Raymond v Cook
[1998] QCA 336
•27/10/1998
IN THE COURT OF APPEAL [1998] QCA 336 SUPREME COURT OF QUEENSLAND
Appeal No. 1332 of 1998
Brisbane
[Raymond v Cook & Ors]
BETWEEN:
ROBERT ERIC MICHAEL RAYMOND
(Applicant) Appellant
AND:
HAROLD ERNEST COOK, MAUD COOK,
LESLIE ALFRED COOK, MONIKA MARIA COOKand YVONNE MANDY COOK
(Respondents) Respondents
Pincus JA
Thomas JAByrne J
Judgment delivered 27 October 1998
Joint reasons for judgment of Pincus and Thomas JJ.A.; separate reasons of Byrne J., dissenting in part.
APPEAL ALLOWED.
ORDERS OF THE TRIAL JUDGE SET ASIDE.
INJUNCTIONS WILL BE GRANTED (OR UNDERTAKINGS OFFERED BY THE
RESPONDENTS) TO BE AGREED BY THE PARTIES OR IN DEFAULT SETTLED BY
THE COURT, TO AVOID FUTURE OPPRESSIVE CONDUCT BY THE RESPONDENTS.
FORMAL ORDER POSTPONED FOR 28 DAYS.
PARTIES GRANTED LIBERTY TO PRESENT FURTHER SUBMISSIONS IN
RELATION TO THE FORM OF ORDER AND IN RELATION TO COSTS BOTH OF
TRIAL AND APPEAL, TO BE EXCHANGED BY THE PARTIES AND FILED IN THISCOURT NO LATER THAN 21 DAYS FROM TODAY'S DATE.
CATCHWORDS:
CORPORATIONS - oppression - joint venturer disclosing company’s tax losses, but not disclosing debt to himself - later dealings failing to postpone debt to joint venture profits - whether conduct "within the affairs of the company" - share issue as an attempt to dilute percentage shareholding of appellant - unmeritorious conduct by both parties - one party retiring from management with venture incomplete - whether respondent should be ordered to purchase appellant's shares - difficulty in valuation of shares - winding up order appropriate.
Caratti Holding Co Pty Ltd v Zampatti (1978) 52 ALJR 732
Thomas v H.W. Thomas Ltd [1984] 1 NZLR 686
Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459
Re Westbourne Galleries [1973] AC 378
In re Wondolflex Textiles Pty Ltd [1951] VLR 458Corporations Law s.246AA(2)(c) (formerly s.260(2)(c)) Counsel: Mr H.B. Fraser QC for the appellant
Mr R.W. Gotterson QC, with him Mrs D.A. Mullins, for the respondentsSolicitors: Kinneally Mahoney, town agents for Morrow & Associates, for the appellant
Bennett & Philp for the respondentsHearing Date: 28 August 1998 IN THE COURT OF APPEAL
SUPREME COURT OF QUEENSLAND
Appeal No. 1332 of 1998
Brisbane
Before Pincus JA
Thomas JA
Byrne J[Raymond v Cook & Ors]
BETWEEN:
ROBERT ERIC MICHAEL RAYMOND
(Applicant) Appellant
AND:
HAROLD ERNEST COOK, MAUD COOK,
LESLIE ALFRED COOK, MONIKA MARIA COOKand YVONNE MANDY COOK
(Respondents) Respondents
JOINT REASONS FOR JUDGMENT - PINCUS AND THOMAS JJ.A.
Judgment delivered 27 October 1998
This is an appeal against a judgment given after a ten day trial in the Supreme Court in Cairns
dismissing the appellant's application for relief under s.260[1] of the Corporations Law. The appellant
is a minority shareholder in Musterford Pty Ltd ("the company"). The company was named as a
respondent but took no active part in the proceedings. The true adversary comprised the majority
shareholders who were all members of the Cook family, of whom the dominant member for the
purposes of these proceedings was Mr Harold Cook. The learned trial judge found it convenient to
refer to him as "the respondent" in his reasons for judgment, and unless otherwise indicated these
reasons will do likewise.[1] That section has from 1 July 1998 been amended in a minor respect and re-numbered as
The application sought various forms of relief including replacement of the directors by an
independent board appointed by the court; an order that the respondent or the company acquire the
applicant's shares at a valuation to be determined in accordance with directions made by the court; the
setting aside of a resolution of 1 October 1996 that increased the authorised share capital of the
company; and such further or other order as might be just. The bringing of such proceedings enlivened
the jurisdiction of the court to make many types of order tailored to the needs of the particular case,
including an order that the company be wound up. In the present case the appellant indicated both at
trial and on appeal that the principal relief desired by him was an order against the respondent for the
compulsory purchase of his shares at a valuation.
Many of the points originally in issue have disappeared in the light of primary facts found by the
learned trial judge. For the purposes of the appeal counsel for the appellant confined his allegations of
oppressive conduct upon which he submitted relief should have been granted, to three. These may
conveniently be discussed under the following headings:
· the antecedent debt · the 25 per cent shareholding · the forced sale threat.
Before discussing these it is necessary to present a short statement of relevant facts.
The appellant, although at some stage having enjoyed some success as a producer and manager
in the entertainment and film industry, was at material times relatively impecunious, although he had the
capacity to borrow some money from a bank. The respondent, a man in his seventies, had during his
lifetime succeeded in a number of business ventures and was described by the learned trial judge as a
wealthy man.
| 5 | The appellant became aware of a property at Ellis Beach which was to be sold by receivers. He tendered, but was unsuccessful. The receivers were prepared to continue negotiations with the two |
highest tenderers, of which he was one.
The respondent heard that the appellant was attempting to acquire the property and that he did
not have the necessary funds to do so. On 25 August 1994 he telephoned the appellant. Arrangements
between them proceeded with remarkable speed. The following day had been stated by the receivers
to be the last day for acceptance of any tender (by 4.00 p.m.). That day, 26 August, the respondent
flew to Cairns, and after reaching apparent agreement with the appellant as to how they would proceed,
made a further tender offer that was in due course accepted by the receivers. The offer was made by
the respondent's company (Musterford), about which the respondent had told the appellant very little.
