Nilant v RL & KW Nominees Pty Ltd
[2007] WASC 105
•10 MAY 2007
CHARLES PHILIPPE LOUIS NILANT as Trustee of the property of RAMON THEODORE OSBORNE, a Bankrupt -v- R L & K W NOMINEES PTY LTD & ANOR [2007] WASC 105
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2007] WASC 105 | |
| Case No: | COR:198/2005 | 22, 23 JUNE & 18 DECEMBER 2006 | |
| Coram: | HASLUCK J | 10/05/07 | |
| 51 | Judgment Part: | 1 of 1 | |
| Result: | Judgment for the plaintiff | ||
| B | |||
| PDF Version |
| Parties: | CHARLES PHILIPPE LOUIS NILANT as Trustee of the property of RAMON THEODORE OSBORNE, a Bankrupt R L & K W NOMINEES PTY LTD (ACN 008 892 493) BERYL NORMA OSBORNE |
Catchwords: | Corporations Act 2001 (Cth) Application for winding up Just and equitable ground Allegations of unfair and oppressive conduct Application by principal shareholder's trustee in bankruptcy Family company holding valuable properties Findings of mismanagement Application for winding up order allowed |
Legislation: | Bankruptcy Act 1966 (Cth), s 81 Companies (WA) Code Corporations Act 2001 (Cth), s 232(e), s 233, s 461(1)(f), s 461(1)(k), s 467 |
Case References: | Coombs v Dynasty Pty Ltd (1994) 12 ACLC 915 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413 Host-Plus Pty Ltd v Australian Hotels Association [2003] VSC 145 Jenkins v Enterprise Gold Mines NL (1992) 6 ACSR 539 Loch v John Blackwood Ltd [1924] AC 783 Malos v Malos (2003) 44 ACSR 511 Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 Official Trustee in Bankruptcy v Buffier [2005] NSWSC 839 Re Dalkeith Investments Pty Ltd (1984) 3 ACLC 74 Re Five Minute Car Wash Service Ltd [1966] 1 WLR 745 Re Jermyn Street Turkish Baths Ltd [1971] 1 WLR 1042 Re Wondoflex Textiles Pty Ltd [1951] VLR 458 Stapp v Surge Holdings Pty Ltd (1999) 17 ACLC 896 Thomas v HW Thomas Ltd [1984] 1 NZLR 686 Wayde v New South Wales Rugby League Ltd (Western Suburbs case) (1985) 3 ACLC 799 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
and
R L & K W NOMINEES PTY LTD (ACN 008 892 493)
- Plaintiff
AND
R L & K W NOMINEES PTY LTD (ACN 008 892 493)
First Defendant
BERYL NORMA OSBORNE
Second Defendant
(Page 2)
Catchwords:
Corporations Act 2001 (Cth) - Application for winding up - Just and equitable ground - Allegations of unfair and oppressive conduct - Application by principal shareholder's trustee in bankruptcy - Family company holding valuable properties - Findings of mismanagement - Application for winding up order allowed
Legislation:
Bankruptcy Act 1966 (Cth), s 81
Companies (WA) Code
Corporations Act 2001 (Cth), s 232(e), s 233, s 461(1)(f), s 461(1)(k), s 467
Result:
Judgment for the plaintiff
Category: B
Representation:
Counsel:
Plaintiff : Mr A P Hershowitz
First Defendant : Mr M J McCusker QC & Mr C P Stokes
Second Defendant : Mr M J McCusker QC & Mr C P Stokes
Solicitors:
Plaintiff : Carles Solicitors
First Defendant : Chris Stokes & Associates
Second Defendant : Chris Stokes & Associates
(Page 3)
Case(s) referred to in judgment(s):
Coombs v Dynasty Pty Ltd (1994) 12 ACLC 915
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413
Host-Plus Pty Ltd v Australian Hotels Association [2003] VSC 145
Jenkins v Enterprise Gold Mines NL (1992) 6 ACSR 539
Loch v John Blackwood Ltd [1924] AC 783
Malos v Malos (2003) 44 ACSR 511
Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692
Official Trustee in Bankruptcy v Buffier [2005] NSWSC 839
Re Dalkeith Investments Pty Ltd (1984) 3 ACLC 74
Re Five Minute Car Wash Service Ltd [1966] 1 WLR 745
Re Jermyn Street Turkish Baths Ltd [1971] 1 WLR 1042
Re Wondoflex Textiles Pty Ltd [1951] VLR 458
Stapp v Surge Holdings Pty Ltd (1999) 17 ACLC 896
Thomas v HW Thomas Ltd [1984] 1 NZLR 686
Wayde v New South Wales Rugby League Ltd (Western Suburbs case) (1985) 3 ACLC 799
(Page 4)
- HASLUCK J:
Introduction
1 The plaintiff in this matter is Charles Philippe Louis Nilant as trustee of the property of Ramon Theodore Osborne, a bankrupt. The plaintiff seeks orders that the first defendant, R L & K W Nominees Pty Ltd, be wound up by the Court and that Martin Bruce Jones be appointed as liquidator of the defendant company.
2 The relief sought by the plaintiffs is claimed on the grounds that the affairs of the defendant company have been and are being conducted by the second defendant, Beryl Norma Osborne, as the sole director of the company, in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members of the company or in a manner that is contrary to the interests of members as a whole. In that respect, the plaintiff relies on s 232(e) or, alternatively, on s 461(1)(f) of the Corporations Act 2001 (Cth).
3 The plaintiff claims in the further alternative that it is just and equitable that the defendant company be wound up pursuant to s 461(1)(k) of the Corporations Act.
4 The plaintiff's application for relief was filed on 8 August 2005. In support of his application the plaintiff relies upon the affidavits of Charles Philippe Louis Nilant sworn 18 July, 2 September 2005 and 16 June 2006. He relies also upon the affidavits of his solicitor, Alan Francois Carles sworn 29 November 2005 and 27 February 2006.
5 The plaintiff's application is opposed by the defendants. The defendants rely upon the affidavits of Beryl Norma Osborne sworn 29 November 2005 and the affidavit of Gerard Francis Clifford sworn 7 December 2005.
6 Orders were made prior to the hearing before me which allowed for the deponents Nilant, Osborne and Clifford to be cross-examined on their affidavits.
Background
7 It emerges from the plaintiff's affidavits that the plaintiff is the trustee in bankruptcy of Ramon Theodore Osborne who became bankrupt on 27 October 2003. The Official Trustee in Bankruptcy was appointed as his trustee in bankruptcy on that date. The Official Trustee remained the trustee of the estate of the bankrupt until 25 February 2004 when the
(Page 5)
- plaintiff was appointed as Trustee in Bankruptcy. He has held that office at all times since then. Mrs Osborne (the second defendant) is the wife of the bankrupt and has been married to him for some 41 years.
8 It seems that Mr Osborne had become bankrupt on a previous occasion. He was declared bankrupt in 1985 and this led to the loss of all joint marital assets including the family home and joint savings. I will look at this phase of his life in more detail later.
9 The evidentiary materials, including a company extract search for the defendant company exhibited to the plaintiff's first affidavit, establish that the defendant company was acquired by Mr and Mrs Osborne in November 1990. The initial directors of the company were Mr Osborne and his son Paul. Mrs Osborne became a director as of 1 November 1990. There were two $1 shares issued in the company, such shares being held by Mr and Mrs Osborne respectively.
10 Mr Osborne ceased to be a director of the defendant company on 27 October 2003 being the date of his second bankruptcy. The company extract search shows that the two shareholders of the company are Mr Osborne and Mrs Osborne who each beneficially hold one of the two issued shares. Mr Osborne's share in the company has vested in the plaintiff as his trustee in bankruptcy.
11 The Official Trustee in Bankruptcy arranged for an examination of Mr Osborne to be conducted on 22 January 2004. Mr Osborne confirmed that he and his wife reside at Suite 4/6 Bellevue Terrace, West Perth being the land comprised in Certificate of Title Volume 1571 Folio 170 ("the West Perth property"). A title search pertaining to the West Perth property shows that the defendant company and Mrs Osborne own the property as tenants in common in equal shares.
12 I pause here to say that it follows from this that the plaintiff, as the holder of Mr Osborne's share in the defendant company, has an interest in ascertaining the value of the West Perth property and in ensuring that the property is turned to account.
13 I digress to say that if the matter is looked at simplistically it might be thought that Mrs Osborne has an interest in the property to the extent of three one-fourth parts in that she owns half the property and holds one of two issued shares in the company that owns the other half of the property. However, in strict analysis, it is immediately obvious that in the event of the West Perth property being occupied by a tenant the defendant company would be entitled to one-half of the net income derived from the
(Page 6)
- tenancy. Questions have arisen in this case as to whether the company has been receiving its proper entitlements and as to whether amounts received by way of rental income have been properly accounted for.
14 A copy of Transfer H422533 obtained from the Land Titles Office shows that the defendant company and Mrs Osborne purchased the West Perth property for a consideration of $1,275,000 on 17 April 2000. A further search shows that at the same time a mortgage to Westpac Banking Corporation was registered against the property, such mortgage being stamped to secure $450,000.
15 There is evidence before me that in 2001 the defendant company acquired a property known as 26/7 Waterway Court, Churchlands comprised in Certificate of Title Volume 1720 Folio 642 for a consideration of $172,500 ("the Churchlands property"). A mortgage affecting the Churchlands property was taken by the ANZ Banking Group, such mortgage being stamped to secure $110,000.
The plaintiff's affidavit of 18 July 2005 – First part
16 The plaintiff's first affidavit asserts that Mr Osborne is an accountant who was a registered tax agent until he lost that registration as a result of becoming bankrupt. He carried on an accountancy practice known as "McMillan Partners" as a sole trader.
17 On or about 2 April 2004 the plaintiff was provided with financial statements and taxation returns for the defendant company for the years ending 30 June 2001, 2002 and 2003. These showed that the company received rental income of $15,000 ($288.46 per week) for 2000 and then $10,400 per annum ($200 per week) for 2002 and 2003. The plaintiff understands that since 1 July 2003 the defendant company has charged $100 per week by way of rental for each of its two properties; that is, the West Perth property and the Churchlands property.
18 The plaintiff contends that the rental income being paid is grossly inadequate having regard to certain evidence referred to in his first affidavit which suggests that the weekly rental value of the West Perth property is $800 to $1000 (being $400 to $500 for the company's half interest) and $120 to $160 for the Churchlands property. The plaintiff's contention is that Mrs Osborne, as the wife of the bankrupt, as sole director and 50 per cent shareholder in the defendant company, is receiving the benefit of occupying the company's half share in the West Perth property to the detriment of the plaintiff as the other shareholder.
(Page 7)
19 The plaintiff's solicitors wrote to Mrs Osborne about this matter by letters dated 1 April and 10 May 2004. It was said that the plaintiff wished to realise his shareholding in the company for the benefit of the creditors. This could be done either by Mrs Osborne purchasing the plaintiff's share for market value or alternatively by the two shareholders agreeing to place the company into voluntary liquidation.
20 It was said that, based on investigations to date, the estimated value of the plaintiff's share of the company would be not less than $300,000. Mrs Osborne was invited to purchase the plaintiff's share in the company or to agree to place the company into voluntary liquidation. The plaintiff understands from his solicitor that no response was received to these letters.
21 On 6 December 2004 the plaintiff's solicitors conducted a public examination of Mrs Osborne at the Federal Magistrates Court pursuant to s 81 of the Bankruptcy Act 1966 (Cth). The evidence she gave on that occasion is reflected in a transcript of proceedings. I will call this the "December 2004 transcript".
