IMO LQD Investments Pty Ltd
[2019] VSC 864
•6 November 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2018 00572
IN THE MATTERS of LQD INVESTMENTS PTY LTD (ACN 606 366 429)
| PRENDERGAST MANAGEMENT CONSULTANTS PTY LTD (ACN 005 920 856) | Plaintiff |
| v | |
| LQD INVESTMENTS PTY LTD (ACN 606 366 429) | First Defendant |
| GEMM THIRTEEN PTY LTD (ACN 606 294 464) (AS TRUSTEE FOR THE ANTHONY MCDONOUGH FAMILY TRUST) | Second Defendant |
| PB ONE PTY LTD (ACN 606 294 222)(AS TRUSTEE FOR THE CHRISTOPHER GLEBATSAS FAMILY TRUST) | Third Defendant |
- and –
S ECI 2018 00807
| GEMM THIRTEEN PTY LTD (ACN 606 294 464)(AS TRUSTEE FOR THE ANTHONY MCDONOUGH FAMILY TRUST) | First Plaintiff |
| PB ONE PTY LTD (ACN 606 294 222)(AS TRUSTEE FOR THE CHRISTOPHER GLEBATSAS FAMILY TRUST) | Second Plaintiff |
| v | |
| PRENDERGAST MANAGEMENT CONSULTANTS PTY LTD (ACN 005 920 856) | First Defendant |
| LQD INVESTMENTS PTY LTD (ACN 606 366 429) | Second Defendant |
---
JUDGE: | Efthim AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 6 and 7 May 2019 |
DATE OF JUDGMENT: | 6 November 2019 |
CASE MAY BE CITED AS: | IMO LQD Investments Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2019] VSC 864 |
---
CORPORATIONS – s 232 of the Corporations Act 2001 (Cth) – Whether there was oppressive conduct – s 232 of the Corporations Act 2001 (Cth) – Releases sought by oppressed parties from any claims against them by the Company as the only relief.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr D C Gration | James Partners Lawyers |
| For the Second and Third Defendant | Mr S Maiden QC and Ms V Bell | Minter Ellison |
HIS HONOUR:
There are four applications before the Court.
On 31 July 2018 Prendergast Management Consultants Pty Ltd (ACN 005 920 856) (‘PMC’) commenced a wind up proceeding against LQD Investments Pty Ltd (ACN 606 366 429)(‘the Company’) on the grounds that the affairs of the Company are being conducted in a manner that is contrary to the interests of the members as a whole (s 461(1)(f) of the Corporations Act 2001 (Cth)(‘the Act’)); and that it is just an equitable to do so (s 461(1)(k) of the Act): S ECI 2018 00572.
On 14 August 2018, Anthony McDonough and Christopher Glebatsas, the founders and directors of the Company (‘the Founders’), through their trustee companies, Gemm Thirteen Pty Ltd (ACN 606 294 464) (as trustee for the Anthony McDonough Family Trust) and PB One Pty Ltd (ACN 606 294 222) (as Trustee for the Christopher Glebatsas Family Trust) (together, ‘the Oppression Plaintiffs’) commenced an oppression proceeding seeking orders that PMC purchase their shares in the Company at fair market value: S ECI 2018 00807.
In the Originating Process, the Oppression Plaintiffs claimed:
1. An order pursuant to s 233(1)(d) and/or 233(1)(j) of the Corporations Act that the first defendant purchase the plaintiffs’ shares in LQD Investments Pty Ltd at fair market value or such other sum as determined by the Court.
2. The first defendant pay the plaintiffs’ costs of the proceeding.
3. Such further or other order as the Court deems fit.
On 14 September 2018, Justice Sifris ordered that the two proceedings be managed and heard together, with the oppression proceeding being treated as if it were a counterclaim in the wind up proceeding.
On 13 February 2019 and 8 March 2019, a related entity to the Company, LQD Trading Pty Ltd (ACN 613 883 980)(‘LQD Trading’) commenced proceedings under s 459G of the Act to set aside two statutory demands served on it by PMC: S ECI 2019 00594 and S ECI 2019 00984, respectively. Randall AsJ ordered that those applications be heard together with the wind up proceeding and the oppression proceedings.
This judgment is only concerned with the wind up and oppression proceedings. The parties agree that the statutory demand proceedings should be adjourned until after judgment is given in the wind up and oppression proceedings.
Background
The Company is part of the LQD Group of Companies (‘LQD Group’) which developed, marketed and sold skin care products in Australia, Europe and the USA. The Company initially marketed the products to gay men until August 2017 when the Founders determined that the LQD brand would become a unisex or gender neutral brand.
Mr McDonough started the LQD business in 2010 and Mr Glebatsas joined LQD in late 2013. In June 2015, they brought in an external investor, Phillip Prendergast, to provide capital necessary for expansion. LQD was restructured for that purpose and funding was provided by Mr Prendergast’s company, PMC. The Company was registered on 11 June 2015. The Founders are 50% shareholders of the Company, with the other 50% owned by PMC. Mr Prendergast was appointed managing director of the Company in May 2018 and exercised effective control of its operations from then on.
Ownership of the LQD Group is divided equally between the Founders and Mr Prendergast. The Founders, through the Oppression Plaintiffs, control half of the shares in the Company and two other companies, LQD Global Capital Pty Ltd and Liquid Skin Care Inc (‘the Offshore Companies’). Mr Prendergast, through PMC, owns the other half of the shares in the Company and the Offshore Companies. The Company has four subsidiaries, which includes LQD Trading and the former trading entity, AMAC Enterprises Pty Ltd (‘AMAC’).
PMC submits that it has invested approximately $4,450,000.00 in share subscriptions and $3,700,00.00 in secured debt funding in the Company. It says that the Founders have provided no debt funding and have not subscribed for further shares since the Company was incorporated. The Founders say that they have also made significant contributions to the director’s business. Their unremunerated contributions were recorded as loans in AMAC’s accounts in the amount of $418,732.00 each as at June 2016.
PMC and the Founders entered into Shareholders Agreements on 24 June 2015, 29 July 2016 and 15 June 2017. The current Amended Shareholders’ Agreement is dated 21 March 2018 (‘the Current Shareholders’ Agreement’). Clause 5(b) of the Current Shareholders’ Agreement provides in relation to the management of the Company that:
No Director or Directors may bind the Company in relation to any matters relating to management of the Company or otherwise, including but not limited to the things listed in Schedule 3, without obtaining unanimous approval of the Board.
In May 2018, Mr Prendergast was appointed managing director of the Company. According to Mr McDonough the Founders agreed to the appointment to secure further funding by PMC. In June 2018 a dispute arose between the shareholders when the Founders advised Mr Prendergast that they wanted to exit the Company. The Founders allege that since this date, Mr Prendergast commenced a campaign of oppression design to exclude the Founders from the Company without compensation for their ownership or efforts. They also allege that Mr Prendergast diverted the Company’s business to his own enterprise, Yora Skin Science Pty Ltd (‘Yora’).
The Issues Raised
Senior Counsel for the Oppression Plaintiffs submitted that the outcome of the wind up proceedings really follows on from the outcome of the oppression proceedings. The submissions put to the Court by the parties appear to proceed on that basis.
The Oppression Plaintiffs submit that the proceedings raise the following four questions:
(a) did PMC deliberately cripple LQD’s business, exclude the Founders from management, poach its key employees, take over its lease, commence the Wind Up Proceedings and pursue unfounded allegations of misappropriation so as to exploit for itself the value in LQD’s business and take advantage of opportunities that had become apparent to Mr Prendergast as a result of his position as a director of LQD?
(b) if PMC did any of those things, did they amount to conduct of the parent’s affairs in a manner contrary to the interests of its members or oppressive to the Founders, engaging s 232 of the Act?
(c) in granting relief against oppression under s 233 of the Act, does the Court have the power to order that the parent purchase the founding shareholders’ shares in the parent and the offshore companies, in consideration for the parent:
(i) releasing the founding shareholders and their directors from any claims against them by the parent; and
(ii) causing the offshore companies and the subsidiaries to grant equivalent releases?
(d) in light of the answers to questions 1 to 3, should the Court resolve the disputes between the parties by:
(iii) making orders of the kind described under question 3;
(iv)ordering that the parent be wound up; or
(v) making some other orders?
Question 1 – The Alleged Oppression
The Oppression Plaintiffs allege that PMC and Mr Prendergast have led a crusade of oppressive conduct to deliberately sabotage them. They submit that the crux of the oppression was the closure of the Company’s business on 7 September 2018. They say that this was a calculated effort by Mr Prendergast with the assistance of two staff, Rowena Mason and Antoinette Bernardo. Ms Mason and Ms Barnardo left the Company on 7 September 2018, and were reemployed to start extracting assets and opportunities from the Company’s business to Yora.
Mr Prendergast was cross-examined regarding this allegation. He gave evidence that PMC paid on behalf of the Company $153,000.00 for the formulation of serums prepared by Lubrizol Australia Pty Ltd (‘Lubrizol’). On 6 August 2018, when Mr Prendergast was managing director of the Company, Ms Mason, an employee of the Company, sent an email to Robert McPherson, the sales manager of Lubrizol which stated:
In regards to despatching this bulk product, would you please be able to hold this shipment in your warehouse until further notice (once completed).
Please DO NOT despatch to Kings Warehouse as we no longer use them for our 3PL services.
Appreciate your assistance and if you wouldn’t mind confirming this is ok, that would be great. We will forward you the shipping details after the 17th of August.
Ms Mason directed McPherson not to deliver the serums to the Company’s warehouse, and noted that the new delivery address will be provided after 17 August 2018. This was the same day that PMC’s application to wind up the Company on just and equitable grounds was first listed before this Court.
In cross-examination it was put to Mr Prendergast that the email of 6 August 2018 was sent on his instruction. Mr Prendergast gave the following evidence:
Right. Ms Mason sent the email at 1725 – beg your pardon –1745 of volume 2 on your instructions, didn’t she?---Could you repeat the question, please?
Turn back to p.1745 of volume 2. We were looking at an email?---Yes.
That email was sent on your instructions?---I don’t recall.
Is there any reason to believe that it wasn’t sent on your instructions? You were, at the time, the managing director, after all?---I – I was.
Is there any reason to believe it wasn’t sent on your instructions?---Well, I don’t think there’s any reason to believe that it was.
Ms Mason was here asking for the delivery of some $150,000 worth of product to be delayed until after the date that the winding up of the company was to be heard. You would accept that?---I do.
And the reason for that is you wanted the product delivered after the company was wound up so it could be used for your new venture?---That’s not true. I believe there is an alternative explanation.[1]
[1]T15.3-22.
When re-examined, Mr Prendergast gave his explanation as follows:
You will see there an email from Rowena Mason to Robert McPherson of Lubrizol that Mr Maiden asked you about, and said it was sent on instructions. You said that you had an alternative explanation for why that email was sent. What was that explanation?---Um, well, at the time, um, um, Mr McDonough had instructed Kings not to accept any orders and to put any orders on hold, and so we couldn’t ship product from KingsWarehouse since that order was made, so um, um – so I made alternative, um, arrangements to – to move to another warehouse, so it was just – that was it.[2]
[2]T75.1-11.
I do not accept Mr Prendergast’s explanation. It seems to be more than a coincidence that shipping details would be forwarded to Lubrizol after 17 August 2018, which was the date the application was listed before the Court. A more plausible explanation would be that the product was to be used for Mr Prendergast’s new venture.
On 6 September 2018, Ms Mason sent an email to Helen Pearce of Lubrizol requesting that the serums be delivered to Pressworks Logistics and Distribution, 101 Keys Road, Moorabbin. Mr Prendergast agreed that Keys Road, Moorabbin was not the Company’s usual warehouse. Mr Prendergast also agreed that Ms Mason’s employment for the Company was terminated the following day, 7 September 2018 and that she then started working for Yora. Mr Prendergast, when cross-examined regarding this email, gave the following evidence:
Sent on 6 September 2018?---Correct.
“Good morning, Helen. The address to have the serums delivered to is as follows”, and she then indicates a logistics and distribution centre on Keys Road, Moorabbin?---Correct.
That wasn’t Liquid’s usual warehouse, was it?---No, it wasn’t.
Now, Ms Mason’s employment for Liquid was terminated the following day, 7 September, wasn’t it?---Yes.
And she started working for your new company, YORA, straightaway, didn’t she?---Yes.