That company had been used for the conduct of a fruit and vegetable business of the respondent and
his wife, and it had been unsuccessful. As a result the company had substantial tax losses. Only that
latter fact was mentioned in the discussions that occurred between the parties. The company was in fact
substantially indebted to the respondent and his wife to the extent of approximately $636,000. On
counsel's submissions, the asset value of the tax loss was approximately $229,000. None of these
details however was mentioned to the appellant other than the general statement that the company had
substantial tax losses available.
The respondent provided the funds (approximately $900,000) necessary for the company to
obtain the land which was duly acquired.
The arrangement reached between the appellant and the respondent was that the appellant
would receive 25 per cent of the shares in the company and the respondent 75 per cent. The
respondent agreed to this proportion mainly because of the role that the appellant had played in
providing the opportunity to acquire the relevant interest in the land.
The basis of the joint venture upon which the appellant and the respondent embarked is
contained in his Honour's finding that at all times the arrangement was that the appellant would receive
25 per cent of the shares and the respondent 75 per cent. It was also agreed between them that the
company would be the vehicle by which their joint venture would be carried out.
The land consists of two parts. On one part a caravan park is conducted; on the other part
(which is held under a perpetual country lease) a kiosk and restaurant business is conducted.
His Honour's reasons contain the following passage:
"The [appellant] says that when the subject of the use of the company was discussed he told the respondent that he was agreeable to this so long as his interests were not in any way disadvantaged. The respondent says he has no recollection of this."
Unfortunately no finding was made in relation to this evidence. The learned trial judge did not indicate
any general preference for the evidence of the appellant or the respondent, although it is noted that on
all points where his Honour did resolve conflicts of evidence between them he apparently preferred the
respondent's version. A number of particular points of divergence between the parties however are not
resolved by his Honour's findings.
After acquiring the land it became clear that significant redevelopment and refurbishing would
be necessary with respect to the facilities on both parts of the land. The respondent provided all further
funds needed for this, exceeding $2M. Despite statements of expectation of receipt of moneys which
he would be able to put into the venture, the appellant contributed nothing except on one occasion in
December 1994 when he advanced $10,000 after being asked by the respondent to do so "as a sign
of his commitment".
Both parties invested a degree of effort and management in relation to the project. The
respondent assumed major responsibility for supervision of the redevelopment of the caravan park,
whilst the appellant largely supervised the refurbishment of the restaurant and kiosk. On completion of those works, managers assumed responsibility for each operation, and some profits were and are
earned by the conduct of these businesses. By late 1995 or early 1996 some differences had emerged
between the parties, and it seems common ground that after a disagreement concerning conduct of the
restaurant business, the appellant distanced himself from the company's affairs, leaving them to be run
by the respondent.
During 1996 the appellant was convicted in the Magistrates Court Townsville of fraudulently
receiving social security payments. The respondent became aware of this. On 1 September 1996 the
appellant informed the respondent that he needed money and wished to withdraw the $10,000 he had
loaned to the company. The respondent thereupon indicated that if the appellant needed money he
would make him an offer for his shares. He did so by means of a letter of 2 September 1996 which will
be quoted at greater length later. Suffice it to say that it raised the question of the imbalance between
loan accounts of the prospective shareholders and asserted that –
"Our clients have resolved that the loan accounts should be converted to equity with all shareholders being given the opportunity to participate in the allotment of the additional shares."
In view of the obvious impecuniosity of the appellant at that stage, the fairness of the foreshadowed
"opportunity to participate" is open to question. The letter went on to make an offer of $11,500 for the
appellant's shares and a promise to repay the loan account which was said to be currently at $8,500.
This offer was declined, and the appellant commenced the present proceedings some weeks thereafter.
In the meantime a company meeting was called by the respondent at which it was resolved that
the share capital be increased to $1M. The appellant was also removed as a director. This latter action
was a lawful consequence of the appellant's conviction for fraud and no attempt has been made on the
appellant's behalf in the present proceedings to rely on this removal. The increase of the share capital
however was expressly to facilitate the respondent's foreshadowed move to convert loan accounts to equity and to give the respondent the opportunity of obtaining a greater proportion of the share capital
than the originally agreed 75 per cent. However the present proceedings intervened and no further step
has been taken to allot shares. The status quo, namely a 75-25 per cent shareholding between the
respondent and appellant in relation to the previously existing 32 allotted shares has therefore been
maintained pending determination of the present proceedings.
At the end of the trial various undertakings were offered on behalf of the respondent which it
was submitted made the principal relief sought by the appellant (a compulsory order for the respondent
to purchase his shares at a value assessed by the Court) unnecessary.
In the end his Honour dismissed the appellant's application and indicated that the respondent
was entitled generally to costs of the application, reserving liberty to make further submissions in relation
to reserved costs. Those matters have not been finalised. In the result the present appeal is against an
order which simply dismisses the appellant's application for relief. The bases upon which his Honour
did so will best be considered in discussion of the three matters raised by the appellant's counsel.
It is as well to preface discussion of these points by setting out the relevant statutory provisions.
"260(1) ...
