FEDERAL COURT OF AUSTRALIA
MF Lady Pty Ltd (Trustee) v Henry Morgan Limited [2022] FCA 978
File number: NSD 1382 of 2020 Judgment of: JACKSON J Date of judgment: 22 August 2022 Catchwords: CORPORATIONS - winding up - application to wind up company on just and equitable ground - purpose of company established by prospectus initially issued - fundamental departure from original purpose - whether change of purpose authorised by shareholders - transactions warranting investigation - compliance breaches - company's solvency position not a factor against winding up in the circumstances - plaintiffs not acting unreasonably to seek winding up rather than pursuing alternative remedies - just and equitable to wind company up - application to wind up also made on oppression ground - oppression shown on evidence - winding up order made Legislation: Corporations Act 2001 (Cth) ss 9, 204A, 228, 232, 250N, 311, 461, 462, 467, 494, 712, 739, Chapter 2E, Part 5.3A
Evidence Act 1995 (Cth) s 131, 136
Federal Court Rules 2011 (Cth) r 7.23
Cases cited: Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd [2018] QCA 48; [2018] 3 Qd R 520
Australian Competition and Consumer Commission v Allphones Retail Pty Ltd (No 3) [2009] FCA 1075
Australian Securities and Investments Commission v ABC Fund Managers Ltd [2001] VSC 383
Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) [2013] FCA 234
Australian Securities and Investments Commission v Chase Capital Management Pty Ltd [2001] WASC 27
Australian Securities and Investments Commission v Merlin Diamonds Ltd [2019] FCA 1546
Australian Securities and Investments Commission v Uglii Corporation Ltd [2016] FCA 1099
Benjamin Hornigold Limited 02 and Henry Morgan Limited 02 [2019] ATP 1
Benjamin Hornigold Limited 05, 06 & 07 [2019] ATP 18
Boros v Pages Property Investments Pty Ltd [2021] NSWCA 288
CIC Insurance Ltd (prov liq apptd) v Hannan & Co Pty Ltd [2001] NSWSC 437
Commonwealth v ABC2 Group Pty Ltd (court-apptd recs and mgrs apptd) [2009] NSWSC 1442
Cumberland Holdings Ltd v Washington H Soul Pattinson & Co Ltd (1977) 13 ALR 561
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
Galanopoulos v Moustafa [2010] VSC 380
Frigger v Trenfield (No 7) [2020] FCA 1740
Gognos Holdings Ltd v Australian Securities and Investments Commission [2018] QCA 181
Gregor v British-Israel-World Federation [2002] NSWSC 12
Harvard Nominees Pty Ltd v Tiller [2019] FCA 1672
Haselgrove v Lavender Estates Pty Ltd [2009] NSWSC 1076
Hillam v Ample Source International Ltd (No 2) [2012] FCAFC 73; (2012) 202 FCR 336
Hillig v Darkinjung Local Aboriginal Land Council [2006] NSWSC 1371
Hillig v Darkinjung Pty Ltd [2008] NSWCA 75
Host-Plus Pty Ltd v Australian Hotels Association [2003] VSC 145
Hylepin Pty Ltd v Doshay Pty Ltd [2021] FCAFC 201; (2021) 288 FCR 104
In Re Straw Products Pty Ltd [1942] VLR 222
John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A'asia) Pty Ltd (1991) 6 ACSR 63
Kingjade Holdings Pty Ltd v Pineridge Nominees Pty Ltd (1997) 15 ACLC 910
Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2005] FCA 1812
Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2006] FCAFC 144; (2006) 156 FCR 1
Loch v John Blackwood Ltd [1924] AC 783
Nassar v Innovative Precasters Group Pty Ltd [2009] NSWSC 342
Pages Property Investments Pty Ltd v Boros [2020] NSWSC 1270
Plaintiff M47/2018 v Minister for Home Affairs [2019] HCA 17; (2019) 265 CLR 285
Re CNPR Ltd [2018] NSWSC 989
Re Johnson Corporation Ltd (1980) 5 ACLR 227; (1980) 2 NSWLR 681
Re New South Wales Leagues' Club Ltd [2014] NSWSC 1610
Re Tivoli Freeholds Ltd [1972] VR 445
Registered Clubs Association of NSW v Australian Broadcasting Corporation [2016] NSWSC 835
Shelton v National Roads and Motorists Association Ltd [2004] FCA 1393
Spotlight Pty Ltd v NCON Australia Ltd [2012] VSCA 232; (2012) 46 VR 1
Strong v J Brough & Son (Strathfield) Pty Ltd (1991) 5 ACSR 296
Vujnovich v Vujnovich [1989] 3 NZLR 513
Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 361 Date of last submissions: 22 December 2021 and 24 June 2022 (defendant)
20 January 2022 and 24 June 2022 (plaintiffs)Date of hearing: 13-14 December 2021 and 30 June 2022 Counsel for the Plaintiffs: Mr J Hynes with Ms K Boyd Solicitor for the Plaintiffs: Corrs Chambers Westgarth Counsel for the Defendant: Mr S Lees Solicitor for the Defendant: McCullough Robertson Lawyers ORDERS
NSD 1382 of 2020 BETWEEN: MF LADY PTY LTD (ACN 616 204 561) AS TRUSTEE FOR BRIANT SADLER SUPER FUND
First Plaintiff
JONATHAN ALLAN DIXON, WENDY LYNN COWAN AND SUSAN JEAN DIXON AS TRUSTEES FOR DIXON SUPERANNUATION FUND
Second Plaintiff
AND: HENRY MORGAN LIMITED (ACN 602 041 770)
Defendant
ORDER MADE BY:
JACKSON J
DATE OF ORDER:
22 AUGUST 2022
THE COURT ORDERS THAT:
1.The defendant be wound up pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth) on the ground that it is just and equitable that the company be wound up.
2.Ian Niccol and Vincent Pirina are appointed as the joint and several liquidators of the defendant.
3.The plaintiffs' costs of this application are costs in the winding up of the defendant.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
TABLE OF CONTENTS
Background to the corporate group
[3]
Diagram 1 - corporate group structure
[3]
HML
[5]
JBL
[9]
JBFG
[13]
Directors and executives
[16]
The proceeding, the pleadings and the issues
[21]
Principles
[35]
The legislation
[35]
The just and equitable ground
[38]
Failure of company's purpose and failure of substratum
[44]
Relevance of breaches of the law
[59]
Oppression
[62]
Relevance of solvency
[65]
Section 467(4)
[68]
Application to set aside a subpoena
[70]
Application to reopen
[80]
The evidence
[101]
Stuart McAuliffe
[101]
2014
[110]
2015
[111]
The Management Services Agreement with JBL
[111]
The Prospectus
[113]
2016
[135]
Transactions in relation to connected companies in late 2016
[139]
2017
[146]
January to April connected party transactions
[146]
The bonus option offer and the ASIC stop order
[149]
The ASX suspension
[157]
July 2017 connected company transactions
[160]
Retractions to ASX announcements
[165]
September to November 2017 connected party transactions
[173]
2018
[177]
More ASX queries
[177]
Diagram 2 - Annexure A
[178]
Request to lift ASX suspension
[191]
July to September 2018 connected party transactions
[195]
HML's annual report for FYE 2018
[201]
JBFG's results for FYE 2018
[215]
JBL's results for FYE 2018
[219]
KPMG step down as auditors
[221]
2019
[222]
Diagram 3 - Takeovers Panel diagram
[223]
ASX refuses to lift the suspension
[224]
Capital Credit loan novated
[228]
HML's financial reporting for FYE 2019
[229]
Other developments in 2019
[234]
2020
[236]
Link share registry
[239]
Further developments in 2020
[246]
2021
[254]
HML's directors and future plans
[254]
Mr McAuliffe promises to advance money to HML
[259]
Capital raising
[263]
The declaration of solvency
[264]
The EGM
[268]
The financial statements
[279]
Audit
[292]
Possible proposed litigation
[299]
Consideration
[304]
Fundamental change of purpose
[307]
Resolutions concerning changes in Investment Mandate or purpose
[319]
Transactions with connected companies
[331]
Governance concerns
[340]
Solvency and HML's prospects
[344]
Whether plaintiffs are acting unreasonably in not pursuing another remedy
[349]
Conclusion on just and equitable winding up
[358]
Oppression ground
[360]
Orders
[361]
REASONS FOR JUDGMENT
JACKSON J:
Henry Morgan Limited (HML) is a public company which, until 3 February 2020, was listed on the Australian Securities Exchange Ltd (ASX). The plaintiffs apply for it to be wound up pursuant to s 461(1)(f) or s 461(1)(k) of the Corporations Act 2001 (Cth), that is, on a ground that can be broadly described as oppression, or on the ground that it is just and equitable. HML opposes the application.
For the following reasons, an order winding HML up will be made.
Background to the corporate group
HML is part of a complex corporate group, which is best described by means of the following diagram. The diagram is taken from a report dated 13 December 2019 that was prepared by administrators of one of the companies in the group, JB Financial Group Pty Ltd (JBFG):
Diagram 1 - corporate group structure
Neither party contested the accuracy of the diagram. However the question of the relationships between the various companies, including whether they were relationships of control, was controversial. Describing the companies as a corporate group implies no finding that they are, for example, 'holding companies' or 'subsidiaries' of each other as those terms are defined in the Corporations Act. At this point it is simply convenient to group the companies together for the purpose of this judgment.
HML
According to the New Encyclopaedia Britannica, vol 8 (15th ed, 1993), Sir Henry Morgan was a 'Welsh buccaneer, most famous of the adventurers who plundered Spain's Caribbean colonies during the late 17th century'. Henry Morgan Ltd was incorporated on 26 September 2014. In late 2015 it made an initial public offering of its shares, together with one option for every share issued. The prospectus for that public offering described it as an unlisted investment company which sought to become a listed investment company on the ASX.
The prospectus referred to a 'Management Services Agreement' with John Bridgeman Limited (JBL, the company in the centre of the top row of Diagram 1) into which HML had entered on 12 March 2015. The agreement was said to relate to the provision of investment management services to HML.
The public offering closed on 17 December 2015, having raised $15.6 million. The official quotation of the issued shares in HML on the ASX commenced on Friday 5 February 2016. It appears that approximately $15 million in further funds were raised by reason of the conversion of options over subsequent years.
On 9 June 2017, all of HML's securities were suspended from quotation on the ASX, in circumstances that will be described below. From around June 2018, HML began to ask ASX to lift the suspension. Substantial correspondence between HML and ASX ensued, which will also be described further below. On 30 May 2019, ASX expressed the view that it would be inappropriate to reinstate the securities of HML to trading until the outcome of certain investigations by the Australian Securities and Investments Commission (ASIC) were known. ASX removed HML from its official list on 3 February 2020.
JBL
The book International Criminals Past and Present (Frederic Boutet, Walter Mostyn trans, Hutchinson & Co, 1930) records that '[c]onspicuous among those pirates of the seventeenth century were the strange beings who were known as the Kings of Madagascar, and of whom James Avery became the most famous' (at 124). Avery had many aliases, including Henry Every, Long Ben and Captain Bridgeman, and so went by the name of John Bridgeman: Encylopaedia Britannica (online). John Bridgeman Limited, that is, JBL, is a public company. It was listed on the National Stock Exchange of Australia (NSX). That listing was, however, suspended on 1 October 2019, because the company failed to lodge its audited financial statements for FYE 2019 (although the securities had originally been suspended on 10 April 2019). On 23 October 2020 the NSX removed JBL from its official list which, according to NSX, was due to the non-payment of annual listing fees for FYE 2021 (this judgment will use the convention 'FYE' to designate the financial year ending on 30 June in the relevant year).
