In the matter of Candy-Vend Pty Ltd

[2020] NSWSC 1735

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Candy-Vend Pty Ltd [2020] NSWSC 1735

Hearing dates:

18 – 20 November 2020

Date of orders:

3 December 2020

Decision date:

03 December 2020

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Originating Process and Cross-Claim dismissed. Parties to make submissions as to costs and as to whether parties should provide copy of judgment to Deputy Commissioner of Taxation.

Catchwords:

CORPORATIONS — Members’ rights and remedies — Oppression — Family company’s affairs conducted by father with sons as shareholders — History of payments from father’s companies to sons — Whether particular payment characterised as loan — Whether Plaintiffs were excluded from participation in company’s affairs — Whether oppressive for Defendants to file Cross-Claim to recover payment as debt — Whether winding up order appropriate — Whether buyout on basis sought by Plaintiffs appropriate

Legislation Cited:

- Conveyancing Act 1919 (NSW), s 66G

- Corporations Act 2001 (Cth), ss 232, 233, 461(1)(k)

- Evidence Act 1995 (NSW), ss 91, 136

- Income Tax Assessment Act 1997 (Cth), Div 7A

Cases Cited:

- Boyd v Feeney [2017] NSWSC 1595

- Byrne v A J Byrne Pty Ltd [2012] NSWSC 667

- County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193

- Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672; [2001] NSWCA 97

- Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd (No 2) [2008] FCA 810

- John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1

- MacLean v MacLean [2017] FCA 194

- Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692

- Munstermann v Rayward [2017] NSWSC 133

- News Limited v Australian Rugby Football League Ltd (1996) 64 FCR 410; 21 ACSR 635

- Re AJ Roberts Removals & Storage Pty Ltd [2017] NSWSC 1054

- Re George Raymond Pty Ltd; Salter v Gilbertson (2000) 18 ACLC 85; [1999] VSC 460

- Re Ledir Enterprises Pty Ltd (2013) 96 ACSR 1; [2013] NSWSC 1332

- Re Lowes Park Pty Ltd; Headlam v Lowes Park Pty Ltd (1994) 62 FCR 535

- Re Rafic Pty Ltd [2017] NSWSC 1013

- Thomas v HW Thomas Ltd [1984] 1 NZLR 686; (1984) 2 ACLC 610

- Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152

- Tomanovic v Global Mortgage Equity Corporation Pty Ltd (2011) 288 ALR 310; 84 ACSR 121; [2011] NSWCA 104

- Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104

- Varma v Varma (2010) 6 ASTLR 152 ; [2010] NSWSC 786

- Victory Projects Pty Ltd v AAA Self Storage Pty Ltd [2016] NSWSC 1758

- Watson v Foxman (1995) 49 NSWLR 315

- Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459; [1985] HCA 68

Category:

Principal judgment

Parties:

Joseph Essey (First Plaintiff)
Johnnie Essey (Second Plaintiff/Cross-Defendant)
Candy-Vend Pty Ltd (First Defendant/Cross-Claimant)
Paul Essey (Second Defendant)

Representation:

Counsel:
Mr J Hassett (Solicitor) (Plaintiffs/Cross-Defendant)
Mr D Neggo (Defendants/Cross-Claimant)

Solicitors:
Hassett & Co (Plaintiffs/Cross-Defendant)
Stanton & Stanton (Defendants/Cross-Claimant)

File Number(s):

2019/307621

Judgment

1. By Originating Process filed on 2 October 2019, the Plaintiffs, Mr Joseph Essey (to whom I will refer, without disrespect, as “Joseph”) and Mr Johnnie Essey (to whom I will refer, without disrespect, as “Johnnie”) have brought proceedings against Candy-Vend Pty Ltd (“Company”) and Mr Paul Essey (to whom I will refer, without disrespect, as “Paul”), in which they seek an order that the Company be wound up under ss 232 and 233 of the Corporations Act 2001 (Cth) on the basis of oppression. The Plaintiffs alternatively seek an order that the Company purchase each of their shares in it and reduce its capital accordingly on terms that involve transferring 20% of its interest in a property at Luddenham to each of the Plaintiffs and (by an amendment made in the course of the hearing) buying each of the Plaintiffs’ shares in the Company at a price reflecting the Company’s residual value, excluding the value of the Luddenham Property. The Plaintiffs originally also sought an order against Paul for repayment of monies allegedly lent by the Company to Paul. It appears that claim is not pursued. If it had been, it would have failed where the Plaintiffs did not seek leave to bring that claim as a derivative action on behalf of the Company or contend that it fell within the limited circumstances in which such a claim may be brought without leave in an oppression claim.

2. By a First Cross-Claim filed in August 2020, the Company seeks an order that Johnnie pay it $523,412 as a debt and interest calculated in accordance with the benchmark interest rate under Div 7A of the Income Tax Assessment Act 1997 (Cth). I will address that Cross-Claim below.

Background and affidavit evidence

3. By way of background, the Company was founded in 1988 by Mr Fred Essey (to whom I will refer, without any disrespect, as “Fred”). Fred now resides in Lebanon and has not given evidence in the proceedings. He has ten children including the Plaintiffs, Paul and the two other shareholders in the Company who were not joined as party to the proceedings, Christopher Essey and Colin Essey (to whom I will refer, without disrespect, as “Christopher” and “Colin” respectively). Each of the Plaintiffs, Paul, Christopher and Colin holds 100 shares in the Company and is a director of the Company.

4. The Company previously owned an interest in a property at Merrylands which was sold for $1.2 million on about 29 June 2010. The Company also owned an interest in a Rosehill property which was sold for $2,875,000 around 29 May 2011, and I will address the evidence as to that sale below. Shortly before settlement of that sale, Fred directed that a bank cheque from the settlement proceeds for $700,000 be made available to Johnnie and an amount exceeding $825,000 was paid to the Company from the proceeds of sale (Daniel Essey 10.7.20 [3]-[5]). The Company continues to hold a 40% interest in a property at Luddenham in New South Wales.

5. The brothers, or some of them, also held interests in another company, Rafic Pty Ltd (“Rafic”) which was previously known as All-Fect Distributors Pty Ltd, and which conducted a confectionary business. Fred, Joseph, Paul and Johnnie were directors of Rafic from 1987. Christopher and Colin, did not become directors, and it appears the daughters also did not become directors, although Fred’s former wife Carol was at one point a shareholder in Rafic (Ex D6). Rafic advanced money to Joseph, or directly to tradespersons on his behalf in connection with a house that Joseph was building from 2003 onwards (Paul 10.7.20 [26]). It appears that the Company subsequently paid money to Rafic, as a reimbursement for amounts that Rafic had previously advanced to Joseph (Paul 10.7.20 [25]). Brereton J ordered that Rafic buy back Joseph’s shares in Rafic in separate proceedings in November 2017.

6. I now turn to the affidavit evidence led by the parties. I have regard, in respect of the affidavit evidence, to the fallibility of human memory which increases with the passage of time, particularly where disputes or litigation intervene: Watson v Foxman (1995) 49 NSWLR 315 at 318–319; Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd (No 2) [2008] FCA 810 at [41]; Varma v Varma (2010) 6 ASTLR 152; [2010] NSWSC 786 at [424]–[425]; Boyd v Feeney [2017] NSWSC 1595 at [25].

