Maddever v Bellyball Investments Pty Ltd - [2017] WASC 216

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: MADDEVER -v- BELLYBALL INVESTMENTS PTY LTD [2017] WASC 216

CORAM: MASTER SANDERSON

HEARD: 1 AUGUST 2017

DELIVERED : 3 AUGUST 2017

FILE NO/S: CIV 1797 of 2017

BETWEEN: ANTONY THOMAS COOMBE MADDEVER
Plaintiff
AND
BELLYBALL INVESTMENTS PTY LTD
First Defendant
KENNETH WILLIAM SHEPHERD
Second Defendant

FILE NO/S :COR 114 of 2017

BETWEEN :FINECRESS HOLDINGS PTY LTD
Plaintiff
AND
BELLYBALL INVESTMENTS PTY LTD
First Defendant
ANTONY THOMAS COOMBE MADDEVER
Second Defendant

Catchwords:

Corporations Law - Winding up on just and equitable ground - Turns on own facts

Legislation:

Corporations Act 2001 (Cth)
Rules of the Supreme Court 1971 (WA)

Result:

Company wound up

Category: B

Representation:

CIV 1797 of 2017

Counsel:

Plaintiff:     Mr K G Robson
First Defendant              :     No appearance
Second Defendant         :     Mr J P Cook

Solicitors:

Plaintiff:     TGC Lawyers
First Defendant              :     No appearance
Second Defendant         :     Mendelawitz Morton Commercial Lawyers

COR 114 of 2017

Counsel:

Plaintiff:     Mr J P Cook
First Defendant              :     No appearance
Second Defendant         :     Mr K G Robson

Solicitors:

Plaintiff:     Mendelawitz Morton Commercial Lawyers
First Defendant              :     No appearance
Second Defendant         :     TGC Lawyers

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

Amazon Pest Control Pty Ltd [2012] NSWSC 1568
Guerinoni v Argyle Concrete and Quarry Supplies Pty Ltd [2000] WASCA 170
In Re Westbourne Galleries Ltd [1973] AC 360

