Re B Personal Pty Ltd
[2016] VSC 211
•3 May 2016
| IN THE SUPREME COURT OF VICTORIA AT MELBOURNE | Not Restricted |
COMMERCIAL COURT
CORPORATIONS LIST
S CI 2012 04565
IN THE MATTER OF B PERSONAL PTY LTD (ACN 094 972 246)
BETWEEN:
| JOHANN CHRISTOPHER BILSBOROUGH | Plaintiff |
| v | |
| SHANE ALEXANDER BILSBOROUGH, FIONA ANNE CLARK AND S B GROUP INTERNATIONAL PTY LTD | Defendants |
JUDGE: | Robson J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 3 June 2013 |
DATE OF JUDGMENT: | 3 May 2016 |
CASE MAY BE CITED AS: | Re B Personal Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2016] VSC 211 |
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CORPORATIONS – Oppression – Two siblings shareholders in a company itself a shareholder in joint venture – Profits of joint venture diverted into personal account of one of the shareholders – Oppressive conduct pursuant to ss 232 and 233 of the Corporations Act 2001 (Cth) – Consideration of ss 180 and 181 of the Corporations Act 2001 (Cth).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P W Collinson QC with Ms J Collins | Schembri & Co |
| For the Defendants | No appearance by or on behalf of any of the defendants |
TABLE OF CONTENTS
Introduction.......................................................................................................................... 1
The witnesses....................................................................................................................... 3
The dispute........................................................................................................................... 3
B Personal and the Global Corporate Challenge............................................................ 5
The evidence........................................................................................................................ 6
Johann’s evidence................................................................................................... 6
Shane’s affidavit.................................................................................................... 10
Mr Lewin’s evidence............................................................................................ 16
Mr Noonan’s evidence......................................................................................... 17
Oppression in the conduct of B Personal’s affairs........................................................ 18
Authorities on oppression............................................................................................... 20
Analysis and conclusions................................................................................................. 21
Shane’s breach of statutory duties.................................................................................. 23
HIS HONOUR:
Introduction
On 3 June 2013, the proceeding came on for hearing before me. The first and second defendants had been represented in the proceeding until the previous week. There was no appearance for them in court. I directed that the three defendants be formally called. There was no appearance for the defendants. The court was informed that the third defendant has been deregistered. The matter therefore proceeded before me on the basis that it was unopposed.
In this proceeding the plaintiff, Johann Bilsborough (Johann), a director and shareholder of B Personal Pty Ltd (B Personal), sought relief under the Corporations Act 2001 (Cth) (the Act) and at law arising out of the conduct of his brother, the first defendant, Shane Bilsborough (Shane), also a director and shareholder of B personal.
Johann’s central complaint in the proceeding is that Shane wrongfully diverted to Shane’s privately controlled company, the third defendant, SB Group International Pty Ltd (SB Group) payments due to B Personal.
Johann sought relief in the following terms:
(a) that Johann have leave pursuant to s 233(1)(f) and/or (g) and s 237 of the Act to bring a proceeding in the name of B Personal against Shane for equitable compensation and compensation pursuant to s 1317H of the Act;
(b) that judgment be entered against Shane for payment to B Personal of the sum of $1,249,000 plus interest;
(c) that Johann be authorised pursuant to s 241 of the Act to take all necessary steps in the name of B Personal to enforce that judgment;
(d) that Shane and the second defendant, Fiona Clark (Fiona), pay Johann’s costs of the proceeding.
As can be seen, leave was sought under both ss 233 and 237 of the Act for Johann to bring proceedings in the name of B Personal against Shane. Section 233 provides for the orders that may be made, inter alia, where the court finds that the conduct of a company’s affairs (in this case B Personal) is oppressive to a member of the company. That is, the order is sought under the oppression provisions. Section 237 applies where, inter alia, the court gives leave to a person to bring proceedings on behalf of a company (in this case B Personal). These proceedings are commonly referred to as derivative proceedings.
Johann’s case was that if it established the necessary oppression to enliven s 233 and/or establish the criteria for leave be so given as set out in s 237(2), that orders then be made on the basis that such proceedings had been commenced by the proceeding before me. Thus the first proposed order would enliven the proceeding as being one made pursuant to an order under s 233 and/or s 237.
On the basis that such an order had been made, on the basis of the evidence before the court, Johann (on behalf of B Personal) sought the orders in (b), (c) and (d) above.
For the reasons given below, I find that Johann has satisfied s 232 of the Act and enlivened the court’s powers to make an order under s 233 of the Act as sought in order (a) above at paragraph 4. I am also satisfied that in my discretion I ought to make orders under s 233(f) and (g) of the Act as sought in order (a) above at paragraph 4.