7. The Plaintiffs rely on Joseph’s affidavits dated 19 September 2019, 13 February 2020 and 27 August 2020. Significant parts of those affidavits were directed to allegations that are no longer pressed and other parts of the affidavits were plainly not admissible and were not admitted. By his affidavit dated 19 September 2019, Joseph contended that, prior to being provided with copies of the Company’s accounts for the financial years 2010 to 2016 and its tax returns for the financial years 2012 to 2016 he had never seen those documents. That evidence was not reliable since he had signed the Company’s 2010 accounts, although he contended in cross-examination that, in effect, he signed those accounts when asked to do so and paid no attention to them (T31-33). His evidence was that he had not been paid any money or dividends by the Company, a proposition which is correct in the limited sense that he did not receive such dividends in cash, although they were applied to the reduction of the alleged loan to him included within the category of loans to directors recorded in the Company’s accounts. Joseph also refers to entries in the Company’s accounts following the sale of the Rosehill property which appear to be directed to a claim that it made a loan to Paul, at a time when I find that it was still under Fred’s control.

8. Joseph also refers (Joseph 19.9.19 [18]-[19]) to the value of the Luddenham property; his hope that the value of that property will rise if it is rezoned due to the development of the Badgery’s Creek Airport; and that:

“I am not prepared to allow my interest in the Luddenham property to be controlled to by Paul. My fear is he will again sell the property and take all the proceeds for himself.”

The difficulties with that proposition include that the Company rather than Joseph has an interest in the Luddenham Property and the evidence does not establish that Paul (as distinct from the Company under Fred’s control) previously sold property of the Company or that Paul took the proceeds of such a sale for himself. By his second affidavit dated 13 February 2020, Joseph corrected several details of the evidence led in his first affidavit which are not presently material.

9. By his third affidavit dated 27 August 2020, Joseph responded to Paul’s affidavit dated 10 July 2020 and did not accept Paul’s evidence that Fred was in charge of the Company until 2016. Joseph’s evidence was that Paul “ran the administrative side” of the Company’s business from when it was involved in a business of selling confectionary by vending machines and that Joseph was involved with stocking the vending machines. There is a dispute as to whether the Company, as distinct from Rafic, conducted that business which it is not necessary to resolve. Joseph’s evidence was also that Paul had prompted the sale of the Merrylands property. Joseph also addressed the circumstances in which a payment was made by the Company to Johnnie to allow him to buy a warehouse and his evidence was that:

“I deny that there was any discussions between any of us about the $780,000 Johnnie received from the sale of this property being a loan to Johnnie. I knew he was never going to pay this money back, just as the money I was given in 2004 to build my house was never going to be paid back, or Paul’s money for his divorce was never going to be paid back. … The ethos of the family right from the 1980’s was that we all worked for minimum wages to build up the family capital, and we all had a share of the wealth created according to what my father thought was fair. The [Company] sale proceeds was part of Johnnie’s share.” (Joseph 27.8.20 [8])

That evidence was undermined by Joseph’s denial in cross-examination that he knew the terms of the arrangements between Fred and Johnnie in respect of that payment. Joseph also responded to affidavits dated 10 July 2020 and 22 July 2020 of the Company’s accountant, Mr Hanna, and denied that he had a conversation with Mr Hanna concerning dividends paid by the Company being used to pay down a loan to Johnnie. Joseph accepted in cross-examination that he knew that the dividends were being declared (T18-20) and I accept Mr Hanna’s evidence in preference to Joseph’s evidence in that regard.

10. The Plaintiffs also relied on Johnnie’s affidavits dated 30 September 2019 and 27 August 2020. By his affidavit dated 30 September 2019, Johnnie claimed that he had not seen the accounts of the Company for the financial years ended 30 June 2010 – 30 June 2016 or the tax returns for the financial years ended 30 June 2012 – 30 June 2016 until he was provided them by his solicitor in the course of the proceedings. His evidence was that he had not been paid any money or dividends by the Company, and specifically denied receiving a franked dividend of $38,590 and a franking credit of $16,538 recorded in the Company’s 2015 tax return. His evidence that he had not been paid money by the Company was incorrect. He received $780,000 from the proceeds of the Company’s sale of the Rosehill property, a matter which he acknowledges in his affidavit dated 27 August 2020 in reply. That error may reflect his perception that that amount was paid to him by Fred rather than the Company. The correctness of Johnnie’s evidence as to dividends turns on a characterisation of the dividends paid by the Company in 2014 and 2015 and the manner in which they were applied to reduce the alleged loan to Johnnie. He also denies knowledge of director’s loan of $926,456 recorded in the Company’s 2014 accounts. Johnnie’s evidence was also that:

“I do not wish Paul to control my interest in the Luddenham property.”

That evidence, which is similar to Joseph’s evidence, misunderstands the present position, for the same reasons as Joseph’s evidence in that respect.

11. By a further affidavit dated 27 August 2020, Johnnie responded to Paul’s affidavit dated 10 July 2020 and took issue with aspects of Paul’s evidence. Johnnie there refers to the sale of the Merrylands property in 2010 and the sale of the Rosehill property in 2011 and gives evidence of a conversation with his father, which he claims provides the basis for the payment of $780,000 to him by the Company, in which he said:

“I’ve found a warehouse in Yennora which I would like to buy. The sale price is $690,000. Can I have the money as my share of the business.”

Johnnie’s evidence is that his father nodded and said “yes” (Johnnie 27.8.20 [11]) and Johnnie denies that the word “loan” was mentioned between his father and him at that time. Johnnie also refers to his request having been in the context of his father, or companies associated with his father, having provided money to Paul for a divorce settlement and had provided money to Joseph to build a house at Merrylands (Johnnie 27.8.20 [13]) and he also refers to other occasions on which his father had distributed assets to others of his ten children (Johnnie 27.8.20 [15]).

12. Johnnie’s evidence (Johnnie 27.8.20 [19]) is that, a few months after the sale of the Rosehill property, the Company’s accountant, Mr Hanna, called him and referred to an instruction from Paul that the amount of $780,000 paid to Johnnie by the Company was a loan and that he was to write the books up as a loan, and indicates that he responded:

“Well it is not a loan, and I’m never going to pay it back.”

13. Johnnie denies that there was a conversation between himself and Paul or Mr Hanna about dividends paid by the Company being used to reduce his loan account. I prefer Mr Hanna’s evidence to Johnnie’s evidence in that regard. Johnnie also refers to conversations with his accountant, in 2014, about the Company declaring a dividend and to his including that dividend in his tax return for the year ended 30 June 2014, but says the dividend was not paid to him, and claims he told his accountant in the next year that he did not want any dividend in his tax return that year and did not declare any dividend in that tax return. Johnnie also responds to several paragraphs of Mr Hanna’s affidavits dated 10 July 2020 and 22 July 2020 and denies several conversations with Mr Hanna. Surprisingly, his evidence in cross-examination was that he not seen the affidavits of Mr Hanna or the paragraphs which set out the conversations which he had denied and that there had only been a general discussion of those matters with his solicitor. I give little weight to Johnnie’s denial of Mr Hanna’s evidence, and I would in any event have preferred Mr Hanna’s evidence to Johnnie’s evidence as to those conversations.

14. The Plaintiffs also relied on an affidavit dated 13 February 2020 of Ms Joseph, who is the co-owner with the Company of the Luddenham property. Her evidence was that she consented to the Court making an order to the effect that the Company transfer one-fifth of its interest in the property to each of the Plaintiffs, so that the Company would then hold a 24% interest in the property and each of Joseph and Johnnie would hold an 8% interest in the property. It emerged from Ms Joseph’s cross-examination that she had not been offered an opportunity to obtain independent legal advice as to the implications of the transaction to which she had been asked to consent, including the possibility that either Joseph or Johnnie could then cause a sale of the property by bringing an application under s 66G of the Conveyancing Act 1919 (NSW). I do recognise, however, that Ms Joseph is already exposed to the possibility that an application could be brought under s 66G of the Conveyancing Act, albeit by the Company rather than by Joseph or Johnnie individually.

