Maine v Chelia [No 2]

[2005] NSWSC 425

CITATION:	Maine & Anor v Chelia & Ors [No 2] [2005] NSWSC 425
HEARING DATE(S):	20 April 2005
JUDGMENT DATE :	20 April 2005
JURISDICTION:	Equity Division
JUDGMENT OF:	Palmer J
DECISION:	Application for provisional liquidator refused.

CATCHWORDS:	CORPORATIONS - PROVISIONAL LIQUIDATOR - Where Plaintiff seeks to wind up solvent company on just and equitable ground and seeks interim appointment of provisional liquidator, the court will consider other means of preserving status quo.
CASES CITED:	- D.G. Brims and Sons Pty Ltd, Re (1995) 16 ACSR 559 - Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625 - Ebrahimi v Westbourne Galleries Limited [1973] AC 360 - Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688 - Zempilas v J.N. Taylor Holdings Limited (No 2) (1990) 55 SASR 103
PARTIES:	Anthony Leonard Maine - First Plaintiff Newsnet.com Pty Ltd - Second Plaintiff Coomar Chelia - First Defendant Indrajit Solomon Arulampalam - Second Defendant Jardine Thompson Pty Ltd (formerly Opipo Pty Ltd) - Third Defendant Digital Messaging Solutions Pty Ltd - Fourth Defendant
FILE NUMBER(S):	SC 2352/05
COUNSEL:	F.G. Lever SC - Plaintiffs B. Goldsmith (Sol) - Defendants
SOLICITORS:	Landerer & Co - Plaintiffs Goldsmiths - Defendants

LOWER COURT JURISDICTION:

Ex tempore

1    The First Plaintiff, Mr Tony Maine, was until a few days ago a director of the Fourth Defendant (“Digital”). The Second Plaintiff (“Newsnet”), is a company controlled by Mr Tony Maine and his brother Mr Peter Maine. Newsnet is a 45% shareholder of Digital. 2    The First Defendant, Mr Chelia, and the Second Defendant, Mr Arulampalam, are directors of Digital. Mr Chelia, through his own shareholding and the shareholding of companies controlled by him, controls 55% of the shares in Digital. In broad terms, Mr Tony Maine has a 45% interest in Digital and Mr Chelia has a 55% interest. 3    Digital is a joint venture company, being an amalgamation of two enterprises which have carried on very similar businesses as media broadcasters. The business of a media broadcaster involves providing facilities for multimedia messaging including fax, e-mail, voice mail and image and video distribution. Newsnet had carried on one such business and the Third Defendant (“Jardine”) had carried on the other. Jardine was owned and controlled by Mr Chelia. 4    Newsnet and Jardine entered into a Joint Venture Heads of Agreement on 15 September 2004. Pursuant to that Agreement, Digital was registered on 20 September 2004 as the joint venture vehicle and Mr Tony Maine and Mr Chelia were appointed its first directors. On 1 October 2004 Mr Tony Maine’s brother, Mr Peter Maine, and Mr Arulampalam were appointed additional directors. A Joint Venture Deed dated 30 September 2004 has been executed, the parties to which are Newsnet, Mr Tony Maine, Mr Peter Maine, Jardine and Mr Chelia. 5    The marriage between the two businesses controlled by the Maine interests on one hand and the Chelia interests on the other has proved a very short and unhappy one. Mr Tony Maine was removed as a director of Digital by resolution of the majority of the shareholders at an extraordinary general meeting on 5 April 2005. The reason for his removal is the allegation by Mr Chelia that Mr Maine conducts himself in the business in an aggressive and very rude manner, both towards himself and towards other staff, so that Digital's business is severely disrupted. 6    On 8 April 2005 Mr Tony Maine and Newsnet commenced these proceedings, seeking an urgent interlocutory order that he be reinstated as a director of Digital pending final determination of the proceedings. The final relief claimed was, at that stage, the same as the interlocutory relief claimed. The application came before me as Duty Judge on 12 April 2005. After a contested hearing I declined to grant the relief sought because, in my view, the balance of convenience was not in favour of it. 7    Later on 12 April 2005 Mr Chelia called a meeting of directors of Digital for 6:00pm on 13 April. At that meeting, which was attended by Mr Peter Maine representing the interests of Newsnet and Mr Tony Maine, a number of resolutions were passed, all of which were opposed by Mr Peter Maine on grounds which he reduced to writing and presented to the meeting. Relevantly, the majority of the directors resolved to approve a Deed of Charge to be given by Digital to secure a loan of $157,000 owed by the company to Mr Chelia. The Charge had been envisaged in the Joint Venture Deed between the parties. I will return to the Charge shortly. 8    On 13 and 14 April, Digital sent four cheques totalling about $22,000 to its solicitors, Messrs Goldsmiths, in payment of fees relating to these proceedings. 9    On 14 April the Charge in favour of Mr Chelia was lodged with ASIC for registration. On 15 April it was withdrawn from registration and on 18 April it was re-lodged for registration with a statement of particulars showing that the Charge was limited to secure no $157,000. 10    On 15 April, the Plaintiffs filed an Amended Summons which claimed by way of additional relief:

