McMillan v Toledo Enterprises International Pty Ltd

[1995] FCA 911

CATCHWORDS

CORPORATIONS - interlocutory application - appointment of provisional liquidator - appointment of receiver and manager - whether affairs of the company conducted unfairly within the meaning of s260 Corporations Law - whether just and equitable that a provisional liquidator be appointed within the meaning of s461(k) Corporations Law - appropriate relief - whether receiver and manager should be appointed rather than provisional liquidator where the company has entered a potentially profitable contract

Corporations Law s260 s461

Morgan v 45 Flers Avenue Pty Limited (1986) 10 ACLR 692
Wayde v New South Wales Rugby League Limited 180 CLR 490
Zephyr Holdings Pty Limited v Jack Chia (Australia) Limited (1988) 14 ACLR 30
Re Dalkeith Investments Pty Limited (1984) 9 ACLR 247
McGuire v Ralph McKay Limited & Ors (1987) 12 ACLR 107
Whitehouse v Carlton Hotel Pty Limited (1987) 162 CLR 285
Ebrahimi v Westbourne Galleries Limited [1973] AC 360

KEVIN CAMPBELL McMILLAN v TOLEDO ENTERPRISES INTERNATIONAL PTY LTD
No. NG3605 of 1995
Beazley J
15 November 1995
Sydney

IN THE FEDERAL COURT OF AUSTRALIA )
  )    No. NG3605 of 1995
NEW SOUTH WALES DISTRICT REGISTRY )
  )
GENERAL DIVISION                 )

BETWEEN:KEVIN CAMPBELL McMILLAN

Applicant

AND:TOLEDO ENTERPRISES INTERNATIONAL PTY LTD

First Respondent

HRISTO ILIEV

Second Respondent

JOSEPH GOLUBINSKY

Third Respondent

CORAM:BEAZLEY J

PLACE:    SYDNEY
DATE:     15 November 1995

REASONS FOR JUDGMENT

BEAZLEY J:    This is an interlocutory application for the appointment of a receiver and manager of the assets and business of the first respondent, Toledo Enterprises International Pty Ltd (Toledo) and for certain other injunctions relating to the conduct of the affairs of Toledo.

Corporate structure
Toledo was incorporated in about December 1994, the corporate name deriving from a business name, Toledo Enterprises, under which the applicant (McMillan) carried on a business unassociated with the present proceedings.  Toledo's issued capital comprises three A class (voting) shares and six B class shares.   The second respondent, Hristo Iliev, (Iliev) holds two of the A class shares and four of the B class shares.  McMillan owns one A class share and one B class share.  Another B class share is owned by McMillan's wife.  Both Iliev and McMillan have contributed substantial funds by way of loan capital to Toledo.  

The submarine venture
In about 1993, McMillan became interested in finding a Russian submarine for the purposes of public exhibition in Australia. In early 1994, he commenced negotiations with the Russian Department of Spetsvneshtechnika (Spets) for the acquisition of a submarine.  In about May 1994, he entered into an option to purchase a submarine from Spets.  In June 1994, McMillan, in the name of his business, Toledo Enterprises, entered into an agreement with Rosvooroushenie (ROS)- formerly Spets - for the lease and purchase of a Russian Foxtrot submarine.

After some difficulties in finalising which submarine would be acquired under the lease and sale agreement, agreement was reached with ROS for the supply of a submarine named "Pluto".   McMillan subsequently renamed the submarine "Scorpion".

As the costs of repairs to the submarine and of towing it to Australia began to increase, McMillan became concerned about his ability to fund the project.   In about October 1994, the third respondent, Joseph Golubinsky (Golubinsky) suggested he take on a partner and introduced him to Iliev.  On 14 December 1994, McMillan and Iliev entered into an agreement (the shareholders' agreement) to cause Toledo to do all things necessary to complete the contract for the acquisition of the submarine.  They also agreed to advance loan funds to Toledo in the sum of $200,000 and $550,000 respectively.   The agreement also acknowledged that Toledo would get the benefit of an amount of $70,000 which McMillan had already expended on the project and the agreement provided that that amount would be treated in the books of the company as additional loan funds contributed by McMillan.   Shortly thereafter McMillan was introduced to John Bowman, solicitor (Bowman).   At that time, Bowman was Iliev's solicitor and agreed to act as solicitor for the company.

On 14 December 1994, Toledo entered into an agreement with the Australian National Maritime Museum (the Maritime Museum) for the exhibition of the submarine for 20 months 16 days from the first day of public access.  Ticketing income was to be split at a rate specified in the agreement.

McMillan contends that subsequent to entering into the shareholders' agreement, Iliev told McMillan that McMillan should contribute his $200,000 first before Iliev made his contribution.   Although McMillan was not happy with this, he said he accepted the proposal and between 13 and 30 December 1994, contributed his $200,000.   Iliev denies that he imposed any such requirement.  He also alleges that he has contributed the whole of his $550,000, although the evidence does not establish what funds, or when such funds, were contributed. However, it appears that Iliev has contributed substantial funds to the company.

The Scorpion arrived in Sydney on or about 31 August 1995.  In early September 1995, McMillan asked Iliev to organise a company cheque book for him so that he could make payments for the cleaning and repair of the submarine.  He says that Iliev refused stating, "No.  I don't want any cheque books floating around or cheques being written out.  I will get Valery Sheinberg to look after it."   When McMillan was refused a cheque book, he requested a company credit card.  This was also refused, Iliev stating that he would only give him cash.

