Re ICB Medical Distributors Pty Ltd

[2018] NSWSC 1315

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:	In the matter of ICB Medical Distributors Pty Ltd and The International College of Biomechanics Pty Ltd; ICB Gait and Posture Clinic Pty Ltd; Foot Steps Orthotics Pty Limited [2018] NSWSC 1315
Hearing dates:	21 – 22 February; 10 – 13, 17 – 20, 26 April 2018; 20, 27 – 28 June 2018, 10, 12 – 13 July 2018
Decision date:	29 August 2018
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	Directions to be made as to preparation of valuation evidence as to basis on which Mr Kielt is to buy out Dr Najjarine’s shares in the companies in the ICB group of companies. Parties to bring in short minutes of order to give effect to this judgment within 14 days.
Catchwords:	CORPORATIONS – oppression – one party seeks winding up order – other party seeks order for the purchase of shares by a member of a company under s 233(1)(d) of the Corporations Act 2001 (Cth) – where amounts improperly recorded as debts owed to director or his associated companies or family members in favour of one party – where diversion of business from company to competing businesses by another party – where both parties have engaged in oppressive conduct – whether to grant order for buy-out of one party’s share by the other. CORPORATIONS – winding up – application to wind up company on just and equitable ground under s 461(1)(k) of the Corporations Act – where deadlock in the management of the company’s affairs – where winding up order would advance director’s associated entities’ adverse interests as trade competitors of company – where alternative remedy can appropriately address the oppression – whether company should be wound up.
Legislation Cited:	- Corporations Act 2001 (Cth) ss 232, 233, 286, 461, 467 - Evidence Act 1995 (NSW) ss 128,136
Cases Cited:	- Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd [2018] QCA 48; (2018) 125 ACSR 227 - Australian Careers Institute Pty Ltd v Australian Institute of Fitness Pty Ltd [2016] NSWCA 347; (2016) 116 ACSR 566 - Australian Securities & Investments Commission v Healey [2011] FCA 717; (2011) 83 ACSR 484 - Boyd v Feeney [2017] NSWSC 1595 - Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55; (2014) 314 ALR 62 - Cook v Deeks [1916] 1 AC 554; [1916-17] All ER Rep 285 - Coope v LCM Litigation Fund Pty Ltd [2016] NSWCA 37; (2016) 333 ALR 524 - Dick v Alan Powell Holdings Pty Ltd [2009] QSC 184 - Green v Bestobell Industries Pty Ltd [1982] WAR 1; (1982) 1 ACLC 1 - Edmonds v Donovan [2005] VSCA 27; (2005) 12 VR 513 - Effem Foods Pty Ltd v Lake Cumbeline Pty Ltd (1999) 161 ALR 599 - Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 - Hillam v Ample Source International Ltd (No 2) (2012) 202 FCR 336 - Howard v Commissioner of Taxation [2014] HCA 2 ; (2014) 253 CLR 83 - Hunter v Organic and Natural Enterprise Group Pty Ltd [2012] QSC 383; (2012) 92 ACSR 183 - Mordecai v Mordecai (1988) 12 NSWLR 58; 12 ACLR 751; 6 ACLC 370 - Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 - Munstermann v Rayward [2017] NSWSC 133 - Pennimpede v Gerard Pennimpede [2009] NSWSC 85 - Re AJ Roberts Removals & Storage Pty Limited [2017] NSWSC 1054 - Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789; (2014) 101 ACSR 233 - Re Kit Digital Australia Pty Ltd (in liq) [2014] NSWSC 1547 - Re Ledir Enterprises Pty Ltd [2013] NSWSC 1332; (2013) 96 ACSR 1 - Re Pure Nature Sydney Pty Ltd [2018] NSWSC 914 - Streeter v Western Areas Exploration Pty Ltd (No 2) [2011] WASCA 17; (2011) 278 ALR 291 - Supercar International Holdings Ltd v Sommers [2011] NSWSC 336; (2011) 84 ACSR 466 - Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152 - Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104; (2011) 84 ACSR 121 - Victory Projects Pty Ltd v AAA Self Storage Pty Ltd [2016] NSWSC 1758 - Watson v Foxman (1995) 49 NSWLR 315 - Wayde v New South Wales Rugby League Ltd [1985] HCA 68; (1985) 180 CLR 459
Category:	Principal judgment
Parties:	Abdul Rahman Najjarine (Plaintiff/Cross-Defendant) Rodney St John Kielt (Defendant/Cross-Claimant)
Representation:	Counsel: F P Carnovale (Plaintiff/Cross-Defendant) V Whittaker/D Birch (Defendant/Cross-Claimant)   Solicitors: Antunes Lawyers (Plaintiff/Cross-Defendant) Webb Henderson (Defendant/Cross-Claimant)
File Number(s):	2015/354468

Judgment

1. By his Second Amended Statement of Claim filed on 12 March 2018 (“SASC”), Abdul Najjarine (to whom I will refer as “Dr Najjarine” as he prefers) brings proceedings against Mr Rodney Kielt seeking an order that ICB Medical Distributors Pty Ltd (“ICB Medical”) and several other companies within the ICB group of companies (“ICB Group”) be wound up or, alternatively, an order that he purchase all of Mr Kielt’s shares at a price equal to half of the value of the ICB Group as determined by a valuer, determined on a particular basis. Dr Najjarine placed primary emphasis on seeking a winding up order at the hearing and made no submissions of substance in support of an order that he buy out Mr Kielt’s shares in those companies. The other companies in the ICB Group that are the subject of the proceedings are International College of Biomechanics Pty Ltd (“ICB College”), ICB Gait and Posture Clinic Pty Ltd (“ICB Gait”) and Foot Steps Orthotics Pty Ltd (“Foot Steps Orthotics”). None of the companies that are sought to be wound up were joined as party to the proceedings, but the parties took no point as to that matter.

2. By a Cross-Claim, Mr Kielt alleged that Dr Najjarine had engaged in oppressive conduct, to put it broadly, in respect of the conduct of the affairs of ICB Medical and the several companies in the ICB Group. I will address that Cross-Claim below.

3. The parties led voluminous affidavit evidence, tendered a substantial volume of documents and engaged in lengthy cross-examinations of Dr Najjarine, Mr Kielt and two accountants to the ICB Group who had given evidence in Mr Kielt’s case. It is not necessary to reach factual findings as to all of the disputed factual matters, which extended to many dealings between the parties over an extended period. I have had regard to all of the evidence led and all of the submissions as to all of those matters but only set out those factual findings that I consider are necessary to a determination of the proceedings.

Factual background, affidavit evidence of Dr Najjarine and Mr Kielt and their credit

4. By way of background, it appears that Dr Najjarine and Mr Kielt initially had contact in respect of a proposal to promote and sell orthotics known as “Footsteps” in late 1999. ICB Medical was incorporated in May 2000, the company Foot Steps Orthotics was incorporated in July 2000 and ICB Gait was incorporated in March 2001. ICB Medical manufactures laboratory made orthotics which are made to a prescription provided by a healthcare practitioner, and were and are sold to third party clients and were also sold to a company associated with Dr Najjarine, AOL FootCare Clinics Pty Ltd (“AOL”). It appears that AOL has now substantially ceased to purchase orthotics from ICB Medical. ICB Medical also imports and sells pre-made prescription orthotics, which are heat moulded to the foot of a wearer by health practitioners, and over the counter retail orthotics under the brand “Pedi Step”.

5. Each of the parties filed and relied on numerous affidavits in the proceedings, many of which were in parts inadmissible, and significantly repetitive, and parts of which were ultimately not read at the hearing. Dr Najjarine relied on part of his first affidavit dated 18 November 2015, filed in the original proceedings which he had commenced. Dr Najjarine’s evidence was that he would sign a single page of the accounts, often when he was with a patient at his clinic, and based on an understanding that the accounts would be correct because the companies employed external accountants, apparently notwithstanding his suggested concerns as to how Mr Kielt was managing the group businesses. That evidence exposed a significant failure to comply with Dr Najjarine’s duties as a director of the companies, which required that he personally engage with the content of their financial reports, understand that information and, if necessary, make further enquiries if matters revealed in those financial statements called for such enquiries: compare, albeit in the context of more substantial entities, Australian Securities & Investments Commission v Healey [2011] FCA 717; (2011) 83 ACSR 484 at [20]. Dr Najjarine’s evidence was also that, as he had been concerned over the accuracy of accounts, he has refused to sign financial reports since 2012 (Najjarine 18.11.15 [21]–[22]).

6. Dr Najjarine also relied on a second affidavit also dated 18 November 2015 and also filed in the same proceedings, which deals with Dr Najjarine’s training as a podiatrist, the commencement of his business relationship with Mr Kielt and the incorporation of the companies in the ICB Group. A substantial part of that affidavit dealing with his concerns as to Mr Kielt’s management of those companies was not read, although that question was addressed in several later affidavits.

7. Dr Najjarine relied on a third affidavit dated 13 May 2016, in response to Mr Kielt’s affidavit dated 8 April 2016 (to which I refer below), although large parts of that affidavit were also not read. That affidavit refers to the commencement of Dr Najjarine’s business relationship with Mr Kielt in late 1999 and sets out lengthy conversations, in direct speech, that are said to have occurred nearly 20 years ago. I will return to that issue below. Dr Najjarine also referred, in this affidavit, to the travel which he had undertaken for ICB Medical between 2000 and 2012 which appears largely to have involved giving seminars to promote ICB Medical’s products, to lectures given by Mr Joshua Kielt for ICB Medical in China in late 2014 or early 2015 and to other matters in dispute to which I refer below. Dr Najjarine also responded to other aspects of Mr Kielt’s evidence in that affidavit. Dr Najjarine’s fourth affidavit dated 10 August 2016 responded to Mr Pyne’s affidavit dated 21 April 2016, which I will address below, and took issue with Mr Pyne’s account of his dealings with Mr Kielt and Dr Najjarine. Dr Najjarine also relied on his fifth affidavit dated 10 March 2017, large parts of which were not read. He was, however, cross-examined as to aspects of that affidavit, including parts of it that had not been read.

8. By his sixth affidavit dated 23 January 2018, Dr Najjarine set out his recollection of a meeting in May 2012. I will refer to that evidence below. Dr Najjarine also there refers to a number of other matters, which largely involved documents and matters which were addressed in the cross-examination of Mr Kielt. Dr Najjarine also relied on his seventh affidavit dated 5 April 2018, which responded to allegations made in Mr Kielt’s Cross-Claim. Dr Najjarine’s eighth affidavit dated 10 April 2018 addressed a collateral issue, which had arisen in his cross-examination, as to the techniques used by health professionals to prescribe orthotic devices and in the manufacture of such devices.

9. Dr Najjarine (like Mr Kielt, whose evidence I will address below) set out detailed accounts in his affidavits, in direct speech, of conversations that had purportedly occurred many years ago. He did not demonstrate any such detailed recollection of conversations in cross-examination, and there deployed his lack of recollection of events long ago, particularly when faced with cross-examination that would be adverse to his case. I am comfortably satisfied that he did not have a reliable recollection of the conversations set out in his affidavits, at least in earlier years. There were occasions, of which examples are given in Mr Kielt’s submissions concerning the Cross-Claim, where Dr Najjarine gave inconsistent evidence as between his affidavit evidence and his cross-examination, and within his cross-examination. Inconsistencies between Dr Najjarine’s affidavit evidence and cross-examination included, for example, his evidence as to the content of the meeting in May 2012, which I will address below; his evidence as to whether Mr Kielt had been involved in the development of orthotic products sold by ICB Medical; and the extent of his knowledge of his son’s and daughter’s, Mr Joshua Kielt’s and Ms Naomi Kielt’s, employment by ICB Medical and of the business of overseas companies associated with ICB Medical.

