Min Y Liang v Auslanbo Enterprises Pty Limited and Danny Xiao Ming Lu

[2005] NSWSC 307

CITATION:	Min Y Liang v Auslanbo Enterprises Pty Limited and Danny Xiao Ming Lu [2005] NSWSC 307
HEARING DATE(S):	30/03/05
JUDGMENT DATE :	30 March 2005
JURISDICTION:	Equity Division
JUDGMENT OF:	Einstein J
DECISION:	Provisional liquidator appointed.

CATCHWORDS:	Companies - Deadlock
PARTIES:	Min Yi Liang (Plaintiff) Auslanbo Enterprise Pty Limited (First Defendant) Danny Xiao Ming Lu (Second Defendant)
FILE NUMBER(S):	SC 2158/05
COUNSEL:	Mr Broun QC (Plaintiff) Mr B Connell (Second Defendant)
SOLICITORS:	Guardian Legal (Plaintiff) Chris Lai & Associates (Second Defendant)

LOWER COURT JURISDICTION:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

Einstein J

Wednesday 30 March 2005 ex tempore
Revised 7 April 2005

2158/05 Min Yi Liang v Auslanbo Enterprise Pty Limited and Danny Xiao Ming Lu

JUDGMENT

The proceedings

1 Auslando Enterprise Pty Ltd [“the company”] has two directors each of which have an equal shareholding. The directors are Mr Danny Xiao Ming Lu [Mr Lu] and Ms Min Yi Liang also known as Mandy Liang [Ms Liang].

2 There is before the court for hearing an interlocutory process pursued by Ms Liang seeking an order for the appointment of a provisional liquidator to the company. Ancillary orders to injunctive relief are also sought.

3 The affidavit evidence before the Court makes it plain that it is appropriate for a provisional liquidator to be urgently appointed. The short position is that the evidence discloses that the company was incorporated in April 2003 by an arrangement described in the affidavit of Ms Laing made on 29 March 2005 in paragraphs 4 – 16 inclusive:

· “In about March 2000, I commenced employment in Tanyas Enterprise Pty Ltd. Ury Gulikov (“Ury”) was the director of Tanyas. In 2003, Ury said to me words to the effect:

“My main business is in China. I import a lot of goods from China to here. I need someone I trust to store those goods for me when they arrive in Australia and prepare for the dispatch of the goods when I am giving the dispatch order. I believe you are the person to be trusted. I have a business of that nature already. The business charges a management fee from those companies. The business already has a very big client namely Best & Less.”

· I felt that it might be hard for a female to do the business alone. I needed someone’s help. I then contacted Lu and said to him words to the effect:

“I have a business opportunity. It's a business involving storage of goods. The business charges a management fee over the goods stored in the warehouse. It already has a big client namely Best & Less.”
Lu said to me words to the effect: “Let me think about it.”

· After further negotiations, Lu agreed to join in the business.

· In about April 2003, a company named Winline Enterprise Pty Ltd (“Winline”) which Ury is a director of sold the business known as D series that manages the shoes, manchester, clothing and shop fittings storage for Best & Less to the company for an amount of $10,000 plus GST.

· The actual arrangement after the sale of the business was that Winline would help Auslanbo by continuing to take orders from Best & Less and then Winline would pass the orders to Auslanbo. To the client companies, it would appear Winline is the company that is conducting the business. The client companies were not to be made aware of Auslanbo. This arrangement was maintained until recently. Auslanbo sends invoices to Winline and Winline then sends its invoices to the client companies. The client companies then pay Winline and Winline pays to Auslanbo. Winline did not charge any fee to Auslanbo on the D series management fee. There was a verbal agreement between Ury, Lu and I that Auslanbo would unconditionally assist Winline for the storage of other goods that were note related to the D series.

· Best & Less is the largest client of the business of the company. The other client companies are all linked to each other and to Best & Less. If Best & Less moves its storage business to somewhere else, it is likely that the other client companies will follow. Ury has a very close relationship with Best & Less.

· As far as I am aware, Best & Less and other client companies have no formal contracts with Winline. Best & Less can turn to other warehouse at any time it wishes.

· When the business was first started in April 2003, the business and its warehouse was located only at 7-11 Claphan Road, Regents Park (“Regents Park warehouse”). That warehouse soon became too small for the business. In about June 2003, Auslanbo leased a second warehouse at Homebush Bay. In about December 2003 when the Homebush Bay lease expired, it appeared that the business was down as many of the businesses went to Australian Post, a competitor of ours. Danny and I wanted to abandon this business. After further thoughts, we decided to continue the business and in December 2003, Auslanbo leased another property at 106A Derby Street, Silverwater (“Silverwater warehouse”) and moved into the Silverwater warehouse in January 2004.