On 3 June 2013, I announced that I proposed to make orders in the proceeding that:
(a) the plaintiff have leave pursuant to s 233(1)(f) and/or (g) and s 237 of the Act to bring a proceeding in the name of B Personal against the first defendant for equitable compensation and compensation pursuant to s 1317H of the Act;
(b) judgment be entered against the first defendant for payment to B Personal of the sum of $1,249,000 plus interest to today’s date of $107,647.08;
(c) the plaintiff is authorised pursuant to s 241 of the Act to take all necessary steps at law in the name of B Personal to enforce this judgment;
(d) the first defendant pay the plaintiff’s costs of the proceeding; and
(e) the second defendant pay the plaintiff’s costs of the proceeding insofar as they relate to the claim made against her.
The authenticated order states that the order was made by consent. That is not correct, and the order ought to be corrected under the slip rule. The orders differ slightly from those sought by Johann.
The witnesses
Johann gave oral evidence and relied on his affidavit of 8 August 2012 that was tendered. Johann also called Andrew Stuart Lewin, a solicitor, who became a director of Global Corporate Challenge Pty Ltd (GCC) and gave evidence of the affairs of GCC and its financial dealings with B Personal and Shane. Johann also called Timothy Wayne Noonan, who had been the financial controller of GCC.
No evidence was led on behalf of the defendants due to their non‑appearance. I have set out the substance of the affidavits filed on behalf of Shane for the record. Naturally, I have not taken those affidavits into account as evidence in the proceeding.
The dispute
This matter arose out of a dispute between two brothers — the plaintiff, Johann and the first defendant, Shane — concerning the affairs of the company of which the brothers were directors and shareholders, B Personal. Shane’s wife, Fiona (the second defendant) was also, at all relevant times, a shareholder in B Personal and, at one point, was purported to have been made a director.
Some days prior to the hearing of the matter on 3 June 2013, Fiona resigned as a director of B Personal. For that reason, the issue regarding her purported appointment was not ultimately pressed by Johann.
As referred to above, Johann’s central complaint in this proceeding is that Shane wrongfully diverted to Shane’s privately controlled company, SB Group, payments and opportunities belonging to B Personal.
Johann sought to bring proceedings in the name of the company on the following bases:
(a) Shane’s conduct in the affairs of B Personal (and GCC) were such as to enliven the court’s jurisdiction to grant relief in respect of oppressive conduct pursuant to ss 232 and 233 of the Act, that relief being leave for the company to institute proceedings against Shane for breaches of his fiduciary and statutory duties under ss 180, 181 and 182 of the Act owed to B Personal, and to seek equitable compensation and compensation under s 1317H of the Act in respect of those breaches;
(b) alternatively, leave should be granted under s 237 of the Act to B Personal to institute proceedings against Shane for breaches of his fiduciary and statutory duties under ss 180, 181 and 182 of the Act owed to B Personal and to seek equitable compensation and compensation under s 1317H of the Act.
Accordingly, the relief sought by Johann encompassed findings with respect to:
(a) oppressive conduct on the part of Shane in conducting the affairs of B Personal in a manner prejudicial to members as a whole under s 232(d) of the Act;
(b) alternatively, that the matters set out in s 237 relating to a derivative action are satisfied; and
(c) Shane’s alleged breaches under any or all of ss 180, 181 and 182 of the Act owed to B Personal in a manner giving rise to a right to equitable compensation and/or compensation under s 1317H of the Act.
B Personal and the Global Corporate Challenge
B Personal was formed in 2000 by Shane and Johann. It provided health and fitness consultancy services. Both Johann and Shane gave evidence of their credentials and experience in that field. At the relevant periods, the shares in B Personal were held by Johann (who held two of the four shares on issue), Shane (as to one share) and Fiona (as to one share).
In 2003, the idea arose for a pedometer-based corporate exercise competition — this concept would ultimately become the Global Corporate Challenge. The genesis of the idea for the challenge was a matter of dispute in the parties’ evidence (with Shane professing it was solely his idea and Johann claiming the idea was discovered and developed jointly). It is not necessary for me to make a finding either way.
Thereafter, the parties met with Glenn Riseley (Riseley) and John Hillier (Hillier) of Flash Advertising Pty Ltd (Flash) to discuss the idea for the pedometer-based program. These discussions ultimately led to an arrangement for the incorporation of GCC to run the challenge event. The shareholdings in GCC were as follows:
(a) Flash Advertising Pty Ltd — 45 shares;
(b) B Personal — 45 shares;
(c) A & H Nominees — 10 shares.
Flash was an entity associated with Riseley and Hillier. A & H Nominees was a company associated with Riseley’s father‑in‑law, Herb Elliott. Shane was appointed to the board of GCC, along with Riseley. In 2011, Mr Stewart Lewin was appointed a director of GCC.
The evidence of the parties set out events between 2004 and 2011. From 2008, the relationship between the brothers became strained. In 2009, Shane incorporated SB Group, of which he is the sole director and shareholder.
Ultimately payments were made to SB Group in 2009, 2010 and 2011 purportedly for services provided by Shane to GCC in connection with the challenge. It is these payments that Johann claims were diverted from B Personal.
The evidence
Johann’s evidence
Johann’s evidence on the substantive issues was contained in two affidavits of Johann dated 8 August 2012 and 5 February 2013.
