Malandris, Michael v Palmreef Pty Ltd

[1997] FCA 264

CATCHWORDS

CORPORATIONS - application to wind up on just and equitable ground - small 'quasi-partnership' with two equal shareholders - dispute between shareholders leading to deadlock - company failing to comply with statutory obligations - company ceased to trade - opposition to enable one shareholder to pursue action on behalf of company against other shareholder - best interests of company for independent person to control company - winding up order made.

CORPORATIONS - appointment of liquidator - opposition to appointment of liquidator nominated by petitioner - no conflict of interest - no prior involvement - liquidator appointed.

Corporations Law s 461(k)

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360

Rural Industries Co-operative Society Ltd v Porky Pigs Pty Ltd
(1988) 6 ACLC 383

Re Nerang Investments Pty Ltd (1985) 3 ACLC 497

No SG 3157 of 1995

MICHAEL MALANDRIS v PALMREEF PTY LIMITED & THEOFANIS DAVAS

Mansfield J
Adelaide
12 March 1997

IN THE FEDERAL COURT OF AUSTRALIA )
  )
SOUTH AUSTRALIA DISTRICT REGISTRY )    No SG 3157 of 1995
  )
GENERAL DIVISION                 )

BETWEEN:

MICHAEL MALANDRIS

Applicant

- and -

PALMREEF PTY LIMITED

Respondent

- and -

THEOFANIS DAVAS

Cross-Claimant

REASONS FOR JUDGMENT

CORAM:    Mansfield J
PLACE:    Adelaide
DATE:     12 March 1997

I have before me today an application, first made to the Court on 11 August 1995, for the winding up of the company Palmreef Pty Limited, ("the company") upon several grounds available under s461 of the Corporations Law ("the Law"). As pressed before me, s461(k), namely that the company should be wound up on the basis that the Court is of the opinion that it is just and equitable that the company should be so wound up, is the ground relied upon.

The application is made by Michael Malandris ("Mr Malandris"), who is one of the two shareholders of the company and a director of it. He has standing to make the application pursuant to s462(2)(c) of the Law.

When the application was first brought, the procedural requirements imposed by s465A and s470 of the Law and of O71 of the Federal Court Rules ("the Rules") were not then fully complied with.  More recently, to a significant extent, those Rules have been fully complied or largely complied with but beyond the time which the Rules prescribe.  I am satisfied for reasons which will appear as to the nature of the company and its assets and liabilities and its business, that the necessary parties are before me, and that any creditors who wished to appear on this application have had at least some, although not the ideal, opportunity to appear at the hearing.  No creditor has sought to appear.  I do not think in the circumstances that there is any actual or potential injustice to any creditor by me proceeding to hear and determine this application today.  In particular, to the extent to which Mr Malandris did not serve on the company the documents required to be served pursuant to O71 r36(7) of the Rules within the time specified, but has only more recently served those documents upon the company, I excuse Mr Malandris from compliance with that rule or dispense with the compliance with that rule to the extent necessary.  The applicant has also not fully complied with the requirements as to the giving of notice of the application under O71 r36(8).  I have power to vary the requirements of that rule and I do so by directing that notice of this application is sufficiently given by the notice of the hearing before the Court today given by the applicant in The Advertiser newspaper of Friday, 7 March 1997.

The other party appearing before me, Theofanis Davas ("Mr Davas"), through counsel, appeared to object to the winding up order sought. To the extent necessary, I give leave to Mr Davas to so oppose the application, despite the absence of a formal notice of objection having been given under s465C of the Law.

The company was incorporated on 8 November 1985 and has until recently carried on business as a carrier.  It has four issued shares, two to Mr Malandris and two to Mr Davas.  On the information before me the shares carry equal voting rights and in the event of the two shareholders disagreeing, there would be a deadlock.  That has obviously happened.  The directors of the company, on the material before me are Mr Malandris, his son Michael Malandris Junior, Mr Davas, and his son Jason Vasilios Davas.  On the information before me, the directors participate as a family block and are deadlocked.