The Oppression Plaintiffs allege that the product was kept in the warehouse and then adopted by Yora as part of its product pipeline. In a confidential exhibit, headed ‘New Product Formulation Report’ (for Yora) there is reference to the serums formulated by Lubrizol. Next to the names of the serums, under a column headed ‘Last Update’ is a notation ‘30 November 2018 in warehouse for packaging/fill’. This exhibit confirms that the product did become part of Mr Prendergast’s new venture and that he was taking advantage of opportunities that had become apparent to Mr Prendergast as a result of his position as a director of the Company.
On 21 February 2019 an email was sent by Teresa Lau, an employee of Yora, to Greg Oakley of PinPoint Design requesting PinPoint to design packages for the serums formulated by Lubrizol. When cross-examined in relation to the packaging, Mr Prendergast gave the following evidence:
Right. And this spreadsheet shows that part of the phase 1 that Ms Lau was asking Pinpoint to design were the four serums – Ultra Defence, Ultra Hydrate, Ultra Repair and Ultra Clear?---Correct.
And they’re the four serums that were the subject of the 12 December product pipeline schedule that we’ve just discussed?---Ah, well, in – insofar as naming conventions, ah, you’ve got to assume that was the case.
Well, it’s the same product, isn’t it?---Well, it appears to be the case.
You’re the managing director and 80 per cent owner of this company; you know it to be the case, don’t you?---Um, as I said to you, it appears to be the case, because the naming conventions are the same.
I hear you say it appears to be. I’ve got another question for you, and that is that you know it to be the same?---It probably is the same, yes.
I’m going to ask you for a fourth time; you know it to be the same?---Yes, it is the same.[3]
...
So what we have got is Ms Lau asking Pinpoint to design the packaging for those four serums, and the intention was for that packaging to be filled with the serums that were in that warehouse, wasn’t it?---No.
So we have got four containers full of bulk serums that have been formulated in 2017, produced in 2018, were sitting in warehouses, had been the subject of an email from YORA asking about product shelf life, and which are, as you have just accepted, the same as the serums that the packaging was being designed for, but you expect the court to believe that you weren’t going to fill the packages with those serums?---Correct.[4]
[3]T28.2-20.
[4]T28.28-29.7.
Mr Prendergast when re-examined on the topic of the packaging gave the following evidence:
Thank you. Mr Maiden asked you about those serums and being stored in the warehouse and the orders that – or the emails concerning packaging and putting the product, essentially, into packaging. Is the product still in the warehouse?---Yes, it is.[5]
[5]T76.5-9.
The products may still be in the warehouse but the fact remains that Yora arranged for packaging of the products which had been paid for on behalf of the Company. The only conclusion that can be reached on the evidence is that PMC has diverted the products for its own use.
Mr Prendergast, in his third affidavit sworn on 13 September 2018 (‘the Third Prendergast Affidavit’), estimated that the Company and its subsidiaries currently owed trade creditors $335,821.00. One of the trade creditors is PMC in the sum of $153,000.00, for the serums made by Lubrizol. The Oppression Plaintiffs submit that PMC wants back the money that it advanced to the Company to buy serums that are now in Yora’s possession and that Yora intends to sell. Not only is this said to be a blatant diversion of the Company’s assets to Yora’s benefit, but Mr Prendergast’s interests are double dipping.
As another instance of oppression, the Oppression Plaintiffs submit that a product Caps2Go was an opportunity for the Company, but became part of Yora’s product line up. On 2 May 2018, Ms Pearce of Lubrizol forwarded an email to Ms Barnardo which referred to the product Caps2Go. It stated:
Looking forward to seeing the product briefs for the developments we discussed.
Please find attached the information on the Caps2Go and the presentation on each, resurface, lifting, look, bright, smile and firming.
I have requested a 2 page dossier from Spain on each product with the claims/benefits with activities included and with this we will include the technical report separately…
Mr Prendergast when cross-examined agreed that that was the first time that Caps2Go had come to the attention of the Company.[6]
[6]T32.
On 20 June 2018, Ms Barnardo sent an email to Ms Pearce which stated:
As discussed previously, we would like to proceed with the Caps2Go – all 4 versions, except for the “Look” product because of our Eye Restore.
Can you get some pricing for me?
On 14 August 2018, Ms Barnardo sent an email to Greg Oakley and Frank DePalma of PinPoint Design seeking the design of packaging for the Caps2Go product. The first two lines of that email state: ‘Hi Greg and Frank. This is from my personal email…’
In relation to that email, when cross-examined Mr Prendergast gave the following evidence:
MR MAIDEN: So far as you know, Mr Prendergast, Ms Bernardo[7] was sending this email from her personal account so as to not to send it from her Liquid account; wasn’t she?---Correct.
Because by 14 August you and Ms Bernardo knew that you were going to be starting this new business YORA; correct?---That’s not the reason she sent from her personal account.
She sent it from her personal account so that there was no record of Liquid ordering the new Caps2Go product?---That’s – that’s the reason that she sent from her personal account.
Right. Did she send this email on your instructions?---Not that I’m aware of.
It was sent while she was employed by Liquid?---Um, yes, that would be the case.
Yes. And it was sent during business hours, wasn’t it?---Correct. [8]
[7]The Transcript incorrectly refers to Antoinette Barnardo as Ms Bernardo.
[8]T34.17-35.2.
On 6 September 2018, Ms Mason sent an email to Ms Pearce of Lubrizol from a Yahoo.com email address attaching a purchase order for the bulk production of six variants of Caps2Go. She stated:
Can you please make sure that the invoice is created to: Prendergast Management Consultants P/L as this is who will be processing the payments for these.
On 6 September 2018, Ms Mason sent another email to Ms Pearce requesting delivery of serums to Keys Roads, Moorabbin. This email was sent from the Company email address. When cross-examined relating to these issues, Mr Prendergast gave the following evidence:
And it’s been issued by your company, Prendergast Management Consultants Pty Ltd - - -?---Correct.
- - - to be delivered to the same warehouse that the Liquid serums has been redirected to by Ms Mason on 6 September?---Correct.
If you turn over to p.1693. At the bottom of that page you’ll find an email from Ms Oakley at Pinpoint Design sent to Ms Bernardo and you attaching what he calls a “revised range”; you see that?---Ah, I do.
And if you turn over the page to the attachment you see pictures of attractively designed cosmetics containers, including two on the right-hand side of the page for Caps2Go products?---Correct.
And they’re labelled YORA, aren’t they?---Correct.
Go back to the email at 1693. That email was sent on 14 September 2018?---Correct.
So do you want to revisit your evidence that the order and the design specifications that were issued by Ms Mason and Ms Bernardo on September weren’t an order and design specification for Caps2Go for the benefit of your new adventure?---Liquid were not in a position to pay for those products. By 17 September, Liquid basically were insolvent – couldn’t pay their creditors.
Okay. Would you like to answer my question now?---Could you rephrase it again, please?
Do you want to – earlier – just a few questions ago, you - - -?---Yes.
- - - denied that when Ms Mason made the order on 6 September for Caps2Go products – that she was doing it on behalf of your new business venture; do you remember denying that?---No, I said I don’t know why – could you reread what I said, because I don’t recall what my answer was.
I asked you two questions. I can’t reread them to you, but my recollection was I said to you, “This is part of a design to purchase the Caps2Go product that had first been made available to Liquid on behalf of your new venture”, and you denied that; do you remember that?---No, I don’t. I’m sorry.
Take it from me that you did, and then I asked you – I withdraw that. I’ll give you the opportunity to answer the question again. When Ms Mason was sending the order for Caps2Go on 6 September, she was doing it on behalf of your new business venture, wasn’t she?---I would assume, at that point in time, she would’ve been.
Right. And, likewise, when Ms Bernardo was having the design process commenced, also on 6 September, she was doing that for your new venture?---For the Caps2Go?
Yes?---Which were non-exclusive products.
Yes. And so your answer to that question is “yes”?---Yes, available to anybody.
That she was doing that on behalf of your new business venture on 6 September - - -?---Yes.
- - - while she was employed by Liquid?---Ah, she was terminated the next day.
Yes, so it was while she was employed by Liquid, and during business hours?---Correct.
So you had Liquid employees doing work for your new business venture during Liquid time?---In that instance, yes.[9]
[9]T36.31-T38.26.
When cross-examined, Mr Prendergast gave evidence that he personally paid the wages of Ms Mason and Ms Barnardo for the last two weeks of employment including termination payments. He said that they were paid out of his pocket and not out of the Company’s funds.[10]
[10]T39.1-9.
Mr Prendergast exhibited to his affidavit a list of the Company’s creditors as at 5 October 2018. The list includes the wages of Ms Mason and Ms Barnardo and it notes that they were paid by PMC. It would appear that the Company was paying wages using funds advanced by PMC, but PMC is claiming to be entitled to repayment for that.
On the evidence, I find that a business opportunity in terms of Caps2Go was diverted to the benefit of PMC.
Mr Prendergast also gave evidence when cross-examined that Yora is trading from 17 William Street, Cremorne, which is the same office that the Company was trading from. He also agreed that Yora has employed a number of ex-Company employees being, Ms Barnardo and Ms Mason.[11]
[11]T40.8-11.
PMC submits that Mr Prendergast openly and honestly addressed his future business intentions. In the Third Prendergast Affidavit, Mr Prendergast deposed that:
I confirm as stated in James Partners Lawyers’ letter that in my work with LQD and its employees, I have gained knowledge of, and contacts in, the cosmetics industry. I intend to take advantage of this knowledge and these contacts in a future business enterprise focussed on women’s cosmetics. However, I have no intention of using, directly or indirectly, the LQD brand, which is focussed on gay men and men with interests in health and fitness, in any future business enterprise that I might undertake.
Further, I understand and accept that on winding up all the assets of LQD will be controlled by the liquidator and, should I wish to use any of those assets, I will need to enter into appropriate arrangements with the liquidator.
I do not accept that to be the case on the evidence. It is clear that Mr Prendergast, for the benefit of PMC, has breached his fiduciary duty to the Company, has taken over the Company’s lease, engaged employees of the Company to do work for Yora whilst employed with the Company and taken over products and opportunities that were previously with the Company.
The Oppression Plaintiffs submit that Mr Prendergast has deliberately crippled the Company and excluded the Founders from management. In his first affidavit, Mr Prendergast deposed that relations between the directors of the Company were volatile over a long period, due to differing views about the direction of the LQD Group brand and marketing position. He says the situation further deteriorated in June 2018.
An email was sent by Mr Glebatsas to Mr Prendergast on 17 June 2018 which stated:
… it is now very clear that you believe that it is Anthony & I, our history and our ego’s that is holding the business back.
The only thing we have ever wanted is to see Lqd succeed. For Lqd to be successful in the future, it can’t continue to be pulled in two different directions; this is not good for our staff, our suppliers nor our customers. Given you have the financial resources to continue to build the business, and we do not, the only way forward we believe is for both Anthony and I to exit the business. We would like to discuss how we can make this happen in the most constructive manner, so the business is not impacted.
The Oppression Plaintiffs submit that in the days following receipt of that email, Mr Prendergast took the opportunity (while the Founders were overseas) to commence an aggressive campaign designed to impose maximum pressure on the Founders and shut them out of the business. This was done so that he could take the benefit of the Company’s assets and opportunities without compensation.
The Oppression Plaintiffs submit that by 22 June 2018, Mr Prendergast had:
-caused PMC to issue notices purporting to terminate consultancy agreements between the Company and the Founders’ corporate entities;
-caused PMC to issue notices to each of the Founders calling for working capital contributions of $925,000.00 each;
-sought to wrest control of LQD’s information technology systems and Facebook account from the Founders;
-caused the Founders to be shut out of the LQD Group premises; and
-sought to cut off the Founder’s access of their LQD Group email accounts.
On return of the Founders from overseas, it is alleged that Mr Prendergast organised for the Company’s staff to operate from different premises for several weeks. It was also alleged that by 18 July 2018 Mr Prendergast had organised to close down the Company’s account with its main supplier, Lubrizol.
Mr Prendergast denies that he commenced an aggressive campaign to shut the Founders out of the business. Under cross-examination, he gave the following evidence:
Okay. You had Mr Glebatsas’ and McDonough’s administrator access removed from Facebook?---Can you, um - - -
You had - - -?--- - - - draw me - - -
- - - Mr Glebatsas and - - -?---Can you draw me to that particular exhibit, please?