Sheinberg is the office manager of Messrs Diamond Peisah, solicitors, of which Mr Bowman is a partner.  Sheinberg is Russian and was a practising lawyer in Russia before he came to Australia.  He met Iliev in about June 1994, when he was introduced to him by another partner of Messrs Diamond Peisah.  At that time, he was asked to provide translation services to Iliev.  He said he had become a friend of Iliev and had assisted him in various ways, such as in relation to opening bank accounts in Sydney and in respect of other personal financial dealings.

Iliev's version of the conversation with McMillan about the provision of facilities such as a chequebook or credit card is different from McMillan's.   However, he does not deny that he arranged for Sheinberg to write such cheques as McMillan required for work on the submarine.   Shortly after the conversation between McMillan and Iliev on this topic, Sheinberg advised McMillan that he, Sheinberg, would be the person handling chequebooks and accounts of the company.  He told McMillan, however, that he was not working for Toledo but doing Iliev a favour in attending to the affairs of the company.

On or about 22 September 1995, McMillan said that Sheinberg informed McMillan that the project was running over budget.   McMillan was surprised at this, given the amount of loan capital which had been contributed by him and Iliev, and said he requested to see the books.  Sheinberg refused.  However, he did show him a small number of chequebook stubs. Sheinberg also refused to show him the company cheque book and said he had no receipts for expenditure.  McMillan again requested the books to which Sheinberg responded:

"The company books will only tell you the same thing.  There is no point in you looking."

Sheinberg denied that he refused to show McMillan the books of the company.    He said he protested that McMillan had never been interested in the books.  He said he told McMillan, however, that he would prepare details of amounts spent by Toledo to show him everything that had happened.

In the latter part of September 1995, McMillan, Iliev and Sheinberg had dinner at the Gazebo Hotel.  On this occasion, Iliev raised the matter of the project running over budget.  Iliev said that he would contribute another $150,000.  McMillan also offered to contribute.  According to McMillan, Iliev responded:

"Don't worry about it.  I'll be sure to get my money back in the long run because we will make millions out of the submarine."

Iliev's version of his response is different.  He said that he questioned McMillan as to whether the estimate of $150,000 for the balance of the repairs and a period of one week to have the submarine ready for exhibition was correct.  He said that he told McMillan that "if it was only a matter of one week it wouldn't be his worthwhile to go and look for money for that short period of time, I would be able to finance."  He also said that he told McMillan at this meeting that if the budget exceeded $150,000 McMillan would have to contribute.  Iliev also alleged that at this meeting, Sheinberg gave McMillan a report upon the financial position of Toledo, but that he did not give him any written report.  Sheinberg said that he gave McMillan a written report but that McMillan was not interested in it and quickly handed it back.

On 2 October 1995, McMillan said that he asked Sheinberg to provide him a copy of the agreement in relation to the submarine and a copy of the agreement between him and Iliev. He again asked to see the books of the company.  He said that Sheinberg refused.  Sheinberg denies McMillan asked to see the books.  He agreed that he was asked for copies of the agreement, but that he told McMillan he did not have them.

On 15 October 1995, there was a further meeting between McMillan, Iliev and Sheinberg, this time at the Woolloomooloo Bay Hotel.  McMillan said that he raised the question of the budget, asking whether any more money was needed.  He said that Iliev said that he was not to worry about it, that he, Iliev would cover the expenses.   McMillan said that he responded that he could not let Iliev do that and that he could mortgage his home.   McMillan also offered him his 40% interest in a travel agency in Moscow known as "EuroPacific".  Iliev told him that that was not necessary.  McMillan said that the conversation then proceeded as follows:

McMillan:

"I need to have a look at the books so I can ascertain what I owe you for this.  Or can you just tell me what I owe you."

Iliev:

"Nothing."

McMillan:

"Can I have a look at the books anyway."

Iliev:

"That's up to (Sheinberg).  Let's just have lunch."

Iliev agrees that McMillan raised the question of the budget at this meeting and that he also asked whether any more money was needed.  He said that he told McMillan that he would cover the excess "not exceeding $150,000."    Iliev also agreed with McMillan's evidence that McMillan said he would seek to mortgage his home and also that he was offered McMillan's shares in the EuroPacific travel agency.   He denied that he told McMillan that it was not necessary for him to arrange to mortgage his home.  He also initially denied that McMillan asked to have a look at the books.  However he eventually stated:

"Yeah, McMillan said that he wanted to have a look at those books and we said, yes, we would show them to you."

He added that he never refused when McMillan wanted to have a look at the books of the company.   Sheinberg also disputes McMillan's version of the conversation on this occasion.  He said that he told McMillan he would prepare a report setting out everything that had been spent and the expected future expenses.

On 16 October 1995, Sheinberg advised McMillan that the agreement with the Maritime Museum had been altered, extending the exhibition time from 20 months to 30 months and altering the fee payable to Toledo under the agreement.   McMillan asked for a copy of the amended agreement but Sheinberg
refused, telling him:

"The sentence I related to you is the entirety of the amendment.  Don't worry about it."

Sheinberg denied that he said this.  Rather, he said that he told McMillan that he did not have a copy of the amended agreement.  It is not disputed that the amendments to the agreement appear to benefit Toledo.

On about 17 October, Sheinberg contacted McMillan and advised him that Toledo had money problems.  McMillan said that he once again asked to have a look at the books but he was told that he did not need to see them.  He also again offered to mortgage his property and to sell his wife's car to get some money together.   Sheinberg denies that he refused to show McMillan the books.

On 18 October 1995, McMillan was admitted to St Vincent's Hospital suffering from suspected cardiac problems.  He was discharged the following day at 5 pm.   Whilst in hospital, he received a telephone call from a security officer from Pier 11 Woolloomooloo Wharf who said that he had been told by Iliev that McMillan was no longer a director of Toledo.  McMillan said he responded by stating:

"This is the first I have heard of it."