10. In cross-examination, Dr Najjarine was often not prepared to focus on the particular questions asked and sought to use his answers to develop a point that he wished to make, for example, his assertions that he had developed the “Najjarine Assessment System” or “NAS” in response to questions directed to the accuracy of a description of that system (T177–178). Dr Najjarine’s evidence in cross-examination was at times contradictory, including as to the question whether he trusted or distrusted Mr Kielt when ICB Medical’s accounts for the year ended 30 June 2012 were signed; whether Mr Poole, an accountant retained by Dr Najjarine, was undertaking investigations of the ICB Group companies’ financial accounts at that time; and whether he trusted Mr Kielt to prepare those accounts correctly, notwithstanding the distrust reflected in Mr Poole’s investigation (T282–285). There were several occasions on which Dr Najjarine’s explanation of matters in cross-examination was implausible, or sought to depart from the obvious meaning of evidence that he had previously given, including his evidence in cross-examination as to the number of seminars which he had given for businesses that compete with ICB Medical, and his evidence in cross-examination as to whether he and Mr Kielt had both been involved in developing orthotic products sold by ICB Medical. Dr Najjarine was generally not prepared to accept that evidence he had given was incorrect, even when that was plainly demonstrated in the course of his cross-examination. There were plainly also significant difficulties as to the adequacy of production of documents by Crown Orthotics Laboratory Pty Ltd (“Crown Orthotics”) and AOL on subpoena, where Dr Najjarine seems at least to have had a significant role in the production of such documents.

11. In closing submissions, Ms Whittaker, who appeared with Mr Birch for Mr Kielt, submitted that other witnesses’ evidence should be preferred to Dr Najjarine’s evidence where there is a conflict between the witnesses. I am not satisfied of the reliability of Dr Najjarine’s evidence, and I generally would not accept that evidence unless it is adverse to his interests or, rarely, corroborated by contemporaneous documentary evidence. However, there were corresponding difficulties with the evidence of Mr Kielt, Mr Pyne and Mr Green, to which I refer below, such that I also cannot place significant weight on their evidence or prefer it to Dr Najjarine’s evidence. It seems to me that the primary witnesses in the case all had little reliable recollection of events and reconstructed or tailored their evidence to support the cases in which they were called and protect their own interests.

12. Dr Najjarine also relies on an affidavit of a solicitor employed by the firm acting for him in the proceedings, Ms Carollo, dated 25 January 2018 which refers to the production of documents on subpoena and in response to notices to produce in the proceedings. A further affidavit of Ms Carollo dated 31 January 2018 corrected aspects of that affidavit. Dr Najjarine also read a further affidavit dated 27 February 2018 of his solicitor, Ms Antunes, which was intended to establish the basis for a claim for privilege in several emails. Dr Najjarine also read a further affidavit of Ms Carollo dated 5 April 2018 which exhibited a number of documents.

13. Mr Kielt relied on his affidavit dated 8 April 2016. That affidavit referred to Mr Kielt’s contact with the late Mr Phillip Vasyli in the period from 1991 onwards, involving his distribution of Mr Vasyli’s medical and retail products, and his initial contact with Dr Najjarine who was then employed as a podiatrist in Mr Vasyli’s business. Mr Kielt also there addressed matters relating to his provision of security for a bank overdraft for ICB Medical in late 2006, the relocation of ICB Medical’s premises in early 2007, the incorporation of ICB UK Limited (“ICB UK”) and Abu Trading (Shanghai) Co Ltd (“Abu Trading”), and ICB Medical’s change of accountants to PKF (which later merged with and traded as BDO) (“BDO”) in mid-2010. Mr Kielt also there referred to a meeting with representatives of BDO said to have occurred on 1 May 2012. Mr Kielt there set out, in direct speech, conversations in relation to the establishment of ICB Medical’s business that had occurred some 18 years ago, in early 2000, and detailed conversations with Dr Najjarine that were said to have occurred in 2010 and 2011. Mr Kielt’s evidence of those matters contrasted with his lack of recollection of more recent matters, when pressed in cross-examination. I am satisfied that Mr Kielt did not have a reliable recollection of those conversations and that they were, at best, reconstructions intended to advance his defence of Dr Najjarine’s oppression case and his attack on Dr Najjarine’s conduct.

14. Mr Kielt also referred in that affidavit to payments made by ICB Medical to Dr Najjarine’s company in respect of Dr Najjarine’s six trips to China in 2012, which I will address below, to Dr Najjarine’s indication that he wished to be more involved in the running of the business and to have more input into ICB Medical’s direction in 2013, and to subsequent steps taken by Dr Najjarine to retain Mr Poole to investigate the position in respect of ICB Medical’s accounts. Mr Kielt also referred to the first correspondence received from the solicitors now acting for Dr Najjarine, in February 2014, which indicated that Dr Najjarine would not make himself available for seminars in 2014 and sought to require that all future correspondence with Dr Najjarine was to be through his legal representatives, and that Mr Kielt was not to contact Dr Najjarine. Notwithstanding that position, it appears that the parties subsequently attended directors’ meetings which were conducted in a confrontational manner.

15. Mr Kielt relied on his second affidavit dated 16 December 2016 which addressed several of the matters particularised in Dr Najjarine’s Amended Statement of Claim, as it then stood, and on a third affidavit dated 3 May 2017 which responded to Dr Najjarine’s affidavit dated 10 March 2017.

16. Mr Kielt’s fourth affidavit dated 2 February 2018 addressed, inter alia, the then position in respect of ICB Medical and companies in the ICB Group, including ICB UK and Abu Trading; his response to Dr Najjarine’s affidavit dated 23 January 2018; matters addressed at a directors’ meeting of ICB Medical held on 2 May 2017, which appears to have been the last directors’ meeting of ICB Medical attended by Dr Najjarine; the steps that would need to occur within the companies in the ICB Group to effect a buy-out of shares by one or other shareholder; and correspondence between the parties and their solicitors since the beginning of the dispute in February 2014.

17. Mr Kielt’s evidence in that affidavit was also that BDO had decided not to prepare further annual accounts or further tax returns for ICB Medical until the proceedings had been resolved, and advised the Australian Securities and Investments Commission (“ASIC”) and the Australian Taxation Office (“ATO”) of that decision, and that ICB Medical had not filed company returns for 2014 through 2017 or company tax returns for the financial years 2014/15, 2015/16 and 2016/17 and had been issued with fines by the ATO for its failure to file tax returns for the 2014/15 and 2015/16 financial years. Mr Kielt’s evidence was that, because ICB Medical could not file its tax returns, it could not access the tax refunds that are “owing to it”. As will emerge below, there is a real question as to whether any tax refunds then claimed by ICB Medical would have been properly founded, had they reflected the approach it had adopted in previous years. Mr Kielt’s evidence was that ICB Gait and ICB College had not traded since the close of the 2013/14 financial years and that the bank accounts for those companies were closed in late 2014.

4. Mr Kielt also there referred to a letter sent by his solicitors dated 7 February 2017 which referred to earlier offers to buy Dr Najjarine’s shares in ICB Medical, according to a mutually agreed valuation methodology. No evidence was led of the substance of those earlier offers, and there is no reason to think that they adjusted for several impugned transactions which I will address below. Mr Kielt also led evidence, which was admitted subject to a limiting order under s 136 of the Evidence Act 1995 (NSW) as evidence of his understanding only, of the steps that would need to be taken by ICB Medical if Mr Kielt acquired Dr Najjarine’s shares in the companies in the ICB Group, or if Dr Najjarine acquired Mr Kielt’s shares in those companies. Mr Kielt’s evidence was, in effect, that the former would be preferable, because Dr Najjarine had not been actively involved in the running of ICB Medical’s business since January 2014.

5. In that affidavit, Mr Kielt also referred to loans and other amounts that he claimed ICB Medical owed to him and associated companies including amounts of $183,486 owed to LW&S Hartley Pty Ltd (“LWS”), a company associated with him, $445,449 owed to him, accrued entitlements to annual leave in the amount of $28,208.67 and to long service leave in the amount of $30,037.29, and Mr Kielt asserted that the total amount owed to him by ICB Medical as at 31 December 2017 was $697,180.96. Mr Kielt also referred to the need for repayment of amounts owed by ICB Medical to Mr Joshua Kielt and Ms Naomi Kielt on termination of their employment, if Dr Najjarine bought out Mr Kielt’s shares, and summarised the position as that the cost to ICB Medical of paying out Mr Kielt, Mr Joshua Kielt and Ms Naomi Kielt would amount to around $856,845 and that amount represented approximately 80% of ICB Medical’s total assets and was significantly higher than the cash held in the various ICB Medical bank accounts. I find below that the circumstances in which these loans and other amounts arose involved serious irregularities and were oppressive of Dr Najjarine, and Mr Kielt here sought to take advantage of those irregularities and that oppression to avoid the relief sought by Dr Najjarine.

6. Mr Kielt’s fifth affidavit dated 14 March 2018 sought to support allegations made in the Amended Statement of Cross-Claim against Dr Najjarine and also addressed a range of allegations made by Dr Najjarine, many of which had previously been addressed, often in less detail, in his previous affidavits. Mr Kielt’s sixth affidavit dated 17 April 2018 led further evidence to address matters that had previously been the subject of evidence that was not in admissible form. Mr Kielt there led evidence of Dr Najjarine’s suggested agreement, in March 2011, that LWS could issue an invoice to ICB Medical “to compensate for the loss of tax losses” in LWS, and of a conversation said to have occurred in March 2013 by which Dr Najjarine was said to have agreed to Mr Kielt issuing a further invoice from LWS to ICB Medical for “consultancy services” in respect of research and development, which would “lower [ICB Medical’s] tax liability for the year, and would also recognise [Mr Kielt’s] work in the ICB Group providing R[esearch] & D[evelopment] services during the financial year”. I am not persuaded that either conversation occurred, given the issues as to the credit of Mr Kielt’s evidence to which I refer below. It also seems to me to be inconceivable that, shortly after Mr Kielt had declined to pay Dr Najjarine for giving further seminars in China in 2013 on the basis of cash flow issues in ICB Medical, Dr Najjarine would have approved ICB Medical incurring a substantial liability to LWS for purported consultancy or research and development services, even if doing so would have had the perceived advantage of avoiding payment of tax that would otherwise be payable on ICB Medical’s taxable income. That approach would be wholly inconsistent with the fact that Dr Najjarine plainly felt strongly that he should be paid for such presentations and with the then level of distrust between the parties.