Just try answering the question without looking at the document first, please?---I’ve found the document.
Did you or did you not have their administrator access removed from Facebook?---I requested it, yes.
Right. And then you wrote to them purporting to terminate what you said were consultancy agreements between them an each of – I beg your pardon – between each of their companies and Liquid?---Correct.
And you required them not to attend the premises of the business of which they were directors - - -?---Correct.
- - - or to access the electronic resources of the business of which they were directors?---Correct.
From your co-directors’ perspective, you’d accept that it would’ve looked to them like you were trying to take the company over from underneath them, wouldn’t it?---No, they still, ah, remained, ah, shareholders, um, of the business, and there was no attempt to, um – to undermine that position at all. The working relationship between the three of us had become untenable, so we were talking about just their day-to-day services.
You were taking steps to remove their access to every significant part of the operation, weren’t you?---No.
No. They received notifications that their accounts are being accessed without their prior knowledge, then they find out that they’ve been removed as administrators from one of the principal marketing tools of the business, Facebook?---Facebook, yes.
And then you write to them, terminating what you say were consultancy agreements - - -?---Yes.
- - - and shutting them out of the business’ premises and its resources?---No, that’s not true.
You don’t deny that you required them not to attend the premises?---Correct.
You don’t deny that you purported to deny them access to its electronic resources?---To electronic resources? No, they were never – they were never – they were never shut off from their email accounts.
That’s not for want of trying, was it?---Um, I don’t believe that’s the case.
You asked Mr Anderson if you could shut – if he could shut off their emails?---No, I didn’t. I asked if it was possible.
It’s the same thing, Mr Prendergast?---That’s not how I characterise it.
I see. You just hypothetically wanted to know if it might have been possible to shut their email accounts off – access off?---Correct.[12]
[12]T57.1-58.21.
Both the Founders gave evidence regarding their exclusion from the business. In relation to being excluded from the bank accounts, Mr McDonough when cross-examined gave the following evidence:
You say that, “Mr Prendergast instructed ANZ to remove our 8 approvals authorities in connection with the company’s 9 bank accounts”?---That’s correct. 10
Is it correct to say that you, in fact, signed an authority removing your and Mr Glebatsas’ signing authority in respect of one account with ANZ?---So what happened was we have one major trading account, which has the funds of the business and continues to run the business out of called Liquid Trading. We were under the assumption that we were signing to add Sheryl as an extra signatory while we went on holidays so the bills could continue to be paid, because, before that, Chris had always paid the bills. What we later sound out was that Phillip had requested the bank to change the signing instructions, and so what he shoved under our noses to sign was actually removing us off the accounts and not just adding Sheryl on, as it had been explained to us. We would never have agreed to take ourselves off our business accounts.
But you did, in fact, sign that document?---I did sign it, but I signed it not knowing what it actually said, because, at that stage, we trusted Phillip.
Okay. But you signed it?---Yes, after he asked us to sign it, literally the day before we stepped on the plane; yes, of course. The same as we signed the new shareholders agreement, because he basically threatened that, if we didn’t sign it, he wouldn’t put the funding through for the business.[13]
...
But you don’t know - - -?---I don’t know what else he changed at the time, no.[14]
[13]T94.8-T95.4.
[14]T95.21-22.
Mr Glebatsas gave the following evidence in relation to removal from the bank accounts:
Yep. Just juggling some folders here, so that we’re all looking at the same thing. This is your evidence as to how you say that you were excluded from management?---Yes.
You say, in paragraph 56, that “Mr Prendergast has removed access to bank accounts, email accounts, social media accounts, work offices, company website and various technology platforms”?---Correct.
You see that? And then you expand on it in the paragraphs that follow, which I’d like to ask you about now. You say that, on 8 June, you received an email from ANZ confirming that you were no longer signatories to LQD’s bank account with ANZ?---Sorry; whereabouts is that?
Paragraph 57?---Yep.
That’s what you say?---Yes, that’s correct.
And I would say to you that that email shouldn’t have come as a surprise, because you signed a master account continuing authority, some time around 9 May, that authorised Mr Prendergast to become a signatory to that account, and removing you and Mr McDonough as signatories to that account?---That document was dressed up as something else. And the bank has since taken that document and set it aside.
What else could you dress a document like that up as?---Well, Philip said to us that he was adding his sister to the accounts; he never said we were being removed.
But you signed that document, and it had that effect?---Yes, we did.
And it’s fair to say that you in fact, apart from that bank account, have remained – have retained control and signing rights for all the accounts that you’d previously had control of or access to?---That’s not fair to say.
Why is it not fair to say?---Because Philip took access away from several accounts.
Which ones?---On various IT platforms.
No, no. I’m talking about bank accounts. Sorry; I should have clarified?---Bank accounts. So which bank accounts are you clarifying?
I’m saying that the only bank account to which the signing authorities changed was the ANZ Bank account, and that only changed because you’ve signed an authority permitting it to change?---Correct.
Thank you. And, in fact, you continued to have access to the Lloyd’s account in London?---So did Philip, but yes.
Yes, but you continued to have access to that account?---I actually – I wasn’t a signing instruction on that account.
Was Mr McDonough?---Yes, he was.
And you or Mr McDonough continued to have access to Liquid Trading’s account with the National Australia Bank?---That’s correct.
And whatever bank accounts AMAC – your other company, AMAC – had, you continued to have control of those bank accounts?---That’s correct.
So, in fact, when you say that – in paragraph 56 – that Mr Prendergast removed your access to bank accounts, the only account to which your access was removed was the ANZ account?---Ninety-eight per cent of all of the bank’s – all the – of Liquid’s trading went through that account.
And the only way that that occurred was because you signed an authority allowing it to occur. Can we move to paragraph 58?---Yep.[15]
[15]T132.8-134.7.
On the evidence, the only account that the Founders were excluded from was the ANZ banking account, but they were only excluded because they signed an authority. I do not accept that they both did not know what they were signing. It cannot be said that Mr Prendergast removed control over their bank accounts without their authority.
In relation to being removed from the Company’s Facebook account, Mr McDonough when cross examined gave the following evidence:
Can I ask you to go to p.772 of the court book?---Yes.
That’s an email dated Thursday 7 June 2018 that you sent to - - -?---Yes, that’s correct.
- - - somebody - - -?---Would you like me explain the email?
No, I want to ask you questions about the email?---Sure.
That email says, “Hi, Ailes. If Phillip contacts you while I’m away asking for anything to be deleted off our Facebook page, please assist him directly. You don’t need to confirm with me first”. You gave authorisation for things to be deleted from the Facebook account without your authorisation?---So - - -
Yes or no?---Yes.[16]
[16]T96.4-96.15.
Mr McDonough’s evidence is clear: he authorised Mr Prendergast to remove him from the Facebook page.
In relation to removal from the email accounts, Mr McDonough gave the following evidence:
Paragraphs 15A(vii) to (ix): you complain about attempts to change passwords – to remove access to online platforms, contacting email account providers, et cetera. All of the company’s IP – intellectual property and domain names, et cetera, were owned by the company; is that correct?---While we’d set them up, we transferred everything over into the company name, yes.
And if it wasn’t in the company’s name but was in your name individually or - - -?---Well, as an example - - -
- - - Mr Glebatsas’ name individually - - -?--- - - - there’s certain - - -
Can I finish my - - -?---Sorry.
- - - question?---Yes, of course.
If it was in your name individually or Mr Glebatsas’ name individually, there was nothing improper about trying to move that asset into the company’s name?---Um, there were some things that needed to be in a person’s name. As an example, when I set up the Facebook account, it had to be under a person’s name. So it had to be under my personal Facebook account. When we first set up the email service, Chris and I set that up directly with a Microsoft Office provider, which we later then handed over the control of to an independent third party called 3dynamics. So there were a number of things that the company, ah, looked after that would have been in either my or Chris’ email accounts attached to them, yes.
But they were the company’s assets?---Absolutely.[17]
...
Paragraph 15A(10), still on p.539, you say, “Contacting the company’s email account provider and requesting control and also requesting to delete our email accounts.” You’ve provided no evidence that that occurred, have you?---Um, there’s – I’ve actually seen evidence in the – in the folder, where, um, Mr Prendergast requested that.
Can you point His Honour to that evidence?---Oh, I would – I would have to go back through the folder. But I’m sure my counsel will.
I put it to you that that did not occur, that Mr Prendergast did not contact the company’s email provider and that he did not request control and he did not request to delete the email accounts?---Okay. So I may have, um, expressed that incorrectly. Ah, I know that he tried to delete our email accounts. Whether or not he actually spoke to the company that manages our email directly, I’m unsure about that. So perhaps I have worded that incorrectly. But the intention that I had intended to get across was that he had taken steps to remove our access to our email.
So what you’ve said in 15A(10) is not correct?---I’m not sure whether it is or not. So all I know is what happened. [18]
[17]T96.20-97.15.
[18]T97.25-98.15.
Mr Glebatsas when cross-examined relating to removal from email accounts gave the following evidence:
You refer to a request by Mr Prendergast to have Mr McDonough removed from that emailer group. And what I’m saying to you is, that request does not appear in that exhibit that you’ve referred to. There is no email or other communication from Mr Prendergast to - - -?---Can I please just read it - - -
You can?--- - - - before I answer? Well, it does – the first paragraph down: “Let’s go for option 2, remove australia@liquid from the group, and permissions from the info, and add back the following members: Phil Anderson, Michael Davis and accounts.”
Thank you, okay. And you’ve correctly identified what was asked for, which was to go for option 2. And you can see, at the bottom of p.1750, where it says “the other option”, that’s option 2, “is to remove the australia@lqd group from permissions on the info@lqd group, and only add back members that require access.” So the people that are added back are Phillip Anderson, Michael Davis, and accounts@lqd; that’s where you took me to before?---Correct. And excluding - - -
But - - -?--- - - - Anthony McDonough.
That’s correct. And let’s see who else is excluded. Can you go to the – can you go to p.1751?---Yes.
If you go – there’s a – the list of all the people there, the members of australia@lqd who have been excluded?---Yes.
Anthony McDonough is the third name down?---Yes.
You’re the fourth name down, Christopher Glebatsas?---Correct, I was excluded as well.
So it removed you as well?---Yeah.
It also removed – if you go – one, two, three, four – five names up or so from the bottom of the list, Mr Prendergast?---It does. However, Phillip and Michael both reported to Philip.
And you can see that Ms Bernardo was also removed from that list – is – is another person whose access has been removed?---The wife of Phil Anderson.
So that when, in paragraph 58, you characterise this as a request to have Mr McDonough removed, in fact what has occurred is, Mr McDonough, yourself, Mr Anderson, Ms Bernardo, and a list of some 15 people, who appear on p.1751, have all been removed?---No, that’s not the case. It’s actually removing Anthony and I from that – access to that, and giving only people that Philip had contact with access to that.
Okay. Let me ask you the question again. There’s a list, on p.1751 - - -?---Yes.
- - - of people who are removed?---Correct.
I haven’t counted them, but I think there’s around 15 people there. And those 15 people include yourself, Mr McDonough, Mr Prendergast and Ms Bernardo?---Yes.
So the request, or the effect of the action that was taken, was to remove a lot of people, including Mr Prendergast himself; it was not an action targeted at Mr McDonough?---No, it was – it definitely was targeted at Mr McDonough, and myself. We used that inbox on a daily basis. And I stand by that.[19]
[19]T134.29-136.22.
Mr Glebatsas further said under cross-examination:
You refer to an email sent by Mr Prendergast to Mr Anderson about “shutting the guy’s email off”?---Yes.
It’s true to say that your email was not shut off?---Not without trying.
But it was not shut off?---Not without trying.
I take that as a “yes”, but I’ll ask you one more time: your email was not shut off?---That’s correct.[20]
[20]T139.4-10.
The allegations made by the Founders regarding the removal of access to their emails and Facebook on the evidence of Mr McDonough and Mr Glebatsas do not support the conclusion that Mr Prendergast was trying to exclude them from the business.
In relation to the allegation that the Founders were denied access to information regarding the affairs and operation of the Company, Mr McDonough when cross-examined gave the following evidence:
Still on the same page, in paragraph 15B, you say that Mr Prendergast has taken steps to deny you access to information in relation to the affairs and operation of the company. You’ve given no examples of that?---Um, for example, he requested the staff not to talk to us. And if they did, they were to be fired.