Johann deposes that B Personal engaged in health and fitness consultancy services outside the Global Corporate Challenge. Johann says that he provided consultancy services through B Personal and developed that business and its client base. At the time of swearing his affidavit on 8 August 2012, Johann says that B Personal no longer carried on business ‘aside from its ownership of shares in GCC’.
Johann contends that the idea for a pedometer-based fitness program arose jointly from discussions between himself and Shane.
Shane was a director of GCC and Johann was not. Johann says that Shane took on the role of director in GCC after telling Johann that he would ‘look after the best interests of the Company [B Personal] on the board of GCC.’
The Global Corporate Challenge commenced in 2004 with 3000 participants.
Johann says that both he and Shane each made contributions to GCC’s business, including the idea for the Global Corporate Challenge, ‘numerous hours’ developing the program and researching the ‘pedometer market’ in order to procure what he describes as the leading brand in the market, for the challenge.
Johann also says that he contributed $10,000 in working capital to GCC in 2003 on behalf of B Personal and a further $12,000 to $12,500 to Shane for GCC’s operating expenses in 2006.
Johann says that in 2005 participation in the event had grown, but issues arose between the shareholders in GCC regarding the split of profits. Johann says that some time in 2005 Shane told him, ‘In substance we were being screwed’ on the basis that Riseley and Hillier wanted to split the profits of GCC 80/20 (in favour of Flash) because they claimed to be doing ‘all the work’.
Johann says that he began to be excluded from the involvement with GCC at the time of these negotiations in 2005.
From that time, Johann says that Shane began to hold himself out as the only person whose interests were affected by B Personal’s shareholding.
Johann explains that the outcome of the negotiations with the other GCC directors was what was referred to as the ‘60/40 Deal’, whereby GCC’s surplus profits would be distributed and paid to its shareholders in the following proportions:
(a) to A & H Nominees Pty Ltd as to the first 10 per cent; and
(b) as to the balance after A & H Nominees was paid:
(i) Flash was entitled to 60 per cent;
(ii) B Personal was entitled to 40 per cent.
Johann says that B Personal was entitled to distributions of GCC’s profit as a shareholder in accordance with the ‘60/40 deal’. Payments were received by B Personal between 2006 and 2008.
Johann confirmed at the hearing that money was received by B Personal from GCC between 2006 and 2008 and that those funds were ‘divided [as between Johann and Shane] how Shane thought fit at the time’.
In 2008 Johann says he began to become suspicious of his brother’s conduct in relation to his role as GCC’s director. He says that Shane initially advised him earlier in 2008 that the 2008 challenge was expected to generate $1 million. However, in June 2008 Shane told Johann that GCC did not make any money for the year ending 2008 because costs had increased.
Johann says that, several months later, Shane attempted to pressure Johann into selling his shares, by providing him a share transfer form and telling him he had to sign it. Johann told Shane that he would not sell his shares without seeking legal advice and that, after taking that advice, he told Shane he would sell the shares once he knew what they were worth.
Johann says he was provided with a valuation of B Personal by BDO, which stated that B Personal was valued at 90 cents. Johann says he subsequently refused several offers by Shane to buy Johann’s shares for $5000 (apparently shortly after the valuation was presented), $10,000, $20,000 and finally, $75,000 on 15 February 2010.
Johann says that he then began investigating the affairs of the company and GCC. He says that he requested GCC’s books and records. He says that Shane did not provide these books and records.
Johann said that, despite signing B Personal’s company returns as required, he did not read those returns or receive a copy.
In 2010 Johann says that he enlisted a friend whom he describes as an ‘experienced businessman’, Jim Smith, and an accountant, Mr Jim Power, and former fraud squad investigator, Mr Alan Bowles, to make inquiries about GCC on his behalf. In the course of those enquiries he says that he received copies of B Personal’s company tax returns for the financial years ending 30 June 2006, 30 June 2007 and 30 June 2008, which disclosed:
(a) for the year ended June 2006, B Personal earned income (which he says was attributable to consulting fees) of $139,669, but with expenses of $205,746 B Personal sustained a loss of $66,077;
(b) for the year ended June 2007, B Personal earned income (which he says was attributable to consulting fees and other income) of $286,423, but with expenses of $295,246 B Personal sustained a loss of $8,823; and
(c) for the year ended June 2008, B Personal earned income (which he says was attributable to consulting fees and other income) of $269,625 and had expenses of $188,336, giving B Personal a profit of $81,289 (the tax return exhibited to Johann’s affidavit for the year ended 30 June 2008 actually discloses expenses of $189,955 and therefore an operating profit of $79,670).
Johann says that he received an email from Mr Lewin in December 2011 (which, in turn, contained an enclosure drafted by Riseley) outlining, relevantly, the following circumstances:
(a) that Shane had held himself out as the only person interested in B Personal’s shareholding from 2005 and that he claimed to have bought Johann’s shares in B Personal in 2010;
(b) that, following a request by Shane to GCC’s finance director, payments were made to SB Group by GCC following the events in 2009 and 2010, and that there was a further anticipated distribution to shareholders following the 2011 event; and
(c) that GCC had not been apprised of the details of the dispute between the brothers and had not known that the payments made to SB Group were misdirected and ought to have gone to B Personal.
