Re Comprop Developments Pty Ltd
[2009] VSC 302
•28 July 2009
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
CORPORATIONS LIST
No. 5715 of 2008
| IN THE MATTER OF COMPROP DEVELOPMENTS PTY LTD (ACN 075 110 717) | |
| FRANCIS ROBERT MENZIES | Plaintiff |
| v | |
| BRADLEY JAMES MATTHEWS | First Defendant |
| COMPROP DEVELOPMENTS PTY LTD | Second Defendant |
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JUDGE: | ROBSON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 18 and 19 May 2009 | |
DATE OF JUDGMENT: | 28 July 2009 | |
CASE MAY BE CITED AS: | Re Comprop Developments Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 302 | |
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CORPORATIONS - Application to wind up on grounds of oppression and on just and equitable grounds – Company conducted as a quasi partnership – Director in day to day control distributed his share of the profits to himself without distributing other director’s share to him - Partnership broken down – Conduct oppressive – Order for purchase of shares at an agreed value – Sections 233 and 461(e), (f), (g) and (k) of the Corporations Act 2001
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M. Bevan-John | John Conquest Lawyers |
| For the Defendants | Mr R. Greenberger | Robert James Lawyers |
HIS HONOUR:
By an originating process dated 15 April 2008, Francis Menzies applies under s 233 and ss 461(e), (f), (g) and (k) of the Corporations Act 2001 for orders winding up Comprop Developments Pty Ltd or for the purchase of Mr Menzie’s shares in Comprop, on the grounds of oppressive conduct of affairs, or on the just and equitable ground.
Mr Menzies has four of the twelve issued shares in Comprop and the first defendant, Bradley James Matthews, the other eight. Mr Menzies and Mr Matthews carried on business together developing properties. Comprop was just one of the corporate vehicles they used to carry on their business. Its sole business was to develop a property at Young Street, Frankston. Mr Matthews had a two thirds interest in Comprop as he took over the interest of another investor, Mr Paul Grogan. Mr Menzies had been married to Mr Matthews aunt, Allison Menzies. Mr Matthews treated Mr Menzies as a father figure and a mentor until their relationship broke down in 2006.
Mr Matthews carried on the day to day management of the property development projects of himself and Mr Menzies. Mr Menzies conducted a long established scrap metal business at Seaford until he sold it in 2008. Mr Matthews conducts a mortgage lending and property business called Rescom Mortgage Corporation Pty Ltd. The business currently has 45 employees on its payroll and has a real estate franchise network of 30 offices employing in excess of another 150 people.
Prior to the hearing, Mr Mathews offered Mr Menzies, without making any admissions that he was liable to do so, to:
(a) purchase Mr Menzie’s shares in Comprop free of all encumbrances for $230,000; and
(b) pay Mr Menzie’s costs of the proceeding on a party/party basis.
The offer contained terms as to payment and for Mr Menzies to resign as a director on the transfer of the shares to Mr Matthews.[1]
[1]Exhibit GJK-1 to the affidavit of Brent Lodding of 23 April 2009.
Mr Menzies did not accept the offer. He did accept, however, that if the court ordered that Mr Matthews purchase his shares, as he seeks, the price of $230,000 would be fair and reasonable. As discussed below, Mr Menzies also wishes Comprop to file an amended tax return for the years ending 30 June 2005, 2006 and 2007 to expressly disclose that a management fee was paid to Mr Matthews’ company, Rescom and otherwise amend returns in relation to the fee. Mr Matthews has declined to do so.
Accordingly, the matter has proceeded before me.
Mr Menzies relies on four grounds of oppression by Mr Matthews as follows.
(a) Mr Matthews caused Comprop to advance moneys to himself and Rescom and associated companies and third parties without Mr Menzies’ knowledge or consent.
(b) Mr Matthews caused Comprop to borrow moneys from Rescom to the disadvantage of Comprop.
(c) Mr Matthews charged Comprop a fictitious management fee in favour of Rescom..
(d) Mr Matthews failed to fully and properly account for the management fee and for the Young Street development’s profit and loss for over three years.[2] Mr Menzies failed to lodge Comprop’s tax return in time, causing it to incur penalty and interest charges to the ATO.
[2]Particulars of unfair and/or oppressive acts by Mr Matthews filed 19 May 2009
I find that Mr Matthews has engaged in oppressive conduct towards Mr Menzies in terms covered by (a) and (d). The balance sheet of Comprop discloses that both Mr Matthews and Mr Menzies contributed equally to the venture as the seed capital of some quarter of a million dollars was provided by another company, Nay Pty Ltd, in which they are equal shareholders.
The expert’s report of Mr Gary Fettes and the balance sheet of the company as at 30 June 2005 discloses that Mr Matthews has withdrawn, through one means or another, the profits made on the Young Street venture. In particular, the current assets of the company include significant loans to Mr Matthews on a personal basis and to companies and clients of his. These loans total almost half a million dollars. On the other hand, Mr Menzies has only taken some $25,000 from the company in 2002.
I accept that Mr Menzies assumed the responsibility for the day to day conduct of Comprop’s affairs. Nevertheless, the essence of the relationship between Mr Menzies and Mr Matthews was akin to that of a partnership. Mr Mathews ought not to have drawn his share of the profits from the Young Street development without at the same or similar time offering Mr Menzies his share. As it was, Mr Mathews drew from Comprop all its surplus funds for his own use to the exclusion of Mr Menzies.