22 Mrs Osborne confirmed that she resided at the West Perth property. The plaintiff's first affidavit contains these passages concerning that matter:
"30. At page 22 of the December 2004 transcript the second defendant indicated that about $350,000 was still owing under the original housing loan secured against the West Perth property.
31. At page 32 of the December 2004 transcript the second defendant confirmed that the West Perth Property was occupied by herself and the Bankrupt and that the Bankrupt paid rent to the Company in order to live at the property. When asked how much rent he paid she replied 'I think it's a couple of hundred dollars a week'. When asked whether he paid this to the Company she replied 'Yes, I think so but I'm not sure. He's the accountant'. When asked whether the $200 per week went into a bank account of the Company she replied 'There's no bank account of the Company, so it would come in cash and I would bank it and pay it off the house – pay it off the mortgage'. When asked whether the Bankrupt gave her
- $200 in cash every week she replied 'No, periodically an amount of money'."
23 As to the Churchlands property, Mrs Osborne indicated that the property was occupied solely by her son who paid rental of $150 per week. She said that this was paid into her account and she paid from that account into the mortgage account. She said that $90,000 was owing under the mortgage secured over the Churchlands property.
24 The public examination of Mrs Osborne on 6 December 2004 gave rise to various exchanges between the solicitors for the parties. These exchanges were directed to documents bearing upon various factual issues addressed in the course of the public examination and to some broader issues.
25 A letter dated 10 December 2004 written by the plaintiff's solicitors included this passage ("the plaintiff's 10 December letter"):
"We refer to your letter of 7 December 2004 addressed to our client Mr Nilant.
We do not agree with the suggestion that the public examination simply confirmed that the beneficial interest held by the bankrupt estate in the property at Bellevue Terrace is minimal and likely to be less than $100,000.00. The following points need to be noted:
1. The documentation at the examination confirmed that the mortgage payments are in excess of $5,000.00 per month and Mrs Osborne's tax returns and tax assessments confirmed that she has earned no income whatsoever in each of the financial years from 30 June 1999 to 30 June 2003. She further indicated at the examination that the mortgage repayments were made out of a bank account of Osborne & Associates with the deposits into that account being made from McMillan Partners. Accordingly, the evidence indicates that the mortgage repayments have been made by the bankrupt. Repayments of $5,000.00 per month over the four year period since the property was acquired equates to $60,000.00 per annum or in excess of $240,000.00 in total.
2. In addition, the company R L and K W Nominees Pty Ltd has a 50% interest in Bellevue Terrace. The equity in that
- property is some $1,150,000.00 ($1.5 million value less $350,000.00 mortgage). The company's interest would therefore be worth some $575,000.00. In addition to this, the company also owns the Churchlands property so that the net worth of the company is likely to be in excess of $600,000.00.
- 3. We consider that there would be good grounds for having the company wound up on just and equitable grounds for various reasons including the fact that Mrs Osborne had allowed family members to occupy company property at well below market value rentals to the detriment of our client as the other 50% shareholder. Furthermore, she has breached her duties as director by banking company funds into her own bank account with the company having no bank account of its own. If the company is wound up then the liquidator can apply under section 126 of the Property Law Act to have Bellevue Terrace sold."
26 By letter dated 14 December 2004 the defendants' solicitors responded in these terms ("the defendants' 14 December letter"):
"In relation to the three points made on page 1 of your letter, it is briefly noted at this stage as follows:
1. The fact that Mrs Osborne's tax returns and tax assessments confirmed she earnt no income whatsoever in the financial years 30 June 1999 to 30 June 2003, is no answer to whether or not the mortgage payments were made by her. She in fact disposed of a large number of personal items that generated large cash sums. As you will appreciate, there was no obligation on her to disclose the proceeds of sale of those items in her tax returns.
2. The observation regarding the net worth of the company fails to take account of the company's liabilities which include the loan account to Mrs Osborne of a sum exceeding $600,000.00. Of that sum $460,000.00 was the subject of an audit by the Australian Taxation Office and approved.
3. It is respectfully suggested that there would only be grounds to wind up the company in the event that there are substantial assets that would be realised. It is also
- unclear from your letter as to how she has breached her duty as a director. The transcript will certainly clarify her evidence but I have no note stating that Mrs Osborne gave evidence that she received company funds which she has deposited into her own account and thereby failed to deposit into the company's bank account."
27 I pause here to observe that these exchanges outlined the nature of the controversy between the parties. In particular, it was a matter of acute controversy at the hearing before me as to whether the liabilities of the defendant company included advances to the company by Mrs Osborne over many years which amounted to $600,000 (as at 14 December 2004) and which had the effect of diminishing the value of the two shares in the company held by the plaintiff (as trustee of Mr Osborne's estate) and Mrs Osborne respectively.
28 I note in passing that a central plank of the defendants' case was that the amount attributed to the loan account as at 1 July 1998 by Mrs Osborne and the accountant she engaged to give evidence in these proceedings, Mr Clifford, was assumed to be correct because of an Australian Taxation Office audit done at that time (Mr Clifford confirmed this under cross-examination at transcript page 104). This explains the reference to an ATO audit in par 2 of the defendants' 24 December letter.
29 Mrs Osborne said at par 30 of her affidavit that her loan account with the defendant company as at 30 June 2005 stands at $977,312.38. She said at par 102 of her affidavit that by reason of her loan account with the company, any winding up and realisation of assets will only result in a repayment of her loan account.
30 There is, therefore, a central issue to be resolved as to whether Mrs Osborne's loan account can be characterised as a valid liability of the company. This made it necessary for the parties to inquire into various financial transactions bearing upon the loan account issue over many years.
The plaintiff's affidavit of 18 July 2005 – Second part
31 The public examination of the second defendant which was adjourned on 6 December 2004, continued on 25 May 2005. A copy of the May 2005 transcript is exhibited to the plaintiff's affidavit.
32 At page 11 of the transcript Mrs Osborne confirmed that she had refused to allow the plaintiff's valuer access to the West Perth property
(Page 11)
- and Churchlands property on the grounds that she valued her privacy. At page 12 of the May 2005 transcript she confirmed that the contents of a draft statutory declaration were true in which she stated her belief that the West Perth property was worth between $1.45 million and $1.55 million and that the Churchlands property was worth between $210,000 and $240,000.
33 The May 2005 transcript reveals that Mrs Osborne was cross-examined at some length about her habits in regard to the keeping of bank statements. On the plaintiff's case, admissions were made that she did not keep bank statements recording rent received on behalf of the company in a systematic manner. She was cross-examined also as to an alleged inadequacy on her part in regard to the preparation of financial statements. On the plaintiff's case she admitted under oath that she had made no attempt to ascertain the market rental value for the West Perth property and Churchlands property.
Mrs Osborne's affidavit of 29 November 2005
34 Mrs Osborne's affidavit sworn 29 November 2005 was presented in opposition to the plaintiff's application to wind up the defendant company. She said that she was born on 27 December 1939 and went on to describe her background. It seems that she completed her Junior Certificate. In her early adult years she worked in various jobs, including secretarial positions, until her second child was born on 4 August 1968. Between 1968 and 1976 she was studying and raising two children. In 1977 she re-entered the workforce in the educational sector and, after obtaining further qualifications, was eventually employed as a secondary school teacher at Greenwood Senior High School. She worked there for nine years until 1992.
35 Mrs Osborne said that following her husband's first bankruptcy in 1985 when all the joint marital assets were lost, she separated from her husband. However, she was reconciled with him in mid-1988. In 1993 she worked at the City Beach High School but then resigned from the Department of Education in order to help her husband set up and operate his new accounting practice know as McMillan Partners. This firm operated from an address in Victoria Park from 1994 until her husband's second bankruptcy on 27 October 2003. She worked in various capacities for the business whenever assistance was required.
36 She confirmed that the defendant company was acquired in 1990 with two $1 shares being held by her husband and herself. She said that at that time she was looking at purchasing a property in City Beach and was
(Page 12)
- advised by her husband to do so in the name of the defendant company as a form of financial and succession planning.
37 Mrs Osborne said that the defendant company's only assets when it was acquired was the initial share capital of $2 and its only activities has been as a family company for her husband and herself. The only income from the company has been property rental. She said at par 28 of her affidavit that all of the company's property purchases have been made from funds borrowed from either the bank or herself. The company's records, including her loan account, were maintained by her husband and various employees of McMillan Partners.
38 Annual returns and tax returns for the company and other financial records from 1990 to 2005 were exhibited to Mrs Osborne's affidavit. The financial records were said to show an increase in the amount due under the subject loan account commencing with an opening balance of $187,950 in 1992 and concluding with a balance due in 2005 of $955,718.
39 Mrs Osborne then proceeded (commencing at par 34 of her affidavit) to set out "my principal loans to the company, the source of the moneys to make those loans, and the main purpose for which the funds were used". For present purposes, it will be sufficient to summarise the main points that emerged from the lengthy particulars provided in her affidavit.
40 I note in passing that it was a live issue at the hearing before me as to how it came about that Mrs Osborne was in a position to advance substantial funds to the defendant company, bearing in mind that she and her husband lost their joint marital assets following his bankruptcy in 1985 and that she herself had only re-entered the workforce in 1977 (initially as a primary school teacher and for nine years after 1992 as a high school teacher).
The alleged loans
41 Mrs Osborne's first loan was said to be $250,000 in November 1990 to assist the defendant company in the purchase of 12 Windarra Drive, City Beach.
42 Mrs Osborne said that she had always been interested in antiques and artworks. Between 1985 and 1990 she began selling a number of these and put the sale proceeds into bank bills with the Commonwealth Bank. The total of the assets sold by her during the period between 1985 and 1990 was approximately $260,000. Exhibited to her affidavit were various documents which were said to evidence the relevant transactions
(Page 13)
- including receipts for $60,780.35 and $50,351.30 in respect of bills of exchange with an aggregate face value of $65,000 (due on 12 September 1985 with an interest rate of 14 per cent) and $51,000 (due on 5 July 1985 with an interest rate of 14.25 per cent) respectively. She said that she continued to reinvest these moneys in Commonwealth Bank bills until she decided to invest in real estate. However, she did not keep all of her records of the Commonwealth Bank bills.
43 In 1990 the defendant company acquired the City Beach property using $150,000 advanced to it by Mrs Osborne and $100,000 borrowed from the Commonwealth Bank, City Beach Branch.
44 Mrs Osborne said that the bank loan of $100,000 was repaid from her income as a secondary school teacher in the period between December 1990 and February 1993 (with bank statements being exhibited to her affidavit in that regard). The loan was discharged on 16 February 1993. She said that as at 30 June 1992 her loan account with the company was $187,950 which is reflected in the company's tax return for the year ending 30 June 1992 with the company's balance sheet attached.
45 The second loan of $240,000 was allegedly made by Mrs Osborne between March 1993 and January 1994 to enable the company to make various renovations and improvements to the City Beach property.
46 Mrs Osborne referred to engaging the West Australian Renovation Company to carry out the improvements at an original contract value of $134,650 which was ultimately increased by variations to a total figure of approximately $180,000. Exhibited to her affidavit are various documents bearing upon this matter including copies of three progress claims in the sum of $28,750 each, the last of which was dated 17 March 1993. She said that she had been unable to locate the other progress claims, or the further variations to the building work.