7. Mr Kielt (like Dr Najjarine) set out detailed accounts in his affidavits, in direct speech, of conversations that had purportedly occurred many years ago. He (like Dr Najjarine) demonstrated no such detailed recollection of conversations in cross-examination and also there emphasised his lack of recollection of events long ago, especially when faced with cross-examination that would be adverse to his case. I am comfortably satisfied that he (like Dr Najjarine) did not have a reliable recollection of the conversations set out in his affidavits, at least in earlier years. There were also many occasions in Mr Kielt’s cross-examination where Mr Kielt initially attempted to avoid conceding straightforward matters that were put to him in cross-examination, formulating an answer in different terms to the question asked, only to concede that matter when the question was pressed (for example, T610).

8. In closing submissions, Ms Whittaker submits that the cross-examination of Mr Kielt was about accounting matters of some sophistication, which were outside his primary expertise or experience, and that he gave responsive evidence about matters of which he had experience. Ms Whittaker accepted that there were occasions on which Mr Kielt’s answers were argumentative, but pointed to the extent of open ended questions asked in cross-examination, and to a level of interruption of Mr Kielt’s answers, which, I should add, was combined with Mr Kielt’s interruptions of the questions asked by Mr Carnovale who appeared for Dr Najjarine. I do not accept substantial parts of Mr Kielt’s explanations of the impugned transactions, and I consider that the circumstances of those transactions and Mr Kielt’s explanations of them were adverse to his credit. I generally would not accept Mr Kielt’s evidence (like Dr Najjarine’s evidence) unless it is adverse to his case or, rarely, corroborated by contemporaneous documentary evidence.

9. Mr Kielt relied on an affidavit dated 13 March 2018 of Mr Lawrence Green, who was the external accountant for the companies in the ICB Group, prior to BDO’s appointment, which referred to the establishment of those companies, investigations made by Mr Green in 2008–2009 in respect of the amount recorded for “sundry creditors” in ICB Medical’s internal accounts, and Mr Kielt’s claim for payment for tax losses applied by LWS to the amounts invoiced to ICB Medical, which were in turn invoiced as consulting fees by LWS and by East Coast Sales Brokerage Pty Ltd (“ECS”) to ICB Medical.

10. Ms Whittaker submits that Mr Green was an impartial witness with no motivation to give evidence that favoured Mr Kielt rather than Dr Najjarine. It was not put to Mr Green that he gave deliberately false evidence, and I do not reach any finding to that effect. However, it seems to me that Mr Green’s affidavit evidence and evidence on cross-examination was significantly influenced by his wish to deflect the attacks on the accounting treatments with which he had been involved. An “amendment” to Mr Green’s affidavit evidence, to which I refer below, to indicate that he was not aware of the basis of the difference between the sundry creditors balance of $272,502.44 as at 30 June 2008 and the sundry creditors balance of $373,318.73 as at 30 June 2010, made at the commencement of his oral evidence, seems to me to emphasise the difficulty with his original affidavit evidence that sought to justify the larger figure, rather than supporting his credit as Mr Whittaker submitted. Mr Green was not prepared, in cross-examination, to accept that the purpose and not merely the effect of the issue of consultancy invoices by ECS to ICB Medical was to reduce ICB Medical’s tax liabilities, despite the contemporaneous emails indicating that purpose (T732). Mr Green’s unwillingness to accept that matter reduces the weight that can be given to his evidence.

11. Mr Kielt also relied on the affidavit dated 21 April 2016 of Mr Grant Pyne, who was a partner in PKF’s East Coast practice, and is now a partner in BDO. Mr Kielt also relied on a report prepared by Mr Pyne dated 14 December 2016, which responded to an affidavit of Ms Bateman dated 10 November 2016 on which Dr Najjarine did not rely, the then Amended Statement of Claim and matters implicit in a subpoena directed to BDO dated 29 August 2016 (Ex D1). I will refer to several aspects of Mr Pyne’s report below. Mr Kielt relied on a second affidavit of Mr Pyne dated 16 February 2018, which addressed the meeting on 1 May 2012, referred to BDO’s identification of several issues in the ICB Group companies’ accounts, and addressed several matters said to have been discussed at the meeting on 1 May 2012 and BDO’s preparation of ICB Medical’s accounts for the year ended 30 June 2011. Mr Pyne’s evidence was that he had only met with Dr Najjarine once in person, on 1 May 2012, and had spoken to him once by telephone on 10 May 2012, and that BDO took instructions from Mr Kielt, who he understood was the managing director of ICB Medical, before he was aware of any dispute between the directors. Significant parts of Mr Pyne’s evidence in that affidavit were not admissible and were not admitted.

12. By a third affidavit dated 15 March 2018, Mr Pyne addressed the question of time off in lieu or “TOIL” in respect of Mr Joshua Kielt, which I address below, and the claim for long service and annual leave in respect of Mr Kielt, which I also address below. Mr Pyne also addressed a claim for travel allowances in some detail, but without reference to the fact that the relevant travel costs had (as Mr Kielt acknowledged in cross-examination) been paid by ICB Medical directly, not by the employees to whom travel allowances were paid. By a fourth affidavit dated 13 April 2018, Mr Pyne led further evidence of the meeting on 1 May 2012, which I will address in dealing with that meeting below. By a further affidavit dated 8 June 2018, Mr Pyne addressed the present position of ICB Medical, including the deferral of lodgement of annual its financial statements for several years, the deferral of lodgement of returns to ASIC, the position as to the shareholding in ICB UK and incorrect information provided in ICB Medical’s income tax returns as to that shareholding.

13. In closing submissions, Ms Whittaker submits that Mr Pyne’s evidence should be accepted in preference to Dr Najjarine’s evidence, where there is a conflict between them. I will refer to several difficulties with Mr Pyne’s evidence, particularly in respect of the 1 May 2012 meeting, below. Ms Whittaker also submits that Mr Pyne was an impartial witness. However, it seems to me that Mr Pyne’s evidence by affidavit and in cross-examination was influenced by his wish to support the accounting treatments that BDO had previously accepted. Ms Whittaker accepts that, during at least the first part of his cross-examination, Mr Pyne’s answers were often not responsive to questions, but submits that did not reflect evasiveness. It seemed to me that, whether deliberately or not, Mr Pyne’s approach in cross-examination often avoided directly confronting the challenges to the accounting treatments with which he or his firm was involved.

14. In addition to the issues as to credit in this case, I have also had regard to the fallibility of human memory, particularly when disputes intervene, in determining these proceedings. In an often quoted observation in Watson v Foxman (1995) 49 NSWLR 315 at 319, McLelland CJ in Eq observed that:

“… human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene; and the processes of memory are overlaid; often subconsciously, by perceptions of self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.”

29. In Effem Foods Pty Ltd v Lake Cumbeline Pty Ltd (1999) 161 ALR 599 at [15], the High Court similarly approved an observation at first instance in that case that:

“[Given the lapse of time] between the events and conversations raised in evidence and the hearing of the evidence before me, the only safe course is to place primary emphasis on the objective factual surrounding material and the inherent commercial probabilities, together with the documentation tendered in evidence. In circumstances where the events took place so long ago, it must be an exceptional witness whose undocumented testimony can be unreservedly relied on. The witnesses in this case unfortunately did not come within that exceptional class. The discussions referred to in evidence were capable of bearing quite opposed meanings depending on subtle differences of nuance and emphasis, and a proper appreciation of the significance of those matters must necessarily be considerably diminished over such a long period of time.”

30. In Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 at 129, Gleeson CJ, Gummow and Kirby JJ observed that:

“Considerations such as these have encouraged judges, both at trial and on appeal, to limit their reliance on the appearances of witnesses and to reason to their conclusions, as far as possible, on the basis of contemporary materials, objectively established facts and the apparent logic of events. This does not eliminate the established principles about witness credibility; but it tends to reduce the occasions where those principles are seen as critical.”

31. In Pennimpede v Gerard Pennimpede [2009] NSWSC 85 at [29], Bryson AJ noted similar issues in observing that:

“Considerations of these kinds pose serious difficulties of proof for a party relying upon spoken words as a foundation of a cause of action in the absence of some reliable contemporaneous record or other satisfactory corroboration. … A great deal of what I was told related to conversations which were alleged to have occurred well over 10 years before I heard the evidence. Most of what I was told about the conversations seemed to me to be little more than impressions, accompanied by plausible details which were very unlikely to be based and were not based on actual memory. These impressions came to me through a filter (perhaps an osmotic barrier) of years of conflict, argument and strong feeling.”

32. I summarised the applicable principles in Re Kit Digital Australia Pty Ltd (in liq) [2014] NSWSC 1547 at [7], as follows:

“It is important in this context to have regard to the fallibility of human memory which increases with the passage of time, particularly where disputes or litigation intervene: Watson v Foxman (1995) 49 NSWLR 315 at 318-319 per McLelland CJ in Eq; Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd (No 2) [2008] FCA 810 at [41] per Rares J; Varma v Varma [2010] NSWSC 786 at [424]-[425] per Ward J. To the extent that credit issues need to be determined in respect of particular conversations, I have also had regard to the fact that objective evidence is likely to be the most reliable basis for determining them. I summarised the relevant principles in Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789 at [10], where I noted that the credibility of a witness and his or her veracity may be tested by reference to the objective facts proved independently of the testimony given, in particular by reference to the documents in the case, by paying particular regard to the witness’s motives and the overall probabilities: Armagas Ltd v Mundogas SA [1985] 1 Ll R 1 at 57; Camden v McKenzie [2007] QCA 136 ; [2008] 1 Qd R 39 at [34]; Craig v Silverbrook [2013] NSWSC 1687 at [141]; State of New South Wales v Hunt [2014] NSWCA 47 at [56].”

Chronology and factual findings

33. I now set out a brief chronology of events, which I deal with in more detail in addressing the parties’ respective claims below. I have drawn, in this chronology, upon chronological statements of the facts for which the parties contended, the affidavit and documentary evidence and evidence given in lengthy cross-examinations, particularly of Dr Najjarine and Mr Kielt.

34. It appears to be broadly common ground that, in late 1999 or early 2000, Dr Najjarine and Mr Kielt agreed that they would establish a company to sell pre-made orthotics, that Mr Kielt would focus on the day to day affairs of the business, Dr Najjarine would focus on conducting education and training courses, and Mr Kielt would work for one year without pay and thereafter for an agreed salary (Najjarine 13.5.16 [5.22]–[5.33]; Kielt 8.4.16, [12]–[17]). ICB Medical was incorporated in May 2000 with Dr Najjarine and Mr Kielt as its directors and each held 50% of the shares. From July 2000, ICB Medical sold pre-made orthotics to health care professionals; Mr Kielt was substantially responsible for its day-to-day affairs and Dr Najjarine provided seminars to health professionals to promote its products. Foot Steps Orthotics was also incorporated in July 2000; Mr Kielt was initially its sole director and he and Dr Najjarine each held 50% of its shares, and Dr Najjarine later also became a director of that company; and it held intellectual property used by ICB Medical and gave the right to use the intellectual property to ICB Medical (Kielt 8.4.16, [28]–[29]; Ex J1, 1633). ICB Gait was incorporated in March 2001 with Mr Kielt and Dr Najjarine as its directors and each held 50% of its shares. Mr Green, who gave evidence in Mr Kielt’s case as I noted above, was initially the external accountant for ICB Medical, ICB Gait and ICB College (Green 14.3.18, [2]).