Later that day Iliev and Sheinberg visited McMillan in
hospital.  They allege that a meeting of director's took place and that it was resolved that Golubinsky be appointed a director of Toledo.  McMillan denies that there was any such meeting.  I shall return to the issues raised by this visit to the hospital later in these reasons.

A directors' meeting was held on 19 October at which Iliev, Golubinsky and Sheinberg were in attendance.  McMillan says that he had no knowledge that the meeting was being held.  Both Sheinberg and Bowman stated that they attempted to contact McMillan at the hospital during the day of the 19th but were told that McMillan had given instructions that no calls were to be put through.  McMillan denies he gave any such direction but says that the ward nursing sister complained about the number of calls and directed that none be put through.

The minutes of that meeting are in these terms:

"FINANCIAL POSITION OF THE COMPANY:

The Chairman noted that it had become apparent subsequent to the recent illness of Mr Kevin McMillan that the cost of preparing the submarine for exhibition and obtaining necessary insurances, customs clearance, etc, was, in fact, far in excess of the budgets previously provided by Mr McMillan.  It was further noted that existing loan funds by the Chairman to the company which had been made at call beyond the agreed loan to the company of $550,000.00 and had been lent at call had now been called for repayment, with repayment due in fourteen days' time.  The Chairman reported that approaches to various banking institutions had proved fruitless, as the company's only  asset was a Russian submarine that was not suitable security for a bank to lend against.   It was accordingly RESOLVED to look to raising additional loans and share capital.

ISSUE OF ADDITIONAL SHARES:

It was RESOLVED unanimously that the company's Secretary write to all shareholders of the company offering six "B" class shares in proportion to their existing shareholding at a premium of $999.00 and conditional upon the shareholders lending the company the sum of $66,000.00 for a term of six months interest free in respect of each share applied for. It was further RESOLVED that in the event that all shareholders do not take up in full the offers of shareholding made to them that any unissued shares be offered to remaining shareholders in proportion to their shareholding in the company.  Having regard to the financial pressures under which the company is placed, it was RESOLVED that responses from shareholders be requested within fourteen days of the date of this meeting, and that the Secretary notify all shareholders accordingly.

It was further RESOLVED that, in light of the recent ill-health of Mr Kevin McMillan and his inability to attend to the business of the company or attend directors' meetings, an extraordinary general meeting of the company be called to consider, and, if thought fit, to pass the following resolution:-

That Valery Sheinberg be appointed as additional director of the company."

Contrary to the terms of the minutes, Iliev denied that he had called for the repayment of his $550,000, or for any monies that he had advanced to the company.  He also denied that any attempts had been made to borrow monies from banking institutions. 

On about 20 October 1995, McMillan received a letter from Iliev, dated 19 October 1995 as follows:

"We note that you hold one "B" class share in he capital of the Company, and that your directors have resolved to double the existing "B" class shareholding of the Company (the equity shares) by the issue of a further six "B" class shares.  These are to be offered to all shareholders in proportion to their existing holding in the Company.  Your proportion is one share.  These shares are to be offered at $1,000.00 per share, being a premium of $999.00 per share, and are conditional upon an interest-free loan being made to the company of $66,000.00 for a period of six months from the date of allotment of shares in respect of each share applied for.  You will appreciate that this course is taken as the Company finds itself in difficult financial circumstances with forthcoming expenditure required urgently to complete the submarine project and to repay some pressing creditors.

If you wish to take up these shares, could you please forward a cheque for $67,000.00 payable to Toledo Enterprises International Pty Ltd within fourteen days of the date of this letter.  In the event you do not take up the offered shares, they will be offered to other shareholders in proportion to their shareholding in the Company.  If other shareholders do not take up their entitlement, it may be that you are offered their shares on an identical basis.  Whilst these funds are required within fourteen days, it would be appreciated if you could let us know whether you will be forwarding these funds and taking up your share entitlement."

Upon receipt of this letter, McMillan attempted, unsuccessfully, to contact Iliev.   He then contacted Bowman seeking a conference.   Bowman stated that he was not able to see him until Monday.   On Monday 23 October 1995, McMillan had a meeting with Bowman and Sheinberg in the offices of Messrs Diamond Peisah.   McMillan said that at the meeting, Bowman stressed the importance of proceeding with the share issue proposed in the letter of 19 October 1994.  McMillan said he also requested time to obtain the finance for the share issue but was told by both Bowman and Sheinberg that there would be no extension of time.  Bowman gave a different version of the exchanges which occurred at the meeting.  Sheinberg supports Bowman's version of the discussions which were had.   Notwithstanding the different versions, it is clear from Bowman's evidence that he stressed the importance of raising funds to enable the submarine project to be brought to fruition. 

It is not clear in what capacity Sheinberg attended the meeting, whether as Iliev's attorney or as a person who had become interested or involved in the affairs of Toledo.  In any event, he gave McMillan documents which he said were "the company's accounts".   The documents comprised a number of handwritten pages of alleged expenditure, a summary page entitled "Total Expenses up to Date" and a further page entitled "Dec '94 - Jun '95 Expenses", which also appeared to be in summary form.  McMillan disputed a number of items in the accounts, and when asked whether the expenditure was "receipted" he was told that there were "some receipts".  It is convenient to state at this point that an expert accountant gave evidence that it was not possible to reconcile these accounts with source documents which were produced to the Court.

Shortly after this meeting, Iliev spoke to McMillan and denied that Golubinsky had been made a director of the company.  He conceded however that Golubinsky had been brought to Sydney to takeover supervision of the restoration of the submarine.