47 Mrs Osborne said also that the company was receiving no income other than rent during these capital improvements. All of the moneys for the improvements came from loans by her. In the period from 1984 to 1994 she was receiving a salary of approximately $687 per fortnight, which (over the ten year period) amounted to approximately $330,000. She was also receiving a regular tax refund of approximately $10,000 per annum as a consequence of being a half owner of the Clearview Stud and being able to offset against her teacher's salary primary production losses. The property was sold during 1985 as a consequence of her husband's
(Page 14)
- bankruptcy but she was able to carry losses forward until they ran out around 1998.
48 According to Mrs Osborne, as a result of her teaching salary, her tax refunds, and her share investments, she had approximately $100,000 in her Commonwealth Bank, Floreat bank account which she was able to use to pay for the capital improvements. She also carried out a number of other improvements which were detailed in her affidavit. It was said that documentation relating to this matter was delivered to the Tax Office so that an audit could be carried out to verify expenses for the purpose of assessing capital gains tax. She said that no capital gains tax assessment was raised against the company. It was she who contributed all of the funds for the improvements effected at the City Beach property.
49 The third loan of $108,889 in 1999 was allegedly made to enable the company to purchase shares.
50 Mrs Osborne said that in March 1995 she took out a loan of $100,000 with Westpac to make some share investments. This loan was secured by a mortgage registered against a property known as 41 Tilton Terrace, City Beach. A copy of the certificate of title was exhibited to her affidavit and shows that the Tilton property was transferred into the name of Mrs Osborne on 13 November 1989 (BNO 56 at page 243).
51 Mrs Osborne described the payments made in relation to this matter. She said that in the financial statements of the company for the year ending 30 June 1999 the shares were shown as an asset of the company with a value of $121,075. The company sold the shares between June 1999 and June 2000 with the result that the financial statements for the year ending 30 June 2000 do not show the shares being held by the company.
52 The fourth loan was said to be of $150,000 in April 2000 to assist the company in its purchase of a 50 per cent interest in the West Perth property; that is, 4/6 Bellevue Terrace, West Perth, being the property now occupied as a residence by Mrs Osborne and her husband.
53 Mrs Osborne said that in 1999 she suggested to her husband that it might be a good idea at their age to try living in a smaller unit. She decided to put both the City Beach property and the Tilton property on the market for sale so as to be in a position to make a cash offer on a suitable property. The City Beach property was sold on 12 December 1999 for $650,000 with settlement being effected on 10 March 2000. Exhibited to her affidavit is a settlement statement showing that the net sum of
(Page 15)
- $642,908.07 was deposited into the company's Commonwealth Bank account.
54 She said that on 8 or 9 March 2000 the Tilton property was sold for $450,000 with a net amount of $437,089.30 being received as reflected in a settlement statement dated 10 April 2000.
55 On 24 March 2000 the vendor of the West Perth property accepted an offer from the defendant company and herself for $1,275,000. A settlement statement dated 10 April 2000 shows that the total moneys required for settlement were $1,334,630.26. Mrs Osborne's affidavit contains the following passage concerning that matter ("the details of the West Perth property purchase price"):
"88. The purchase price sum of $1,334,630.26 was paid from the following sources:
(a) the deposit of $100,000 (paid on 24 March 2000) came from the sale proceeds of 12 Windarra Drive City Beach.
(b) the further deposit of $495,000.00 was paid from the proceeds of sale of 12 Windarra Drive City Beach.
(c) the stamp duty of $56,642.50 was paid from the proceeds of sale from 12 Windarra Drive City Beach.
(d) the final balance of $682,987.76 was comprised of two sums:
i) $450,000.00 in a personal loan taken out by Ray and myself from the Challenge Bank Victoria Park branch.
ii) $232,987.76 from the sale proceeds of 41 Tilton Terrace City Beach, that had been put on term deposit with Challenge Bank."
(Page 16)
- property mentioned earlier shows that the land in question was transferred to a third party on 11 April 2000.
57 I understand that the reference in par 88(d)i) of Mrs Osborne's affidavit to a personal loan of $450,000 from the Challenge Bank is linked to the security in that amount taken by Westpac against the subject title. Indeed, in the subject loan agreement Challenge Bank is described as a division of Westpac Banking Corporation. I note that the loan agreement dated 12 April 2000 is signed by Mr and Mrs Osborne as borrowers (BNO 65 at page 256 of the affidavit).
58 The fifth loan of $72,000 was allegedly made in 2002 to assist the defendant company in its purchase of the Churchlands property. (I note in passing that at par 90 of Mrs Osborne's affidavit this is mistakenly described as the fourth loan, but I will continue to refer to it as the fifth loan).
59 Mrs Osborne said as to this loan that in 2001 she was looking for another investment property for the company and a home for her son Paul to rent. Her son is on a permanent disability pension. She caused the company to put in an offer to purchase the Churchlands property for the sum of $172,500. The company became the registered proprietor of the property on 17 January 2001.
60 Mrs Osborne said that the purchase price for the Churchlands property (plus stamp duty) consisted of $71,292 from her personal ANZ Bank account and $110,000 by way of a loan taken out by the company with the ANZ Bank secured by a first mortgage over the property.
61 The sixth loan of $87,000 was allegedly made by Mrs Osborne in 2003 to reduce the company's mortgage with the ANZ Bank. (At par 95 of the affidavit this is mistakenly described as the fifth loan, but I will refer to it as the sixth loan).
62 As to this matter, Mrs Osborne said in her affidavit that on July 2003 her daughter, Natalie Fulcher, repaid to her a loan of $50,000 that had been made in 2002. On 17 July 2003 Mrs Osborne paid $48,000 of the amount in question directly into the company's ANZ mortgage account number 3444-80722. Exhibited to her affidavit is a true copy of the ANZ interim statement of account showing such a deposit on 17 July 2003.
(Page 17)
63 She went on to say (as at 29 November 2005 being the date on which the affidavit was sworn) that her son, Paul Osborne, was paying $150 per week to the company to rent the Churchlands property. That rent was paid directly into Mrs Osborne's Bankwest, Floreat bank account, as part of her son's disability pension. She then added $325 from her own moneys to make total payment of $625 per fortnight reduction of the company's loan with the ANZ Bank. The fortnightly payment was being automatically transferred to the ANZ account. A bank account statement to that effect was exhibited to her affidavit.
Mrs Osborne's additional evidence
64 Mrs Osborne went on to say at par 98 and par 99 of her affidavit that apart from the advances mentioned above she regularly paid the difference between the amount required by the company to meet the outgoings and expenses of the company's properties, and the income received from those properties. The total of these expenses was calculated at the end of each financial year by the company's accountant.
65 She said further that she had reviewed the loan account schedule prepared by Gerry Clifford for the 1999 to 2005 inclusive financial years and the schedules of property expenses paid by her on behalf of the company. She said that these were true and correct records of those expenses and the amounts incurred.
66 Mrs Osborne concluded her affidavit by saying that since she and her husband had purchased the defendant company in November 1990 its sole activity had been that of a private family company. It had carried out no activities other than the purchase and maintenance of assets from funds provided either by way of loans by herself or rental income.
67 She said further that the financial records of the company had been regularly maintained, but from time to time financial statements and income tax records had not been lodged in a timely fashion. She did not believe that this was unusual with private family companies.
68 As I indicated in earlier discussion, Mrs Osborne said finally at par 102 of her affidavit that by reason of her loan account with the company, any winding up of the company and realisation of company assets will only result in a repayment to her of her loan account.
Affidavit of Gerard Francis Clifford
69 Gerard Francis Clifford in his affidavit sworn 7 December 2005 said that he was an accountant and registered tax agent and a principal of the
(Page 18)
- tax accounting firm of Clifford Partners Pty Ltd. In September 2005 he accepted instructions from Mrs Osborne to conduct a detailed investigative special purpose financial report of her loan account with the defendant company. As part of her instructions he was advised that the current proceedings had been commenced and that Mr Osborne's trustee was seeking to wind up the company on the grounds, inter alia, that the affairs of the company were not being properly managed and that Mrs Osborne's loan account had not been verified.
70 Mr Clifford said further that for the purposes of compiling the financial report Mrs Osborne provided him with a number of her personal financial records and a large number of financial records of the company. Exhibited to his affidavit was a true copy of the "special purpose financial report" compiled by him ("Mr Clifford's first report"). It was prepared on the basis that the opening balance for the loan account as at 1 July 1998 was correct and had been the subject of a detailed tax audit by the Australian Taxation Office.
71 Mr Clifford went on to say that following the submission of his first report he was requested by solicitors for Mrs Osborne to prepare a further report verifying the loan account for the period from its inception to 1 July 1998 and to identify the source documents from which the loan account was verified for the period from 1 July 1998 to 30 June 2005. Exhibited to his affidavit was a true copy of his "further compilation report" prepared by him identifying the source documents and information used to verify the loans made by Mrs Osborne between 1 July 1998 and 30 June 2005 (Mr Clifford's second report).
72 I pause here to say that Mr Clifford was cross-examined by counsel for the plaintiff about his first report and second report. I will look at the details in that regard later. However, speaking in general terms at this stage, I note that one line of challenge to the validity of his first report was that mentioned by me in earlier discussion, namely, Mr Clifford's assumption that everything prior to 1 July 1998 was correct because of the capital gains tax audit done by the Tax Department (TS 104). Thus, the amount allegedly due to Mrs Osborne on the loan account as at 1 July 1998 of $503,273 had not been checked out by him but was assumed to be correct. He accepted that the tax audit was being done for the capital gains purpose in relation to funds and expenses provided to purchase and carry out work in respect of the City Beach property.
73 As to his second report, being the compilation report aimed at verifying the loan account from its inception, Mr Clifford was
(Page 19)
- cross-examined at length about the sufficiency of the evidentiary materials provided to him. For example, as to the first loan of $250,000 allegedly made by Mrs Osborne in 1990 as funds paid to acquire the City Beach property, Mr Clifford was asked what proof he had seen of where the funds came from. He said that the proof was made up of "various documents as far as proceeds of sales of paintings, proceeds of sales of various paintings, and also proceeds of sales of shares and proceeds of sale of horses" (TS 107).
74 Finally, Mr Clifford went on to say in his affidavit at par 9 that on Friday, 2 December 2005 he received further instructions from Mrs Osborne to prepare a further report addressing certain matters, being first, the consequence of a sale of the Churchlands property and the West Perth property and the final assets position of the company after all liabilities were paid out as at 30 June 2005; second, the value of the shares of the company in the event of a realisation of assets and a discharge of liabilities as at 30 June 2005.
75 Exhibited to his affidavit is a copy of the further report prepared on 6 December 2005 ("Mr Clifford's third report"). In this report, he concluded that the surplus of assets over liabilities of the company, if no interest was charged on Mrs Osborne's loan account, was $10,971.
Further affidavits
76 The plaintiff filed and served certain responsive affidavits. I have before me the plaintiff's second affidavit sworn 16 June 2006 and the second affidavit of the plaintiff's solicitor, Alan Francois Carles sworn 27 February 2006.
77 Exhibited to the second affidavit of the plaintiff is a copy of a restricted valuation dated 12 June 2006 conducted by Hegney Property Valuations indicating in respect of the West Perth property a valuation in the range of $1,650,000 to $1,900,000.
78 Exhibited to this affidavit also is a copy of a restricted valuation dated 26 May 2006 conducted by Hegney Property Valuations indicating in respect of the Churchlands property a valuation in the range of $275,000 to $300,000.
79 The second Carles affidavit refers to exchanges of correspondence between the parties and their solicitors. Copies of the relevant letters are exhibited to his affidavit.