35. From about July 2001 to 2002, Mr Kielt was an employee of ICB Medical and was paid wages of about $52,000 per annum (Kielt 14.3.18 [93]). From at least 2001, ICB Medical manufactured and sold pre-made orthotics, including an “ICB dual density” orthotic. From about 2003 on, Mr Kielt’s employment arrangement was replaced by an arrangement for LWS to provide Mr Kielt's services to ICB Medical in return for consulting fees paid by ICB Medical to LWS in place of Mr Kielt’s salary (Kielt 14.3.18 [102]). Mr Joshua Kielt and Ms Naomi Kielt later commenced employment with ICB Medical. From about 2006, ICB Medical made laboratory orthotics, including for AOL. For the majority of the period from 2006 until 2014, AOL was the largest buyer of ICB Medical’s products (Najjarine 5.4.18 [52]; T174).

36. Dr Najjarine claims to have requested and not received (other than in one year) payment for giving seminars for ICB Medical in the period from 2008 and I address that issue in paragraphs 77–81 below. From March 2010, LWS invoiced ICB Medical for annual leave and I address that issue in paragraphs 105–116 below. ICB UK was incorporated in May 2010 and I address an issue as to the shareholding and appointment of directors to that company in paragraphs 87–92 below. In March 2011, LWS issued invoices to ICB Medical claimed to be referable to interest on a loan by ICB Medical and for compensation for the use by ICB Medical of ECS's tax losses. I address those issues in paragraphs 129–131 below.

37. In about July 2011 BDO replaced Mr Green as external accountants for ICB Medical, ICB Gait and ICB College (Kielt 8.4.16 [113]). In December 2011, Mr Kielt caused LWS to issue nine invoices totalling $12,909.71 to ICB Medical for the months of March to November 2011 in relation to payments made by ECS to Quality Pharma Brokers (“QPB”) which I will address in paragraphs 126–127 below. Abu Trading was established in February or March 2012 and I will address an issue as to the appointment of Mr Joshua Kielt as its sole director or executive director in paragraphs 90–92 below.

38. By an email dated 28 February 2012 (Ex J1, 2312), Mr Green advised Mr Kielt that Mr Stubley, an accountant from BDO, had asked about what made up a sundry creditors balance of $373,318.73 (an issue that I will address in paragraphs 151–161 below) and advised that:

“This largely arose back in 2006 calendar year and has been carried forward ever since then. I have assumed it was amounts owing to Shareholders from back then but have no argument for that position.

The balance substantially arose at a time when there was lots of confusion in the GST accounts and debtors and creditors that were being sorted out and still remains there even though those issues were sorted out. If it was anything else than it should have come to light or else it would be taxable income from almost five years ago if it isn’t shareholders balances. Effectively the formal balance sheet says that shareholders loaned the company money to pay for the IP etc. QuickBooks doesn’t at the moment show the same story but rather shows it as income. Happy to chat this through with you but noted that [Dr Najjarine] needs 2011 ICB [Medical] financials completed fairly quickly for financing purposes so feel free to call me on my mobile if you cant [sic] reach me at the office.”

This email provides no real explanation of how the sundry creditors balance arose, where that matter is described as an assumption for which Mr Green had “no argument”.

39. Plainly, Mr Joshua Kielt was not persuaded by Mr Green’s explanation of how the sundry creditors balance arose, and he forwarded the email to Mr Stubley asking “[d]oes this make any sense?” (Ex J1, 2311–2312). Mr Stubley responded, by email dated 29 February 2012, observing that:

“Regarding the sundry creditors balance, no that makes no sense. It is odd to have a $380,000 payable which has been unreconciled for five years?? I suggest we move on and reallocate it to a loan account, however should this be [Mr Kielt’s] loan account or should it be split 50/50 between [Mr Kielt] and [Dr Najjarine]? For example if we split 50/50 we are saying that the company now owes [Mr Kielt] and [Dr Najjarine] an additional $190,000 each. In light of [Dr Najjarine’s] divorce we need to give strong consideration to this and all the loan accounts shown at 30 June 2011.” (Ex J1, 2315)

40. Mr Stubley’s suggested reallocation of that amount was proposed for convenience, rather than by reference to any analysis of its substance. Mr Stubley’s email would also have made apparent to Mr Joshua Kielt and to Mr Kielt, to whom it was copied, that a reallocation of the loan account to Mr Kielt would have the consequence that the financial records would show an additional amount of over $370,000 payable to Mr Kielt, notwithstanding the absence of any objective basis for such a liability.

41. By email dated 24 April 2012, Mr Stubley advised Mr Joshua Kielt, with copies to Mr Kielt and Mr Pyne (but not Dr Najjarine) of key issues for discussion in respect of draft financial statements and tax for the companies in the ICB Group for the year ended 30 June 2011, and attached draft financial statements and tax positions. That email referred to the position as to sundry creditors and observed that:

“There is a significant sundry creditor’s balance in ICB Medical of $399,347. On querying [Mr Green] on what this relates to it was clear it hasn’t been reconciled for a number of years and also that it is unlikely it relates to any present obligation of the company. I suggest that this balance be cleared to the directors’ loan account, the split of this will need to be discussed in light of other issues identified below.”

42. That email in turn identified items for discussion as follows:

“1.   Loan account and sundry creditors discussion;

2.   [Dr Najjarine’s] divorce and impact on loan accounts and company;

3.   Recording of travel allowances in future, consideration of profit vs tax implications;

4.   [ICB Gait] future profits and interaction with ICB Medical.”

Mr Stubley invited Mr Joshua Kielt to pass the email onto Dr Najjarine “if appropriate” and proposed a meeting be organised to sign off on the accounts (Ex J1, 2346).

43. There is a contest as to whether a meeting took place on 1 May 2012 between Mr Kielt, Mr Pyne and others, or at least as to whether Dr Najjarine attended that meeting and agreed to the steps taken following that meeting. The minutes of that meeting recorded a resolution to allocate an amount referable to sundry creditors of $373,318.73 and other amounts of $57,725.90 to Mr Kielt’s loan account as at 30 June 2011, with the result that Mr Kielt was treated as a creditor of ICB Medical for those amounts. Mr Kielt’s and Mr Pyne’s evidence is that a decision was also made at that meeting that led to amounts being recorded as due as travel allowances to Mr Kielt, Mr Joshua Kielt and Ms Naomi Kielt. I will address that meeting at this point and return to the issues as to the treatment of sundry creditors and travel allowances in paragraphs 151–161 and 117–125 below.

44. Mr Kielt’s and Mr Pyne’s evidence is that a meeting occurred on 1 May 2012, lasting between one and two hours (Kielt 2.2.18 [31]–[32], Pyne 21.4.16 [6], Pyne 16.2.18 [17]), which led to the reallocation of an amount recorded in sundry creditors (which I address in paragraphs 117–125 below) so that it was treated as a debt owed to Mr Kielt. There are uncertainties as to who attended that meeting. Both Mr Kielt and Mr Pyne give evidence that Mr Stubley attended, but there is no record of Mr Stubley’s attendance at that meeting in contemporaneous time records (Ex J2, 1071; T792). Dr Najjarine, at least in the latest version of his evidence, denies that he attended that meeting.

45. Mr Pyne’s evidence is that he received instructions from Mr Kielt and Dr Najjarine as to specified matters at that meeting, including that he should allocate unreconciled cash transfers of $25,685 between ICB Medical and ICB Gait against the intercompany loan difference of $17,027.96, so that the net difference in the loan account between ICB Medical and ICB Gait was $8,657.04 (Pyne 13.4.18 [5]); that he should allocate differences in the intercompany loan balances totalling $21,489.76 to the directors’ loan accounts equally in ICB Medical (Pyne 13.4.18 [6]); that he should consolidate all directors’ loan accounts (as set out below) into ICB Medical, with a loan to AOL being allocated to Dr Najjarine (Pyne 13.4.18 [8]); and that a “loan from directors” of $10,000 to ICB Medical was to be allocated equally between the directors’ individual loan accounts (Pyne 13.4.18 [9]). Mr Pyne’s evidence is also that the directors instructed him that several other unreconciled amounts were to be allocated equally between the directors’ individual loan accounts (Pyne 13.4.18 [11]–[17]). His evidence on cross-examination was that he provided the directors with a copy of Mr Green’s email dated 28 February 2012 which referred to the sundry creditors balance of $373,318.73 and the directors concluded that the amount should be allocated equally between the directors individual loan accounts (T804-805). The instruction which Mr Pyne claims to have sought and obtained from the directors as to the treatment of sundry creditors is strikingly inconsistent with the view previously expressed by Mr Stubley, of his firm, as to the lack of sense in Mr Green’s explanation of that amount.

46. Mr Pyne’s evidence was also that Mr Kielt provided a list of items he believed should have been accounted for in his loan account, and the directors instructed Mr Pyne to review that list and advise whether those items had been accounted for in Mr Kielt’s loan account and the LWS loan account (Pyne 13.4.18 [19]). Mr Pyne’s evidence was that he then informed Dr Najjarine that loan accounts, whether assets or liabilities, would ordinarily be included in a personal asset and liability statement, which (if it was said) appears to have been an indirect reference to the availability of such assets to Dr Najjarine’s former wife in his divorce proceedings. Mr Pyne’s evidence is that the directors then reversed, without any discussion to which he refers, all previous instructions to allocate amounts equally between the directors and instructed Mr Pyne that the adjustments that were previously to be allocated 50/50 between the directors were to be wholly allocated to Mr Kielt’s loan account, and that the directors would revisit that arrangement again in the future. Mr Pyne does not suggest that he then pointed out that such a reallocation could have no proper basis, because if the amount was properly owed to both directors, it could not be reallocated to one for convenience, still less to avoid proper third party claims.

47. Mr Pyne’s affidavit evidence (Pyne 16.2.18 [38]) was initially that he was instructed at the meeting on 1 May 2012 that calculations be carried out to reimburse Mr Kielt for his travel expenses over earlier years. In his further affidavit dated 13 April 2018, Mr Pyne’s evidence was that Mr Kielt and Dr Najjarine instructed him, at this meeting, that travel allowance entitlements for Mr Joshua Kielt, Ms Naomi Kielt and Mr Kielt should be calculated for the 30 June 2011 year in accordance with the ATO’s Tax Determination 2011/17, and that calculation would be provided to BDO and would apply for future years; and that ICB Medical was not in a financial position to pay the travel allowances at the time and the entitlement should be treated as a loan from Mr Joshua Kielt and Ms Naomi Kielt to ICB Medical until it could repay the loan (Pyne 13.4.18 [20]–[21]). Mr Pyne accepted in cross-examination that his initial affidavit evidence that such an instruction extended to earlier years, as distinct from to expenses in the 2011 year and subsequent years, was incorrect (T767). Mr Pyne did not accept, but I find, that that error reflected his lack of reliable recollection of that meeting.

48. I do not accept that Mr Pyne has a reliable recollection of the meeting on 1 May 2012 and I give little weight to his evidence of that meeting. Mr Pyne’s evidence of this meeting was purportedly given in direct speech, after his earlier inadmissible evidence had been rejected, although he still relied on his usual practice in order to support his evidence of what he now claimed to recall was said. His evidence did not refer to any advice that he had given at that meeting, or to any discussion of the kind that ordinarily occurs at meetings, but instead recorded Mr Kielt and Dr Najjarine having instructed him in respect of each open accounting issue to take the approach that was in fact taken. Mr Pyne’s evidence of that meeting was strikingly inconsistent with ordinary experience of the conduct of meetings and the process by which professionals, including accountants, provide advice to their clients. At best, it seems to me that evidence amounted to no more than an extended exercise in reconstruction to seek to make good Mr Kielt’s (and Mr Pyne’s) contention that Dr Najjarine had acquiesced in the accounting treatments of these issues.