McMillan stated that because of these events, he has lost all trust and confidence in Iliev.  He stated that he considers that he has been deceived and excluded as a director and member from the management of Toledo.  He said that he does not wish the company to continue and that he wished to have a liquidator appointed.   This reference to the appointment of a liquidator reflected the nature of the relief initially sought by the applicant.   Subsequent to the applicant giving this evidence, counsel for the applicant sought, and was granted, leave to amend the application so as to seek the appointment of a receiver and manager, both on an interlocutory and final basis.

For his part, Iliev has developed a distrust of McMillan, stating in cross examination:

"I believe that Mr McMillan is currently...in a difficult financial situation and I don't trust him."

He added:

"I don't trust him as a partner.  Now, one thing I don't want, I don't want him to be in control and be able to sign, say, financial papers."

He was further asked:

"So, you are happy to be in business with him so long as he does not have any power to make decisions, is that what you say?"

Iliev agreed.   However, he later said that the decisions to which he referred were in relation to financial matters.  He was then asked:

"But Mr Iliev, any decision worth speaking about that needs to be made in this submarine project is going to be a decision which involves financial matters, is it not?"

Iliev agreed and said that he did not want McMillan to have the right to sign cheques.  He said he was happy doing business with him and happy to make decisions together.  Another apparent reason for Iliev's unhappiness with McMillan is that McMillan had told two friends in Queensland about Iliev's involvement in the venture, contrary to Iliev's wishes.

Before departing from the general factual matters which have given rise to this dispute, it is necessary to refer to certain other matters.  McMillan stated in his evidence that he considers that he owns the submarine.  He was cross-examined upon the terms of the shareholders' agreement, which provided that McMillan held the benefit of the contract for the acquisition of the submarine on trust for Toledo.  He confirmed his evidence that he considered this clause meant  that he was the owner of the vessel.  It was contended that this was a relevant factor in the exercise of discretion.  However, as the applicant has sought orders which make it clear that he will not interfere with a receiver and manager's ability to complete the contract with Maritime Museum, it is convenient at this point to state that I do not consider this to be a substantial consideration on the question of balance of convenience.

Iliev opposes the appointment of a receiver and manager or a provisional liquidator.  He states that the costs of a provisional liquidator will be substantial and will unnecessarily erode the profits of the company.   He is also concerned that such an appointment may result in the exercise by the Maritime Museum of its power to terminate its agreement with Toledo pursuant to clause 2.2 of the contract with the Museum, which provides that the Museum may terminate the contract on three months notice without cause.  He is also concerned that ROS may seek to exercise its rights under its contract with McMillan.  This concern arises out of correspondence between Iliev and Golubinsky and ROS commencing on 16 October 1995 and 9 November 1995.

In his primary affidavit filed on the application, he made an open offer to the Court by way of final relief under s 260 of the Corporations Law to purchase the shares owned by McMillan and his wife at a price of $1 per share and to repay McMillan an amount of $270,000 being the monies accepted as having been contributed by McMillan to the company.   Subsequently, he made two alternative open offers the terms of which are contained in the schedule hereto.

Validity of meeting on 18 October 1995
It is convenient at this point to return to the holding of the alleged directors' meeting at the hospital on 18 October and the purported appointment of Golubinsky as director.  The records filed with the Australian Securities Commission reveal that Golubinsky was appointed a director of Toledo on 18 October 1995.  McMillan said that he had no knowledge of this appointment until a search of the ASC records was undertaken for the purposes of these proceedings.   Iliev alleges that the appointment took place at a meeting of directors conducted at St Vincent's Hospital on 18 October 1995.  He said that Sheinberg was present at the time, acting as his interpreter. His initial version of what occurred at this "meeting of directors" was as follows:

"I recall that at that meeting a resolution was put for the appointment of Mr Golubinsky as a director of the company and that Mr McMillan voted against the resolution."

Subsequently, in cross examination, Iliev gave the following versions of what occurred:

THE INTERPRETER:   I told him what happened.  He said that he was in a bad way, he had a heart problem and also said that he would have to spend seven to 10 days in the hospital and it's possible he would have to undergo surgery for bypass, so I told him not to worry and said that I actually called Mr Golubinsky to come here in order to complete the project.

MR CAMPBELL:   What did he say to that?

THE INTERPRETER:   And I said that I propose to appoint Mr Golubinsky as a director in order to complete the project.  So he said "No", he was a bad person and people would run away from him.  So I said to  him that Mr Golubinsky has been involved in the project right from the very beginning and he
knew about all the issues, and I said we didn't have anyone else to continue with the submarine repairs because I couldn't and Mr [Sheinberg] also couldn't and Mr McMillan said he did not agree to that, and I said that as the chairman of the company I had a right to appoint a director.  Then medical nurse came and told us we didn't have to, like, bother, worry, Mr McMillan and we left at that.

Shortly after this evidence, Iliev gave a different version again, as follows: 

MR CAMPBELL:   At the time you visited the hospital there was no suggestion of you and Mr McMillan choosing which of you would be chairman, was there?

THE INTERPRETER:   No, because we knew right from the very beginning.

MR CAMPBELL:   And no votes were taken at the meeting, were they?

THE INTERPRETER:   We voted in regard to the appointment of Mr Golubinsky.

MR CAMPBELL:   How did you vote?

THE INTERPRETER:   So I proposed to Mr McMillan to cast votes in order to appoint Mr Golubinsky a director.  Mr McMillan refused.  I proposed again; he refused once again and then as the chairman of the company I voted and - I said I was the chairman of the company and voted for Mr Golubinsky to become a director.  Then Mr McMillan said, no.  That time the nurse walked in.