(Page 20)
80 Mrs Osborne wrote to the plaintiff on 22 February 2006 referring to the plaintiff's offer to purchase her shares in the defendant company for the sum of $10,000. She said that the offer was not accepted. She said that as at 30 June 2005 her loan account with the company was $955,718. The calculation of the loan account was set out in detail in her affidavit of 29 November 2005. Since then her loan account with the company had continued to increase as a consequence of outgoings in respect of the two properties being met by her on behalf of the company. She expected that by 30 June 2006 her loan account with the company will have increased by a further $25,000 to approximately $980,000. This calculation takes no account of interest which she could have charged the company on the loan.
81 Mrs Osborne said that in an attempt to settle the action and avoid incurring further legal costs she offered to purchase the share held by the plaintiff as trustee of the estate of Mr Osborne for $11,000 on certain terms intended to deal with the costs of the proceedings and related matters. The offer was open until 4 pm on Monday, 27 February 2006.
82 In a letter dated 22 February 2006 from the defendant's solicitors (Chris Stokes & Associates) to Mr Carles, as solicitor for the plaintiff, reference was made to Mrs Osborne's offer to settle the matter. The letter in question included this passage:
"It is clear that the only real issue in these proceedings is whether my client has a loan account with RL & KW Nominees Pty Ltd for $955,718 as she claims. That claim is supported by her November 2005 affidavit, and the documentation annexed. The validity of her claim is, in our view and that of senior counsel, beyond dispute. You are, of course, welcome to have access to, and examine, all of the documentation which verifies the loan account, and its existence since 1990 – well before the bankruptcy of Mr Osborne."
83 It appears from the second Carles affidavit that by letter dated 23 February 2006 from the plaintiff's solicitors to Mrs Osborne's solicitor, a response was provided by the plaintiff. The letter in question reads in part as follows:
"We refer to your letter of 22 February 2006 and to your client's letter of the same date offering $11,000 for our client's share in the company plus $1,000 costs. That offer is not accepted by our client.
(Page 21)
- The Plaintiff hereby offers to purchase the second defendant's shareholding in RL & KW Nominees Pty Ltd for the sum of $15,000 on the following terms:
1. The current proceedings are to be dismissed with no order as to costs (save for the costs order which has already been made in favour of our client on 30 November 2005);
2. The second defendant execute and deliver a transfer of her entire shareholding in RL & KW Nominees Pty Ltd to the plaintiff as settlement in exchange for a bank cheque for $15,000;
3. Settlement take place within 7 days of acceptance.
Please note that if your client responds with a slightly higher offer to purchase our client's share then our client intends to do likewise. Accordingly, there appears to be little point in having each party continue to make slightly higher offers to purchase the other party's share. If your client genuinely intends to resolve this matter then a substantially increased offer will be required.
Our client's position has always been that he disputes the loan account position as suggested by Mrs Osborne. That remains his position."
84 It will now be useful to stand back from the narrative with the view to identifying the matters brought into issue by the plaintiff's application.
The issues
85 The plaintiff's case is that the conduct of Mrs Osborne as a director and substantial shareholder in the defendant company has been oppressive and contrary to the interests of the members of the company as a whole. It has been prejudicial and unfair to the plaintiff in that she has allowed family members to occupy company property at well below market value rentals to the detriment of the plaintiff as a 50 per cent shareholder in the company. She has breached duties as director by banking company funds in her own bank account as it seems the company has no bank account of its own.
86 Further, Mrs Osborne as director and 50 per cent shareholder of the company receives the benefit of occupying the company's half share in the West Perth property to the detriment of the plaintiff as the other
(Page 22)
- shareholder. She has not made any or any sufficient attempts as a director to ascertain rental that could be achieved on the open market. She has not kept proper records reflecting the business activities of the company.
87 The plaintiffs say that the underlying assets of the company exceed $1 million, the existence of the disputed loan account is dubious, and the various advances contended for by Mrs Osborne have not been adequately substantiated. After discharge of the verifiable debts of the company such as the balance due under the mortgage against the Churchlands property and the company's share of the mortgage registered against the West Perth property, there is a prospect that the 50 per cent shareholding of the plaintiff in the company is of significant value.
88 It is said further that the plaintiff's reasonable attempt to purchase Mrs Osborne's share has been refused. It is said, in effect, that if the presence of the loan account had truly reduced the value of the plaintiff's share to $11,000, as Mrs Osborne contended, then the plaintiff's offer to acquire her share for $15,000 should be acceptable to her. In the absence of any agreement about these matters, the company should be wound up so that an independent investigator could investigate and unravel the affairs of the company, including the disputed loan account.
89 On the other hand, the defendants say that if the disputed loan account is upheld there will be no surplus funds available for distribution to the shareholders. It follows that Mrs Osborne's attempt to purchase the plaintiff's share for the sum of $11,000 was reasonable. Likewise, her refusal to sell her share to the plaintiff was reasonable because the amount offered did not reflect the realities of the situation. She has not been acting unfairly or oppressively because the presence of the loan account means that the plaintiff is not being deprived of anything of value. The plaintiff's share is of negligible value.
90 The defendant says further that the plaintiff's application for a winding up order is being brought for a collateral purpose, namely, to pressure Mrs Osborne to increase her offer for the plaintiff's share. A winding up order should not be made in circumstances where the Court, by upholding the validity of the loan account and the figures contended for by Mrs Osborne, can determine what is a fair price for the plaintiff's share, and make orders for the sale of that share to Mrs Osborne; or, alternatively, orders for an account can be made (with a view to verifying the disputed loan account), but without winding up the company.
(Page 23)
91 Let me now turn to the legal principles bearing upon an application of this kind.
Legal principles
92 The plaintiff's application is made pursuant to provisions of the Corporations Act concerning the winding up of a company in circumstances where a shareholder is found to have a justifiable grievance as to the manner in which the affairs of the company are being conducted. Before turning to the statutory provisions specified in the originating process, it will be useful to set the application for relief in context by making some preliminary observations. In dealing with the law concerning the protection of minority rights, I will draw principally upon Ford's Principles of Corporations Law (13th ed) at par 11.010 to par 11.510.
93 The learned author observes that every member of a company has certain rights by virtue of membership. These include rights conferred by the company's constitution and statute. Additionally, company law confers rights on members to protect them from abuse at the hands of the controllers of the company. In this context "controllers" includes both the directors who are subject to fiduciary duties, and the controlling shareholders, who do not occupy a fiduciary position. It is said that the existence of these remedies operates as a deterrent against mismanagement, since managers and controlling parties should be aware that if they do not act properly, with due regard to shareholders' interests, they are exposing themselves to the possibility of litigation.
94 Generally speaking, the statutory remedies have been framed very broadly, overcoming some of the limitations which had developed over time with the equitable remedy. In particular, standing is generally more easily satisfied and the Court has power to order an indemnity for costs. Furthermore, the courts have shown a willingness to interpret some of the statutory remedies in a liberal fashion,
95 Part 2F.1 of the Corporations Act deals with oppressive conduct of affairs. By s 232 of the Act the Court can make any order under s 233 of the Act that it considers appropriate including that the company be wound up if the elements of oppressive conduct specified in the earlier provision are made out.
96 Section 461 of the Act provides various circumstances in which a contributor may petition the Court to compulsorily wind up a company including on the ground that it is just and equitable to do so.
(Page 24)
97 It follows from this brief overview that it will be useful at the outset to consider the relationship between the oppression remedy and the other avenue of relief allowed for under s 461 of the Act, bearing in mind that both avenues are relied upon by the plaintiff in the present case.
98 The author of Ford's Principles of Corporations Law (supra) observes at par 11.386 that winding up a company on the just and equitable ground has existed as a member's remedy for a significant period of time. However, since the introduction of the oppression remedy there has been a substantial reduction in the number of cases relying solely on this cause of action. Generally speaking, this cause of action is argued alongside the oppression remedy.
99 The reasons for favouring the oppression remedy are two-fold. First, Pt 2F.1 and the matters referred to in s 232 and s 233 of the Act are being interpreted widely by the Court. Second, judges have a wide discretion under Pt 2F.1 to make appropriate orders. Compulsory winding up is a drastic remedy and judges are extremely reluctant to wind up a solvent company. Part 2F.1 allows judges flexibility to select from a broad range of remedies.
100 It has been said that where there are irreconcilable differences between members of a company the appropriate relief is for an application for winding up on the just and equitable ground under s 461(1)(k) rather than under Pt 2F.1 of the Act.
101 However, s 467(4) provides that where an application is made by a contributory 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 is not permitted to make a winding up order where it is of the opinion that some other remedy is available to the applicant and that the applicant is acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.
Specific provisions concerning the oppression remedy
102 Let me now turn to the specific provisions relied on by the plaintiff in the present case, being the provisions mentioned in the originating process dated 8 August 2005.
103 Section 232 of the Corporations Act reads as follows:
"The Court may make an order under section 233 if:
(Page 25)
- (a) the conduct of a company's affairs; or
(b) an actual or proposed act or omission by or on behalf of a company; or
(c) a resolution, or a proposed resolution, of members or a class of members of a company;
is either:
(d) contrary to the interests of the members as a whole; or
(e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.
For the purposes of this Part, a person to whom a share in the company has been transmitted by will or by operation of law is taken to be a member of the company."
104 The conditions of s 232 concerning oppressive conduct must be fulfilled. Depending upon the facts, and the exercise of discretion by the Court, s 233 allows for ten alternatives in remedying the oppression or injustice. Thus, the Court can make any order that it considers appropriate in relation to the company including an order that the company be wound up (s 233(1)(a)) or for the purchase of any shares by any member (s 233(1)(d)) or for the appointment of a receiver or a receiver and manager of any or all of the company's property (s 233(1)(h)). By s 233(2) if an order that a company be wound up is made, the provisions of the Act relating to the winding up of companies apply.
105 Section 234 of the Corporations Act specifically provides that an application for an order under s 233 in relation to a company may be made by a member of the company. The conduct complained of does not have to be unlawful. There is no overriding requirement that the applicant for relief must have clean hands but an attempt to achieve a collateral purpose by exerting pressure may lead to the application being dismissed as an abuse of process.
106 The Court must keep in mind that the investment in the company by the majority shareholders is by definition larger than that of the minority. They should not be prevented by minority obstruction from taking steps
(Page 26)
- which in their reasonable opinion will enhance the value of the company for the benefit of all members.
107 The content of fairness in an oppression application will depend upon the context. Conduct which may be considered to be fair between competing business people may not be fair between members of a family company. The concept of fairness was designed to free the Court from technical considerations of legal rights and to confer a wide power upon the Court to do what is just and equitable. It follows that a valid exercise of a legal power may nevertheless be entirely outside what can fairly be regarded as having been in the contemplation of the parties when they became members of the company: Re Wondoflex Textiles Pty Ltd [1951] VLR 458 at 467.
108 It appears from Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413 that unfairness can arise from the breach of a collateral agreement or understanding as to how the company is to be managed, especially in the case of small companies. It appears from that case also that because the specific orders listed in s 233 are only examples, it is open to the Court to make any other orders it thinks appropriate. Such an order can be an account of profits earned in breach of fiduciary duty where this constitutes oppression. There is a principle of proportionality between the act of oppression and the remedy.
109 Fexuto's case and other cases suggest that the remedy that is the least intrusive and which will eliminate the oppression should be considered first by the Court. One order that may be sought is the compulsory purchase of the applicant's shares by either the company or the member whose conduct amounted to unfair prejudice. The basic requirement is that a valuation of the subject shares must be fair on the facts of the particular case.