(2) If the Court is of the opinion:
(a)
that affairs of a company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members (in this section called the ‘oppressed member or members') or in a manner that is contrary to the interests of the members as a whole; or
(b)
that an act or omission, or a proposed act or omission, by or on behalf of a company, or a resolution, or a proposed resolution, of a class of members of a company, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members (in this section also called the ‘oppressed member or members') or was or would be contrary to the interests of the members as a whole;
the Court may, subject to subsection (4), make such order or orders as it thinks fit,
including, but not limited to, one or more of the following:
(c) an order that the company be wound up; (d) an order for regulating the conduct of affairs of the company in the future; (e)
an order for the purchase of the shares of any member by other members;
... (5) In this section ... (b) a reference to affairs of a company being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member is a reference to affairs of a company being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a person who is a member, whether in his capacity as a member or in any other capacity; and (c) a reference to an act or omission by or on behalf of a company or a resolution of a class of members of a company being oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member is a reference to an act or omission by or on behalf of a company or a resolution of a class of members of a company being oppressive or unfairly prejudicial to, or unfairly discriminatory against, a person who is a member, whether in the person's capacity as a member or in any other capacity. (6) Where an order that a company be wound up is made under this section, the provisions of this Law relating to the winding up of companies apply, with such adaptations as are necessary, as if the order had been made upon an application duly filed in the Court by the company.
..."
"53 For the purposes of ... section ... 260 ... , the affairs of a body corporate include:
(a)
the promotion, formation, membership, control, business, trading, transactions and dealings (whether alone or jointly with any other person or persons and including transactions and dealings as agent, bailee or trustee), property (whether held alone or jointly with any other person or persons and including property held as agent, bailee or trustee), liabilities (including liabilities owed jointly with any other person or persons and liabilities as trustee), profits and other income, receipts, losses, outgoings and expenditure of the body;
... (c) the internal management and proceedings of the body; ... (e)
the ownership of shares in, debentures of, and prescribed interests made available by, the body;
(f)
the power of persons to exercise, or to control the exercise of, the rights to vote attached to shares in the body or to dispose of, or to exercise control over the disposal of, such shares;
... (h)
the circumstances under which a person acquired or disposed of, or became entitled to acquire or dispose of, shares in, debentures of, or prescribed interests made available by, the body."
THE ANTECEDENT DEBT
The disclosure made by the respondent to the appellant concerning the position of the company
was limited to his mentioning that the company had some tax losses, or possibly his mentioning that the
company had tax losses which he guessed would be around $500,000. He commented that the
appellant was "overjoyed" to find that out but it is not known what parts of this evidence were accepted
by his Honour. The respondent admitted that one of his motives in recommending the use of the
company as the vehicle for the contemplated project was recoupment of the losses that he and his wife
had sustained in that company. No hint of this was given to his prospective joint venturer.
There can be little doubt that the respondent at all material times until the hearing of this appeal
intended that the company should discharge that debt in the ordinary course before payment of any
entitlement to the appellant as a shareholder. A late unconditional undertaking was offered on his behalf
to this Court of Appeal at the conclusion of the argument of counsel for the appellant, in effect to
segregate that debt and not to recover it any time while the appellant remains a shareholder in the
company. But that is a change of ground. Submissions were made on behalf of the respondent to the
effect that the respondent did not ever assert an entitlement to insist on his legal entitlement to this debt,
but when one examines the affidavit and cross-examination of the respondent, the pleadings and the
conduct of the litigation all the way to the Court of Appeal, no other conclusion is reasonably open. The
respondent's pleading ("points of defence") with respect to the antecedent debt relies upon the existence
of the debt, and suggests that the appellant either knew or ought to have known of it. It alleges "that
the respondents were under no duty to directly draw that indebtedness to the attention of [the appellant]
or any other person" and asserts "the fact of that indebtedness was not concealed from [the appellant] and was indirectly referred to by [the respondent] and the respondent's son by reference having been
made to the company having accumulated ‘tax losses'." The respondent also pleaded that such matters
do not give rise to events such as to afford relief under s.260 of the Corporations Law. If the
respondent did not seek to maintain the full advantage of recovering his debt from the profits of the
company, it is difficult to understand why he did not offer an undertaking along the lines now given rather
than present a defence and litigate the issue. His counsel was unable to suggest any other reason for
the course of events other than perhaps a belief that insistence on such a right did not amount to
oppression. By the conclusion of the hearing before the learned trial judge, the position was apparently
still maintained as one under which the respondent was entitled to have the debt repaid before the
appellant derived his advantage from the joint venture.
His Honour's findings on this issue are essentially that "I do not think there is anything oppressive
or unfair in the relevant sense in the conduct complained of" and:
" ... I do not think that there is anything in relation to this aspect of the matter which can
be regarded as oppressive or unfairly prejudicial to or unfairly discriminatory against the
[appellant]. That the [appellant] and the respondent each stood to benefit from the tax
losses is obvious enough. Neither the respondent's failure to inform the [appellant] of
the company's indebtedness to him in respect of such losses or the maintenance of his
claim to the debt are in my view and assuming this to be conduct within the section
(something I have considerable reservations about) matters which give rise to any cause
for complaint."
The respondent sought at trial to create a further line of argument against making the orders
sought by offering a conditional undertaking as follows:
"If Your Honour makes a finding that it [the existence of the antecedent debt] is or was oppressive on [the appellant], my client offers these undertakings: not to seek to recover from Musterford Pty Ltd any part of the debt of $636,227 owed by Musterford ... without first having obtained the written consent of each of the current shareholders ... or successors in title ... further undertakes in the event of such a finding against him that in the event of Musterford being wound up he shall forgive any part of that antecedent debt then outstanding."
(emphasis added)
His Honour found it unnecessary to require such an undertaking, as he made no adverse finding on that
ground, intimating that he considered that even in the event of a finding of oppression such an
undertaking would be effective to achieve what the appellant had sought in this aspect of the case.
His Honour's conclusions on this issue seem to have proceeded on the following reasoning.
"The [appellant] did not seek any information as to the history of the company or the circumstances which gave rise to the tax losses. Before me various possibilities were canvassed in which tax losses might be incurred which do not give rise to indebtedness on the part of the company. One would think that at the very least the likelihood or possibility that the company had debts in consequence of the losses which gave rise to the tax losses must have occurred to the [appellant] had he turned his mind to it."