This is a case par excellence of a proposed business arrangement in the nature of a quasi partnership through the company for the conduct of the business of the company for the two family groups identified, including initially the employment of a member of each family, where the family groups have fallen out in a way which I am satisfied is irresolvable without some order of the Court.

The company's business as a carrier was initiated following Mr Malandris at some point proposing the arrangement between himself and Mr Davas for the taking over of a carrying contract which Mr Malandris had for Franklins Limited.  At the time it was contemplated that there would be an upgrading of vehicles and further financing required and that process happened through the incorporation and funding of the company.  The company operated successfully for a number of years until the last several years when issues have arisen between the two shareholders.  But it has, until 1996, continued to carry goods for Franklins Limited, pursuant to the arrangement which was contemplated.  That arrangement, I understand, was renewed annually but on an informal basis.

From about 1992 but more intensively during the years 1994 and subsequently, issues arose between the two shareholders as to the running of the company and as to the application of the funds of the company.  I am not in a position to, and I do not, make any judgment as to the merits of the respective positions on those issues.  I note from the affidavit material before me that those issues include the appropriateness of certain cash withdrawals made from time to time by Mr Malandris through a fuel account operated by the company; secondly, in relation to the receipt of and accounting for certain cheques and payments due or said to be due by Franklins Limited to the company; thirdly, to the appropriateness of the application of certain funds of the company to certain purposes which applications were apparently effected by Mr Davas; and fourthly, and in a sense much more trivially but indicative of the degree of breakdown of the relationship between the shareholders, issues as to whether the company's vehicles should be serviced in a certain way, whether tyres should be replaced, whether brakes should be repaired, whether expenses on the vehicles should be expended and such matters.

The point has clearly been reached, at least since 1995, that the relationship between the two shareholders has completely broken down.  The company, although it has struggled on in a day to day sense until 1996, could not continue to function meaningfully.  Its underlying raison d'être as a two family joint venture has disappeared.  There has been no consensus as to the signing of cheques.  Various interlocutory directions or hearings have taken place before the Court when attempts have been made to resolve the more immediate and practical issues.  There is no agreement as to who should sign cheques and the company, I am told, because of the breakdown of this relationship between its two shareholders, is not preparing financial accounts or filing annual returns or taxation returns and is not meeting in a proper way its statutory responsibilities.  Its accountant is in the position where he is unable to obtain clear instructions on behalf of the company because of the relationship between the two shareholders.

The position is, therefore, in my view classic of the type of situation referred to by Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 379:

"My Lords, in my opinion these authorities represent a sound and rational development of the law which should be endorsed. The foundation of it all lies in the words "just and equitable" and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The "just and equitable" provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way."

There have of course been many other cases where similar comments have been made.  Mr Fricker referred me in particular to Re Yenidje Tobacco Company Ltd [1916] 2 Ch 426. There are other Australian cases to the same effect, including Re Straw Products Pty Ltd [1942] VLR 222 and Re Wondoflex Textiles Pty Ltd [1951] VLR 458.
Although the company, albeit a small one, is a separate legal entity as distinct from both its promoters and its shareholders, there is no benefit in the present circumstances to the company being allowed to continue, rather than to be wound up, subject firstly to consideration of its trading position and any considerations relevant to its debtors and creditors, and secondly to the matter which Mr Pickhaver of counsel on behalf of Mr Davas, put in opposition to the application to which I shall shortly refer.

Before turning to those matters, it is appropriate to note the course of this application, as it reveals in part the company's present trading position.  When the application was first instituted there was also an application for the appointment of a provisional liquidator.  That application came on for hearing first on 22 August 1995.  The principal application, and the notice of motion for appointment of a provisional liquidator, were then adjourned from time to time whilst various attempts were made by the parties to resolve the issues between them, including one or other of the shareholders buying out the interests of the other shareholder.  It seems implicitly to have been recognised by Mr Malandris and Mr Davas that the company by reason of its ongoing business might continue to exist and be of value under a changed shareholding.  It is both unnecessary and probably unhelpful to recite the full history of those attempts, save to note that they have been unsuccessful.