· I always remained in the Regents Park warehouse as Auslanbo's head office always remained there. It is the place where orders are picked up from the client companies. I managed the communication with the client companies, administrative work, some book keeping and some paper work of the company. Auslanbo did not pay me any wage in the last two financial years ending 30 June 2003 and 2004 except 4 weeks prior to the end of the financial year of 2004. Winline paid me a net wage of $445.00 per week. Lu, Ury and I have agreed that Auslanbo would pay me the difference between the $445.00 I received and Danny’s wage of $724.00 per week and Auslanbo would fully help Winline on the storage of other goods outside the D series stored in the warehouses. However, Auslanbo never paid me the difference.

· When the business first started, Lu managed all the groups. However, Lu made a lot of mistakes in managing the warehouse. Lu then managed shoes and shop fittings groups only. The other two groups of the D series have other managers appointed. Lu however still has the highest error rate among all the managers. Lu also participates in the decision making of the company i.e. whether to order new shelves in the warehouses, whether to purchase more equipment for the business etc, rent warehouse and purchase company truck.

· When the business first started, the income of the business was about $5,000 per week. That amount would not always cover the expenses of the business. The expenses of the business include rent of the warehouses. (The rent in the Silverwater warehouse is about $16,666.67 per month and the rent of the Regents Park warehouse).

· The business was in the first two years in a status of being sometimes good and sometimes bad. The staff members in the warehouse were changing all the time as well. A lot of expenses were wasted due to the change of staff members. From November 2003 to March 2004, the business did not go very well as Best & Less had many of goods sent to Australia Post. As a result, our warehouses were empty and the weekly income became very low.

· From about April 2004, the business slowly grew. The weekly income slowly but steadily increased nearly every week. By January 2005, the business reached its peak and every week the income of the business was around $18,000. To the best of my knowledge, the estimated average weekly expense were about $9,000.00 - $12,000.00.”

4 The affidavit evidence makes clear that the company is in a situation of hopeless deadlock. The evidence of Ms Liang is that the company is currently insolvent and is continuing to trade being unable to meet its current debts. Whilst the precise solvency position may require to be clarified it is also clear that the directors are seemingly agreed that the books and records of the company are in a state of hopeless or near hopeless mess. The affidavits include cross contentions, each director accusing the other of practices having contributed to this sad state of affairs. Allegations have been made of substantial cash removals from the company occurring without a proper basis. Allegations are made that the bank accounts do not reflect the state of affairs of the company. Allegations are made as to doubtful transactions. One or other of the directors has complained of the others refusal to permit the complaining director’s statutory rights to inspect the records to be recognised.

5 Additionally the evidence before the court satisfies me that on a number of occasions one director Mr Lu has locked the other director and employees out of one or other of the warehouses used by the company. The affidavits are replete with allegations of locks of the warehouse or warehouses being changed. Ms Liang has given evidence that it is a waste of time for her to talk to Mr Lu and that she finds it distressing to get into arguments with him. The directors are at loggerheads as to whether or not as Mr Lu contends, Ms Liang has failed to account for a deficit in the company of approximately $400,000 or arguably more. Mr Lu has accused Ms Liang of being a party to a fraud committed on the company.

6 Ms Liang has put before the Court evidence of the indebtedness of the company to major creditors including the landlords of the two warehouses used by the company. That indebtedness taken together with the amounts said to be owing to identified other creditors amounts on her evidence to the sum of approximately $226,669.

7 Mr Lu contends that this indebtedness is not a necessarily correct figure and contends that to the contrary of the proposition that the company is insolvent that the company is owed substantial sums by the company Winline Enterprises Pty Limited, by Best and Less and by Ms Liang.

8 Ms Liang has put forward evidence that the current bank balance as at Tuesday of this week of the company was $4,339.

9 Ms Liang contends that Mr Lai solicitor has purported to act for the company in relation to a litigious dispute with Best and Less despite the fact that on her evidence she has never authorised the employment by the company of this solicitor to act in this dispute.