49. At least until his fifth affidavit dated 10 March 2017, Dr Najjarine accepted that he was present at the meeting on 1 May 2012, inconsistent with his later position in his sixth affidavit dated 23 January 2018 and at the hearing that he had not attended that meeting. In his third affidavit dated 13 May 2016, Dr Najjarine refers to a conversation with Mr Kielt, although the date of that conversation is not made clear by that affidavit, as to a suggested liability of Dr Najjarine and Mr Kielt to ICB Medical, which could be changed to show that ICB Medical owed Dr Najjarine and Mr Kielt the relevant amount. That appears to be a reference to the treatment of sundry creditors, although the conversation to which Dr Najjarine refers does not correctly state the amount involved. Dr Najjarine there also addressed a comment said to have been made by Mr Pyne as to the incorrect allocation of an amount of approximately $600,000 (Najjarine 11.5.18 [5.211], [5.214]), and his then recollection was that he was asked to sign a pre-prepared typed letter (Najjarine 13.5.18 [5.215]), rather than Mr Kielt having signed the minutes of that meeting with a handwritten notation to which I refer below.

50. In his sixth affidavit dated 23 January 2018, Dr Najjarine gave evidence that the meeting which he had attended, and which he previously accepted took place on 1 May 2012, in fact took place on 15 May 2012. Dr Najjarine also there set out, in direct speech, evidence of a conversation with Mr Kielt at that meeting that took place some six years ago. Dr Najjarine’s evidence, in that version, was that he, Mr Kielt, Mr Joshua Kielt and Mr Pyne attended that meeting and Mr Kielt represented to Dr Najjarine that the amount of $373,318.73 referable to sundry creditors and the other variances of $57,725.90 in ICB Medical's financial statements (which I address below) were the result of errors by Mr Green and that those amounts should be transferred to Mr Kielt's loan account in ICB Medical and recorded there as owed to him, apparently to avoid any claim by Dr Najjarine’s former wife that they were an asset of Dr Najjarine. I am not satisfied that Dr Najjarine has any reliable recollection of that conversation, having regard to the alterations in his evidence and his lack of recollection of events that have occurred in the more recent past. It seems to me likely that Dr Najjarine’s account of the statements made by Mr Kielt for that meeting is in the nature of reconstruction.

51. In cross-examination, Dr Najjarine’s evidence of that meeting was that Mr Kielt, Mr Joshua Kielt and Mr Pyne walked into the boardroom, after Mr Green had been replaced with BDO as ICB Medical’s accountant; Mr Kielt mentioned that Mr Green had made mistakes in the accounts and the directors owed the business $600,000; and, remarkably, that BDO had “worked out a system” that would convert the amount owing by the directors to the business to an amount that the business owed to the directors. Dr Najjarine’s evidence was that Mr Kielt rather than Mr Pyne addressed these matters. Dr Najjarine said that Mr Kielt then referred to Dr Najjarine’s divorce and to the amount to be transferred to Mr Kielt and then split 50/50 between Mr Kielt and Dr Najjarine after one year. Dr Najjarine claimed to have been confused by the process, a reaction which would not be surprising if it had occurred in the manner that Dr Najjarine described (T238). In cross-examination, Dr Najjarine also claimed that his recollection of this meeting had become better as the proceedings had developed (T240). Dr Najjarine again denied, in cross-examination, that the adjustments made on the 2011 accounts in respect of sundry creditors were discussed with him, that he had agreed the course that was taken with Mr Kielt, or that he had agreed that the adjustment to the sundry creditors account would be made to Mr Kielt’s loan account only by reason of Dr Najjarine’s divorce, with a view to reallocating his half of the adjusted amount in the future (T269). As I understood Dr Najjarine’s evidence, in cross-examination, he agreed that there had been discussion of those matters, but his position was that the matters were not properly explained to him, he did not understand what was occurring and he had not, in substance, consented to these steps.

52. Ms Whittaker submits, and I accept, that the inconsistencies in Dr Najjarine’s evidence as to the 1 May 2012 meeting are such that his recollection as to that meeting is plainly unreliable. These inconsistencies between the several versions of Dr Najjarine’s evidence included not only the date of the meeting, but also whether it was Mr Kielt or Mr Pyne who outlined the proposed treatment of sundry creditors to Dr Najjarine, and whether Dr Najjarine did or did not recall what Mr Pyne had said at the meeting. It seems to me that those accounts are also adverse to Dr Najjarine’s credit, where he was prepared to give evidence of what occurred, in several differing versions, without a sufficient basis in recollection to support that evidence.

53. On about 8 May 2012, BDO drafted, dated and provided a minute which recorded a directors’ resolution on 1 May 2012 with respect to the adjustments to Mr Kielt’s loan account. That minute (Ex J1, 1634) was dated 30 June 2011 and recorded that:

“LOAN ACCOUNT AND SUNDRY CREDITORS VARIANCES

IT WAS RESOLVED the following items be adjusted to the loan account of [Mr Kielt] at 30 June 2011.

Sundry creditors 373,318.73

Loan account variances 57,725.90

Total adjustment 431,044.63.

The transactions relate to prior to 30 June 2006 and the directors confirm there are no known present liabilities not accounted for and if there were at the time they would have been settled by the directors.

Based on the above, the balance substantially relates to shareholders personal contributions to the entity and has now been adjusted accordingly.”

54. Mr Pyne’s evidence in cross-examination was that the fact that minute was backdated to the last day of the previous financial year, when it would be relied on for the accounts in that financial year, was an “error in the drafting” (T794) and he thereafter would not provide direct or responsive answers to questions about that “error” in cross-examination. If Mr Pyne’s evidence was intended to suggest the backdating of that minute was inadvertent, then I do not accept it. The backdating of that minute was a significant matter.

55. Dr Najjarine and Mr Kielt subsequently signed the 2011 accounts for ICB Medical and the other companies in the ICB Group and Mr Kielt signed the backdated directors’ resolution as chairman of the meeting, and verified that it was a “true and correct” record notwithstanding its false date (Kielt 2.2.18 [34]; Pyne 16.2.18 [47]; Ex J1, Tabs 120, 127, 129). Ms Whittaker contends that Dr Najjarine signed those financial statements because he was comfortable with their contents at that time. I think it more likely that Dr Najjarine, consistent with his evidence although in significant breach of his directors’ duties, failed to give any real attention to the content of the accounts. On or about 15 May 2012, Mr Kielt also wrote a handwritten notation to the minute of the purported 30 June 2011 directors’ meeting, stating that the amount attributed to Mr Kielt’s loan account would be redistributed 50/50 in the following year (Ex J1, 1635; Kielt 2.2.18 [35]–[36]). Ms Whittaker submits that that notation is only consistent with the directors having reached a consensus that the sundry creditors would be reallocated to the directors’ loan accounts. There is force in that proposition, but it does not follow that Dr Najjarine then had any adequate understanding of the origin of the amounts comprising the sundry creditors amount, and that consensus was not subsequently implemented.

56. In February or March 2013, Mr Kielt advised Dr Najjarine that ICB Medical did not have the funds to be able to pay for Dr Najjarine's seminars in China in 2013. Dr Najjarine continued to conduct overseas seminars for ICB Medical during 2013, without payment. In March 2013, Mr Kielt caused LWS to issue a further invoice dated 29 June 2012 to ICB Medical charging $77,000 (including GST) for consulting fees, and I address that issue in paragraphs 135–150 below. ICB Medical‘s financial statements for the 2012 financial year recorded a further amount of $24,303.80 as travel allowances due to Mr Kielt, Mr Joshua Kielt and Ms Naomi Kielt. I return to that issue in paragraphs 117–125 below.

57. Also in March 2013, Dr Najjarine’s personal accountant, Mr Poole, asked BDO several questions in relation to ICB Medical’s accounts for the years ended 30 June 2011 and 30 June 2012 (Ex J1, 2496) and correspondence continued during March and April 2013, without BDO providing a substantive response (Ex P7). On 28 June 2013, although Mr Poole’s questions had not been addressed, Dr Najjarine and Mr Kielt signed the 2012 accounts for ICB Medical, ICB Gait, and ICB College, prepared by BDO (Ex J1, 1395, 1470, 1478). Mr Kielt’s evidence is that BDO prepared a response that addressed the issues about which Dr Najjarine now complains and Dr Najjarine was invited to participate in a discussion about that response (Kielt 8.4.16 [155]; Kielt 14.3.18 [155]) and it appears that, while BDO was preparing its response, Dr Najjarine terminated his engagement of Mr Poole (Ex J1, 3034; Pyne 21.4.16 [13]). There was of course nothing to prevent Mr Kielt or BDO providing a substantive written response to Mr Poole’s questions directly to Dr Najjarine, after Mr Poole’s engagement ceased, but they did not do so. On 18 November 2013, Dr Najjarine’s now wife, Ms Nabiha Najjarine, requested copies of financial records from ICB Medical’s account clerk, for the purposes of Dr Najjarine’s family law property settlement with his former wife, and records were provided in response to that request (Ex J1, 2529).

54. In January 2014, Dr Najjarine and Mr Kielt had a disagreement in Dr Najjarine’s clinic, which appears to have contributed to the breakdown of their relationship. The circumstances of that disagreement are disputed, including as to whether Mr Kielt had claimed, in front of a patient, that the patient’s orthotics were correct when Dr Najjarine had indicated they were not, and Mr Kielt had then rushed out and fallen over a baby stroller. I do not consider it necessary to determine the dispute as to the circumstances of that disagreement to determine these proceedings.

55. In February 2014, Dr Najjarine declined to conduct any more seminars for ICB Medical, at least without remuneration. It appears to be common ground that, since February 2014, Dr Najjarine has referred at least a substantial portion of AOL’s orthotic work to companies associated with him or his family members, AOL and Crown Orthotics rather than to ICB Medical and no longer promotes ICB Medical’s pre-made orthotics to his patients (Najjarine 5.4.18 [59]; T174) and has ceased visiting the ICB Medical laboratory to oversee work, to the limited extent to which he previously did so. Plainly, the loss of referrals of a significant element of ICB Medical’s business has been detrimental to ICB Medical. Dr Najjarine or AOL have also employed staff who were previously employed by ICB Medical to work for AOL or Crown Orthotics, necessarily in competition with ICB Medical (Najjarine 5.4.18 [59], [79], Kielt 14.3.18 [46]–[52]).

56. Voluminous correspondence from Dr Najjarine’s solicitors’ to Mr Kielt commenced in February 2014 (Ex J1, 2635) and continued thereafter. On 5 June 2014, Mr Kielt signed the ICB Medical management accounts for the 2013 financial year and BDO provided them to Dr Najjarine for signature (Kielt 8.4.16 [166]). Dr Najjarine did not sign those management accounts or subsequent accounts. In a letter from his solicitors sent on 17 June 2014, Dr Najjarine requested payment for presenting overseas seminars and also sought to require that ICB Medical cease using the so-called “NAS/ALM” method (Ex J1, 2710). Dr Najjarine accepted in cross-examination that he knew that he had no property rights in the NAS system when that demand was made (T176).