More recently, by arrangement between the shareholders of the company, the realisation of its assets and the taking and conducting of an account by the Court, including of the disputes between them, was subject of an order by consent on 8 November 1996.  The company had by then ceased trading.  That consent reflects the common acknowledgment that the company's practical life was at an end.  Even in respect of that consensual arrangement for the realisation of the company's assets, during the course of which it was contemplated, that an account and inquiry would be taken in an endeavour to resolve the competing claims as to the use or alleged misuse of the company's funds, each against the other, of Mr Davas and Mr Malandris, difficulties and disagreements arose which in part caused the matter to come back before me.

The position is that the company has ceased to trade.  Its assets have either been sold or are being sold.  Its principal assets, two trucks, have been disposed of.  One of those trucks was disposed of in circumstances where there was likely to be a shortfall on sale, after payment out of the lease, and the truck was re-leased to another party effectively by arrangement by taking over the company's ongoing obligations to the lessor.  There was no benefit nor any ongoing loss to the company.  The other truck has more recently been sold and the proceeds of sale of $52000 paid into Court.  On the material before me, the remaining assets, other than perhaps a small amount of money in the bank, are two trailers which are still for sale.  I have no evidence as to the current liabilities of the company, if any, but I am told by both counsel that there are no significant external liabilities of the company of which they are aware.  There is certainly no indication of any external creditor of any substance.  It seems, therefore, the company having ceased to trade, that it is solvent, but that it is hopelessly deadlocked.  There is no disadvantage to the company per se in those circumstances in the making of a winding up order.

The remaining consideration is that put to me by Mr Pickhaver of counsel for Mr Davas that the company should not be wound up, or at least not at present, because Mr Davas as a non-majority shareholder wishes to maintain or to bring proceedings in his own name on behalf of the company against Mr Malandris for the mis-application of funds by Mr Malandris which he alleges.  He made such allegations formally in a cross-claim against Mr Malandris brought in this proceeding initially on 5 October 1995 and the subject of more recent proposed detailed amendments.  As I have said I make no observation as to whether the matters which Mr Davas seeks to assert on behalf of the company do or do not have any merit.  That has simply not been the subject of determination.

It is put to me that the company will be better off by Mr Davas being able to pursue that action in his own name but on behalf of the company without the company being wound up, as distinct from a liquidator of the company determining whether or not to pursue that action, and then pursuing it, essentially for two reasons.  One reason is that Mr Davas is said to be more fully informed of the relevant facts, and is likely to be a more vehement pursuer of that claim on behalf of the company than a liquidator might be, as he has been complaining of such matters at least since 1995.  Secondly, it is put that the cost to the company of the conduct of such proceedings, if the liquidator should choose to bring them, would mean that the company would be financially worse off compared to Mr Davas conducting those proceedings in his own name, as he would have to do at his own expense.

I have had regard to those considerations.  I have however formed the view that it is appropriate in all the circumstances for a winding up order to be made against the company.  Although in the context of the appointment of a provisional liquidator rather than the appointment of a liquidator, I am influenced by the decision of von Doussa J in Rural Industries Co-operative Society Ltd v Porky Pigs Pty Ltd (1988) 6 ACLC 383. Of course every case will depend upon its own facts, but the considerations which there moved von Doussa J to appoint a provisional liquidator, in the face of the same sort of propositions as those which Mr Pickhaver put to me on behalf of Mr Davas, have influenced me to the decision I have reached. In that case, the minority shareholding group of a company had control of the board and were pursuing claims against former directors who had been appointed with the support of the majority shareholder. The majority shareholder sought the appointment of a provisional liquidator, to place an independent person between the company and the warring groups of shareholders. As here, the company had ceased to trade and the only real issue was the time at which the winding up of the company should commence. The company, through its directors, opposed the application on much the same grounds as were put on behalf of Mr Davas in this matter.