15. The Plaintiffs also relied on two affidavits dated 14 February 2020 and 2 September 2020 of an accountant, Mr Ian Paul, which annex his expert reports. Significant parts of those expert reports were not read or were not admitted because they were not relevant to the relief sought by the Plaintiffs. Mr Paul’s evidence established the propositions, which hardly required expert evidence, that if (1) the balance sheet of the Company as at 30 June 2016 was taken at face value and (2) the surplus of the Company’s assets over liabilities (excluding the value of the Luddenham property) as at 30 June 2016 was calculated and divided by five, to attribute one-fifth of the Company’s net assets at that date to each shareholder, then each of Joseph’s and Johnnie’s shareholding in the Company had a value of $154,951 as at 30 June 2016. That evidence has at least three obvious difficulties. The first is that there is little utility in determining the value of shares in the Company at 30 June 2016, so as to order a buy-out of the shares in late 2020, which must turn on the current value of shares in the Company. The second difficulty is that that valuation assumes that loans to directors shown in the Company’s accounts are recoverable, and those loans include the loan by the Company as to which Johnnie denies liability. Obviously enough, the Court cannot accept Mr Paul’s valuation of the Company’s shares on a basis that includes that loan in determining the Company’s assets in the Plaintiffs’ oppression claim and at the same time accept Johnnie’s evidence denying that amount is a loan in resisting the Company’s Cross-claim for repayment of it. The third difficulty is that that valuation also assumes that a loan to Rafic is recoverable and Mr Paul has made no attempt to determine whether that assumption is correct and there is no other evidence that establishes its correctness.

16. By his second affidavit dated 2 September 2020 and the associated report, Mr Paul increases his value of the 20% shareholding for each of the Plaintiffs in the Company on the basis that a liability of the Company to RT Miller Distributors Pty Ltd, which has been recorded in the balance sheet for many years, is not recoverable by reason of the Limitation Act 1969 (NSW). That may be the case, but it does not assist in establishing a current value of the Company’s shares (excluding the value of the Luddenham property) where the difficulties noted above are not addressed by that report.

17. The Defendants in turn rely on Paul’s affidavits dated 10 July 2020 and 16 October 2020. Paul’s evidence, in his first affidavit, is that Fred controlled the family’s business affairs; Paul and his brothers deferred to Fred in respect of decision-making; and that position continued beyond 2006, when Fred started to divide his time between Australia and Lebanon, until about 2016, when Fred moved to Lebanon on a permanent basis (Paul 10.7.20 [8]). Paul also refers to the extent of his involvement in Rafic, which conducted a confectionary business, and denies that he was managing director of the Company. He denies that the Company conducted a confectionary business, taking issue with the Plaintiffs’ evidence in that respect, but it is not necessary or possible to resolve that dispute on the available evidence. Paul’s evidence is that the Company has no real business affairs to manage, other than the receipt of rental payments in respect of a lease of the Luddenham property.

13. Paul’s evidence is that the sale of the Merrylands property was overseen by Fred and that he signed the transfer document for the sale of that property at Fred’s direction (Paul 10.7.20 [19]). His evidence is that he had some involvement with the sale of the Rosehill property, but also took steps on instruction from Fred in that respect and signed the transfer for that property at Fred’s direction (Paul 10.7.20 [20]). Paul’s evidence, which finds some support in the Plaintiffs’ evidence, is also that he was opposed to the sale of the Rosehill property at that time, but he deferred to his father’s wish to sell that property (Paul 10.7.20 [21]).

14. Paul also refers to the matters which led him to believe that the payments made by the Company to Johnnie were loans and he refers to a subsequent conversation with Mr Hanna in 2014 and 2015 relating to the payment of dividends from the Company to reduce the balance of the loan to Johnnie, so as to reduce Johnnie’s potential tax liability arising under Div 7A of the Income Tax Assessment Act. Paul’s evidence is that he decided by 2016 that it was unfair for shareholder dividends to continue being used to reduce Johnnie’s loan and that Johnnie should repay the loan out of his own funds (Paul [23]). That evidence is consistent with the fact that dividends were not subsequently declared by the Company or applied to reduce Johnnie’s alleged loan, but there is no evidence that any decision was then taken by the Company’s board to take steps to require repayment of that loan or any earlier loan made by the Company to Paul at the time of his divorce. Paul also gives evidence of money paid by Rafic to fund the building of Joseph’s house, which he says was subsequently repaid by the Company to Rafic at his father’s direction (Paul [25]), and he refers to a conversation with Fred (admitted with a limiting order under s 136 of the Evidence Act, as not proof of the asserted fact) that the money paid by Rafic to Joseph would be reimbursed to Rafic by the Company from the sale proceeds of the Rosehill property.

15. By his affidavit dated 16 October 2020, Paul responds to Joseph’s affidavit; acknowledges receipt of funds from his father to pay an amount to his former wife in 2010, and claims that payment repaid an earlier loan he had made to his father; denies being aware that those funds were sourced from the sale of the Merrylands property; and denies that he provided instructions to Mr Hanna in relation to Joseph’s tax affairs or that he made the decision that dividends from the Company would be allocated to reduce the alleged loan to Johnnie. In closing oral submissions, Mr Hassett, who appears for the Plaintiffs, drew attention to an apparent inconsistency between Paul’s evidence in cross-examination (Ex P2) before Brereton J in Re Rafic Pty Ltd [2017] NSWSC 2013 and his evidence given in these proceedings (T144). I accept that Paul’s evidence as to the funds he received from the Company in 2010 was inconsistent, in significant respects, with the evidence that he had given before Brereton J in the Rafic proceedings, where he there appeared to acknowledge that payment was a loan from the Company that he would be obliged to repay, and did not raise any suggestion of an earlier loan to his father. I give little weight to Paul’s evidence in respect of this transaction in these proceedings. Paul also there responds to Johnnie’s affidavit, taking a similar position in respect of the receipt of money from the sale of the Merrylands property to fund a payment to his former wife.

16. The Defendants also rely on the affidavits dated 10 July 2020, 22 July 2020 and 16 October 2020 of the Company’s accountant, Mr Hanna. Mr Hanna was a credible and convincing witness. By his affidavit dated 10 July 2020, he refers (in evidence subject to a s 136 limiting order as not proof of the asserted fact) to an instruction that Fred gave him in 2012 that the payments to Johnnie of $780,000 were loans by the Company to Johnnie (Hanna 10.7.20 [15]). He also refers (in evidence admitted only as to his understanding) to having initially included those amounts under a heading “Loans – Related Entities” in the Company’s 2012 financial statements, on the assumption that the amount had been loaned to a company associated with Johnnie, and to have subsequently revised that treatment as a result of a conversation with Johnnie’s accountant and then recognised that the loans to Johnnie were subject to Div 7A of the Income Tax Assessment Act, requiring that regular payments be made towards them and that interest would accrue on them, or would otherwise be treated as unfranked dividends and attract a significant income tax liability on Johnnie’s part. Mr Hanna also there addressed the circumstances in which dividends were declared by the Company in the 2014 and 2015 financial years and referred to conversations with the directors and shareholders obtaining consent for the dividends to be used to pay down the “loans” to Johnnie. Mr Hanna also addressed the treatment of those dividends in the Company’s financial accounts and responded to aspects of Mr Paul’s report, which are no longer relevant to the Plaintiffs’ case.