Up to at least the end of FYE 2018, the main business of JBL was investment management and, as has been said, it was party to an agreement for it to provide services of that kind to HML. JBL not only acted as the investment manager for HML, as at 16 June 2021 (the date of Mr McAuliffe's first affidavit in this proceeding) it held a 46.28% interest in HML.
International Criminals Past and Present describes Bartholomew Roberts as 'undeniably the greatest pirate captain of his time', and leader of the 'most formidable gang of pirates that ruled the waves in the eighteenth century' (at 172, 176). Bartholomew Roberts Pty Ltd is another company in the group (in the second row of Diagram 1). JBL was also the manager of investments for Bartholomew Roberts Pty Ltd and, as at 13 December 2019, JBL held a 49.66% interest in that company. HML also held a 29.93% interest in Bartholomew Roberts Pty Ltd as at 13 December 2019.
Benjamin Hornigold was one of a 'powerful and insolent' group of pirates in the Bahamas though after receiving a pardon he 'was back at sea; but this time in the service of law and order' engaged 'in hunting down his former associates': Caribbean Pirates (Warren Alleyne, Macmillan Education, 1986) at 32, 33, 36. JBL is also the manager of investments for Benjamin Hornigold Limited (BHD), the other company at the top of Diagram 1. BHD is listed on the ASX.
JBFG
Diagram 1 shows that between them, HML, JBL and Bartholomew Roberts held approximately 60% of the issued shares in JBFG as at 13 December 2019.
It can also be seen from Diagram 1 that JBFG directly and indirectly held 100% of the shares in a number of subsidiary companies, including King's Currency Exchange Pty Ltd and Growth Point Capital Pty Ltd, subsequently known as Capital Credit Pty Ltd (Capital Credit). According to the plaintiffs' submissions, holding those shares was its predominant function.
Receivers were appointed to JBFG on 28 October 2019, and on 19 November 2019 it was placed into voluntary administration. On 5 August 2020 it went into liquidation.
Directors and executives
Stuart McAuliffe is the Managing Director of HML and has been since it was incorporated on 26 September 2014. He is also a director of JBL; in fact, since 8 January 2015 he has been JBL's Managing Director and Chief Investment Officer.
Between 15 December 2016 and 21 February 2018, Mr McAuliffe was also a director of JBFG, and between 8 May 2017 and 3 November 2019 he was the Group Chief Executive Officer of that company.
Between 28 September 2016 and 12 June 2019, Mr McAuliffe was also a director of BHD. He was appointed executive chairman of BHD in or about February 2017 and resigned as a director of BHD on 12 June 2019.
Also, since 22 April 2016, Mr McAuliffe has been a director of Bartholomew Roberts.
Also, between at least August 2016 and April 2019, Stuart McAuliffe's father John McAuliffe, and one Rosario (Ross) Patane were directors of each of HML, JBL and Bartholomew Roberts. (Save where necessary for clarity, I will generally call Stuart McAuliffe 'Mr McAuliffe' in this judgment, and will refer to John McAuliffe by name.)
The proceeding, the pleadings and the issues
The first plaintiff commenced this proceeding on 24 December 2020. The second plaintiffs were joined as parties on 10 November 2021. The matter went to trial over two days on 13 and 14 December 2021. Final written closing submissions were filed by the plaintiffs on 20 January 2021. HML made an application to reopen which was heard and dismissed on 30 June 2022, for reasons that will be given below.
The plaintiffs are shareholders in HML; in the case of the first plaintiff, as a beneficial owner through custodian arrangements and in the case of the second plaintiffs as registered shareholders. By the time of trial, no point was taken as to the plaintiffs' standing to apply to wind the company up.
The matter proceeded on pleadings. However several potentially significant developments occurred after the close of pleadings, and these were the subject of evidence filed shortly before trial which was largely admitted by consent. Counsel for the parties accepted in closing that the issues at trial had changed since the pleadings and that the parties were content to deal with those issues in substance, and that was also manifest throughout the course of submissions. For that reason it is not necessary to describe the pleadings in great detail. They are mainly relevant here for the purposes of identifying factual matters that are not in dispute.
For the most part HML does not dispute the underlying facts on which the plaintiffs rely. Most of those facts are matters of public record, such as the contents of the prospectus for the initial public offering, the share registry initially engaged by HML, the holding of annual general meetings (AGMs), and the release of reports to the ASX. In broad terms the parties joined issue on whether the company should be wound up by reference to the following alleged matters:
(a)HML's failure to conform with the purposes or objects stated in the prospectus under which it raised funds from investors;
(b)related party transactions, at least some of which have caused HML to suffer loss; and
(c)various concerns that could be classified as compliance concerns (which is neither to minimise nor to emphasise their importance, if established), namely HML's lack of a share registry, its failure to maintain the required number of directors, its failure to hold AGMs, its failure to publish financial reports and its failure to maintain a registered office or principal place of business. The plaintiffs submit that these issues have been rectified only belatedly, and for the most part not at all.
In relation to the compliance concerns, the plaintiffs submit that HML has displayed a cavalier attitude to the requirements to lodge accounts and the delay is not adequately explained. They also submit that the unaudited accounts that had been provided by the time of the hearing give rise to real concern about whether HML is insolvent. The plaintiffs also point to what they say was a large number of statutory notices and requests from ASX and ASIC.
Other alleged matters on which the plaintiffs relied in closing to submit that HML should be wound up were as follows:
(1)The 'substratum' of HML has collapsed. It had been marketed to shareholders as a listed investment company but it was no longer listed and had engaged in no trading activity for the last two years. Its now stated purpose is instead to pursue litigation opportunities, chiefly (perhaps only) against ASX. The plaintiffs say that is entirely outside the common understanding of members when the company was formed and listed.
(2)HML's affairs were being conducted in a manner that was oppressive or unfairly prejudicial to or unfairly discriminatory against a member or members or in a manner that was contrary to the interests of members as a whole. The plaintiffs relied in particular on an extraordinary general meeting that was held on 3 December 2021 (EGM), which they say was conducted in an oppressive manner, and on various loans and other transactions with related parties, on the lack of trading activities and the failure to maintain appropriate standards of corporate governance.
A theme which underlies many of these allegations and the plaintiffs' case as a whole should also be mentioned. It is that Mr McAuliffe is alleged to have been in substantial control of HML, JBL and JBFG, which in turn informs the plaintiffs' characterisation of various transactions as related party transactions. But, the plaintiffs submit (and HML agrees), it is neither necessary nor appropriate for the Court to make findings of contraventions of the Corporations Act in relation to alleged related party transactions at this time. It is enough, according to the plaintiffs, that the fact and complexity of the transactions, along with the lack of an apparent return to HML, 'point to a real need to investigate the affairs of HML'. The plaintiffs submit that the most appropriate person to do that is a liquidator.
For HML's part, while it accepts that there have been shortcomings in relation to its administration and management, and compliance with some of its Corporations Act obligations, it submits that it has made serious efforts to address those issues, that most of those issues have been addressed, and there is a serious and credible plan to rectify the remaining issues in the short-term future. And so, as a result of that, HML submits that the Court should not be satisfied that the just and equitable ground has been made out to warrant the drastic remedy of winding up the company.
HML points to evidence that the compliance and governance failures have been rectified or are in the process of being rectified. It also relies on the EGM of 3 December 2020, at which a special resolution for a members' voluntary winding up was defeated, with about three quarters of the votes cast being votes against. It submits that the loss of capital invested is a risk that every contributory takes when they invest in a company.
HML disputes the submission that it is defunct or dormant. It points to lines of credit it has obtained from Mr McAuliffe on which it can draw down to fund the ongoing activities including litigation against ASX. It says that the company has been 'undergoing a rebuilding period, of consolidation and change'. It also denies that there has been any failure of substratum in the sense of a departure from its original purpose that would justify winding up. It points to what it says is shareholder approval at the EGM of a change to its purpose to being an unlisted investment company. It submits that it is open to it and reasonable for it to undergo 'a period of consolidation', including by the realisation and recovery of assets through litigation, before turning again to investment activities.
HML disputes that Mr McAuliffe was in a position to control HML or the other entities said to be related parties. It also says that the plaintiffs' submission about how the Court should approach findings on that issue is properly made. That is, HML agrees with the plaintiffs that it is neither necessary nor appropriate for the Court to make findings of contraventions of the Corporations Act in relation to the alleged related party transactions on which the plaintiffs rely. While it denies the plaintiffs' allegations, it mounts no real rebuttal of the proposition that an investigation into those transactions is warranted. It submits, however, that the appropriate entity to make that investigation is ASIC, not a liquidator.
In relation to oppression, HML characterises the plaintiffs' complaints as reflecting unhappiness with commercial decisions that have been made by management, unhappiness with being outvoted by majority shareholders, unhappiness that the capital they invested in HML has been diminished, and unhappiness with its delisting. According to HML, none of those things amounts to oppression and they do not justify the winding up of the company.
HML also submits that s 467(4) of the Corporations Act means that the Court should not make a winding up order. That section concerns circumstances where plaintiffs are acting unreasonably in seeking to have the company wound up, instead of pursuing other remedies that would be available.
Much of the rest of this judgment will consist of a chronological account of the evidence relevant to the plaintiffs' allegations, making observations and findings along the way with the above areas of dispute in mind. I will then reach conclusions about whether HML should be wound up because it is just and equitable to do so, or because its affairs have been conducted oppressively. But it will be helpful first to review the statutory provisions and the principles that the Court must apply, and also necessary to give reasons for the dismissal of two interlocutory applications HML brought which were disposed of at or after trial.
Principles
The legislation
Section 461(1) of the Corporations Act provides that the Court may order the winding up of a company if, relevantly:
(f)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 interests of the members as a whole; or
…
(k)the Court is of opinion that it is just and equitable that the company be wound up.
Section 462(2)(c) confers standing to apply for such an order upon contributories, where a contributory is defined in s 9 to include a holder of fully paid shares in the company. As I have said, there is no issue about the plaintiffs' standing to make this application.
Section 467(4), on which HML relies, provides as follows:
Where the application is made by members as contributories on the ground that it is just and equitable that the company should be wound up or that the directors have acted in a manner that appears to be unfair or unjust to other members, the Court, if it is of the opinion that:
(a)the applicants are entitled to relief either by winding up the company or by some other means; and
(b)in the absence of any other remedy it would be just and equitable that the company should be wound up;
must make a winding up order unless it is also of the opinion that some other remedy is available to the applicants and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.
The just and equitable ground
The plaintiffs base the application principally on the just and equitable ground. That is potentially broad in scope. In In Re Straw Products Pty Ltd [1942] VLR 222 at 223, Mann CJ said:
Facts rendering it just and equitable that a company should be wound up cannot be resolved into categories. Cases upon the subject are to be read with this always in mind. They merely illustrate the diversity of the circumstances calling for an exercise of the Court's discretion in winding up a company because it is just and equitable so to do.
See also Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 374‑375 (Lord Wilberforce). The classes of conduct which justify the winding up of a company on the just and equitable ground are not closed, and each application will depend upon the circumstances of the particular case: Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) [2013] FCA 234 at [19] (Gordon J).