His Honour also twice recited the appellant's evidence that he had told the respondent that he was
agreeable to the use of the respondent's company so long as his (the appellant's) interests were not in
any way disadvantaged in consequence. On neither occasion did his Honour reject the evidence, but
neither did he indicate its acceptance. If such evidence were accepted, it would in our view have been
plainly wrong for the respondent to have proceeded, as he later did, to insist upon his rights to recover
the debt in the context of making an offer for the appellant's shares.
The company was put forward by the respondent as the means that would permit a joint venture
to proceed in which the respective entitlements of the parties were to be 75-25. The means of getting
the eventual benefits to the venturers was through the issue of shares in the company in the same
proportions. Against that background the mere mention of the existence of tax losses can hardly be taken to be notice that one of the joint venturers intended in due course to have the profits of the venture
used for the payment of an antecedent debt of $636,000. The existence of the antecedent debt cut
across the joint venture agreement, and, from the respondent's point of view this undisclosed liability
would eventually erode the appellant's entitlement. All that was disclosed was the positive side of a
liability which was considerably less than the amount of the liability. The existence of tax losses is not
always accompanied by subsistence of the original debt, and the limited disclosure made by the
respondent could not falsify the essential promise of the 75-25 joint venture with a shareholding in that
proportion in the respondent's company as the vehicle to provide it.
Fair dealing in such a situation would require that if the company were to be used as the neutral
vehicle to obtain this end, then as between the parties the respondent should postpone recovery of the
antecedent debt to the proper distribution of the profits of the joint venture. There are perhaps many
ways in which this particular notion might be expressed. It may be that the proper construction of the
joint venture agreement requires such a postponement; it might be that equity would prevent one joint
venturer from dealing with his joint venturer in such a way after a misleading non-disclosure. However
in the context of an application under s.260 it is not necessary to ascribe a single characterisation to the
situation between the immediate parties. If in the subsequent conduct of the company's affairs the
maintenance by the respondent of an entitlement to the benefit of such a debt was used in an attempt
to divest the appellant of his shares at less than fair value, such conduct in our view would plainly come
within the wide concepts expressed in s.260 of conduct that is oppressive or unfairly prejudicial to or
unfairly discriminatory against a member".
Counsel for the respondent submitted that the conduct in relation to the antecedent debt did not fall "within the affairs of Musterford" and that it was not within the reach of s.260. Consideration of this submission will be deferred until the other conduct relied on by the appellant has been discussed.[2]
Suffice it to say that conduct asserting such a right had a considerable potential to be used oppressively.
THE 25 PER CENT SHAREHOLDING
[2] See below paras 37 et seq.
Although the purchase was made in late August 1994, it was not until 2 January 1995 that
shares were allotted to the appellant. He was then issued with only six out of 32 shares. The appellant
did not discover the error until July 1996 when he received accounts for the year ended 30 June 1995.
The trial judge found that the incorrect share issue occurred by mistake, and that after the respondent
became aware of it in early 1996, no advantage was taken of the situation. Solicitors' letters were
written after the institution of proceedings and his Honour accepted that the respondent was prepared
to do whatever was necessary "to achieve the result that was intended at all times, namely that the
appellant have 25 percent of the shares". An undertaking to that effect was given to the court. This
question is of course separate from the issue of attempted dilution of the appellant's shareholding by the
issue of further shares designed to reward the holders of loan equity.
So far as this particular point, which is limited to the failure to ensure that the appellant actually
received his agreed 25 per cent shareholding is concerned, his Honour's findings preclude any adverse
finding under s.260. His Honour's findings include:
"At all times the respondent has been prepared to treat the [appellant] as a 25 per cent shareholder and has not sought to deny that he is entitled to it. The [appellant] at all times had access to the records of the company and could have established the position of their shareholding prior to the time at which he did learn that he had in fact had issued to him something less than 25 per cent of issued shares."
and
"The fact that the respondent remained silent after becoming aware of the error in relation to the shares and did so for some period, apparently taking the view that he was not going to go out of his way to inform the [appellant] with whom by then he was in some dispute, does not reflect any great credit upon him but I am not satisfied that there is anything in relation to this issue which amounts to conduct of the kind contemplated by s.260."
We agree with those conclusions. This conduct is of course a part of the overall story, but it
does not independently justify a finding under s.260.
THE FORCED SALE THREAT
The letter sent by the respondent's solicitors to the appellant on 2 September 1996 commenced
by referring to the preparation of documents to remove the appellant as a director of the company. No
complaint can be made on this score. The letter then continues:
"At the same time, our clients had resolved to take steps to correct the current imbalance in the balance sheet of the company. You would be aware from the accounts of the company that the company is currently financed by on demand loans by the shareholders. Clearly enough, if the company is to continue, its financing must be put on a proper basis. To this end, our clients have resolved that the loan accounts should be converted to equity with all shareholders being given the opportunity to participate in the allotment of the additional shares.
We have just been given instructions to prepare the documents to commence this process.
Nevertheless, Mr Cook telephoned this morning and advised that he had spoken with you over the weekend about selling your shares in the company and retiring as a director of the company immediately.
In this regard, we enclose the following:-
1. Sale Agreement;
2. Share Transfer;
3. Stamp Duty Declaration.
You will see from the documents that you will be paid $11,500.00 for your shares in the company. In addition, the company will repay to you the total of your loan account which is currently $8,500.00.
It is a condition of these arrangements that you resign as a director and release the company and our clients from any claims.
Our instructions that payment pursuant to these arrangements can be made to you immediately you execute the documents and return them to Mr Cook.
Finally, we are instructed to emphasise to you that the offer hereby made is a first and final offer. Our clients will not entertain any attempt to negotiate the terms of the offer. If you wish to accept the proposal, you must sign the documents and hand them to Mr Cook within 24 hours, failing which our clients will proceed in the manner outlined above."
The ambiguous use of the word "resolved" not surprisingly seems to have given the appellant and his
advisers the impression that a resolution to that effect had already been carried, although that apparently
was not the case.
