into the room. He found that he had no doubt that the course of action was pre‑planned by the others and was part of a plan to catch Mr Trihey by surprise.
At the Court of Appeal hearing the Court said that the principles of equity "seem to us to clamour for attention"; that by "the artifice of the father and son, aided by Lilly, he was placed in a position where, without any opportunity for reflection, let alone the taking of advice, he had to decide whether to walk out of the meeting before its convenors could force through their resolution, or stay and either vote against, or at least register his protest against the motion to appoint a further director." Their Honours referred to the plan to entrap Mr Trihey and "to trick him" into attending a meeting. They referred to the decision in Evans v Llewellin [1787] 1 Cox Eq Cas 333 at 340‑1; (1787) 29 ER 1191 at 1194 where the Master of the Rolls (afterwards Lord Kenyon) said:
"However, here, I say, the party was taken by surprise; he had not sufficient time to act with caution; and therefore although there was no actual fraud, it is something like fraud, for an undue advantage was taken of his situation. The cases of infants dealing with guardians, of sons with fathers, all proceed on the same general principle, and establish this, that if the party is in a situation, in which he is not a free agent, and is not equal to protecting himself, this Court will protect him."
At 490 the Court referred to Professor Story's "Commentaries on Equity Jurisprudence" (13th ed) where it is said:
"The surprise here intended must be accompanied with fraud and circumvention, or at least by such circumstances as demonstrate that the party had no opportunity to use suitable deliberation, or that there was some influence or management to mislead him. If proper time is not allowed to the party and he acts improvidently, if he is importunately pressed, if those in whom he places confidence make use of strong persuasions, if he is not fully aware of the consequences but is suddenly drawn in to act, if he is not permitted to consult disinterested friends or counsel before he is called upon to act in circumstances of sudden emergency or unexpected right or acquisition - in these and many like cases if there has been great inequality in the bargain, Courts of Equity will assist the party upon the ground of fraud, imposition, or unconscionable advantage."
Their Honours also referred to a passage by Professor Story where it was said:
"When a Court of Equity relieves on the ground of surprise, it does so upon the ground that the party has been taken unawares; that he has acted without due deliberation, and under confused and sudden impressions… There may be cases where the word 'surprise' is used in a more lax sense and where it is deemed presumptive of, or approaching to, fraud. But it will always be found that the true use of it is where something has been done which was unexpected, and operated to mislead or confuse the parties on the sudden, and on that account has been deemed a fraud."
In my view, the approach of the Court of Appeal in Aqua‑Max (supra) does not support the respondent's propositions in this case. There was no taking of the respondent unawares. He was the one who, after consulting with counsel and solicitors, tried to force the situation with the other two directors. GFS had paid over $50,000 to register claims for intellectual property. Mr Menz was unexpectedly claiming ownership of that property. Up until the time of the letter he had not made that claim. It was admitted that the directors had grounds for dismissing Mr Menz. However, it was said that after the letter of 12 February, Mr Menz had not claimed the intellectual property.
In his letter of 11 February 1999 Mr Menz was saying that he was no longer going to be bound by the considerations which had brought the three directors that far. He was going his own way and wished to take the company's main asset with him.
There is no decided case of which I am aware which states that notwithstanding a repudiation of the fundamental obligations by a Managing Director, it is inequitable for the company to dismiss him. It does not help that prior to that time there had been a good and solid relationship. Mr Menz had precipitated the breakdown of the relationship. It had not been a gradual deterioration. This was not an ordinary case of a relationship breaking down but one where the Managing Director was making a demand which put him in a wholly untenable position.
Another point made for the respondent was that Mr Menz had offered his shares pursuant to the mechanism of Article 25 of the Articles of the Company and the other two directors had decided not to respond. However, Mr Menz offered to sell his shares for $500,000 which, on the learned Judge's findings, was far in excess of their real value. The value of the shares had been depreciated due to the fact that Mr Menz had left GFS and started another company in opposition to it.
It was contended that there is no mechanism for Mr Menz to withdraw from the company if this appeal is allowed. However, Mr Menz could make a realistic offer to sell his shares which he has not yet done. If that offer was not accepted Mr Menz could take action in that regard.
It was conceded for the respondent that without an act of oppression the statutory remedy failed.

Notice of Contention

In the notice of contention the respondent contends that the summary dismissal of Mr Menz amounted to an act contrary to the interests of the members of GFS as a whole pursuant to the dicta of Murray J in Re Spargos Mining NL [1990] 8 ACLC 1218 at 218 and that the summary dismissal of Mr Menz was an act contrary to the interests of the members of GFS as a whole.
In all the circumstances related above it could not be said that the dismissal of Mr Menz was contrary to the interests of the company. In my view it was the only thing which could have been done. The Managing Director was trying to hold the company to ransom.
It was submitted that the two directors could have called for an unequivocal and entire withdrawal of Mr Menz's position. However, in my view, that was not a realistic proposition.
At the hearing counsel for the respondent advised that the only submission put to the Court with respect to whether or not the appeal is competent was that there was a formal notice to abide filed by the first appellant at the inception of the trial. It was submitted that the company had elected not to appeal or was estopped from appealing. It was said that the second and third respondents, who represented directors of the company were appealing the judgment in the face of a notice to abide by the company when they had partaken in that decision. It was contended that the second and third appellants being privy to that decision were also bound by it because they were the parties who made the decision to abide. They had effectively made an election on behalf of the company. Their action in doing that would be the equivalent of an action of the company.
An election to abide by the decision in the circumstances of this case does not estop an appeal if the decision is thought to be wrong. It simply says that the person concerned does not wish to be heard at the trial. Further, the fact that after his Honour's decision, and on the assumption it was to be to put into effect, it was agreed that the company would buy the shares does not mean that there was an estoppel preventing an appeal.
The contention that the second and third appellants, being privy to the notice to abide, and having accepted and elected that the first appellant purchase Mr Menz's shares as agreed to by the first appellant after trial and judgment, are then estopped from appealing, in my view, should not be upheld. There is no authority to that effect.
A further question raised by the respondent was whether the value of $180,000 for Menz's shares in GFS should be increased by the after tax difference between the cost and market value of GFS's share portfolio. In view of the conclusions to which I have come, that is not a live issue.
The question of costs arising from an offer of 22 December is also now theoretical. The question of costs will be revisited when the decision in this appeal is given.
The other two matters in the notice of contention were abandoned.

Conclusion

I would allow the appeal, set aside the orders of the learned Judge at first instance, and dismiss the action brought against the appellants.
ANDERSON J: I have read the judgment of Wallwork J and agree with it. There is nothing I can usefully add.
BURCHETT AUJ: I agree that the appeal should be allowed and the action brought against the appellants should be dismissed. I do so for the reasons given by Wallwork J.