17. By his second affidavit dated 22 July 2020, Mr Hanna referred to conversations with Johnnie in 2014 and 2015 in substantially identical terms in which he sought Johnnie’s agreement that dividends paid by the Company be applied to pay down Johnnie’s loan, to avoid a substantial tax liability for Johnnie, and Johnnie accepted that position. The substantively identical terms of those conversations in the two years are not surprising where Mr Hanna’s evidence is to the effect of the conversations, which are in simple terms. Those conversations are consistent with the probabilities and I prefer Mr Hanna’s evidence to Johnnie’s evidence in that regard.

18. In his further affidavit dated 16 October 2020, Mr Hanna referred to emails relating to the dividends and the alleged loan to Johnnie. By emails dated 16 April and 29 April 2015, Johnnie’s accountant asked Mr Hanna whether there would be any dividend paid to Johnnie for the 2014 year, although those emails do not specifically refer to the application of the dividend to part repayment of a loan to Johnnie. Mr Hanna’s email dated 13 August 2014 recorded that:

“When [the Company] sold the properties at Virginia Street and Fox Street, an amount of money was taken out of the [Company] by Johnnie and Paul Essey.

They have been treated as loans to date but there is now a Division 7a/shareholder loan issue.

In order to meet the requirements of the legislation, the Company must charge interest to the borrower and loan must be repaid over a period of 7 years.

The shareholdings are all equal, no class shares just ordinary shares. If we pay a dividend to the shareholders to reduce the loans the income for Chris/Fred, Paul, Colin, Joe and John will be increased. This will lead to increased tax payable by the individuals and higher income for Child Support reporting leading to increased amounts payable to ex-wives.

I have tried to call a meeting at my office to discuss this with all the boys, to sort out a resolution but the meeting got cancelled as Johnnie spoke to Fred and asked me to call Fred who would said [sic] he would sort it out.”

24. That email indicates that Joseph and Johnnie were advised of the intent to treat the payments to Johnnie as a loan in 2014 and 2015, although that does not establish that that treatment has a proper basis. I note, without further comment, the assumption in this email that it would be undesirable if the sons were required to pay additional tax or give increased financial support to their former spouses or their children. An email dated 2 September 2014 from Mr Hanna to Johnnie’s accountant and Johnnie sought to organise a meeting relating to the “Div 7a problem”.

25. By a further affidavit dated 16 November 2020, Mr Hanna explained that unsigned copies of financials had previously been provided for inspection by Joseph and his solicitor from his firm’s software and annexed copies of signed financials for the 2010, 2012-2013 and 2016 years, and indicated he had not been able to find signed financials for other years.

26. The Defendants also rely on the affidavits dated 10 July 2020 and 21 July 2020 of Daniel Essey, who is a solicitor and was retained by the Company and a co-owner to act on the sale of the Rosehill property. In his affidavit dated 10 July 2020, he refers to a telephone conversation with Fred who instructed him to arrange for a bank cheque of $700,000 from the settlement proceeds to be paid to Johnnie and to settlement instructions which recorded that payment and to passing that cheque to Johnnie. There is no contest that Johnnie received that cheque.

27. The Defendants and Cross-Claimants rely on a further affidavit dated 19 November 2020 of their solicitor, Ms Quarrell, which addresses a narrow question, whether the Cross-Claim was authorised by the Company. It is ultimately not necessary to determine that question, where I find below that the Cross-Claim would not succeed but also does not amount to oppression. Had it been necessary to determine that question, I would likely have held that the directors’ resolution which authorised the retainer of the Company’s solicitors to act in the proceedings impliedly authorised not only the defence of the proceedings but also the Cross-Claim so far as it was necessary, as I note below, to protect the Company against the risk that it was required to buy out Johnnie’s shares on a basis that treated the loan to Johnnie as recoverable against him, and at the same time unable to recover that loan where Johnnie maintained the inconsistent position that the loan was not recoverable against him. It is not necessary to determine whether a further circular resolution, passed by the requisite majority of the Company’s directors without notice to Johnnie and Joseph, that specifically authorised the Cross-Claim, was also effective for that purpose.

The Plaintiffs’ oppression claim

28. The Plaintiffs contend that the affairs of the Company have been conducted in a manner that is oppressive to, unfairly prejudicial to, or unfairly discriminatory against them for the purposes of s 232 of the Corporations Act 2001 (Cth). The principles applicable to an oppression claim in respect of a closely-held company are well-settled and were not controversial in this case. I draw below on the legal representatives’ submissions and my summary of those principles in Re Ledir Enterprises Pty Ltd (2013) 96 ACSR 1; [2013] NSWSC 1332; Victory Projects Pty Ltd v AAA Self Storage Pty Ltd [2016] NSWSC 1758, Re AJ Roberts Removals & Storage Pty Ltd [2017] NSWSC 1054 and Boyd v Feeney above at [33]ff, to which the parties referred.

29. Section 232 of the Corporations Act provides that the Court may make an order under s 233 if:

“(a)   the conduct of a company’s affairs; or

(b)   an actual or proposed act or omission by or on behalf of a company; or

(c)   a resolution, or a proposed resolution, of members or a class of members of a company;

is either:

(d)   contrary to the interests of the members as a whole; or

(e)   oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.”

30. This section and its predecessors extend to conduct involving “commercial unfairness” or where the conduct complained of involves a visible departure from the standards of fair dealing and a violation of the conditions of fair play, or a decision has been made so as to impose a disadvantage, disability or burden on the plaintiff that, according to ordinary standards of reasonableness and fair dealing, is unfair: Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 704; Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459; [1985] HCA 68. In Thomas v HW Thomas Ltd [1984] 1 NZLR 686; (1984) 2 ACLC 610, Richardson J observed (at 618) that

“Fairness cannot be assessed in a vacuum or simply from one member’s point of view. It will often depend on weighing conflicting interests of different groups within the company. It is a matter of balancing all the interests involved in terms of the policies underlying the companies legislation in general and s 209 [the NZ provision] in particular: thus to have regard to the principles governing the duties of a director in the conduct of the affairs of a company and the rights and duties of a majority shareholder in relation to the minority; but to recognise that s 209 is a remedial provision designed to allow the Court to intervene where there is a visible departure from the standards of fair dealing; and in the light of the history and structure of the particular company and the reasonable expectations of the members to determine whether the detriment occasioned to the complaining member’s interests arising from the acts or conduct of the company in that way is justifiable.”

31. In Morgan v 45 Flers Avenue Pty Ltd above, Young J observed (at 704) that the phrases “oppressive, unfairly prejudicial or unfairly discriminatory” in s 232 of the Corporations Actshould be construed as “a composite whole and the individual elements mentioned in the section should be considered merely as different aspects of the essential criterion, namely commercial unfairness”. His Honour also there noted that whether oppression was established was to be determined by reference to the nature of the business carried on by the company and the nature of the relations between its participants and:

“whether objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair.”

32. In Re Lowes Park Pty Ltd; Headlam v Lowes Park Pty Ltd (1994) 62 FCR 535, Burchett J noted (in an observation that I cited with approval in Byrne v A J Byrne Pty Ltd [2012] NSWSC 667 at [46]) that fairness cannot be considered in a vacuum, and in relation to a family company can only be considered in the light of the history of the company and the family and the purpose for which the company was formed, and that a person who receives the gift of an interest in a company in a situation of this kind is in a somewhat different position from one who has invested his own funds in a company from which he cannot extract himself or herself.