The effect of conversion of the loan accounts to "equity", i.e. share entitlement, would have
produced a dramatic dilution of the appellant's entitlements, and was inconsistent with the basis of the
joint venture. It is true that circumstances had changed considerably in that much greater capital costs
had been incurred than had been anticipated, the appellant's contributions were disappointingly small
and the amounts contributed by the respondent unexpectedly large. Even so, it was not submitted that
the development and resale of the land, which seems to have been the primary object of the venture,
had become impossible of fulfilment or that it was at that stage frustrated by operation of law. Of
course it would not be surprising or improper in such circumstances that the respondent might seek to
renegotiate the original bargain. The appellant's submission is that the conduct manifested in this letter
and in further activity on behalf of the respondent was high-handed activity that went well beyond a
mere attempt to negotiate a variation.
The letter shows that the respondent, without consultation with the appellant who was up to that
time a co-director, had "resolved" to convert the loan accounts which stood at $2.6M on the
respondent's ledger and $8,500 on the appellant's ledger into "equity". If, as seemed likely, the
appellant was unable to bring more money into the company, the result would be a dilution of the
appellant's interest to a proportion of about 1 in 300. The letter informed the appellant that the only way
to avoid such a consequence was to accept a non-negotiable offer of $11,500 for his shares within 24
hours.
As earlier indicated, the respondent then proceeded to take the next step of issuing additional
shares (one million). However the present proceedings intervened before any further allotment
occurred. Counsel for the appellant submitted that the proposed conversion was not justified as an
economic measure, and that the conduct manifested by the letter was a serious attempt to dilute the
minority holder's interest, or at best an unfair ploy designed to buy him out at an unrealistic figure. On
this aspect, once again, his Honour refrained from making any finding whether there was any genuine
commercial advantage to the company from a conversion of debt to equity.
Although co-management had ceased for some time, and further participation by the appellant
as a director was made impossible by his own conviction, the parties were still participating in the 75-25
venture for redevelopment of the land, and indeed that core part of their venture remains alive to the
present day.
His Honour dealt with the present allegations of oppressive conduct by postponing their
resolution to another day. At the conclusion of the hearing counsel for the respondent gave an
unconditional undertaking that the respondent would use his position as director and shareholder to
ensure that no steps would be taken to allocate shares without 21 days prior notice of any proposal to do so being given to the appellant. His Honour concluded consideration of these questions with the
following remarks:
"In these circumstances I think it is desirable if I refrain from making any findings of a general kind on the question of justification for converting the company's indebtedness [to the respondent] into equity leaving the question of any proposal to allocate shares to be considered if it is the subject of any challenge in the circumstances as they exist at that time."
It is at least unfortunate that after ten days litigation one of the major threats that exist to future
fair dealings as between the parties in relation to the conduct of the company's affairs, which are now
solely in the hands of the respondent, was left unresolved.
APPLICATION OF SECTION 260
Counsel for the respondent submitted that insofar as his client's conduct related to the
antecedent debt, such conduct was not "within the affairs of Musterford". The submission continued
that complaints about the respondent's conduct, including the attempt to purchase the appellant's shares,
merely relate to the respondent's conduct as a shareholder, and not to his conduct as a director or
majority shareholder.
The short answer to that submission is that it does not follow that such conduct is beyond the
reach of s.260. Indeed the combination of the respondent's failure to postpone his entitlement to
recovery of the antecedent debt to fulfilment of the appellant's entitlement to a quarter share of the fruits
of the joint venture, combined with the subsequent conduct of the respondent in attempting to dilute the
appellant's interest or alternatively force him to relinquish his shares in the circumstances mentioned,
might well reveal that the affairs of the company were conducted by the respondent in a manner that was
oppressive and unfairly prejudicial to a member of the company, namely the appellant. Such conduct would prima facie fall within the ambit of s.260(2)(a). However the submission deserves further
scrutiny.
Neither side was able to refer to any authority which is of more than general assistance in placing
limits upon the ambit of "conduct [of] affairs of the company" in s.260(2). In the end the exercise comes
down to examining the facts and determining whether they fall within that subsection on its proper
construction. Mention may be made however of Caratti Holding Co Pty Ltd v Zampatti[3] which
bears some factual similarity to the present case. In that case the original relationship between the two
parties (Z and C) was for a partnership with Z having a 10 per cent share in profits and capital. In due
course Z received 10 per cent of the issued share capital of a company. However C held the life
governor's share in the company, and Article 32 enabled him to acquire compulsorily any other
member's shares for the price paid by that member for them. The Privy Council was of the view that
it would be contrary to the whole basis of the original arrangement for C to invoke Article 32, since to
do so would be to seek to deprive Z of that which it had been agreed he should have - a 10 per cent
share in the profits and capital of the business.
[3] (1978) 52 ALJR 732.
The original decision in that case (by Burt J as he then was) was founded on s.186 of the
Companies Act, the predecessor of s.260 of the Corporations Law. His Honour ordered a
compulsory purchase by C of Z's shares and directed that in ascertainment of the value of such shares
Article 32 be disregarded. Burt J considered that such conduct amounted to oppressive conduct under
s.186 and framed the order under that section.[4] An appeal to the Full Court of Western Australia was dismissed.[5] However the Full Court was relieved of the necessity of considering the application of
s.186 because the appellant indicated that if the petition was not to be dismissed he would prefer an
order of the kind that was in fact made. Upon appeal to the Privy Council, it was initially submitted that
s.186 was not applicable to the circumstances of such a case, but at an early stage the parties conceded
that the appeal could be determined to the satisfaction of the parties if Their Lordships determined that
C was not entitled to invoke his power under Article 32 against Z. Their Lordships were amply satisfied
that C was not entitled to do so. The authority then for the applicability of s.186 to such circumstances
is limited to the decision of Burt J.
[4] Burt J's decision is reported in [1975] 1 ACLR 87.
[5] [1976] 2 ACLR 152.