110 Whether conduct complained of is oppressive, unfairly prejudicial or unfairly discriminatory is determined objectively, from the position of the hypothetical, reasonable person/director: Wayde v New South Wales Rugby League Ltd (Western Suburbs case) (1985) 3 ACLC 799 at 804; Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 704; Coombs v Dynasty Pty Ltd (1994) 12 ACLC 915. Oppression includes conduct which lacks the degree of probity which the members are entitled to expect in the conduct of the company's affairs: Re Jermyn Street Turkish Baths Ltd [1971] 1 WLR 1042 at 1059.
(Page 27)
111 Conduct that is unwise, inefficient and careless will not by itself amount to oppression: Re Five Minute Car Wash Service Ltd [1966] 1 WLR 745 at 753. A commercially unreasonable approach to the making of profits might not amount to oppression, in the absence of any suggestion of wilful mismanagement or of any impropriety in the conduct of the company's affairs: Thomas v HW Thomas Ltd [1984] 1 NZLR 686.
112 In Jenkins v Enterprise Gold Mines NL (1992) 6 ACSR 539 the Full Court in this State was concerned with the concept of oppression as defined by the Companies (WA) Code s 320, being an earlier version of the present provision. The Full Court in this State held that the key issue in the application of the statutory test is fairness. It is for the Court to decide whether, in balancing the interests of the company as a whole against minority interests, the directors of the company have acted so as to unfairly prejudice the interests of the minority. The Court decides whether the directors have acted in this matter according to ordinary standards of reasonableness and fair dealings. Whether the conduct is unfairly discriminatory will be judged on standards which reasonable directors with such skills as directors should have, acting bona fide, would think to be fair.
113 The Full Court said further that where the facts established by the applicant demonstrate that a company entered into a transaction for no apparent commercial benefit, and there is an apparent conflict of interest on the part of the directors of the company, the evidentiary burden shifts to the company to establish the commercial reality of the transaction and the commercial basis and benefits to the company and the manner in which the directors resolved the conflict of interest. If the company does not adduce satisfactory evidence on these matters, unfairness may be inferred for the purposes of the statutory provisions.
Specific provisions concerning the just and equitable ground
114 The plaintiff also seeks to rely upon certain of the general grounds specified in s 461 of the Corporations Act on which a company may be wound up by the Court. In this case, the plaintiff places reliance upon s 461(1)(f) or, alternatively s 461(1)(k) of the Corporations Act.
115 Section 461(1)(f) provides that the Court may order the winding up of a company if the 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.
(Page 28)
116 Section 461(1)(k) provides that the Court may order the winding up of a company if the Court is of the opinion that it is just and equitable that the company be wound up.
117 The classes of conduct which justify a winding up order on the just and equitable ground are not closed and each application will depend on the circumstances of the particular case. It is open to the Court to order the winding up of a company on the just and equitable ground because of a complete breakdown of the relationship between shareholders: Malos v Malos (2003) 44 ACSR 511.
118 A lack of confidence in the conduct and management of the company's affairs must be grounded on the conduct of the directors, not in regard to their private life or affairs, but in regard to the company's business. The lack of confidence cannot spring from being out voted on the company policy or on what is called the domestic policy of the company. The lack of confidence can be based on lack of probity in the conduct of the affairs of the company: Loch v John Blackwood Ltd [1924] AC 783. See also Stapp v Surge Holdings Pty Ltd (1999) 17 ACLC 896.
119 The Courts have emphasised that winding up is a remedy of last resort and ought not to be granted if some other less drastic form of relief is available and appropriate: Re Dalkeith Investments Pty Ltd (1984) 3 ACLC 74 at 79.
120 By s 467(4) of the Act the Court must consider whether some other remedy is available to the applicants and whether they are acting unreasonably in seeking the company to be wound up instead of pursuing that other remedy. A rejection of an offer to have the members' shares purchased at a fair value as an alternative to winding up may be considered unreasonable: Host-Plus Pty Ltd v Australian Hotels Association [2003] VSC 145.
121 In Official Trustee in Bankruptcy v Buffier [2005] NSWSC 839 Campbell J observed at [40] what while one can identify categories of case which the Court has regarded as one suitable for the winding up of a company on the just and equitable ground, the full scope of the power is not confined to particular pre-existing categories. He went on to make these observations at [65]:
"Winding up on the just and equitable ground can occur when there are serious grounds for lack of confidence in the directors of companies in the conduct and management of the affairs of
(Page 29)
- the company (Australian Securities Commission v AS Nominees Ltd (1995) 18 ACSR 459 at 519), or when there is a lack of straightforward dealings between the company and the public (Re Producers Real Estate and Finance Co Ltd [1936] VLR 235) or its clientele (Macquarie Bank Ltd v TM Investments Pty Ltd [2005] NSWSC 608 at [13] per Barrett J), or its shareholders. In the present case, I cannot conceive of a proper reason why Mr Service (even if he had been validly appointed) should seek to remain as a director of the company, in direct opposition to the wishes of the totality of the shareholder body. He presents none in evidence. The dealings of the company, though the medium of the Bankrupt and notwithstanding both his bankruptcy and his disqualification, are not ones that seem calculated to advance the interests of the Official Trustee, who is now the sole shareholder, and has had the right to become the sole shareholder since the bankruptcy occurred. This is an appropriate case to wind the company up."
122 Let me now return to the circumstances of the present case.
The evidentiary issues
123 It was apparent from the opening addresses of counsel on both sides at the commencement of the hearing before me that the validity of the loan account was a central issue in the case. Counsel for the plaintiff said that the objective of his client as a trustee in bankruptcy was to realise his shareholding in the defendant company for the benefit of Mr Osborne's creditors.
124 Counsel said that Mrs Osborne was the sole director of a company which stood in a complicated relationship to the assets owned by the company including the West Perth property (occupied by Mrs Osborne and her husband) and the Churchlands property. The loan account figures were questionable. These features of the company had given rise to the plaintiff's justifiable loss of confidence in the second defendant's conduct of the affairs of the company which meant that the only way forward was for a court appointed liquidator to unravel the facts and matters bearing upon the validity of the disputed loan account. It was for these reasons that orders had been made for cross-examination of Mrs Osborne and Mr Clifford upon their affidavits.
125 Counsel for the defendants agreed that the main issue was whether the loan account was valid and whether it in fact stood at "about
(Page 30)
- $980,000" as alleged by the defendants (TS 6). Counsel said that the recent valuations obtained by the plaintiff could only be regarded as "qualified" valuations because Mrs Osborne had refused to give the valuer access to the properties.
126 However, even if those values were taken into account, the net result of a liquidator's sale of the properties (being the company's half interest in the West Perth property and the entirety of the Churchlands property) would be that the company was still indebted to Mrs Osborne and the proceeds of the sale would have to be applied in reduction of the disputed loan account. Hence, there was no utility in ordering a winding up of the company.
127 Counsel for the defendants went on to submit that if the disputed loan account was found to be of the order contended for by Mrs Osborne that might resolve matters between the parties, for this would have a bearing upon whether the plaintiff was precluded from realising a share having no real value.
128 Counsel referred also to some "subsidiary" issues including the question of whether the rental being paid for the West Perth property was below market rental. Mrs Osborne's position was said to be that she had mistakenly thought that because she was a half owner of the property and a half shareholder in the company, the company would only be entitled to a quarter of the current market rental. Counsel conceded that such an assumption was incorrect. She was now prepared to ensure that a half share of market rental went to the company. It was said that in addition to payments made to her by her husband for his share of the rental she herself had been paying the outgoings in respect of that property. Further, she had been meeting all the mortgage payments due in respect of the Churchlands property.
129 Counsel submitted that if the main issue and other issues between the parties could be determined then this might result in an acquisition of the share held by the plaintiff as trustee.
Mrs Osborne's evidence-in-chief
130 Counsel for Mrs Osborne adduced evidence-in-chief from his client which was related to the matters in issue and events dealt with in her affidavit. Mrs Osborne reiterated that after her husband's first bankruptcy in 1985, and their brief separation, she began building up assets again by selling art works. She also had a horse that her husband had given her for a Mother's Day present. She sold the horse called Orange Royale for
(Page 31)
- $40,000 and had some winnings from that as well. She said that she ended up with about $230,000 in cash and started putting it into bank bills at a time when the interest rates were very high. Her money mounted up to about $400,000 by 1990. An offer was then made in respect to the City Beach property which was put in the company's name as she did not want to run the risk again of losing her house.
131 Mrs Osborne went on to speak of other matters mentioned in her affidavit including the renovation and eventual sale of the City Beach property owned by the company and the sale of another property (the Tilton property) which had been acquired her in 1989. The sale of the Tilton property meant that funds could be provided to the defendant company by her for the purchase of its interest in the West Perth property. She purported to verify the validity of the loan account.
Cross-examination of Mrs Osborne
132 Under cross-examination, Mrs Osborne agreed that her salary as a teacher of $687 per fortnight over a ten year period would give rise to a total income of about $178,000 rather than the total of $330,000 mentioned in her affidavit. However, she said that as the years went by her salary went up to $800 per fortnight. She agreed that perhaps she could have taken more care in making the calculation. She denied that there was any absence of a reference to the horse in her affidavit because at page 164 of her affidavit, amongst the documents evidencing the sale of art works and other assets, there was a reference to the sale of Orange Royale on a cheque stub. There was also a photograph showing that she was the owner of the horse.
133 Mrs Osborne agreed that at the time of her husband's bankruptcy she was liable as a guarantor of his debts. She had to make payments in that regard but the creditors did not take all her assets. As at 1985 she had by way of assets, certain antiques, paintings and the horse, Orange Royale. Her interest in the Clearview Stud, which was acquired in about 1975 as a consequence of her husband's interest in such matters, had been sold in 1984 or 1985. She got no funds from the sale of that asset, but tax losses were carried forward for a few years.
134 She was questioned about the sale of a Drysdale painting for $100,000. She said that she used the proceeds to acquire bank bills. Reference was made to a so-called receipt dated 15 May 1987 from Greenhill Galleries which spoke of the painting being sent to Sydney. It was put to her that this was only a consignment note and did not evidence
(Page 32)
- the sale of the painting. She answered this by referring to a bank deposit slip of 15 May 1987 concerning a deposit of $100,000.
135 Mrs Osborne was then asked why in 1987 she was minded to deposit $100,000 of her own funds into a company in which she did not acquire an interest until 1990. She said that this was because the company was owned by her two brothers. She did not know why she put the money in, she just did. She denied that the deposit of $100,000 was not her money. She could not remember whether she had authority to use the bank account. She said that she accumulated about $220,000 from the sale of the antiques, paintings and the horse.
136 Mrs Osborne was referred to certain documents from Leonard Joel Auctioneers dated 25 November 1986 which were said to substantiate her evidence. It was put to her that the invoice in question was directed to the name of Gray, being her mother's name. She said that, nonetheless, the painting belonged to her as her mother did not have any assets. Mrs Osborne was living with her parents at that time.
137 Mrs Osborne said that her only proof that she had sold a Sali Herman painting was that she did buy it and did not have it any more. She was questioned about an alleged incongruity between the dates on which certain paintings were sold, which were said to have financed the purchase of bank bills, when there was evidence that certain of the bank bills had been purchased at an earlier stage in 1985. She said that the bills were acquired with her money. She said that "I don't know how it worked out but that's how it is" (TS 31).
138 Mrs Osborne was asked about a bank bill said to be due on 12 September 1985. This exchange with the cross-examiner then occurred (TS 33):
"So within a period of two months you have deposited separately, you say, 60,000 and 50,000 approximately but you don't know where those moneys came from?---Look, I can't answer that. I just know that was my money. There's no doubt about that.