The schedule to that email set out the following table of payments in respect of the Global Corporate Challenge:
40% SB 60% Flash 10% Herb 2006 200 300 50 2007 220 330 55 2008 220 330 53 2009 220 330 55 2010 864 1,296 240
The table refers, apparently erroneously, to SB Group receiving payments in 2006 to 2008. Johann did not allege that such payments had been improperly diverted from B Personal to SB Group in those years.
Johann says that the payments made to SB Group in 2009, 2010 and 2011 were made without his knowledge and consent.
Shane’s affidavit
Shane’s evidence on the substantive issues is contained in an affidavit sworn 28 November 2012. As indicated above, this affidavit was not read into evidence. Nevertheless, I set out what Shane deposes for the sake of completeness.
Shane says that his expertise is in human nutrition and describes B Personal’s business as ‘nutrition and exercise education for the fitness industry’.
Shane explains that Johann initially only owned one share in B Personal until an additional share was transferred to Johann in 2003 after Johann’s romantic relationship with another shareholder broke down.
Shane contrasted his own business experience and connections with Johann, whom he says had no experience in a corporate environment.
Shane says that he conceived the idea for the pedometer-based corporate challenge (that would later become the Global Corporate Challenge) without any input from Johann, whom he says had ‘nothing to do with the concept, or its development’. He further says that Riseley was a connection of his, whom he later met to develop the idea for the Global Corporate Challenge.
Shane says it was understood that it was Johann’s role to bring in clients for B Personal, while Shane worked on GCC. He said that Johann failed to find clients to ‘generate cash flow’ for B Personal.
Shane says, by contrast, he performed many hours of work for GCC. He says that he was not paid a salary by GCC, but would only get paid if at the end of the year there were funds left over ‘once all the GCC bills were paid’.
Shane says that he does not recall the shareholders agreeing to an arrangement in the terms of the ‘60/40 Deal’ of 2005.
Shane disputes Johann’s assertion that Shane used the negotiations with Riseley and Hillier at this time to exclude Johann from GCC’s management. Rather, he says,
I had face to face meetings with Glenn and John because I knew GCC’s business intimately [and] Johann had little to do with the business.
Shane’s evidence consistently complained that Johann received payments from GCC, even though it was Shane who did most of the work.
Shane says in relation to the Global Corporate Challenge in 2004, ‘[d]espite working long hours in the business (and long before it commenced in 2003), I was not paid anything’, which he says put strain on his family finances.
Shane says that in 2005 Johann’s contribution to the challenge was minimal, but he nevertheless received $22,000 from the profits of the challenge. By contrast, Shane says he was paid $48,000 for ‘effectively a year’s salary’.
In 2006, Shane says B Personal received payments from GCC of $184,000 plus GST, of which $70,000 was paid to Johann for ‘about 2 to 3 hours of work into GCC’ while Shane was paid $114,000 for ‘many hundreds of hours’ work’ for which he did not receive a salary throughout the year, which left him and his family in financial stress.
In 2007, Shane says that GCC paid to B Personal $204,000 plus GST, with Johann again receiving $70,000 for ‘doing perhaps a few hours’ work’, while Shane was paid $115,000 ‘for many hundreds of hours work’.
Shane says that because GCC only received its annual revenue following the Global Corporate Challenge event, it was necessary for shareholders to contribute to working capital during the year, which would then be repaid ‘funds permitting’ after each event.
Shane says that in 2006, he and the second defendant, his wife, loaned GCC $25,000, whereas Johann declined to provide any funds on behalf of B Personal for GCC’s operating costs.
Again, in 2007, Shane says that he and his wife advanced $300,000 to GCC on an unsecured basis by way of a shareholder loan on behalf of B Personal for the purposes of GCC’s working capital, while Johann did not provide any funds as he ‘did not want to risk his house’.
In 2007, Shane says he responded to a request from Riseley for a further $400,000 for working capital, which Shane and Fiona advanced. Shane says that Johann was asked to contribute but did not.
Shane says that in 2007 he and Fiona ‘advanced a total of $700,000 to GCC on the understanding that contributors would be compensated when the company was in a position to do so’.
Shane further says that in 2007 GCC’s board agreed that, when funds were available, those who contributed working capital for the company would be paid ‘risk remuneration’ on the money lent. Johann says that Shane never disclosed the concept of ‘risk remuneration’ on money loaned to GCC but that if he had been offered the opportunity to loan on these terms, he would have taken it up.
In 2008, Shane says that Johann was apprised of the problems in GCC’s business and the likely underperformance of GCC for that year. He says that, due to GCC’s problems in 2008, he again requested a contribution from Johann to GCC’s working capital and when that loan did not eventuate he says that he and his wife loaned an amount of $700,000, in addition to granting two mortgages over their house to secure funding by the Commonwealth Bank of Australia to GCC.