33. In Re George Raymond Pty Ltd; Salter v Gilbertson (2000) 18 ACLC 85; [1999] VSC 460 at [24], Byrne J observed, in respect of a predecessor section that:

“Whether, for oppression purposes, a company should be regarded as a family company, or a group of companies as a family group, is a question of fact. Moreover, unlike companies, families do not last for ever. The characteristic of the company or group of companies as a family company or family group may change or disappear as the years pass and generations are replaced by successive generations. In this case, the current members of the Gilbertson family have drifted apart somewhat but it was submitted that the conduct of the affairs of [the company] must be understood against the background that dealings between family members are often informal, that loans within a family may not necessarily be made on a commercial basis and that certain family members may assume or be given a position of dominance over others. The requirements of s246AA that the conduct in question have the characteristic of unfairness and the concern of the courts to assess that conduct in a realistic way having regard to all relevant considerations, means that, where appropriate, this aspect of the conduct should not be ignored. See, for example, Thomas v H W Thomas Ltd [1984] 1 NZLR 686 at 695 per Richardson J; McWilliam v L J R McWilliam Estates Pty Ltd (1990) 20 NSWLR 703 at 711, per Young J; Re Lowes Park Pty Ltd (1994) 62 FCR 535 at 552, per Burchett J.”

That observation was cited, with apparent approval, by Greenwood J in MacLean v MacLean [2017] FCA 194 at [9].

34. The principles applicable to a claim for oppression were summarised by Austin J in Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152 at [39], and the Court of Appeal noted the parties did not challenge that summary of the applicable principles in Tomanovic v Global Mortgage Equity Corporation Pty Ltd (2011) 288 ALR 310; 84 ACSR 121; [2011] NSWCA 104 at [140]. His Honour observed that:

“(a)   consistent with the principle that the purpose of relief is to terminate the effects of oppression, relief will generally be inappropriate as a matter of discretion if there is no continuing oppression: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, at [182]; [2009] HCA 25;

(b)   unfairness is assessed by reference to whether “objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair”: eg, Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359, per Basten JA at [181]; [2008] NSWCA 95;

(c)   while it is recognised that conduct may be oppressive if inconsistent with the “legitimate expectations” of shareholders, expectations are not immutable. The non-fulfilment of expectations will not establish oppression, if there has been some good reason for the extinguishment of the expectation: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672, at [85], [86], [175]; [2001] NSWCA 97; Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343, at [96]; [2009] NSWSC 342 per Barrett J;

(d)   “it is important when assessing corporate activities to see if there has been oppression that judges do not remain in their ivory tower”: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1988) 28 ACSR 688, Young J at 739; [1998] NSWSC 413;

(e)   a particular matter which will be taken in account in assessing the gravity of any allegation of oppression, is the extent to which the minority shareholder has “baited” the majority shareholder to act in an oppressive manner: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1988) 28 ACSR 688, at 741; [1998] NSWSC 413 …”

35. Those principles were again summarised by Stevenson J in Munstermann v Rayward [2017] NSWSC 133 at [22] as follows (omitting citations):

1. The test of oppression is an objective one of unfairness ...

2. The court must look to determine whether on the balance of probabilities the objective commercial bystander would be satisfied that the affairs of the company were being conducted unfairly …

3. A director may act oppressively in the sense relevant to the operation of s 232 and yet not breach any fiduciary or other duty owed as a director ...

4. Conduct of a company’s affairs may be oppressive even though the conduct is otherwise lawful ...

5. Conduct that has the effect of paralysing a company in the operation of its business is properly characterised as conduct contrary to the interests of the members as a whole …

6. A shareholder of 50 per cent of the shares in a company can seek relief for oppressive conduct because they do not have control in the form of power to prevent the oppression, particularly where individual strong arm tactics are used …

7. The court must formulate an opinion about oppression or unfair prejudice as at the date of the institution of proceedings and the issue of relief under s 233 must be determined at the date of the hearing …

8. The discretion under s 233 is wide as to the appropriate remedy …

9. The nature of the remedy chosen by the court under s 233 will be dependent upon the conclusions drawn by the court as to the type of oppression with which the court is dealing and the court will choose the remedy which is least intrusive ….

10. The aim of any order under s 233 must be to put an end to the oppression …

11. The court should only look to wind up an otherwise solvent company as a “last resort” …

12. As a remedy for oppression, an oppressor can be ordered to sell their shares to the oppressed party ….

1. If an order is to be made for the purchase of shares under s 233 the task of the court is to fix a price that represents a fair value in all the circumstances.”

   36. I also bear in mind the observation in Tomanovic v Global Mortgage Equity Corporation Pty Ltd above that each case has to be considered on its own facts and circumstances, and by reference to the conduct as a whole. I bear in mind that I must also have regard to the collective impact of the matters on which the Plaintiffs refer.

The parties’ submissions and determination as to the oppression claim

37. In opening submissions, the Plaintiffs submit that the conduct of the Company’s affairs is contrary to the interest of its members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member or members for the purposes of s 232 of the Corporations Act. They refer to observations of Campbell J in Tomanovic v Global Mortgage Equity Corporation Pty Ltd above as to the scope of the Court’s jurisdiction to make an order in the case of oppression. The Plaintiffs also refer, in both oral and written submissions, to the findings reached by Brereton J in a different dispute between some of the same parties in Re Rafic Pty Ltd above, where Joseph was successful in an oppression claim in respect of that entity and Brereton J ordered Rafic to buy back Joseph’s shares in that company. That order obviously provides a model for the relief sought by the Plaintiffs in these proceedings, other than as to the way in which they seek to treat the Luddenham property. I bear in mind that, under s 91 of the Evidence Act, evidence of the decision, or of a finding of fact, in another Australian proceeding is not admissible to prove the existence of a fact that was in issue in that proceeding, even if it is relevant for another purpose in these proceedings. I proceed on that basis.

38. In opening submissions, Mr Hassett submits that the manner of conducting the Company’s affairs over 30 years amounts to oppression and, in closing submissions, that a quasi-partnership has broken down with the Plaintiffs’ exclusion from management. In closing submissions, Mr Hassett also relied on the suggested “exclusion” of Joseph and Johnnie from the management of the Company (T144, 147). In closing submissions, Mr Neggo, who appears for the Defendants, responds by reference to evidence that Joseph and Johnnie have shown little interest in participating in the management of the Company, as distinct from being excluded from it (Joseph [5], T60) and submits that that question is to be addressed in a context that Fred and the sons have never been inclined to hold formal meetings of directors or shareholders (T11-12).

39. It is common ground between the parties that, during the period that Fred was in control of the Company and other companies within the family group, monies were advanced out of the Company as Fred saw fit and other family members acquiesced in that arrangement. By contrast with the position considered by Brereton J in Re Rafic Pty Ltd above, the Company is not an operating business in which several sons work. I am not persuaded that a quasi-partnership has ever existed, where the Company was previously under Fred’s control, rather than having any character of a partnership. While the sons are now the Company’s directors and shareholders, I am not persuaded that their relationship in respect of the Company has at any time been a cooperative business relationship analogous to partnership, as distinct from their being the common beneficiaries of Fred’s disposition of shares in the Company. I am also not persuaded that the Plaintiffs have been excluded from management, at least in the period since Fred controlled the Company with their acquiescence.

