In the matter of A.C.N. 607 358 887 (formerly known as Carzapp Pty Ltd)

[2019] NSWSC 1561

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of A.C.N. 607 358 887 (formerly known as Carzapp Pty Ltd) [2019] NSWSC 1561
Hearing dates:	16, 17, 18, 19, 20 July 2018; 1, 2, 3 August 2018; 2 October 2018; 18 October 2018 (written submission)
Decision date:	08 November 2019
Jurisdiction:	Equity
Before:	Kunc J
Decision:	Oppression not established; administrators validly appointed; companies to be wound up with administrators to become liquidators
Catchwords:	CORPORATIONS — Members’ rights and remedies — Oppression — Where conduct is oppressive to, unfairly prejudicial to, or unfairly discriminatory against minority — No issue of principle   CORPORATIONS — Voluntary administration — General matters — Whether administrators validly appointed
Legislation Cited:	Civil Procedure Act 2005 (NSW) Corporations Act 2001 (Cth) Trustee Act 1925 (NSW)
Cases Cited:	Beconwood Securities Pty Ltd v Australian and New Zealand Banking Group [2008] FCA 594; (2008) 246 ALR 361 Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95; (2008) 66 ACSR 359 Commonwealth v Irving & NPC Manufacturing Pty Ltd (1996) 65 FCR 291 Downey v Crawford [2004] FCA 1264; (2004) 51 ACSR 182 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672 Herrman v Simon (1990) 4 ACSR 81 Hunter v Organic & Natural Enterprise Group Pty Ltd [2012] QSC 383; (2012) 92 ACSR 183 Lewski v Australian Securities and Investments Commission [2016] FCAFC 96; (2016) 337 ALR 1 Lindholm, Re; Opes Prime Stockbroking Ltd (admin apptd) (recs and mgrs apptd) [2008] FCA 1425; (2008) 171 FCR 473 Macquarie International Health Clinic Pty Ltd v Sydney Local Health District; Sydney Local Health District v Macquarie Health Corporation Ltd [2013] NSWSC 764 Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 Rapsey (in Their Capacity as Former Administrators of Lime Gourmet Pizza Bar (Charlestown) Pty Ltd (Formerly Under Admin) ) v Lime Gourmet Pizza Bar (Charlestown) Pty Ltd [2015] NSWSC 244 Re Compaction Systems Pty Ltd & the Companies Act [1976] 2 NSWLR 477; (1976) 2 ACLR 135 Re Condor Blanco Mines Limited [2016] NSWSC 1196 Re Express Engineering Works Ltd [1920] 1 Ch 466 Sutherland v Take Seven Group Pty Ltd [1998] NSWSC 538 Territory Realty Pty Ltd v Garraway [2009] FCA 292 Wayde v New South Wales Rugby League Ltd [1985] HCA 68; (1985) 180 CLR 459
Category:	Principal judgment
Parties:	Twinkledom Pty Ltd ACN 606 702 416 (First Plaintiff) Busy Traveller Pty Ltd ACN 097 668 221(Second Plaintiff)     ACN 607 358 887 Ltd (formerly known as Carzapp Pty Ltd ACN 607 358 887) (First Defendant) ACN 613 155 561 Pty Ltd (formerly known as Carzapp Trading (Aus) Pty Ltd ACN 613 155 561) (Second Defendant) ACN 612 819 548 Pty Ltd (formerly known as Carzapp Holdings Pty Ltd ACN 612 819 548) (Third Defendant) Graham Meyerowitz (Fourth Defendant) Mark Lasarow (Fifth Defendant) Anthony Resnick in his capacity as joint administrator of Carzapp Pty Ltd, Carzapp Trading (Aus) Pty Ltd and Carzapp Holdings Pty Ltd (Sixth Defendant) David Solomons in his capacity as joint administrator of Carzapp Pty Ltd, Carzapp Trading (Aus) Pty Ltd and Carzapp Holdings Pty Ltd (Seventh Defendant)
Representation:	Counsel: T J Morahan (First and Second Plaintiffs) G O’Mahoney (Fourth and Fifth Defendants)   Solicitors: Chen Shen Lawyers (First and Second Plaintiffs) Wotton & Kearney (Fourth and Fifth Defendants) Somerset Ryckmans (Sixth and Seventh Defendants)
File Number(s):	2017/271980
Publication restriction:	No

Judgment

Summary

1. A basic outline of the facts of these proceedings belies the detailed factual analysis which the case has required.

2. Reduced to essentials, these proceedings concern a dispute between three company directors, Domenic Ruberto, Marcus Lasarow and Graham Meyerowitz, regarding the sale of a smartphone application known as Carzapp (CZA), which provides a sales platform for car dealers to trade used cars. Without any disrespect, I will refer to these parties by their given names.

3. Carzapp Pty Ltd was the corporate vehicle the three directors used. Their relationship was governed by a Shareholders’ Agreement. They also obtained other investors in the CZA project, in particular Dr Richard O’Connor and Ms Suzanne Berlandier, by issuing units in a unit trust.

4. As a result of Domenic’s unreasonable and obstructive behaviour, the relationship between him and his two co-directors Marcus and Graham became completely unworkable. The CZA project found itself stalled and with virtually no money in the bank. Marcus and Graham – without Domenic – negotiated a sale of CZA to Pickles Auctions Pty Ltd for $2 million. Domenic was made aware of the sale but declined to approve it when it was presented for consideration in purported board meetings.

5. Notwithstanding Domenic’s opposition, the sale went ahead. Two features of the sale should be noted. First, Carzapp Pty Ltd was required to hold a members’ meeting to change its name to something other than “Carzapp”. Second, Marcus and Graham accepted a consultancy role from Pickles Auctions Pty Ltd in relation to CZA which they did not disclose to Domenic until after the sale of CZA had been completed.

6. Once the $2 million had been received, Marcus and Graham then set about in effect winding up Carzapp Pty Ltd and other companies that were part of the CZA project. After paying all liabilities they proposed dividing what was left between the shareholders in accordance with their shareholdings, but reducing what they and Domenic might otherwise receive to enable ex gratia payments to be made to Dr O’Connor and Ms Berlandier (who would otherwise have completely lost their investments). A similar approach was taken to making some part of the payments through the unit trust. Acting on legal advice, they insisted that everyone involved should sign deeds of release as a prerequisite to receiving those payments.

7. Everyone involved except Domenic and Dr O’Connor signed deeds of release and received their payments. In addition to refusing to sign (or even negotiate about the terms of) a deed of release, Domenic also refused to vote to approve the name change. Concerned by threats from Pickles Auctions Pty Ltd and claims by Domenic, Marcus and Graham voted to put Carzapp Pty Ltd and two related companies into administration. Messrs Anthony Resnick and David Solomons were appointed administrators.

8. In these proceedings, Domenic has alleged that Marcus and Graham conducted the affairs of Carzapp Pty Ltd in a way that was oppressive to him and in breach of the Shareholders’ Agreement. He has also challenged the validity of the appointment of the administrators and alleges that the costs of the administration are damages for which Marcus and Graham are liable to Carzapp Pty Ltd. Domenic and Dr O’Connor also seek orders that they be paid the money which they would otherwise have received from Carzapp Pty Ltd and the unit trust if they had signed a deed of release.

9. From the beginning of the hearing, and somewhat unsatisfactorily, the utility of these proceedings and the precise relief sought by Domenic was very much “a work in progress” (to quote Domenic’s counsel). In large part this was because two things were not in dispute. First, notwithstanding all of his complaints about what had occurred, Domenic did not challenge the sale of CZA for $2 million. Second, the parties came to agree that the companies now in administration should be wound up on the just and equitable ground, although they could not agree on who should be the liquidator. Marcus and Graham proposed it should be the administrators; Domenic argued it should be someone else with no previous involvement in the matter.

10. The Court’s conclusions may be summarised as:

1. The companies now in administration will be wound up and the current administrators appointed liquidators.

2. Domenic’s claim in oppression fails, notwithstanding that the Court accepts that some of the steps taken by Marcus and Graham were in breach of the Shareholders’ Agreement. Domenic has failed to demonstrate that when all the circumstances are taken into account (including that he does not challenge the sale of CZA) the conduct of which he complains had the requisite element of unfairness towards him so as to constitute oppression. A very important factor in the Court reaching this conclusion is that it is satisfied that Marcus and Graham’s conduct was in large part necessitated by Domenic’s abusive and destructive behaviour and refusal to engage reasonably (or at all) with what was being done.

3. Domenic’s challenge to the validity of the appointment of the administrators fails. He has not discharged his onus to satisfy the Court that Marcus and Graham did not believe in good faith that the relevant companies were likely to become insolvent. Nor has he demonstrated that the appointment was in breach of the Shareholders’ Agreement.

4. A new trustee will have to be appointed for the Carzapp Holdings Unit Trust.

5. Insofar as Domenic seeks orders that he be paid what he would otherwise have received from Carzapp Pty Ltd, there does not appear to be a dispute that he is entitled to the money, which he would have received if he had signed a deed of release. If the Court is correct that is not a matter of dispute, the Court will make a declaration that Carzapp Pty Ltd owes Domenic that amount and will afford Domenic and other interested parties (including the soon to be liquidators) an opportunity to be heard as to whether any further order should be made.

6. There can be no doubt that Dr O’Connor, like the other parties, would have been paid had he signed a deed of release. However, as a matter of law the payment proposed to Dr O’Connor from Carzapp Pty Ltd was either a gift or a contractual offer that he would be paid the money on condition that and in consideration for him entering into a deed of release. Dr O’Connor has failed to demonstrate any legal basis on which he could enforce such a gift or unaccepted offer. It will be a matter for the soon to be liquidators to determine whether Dr O’Connor should in all the circumstances nevertheless be permitted to prove he is entitled to the payment in the liquidation of Carzapp Pty Ltd.

7. Both Domenic and Dr O’Connor have failed to demonstrate a presently enforceable right to the payment Marcus and Graham intended each should receive from the Carzapp Holdings Unit Trust. It will be a matter for the new trustee to determine whether or not either or both of them should receive the payments that they would have received if they had signed a deed of release.

11. Mr T J Morahan of Counsel appeared for the first and second plaintiff. Mr G O’Mahoney of Counsel appeared for the fourth and fifth defendants.

12. Mr M Rosenblatt, Solicitor, appeared on the first and eighth days of hearing for the sixth and seventh defendants and Mr M Ryckmans, Solicitor, appeared for them on the final day for closing submissions. The sixth and seventh defendants played an essentially neutral role in the proceedings, but relied on an amended cross-claim to formalise a claim for a declaration as to the validity of their appointment and for consequential relief if their appointment was found to be invalid. There was no dispute that they would be entitled to their remuneration on a quantum meruit basis if the Court concluded that they had been invalidly appointed.

The parties and others

13. Domenic is the sole director and shareholder of the first plaintiff, Twinkledom Pty Ltd ACN 606 702 16 (“Twinkledom”). He is also the owner of a used car company, Better Car Company.

14. The second plaintiff, Busy Traveller Pty Ltd ACN 097 668 221 (“Busy Traveller”), is the corporate trustee for Dr Richard O’Connor’s family trust. Introduced to CZA by Domenic, Dr O’Connor invested $200,000 through Busy Traveller in May 2016.

15. The first defendant is a company formerly known as Carzapp Pty Ltd (“CZAPL”). CZAPL was the main vehicle for the development of CZA and owned the intellectual property in CZA.

16. The second defendant is a company formerly known as Carzapp Trading (Aus) Pty Ltd (“CZAT”). CZAT was formed to sell CZA under a licence agreement from CZAPL.

17. The third defendant is a company formerly known as Carzapp Holdings Pty Ltd (“CZAH”). CZAH is the trustee of the Carzapp Holdings Unit Trust (“CZAUT”) through which Dr O’Connor and another investor, Ms Suzanne Berlandier, invested in CZA.