And later again

THE INTERPRETER:   Now, when we arrived to the hospital we asked, inquire whether it will be possible to talk with McMillan and we were given answer, yes.  So, when we entered the room we inquired about Mr McMillan's health and I told him not to worry about the project because I was calling Mr Golubinsky to come here to complete the project, and Mr McMillan rejected Mr Golubinsky out of hand and said that he had a bad character and people would run away from him. 

Now, I replied that other people don't know Mr
Golubinsky, and secondly, Mr Golubinsky knows about the project right from the very beginning to the current stage, and nobody else knew the project better than him.  Mr McMillan opposed once again and said, "No, no, no".  Then I asked him how could the project be completed since he was going to stay at the hospital between 7 and 10 days or maybe even more. 

Now, he said that Mr Hilton who is the current supervisor over the project, he knows all the details and he would be able to complete the project.  I said I couldn't trust a person that I know nothing - that I didn't know him at all, and I said that I had already called Mr Golubinsky and he agreed to come down on the same day and I said that I wanted to appoint Mr Golubinsky a director in order to complete the project.  Mr McMillan said no and I said that as the Chairman of the company and that was my belief that the best possible opportunity would be if Mr McMillan - sorry, Mr Golubinsky would complete the project and I said there was the  meeting of the directors and I would vote for Mr Golubinsky.  Mr McMillan became very agitated and then the medical nurse came and asked us not to bother him any longer and to leave and he left.

The holding of director's meetings, the position of chairman and the appointment of directors are governed by the provisions of Toledo's Articles of Association.  Relevantly, the Articles provide:

"96 The Directors may meet together for the dispatch of business and adjourn and otherwise regulate their meetings as they think fit..."

..."

Even if the meeting was a properly constituted meeting of directors, the validity of the vote taken at the meeting depends upon whether Iliev was entitled to a casting vote as Chairman.  Article 97 provides:

"97  The Directors may elect a Chairman of their meetings and determine the period during which he is to hold office. Except as hereinafter mentioned, a Chairman shall have one vote at such meetings.  All meetings of the Directors shall be presided over by the Chairman if present and in his absence at the time appointed for holding the same or if no Chairman has been elected the Directors present may choose one of their number as Acting Chairman to preside at the meeting."

Article 99 provides:

"99Every question at meetings of the Directors shall be determined by a majority of the votes of the Directors present every Director having one (1) vote and in the case of an equality of votes the Chairman at such meetings shall have a second or casting vote.

Iliev conceded in cross examination that nobody had appointed him as Chairman of the company.  He also conceded that nothing was said at the meeting at the hospital about his being the Chairman of that meeting.  In making this concession he stated:

"...because I announced that I was Chairman and that they wanted to appoint Mr Golubinsky."

Earlier, when it was put to Iliev in cross-examination that he had never been appointed as Chairman, he answered:

"I believe that in the Company's regulations it says all about this matter."

It was alleged that Iliev was the de facto chairman of the company, arising out of a pre-incorporation agreement or arrangement with McMillan that Iliev would have the role of senior partner in their relationship.   It is not appropriate for me to resolve that matter on this interlocutory application.   However, I should indicate that there are factors pointing in both directions on this issue.

Claim under section 260
Relevantly, s 260 provides:

"An application to the Court for an order under this section in relation to a company may be made:

(a)by a member who believes:

(i)that affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members, or in a manner that is contrary to the interest of the members as a whole;  or

(ii)that an act or omission, or a proposed act or omission, by or on behalf of the company, or a resolution, or a proposed resolution, of a class of members, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against a member or members or was or would be contrary to the interests of the members as a whole."

The orders which the Court may make if it determines to grant relief under s 260 include an order that the company be wound up; an order for regulating the conduct of affairs of the company in the future; an order for the purchase of the shares of any member by other members; and an order appointing a receiver or a receiver and manager of property of the company: s260(2).

The boundaries of the operation of s 260 are reasonably well, although not finally, settled. Thus, there are differing views as to whether the expression "oppressive or unfairly prejudicial or unfairly discriminatory or contrary to the interests of the members" is a composite expression or whether it should be approached as specifying three distinct alternatives.   In Thomas v H. W. Thomas [1984] 1 NZLR 686; 2 ACLC 610 and Morgan v 45 Flers Avenue Pty Limited (1986) 10 ACLR 692, the broad approach was taken. However, in Re Spargos Mining NL (1990) 3 ACSR 1 Murray J of the Supreme Court of Western Australia, expressed the view that the section throws up distinct categories. It is not necessary for the purposes of this interlocutory application to resolve that dispute. However, for convenience I shall refer to any conduct which may fall within the section as "unfair conduct".
It is well settled that the test of fairness is an objective one;  Wayde v New South Wales Rugby League Limited (1985) 180 CLR 490; Morgan v 45 Flers Avenue Pty Limited; and that it is not necessary to show that the persons controlling the company had a conscious knowledge that they were acting unfairly. The corollary of this proposition is also true. Even where directors of a company act in good faith and for proper purposes, their conduct, objectively viewed, may be considered to be relevantly unfair within s 260: see Wayde v New South Wales Rugby League Limited.

Acts or omissions which may constitute unfair conduct may be those of anyone taking part in the conduct of the company, whether de facto or with authority:  Re East West Promotions Pty Limited (1986) 10 ACLR 222. In assessing whether conduct falls within s 260, the Courts have shown a reluctance to examine the merits of a board decision: Re G. Jeffery (Mens Store) Pty Limited (1984) 9 ACLR 193 at 198; Zephyr Holdings Pty Limited v Jack Chia (Australia) Limited (1988) 14 ACLR 30 where, Brooking J stated at 37-38 that although he was disposed to think that the option issue proposed by the company in that case was:

"antipathetic to the interests of the members ...I am not prepared to say that no board of directors, acting reasonably, could have decided that the proposed option issued to members and option holders was in the interest of the members as a whole.   While I am uneasy about this proposed option issue, I am not, in all the circumstances prepared to say that the inclination of my own opinion should prevail over the view formed by the board of directors, the good faith of which has not been successfully impugned."

