Joint v Stephens
[2008] VSCA 210
•21 November 2008
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No 3735 of 2008
| PETER JOINT | |
| Appellant | |
| v | |
| JASON JOHN STEPHENS | Respondent |
---
JUDGES: | NETTLE, ASHLEY and NEAVE JJA | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 29 September 2008 | |
DATE OF JUDGMENT: | 21 November 2008 | |
MEDIUM NEUTRAL CITATION: | [2008] VSCA 210 | |
---
Companies – Oppression – Oppressive conduct of affairs of company – Quasi-partnership – Dissension between principal shareholders – Member of company deprived of directorship and benefits of membership – Dispute relating to management fees charged to company by related companies – Offer by minority shareholder to purchase majority’s shares – Subsequent dismissal of minority shareholder by majority – Relief – Compulsory purchase of minority shareholder’s share – Value of company – Appropriate date for valuation of minority shareholding – Corporations Act 2001 (C’th) s 233 – Wayde v New South Wales Rugby League (1985) 180 CLR 459, Morgan v Flers Avenue Pty Ltd (1986) 10 ACLR 692 referred to.
---
| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr C R Northrop | Goldsmiths Solicitors |
| For the Respondent | Mr R S Randall | Rigby Cooke Lawyers |
NETTLE JA:
ASHLEY JA:
NEAVE JA:
This is an appeal against a judgment given in the Commercial and Equity Division. The appellant’s claim below was for relief under s 233 of the Corporations Act 2001 (C’th) in relation to the conduct of the affairs of Program IT Pty Ltd (‘Program IT’) or alternatively for an order that Program IT be wound up under s 461(1)(k) of the Act on the just and equitable ground.
The facts
Before the formation of Program IT, the appellant had eight years’ experience running a small computer sales, desktop publishing software development and deployment business called Joint Computer Marketing (JCM). It grew to a turnover of several hundred thousand dollars a year and employed a total of four people. In 1998 he closed down JCM and began working as the principal Customer Relationship Manager (CRM) consultant at an organisation called AIPC, and he remained there until 2000. CRM is also a methodology for retaining customers and ensuring repeat business. It includes a significant computer and software component and its implementation requires a high degree of technical and business experience.
The respondent was an entrepreneur whose object was to develop businesses for sale. From June 2000, he and a chartered accountant named John Tan (Tan) worked together in a company called ReImage Pty Ltd which provided on-site refurbishment and maintenance of service stations for oil companies and the refurbishment and maintenance of physical assets for other organisations. From time to time, the respondent also owned and operated several other companies. He established Octopus Pty Ltd, which was an advertising company, and it operated for about three years. He had another company, called Builders’ Choice Pty Ltd, which imported kitchen appliances. He was a director of further company, Program Development Pty Ltd, although at relevant times it did not carry on any business. He also owned a company, called Spray Mobile Franchise Pty Ltd, which was a franchisor company; a landholding company, called Yarnock Developments Pty Ltd; a development company called Sanquest Properties Pty Ltd; a company interested in sculpture, called Art of Aiden McLeod Pty Ltd; and a superannuation company, called Jason Stevens Superannuation Pty Ltd. The respondent called all of those companies the Program Group, although they were a group only in the sense that he owned the shares in each of them. As will be seen, he also adopted a practice of raising ‘management fees’ and ‘administration charges’ between the several companies in order to minimise taxable income and thus tax for the group as a whole.
Tan was the appellant’s sometime accountant and advisor. During June 2000, the appellant fell out with AIPC and sought Tan’s advice. That led to discussions between the appellant, Tan and the respondent and the formation of Program IT. The company was incorporated with 100 issued shares held by the respondent on trust as to 51 shares for himself and Tan and as to 49 shares for the appellant. The appellant provided the IT related impetus for the project.
The business of Program IT was to assist other companies to manage call centres and CRM. A call centre may consist of a large group of people answering telephone calls or emails from customers requiring assistance or a large group of people making outbound calls in order to solicit business or request the repayment of loans. Program IT implemented new CRM methodologies and oversaw the automation of existing methodologies through computer software deployment. Program IT was also involved in the distribution in Australia and Asia of two Business Intelligence applications and one CRM software application. Business Intelligence applications are software programmes which consolidate large quantities of transactional information and provide visual and textual analysis of trends, patterns and unusual company performance. Program IT trained staff in the applications and was responsible for the implementation, training, and marketing of the applications. It sold the software in Asia through ‘partner’ organisations.
At the outset, it was proposed that the appellant and the respondent and Tan would run the business of Program IT as a joint effort. The appellant was to be concerned with the technical and sales aspects of the company’s business. The respondent’s intended role was to be in the marketing and financial aspects of the company’s activities. Tan’s intended role was to oversee the company’s accounts. It was agreed that the appellant should be employed by the company until he concluded his dispute with AIPC and that he then be appointed a director. It was also intended that the 49 shares held in trust for the appellant would be transferred to him at that point.
In order to begin operations, the respondent provided $10,000 seed capital through Spray Mobile Franchise Pty Ltd. Administrative and clerical services were provided by employees of Spray Mobile Franchise Pty Ltd, in particular by Di Trucano and Paul Crapper of Spray Mobile Franchise Pty Ltd, and charged for by way of administration charges which were recorded in the books of account as company loans. The accounts of Program IT were kept by Di Trucano and Paul Crapper under the instructions of the respondent and Tan, and the company’s annual accounts and tax returns were prepared by the respondent’s personal and business accountant, Stephen Murphy of GNS Group Pty Ltd Accountants. The appellant was not involved in any of the administrative tasks during the initial phase of the company’s operations.
Some time after operations began, Program IT arranged a $100,000 overdraft facility with the National Australia Bank. To begin with, the respondent was the sole guarantor. That changed in 2002 when Tan, as a director, also became a guarantor and then again, on 31 October 2002, when the appellant became a director and the managing director. At that point, he became a guarantor and the respondent’s liability as guarantor was discharged. At much the same time, the initial seed capital of $10,000 was repaid to Spray Mobile Franchise Pty Ltd and the 49 shares in the capital of Program IT which had been held on trust for the appellant were transferred to him.