The consequence is that my discretion is enlivened under s 233 of the Corporations Act2001. Mr Greenberger submitted that the Court should not wind up the company and referred me to Re Hollen Australia Pty Ltd.[3] I agree that in the circumstances of this case, the Court should avoid winding up Comprop.
[3][2009] VSC 95.
Comprop no longer carries on business. On the other hand, it does have interconnecting loans to other companies in Mr Matthews’ group and prejudice would or may be suffered by those other companies if Comprop was wound up. Further, and more importantly, as indicated above, Mr Matthews has offered to buy Mr Menzies’ shares for $230,000. Mr Menzies agrees that this is a fair offer.
The only qualification Mr Menzies places upon this offer, and which lies really at the heart of the case, is that the company file an amended tax return for the years ending 30 June 2005, 2006 and 2007. Mr Menzies is concerned that Comprop may have filed false tax returns and that such tax returns may in some way rebound upon him and expose him to liability under the Tax Administration Act 1953 and in particular s 8Y.
Section 8Y provides:
8Y Liability of officers etc. of corporations
(1) Where a corporation does or omits to do an act or thing the doing or omission of which constitutes a taxation offence, a person (by whatever name called and whether or not the person is an officer of the corporation) who is concerned in, or takes part in, the management of the corporation shall be deemed to have committed the taxation offence and is punishable accordingly.
(2) In a prosecution of a person for a taxation offence by virtue of subsection (1), it is a defence if the person proves that the person:
(a) did not aid, abet, counsel or procure the act or omission of the corporation concerned; and
(b) was not in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the act or omission of the corporation.
Note 1: A defendant bears a legal burden in relation to the matters in subsection (2), see section 13.4 of the Criminal Code.
Note 2: Subsection (2) does not apply in relation to a prosecution under Part 2.4 of the Criminal Code.
(3) For the purposes of subsection (1), an officer of a corporation shall be presumed, unless the contrary is proved, to be concerned in, and to take part in, the management of the corporation.
(4) In this section, officer, in relation to a corporation, means:
(a) a director or secretary of the corporation;
(b) a receiver and manager of property of the corporation;
(ba) an administrator, within the meaning of the Corporations Act 2001, of the corporation;
(bb) an administrator of a deed of company arrangement executed by the corporation under Part 5.3A of that Act;
(d) a liquidator of the corporation appointed in a voluntary winding up of the corporation; or
(e) a trustee or other person administering a compromise or arrangement made between the corporation and another person or other persons.
The particular concerns that Mr Menzies has are as follows. One of the means by which Mr Matthews was able to withdraw moneys from Comprop was to credit himself (or rather his company Rescom) with a management fee of $300,000. This is not to say that he did not have in mind to credit Mr Menzies with a similar fee relative to his one third shareholding. The management fee does not appear to have been raised in the books of account until after 30 June 2005. There is authority to suggest that in those circumstances, the fee could not have been claimed in the year ended 30 June 2005. Rather, the fee could only be raised in the year in which it was incurred.
More importantly, however, the income tax return disclosed that the gross income of the company for the year ended 30 June 2005 was around $300,000, whereas in fact, the gross income was in the order of $600,000. The tax return was prepared and filed on the basis that the gross income of the company was reduced by the management fee and the return did not otherwise refer to the management fee. Obviously, the management fee was, in those circumstances, not claimed as an expense. It is submitted that the appropriate return should have declared the gross income of the company at the $600,000 figure and claimed, as an expense, the management fee of $300,000. Mr Matthews established to my satisfaction that the recipient of the management fee, Rescom, included the fee in its income tax return as assessable income.
The Court was informed that the Commissioner of Taxation will challenge a management fee in some circumstances. The effect of a management fee may be to transfer profit from the company to the entity charging the management fee. In this way, some tax minimisation can be engaged in. I do not need to find, nor do I find, that that was the purpose behind charging the management fee in this case.
Mr Menzies says that to avoid the oppression that I have found, it is necessary for one of the consequences of the oppressive conduct, that is, the treatment of the management fee, to be alleviated. He suggests that I do this by directing under s 233 that the company file an amended tax return for the years ending 30 June 2005, 2006 and 2007, disclosing the management fee as an expense and further, if the management fee was not raised until the year ended 30 June 2006, ensuring that it is not claimed as a deduction in the year ended 30 June 2005, but rather be claimed as a deduction in the year ended 30 June 2006.
Mr Menzies bears the onus of establishing the oppressive conduct. He failed to call any evidence from a tax expert as to whether or not his concerns were well grounded. No evidence was led before me to establish that adverse tax consequences would befall Mr Menzies as he fears.
Secondly, there is no evidence to establish that Mr Matthews is in any way responsible for the manner in which the tax return was prepared. Thirdly, the terms of section 8Y of the Tax Administration Act 1955 do not suggest that Mr Menzies will be liable if the Commission does decide to reassess Comprop. The evidence establishes that Mr Menzies was not in any way, directly or indirectly, knowingly concerned in or party to the payment of the management fee or its treatment in Comprop’s income tax returns.
Accordingly, I am not prepared to make any order in respect of Comprop’s tax returns.
I will order, however, that Mr Matthews purchases Mr Menzie’s shares for $230,000 and that Mr Menzies resigns as a director of Comprop. I will hear the parties on the question of costs.
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