18. The fourth defendant is Graham.

19. The fifth defendant is Marcus (also referred to as Mark).

20. The sixth defendant, Mr Anthony Resnick, is one of the joint administrators of CZAPL, CZAT and CZAH.

21. The seventh defendant, Mr David Solomons, is the other joint administrator of CZAPL, CZAT and CZAH.

22. Marcus and Graham are directors of Blade Media Pty Ltd (“Blade Media”). The shares in Blade Media are held equally by Marcus, and by Graham through his and his wife’s company Meylex Pty Ltd (“Meylex”). Blade Media owns a subsidiary company Media Tag Pty Ltd (“Media Tag”) of which Marcus and Graham are both directors.

23. For simplicity, “CZA Companies” collectively refers to CZAPL, CZAT and CZAH, and “CZA Entities” includes additionally the CZAUT. In these reasons, reference to a person includes their corporate entity unless specifically stated otherwise: e.g. a reference to Domenic incorporates Twinkledom. Furthermore, reference to the defendants refers to Graham and Marcus, and reference to the administrators refers to Messrs Resnick and Solomons, unless otherwise stated.

The facts

24. The Court finds the facts to be as follows. It is not necessary for the Court to resolve every allegation and counter-allegation. With very few exceptions, the primary facts were not in dispute or were established by contemporaneous written records. The written record alone provides unequivocal and irrefutable evidence of how deeply dysfunctional the relationship between the parties became.

25. During 2011, Domenic and Tim Clark (an employee of Better Car Company) began developing the concept of a technological application to sell and purchase used cars. This application was called Carzapp.

26. In late 2012 or early 2013, Graham purchased a car from Marcus. Graham began working with Marcus and Media Tag through the purchase of shares in Blade Media towards the end of 2013.

27. In late 2013, Domenic first met and purchased a used car from Marcus. It became apparent that Marcus was interested in the information technology industry and they discussed the CZA concept.

28. In about mid-2013, Marcus introduced Domenic to Graham.

29. In late 2014, Marcus and Graham proposed joining together with Domenic to work on developing CZA, although there was no formal arrangement as to who would own the intellectual property in CZA (the “IP”).

30. Domenic, Marcus and Graham began tangible development work on CZA in about December 2014. At this stage, Media Tag was the entity through which CZA was being developed. Domenic invested about $100,000 in the project.

31. In about August 2015, Tim Clark left Better Car Company and the CZA project. Marcus and Graham subsequently agreed with Domenic to develop CZA with their interest in the project to be held in equal thirds.

32. Throughout this period, CZA was being developed with a prototype design produced midway through 2015. Media Tag held the IP in CZA and any third-party employed to work on the app was required to execute an intellectual property assignment deed in favour of Media Tag.

33. The directors began courting investors in CZA and, in mid-2015, meetings were held with A.P. Eagers Ltd (“APE”), including an initial meeting with its Chief Operating Officer Mr Keith Thornton.

34. On 26 June 2015, Twinkledom was incorporated with Domenic as sole director and shareholder.

35. On 30 July 2015, CZAPL was incorporated with Domenic, Marcus and Graham as equal directors and shareholders. Graham’s shares are held by Meylex. Domenic’s shares were held by Twinkledom.

36. By about September 2015, CZA was ready to be demonstrated to potential investors. An email sent on 9 September 2015 at 1:59 pm from Domenic to Marcus and copied to Graham reads:

“Mark Johnson is Tony McCulloch’s I.T guy… that’s all (and in my opinion not a very good IT guy at that)

I don’t know if he has or hasn’t got money… I would suspect not so

ALSO…once we give these fuckers the app, that’s it… we’ve given them the idea in a fucking nutshell

I know I’ve driven this to happen to this point… but I’m just trying to say that there’s NO time to waste or fuck around with developers/problems/issues or excuses We need to act fast or someone else Will steal this from us!!!! we need to put as many “irons in fire as possible”!!!

That means… nurture Easy Cars and get Dealer Solutions on board in a secure fashion and work on the large players such as Eagers and AHG Group

Please call me when you can to discuss… I’m of the mind set to just pick up the phone and speak to the people at the very top of Eagers and AHG… I can make the call, I have no problem SELLING the app!!

Timing is EVERYTHING NOW”

37. During this time, development work on CZA’s functionality and features continued. An email of 19 October 2015 at 3:50 pm from Graham to Domenic and Marcus listed the new features of version 1.0.37 of CZA.

38. In early November 2015, according to the defendants, the directors of CZAPL resolved to acquire the IP from Media Tag for $300,000 plus GST. This resolution proved to be the subject of great debate amongst the parties. It was conceded by the defendants that there was no formal meeting on 4 November 2015 at which this resolution was adopted. Instead, they said there was an informal meeting at which all directors were present and it was agreed amongst all of the directors to sell the IP to CZAPL for $300,000. The minutes of this resolution were subsequently backdated and presented at a formal meeting on 23 March 2016. This was conceded during cross-examination (T325:27-326:12):

“Q. Is it the case then that that document we saw dated 4 November 2015, that no meeting occurred on that day at all?

A. As I say, those were informal meetings in November and there was a mistake on that minute, I’ve mentioned that before.

Q. They weren’t directors’ meetings?

A. Well, it’s the three of us. I mean, it was three directors.

Q. But I mean, you were chatting about these things every day of the week, weren’t you?

A Well, that’s right.

Q. What, you decided to make one of those discussions?

A. I didn’t decide to make anything, that – that was what came about from our discussions and that was ratified on 23 March, all were present.

Q. Are you saying that back in December 2015, at one of these discussions, part of the agreement in that discussion was that this would be a directors meeting?

A. Yes, we did – we did do that. We did do ad hoc meetings where we said, “This will be a directors meeting.”

…

Q. But are you making this up on the run about the directors’ meeting in November 2015?

A. Okay, sorry, Mr Morahan, I’ll be clear. There wasn’t an official directors’ meeting with minutes held in November 2015 but we had many informal meetings where we discussed this topic.

Q. Why was the document produced that had as its only item on the agenda the sale of the IP from Media Tag to Carzapp Pty Ltd?

A. Because we wanted to ratify that at a meeting of the directors and shareholders at a meeting.”

39. Domenic denied being part of any arrangement whereby Media Tag sold the IP to CZAPL. It was also put for Domenic in final submissions that any such acquisition by CZAPL would have been in breach of the Shareholders’ Agreement between the parties (see paragraph [43] below). However, while the circumstances in which CZAPL came to own the IP was explored at length in the evidence, those matters were not pleaded anywhere in the plaintiffs’ case as having any legal significance for the purposes of these proceedings. I therefore do not give them any such significance. Nor do I accept the plaintiffs’ submission that the history of how the IP was dealt with “shows an attitude of mind” on the part of Graham and Marcus to exclude Domenic from the affairs of CZAPL which is relevant to analysing subsequent events. Those events must be analysed in the circumstances in which they arose.

39. In about November 2015, APE agreed to invest $300,000 in CZA in return for a 10% equity stake in CZAPL.

40. The IP was subsequently transferred from Media Tag to CZAPL in about February 2016.

41. On 8 February 2016, the Carzapp Shareholders’ Agreement was entered into initially between CZAPL, Media Tag, Blade Media and Twinkledom (the “Shareholders’ Agreement”). As a consequence, Media Tag, Blade Media, Twinkledom each held 30% of the shares in CZAPL (54 shares each), and APE held the remaining 10% (18 shares).

42. The Shareholders’ Agreement included:

“Recitals

A   The Initial Shareholders incorporated the Company.

B   The Company carries on the Business.

C   AP wishes to subscribe for 18 Shares in the Company on the terms of this Agreement.

D   The Shareholders wish to enter into this Agreement in order to regulate their rights and obligations as members of the Company.

E   The Company has agreed with the Shareholders to be bound by and to comply with all of the provisions of this Agreement which relate to the Company.

It is agreed as follows.

1   Definitions and interpretation

1.1   Definitions

The following definitions apply unless the context requires otherwise.

…

Business means the Company's business; CarZapp is the No 1 App for Car Dealers with a fast growing dealer network with thousands of cars to buy and sell at wholesale prices. As a dealer on the CarZapp network, you will be able to grow your network enabling you to share your inventory with each other, as well as, buy, sell at wholesale prices. CarZapp is for licensed dealers only. By joining CarZapp, you will enjoy many features like real-time instant chat and Flicka, and be able to move cars fast.

...

Dispose or Disposal in relation to any property means to sell, transfer, assign, create a Security over, declare oneself a trustee of, part with the benefit of or otherwise dispose of that property (or any interest in it or any part of it) including, in relation to a Share, to enter into a transaction in relation to the Share (or any interest in the Share) (other than a transaction permitted by this Agreement and the Constitution or conditional on each other Shareholder consenting to it or waiving certain of its rights under this Agreement or the Constitution or as otherwise agreed by each Party) which results in a person other than the registered holder of the Share:

(a)   acquiring any equitable interest in the Share, including an equitable interest arising under a declaration of trust, an agreement for sale and purchase, an option agreement or an agreement creating a charge or other Security over the Share; or

(b)   acquiring any right to receive directly or indirectly any Dividends payable in respect of the Share: or

(c)   acquiring any rights of pre-emption, first refusal or other control over the disposal of the Share; or

(d)   acquiring any rights of control over the exercise of any voting rights or rights to appoint Directors attaching to the Share; or

(e)   otherwise acquiring legal or equitable rights against the registered holder of the Share which have the effect of placing the person in the same position as if the person had acquired a legal or equitable interest in the Share itself.

Dividend includes a bonus or other distribution in kind or in cash.

…

Group means;

(a)   the Company; and

(b)   each Subsidiary of the Company (if any).

Group Entity means each entity which is a member of the Group.

…

Initial Shareholders means Blade, Media Tag and Twinkle.

…

Related Body Corporate has the meaning given to related body corporate in the Corporations Act, but on the basis that Subsidiary has the meaning given in this Agreement.

…

Required Majority means;

(a)   in the case of Shareholders. Shareholders that together hold more than 75% of the total voting rights of Shareholders present at the meeting of Shareholders and entitled to vote on the resolution concerned;

(b)   in the case of Directors, Directors that together hold more than 50% of the total voting rights of all Directors who attend the relevant Board meeting or sign the relevant written resolution (as the case may be) and who are entitled to vote on the relevant resolution.

…

Rules means the rules set out in the Constitution, as amended.

…

Subsidiary has the meaning given in the Corporations Act but so that:

(a) an entity will also be considered to be a Subsidiary of a company if it is controlled by that company within the meaning of section 50AA of the Corporations Act;

(b)   a trust may be a Subsidiary, for the purposes of which a unit or other beneficial interest will be regarded as a share; and

(c)   a corporation or trust may be a Subsidiary of a trust if it would have been a Subsidiary if that trust were a corporation.

…

3   Business and management of Company

3.1   Conduct of Company’s Business

Each Shareholder (in so far as it lawfully can do so) must exercise its powers in relation to the Company to ensure that:

(a)   the Company carries on and conducts the Business in a proper and efficient manner in accordance with sound business practice and for its own benefit and so as to give effect to any business plan of the Company; and

(b) the Company performs and complies with all obligations on its part under this Agreement and complies with the restrictions imposed on it by the Constitution.

3.2   Scope of Company Business

Unless the Shareholders otherwise agree, the business of the Group will be limited to the conduct, maintenance, improvement and extension of the Business in accordance with any business plans (as amended by agreement between the Shareholders) and budgets approved under clause 4.2.

3.3   General policy determined by Directors

Subject to clause 3.12, the Board will be responsible for:

(a)   the overall direction and control of the management of the Company; and

(b)   the formulation of the policies to be applied in the conduct of the Business.

…

3.8   Voting and regard to Shareholders' interests

Each Director is entitled to one vote.

…

3.10   Board meetings

(a)   The Directors must meet quarterly or more frequently as requested by any two Directors. Unless otherwise agreed by the Required Majority of Directors:

(i) any Director may cancel or postpone any meeting convened by that Director by written notice to all persons who were entitled to receive notice of that meeting, except where the cancellation or postponement would be contrary to the Corporations Act. Any failure to give notice of cancellation or postponement does not invalidate the cancellation or postponement or any resolution passed at a postponed meeting; and

(ii)   subject to any protocols adopted by the Board on the holding of meetings, each meeting of the Board must be held at a reasonably convenient location determined by the Directors requesting the meeting.