Program IT began business with one client, Kistend Travel, which was introduced by Tan, and a number of the appellant’s contacts from businesses before his association with AIPC. Kistend Travel generated approximately $13,000 in revenue in the first few months. The company was also approached by several of AIPC’s clients but refused their work because of the litigation with AIPC. Over time, Program IT developed both local and overseas customers. Among others, they included the Commonwealth Department of Defence, Olex Cables Ltd and the Australian and New Zealand Banking Group Ltd. By September 2000, Program IT was rendering services to Siemens for which it was charging tens of thousands of dollars per week.
According to undisputed evidence, the appellant provided ‘great service to [Program IT]’. From the start, he worked more than 60 hours a week on automation, streamlining and other activities and some weeks he worked in excess of 100 hours. He assessed project risks, and was responsible for ensuring that quotations to customers had a solid business case ensuring profitability of the company. He had input into every tender and contract the company entered into. Throughout the four and a half years he was with Program IT, he had no more than eight weeks’ holiday and even then when on holidays he always took his laptop computer and accessed company email daily, filtering between 80 and 150 emails per day and keeping watch on every customer support enquiry. During the early years of the company, he was directly involved in all project work and conducted the company training and customer training for CRM applications, as well as the Business Intelligence Applications, and he was responsible for all employee management, including hiring, dispute resolution and company social events.
The evidence was less clear as to what the respondent or Tan contributed to the operations of the company. According to the respondent, he worked with Program IT for years without drawing a salary and made ‘substantial contributions to the operations of the business’. According to the appellant, however, the respondent’s input was minimal and his only apparent involvement was during the time of one marketing exercise, for which he attempted to charge the company through one of his companies for 18 weeks (at 30% of his time). The respondent deposed that Tan ‘worked long hours on matters relating to the Company and his input both into management and marketing to clients and potential clients greatly assisted the Company’. The appellant deposed that Tan’s direct input was also limited. He said that Tan was involved in another company, EProgram Asia, which was incorporated in Hong Kong and the shares in which were supposed to be held on trust for Program IT. But on average, the appellant and Tan exchanged only one or two emails a day.
Problems with the accounts
The appellant gave evidence that Program IT was continually generating profits but that the cash flow was always a problem. He said that he did not believe that work on the company’s books was competently done. Eventually, after more than three years of the books being kept by Di Trucano, he appointed a new bookkeeper, Sue Hammond, to replace Trucano and a CPA, Ulla Lonnqvist, as her supervisor.
The appellant’s evidence as to the unsatisfactory state of the company’s books was corroborated by Ulla Lonnqvist. She deposed that she was a Certified Practising Accountant who commenced work with the company as a contractor on 8 June 2004 and was appointed to the salaried position of Chief Finance Officer in September 2004. Within five days of commencing work, she prepared a draft report on the company’s accounts containing her initial observations on their inadequacies and seeking to address a number of issues that had become apparent:
One of those was the reporting for, and payment of GST. The company had been paying invoices that were not addressed to it but to other entities of Jason Stephens such as Reimage [sic], Spray Mobile and Builders’ Choice. The company paid the bills eg to Optus and Telstra, among others and claimed the GST credit but the invoices should have been entered in Program IT’s books through loan accounts. Another concern was management fees paid by the company which included GST. I recall seeing a letter from the company’s accountants, GNS Group, advising that the refund of the GST resulting from these fees should be paid directly to other companies even though it belonged to Program IT.
… I recall seeing invoices for personal tax returns for Jason Stephens’ Family Trust and other individuals. These services were rendered by GNS Group. I checked whether Program IT had paid the invoice and found that it had been incorporated into the company’s accounting fees. In addition to this, at around the same time, August/September 2004, the company received an invoice from GNS Group for their services rendered. As I was not aware of any services having been requested from GNS at the time, I queried this invoice. Their accounts receivable person advised me, that the invoice actually related to services rendered to another Jason Stephens’ entity. I requested a credit note. As at the time of my dismissal [on 22 October 2004], no credit note had been received.
When I commenced at the company, Program IT paid all rent and outgoings for the premises and had been doing so since they moved to the premises at Arthur Street even though parts of the premises were used by other companies [belonging to Stephens]. Invoices were not rendered to the other companies using the premises and I believed they should have been paying around 50%. I attempted to implement a procedure for that to occur.
…
At the end of the June 2004 quarter it was clear to me the accounts of the company contained many discrepancies needing clarification…
Disputes about management fees and administration charges
There was also a dispute about the amounts of ‘administration charges’ and ‘management fees’ that were charged by companies in the respondent’s Program Group, and as to whether the respondent was taking amounts of money out of Program IT which resulted in it being short of cash. The appellant’s evidence was that, although Program IT earned good income, he became concerned about accounting practices from the outset. He said that during the first two years of operation, there were many management fees charged by the respondent to the company and that when the appellant questioned them he was told that he was not in a position to dispute the charges.
Ulla Lonnqvist corroborated the appellant’s concerns about the level of administration charges and management fees. She deposed that, in addition to the ordinary duties of a CFO:
[I] was working on a report in relation the company’s loan accounts. I had been analysing transactions through these for the financial years ended 30 June 2003 and 30 June 2004. My focus was particularly on the directors’ personal loan accounts and loan accounts of entities owned by Jason Stephens. My report was in the form of Excel work sheets and contained data retrieved from the company’s books of account. I delivered this report to Peter Joint, Jason Stephens and John Tan on 13 October 2004. I offered no opinion or interpretation as to the contents of the report.
After this had been done I attended a meeting with Jason Stephens, Stephen Murphy of GNS Group and Di Trucano in the Program IT boardroom [on 19 October 2004] three days before I was dismissed. At the meeting I was given a handwritten summary by Stephen Murphy of the end of year management fees charges from 2001 onwards. I was not at any time asked whether I approved of the fees being paid or whether they were fair and reasonable…
She was cross-examined on that evidence and said this:
It was a 19 page spreadsheet, was it not? - - - Yes.
Do you know what’s happened to that report? - - - No.