You’ve given no evidence that that’s the case. Did you see Mr Prendergast - - -?---Oh, I think there’s enough evidence.
No. There’s not enough evidence, Mr McDonough. Please, did you see Mr Prendergast say that to somebody?---No. I didn’t see it myself, but I – it was repeated to me.
Did you see an email that said that?---No. I didn’t see an email that said that.
So in fact you’ve got no evidence that he did that?---Well, um, one of the witnesses who’s here today, ah, said directly to us that she had been told that she was not to talk to us. So that can be entered into evidence when you ask her the question.[21]
[21]T98.15-99.2.
Mr Glebatsas when cross-examined gave the following evidence:
I take that as a “yes”, but I’ll ask you one more time: your 9 email was not shut off?---That’s correct.
Thank you. And the reality is that you and Mr McDonough remained in control of key aspects of the business. Let me take you to examples. If we go to p.534 of the court book; that’s in volume 1?---Five-thirty-four.
Five-thirty-four?---Yes, I’m there.
And that’s an email exchange, you can see, between a gentlemen called Paul Shev, who was an account advisor to Mr Prendergast, and Mr Prendergast, and you’ll see about halfway down the page, “Hi, Phillip. I’ve just received a call from Arvie. He’s been instructed by Chris to revoke my access to all zero accounts due to, quote, ‘Phillip was not entitled to make the decision to approve accesses. All the directors needed to approve’“. Do you remember giving that instruction to Arvie?---Yes.
So, in fact, far from you being the person who’s been shut out from information, you were shutting Mr Prendergast and his accounting advisor out from information about the company?---I had no idea who this person was, and this person was a rogue person that was entering our zero accounts. So we told Arvie that he needed three directors to make any changes to their account. [22]
[22]T139.9-31.
Again, when cross-examined, Mr McDonough and Mr Glebatsas could not demonstrate how they were denied access to information in relation to the affairs of the operation of the Company. Their evidence did not support their allegations.
In the context of the control of the Company being taken over by Mr Prendergast, I note that Mr McDonough and Mr Glebatsas, on behalf of the Oppression Plaintiffs, signed the Current Shareholders’ Agreement. Clause 5(b) provides that:
No Director or Directors may bind the Company in relation to any matters relating to management of the Company or otherwise, including but not limited to things listed in Schedule 3, without unanimous approval of the Board.
The Board is defined in Clause 1.1 as the ‘board of directors of the Company as constituted from time to time. ‘
Clause 5(c) of the Current Shareholders’ Agreement provides:
(c) To avoid doubt:
(i)no Shareholder may take any step or do anything (or refrain from taking any step or doing any thing), the effect of which would be to circumvent the operation of Clause 5(a) and thereby (directly or indirectly) seek to exercise the powers that are reserved to the board.
Clause 5(a) provides:
Subject to clause 6, each Shareholder must exercise its rights as a Shareholder to ensure the management of the Company is vested in the Board, including the Board being responsible for:
(i)the day-to-day management (sic) the Company and conduct of the Business;
(ii) the general administration of the Company; and
giving the Board full information about the activities of the Company.
It is alleged by the Oppression Plaintiffs that Mr Prendergast exercised effective control of the operations of the Company from the date of when he was appointed managing director in May 2018. Mr McDonough was cross-examined relating to the appointment of Mr Prendergast as managing director and gave the following evidence:
So all of those in paragraph – schedule 3, your understanding in May 2018 was that those matters required unanimous approval, and that Mr Prendergast’s appointment as managing director did not affect that?---I would have to see which version of the shareholders agreement it was, because I can tell you we had multiple versions, including the version we signed just before we left the country to go on holidays under duress.
Is it true to say your understanding in May 2018 was that Mr Prendergast’s appointment as managing director did not alter the shareholders agreement?---It shouldn’t have.
And it did not?---It may not have altered the shareholders agreement, but we – we soon found out that our shareholders agreement didn’t mean very much?[23]
[23]T92.4-17.
The fact that Mr Prendergast was appointed managing director did not legally give him control of the Company. The Current Shareholders’ Agreement remained in force and continued to operate.
The Oppression Plaintiffs submit that PMC excluded the Founders from LQD, pursued unfounded allegations of serious wrong-doing against the Founders and issued the wind up proceedings on just and equitable grounds in aid of Yora usurping the assets, employees and opportunities of the Company.
Mr McDonough when cross-examined regarding being excluded from the business, gave the following evidence:
Thank you. You’ve put forward that evidence essentially to show that you and Mr Glebatsas had lost control of the business to Mr Prendergast?---Um, Mr Prendergast kicked us out of the business.
Can I test that. No resolutions of the board of LQD Investments could be passed if you and Mr Glebatsas opposed it, could they?---I’m sorry?
No resolutions of the board of LQD Investments could be passed if you and Mr Glebatsas opposed them?---Well, we were supposed to all agree on all decisions. That was the point of our shareholders agreement, to have the three directors agree on all key decisions.
Yes. So key decisions required unanimous consent?---Yes. Correct.
And any other decision you and Mr Glebatsas were a majority of the board, in any event?---But we always had three directors agree prior to us going on holidays. We’d never had a scenario where one of the directors had been outvoted.
Yes. Since these proceedings have commenced, you’ve not convened a board meeting of LQD Investments Pty Limited at any time?---Yes, we have.
When?---Um, I can’t tell you the exact date, but I’m sure you know the date and you can point me to it.
I don’t know the date and I don’t think you have?---Sorry?
I don’t think you have convened a board meeting of LQD Investments Pty Limited since these proceedings commenced?---Probably we – it was LQD Trading. I don’t know.
Yes. So LQD Investments, of which you and Mr Glebatsas form a majority of the board, at no point have you tried to convene a meeting with that company’s board?---No, we haven’t.
Thank you. And you referred to LQD Trading; that’s a subsidiary of LQD Investments Proprietary Limited?---Yes, I believe it is.
And, in fact, you and Mr Glebatsas control or form a majority of the boards of all of the subsidiaries of LQD Investments Proprietary Limited, don’t you?---Yes, we do.
Yes. So - - -?---But it was our understanding that our shareholder agreement trumped that.
Can I test that understanding, because in fact you have taken the position that your shareholders agreement does not prevent you passing resolutions of the board of LQD Trading Proprietary Limited; is that correct?---Um, well, our lawyers suggested to us that it was potentially an opportunity, ah, to represent it under the, um – under the Corporations Act, I believe. But I – we didn’t even think that that was going to be possible.
Perhaps if I - - -?---So as far as we were aware, it was a – a contentious part of the law that needed to be investigated.
Perhaps if I can keep it simple. You have convened at least two meetings of the board of LQD Trading Pty Ltd?---Yes, correct.
In each case, you have passed resolutions which you and Mr Glebatsas voted in favour of - - -?---That’s correct.
- - - and Mr Prendergast was opposed to?---Which Mr Prendergast had a conflict of interest in, yes[24]
[24]T100.17-102.13
…
Mr Prendergast was opposed to those - - -?---Yes, he was.
- - - resolutions?---And you, nevertheless, passed them?---Yes, we did.
And, in fact, LQD Trading is the entity through which the business was conducted; is that correct?---Ah, it was the business entity that we used to purchase and pay for things.
So you and Mr Glebatsas controlled the board of that company, but you took no steps to actually exercise that control to manage the business since the - - -?---No, if we’d - - -
- - - commencement of this proceeding?---Maybe if we’d been more busy – ah, business savvy like Mr Prendergast is, we would’ve realised that we could’ve done that. We didn’t know that. Can I take that as a no, you didn’t take any steps to exercise your control of the business through your control of the LQD Trading board?---No, we didn’t.
Thank you. And, in fact, the only time you’ve exercised that control was when there was a perceived threat to your strategy of exiting the business and obtaining concessions from Mr Prendergast in order to do that when the statutory demand proceedings were commenced?---No, that wasn’t the purpose of it.
The purpose of that was to appoint solicitors to oppose the statutory demand proceedings at those - - -?---Yes.
- - - two meetings, and that’s the only time you’ve exercised the power that you have to control that board; is that correct?---That’s correct.
And you haven’t otherwise exercised that power to seek to have any influence or control of the functioning of the business, notwithstanding that you had it?---Well, we didn’t think that we could effectively do anything, given that he had forced his control on the business. If we’d known that there was a way that we could’ve done it besides spending ten months in court litigation, we would’ve taken it.
So, Mr McDonough, the fact is you’ve not been excluded from the management of the company. You have chosen not to exercise any management control since the commencement of these proceedings?---No, that’s not correct. I mean, we – we were basically kicked out of, (1), our jobs, (2), our business, and you’re bringing up a technically around the law which we aren’t familiar with.[25]
[25]T102.17-103.29.
In relation to restricting access to the premises, Mr Prendergast when cross-examined admitted that the Founders were not given access to the premises. He gave the following evidence:
And you required them not to attend the premises of the business of which they were directors - - -?---Correct.
- - - or to access the electronic resources of the business of which they were directors?---Correct.
From your co-directors’ perspective, you’d accept that it would’ve looked to them like you were trying to take the company over from underneath them, wouldn’t it?---No, they still, ah, remained, ah, shareholders, um, of the business, and there was no attempt to, um – to undermine that position at all. The working relationship between the three of us had become untenable, so we were talking about just their day-to-day services.[26]
[26]T57.14-25.
Mr Glebatsas has deposed that on 22 June 2018, Ms Barnardo sent an email to Stephanie Doyle, the property manager for the Company’s offices, cancelling nine access cards including the access cards initially registered to him and Mr McDonough. When cross examined he gave the following evidence:
Can I take you to paragraph 62. And you talk here about Ms Bernardo sending an email cancelling nine access cards, and you say, “Including the access cards initially registered to me and Mr McDonough”. Can I ask you what do you mean by “initially registered”?---Sorry, just registered to myself and Anthony McDonough.
“Initially” gives the impression no longer registered?---Well, they were initially registered – they were registered at the inception of the account.[27]
[27]T137.22-30.
On the evidence the Oppression Plaintiffs have not been able to demonstrate that their access cards were removed. Mr Prendergast when cross-examined denied that allegation.[28]
[28]T57.14-58.7.
After considering the evidence, and in particular the cross-examination, the Oppression Plaintiffs have not proved that Mr Prendergast commenced an aggressive campaign designed to impose maximum pressure on the Founders and shut them out of the business.
The Oppression Plaintiffs submit that throughout the proceeding PMC made relentless and baseless attacks on the Founders’ characters. They also submit that PMC made unfounded assertions of misappropriation and inappropriate expenditure before the commencement of this dispute. PMC has alleged that:
-the payment of home rental costs of $2,650.00 per month in the period up to July 2017 was improper for home rental payments;
-there was an overpayment of $4,867.62 in the period of May to August 2018 for car lease expenditure;
-the Founders were overpaid directors fees by a total of $30,000.00 in the period July 2017 to August 2018;
-AMAC paid a personal taxation bill of $17,394.00 on behalf of Mr McDonough in September 2016 when no such taxation bill existed;
-in July 2015 a payment of $11,926.00 was made by AMAC to Minter Ellison for work on a shareholder’s agreement despite that agreement providing that each party was to meet its own costs;
-Mr McDonough withdrew £45,000.00 from a LQD account with Lloyd’s Bank in the United Kingdom in June 2018;
-over 500 line items of Mr Glebatsas’ AMEX’s expenditure was actual, believed or suspected personal expenditure;
-a transfer of $121,908.06 from LQD Trading Pty Ltd’s account for the payment of Mr Glebatsas’ AMEX account was intercepted or diverted;
-over $105,000.00 in expense claims made by the Founders in the 2016 financial year were for private expenses; and
-sums totalling over $55,000.00 were diverted to AMAC which were allegedly payable to the Company.
Mr Glebatsas has responded to each and every one of these allegations and was also cross-examined in relation to these allegations. Counsel for PMC made the following submission:
Your Honour doesn’t need to determine, as part of this case, the validity or otherwise either of the allegations that have been made against my client or the allegations that are made against Messrs Glebatsas and McDonough.
Your Honour has seen the escalating paper warfare of, sort of, between the parties, lengthy allegations, lengthy responses, lengthy further responses. Your Honour does not need to resolve those issues and, frankly, the court was not in a position to do that, to be able to say, “Well, were you” – “what were you doing in this restaurant on Mykonos on whatever date it might have been, and was that a valid expense for the company”, is simply not something that Your Honour needs to do.[29]
[29]T234.14-27.