It can, however, be said that 'at the foundation of applications for winding up, on the "just and equitable" rule, there must lie a justifiable lack of confidence in the conduct and management of the company's affairs': Loch v John Blackwood Ltd [1924] AC 783 at 788 (Lord Shaw). Three general fundamental principles are relevant to that consideration: a lack of confidence in the conduct and management of the affairs of the company; a demonstrated risk to the public interest that warrants protection; and reluctance on the part of the courts to wind up a solvent company: ActiveSuper at [20] quoting Australian Securities and Investments Commission v ABC Fund Managers Ltd [2001] VSC 383 at [119] (Warren J).
In relation to the first of these, in ActiveSuper at [21] Gordon J said (quoting from Galanopoulos v Moustafa [2010] VSC 380 at [32] and citing other authorities as well) that:
… a lack of confidence may arise where, 'after examining the entire conduct of the affairs of the company' the Court cannot have confidence in 'the propensity of the controllers to comply with obligations, including the keeping of books, records and documents, and looking after the affairs of the company'.
In relation to the second consideration, Gordon J said at [23] (citations omitted):
… a risk to the public interest may take several forms. For example, a winding up order may be necessary to ensure investor protection or where a company has not carried on its business candidly and in a straightforward manner with the public. Alternatively, it might be justified in order to prevent and condemn repeated breaches of the law.
The public interest justifies intervention where, among other things, it is required for investor protection and where there have been regular or repeated breaches of the law: Australian Securities and Investments Commission v Chase Capital Management Pty Ltd [2001] WASC 27 at [75] (Owen J).
I will return to the third consideration, solvency, below.
Failure of company's purpose and failure of substratum
It may be appropriate to wind a company up on the just and equitable ground 'where it is impossible to carry on the company's business because the "substratum of the company" has failed or, in other words, it has become impossible for the company to achieve the purpose for which it was formed': Re CNPR Ltd [2018] NSWSC 989 at [9] (Black J).
HML submits that the '"failure of substratum" factor is limited to circumstances where it is an impossibility for the company to fulfil its original purpose' (original emphasis). It relied on Re CNPR, on CIC Insurance Ltd (prov liq apptd) v Hannan & Co Pty Ltd [2001] NSWSC 437, and on Kingjade Holdings Pty Ltd v Pineridge Nominees Pty Ltd (1997) 15 ACLC 910. But Re CNPR was an essentially uncontested case (the company was itself the applicant) where, in terms quoted above, the Court said only that it may be appropriate to wind the company up when it had become impossible to carry on the company's business or impossible to achieve its purpose. CIC Insurance was also uncontested (the company's sole shareholder was the applicant) and was based on corporate paralysis, because there was no one willing to serve as director, not on a failure of substratum or purpose. In Kingjade, the rule ultimately depended on approval of a 1964 journal article in which the doctrine of winding up on just and equitable grounds was reduced to three principles:
(1)where initially it is, or later becomes, impossible to achieve the object for which the company was formed;
(2)where it has become impossible to carry on the business of the company;
(3)where there has been serious fraud, misconduct or oppression in regards to the affairs of the company.
[BH McPherson, 'Winding Up on the "Just and Equitable" Ground' (1964) 27(3) Modern Law Review 282]
To reduce the breadth of the term to those principles is, with respect, inconsistent with the broader course of authority on the just and equitable ground described above.
The true approach appears in Menhennitt J's comprehensive summary of the principles in Re Tivoli Freeholds Ltd [1972] VR 445. At 468 (point (4)) his Honour stated the basic principle as follows (citations removed):
It has been recognized that it may be just and equitable to wind a company up if the company engages in acts which are entirely outside what can fairly be regarded as having been within the general intention and common understanding of the members when they became members. The cases on loss or failures of substratum are an illustration of this more basic concept. This more basic concept is not, it appears to me, confined to cases of 'partnership' companies or 'main object' companies. Whilst it may be easier to find the general intention and common understanding in those cases I can see no reason in principle why it should be confined to such cases and I am not aware of any decision that it is so confined.
The following discussion of authority in Re Tivoli Freeholds at 469 (point (5)) is also relevant in this case:
But where, even although a company could still pursue its original objects, whether they be main or paramount objects or not, if in fact the matter has gone beyond intention and the company had in fact embarked upon a course which, even although it is within power, is quite outside and different from what was originally commonly intended and understood, then it appears to me that it may be just and equitable to wind up a company. The case of Re National Portland Cement Co. Ltd., [1930] N.Z.L.R. 564, was one in which a main object had never been pursued for five years and it was then proposed to pursue a subsidiary object. However, it appears to me that Myers, C.J., was stating a principle which can have general application when he said at p. 572: 'The most that can be said by the directors is that if their present proposed experiment of hydrating lime is successful they may be able to secure capital to carry out the main object for which the company was established. It seems to me that this really involves an abandonment of the primary object of the company, and that the shareholders who have taken up contributing shares are being asked to leave their money in a venture different altogether from that to which they have subscribed.'
At 471 (at point (7)) his Honour described it as a 'question of equity between a company and its shareholders'.
In fact there are many cases where there has been held to be a failure of substratum even though the circumstances fall short of impossibility of fulfilment of the company's original purpose. The tenor of many of those cases is that something fundamental to the company's business has fallen away: see e.g. Hillig v Darkinjung Local Aboriginal Land Council [2006] NSWSC 1371 at [36] (failure of substratum once trustee company's assets transferred to beneficiary company, overturned on appeal but not on this point: Hillig v Darkinjung Pty Ltd [2008] NSWCA 75); Commonwealth v ABC2 Group Pty Ltd (court-apptd recs and mgrs apptd) [2009] NSWSC 1442 at [39] (failure of substratum of company used to run and sell childcare centres as going concerns, once sales made); Nassar v Innovative Precasters Group Pty Ltd [2009] NSWSC 342 at [72] (expiry of licence to use patent).
Once again, the truth is that it is a matter of degree. Obviously, not every departure from a company's stated or commonly intended objects will justify its winding up; in many cases, even very substantial departures will not attract that consequence. The Court must make sensible allowances for the fact that the circumstances of a company will change over time, and so too may its objects and purposes: see Haselgrove v Lavender Estates Pty Ltd [2009] NSWSC 1076 at [81] (Ward J). Sometimes, the span of time will be considerable indeed, such as the near century involved in Re New South Wales Leagues' Club Ltd [2014] NSWSC 1610.
Nor, obviously enough, will every difficulty the company experiences in carrying on its business put it at risk of a just and equitable winding up; a realistic chance that the difficulties will resolve, and the company will be able to carry on, may make that undesirable. The just and equitable outcome will depend on all the relevant facts in the circumstances of the particular case.
Another submission HML makes is that the prime source to use for determining the purpose of a company is its memorandum of association or constitution. It cited Re Tivoli Freeholds at 471 (point (8)), where Menhennitt J said:
All the authorities appear to me to recognize that the prime source for ascertaining the general intention and common understanding of the members is the company's memorandum of association which among other things states its objects.
Counsel for HML also relied on a 1991 case (Strong v J Brough & Son (Strathfield) Pty Ltd (1991) 5 ACSR 296 at 300) which in turn relied on a 1980 decision (Re Johnson Corporation Ltd [1980] 2 NSWLR 681) for the principle that 'one does not look at the prospectus to find the main object, but one looks at the memorandum of association'.
But that asserted principle implies an assumption that the company will have a memorandum of association that does state its objects. While that assumption was no doubt sound in 1972 or 1980, it is not any longer. The LexisNexis service, Australian Corporation Practice (online), summarises the contemporary position as follows (at [7.075]):
The company's constitution may specify the objects of the company: s 125(2). Originally companies were required to provide an objects clause in their memorandum of association. This was abolished in 1981 when companies were granted the legal capacity of an individual: s 124. The abolition of the doctrine of ultra vires in its application to companies, achieved by ss 124-125, has largely circumvented the need for object clauses, other than for the companies noted below.
Object clauses will generally only be included in a company's constitution where this is required by law or otherwise necessary in order for the company to qualify for the applicable tax concessions …
In Re Tivoli Freeholds (at 468, point (3)) Menhennitt J acknowledged that in having regard to previous decided cases in relation to the just and equitable ground, 'it would be necessary to have regard to changing circumstances and developments in relation to company practices including any relevant changes in the law'. At 471 (point (7)) his Honour said that regard should be had to all relevant developments including changes in the law. It has since been recognised that changes in the corporations legislation have borne directly upon the significance to be attributed to the public purposes served historically by the documents making up a company's constitution: Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2005] FCA 1812 at [75] (Finn J) approved in Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2006] FCAFC 144; (2006) 156 FCR 1.
It is true that in Strong, decided in 1991, Young J was considering a company which had no objects stated in its memorandum of association, and his Honour held, citing Re Johnson Corporation, that it was doubtful how far a prospectus would be determinative. But I do not consider that Strong is clear authority that one looks to the constitution rather than a prospectus to determine the company's objects or purposes. The relevant observations were obiter dicta: there was no prospectus in Strong, and in any event it was not a winding up case, but a case about whether, on the construction of a provision of the articles of association, the directors were authorised to dispose of the company's main business. Further, in relation to Re Johnson Corporation, Young J describes Needham J as saying that one does not look at the prospectus to find the main object, but one looks at the memorandum of association. But Young J was, with respect, not accurately stating Needham J's view. What Needham J in fact said in Re Johnson Corporation (at 689-690) was:
It is, in my opinion, still an open question whether, in determining whether a company has main objects and, if so, what they are, the court may go outside the memorandum of association. It could be argued that a prospectus issued at the time of incorporation could be examined, although, I hasten to add, there is authority against that proposition.
In my opinion that question, while open in 1980, is no longer open now more than 40 years later. In Registered Clubs Association of NSW v Australian Broadcasting Corporation [2016] NSWSC 835, McCallum J said at [18]:
Implicitly, the Corporations Act contemplates the possibility that a company will have neither a constitution nor stated objects. Plainly, in such a case, the ascertainment of the objects for which the company was formed would require inquiry beyond the documents by which it was formed, potentially extending to consider its activities and published statements since incorporation (what the company had said and done).
Even in Re Tivoli Freeholds in 1972, Menhennitt J seemed to accept the potential relevance of prospectuses for the purposes of identifying the objects of the company: see 472 (point (9)), although his Honour also acknowledged authority to the contrary. His Honour held that:
a basic consideration is that the material being looked at must establish something general or common to all members and this consideration of itself precludes something passing between only the company and a particular shareholder unless it can be concluded that it was a matter common to all shareholders.
Similarly, in Strong Young J said that 'one looks to "the general intention and common understanding of the members"'. A prospectus on the basis of which most members provide funds to subscribe for shares can meet that criterion. In a just and equitable winding up, which will always depend on the particular circumstances of the case, there can be no rigid rule against having regard to a prospectus to determine the purpose for which a company was formed. In my view it is open to the Court to put weight on documents, such as the prospectus under which the bulk of the funds employed by a company have been raised, in order to ascertain what was, in truth, generally intended and understood among members who subscribed to shares on the basis of that prospectus.
Relevance of breaches of the law
On the subject of regular or repeated breaches of the law (Chase Capital Management, see above) relevant breaches may include breaches of directors' duties, inadequacy of accounts and record keeping, and failure to comply with legal requirements with respect to financial records and reports: Australian Securities and Investments Commission v Merlin Diamonds Ltd [2019] FCA 1546 at [107] (O'Bryan J); Pages Property Investments Pty Ltd v Boros [2020] NSWSC 1270 at [203] (Black J, overturned in Boros v Pages Property Investments Pty Ltd [2021] NSWCA 288 but not on this point). On this subject HML relied on cases including Gregor v British-Israel-World Federation [2002] NSWSC 12, where failure to comply with statutory requirements for financial and directors' reports was held at [146] to be 'an additional but not independently weighty ground supporting the making of a winding up order', and Gognos Holdings Ltd v Australian Securities and Investments Commission [2018] QCA 181, where non‑lodgement of financial reports for eight to nine years, when the reporting had still not been brought up to date, did justify winding up. But each of these cases turned on their own facts, and they do not give rise to any rigid rules as to when non-compliance is, or is not, enough to justify a winding up order.