Shane describes Johann as ‘contribut[ing] nothing and taking absolutely no risk’.
Shane says that again, in 2009, he and his wife advanced $670,000 in unsecured loans to GCC for working capital, while Johan contributed nothing.
Shane says that in 2008 Johann said that he could no longer do any work for B Personal. Shane attributes the failure of B Personal to Johann’s absence from the business.
Shane says that in 2009 he discussed with Riseley that he would provide services to GCC through SB Group.
Between 2008 and 2010, Shane describes services which he performed for GCC as follows:
(a) following a revelation in 2008 that the pedometers for the event were ‘substandard’, Shane says that he set about developing and dispatching new, more reliable pedometers. This included establishing a pedometer-testing laboratory involving Shane’s father (who he says was an engineer), ‘many long hours pedometer testing’ and travelling to China in 2008, 2009 and 2010 to test pedometers;
(b) completing presentations to participants during and following the completion of each event, including trips to the United Kingdom (5–6 weeks), Europe (6–7 weeks) and the US (7–8 weeks);
(c) reviewing the ‘latest medical research on diabetes, heart disease and physical activity’ and presenting to companies on these research developments;
(d) establishing a research arm of GCC, called the Centre for Heart Disease and Diabetes Prevention; and
(e) media and public relations for GCC, including a contribution to its newsletter.
Shane says he was then asked by GCC’s finance manager, Tim Noonan, for an invoice as at 30 June 2009 for consultancy fees.
He says SB Group received $204,000 plus GST in respect of that invoice. That invoice describes his work as ‘Consultancy to GCC’.
Further invoices were raised in 2010. There are four invoices for the quarters between July 2009 and June 2010. Each of the invoices is for $237,600 (including GST) and on each appears an annotation to the effect that the invoices are in respect of:
Consultancy Fee paid in arrears as per contract ($400/hour X 8 hours /200 days totalling $640,000, plus research and development of GCC Nutrition Buddy, $90,000, Pedometer research $60,000 plus Travel Per diams $74,000, totalling $864,000).
Shane described these payments as follows:
Glenn and I also discussed that 2010 would be a ‘catch up’ year in addition to payment of consultancy services for that year. That is, we would receive a sum which reflected a fair level of remuneration for the years when we received little or no salary (in the first year of the event held in 2004, neither of us were paid anything), directors fees (which had been unpaid for the 2004 – 2010 years) and further we would be compensated for the risk we had undertaken in advancing unsecured loans to GCC and putting our homes up as security for additional funding. Glenn, Tim and I agreed on the payments to be made to A & H Nominees, Flash Advertising and SB Group International and considered them to be fair and reasonable. Tim Noonan suggested that SB Group International account to GCC by raising several quarterly invoices for consultancy fees. Now produced and shown to me and marked “SAB-10” are true copies of the invoices raised by SB Group International totalling $864,000 plus GST.
Glenn approved the payments to SB Group International. Tim Noonan, the CFO, transferred funds into my account on about 25 November 2011.
Shane says that in April 2010 he discussed the possibility of winding up B Personal with Johann due to the costs of keeping it operating. Shane says that he subsequently offered to buy Johann’s shares and he says that Johann agreed (by way of a letter from his solicitors) to sell Shane his shares for $75,000. Although some correspondence concerning the share sale was put in evidence, Shane’s affidavit did not exhibit the relevant letter of April 2010 by which it was agreed that Johann would sell his shares to Shane. The share sale did not ultimately proceed.
Shane says that on 12 August 2010, B Personal received a letter from GCC which asked shareholders to help fund GCC’s working capital requirements. That letter requested $1,957,000 from B Personal (which was a contribution calculated in accordance with its proportion of the shareholding in GCC).
A further letter was sent on 23 September 2010 from GCC requesting that shareholders put up security to enable GCC to access bank funding and/or themselves fund GCC’s working capital requirements.
Shane says that B Personal could not afford to contribute working capital commensurate with its shareholding because Johann would not contribute. He says that if B Personal would not contribute its share of the working capital, the other GCC shareholders were not prepared to either.
Shane says that he then discussed putting money into GCC from Shane’s own company, SB Group. He describes this as follows:
Due to the total breakdown in communication between Johann and me, and the refusal of Johann to put funds into GCC, I approached Glenn telling him that Fiona and I were no longer prepared to put money in on behalf of B Personal for the 2009 [sic] event. We discussed putting money in via my company, SB Group International. Glenn had no issue with this, because GCC needed money and the financial markets were really tight. The board decided that if funds were not going to be put in via B Personal, they would accept funds from my company, SB Group International.
Shane says that SB Group subsequently advanced $720,000 to GCC by way of an unsecured loan from SB Group in 2010.
In 2011, Shane says that GCC’s business was sold, which prompted a separate dispute between Shane and the other directors of GCC. That dispute is not relevant for present purposes.