I agree with Counsel. On the evidence before me, I can make no findings in relation to these allegations and it would be inappropriate for me to do so.
The Oppression Plaintiffs submit that the making of the application under s 461 of the Act was part of Mr Prendergast’s strategy of taking over the assets and opportunities of the Company. I am not prepared to attribute the windup proceedings as part of Mr Prendergast’s strategy. There is no doubt that at the time the application was issued, the Company was in deadlock. The best evidence of the deadlock is from Mr McDonough who deposes that:
Since June 2018, as a result of Phillip’s conduct described above, there has been a complete breakdown in the relationship between Chris and I on the one hand, and Phillip on the other. The breakdown of that relationship is materially frustrating the commercial viability and sensible operation of the business. By way of example, as a result of the dispute, the Company has been unable to finalise distribution arrangements with major retailers (including Woolworths South Africa), fulfil customer orders and pay trade creditors. The strategy for the future direction of the Company is also unresolved. Phillip has delayed an opportunity for distribution through 400 pharmacies across Australia on the basis that the products would be marketed in the male section of the pharmacies (which does not align with his view that the products should be marketed to a unisex demographic), and an opportunity for distribution in Debenhams Australia on the basis that he wanted to wait until the product range had been expanded to include unisex products.
I also note that the letter sent by the Founders’ solicitors, Minter Ellison, on 20 June 2018, shows that the parties were in deadlock. Minter Ellison stated:
We are instructed that PMC and the Founding Shareholders are fundamentally opposed as to the direction of the Company. There appears to be irreconcilable differences between the Founding Shareholders and the PMC and its representatives.
The application to wind up the Company was on the just and equitable ground pursuant to s 461(1)(k) of the Act. A deadlock is a common ground upon which a company will be wound up under s 461(1)(k) of the Act and it was appropriate that an application was made by PMC to wind up the Company pursuant to s 461.[30]
[30]See Ebrahimi v Westbourne Galleries Ltd & Ors [1972] 2 All ER 492.
Overall, I accept that PMC through Mr Prendergast has engaged employees of the Company to do work for Yora whilst they were employed with the Company and that he has taken over products and opportunities that were previously with the Company. The Oppression Plaintiffs have not been able to demonstrate that the Founders have been excluded from the business. As to the allegations made against the Founders of serious wrong doing, it has not been made out by PMC. The Oppression Plaintiffs have not demonstrated on the balance of probabilities that there has been a strategy to usurp the assets of the Company.
Question 2 - Does the Conduct of PMC Constitute Oppression?
The Oppression Plaintiffs allege that the affairs of the Company have been conducted in an oppressive manner prejudicial to the Founders and contrary to the interests of the members of the Company as a whole.
Section 232 of the Act provides:
S 232 Grounds for Court order
The Court may make an order under section 233 if:
(a) the conduct of a company’s affairs; or
(b) an actual or proposed act or omission by or on behalf of a company; or
(c)a resolution, or a proposed resolution, of members or a class of members of a company;
is either:
(d) contrary to the interests of the members as a whole; or
(e)oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.
For the purposes of this Part, a person to whom a share in the company has been transmitted by will or by operation of law is taken to be a member of the company.
In Joint v Stephens[31] the Court of Appeal held that the expression ‘oppressive or unfairly discriminatory against’ contained in s 232(e) is concerned with commercial unfairness. Nettle, Ashley and Neave JJA stated: [32]
With respect, we agree with her Honour’s summation of the law. Section 232 of the Corporations Act confers jurisdiction to give relief if the court is of opinion that the conduct of a company’s affairs, or an actual or proposed act or omission by or on behalf of the company or a resolution or a proposed resolution of a member of a class or members of the company is either contrary to the interests of the members as a whole or ‘oppressive to, unfairly prejudicial to or unfairly discriminatory against’ a member or members whether in that capacity or any other capacity. The expression ‘oppressive or unfairly prejudicial or unfairly discriminatory against’ is considered to be a compound expression. It is concerned with ‘commercial unfairness’. As Brennan J explained in Wayde v New South Wales Rugby League:[33]
Section [320] requires proof of oppression or proof of unfairness: proof of mere prejudice to or discrimination against a member is insufficient to attract the court’s jurisdiction to intervene…. At a minimum, oppression imports unfairness and that is the critical question in the present case.
…
…The question of unfairness is one of fact and degree which [s 320] requires the court to determine, but not without regard to the view which the directors themselves have formed and not without allowing for any special skill, knowledge and acumen possessed by the directors. The operation of [s 320] may be attracted to a decision made by directors which is made in good faith for a purpose within the directors’ power but which reasonable directors would think to be unfair. The test of unfairness is objective and it is necessary, though difficult, to postulate a standard of reasonable directors possessed of any special skill, knowledge or acumen possessed by the directors. The test assumes (whether it be the fact or not) that reasonable directors weigh the furthering of the corporate object against the disadvantage, disability or burden which their decision will impose, and address their minds to the question whether a proposed decision is unfair. The court must determine whether reasonable directors, possessing any special skill, knowledge or acumen possessed by the directors and having in mind the importance of furthering the corporate object on the one hand and the disadvantage, disability or burden which their decision will impose on a member on the other, would have decided that it was unfair to make that decision.[34]
[31][2008] VSCA 210.
[32]Ibid [134].
[33]Wayde & Anor v New South Wales Rugby League Ltd (1985) 180 CLR 459.
[34]Ibid 472 (Brennan J).
The test to be applied in determining whether conduct is oppressive was stated by the Court of Appeal in Knights Quest Pty Ltd v Daiwa Can Company.[35] Beach, Kyrou and Hargrave JJA said:[36]
The expression ‘oppressive to, unfairly prejudicial to, or unfairly discriminatory against’ in s 232 of the Corporations Act is a compound expression and is concerned with commercial unfairness.[37] It is not necessarily unfair for nominee directors to, in good faith, advance one of the objects of their nominating parent company, where that advancement necessarily entails prejudice to another shareholder.[38] However, a decision by nominee directors in good faith but for a purpose which reasonable directors would think to be unfair may be sufficient to warrant the intervention of a court.[39] The relevant question, in determining whether conduct is oppressive, is whether, objectively, in the eyes of a commercial bystander, there has been conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair.[40] It is not necessary for a plaintiff to demonstrate a lack of probity, a want of good faith[41] or breach of contract.[42]
[35][2018] VSCA 349.
[36]Ibid [130].
[37]Joint v Stephens [2008] VSCA 210 [134].
[38]Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459, 472 (‘Wayde’); Wilmar Sugar Australia Ltd v Mackay Sugar Ltd (2017) 345 ALR 174, 178–9 [13] (‘Wilmar’).
[39]Wayde 473; Wilmar 178–9 [13].
[40]Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692, 704; Wayde 472–3.
[41]Wayde 471.
[42]O’Neill v Phillips [1999] 1 WLR 1092, 1098–1102.
The Oppression Plaintiffs submit that it is oppressive for company directors to usurp a company’s business opportunities for its own benefits, as has occurred here.
In Catalano v Managing Australia Destinations Pty Ltd,[43] the full court of the Federal Court held that the conduct of the directors, having taken steps to set up a new company which they had interests to manufacture products using equipment from a company in which they were also directors, was oppressive to that company. Siopis, Rares, and Davies JJ said:[44]
We consider that the primary judge in this regard fell into error in his reasoning process by focussing on the motives of Messrs Hepner and Kurth in assessing whether there was commercial unfairness. As the High Court made clear in Campbell 238 CLR at 360 [176], the test of unfairness is objective, and “it is [not] to be supposed that there cannot be oppression on the part of one who thinks that he or she is acting rightly” and it is therefore not to the point to examine the motives for what was done. There is no doubt in our opinion that the Kurth/Hepner camp engaged in oppressive conduct. Viewed objectively, the conduct of the Kurth/Hepner camp in taking steps to set up a company in which they held all the interests and in which the Catalano camp had no interest, for the purpose of manufacturing products, using Fine Food Solutionz’ equipment, for direct supply to customers of Fine Food Solutionz, was conduct that was commercially unfair to Fine Food Solutionz and prejudicial to the interests of the Catalano camp’s shareholding: Scottish Co-Operative Wholesale Society v Meyer [1959] AC 324 at 341–343 per Viscount Simonds, 361 per Lord Keith of Avonholm, 366–367 per Lord Denning; Re Bright Pine Mills Pty Ltd [1969] VR 1002; Fitzpatrick v Cheal (2012) 264 FLR 313 at 365 [175] per Ward J.
[43][2014] FCAFC 55.
[44]Ibid [19].
Here Mr Prendergast has entered into a transaction for the benefit of Yora at the expense of the Company. The Oppression Plaintiffs submit that there is a conflict of interest. In such circumstances, it says the evidential burden shifts to PMC to establish that there has been no oppression. In Jenkins v Enterprise Coalmines NL,[45] the Full Court of the Western Australian Supreme Court held that the onus shifts on directors to explain that a transaction entered into involving a conflict of interest by a director for no apparent commercial benefit was not unfair. If the director is unable to meet that burden then the Court will infer unfairness for the purposes of s 232.
[45](1992) 6 ACSR 539.
Here, PMC did not submit any evidence to demonstrate that the conduct of Mr Prendergast and/or PMC was for the benefit of the Company. Even if the onus was not on Mr Prendergast, the conduct complained of by the Oppression Plaintiffs regarding the usurping of assets and opportunities of the Company for the benefit of Yora was proved.
The Oppression Plaintiffs submit that this conduct is a clear breach of ss 181, 182 and 183 of the Act, which provide that:
-the directors must exercise their powers and discharge duties in good faith, in the best interests of the corporation and for a proper purpose (s 181);
-the directors must not improperly use their position to gain an advantage for themselves or someone else or cause detriment to the corporation (s 182); and
-a person who obtains information because he have been a director must not improperly use the information to gain an advantage for himself or someone else or cause detriment to the corporation (s 183).
Here, in my view, Mr Prendergast has not acted in good faith or in the best interests of the Company. He has gained an advantage for PMC (which is an 80% shareholder of Yora) by virtue of his position as a director of the Company by obtaining information regarding the products and the business opportunities of the Company. His conduct and that of PMC has been oppressive towards the Founders of the Company. I do not accept PMC’s submissions that there is no substance to the allegations of oppression. In my view, with the objective eyes of a commercial bystander, there has been conduct that is so unfair that reasonable directors would not have thought the decision to take advantage of the assets and business opportunities of the Company was appropriate.
PMC submits the reality is that since June 2018 the Founders have had no interest in participating in the management of the Company or its business. They have only sought to extract a sizable price for their exit from the business, and do not now seek monetary compensation. The Founders say they were excluded. On the evidence, in my view they have not been able to demonstrate that they have been excluded, even if they had no interest in participating in the management of the Company or its business, but that does not mean that there has been no oppression. The conduct of Mr Prendergast relating to the removal of business opportunities and assets has clearly been oppressive to the Founders’ interests.
Question 3 - Is the Relief Sought Available?
The Oppression Plaintiffs have sought the following orders:
...
3. Orders that pursuant to s 233(1)(c), (e) and (j) of the Corporations Act:
(a)the second defendant purchase the plaintiffs’ shares in LQD Investments Pty Ltd and, as consideration for the purchase:
(i)release and indemnify the first and second plaintiffs and Mr McDonough and Mr Glebatsas in respect of any liability to the second defendant whatsoever; and
(ii)cause each of LQD Trading Pty Ltd, LQD Capital Pty Ltd, AMAC Enterprises Pty Ltd (AMAC), LQD Wellness Pty Ltd and Liquid Skin Care Ltd (a corporation registered in the United Kingdom) to grant equivalent releases and indemnities in respect of any liabilities to the grantor;
(b)the first defendant purchase the plaintiffs’ shares in LQD Global Capital Pty Ltd and Liquid Skin Care Inc (a corporation registered in the United States) and, as consideration for the purchase, cause LQD Global Capital Pty Ltd and Liquid Skin Care Inc to release and indemnify the first and second plaintiffs and Mr McDonough and Mr Glebatsas in respect of any liabilities whatsoever to the grantor; and
(c)the first and second plaintiffs as further consideration for the releases referred to in paragraphs (a) and (b) above, release and indemnify the first defendant and each of LQD Trading Pty Ltd, LQD Capital Pty Ltd, AMAC, LQD Wellness Pty Ltd, Liquid Skin Care Ltd, LQD Global Capital Pty Ltd, and Liquid Skin Care Inc in respect of any liability whatsoever to the grantor.