Observations in Gognos by McMurdo JA (Sofronoff P and Gotterson JA agreeing) do, however, provide guidance on how the Court is to approach a situation, which has arisen in this case, where the defendant company seeks to rectify non-compliance shortly before trial. His Honour said at [98]:
The task for the judge was to assess the nature and extent of the risks to the public interest from these companies being allowed to continue, given their lamentable history of mismanagement and misconduct. Ultimately, it was common ground that as things stood just a few weeks or days from the trial, there was a compelling case for the companies to be wound up. Her Honour had to consider whether the risk to the public interest had been eliminated, or at least reduced to an acceptable level, by what had been put in place at the eleventh hour.
That is the approach I will follow here.
In relation to breaches of the Corporations Act generally, a serious issue may exist to justify intervention even where the Court has not reached a final conclusion as to whether particular alleged breaches have been established: see Chase Capital Management at [77]. In many cases it will not be necessary or appropriate to reach any final conclusion. As I have already indicated, in this case both sides effectively embraced that proposition. So, for example, in Australian Securities and Investments Commission v Uglii Corporation Ltd [2016] FCA 1099 at [78], Davies J found it relevant to the just and equitable ground that a lack of evidence to support certain substantial cash flow projections was a matter warranting independent investigation by an external controller.
Oppression
As to s 461(1)(f) of the Corporations Act, concerning oppression, the plaintiffs submit, and HML does not contest, that the principles that have been developed in relation to remedies for oppressive conduct, as found in s 232 of the Corporations Act, may be applied to cases of winding up. In Hylepin Pty Ltd v Doshay Pty Ltd [2021] FCAFC 201; (2021) 288 FCR 104 at [124]‑[130], the Full Court (Markovic, Banks‑Smith and Anderson JJ) summarised as follows, with apparent approval, the review of those principles conducted by the primary judge (O'Bryan J):
[124]The primary judge commenced a review of the oppression principles under s 232(e) by noting that 'oppressive to, unfairly prejudicial to, or unfairly discriminatory against' is a compound expression: Hillam v Ample Source International Ltd (No 2) (2012) 202 FCR 336 at [4].
[125]His Honour referred to Re Ledir Enterprises Pty Ltd (2013) 96 ACSR 1, where Black J observed at [178], and having referred to various authorities including Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459, that the phrase in s 232(e) is concerned with 'commercial unfairness'; or 'a departure from the standards of fair dealing, or where a decision has been made so as to impose a disadvantage, disability or burden on the plaintiff that, according to ordinary standards of reasonableness and fair dealing, is unfair'.
[126]The primary judge cited the statement of Brennan J in Wayde (at 472-473) that the relevant test as to unfairness in the context of oppression is 'whether reasonable directors, possessing any special skill, knowledge or acumen possessed by the directors and having in mind the importance of furthering the corporate object on the one hand and the disadvantage, disability or burden which their decision will impose on a member on the other, would have decided that it was unfair to make that decision'. Whether there has been unfairness in the requisite sense is to be judged objectively: Wayde at 472‑473. To those references we would add that the section requires proof of oppression or proof of unfairness. Proof of mere prejudice to or discrimination against a member is insufficient to attract the court's jurisdiction to intervene: Wayde at 472.
[127]His Honour also cited the test as to unfairness as described in Catalano v Managing Australia Destinations Pty Ltd (2014) 314 ALR 62 at [9], being whether 'objectively in the eyes of a commercial bystander there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair'.
[128]It was noted that mismanagement alone does not constitute oppression, and a court is concerned 'to avoid an unwarranted assumption of the responsibility for management of the company': Wayde at 467 (Mason ACJ, Wilson, Deane and Dawson JJ).
[129]Turning to s 232(d), the primary judge said that whether conduct is 'contrary to the interests of the members as a whole' is also objectively ascertained, citing Goozee v Graphic World Group Holdings Pty Ltd (2002) 170 FLR 451 at [42]‑[44], and is determined by an assessment of whether the conduct adheres to 'accepted standards of corporate behaviour' or is in accordance with how reasonable directors would act in attending to the affairs of the company.
[130]Further, the primary judge noted that although s 232 is not subject to any limitation period, and a court may grant relief even if the oppressive conduct has ceased, a court has a broad discretion as to remedy, citing Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at [65] (French CJ), [182] (Gummow, Hayne, Heydon and Kiefel JJ).
In Hylepin at [133]‑[135] the Full Court held that it was necessary to look to the cumulative effect of the whole course of conduct, in overview, since (at [136]) 'depending on the circumstances, an accumulation of conduct, even where none of the separate matters of conduct is found to be oppressive, may have that result'.
HML submits, and I accept, that the mere fact that a member of a company has lost confidence in the manner in which the company's affairs are being conducted does not lead to the conclusion that the member is oppressed, and nor does mere dissatisfaction with or disapproval of the conduct of the company's affairs; nor does even a fundamental disagreement with a decision made by majority shareholders and directors (by itself) amount to oppression: see John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A'asia) Pty Ltd (1991) 6 ACSR 63 at 6; Shelton v National Roads and Motorists Association Ltd [2004] FCA 1393 at [24] (Tamberlin J).
Relevance of solvency
As for the winding up of a solvent company, in Hillam v Ample Source International Ltd (No 2) [2012] FCAFC 73; (2012) 202 FCR 336 at [70] (Emmett, Jacobson and Buchanan JJ) it was held that there is no presumption against this, although:
the warnings given in the authorities, that an order to wind up a solvent company is an extreme step, are warnings which should be borne in mind … An order to wind up a solvent company may often be too extreme a step to take (and therefore not justified or appropriate) but that is very different from proceeding upon any 'principle' or assumption that a winding up order of a solvent company is inappropriate. No such implication arises from s 232 or s 233 of the Act, or should be made in those terms. The real question is whether a winding up order was appropriate to deal with and address the grounds for relief which had been established. The answer to that question must be found in the facts of the particular case.
These comments were made in the context of a remedy of winding up being sought under the provisions of the Corporations Act concerning oppressive conduct, but there is no reason to think they do not apply more broadly.
It is notable that in the principal case to which the Full Court in Hillam referred before reaching the above conclusion, Cumberland Holdings Ltd v Washington H Soul Pattinson & Co Ltd (1977) 13 ALR 561, the warning was against the winding up of 'a successful and prosperous company and one which is properly managed' (at 566). This confirms what would be evident from the broad evaluative nature of the statutory criteria in any event, namely that it is a matter of degree. Obviously, a court will be more reluctant to wind up a successful, prosperous and properly managed company than it will be to wind up a company of doubtful solvency and dubious management practices. So a stronger case may be required where the company is prosperous, but solvency per se is no bar to the appointment of a liquidator, particularly where there have been serious and ongoing breaches of the Corporations Act: ActiveSuper at [24].
As will be seen, HML does not defend the case on the basis that the strength of its financial position meant that it would be an extreme step to order its winding up. It submits that this is a neutral factor. Nevertheless, the Court must keep in mind the interests of creditors and members of the company as a whole and the considerations just outlined remain relevant to the exercise of the discretion.
Section 467(4)
HML relies on s 467(4) of the Corporations Act to submit that an order for winding up would not be appropriate. That sub-section, which is set out above, requires the Court to make a winding up order, relevantly on the just and equitable ground, if it is satisfied of the necessary matters, but then provides for an exception that lifts that requirement, if the Court 'is also of the opinion that some other remedy is available to the applicants and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy'. So it imposes a mandatory duty on the Court to make a winding-up order with a discretion not to make one if certain conditions are satisfied: Vujnovich v Vujnovich [1989] 3 NZLR 513 at 518‑519, applied to s 467(4) in Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd [2018] QCA 48; [2018] 3 Qd R 520 at [96] (Jackson J). 'Other remedy' in s 467(4) is not restricted to a legal remedy in the sense of a cause of action but is to be understood in the wider sense of a course of action otherwise open to the party: Host-Plus Pty Ltd v Australian Hotels Association [2003] VSC 145 at [67] (Hansen J).
The onus is on the defendant to establish that this exception is made out: Asia Pacific Joint Mining at [43] (McMurdo JA, Gotterson JA and Jackson J agreeing). The question of whether an applicant is acting unreasonably requires an objective assessment of the applicant's preference for a winding up order: Asia Pacific Joint Mining at [45]. In Asia Pacific Joint Mining at [47] McMurdo JA said (footnotes omitted):
The evident purpose of the proviso in s 467(4) is to avoid the extreme step of a winding up if there is an alternative and adequate remedy. Consequently a winding up will be ordered if there is no other remedy which is adequate, in that it would redress the consequences of the facts and circumstances which are the basis for relief. This is another way of saying what McPherson J said in Re Dalkeith Investments Pty Ltd [(1984) 9 ACLR 247] about the statutory predecessor of s 467(4) namely 'that winding up is to be regarded as a remedy of last resort and [one] which ought not to be granted if some other less drastic form of relief is available and appropriate.' In referring to a winding up as 'drastic form of relief', McPherson J was referring to the far reaching consequences of a winding up. In referring to an alternative form of relief which was 'appropriate', his Honour was referring to what was necessary, in the interests of the applicant, to redress the consequences of the relevant events and circumstances.
Application to set aside a subpoena
Before turning to describe the evidence it is convenient to give reasons for a decision that was made at trial concerning an application to set aside a subpoena. It will also then be necessary to give reasons for the dismissal of an application to reopen that HML made after trial.
As has been indicated, the trial commenced on 13 December 2021. On 8 December 2021, that is, three business days before, an affidavit of Mr McAuliffe was filed that set out a substantial amount of new evidence that was not covered in his first affidavit, which had been filed in accordance with pre-trial directions on 16 June 2021. Some of the evidence in the second affidavit appears to have been intended to bring the Court up to date about developments since the first affidavit. There was no objection to reliance on the affidavit and the evidence in it will be considered below.
However the late date of filing of the second affidavit was relevant to the subpoena, because the plaintiffs applied for its issue on the same day, that is, 8 December 2021. It was addressed to Mr McAuliffe and sought the production of documents in two categories:
For the period from 1 October 2021 to 6 December 2021, a copy of any bank statement for any account held (either individually or jointly) in your name that records:
1the transfer of funds by you to Henry Morgan Limited ACN 602 041 770; and / or
2the funds available to you.
The first of these was not in issue. The application to set the subpoena aside concerned the second. A registrar gave leave to issue the subpoena and it came to be returnable before me at the commencement of the trial on 13 December 2021. At that time counsel for HML, acting on instructions from Mr McAuliffe, applied to set aside the subpoena to the extent of that disputed ground. I dismissed the application and said I would give reasons as part of this judgment.
Mr McAuliffe sought the setting aside of the subpoena on the grounds of oppression and lack of a legitimate forensic purpose, that is, relevance. The oppression ground was based on things said from the bar table to the effect that Mr McAuliffe's funds were held in 12 different accounts, some in Australian dollars, some in various different foreign currencies, and they included futures contracts. It was said that it would be time consuming to collate the relevant bank statements in order to comply with a subpoena that was served only one clear business day before the commencement of the trial, at a time when Mr McAuliffe needed to prepare for the hearing and had other personal and work commitments.