Reasonable notice must be given to each Director of all meetings of the Board, although a Director may agree, as regards notice to be given to that Director, that a shorter period is acceptable.

(b)   Subject to any protocols adopted by the Board on the holding of meetings:

(i)   the Directors may meet together for the despatch of business and adjourn and otherwise regulate their meetings as they think fit;

(ii)   the Directors may meet in person or by any means which allows the participating Directors to hear and be heard by other participating Directors;

(iii)   where the Directors are not all in attendance at one place and are holding a meeting through a system of communication and each of the Directors can hear and be heard by one another at the same time;

(A)   the participating Directors will be taken to be assembled together at a meeting and to be present at that meeting: and

(B)   the meeting will be taken to be held at the place agreed to by the participating Directors so long as at least one participating Director is physically present at that place; and

(C)   all proceedings of those Directors conducted in that manner will be as valid and effective as if conducted at a meeting at which all of them were present.

(c)   Each notice of meeting must contain, among other things, an agenda specifying in reasonable detail the matters to be discussed at the relevant meeting and must be accompanied by any relevant papers for discussion at that meeting. Unless otherwise agreed by each of the Directors, a Board meeting may only resolve matters specifically described in the agenda.

(d)   The Company must bear all travelling and other expenses incurred by any Director appointed by it in attending and returning from Board meetings and performing that Director’s duties as a Director.

(e)   A quorum for a Board meeting is constituted by the attendance (in person or by alternate) of at least two directors. No business is to be transacted at a Board meeting unless a quorum is present, except for the adjournment of the meeting. If a quorum is not present within one hour after the time appointed for the meeting, the scheduled Board meeting will be adjourned until a later date. If a quorum is not present at the rescheduled Board meeting within one hour after the time appointed for the adjourned meeting, the meeting shall be postponed to such date that a quorum can be formed.

(f)   All resolutions of the Board will be decided by either:

(i)   the Required Majority of all Directors present and entitled to vote at a meeting of the Board; or

(ii)   the unanimous written approval of all Directors,

except to the extent otherwise required by law.

(g)   Subject to clause 3.12 and any law which requires any decisions to be determined by Shareholders, all business of the Company will be decided by the Board. The Board may by resolution delegate decision-making to a committee of the Board comprised of any one or more Directors or any other person or persons as the Board thinks fit.

…

3.12   Shareholder reserved matters

The Company may not take any action or pass any resolution in respect of any of the following matters unless the action or resolution has been approved by the Required Majority of Shareholders present and entitled to vote at a meeting of the Company except to the extent otherwise required by law:

…

(i)   (assets) arranging for any Group Entity to sell or buy any assets (or more than one asset in a series of transactions), either tangible or intangible, having a value of more than $20,000;

(j)   (winding up) taking any step to dissolve or wind up the Company, appoint a receiver or receiver and manager (or any similar officer) of the whole or any part of the business or assets of any Group Entity;

…

The Company may not take any action or pass any resolution in respect of any of the following matters unless the action or resolution has been approved by the Required Majority of Shareholders present and entitled to vote at a meeting of the Company (which Required Majority must include AP) except to the extent otherwise required by law:

…

(v)   (change in nature of business) ceasing, or materially altering the scale of operations of, the Business or commencing any material new business or operational activities other than the Business at the date of this Agreement except in accordance with any business plan of the Company as approved by the Directors (including the Director appointed by AP).

Subject to any relevant law, any action or resolution in respect of any matter other than the matters set out in this clause 3.12 which is to be decided by the Shareholders will be made by the affirmative vote of the Required Majority of Shareholders.

…

4   Budgets and financial information

…

4.3   Financial information

The Company must provide to each Director and Shareholder:

(a)   (unaudited management accounts) as soon as practicable (and in any event not later than 21 days) after the end of each calendar month, unaudited management accounts which must include a detailed statement of financial performance, statement of financial position and cash-flow statement, and such other financial information as the Board may determine from time to time;

(b)   (annual financial statements) as soon as practicable (and in any event not later than 60 days) after the end of each of its financial years, copies of the statement of financial position, statement of financial performance and a statement of cash flows of the Company (on a consolidated basis if required by any law having application in Australia); and

(c)   (additional information) any other information the Shareholders may at any time reasonably require as to any matter relating to the business or financial condition of the Company or of any other Group Entity, including Board minutes.

…

4.6   Remedies of a Shareholder

(a)   If there is a material failure to provide any of the access, records or information referred to in this clause 4, for so long as it holds any Shares, each Shareholder has the additional right to appoint a representative to enter the premises occupied by the Company during normal office hours to search for, inspect and take copies of the records and accounts.

(b)   A Shareholder exercising its right under clause 4.6(a) must provide at least three Business Days' prior written notice to the Company of its intention to exercise such right and the identity of its representative.

(c)   To the extent that any information obtained by a Shareholder exercising its right under clause 4.6(a) is Confidential Information, the Shareholder must comply with, and procure its representative to comply with, the provisions of clause 13 in relation to that information.

(d)   Nothing in this clause 4.6 limits the remedies otherwise available to a Shareholder for the failure of the Company to provide the access, reports and information specified in clause 4.

…

15   Operation of Agreement

15.1 Shareholders' Agreement to override the Constitution

If there is any inconsistency between the provisions of this Agreement and the provisions of the Constitution, then the provisions of this Agreement prevail amongst the Shareholders to the extent of the inconsistency and the Constitution must be read and construed accordingly.

…

15.3   Shareholders to observe and implement Agreement

Each Shareholder undertakes with each other Shareholder and the Company to:

(a) exercise all its votes, powers and rights under the Constitution so as to give full force and effect to the provisions and intentions of this Agreement;

(b) observe and comply fully and promptly with the provisions of the Constitution so that each provision of the Constitution is enforceable by the parties among themselves and in whatever capacity; and

(c) exercise all its votes, powers and rights in relation to the Company so as to ensure that the Company fully and promptly observes, complies with and gives effect to the requirements and intentions of this Agreement and the Constitution.

The obligations in this clause 15.3 include an obligation to exercise its powers both as a Shareholder and (where applicable and to the extent permitted by law) through any Director appointed by it and (to the extent permitted by law, subject to any rights it may have under clause 3.9) to ensure that any Director appointed by it (whether alone or jointly with any other person) obtains that matter or thing.

16   Relationship of the Shareholders

Neither this Agreement nor the Constitution is to be interpreted as constituting:

(a)   the relationship of the Shareholders as a partnership, quasi-partnership, fiduciary, association or any other relationship in which one or more of the Shareholders may (except as specifically provided for in this Agreement) be liable generally for the acts or omissions of any other Shareholder; or

(b)   any Shareholder as the general agent or representative of any other Shareholder or of the Company with the exception of any powers of attorney specifically granted or contemplated by this Agreement.

In particular, but without limitation, no Shareholder has the authority to pledge or purport to pledge the credit of any other Shareholder or the Company or to make or give (or purport to make or give) any representations, warranties or undertakings for or on behalf of any other Shareholder or the Company.”

44. On 10 February 2016, Mr Stephen Best of APE was appointed a director of CZAPL.

45. A directors’ meeting was held on 23 March 2016 at which minutes were passed confirming the meeting purportedly held on 4 November 2015 and the resolution in respect of the sale of the IP from Media Tag to CZAPL.

46. In around late April, Domenic and Marcus met with Mr Philip Rofe (CEO of PBR Capital Pty Ltd). Mr Rofe had been Dr O’Connor’s stockbroker since 2012. The meeting was to discuss raising capital to fund the CZA project. Dr O’Connor also attended the meeting. Subsequently, CZAPL retained Mr Rofe to find prospective investors and raise funds for the company.

47. In early June 2016, in order to source further capital, the directors and the solicitor for CZAPL, Mr Eric Shmilovits, met with Dr O’Connor and Ms Berlandier to discuss investing in CZA.

48. Further companies were established to facilitate the process of attracting investment without diluting existing shareholdings. On 5 June 2016, CZAH was incorporated with Domenic, Marcus and Graham as directors and Media Tag, Blade Media and Twinkledom each one-third shareholders.

49. On 15 June 2016, a deed of trust was executed establishing the CZAUT with Marcus, Graham through Meylex, and Domenic through Twinkledom as initial unitholders (the “Trust Deed”). Subsequently, Dr O’Connor and Ms Berlandier, through their respective corporate entities Busy Traveller and Flobert Pty Ltd (“Flobert”), each invested $200,000 in the CZAUT and received 37 units in the CZAUT (3.69% of the units). CZAH was the trustee of the CZAUT.

50. On 22 June 2016, CZAT was incorporated with Domenic, Marcus and Graham as directors. The shares were held as to 90% by CZAH (as trustee for the CZAUT) and the remaining 10% divided between Marcus, Meylex and Twinkledom.

51. There was no dispute that not long after these events, relations between Domenic, of the one part, and Marcus and Graham, of the other part, began to deteriorate. Graham particularly was dedicating significant time to the application’s development and administration, and Marcus and Domenic were handling the sales aspects of the business. Graham’s affidavit evidence is that CZAPL was “running out of working capital” by mid-2016 and that he had been working on the application “three days a week for over 18 months without drawing a wage.”

52. In early September 2016, Domenic, Marcus and Graham launched CZA at the 2016 Australian Automotive Dealers Association (AADA) National Dealer Convention in Melbourne.

53. On 13 September 2016, the directors attended a meeting with Mr Best and Mr Thornton of APE in Brisbane about the development of an iPad version of CZA in return for support from APE with expanding the customer base.

54. By this stage, Graham was being paid for the time spent working on CZA. Graham’s evidence is that, in response to a request that Marcus and Domenic dedicate more time to the application, Domenic indicated that he could “only spend one hour a week on the app”. Domenic denied he ever said this.

55. On 31 October 2016, following an email exchange between Marcus and Mr Tony Roberts of Pickles Auctions Pty Ltd (“Pickles”), Domenic and Marcus met with Mr Simon Meyrick of Pickles and presented the CZA concept. Domenic was not copied into the follow-up email Marcus sent to Pickles the next day, although Graham was. Marcus’ evidence – which Domenic did not challenge and the Court accepts – was that Domenic was not optimistic about Pickles investing in CZA. After their presentation to Mr Meyrick, Domenic said to Marcus, “You will never do a deal with Pickles, it will never happen, you are wasting your time.” Marcus’ follow up email to Pickles began “In summary, Carzapp is at the point where we are focussing on monetising the platform”.

56. On 24 November 2016, the directors met with Mr John Bailey, a senior representative of Cox Automotive (an international car sales company). Graham gave evidence – denied by Domenic – that Domenic said words to the effect of “I have been a car dealer for 30 years. The industry is fucked”, and although there was another meeting with Cox Automotive, no deal eventuated.

44. On 29 November 2016 at 11:11 am, Graham sent an email to Mr Roberts (copied to Marcus but not to Domenic) asking for a meeting to follow up on their earlier meeting (see paragraph [55] above). That follow up meeting occurred the following week.

45. On 29 November 2016 at 11:35 am, Graham sent an email titled “Development Update” which provided an overview of work completed and ongoing on CZA and requested any “updates on sales calls to dealerships as we have discussed, especially if you have more inventory to add.” Domenic’s reply email later that day states:

“Graham

STOP asking me to call dealers.

I will call dealers when I am satisfied that the app is in the right place.

There are still far too many glitches.”

59. By early December 2016, relations between the directors had disintegrated further and by mid-December 2016, Dr O’Connor was acting in a facilitative role, mediating relations and communication between the directors. It appears from the correspondence between the directors that by this point Domenic was particularly dissatisfied with the development and progress of the CZA. Marcus’ evidence – which Domenic did not deny and the Court accepts – is that by about December 2016, Domenic would say things at meetings such as “This app is fucked. This app doesn’t work. No dealers want to use it. We can’t work like this.”

60. An email chain commencing on 12 December 2016 between the directors, in which Domenic was requesting information regarding the location of CZA’s source code and archives, is notably hostile. Graham gave evidence that he was increasingly concerned about why Domenic wanted access to the source code and recalled a phone conversation where Domenic said, “If I was you I would walk away from this – the App is mine and I want the code. If you don’t give it to me I will make your life a misery.” Domenic did not deny saying this.