40. Mr Hassett also submits that the Company was established on the premise that each of the sons would benefit in the long term from its investment in property and that premise has been “subverted” by subsequent events. The first of those events is that Joseph is said to have received “nothing” but that proposition disregards the fact that Joseph benefited from monies paid to him by other companies under Fred’s control, including for the purchase of his house. Mr Hassett also submits that the Plaintiffs were not given access to Company records. Mr Neggo points out that there is no affidavit or documentary evidence of requests for documents by Joseph or Johnnie that were not met, and Johnnie’s evidence in cross-examination that he had asked to see documents on many occasions was unconvincing (T65). I accept Mr Hanna’s evidence that financial statements and other accounting documents have been available for inspection by the Company’s directors as required, and that he has provided copies of financial documents to the directors when requested to do so (Hanna 10.7.20 [5]). The Plaintiffs also submit that the Company’s accounts have been kept in an incomplete and generalised manner and, in closing oral submissions, Mr Hassett also relied on suggested deficiencies in the form of the Company’s accounts (T143). I accept that there is a lack of detail in the recording of related party transactions in those accounts, dating back to the period in which Fred was in control of the Company. I do not accept that that provides, alone or with other matters, a sufficient basis for the relief sought by Plaintiffs.

41. Next, the Plaintiffs submit that the Company has not held directors’ meetings, but that is the manner in which the relevant family companies conducted their business for many years under Fred’s control and with the sons’ acquiescence, and I am not persuaded directors’ meetings would not be called, if the Plaintiffs sought to have them take place. The Plaintiffs submit that dividends have not been paid to the Plaintiffs. I find that dividends were in fact paid in 2014 and 2015 and applied, with the Plaintiffs’ consent, in a manner that was intended to reduce the “loan” made to Johnnie and reduce the risk of tax liability for him under Div 7A of the Income Tax Assessment Act. I find that was done, at the time, with the Plaintiffs’ consent, although they have since resiled from that position. In any event, it would not be oppressive for the Company not to pay dividends, where it is holding a substantial property which is apparently expected to increase in value, if the majority of directors or majority of shareholders did not support the distribution of its profits by dividends. This is not a case where there is any apparent inequality of treatment of shareholders in that respect.

42. There was at one point also a dispute as to the manner in which the proceeds of sale of the Rosehill property on 29 June 2011 was paid out by the Company. The Plaintiffs also advanced criticisms as to payment of an amount of $64,774.88, described as “Fred legal fees”. It seems to me that these payments made, under Fred’s control, over nine years ago, are of little weight in now establishing that the affairs of the Company are currently being conducted in an oppressive manner. The Plaintiffs also attacked the payment of $395,000 to Rafic, to which reference is made in Mr Paul’s expert report, and the payment of a $200,000 management fee from the Company to Rafic, which later came under Paul’s ownership by reason of Brereton J’s decision in Re Rafic Pty Ltd above. Johnnie’s evidence (Johnnie 27.8.20 [22(f)]) in respect of those payments is that:

“As to the balance of $395,000 which went to Rafic Pty Ltd, this was simply the money that was ploughed into the family business … I do not know what became of this money. I knew nothing of any $200,000 management fee payable by Rafic Pty Ltd from [the Company] which Louis Hanna refers to at 9a. of his affidavit and I was never consulted about it.”

43. These transactions also appear to have been made when the Company was under Fred’s control. Mr Hanna’s evidence in respect of the management fee was that he was advised by Fred and Paul that, during the 2011 financial year, the Company paid $200,000 to Rafic, characterised as a “management fee” for work done by Rafic (or by Fred or other of the Essey brothers who involved in Rafic) in relation to the day-to-day management and ultimate sale of the Rosehill Property (Hanna 10.7.20 [9a]). There is nothing, on the face of it, that is oppressive in the payment of the amount of $395,000 from the Company to Rafic which conducted the family business, nor does Johnnie’s lack of knowledge as to how the family business dealt with that money establish oppression in the Company. There is no evidence that the management fee paid by the Company to Rafic was not properly based, and the absence of consultation with Johnnie does not establish oppression, where the Company was then under Fred’s control and the sons had acquiesced in that position.

44. The Plaintiffs also identify a concern that “their interest” in the Luddenham Property is “controlled by Paul”. Mr Hassett also submits that Paul controls the Company, because Colin and Christopher are (or were) employees of Rafic and are under his influence. That proposition has not been established by evidence, and Colin and Christopher would have an obvious and significant economic interest in dealing appropriately with the Luddenham property as a valuable asset of the Company. I also do not accept the Plaintiffs’ further submission that rent from the Luddenham property is being disbursed under Paul’s control, where that rent is presently received into an account under Joseph’s control. Mr Neggo responds that the evidence does not support any apprehension that Joseph or Johnnie would not receive anything from the Luddenham property, because no impropriety in the dealing with the proceeds of the sale of the Rosehill property was established; the other co-owner of the Luddenham property attends to the rental arrangements for that property and Paul is not a signatory to the account in which rent was paid; no one director has the ability to sell the property; and the other co-owner of the property, Ms Joseph, would also have to join in the sale of the property, and she has a good relationship with Joseph.

45. I am not satisfied that this concern supports the relief sought, where Paul is one of five directors of the Company; the property is under the direct control of its co-owner; and the account to which income from the property is paid is under Joseph’s control. There is no reason to think that Paul could deal with the property, or the proceeds of any sale of the property, without the agreement of the co-owner of the property, or without appropriate decisions made by the Company’s board. There is no basis, on the evidence, for the fear expressed by Joseph that Paul will “sell the property and take all the proceeds for himself”.

46. Mr Hassett also submits that all trust between Paul and the Plaintiffs has broken down, and the Company was founded on mutual confidence and conducted for decades on that basis. In closing oral submissions, Mr Hassett also relied on the breakdown of the relationship between the parties (T146). I accept that trust between Paul and the Plaintiffs has broken down, as is evidenced in the proceedings before Brereton J in Re Rafic Pty Ltd above and in these proceedings. Mr Neggo responds, and I accept, that even irreconcilable differences between shareholders do not, in themselves, establish oppression, although he fairly accepts that a breakdown in trust can be a significant consideration: Byrne v AJ Byrne Pty Ltd above; Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672; [2001] NSWCA 97. Mr Neggo also submits, and I accept, that any lack of trust is less significant given the narrow scope of the Company’s business, in holding one property which is leased to a third party, where the lease arrangements are managed by the co-owner and leasing agents and the bank account is under Joseph’s control and, as I have noted above, other directors and shareholders and the co-owner would be involved in any decision to sell the Company.

47. The Plaintiffs did not bring an application to wind up the Company under s 461(1)(k) of the Corporations Act on the just and equitable ground, and it seems to me that their lack of trust in Paul, or Paul’s lack of trust in them, is not sufficient to give rise to oppression. I am therefore not satisfied that oppression has been established in respect of the management of the Company’s affairs generally, albeit that the Company was under Fred’s control for a significant period and has subsequently been managed in a somewhat informal way.

48. In his closing oral submissions, Mr Hassett also relied on the circumstances in which the Cross-Claim, which I address below, was brought by the Company as a matter giving rise to oppression (T150). Mr Hassett submits, and I accept, that there is a degree of similarity between the circumstances of the “loan” to Paul from the proceeds of the Merrylands property, which he applied in respect of payments in respect of his divorce, and the “loan” to Johnnie from the sale of the Rosehill property. I also accept Mr Hassett’s submission that there are inconsistencies between the evidence given by Paul in cross-examination in the Rafic proceedings to which I referred above which seems to me to have substantially accepted that the relevant funds were made available to him as a loan from the Company, and the evidence he gave in these proceedings. In closing submissions, Mr Neggo responds that:

“The Plaintiffs say that the bringing of the Cross-Claim is itself oppressive. The Plaintiffs also seek an order that they each be paid a sum of money calculated by reference to the ‘residual value’ of the Company. The way that the Plaintiffs’ expert witness values that ‘residual value’ depends wholly on the recoverability, and the actual recovery of loans.”