It may be unfairly prejudicial for a majority shareholder in a company to procure the company to make a rights issue when the minority shareholder is unable to subscribe. In determining whether such an act would contravene s 260 it is relevant to look at the purpose for which the share issue was made or proposed. In Whitehouse v Carlton Hotel Pty Limited (1987) 162 CLR 285 Mason, Deane and Dawson JJ said in a joint judgment at 721:

"[r]egardless of whether the impermissible purpose was the dominant one or but one of a number of significantly contributing causes, the allotment will be invalidated if the impermissible purpose was causative in the sense that, but for its presence, 'the power would not have been exercised' (Per Dixon J, Mills v Mills (1938) 60 CLR at 186)".

A share issue might also be relevantly unfair in the case of a small company, founded upon the basis of mutual trust and confidence where the parties had a legitimate expectation of maintaining fixed proportional stakes in the company:  see Re Dalkeith Investments Pty Limited (1984) 9 ACLR 247, where McPherson J considered at 252 that a proposed share issue was:

"undertaken not in the interests of the company as a whole but to the collateral purpose of gaining control and of diluting by means of the new share issue or issues (the member's) 'equity' in the company."

In that case McPherson J held that the member was likely to be prejudicially affected by the share issue because it would mean he was obliged, either to invest more money in the company in association with shareholders who were antithetical to his interests, or to suffer his interest in the company to be diminished to his prejudice.  His Honour found that knowing of these matters, the other members took advantage of the circumstances in proposing the share issue.   However, as the Full Court of the Supreme Court of Victoria pointed out in  McGuire v Ralph McKay Limited & Ors (1987) 12 ACLR 107, any underwritten issue of new shares has the effect of diluting the voting power attaching to the already issued shares. The Court held in that case that unless the purpose to dilute was proven, the dilution was not necessarily impermissible.

It must be borne in mind that s 260 is only available in the case of "unfair conduct" within the meaning of the section.  Irreconcilable differences between members of a company is not sufficient for the purposes of the section:  Re A Company (1986) 2 BCC 99191. The appropriate relief in such a case is an application for winding up on the just and equitable ground.

In the present case, a number of factors were relied upon to establish that there was a serious question to be tried under s 260 and that the balance of convenience lay in favour of the grant of the relief sought. The applicant's evidence is, in large measure, denied by the respondents. Counsel for the applicant submitted that whilst it was not possible on such an application as this to make findings of credit, it was possible and appropriate to form a preliminary view as to credit. He submitted that there were aspects of Iliev's evidence upon which I could form such an opinion. Having regard to the hurried circumstances in which the matter was brought on for hearing and the limited nature of the cross-examination, I do not consider it appropriate to make findings on credit. However, it is relevant to take into account, in an overall sense, that parties who entered into a business relationship on the basis of mutual trust are now in the situation where, on oath, each gives different versions of matters affecting the conduct of the affairs of the company.

The factors relied upon in support of the claim for the interim appointment of a receiver and manager were as follows.  McMillan alleged that he had been denied access to the books of the company;  or at least, that it was left to Sheinberg to decide if he should be shown the books of the company, notwithstanding that Sheinberg protested throughout that he had no involvement in, and no responsibility for, the affairs of Toledo.  I consider that this is a relevant factor.  In addition, a tight rein had been placed on McMillan's access to the finances of the company in circumstances where similar restrictions were not replicated as part of Toledo's general corporate governance.  It appears that the reasons for Iliev's actions in this regard arise from his distrust of McMillan. Whilst it may be appropriate, indeed necessary, even in a small company such as this, to have measures designed to ensure the security of the company's funds, it is arguably unfair to have such a restriction placed on one director by another director where that other director does not appear to have the same restrictions placed upon him.   Accordingly, I consider that this is a relevant factor.

Further, the contract with the Maritime Museum had been altered without McMillan's knowledge.  Counsel for the respondents submitted this was an irrelevant factor, as the alteration had been for the benefit of the company.  I do not agree.   McMillan was a director of the company and had an interest in knowing what was happening in the affairs of the company.  In my opinion, this incident is another example of his not being consulted in relation to or informed of, the affairs of the company.

In addition to the lack of consultation in relation to the amendment to the contract with the Maritime Museum, the affairs of the company have been conducted in such a way that McMillan has been excluded from important aspects of management.  He does not know about the quantum of certain major items of expenditure, such as the towage contract.  Iliev had been involved in negotiations for the acquisition of a further submarine.  Those negotiations had not been disclosed to McMillan.  In my opinion, these are relevant matters to take into consideration.  It is also relevant that proper books of account have not been kept and that the minutes of the directors' meeting of 19 October contain substantial inaccuracies.

It was also submitted that the proposed fund raising was, in the circumstances, oppressive.  Although the scheme proposed in the 19 October 1995 letter was not itself attacked as unfair, it was submitted that the proposal was unfair in that it specified a time scheme which McMillan could not meet, in circumstances where McMillan had twice offered to arrange finance on the security of his assets and on both occasions he had been told by Iliev not to do so, that he, Iliev, would raise the funds.  It was submitted that McMillan had been lulled into a false sense of security about whether he would be required to contribute any more to the company and that the fund raising, put in motion when McMillan was ill in hospital, was a crisis manufactured by Iliev "at a time and in circumstances where Iliev thought that McMillan would not be able to raise the money".  It was submitted therefore that there was a real possibility that, at trial, it would be found that the proposed fund raising arose from Iliev wanting to squeeze McMillan out.  There is some dispute between the parties as to what conversations were had in relation to the funding issue.   However, Iliev conceded that McMillan had said he would raise monies upon the security of his house.   I do not propose to determine whether "a crisis" was "manufactured"  as submitted.  However, I am of the opinion that there is a serious question to be tried as to whether the proposed fundraising was, in the circumstances, unfair. 