61. The correspondence makes plain that the working relationship between the directors was continuing to break down, especially between Domenic and Graham. The Court finds that Domenic was being intentionally obstructive and critical of CZA’s marketability.

62. In an email chain on 13 December 2016 commencing at 10:08 am, Domenic stated “The very simple reason I’m not calling dealers to sell the app to them is that I’m not satisfied that it’s ready. We, as a business are certainly not ready.”

63. At 10:26 am Domenic stated: “I’ve read the notes … in my opinion the demonstration of the app should have been done by me.”

64. Graham’s reply email of 10:43 am, points to the contradiction in Domenic’s assertion, says:

“Please help me here. You say you will demo the app confidently to the largest companies in Australia, like Eagers and Pickles, yet you are not satisfied that it’s ready. Please clarify this, as I am missing something from your explanation of “ready”.”

65. At 11:29 am, Domenic replied that demonstrating CZA to APE was different than demonstrating “a flawed app” to car dealers. He continued:

“I understand you and Marcus are unable to hear me on this sticking point but dealers WILL NOT PAY for the app as it is now. Dealers will not pay if they don’t have value. I have solutions to this but I’m not being heard so I cannot continue to “beat my head against a bring [sic] wall” silence may be a far easier option for me at this point. … I welcome some openness, transparency and clarity around the development spend and methods of communication with the developers.”

66. At 12:26 pm, Graham replied to Domenic’s request by setting out CZA’s various modules or screen names, and asked Domenic to “indicate which of these you are not happy with” or considered problematic. Domenic did not respond to this email or provide further detail of his concerns about CZA. The Court notes that Domenic’s tone in these emails was often aggressive and created the impression that he was difficult to work with and to please.

67. The overall effect these emails convey is that Domenic was dissatisfied with CZA and very critical of its progress (“I’m sure you know my greatest issues are around the development and cost”) and he blamed Graham and Marcus for trying to sell what he perceived to be “a flawed app”.

68. Domenic was firmly of the view that CZA needed to be “demoed by a car dealer to let them understand the concept so that they can either buy or invest” and was immovable from this position. This was confirmed in cross-examination (T196:40-48):

“Q. It was a source of frustration, wasn't it, expressed to you that both Mr Lasarow and Mr Meyerowitz couldn't get your engagement to promote the app to dealers?

A. It was a source of frustration to?

Q. They were expressing frustration to you that they just couldn't get your buy‑in to promote this app to dealers?

A. I guess they were but just no - no - no different to my frustration with the app not functioning properly and not in a position to be selling it to dealers.”

69. Graham and Marcus on the other hand considered CZA to be marketable and Graham told Domenic in his email on 13 December 2016 at 12:26 pm “we can’t keep building unless we start selling, so the time is now.”

70. When asked why he did not respond to this email which was put to him as an opportunity to specifically identify the technical issues he had with CZA, Domenic eventually said that he thought responding would have been a pointless exercise because “they would have paid no attention whatsoever to any reply that I would have made to this” (T200:27-28). This is an excellent example of what became a pattern of Domenic refusing to engage with entirely reasonable requests from his co-directors.

71. It is clear that by this time, the distrust and resentment between Domenic on the one hand, and Graham and Marcus on the other, had led to what was almost a complete breakdown in their relationship. For instance, Graham’s suspicion of Domenic‘s requests for the source code information was confirmed in an email to Dr O’Connor on 19 December 2016 at 8:27 pm titled “Protocol”:

“Hi Geoff

Thank you for your time on the phone.

Please explain to Dom that the protocol in companies is for Boards to make decisions relating to the getting in external parties.

So any attempt to send company sensitive information outside of the company needs a vote of the board, and very good reason.

I am not going to be the person to allow this unless I have a unanimous board decision.

Also, please note that the timing is very bad to rock the boat, as we are negotiating with new and existing parties.

Nothing should be done until we have a new structure in place, because it could jeopardise everything if it is discovered that outside parties have our source code!!

Please explain this to Dom, he is being dangerously irrational here.

Best regards

Graham Meyerowitz”

72. Dr O’Connor agreed in cross-examination that by this point he was increasingly concerned that the communication issues and hostility between the directors (their inability “to sit around a table together”) was interfering with and negatively impacting “the ability to develop, market and sell the app” (T96:5-12).

73. Dr O’Connor also confirmed that he had discussions with Graham and Marcus about Domenic (T129:28-129:38). He further agreed that he had suggested to Domenic that “it might be a good idea to defer to the technical expertise of Messrs Lasarow and Meyerowitz” (T133:8-11).

74. By January 2017 the CZA Companies had nearly run out of cash. On 10 January 2017 at 4:32 pm Domenic emailed Graham and Marcus under the subject title “State of the bank accounts”:

“I understand that Carzapp now has minimal funds in its bank accounts.

That is;    #365842 - $4288.27

#353534 - $246.69

#366060 - $10.14

Given this situation, I believe it is necessary to exercise fiscal responsibility and NOT incur any further expenses until such time that there are sufficient funds to incur any expenses.

Moving forward, naturally a clear path would need to be agreed upon regarding expenditure should funding be raised.

I urge cessation to all spending at this point in time.

Specifically I ask Graham to immediately make arrangement to cease any work with the programmers that may incur further ongoing charges.

I wish to make it absolutely clear that I do not want Carzapp to engage in any activity that incurs expense until relevant directors meetings are had.”

75. Later that day Graham replied by email to Domenic (copied to Marcus) which included:

“Yes I have been watching this and managing this as well as I can

The accounts are:

CarZapp: $246 + $243 = $489.00

CarZapp Holding: $4,288 + $449.98 = $4,738.00 CarZapp Trading: $10.14 Total = $5,217

I have just received the payment receipt for last week from the developers, $2K, which I have paid via Media tag credit card, so this needs to be repaid. I have already reduced their hours substantially.

I have asked the developers to stop work today, and I will chat to Oliver again today to understand the possibility of the team dis-banding, I hope at least the main people stay as they know the code well, and there is a lot to know and understand of the inner workings of it.

This week, we are in the middle of testing with Eagers, and if they would hurry up and send the test inventory file rough [sic], we may actually get somewhere, but they remain a very cumbersome group to work with, and all tasks drag on and on. I am pushing them, with daily calls and emails to Dave Phillips and to Dealer Solutions. I expect to see inventory on the test app from Eagers this week. However without the dev team, I am unsure of whether this will happen now.

…

I am doing everything I can to keep this all going.

Marcus has been trying to get in touch with Steve Best, I hope we hear from him this week. Ideally we get Eagers to start using the app on ipads, with Zooper cars, it’s the lowest hanging fruit to get income.

If you have any good ideas, I'm all ears. Thank you for your assistance.”

76. The strained relations between the directors did not improve. A file note of a telephone conversation between Graham and Domenic on 16 February 2017, the conduct and contents of which Domenic conceded in cross-examination probably occurred and which the Court finds did occur, records:

“Phone call to Domenic Ruberto, On 16-Feb, 08:57:49 AM

I, (Graham Meyerowitz), called Dom to discuss some current issues of the business, regarding software and accounting matters, especially I needed to know why he wanted the source code information as it was trusted to the developers.

He became very abusive and angry and said it was none of my business.

I explained that it was my business as my responsibility as a director and technical COO was to maintain the confidential and privacy of all things technical. And that if he wanted certain details, I should at least know what he intended to do with it.

He repeated that it was none of my business and that I should shut up and listen to him.

He went on to scream at me that I never listen to him, and that I am an idiot and need a psychiatrist.

I then said that that as a director I was not prepared to allow sensitive information out of the company without good reason and agreement from all directors.

He then started to scream and rant how he did not trust me.

I then said that I was sorry he did not trust me, and I asked him how I could regain this trust.

He continued to scream at me that I was an idiot and that I don't listen to him.

I the, offered to send him an update of all account as and come over to him to go through the accounts. I offered to meet with him immediately if that was convenient. He jeered in an angry snarling way that I dare not come to see him, and in a warming threatening way, he said “If I were you I would not come here (to him) now.”

I continued to offer any assistance, I then said that I had to go to a meeting and said goodbye.

Side note: The call left me feeling extremely concerned for the future of the business as I was not able to conduct a reasonable conversation with Domenic.”

77. In early February 2017, Graham and Marcus began substantive negotiations with Pickles. They did not involve Domenic. Dr O’Connor’s evidence is that he received a phone call on about 16 February 2017 from Marcus explaining the contact with Pickles.

78. On Sunday, 19 February 2017 at 2:26 pm Marcus emailed Messrs Roberts and Meyrick of Pickles in anticipation of a meeting the following Tuesday, 21 February 2017. That email included:

“Pickles meeting agenda,

•   The key asset held by CarZapp today sits within its Intellectual property (CarZapp Code summary below)

•   The intellectual property can be sold/licensed/contracted to Pickles

•   Discuss the opportunities with specific regard to the alignment/sale/licensing of the IP with/to Pickles

•   The IP sale/license opportunities allow CarZapp to continue to focus on building and supporting further IP if required by Pickles

•   Cost of build to date AUD3.2 million, completed platforms ios, android, web and ipad

•   Last investment valued the platform at AUD6 million”

79. On 21 February 2017, Mr Best of APE resigned as a director of CZAPL.

80. Additionally on 21 February 2017, Graham and Marcus met with Mr Meyrick of Pickles to demonstrate CZA.

81. On 2 March 2017 there was an email exchange between Marcus and Mr Meyrick (copied to Graham but not Domenic), with Marcus telling Mr Meyrick “we will revert back to you with indicative numbers/deal terms”.

82. On or around 7 March 2017, Marcus and Graham met with Pickles to discuss selling the IP to Pickles. Graham’s evidence was that a tentative agreement was reached to sell the IP for $2 million.

83. On or around 8 March 2017, Marcus and Graham met with Dr O’Connor to discuss progress with Pickles and the sale of CZA. They explained to Dr O’Connor that there was no official offer to purchase at this stage but they expected further clarity from Pickles by 10 March 2017.

84. Both Marcus and Graham requested Dr O’Connor not tell Domenic until a formal offer had been provided by Pickles.

85. In an email of 13 March 2017 at 9:37 pm to Marcus (copying Graham and Domenic), Dr O’Connor wrote, in part, under the subject heading “ongoing issues”:

“Starting last Dec I made proposals for a cooling off period over Xmas to allow the main shareholders in Carzapp (yourselves) to step back from interpersonal conflicts. The plan was that all return to the business on or about the 20th of January with fresh ideas and a co-operative frame of mind. It is now 7 weeks since that date without a meeting occurring…

The last few days has been an issue for me. There is information from yourself, Marcus, re an offer of purchase for CarZapp … this was to be confirmed by the end of last week. Again by phone this was postponed till the end of the week. I conveyed this information to Domenic at your request; there was however no written evidence of negotiations. I would assume that there would be written communication of a proposed deal involving $2,000,000.”

86. The meaning of “at your request” was debated in cross-examination. Dr O’Connor asserted that Marcus and Graham had requested he delay communicating information to Domenic until Pickles had provided a formal offer. This was because of Marcus’ concerns Domenic might “upset the deal”. Dr O’Connor said (T120:23-24; 121:10-14)

“That's not something I would do lightly. … I was in a situation where I was trying to be fair to both sides, I had difficulty not telling Domenic, I restricted that period till the Friday because I didn’t want to withhold that information any longer. But I was specifically asked, and I’ll state that again, I was specifically asked to withhold the information till Friday because there was no written confirmation of the deal.”

87. His answer remained unchanged to the Court’s enquiry (T122:13-27):

“Q. Just so again in fairness to you and so I can understand your evidence, your email of 13 March 2017 at 9.36 pm where you say “I conveyed this information to Domenic at your request”, what am I to make of that?

A. I think in the context it does seem weird but the actual fact of the situation is that I am probably saying in my own mind there, I don’t - that I was withholding the information at their request, that was the implication of that. It’s if you like a structural error in a sense but - well I was withholding the information at their request until the Friday. That’s the meaning of that sentence in my mind.