The Oppression Plaintiffs seek orders that PMC purchase their shares in the Company and as a consideration for the purchase provide releases to the Founders and the Company in respect of any liability to the Company whatsoever.
The Oppression Plaintiffs are not seeking monetary compensation and they submit that the Company should not be wound up. Section 233 of the Act provides:
S 233 Orders the Court can make
(1)The Court can make any order under this section that it considers appropriate in relation to the company, including an order:
(a) that the company be wound up;
(b)that the company‘s existing constitution be modified or repealed;
(c) regulating the conduct of the company‘s affairs in the future;
(d)for the purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law;
(e)for the purchase of shares with an appropriate reduction of the company‘s share capital;
(f)for the company to institute, prosecute, defend or discontinue specified proceedings;
(g)authorising a member, or a person to whom a share in the company has been transmitted by will or by operation of law, to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company;
(h)appointing a receiver or a receiver and manager of any or all of the company‘s property;
(i)restraining a person from engaging in specified conduct or from doing a specified act;
(j) requiring a person to do a specified act.
Order that the company be wound up
(2)If an order that a company be wound up is made under this section, the provisions of this Act relating to the winding up of companies apply:
(a) as if the order were made under section 461; and
(b) with such changes as are necessary.
Order altering constitution
(3)If an order made under this section repeals or modifies a company‘s constitution, or requires the company to adopt a constitution, the company does not have the power under section 136 to change or repeal the constitution if that change or repeal would be inconsistent with the provisions of the order, unless:
(a)the order states that the company does have the power to make such a change or repeal; or
(b) the company first obtains the leave of the Court.
It has been held that s 233 of the Act confers broad powers to the Court to remedy oppression. In Turnbull v NRMA Ltd,[46] Campbell J stated:
The power conferred on the Court by s 233 is to “make any order under this section that it considers appropriate in relation to the company”. That is a power conferred in extremely wide terms, which would be confined as a matter of construction only to the extent that the scope and purpose of the statutory enactment may enable the court to see that some exercises of the power would be definitely extraneous to any objects the legislature could have had in view.[47]
[46](2004) 50 ACSR 44.
[47]Ibid [42].
In Jenkins v Enterprise Goldmines NL, the Full Court of the Supreme Court of Western Australia held that that obligation of the Court is to grant whatever relief is best suited to deal with the oppression or in fairness that has been found by a court. Here, the plaintiffs say the best relief is that of a release and not an order winding up the Company.
In John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A’Asia) Pty Ltd,[48] Young J held that courts should avoid winding up a viable company if any other alternative can be found.
[48](1991) 6 ACSR 63.
Elliott J followed this approach in Ubertini v Saeco International Group SpA (No 4).[49] His Honour said:
Saeco International submitted that in the event that the plaintiffs successfully established that Saeco International had engaged in oppressive conduct of the affairs of Saeco Australia, Saeco Australia ought to be wound up. In my view, to make a winding-up order would be to allow Saeco International to successfully complete its strategy. To echo the words of Lord Keith, to make such an order would deprive the plaintiffs of any recourse in circumstances where the oppressive conduct has effectively caused the destruction of Saeco Australia. Such an order would defeat the whole purpose of the section.[50]
[49](2014) 98 ACSR 138.
[50]Ibid [539].
In Vigliaroni v CPS Investment Holdings Pty Ltd,[51] Davies J referred to the court’s wide powers under s 233 as follows:[52]
The court is given the power under s 233 to make any order “that it considers appropriate in relation to the company”. The legislature deliberately conferred a wide discretion on the court, giving it extensive powers, so that the remedy will eliminate the oppression and enable the causes of any future oppression to be avoided.[53] The High Court in Campbell v Backoffice Investments Pty Ltd[54] very recently affirmed that ss 232 and 233 are to be read broadly and that “[t]he imposition of judge-made limitations on their scope is to be approached with caution”.[55]
[51](2009) 74 ACSR 282.
[52]Ibid [64].
[53] Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688 .
[54] (2009) 257 ALR 610; 73 ACSR 1; [2009] HCA 25.
[55]Ibid [72] per French CJ
The Oppression Plaintiffs submit that there is precedent for orders granting releases and indemnities. The Oppression Plaintiffs could not point to any authorities in Australia where releases and indemnities were granted as a remedy for oppression, but, however, relied on numerous international authorities in support of that submission. They say that the Court does not need precedent to make this order.
The Oppression Plaintiffs first referred to Patel v Ferdinand,[56] and Patel v Ferdinand (No 2).[57] The High Court of England and Wales granted a director relief against breaches of her fiduciary duty. His Honour Purle J did express the view however that he was not in principle prepared to make a winding up order but would urge the parties to endeavour to negotiate to come to a more satisfactory resolution of the matters before him. The relief granted was made under s 1157 of the Companies Act 2006 which is similar to s 1318 of the Act which provides:
[56][2016] EWHC 1524 (Ch).
[57][2016] EWHC 2362 (Ch).
S 1318 Power to grant relief
(1)If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person‘s appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.
(2)Where a person to whom this section applies has reason to apprehend that any claim will or might be made against the person in respect of any negligence, default, breach of trust or breach of duty in a capacity as such a person, the person may apply to the Court for relief, and the Court has the same power to relieve the person as it would have had under subsection (1) if it had been a court before which proceedings against the person for negligence, default, breach of trust or breach of duty had been brought.
(3)Where a case to which subsection (1) applies is being tried by a judge with a jury, the judge after hearing the evidence may, if he or she is satisfied that the defendant ought pursuant to that subsection to be relieved either wholly or partly from the liability sought to be enforced against the person, withdraw the case in whole or in part from the jury and forthwith direct judgment to be entered for the defendant on such terms as to costs or otherwise as the judge thinks proper.
…
In Hurstfield v Hektoen,[58] a British Columbia case, the parties agreed that they were deadlocked. They had a disagreement about what should be the direction of the company and they accused each other of wrongdoings. The Supreme Court of British Columbia ordered that there be a buyout on terms including, in effect, releases by the company to both the vendor and purchasing shareholders in order to effect the clean break between disputing shareholders.
[58][2011] BCSC 1290.
The Oppression Plaintiffs also referred to Shah v Shah,[59] where the High Court of England and Wales ordered the oppressed shareholder’s shares to be purchased. It also ordered that the company itself provide a charge over a valuable commercial property that the company owned in order to protect the oppressed shareholder against his potential liability under a guarantee of the company’s debts.
[59][2011] EWHC 1902 (Ch).
In Allmark v Burnham,[60] the High Court of England and Wales this time ordered the wrongdoing shareholder to indemnify the innocent shareholder when guaranteeing the debt and to take all lawful and reasonable steps within his power to procure releases from those guarantees.
[60][2005] EWHC 2717 (Ch).
The last case referred to by the Oppression Plaintiffs is that of Lunn v BCL Holdings Inc,[61] where the Court of Queen’s Bench for Saskatchewan ordered that the company and the purchasing shareholders indemnify the vendor’s shareholders against the vendor’s liability under guarantees.
[61](1996) CarswellSask 712; 150 Sask. R. 258.
In summary, the Oppression Plaintiffs submit that in Patel, the Court exercised its own power of releasing a shareholder; in Hurstfield, the Court ordered the company and other shareholders to give releases; in Shah, the Court ordered the company to give an indemnity; in Hallmark, the Court ordered the wrongdoing shareholder to give an indemnity and to take steps to procure releases; and in Lunn, the Court also ordered an indemnity for the company. In light of these cases, the Oppression Plaintiffs submit that there is a precedent for the sort of orders that are presently being sought.
PMC, on the other hand, submits that each of the cases referred to by the Oppression Plaintiffs involves the release of a specific identified liability or claim. None of them involve a blanket exemption, which is what the Oppression Plaintiffs seek here.
PMC submits that Patel has remarkable similarities to the present case. Purle J, in coming to his decision, stated:
What then, I ask myself, is to be done? I have a wide discretion under s.996 of the Act to make such order as I think fit for giving relief in respect of the matters complained of. In my judgment, though neither side is asking for this, the unfair prejudice of which Miss Patel complains would be properly and fairly dealt with by a winding up order, given that both parties have another company through which their respective legal aid practices can now be carried on. This company was a vehicle for their joint enterprise, which has now come to an end.
I am not going to make a winding up order today because it seems to me that the parties may wish to negotiate in the light of the knowledge that a winding up order may follow if agreement cannot be reached. It is possible that a revised offer or offers will be made, obviating the need for a winding-up, but achieving the same financial result. Subject to that, it would be in the event of a winding-up be for the liquidator to take such steps as the liquidator sees fit in relation to past events. I cannot wipe the slate clean. I have expressed my view that in the unusual circumstances of this case Miss Ferdinand did not act improperly in setting up her new practice. There may have been a technical breach of fiduciary duty, but it is one that it seems to me the court would be inclined to excuse under section 1157 of the Companies Act 2006...[62]
[62]Patel v Ferdinand [2016] EWHC 1524 (Ch) 6.
PMC submits that on the basis of that judgment, a liquidator should take such steps as the liquidator sees fit in relation to past events and any allegations of conduct made by any member or director against any other member or director. PMC says that the plaintiff in that case is in a similar position as Mr Prendergast has found himself in. There may have been a technical breach of fiduciary duty under s 1157 of the Companies Act (UK), but that could be excused.
PMC submits that the legislature has turned it collective mind to the question of the circumstances in which a person might be granted release, and the basis on which that may be granted is set out in s 1318 of the Act. What the legislature did not have in mind is that ss 232 and 233 could be used as a vehicle to obtain releases that would otherwise not be available under s 199A of the Act.
Section 199A provides:
S 199A Indemnification and exemption of officer or auditor
Exemptions not allowed
(1) A company or a related body corporate must not exempt a person (whether directly or through an interposed entity) from a liability to the company incurred as an officer or auditor of the company.
When indemnity for liability (other than for legal costs) not allowed
(2) A company or a related body corporate must not indemnify a person (whether by agreement or by making a payment and whether directly or through an interposed entity) against any of the following liabilities incurred as an officer or auditor of the company:
(a) a liability owed to the company or a related body corporate;
(b)a liability for a pecuniary penalty order under section 1317G or a compensation order under section 1317H;
(c)a liability that is owed to someone other than the company or a related body corporate and did not arise out of conduct in good faith.
…
PMC submits that s 199A(1) of the Act prohibits a company or a related body corporate from exempting a person (whether directly or through an interposed entity) from a liability the company incurred as an officer. Section 199A(2) prohibits a company or related body corporate from identifying a person (whether by agreement and whether directly or through an interposed entity) against a liability to the company incurred as an officer of the company. PMC submits, therefore, that the relief sought by the Oppression Plaintiffs requires the Company to do precisely what is prohibited by s 199A.
The Oppression Plaintiffs submit that s 199A does not prevent the releases as part of bona fide compromises of disputed claims. They rely on Eastland Technology Pty Ltd v Whisson.[63] The Supreme Court of Western Australia Court of Appeal held that a company could give releases pursuant to s 241 of the Companies Act 1981 (Cth) (‘the Companies Act’), which has since been replaced by s 199A, in relation to a bona fide compromise of a disputed debt.
[63](2005) 223 ALR 123 (‘Eastland’).
McLure JA, who gave the leading judgment, first referred to the Greene Report of 1926 and said:
A proper understanding of the parties’ contentions requires some background as to the genesis of provisions such as s 241. That information is conveniently collected in discussion paper number 9 of the then Companies and Securities Law Review Committee (Committee) entitled “Company Directors and Officers: Indemnification, Relief and Insurance”. The discussion paper addresses s 237 of the Companies Act 1981 (Cth) which is in similar terms to s 241 of the Law. Section 237 (and s 241) was derived from United Kingdom legislation that was passed after the Greene Committee in 1926 expressed disquiet about provisions in company articles that sought to relieve directors from liability for all but dishonesty. At the time, it was common to include in the articles of association of a company a provision exempting or indemnifying directors from liability for costs, losses and expenses incurred by them in the discharge of their duties “except such as may happen from their own respective wilful or wrongful act or default”. In some articles directors were exempted from liability as long as they were not dishonest.[64]
[64]Ibid [19].