Mr Neggo in turn points out that, if the amount paid to Johnnie was not a loan, then the Plaintiffs cannot sustain the claimed value of their shareholding; and, conversely, if the shareholding has that value, it is only because the Company is entitled to recover that loan from Johnnie.

49. But for the fact that the Plaintiffs approached the valuation of their shares in the Company on a basis that included the value of the directors’ loans, I might well have held that the pursuit of the Company’s Cross-Claim against Joseph amounted to oppression. That possibility would have arisen where, even if (contrary to my view) the payments by the Company to Joseph were properly characterised as a loan, they were of a similar character to payments made by the Company to Paul at the time of his divorce, payments made by Rafic to Joseph to fund the building of his house and benefits provided to other family members by Fred, and those payments were made by the Company under Fred’s control and received by Johnnie on a basis that did not contemplate that it would be repayable on demand many years later. The commencement of the Cross-Claim, and treating that loan as due and payable, might then appear to have been a “tit for tat” response to Joseph’s and Johnnie’s attempt to force the sale of the Luddenham property, with the potential to expose Joseph to the risk of serious consequences and expose the Company to the risk of significant wasted costs.

50. However, I am not able to reach that conclusion given the structure of the Plaintiffs’ case which, it seems to me, provides objective justification for the Cross-Claim. (It is also not possible to reach any findings as to the Cross-Claimants’ subjective reasoning in that respect, which would depend on the legal advice they had received which they were not obliged to and did not disclose.) As I noted above, the Plaintiffs quantified the basis on which the shares in the Company would be valued on a buy-out as including the value of director’s loans owed to the Company which included the amount of the loan to Johnnie. I recognise that Mr Hassett contends that that was done when they did not have a full understanding of the relevant transactions, but there is nothing to suggest that they altered their position when further information became available to them. Where a claim was made against the Company on that basis, it seems to me that the Company then had a proper basis for bringing a Cross-Claim that sought to recover that loan. Had it not done so, it would have been exposed to the unreasonable result that it was required to buy Johnnie’s shares on a basis that treated that loan as recoverable, while Johnnie at the same time maintained the position that the loan was not recoverable and it was not recovered from him. I cannot find that the Cross-Claim amounted to oppression, where a failure to bring it would have exposed the Company to that result.

The relief sought by the Plaintiffs

51. Turning now to the relief sought by the Plaintiffs, Mr Hassett recognises, in his closing written submissions, that there were “difficulties” associated with making the orders the Plaintiffs sought, or possibly the primary orders that they sought, and suggested that those orders could be made by consent or upon a late joinder of Christopher and Colin to the proceedings by consent. There is no suggestion that the Defendants consent to those orders or that Christopher and Colin’s consent to that course was sought or given. He also retreated somewhat from the Plaintiffs’ application for a winding up order, submitting that that remedy would damage all parties, by reason of the usual costs of liquidation and the fact that no party wanted the Luddenham property to be sold at this time. In closing submissions, Mr Neggo submits that a transfer of part of the Company’s interest in the property to the Plaintiffs would not address the alleged oppression, and would affect a significant change in the relationship between the parties, and also between the co-owners to the property. In closing submissions, Mr Neggo also accepts that none of the parties want the Company to be wound up, taking the same view as Mr Hassett in that respect.

52. I am not persuaded that, even if oppression had been established, a basis has been shown to make an order requiring the Company to transfer 20% of its interest in the Luddenham property to each of the Plaintiffs. That order would not dissolve the parties’ legal or economic relationships so as to address the difficulties between them, but simply continue those relationships in a different legal form which the Plaintiffs perceive as more attractive or advantageous to them, and that is not appropriate relief for oppression. I also cannot make an order that the Company buy back the Plaintiffs’ shares at a value excluding the Luddenham property, where that would not be a fair result for the Plaintiffs, where they are not to receive a transfer of any interest in the Luddenham property. In any event, the contradiction in Joseph’s position as to whether a loan is owed by him (comprising a significant part of the directors’ loans shown in the Company’s balance sheet), between that assumed in Mr Paul’s evidence and that taken in the Cross-Claim, and the absence of current evidence as to the value of shares in the Company, prevent an order of that kind being made.

53. I am also not persuaded that a winding up order should be made, quite apart from the parties’ own reluctance to achieve that result. Only the Company and Paul have been joined as Defendants in these proceedings and, ordinarily, the Company would not be expected to take an active role in opposing a winding up order in a dispute between its shareholders. As I noted above, two other shareholders in the Company, Colin and Christopher, have not been joined as Defendants. Their rights as shareholders in the Company would arguably be affected by the making of a winding up order and their interests as shareholders would plainly be affected by the making of such an order.

54. It is not necessary to decide whether the Court has jurisdiction to make such an order, in an oppression case, where the shareholders affected by that order have not been joined: compare News Limited v Australian Rugby Football League Ltd (1996) 64 FCR 410; 21 ACSR 635; John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1 at [131]-[132]. Whether or not the Court has jurisdiction to make such an order, it seems to me that it should not, as a matter of discretion, do so where the Plaintiffs have not joined Colin and Christopher to ensure that they had procedural fairness in respect of that outcome. For the reasons identified by the Full Court of the Federal Court in News Ltd v Australian Rugby Football League Ltd, it seems to me that it is not sufficient to address that difficulty for the Plaintiffs to have given notice of the proceedings to Colin and Christopher, as they say they have done, and seek to shift the obligation to take active steps to become party to the proceedings to Colin and Christopher. I would therefore not have exercised the discretion to make a winding up order, potentially adverse to Colin’s and Christopher’s rights and interests, even if I had formed the view that relevant oppression was established. I am not persuaded that an order should be made winding up the Company.

The Company’s Cross-Claim

55. As I noted above, by a First Cross-Claim filed in August 2020, the Company seeks an order that Johnnie pay it $523,412 as a debt and interest calculated in accordance with the Division 7A benchmark interest rate. The Company pleads that it made a loan of $780,000 to Johnnie in around 2011, in payments of $700,000 and $80,000, which was repayable on demand; that franked dividends declared by the Company on or about 30 June 2014 and on 30 June 2015 were applied to reduce the principal on the loan; and that that amounted to a confirmation of the debt by Johnnie for the purposes of s 54 of the Limitation Act 1969 (NSW). By his Defence, Johnnie admits that these amounts were paid to him but denies that they were a loan and contends that they were a “gift arranged by his father to him”; denies that the dividends were applied in reduction of the alleged debt; denies that he confirmed the debt and relies on s 14 of the Limitation Act; and says that he was not obliged to make any payments in reduction of the alleged debt. Johnnie accepts that $700,000 was paid by the Company to him on 29 June 2011 from the sale of the Rosehill property and another $80,000 was paid on 12 July 2011. He also accepts that the balance sheet of the Company for the year ended 30 June 2011 refers to “loans to related entities” of $1,041,183, although Mr Hanna’s evidence is that the ledgers for that year, which should be held by his firm, have been lost. Mr Hassett submits, in closing submissions, and it appears to be common ground, that there was a family practice of “advancing” money from Rafic or the Company to the sons as determined by Fred.

56. Mr Hanna’s evidence (admitted with an order under s 136 of the Evidence Act as not evidence of truth of the fact asserted), to which I have referred above, is that Fred told him that the payments totalling $780,000 were loans from the Company (Hanna 10.7.20 [15]), and that he had conversations with various members of the Essey family, including Fred, and accountants acting for them (including Mr Mehri, an accountant acting for Johnnie) in respect of the proposal to pay dividends from the Company in 2014 and again in 2015 and apply them to reduce the amounts previously paid to Johnnie, consistent with the characterisation of them as Div 7A loans, and that each of the Essey brothers then agreed to those transactions, although Johnnie and Joseph now deny that matter. I have referred above to Mr Hanna’s evidence that he recorded the relevant amount, initially under the entry “loans related entities” and subsequently under the heading “director’s loan” in the Company’s financial statements.