Q. So you’re saying that I should read the statement “I conveyed this information to Domenic at your request”, this is in response to, you’re writing

to “Dear Marcus” so that’s Mr Lasarow, you are saying “I conveyed this information to Domenic at your request”, I should understand that to actually mean “I withheld this information at your request”?

A. That’s correct sir.”

88. In the same email of 13 March 2017, Dr O’Connor resigned as mediator stating:

“I believe that my presence [as mediator] is no longer useful and you all have the opportunity to meet and discuss your imminent offer. …I hope you do meet and make an appropriate response in the interests of your minority unitholders in Carzapp.”

89. It became apparent in cross-examination that part of his reason for leaving was he “no longer wanted to put up with the rantings and ravings of Mr Ruberto and other displays of his anger and aggression” (T87:36-39). He also stated that he was “tiring of both parties. If you like I was the punching bag in the middle and it wasn't unique to one side” (T89:28).

90. Though he had formally resigned as mediator, Dr O’Connor continued to facilitate communications with Domenic.

91. On 14 March 2017 Marcus replied to Dr O’Connor’s email in paragraph [85] above (copied to Graham, Domenic and Mr Shmilovits) interpolating his responses in a different colour:

“Dear Marcus

Starting last Dec I made proposals for a cooling off period over Xmas to allow the main shareholders in Carzapp (yourselves) to step back from interpersonal conflicts. The plan was that all would return to the business on or about the 20th of January with fresh ideas and a co-operative frame of mind.

It is now 7 weeks since that date without a meeting occurring.

Marcus: This is correct, however both Graham and I have explained the reasons to you step by step as to why a meeting has not taken place.

The last few days has been an issue for me. There is information from yourself Marcus re an offer of purchase for Carzapp from Pickles. This was to be confirmed by the end of last week, again by phone this was postponed till the end of this week. I conveyed this information to Domenic at your request; there was however no written evidence of negotiations. I would assume that there would be written communication of a proposed deal involving $2,000,000.

Marcus: For clarity, Graham and I held a meeting with you face to face last week highlighting the following points:

•   Pickles have displayed strong consideration towards CarZapp receiving an offer, there is no official offer of Purchase from Pickles to CarZapp as of today.

•   Pickles indicated in providing clarity towards the consideration of an offer by COB Friday 10th March

•   Both Graham, Geoff and Marcus agreed to verbally connect on the 10th March by 4pm

•   Marcus called Geoff at 4pm on the agreed Friday to explain that there has been no correspondence from Pickles as yet, communication from Pickles was received at around 530pm to request a further 7 days, Marcus immediately called Geoff and communicated the same message.

Once again for clarity, there is no formal written offer from Pickles to CarZapp as of today.

I have been receiving copies of Domenic’s responses to the information that you've asked me to give him but there have either been no replies or I have not received copies.

If there is an offer imminent I believe it would normal [sic] for the shareholders in Carzapp to meet and prepare a response to such an offer knowing that it is forthcoming. I broached this with you in our phone call this afternoon and it was agreed that you would email the other shareholders of Carzapp with the intent of planning an answer to an offer from Pickles.

Marcus: Domenic's request below, AP Eagers sent us an email from Denis Stark requesting the resignation of Stephen Best, we sent to Eric (our company Lawyer) to circulate to all shareholders, this was done and completed.

Has Stephen Best resigned and; Yes, Domenic was sent the same correspondence we received from Eric and Denis

-A. We are waiting for AP Eagers to complete the paperwork relinquishing their shares? No, They are currently shareholders.

-B. We are we waiting for AP Eagers to assign another director? We have not received correspondence from them.

-C. Since his resignation have they now informed us who that new director will be and/or when? We have not received correspondence from them.

Geoff: If there is an offer imminent I believe it would normal for the shareholders in Carzapp to meet and prepare a response to such an offer knowing that it is forthcoming.

Marcus: A meeting held between Marcus, Geoff and Graham was for the exact purpose of the above statement by Geoff.

Failing this offer you indicated discussions with Anthony Klok's organisation could proceed as soon as Wednesday.

Marcus: Anthony Klok is meeting Greg Roebuck on Wednesday, thereafter, Anthony may communicate his intentions of potential opportunities with CarZapp.

I would suggest that all concerned now have the opportunity to conclude your difficulties.

I also spoke and indicated that I would withdraw from any role as mediator or communicator. I believe that my presence is no longer useful and you all have the opportunity to meet and discuss your imminent offer.

Marcus: Thank you Geoff, after our phone call yesterday you indicated you would be available until this coming Friday.

I wish to pursue my own interests, as you're aware I am not a shareholder in the company which you gentlemen are involved and my presence would not be appropriate at your forthcoming meeting. l hope you do meet and make an appropriate response in the interests of your minority unitholders in Carzapp.

As of this email I will not participate in mediation I would wish that you communicate directly and fully with each other and your minority unitholders.

Regards

Geoff O'Connor”

92. On 17 March 2017, Dr O’Connor replied (copied to Domenic and Graham):

“Marcus

In whatever colour you like re my comment "that it would be normal for shareholders in Carzapp to meet and prepare a response to such an offer knowing that it is forthcoming”

Your reply is erroneous you asked me to meet “to bring me up to date”. I was told the meeting was just for me: I found myself talking to both Graham and yourself in Danny’s café in Bondi Junction. lt was explained to me that you had an offer from Pickles for $2,000,000 for Carzapp in its entirety.

Furthermore you did not wish this information to be imparted to Domenic.I undertook at your request to do this until last Friday afternoon when we spoke on the phone twice.

At this time in the second phone call I was informed that Pickle’s requested a further delay till Friday (today) before written confirmation would be given. As per my undertaking I refrained from discussing the Pickles offer with Dom until 5pm last Friday at which time I related the details you had given me to him. It is now one week later and l have not heard from yourself or anyone else as to the outcome .

Does this imply:

1.   There is no offer from Pickles if so why not.

2.   Was there any information from Anthony Kloks meeting last Wednesday.

3.   Did the shareholders of Carzapp have a meeting to discuss a reply to an offer from Pickles.”

93. On 20 March 2017, Graham emailed Dr O’Connor, Marcus, Domenic and Ms Berlandier under the subject heading “Finding resolution”:

“Dear Geoff

Thank you for your email and for meeting at Dannys. At our meeting at Dannys, Marcus and I explained that Pickles are very keen to proceed, and have verbally indicated they will offer a sum to purchase 100% of the IP.

It's all positive, but due to the fact that we are dealing with a large company, there are many people for them to cover off before an official written offer can be made.

Without a firm written offer, concrete decisions are a challenge to make.

As always Marcus and I have been working tirelessly in finding a solution and resolution. We are currently focussing on getting this deal to the point that we receive a written offer, and we anticipate this to eventuate on 27th March.

We have already spent much time, and incurred our own personal cost on this deal.

We sincerely hope that this deal happens and brings a resolution to all, as right now CarZapp has no alternative that we are aware of.

Rest assured that as soon as a written offer is tabled, you and all shareholders will be notified. 

All shareholders need to be working to find a solution that will move the business forward, and bring concrete deals forward.

In this regard, if any other shareholders have a concrete written offer then please forward this news. Failing any positive input from other shareholders, all we ask is your patience while we continue to provide solutions to move forward and remove the current impasse.

We do not have any positive outcome as yet from Anthony Klok.”

94. On about 23 March 2017, Marcus and Graham met again with Mr Meyrick to discuss Pickles’ purchase of CZA. Domenic was not informed of the meeting and was not present. It appears that Marcus and Graham agreed to sell the IP and CZAT to Pickles for the negotiated price of $2 million. Graham’s evidence is that at this meeting, Mr Meyrick proposed to Graham and Marcus that Pickles was interested in employing them as consultants for CZA on an annual salary of $70,000 and a 25% equity stake in CZAT after Pickles’ purchase (the “Consultancy Agreement”).

95. On 24 March 2017, Marcus emailed Mr Meyrick (copied to Graham) stating:

“Morning Simon,

Just thinking this through to help in the short term to facilitate and disclose the potential purchase re internal shareholders excluding Eagers and without holding you/Pickles to any commitment for the purpose of internal circulation/reporting only.

Would you be able to send through a one liner. Perhaps “We are seriously interested in acquiring 100% of CarZapp's IP and we are continuing to follow Pickles/our procedures in delivering/achieving this result. Thank you for your patience”, or whatever you're comfortable saying, not too much detail.

Let me know if ok”

96. Mr Meyrick replied to Graham on 27 March 2017 saying: “I will be in a position to send you something along those lines on Tuesday evening.”

97. On 26 March 2017, Domenic emailed Marcus and Graham (copying Dr O’Connor and Ms Berlandier) expressing his dissatisfaction about not being included in discussions. This included a covering email and then his response to Graham’s email of 20 March 2017 by Domenic interpolating his comments (which for ease of reading have been reproduced in what follows in italics – otherwise all bolding and underlining is in the original):

“Graham and Marcus,

What little correspondence you have provided lacks substance, specifics and is convoluted at best, it continues to highlight your lack of credibility and your defiance to act in good faith.

You claim Pickles “are very keen to proceed”... this clearly indicates that there has been a process and or series of communications to which I have not been party to. In regard to any meeting held with Pickles which I was not present at... please table all/any of these (times and dates) and what was discussed both verbal and written and who where the participants present.

For the sake of clarity…. TABLE ALL THE DETAILS.

Now see below my response to your previous email.

…

Dear Geoff

Thank you for your email and for meeting at Dannys. At our meeting at Dannys, Marcus and I explained that Pickles are very keen to proceed, and have verbally indicated they will offer a sum to purchase 100% of the IP.

Clarify sum, What was the specific sum offered/discussed? and table all the correspondence ... written and verbal that you’ve had with Pickles.

It’s all positive, but due to the fact that we are dealing with a large company, there are many people for them to cover off before an official written offer can be made.

The message I received was that the offer was set to come on Wednesday 8th ... which then became Friday 10th, and then you claim Pickles asked for a further 7 day period of “grace” was the use of the word “grace” your choice of word or specifically the word they used?

Without a firm written offer, concrete decisions are a challenge to make.

Clarify exactly what you mean by this, what concrete decisions are you refening to? Why is it a challenge for you to not have information in writing yet you expect me to make concrete decisions without information. How on earth can you justify this double standard?

As always Marcus and I have been working tirelessly in finding a solution and resolution. We’re currently focussing on getting this deal to the point that we receive a written offer, and we anticipate this to eventuate on 27th March.

Your claim of “working tirelessly” is melodramatic and meaningless.

We have already spent much time, and incurred our own personal cost on this deal.

No one has asked you to spend ANY time or money/expenses so don’t even think for one moment that you will be putting forward an invoice to Carzapp for renumeration [sic] or compensation in anyway shape of form. Let us be totally clear, I instructed you in January on 2 occasions to NOT incur any expenses on behalf of Carzapp and this still stands. I also instructed you to NOT have any meetings/contact with investors, i.e. Pickles! UNTIL we sorted out our internal affairs first BUT You go ahead and recklessly act independently yet again, Putting Carzapp and its stake holders at great risk.

Further to your., “working tirelessly” comment, to date, this hasn’t at all held you in good stead there is a clear difference between working had [sic] (tirelessly) and working smart.

We sincerely hope that this deal happens and brings a resolution to all, as right now CarZapp has no alternative that we are aware of.

This is contradictory to your opening remarks, “they are very keen to proceed, and have verbally indicated they will offer a sum to purchase” and also in your second sentence, “it’s all positive”...

Why are you now relying on “hope"?!! Hope is not a strategy or a plan. What is your plan(s) should the offer not come tomorrow? 27/March.

Rest assured that as soon as a written offer is tabled, you and all shareholders will be notified.

Based on your poor history of communication (or lack there of) I certainly cannot rest assured in any way shape of form whilst you are acting independently and withholding information.

All shareholders need to be working to find a solution that will move the business forward, and bring concrete deals forward.