They were account queries and transaction queries, were they not? - - - Yes.
And have you seen Mr Murphy’s comments about it? - - - Seen his comments on that day or ---
No, subsequent to that? - - - No.
So you had a discussion with Mr Murphy on the day? - - - Yes.
And would it be fair to say that some items he agreed with, others he disagreed with? - - - Di Trucano had also gone through them and ticked them all off from – also through the same – to verify that all the information I had on those sheets had actually been retrieved from the books of account…
…
And then you’ve had a - was she at the discussion with Mr Murphy? - - - She was at the same meeting, yes.
And there was no further meeting after that, is that right? - - - No, no. I was dismissed.
The respondent denied that the accounts were inadequate or that he or any of his companies had acted improperly in using Program IT to pay personal expenses or the expenses of companies in the Program Group, and he denied that he or any of his companies took excessive amounts out of the company by way of loan. As he saw the position, Program IT was one of the companies in his Program Group and therefore it was permissible to move money into it and out of it according to what he perceived to be the best interests of that group as a whole. As he put it in his affidavit of 15 December 2004:
For the first 12-18 months of operation of Program IT, the overhead expenses were paid for and met by Spray Mobile Franchise Pty Ltd. Other businesses developed or grew out of the same premises at Main Road Eltham. My view with the shared accommodation was that there were times when other companies needed financial support and accordingly, borrowings between the group companies would occur which were then entered into the books of accounts and repaid where possible. In May 2003 we moved to Arthur Street in Eltham.
…
…Program IT was a start up company. It had no clients when we began and relied upon my $10,000.00 capital injection and then later the $100,000.00 overdraft. Program IT was one of a number of companies within the group known as the Program Group and shared overheads and expenses such as rental, accounting services and provision of administrative support. Program IT was not in a position to become financially viable from day one and within the Program Group, Program IT had its fixed and variable overhead costs subsidised by other companies. For instance, Program IT paid little if any fees for accounting services provided to it. These were all met by Spray Mobile Franchise Pty Ltd. This continued until Program IT was in a position to be cash positive and generate income to pay for these sorts of administrative expenses. The provision of these administrative services are recorded in the books of Program IT as company loans, and [the appellant] is incorrect when he describes these as disputed inter company management fees. I have sought and obtained from Mr Steven Murphy, our accountant at GNS Group Pty Ltd, Accountants, a report as to the trading results of Program IT for the period from June 2000 through to the end of 2003. I have also asked Mr Murphy to comment upon some of the allegations regarding intercompany management fees and the tax position of Program IT.
Mr Murphy’s response to Ulla Lonnqvist’s 19 page spreadsheet was tendered below. In fact, as it emerged from that report and Mr Murphys’ cross-examination, the administration charges and loan accounts were to a large extent a work of fiction contrived to reduce the apparent taxable income of the Program Group as a whole.
Thus, for example, Mr Murphy stated in his report that in the year ended 30 June 2001 Program IT achieved a turnover of $620,418 but, after allowing for expenses and ‘management fees’ of $22,833.22 (representing three point six percent of turnover) which were credited in favour of one or more of the respondent’s other companies, Program IT was left with a net profit of $197,178. Taxable income was then purportedly reduced to nil by the transfer of $197,178 tax losses from Spraymobile. Additionally, although it was not disclosed in the accountant’s report, but emerged in the course of the respondent’s cross-examination, a further $66,500 went out of the company to Spraymobile by way of loan.
For the year of income ended 30 June 2002, the report stated that Program IT generated a turnover of $1,121,295 which was then reduced to a loss of $224,850 after paying ‘administration charges’ of $195,581.55 and ‘management fees’ of $1,977.92 to companies in the respondent’s Program Group. That result was then improved to a loss of $8,628,05 by ‘journalising’ in ‘management fees’ of $225,000 as income received from other companies in the respondent’s Program Group. In the result, companies in the respondent’s Program Group were enabled to receive tax free income of $195,581.55 at the expense of depriving Program IT of the benefit of tax losses of almost $220,000.
As appeared for the year end accounts of Program IT for the year of income ended 30 June 2003, the company generated a turnover of $2,293,750 from which were extracted ‘administration charges’ of $74,346.47, apparently paid to other of the respondent’s companies, and ‘management fees’ of $222,634.55 apparently paid to other of the respondent’s companies, yielding an operating profit of $236,586.76 and taxable income of $227,375.48. According to the report:
Management fees totalling $221, 634 were journalised out of Program IT into 2 companies in the Group at year end to take advantage of losses in the Group. This adjustment reverses the transaction in the 2001/02 year with a differential balance of $13,366.’
Mr Murphy conceded in cross-examination that the so-called ‘management fees’ were solely for the purpose of avoiding the tax burden of the Program Group as a whole:
… you were the accountant for a number of companies in what’s been called the Program Group? - - - Yes.
And your job was to move money in the accounts between the companies in order to maximise the position of the group as a whole, do you agree with that proposition? - - - I provided advice on how they could possibly reduce tax within the group, but I had no involvement in transferring of moneys.
One of the devices was to raise entries against management fees from time to time? - - - Correct, yes.
…
Was the sole purpose of that to reduce tax? - - - Yes.
Mr Murphy sought for a while to maintain that there was a distinction between ‘administration charges’ and ‘management fees’. Thus, when it was first put to him that the two were fairly interchangeable, he said this:
…no, the administration charges are purely for the overheads and wages of the group, management fees were to cover a reduction in tax from one company to the next.
Then, however, he was taken to a letter which he had written concerning the 30 June 2002 administration charges, in which he had stated that: ‘This amount was put through to minimise the amount of tax payable between the group entities’, and he agreed that the administration charges were simply what the respondent said they should be and that there was no verification of them:
As far as attributing various amounts to various companies are concerned by way of expenses, do you act on the instructions that are given to you by Mr Stephens? - - - Yes.
You don’t claim to do any sort of verification work do you? - - - No.
The respondent also gave evidence in cross-examination which implied that, at least on some occasions, there was little difference in principle between the two categories:
Can you explain the logic behind having management fees as income and administration costs as expense, which almost cancel each other out” - - - Can I explain – sorry, can you say that again.