10 Ms Liang has contended that advice has been received that the company must file amended tax returns disclosing in particular information concerning the use of cash: see her affidavit at paragraph 25 which reads as follows:

“From an early stage in the company, it was the practice of Lu and myself to cash some of the cheques received by the company from Winline. That money was used in part for company expenses, particularly to pay overtime to employees or to contractors who requested to be paid in cash, and the entertainment of some customers to dinners or drinks in order to improve our relationship with those customers. The balance was divided between Lu and myself as part of our remuneration. I have been advised that it is essential that the company should file amended Tax Returns disclosing that information for the year ending 30 June 2003 (although I am not sure whether any of the cash transactions had occurred up to that date) and that the Tax Return for 30 June 2004 (which has not yet been completed) should disclose that income. My personal tax returns for the years ending 30 June 2003 and 2004, should disclose that additional income. I propose to follow that advice. Lu and I used to keep a record of these internal accounts separately from the other records of the company. The practice was that one internal records was in the hands of Lu which I saw and sometimes signed, and one internal records in my possession which Lu saw and signed regularly. In early January 2005, Lu took from me my part of the internal accounts covering 23 October 2004 – 31 October 2004 and the months of November, December 2004 and January 2005. He said to me at the time, words to the effect, in Cantonese:

“I just want to check something from the accounts.”

He has never returned that part of my records to me. Because of their sensitive nature, I fear that Lu may destroy them or fail to produce them.”

11 There is also evidence before the Court of a letter written by Mr Lu to Best and Less on 7 February 2005 in which he put forward a suggestion that a contract is signed exclusively between Best and Less and himself to protect the financial interests of both parties.

12 In early February 2005 the solicitors acting for Ms Liang wrote to the solicitors acting for Mr Lu stating the understanding that Mr Lu was no longer actively taking part in the day-to-day operation of the business such that this might have a disastrous effect on the business. A proposal was put forward for the purchase by Ms Liam from Mr Lu of his shares in the company or for the purchase by Mr Lu from Ms Liang of her shares in the company. It is clear that no such accommodation has been able to be reached. The sorry position is that as long ago as early February 2005 the solicitors for Mr Lu claimed that a substantial part of the accounting records had been found to be missing. Indeed that very allegation was a foundation stone supporting the commencement of proceedings to 2020 of 2005.

13 Evidence before the Court given by the accountant Ms Ho is that on a particular occasion in early February she inspected documents produced by Ms Liang which she describes as follows at [19].

“The documents were in a big mess, not in any sequence or order. Not all the documents are originals. The documents were all over the place, I could find a docket from 2003 on the top of the pile and then found another one in the middle of the pile. A number of documents are lacking proper description as to what they are for and one can only guess as to their purpose. It did not appear that there was a proper system of accounting nor proper conventional accounting records were.”

14 She continues at [20]-[34].

“I heard Danny said to Ray “Ray, is that all Mandy gave you?” He said with a light smile “She made an appointment to see me last week and then she rang up again and said that her car was broken into and all the information and documents in relation to the company were in the car had been stolen. She has reported to the Police and could not make the appointment.” On that basis no documents after 1 July 2004 were produced except one cheque book from Commonwealth Bank, a small number of invoices on which payments were made by Auslanbo.

The bag of documents contains papers that are written partly in Chinese and partly in English. There are several documents appearing as conforming to computer accounting programs, probably MYOB.

One document appeared to be a list of deposits between 28 March 2003 and 29 June 2004. On top of the document it has a Chinese writing which means “Income and Others”.

Another document appeared to be a sequential list of cheques between 4 July 2003 and 29 June 2004.

I also found 4 pages of a document that appears to be a hand written spreadsheet dividing expense according to categories over unspecified periods. There is no heading to the document and figures are altered either by hand or liquid paper all over the document.

In the bag there was a large volume of formed document titled “Invoice/Statement” purporting to be from other parties to Auslanbo. The handwriting seems to be by the same person. I have found some discrepancies in the document.

There was a Commonwealth Bank chequebook with cheque stubs between 631 and 715 but with a number of cheques without dates or with dates out of sequence. There are many cheque butts with the word “cancelled” or “cancel” but the supposedly cancelled cheques are not attached to the butts.

There was one bank deposit book in most cases the source of the deposit was not recorded.

To me it does not look like that proper records were kept as there is not a system in place to account for the income and expenditure and source documents seem to be incomplete. I have found that there are many expense items of the company that do not relate to the operation of the company. I used the record containing the list of cheque payments and tried to trace the supporting invoices. For example, cheque numbered 680 issued on 14 January 2005 was for $3,373.21. I searched through the entire bag to locate all the relevant supporting invoices, the total comes to only $2,602.35. The balance of $770.96 was not supported by any invoice.