Graham and Marcus, once again another perfect example of how you both “put the horse before the cart”. To date, I lack statutory information about the business. How can you expect me to formulate a plan/solution of any kind without the information to make meaningful and informed decisions. I do not believe that it would be prudent to approach investors without knowing the true position of the business. Once again I remind you that I have been asking you to provide information for an extended length of time. So in your very own words, “all shareholders need to be working to find a solution”, how about you begin by taking your own advice and supply me all the information I have asked for.

In this regard, if any other shareholders have a concrete written offer then please forward this news. Failing any positive input from other shareholders, all we ask is your patience while we continue to provide solutions to move forward and remove the current impasse.

No patience or authority has been nor will given for you to act independently or without my knowledge. You are NOT to speak on my behalf.

At this point in time, the only solution to even begin moving beyond this “impasse” is for you to supply me with all the information that I have asked for in full context and precise detail. This also means no omissions. If you choose to ignore or disregard this solution, then provide a detailed response as to why.

Graham and Marcus, your tone implies that you just don’t get it! you plainly fail to comprehend that YOU are on notice, and have been since before Christmas. Failing any positive response to my correspondence, please refrain from sending your irrelevant, non specific and time wasting emails.

Simply provide me with the statutory information which I have been asking for.

Based on your behaviour to date I would go so far as to put it to you that there is no offer coming on Monday or that any offer even exists from Pickles.

Regard

Domenic Ruberto

Director and FOUNDER of the Carzapp concept”

98. Domenic’s signing himself as “FOUNDER of the Carzapp concept” and his final barb “…I would go so far as to put it to you that there is no offer coming on Monday or that any offer even exists from Pickles” demonstrates how completely dysfunctional the relationship between Domenic and his fellow directors had become.

99. On 28 March 2017 at 4:57 pm Mr Meyrick emailed Graham and Marcus (as requested):

“Hi Marcus/Graham,

We are seriously interested in acquiring 100% of CarZapp's IP and we are working through our procedures in achieving this result.

Thanks for your patience.”

100. On 28 March 2017, Graham sent an email at 10:43 pm to Marcus and Domenic (copied to Mr Shmilovits) with the subject line “Notice of Directors meeting to be held at 12:00 pm 29 March 2019”. The email reads:

“Notice to all Directors of CarZapp Pty Ltd and CarZapp Trading Pty Ltd

Please find attached minutes to be passed at a meeting of Directors, to be held at 12:00 PM 29 March 2019. Please reply with your intent to meet in person, by phone, or by voting by email.

Based on receiving the following email below from Simon Meyrick from Pickles Auctions dated 28th March 2017 [this is the email reproduced in the preceding paragraph of this judgment], CarZapp Pty Ltd and CarZapp Trading Pty Ltd note the following summary board meeting requests.

1. GM, ML and DR intend to note and confirm that the company is progressing to sell 100% of the Intellectual Property of CarZapp Pty Ltd and the trading of CarZapp Trading Pty Ltd to Pickles Auctions for the total sum of AUD$2,000,000 (Two Million Dollars)

2. GM, ML and DR intend to note and confirm that the company is progressing to sell 100% of the Intellectual Property of CarZapp Pty Ltd and the trading of CarZapp Trading Pty Ltd to Pickles Auctions for the total sum of AUD$2,000,000 (Two Million Dollars). The directors intend to note a % of the sale consideration is to be realised for consideration to both Geoff and Suzanne and/or their respected [sic] entities.”

101. On 29 March 2017 in an email at 5:39 pm to Graham, copying Marcus and Mr Shmilovits, Domenic confirmed he would be attending the meeting (which was ultimately rescheduled to 3 April 2017) with his “financial controller”. The email included:

“Following from my earlier email and given the gravity of what is to be discussed, I will be bringing my financial controller with me to provide advice. We can make ourselves available on Friday at 11.00am at Bondi Junction,

Marcus and Graham, I would like to add that it was at 10.43pm last night that I was informed of the board meeting that was called for today at 12.30pm, I do not consider this to be a reasonable amount of notice.

As is standard practice, circulate (what you will be tabling) all knowledge on the topics to be discussed including any verbal or written correspondence prior to any/this board meeting.

You are also to circulate and provide the most current company financials, any and all correspondence with AP Eagers from 1/12/2016 (written and verbal), and all correspondence with Pickles from 1/12/2016 (written and verbal) as well as any and all correspondence you have had with Anthony Klok. (written and verbal) and the same for any other person or entity that we have not been informed of over the same time period.

Further to this you are to provide any and all correspondence that you have had with Geoff and/or Kerri O’Connor and Suzanne Berlandier, both (written and verbal) from the 1/11/2016, you have claimed that everyone has been kept up to date so I’m sure that all the information being asked for in this email will be readily available to you to provide.

Needless to say, I have repeatedly been asking you for this information over the past few weeks in preparation for a board meeting and to date your response(s) has been unsatisfactory.

Again given the magnitude of the situation we request all this information immediately today and whatever information is further available by 10.00am tomorrow.

This is for the review by my Legal representative Philip Beazley and forensic accountant Al (Achilles) Constantinidis throughout tomorrow and therefore having at least some time to process the information and contribute as productively as possible.

We look forward to receiving the information. We will see you on Friday 31/3/17 at 11.00am at Eric’s Bondi Junction Office. (Eric could you please provide us you Bondi Junction address).”

102. On 30 March 2017 at 6:11 pm, Graham sent an email to Domenic’s accountant (referred to by Domenic in his email as his “financial controller”), Mr Achilles Constantinidis, (copied to Marcus):

“Great chatting. Please find attached headline number in the PnL of both companies aggregated, namely: CarZapp Trading PL and CarZapp PL.

The detail journal entries are being checked and reconciled by Carron at AFYF.

For the sake of clarity, disclosure and information flow, the following is the timeline of events with specific regard to information flow.

1.   Geoff O'Connor was appointed and agreed to be appointed on the 12th December 2016 as a mediator on behalf of the company. This was agreed to by Domenic, Graham and Marcus.

2.   Geoff O'Connor resigned as mediator from CarZapp on the 13th March 2017

3.   During his time as mediator, Geoff received a full overview as to the status of CarZapp from Marcus, Domenic and Marcus [sic], Geoff's roll [sic] was to inform Domenic, Marcus and Graham of all activity as well as to seek resolutions, this included but not limited to all information relating to AP Eagers, Pickles, Anthony Klok and general activity.

4.   The only information Geoff did not receive directly was the resignation of Stephen Best as director and an email from Keith Thornton, both these emails and relevant information were provided/emailed directly to Domenic.

5.   On Geoff's resignation, from the 13th March to date, the only new/relevant/material information was an email from Pickles Auctions confirming their intent to purchase 100% of CarZapp's IP, this was received on the 28th March 2017 and subsequently an immediate board meeting minute/s was/were initiated. We have emails with Geoff confirming the above.”

103. The profit and loss summary attached to that email was to the effect that through the various entities, $700,000 had been raised and $719,729.57 had been spent.

104. On 2 April 2017, Mr Meyrick sent an email at 5:12 pm to Graham and Marcus attaching a draft “Letter of Intent” which outlined the terms of Pickles’ offer to purchase CZA’s IP and business of CZAT for $2 million. The email states:

“Hi Graham/Marcus — attached Letter of Intent in line with discussions. This is not considered to be an official offer without a signature and a signature will not be applied without doing so in conjunction with the other agreement. I would expect the agreement being prepared on your side, for the most part, to mirror the content of the document sent to you on Friday.”

105. The “other agreement” referred to the Consultancy Agreement, see paragraph [94] above. At 7:28 pm, Marcus replied to Mr Meyrick (copying Graham and Chris Avramis of Pickles) attaching an amended draft version of the Letter of Intent. Notably, this version removed reference to the meeting and discussions of 23 March 2017, where the Consultancy Agreement was discussed. Marcus’ email included “Can you also kindly remove the first sentence “We refer to our recent meeting…that”..”. The Consultancy Agreement was not disclosed to Domenic until after the settlement of the sale to Pickles on 24 May 2017.

It is difficult to quantify, at this point, how much Pickles might claim or will be awarded. The maximum risk, however, pursuant to the limitation of liability clause, is $800,000. In any event, the legal costs of defending such a claim will be more than $200,000.

All in all, the directors should consider the future of the company, in light of the exposure to a likely significant damages claim. The two obvious alternatives are:

1.   Reaching agreement with Domenic about changing the name, in which case the company will hopefully be able to avoid the above claim; or

2.   Putting the company into administration …”

5. In July 2017, Graham and Marcus received further legal advice from Mr Lyons, a solicitor from K&L Gates, in relation to what they should do as directors. Mr Lyons gave advice to the following effect:

“I think you should speak to an administrator as soon as possible and consider putting the company into administration.”

Furthermore, in May 2017 Graham and the accountant for the CZA Entities had prepared a schedule of payments to creditors and shareholders. By July 2017, Graham had received that schedule which supported his view that the companies would have no money or assets to deal with legal action by Domenic or Pickles.

6. In around July 2017, Graham explained the situation of the company to Mr Resnick. Mr Resnick gave advice to the following effect:

“I think that, based on the financial position and on the claims made against the companies, you need to carefully consider administration.”

331. It is the accumulation of this information and advice which resulted in Graham giving considerable thought to the financial position of the CZA Companies. Graham was aware of the distributions which needed to be met, the lack of assets, the dispute between the shareholders, the possibility of litigation from Domenic or Pickles and the cost of such litigation, the absence of a means for the companies to generate income, the legal advice from both Mr Shmilovits and Mr Lyons and the desire to avoid insolvent trading.

332. During cross-examination, Graham stated that “by January 2017 the position of the company” was that it “[had] less than $10,000 in the bank account and [was] on the verge of insolvency” (T328:44-46). Graham went on to explain how the threats of litigation, the lack of assets the company held, and the fact that any money the companies still had had been allocated to either the ATO or various creditors all compounded his belief in the need to place the company into administration. This opinion was solidified by two different lawyers, and Mr Resnick who was an experienced administrator.

333. Marcus gave similar evidence to Graham and conceded in cross-examination that during the negotiation with Pickles, “[t]he company was desperate for funds and it was on the brink of administration” (T459:42-43). Two key issues informed Marcus’ decision, namely threat of litigation from either Domenic or Pickles, and the financial position the company was in at the time. Marcus said (T520:8-14):

“There were a number of factors. We had legal costs. We had accounting costs. We had a threat, a real threat from Pickles which could amount to $800,000. We had impending legal threats from Domenic Ruberto and Dr Geoff O’Connor not against me alone and Graham alone as directors but against the company as well. And I was of the very firm belief that the company was likely to become insolvent or insolvent, which led me to truly consider firmly administration.”

334. Furthermore, the resolutions themselves expressly stated that both Graham and Marcus thought the companies were at risk of becoming insolvent. As such, they voted to appoint administrators.

335. Evidence was also provided by Dr O’Connor which confirmed the financial worries both Graham and Marcus had about the companies. Dr O’Connor accepted CZAPL was in a “precarious financial position” and “was running low on working capital” (T112:1-9). The concerns of Graham and Marcus had been ventilated to Dr O’Connor, and he was aware of their stance on the finances of the company.

336. There were attempts made by the plaintiffs to suggest the appointing of the administrators was motivated by the Consultancy Agreement between Pickles and Graham and Marcus. The defendants submitted this argument should be rejected for the following reasons:

1. The extensive evidence already established in relation to the financial position of CZAPL reveals the purpose of placing the company into administration and appointing the administrators was to ensure the company avoided insolvent trading;

2. The plaintiffs failed to make any connection between the appointment of the administrations and the Consultancy Agreement; and

3. The circumstances of the Consultancy Agreement were fairly standard and normal practice in the industry. Namely, it was not uncommon for individuals with technical expertise and who were involved in the development of a product to provide support after the acquisition of that product. The Consultancy Agreement did not impact the price of the sale and given the broader circumstances of the transaction, was unsurprising.

337. Therefore, the evidence of the broader context reveals how the threats of litigation, the poor financial position of the companies, and the consistent advice to place to CZAPL into administration informed Marcus’ and Graham’s view that the companies were, or were likely to, become insolvent.