As to relevance, counsel for Mr McAuliffe submitted that HML did not put its solvency in issue as a factor against the winding up order sought. He submitted that at most the company's solvency position was a neutral factor in relation to the winding up sought on just and equitable grounds. While HML is relying on some funding from Mr McAuliffe, and there is evidence about the current position of the funds he has provided, the possible extent of any future funding he is to provide is not an issue before the Court. Evidence in Mr McAuliffe's second affidavit is to the effect that he was providing funding of up to $410,000 to HML for the purposes of working capital and funding of up to $2 million for the purposes of conducting litigation. Counsel for the plaintiffs said, in reply to Mr McAuliffe's submissions, that he would be submitting that the financial statements for HML (that were also annexed to Mr McAuliffe's second affidavit) demonstrated that HML will be insolvent without Mr McAuliffe's ongoing financial support, so that Mr McAuliffe's ability to provide that support was relevant. Counsel indicated from the bar table that the subpoena was directly prompted by Mr McAuliffe's second affidavit which explained the timing of issue of the subpoena.
I did not accept either of the bases that HML advanced as warranting the setting aside of the subpoena. The short time for responding to the subpoena was a function of the fact that an affidavit from Mr McAuliffe deposing to his funding of HML was only filed on 8 December 2021. The application for the issue of the subpoena was made on the same day. As for the submission that there were a large number of bank accounts and it would be difficult to comply, that was not supported by evidence and in any event the subpoena only required the production of bank statements. It appeared to me to be quite feasible for Mr McAuliffe to locate such bank statements as were in his possession, custody or power for the purpose of production to the Court. In the circumstances I was prepared to permit him to do so overnight, between the two days on which the matter was listed for hearing. Although that was a short period of time, it was a function of the lateness with which the question of the funding of HML's ongoing activities was raised.
As for the relevance objection, the threshold is one of apparent relevance which is not necessarily at the level required for the material to be admitted into evidence: see the summary of principles in Harvard Nominees Pty Ltd v Tiller [2019] FCA 1672 at [3]‑[6] and the authorities referred to there. I understood counsel's submission about relevance to be to the effect that Mr McAuliffe had already provided financial support to HML, so Mr McAuliffe's ability to provide further amounts in the future was not relevant. But there was no clear evidence that the advances promised had been drawn down, whether fully or at all, and it is inherently unlikely from the legal activity described below that the $2 million line of credit taken out to support the activity of potential litigation against ASX has been fully utilised.
As will be set out below, on HML's case that potential litigation is a substantial rationale for its ongoing existence. It is also clear that HML will not be able to engage in this activity unless it obtains funding to do so. The $2 million line of credit appears to have been taken out for that purpose. No substantial source of funding for potential litigation other than Mr McAuliffe has been suggested in the evidence; while HML has raised some funds from investors, there is no evidence that this money was raised to fund the litigation, and one of those investors has been Mr McAuliffe himself, and the amounts raised have not been nearly as large as the line of credit. The only potential defendant named is ASX, in connection with its decision to suspend HML's securities from trading and its refusal to approve the release of meeting materials in respect of a proposed transaction involving JBFG (each of which will be described further in these reasons). It can be expected that to pursue successful litigation of that kind against a defendant such as ASX will cost the best part of the $2 million that Mr McAuliffe has promised, if not all of it. Mr McAuliffe's ability to fund litigation in future therefore satisfied the test of apparent relevance required to justify the issue of a subpoena.
For those reasons, the subpoena was not set aside. And despite what was said from the bar table, on the second day of trial Mr McAuliffe ended up complying with the subpoena by producing only one bank statement in connection with only one bank account. His counsel (that is, counsel for HML) stated on the second day that the instructions that he had been given before he made his submissions on the first day were incorrect because 'Mr McAuliffe had misunderstood the breadth of the subpoena'.
Application to reopen
As has been said, the hearing finished and judgment was reserved on 14 December 2021, although the parties filed further written closing submissions with the last of those received on 20 January 2022. On 26 May 2022, HML filed an interlocutory application to reopen its case in order to adduce further evidence in an affidavit of Mr McAuliffe of the same date. The plaintiffs opposed the application and at a hearing on 30 June 2022 I dismissed it. These are my reasons.
Other than an up to date company extract for HML, the further evidence in Mr McAuliffe's affidavit of 26 May 2022 was three annual reports for HML for FYE 2019, FYE 2020 and FYE 2021, which had been lodged with ASIC on 26 May 2022. These included accounts that had been audited by Pitcher Partners. As will be seen below, annual reports and audited reports for those years were outstanding at the time of the substantive hearing.
On 27 June 2022 Mr McAuliffe swore a further affidavit by which HML sought to adduce evidence that HML had convened an AGM to be held on 25 July 2022.
HML submitted that the annual reports amounted to highly probative evidence, primarily because the audited accounts, and the fact of their filing with ASIC, went to two issues that it submitted would be central to the Court's decision, namely the company's compliance with the Corporations Act and its financial position. HML submitted that this meant that it would be in the interests of justice to admit the evidence as it would probably affect the outcome of the case. While HML accepted that it would be necessary to show that it could not, by reasonable diligence, have adduced the evidence earlier, it submitted that this was the case here, as the audited accounts were not in existence at the time of the hearing. HML submitted that the prejudice to the plaintiffs would be minimal. It suggested that the matters the plaintiffs would need to follow up would be discrete.
The plaintiffs disagreed with that, having put on evidence in an affidavit of Michael Catchpoole, one of their solicitors, affirmed on 7 June 2022, as to further work they would need to do. This would include subpoenas to HML's accountants (Pilot Partners) and its auditors (Pitcher Partners) for the production of their working files in order to seek to understand a number of important differences between the audited accounts of May 2022 and the unaudited ones produced in December 2021 which were in evidence at the hearing. The plaintiffs submitted that they would then need to cross examine Mr McAuliffe on the differences and on the reasons for the further delay in producing the audited reports (noting that, as will emerge, the evidence at hearing was that Pitcher Partners had expected to complete the audits by 28 January 2022). The plaintiffs would also seek to subpoena JBL, Mr McAuliffe and another company, Tetue Pty Ltd, to seek to understand a particular transaction which appears to have converted a deficiency in shareholders' equity and working capital, as shown in the unaudited accounts, to a surplus, as shown in the audited accounts. I will describe the evidence about that transaction shortly. They would also need to obtain documentary evidence about a further placement of shares referred to in the annual reports that appears to have taken place in May 2022.
The plaintiffs also submitted that the annual reports could have been produced prior to the hearing and that it was a 'commercial and forensic choice' not to arrange for their inclusion in HML's case. They submitted that the reasons given for the delay were unsatisfactory. They also submitted that the expiry of possible limitation periods for taking action in respect of certain transactions were approaching so that excessive delay would prejudice them, assuming that a liquidator is appointed.
As to the applicable principles in an application to reopen, it is convenient to repeat the summary I gave in Frigger v Trenfield (No 7) [2020] FCA 1740 at [22]-[24]:
The power is discretionary: Urban Transport Authority of New South Wales v Nweiser (1992) 28 NSWLR 471 at 474; Commonwealth of Australia v Davis Samuel Pty Ltd (No 7) [2013] ACTSC 146; (2013) 282 FLR 1 at [1578]. The ultimate question is where the interests of justice lie: Inspector-General in Bankruptcy v Bradshaw [2006] FCA 22 at [24] (Kenny J); Telstra Corporation Ltd v Australian Competition and Consumer Commission [2008] FCA 1436; (2008) 171 FCR 174 at [208] (Lindgren J); Spotlight Pty Ltd v NCON Australia Ltd [2012] VSCA 232; (2012) 46 VR 1 at [26].
Broadly speaking, there are four recognised classes of cases where leave to reopen may be given, although the classes are not closed: (1) fresh evidence; (2) inadvertent error; (3) mistaken apprehension of the facts; and (4) mistaken apprehension of the law: Bradshaw at [24] (Kenny J); Spotlight at [25]-[26].
Likely prejudice to the party resisting the application will be relevant: Nweiser at 478. So will the public interest in the timely conclusion of litigation: Australian Securities and Investments Commission v Rich [2006] NSWSC 826; (2006) 235 ALR 587 at [18]. The probability that the additional evidence will affect the result is also relevant: Telstra at [209]. If success in reopening is not likely to make any difference to the outcome of the trial, that would weigh against putting the parties and the court to the delay, trouble and expenditure of resources involved in reopening.
Relevant to that last point, HML submitted that one factor that guides the court's discretion is whether the further evidence, if accepted, would probably affect the result of the case. It seems to me, however, that the Court cannot assume that the evidence will be accepted. The probability that the evidence will be accepted as true (if admitted) is relevant to the probability that it will affect the result. In any event, counsel for HML agreed that in deciding the application to reopen, it was necessary for the Court to make a preliminary assessment of the likelihood that the new evidence will affect the case.
Also relevant are the following observations in Spotlight Pty Ltd v NCON Australia Ltd [2012] VSCA 232; (2012) 46 VR 1 at [17]-[18] (Harper and Tate JJA and Beach AJA, footnotes omitted):
There are good reasons why the circumstances must be exceptional before a court may allow a case, having been closed and judgment reserved, to be re-opened. The need for finality in litigation is one. It is no answer to this point to say that the further evidence sought to be adduced by the respondent in this case is confined to the quantum of damages. Were applications to re-open to be allowed almost as of course, such applications would be regularly made. That would add enormously to inefficiencies in the administration of justice, even if the re-opened hearing was strictly confined. The discipline which ought to attend the conduct of litigation by highly competent litigators would also inevitably decline.
The very strict rule that, subject to any applicable process of appeal or review, the presentation of their cases by parties to litigation must conclude with the end of the trial, has another important justification. It is that, very often, the boundaries of the re‑opened issues would be hard to define and as difficult to protect. The re-opened hearing would then be bedevilled by arguments about whether one party or the other was seeking to take advantage of the re-opening to polish parts of its case which were more or less within the scope of the re-opened proceeding but not clearly on one side or the other of the prescribed limits.
I dismissed the application to reopen on the basis of these principles, and because I did not consider that the evidence to be adduced was likely to affect the result. My specific reasons were as follows.
First, there was no reason to doubt or second guess Mr Catchpoole's affidavit to the effect that the plaintiff would seek to subpoena a number of people or entities to investigate the new developments disclosed in the annual reports. What that reveals is that, decisive or not, the new evidence would open up a range of issues going both to the financial position of HML and to further transactions in which it has engaged. The application would be a prime example of one where, in the words used in Spotlight, 'the boundaries of the re-opened issues would be hard to define and as difficult to protect'.
Second, the particular transaction involving Tetue Pty Ltd was likely to raise further concerns. The transaction is described in the annual report for FYE 2021 (also in the reports for the prior years) as a post reporting period development. It concerns debts between HML and JBL. A debt of approximately $2.4 million owed to HML by JBL (described in more detail in the narrative of the evidence below) was valued at nil in the unaudited accounts for FYE 2019, but in the audited accounts was given full value. According to the FYE 2021 annual report, that was because of the following transaction:
On 5 May 2022, Henry Morgan Limited entered into a Deed of Assignment & Novation with Stuart McAuliffe, Tetue Pty Ltd and John Bridgeman Limited to offset amounts payables [sic] and receivable between the above-mentioned parties. As set out in the notes to the financial statements, the balance of any net loans receivable will be repaid from funds held in trust with the Company's legal counsel.
