McKinnon, R.N. v Isenberg, B.M

[1992] FCA 306

Re: PARTS LOCATING SERVICES PTY. LTD. and ROGER NEIL MCKINNON
And: BARRY MEYER ISENBERG
No. V G3009 of 1992
FED No. 306
Corporations

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Heerey J.(1)

CATCHWORDS

Corporations - winding up - just and equitable ground - Corporations Law s.461(k) - equal shareholders in company - alleged loss of confidence by applicant - applicant in fact in control of company - deadlock - whether disagreement as to value and disposal of interests sufficient.

Re Bright Pine Mills Pty Ltd (1969) VR 1002

Re Wondoflex Textiles Pty Limited (1951) VR 458

Re Yenidje Tobacco Company Limited (1916) 2 Ch 426

Scottish Co-operative Wholesale Society Limited v Meyer (1959) AC 324

Re: Parts Locating Services Pty Ltd

Roger Neil McKinnon v Barry Meyer Isenberg VG 3009 of 1992

HEARING

MELBOURNE

#DATE 6:5:1992

Counsel for the applicant: Mr J.R. Dixon

Solicitors for the applicant: Scanlan Carroll

Counsel for the respondent: Mr P.N. Vickery

Solicitors for the respondent: Darvall McCutcheon

ORDER

1. The application be dismissed with costs, including reserved costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

The Applicant Mr Roger McKinnon and the respondent Mr Barry Isenberg are equal shareholders in Parts Locating Services Pty Limited (PLS). Mr McKinnon applies for a winding up order on the just and equitable ground: Corporations Law s.461(k). His case primarily is that he has a justifiable loss of confidence in Mr Isenberg. As an alternative, he says there is a deadlock in the company. He relies on the well known authority Re Yenidje Tobacco Company Limited (1916) 2 Ch 426.

1. In 1982 the two men commenced a partnership business called Melbourne Hotlines. The business provided a means by which car dealers and wreckers could exchange information about car parts offered for sale or purchase. This was done by the installation of dedicated Telecom land lines. At this time, and indeed up until April 1991, Mr Isenberg was a resident of the United States of America. The day to day operations of the business were run by Mr McKinnon.

2. On 24 May 1988 PLS was incorporated to carry on the business. The company was initially called Melbourne Hotlines Pty Limited. Two other developments occurred in that year. First, a service called Parts Link was introduced. This was a computerised system conducted on a national basis whereby subscribers could locate car parts required from other subscribers to the system. Secondly, a company called Auto Part Network Inc (APN) was incorporated in the United States of America for the purpose of carrying on a similar business. Mr McKinnon and Mr Isenberg were again equal shareholders, although subsequently a third shareholder called Schneider was admitted. APN was run by Mr Isenberg. APN was not successful and attempts have been made to sell its business. It ceased trading in July 1990.

3. Since about the middle of 1990 Messrs McKinnon and Isenberg have been attempting to negotiate a separation of their interests. In September 1990 Mr Isenberg visited Australia for six weeks specifically for that purpose. In April 1991 he migrated to this country.

4. This is an unusual case. When a complaint is made about lack of confidence in a company which is a quasi-partnership, as PLS is, it is usually a complaint about the conduct of those who control the company. For example, it might be contended that the controllers are seeking to appropriate the assets or opportunities of the company for their own benefit, as in Scottish Co-operative Wholesale Society Limited v Meyer (1959) AC 324 and Re Bright Pine Mills Pty Limited (1969) VR 1002. Or the controllers might be attempting to freeze out the applicant and acquire his shares at an undervalue, as in Re Wondoflex Textiles Pty Limited (1951) VLR 458.

5. However, in the present case, Mr McKinnon himself is for all practical purposes the controller of PLS. He manages its day to day affairs; staff are answerable to him. In contrast, Mr Isenberg is not even a signatory on the company's bank accounts. He has not visited the office of the company for nine months or spoken to any staff for five months. The evidence shows that in relation to a few issues, such as the dismissal of a manager and the institution of recovery proceedings against a particular debtor with whom Mr Isenberg had some business connection, Mr Isenberg challenged the course of action taken by Mr McKinnon, but the latter's view prevailed. There was no doubt from the evidence of members of staff that it is Mr McKinnon to whom they look for direction. Mr Isenberg has been, as Mr McKinnon readily conceded, a sleeping partner in PLS.

6. I therefore find the contention that Mr McKinnon has lost confidence in Mr Isenberg a puzzling one. Perhaps he has lost confidence, but Mr Isenberg has no role to play in the day-to-day conduct of the business of PLS. Therefore I do not see that Mr McKinnon's lack of confidence in him or, as Mr McKinnon put it, the "intense dislike" between the two men, has any real relevance.

7. Specifically, the instances of this lack of confidence advanced by Mr McKinnon's counsel in his final address were as follows:
   

1. Mr Isenberg's attempt to sell the assets of APN without keeping Mr McKinnon informed. I accept Mr Isenberg's detailed refutation of this allegation. In any case, it seems of little or no relevance to the affairs of PLS.

2. Mr Isenberg made a complaint to the Australian Securities Commission about Mr McKinnon. Without knowing anything about the nature of the complaint, I cannot conclude it was without foundation. Moreover, it does not appear this complaint has impaired Mr McKinnon's capacity to conduct the business of PLS.