“13A A declaration that the affairs of the fourth defendant have been conducted by the first and second defendants:–

a) in a matter [sic] contrary to the interests of the members as a whole; and/or

b) oppressive to, unfairly prejudicial to, or unfairly discriminately [sic] against, the interests of the second defendant.

13B Orders pursuant to subsection 233(1) of the Corporations Act as the Court may deem necessary or appropriate in the circumstances.

13C further and in the alternative, an order that the fourth defendant be wound up pursuant to:-–

a) subsection 233(1)(a) of the Corporations Act; and/or

b) subsection 461(1)(k) of the Corporations Act.”
11    The Plaintiffs now move for the appointment of a provisional liquidator to Digital pending a final hearing of these proceedings. Mr Lever SC appears for the Plaintiffs and Mr Goldsmith, solicitor, appears for the Defendants. 12    Mr Lever submits that the Plaintiffs have made out a prima facie case for the winding up of Digital, either on the ground of oppression or discriminatory conduct or on the just and equitable ground. He submits that the appointment of a provisional liquidator is necessary to preserve the status quo in the conduct and management of Digital's business until a final hearing. 13    Mr Lever relies upon six alleged wrongful acts of Mr Chelia and Mr Arulampalam as demonstrating both a prima facie case for winding up and also the necessity for the immediate appointment of a provisional liquidator. I will deal with each in turn. 14    The first alleged wrongful act is that Mr Tony Maine was removed as a director of Digital in breach of Digital's constitution, in breach of the provisions of the original Heads of Agreement between the parties and contrary to the common assumption and understanding of the parties that Mr Tony Maine would continue to participate as a director in the management of Digital for the life of the joint venture. 15    In response, the Defendants say, and I accept, that there are real issues both of fact and law as to whether the shareholders were entitled to remove Mr Maine as a director. They say that, on the true construction of the Joint Venture Deed and of the company's constitution, Mr Maine was not guaranteed what would in effect be an entrenched position as a director. 16    Further, they say, Mr Tony Maine's conduct as a director warranted his removal in the interests of the company as a whole. There is prima facie evidence of Mr Tony Maine's rude and abusive conduct to various employees in the form of letters or e-mails from staff in which they complain of his conduct. There is in evidence one particularly offensive and demeaning e-mail from Mr Tony Maine to Mr Chelia sent on 8 April 2005. There is evidence of physically aggressive behaviour on the part of Mr Maine directed towards Mr Chelia on 10 March 2005. 17    If these allegations are proved at a final hearing, they would weigh heavily in what relief might be granted if it were found that the Plaintiffs had otherwise made out the just and equitable ground for winding up discussed by Lord Wilberforce in Ebrahimi v Westbourne Galleries Limited [1973] AC 360, at 379. In any event, whether or not Mr Tony Maine was wrongly removed as a director of Digital cannot be determined in the present application and therefore cannot in itself justify the immediate appointment of a provisional liquidator. 18 The second wrongful act alleged by the Plaintiffs is the granting and registering of the Charge over Digital's assets in favour of Mr Chelia. They say, correctly, that the Deed of Loan between Mr Chelia and Digital authorised a Charge to be given to secure no more than $157,000, whereas the Charge which has been registered secures all monies which Digital may now or hereafter owe to Mr Chelia. The registration of a Charge in those terms, says Mr Lever, indicates dishonesty or deliberately wrongful conduct by Mr Chelia and Mr Arulampalam. 19 In response, the Defendants say that the inclusion of an “all monies clause” in the Charge was an oversight. They point to the fact that the terms of the present Charge were appended to a Deed of Loan dated 30 September 2004 between Digital and Mr Chelia, and that Mr Peter Maine attested the affixing of Digital's seal to the Charge. They say they have made it clear in the statement of particulars lodged with the Charge in ASIC on 18 April 2005 that the security is limited to $157,000. 20 I accept that the inclusion of an “all monies clause” in the Charge was an oversight and that the registration of the Charge with the statement that it is limited to secure $157,000 weighs against any inference of dishonest purpose on the part of the Defendants in the circumstances of the creation and registration of the Charge. 