The note to the 'Loans and Receivables' section in the accounts then said:
(a) On 8 August 2018 the Company made a loan of $2,411,000 to JBL for a term of one year at 11.5% pa interest. On 28 June 2019 the term of the loan was extended to 31 March 2021.
As of 5 May 2022 the Loan to John Bridgeman Limited is subject to rights of set-off of liabilities as set out in:
• Note 6 Trade and Other payables, being Accrued expenses of $194,883 (2020: $73,333) and Other payables - JBL of $1,172,008 (2020: $1,172,008);
• Note 7 Borrowings, being loans from Stuart McAuliffe $343,916 (2020: $85,261).
Whilst the net amount receivable from John Bridgeman Limited as at 30 June 2021 of $603,751 is past due, it has not been impaired on the basis of these funds being transferred to the Company's legal counsel trust account on 25 May 2022.
A company search of Tetue Pty Ltd that is in evidence on the interlocutory application shows its sole director is one Brett James McAuliffe and its previous directors include Stuart McAuliffe, John McAuliffe and a Barbara Joan McAuliffe. In short, this evidence, if admitted, would raise yet another transaction with connected parties which the plaintiffs would submit requires investigation. The evidence to be adduced by HML on any reopening would be limited to the new annual reports, so there would be no further explanation of the transactions in evidence. It would be necessary, as Mr Catchpoole's evidence showed, for the plaintiffs to investigate by the issue of more subpoenas and test HML's claims by further cross examination of Mr McAuliffe.
Also in relation to solvency, the directors noted in the annual report for FYE 2021 (also in the reports for the prior years):
The continuation of the Company as a going concern is largely dependent on the Company's ability to:
• maintain forecast expense levels;
• raise additional capital and funding, of which $410,000 was raised subsequent to 30 June 2021 (refer note 10); and
• have funds continued to be advanced from one of its Directors to allow it to maintain its solvency and allow it to pay its debts as and when they fall due.
These conditions give rise to a material uncertainty which may cast significant doubt of the Company's ability to continue as a going concern. Should the above actions not generate the expected cash flow, the Company may be required to realise assets and extinguish liabilities other than in the normal course of business and at amounts that differ from those stated in the financial statements. The report does not include any adjustments relating to the recoverability and classification of recorded assets amounts and classification of liabilities that might be necessary should the Company not continue as a going concern.
It therefore appeared to me that the evidence sought to be adduced would raise further questions about transactions with connected parties and about the solvency of HML. There was some confusion at the hearing of the application to reopen as to the significance of the issue of solvency to the case, but in his written closing submissions filed in December 2021 counsel for HML said:
the court need not make any specific finding as [to] the solvency of the company, as [HML] does not submit that this case falls within the category of cases where courts have held that the strength of solvency of a company was such that it would be an extreme case to order a winding up. In the present case, it is submitted that solvency would be a neutral factor in the Court's decision.
That being so, it appears unlikely that admitting the audited accounts would significantly improve HML's case. Despite the apparent change in net assets that they record, they are hardly likely to rise to the level of establishing a strong case for solvency. HML did not put the application on the basis of any proposed change of such significance in the nature of its case. Rather, it was put on the basis that the new evidence was highly relevant to the case as framed by the time that judgment was reserved.
Nor would the less contestable fact that the audits and annual reports had been completed be likely to change the result; while it might be relevant that it has put an end to certain defaults in legislative compliance, it cannot erase the very long delay before that occurred, and the concerns about the management of HML the delay might raise.
I therefore did not consider it likely that the evidence would affect the result. I did consider it likely that admitting the evidence would lead to significant delay in the resolution of the proceeding by opening up new areas of inquiry. Those considerations, together with the systemic importance of holding parties to the closing of their cases in all but exceptional circumstances, led me to conclude that it would not be in the interests of justice to permit reopening.
In reaching that conclusion I placed no weight on the plaintiffs' argument based on limitation periods. Those periods have been approaching for some time and it would have been within the plaintiffs' power to inform the Court earlier and take appropriate procedural steps to ensure that the limitation periods would not expire. I note HML's submission that the plaintiffs here made deliberate forensic decisions to obtain extensive discovery, issue numerous subpoenas and engage in lengthy cross examination exploring the affairs of the company in depth, when they could have brought an application for a just and equitable winding up framed in simpler terms which would have led to a quicker result. The volume of evidence about to be addressed in this judgment goes some way to bearing that submission out.
I also did not place any weight on the plaintiffs' argument that the annual reports were not really fresh evidence, because they could have been prepared earlier. I agree that any unexplained delay is relevant to the question of whether it is just and equitable to wind up HML, but how it impacts on the different discretion to permit the reopening of the trial is not something that is necessary to decide in the present case. Nor did I put any weight on a submission made by the plaintiffs that it was open to infer that HML deliberately waited to complete the audits and make the application to reopen specifically to disrupt the orderly resolution of the matter. I did not consider that the evidence supported that inference.
I did, however, put some weight on the plaintiffs' submission that HML could have sought an adjournment of the hearing pending the production of the annual reports. The audit was expected to be concluded as soon as 28 January 2022, noting that final submissions did not come in until 20 January 2022. The option of an adjournment application was raised in discussion between the bar and the bench at the hearing, but was not taken, instead leaving any developments after the hearing to depend on an application to reopen, as has in fact occurred. It was appropriate to hold that decision not to seek an adjournment against HML's application, given the importance of holding parties to some finality in the closing of their cases.
The evidence
Stuart McAuliffe
It is convenient to start the discussion of the evidence by making some observations about the evidence of Mr McAuliffe, as he was the only witness from whom HML adduced evidence and the only person who gave oral evidence in the proceeding.
Mr McAuliffe was 51 years of age when he gave evidence. He holds a Bachelor of Arts from the University of Queensland, a Graduate Diploma of Legal Studies from the Queensland University of Technology, and a Masters of Education from Bond University. Between 2007 and 2014 he was an Associate Professor in finance and investment analysis at Bond University. Between 2012 and 2015 he was investment manager for the Aliom Managed Futures Fund No 1, a 'wholesale investment fund'. His various positions at HML and other companies are identified above and below. According to Mr McAuliffe, those roles as director or CEO of companies have given him approximately seven years of experience managing listed and unlisted investment companies and managing all aspects of their operations.
I found Mr McAuliffe to be an unsatisfactory witness. His approach to his cross examination tended to be obstructive and, beyond that, to have an unreal quality. For example, he accepted that HML, JBL, BHD, Bartholomew Roberts and JBFG were all located at the same Brisbane CBD address, which had been notified to ASIC as their business premises, but asserted that 'the operational [sic] of the company was with the independent directors, and they weren't located there'. He accepted that the companies all had interests in each other, including that HML was the largest shareholder in JBFG. He accepted that there were various loans between the different companies. He appeared to accept that they used the same accounting staff, although he sought to qualify that by saying 'Some internal people were - were the same; although, I don't know if that's really exactly accurate, because not every person worked on - on - on every company'. He accepted that JBL was the investment manager for HML, and that: his role at JBL was investment manager; he was also the Managing Director of JBL; and that he had oversight of its business. He accepted that he was a director of JBL along with his father and Mr Patane, and that he has a 22% shareholding in JBL. He accepted that JBL provided office services and corporate support to HML. And yet he did not accept the common sense proposition that HML was 'part of a wider group of companies which appears to be referred to variously as the JBL Group'.
There were also several examples of Mr McAuliffe's refusal to accept propositions that were evidently true. One was that he did not agree that since it was listed, HML had a relatively consistent experience of complaints from ASIC and ASX. The history about to be recounted shows that was plainly so. Nor would he accept that a number of matters raised by ASX and ASIC remained unresolved.
The above transactions are limited to those involving HML. There are a number of other transactions involving companies such as JBL, JBFG, Benjamin Hornigold and Bartholomew Roberts disclosed by the evidence which have not been canvassed.
The need for investigation of the transactions I have described speaks for itself. They may involve breaches of Chapter 2E of the Corporations Act, concerning related party transactions, or of listing rules on that subject. Mr McAuliffe accepted in cross examination that HML had never called meetings to approve loans to related companies, although he did not accept that they were related companies. As to that issue, s 228 in Chapter 2E defines related parties of a company to include a director of the company, and any entity controlled by such a director: see s 228(2)(a) and s 228(4). At the relevant times, Mr McAuliffe was a director of HML, and there is also, at least, substantial cause to investigate whether he controlled counterparties to the transactions including JBL, JBFG and Bartholomew Roberts at relevant times. That is so at least because of Mr McAuliffe's board and executive positions with those companies, and even before their shareholdings in each other, and Mr McAuliffe's shareholdings, are taken into account.
Further, I have made comments in the narrative of evidence above about the unreality of Mr McAuliffe's apparent view that these transactions were all the result of decisions made by directors who were independent of him. The transactions may involve breaches of directors' statutory duties or duties at common law or equity, for example because they may not have been carried out bona fide in the interests of the company as a whole. They warrant investigation in order to ascertain whether such breaches have occurred.
More broadly, from the evidence in the proceedings detailed above, it is possible to see that at least $13 million flowed out of HML by way of share investments in and loans to connected companies [140], [144], [148], [160], [197]. It appears that the bulk of those funds will not be recovered from those companies. On that basis, it can be said that the transactions described above have contributed to the collapse in HML's financial position.
It is also relevant that the transactions involve a significant departure from the purposes of HML that were explained so clearly in the Prospectus. Investors provided their funds on the basis of a document which repeatedly emphasised that the company's investment would be limited to deeply liquid, high volume global markets, primarily through investments in exchange traded futures contracts. The Prospectus said very specifically that under normal market conditions the company would be able to liquidate at least 90% of its portfolio quickly. Instead, from at least August 2016, HML engaged in a program of providing many millions of dollars to companies connected with Mr McAuliffe, several of which were unlisted. For the reasons I have given, the resolution passed in October 2016 and the resolution passed in December 2021 were not sufficient to authorise that fundamental change of purpose. Nor does it appear that a decision to change the strategic direction of the company was ever disclosed to shareholders or the market. That is despite an assurance in the Prospectus that any material change in HML's risk profile or strategy would be disclosed. These transactions indicate that the abandonment of the company's original purpose occurred much sooner than the time that it became inoperative, or the time at which it decided that its main activity was to investigate legal action against ASX.
HML submits that if an investigation is needed, then ASIC is the most appropriate body to do so. I do not accept that. While HML points to evidence that ASIC is investigating, that evidence dates back to October 2019 at the latest. There is nothing to indicate whether the investigation is ongoing. HML submits that ASIC has extensive investigative powers. It does, but so does a liquidator. It is true, as HML submits, that a liquidator requires funding and, speaking broadly, ASIC already has funding. But it is notorious that liquidators have many possible avenues of funding available to them, such as litigation funders and interested creditors and shareholders. In contrast, given that the last evidence of ASIC taking steps to investigate HML dates from October 2019, the prospect that it remains willing to expend public funds to investigate the company further is at least equally uncertain. Further, ASIC's regulatory functions of pursuing persons for breaches and penalties is different to the likely purpose of a liquidator, which is to recover funds for creditors and shareholders. The transactions detailed above provide ample scope for investigation for the latter purpose.