And you say you continued to invest those moneys in the bank bills until you decided to invest in real estate?---That's right.
Do you have any of the other proof of investments in bank bills, although what you have - - -?---Only what's in here.
(Page 33)
- Just those two?---That was lucky that I had those."
139 Mrs Osborne said that she purchased the Tilton property for $162,000 in 1989. She said that she could not remember where the money came from. She could not remember whether she put a mortgage on it to start with or whether she paid all cash (TS 35). She thought she had put a mortgage on it later. When she was asked where she got $165,000 from at that time, she responded: "Out of the bank, out of shares. I can't remember" (TS 36). Her attention was then drawn to the title document and an entry which suggested that a mortgage was registered over the property on the same date as the transfer to Mrs Osborne. However, she could not recall how much the mortgage was for.
140 The cross-examiner then took Mrs Osborne to the purchase of the City Beach property in 1990 and the assertion in her affidavit that she lent $150,000 to the company with $100,000 being borrowed by the company from the Commonwealth Bank. The sum of $150,000, she said, came from the sale of her paintings and other assets. Then, in the period between December 1990 and February 1993, she repaid the company's loan of $100,000. She conceded that this was not done simply from her teacher's salary but from other moneys she kept in the bank.
141 Mrs Osborne acknowledged that prior to 1990 she had no loan account with the company. It was this loan of $150,000 in respect of the City Beach property and the $100,000 paid back to the bank on the company's behalf which gave rise to the first loan account entry in Mrs Osborne's favour in the company's books; that is, the so-called first loan of $250,000. When pressed, she agreed that the assertion in her affidavit that the loan of $100,000 was repaid by her from her income as a secondary school teacher was a mistake. She had been paying it off with other moneys as well. She agreed that her husband did not have any money at that time (TS 41). She agreed that she was using part of her salary towards household expenses.
142 It was in this context that Mrs Osborne confirmed (being a matter acknowledged in the December 2004 transcript) that, although in 1990 the company had bank accounts and bank statements, the company did not presently have a bank account (TS 44).
143 The cross-examiner referred her to the bank statements which suggested that in 1992 the company had an overdraft of $97,000. It was put to her that the renovations of the City Beach property were in fact
(Page 34)
- funded by the overdraft, but this was denied by her. She denied that the bank account was being used for some other purpose. She agreed that as at 30 June 1992 her loan account with the company was said to be $187,950. She said that the cost of the house was funded by her through the bank and through her loan. There was no doubt about that, but the dates were possibly a little bit out (TS 50). It was true that the balance sheet referred to the Osborne Family Trust but in fact it should have been to Beryl Norma Osborne. She was a trustee of the Osborne Family Trust.
144 Mrs Osborne was referred to a receipt from the builder which appeared to be directed to Mr and Mrs Osborne. She denied that this signified that both she and her husband had been paying for the renovations. It was simply the builder's practise to issue a receipt to husband and wife. She was challenged about the absence of documentation in respect of the renovation expenses including variations.
145 She was questioned about instructions given to Macquarie to pay funds to exercise share options and the fact that the funds were placed in an account bearing the name of her husband also. She said that the account should not have been in her husband's name. When she was asked whether the company purchased the shares under discussion or whether she purchased the shares, Mrs Osborne responded by saying that she put the money into the company to purchase the shares (TS 56). She borrowed the money to enable the shares to be purchased in the name of the company.
146 Mrs Osborne was cross-examined about the fourth loan being $150,000 allegedly advanced to the company in April 2000 to assist in its purchase of a 50 per cent interest in the West Perth property. She confirmed that at about this time she sold the Tilton property for $450,000 and a net amount of $437,089.30 came to hand from that source. She was cross-examined about the relevant settlement statement dated 10 April 2000 which suggested that the amount just mentioned went towards discharging a mortgage over the property to Challenge Bank. She said that in fact there was no mortgage and that she did receive the net amount mentioned in her affidavit (TS 62).
147 In the course of being cross-examined about the sources and details of the West Perth property purchase price Mrs Osborne confirmed that the mortgage on the property at the moment was "around about $275,000" (TS 64). She thought that the mortgage repayment was about $1100 per week which was paid by her from income from rental properties. Her
(Page 35)
- husband did not contribute towards the mortgage but he paid rent of $200 per week.
148 As to the Churchlands property, Mrs Osborne said that she thought about $8000 was presently outstanding. She agreed that the December 2004 transcript of the bankruptcy examination suggested there was $90,000 owing on the mortgage at that time. She agreed that one month later, by January 2005, it was down to $28,000. She said that she got the $60,000 to reduce the mortgage in that period as a consequence of receiving a cheque for $50,000 from her daughter of which she kept $2000 and transferred $48,000 into the company account.
149 Mrs Osborne was then referred to the company's ANZ Bank statement (page 294) which suggested that a deposit of $48,000 allegedly referable to repayment of the daughter's loan was in fact made on 17 July 2003. However, she continued to assert that, in her belief, the cheque for $50,000 from her daughter Natalie was used to reduce the mortgage at the end of 2004 and "whether the dates are tying up, I don't know, but that's exactly what happened" (TS 73).
150 She added, upon reflection, that she may have been in error in what she said in December 2004 that about $90,000 was due on the mortgage. She must have forgotten that $48,000 had been paid off. She agreed that her son's disability pension went into her personal account automatically. This represented rental and was used to pay off the mortgage.
151 Mrs Osborne acknowledged that the rent income that was due to the company for the West Perth property was not received into any company account. She said that she did not keep an account for that small amount of money because the bank costs made it unnecessary to do so. She said that she had refused to allow the plaintiff's valuers access to the properties as a privacy thing. This was because she owned half the house and owned a half share in the company so that, ostensibly, she owned three-quarters of the property. Her entitlement was underpinned by her loan account with the company. She did not say so directly in her evidence but the clear implication was that she saw herself as being essentially the sole proprietor of the premises.
152 Mrs Osborne said that her inquiries suggested that $800 was a fair rental for the West Perth property. The company's half share was $400 of which $200 was being paid by her husband. She then made these observations (TS 79):
(Page 36)
- "I'm told that I should have been paying $200 to [the company] but because I was covering a lot of the costs and everything in the place, I didn't pay it but if I have to and I should – I didn't understand that I should be paying it when I own so much of it myself, and it was a bookwork thing that I didn't do but I am happy to pay that if I should be."
153 When pressed about why the company had ceased to have a bank account she said that this was not necessary because there was no profit. There was nothing going in and out of the company except the rent, and it was not worth having an account for that small amount, paying a couple of hundred dollars a year for bank fees. It was just a small company thing with just her husband and herself in it. If she had known when the plaintiff, as trustee in bankruptcy, got involved that she should have opened an account then she would have done so.
154 The cross-examiner took her back to an area of the cross-examination in which she had mentioned having certain rental properties in Albany Highway. These were units at 443 Albany Highway, being units 5, 6 and 7. They were acquired in the late 1990s in conjunction with her son-in-law, although one of them she owned on her own behalf. She took advantage of an opportunity to pick them up cheaply with her own funds. These funds were in addition to the funds she had advanced to the company.
155 Mrs Osborne affirmed, towards the close of the cross-examination, that it was right to say that she now had a loan account with the company in excess of $900,000, even though she was someone who, in 1985, had lost everything in the first bankruptcy other than her art work and a horse. In addition to the loan account she had an interest in other properties as well. Her funds had come from the sources she had described.
156 Under re-examination Mrs Osborne said that the mortgage over the West Perth property to Westpac (being a division of the Challenge Bank) was in fact to secure a loan made to her to cover any shortfall if the amount received from the sale of the City Beach and Tilton properties was not sufficient to buy the West Perth property. It was a facility that could be drawn upon if needed. She said that the sources underlying the figures standing to her credit in the loan account included profits made upon the sale of the Tilton property, being a profit of approximately $300,000 and from the sale of shares she had purchased. She had sold WA Newspaper and CBA shares. There was also an amount of $16,000 in a bank book
(Page 37)
- being money she had withdrawn from the Teachers Credit Society back in 1985.
157 Mrs Osborne said further that apart from the funds that she provided, the company did not have any source of funds other than the rental from the acquired properties. She said that the company had not paid director's fees and no interest had been charged on the loan account. She had never sought to have interest charges added to the loan account each year.
Mr Clifford's evidence
158 Mr Clifford gave evidence bearing upon matters covered by his affidavit. He confirmed, as to his first report, that it was prepared on the basis that the opening balance at 1 July 1998 was correct and had been the subject of a detailed tax audit by the Tax Office. In order to arrive at that conclusion he viewed the documents that were handed to the Tax Office, and the notice of assessment. He understood that the audit was carried out at the offices of McMillan Partners in Victoria Park. This was about 15 March 2004 based on a letter from the Tax Office.
159 He was taken to an opening balance as at 1990 of $250,000. He said that this was the opening balance he referred to as having been verified by the tax audit based on a document that was supplied to the Tax Department. The detailed schedule of the loan showed various additions to the loan over the years. The additional information was supplied by Mrs Osborne on different transactions that had transpired. He said that the loan figure of $503,273 was from the closing balance of the loan account as at 30 June 1998. He was asked whether this was something which was verified by the tax audit. His answer was in the negative. He said that the opening balance was as per the accounts that were actually lodged with the Tax Office as at 30 June 1998.
160 Mr Clifford was then taken to his second report which purported to verify the loan account to Mrs Osborne with the company for a period from its inception to 1 July 1998. He said that to verify those figures he had to view source documents, being the source documents provided by Mrs Osborne save for some that she had requested to be kept private and confidential.
161 Under cross-examination Mr Clifford confirmed that he had a long association with Mr and Mrs Osborne going back to 1976. He was not a CPA (Certificated Practising Accountant). He was not a CA (Chartered Accountant). He assumed that everything was correct prior to 1 July 1998 because of the audit done by the Tax Office concerning capital gains. It
(Page 38)
- followed that he assumed the figure for the loan account at 1 July 1998 of $503,273 was correct.
162 It was put to him that the Tax Office was not verifying the loan account but simply inquiring into the purchase and the costs related to the City Beach property for the purpose of assessing capital gains tax. He agreed that they would not have seen any documents relating to the sale of art works or what Mrs Osborne put into the company or anything like that. They were doing a tax audit for a different purpose. He agreed that the focus of the audit would have been upon expenses relating to the City Beach property.
163 Mr Clifford acknowledged that he had not seen Mrs Osborne's tax returns. He had not seen any accounts for the Osborne Family Trust and did not know who the trustee of that entity was. He had not seen a statement of assets and liabilities for Mrs Osborne.
164 Mr Clifford was taken to a schedule to the loan account appearing at page 14 of his report in which $250,000 was attributed to the year 1990. His understanding was that this was related to the purchase of the City Beach property. When asked whether he had seen proof of where the subject funds came from to effect the purchase he said that he had seen proof in the tax returns of the company. These were not part of his report but they had been forwarded to the Tax Department to support the land tax situation. He agreed that this did not show where the funds came from.
165 When pressed as to whether he had verified the existence of the loan account of $250,000, or seen independent documentation as to the funds to acquire the City Beach property coming from Mrs Osborne own resources, he referred to various documents concerning the proceeds of sales of paintings, the sale of shares and the sale of horses. He said that the total figure from the documents added up to $260,022.25. Those were from the sale of paintings and sale of a horse in the period 1986 through to 1990. He agreed that he could not verify the full extent of the loan account (TS 111).
166 Mr Clifford was taken through various documents provided to him by Mrs Osborne which were said to verify the funds she had raised by dealing with her personal assets and which led to advances being made to the company. He was asked to address various alleged discrepancies between the documents and the figures contended for by Mrs Osborne.