Von Doussa J observed at 388, in making the appointment of a provisional liquidator:

"A provisional liquidator would take over the action and all the fruits of the preparations so far.  Dr Irving and the other directors who represented the minority shareholders prior to 1 April 1987 were personally involved in the events which give rise to the allegations of breach of fiduciary duty.  But at the end of the day the litigation will succeed, if it will at all, not on their view of the facts but on an assessment of the facts by an independent tribunal.  If it is not possible for the minority shareholders to make clear the merits of the plaintiff's claim to a provisional liquidator, and those who advise him, that may indicate that the merits cannot be made sufficiently clear to a court to have any real chance of success.  I think Dr Irving's argument tends to demonstrate the importance, in the interest of the company, of having someone in control of the action who is independent of the present directors who have a close personal interest and involvement in the matters and dispute."

Whilst, inevitably, the facts of that case are somewhat different from those presently under consideration, I note that von Doussa J was influenced by the fact that a provisional liquidator, as a competent independent person owing no allegiance to either side, was highly desirable in the interests of the company and all its shareholders.  I note also the observations of Williams J in Re Nerang Investments Pty Ltd (1985) 3 ACLC 497.

What particularly influences me is, that given the obvious extent of loss of faith, and indeed ill-will now between the two shareholders of the company, it is in the company's interests in my view that an independent person should take control of the company's situation, and decide whether in the light of the material available to the company it should or should not pursue claims against Mr Malandris, or indeed against Mr Davas, or anyone else. In making that decision a liquidator would have the benefit of information supplied to the liquidator both by Mr Davas and by Mr Malandris, and would also have the opportunity if it was considered appropriate, of conducting an examination of any of the directors of the company, or of any other person subject to the leave of the Court in respect of non-officers of the company, under s596A and s596B of the Law. In that way, the decision on behalf of the company whether or not to bring the proceedings which Mr Davas proposes on its behalf can be made by an independent person who can, to the extent that person considers necessary, be informed of the material both in support of and in response to or by way of explanation for the conduct Mr Davas complains of. That decision can also be made in the light of any information as to the practical recoverability of any judgment obtained. As there also seems to be some dispute on the affidavit material before me even as to what services were provided to Franklins Limited by the company, and what moneys were payable by Franklins Ltd to the company, and what moneys were paid by it, avenues of investigation including under s596B of the Law may well be ones which a liquidator might choose to pursue to resolve or clarify such matters.

I also have regard to the fact that, but for that argument put on behalf of Mr Davas, as the company is no longer trading and there is no prospect of the shareholders coming together in any consensual way, it is obviously a matter where the company but for that argument would immediately be wound up. I am not aware of any authority in those circumstances which indicates that it is more appropriate to defer the winding up, which is in my view inevitable, to enable one shareholder to pursue a claim on behalf of the company against the other shareholder when a liquidator is perfectly capable of so doing and explicitly so empowered under s477(2) of the Law. On the information before me there is nothing to suggest that the liquidator would not have available to him sufficient funds to properly investigate such matters, and if appropriate, to prosecute any action. The liquidator would also have the opportunity of exploring with either Mr Davas or Mr Malandris in respect of any proposed action the getting of an indemnity for costs from one or other of them, bearing in mind that in the absence of any significant creditors, the benefit of any action by the company against one of its directors or shareholders will inure essentially to the other of its directors and shareholders.

If such an action is brought and is successful, the company will not be at a disadvantage.  It will recover its costs.  In my view the risk of the liquidator bringing such an action and being unsuccessful, and not having sought an indemnity from the shareholder or director who is not the subject of the proposed action, thereby suffering a detriment is one which I should take into account and have taken into account, but nevertheless does not weigh sufficiently heavily in the scales to justify not making the order which I otherwise consider to be appropriate.

Accordingly the order I make is that the company should be wound up.