3. Mr Isenberg protested at Mr McKinnon's decision to discontinue Parts Link. Mr Isenberg's solicitors wrote to Mr McKinnon's solicitors on 4 June 1991 asserting: "Disposal or discontinuance of a major part of the business of the

group such as "Parts Link" requires the authority of the Board of

Directors, not just one director. If any attempt is made to

dispose of or discontinue that operation, your client will be held

personally responsible for any damages which flow from such an

action on his behalf". (Their emphasis).

1. This does not seem to me an incorrect statement of the legal position. But, as will hereafter appear, in any properly constituted board meeting.

2. Mr McKinnon's view would prevail. As it happens, it seems that Parts Link is still operating so perhaps Mr McKinnon saw some merit in Mr Isenberg's view on the subject.
   

non-interference in the business of PLS and Mr McKinnon said he would not trust Mr Isenberg. This seems entirely self-serving on Mr McKinnon's part.

5. Communication has for some time only taken place between the parties' solicitors. This may be an unduly formal (and expensive) method of communication, but it does not seem to prevent PLS from operating.

6. Mr Isenberg relied on his solicitor and accountant in investigating the affairs of PLS. Since Mr Isenberg was negotiating to sell his interest in the company, or buy Mr McKinnon's interest, professional assistance of this kind seems reasonable.

7. Mr Isenberg visited a number of customers and created a "perception of instability" in PLS. I accept Mr Isenberg's evidence that he had visited a limited number of customers, about a dozen, for the purposes of assessing their attitude towards PLS, this being part of his investigation of the worth of PLS, and that he did so in a discreet manner. This seems to me a legitimate purpose. There is no satisfactory evidence that his contact with such customers was detrimental to the interests of PLS.

1. Turning to the alternative basis of Mr McKinnon's case, it was conceded by his counsel in his final address that there was not a deadlock in the running of the company, but a "deadlock as to how they should separate". I take this to be a euphemism for lack of agreement on price. I know of no authority that the jurisdiction to wind up on the just and equitable ground can be exercised merely because shareholders cannot reach agreement as to the terms on which they are to sever their relationship. Such disagreement is not a matter concerning the conduct of the company, but rather a dispute as to the disposal and value of the proprietorships.

2. Again there was an odd feature in this case. Both Mr McKinnon and Mr Isenberg are directors. Unless there were some mechanism for resolving disagreements, there might very well be a source of deadlock. One obvious such mechanism is the appointment of one of the directors as chairman, combined with a provision in the articles of association giving the chairman a casting vote. It is worth noting that in Yenidje, the classic deadlock case, there was no provision for a casting vote: (1916) 2 Ch at 430.

3. In the present case, the articles do provide for a casting vote by the chairman; see article 4.6.2. Surprising as it may seem, there was a contest as to whether Mr McKinnon was the chairman. He contended that he was not. The evidence on this point was vigorously challenged by Mr McKinnon, even to the extent of contending, through his counsel, that his signature on a number of minutes over the description "chairperson" did not indicate that he was the chairman. I find that Mr McKinnon was at all material times the chairman of PLS, and well knew that he was.

4. His attempt to dispute such a simple matter of fact which was basic to the way the company operates strongly suggests to my mind an intention to create artificial difficulties where none in truth existed. It leads me to have serious doubt as to the true purpose of Mr McKinnon in bringing this application. Although in his affidavit sworn 31 March 1992, Mr McKinnon deposed that he was "gravely concerned by both the company's ability to pay its creditors and the risk associated with payment of future creditors", there was no financial detail provided to support this view. At the hearing, in evidence-in-chief, he said the company was able to pay its debts although things were "fairly tight". Returning to the affidavit of 31 March 1992, I note Mr McKinnon deposes:
   

"5. The company is urgently in need of new business. With the present Application pending I do not believe that any further new business can be arranged as this would involve undertakings and obligations to customers which could not be assured. However, with every day that transpires, the company's liquidity problems are worsened by the fact that I am not prepared to pursue new business.

6. Furthermore, in order to develop and market new business it is necessary for new staff to be hired. I am not able or prepared to retain new staff in view of the uncertainty of the company's future due to the pending Application."

1. Since Mr McKinnon brought these proceedings, the inhibition they impose on the development of the company's business is entirely self-inflicted. I am not persuaded that PLS is insolvent or that its business as a going concern does not have some worthwhile value. I am inclined to think that Mr McKinnon wants complete control of PLS and believes that if a liquidator were appointed or, as was put by his counsel, this Court were to indicate that a liquidator would be appointed within a short time unless the parties reached agreement, as was ordered in Wondoflex, then Mr Isenberg would be virtually forced to accept any offer Mr McKinnon made. I do not think this application has been brought because PLS has become unworkable, but rather as a tactic to assist Mr McKinnon to achieve the dissolution of his arrangements with Mr Isenberg on advantageous terms.

2. By the end of the case there did not seem to be any reliance on instances where Mr Isenberg had allegedly disrupted the staff of PLS when he visited the office in the course of obtaining information about its financial position. Mr Isenberg through his counsel did proffer undertakings that he would not visit the office or contact staff, but I think it undesirable to impose as a matter of formal undertaking an obligation which may conflict with his obligation of due diligence as a director. Mr Isenberg struck me as a sensible man who will be unlikely to create a situation where there is any risk of disruption if that can possibly be avoided.

3. For the foregoing reasons I have come to the conclusion that a case for winding up on the just and equitable ground has not been made out.

4. The application will be dismissed with costs, including reserved costs.