The other example is the cheque numbering 650 issued on 9 December 2004 for $11,525.55. Attached to it is actually a copy of my original reimbursement application for $1,525.55. This application for reimbursement includes for example mobile phone expenses, work tools expenses and payment of batteries from Danny’s own money. However, this cheque was from the chequebook produced by Mandy. When I examined the cheque butt of this cheque, it has been altered by liquid paper and the writing beneath the altered area shows an amount of $11,525.55 and words of “Cash Out”. Firstly, the amount was inflated by $10,000.00 without the support of any invoice and secondly, it was for cash out, an unusual withdrawal when Auslanbo is barely required to get cash for its business transactions. According to Danny, the original supporting invoices submitted by him were not there.

Another example is a tax invoice dated 25 October 2004 issued by Winline to Auslanbo for selling 3,920 plain pallets for a total of $13,720.00. Danny said to me “I have no idea as what this invoice is for.”

I noticed that cheque numbered 626 was drawn for the amount of $8,869.00 to pay Winline’s invoice dated 2 October 2004 for the purchase of 288 beams and 58 bases. Danny said to me “I am not aware of this purchase and if it had occurred, I did not authorise this purchase.”

Also, on the same date, Winline issued another invoice to Auslanbo charging for the sum of $8,195.00 which was paid by cheque numbered 659 for 23 six-meter frames and 50 three-meter frames. Danny said to me “The number of six-metre frames passed on by Winline to Auslanbo was no more than 8, and for the three-metre frames, the quantity was no more than 25. Either the items were part of the original business sale to Auslanbo by Winline or if these were treated as items to be purchased by Auslanbo, the quantity has been exaggerated.”

For the cheque numbered 649, it was paid for an invoice dated 6 December 2004 from Winline in the sum of $19,368.00 for 1,614 pallet wraps. The last 2 deliveries of pallet wraps were in around May and August 2004 respectively for156 and 888 rolls, for which I can recall that have seen the supporting invoices from the bag of documents.

Cheque numbered 687 was drawn to pay for what it appears to be a local tour for 3 people, which obviously does not fall within the business scope of Auslanbo.”

15 There is clear power for the Court to wind up a company in a situation of hopeless deadlock. Presently the calibre of the cross allegations strongly suggests that such a course will be taken in the fullness of time. The gravity of the allegations made by each of the directors against the other and the inability of the directors and continuing inability of the directors to agree upon any matter of significance in relation to the running of the company to my mind mandates the appointment of a provisional liquidator as a matter of urgency upon the giving to the Court by the moving party namely Ms Liang of the usual undertaking as to damages.

16 To the extent that Mr Connell has submitted that the position of his client is that it was unable to meet today the application pursued by Mr Lu and for additional time in which to inspect documents so as to better be in a position to treat with the application put by Ms Liang, I am entirely satisfied from the history of the dispute set out in the affidavits and from the problems of documentation which had led in the first instance to Mr Lu’s commencement of proceedings 2020 of 2005 that it is inappropriate to simply adjourn the hearing of the application for appointment of a provisional liquidator.

17 If and to the extent that at sometime in the future the provisional liquidation throws up the propriety of an order being made removing the company from its provisional liquidation status there will always be an entitlement in either of the shareholders and directors make such an application. Whilst those applications are certainly not commonly encountered, the fact is that applications of that type where the proper exercise of the court’s discretion has required the making of such an order have been known to be successful from time to time.

18 The proper orders of the Court therefore are as follows:

“Upon the plaintiff by her counsel giving to the court the usual undertaking as to damages and upon the consent of Ivor Worrell to being appointed the liquidator of Auslanbo Enterprise Pty Limited noted in Ivor Worrell’s written form 8 Consent of Liquidator filed in chambers on 30 March 2005:

1. Order that Ivor Worrell of Worrells Solvency & Forensic Accountants, Level 3, 333 George Street, Sydney New South Wales 2000 be appointed provisional liquidator to Auslanbo Enterprise Pty Limited.

2. Direct the provisional liquidator to communicate to the Court by 20 April 2005 the period which he will require in order to present an interim report to the Court.

3. All parties have liberty to apply.

4. The proceedings are stood over to the Corporations list on 26 April 2005.

5. Order that these orders be entered forthwith.”

I certify that paragraphs 1 - 18
are a true copy of the reasons
for judgment herein of
the Hon. Justice Einstein
given on 30 March 2005 and
revised 7 April 2005

___________________
Susan Piggott
Associate

7 April 2005