Can you explain why there is management fees as an income item and administration fees as an expense item, which are within $30,000 of each other? - - - I can’t explain that , no.
Well I put it to you it was done for the purposes of adjusting the different accounts between the different companies to minimise taxation for other companies? - - - Yes.
More disputes about loan accounts
The appellant deposed that in January 2004 the respondent told him that he required a loan from the company of between $50,000 and $75,000 for one of his other companies. The appellant said that he was pressured into agreeing but made it clear that the loan was only to be for two weeks, and that the respondent assured him that that time frame would be met. In fact, the loan was not repaid at any time before the appellant was dismissed as managing director and locked out of the company on 22 October 2004.
The respondent did not dispute that evidence apart from the suggestion that the appellant acted under pressure. Once again, he made it plain that he regarded Program IT as one of the companies within his Program Group and thus that he and Tan were at liberty to direct funds into it and out of it to his other companies as he chose. As he put it in his affidavit of 15 December 2004:
The interest free loans [were] payments made between companies inside the Program Group for management fees and at times for repayment of loans to or from Program IT depending on whether it was in a position to lend monies to other companies within the Program Group. Program IT was one company inside the Program Group and, to the best of my ability and that of John Tan, we tried to ensure any peaks or troughs in financial positions of any of the companies were covered by other companies within the Program Group.
In April 2004, the appellant found that the company did not have sufficient funds on hand to pay an urgent invoice from a key supplier and, when he queried how that could be, he ascertained that a management fee of approximately $66,000 including GST had been invoiced and paid to one of the respondent’s companies on the authority of the respondent (even though the real value of the transaction should have been at least $50,000 less than that). The appellant then demanded that the respondent return the moneys immediately and the respondent replied that he was not in a position to do so. Tan refused to take any action to recover the moneys, so the appellant was forced into borrowing $40,000 at high interest to cover the deficit.
The respondent did not dispute that except to say that the appellant should have called on one of the company’s debtors rather than borrowing at high interest and that one of the respondent’s companies repaid the $40,000 and interest within seven days, although the debt of $66,000 remain unpaid.
The Memorandum of Understanding
According to the appellant, such was the dispute about administration charges and management fees that, by May 2004, it had become apparent that the relationship between himself and the respondent and Tan was virtually unworkable. He therefore spoke to the respondent and told him that he was prepared to buy his shares in the company. They reached a handshake agreement that the appellant would purchase the respondent’s shares under an arrangement which valued the company at $4,000,000. Thereafter, the respondent had a memorandum of understanding drawn up by his solicitors which was intended to incorporate the terms of the handshake agreement. It provided that the appellant should purchase the respondent’s shares in the company for $2,000,000 by a deposit of $200,000 payable on the signing of formal documentation of sale and thereafter by 36 equal monthly instalments of $20,000 payable on the first day of each month commencing on the first day of the month following the deposit, with the balance of $1,280,000 in the event of a sale of a major asset or undertaking of the company, the sale or disposal by the respondent of a substantial shareholding in the company or entry into a joint venture.[1] That amount of $1,280,000 was called ‘the retirement fund’, and as will be seen, the appellant did not agree with it.[2]
[1]It is apparent that the total provided for in the agreement ($2.2m) was slightly more than half the $4m value mentioned.
[2]See [57] and [104] below.
The audit
As events transpired, the appellant was not prepared to commit to the purchase until the books of account of Program IT had been investigated and disputes about loan accounts, management fees and administration charges had been resolved. To that end, he engaged the new bookkeeper, Sue Hammond, in April 2004, to review the company’s accounts and maintain the company’s books, and Ulla Lonnqvist, in June 2004, in effect to audit the accounts. He instructed Ms Lonnqvist to prepare a complete summary of all transactions she could find in the previous two years that she considered might be irregular. As he deposed in his affidavit of 7 February 2006:
I made it clear at the time that I intended to independently audit the books prior to completing the deal. It was expected that should the books have been maintained in a tidy and orderly manner that it should be completed within three weeks. However many of the entries in the accounting system did not make sense, and much paperwork was missing, including a huge mess with international payments and foreign currencies.
On 30 June 2004, the appellant emailed to Di Trucano, who until then had been the bookkeeper for Program IT, with a copy to the respondent, explaining the position thus:
I understand your discomfort and the distaste that the introduction of Sue (and Ulla), and frankly the way I have handled it. For this I truly apologise. You have been in the most awkward of positions for a very long time, and the fact that you’ve not run out of the building screaming on numerous occasions is a credit to you…
…
We will still need some guidance from you from time to time as we continue to Audit the eProgam accounts in relation to company cross charging.
Again, this is not a process that is directed at yourself, as you were simply doing your job, and I admire it. I understand you not wanting to deal with the eProgram accounts at all anymore – and I am fine with that – if I could please ask that you help out until we can get the banking sorted out with NAB, which, if Graeme was not away should have been done by now.
Once that’s sorted, the only assistance we’ll need is in helping to dig up some of the reasons behind some of the more obscure transactions in the books and Steve Murphy will be part of the explanation trail.
Finally, just to re-iterate, the reason for the audit and Ulla’s current involvement is not a witch hunt (I had a long heart-to-heart with [the respondent] about this yesterday as well). It’s purely because through ignorance, naivety, or stupidity, I really just don’t understand the various accounts and transactions in the system. Once these are understood, I can place an appropriate valuation on the company and get eProgram more takeover friendly as at the moment – it is anything but…
Tensions remained high. On 22 July 2004, Tan emailed to the appellant and the respondent as follows:
It is not secret that the 3 of us are not tracking well as a team. [The appellant] is going to be away for a month and issues are bound to come up that give rise to misunderstanding in the current climate. I suggest we have an eProg board meeting tomorrow to ensure protocols are in place and we and the staff have a clear understanding. The aim is to create an acceptable equilibrium/working environment. To this end I suggest we put our individual concerns on the table with care and consideration so as not to escalate; put forward ideas on how to resolve the concerns at this meeting.