The types of situation in which this jurisdiction is invoked are legion, but of course the conduct
must involve the affairs of the company.[6] Relevant conduct is not limited to external corporate activity.
This jurisdiction is intimately concerned with internal management and abuses thereof by individuals
which tend to oppress others in the obtaining of their due entitlements from a properly run company.
Section 53 of the Corporations Law expressly includes internal management and proceedings of the
company, and many other matters of familiar company dealings and transactions as expressly within the
affairs of a company for the purposes of s.260. The section covers not only instances such as disregard
by a company officer of provisions of the articles;[7] it may equally apply to restraining an officer from
using the company or its articles unfairly to disadvantage another member, as for example inconsistently
with the basis upon which that person became a member.[8]
[6] Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, 346.
[7] Re H.R. Harmer Ltd [1959] 1 WLR 62.
[8] Compare Re M. Dalley & Co Pty Ltd [1968] 1 ACLR 489, (1968) 120 CLR 603.
In our view there can be little doubt that Burt J was correct in seeing s.186 as a proper means
of protecting Z from threatened corporation-related activities by his co-partner. It involved conduct of
the internal affairs of a company in a way that would subvert other arrangements that bound the affected
parties. Conduct of that kind was able to be controlled by the court under s.186 of the 1961
Companies Act. The later s.260 of the Corporations Law does not appear to have reduced the ambit
of court control in this area. The gradual statutory extension of conduct considered appropriate for such
supervisory jurisdiction is traced by Richardson J in Thomas v H.W. Thomas Ltd.[9] Relevantly his
Honour discussed a number of cases where this jurisdiction has appropriately superimposed equitable
considerations on the dealings inter se between members of a company in conducting the day to day
affairs of the company. The jurisdiction is seen as "a remedial provision designed to allow the court to
intervene when there is a visible departure from the standards of fair dealing".[10] The concepts of
unfairness and of unfair prejudicial effect seem to be thought to be the most important criteria in
attracting application of the New South Wales forerunner to s.260 of the Corporations Law in the High
Court decision of Wayde.[11]
[9] [1984] 1 NZLR 686, especially at pp 690-695.
[10] Ibid. pp 694-695; cf. Re Weedmans Ltd [1974] Qd R 377 where Lucas J, under s.221(1)(f)
[11] Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459, 468, 471-472.
In Re Westbourne Galleries[12] the "just and equitable" ground for winding up was construed
as permitting equitable considerations to be imposed upon those minded to act otherwise. Lord
Wilberforce cited with approval the remarks of Smith J in a Victorian case[13] as follows:"... Acts which, in law, are a valid exercise of powers conferred by the articles 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; and in such cases the fact that what has been done is not in excess of power will not necessarily be an answer to a claim for winding up. Indeed, it may be said that one purpose of [the just and equitable provision] is to enable the court to relieve a party from his bargain in such cases."
[12] [1973] AC 360, 378 et seq.
[13] In re Wondoflex Textiles Pty Ltd [1951] VLR 458, 467.
It is not suggested that conduct that will justify relief on the just and equitable ground[14] will
necessarily secure relief on an oppression application, but there is a considerable area of overlap. One
of the main bases for relief under the just and equitable ground is fraud, misconduct or oppression in
regard to the affairs of the company.[15] The reference in Thomas v H.W. Thomas Ltd (above) to cases
under the just and equitable ground was necessary, as the relevant statutory provision, in addition to
requiring proof of what might compendiously be called oppression, required the court to be satisfied
before granting relief that it was just and equitable to do so. Richardson J in any event considered that
harmony existed between application of that text and the grant of relief for conduct that falls under the
compendious expression "oppressive, unfairly discriminatory or unfairly prejudicial".[16]
[14] Corporations Law, s.461 (k).
[15] International Hospitality Concepts Pty Ltd v National Marketing Concepts Inc (No 2)
[16] Ibid. pp 693-694.
The submission[17] that the respondent's conduct falls outside the reach of s.260 should be
rejected.
VALUE
[17] At para 37 above.
Conflicting evidence was called on behalf of the respective parties directed to the issue of the
value of the shares. A finding of such value depended primarily upon a finding of the value of the land
improvement and business at a given date. Without ascribing any particular reason his Honour stated
that the appropriate date for valuing the shares would be the date of institution of proceedings (30
September 1996) although the evidence of the valuers did not specifically relate to that time. His Honour did not accept the opinion of any of the valuers, and did not resolve the principal conflicts
between them. Of course the issue of valuation was ultimately hypothetical in the light of his Honour's
decision not to order a sale of the shares. Although his Honour discussed the evidence on this issue to
some extent, it could not be said that his Honour "used his advantage"[18] in the fact-finding area
concerning this issue. His Honour's conclusion was:
"It is not possible to reach a conclusion that when the assets and liabilities of the company are taken into account the value of the [appellant's] shares exceeds their nominal value."
It would seem that that conclusion was premised upon accepting the antecedent debt as a liability of the
company.
[18] Devries v Australian National Railways Commission (1992-1993) 177 CLR 472.
It is as well to mention the extent of unresolved divergences in evidence concerning the
redevelopment land. The evidence of Mr Karutz (called on behalf of the appellant) ascribed $2M to
this land. The evidence of Mr Rose (also called by the appellant) on the basis of a notional
redevelopment ascribed $5.189M. His Honour however considered that opinion to be over-optimistic.
The evidence of Mr Malone (called by the respondent) valued the land at $0.5M. It may be noted that
on an exercise performed by an accountant called on behalf of the respondent, it can be inferred that
the break-even point for company assets and liabilities (if the antecedent debt were kept out of account)
would occur at a valuation of the redevelopment land at $783,973. If the $2M valuation of Mr Karutz
were to be accepted, the value of the shares would seem to lie between $826,027 and $1.2M.[19] If an
intermediate figure were found as the value of the redevelopment land (e.g. $1M) there would certainly
be a positive value to be ascribed to the shares, although counsel for the appellant conceded that on
such a finding the value of his client's entitlement would be, at maximum, $125,000.