Shane denies holding himself out as the sole interested party in B Personal’s ownership stake in GCC.
Shane says that payments were made by GCC to B Personal in 2006, 2007 and 2008, and that distributions as between Shane and Johann were agreed by both. Shane says that payments made to shareholders represented consultancy fees, not distributions.
Shane says that he did not exclude Johann from the affairs of GCC but rather he sent many updates to Johann, including ‘sales reports and other materials relevant to GCC’s activities [but] Johann never took an interest in the finances of B Personal or GCC’. Shane says that Johann could have looked at GCC’s accounts any time but was not interested.
Mr Lewin’s evidence
Mr Stuart Lewin was a director of GCC from early in 2011. He appeared under subpoena to give evidence about the ‘60/40 Deal’ among other matters.
Mr Lewin gave evidence of a meeting he had with Shane and Riseley shortly after he became a director of GCC. Mr Lewin says that during that meeting the parties discussed in broad terms the dispute between Johann and Shane. He says that, at that time, he was aware of the following arrangements between the various shareholders in GCC, which were discussed during the meeting:
(a) that the shareholders in GCC were not paid dividends. Rather, once the profits from the Global Corporate Challenge were known, each shareholder raised an invoice for its share of the profits;
(b) the share of the profits for which each shareholder company would invoice were in accordance with the ‘60/40’ deal;
(c) at the time of the meeting, Mr Lewin understood that Shane had provided services through, and issued invoices from, B Personal; and
(d) the invoiced amounts would absorb all of GCC’s profit.
In summary, Mr Lewin gave evidence at the hearing that, in practice, the ‘60/40 Deal’ operated as follows: GCC first ascertained each shareholder’s entitlement then requested each shareholder to raise an invoice for payment of a consultancy fee corresponding to that entitlement. Paying those invoices had the effect of clearing GCC’s profit each year.
At the time of his appointment, Mr Lewin says that there were no formal contract arrangements with ‘related party service providers’ but that Shane did offer various services ‘that had a direct relationship to GCC’s business’, including pedometer testing and client presentations.
Upon his appointment as a director in 2011, Mr Lewin set about formalising the service arrangements. At this time he learned that invoices had been issued by Shane’s company, SB Group, rather than B Personal. Contracts were subsequently entered into with Shane for the provision of services, including a contract with SB Group. Those service agreements provided for a fixed sum in exchange for specified services over a 12‑month period.
Mr Lewin says further that those arrangements were terminated in June or July 2011, when the board resolved to sell GCC’s business. Shane’s company, SB Group, was paid $165,000 pro rata for the services offered in 2011 before termination of the arrangements.
Mr Noonan’s evidence
Mr Tim Noonan was the financial controller of GCC from September 2009. He appeared under subpoena to give evidence about the payments made by GCC to SB Group at the direction of Shane.
Mr Noonan gave evidence that he understood payments were made between the shareholders of GCC in accordance with the ‘60/40 Deal’.
Mr Noonan gave evidence that, notwithstanding SB Group’s 2009 invoice to GCC was raised before he commenced in his role there, he was aware that the payment of $224,400 was made to SB Group by GCC in respect of that invoice in the months before his engagement with GCC.
Mr Noonan gave evidence that four invoices from SB Group to GCC totalling $864,000 were paid in the 2009–2010 financial year. Mr Noonan says he paid SB Group that amount at Shane’s direction. Mr Noonan also gave evidence that an amount of $165,000 was paid to SB Group in respect of an invoice raised in 2011.
Oppression in the conduct of B Personal’s affairs
The plaintiff gave the following particulars of the oppressive conduct by Shane of B Personal’s affairs:
…
8.From late 2005, Shane excluded Johann from the management of GCC’s business.
9.At all relevant times between 2006 and late 2010, Shane held himself out within GCC as being the only person whose interests were affected and represented by B Personal’s shareholding.
10.In 2009, Shane permitted and caused the diversion of $220,000, being profits of GCC to which B Personal was entitled, to S B Group International Pty Ltd (SB Group).
11.In 2010, Shane permitted and caused the diversion of $864,000, being profits of GCC to which B Personal was entitled, to SB Group.
12.In around early 2011, Shane permitted and caused SB Group to enter into a “contractor agreement” with GCC, which provided for SB Group to provide services to GCC in return for financial reward.
13.The services SB Group agreed to provide pursuant to the contractor agreement included testing and sourcing of pedometers used in GCC’s global corporate challenge event and event presentations. Those services were within B Personal’s line of business.
14.By reason of these matters, by procuring GCC to enter into the contractor agreement with SB Group, Shane permitted and caused the diversion of a corporate opportunity from B Personal to SB Group.
15.Johann had no opportunity to participate in any similar arrangement for the provision of services to GCC for financial reward, because Shane had excluded Johann from management of GCC’s affairs from late 2005.
16.Subsequently in 2011, Shane permitted and caused SB Group to submit an invoice for payment to GCC pursuant to the contractor agreement, and GCC paid SB Group the sum of $165,000 pursuant to the invoice.