(Page 39)
- He agreed that as to certain items he had accepted the figures but there was a need for additional information.
167 It was put to Mr Clifford that unless the figures in the disputed loan account were completely verified the value he had attributed to a share in the company could not be accurate. He did not give a direct answer to the question to him. He agreed that there were variances between the figures in the loan account and the supporting documents supplied by Mrs Osborne, because the task had involved going back over a 21 year period, but the variances had been highlighted.
The plaintiff's evidence at the hearing
168 The plaintiff said in evidence that he was a registered company auditor, registered liquidator, registered court official liquidator and a registered trustee in bankruptcy. These registrations had accumulated over many years. His audit career spanned from about 1975 and his insolvency career since 1982. He confirmed that he was the trustee in bankruptcy of Mr Osborne.
169 The plaintiff said that his obligation as a trustee was the realisation of assets by turning them into cash and attending to payment of insolvency priorities in terms of the Bankruptcy Act. He said that there were substantial creditors in the present case. He had proofs of debt to date of approximately $2.7 million and they were continuing to increase. There were major creditors. The petitioning creditor was a company called Land Power Developments Pty Ltd which had lodged an admitted proof of debt of close to $1.8 million.
170 As to the allegation that the plaintiff's application had been brought for a collateral purpose of achieving some sort of payout from Mrs Osborne, he referred again to his duty of asset realisation in a commercial sense. The moneys from the realisation were not his moneys. They belonged to the creditors to whom he owed certain duties.
171 The plaintiff said that other than the affidavit provided by Mrs Osborne he had not been able to in any way determine the validity and accuracy of the loan account asserted.
172 Under cross-examination the plaintiff said that what brought him to Court was to progress the administration of a bankruptcy estate; that is, to bring it to a point of conclusion. As he saw it, it was necessary to petition for the winding up of the company. His concerns included that the West Perth property and Churchlands property were not producing a fair market
(Page 40)
- rental. This was one aspect of the oppressive conduct complained of. He said that he complained also of a complete lack of communication with the other shareholder. There were no annual general meetings. There were no dividend payments or reasons for lack of payments.
173 The plaintiff said that he was appointed in February 2004 and requested information from the bankrupt initially. He agreed that as a mere shareholder, he had a limited right of access to the company's books. He agreed that as a consequence of the Court proceedings he had received a good deal of information concerning the affairs of the company. However, notwithstanding the cross-examination in Court, he was not necessarily satisfied as to certain matters.
174 The plaintiff agreed that he had come along as a new shareholder and sought to challenge the veracity of a loan account that had been in existence for many years before he became a shareholder. He said that, through his solicitors, he had pressed Mrs Osborne and the company to address particular concerns in relation to the loan account. He said that the replies received and the attempts to settle the matter were not satisfactory. He agreed that he could have obtained verification as to the amount due on the mortgage against the West Perth property without necessarily coming to Court. It was a concern of his that there were not annual general meetings of the two shareholders. However, he could not recall having ever written to the company requesting that a meeting be held. Any such request had not been refused as far as he could recall.
175 The plaintiff said that he had attempted to resolve the fair market rental issue. He had spoken to the bankrupt but had not been able to obtain satisfaction. He did expect a company of this size to keep company records going back over 16 years. This was a matter of commercial wisdom even if not strictly required by statute.
176 The plaintiff said that he was not aware of the mortgage over the West Perth property to the Challenge Bank being to secure a loan made to Mrs Osborne. He was not aware that any part of the mortgage debt had been paid by the company. He could not recall whether he had looked at the Challenge Bank mortgage to see whether the company was a borrower as distinct from simply providing the collateral security.
177 According to the plaintiff, it was part of his duty as a trustee, and as a person holding a share in the company, to challenge the records of a company going back 16 years. He sincerely doubted the level of the disputed loan account.
(Page 41)
178 It was put to the plaintiff that he was using a petition to wind up the company as a basis for determining whether the bankrupt (Mr Osborne) had access to undisclosed financial resources. The plaintiff denied this allegation. He denied that the present proceedings were being used as a fishing expedition. His position was that he did not really know whether the loan account existed but verification was required. The demand for verification of a loan account which existed at the time he became a shareholder of the company was both to assess the assets of the bankrupt's estate and to realise those assets.
179 The plaintiff accepted that, while wearing his bankruptcy trustee's hat, he did not have a right as a shareholder to demand verification of that kind. He accepted that unless he could establish as a shareholder that there was a clear error in the accounts, as distinct from simply demanding documentation of the accounts, there was no basis upon which he could challenge the accounts.
General observations
180 It was common ground between the parties that Mrs Osborne is the sole director of the defendant company and manages and has the effective control of the affairs of the company. The two issued shares in the company are held by Mrs Osborne and by the plaintiff as trustee in bankruptcy for Mrs Osborne's husband. The company has two significant assets being an undivided half share in the West Perth property and the entirety of the Churchlands property. Mrs Osborne, in her own right, is the owner of the other undivided half share in the West Perth property. That property is occupied by Mrs Osborne and her husband for residential purposes. The Churchlands property is occupied for residential purposes by Mrs Osborne's son who is in receipt of a disability pension.
181 It is apparent from the history of the matter that the defendant company does not conduct conventional business activities. For many years its affairs have been essentially limited to the provision of accommodation for family members and as a vehicle for family investments. However, there is evidence before me that properties owned by the company were put in the company's name with a view to providing a degree of protection against any personal liabilities that might arise from the business activities of Mrs Osborne and her husband. I consider that I am entitled to take account of this factor in reviewing the issues before me.
182 I am of the view that, as a consequence of Mr Osborne's second bankruptcy (in 2003), the defendant company is now obliged to have a
(Page 42)
- greater sense of responsibility in dealing with Mrs Osborne and her husband in their role as tenants of the West Perth property. The company is entitled to a half share of whatever amount is held to be a reasonable rental for the premises. The same can be said in respect of their son's occupation of the Churchlands property. As it happens, there is a controversy between the parties as to whether the company has received a proper and sufficient return from its interest in the subject properties.
183 It emerges from the evidence that the company's principal assets are of considerable value. I accept that the valuation evidence exhibited to the Carles affidavit of 29 November 2005 must be viewed with caution because, owing to Mrs Osborne's wish to protect her privacy, the valuer had only restricted access to the subject properties. Nonetheless, there is evidence before me that towards the end of 2005 the West Perth property was arguably worth up to $1,750,000, with the result that the company's half share in the property could be described as worth approximately half that amount, being $875,000. It was common ground at the hearing before me that property prices have gone up since that time and there were real prospects that the value of the half share was close to $1 million.
184 The West Perth property is subject to a mortgage in favour of Westpac. Under cross-examination Mrs Osborne said that the amount presently outstanding was "around about $275,000" (TS 64). A debt of this kind must be brought to account in determining the company's net equity in the property, in which respect it would be necessary to give consideration to some evidence given by Mrs Osborne that the bank advance was in the nature of a personal facility. Nonetheless, for present purposes, I am able to find that the value of the defendant company's interest in this property, on a conservative view, is potentially in the order of $700,000.
185 As to the Churchlands property, the Hegney valuation exhibited to the Carles affidavit indicates that the subject property has a restricted valuation range in the order of $200,000 to $220,000. Again, counsel at the hearing seemed to accept on both sides that the value of this property had probably increased. Mrs Osborne acknowledged in the May 2005 transcript that the property could be worth up to $240,000. Under cross-examination Mrs Osborne said that about $8,000 was presently outstanding in respect of the Churchlands property. Accordingly, it seems that the net equity of the company in this property could be potentially in the order of $250,000. Thus, in round figures, it might be said that the principal assets of the company, taken together, could potentially be in the order of close to $1 million.
(Page 43)
186 When the matter is viewed in this light, a shareholder in the company holding one of the two issued shares is clearly entitled to require that he be kept informed as to the use being made of the company's properties and as to the company manager's proposals concerning the same in coming years. Such a shareholder could expect that arrangements would be made from time to time for the properties to be valued in a professional manner and steps would be taken to ensure that rental income reflected commercial realities and was properly accounted for.
187 I am conscious, of course, that the decided cases bearing upon the question of whether the affairs of a company have been conducted fairly and with probity establish that a distinction must be drawn between a large company with many unrelated shareholders (possibly running an active business) and a small family company which has been set up essentially to serve the needs of family members. A degree of informality is bound to occur in the latter situation and irregularities or oversights in attending to handling properties owned by the company and banking rental income may often be overlooked or excused.
188 By the same token, general explanations about the state of the accounts may be regarded by all concerned as sufficient to satisfy the requirements of the shareholders in regard to the provision of information. The decided cases establish that the content of fairness in an oppression application will depend upon the context. It has been said that there is a principle of proportionality between the act of oppression and the remedy.
189 However, it is questionable whether the paradigm of a small family company I have just described can be taken as applicable to the circumstances of the present case. I mentioned in earlier discussion that one purpose to be served by the defendant company was to alleviate the effects of any unwanted personal liability that might arise in the course of business activities undertaken by Mr and Mrs Osborne. Thus, to that extent, the activities of the company can be linked to considerations that go beyond strictly family concerns.
190 More importantly, the painful reality is that following upon Mr Osborne's bankruptcy in 2003 the internal workings of the company have been reconfigured by the fact that Mr Osborne's share in the company has been vested in the plaintiff as his trustee in bankruptcy. The holders of the two shares have ceased to be linked by family ties. They must now be regarded as being in a professional or business relationship. That being so, a sensible manager would recognise that the informal style of management and generalised explanations that might once have been
(Page 44)
- sufficient in an earlier era have to be upgraded, especially in the case of a company with two principal assets having a value potentially in the order of close to $1 million. As I have indicated, in my view, the defendant company and Mrs Osborne as its sole director, must now have a greater sense of responsibility in accounting for the occupancy of the company's properties to the plaintiff.
191 A central allegation made by the plaintiff in the present case is that the affairs of the defendant company have been and are being conducted by Mrs Osborne, as the sole director of the company, in a manner that is oppressive or unfairly prejudicial to the plaintiff as a member of the company, or in a manner that is contrary to the interests of the members as a whole. Further, it is alleged that certain matters of contention have given rise to an irreconcilable conflict between the two shareholders which is sufficient to justify a winding up of the company on the just and equitable ground.
192 I feel obliged to say at the outset, and so find, that having regard to the context I have described, I consider that it is reasonable and appropriate for the plaintiff, as Mr Osborne's trustee in bankruptcy, to press for clear answers bearing upon the net value of the company's assets and the manner in which they are presently being turned to account. This is a legitimate function of a trustee in bankruptcy acting on behalf of creditors.
193 For the reasons I have given, I consider that the plaintiff is entitled to press for information with a view to determining the value of his share and thereby possibly finding a resolution to the impasse. There can only be meaningful negotiations directed to the sale of the plaintiff's share if both parties to the proposed sale are fully informed. Accordingly, I consider, and so find, that the plaintiff cannot be regarded as pursuing a collateral purpose, or otherwise abusing his position as a shareholder, in a way which, of itself, stands in the way of relief being afforded to him. In my view, he was obliged to commence the present proceedings because, as at 8 August 2005, he had not received satisfactory answers to the matters of concern he had raised.
194 Counsel for the plaintiff recognised that in determining whether the affairs of the defendant company were being conducted unfairly, it was necessary to inquire into the validity and level of the disputed loan account.