57. In opening submissions, Mr Neggo submits that the Cross-Claim against Johnnie depends on whether the payment of $780,000 to Johnnie was a loan or a gift. That proposition is an oversimplification because, as I will note below, the alternatives also include an appropriation of the Company’s assets by Fred, for Johnnie’s benefit; a payment out of the Company’s capital, by way of a lawful or unlawful reduction of capital; and a dividend, which may or may not have complied with the statutory requirements as to when a dividend could be paid. I bear in mind Johnnie’s evidence that the $780,000 was a “gift arranged by his father to him” which is not inconsistent with the money being sourced from the Company, although it leaves open whether the transaction, if it was a loan, was a loan by the Company to Fred and by Fred to Johnnie or a loan direct by the Company to Johnnie. I also bear in mind Paul’s evidence that he was not involved in any discussion about the Company giving money to Johnnie as a gift and is not aware of such a discussion, but that evidence does not go far where the Company was largely under Fred’s control at that time. I also bear in mind the evidence of Mr Hanna’s subsequent discussion of “loans” with Fred and, on his account which is disputed by Johnnie, with Johnnie in 2014 and 2015. Mr Neggo also submits that the parties’ subsequent conduct in respect of the dividends, in 2014 and 2015, is admissible and should be given subsequent weight to prove the terms on which the money was paid, referring to County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193 at [24]. I am not persuaded that that approach is appropriate, where Mr Hanna’s evidence makes clear that he was seeking to characterise the transaction in a way that would minimise the tax risks attached to it, in 2014 and 2015, relying only on Fred’s statement to him characterising the payment as a loan.

58. In closing submissions, Mr Neggo also submits that whether the payment to Johnnie was a loan comes down to the intention of the parties at the time of the payment; that Fred’s intention can be imputed to the Company, because he was the guiding mind of the Company; that Fred told Mr Hanna that the payments were loans, although Mr Neggo fairly accepts that is not admissible to prove the agreement between the Company and Johnnie; and that Fred’s purpose in telling Mr Hanna that the payments were loans could only have been that Mr Hanna recorded them as such in the accounts, which are prima facie evidence that the payments were loans.

59. Mr Hassett responds that there was no directors’ resolution to make a loan, no formal loan deed, no agreed repayment date or interest rate and he refers to the references in the Company’s financial records to loans to related entities, and subsequently loans to directors. Mr Hassett submits that:

“The lack of any contemporaneous document or any agreement as to interest rate, repayment date or any other salient feature of a loan, indicates no loan was ever intended.”

He submits, referring to the similar circumstances considered by Brereton J in Re Rafic Pty Ltd above in respect of the loan by Rafic to Joseph, that the Court should find that there was no expectation that the loan made by the Company to Johnnie would be repaid. He also points to Johnnie’s refusal to engage with Mr Hanna in documenting the loan for the purposes of Div 7A of the Income Tax Assessment Act, and I accept that that suggests that at least Johnnie did not intend to recognise the arrangement as a loan. It is not necessary to address Mr Hassett’s further submission that Mr Hanna’s attempt to minimise Johnnie’s tax liability under Div 7A of the Income Tax Assessment Act would not have succeeded, because a loan in writing was not in existence before the lodgement day for the relevant year of income. It seems to me that there is at least some force in Mr Hanna’s view that the Deputy Commissioner of Taxation may have been more sympathetic to the arrangements, if there had been at least partial compliance with the requirements of Div 7A of the Income Tax Assessment Act.

60. In his written outline of closing submissions, Mr Hassett also advanced the position that the loan accounts in the Company’s books were “nothing more than a sham designed to be used as [a] “defendable position” … against the Deputy Commissioner of Taxation should there be any tax audit and deeming of dividends” under Div 7A of the Income Tax Assessment Act and submitted that there was never any intent on the part of any of Fred or the sons that the advance made by Rafic to Joseph be repaid; or that the advance made to Paul from funds realised from the sale of the Merrylands property be repaid; or that the advance made to Johnnie from funds realised from the sale of the Rosehill property be repaid. I would not go so far as to find that the arrangements were a sham, where the parties acted in accordance with them in respect of the declaration and application of dividends at least in 2014 and 2015, although I accept that the evidence does not establish any intention of Fred or the sons, as at the time the loans were made, that they should be repaid.

61. I give little weight to the absence of a director’s resolution or a formal loan deed, given the informal manner in which the Company’s affairs were conducted under Fred’s control. However, no evidence was available from Fred, or given by Johnnie, of any conversation at the time the payment was made to Johnnie in which the payment was characterised as a loan, or its terms including as to repayment date and any interest payable were agreed. It is equally plausible, in the circumstances, that the transaction was simply an appropriation of the Company’s funds by Fred for Johnnie’s benefit, or a lawful or unlawful capital reduction, or a lawful or unlawful dividend paid by the Company to Johnnie. I am unable to conclude, given the paucity of the evidence, that the payments by the Company to Johnnie initially had a character of a loan. It seems to me that a subsequent characterisation of the arrangement was not sufficient to create a loan, where the arrangement was not initially characterised as a loan. The position here is similar to that which I addressed in Re Ledir Enterprises Pty Ltd above at [126], to which Mr Hassett referred in closing submissions, where I noted the absence of a resolution or any contemporaneous consensus that a payment was a loan; that the later characterisation of a transaction as a loan by a company’s accountants, and in its accounts, did not seem to me to be sufficient to support that characterisation where it had not been adopted contemporaneously; noted the absence of contemporaneous transactional documents, including a written loan agreement as required by Div 7A of the Income Tax Assessment Act, and concluded that:

Where there was no corporate decision of [the company] to make a loan to [a shareholder], whether formally by the board of by a meeting of minds of the directors, including in respect of the approval of [the company’s] accounts, the description of the payments as loans in [the company’s] accounts cannot alter the substance of the transaction: Temples Wholesale Flower Supplies Pty Ltd v Commissioner of Taxation (1991) 29 FCR 93.

62. It is not necessary to determine the further question whether, if a loan were established, it would be repayable on demand, or barred by the operation of the Limitation Act, where I have not found that a loan is established on the balance of probabilities.

Orders and costs

63. For these reasons, the Plaintiffs’ Originating Process and the Cross-Claim should each be dismissed. My preliminary view is that there should be no order as to the costs of the proceedings, but I will allow the parties 7 days to make written submissions to the extent that they contend for any contrary result as to costs.

64. For completeness, I note that Johnnie has, in these proceedings, resolutely resisted the attempts to treat the payment of $780,000 made by the Company to him as a loan, and claims to have previously also rejected Mr Hanna’s suggestion of that approach, made to assist him in avoiding a tax liability under Div 7A of the Income Tax Assessment Act in respect of that payment. The evidence suggests that Johnnie has not considered it necessary to act consistently with that position in managing his tax affairs. He may or may not have self-reported the receipt of that payment to the Deputy Commissioner of Taxation after I raised this matter at the conclusion of submissions in the hearing. Unless he has done so, my preliminary view is that the parties should be ordered to provide a copy of this judgment to the Deputy Commissioner of Taxation, so that it has the opportunity to pursue any unpaid tax and any penalties which arise from the matters addressed in this judgment. I will allow Johnnie an opportunity to make submissions, within 7 days, as to why the Court should not make such an order.

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Decision last updated: 07 December 2020