17.By reason of the matters referred to in paragraphs 0 – 0, between 2009 and 2011, Shane permitted and caused GCC to pay SB Group the total sum of $1,249,000.
18.At all relevant times from 2009 to 2011, Shane was the sole director and shareholder of SB Group.
19.The conduct referred to in paragraphs 0 – 0 occurred without Johann’s knowledge or consent.
20.By reason of matters and conduct referred to in paragraphs 0 – 0:
i.Shane preferred his own personal financial interests over the interests of B Personal and over Shane’s duties as a director of B Personal;
ii.Shane did not discharge his duties as a director of B Personal with the degree of care and diligence that a reasonable person would exercise if they were a director of B Personal in the same circumstances;
iii.Shane did not act in good faith in the best interests of B Personal;
iv.Shane did not exercise his powers as a director of B Personal for proper corporate purposes;
v.Shane conducted B Personal’s affairs in a way which was contrary to the interests of B Personal’s members as a whole, and which was oppressive to, unfairly prejudicial to, or unfairly discriminatory against, Johann.
The plaintiff’s particulars of oppression also covered the issues concerning the conduct of the meeting at which Fiona was purportedly installed as a director, and Shane’s conduct in allegedly pressuring Johann to sell his shares. In some circumstances, conduct of board meetings can result in a finding of oppressive conduct,[1] as would undue pressure to sell shares in some circumstances. However, given that, as detailed below, the other evidence concerning the diversion of opportunities and profits is more than sufficient to warrant a finding that Shane acted oppressively in conducting B Personal’s affairs, it is not necessary to make separate findings about the conduct of the meeting.
[1]See, for example, Young J’s decision in John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A’asia) Pty Ltd (1991) 6 ACSR 63.
Authorities on oppression
There are countless authorities on the oppression arising in circumstances where corporate opportunities or profit have been diverted. I need recite only a few.
There was a finding of oppression in similar circumstances in Sandford v Sandford Courier Service Pty Ltd.[2] In that case, Waddell CJ in equity held that the two defendants engaged in oppressive conduct in diverting opportunities to another company they owned in circumstances where those opportunities were properly within the business of the company (‘SCS’) which they owned with the plaintiff:
There is no reason, therefore, for not concluding that it could equally as well have been undertaken by SCS or a subsidiary which would have ensured that the profit went to that company. In my opinion, it should be concluded from the evidence that the business was given to Axthorn so that the benefit of any profits would be gained by the second defendants rather than the plaintiff. In doing so, the second defendants, as directors of SCS, acted in the affairs of that company in their own interests and not in the interests of its members as a whole. They were under a duty to get the business for SCS. In this respect a case coming within s 320 has been made out.
[2](1986) 10 ACLR 549 (‘Sandford’).
Section 320 was relevantly similar to s 232 of the current Act.
In Scottish Co-operative Wholesale Ltd v Meyer,[3] the common directors of a holding company and its subsidiary acquiesced in a plan to destroy the business of the subsidiary and divert that business to the holding company. It was held that their inactivity and silence (in their capacity as directors of the subsidiary) in the face of that plan, of which they were well aware, constituted conduct in the affairs of the subsidiary that was oppressive to the minority shareholders of the subsidiary.
[3][1959] AC 324.
In Scottish Co-operative Wholesale Ltd v Meyer, Viscount Simons stated that:
My Lords, it may be that the acts of the Society [holding company] of which the complaint is made and the company were bodies wholly independent of each other, competitors in the rayon market, and using against each other such methods of trade warfare as custom permitted. But this is to pursue a false analogy.
…
It is just because the Society could not only use the ordinary and legitimate weapons of commercial warfare but could also control from within the operations of the company that it is illegitimate to regard the conduct of the company’s affairs as a matter for which it had no responsibility.
Analysis and conclusions
In my view, in this case, Shane not only acquiesced in a plan to transfer the business of B Personal to SB Group, as in Scottish Co-operative Wholesale Ltd v Meyer, but took active steps to divert the relevant opportunities and profits to his privately owned company.
There was no evidence from Shane at the hearing and no written submissions filed on his behalf in relation to the substantive issues.
I note that Shane does not deny that payments were made to SB Group in 2009 and 2010 (his affidavit does not deal with the payment in 2011.)
Shane’s affidavit evidence implies that he might have considered that he was entitled to receive the payments he did by way of remuneration for all the work he says he performed in the operation of the Global Corporate Challenge and for ‘risk remuneration’ after having given loans and proffered security to enable GCC to raise capital.
There was no evidence to substantiate Shane’s claims that he made the loans outlined in his affidavit.
As indicated above, Shane’s affidavits were not read into evidence. Although his affidavits were not in evidence, I find that if they were that they would not alter my findings.
I find that, based on the evidence, the payments received by Shane via SB Group should not, in reality, be characterised as remuneration for services. Rather, the purported ‘consultancy’ arrangements arose rather from the way in which the shareholders in GCC agreed to split the profits of that company.