(Page 45)
195 Mrs Osborne said in her affidavit that as at 2005 the balance due to her under the disputed loan account stood at (in round figures) $950,000. She said under cross-examination that it now stands at $980,000. It emerges from earlier discussion that if the latter amount can properly be set off against the net value attributed to the principal assets of the company of close to $1 million, the value attributed to the plaintiff's share will be negligible. Hence, the offer made by Mrs Osborne, by her solicitors, in February 2006 to purchase the plaintiff's share for $11,000.
196 There are various passages in the cross-examination of Mrs Osborne mentioned in earlier discussion which suggest that she is not minded to allow access to the subject properties or to provide elaborate details as to how they are being turned to account for the simple reason that, in her view, the plaintiff, as the other shareholder, does not have a significant financial stake in the company; she is entitled to manage the company in the same informal style of an earlier era because she is the effective owner of what is essentially a family operation.
197 As I have indicated, because the question of unfairness depends upon the context, it is possible to envisage circumstances in which a stance of this kind might be defensible. Having regard to the principle of proportionality, it might be possible in some cases to fend off the claim for relief by agreeing to orders for the sale or purchase of the share or shares in issue at a price determined by the parties or by the Court or pursuant to a prescribed valuation procedure, as a means of resolving an impasse.
198 However, in the present case, the question of whether such a stance is fair and reasonable depends very much upon the validity and level of the disputed loan account. If an account of this size cannot be substantiated, or gives rise to evasive or unsatisfactory answers being provided about the state of the account, then the plaintiff may be in a position to complain of a lack of probity and being unfairly treated. Accordingly, as counsel on both sides recognised, it is necessary to enquire into the validity of the disputed loan account, including reference to the way in which it was created and the manner in which the level of debt, which is now considerable, gradually increased.
Further observations
199 The plaintiff's case is that it is impossible to ascertain the value of the respective shareholdings in the company, given the tenuous and unpersuasive evidence adduced to support the loan account. Moreover, valuation of the shareholdings depends not only upon the resolution of the
(Page 46)
- disputed issue concerning the loan account but upon a determination of the true value of the subject properties. There is insufficient evidence before the Court about that aspect of the matter due to the recalcitrance of Mrs Osborne as the company's sole director.
200 The plaintiff submits that it will be sufficient for the Court to be satisfied that there are flaws and ambiguities in the loan account because this, of itself, will establish that the defendant company is being managed unfairly; that is, in the presence of such defects, and justifiable queries concerning the valuation and management of the company's properties, a finding can be made that there is a justifiable lack of confidence in the management which warrants a winding up of the company. Upon a winding up, the true value of the loan account and of the company's assets can then be determined in an orderly manner.
201 On the other hand, it is said by the defendants that if, having regard to the evidence as a whole, the Court is satisfied that the loan account is valid and stands at the level contended for by Mrs Osborne, then the complaint of unfairness and lack of probity falls away. On that view of the matter, there is no real risk of the plaintiff being deprived of anything of real value. It is said that any comparatively minor irregularities concerning management of the properties and banking of the company funds can either be attended to pursuant to orders made by the Court, or can be dealt with by the expedient of making orders which will allow for the purchase of the plaintiff's share.
202 Accordingly, against the background of these general observations, I must now deal with certain more specific issues concerning the validity and level of the loan account.
Specific observations
203 It is apparent from the evidence that in 1985 Mrs Osborne's husband was declared bankrupt. It was said by Mrs Osborne, and I so find, that all joint marital assets were lost at that time and in her right she was left with only antiques, art works and a horse. She had no other property (TS 21).
204 It was an undisputed fact that when the defendant company was acquired in 1990 there was initially no loan account. However, according to Mrs Osborne, the first loan of $250,000 was made by her in November 1990 to assist the defendant company to purchase the City Beach property. More particularly, she said that the defendant company acquired the property using $150,000 advanced by her and $100,000 by way of bank loan. In due course she paid off the bank loan of $100,000
(Page 47)
- from her income as a teacher. The bank statements indicate that the loan was finally repaid on 16 February 1993.
205 This sequence of events immediately raises the query as to how it came about that Mrs Osborne, from a position of limited means in 1985, was able to assemble funds sufficient to make the first loan, and following loans, leading to a position as at the year ended 30 June 1998 when the amount due to her on the disputed loan account was said to be $503,273.
206 The origin of these advances is said to be funds acquired from the realisation of the paintings, the horse and her other personal assets. She said in her evidence that she took the money realised from those sources and put the funds into bank bills earning high interest rates.
207 There are various unsatisfactory features of her evidence concerning these matter. The documents said to evidence the sale of the Drysdale painting for $100,000 was dated 15 May 1987, being three years prior to her acquiring an interest in the company. She could give no convincing explanation as to why the funds in question were deposited into a company in which she had no interest. She could only say that it was a company owned by her brothers and she was very close to her brothers.
208 Further, she said that the first painting sold was the Drysdale painting. And yet, the bank bills adduced in evidence were dated 15 March and 3 May 1985, being two years prior to the sale of the Drysdale painting. She was unable to account for this incongruity satisfactorily and this suggested that the funds for the bank bills may have come from some other source. It is material to note also that the documentation concerning one of the paintings was made out in the name of her mother, Mr Gray.
209 I pause here to say that I can give little weight to the evidence of Mr Clifford concerning his review of these early figures in the loan account. He conceded under cross-examination that a number of the items in dispute were not convincingly verified by the documentation that had been submitted to him. To my mind, it is clear from his evidence, considered as a whole, that he was overly influenced by the fact that an audit had been undertaken by the Tax Office for capital gains tax purposes which did not fault the figures said to represent the amount due under the loan account. However, this cannot be regarded as a proper verification of the figures in question, bearing in mind especially that the audit appears to have been confined essentially to outgoings and expenses associated
(Page 48)
- with the purchase and renovation of the City Beach property which had a bearing upon the capital gains tax issue.
210 Mrs Osborne said that she repaid the loan of $100,000 obtained from the Commonwealth Bank in respect of the City Beach property in a period of two years at a time when she was earning only a teacher's salary ranging from $687 initially to $800 per fortnight in due course. It emerges from her cross-examination that part of her salary (understandably) was directed to living expenses. Moreover, bank statements relating to the relevant Commonwealth Bank account for the period when the loan was repaid reflect not only regular payments of $677 but also other large payments of $7,601, $7,914 and $49,302. No satisfactory explanation was given as to where these payments came from. One finds also, reflected on the May 1992 bank statement, payments of $62,016, $41,067 and $16,792. Mrs Osborne was unable to give a clear explanation as to where these funds came from.
211 When I stand back and look at the sequence of events in these early years, I find a lack of compelling evidence that Mrs Osborne amassed funds from her own resources in the manner she described and made the first and second loans to the company in the manner she contended for. I am unable to find that she repaid the loan of $100,000 to the Commonwealth Bank in the manner she described. Thus, to my mind the loans in question have not been fully verified by the evidence. Mr Clifford's assumption that everything prior to 1 July 1998 can be regarded as substantiated in the sum of $503,273 was unwarranted.
212 Mrs Osborne said that she purchased the Tilton property in 1989 for $162,000. She was unable to say where the $10,000 deposit came from. She was unable to say at first whether there was a mortgage on the property or not. When asked where she got the sum of $160,000 from at that time she said that she got it out of the bank or out of shares – she could not remember (TS 34 - TS 36). When referred to the relevant documents she said finally that she obtained a bank loan to acquire the property, but she was unable to recall the amount of the loan.
213 All of this immediately gives rise to further doubts about the quality of her evidence. If Mrs Osborne obtained the funds from the realisation of her assets and moneys in bank bills to purchase the Tilton property, then it is questionable whether she could have had other funds to advance to the company amounting to $150,000 to purchase the City Beach property a year later in 1990.
(Page 49)
214 As to the improvements of the City Beach property, the only answer Mrs Osborne had to the fact that the invoices for improvements were in the name of she and her husband was that that was how the builder insisted that the invoices be rendered. Her own documents appear to suggest that the funds for the improvements to the City Beach property came from both her husband and herself.
215 In relation to the share purchases, Mrs Osborne was unable to explain why the Macquarie share documents indicated that the shares were held both by Mr and Mrs Osborne, and with some documentation being in the name of the company and not her. The documents do not support her account of what happened in support of her alleged share holding.
216 In assessing the credibility of Mrs Osborne as a witness, I take account also of the fact that it emerged in the course of cross-examination that she owned other properties not previously disclosed in Albany Highway (TS 82). It was not made clear where the funds came from to acquire these properties.
Findings
217 It emerges, then, that, in my view, Mrs Osborne has not been able to provide satisfactory explanations for the way in which she amassed the funds which are said to have been the subject of the various loans to the company. In some circumstances, a lack of detail might possibly be explained by the passage of the years and the fact that many of the transactions range back over 20 years, and to what was a troubled period of her life. However, in many instances, her evidence is not adequately supported by contemporary documentation or by inferences drawn from the situation as a whole. In other words, I cannot infer that from a position of comparatively limited means, she was able to have made advances amounting to $503,273 up to 1 July 1998, and eventually advances which are currently said to stand at close to $950,000.
218 I find also that there has been a failure of the company in recent times to operate a bank account in respect of receipts of rental income and outgoings due to the company's creditors. In addition, I am not satisfied that sufficient steps have been taken to ascertain what is the fair market rental for the properties and to ensure that the company's share of the rental has been collected. This permits me to find that the plaintiff has a legitimate concern as to the governance of the company and the preservation of his interest in the company as a shareholder.
(Page 50)
219 It follows from my general observations, and from my finding that there are significant flaws and defects in the verification of the figures in the loan account, that there is force in the plaintiff's contention that there is a lack of probity in the management of the company. Owing to the ongoing and deep-rooted controversy between the parties concerning the validity and level of the loan account, I am satisfied that the conflict between the parties cannot be resolved.
220 Having regard to my general observations, these findings made in the context I have described, permit me to make a further finding that the plaintiff has a justifiable loss of confidence in Mrs Osborne's conduct of the affairs of the company. I am of the view that the plaintiff is entitled to relief pursuant to s 232(e) of the Corporations Act on the grounds that the conduct of the company's affairs has been oppressive to the plaintiff, and also pursuant to s 461(k) on the just and equitable ground. The decided cases establish that the conduct complained of need not be unlawful and it does not necessarily have to be established that financial benefits will flow to the complainant if the company is wound up.
221 This brings me to the question of what is the suitable remedy.
222 It is apparent from my review of the legal principles that a winding up order of the kind sought by the plaintiff in the present case must be regarded as a remedy of last resort, especially in the case of a solvent company. Moreover, there is a principle of proportionality between the nature of the conduct complained of and the remedy being sought. Thus, in some cases, it might be possible and appropriate for an order to be made for an account to be taken as for the complainant's share to be purchased at a prescribed price.
223 In my view, such an approach is not appropriate in the circumstances of the present case. In that regard, I rely upon the reasoning of Campbell J in Buffier's case (supra).
224 The fact is that issues concerning the disputed loan account have given rise to an irreconcilable conflict between the parties. Mrs Osborne's stance in regard to that controversy and her refusal to allow for a valuation of the subject properties stands in the way of any effective determination being made in these proceedings as to the value of the plaintiff's share. A proper determination as to the validity and level of the disputed loan account can only be made by the unravelling of the company's affairs in an orderly way in the course of a winding up. It is sufficient for the plaintiff in these proceedings to satisfy the Court in general terms, as it
(Page 51)
- has, that it has a justifiable lack of confidence in the way the affairs of the company are being conducted.
Summary
225 There will be an order for winding up of the defendant company. I will hear from the parties as to whether further orders are required.
19
9
3