21 The third wrongful act alleged by the Plaintiffs is the failure by Digital to pay an amount of $10,000 per month payable to Mr Tony Maine as an consulting fee in accordance with the provisions of the Joint Venture Deed. The Plaintiffs say that an amount of $60,000 is now owing and has been withheld by Mr Chelia, whereas Digital has paid licence fees to Jardine under the provisions of the Joint Venture Deed in an amount of $10,500. The Plaintiffs say that this circumstance demonstrates unfair and discriminatory conduct on the part of the majority directors. 22 The Defendants say that they have never disputed Mr Tony Maine's entitlement to consulting fees of $10,000 per month. However, they say that Digital refrained from paying the fees monthly at Mr Tony Maine's express request, the reason given by Mr Maine being that he was then involved in some matrimonial proceedings. It is significant in this regard that no demand for payment of outstanding consulting fees appears to have been made by Mr Tony Maine until a few days ago. 23 In any event, the Defendants are prepared to proffer to the Court an undertaking that Digital will, within seven days, pay to Mr Tony Maine the sum of $60,000, less any proper deduction for tax, without prejudice to a right later to assert that he is presently entitled only to $55,000 under the terms of the Joint Venture Deed. In these circumstances, I do not consider that non-payment of Mr Tony Maine's consulting fees justifies the appointment of a provisional liquidator. 24 The fourth wrongful act alleged by the Plaintiffs is the payment by Digital to Mr Goldsmith's firm of some $22,000 for legal fees in connection with these proceedings. The Plaintiffs submit that the use of Digital's money to pay the legal fees of some of its directors and shareholders in what is a shareholders’ dispute is a wrongful use of Digital's money. There is certainly authority for that proposition: see, for example, Re D.G. Brims and Sons Pty Ltd (1995) 16 ACSR 559, at 591 per Byrne J and the authorities referred to by Young J (as his Honour then was) in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688, at 733. 25 In response the First, Second and Third Defendants say that they will undertake to the Court to repay to Digital the amount of the fees paid to Messrs Goldsmith pending final determination of these proceedings. In those circumstances I do not consider payment of legal fees by Digital in itself warrants the appointment of a provisional liquidator. 26 The fifth wrongful act alleged by the Plaintiffs is the proposed entry by Digital into a business agreement with a company favoured by the majority directors rather than with a company favoured by Mr Tony Maine and Mr Peter Maine. The Plaintiffs say that the agreement with the company which they favour is in the best interests of the company and that the agreement with the company favoured by the majority of directors is less beneficial and will result in a side benefit to Jardine. 27 The Defendants say that the agreement with the company which they favour is in the best interests of the company as a whole and they deny that the agreement will produce a side benefit to Jardine. The Defendants say also that whether one agreement or the other should be entered into is a matter for the commercial judgment of the directors and that the Court is not in a position to form a view as to what is in the best interests of the company as a whole. 28 Mr Lever submits that to resolve this dispute it is desirable to appoint a provisional liquidator to the company who can make a decision for himself as to what is in the company's best interests. 29 I do not agree with this submission. It seems to me that which of the two agreements is in the company's best interest and what benefits would flow is a matter, in the first instance, for the commercial decision of the directors. If it is found later that the majority directors have acted with improper motive, there is a remedy for the company and the shareholders oppressed. However, the remedy of appointing a provisional liquidator now may well be one that kills the patient and kills it prematurely. I do not think that a possible dispute as to which business agreement the company should enter into warrants the appointment of a provisional liquidator. 30 The sixth wrongful act alleged by the Plaintiffs is that Digital's assets have been charged to secure a loan made to Mr Chelia, not to Digital. This submission is founded upon a construction of a share sale agreement between Mr Chelia's interests and Mr Arulampalam's interests. As security for a loan to be made by Mr Arulampalam's interests, Mr Chelia charges his own security interest over Digital under the Charge which has been registered on 18 April 2005. 