Later that day, the appellant responded by email to Tan, making plain that his principal concern remained the state of the accounts and that he still intended to buy out the respondent once the audit was complete:
This makes it look worse than it is mate. This is so way out of proportion. Like I said to you over coffee, and sms’d you on the phone tonight, when the audit is concluded, and discrepancies cleared up, monies paid back in what ever direction they are owed, I’ll buy Jason as per our original handshake. This audit should have been over months ago – it is only because of the state of the books that this is taking too long – this is the single biggest reason that everyone is getting antsy – I’m getting just as impatient as Jason and probably you. If the books and tax situation was clean, I could have concluded the deal with Jase months ago. There is no need to run around fanning flames mate – at the end of the day I want the company to succeed – I’ve put a lot of effort into it. I want to support the exit strategy from Rob, but it is not my main focus, nor will it ever be. An all out war is a lose – lose for everyone here – and you should know me better than to think it’s going to be my first move. I’ve sat on my arse for the first 4 years on this company only to have its cashflow drained and the books unauditable. If I hadn’t said fuck this and bulldozed my way into the control booth, I’d still be still on my arse, politely asking for Di [Trucano] to be sacked and begging Jason to put money back. I’m not going to see me, my friends and the company suffer through negligence. If it all blows up, then at least I’ll have learnt something and I can finally move on with my life and get back to a salary that I’m happy with.
Anyhow, this meeting should be over in 10 minutes – I’ve got a lot of stuff to get done tomorrow before I go.
That was followed over the next few weeks by a number of emails concerning the mechanics for Tan to transfer the shares which he held in eProgram Asia to the company and further emails as to the manner in which Tan’s salary should be accounted for.
At some point, the respondent withdrew his offer to sell his shares in Program IT to the appellant. When asked in cross-examination why he had done so, he said that that business was in no position to buy him out at that time. But as appears from what follows, it is more likely that it was to do with the audit and the time which it was taking to complete. As the appellant deposed in his affidavit of 7 February 2006:
It was expected that should the books have been maintained in a tidy and orderly manner that it should be completed within three weeks. However many of the entries in the accounting system did not make sense, and much paperwork was missing, including a huge mess with international payments and foreign currencies…before the audit was complete, Jason advised me that he was taking the offer off the table.
Concerns over Tan’s financial arrangements
At all events, the sense of frustration over the state of the accounts was significant. On 12 August 2004, the appellant emailed to the respondent as follows:
His [Tan’s] loan account has continued to accrue for the last 9 months. It was at his request that he stopped being paid, and it was at his request that we started frigging around with crap in Hong Kong. We can’t run the ship like this anymore – not with the turnover we are doing, not with the vast numbers of people we employ, and if we are going to sell this company, it’s gotta stop. I know you and John don’t like the way I’m doing this, but frankly, if I don’t jump up and carry on like a pork chop, fuck all gets done. Like it has done for the last 3 years.
He’s not been paid because we don’t know how to pay him, nor how much to pay him, and he continues to ignore simple details like where to send the money, and from what account he expects. As directors of the company, we both are responsible for fiscal decisions – as a director, I’m sorry, but I will not allow myself to face the wrath of the family court. He’s avoiding his duties here – rightly, wrongly, don’t give a shitly. But I’m not going to [be] a party to it, and nor will I allow the company to be brought down by it. If his Ex decides to ask the family court to audit eProgram – we’re screwed.
John’s carrying on like a pork chop too – he’s dragged Rob and Andrew into all this bullshit unnecessarily and has said some unbelievably stupid things that has done more damage to his reputation than I could have possibly done.
The smiley face emails
Further frustrations over Tan’s financial arrangements appear in an exchange of emails on Friday 11 and Saturday 12 September 2004. On Friday 11 September 2004 at 3.51 pm Tan emailed to Sue Hammond (cc to the appellant):
Sue,
Did the funds get deposited? I am having problems with withdrawing funds in BKK?
She replied to Tan (cc to the appellant) at 5.38pm:
What funds? I gave you $5000 in cash and paid $3000 into your Commonwealth bank account when Linda asked me to. As this was NOT what we had discussed (you had instructed me to transfer money to your HK account) I decided you must have changed you mind without telling me and left it at that. As far as your expense claims are concerned, they are with Pete.
An hour later, the appellant emailed to Hammond:
Do you reckon he’s getting Alzheimers? Serious question.
The next day, Saturday 12 September 2004 at 6.18 pm, Hammond replied to the appellant with what was later called the smiley face email, as follows:
Ulla reckons, it’s a short circuit which requires a frontal lobotomy☺ Can I watch☺
The appellant responded immediately:
You can be anithesist [sic], Ulla can [be] head nurse. I’ll hold the scalpel.
I’ll install a cd player in his head…make him more useful.
The railway crossing proposal
On 11 August 2004, when the appellant was still away on leave in Thailand, Warren Cowcher, who was the manager of ReImage,[3] emailed to the appellant, as follows:
While you have been away there has been a triple fatality on a railway crossing. The people were stuck on the crossing in the car…Even when the train driver may see a car on the crossing, usually he cannot pull up in time.
…
I was thinking about this and can this be seriously considered? How about having weight insert pads laid in the crossing with a sensor that when a train is say a ½ kilometre away from the crossing it automatically receives a signal that governs the engine down to 5/10 klm so when he has a visual he can stop in time or continue on if the crossing is clear.
These weight pads would need to act when say ½ a tonne is on it, send by remote to a radius area of say ½ – 1 klm to a devoted receiver either to a signal on the line to a sensor or a warning lamp on to the train engine?
[3]The respondent’s company which was in the business of maintaining and renovating service stations for oil companies.
The appellant replied by email on 12 August 2004:
Hi Warren,
I read about the accident on the online newspapers…
Sounds like a bloody good idea to me – how much do these weight pads cost?
Might be worth trying to patent the idea… How does one progress this sort of thing?
A week later on 20 August 2004, Mr Cowcher emailed again to the appellant as follows:
Hi Pete,
How’s it going? Hope you are having some R & R.
I have made some enquiries re weight inserts and these can be made to size say, 3m x 3m around $10k including customizing and provision for weight to activate and light a remote lamp. If it can send to a lamp it could send to an alternative sensor?