MASTER SANDERSON: By originating motion filed 18 May 2017 the plaintiff seeks pre‑action discovery under O 26A r 4 of the Rules of the Supreme Court 1971 (WA) from the defendant (CIV 1797 of 2017). This action is separate from, but related to, an application by Finecress Holdings Pty Ltd to wind up Bellyball Investments Pty Ltd (COR 114 of 2017). The two matters have progressed in tandem. As I understand the position certain documents have been provided to the plaintiff in the pre‑action discovery application and at the moment that application is not pressed further. However, Finecress Holdings Pty Ltd does seek to wind up Bellyball Investments Pty Ltd. That application is resisted by the defendant. These reason, while relevant to both matters, deal with the winding up application.
The winding up application is made pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth). This is the section which is generally referred to as winding up on the just and equitable ground. It is the position of the plaintiff that the first defendant company is a quasi‑partnership and the relationship between the directors has broken down. They can no longer work together and on that basis the first defendant ought be wound up.
The relevant facts are found in an affidavit of Kenneth William Shepherd sworn 24 May 2017. Mr Shepherd and his wife are the shareholders in the plaintiff. Mr Shepherd is its sole director and secretary. The plaintiff owns half of the issued capital in the first defendant. The other half is owned by the second defendant. Mr Shepherd and the second defendant are the two directors of the first defendant.
The first defendant trades under the name of RMD Logistics. The business operates from premises in Wangara. It provides transport and storage solutions to the Western Australian food industry and its suppliers. It delivers fresh, frozen and shelf stable food products to both retail and food service industries throughout the metropolitan area of Perth on a daily basis. It operates a fleet of 15 delivery trucks which together deliver approximately 200 tonnes of food every day. A copy of the latest accounts for the business is found as attachment KWS 7 to Mr Shepherd's affidavit. It shows the business has a substantial turnover, is operating at a profit and that there is considerable net equity in the business. All in all the impression is of a stable, profitable enterprise operating effectively in a niche market.
The plaintiff trades under the name of Select Poultry (WA). The business supplies a range of fresh and frozen poultry to manufacturers. Select Poultry (WA) operates from the same premises as RMD Logistics. It would appear that there are no written agreements between the two businesses and until recently they appear to have operated effectively as co‑tenants. Mr Shepherd says Select Poultry (WA) pays commercial rates for delivery services provided by RMD Logistics. As he puts it, 'there have never been any commercial favours between the two businesses'. In or about July 2016 the second defendant ceased attending the business premises. Mr Shepherd gives no background as to why the second defendant may have stopped attending the business. This is explained more fully in an affidavit of the second defendant which I will detail below. But it is common ground between the parties that the second defendant has not participated in management of the first defendant since July 2016. He has not contributed in any way although he has been paid at the same rate as prior to his departure. All that Mr Shepherd can say is that he has been told the second defendant has medical issues which prevent him from participating in the business.
It is clear Mr Shepherd and the second defendant are in a quasi‑partnership which is the first defendant. For instance, Mr Shepherd says that he and the second defendant never held formal meetings of directors or shareholders. For a period of 12 years the business was run on mutual trust and open verbal discussions. Until the second defendant's departure from the business all issues between the directors were resolved by consensus.
The second defendant relies on an affidavit sworn 28 July 2017. He acknowledges he has not participated in management of the business since July 2016. Without going into detail the second defendant clearly believes Mr Shepherd and the plaintiff have been managing the RMD Logistics business in a way that gives a commercial advantage to Select Poultry (WA). It is also clear the two men now have an antipathy to one another - the second defendant believes Mr Shepherd is dishonest and Mr Shepherd is deeply offended by that alleged slur. Reading the affidavit material it is clear the depth of feeling between the two directors is such that it is impossible to image how they could work together.
That is further reflected in the fact that Mr Maddever has sought pre‑action discovery in the other proceedings (CIV 1797 of 2017). What he is seeking in those proceedings is access to the books and records of Bellyball Investments and Mr Shepherd with a view to taking action to recover money which, in his view, Select Poultry (WA) should have been paying to the first defendant.
During the course of the hearing I was advised by counsel that a further action has been initiated by the second defendant seeking leave to bring proceedings in the name of the first defendant against the plaintiff and Mr Shepherd - in other words, the second defendant wishes to launch a derivative action. Doubtless there is an affidavit in support of that application which makes allegations against Mr Shepherd and the plaintiff. It is difficult to image the launch of those proceedings will do much to improve the relationship between Mr Shepherd and the second defendant.
In the face of all of that the plaintiff says the only reasonable course is to wind up the first defendant. The second defendant does not agree. He takes the view Mr Shepherd should continue to run the business and presumably continue to pay him at the rate he has been paid in the past. There is nothing in the affidavit of the second defendant which suggests he will be returning to participate in the business in the near future or at all. The second defendant does say that he will cooperate with Mr Shepherd in the running of the business - all the while seeking leave to bring action against Mr Shepherd and related entities in the name of the first defendant.
It is the plaintiff's position that it is clear the first defendant ought be wound up. The position is, counsel submitted, unworkable. If a liquidator is appointed he or she can investigate the affairs of the company and if there has been some wrongdoing on the part of Mr Shepherd and related entities (and I am not in any way suggesting that is the case) then appropriate action can be taken by the liquidator. Counsel submitted the idea that Mr Shepherd and the second defendant could cooperate given the poisonous nature of their relationship was simply fanciful. Moreover, if Mr Shepherd were to resign as a director of the first defendant - and he could do that at any time - the company would have no effective management. That would be in no one's interests.
On the other hand the second defendant says there is a real question as to whether or not the plaintiff and Mr Shepherd could come to the court with clean hands. Counsel referred to two decisions. In Guerinoni v Argyle Concrete and Quarry Supplies Pty Ltd [2000] WASCA 170 Kennedy J referred to In Re Westbourne Galleries Ltd [1973] AC 360:
A petitioner who relies on the 'just and equitable' clause must come to court with clean hands, and if the breakdown in confidence between him and the other parties to the dispute appears to have been due to his misconduct, he cannot insist on the company being wound up if they wish it to continue (387).
In the matter of Amazon Pest Control Pty Ltd [2012] NSWSC 1568 Black J said:
The court may withhold a winding up order where the plaintiff lacks clean hands or has himself or herself been the primary contributor to the breakdown of the relationship … However, even if a lack of clean hands were established, it is not an absolute bar to a winding up order because, as Santow J pointed out in Ruut v Head … otherwise neither party could obtain a winding up order where both were at fault. In Duc v PTS Australia Distributor Pty Ltd Barrett J referred to Ruut v Head and noted that the respective contributions to the breakdown should be assessed in determining what is just and equitable; and observed that a degree of fault on the part of the applicant in that case, viewed in the context of the fault of the other shareholder, should not deter the court from making an order for winding up so as to address the deadlock in the company's affairs.
In this case even assuming some fault on the part of Mr Shepherd it can hardly be said that the second defendant is blameless. He has not attended at the premises of the first defendant for over 12 months. Despite repeated requests he has not provided adequate medical evidence as to the reason for his present incapacity. That is hardly consistent with an ongoing working relationship. In any event this so‑called lack of clean hands does nothing more than enliven a discretion to refuse to make the order. Whether that discretion is exercises must depend upon the facts in each case.
In reality when a relationship that is a quasi‑partnership breaks down there are only three options available. First, the business can be sold by the parties as a trade sale. That may well be the best way to realise the underlying value of the company's core assets. The second alternative is for one party to buy the other out. Orders can be made for valuations and the sale process can be controlled by the court. Because there is a level of mistrust between the parties there are inevitable difficulties in this course but it can and frequently is done.
The third option is winding up. It is the option of last resort. The appointment of a liquidator to a healthy business will necessarily destroy some of the underlying value. If nothing else it must have an adverse effect on the goodwill. But at least someone takes control of the business, is able to maintain it if necessary and to organise an orderly sale. Furthermore, a liquidator who has funds available from a profitable business can examine the affairs of the company to determine whether there has been anything done by any party which is wrong. If such conduct is established then the liquidator is well placed to take steps to protect the company's interests.
These are, in my view, the only three options available. While in theory it is possible to decline to order a winding up - and I did so at first instance in Guerinoni - and have the company limp on when there is a deadlock between directors generally that is simply not practical. This case provides a good example. Mr Shepherd has continued to run the company and has taken decisions which, by rights, should be the decisions of both directors. It might be said the second defendant has tacitly approved Mr Shepherd operating as he has. But that is hardly a satisfactory situation. Mr Shepherd may have made decisions which, if they had been discussed with the second defendant, would have been at least modified or perhaps abandoned all together. To expect that arrangement to continue is unrealistic.
In my view there is no utility in refusing to wind up the first defendant. To put the parties to the inconvenience and expense of a contested hearing with cross‑examination and extensive legal argument is pointless. A contested hearing is not going to improve the relationship between Mr Shepherd and the second defendant. They are destined always to be at loggerheads. Better the company be wound up now and save everyone time an expense.
Accordingly, there will be an order the first defendant be wound up on the just and equitable ground. I will hear the parties as to the form of orders and as to costs.