[19] The $826,027 figure in this exercise seems to be based upon valuation of the redevelopment
It is not now possible for this Court to make any satisfactory finding of value of the shares at
a particular date. But it is clear that his Honour's conclusion of inability to find any positive value in the
shares was unsatisfactory in a number of respects, one of which is that it is partly based upon an
erroneous premise which is now in conflict with the undertaking that has been offered on behalf of the
respondent.
The question of value is of course relevant in the assessment of the respondent's conduct in
attempting to obtain the appellant's shares in September 1996. The evidence certainly does not reveal
any charitable disposition on the respondent's part towards the appellant, at least by 1996. It would
be quite unrealistic to accept the respondent's claim that he believed at that time that the appellant's
shares for which he was willing to make an offer of $11,500 did not have any value. His Honour did
not make a specific finding with respect to that evidence, but the evidence as a whole suggests that the
only realistic view is that the respondent at the relevant time was endeavouring to assert and obtain an
advantage arising from the weak position of the appellant, and that he believed the shares to have
material value.
CONCLUSIONS
The principal submissions of counsel for the appellant in relation to the antecedent debt and the
forced sale threat should be accepted. The failure of the learned trial judge to identify the persistence
of the respondent in asserting entitlement to the antecedent debt as inequitable and unfair was a
fundamental error. On the primary facts actually found by the learned trial judge and on uncontroverted
facts from the record of proceedings, the only reasonable conclusion open is that the respondent's
conduct in relation to the antecedent debt, and in attempting to dilute the appellant's shareholding and
obtain the appellant's shares amounted to conduct of the kind described in s.260(2). The respondent's
conduct in this respect both before and during the proceedings, and in using his claim to the antecedent
debt as a factor in the attempt to obtain the appellant's shares is conduct within both limbs of s.260
when regard is had to the broad definitions in ss.260(5) and s.53. His Honour's refusal to grant relief
of any kind was necessarily influenced by the above errors.
The question remains - what should this Court now do?
One starts with the premise that the appellant is entitled to a finding that oppressive conduct
occurred within the meaning of s.260(2). But it does not follow that he is automatically entitled to his
preferred remedy of compulsory purchase by the respondent of his shares, let alone to fixation by the
court of a date for valuation which would give him the benefit of a peak or plateau in what has been
described as a volatile market.
In view of the length and expense of the trial it would be undesirable simply to set aside the
orders below and order a retrial. Counsel for the appellant sought an order that the matter be remitted
to the learned trial judge with a direction that the respondent be ordered to purchase the appellant's
shares valued as at 30 September 1996, and that the parties be given a limited right to call evidence on
further aspects of valuation such as the rate of discount to be allowed for a notional freeholding of the
land, and the presentation of up-to-date accounts of the trading of the company. Considerable difficulty
however would be likely to arise in a limited retrial of this kind by the same judge, as the principal
substituted findings and approach directed by this Court are contrary to his Honour's basic approach
to the evidence. In any event, we are by no means satisfied that the appropriate order is one of
compulsory purchase of shares valued as at 30 September 1996.
The initial question then is whether the respondent ought to be required to purchase the
appellant's shares, and if so according to valuation as at what date? The submissions of counsel for both
parties make it clear that their clients regard the current state of the economy and market as less
favourable than it was at the date of institution of the proceedings or at trial. Counsel for the respondent
submitted that in the event that this Court held that findings of oppression should be made against his
client, it would be preferable that the company should be wound up rather than that the respondent be ordered to purchase the appellant's shares valued at some selected past date. A winding up order
would enable the true market to fix the values of the parties' entitlements. Consistently with his client's
undertaking, his client's entitlement to the antecedent debt would be postponed to the entitlements of
the contributories.
It seems desirable that if an appropriate order could be framed by this Court so as to avoid
further litigation between these parties, this Court should make such an order.
Although the appellant is entitled to a finding that in two particulars the respondent was guilty
of oppression, the merits are by no means entirely on one side. The threat of 2 September 1996 failed
and was not proceeded with. Further, the initial expectations of the joint venturers proved to be
unrealistic and circumstances altered appreciably after the venture commenced. In the result the
appellant, who had given the respondent reason to expect that the appellant would probably be able
to contribute some money to the company, failed to live up to expectations. The project became far
more expensive than had been originally expected. The respondent continually injected personal capital
by way of loans to the company to enable the project to remain viable. After some dispute between
the parties, the appellant "distanced himself" from the management of the company. The respondent
continued to advance the position of the company to the best of his ability. Still later, the appellant, by
suffering a criminal conviction, made further directorial participation by himself impossible. Then, on 1
September 1996 the appellant asked for the repayment of the only moneys that he had invested in the
company, which then stood at $8500. The respondent overreacted and sought to take unfair advantage
of his position, but as already mentioned did not succeed in doing so. Co-management of the company
had ceased long before the events which precipitated the litigation, and trust between them had
evaporated. The parties are agreed on one thing - that it is desirable that they be separated.
In light of the above facts it is difficult to see why the appellant should be given the benefit of
forcing the respondent to purchase his shares, particularly at a time that is advantageous for him and
disadvantageous to the respondent. An order for purchase of the shares at today's value seems fairer
than at an arbitrary past date, and in some respects might be thought better than an order winding up
the company. But it suffers from the disadvantage that further litigation would then become necessary
enabling further valuation evidence to be called of today's values. Apart from the disadvantage and
expense of further litigation, the result would be a hypothetical one in contrast to a liquidation where the
true market would bespeak the result. It may fairly be deduced from the wide range of valuers' opinions
about the kiosk and restaurant site ($0.5M, $2M and $5.189M) that the value is problematic and that
a judicial conclusion as to what a purchaser would pay for the property has a strong chance of being
falsified by subsequent events. A possible outcome, which would be unfair to the respondent, is that
the appellant would be paid a price which might turn out to be inflated, the respondent being left to bear
the risk and responsibility of carrying the venture to a conclusion.