If this could be considered I am sure that you could get a non disclosure /confidentiality agreement with the scale/weight company.
So the up shot is at this stage without giving anything away to these companies is that the idea does have merit and could work or at least be explored.
What do you think? I put this idea to you because you have nouse on getting a system to work, enthusiasm and readiness to take it further as you can see what I can see. Realizing you are busy with eprogram[4] do you think you could talk further to me on this with a view that you provide a nondisclosure to the weight company, we patent the idea, seek further consulting etc with an end view of proposing to government and getting funding to develop it? How do you patent an idea?
At the end of the day; are you (I hope) interested enough to take it further with me?
[4]eProgram was a name sometimes used by Program IT.
During the course of the same day, there was a further exchange of emails between the appellant and Mr Cowcher about various technical difficulties and as to how they might be resolved. The appellant deposed in his affidavit of 7 February 2006 that:
Warren Cowcher and I [were] in discussions for many months on two business ventures. I arranged a technical presentation with a Mr Mike Cole [a technical consultant] of a possible solution for the railway crossing project, and explained to Mike Cole that it was not an eProgram project if it was to go ahead.
The appellant was not cross-examined on that part of his affidavit and it was not otherwise put to him that the proposal was an eProgram project, although according to evidence later given by the respondent in the course of his cross-examination, Mr Cowcher originally brought the idea of the railway crossing to the respondent and it was then explored for a period of time ‘throughout the technical people’, including Mike Cole. The respondent added that quite a few people in Program IT knew about the proposal and that the appellant had asked employees of Program IT to look into the matter. When, however, he was asked who were the people who had examined the proposal, he referred only to Mike Cole. Although Mr Cowcher was still a consultant with ReImage, he did not give evidence.
The appellant’s attempts to buy shares before completion of the audit
While the appellant was still on leave, on 16 August 2004 he emailed to the respondent asking him to revive the respondent’s offer to sell his shares in Program IT and offering to pay for some of the shares before the audit was complete:
Jase,
I would still like to you to consider our original deal. The Audit is still going to take months to complete, but given the mess we are creating here, I would like to at least set some more cohesive directions, in particular for you to reconsider withdrawing your offer. I can have the first 3 payments made upfront if you still consider it - I have that sort of cash without involving other shareholders.
Two days later, on 18 August 2004, the appellant emailed to Rob Williams, who was one of the employees of the company, explaining his objective:
Hi Rob,
Cool. That sounds good.
‘Got some cash’ means that I have easy access to about $60k, which covers three payments to Jason. Yes there are people interested, but I’m keeping them well away because I know, like you do, that given the right time, we can get a lot more than what the company is worth at the moment (which is bugger all).
I want to end this bullshit – and if this is what it’ll take, I’ll do it even before the audit is complete … which I really didn’t want to do, and it’s far from complete, but I would rather do this than give up….
We interpolate that the apparent inconsistency between the appellant’s wish to buy the shares at $20,000 per share and the observation in the email that the company was worth ‘bugger all’ was explained by the appellant in cross-examination in terms that ‘bugger all’:
[W]as a reference to the state of the accounts and … the fact that without control of the company the funds would continue to be borrowed and taken out of the company [by Stephens] without my agreement.
On 23 August 2004 the respondent emailed to the appellant in response to Joint’s email of 16 August 2004:
Hi Pete,
I have been to the snow for a week. When are you back.
The appellant replied by email the same day:
Hi Jason,
Friday, night.
The respondent rejoined, still later in the day:
Cool lets wait till then, hope everything is going well over there.
On 23 September 2004, the appellant emailed to the respondent offering again to buy some of his shares for cash:
Jase,
Do you want to offload some of your shares to me for some cash in addition to the move? It can be put through as management fees, or as cash in your pocket thing.
I can raise a fair bit at the moment.
To which the respondent replied the same day:
We need to treat that separately at the moment but I am sure ready to listen to what you have to say when you get back.
Twenty minutes later, the appellant sent an email back to the respondent offering:
$100k for 5 shares. Can have the money by Friday next week.
The Alta Vita coffee shop meeting
So far as the evidence goes, matters thus remained until a meeting a fortnight later at the Alta Vita coffee shop in Eltham. According to the respondent’s affidavit of 15 December 2004, the meeting (which was on 6 October 2004) proceeded as follows:
In early October 2004 [the appellant] and I met at Alta Vita Café in Eltham. Peter said to me that if he did not get total control of the shares in Program IT that he would take a job offer elsewhere and that there would be no company left and that he would take the key technical employees and contractors and the intellectual property of Program IT. [He] said he had $100,000 to buy my shares in Program IT and he might be able to raise some more money but not much more than $100,000 to buy me out. I did not accept this proposal and this negotiation did not go any further.
The appellant gave a different version of what occurred. In his affidavit of 7 February 2006, he said that:
I did not say that I would take the employees or the customers. I also never requested a complete buyout for $100,000. The offer was for 5 shares only, which valued the company at approximately $2,000,000. I had always maintained a line of $20,000 per share, and many people in the company were aware of this.
The respondent replied in his affidavit of 30 March 2006 reiterating his version of events:
I reject the Plaintiff’s assertions contained in this paragraph and confirm the statements made by me at paragraph 28 of my First Affidavit. Evidence of the fact that the Plaintiff was threatening to ‘take the employees and the customers’ is contained in the Plaintiff’s email to John Tan dated 8 October 2004…
We shall come later to the email of 8 October 2004, but we note at this point that it did not in terms constitute a threat that the appellant would take the employees or the customers and, in cross-examination, the appellant denied that he ever threatened to solicit staff or customers of the company:
And at that coffee shop meeting, you had made like comments as set out in this email transmission of 8 October hadn’t you” - - - I don’t recall the exact comments of that meeting.
Mr Stevens [sic] will say that you threatened to walk away and take all the clients and staff with you, what do you say about that? - - - I never made any threat ever to do that.
But you’ve made threats in the email of 8 October haven’t you? - - - No.
So you don’t consider what’s here as threatening? - - - No.