31 It does not seem to me that the granting of this Charge by Mr Chelia is wrongful in any way. Mr Chelia is simply dealing with his own interests in a way which would probably not be any more harmful or detrimental to Digital than if he were to assign to a third party his security interests. I do not think that the circumstance of the Charge created by Mr Chelia over his own security interest is a circumstance warranting the appointment of a provisional liquidator. 32 It will be seen, in summary, that I do not consider that any of the several grounds advanced by the Plaintiffs as supporting the appointment of a provisional liquidator justifies that course. There are, however, considerations which point in the opposite direction. 33 Digital has had a very short life, some seven or eight months, but so far as its accounts presently show, it has been profitable during that time. A profit and loss statement up to March 2005 shows a gross profit derived by the company of almost $701,000. There is a net income for the same period of almost $93,000 and a balance sheet as at April 14, 2005 shows a total equity of $65,000. There is no evidence whatsoever that suggests that Digital is presently unable to meet its debts as and when they fall due. The picture which is presented by the accounts is of a company, which although recently formed, is trading successfully and is supporting nine employees, including the three current directors. 34 There is well established authority that the appointment of a provisional liquidator to a company pending final adjudication of proceedings for a winding up is a drastic intrusion into the affairs of the company and is not to be contemplated if other measures would be adequate to preserve the status quo: see, for example, Zempilas v J.N. Taylor Holdings Limited (No 2) (1990) 55 SASR 103, adopted and approved by the Court of Appeal in Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625. 35 It is clear, of course, that the Court exercises a discretion in deciding whether or not to appoint a provisional liquidator. If a winding up is sought on the just and equitable ground rather than alleged insolvency, it may well be, and often is, the case that means other than the appointment of a provisional liquidator may be found to protect the parties' interests sufficiently until a final hearing, bearing in mind that the appointment of a provisional liquidator may destroy the very subject matter about which the parties are fighting. 36 There can be no doubt that when a company is trading successfully, as Digital appears to be doing, the appointment of a provisional liquidator would be a severe disruption to the conduct of its business and may well impact fatally on its ability to continue trading. That would not seem to be in the interests of either of the two contesting sides in the present case. 37 The Defendants have proffered undertakings to the Court which, in my view, go a long way towards relieving the injustices alleged by the Plaintiffs as warranting the appointment of a provisional liquidator. In those circumstances, in the exercise of the Court's discretion, I decline to appoint a provisional liquidator on condition that the Defendants proffer the undertakings to the Court which have been foreshadowed. 38 The Defendants seek an order that the Plaintiffs pay the costs of the interlocutory application which I have just heard and that there be an immediate assessment of those costs. Mr Lever SC submits that the proper order should be that costs be reserved. Basically, the reason that Mr Lever advances for that order is that this application was necessary in view of the fact that the Charge in Mr Chelia's favour had been registered and not withdrawn, even though the solicitors for the Plaintiffs had protested that it was wider than was permitted by the terms of the deed of loan. 39 It seems to me that this is another illustration of the difficulties which have arisen between the parties by reason of their inability to communicate sensibly or even with sufficient commercial detachment to conduct their affairs with the minimum of litigious cost and fuss. It is very difficult to apportion responsibility for that breakdown in communication at this stage. The question will obviously be ventilated at a final hearing and I think it is better to reserve costs of this application until a final hearing determines where responsibility lies for the problems which have arisen in the administration of this company. For those reasons, I will reserve costs. 40 I indicated in my judgment that I would dismiss the application for the appointment of a provisional liquidator upon receiving certain undertakings. Those undertakings are now proffered in writing and are signed by the parties' representatives. Accordingly, I note that the Defendants undertake to the Court in terms of paragraphs 1, 2 and 3 of the two page document signed by the parties' representatives, dated today, initialled by me and placed with the papers. 41 I stand the proceedings into the Expedition List on 22 April 2005.

– oOo –