Her Honour then went on to consider s 241 of the Companies Act and said:
However, this court is not directly concerned with the question whether a company in general meeting can ratify a release of a company’s entitlement to a remedy for breach of statutory duty. It is common cause that Eastland’s shareholders in general meeting did not ratify the settlement deed.
The novel question for this court is whether a release for valuable consideration in the compromise of a disputed claim is outside the scope of s 241(1) of the Law. However, the logically anterior question is whether a company (by resolution of its board) has the power to release an officer from liability or the consequence thereof as part of a bona fide compromise of a disputed claim. There is authority that, apart from s 241, a company does have the power to compromise a disputed claim against a former officer for breach of the general law on terms that include a release: Re Joint Stock Trust and Finance Corp Ltd (1912) 56 SJ 272; Massey v Wales (2003) 57 NSWLR 718 at 730, 738; [2003] NSWCA 212.
The next question is whether, apart from s 241, a company has the power to release an officer from his duties under s 232 of the Law or alternatively its right to relief under s 1317HD of the Law, as part of a bona fide compromise of a disputed claim.
A bona fide compromise of a disputed claim can prevent a breach of statutory duty from arising as demonstrated in Commonwealth Homes & Investment Co Ltd v MacKellar (1939) 63 CLR 351. In that case, MacKellar, a Sydney architect, was approached by representatives of a South Australian company with a proposal that he join a local board of directors which it was intended to establish in Sydney… [65]
However, there are indications in the language of the section that it is not intended to apply to a release that constitutes part of the consideration by a company for the bona fide compromise of a disputed claim the subject matter of the release. What in substance is achieved in those circumstances is not an exemption from liability but rather a release from a bona fide disputed claim of liability. Further, on a proper construction of s 241(1) and (1A) of the Law, only the offending provision excluding or indemnifying the officer from liability is invalidated. That would be a very odd consequence where the release comprises all or part of the company’s consideration for the compromise agreement. For those reasons, I am of the opinion that s 241 does not prohibit a release as part of and related to a bona fide compromise of a disputed claim. This conclusion is supported by Gore-Browne on Companies (Boyle and Sykes), 44th ed, at para 27.21.4 and Partridge, above, at 147–8. It is unnecessary for the purpose of this appeal to decide what may be a wider question, namely, whether s 241 only applies to blanket exemptions.[66]
[65]Ibid [31]-[34].
[66]Ibid [39].
The Oppression Plaintiffs submit that what is achieved in that case is not an exemption from liability, but rather a release from a bona fide disputed claim of liability. They say that s 241 of the Companies Act is not a section which is designed to prevent a company from compromising actions which are brought to pursue such breaches.
In NRMAv Whitlam,[67] the New South Wales Court of Appeal held that s 241 of the Companies Act imposed a prohibition on the company indemnifying an officer or auditor that was narrower than the prohibition that s 241 had imposed.
[67][2007] NSWCA 81.
PMC submits that s 241 of the Companies Act is concerned with ‘blank cheque’ indemnification and exemption. In Eastland Technology, McLure JA referred to Miller v Miller,[68] which determines questions relating to construction of a will. One of the conditions of the will was that the company (of which the testator had been a director) release and indemnify the testator and his legal personal representatives from any claims which it may have had against the testator or his legal personal representatives, arising out of any transactions by the testator, with the company, or on its behalf, during the testator’s lifetime. Her Honour said: [69]
Santow J’s reasoning is based on his acceptance of the proposition that ratification, save when used in the sense of affirming a voidable transaction, does not itself effect the release of a claim: see R Partridge, “Ratification and the Release of Directors From Personal Liability” (1987) 46 CLJ 122. However, Santow J regarded ratification of cl 4 as achieving that result. He concluded that the release of a claim was not to “exempt |PO from a liability”. He said (at 88):
The notion of “exempt” is to “free from an obligation or liability” |PO Whereas to release means “to surrender a right”. The former notion of “exempt” again leaves the underlying right (of the company against the director in this context) intact. But it embargoes any attempt to free the director from his or her consequential liability for contravening that right.
This is conceptually distinct; but is the distinction one which is truly without a difference? In my judgment no. The clear policy of s 241, as evinced in its earlier reference to “indemnify”, is to deal with the consequences of breach of obligation owed to the company, not the release of rights which give rise to those obligations. There is a long history known to the legislature, of ratification of such releases, with limits established by the cases. One would not expect that history to have been expunged with no reference in any explanatory memorandum or ministerial speech, or in the words of s 241 itself. Section 241 is concerned with “blank cheque” indemnification and exemption, while ratification requires specific release after full disclosure of the particular cause for claim.
[68](1995) 6 ACSR 73.
[69]Eastland [25].
PMC submits that there is to be a distinction between a blank cheque or a blanket exemption and a specific exemption, properly disclosed and understood. Counsel for PMC referred to the Explanatory Memoranda to the Corporate Law Economic Reform Program Bill 1998 (Cth), which was the Bill that introduced s 199A. Paragraph 6.9 of the Explanatory Memoranda provides:
... it is proposed that the provisions concerning indemnification be rewritten to state all circumstances in which indemnification and exemption of officers or auditors is not permitted. As is currently the case, it is proposed that exemptions in respect of officers or auditors by the company, for a liability owed to a company, will not be permitted at all. Indemnification will be permitted in circumstances other than those expressly prohibited. [70]
[70]Explanatory Memoranda, Corporate Law Economic Reform Program Bill 1998 [6.9].
Paragraph 6.10 provides:
There are proposed to be no exceptions to the rule that a company or related body corporate must not exempt a person (whether directly or through an interposed entity) from the liability of the company, incurred as an officer or auditor of the company (proposed sub-section 199A(1)).[71]
[71]Ibid [6.10].
PMC submits that there is no suggestion that s 199A was narrower in respect of exemption and release. It says that what the Court was considering in NRMA v Whitlam was in s 241 with respect to indemnity, and there was no suggestion that 199A was narrower in respect of exemptions and releases.
In my view, it makes no difference whether s 199A is narrower or not. It is clear that s 199A is, and was meant to be, legislation that would not allow a company to exempt an officer of the company for a liability owed to the company.
The Oppression Plaintiffs submit that it would make no sense for Parliament to have attempted to prohibit a company from compromising actions against directors for breaches of their duty. It cannot be the case that s 199A of the Act operates in that way or countless proceedings issued in every corporations Court across the country would be incapable of settling. I do not accept that submission. What s 199A of the Act is prohibiting is a blanket release of conduct which may exist but not yet investigated. It does not prohibit compromising actions against directors for breaches of their duties.
The Oppression Plaintiffs also submit that s 199A cannot have been intended to confine the liberally wide powers granted to the Court under s 233 which allows the Court to compel a person, including a company, to do a specified act. They say it makes no sense to remove releases from the unfettered arsenal of the Court as a remedy for resolving oppression claims.
There is no doubt that the remedies given under this section are wide. However, in s 233 there is no reference to any releases and releases have been specifically prohibited by s 199A of the Act. Both sections are compatible. The relief that can be given under s 233 remains wide, but does not include the releases that are sought by the Oppression Plaintiffs.
The Oppression Plaintiffs submit that they sought releases because:
... Given the aggression demonstrated by Mr Prendergast and PMC in their pursuit of the founders and their companies, there is a significant danger of future litigation unless these proceedings are determined in a way that removes the danger.
An example of the aggression demonstrated by PMC and Mr Prendergast is said to be the commencement of the proceedings seeking a just and equitable windup pursuant to s 461 of the Act. In January 2019 after proceedings were commenced, PMC endeavoured to expand the issues in dispute by serving three statutory demands on the Company, two on 23 January 2019 and the other on 1 February 2019.
Glen Bernard Ward, solicitor for the Oppression Plaintiffs, deposes that the first debt was paid by PMC on 21 July 2018 and the second debt was paid on 22 September 2018 and therefore the debts were extinguished prior to the purported assignment. In relation to the third debt, Mr Ward deposes that the creditor, New Royals, had no authority to perform any works for LQD Trading after 25 June 2018 without approval from all three directors of LQD Trading and no such approval was given such that the debt is not due and payable.
When cross-examined about these statutory demands, Mr Prendergast gave the following evidence:
So you have caused to be issued a total of five statutory demands against the Liquid companies in the last six months; is that right?---Um, I – I – I believe it’s four, but please correct me if I’ve - - -
It doesn’t concern you at all what it costs or who you inconvenience, so long as you involve these companies in liquidation, does it? I beg your pardon, in litigation, does it?---Can you just ask the question again, please.
Well, there’s no purpose served at all by issuing these statutory demands, given that you’ve got a winding-up proceeding on foot?---Um, it was my desire to try to accelerate the process, um, to its inevitable conclusion to – to avoid further cost by issuing those demands.
So you had multiple statutory demands issued for the purpose of putting pressure on this court process, to speed it up?---Correct.
And you accept that that caused significant further inconvenience and cost?---Um, to who?
Well, to my clients, among other people?---Ah, well, I have no way of quantifying that.
It doesn’t really concern you how much cost and inconvenience you cause, so long as you get your way in this proceeding; is that right?---That’s not true. [72]
[72]T48.27-49.18
There have also been persistent allegations by Mr Prendergast that the Founders have misappropriated Company funds. Mr Glebatsas has endeavoured to answer those allegations but I note that there has been no response disputing any explanations made by Mr Glebatsas. Due to the conduct of Mr Prendergast and the allegation made of misconduct, the Oppression Plaintiffs submit that there could be no finality even if a liquidator is appointed. The Founders are understandably concerned that they would be pursued if the case ends without release.
If a liquidator is appointed, which is the relief sought by PMC, it is true that the liquidator may continue to pursue the Founders. It is also highly likely that Mr Prendergast will fund a liquidator appointed to the Company. However, the liquidator is first and foremost an officer of the Court. He would have seen Mr Glebatsas’ responses and read the affidavits and been aware of the proceeding. If there is nothing in the allegations as stated by Mr Glebatsas, then I would expect he would not pursue the Founders. However, if there have been unreasonable director related transactions, or any conduct not permitted under the Act, then a liquidator should have every opportunity to pursue the Founders.
Question 4 – The Appropriate Remedy
The Oppression Plaintiffs as part of their relief have sought that PMC purchase their shares. The value they have put on their shares appears to be the price of a release.
The Court was informed that the Founders made two open offers to resolve this proceeding. The first offer was made on 12 October 2018 when the Founders offered to accept $100,000.00 in exchange for the transfer of their shares in the Company to PMC, with mutual releases between the party and dismissal of both proceeding and no order as to costs. On 26 November 2018, the Founders offered to sell their shares in the Company to PMC in return for indemnities and releases from the Company and its related entities for both the Founders and the Oppression Plaintiffs. The offer also required PMC to pay $100,000.00 towards the Founder’s legal costs of the proceeding and the dismissal of both proceedings with no order as to costs.
It appears that the oppression commenced in May 2018 when Mr Prendergast was appointed managing director. PMC submits that at that date, the Company was insolvent because:
-the Company’s principal asset was a loan to LQD Training which could not be repaid;
-LQD Trading had made a loss in the ten months to 30 April 2018 of $2,507,107.88 following a loss of $835,129 the previous year;
-LQD trading had negative shareholder’s equity of $1,902,404.08; and
-it had terminated its employees and ceased to trade.
PMC submits that the Company cannot pay its debts as and when they fall due. Its only likely source of further funds or its subsidiaries is, according to PMC, any claims against the Founders in respect of funds that are alleged to have been misappropriated. PMC has ignored the removal of assets and the diversion of business opportunity which may have some value. It also ignores that the liquidator may have claims for insolvent trading because the Company continued to trade after 30 April 2018 when PMC alleges it was insolvent.
The Oppression Plaintiffs submit that the Company had value until the circumstances of the oppression took place and was solvent as long as it had the financial support of Mr Prendergast.
On 15 March 2019, PMC’s lawyers forwarded a notice of repayment to the Company. The notice of repayment referred to advances of $1.6 million dollars made to the Company by PMC between 7 May 2018 and 22 June 2018. PMC was prepared to fund the Company well after 30 May 2018 when it alleges it was insolvent.