Governance concerns
All of the above took place against the background of a troubling record of behaviour prompting multiple inquiries from and disputes with ASX and ASIC, as well as significant failures of compliance with basic requirements of the Corporations Act. Some of the inquiries and disputes were prompted by the transactions considered above, so there is overlap between this head of concerns and the previous one. Concerns of this kind include the following:
(1)In the Prospectus, HML promised that it would make regular disclosure to shareholders, including of the actual allocation of investments among various classes of assets and any material change in the company's risk profile and strategy [131]. It is true that the Investment Mandate was altered in October 2016 by a resolution of shareholders to permit more than 10% of HML's portfolio to be invested in unlisted securities [143], also [189]. But there is no evidence of any disclosure to shareholders that the board of the company was considering or had decided upon a change in the strategic direction of the company which meant that less than two months later a substantial proportion of its funds, over $6 million, was invested in one unlxisted company's shares, namely JBFG [144]. In fact it does not appear that the investment was disclosed at all until 23 January 2017, more than six weeks after it was made [146]. On any view, a decision to invest that much money into one unlisted company was a significant change in risk profile and strategy for a company that raised funds on the basis that it would invest in exchange traded futures contracts in deeply liquid global markets.
(2)In June and July of 2017, ASIC stopped the issue of the bonus options on the basis of concerns about misleading statements to the market about HML's NTA backing and the basis on which its large investment in JBFG had been valued [149]-[156], [159]. ASIC also had concerns about the adequacy of HML's internal accounting [153]. ASIC's statement of concerns was detailed and specific and admitted into evidence without objection and without any ruling sought as to the evidentiary use that could be made of it. I acknowledge that it is just ASIC's opinion, and that it would not be appropriate to find in a proceeding like this that the concerns were correct. I do, however, consider that it is appropriate to find that ASIC had reasonable cause for the concerns. As with the ASX letter set out at [224], HML adduced no evidence to the contrary. As I have explained, Mr McAuliffe's evidence about the initial stop order was unconvincing and, even if accepted, it would not have reflected well on his management of HML [156].
(3)At the same time and connectedly, as I have found despite Mr McAuliffe's evidence, ASX suspended the securities in HML from quotation [157]-[158]. The securities were never returned to quotation on the ASX.
(4)On 15 August 2017, HML was forced to retract prior statements it had made to the market. Even the retractions lacked candour [165]-[171].
(5)In its annual report for FYE 2017, and despite ASIC's concerns, HML revalued its investments in JBFG upwards by over $23 million and its investment in Bartholomew Roberts upwards by over $10 million [174]. Over the course of the following year it would become clear that the investment in JBFG was worthless and as at 30 June 2019 its investment in Bartholomew Roberts was also revalued to nil [286].
(6)ASX made further detailed queries about HML's announcements in February 2018. The company's response again lacked candour [177]-[181].
(7)On 8 March 2018, ASX wrote to HML requiring it to announce that its acquisition of shares in JBL on 17 November 2017 breached the listing rules, because of JBL's relationship to Mr McAuliffe [182]-[183].
(8)HML began to actively seek the return of its securities to quotation on the ASX from June 2018. ASX still held concerns and refused [191]-[193]. It appears that at the same time ASX held concerns about late financial reporting by HML [194].
(9)In their annual reports for FYE 2018 each of HML [201], JBL [219] and JBFG [215] announced very large losses which, in the case of the latter two companies, resulted in a net deficiency of working capital (meaning current assets less current liabilities). And yet, the tenor of Mr McAuliffe's evidence was that he did not know about JBL's financial problems until shortly before the public accounts were released (in October 2018) [219]-[220], or about JBFG's financial problems until after the accounts were released [216]-[218]. Assuming that this evidence is truthful, it shows a remarkable lack of diligence and oversight on the part of Mr McAuliffe, who was not just Managing Director of HML but also Managing Director and Chief Investment Officer of JBL and Group CEO of JBFG. Also, Mr McAuliffe's communication to HML's shareholders about the decline in their company's fortunes lacked candour or, even, information [202]-[203].
(10)HML had no auditors between 29 November 2018 and 23 January 2019. ASIC served HML with notice of its failure to appoint an auditor [221].
(11)On 25 January 2019, the Takeovers Panel made a declaration of unacceptable circumstances in relation to the affairs of HML [222], also [199].
(12)On 30 May 2019, in something of a culmination of the correspondence about the suspension of the company's securities, ASX wrote to HML detailing numerous 'serious concerns about the conduct and operations' of HML, BHD and JBL. HML made no real attempt in this proceeding to contradict the factual bases of the concerns, which had a reasonable basis [224]-[227].
(13)On 3 February 2020, ASX removed HML from the official list because it had been suspended for an unacceptably long period of time, and it has not been restored [237].
(14)No AGM was held between 29 November 2018 and the hearing [235]. To fail to hold an AGM at least once every calendar year is an offence: Corporations Act s 250N(2).
(15)By 15 January 2020, HML had only two directors, when its constitution requires a minimum of three, and by the end of September 2020 it had only one, Mr McAuliffe [236], [247], [252]. The insufficient number of directors was not remedied until 30 September 2021 [254]-[255].
(16)From about 4 November 2019, HML had no company secretary and it still did not have one at the time of the hearing [252]. That means it was in breach of s 204A(2).
(17)HML did not arrange for the completion of an audit of its accounts after the accounts for FYE 2018 (published in September 2018) up to the time of the hearing, more than three years later. Unaudited accounts for the missing three years were only prepared shortly before the hearing. The explanations HML has given for the delays are unsatisfactory [279]-[284], [292]. The true explanation for the lack of any audit as at December 2021 was because the company had not paid its auditor's fees and its director, Mr McAuliffe, and another company officer were not engaging with the auditor's attempts to speak to them [293]-[296]. For over two years, from around September 2019 to the time of the hearing, HML failed to provide any accounts to its shareholders [229], let alone audited accounts. Mr McAuliffe thinks this was a 'technical breach' [285]. It was not; it was a significant failure to meet basic obligations to disclose HML's financial position to its shareholders and the public.
(18)HML had no professional share registry between about February 2020 until at least the date of the hearing. That is because it could not pay its share registry service provider, Link [239]-[245].
(19)From about February 2020 until the end of 2021, HML did not maintain a registered office or registered principal place of business nor, it seems, functioning email addresses [249]-[250], [252], [257]-[258].
(20)HML lodged a materially misleading declaration of solvency with ASIC [264]‑[267] and proceeded at the December 2021 EGM to put a resolution for the voluntary winding up of the company to shareholders on the basis of it. A director who makes a declaration of solvency under s 494 without having reasonable grounds for his or her opinion that the company will be able to pay its debts in full within the period stated in the declaration is guilty of an offence: Corporations Act s 494(4).
(21)The lack of directors' liability insurance raises further concerns about the composition and conduct of HML's board [288].
The above is a mere subset of the numerous inquiries made and concerns expressed by ASIC, and especially ASX, during HML's time as a public listed company. I acknowledge that they are just concerns and inquiries, not firm findings of contravention. Individually, each concern might not justify an order to wind up the company. But their sheer number undermines any confidence in the management of HML, and I have found that significant aspects of the concerns had a reasonable basis. Taken together with all the other matters detailed above, they provide reason to consider that the protection of the public is best served by winding up.
As for the basic governance and compliance failures that have been incontrovertibly established - not publishing audited accounts, not holding AGMs and not having an accurate registered office or principal place of business - these were not remedied for up to a year after the commencement of the proceeding. No attempts to fix them were made until the eleventh hour, before the hearing, and as at the date of the hearing those attempts had not resulted in either audited accounts or the holding of an AGM. Even if those things could be expected to have taken place in 2022, that would not erase the record of poor governance and poor compliance with basic requirements of the ongoing status of a company. Whether eventually remedied or not, that record is damaging to the level of confidence the Court has in those managing the company. To adapt the words used in Gognos (see [60] above), I do not consider that the risk to the public interest has been eliminated or reduced to an acceptable level by what has been put in place at the eleventh hour, even if it leads to belated compliance with requirements of the Corporations Act.
Indeed it seems that from at least September 2020 to June 2021 (when Mr Koster was appointed), to speak of those persons in the plural would be incorrect, because the sole person in a position of management responsibility was Mr McAuliffe. The Court has no confidence in his management of HML, and has no reason to think that the other directors appointed in 2021 will bring about any improvement. It is unlikely that they will manage the affairs of HML independently of Mr McAuliffe. They have given no evidence to the effect that they will do so, and as is discussed below it is likely that the company's ongoing operation depends on Mr McAuliffe extending substantial funds to HML, and not calling for repayment of those funds when the 24 month expiry date for the facilities comes around, or earlier if there is a default [262].
Solvency and HML's prospects
As noted above, HML does not defend the case the basis that the strength of its solvency meant that it would be an extreme step to order its winding up. It submits that this is a neutral factor [75]. Nevertheless, the Court must keep in mind the interests of creditors and members of the company as a whole and the evidence as to the financial position of the company is relevant to the exercise of the discretion.
The unaudited accounts of HML that were available to the Court as at the time of the hearing presented reason to doubt that the company would be able to continue as a going concern. By the time of the hearing it had raised relatively small amounts of capital from a small group of persons, including Mr McAuliffe and several others connected with him [263]. To a large extent the company was also dependent on ongoing direct financial support by way of loans from Mr McAuliffe.
On the basis of the principles summarised earlier in these reasons, and the way the parties' cases were put, I do not need to make a finding about whether HML is solvent, and I make no such finding. It is enough to say that it could not by any stretch of the imagination be called a prosperous enterprise, and it is likely to be dependent on ongoing financial support from Mr McAuliffe if it is to continue in operation, if that is the right way to describe its current sole proposed enterprise of possibly litigating against ASX. A successful outcome for such an enterprise can only be described as speculative, and when any such outcome could be achieved is entirely unknown. It would have been within HML's power to produce legal advice as to the prospects of the proposed litigation, although I acknowledge that it may have been reluctant to waive privilege over that advice. But on any view, it can be expected to take years and many millions of dollars to prosecute any claim against a defendant like ASX. Even the $2 million facility promised by Mr McAuliffe to HML is expressed to be for 'initial' litigation funding only [260].
Whether anyone other than Mr McAuliffe will be willing to keep funding HML through those years of expensive uncertainty must be highly doubtful, as must the ongoing willingness of Mr McAuliffe himself. In addition, the evidence of his ability to keep funding the company is doubtful. As described above in connection with the application to set aside a subpoena, the plaintiffs had put that in issue, albeit just before trial when Mr McAuliffe filed his second affidavit (which evidenced the loans he granted to HML) [75]. It was in his power to produce evidence of his financial position in order to allay any concern that he could keep HML in the necessary funds. He did not produce anything, apart from a single bank statement (under compulsion) which shows that in one bank account he has just over $200,000 in cash [261], also [79]. HML submits that it is reasonable to infer that he has access to other funds but in view of his apparent inability or unwillingness to provide direct evidence of that, I do not make that inference. HML points to Mr McAuliffe's shareholdings in various companies including JBL and BRL but points to no evidence that those shares have any value. So there is no real basis for the Court to find that it is likely that Mr McAuliffe will be willing and able to continue to fund HML in its possible claim for compensation against ASX, which is likely to cost millions. Whether or not HML is currently solvent, its ability to carry on any successful business activities in future can only be described as highly doubtful.
For those reasons, on the particular facts of this case, and in light of the numerous serious concerns about the company that have been summarised above, HML's financial position and future prospects are not so sound as to warrant the Court refusing to make an order to wind the company up.