Appointment of the administrators

338. In Downey v Crawford [2004] FCA 1264 at [189]; (2004) 51 ACSR 182 Weinberg J, when dealing with a case where it was said administrators had been invalidly appointed to a company that had ceased to trade and was described as a cashbox, said:

“[189] However, the question whether the company was insolvent as at 4 August 1999 in one sense presents a red herring. The real issue is whether the defendants, or either of them, acted in breach of duty when they proceeded to put the company into administration. The answer to that question depends largely upon whether they genuinely believed, on reasonable grounds, that the company was insolvent or likely to become so in the future, and not upon whether that was the company’s actual position. The reasonableness of any such belief in turn depends, at least in part, upon the adequacy of the steps that they took to satisfy themselves that the preconditions for the appointment of an administrator had been met.

…

[196] This takes me to my findings in relation to the primary claim. That claim depends upon my being satisfied that the Crawfords, or either of them, acted in breach of their duties to the company when they resolved, on 4 August 1999, to place it into administration. As previously indicated, the question is not whether, as at that date, the company was actually insolvent, or likely to become so at some future time. It is rather whether the directors genuinely believed that this was so, and whether that belief was reasonable in the circumstances. That in turn will depend largely upon whether they took adequate steps to satisfy themselves that the statutory requirements were met before resolving to appoint Mr Downey as administrator.

[197] The onus rests upon the plaintiffs to satisfy the Court that the directors acted in breach of their statutory or fiduciary duties….”

339. Both Marcus and Graham were extensively challenged in cross-examination about the basis of their belief that the CZA Companies were likely to become insolvent in the future. Having had the advantage of seeing them give their evidence, I have no doubt that they were motivated by a genuinely held belief that in August 2017 the CZA Companies were likely to become insolvent at some time in the future. I reject the submission that they acted for extraneous or improper motives such as in relation to the Consultancy Agreement (the plaintiffs drew no logical or plausible link between that agreement and why the administrators were appointed), to satisfy Pickles, to avoid the operation of the Shareholders’ Agreement or to resolve their dispute with Domenic.

340. However, that they genuinely subjectively held the requisite belief is insufficient. The question then becomes whether that belief was objectively reasonable in the circumstances. The plaintiffs bear the onus of satisfying the Court that it was not a reasonable belief. They have not satisfied that onus. The Court finds Marcus’ and Grahams’ belief was reasonable by reference to the following matters:

1. The CZA Companies had ceased to trade, so no further income was to be generated.

2. Marcus and Graham had received advice from two solicitors (Mr Shmilovits and Mr Lyons) and an accountant (Mr Resnick) that they should seriously consider administration.

3. In my respectful view, the advice tendered by Mr Shmilovits recorded in paragraph [330(5)] above was entirely reasonable, in particular his estimate of possible legal costs if Pickles brought proceedings. While I have taken into account the plaintiffs’ submissions to the contrary, I am satisfied that the insistent tone and regularity of Pickles’ correspondence in relation to the name change made it entirely reasonable to regard litigation by Pickles as a real possibility in order to protect an asset for which Pickles had paid $2 million.

4. The May 2017 schedule of payments to creditors and shareholders referred to in paragraph [335[6] above was in evidence. It was prepared with the assistance of the CZA Companies’ accountant. It showed a zero balance after actual and contingent creditors were allowed for (including the ATO) and the various payments were made to the shareholders and the funds advanced ultimately to CZAH to make the proposed distributions to unitholders. Those distributions were in fact made, other than to Domenic and Dr O’Connor. The Court therefore infers that the only funds that would have been available to CZAPL for litigation (being not otherwise distributed or accounted for to creditors) would have been the amounts earmarked for Domenic and Dr O’Connor to be paid by CZAPL being $385,982.40 and $45,818.05. Given the realistic possibility of litigation from Pickles, from Domenic (given his previous behaviour, his threats and as has in fact occurred) and from Dr O’Connor, it was in my view reasonable for Marcus and Graham to believe that potential litigation costs (both for the CZA Companies’ own lawyers and the possibility of liability for other parties’ costs) would mean that the CZA Companies were likely to become insolvent at some time in the future.

341. In reaching this conclusion I should also record the following two matters.

342. First, I have not taken into account the solvency concerns in January 2017 which led to the sale of the IP in the first place. The situation had to be considered on the basis that CZAPL had received the sale price and had now ceased to trade.

343. Second, I have not overlooked Domenic’s offer to approve the change of name for the CZAPL companies if he received his promised share of the proceeds (see paragraph [167] above). However, it is significant that his offer refused to engage with the request that he provide a deed of release. I have already explained that in my view the request for a deed of release was commercially reasonable, albeit not a deed in the wide terms originally propounded by Marcus and Graham. However, notwithstanding the matters referred to in paragraph [234] above, Domenic failed even to attempt to negotiate a more focussed form of release that would have been acceptable to all concerned. That failure, and the long and bitter history of his poor behaviour towards Marcus and Graham, means it was objectively reasonable for Marcus and Graham to give no real weight to the possibility of an agreement being reached with Domenic that would have relieved the threat of action from Pickles and Domenic. I am fortified in that conclusion by the fact that Domenic did not respond to Marcus’ further offer set out in paragraph [168] above.

344. The Court therefore finds that this aspect of the plaintiffs’ challenge to the validity of the appointment of the administrators fails. Furthermore, for the preceding reasons and those that follow to the effect that the resolution to appoint the administrators was not in breach of the Shareholders’ Agreement, the Court finds that the appointment of the administrators – being valid – cannot be an indicium of oppression as particularised by the plaintiffs. While possible, it would be a rare case, of which this is not an example, where the lawful exercise of a statutory right could constitute oppressive conduct.

345. The Court’s conclusion means that it is unnecessary to consider the defendants’ alternative submissions based on s 477A of the Act.

Were the resolutions appointing the administrators a breach of the Shareholders’ Agreement? – The plaintiffs’ submissions

346. The plaintiffs submitted that the resolutions which appointed the administrators were a breach of the Shareholders’ Agreement.

347. Clause 3.12(j) of the Shareholders’ Agreement states the following as being a reserved matter for the shareholders “except to the extent otherwise required by law”:

“(winding up) taking any step to dissolve or wind up the Company, appoint a receiver or receiver and manager (or any similar officer) of the whole or any part of the business or assets of any Group Entity.”

348. The plaintiffs contended that “any similar officer” must also include an administrator.

349. Similarly, clause 3.12(s) states a “Required Majority” is necessary to

“[make] any agreement or arrangement to carry out any of the matters referred to in the foregoing provisions of this clause 3.12.”

350. If the Board did not have the power to take such action, then the decision to do so must be invalid (Sutherland v Take Seven Group Pty Ltd [1998] NSWSC 538 per Young J, as his Honour was then).

351. The plaintiffs submitted that placing the companies into administration was beyond the powers of the directors. Appointing the administrators was a matter which only members were empowered to do, pursuant to clause 3.12(j) and (s) of the Shareholders’ Agreement.

352. Furthermore, the plaintiffs submitted that the appointment of the administrations was similarly invalid for both CZAH and CZAT.

353. As the directors did not have the power to appoint the administrators, their decisions were therefore invalid.

354. The plaintiffs further submitted that invalidly placing the CZA Companies into administration resulted in the companies suffering damages, being the costs associated with the administrators, and the costs of these legal proceedings. If damage has been suffered by the companies, the Court is empowered to make an order pursuant to s 598 of the Act that the person who has caused the damage pay the damages which were suffered.

Were the resolutions appointing the administrators a breach of the Shareholders’ Agreement? – The defendants’ submissions

355. The defendants had two lines of argument, the first being in relation to both CZAH and CZAT, and the second being in relation to CZAPL.

CZAH and CZAT

356. In relation to CZAH and CZAT, the defendants submitted that neither company was subject to the Shareholders’ Agreement.

357. Clause 3.12(j) referred to dissolving or winding up CZAPL or the appointment of the “similar officer” to the business or assets of any “Group Entity.”

358. “Group Entity” is defined in clause 1.1 of the Shareholders’ Agreement as follows:

“Group Entity” means each entity which is a member of the Group.”

359. The term “Group” is defined as follows:

“Group means:

(a) the Company; and

(b) each Subsidiary of the Company (if any)”

360. The term “Subsidiary” is defined as follows:

“Subsidiary” has the meaning given in the Corporations Act but so that:

(a) an entity will also be considered to be a subsidiary of a company if it is controlled by that company within the meaning of section 50AA of the Corporations Act.”

361. Sections 46 and 50 AA of the Act provide:

“46.   What is a subsidiary

A body corporate (in this section called the first body) is a subsidiary of another body corporate if, and only if:

(a)   the other body:

(i)   controls the composition of the first body's board; or

(ii)   is in a position to cast, or control the casting of, more than one-half of the maximum number of votes that might be cast at a general meeting of the first body; or

(iii)   holds more than one-half of the issued share capital of the first body (excluding any part of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital); or

(b)   the first body is a subsidiary of a subsidiary of the other body.

…

50AA   Control

(1)   For the purposes of this Act, an entity controls a second entity if the first entity has the capacity to determine the outcome of decisions about the second entity's financial and operating policies.

(2)   In determining whether the first entity has this capacity:

(a)   the practical influence the first entity can exert (rather than the rights it can enforce) is the issue to be considered; and

(b)   any practice or pattern of behaviour affecting the second entity's financial or operating policies is to be taken into account (even if it involves a breach of an agreement or a breach of trust).

(3)   The first entity does not control the second entity merely because the first entity and a third entity jointly have the capacity to determine the outcome of decisions about the second entity's financial and operating policies.

(4)   If the first entity:

(a)   has the capacity to influence decisions about the second entity's financial and operating policies; and

(b)   is under a legal obligation to exercise that capacity for the benefit of someone other than the first entity's members;

the first entity is taken not to control the second entity.”

362. The plaintiffs relied on the uncontested evidence of the company searches that were before the Court that:

1. The share capital of CZAH was held equally by Blade Media, Media Tag and Twinkledom;

2. The share capital of CZAT was held by CZAH (as to 90%), Marcus (as to 3.4%), and Twinkledom and Meylex (as to 3.3% each);

3. The share capital of CZAPL was held by Media Tag, Blade Media and Twinkledom (as to 30% each) and APE (as to 10%).

363. CZAPL did not hold any shares in CZAH or CZAT nor did it control them for the purposes of s 50AA of the Act. Therefore, the defendants submitted, neither CZAH nor CZAT was a “Group Entity” and subject to the Shareholders’ Agreement. Appointing administrators for both CZAH and CZAT was not invalid as a result of the Shareholders’ Agreement because neither company was subject to that agreement.

CZAPL

364. The defendants contended there were two reasons why the resolutions appointing the administrators to CZAPL were not invalid for non-compliance with the Shareholders’ Agreement.

365. First, the entirety of clause 3.12 is qualified with the chapeau (emphasis added):

“The Company may not take any action or pass any resolution in respect of any of the following matters unless the action or resolution has been approved by the Required Majority of Shareholders present and entitled to vote at a meeting of the Company except to the extent otherwise required by law”.

366. Section 436A(1) of the Act allows a company to appoint an administrator if the board has resolved that the company is insolvent, or is likely to become insolvent.

367. The defendants submitted that both Marcus and Graham had numerous reasons to believe CZAPL was likely to become insolvent, and placing CZAPL into administration was a prudent business decision. Given the context of the real possibility of litigation with Pickles and Domenic, and the prohibition in the Act on insolvent trading, the directors were “required by law” to place CZAPL into administration.

368. Second, the defendants also argued that clause 3.12(j) was not enlivened because it did not, on its proper construction, extend to the appointment of an administrator. Clause 3.12(j) was limited only to the winding up of the CZAPL or the appointment of a receiver or a receiver and manager to any Group Entity. The clause did not capture the appointment of an administrator because an administrator was not “any similar officer” to a receiver or receiver and manager.