The next issue relates to the alleged holding of the directors' meeting at the hospital on 18 October 1995. McMillan denied there was any such meeting. Iliev, with varying degrees of specificity, maintained his assertion that such a meeting had been held. His evidence was supported in large measure by Sheinberg. I do not propose to comment upon the credibility of either Iliev or Sheinberg on this issue. Assuming, for present purposes, that their evidence is accepted, I am of the opinion that there is a question as to the validity of the directors' meeting. I am also of the opinion that the circumstances of holding that meeting, and the passing of the resolution to appoint Golubinsky a director, give rise to serious questions to be tried under s 260.

Counsel for the respondents submitted that, in any event, it was not necessary for his purposes to maintain the validity of the 18 October 1995 hospital meeting.  He submitted that Iliev has the voting strength to remove McMillan from the Board and appoint other directors, subject only to the principles of fraud on the minority and oppression.  He said there was no injustice perpetrated at the meeting as the company had run out of money and it needed someone to take over the day to day running of the company during McMillan's indisposition.

Counsel for the applicant submitted, however, that if the appointment of Golubinsky as a director on 18 October 1995 was valid, it had important, immediate and adverse consequences for McMillan.  In the first place, it removed McMillan's equal voting strength on the board.  Secondly, it meant that there could be no deadlock over the appointment of a chairman.  This would have the consequence that McMillan could not effectively veto any decision of the Board and it also removed McMillan's ability to effectively cause the quorum at a directors' meeting to lapse.  The submission acknowledged that these powers were not ones likely to be used where directors trust each other.  It was submitted however that they are important rights when there is a falling out between the directors, as they constitute a practical way of a director ensuring that nothing happens in a company during the time taken to approach the court for relief. 

It was also submitted that without Golubinsky's appointment, the directors' meeting of 19 October 1995 would not have taken place so that there would be no immediate threat to McMillan's percentage shareholding being diluted arising from the proposed new issue of shares.   Nor would there be a current threat to his position on the board arising from the calling of the extraordinary general meeting for 14 November 1995.  Even if Golubinsky's appointment was invalid, it is arguable that the 19 October directors' meeting was valid.  However, leaving that matter aside, I am of the opinion that the purported appointment of Golubinsky did affect McMillan's rights in the company, including in the ways submitted by counsel for the applicant and that these are relevant matters.
Counsel for the respondents also submitted that Iliev was the de facto chairman of Toledo.   As with the other matters subject of dispute, it is not necessary for me to decide this question.  However, the fact that Iliev asserts that he is the chairman and has assumed voting rights under the Articles that he otherwise would not have, is relevant to both the serious issue question and the balance of convenience.

Quite apart from his submissions in relation to the above factors, counsel for the respondents argued that there were a number of factors which made it inappropriate to grant interim relief.   He submitted that the application itself was oppressive and was an attempt by a minority shareholder to force his will on the company.   He also submitted that if the Court intervened in the affairs of the company by appointing a receiver or provisional liquidator, the assets of the company might be placed in jeopardy, either because the Russian owners of the submarine might seek to exercise such rights as they consider they have under the contract or alternatively, because the Maritime Museum might consider it inappropriate to proceed with the exhibition and thus terminate the contract on 3 month's notice, as it is entitled to do.

I do not consider that the application was oppressive as alleged.   It was brought in circumstances where McMillan believed, according to his evidence, that a director had been appointed without his knowledge and where a formal funding proposal was in place which jeopardised his percentage shareholding in the company.  The evidence has revealed that there are serious difficulties and differences between the parties relating management and there are issues in relation to the accounts of the company.

The possibility of the Russian owners of the submarine or the Maritime Museum taking action to terminate their respective contracts, is however, an important consideration.   Counsel for the applicant submitted that in so far as there was any threat from the Russian owners of the submarine, it was apparent from the correspondence that their real interest was in receiving payment.  To the extent that any other problem was raised by them, it had been instigated by the alarmist communications from Iliev and Golubinsky.   I consider that there is merit in these submissions.  More relevantly, however, there is no clause in the contract for the acquisition of the submarine which gives any right to ROS to terminate the contract if a receiver or liquidator is appointed.  Similarly, there is no such clause in the contract with the Maritime Museum.  In these circumstances, although the appointment of a receiver and manager may place the venture at risk, on the evidence before me, that risk does not appear to be very high.

Next, it was submitted that the mere fact of the appointment of a receiver or provisional liquidator would place in jeopardy the ability of the company to raise funds.  It was submitted that McMillan's estimate of a further $40,000 as being needed to bring the submarine to exhibition stage was "nonsense" and that the company needed at least $150,000.  It was submitted that it was unlikely that Iliev would contribute funds to the company if it was in receivership or provisional liquidation.   Counsel for the applicant submitted, however, that there was no accurate figure before the Court as to the costs which would have to be incurred, at least on an immediate basis, for the purposes of getting the submarine to exhibition stage.  In particular, it was submitted that at least some of the costs which had been alleged would be necessary to be incurred for this purpose, were costs which were likely to be spread over the life of the exhibition.  The ability of a receiver and manager to fulfil the objects of the receivership is a relevant consideration.  However, McMillan offered to give an undertaking to the Court to negotiate with the receiver to make loan funds available up to $150,000.  Having regard to these various factors, I do not consider that any potential problems a receiver may have in relation to raising funds to fulfil the purposes of the receivership, override the factors which indicate that a receiver should be appointed. 