57. ICB Medical’s financial statements for the 2014 financial year recorded a further amount of $96,785.70 as travel allowances due to Mr Kielt, Mr Joshua Kielt and Ms Naomi Kielt. I address that question in paragraphs 117–125 below.

58. In August 2014, Dr Najjarine instructed an accountant, Ms Fiona Bateman, to conduct a review of ICB Medical’s accounts (T290). It appears that Ms Bateman’s report was not provided to Dr Najjarine until May 2015 (T292) and he did not then disclose its findings to ICB Medical or Mr Kielt until it was served in these proceedings. Dr Najjarine ultimately did not read Ms Bateman’s affidavits or tender her report in these proceedings.

59. From 9 March 2015, Dr Najjarine and Mr Kielt exchanged correspondence concerning a long-term lease of its business premises and a long-term hire-purchase agreement for a motor vehicle used by Mr Joshua Kielt and, on 18 March 2015, ICB Medical entered into a new lease of those business premises and also entered into a new finance agreement for that motor vehicle. I address those matters in paragraphs 82–86 below. In April 2015, Dr Najjarine objected to ICB Medical’s conducting of educational seminars using Mr Joshua Kielt as the presenter (Ex J1, 3123). That issue was pleaded by Dr Najjarine but not pressed by him in these proceedings. I address it below in the context of Mr Kielt’s Cross-Claim.

60. ICB Medical's accounting records for the 2015 financial year also recorded an expense of $69,934.14 for money said to be owed to Mr Joshua Kielt in respect of TOIL. ICB Medical’s financial statements for the half year to 31 December 2017 (Ex J1, 1623) also included an expense of an amount of $30,037.29 in respect of long service leave said to be owed to Mr Kielt up to 30 June 2017. I address these questions in paragraphs 93–116 below.

The applicable legal principles

65. Before turning to the particular matters on which Dr Najjarine and Mr Kielt rely in their respective oppression claims, it will be convenient to identify the applicable legal proceedings as to whether oppression is established. I defer dealing with the question of the applicable remedy, which is the most difficult issue in this case, which I address below. I have drawn upon Counsels’ submissions and my summary of the relevant principles in Re Ledir Enterprises Pty Ltd [2013] NSWSC 1332; (2013) 96 ACSR 1, Victory Projects Pty Ltd v AAA Self Storage Pty Ltd [2016] NSWSC 1758, Re AJ Roberts Removals & Storage Pty Limited [2017] NSWSC 1054 and Re Pure Nature Sydney Pty Ltd [2018] NSWSC 914 in that respect.

66. Section 233(1)(d) of the Corporations Act 2001 (Cth) relevantly provides that the Court may make an order for the purchase of shares by a member of a company and s 233(1)(j) allows the Court to make an order requiring a person to do a specified act. Such an order may be made where the matters specified in s 232 of the Corporations Act are established. Section 232 of the Corporations Act provides that the Court may make an order under s 233 if:

“(a)   the conduct of a company’s affairs; or

(b)   an actual or proposed act or omission by or on behalf of a company;

or

(c)   a resolution, or a proposed resolution, of members or a class of members of a company;

is either:

(d)   contrary to the interests of the members as a whole; or

(e)   oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.”

67. Section 232 of the Corporations Act and its predecessors extend to conduct involving “commercial unfairness” or where the conduct complained of involves a visible departure from the standards of fair dealing and a violation of the conditions of fair play, or a decision has been made so as to impose a disadvantage, disability or burden on the plaintiff that, according to ordinary standards of reasonableness and fair dealing, is unfair: Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 704; Wayde v New South Wales Rugby League Ltd [1985] HCA 68; (1985) 180 CLR 459. In Morgan v 45 Flers Avenue Pty Ltd above at 704, Young J observed that the phrases “oppressive, unfairly prejudicial or unfairly discriminatory” in a predecessor to s 232 of the Corporations Act should be construed as “a composite whole and the individual elements mentioned in the section should be considered merely as different aspects of the essential criterion, namely commercial unfairness”. His Honour also there noted that whether oppression was established was to be determined by reference to the nature of the business carried on by the company and the nature of the relations between its participants and:

“whether objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair.”

68. The principles applicable to a claim for oppression were summarised by Austin J in Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152 at [39], and the Court of Appeal noted the parties did not challenge that summary of the applicable principles in Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104; (2011) 84 ACSR 121 at [140]. His Honour observed that:

“(a)   consistent with the principle that the purpose of relief is to terminate the effects of oppression, relief will generally be inappropriate as a matter of discretion if there is no continuing oppression: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, at [182]; [2009] HCA 25;

(b)   unfairness is assessed by reference to whether “objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair”: eg, Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359, per Basten JA at [181]; [2008] NSWCA 95;

(c)   while it is recognised that conduct may be oppressive if inconsistent with the “legitimate expectations” of shareholders, expectations are not immutable. The non-fulfilment of expectations will not establish oppression, if there has been some good reason for the extinguishment of the expectation: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672, at [85], [86], [175]; [2001] NSWCA 97; Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343, at [96]; [2009] NSWSC 342 per Barrett J;

(d)   “it is important when assessing corporate activities to see if there has been oppression that judges do not remain in their ivory tower”: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1988) 28 ACSR 688, Young J at 739; [1998] NSWSC 413;

(e)   a particular matter which will be taken in account in assessing the gravity of any allegation of oppression, is the extent to which the minority shareholder has “baited” the majority shareholder to act in an oppressive manner: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1988) 28 ACSR 688, at 741; [1998] NSWSC 413 …”

69. In Munstermann v Rayward [2017] NSWSC 133 at [22], Stevenson J summarised the applicable principles as follows (omitting citations):

“(1)    The test of oppression is an objective one of unfairness ...

(2)    The court must look to determine whether on the balance of probabilities the objective commercial bystander would be satisfied that the affairs of the company were being conducted unfairly …

(3) A director may act oppressively in the sense relevant to the operation of s 232 and yet not breach any fiduciary or other duty owed as a director ...

(4)    Conduct of a company’s affairs may be oppressive even though the conduct is otherwise lawful ...

(5)    Conduct that has the effect of paralysing a company in the operation of its business is properly characterised as conduct contrary to the interests of the members as a whole …

(6)    A shareholder of 50 per cent of the shares in a company can seek relief for oppressive conduct because they do not have control in the form of power to prevent the oppression, particularly where individual strong arm tactics are used …

(7) The court must formulate an opinion about oppression or unfair prejudice as at the date of the institution of proceedings and the issue of relief under s 233 must be determined at the date of the hearing …

(8) The discretion under s 233 is wide as to the appropriate remedy …

(9) The nature of the remedy chosen by the court under s 233 will be dependent upon the conclusions drawn by the court as to the type of oppression with which the court is dealing and the court will choose the remedy which is least intrusive ….

(10) The aim of any order under s 233 must be to put an end to the oppression …

(11)    The court should only look to wind up an otherwise solvent company as a “last resort” …

(12)    As a remedy for oppression, an oppressor can be ordered to sell their shares to the oppressed party ….

(13) If an order is to be made for the purchase of shares under s 233 the task of the court is to fix a price that represents a fair value in all the circumstances.” [citations omitted]

70. I have also borne in mind the observation in Tomanovic v Global Mortgage Equity Corporation Pty Ltd above that each case has to be considered on its own facts and circumstances, and by reference to the conduct as a whole.

Dr Najjarine’s pleaded case

71. Dr Najjarine commenced two proceedings, the first in 2015 and a second in 2017, and his claims were ultimately consolidated in a Second Amended Statement of Claim referable to both proceedings. Mr Kielt filed Defences in each of the 2015 and 2017 proceedings, which admitted only formal paragraphs and otherwise denied the entirety of the pleaded facts and claims.

72. Dr Najjarine pleads that he and Mr Kielt were equal shareholders in and the only directors of each of the relevant companies (SASC [5]). Dr Najjarine also pleads (SASC [6]) that Mr Kielt, as a director of the companies and as de facto chief executive officer of each of the companies, is subject to:

“An implied term of his position that he would honestly and in good faith consult [Dr] Najjarine as his co-director of each of the companies in matters of importance to the respective company and would not make and implement significant decisions concerning each company’s affairs unilaterally as if he were the sole shareholder and director in the company.” (SASC [6])

The contract in which the suggested term is to be implied was not identified, and no submissions were put as to how that implication might satisfy the usual tests for implication of a term. Even if such an implied term were established, no relief by way of contractual damages was claimed for a breach of it. However, the matters that might give rise to a breach of such an implied term, if it existed, would be relevant to an oppression claim.

73. Dr Najjarine also relied (SASC [10]–[11]) on duties alleged to apply to Mr Kielt, as director and de facto chief executive officer of each of the companies, to keep written financial records that correctly recorded and explained their transactions and financial position and performance, and that would enable true and fair financial statements to be prepared and audited, and relied on s 286 of the Corporations Act in that respect. Dr Najjarine also pleaded the duty of care and skill attaching to Mr Kielt as director and as “de facto” chief executive officer of each of the companies. Dr Najjarine did not, of course, have standing to bring a claim for breach of s 286 of the Corporations Act or for breach of directors’ duties, and did not seek leave to bring a derivative action or invoke the principles in which such a claim may, in an appropriate case, be brought in an oppression claim. The factual matters underlying those allegations were also relevant to the oppression claim.

74. Dr Najjarine pleaded (SASC [14]), in a rolled up and conclusory paragraph, that Mr Kielt:

“Acted as he thought fit and treated the ICB Group companies as if he were the sole owner thereof in disregard of [Dr] Najjarine’s status as a co-director and interests as an equal 50% shareholder.”

That allegation was particularised by reference to seven paragraphs, some of which had sub-paragraphs, which set out matters that ordinarily ought to have been pleaded as allegations of material fact, rather than provided as particulars. The parties treated those matters as largely comprising the factual issues in dispute in Dr Najjarine’s claim. I will address those matters seriatim below, adopting the not particularly logical order in which they were particularised by Dr Najjarine.

Dr Najjarine’s complaint as to lectures given by Mr Joshua Kielt (SASC [14] particular (a))

75. First, Dr Najjarine initially contended that, despite Dr Najjarine’s objections, Mr Kielt refused to prevent Mr Joshua Kielt from giving lectures and presentations on matters on which Mr Joshua Kielt had no qualifications or relevant experience:

“which could have not only diminished ICB Group’s standing amongst professionals in the field of lower limb problems in humans but exposed ICB Group to the risk of liability for erroneous advice given by an unqualified person”.

76. This claim was ultimately not pressed but is relevant to Mr Kielt’s cross-claim which I address below.

Dr Najjarine’s complaint as to non-payment for lecturing fees (SASC [14] particular (aa))

77. The second particular to the claim pleaded in SASC [14] is that Mr Kielt “improperly” refused to allow the ICB Group to pay Dr Najjarine to conduct seminars and training sessions for the ICB Group, except for a series of seminars and training sessions conducted during six overseas trips by Dr Najjarine in 2012.