Mr McDonough has deposed that:
The most recent information to the value of the shares is that in July 2017, PMC acquired 10% shareholding of $1,500,00.00. If the July 2017 acquisition prices was used, each share would be worth $7,861.64. Since that time, the business opportunities have expanded considerably, including the development of the new products and distribution into a number of new retailers including QVC (the 3rd largest e-retailer in the USA), TSC Canada (Home Shopping Network), Amazon Luxury, Dermstore USA, Harvey Nichols UK and Arnotts UK.
In or about May 2018 an offer was made to an employee of the business for a 10% shareholding in the Company, as part of her remuneration package. During discussions in relation to that offer, Phillip told me and Chris that the Company would ascribe a value to those shares on the basis of the PMC subscription in July 2017. The documents relating to this offer have not been finalised given the dispute between the shareholders.
Mr McDonough when cross-examined in relation to this gave the following evidence:
But the evidence you gave as to the value of the business was that 10 per cent was worth 1.5 million and, therefore, 50per cent was worth 7.5 million?---Um, actually there were a couple of things that that was based on. One of them was the share – employee share loan agreement that was being made out to Antoinette Bernardo to take 10 per cent of the business. And Phillip had sought outside counsel to value that share and what the business was worth. And he placed that valuation on the business, not us.[73]
[73]T108.11-19.
The fact that 10% of the Company was sold to Ms Barnardo does not meant that the Company was valued at $1.5 million dollars. I have little information about that transaction and it would not be appropriate based on the evidence before me to value the Company at $1.5 million as and when it was sold to Ms Barnardo. Neither PMC or the Oppression Plaintiffs put any evidence to the Court in relation to the value of the Company. On the evidence before me it would be impossible to value the Company when the oppression took place in May 2018. The only certainty is the Company is now insolvent and ceasing to trade. There are no accounts before me by which I could determine when insolvency took place but it would appear to me that the Company would have been insolvent when PMC stopped providing finance. That does not mean it was insolvent earlier. Without the accounts, I have no way to determine whether the Company was insolvent, nor what is the proper value of it assets.
The Oppression Plaintiffs submit that s 461(f) of the Act, which provides that a Court may wind up a company if the company is being conducted in a manner that is oppressive or unfairly prejudicial to, or discriminatory against, any or all members’ interests, reflects the grounds for oppression under s 232. Section 461(f) of the Act provides:
S 461 General grounds on which company may be wound up by Court
(1) The Court may order the winding up of a company if:
…
(f)affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members or in a manner that is contrary to the interests of the members as a whole;
In ASIC v ABC Fund Manager[74], Warren J (as she then was) articulated the factors that the Court should take into account in determining whether it just and equitable to wind up a company. Her Honour said:
There are general fundamental principles applied by the courts with respect to a winding-up application on the just and equitable ground. First, there needs to be a lack of confidence in the conduct and management of the affairs of the company: see Loch v John Blackwood Limited(1924) AC 783, 788. Second, in these types of circumstances it needs to be demonstrated that there is a risk to the public interest that warrants protection. Third, there is a reluctance on the part of the courts to wind up a solvent company.[75]
[74](2001) 39 ACSR 443.
[75]Ibid [119].
Here, the Oppression Plaintiffs have conceded that in the circumstances there is lack of confidence in the conduct and management of the Company’s affairs. In Ruutv Head,[76] Santow J (as he then was) refused to wind up a partnership because the plaintiff’s conduct was a predominant cause of the breakdown of the partnership and he lacked clean hands. In that case there was not a complete deadlock. Here, however, there is a complete deadlock.
[76](1996) 20 ACSR 160.
It also appears that Mr Prendergast has not acted with clean hands, however PMC submits that neither have the Founders. It says the Founders’ conduct in gaining unauthorised and illegal access to Mr Prendergast’s email account, and taking confidential and privileged information from it should disincline the Court to exercise any discretion in their favour.
Mr McDonough gave the following evidence when cross-examined about accessing Mr Prendergast’s account:
Thank you. And at the same time, in June 2018 – in fact between 17 June and 29 June – you and Mr Glebatsas accessed Mr Prendergast’s email account?---Um, I didn’t access Mr Prendergast’s email account.
Do you know who did?---Yes, I do.
Who was that?---It was Christopher Glebatsas. [77]
[77]T85.1-6.
...
And if you then go to the following page, you then – and, again, this is where the timestamps aren’t entirely clear, but it’s certainly around the same time – you send an email to Peter Moulton at 3dynamics, and you ask him to do three things. The first thing you ask him to do is to change the passwords on the following LQD email accounts: admin, info, accounts, and no reply. And you ask him to SMS those passwords to you?---Yes, that’s correct.
The second thing you ask him to do is to change the passwords of Phillip Anderson and Philip Prendergast to “welcome02” and immediately SMS you when that has been done. And you say they can reset them with you on Monday?---Yes, that’s correct.
Was that how Mr Glebatsas accessed Mr Prendergast’s email account?---Um, we actually were able to access Mr Prendergast’s account, or Chris was, by using the “welcome01” email password that we had set up for all of our email accounts in the business.
Okay. So why did you ask for it to be reset to “welcome02”?---Um, because, ah, I didn’t want the – well, Chris and I didn’t want them to have access to their email over the weekend.
Thank you for that. And you say that Mr Glebatsas then accessed that account around that time. And you – if I can take you now to p.490 - - -?---Actually, we had already - - - [78]
...
And you can see at the bottom of that page there’s an email from Peter Moulton that says, “Hello, everyone. I’ve received a request for the audit trail of the Office 365 logs” – that’s the email logs, isn’t it?---Ah, yes, it is.
Yes. “While I have the data, I cannot send it out without agreement from all three directors while the dispute is in progress. I’m happy to send it if I receive approval from all three via email”. You then sent Mr Moulton an email in reply, further up the page, saying, “Hi, Peter. Chris and I don’t give our approval to send out this information, and please be aware Phil Anderson no longer acts on behalf of our business interest”. You sent that email to Mr Moulton to try to ensure that Mr Prendergast didn’t know that you had accessed his email?---No. We knew that he would know that we accessed his email, because you would be able to see that an email had been forwarded. Um, I sent that primarily because Mr Prendergast wasn’t agreeing to anything that we wanted, and so this was a – an example of not giving him what he wanted. I know that sounds childish, but that was the way it was.
What you’re saying there is this was an example of the deadlock that occurred between you by this stage?---This was an example of, yes, us feeling very victimised, after we had been kicked out of a business that we started and ran for nearly 10 years. [79]
[78]T86.4-30.
[79]T87.15-88.10.
In relation to the allegations that the Founders were accessing Mr Prendergast’s emails, two emails were produced to the Court. Both these emails contained confidential information given to Mr Prendergast by his lawyers and accountants. Mr Glebatsas gave the following evidence when cross-examined in relation to this document:
Does it surprise you that Mr Prendergast appears to have sent, to you, his confidential legal and accounting advice with respect to the dispute that he was having with you and Mr McDonough?---Does it surprise me?
Does it surprise you?---Well, I don’t remember that email.
Okay. So it would not surprise you that Mr Prendergast would send that to you?---Well, I’m not saying that.
So what are you saying?---I’m saying I don’t remember that email.
You don’t remember that email. Let me see if I can jog your memory a bit further. If you have a look at p.201?---Yep.
There’s an email there, from Christopher Glebatsas to Chris Glebatsas?---Yes.
Can I take you back to – I hope that you’ve got this as well as we’ve got this, the key documents index at the front of that folder?---Yep.
If you have a look at item 39 in that index?---Yes.
It’s described as an email from Christopher Glebatsas’ LQD email account to Christopher Glebatsas Gmail account?---Yes.
This index was prepared by your lawyers, and you accept, if your lawyers have described it that way, that that’s likely to be a correct description?---Yes.
Thank you. Now, if we have a look on p.201?---Yes.
It’s an email from you, to you?---Yes.
Forwarding LQD proposed scenario?---Yes.
And this has now happened on 25 June at 6.21?---Yep.
And if you go down, you can see it’s – in fact, what it’s forwarding is the email at p.197?---Yes.
Do you recall this email?---I don’t remember that email.
So you had access, it would appear, to what would – confidential legal and accounting advice that your opponent in a dispute had received. You forwarded it from your work email to your Gmail, but that wasn’t something that stuck in your mind?---No, it wasn’t.
Do you accept that you may have sent this email?---No.
So you say you wouldn’t – you did not send this email, or you simply don’t recall that you sent this - - -?---I don’t recall that I sent that email.
Do you accept that you might have done?---Possibly.
But you don’t recall, one way or the other?---I don’t recall.[80]
[80]T130.16-131.26.
On the evidence before me, I accept that the Founders had unauthorised access to Mr Prendergast’s email.
That, however, is not the only allegation of bad faith. The sum of £45,000 was withdrawn from Lloyd’s Bank on 25 June 2018 by Mr Glebatsas. Mr Glebatsas, when cross-examined, gave the following evidence relating to this transaction:
After on 17 June you told Mr Prendergast that you wanted to exit the business, after on the weekend preceding I’ve shown you emails that suggest that you were accessing Mr Prendergast’s emails – and you tell me that you don’t recall those emails, but nevertheless to put this in a timeframe – you then on the Tuesday morning, on 25 June, you go to Lloyds Bank and withdraw £45,000 from that account; is that correct?---I’m sorry. There was a lot of information, so - - -
Did you go to Lloyds Bank on 25 June and withdraw £45,000 from that account?---Yes, I did.
Did you tell Mr Prendergast that you’d done that?---No, I didn’t.
Why didn’t you do that?---Because it was being deposited into the Liquid Trading account.
Was that an easy process of depositing it into the Liquid Trading account?---No, it wasn’t.
In fact, it was quite difficult. Can I show you an email exchange that you had, where you found it quite difficult, in fact, to do exactly that. Mr Glebatsas, you can see at the top right-hand corner of the first page there there’s a marking GEM, etcetera. Those figures show that this is in fact a document taken from your discovery in this proceeding. And it’s a chain of emails. If I can ask you to turn to the last page?---Yes.
You’re in fact having quite a bit of difficulty here?---No. It’s just an email chain.
No. Sorry. Why don’t we go through the email chain. So on the fourth page there, at the bottom of the page, you send an email to David Amalfi at the National Australia Bank, saying that, “I have a bank cheque for £45,000, which I need to deposit in my NAB sterling business account. The teller called Phoebe, however, she wouldn’t authorise the deposit. I need to understand what’s going on and how this can be fixed ASAP, as a bank cheque should be as good as a cash deposit and I’m not waiting up to 12 weeks for this to be cleared”?---Correct.
You see you sent that email?---Yes.
So this was a difficult process. It was far from the ordinary course of business?---Well, you’re saying that, but it’s part of – I was clarifying with the bank how to deposit the cheque and the times that it would take to have the cheque cleared, because my understanding – I’ve worked in banks for quite a few years and I thought a bank cheque was the same as cash.
And if you go to the top of the first page, there’s an email from you to Max Lowe at NAB, sent on Thursday, 28 June. You say, “Hi, Max. The UK doesn’t have Pty Limited.” That was a problem with the name that was on the cheque, wasn’t it?---Correct.
“It’s only an Australian business acronym. I was told I could deposit the funds directly into our account. If I’d known this, I would have sent a TT”. What’s a TT?---A telegraphic transfer.
While you were in London. So, in fact, notwithstanding your evidence that you needed to take it out by way of bank cheque, because that was the only way that this could be done, you actually say that there’s an alternative there, that you could have sent it by telegraphic transfer?---Well, I’ve just tried to push Max to get the job done.[81]
[81]T143.22-145.22.
In my view, neither party has come to Court with clean hands. However, I note that Santow J in Ruut said:
As a matter of logic, lack of clean hands could not be an absolute bar, else otherwise for example, where both partners are equally at fault, neither could obtain a winding up order. Nonetheless it must be an important factor in the exercise of the court’s discretion along with other factors, such as whether the partnership is truly deadlocked.[82]
[82](1996) 20 ACSR 160, 162.
Conclusion
Here I have a Company with directors that are truly deadlocked. Neither party has come to the Court with clean hands. The Company no longer trades and is now clearly insolvent. There has been oppression by PMC. The only appropriate remedy in the circumstances is to order a wind up. I cannot order a release and I have no idea what the Company is worth as neither party chose to put valuations before the Court, but even if I could value the shares, my view is the most appropriate order is to wind up the Company.
0
5
0