Counsel for the respondent submitted further that "generous" final open offers had been made to McMillan, which was a relevant factor to take into account in the Court's discretion as to whether relief should be granted.  In my opinion, the offers are relevant factors to be taken into account in determining whether any relief should be granted.   However, the weight which should be attached to the making of the offers very much depends upon the extent to which I could be persuaded that those offers were in terms which the court would be likely to make by way of order at a final hearing.   There is not sufficient material before me to enable that determination to be made.

It was also submitted that in so far as there were other irregularities in relation to the accounts of the company, these could be fixed readily by the maintenance of correct books of account and the appointment of an auditor.   This might have been an appropriate resolution of the matter if it was the only problem which emerged from an examination of the affairs of the company.   However, I consider that the applicant has established a serious case in relation to matters which go beyond a matter of mere accounting. 

It was next submitted that the cost of receivership or provisional liquidation was itself a factor which should weigh against the granting of any relief.   Counsel for the applicant countered by submitting that the remuneration of a receiver or provisional liquidator was reviewable by the Court.   Whilst this is correct, it would be naive to suggest that the costs of the appointment of a receiver or provisional liquidator would be other than substantial.  I consider that this is a relevant factor to take into account in the exercise of my discretion.   However, the alleged potential level of profitability of the Maritime Museum contract substantially affects the weight this factor might otherwise have had. 

It was also submitted that any undertaking as to damages would be inadequate to protect the respondents.   However, I was not appraised of the full financial circumstances of the applicant, nor was he cross examined as to his ability to satisfy any such undertaking.  Accordingly I consider I should accept the undertaking as to damages on its face value.
The applicant has demonstrated that there is a serious question to be tried.  I am of the opinion that the balance of convenience clearly lays in favour of granting relief.  The relationship between the parties has broken down; McMillan's percentage shareholding in the company is in jeopardy; his role in the management of the company has been marginalised by the conduct of Iliev; the accounts of the company have not been properly kept; there is a dispute as to whether Iliev is the chairman of the company and what rights that gives him; there is a dispute as to the validity of the appointment of a director of the company; and finally the company is in urgent need of funds to enable it to fulfill its contract with the Maritime Museum.   I shall deal with the question of appropriate relief at the conclusion of these reasons.

Breakdown in relationship between the parties
The application was also brought on the basis of the just and equitable ground: see s 461(k) of the Corporations Law. That section provides:

"The Court may order the winding up of company if:

(k)the Court is of the opinion that it is just and equitable that the company be wound up."

The classic statement of the circumstances in which the just and equitable ground may apply remains that of Lord Wilberforce in Ebrahimi v Westbourne Galleries Limited [1973] AC 360 at 379 where his Lordship said:

"The 'just and equitable' provision does not...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.

It would be impossible, and wholly undesirable, to define the circumstances in which consideration may arise.  Certainly the fact that a company is a small one, or a private company, is not enough.  There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustibly laid down in the articles.  The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence...(ii) an agreement, or understanding, that all, or some...of the shareholders shall participate in the conduct of the business."

Those words are apt here.  Both McMillan and Iliev stated that they had commenced the relationship on the basis of mutual trust.  Both stated that they no longer trusted the other.  Their mutual mistrust has not remained inert.  Iliev has demonstrated his mistrust in the way he has treated McMillan in relation to the conduct of the affairs of the company.  He has deprived McMillan of access to a cheque book or other means to facilitate payment for work being done on the submarine.  McMillan alleges that Iliev has denied him access to the books of the company.  He has been excluded from major decision making.  Iliev has purported to assert control over the company by alleging he is the chairman.  There are major issues in the company in relation to fund raising.  These factors reflect a serious and operative state of mistrust and disharmony between Iliev and McMillan.  Accordingly, I am satisfied that it is appropriate to grant relief on this ground also. 

This raises the question of the relief which ought to be granted.  The application as initially filed sought the appointment of a liquidator, and, on an interlocutory basis, a provisional liquidator.   During the course of the hearing of the interlocutory application, the applicant sought, and was granted, leave to amend to seek the appointment of a receiver and manager.  The reason for the amendment was that although the company was in apparent immediate financial difficulties, all parties asserted that the contract with the Maritime Museum was likely, indeed, very likely, to be highly profitable.   The applicant submitted therefore, that there was a significant advantage in the appointment of a receiver and manager so as to enable the contract with the Maritime Museum to proceed, rather than having a provisional liquidator appointed with the longer term aim of selling the assets and undertakings of the company.  I consider that, on an interim basis at least, the potential profitability of the contract with the Maritime Museum should be protected, so far as is possible and that is best done by the appointment of a receiver and manager.  Accordingly, I am of the opinion that the appropriate order to make at this stage is for the appointment of a receiver and manager.

I certify that the preceding 37 pages
are a true copy of the Reasons for Judgment
of the Honourable Justice Beazley.

Associate:

Dated:    15 November 1995

APPEARANCES

Counsel for the Applicant:           Mr J.C. Campbell QC with Mr F. Kunc

Solicitors for the Applicant:             Messrs Esplins

Counsel for the

First and Second Respondent:         Mr D.E. Grieve QC  with Mr S. Burley

Solicitors for the

First & Second Respondent:           Messrs Diamond Peisah & Co

Dates of hearing:  1, 2, 3, 10, 14 November 1995