We also note that when the respondent was cross-examined about the meeting of 6 October 2004 he did not appear to have a clear recollection of what was said. So far from confirming his earlier allegation that the appellant had demanded all the respondent’s shares in Program IT for just $100,000, he suggested that the appellant had said that he would settle for just two shares for that amount:
I put it to you that in the meeting in early October 2004 he [Joint] repeated that proposal to buy five shares for $100,000? - - - It was a fairly short meeting and abrupt and on the way up from that meeting, walking back, he did offer me – he said anything. Just two shares will do for that amount.[5]
[5]Emphasis added.
The 8 October 2004 emails
Two days after the Alta Vita coffee shop meeting, on 8 October 2004 the appellant emailed to Tan apparently following up on his offer:
So what have you and Jason decided to do? Who’s pocketing the cash?
Tan replied an hour later:
Hi Peter,
When the environment was ‘rather tense’ I spoke to Jason and agreed to a strategy of stability, ie not breaking off into factions. I agreed that if there was to be a decision to sell it would have to be ‘sell one sell all’. The corollary to that is that each was not to sell without consulting the other.
Jason is taking it all in yesterday and seeking advice. My decision is ‘secondary’ due [to] the facts and circumstances. I can voice an opinion but it needs to be ‘persuasive in its own right’ to carry through.
My preferences:
1.I would like US ALL to see it through to an exit in the near future.
2.If there is a sale of Jase or me – I personally would prefer a FULL sale.
3.However I am open to canvassing various views and options.
Two hours after that, the appellant emailed back to Tan as follows:
John,
Option One is not an option. I won’t wait for some fictional sale [of the company to a third party] in the future, as it is well more than 12 months away – I can’t and won’t stomach this for that long. I can sell myself for $200k a year or more elsewhere.
Option Two is possible, but both of you can forget a retirement fund. If I left the company, the consultants and vendors would follow. Rob would have nothing to sell, so you’d see his arse out the door as well. The company is worthless without me, I know it, and I’m being constantly reminded of it, by everyone, including people whom you might think would not remind me of that. Everyone knows what’s going on.
As you’ve just stated – you and Jason are one in [sic] the same. This is the hoodwink I feel I’ve been sucked into because you’ve spent a lot of time convincing me that Jason was shafting you in the past…. Now you are best buddies. The whole stopping him from throwing you out feels like a charade. I’ve no issue in paying you a fair price for some or all of the shares but the choice is yours ultimately. I can’t force you to sell worthless shares to me.
I find it interesting that you see this as an all or nothing game. Given the chance in the past, I could have shafted you, and Jason waived 1% of the company for free under my nose for it. But I refused that because it was the wrong thing to do. As I said to you in the meeting the other day – this is a control thing. I want control of the company – and I’m not ashamed in stating that – I’m not interested in being controlled by you or Jason. Psycho analyse it all you want. I would be happy with buying anything from 2 percent upwards – at the moment, given the state of play, I feel that the company is worthless to me with a minority share holding, so there’s little to keep me interested.
Lastly, you said to me a long time ago that when I was ready to take over, you would walk away from the company. That was a lie. Don’t pretend that it wasn’t. Lets just get it out in the open and be honest in saying that there is no trust relationship between the shareholders anymore, and find a way to go our separate ways.
Pete
Less than week later, on 14 October 2004, the appellant emailed to the respondent seeking documents with which to advance the possibility of attracting an investor in the company or alternatively the purchase by the appellant of the respondent’s shares:
How are we going with getting those papers?
to which the respondent replied the next day:
Not good my lawyer is away could you give me the copy I gave you.
The appellant explained that exchange of emails, in his oral evidence in chief (which on this point too was not contradicted), as follows:
Can you tell her Honour what that subject has to do with?- - - That was concerning a discussion I’d had with Jason where he’d said that he would be agreeable to an investment, or for me to buy him out, and Jason was going to solicit the copies of the original documentation, which have turned up in the court books, for me to look at again.
Does it end with an email from Jason to yourself on 15 October at 8.29 in the morning? - - - Yes, he said that his lawyer wasn’t around at the time, but he’ll get back to me later, or for me to dig up the copy that I had.[6]
[6]Emphasis added.
The company’s business goes on
Meanwhile, the company’s business appears to have continued on successfully. Space does not permit reference to the detail, but there were in evidence a plethora of emails between the appellant and the respondent and the appellant and other persons associated with the company dealing with normal company business. There was no indication of the appellant stopping or slowing or otherwise altering the business of the company.
The McDonald’s meeting
In the days following the email of 14 October 2004, the appellant made arrangements for a meeting with a Mr Tony Joyce and Mr Mike Novis. Joyce was an old friend of the appellant’s father and a prospective investor in the company. At 12.23pm on 19 October 2004 the appellant emailed to Andrew Harris, who was one of the employees of the company, asking whether he knew of anywhere in the Camberwell area with reasonable parking facilities where they could have a meeting with Tony Joyce and Mike Novis:
Can you identify a place near/in Camberwell that we can meet with Tony and Mike that has reasonable parking facilities.
Half an hour later at 12.51pm Harris emailed back
Are you talking café type places?
At 15.37 pm Harris emailed through a map showing where they could park in Camberwell and meet in front of the McDonald’s restaurant in Bourke Road. The appellant then sent that on by email to Ulla Lonnqvist who responded by email that she would be at the meeting with Joyce ‘with bells on’.
The meeting with Joyce took place the next day, 20 October 2004, at 10.00 am. It was attended by appellant, Ulla Lonnqvist, Sue Hammond, Kevin Lee (who was and remains an employee of the company and senior sales consultant with the company), Andrew Harris (who was and remains an employee of the company) and Tony Joyce and Mike Novis. As the appellant explained in his affidavit of 5 November 2004, the purpose of the meeting was to solicit advice on how to raise capital to purchase the respondent’s shares and, hopefully, by showing the core team of the company, to induce Joyce to offer capital of his own. The appellant said it was also intended to gain advice on how to recall the debts owed to Program IT by companies in the respondent’s Program Group.