78. Dr Najjarine’s affidavit evidence was that, from 2008 to 2011, he orally requested that ICB Medical start paying him for conducting seminars for ICB Medical and Mr Kielt did not agree that it should do so (Najjarine 5.4.18 [85]). However, in cross-examination, Dr Najjarine appeared to accept that he had been prepared to conduct seminars for ICB Medical without remuneration at an earlier point, but changed that view when the time involved in the seminars was increasing, and his podiatry practice was suffering from the time that he spent away giving seminars (T290). That evidence seems to me to be consistent with the probabilities and I can see nothing unreasonable in Dr Najjarine’s perception in that respect.

79. By letter dated 8 December 2011, addressed to Dr Najjarine’s company, AOL, ICB Medical offered to cover airfares and pay a fee for each of Dr Najjarine’s trips to China mainland for training in the amount of $9,000 plus GST (Ex J1, 2196). During 2012, AOL issued six invoices in that amount to ICB Medical in respect of the training conducted by Dr Najjarine in China, and ICB Medical applied the amounts payable to amounts that were then owed by AOL to ICB Medical. In early 2013, Mr Kielt did not agree to the continuance of that arrangement in 2013. By a letter also dated 8 December 2011, although it is common ground that it was sent in February or March 2013, Mr Kielt advised Dr Najjarine that:

“As discussed prior to Christmas and again with [Joshua Kielt] during January 2013 [ICB Medical] does not have the funds to be able to pay for your teaching trips to China in 2013.

Our current agreement was for 2012 for six trips to China at a consultancy rate of $9,000.00 per trip plus GST and we have met this obligation with credits on the AOL account against Laboratory product purchases.

In the discussion with Josh, you indicated that you were OK with the 2013 arrangement, as you understood that the current cash flow was making it difficult to provide the support this year.” (Ex J1, 2195)

80. Mr Kielt was cross-examined to seek to establish that ICB Medical was in a position to pay lecturing fees to Dr Najjarine in earlier years, by reference to reductions in its overdraft over that period, as at the end of the financial year (T505ff). I am not persuaded that the reduction in ICB Medical’s overdraft, at a point in time, is capable of establishing that matter, since there is no reason to doubt Mr Kielt’s evidence that the overdraft would vary during the year, as ICB Medical was required to make payments to suppliers and others. Mr Kielt’s evidence in cross-examination was also that there was no agreement to pay Dr Najjarine for seminars prior to 2012; that ICB Medical did not pay him for those seminars; that ICB Medical may not have had the capacity to pay him for those seminars; and the decision in respect of payment for seminars in earlier years was made by the directors jointly (T513-514). Mr Kielt’s unwillingness to authorise that remuneration significantly contributed to the deterioration of the parties’ relationship. In February 2014, Dr Najjarine declined to conduct any more seminars for ICB Medical.

81. It appears that, for at least some period, Dr Najjarine agreed to conduct such seminars in order to promote the ICB Group and, it appears, his personal profile, without payment; in later years, he claims to have pressed for payment, but continued to give seminars for a period although Mr Kielt did not agree that ICB Medical should make such payment; and, after 2014, when payment was not made, he ceased to conduct such seminars. It has not been established that Mr Kielt’s refusal to agree that Dr Najjarine should be paid to conduct such seminars was (as pleaded) “improper” in the sense of a breach of any legal or other standard that required Mr Kielt to agree that ICB Medical should pay Dr Najjarine for conducting such seminars. I am not persuaded that this matter, alone or together with other matters, establishes oppression on the part of Mr Kielt.

Dr Najjarine’s complaint as to entry into long term lease for ICB Medical’s business premises and lease of motor vehicle (SASC [14] particulars (ab)–(ac))

206. Mr Carnovale also addressed, in closing submissions, several matters which he accepted were not pleaded, on which he relied only as going to Mr Kielt’s credit, relating to the lack of reference to shares in ICB UK in ICB Medical’s financial statements; the backdating of a share transfer between Mr Kielt and ICB Medical; incorrect statements in ICB Medical’s tax returns and applications for expert market development grants as to its interests in ICB UK and Abu Trading; and the appointment of Mr Joshua Kielt as a director of another entity, Australian Biomechanics Association Ltd. Ms Whittaker in turn responded to the attacks upon Mr Kielt’s credit in respect of those matters. Although I have referred to several of those matters above, I do not consider it necessary to reach findings about them, and I do not treat them as in issue in respect of the substantive relief sought.

207. Mr Carnovale submitted, in closing submissions, that a company could be wound up on the basis of oppression where there was conduct involving “commercial unfairness, or involving a visible departure from the standards of fair dealing referring, inter alia, to Morgan v 45 Flers Avenue Pty Ltd above; Boyd v Feeney [2017] NSWSC 1595 at [35]. Mr Carnovale accepted that Dr Najjarine’s conduct was a relevant factor in the balancing exercise involved in determining whether oppression was established. Mr Carnovale also submitted that an order for winding up, rather than a compulsory purchase, may be appropriate where the Court concludes that both parties have acted oppressively toward the other: Supercar International Holdings Ltd v Sommers [2011] NSWSC 336; (2011) 84 ACSR 466 at [275]; Catalano v Managing Australia Destinations Pty Ltd above at [47]; Re Pure Nature Sydney Pty Ltd above at [68]. Mr Canovale rightly accepted, in closing submissions, that an order to wind up an otherwise solvent company is a remedy of “last resort” although there is no principle that a winding up order cannot be made against such a company: Tomanovic v Global Mortgage Equity Corporation Pty Ltd above at [289]; Hillam v Ample Source International Ltd (No 2) (2012) 202 FCR 336 at [68]–[70]. I will assume, without deciding, that ICB Medical is solvent, where neither party submitted to the contrary.

208. Mr Carnovale also contended, in closing submissions, that it was just and equitable that ICB Medical be wound up for the purposes of s 461(1)(k) of the Corporations Act, and noted that such an order could be made where there was deadlock in the management of a company’s affairs, and where the Company was formed on the basis of a personal relationship involving mutual confidence that had broken down. In closing submissions, Mr Carnovale submitted that a winding up order could be made on the “just and equitable” ground on the basis that there was a deadlock in ICB Medical’s management and Mr Kielt has demonstrated a lack of understanding of fundamental commercial matters. It seems to me that the first of those matters was squarely raised and addressed by the evidence in the proceedings and I have addressed the relevant issues above. I do not consider that I could fairly grant relief on the second basis, where it was not pleaded and Mr Kielt was not afforded the opportunity to lead evidence that was squarely directed to it. In any event, nothing turns upon those matters, where I have found that oppression was established, but the Court would not order a winding up on just and equitable grounds where less intrusive orders, in the nature of a buy-out at a value that adjusts for the impugned transactions, would remedy that oppression.

209. Ms Whittaker submitted that Mr Kielt caused no material detriment to the companies in the ICB Group or Dr Najjarine, where the only amount paid to Mr Kielt (as distinct from recorded as a debt owing to him or his associated companies or family members) that is referrable to any of the impugned transactions is the amount of $28,000 paid on or about 27 June 2013. I do not accept that submission, where the transactions in issue involved the creation of debts recorded as owed by ICB Medical to Mr Kielt, which would have had a significant impact in any valuation of Dr Najjarine’s equity in ICB Medical in a buy-out or in a winding up. Ms Whittaker also submitted that Mr Kielt had not unreservedly asserted the truth of the liabilities recorded in his favour. While that may accurately record Ms Whittaker’s approach in submissions, it does not record Mr Kielt’s position, where those liabilities were squarely asserted in his affidavit evidence in opposition to a winding up order.

210. Ms Whittaker also submitted that the fact that ICB Medical had taken accounting advice from Mr Green and BDO tended against a finding that the impugned transactions were oppressive. It may be that Mr Green’s and BDO’s role largely did not extent beyond acquiescence in the impugned transactions, as distinct from advising as to their propriety. Irrespective of that acquiescence, a reasonable director in Mr Kielt’s position would have understood that the impugned transactions were not properly founded and advantaged Mr Kielt, his associated companies and his family members and disadvantaged Dr Najjarine. In those circumstances, it does not seem to me that the fact that ICB Medical’s accountants acquiesced in those transactions is an answer to oppression: compare Hunter v Organic and Natural Enterprise Group Pty Ltd [2012] QSC 383; (2012) 92 ACSR 183 at [103]. Ms Whittaker submitted, and I accept, that any acquiescence by Dr Najjarine in the conduct in issue may be relevant both to whether oppression is established, and to the relief that should be granted: Dick v Alan Powell Holdings Pty Ltd [2009] QSC 184 at [43]. However, such acquiescence has not been established on the findings that I have reached above.

211. Ms Whittaker also submitted that several of Dr Najjarine’s grounds of oppression relate to conduct that has ceased, for example as to Mr Kielt’s previously having been registered as the sole shareholder of ICB UK. It is not necessary to address the principles applicable to whether relief for oppression can be granted in respect of conduct that is no longer continuing, where the effect of recording the several disputed liabilities, which were significant in amount, continued up to and throughout the hearing. Ms Whittaker also submitted that the Court would find that Mr Kielt is less culpable than Dr Najjarine. I would not reach that finding, where the financial transactions which I have referred above seem to me to be significant, preceded Dr Najjarine’s conduct, and are likely to have provoked that conduct. I consider that both Mr Kielt’s and Dr Najjarine’s conduct was of a serious character, and both are significantly culpable in that regard.

212. Ms Whittaker submitted, by reference to Mr Pyne’s evidence, that the companies in the ICB Group are compliant in regard to both their lodgement obligations with ASIC and the ATO. However, that submission amounted to no more than a statement that those companies have obtained ASIC’s and the ATO’s consent to not lodging financial or reporting documents, while the proceedings are ongoing, and have in fact not lodged such documents. That matter has little weight.

213. Ms Whittaker also submitted that Dr Najjarine’s oppression claim is part of an interconnected strategy, directed to ending his association with Mr Kielt through the winding up of ICB Medical and its associated companies, while retaining its business for Dr Najjarine. Ms Whittaker identified several steps in that strategy, including the establishment of Crown Orthotics in competition with ICB Medical, Dr Najjarine moving the business of AOL, initially to AOL and then to Crown Orthotics, and Dr Najjarine’s failure to participate in ICB Medical’s business, including ceasing involvement in marketing ICB Medical’s products at seminars since 2014. Ms Whittaker also referred to Dr Najjarine’s failure to bring accounting issues or concerns, the subject of his primary claims, to Mr Kielt’s or BDO’s attention until these proceedings were commenced. It seems to me that the effect of the orders sought by Dr Najjarine would be to promote the competing businesses with which he is now associated, and it may be that they are intended to achieve what they would in fact achieve. That, however, does not undermine the significance of the matters that I have addressed above, or of the liabilities recorded in ICB Medical’s accounts without a proper basis.