A winding up order was foreshadowed by the Court as a distinct possibility during argument.
We have fluctuated on the question whether that represents the most appropriate relief for the Court
to order at this stage. There are however difficulties in the way of making such an order. Firstly, this
is not the relief which the appellant seeks: a winding up order might be less favourable to him than
permitting the company to continue trading so that the respondent might sell the property to mutual
advantage if and when the market improves. Secondly, it sometimes happens that the liquidator's costs
and professional fees swallow up an appreciable portion of benefits that would otherwise be available
to the shareholders. Thirdly, although the evidence suggests that the company's assets are worth some
millions of dollars, their liabilities are also very substantial; in the present economic climate there must surely be a risk that a sale of assets by a liquidator would produce a very modest nett return. Fourthly,
the danger to the appellant of the respondent reviving his proposal to water down the appellant's
shareholding by converting debt to equity does not, in the light of the conclusions reached in this Court,
seem to be likely to eventuate, and it could in any event be prevented by the framing of an appropriate
injunction. There is of course an evident advantage in severing the parties' business connection. But
it is also true that the appellant has not participated in the management of the company for a
considerable time, and that his continuing as a shareholder does not appear to have caused any practical
difficulty in the day to day running of the company. And neither party wants the company to be wound
up.
There remains the prospect of permitting the company to proceed as at present constituted
subject to various injunctions or undertakings. The negative side of this is that the parties have lost
whatever trust they originally reposed in one another and the future management of the company now
lies solely in the hands of the respondent. On the other hand there now exists an undertaking which
apparently puts an end to the appellant's complaint with respect to the antecedent debt. It was not
submitted that an undertaking in these terms would be in any respect inadequate. There is no reason
why additional undertakings (or if necessary injunctions) could not be framed to minimize any prospect
of future oppression, and to ensure that the opportunity is kept open of realizing the property at a time
more favourable than the present. Of course if the respondent is unwilling to do this or if he perceives
a long term falling market, he would seem to have the capacity, either as a creditor or as a director to
cause the company to be placed into liquidation. That however would at least have the merit of being
the act of a party pursuant to law rather than a compulsory order made by the court against the wishes
of both parties.
It seems to us that this latter option at least leaves the way open for a maximum favourable
realization of the venture.
We would therefore propose the following orders.
ORDERS
The appeal is allowed, and the orders of the trial judge set aside. Injunctions will be granted
(or undertakings offered by the respondent) to be agreed by the parties or in default thereof settled by
the Court, with the primary object of avoiding future oppressive conduct by the respondent.
The making of a formal order is postponed for 28 days. In the meantime the parties are granted
liberty to present further submissions in relation to the form of order and in relation to costs both of trial
and appeal. Such submissions should be filed and exchanged by the parties and filed in this Court no
later than 21 days from today's date.
IN THE COURT OF APPEAL
SUPREME COURT OF QUEENSLAND
Appeal No. 1332 of 1998
Brisbane
Before Pincus JA Thomas JA Byrne J
[Raymond v Cook & Ors]
BETWEEN:
ROBERT ERIC MICHAEL RAYMOND
(Applicant) Appellant
AND:
HAROLD ERNEST COOK, MAUD COOK,
LESLIE ALFRED COOK, MONIKA MARIA COOKand YVONNE MANDY COOK
(Respondents) Respondents
REASONS FOR JUDGMENT - BYRNE J.
Judgment delivered 27 October 1998
Except with respect to the appropriate relief, I agree with Pincus and Thomas JJA.
Despite the considerations tending against a winding up mentioned in their reasons, in my
opinion the parties should now confront the inevitable: that the corporate vehicle by which
their joint venture was to be conducted is to be wound up, at least unless agreement is
reached promptly upon the terms of an acquisition of the appellant’s shares.
The respondent’s oppressive conduct seems symptomatic of deep-seated
antagonism. Hostility is evident both in the oppression which justifies the Court’s
intervention and in the conduct of the litigation. Undertakings or injunctions fashioned to
cope with the existing manifestations of the breakdown in mutual trust and confidence are, I think, most unlikely to address adequately the real concerns that have resulted in the
parties’ behaviour. In my view, it is not satisfactory to make orders that would allow the
respondent to retain sole future management, subject only to restraint of conduct of the kind
that has so far occurred. That will lead to more trouble.
The respondent’s expressed preference for winding up rather than a purchase order
is consistent with the notion that the venture is really over. And not to order a winding up
now - albeit one postponed for 28 days or so to enable the respondent to purchase the
appellant’s shares by agreement - seems to me likely to advantage the respondent unduly
in any buyout negotiations which might take place when he is subjected to some restraint
by undertaking or injunction.
The parties are, as the other members of the Court point out, agreed on one thing
- that it is desirable that they be separated. I favour orders calculated to achieve that result.
I agree that an order for purchase of the appellant’s share should not be made, for the
reasons given by the majority. But a winding up does seem to me appropriate, and sooner
or later bound to come to pass; it may as well be sooner.
s.246AA. However for the purposes of this case reference will continue to the provision as numbered at the
of the Companies Act 1961 (acting "in the affairs of the company in their own interests rather than in the interests of the members as a whole, or in any other names whatsoever which appears to be unfair or unjust to other members"), having found that the majority directors had failed to observe the requisite standard of commercial morality and that they favoured another company's interests over that of the company, ordered the company to be wound up. The terms of s.221(f) of the Companies Act may be compared with those now appearing in s.260(2) of the Corporations Law which gives wider remedies than those available under s.222 of the former Act.
(1994) 13 ACSR 368, adopting the analysis of BH McPherson in "Winding up on the 'Just and Equitable'
Ground" (1964) 27 MLR 282.
land at $1,610,000.
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