366. In support of this submission the defendants drew attention to two decisions of Finkelstein J. In Beconwood Securities Pty Ltd v Australian and New Zealand Banking Group [2008] FCA 594; (2008) 246 ALR 361 at [60] his Honour distinguished the role of liquidator, receiver and administrator:

“In my view the role and function of, on the one hand, a party-appointed receiver or an administrator and, on the other hand, a liquidator, are not analogous. The role of a liquidator is to get in the assets of the company that is being wound up, dispose of those assets and out of the proceeds discharge the debts due to creditors (pro rata if there is a deficiency) and pay the balance (if there be a balance) to the contributories. When this task is complete the company is finished. This is in marked contrast to the role of a party-appointed receiver or an administrator. A party-appointed receiver takes control of the company’s assets (and sometimes manages its business), but for the single purpose of discharging the debt due to his appointer, the secured creditor. The receiver holds any surplus he has secured for the benefit of the company. On his retirement the company continues in existence. An administrator does little more than take over the running of the company, and then only for a relatively short period. This enables the creditors to decide the company’s fate.”

370. Similarly, in Lindholm, Re; Opes Prime Stockbroking Ltd (admin apptd) (recs and mgrs apptd) [2008] FCA 1425 at [61]; (2008) 171 FCR 473 his Honour said:

“In my view, whether the issue of “analogy” is approached from the perspective of the nature of the appointee or from the principal consequence of the appointment, the result must be the same: a liquidator is not analogous to either an administrator or a receiver appointed by a secured creditor. The function of a liquidator — whether called a liquidator, a trustee, a receiver, a curator or a syndic — is to preside over the death of a company. An administrator appointed in rescue proceedings strives for the opposite result (even though the company may yet in the end die). A receiver appointed by a secured creditor does neither of those things, being largely unconcerned about the fate of the company. From any perspective, the offices are poles apart.”

Were the resolutions appointing the administrators a breach of the Shareholders’ Agreement? – Resolution

371. The Court concludes that the resolutions appointing administrators to the CZA Companies were not invalid as breaches of the Shareholders’ Agreement. The Court accepts the defendants’ submissions for the reasons advanced by them as to why CZAH and CZAT are not subject to the Shareholders’ Agreement and the second of the two reasons advanced by them in relation to CZAPL. I add the following by way of further and alternative analysis.

372. I do not accept that the appointment in relation to CZAPL was “otherwise required by law” in the way the defendants contend because the appointment of the administrator was not “required by law”. The defendants could not point to any provision of the Act that required (in the sense of “must”) CZAPL to appoint the administrators. Accordingly, if clause 3.12(j) otherwise applied to the appointment of an administrator (which it does not for the second reason advanced by the defendants), the requirement for a “Required Majority of Shareholders” to approve the action of the Company was not displaced by some requirement of the law otherwise.

373. Turning to the construction of clause 3.12(j), it may be divided into two parts, both qualified by “taking any step to”:

“(winding up) taking any step to [dissolve or wind up the Company], [appoint a receiver or receiver and manager (or any similar officer) of the whole or any part of the business or assets of any Group Entity].”

374. That division is supported by the use of “Company” in the first part and “Group Entity” in the second part. In my view that use of separate descriptors is deliberate and is an example of where the “context requires otherwise” (see the chapeau to the definition clause 1.1 in the Shareholders’ Agreement) such that “Group Entity” does not, in clause 3.12(j), include CZAPL as part of the “Group” (which is defined as CZAPL and any subsidiary – see paragraph [359] above). It makes no sense to speak of CZAPL appointing a receiver or receiver and manager to its own assets or business, but it does make sense to provide for CZAPL to take that action in respect of a subsidiary. Accordingly, in addition to accepting the defendants’ contention that an administrator is not “any similar officer”, in my respectful view what I have described as the second part of clause 3.12(j) does not extend to CZAPL.

The payments from CZAPL

375. Domenic sought an order that CZAPL pay him the amount he would have received if he had signed the deed of release. The difficulty is that the only basis on which he contended such an order should be made was under the Court’s wide power to make orders where it is satisfied there was oppression. The Court has not found any such oppression.

376. However, there does not appear to be a dispute that he is entitled to the money from CZAPL, which he would have received if he had signed the Release ($390,097.39). If the Court is correct that is not a matter of dispute, the Court will make a declaration that CZAPL owes Domenic that amount and will afford Domenic and other interested parties (including the soon to be liquidators) an opportunity to be heard as to whether any further order should be made.

377. Dr O’Connor seeks an order that he be paid what was offered by CZAPL if he had signed the Release ($46,306.52). However, neither the Amended Statement of Claim nor the submissions made on his behalf identify a legal basis for this entitlement given that he was not a shareholder in CZAPL.

378. There can be no doubt that Dr O’Connor, like the other parties, would have been paid had he signed a deed of release. However, as a matter of law the payment proposed to Dr O’Connor from CZAPL was either a gift or a contractual offer that he would be paid the money on condition and in consideration for him entering into a deed of release. Dr O’Connor has failed to demonstrate any legal basis on which he could enforce such a gift or unaccepted offer. It will be a matter for the soon to be liquidators to determine whether Dr O’Connor should in all the circumstances nevertheless be permitted to prove he is entitled to the payment in the liquidation of CZAPL.

The payments from CZAUT

379. The parties gave no detailed attention to how Domenic and Dr O’Connor had a presently enforceable right to receive what was intended to be paid to them as distributions to unitholders from the CZAUT ($68,200 to Domenic and $7,260 to Dr O’Connor). There is no basis in the evidence to find a formal resolution on the part of CZAH as trustee of the CZAUT to make distributions to anyone. Insofar as it might be said there was somehow an informal resolution, that resolution was for a distribution on condition of the provision of a deed of release. There was no argument addressed as to whether such a condition was an improper exercise of the trustee’s powers (assuming they had in fact been exercised). Assuming the validity of that condition, neither Dr O’Connor nor Domenic has satisfied it, so they are not assisted by the fact that distributions were made to those unitholders who executed deeds of release.

380. In the Amended Statement of Claim Dr O’Connor claimed he was owed the distribution as a debt, relying on clause 12.1(g) of the Trust Deed, which provided that a “requirement” in the Trust Deed to pay any amount to a unitholder could be effected “by setting the amount aside to a separate account in the books of the Trust in the name of the unitholder whereupon such moneys will constitute a debt due to the unitholder at call and will not bear interest”. However, no such “requirement” was identified. Even more fundamentally, neither Dr O’Connor nor Domenic could point to “a separate account in the books of the” CZAUT referring to the proposed payments to them.

381. The Court finds that Domenic and Dr O’Connor have not proven a legally enforceable right to the distributions from the CZAUT. There can be no doubt however that they would have received the funds had they signed the deeds of release. Whether they should receive those payments will be a matter for the new trustee (see the following section).

Appointment of a new trustee for CZAUT

382. The plaintiffs seek the appointment of a new trustee for the CZAUT. Clause 14.1 of the Trust Deed vests the power to appoint a new trustee in unitholders not holding less than 51% of issued units. Clause 14.5 of the Trust Deed provides:

“14.5 Insolvency of Trustee

(a) if the Trustee being a corporate body goes into liquidation, ceases to carry on business or has a receiver or official manager of its assets or undertaking appointed, the Unitholders must immediately act to remove the Trustee and appoint a replacement.”

383. CZAH, as trustee of CZAUT, ceased trading after May 2017 and had an administrator appointed in August 2017. It was submitted by the plaintiffs that their prayer in these proceedings for a new trustee met the requirement of “immediately acting”. They proposed a solicitor, Mr Mark Peoples, be appointed as trustee of CZAUT, although not all the formalities required for his appointment had been attended to prior to the conclusion of the hearing.

384. I note in passing that “official manager” is not defined in the Trust Deed. Clause 1.2(g) of the Trust Deed provides “words or phrases defined in the Corporations Act as at the date of this Deed have the corresponding meaning”. By the date of the Trust Deed “official manager” was no longer defined in the Act. However, as the voluntary administration regime succeeded the official management regime, were it necessary to do so I would conclude that “official manager” in the Trust Deed includes an administrator.

385. Section 70 of the Trustee Act 1925 (NSW) provides:

“70   New trustees

(1)  The Court may make an order for the appointment of a new trustee or new trustees either in substitution for or in addition to any existing trustee or trustees, or although there is no existing trustee.

(2)  The appointment may be made whenever it is expedient to appoint a new trustee or new trustees, and it is inexpedient difficult or impracticable so to do without the assistance of the Court.

(3)  In particular and without prejudice to the generality of any other provision of this section, the Court may make an order for the appointment of a new trustee in substitution for a trustee who is convicted of a serious indictable offence, or is a bankrupt, or being a corporation is in liquidation or is dissolved.”

386. Given the dispute between the parties and the appointment of the administrators, the Court is satisfied that it is expedient that a new trustee be appointed to the CZAUT and that it is difficult or impracticable to do so without the assistance of the Court. The parties should endeavour to agree on a new trustee, whether it be Mr Peoples or someone else. In default of agreement, and subject to hearing the parties, the Court will appoint the NSW Trustee & Guardian.

Who should be liquidator?

387. It is the agreed position between the plaintiffs and the defendants that a liquidator should be appointed to the CZA Companies.

388. The plaintiffs submitted that the liquidator should be Mr Thomas Dawson. Mr Dawson has no connection with any of the parties.

389. The plaintiffs submitted that any suggestion of appointing one of the administrators as the liquidator should be rejected. The plaintiffs contended the core principle in appointing a liquidator is that the person must not only be independent, but be seen to be independent (Commonwealth v Irving & NPC Manufacturing Pty Ltd (1996) 65 FCR 291 (“Irving”)).

390. It was submitted that the administrators had acted in a partisan way during the proceedings by creating a report which specified that the CZA Companies were insolvent. Furthermore, Mr Solomons had previously been involved with another of Marcus’ companies. During the cross-examination of Marcus, it was established that Marcus first met Mr Solomons in 2010, when Marcus considered appointing a partner at the firm Mr Solomons worked at as the administrator of another of Marcus’ companies. In those circumstances the plaintiffs submitted that it would be inappropriate to appoint the administrators to act as liquidators.

391. The defendants submitted that the administrators should be appointed as the liquidators for the companies, largely for reasons of efficiency and economy. The administrators have already undertaken the necessary analysis of the CZA Companies and were familiar with the companies as they currently stand.

392. It is necessary to say something about the role of the administrators. They have played an essentially passive role in this litigation. No claims made by the plaintiffs are made against the administrators. The administrators submitted it would be inappropriate for them to contend for a specific result in relation to the assertion that they were appointed invalidly. Instead, the administrators have filed an amended cross-claim asking the Court to determine the validity of their appointment under s 447C(2) of the Act, or alternatively make an order under s 477A of the Act that Part 5.3A of the Act should operate so that the administrators were validly appointed.

393. There was no submission that the administrators accepted their appointments in circumstances where there was any basis for the administrators to doubt the authority of the appointing directors or the genuineness of their belief of the insolvency of the company. The administrators issued a Supplementary Report on 28 March 2018 which expressed their view that regardless of the litigation at hand, the CZA Companies were insolvent at some time before they were appointed as administrators. Neither the plaintiff, nor the other defendants, submitted that it was appropriate to deprive the administrators of their remuneration, should the Court find they were appointed invalidly.

394. The decision of Branson J in Irving is authority for the proposition that mere professional acquaintanceship or prior contact with a company or its directors is not sufficient of itself to give rise to actual bias or a reasonable perception of bias on the part of administrators. In reaching that conclusion, her Honour applied the authorities in relation to liquidators.

395. I do not accept that the administrators have acted in a partisan way in these proceedings. My impression was that they acted scrupulously to maintain a neutral position but being available to assist the Court if required. Nor does Marcus’ prior involvement with Mr Solomons provide a proper basis to conclude that Mr Solomons should not be appointed one of the liquidators.

396. The parties have already been put to what must have been very substantial costs by these proceedings. There is a compelling interest in minimising further costs from professionals. I accept the defendants’ submission that economy and efficiency support the appointment of the administrators as liquidators.

Conclusion

397. The parties will be given an opportunity to bring in short minutes to give effect to these reasons. I will fix a date to determine any disputes over what orders should be made, including as to costs.

**********

Decision last updated: 08 November 2019