214. Ms Whittaker submitted that Dr Najjarine’s conduct identified in the Cross-Claim constitutes oppressive conduct and would ordinarily justify the relief sought in the Cross-Claim, namely a buy-out order in Mr Kielt’s favour, although she accepted that the Court would have regard to the issues in the proceedings as a whole when considering any such relief. She submitted that the companies in the ICB Group should not be wound up, but an order should be made for Mr Kielt to purchase Dr Najjarine’s shares in those companies. Mr Kielt initially sought an order under s 233 of the Corporations Act that he purchase, and implicitly that Dr Najjarine sell, all shares held by him in the several companies at a price of 50% of the net value of the companies. That order, if made in the form that was initially proposed, would have had reference to the value of the companies, after taking into account the debts and liabilities recorded in their financial records, including the several debts and liabilities to Mr Kielt, his companies and members of his family that, as I have found above, did not have a proper basis. I would not have made that order on that basis. Mr Kielt only addressed that difficulty, in part, in submissions on the penultimate day of the hearing and more fully on the final day of the hearing, as I will note below.

215. Ms Whittaker submitted that the Court would not make a winding up order, on the just and equitable ground, where Dr Najjarine is the principal contributor to the breakdown of the relationship; Mr Kielt would have worked with Dr Najjarine to resolve the issues; the breakdown in relations has not frustrated the sensible operations of ICB Medical, and it continues to operate as a going concern; and Mr Kielt has made reasonable offers to buy out Dr Najjarine. I do not accept that Dr Najjarine has contributed to the present position, to a greater extent than Mr Kielt, for the reasons noted above. I also do not accept that Mr Kielt had made reasonable offers to buy out Dr Najjarine’s shares, prior to the orders formulated on the last day of the hearing, where such offers had not excluded the debts and liabilities arising from the impugned transactions. Ms Whittaker also points to the adverse implications of a winding up of ICB Medical, which include the loss of employment for several employees, the loss of capital contributed to establishing ICB UK and Abu Trading, a potential impact on employee entitlements, possible difficulties in sale of stock which was the subject of forward orders as at March 2018 and consequences for ICB Medical’s Australian and international distributors. I accept that those are relevant matters.

216. Ms Whittaker also drew attention to s 467(4) of the Corporations Act, applicable where a winding up order is sought on the just and equitable ground. Ms Whittaker submits that the matters identified in that section, including the availability of some other remedy, and whether the applicant is acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy, are also applicable where a winding up order is sought under s 233 of the Corporations Act: Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd [2018] QCA 048; (2018) 125 ACSR 227 at [46]–[47], [62]. McMurdo JA there observed, in an observation which is of significance relevance in this case, that:

“In my view, the reasonableness of the applicant’s position is to be assessed by reference to the consequences of the events and circumstances upon which the application is founded and what is necessary to redress them. If they could be redressed only by a winding up, then the pursuit of a winding up order would not be unreasonable in the relevant sense. On the other hand, if there is an alternative remedy which would equally redress those consequences, then an applicant’s preference for a winding up order would usually be considered to be unreasonable, because ordinarily the winding up of a solvent company will have far reaching effects. It will not only deprive the other shareholders of their investment in a solvent enterprise, but it will also be likely to affect the interest of others, such as the company’s employees and third parties whose interests from transacting business with the company would be affected. It is the likelihood of substantial and wide ranging prejudice of this kind which would cause judges to describe a winding up of a solvent company in this context as an extreme step.”

218. On the penultimate day of the hearing, Mr Kielt offered an undertaking to propose a resolution to Dr Najjarine, vote in favour of the resolution and execute any necessary documents to give effect to the resolution, which would have involved the replacement of BDO with another firm of accountants and an instruction to that firm to make “appropriate adjustments” to ICB Medical’s accounts to address a number of the impugned transactions (MFI 19). Mr Carnovale identified a number of specific criticisms of the terms of that undertaking, in the course of submissions, which it is not necessary to address. Its fundamental difficulty was the uncertainty of the adjustments which were proposed, or would have been made, by the new accountants. The Court could not have granted an injunction in the terms of that undertaking, given its lack of certainty, and could not have accepted that undertaking where it could not have granted a corresponding injunction.

219. On the penultimate day of the hearing, Mr Kielt also proposed, for the first time, an undertaking not to assert the existence or enforceability of the liability recorded in his favour of $431,044.66, arising from the transaction recorded in the minutes dated 30 June 2011, or of $44,616.40, referable to travel allowances, or the amount of $32,707.55 with respect to annual leave to 2009, and not to cause LWS to assert the existence of enforceability of certain amounts (MFI 20). That undertaking would have gone some way in avoiding the fundamental difficulty with an order for the purchase of Dr Najjarine’s shares in ICB Medical by Mr Kielt, to which I referred above, that the value of those shares would be substantially reduced by the amounts improperly recorded as debts owing to Mr Kielt and LWS. It would not have addressed the amounts recorded in ICB Medical’s financial records as liabilities to Mr Joshua Kielt and Ms Naomi Kielt which I have also found were not properly based.

220. On the final day of the hearing, Mr Kielt proposed a form of orders, by which he would purchase Dr Najjarine’s shares in ICB Medical and the other companies in the ICB Group by reference to their “market value” at the date of judgment, with that price to be calculated on a basis that made adjustments to ICB Medical’s financial accounts in respect of identified transactions (MFI 21). Ms Whittaker made clear that the orders reflected the orders that Mr Kielt contended should be made if the Court reached adverse conclusions to him in respect of each of the matters in issue. I have reached adverse conclusions to Mr Kielt in respect of the treatment of the amount of $475,661.06 arising from the minutes dated 30 June 2011 and the amount referable to travel allowances; the amount of $26,671.55 claimed to be due to LWS; the loan account of $98,470 claimed to be due to Mr Joshua Kielt; the loan account of $18,673.40 claimed to be due to Ms Naomi Kielt; the amount of $32,707.55 referable to annual leave for Mr Kielt; the amounts of $11,601.70, $15,069.85, $35,978.28 and $77,000 recorded in the LWS loan account; the amount of $69,934.14 recorded as TOIL in respect of Mr Joshua Kielt; and the amount of $30,037.29 in respect of long service leave referable to Mr Kielt. Mr Kielt accepts that any valuation would also need to take account of income tax that would have been payable by ICB Medical in the relevant years, having regard to those adjustments, at least to the extent that it had regard to historical earnings of ICB Medical. Mr Kielt subsequently proposed amended orders which addressed several criticisms made by Mr Carnovale of the detail of those orders (MFI 22).

221. It seems to me that an order for Mr Kielt to buy out Dr Najjarine’s shares in ICB Medical and the other companies in the ICB Group on that basis will sufficiently address the oppressive conduct that has been established without the adverse impacts on third parties, including employees, arising from a winding up, and without allowing Dr Najjarine to use a winding up order to advance his and his associated entities’ adverse interests as trade competitors of ICB Medical. In principle, a valuation could be undertaken of Dr Najjarine’s equity in the companies in the ICB Group, by reference to future cashflow, excluding the liabilities to which I have referred above, and having regard to income tax that would properly be payable on those future earnings. The financial adjustments that would be required to bring about a purchase of Dr Najjarine’s shares at fair value, by excluding debt that I have held was not properly recorded as owed to Mr Kielt, his associated companies and members of his family, are relatively straightforward and Mr Kielt has proposed orders that would largely bring them about. There is no reason to think that those adjustments would not address all relevant matters, given the detail of the exploration of ICB Medical’s financial affairs in these proceedings. Where an order of that kind can appropriately address the oppression, a winding up order should not be made.

222. Where a winding up order is not made, it seems to me several factors support an order that Mr Kielt should buy Dr Najjarine’s shares, rather than the reverse, in circumstances that I have found oppressive conduct by both Mr Kielt and Dr Najjarine. First, as Mr Kielt points out, he has had a more substantial involvement in the day-to-day business of the companies in the ICB Group over a lengthy period. It is also a relevant factor to relief that the growth of ICB Medical’s business has been funded, at least in part, by an overdraft guaranteed by both Dr Najjarine and Mr Kielt, but secured only against Mr and Mrs Kielt’s home, where Dr Najjarine did not provide security for that overdraft (Kielt 8.4.16 [46]–[48]; Najjarine 13.15.16 [5.105]; Kielt 2.2.18 [58]). A winding up would potentially adversely affect Mr and Mrs Kielt, so far as it may be likely to generate a requirement for repayment of any overdraft and a potential claim against that security.

223. Second, Mr Kielt also has a continuing involvement in that business, whereas Dr Najjarine has withdrawn from any significant involvement in that business, and involved himself in the competing businesses of AOL and Crown Orthotics, since 2014. Third, Mr Kielt does not seek compensation, in any buy-out order, for any diversion of business to AOL or Crown Orthotics or other breach of duty by Dr Najjarine. On the other hand, it would be difficult to adjust, in determining the value at which Dr Najjarine could buy out Mr Kielt’s shares, for the effect of diversion of business and the other conduct of Dr Najjarine to which I have referred above, and neither party advanced submissions or proposed orders as to how such an adjustment could be made. This is not a case, by contrast with the position which I considered in Re Pure Nature Sydney Pty Ltd above, where there is any conceptual difficulty in making adjustments in a valuation process that will eliminate the effect of the oppressive conduct on the part of Mr Kielt.

218. While I will make an order that Mr Kielt buy out, and Dr Najjarine sell, Dr Najjarine’s shares in the companies in the ICB Group, I will not order the appointment of a single expert to value those shares as Dr Najjarine proposed. It seems to me that there is little or no prospect that the parties would agree common assumptions for such an expert, and the appointment of such an expert would be the precursor to a range of further disputes as to his or her instructions. I will instead make orders for each party to serve their respective expert evidence, based on assumptions they agree or otherwise adopt at their own risk, in respect of the valuation of those shares. There will then need to be a further hearing to determine the value of Dr Najjarine’s shares, if the parties cannot agree that matter so as to avoid the costs of that further hearing. I should add, for completeness, that I do not consider it necessary to make orders in respect of amounts that would be credited to directors’ loans accounts, as proposed by Mr Kielt, if Dr Najjarine does not consent to them, even to the extent that they would be in his favour.

Orders and costs

225. In the result, Dr Najjarine has not been successful in obtaining the relief that he sought, namely a winding up order of the relevant companies. Dr Najjarine has failed in several of the matters alleged against Mr Kielt, and in significant aspects of his defence of the Cross-Claim, which together took up a substantial portion of the hearing time. Mr Kielt has succeeded in defending Dr Najjarine’s winding up application, but only by reason of a position first advanced on the last day of a lengthy hearing. Had he not advanced that position, the companies in the ICB Group would have been wound up by reason of his and Dr Najjarine’s conduct, because a buy-out order that did not exclude the debts improperly created in favour of Mr Kielt, his family members and his companies would not have done justice to Dr Najjarine.

226. I had, in the course of the hearing, drawn the parties’ attention on several occasions to the fact that the conduct of the hearing, by both of them, might raise the possibility that no order as to costs would be made in favour of a successful party. In the result, Dr Najjarine has not achieved the result he sought, and Mr Kielt has only succeeded in achieving a much less favourable buy-out order than he originally sought by reason of a last minute change of position. It seems to me that the proper course will be to make no order as to the costs of the proceedings and leave each party to bear his own costs. I will, however, allow the parties a brief opportunity to be heard in that respect.

227. I direct the parties to bring in agreed short minutes of order to give effect to this judgment within 14 days or, if there is no agreement, their respective draft short minutes of order and submissions not exceeding 10 pages, in one and a half spacing, as to any differences between them.

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Amendments

02 October 2018 - Correct typographical errors paras [103], [220]

Decision last updated: 02 October 2018