Whether plaintiffs are acting unreasonably in not pursuing another remedy
As has been said, HML relies on s 467(4) of the Corporations Act in submitting that the plaintiffs are acting unreasonably in seeking to have the company wound up instead of pursuing some other remedy that is available to them. I have set out earlier in these reasons the principles that govern the application of this proviso in s 467(4); the key question is whether, assessed objectively, the plaintiffs are indeed acting unreasonably in not pursuing another remedy, noting that 'remedy' in this context can mean something other than pursuit of a court ordered remedy.
HML points to several 'alternative remedies' which, it says, engage the proviso: the plaintiffs could bring a claim for damages for alleged breaches of continuous disclosure provisions; they could pursue the making of resolutions at an AGM, which HML describes by saying that an AGM would provide an opportunity for accountability and member participation; they could transfer their shares; and ASIC can take action in relation to compliance issues and in relation to related party transactions.
I do not consider that any of these alternative remedies, or all of them considered together, are sufficiently likely to remedy the plaintiffs' concerns to mean that the plaintiffs are acting unreasonably not to pursue them, recalling that the onus of establishing that is on HML. First, the claim for damages for alleged breaches of continuous disclosure provisions is postulated in a vague way, without naming a defendant. Assuming that the defendant would be HML, the evidence provides no firm basis to think that it will be able to meet any judgment against it, a judgment that would doubtless only be reached after long and expensive litigation. HML has not identified any other prospective defendants to a continuous disclosure action.
The potential benefit of a winding up, in contrast, is that a liquidator may investigate the transactions described above and others with a view to recovering substantial assets and, ultimately, making a distribution to the plaintiffs as contributories. In any event, while the pleadings indicated emphasis on alleged failures to ensure continuous disclosure, as the present application proceeded, it became clear that the concerns raised by the plaintiffs went well beyond failures in continuous disclosure.
As for the other alternative remedies, the benefits to the plaintiffs of an AGM are put in the vaguest possible way and, given the conduct of the EGM as detailed above, there can be no confidence that it will be a true opportunity for accountability and shareholder participation. The idea of a transfer of shares is also put in an extremely vague way, without saying to whom or for what consideration. Any valuation would no doubt be based on the company's parlous position, in which it finds itself partly as a result of the transactions detailed above, where, once again, the objective of a liquidator would be to try to recover funds potentially including funds lost as a result of those transactions.
It is convenient at this point to deal with an evidentiary objection made at trial that was left to be resolved in these reasons. HML tendered two letters from its solicitors, McCullough Robertson, to the plaintiffs' solicitors, Corrs Chambers Westgarth, in which offers were made to purchase the plaintiffs' shares in return for the discontinuance of the proceeding and fixing of costs. The plaintiffs objected under s 131 of the Evidence Act to the admission of the letters (other than in relation to any question of costs).
Section 131(1) relevantly provides that evidence is not to be adduced of a communication between persons in dispute in connection with an attempt to negotiate a settlement of the dispute. I uphold the objection on that basis. The two letters make offers to settle the proceeding. They fall within the words of s 131(1). Counsel for HML submitted that they did not because, as well as making an offer to settle the proceeding, they also served the additional purpose of 'resolv[ing] the rights of the shareholders and the complaints they make' by allowing the plaintiffs to exit the company and obtain return of their capital. I reject that submission. The breadth of the wording in s 131(1) belies it - to engage the section a communication need only be 'in connection with' an attempt to negotiate a settlement of the dispute. The section imports no 'sole purpose' or 'dominant purpose' test: Australian Competition and Consumer Commission v Allphones Retail Pty Ltd (No 3) [2009] FCA 1075 at [67], [75] (Foster J).
HML also submits that if s 131 did apply to the letters, they came within the exception in s 131(2)(d), which provides that s 131(1) does not apply if 'the communication or document included a statement to the effect that it was not to be treated as confidential'. I also reject that submission. Neither of the letters said any such thing. Counsel for HML submitted that the 'statement' of non-confidentiality was implied but the statutory requirement that the communication 'included a statement' plainly requires that the lack of confidentiality be expressed in the letter. I therefore rule that the letters are not admissible evidence. So they can have no bearing on whether there is an 'alternative remedy' of a transfer of shares available to the plaintiffs.
As for the final 'alternative remedy' that HML says the plaintiffs should pursue, being action by ASIC, there is no evidence that it intends to continue its investigations into HML, when those investigations might result in litigation, or how such litigation might directly benefit shareholders in HML. The suggestion that this is an alternative remedy that the plaintiffs should pursue is entirely speculative and, since it depends on action by ASIC, not the plaintiffs, it would not fit the relevant words of s 467(4) of some other remedy that is 'available to the applicants'. Even if a narrow view of what is in the plaintiffs' interests is taken, they are not acting unreasonably in pursuing the appointment of a liquidator with powers to recover assets for the benefit of shareholders rather than, say, agreeing to be bought out at a value that is likely to reflect the company's parlous financial state. In my view, the proviso in s 467(4) is not engaged.
Conclusion on just and equitable winding up
One of the bases of HML's opposition to winding up was that the alleged circumstances constituting a 'failure of substratum' did not arise and, if they did, did not justify winding up. But I have found that there has been a fundamental abandonment of HML's original purposes which has contributed to a catastrophic loss of shareholder funds. HML also claims that at the time of the hearing the various failures of compliance had been addressed or would be addressed soon. But even if that is so, those failures have been fundamental and persistent, with partially effective measures only taken at the eleventh hour before the hearing, even in the face of a winding up application that had been on foot for a year beforehand. They provide serious cause for concern leading to a justifiable lack of confidence in HML's management. The company's lack of candour with shareholders, the market and regulators exacerbates that concern. And the concerns arising from the transactions described above warrant investigation which is best carried out by a liquidator.
I take account of the authorities on s 461 that describe winding up a solvent company as an extreme step with far reaching consequences beyond the plaintiffs. Even assuming that HML is solvent (which is at least doubtful), I consider that the extreme step is warranted here. The reasons just given lead to the conclusion, after examining the entire conduct of the affairs of the company, that the Court can have no confidence in the propensity of those managing HML to comply with their obligations. The company has not carried on its business candidly with the public and in a straightforward manner and it will be protective of the public interest to wind the company up.
Oppression ground
Having reached that conclusion it is not strictly necessary for me to express any view about whether HML should be wound up on the ground that its affairs have been conducted in a manner that has been oppressive to shareholders such as the plaintiffs. I need only comment on that ground briefly. There is no evidence that the plaintiffs or any minority shareholders have been specifically targeted for unfair treatment to the benefit of majority shareholders. While I do not put any weight in the company's favour on the outcome of the EGM, I do not find that it rises to the level of oppressive conduct. But the conduct of the affairs of the company as I have described it does meet the criterion of having been contrary to the interests of members as a whole. As required by the principles set out earlier in these reasons, the conduct of the affairs of the company has not complied with accepted standards of corporate behaviour and is not consistent with how reasonable directors would have acted in attending to the affairs of the company. It is not necessary to repeat all the reasons given above, which apply equally here. Whether any individual occurrence would merit the description of oppressive conduct in the sense of conduct contrary to the interests of members as a whole, the accumulation of conduct that has been described does merit that description: see Hylepin at [63] above. For that reason, and contrary to HML's submissions [32], the complaints on which the plaintiffs rely go beyond the complaints of minority shareholders who disagree with management decisions and are disgruntled at the loss of the value of their investments. At the very least, before embarking on a program of investing substantial funds in unlisted connected companies and advancing substantial sums to such companies, reasonable directors would have made full disclosure to shareholders of their intentions and the possible outcomes of the transactions. They would have put the change in strategy to shareholders for approval before risking their capital in a quite different venture from the one that they originally embarked on. However the case for just and equitable winding up is stronger and it is on that basis that HML will be wound up.
Orders
There will be an order for the winding up of HML and the appointment of the individuals nominated by the plaintiffs as liquidators. The plaintiffs' costs of the proceeding will be costs in the winding up.
I certify that the preceding three hundred and sixty-one (361) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackson. Associate:
Dated: 22 August 2022
- AGLC
- MF Lady Pty Ltd (Trustee) v Henry Morgan Limited [2022] FCA 978
- Case
- [2022] FCA 978
- Decision Date
CaseChat Overview and Summary
The Court considered whether it was appropriate to wind HML up on the just and equitable ground. The plaintiffs established that HML had departed fundamentally from its original purpose as set out in its prospectus. The evidence showed that HML had invested substantially in unlisted connected companies without the authorisation of its shareholders. The transactions warranted investigation which was best carried out by a liquidator. HML's lack of candour with shareholders, the market and regulators exacerbated the justifiable lack of confidence in HML's management. The Court found that the plaintiffs were not acting unreasonably in seeking winding up instead of pursuing other remedies. The Court concluded that it was just and equitable to wind HML up. The Court also found that HML's affairs had been conducted in an oppressive manner, contrary to the interests of members as a whole.
Orders
Orders of the court
1. The defendant be wound up pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth) on the ground that it is just and equitable that the company be wound up.
2. Ian Niccol and Vincent Pirina are appointed as the joint and several liquidators of the defendant.
3. The plaintiffs' costs of this application are costs in the winding up of the defendant.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
TABLE OF CONTENTS
Background to the corporate group
[3]
Diagram 1 - corporate group structure
[3]
HML
[5]
JBL
[9]
JBFG
[13]
Directors and executives
[16]
The proceeding, the pleadings and the issues
[21]
Principles
[35]
The legislation
[35]
The just and equitable ground
[38]
Failure of company's purpose and failure of substratum
[44]
Relevance of breaches of the law
[59]
Oppression
[62]
Relevance of solvency
[65]
Section 467(4)
[68]
Application to set aside a subpoena
[70]
Application to reopen
[80]
The evidence
[101]
Stuart McAuliffe
[101]
2014
[110]
2015
[111]
The Management Services Agreement with JBL
[111]
The Prospectus
[113]
2016
[135]
Transactions in relation to connected companies in late 2016
[139]
2017
[146]
January to April connected party transactions
[146]
The bonus option offer and the ASIC stop order
[149]
The ASX suspension
[157]
July 2017 connected company transactions
[160]
Retractions to ASX announcements
[165]
September to November 2017 connected party transactions
[173]
2018
[177]
More ASX queries
[177]
Diagram 2 - Annexure A
[178]
Request to lift ASX suspension
[191]
July to September 2018 connected party transactions
[195]
HML's annual report for FYE 2018
[201]
JBFG's results for FYE 2018
[215]
JBL's results for FYE 2018
[219]
KPMG step down as auditors
[221]
2019
[222]
Diagram 3 - Takeovers Panel diagram
[223]
ASX refuses to lift the suspension
[224]
Capital Credit loan novated
[228]
HML's financial reporting for FYE 2019
[229]
Other developments in 2019
[234]
2020
[236]
Link share registry
[239]
Further developments in 2020
[246]
2021
[254]
HML's directors and future plans
[254]
Mr McAuliffe promises to advance money to HML
[259]
Capital raising
[263]
The declaration of solvency
[264]
The EGM
[268]
The financial statements
[279]
Audit
[292]
Possible proposed litigation
[299]
Consideration
[304]
Fundamental change of purpose
[307]
Resolutions concerning changes in Investment Mandate or purpose
[319]
Transactions with connected companies
[331]
Governance concerns
[340]
Solvency and HML's prospects
[344]
Whether plaintiffs are acting unreasonably in not pursuing another remedy
[349]
Conclusion on just and equitable winding up
[358]
Oppression ground
[360]
Orders
[361]
Background
Background to the litigation
Evidence
Evidence Before The Court
Decision
Reasons for decision
Ratio Decidendi
Legal Principle Established
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