An issue arose as to the person who should be appointed as liquidator.  As required by the Rules, when the application was instituted Mr Malandris obtained the consent of Frederick Charles Perkins ("Mr Perkins"), to act as liquidator of the company, and at that time Mr Perkins signed the usual form of consent including that he was unaware of any conflict of interest which would make it improper for him so to act.  Mr Davas does not assert any facts which would indicate that Mr Perkins was an inappropriate person to be appointed as liquidator of the company, but somewhat understandably, I think perhaps more through ignorance than anything else, would prefer to have a liquidator appointed who was not nominated by Mr Malandris.  For his part he has procured the consent of another person who is an official liquidator to act as liquidator of the company should I make a winding up order.

I am proposing to appoint Mr Perkins as liquidator of the company. Whilst I can perhaps understand Mr Davas' general concern, I bear in mind that Mr Perkins is an official liquidator registered under s1283 of the Law. He has certified in his consent that he is unaware of any conflict of interest which would make it improper for him to act. The fact that he has been nominated by Mr Malandris arises simply from the entitlement under O71 r36(7) of the Court Rules that an applicant for the winding up of a company nominate a person who is an official liquidator to be the liquidator. It is a common practice in those circumstances for solicitors acting for an applicant to speak to the liquidator proposed to be nominated to procure his consent. On the information before me that is all that has happened.

Mr Perkins is a registered liquidator under s1286 of the Law. He, as is any liquidator, is subject to the supervision of the Court and of the Australian Securities Commission including under s536 of the Law. As a liquidator of the company, he becomes an officer of the company: s232 of the Law with the duties which the Law imposes on officers of a company. I am mindful of the fact that it is the liquidator's obligation to get in and account for the assets of the company, including giving consideration of what action or actions might be brought by the company for losses which it might have sustained through misconduct on the part of any of its officers. In the present circumstances particularly, having in mind my reasons for judgment on the winding up of the company, I would expect the liquidator to be informed by Mr Davas of the matter which he wishes the liquidator to consider, but also to be aware that those matters have been raised in these proceedings by the cross-claim of Mr Davas and that Mr Davas has the view that it is important in the company's interests to prosecute that proposed claim on behalf of the company against Mr Malandris. It is of course for the liquidator to decide whether or not the liquidator should do so, and whether and, if so how, to pursue potentially relevant information for such a decision to be made. I am not to be taken as given any direction to the liquidator in that regard.

Accordingly the orders of the Court are:

1. that the company Palmreef Pty Limited should be wound up;

1. that Frederick Charles Perkins be appointed as liquidator of the company; and

1. that the applicant's costs, including reserved costs on the hearing of the notice of motion to appoint a provisional liquidator on 6 October 1995, but limited to the following in addition to those reserved costs, namely costs of

(a)the application itself of 11 August 1995;

(b)the notice of motion itself of 11 August 1995;

(c)the affidavits filed on behalf of the applicant on 11 August 1995, including the affidavits of Mr Malandris, Ms Ambrose and Mr Fricker, and the affidavits of Mr Fricker sworn on 3, 7 and 12 March 1997;

(d)the attendance on the directions hearing on 22 August 1995, and on the directions hearing on 4 March 1997; and

(e)the hearing of the application today

be taxed and reimbursed out of the property of the company in accordance with subs466(2) of the Corporations Law.

As the question of pursuing any claim against Mr Malandris is now for the liquidator, I dismiss the cross-claim with no order as to costs on that cross-claim.

I authorise the Registrar, upon the written request of Mr Perkins as liquidator, to order the payment out of Court of the sum of $52000 paid into Court on 7 March 1997 in the circumstances referred to above.

I certify that this and the preceding       pages are a true copy of the Reasons for Judgment of the Honourable Justice Mansfield.

Associate:

Dated:

Counsel for the applicant        :    Mr M S Fricker
Solicitors for the applicant     :    Scammell & Co

No appearance by or on behalf
     of the respondent

Counsel for the cross-claimant    :    Mr M G Pickhaver
Solicitors for the cross-claimant :    Jamison & Associates

Hearing Date  :    12 March 1997