That evidence was not directly disputed. Counsel for the respondent indeed put to the appellant that the purpose of that meeting was to look at investment by Tony Joyce. But counsel for the respondent suggested that the purpose of the meeting was also to look at ways of exploiting the railway crossing idea suggested by Mr Cowcher without Program IT being involved. The appellant rejected that notion:
The purpose of that meeting was to look at investment by Tony wasn’t it? - - - Yes.
…
Was not part of the discussion to look at ways of exploiting the level crossing idea without Program IT being involved? - - - What discussion are you referring to sorry?
The 19 [sic, 20] October discussion? - - - At the coffee shop no, that wasn’t discussed at all.
Was it also - sorry I withdraw that. Was it discussed that the level crossing idea should not be part of ReImage? - - - The level crossing project wasn’t discussed at that meeting at all.
So can I take it that on 19 [sic, 20] October the discussion was about how to reorganise Program IT with Tony coming into it? - - - That was one of the things we explored at that meeting, yes.
…
If you turn to p. 74 you’ve said to Warren in the email transmission at 12.25 that ‘We shouldn’t be putting it on the ReImage letterhead…I can arrange a new company name and letterhead if you want’. Now Mr Joint wasn’t that because of your meeting on 19 [20] October you were already looking at ways to get rid of Mr Tan and Mr Stevens [sic] and invest with Tony? - - - Sorry you’re drawing two completely separate arguments.
The answer’s yes or no Mr Joint? - - No, the answer is no.
The appellant’s evidence on that point was corroborated by Andrew Harris and Ulla Lonnqvist. Harris, deposed in an affidavit filed on behalf of the respondent that:
At approximately 10.00am on the morning of Wednesday 20 October 2004 we all met as planned outside McDonalds in Camberwell. We then moved across the road to a café (I cannot recall its name). The meeting started with Peter [Joint] introducing Tony Joyce and Mike Novis. He described the events that had taken place with respect to his interactions with John Tan and Jason Stephens over the last couple of months in relation to the business. He stated that the purpose of the meeting was to investigate options for him to move forward and continue to operate a business in the manner he wished.
Peter said that he was a 49% shareholder of the Company and that he had been having problems with the other shareholders. Peter said that he had offered to buy 2% upwards of the shares owned by John or Jason but could not come to an agreement.
Tony and Mike responded by suggesting a number of real world options such as:
a)to leave and start another company. If he did that he would not be able to approach existing employees. The employees would be required of their own accord to leave the Company and seek employment with Peter;
b)to reach an agreement on the buy-out of the other shareholders; or
c)for Peter to sell out his shareholding.
All these options were discussed, and some short discussion took place, the meeting was called to an end. I do not remember Kevin Lee, Sue Hammond or myself having much to say. My input was limited to answering questions that were raised to fill in gaps in terms of dates, times and exchanges that had taken place between Jason, John and Peter.
I recall that Ulla made some statements that related to intercompany transactions.
The meeting went for approximately one hour.
Similarly, Ulla Lonnqvist said in her affidavit that:
By October 2004 a number of things had become clear. First, Program IT was growing at a very fast rate and secondly, there was a ‘deadlock’ between the directors of the company. In mid-October a meeting was held between Peter Joint, Sue Hammond, Kevin Lee, Andrew Harris, and myself with a potential investor called Tony, who was a long-term friend of Peter Joint’s father. Tony was an experienced businessman and who was not only considering becoming an investor in the company but who also offered business advice on how to recall the debts owed to the company. In short the meeting was held to seek solutions for the benefit of the whole company.
Ms Lonnqvist was cross-examined on her affidavit, but it was not sought to contradict her evidence about what happened at the meeting with Tony Joyce, and it was not suggested to her there was any discussion at the meeting concerning the level crossing idea. The majority of the her cross-examination on what occurred at the meeting was directed to confirming that it was about the possibility of Tony Joyce buying shares in Program IT:
The purpose of the meeting was to meet with Tony? - - Yes.
The purpose of the meeting was to organise a restructure of Program IT wasn’t it? - - - No.
I put it to you that Tony was looking at ways of refinancing the company or coming into it, what do you say about that? - - - The way I understood it at the time was that he was look – he was a potential investor.
To inject funds? - - - Yes.
Did you also understand it that Peter Joint wished to go forward by himself without Jason Stephens or John Tan? - - - No.
…
He [Tony Joyce] was to be an investor, you agree with that? - - - That was being investigated, and - - -
Yes, and no amount was spoken about? - - - No.
…
No discussion of whether he would lend funds or not? - - - No.
Do you agree with that? - - - Yes.
On what basis then was he to be an investor? - - - Can I use more words than ‘Yes’ or ‘No’?
Yes, please? - - - I understood that Mr Joint wanted to get Tony to introduce the team at the program to Tony Joyce so that he could consider to become a shareholder. It was investigated whether he would be interested.
…
Were you to provide reports to him about it? - - - Yes. Peter Joint, that’s what I understood, that he would be getting a complete – completed accounts for 2004 and these discussions would continue.
When were you to get the accounts for 30 June 2004 to him? - - - When the directors had agreed on the disputed items.
Did you explain to him that there was a dispute about some items? - - - Yes.
Did you take your work in progress along to that meeting? - - - No.
Did you take any financial information along to that meeting? - - - No.
Was it a case that you relied upon you memory of the accounts at that stage at that meeting? - - - Yes, and Mr Peter Joint was there present himself, and he had a very good understanding of the company’s financial position.
…
Yes? - - - this was a very informal meeting that took place with Tony Joyce. There were no presentations. I understood that those financials would be provided when they were completed.
…
Ms Lonnqvist, the discussions at the meeting of 19 October 2004 [sic, 20 October 2004] related to a new shareholder coming on board. You agree with that, don’t you? - - - It was – I keep saying the same thing. This is a very casual round table meeting with potentially this person – person being interested in becoming a shareholder.
There was some emphasis put on the question of whether the respondent and Tan knew of the meeting with Joyce. Ms Lonnqvist said that she assumed that they did know:
Yes, and you had not consulted with Mr Stephens before attending that meeting, had you? - - - No.
- - -
51
0
0