It was the practice of the shareholding parties to raise ‘invoices’ in respect of their payments under the ‘60/40 deal’ rather than being paid a dividend. Payment of those invoices absorbed all of the profits of the companies. They were, in effect, a dividend.
These dividend payments were profits of B Personal which were diverted by Shane to his own privately controlled company.
The diversion of these payments to Shane’s company cannot be justified on the basis of any services he may or may not have provided to GCC. There was evidence from Mr Lewin to substantiate Shane’s claims to have performed the services he did for GCC. However, I accept the plaintiff’s submissions that the services provided by Shane were in the line of B Personal’s business and should have been opportunities undertaken on its behalf or otherwise with the consent of shareholders (which was not obtained).
The company was entitled to the benefit of these profits. If there was a difference in the contribution of the brothers, that could have been dealt with (as it was between 2006 and 2008) by both taking a different share of the dividends once they were received by B Personal (as they had done from 2006 to 2008.) The hostilities between the parties did not entitle Shane to divert the entirety of the profits from the entity to which he owed fiduciary duties.
In purporting to perform those services in his own right, Shane diverted an opportunity properly within the purview of B Personal. From the outset, B Personal was the intended beneficiary of the Global Corporate Challenge opportunity. This diversion of opportunity led to a diversion of profits which were properly to be paid to B Personal.
In Sandford, it was also a basis for a finding of oppression that the second defendants had paid themselves remuneration beyond what was commercial. If any of the payments received by Shane were referable to any kind of remuneration, they were oppressive in being excessive, absorbing as they did the entirety of B Personal’s profits.
I do not find that Johann was aware of or acquiesced in the diversion of opportunities and payments to SB Group. That is so, notwithstanding his evidence that he chose to have a limited involvement in the business with his brother from some time in 2008.
Accordingly, I find that the circumstances of Shane incorporating SB Group and diverting opportunities from B Personal amounted to oppression under s 232(d) (as against members as a whole) and also under s 232(e) regarding the interests of a group of members) such as to give rise to an entitlement for relief under s 233.
The particular relief sought by the plaintiff was under s 233(1)(f), permitting the oppressed members to institute proceedings on behalf of the company.
It is not necessary to consider the relief sought under s 237. If it were, I find that:
(a) it is probable that B Personal would not itself bring proceedings, or properly take responsibility for them, or for the steps in them; and
(b) the plaintiff was acting in good faith in its application under s 237;
(c) it was in the best interests of B Personal that the plaintiff be granted leave; and
(d) there was a serious question to be tried; and
(e) at least 14 days before making the application, the plaintiff gave written notice to B Personal of the intention to apply for leave and of the reasons.
Shane’s breach of statutory duties
I was also asked to make a finding with respect to Shane’s breaches of fiduciary duty and statutory duties under ss 180 to 182 of the Act owed to B Personal.
In my view, the facts of this case squarely point to Shane’s breach of duty in diverting, and profiting from, a corporate opportunity properly belonging to B Personal. I have found that the payments to SB Group represented a diversion of B Personal’s profits by way of a dividend from GCC. This constituted a breach of Shane’s duties to B Personal.
The law is replete with cases in which a breach has been found to occur in similar circumstances as obtained in this case. The seminal statement of Lord Russell of Killowen in Regal (Hastings) Ltd v Gulliver[4] bears repeating:
[directors] may be liable to account for the profits which they have made, if, while standing in a fiduciary relationship to Regal, they have by reason and in course of that fiduciary relationship made a profit.
[4][1967] 2 AC 134 (‘Regal’).
However, in Regal, as observed by Lord Russell, the fiduciaries in question had intended to act in the interests of the company. So much cannot be said of Shane’s conduct in (a) purportedly diverting the opportunity to provide services to GCC and/or (b) in diverting profits which should have been paid to B Personal by way of a dividend.
In Cook v Deeks,[5] three directors of a company, Toronto Company, carrying on business of railway construction, obtained a contract in their own names with Canadian Pacific Railway Co (for whom the company had completed other projects) for a railway construction project. The Privy Council held that the directors breached their duties to the company (amounting, in the circumstances, to a breach of trust) in circumstances where (as their Lordships say at 562–3):
[the directors] while entrusted with the conduct of the affairs of the company they deliberately designed to exclude, and used their influence and position to exclude, the company whose interest it was their first duty to protect.
… [m]en who assume complete control of a company’s business must remember that they are not at liberty to sacrifice the interests which they are bound to protect, and, while ostensibly, acting for the company, divert in their own favour business which should properly belong to the company they represent.
[5][1916] 1 AC 554.
In all the circumstances, I find that Shane acted in a manner contrary to his duties laid out, inter alia, in ss 181(1) and 182(1) of the Act in failing to discharge his duties ‘in good faith in the bests interests of the corporation ... and for a proper purpose’ and in improperly using his position to gain an advantage for himself and cause detriment to the corporation.
I should add for completeness, that my reason for making the costs order against the second defendant are adequately set out in the transcript of the hearing on 3 June 2013.
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